Annual Market Commentary 2009

The MSCI World Index (£) gained 29.99% over the twelve months to the end of December 2009, rebounding from the market lows of early March. The Barclays Capital Global Aggregate Index (£) of bond markets returned 6.93% over the 12-month period, as leadership shifted from government to non-government bonds from early 2009.

The Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility in the S&P 500 Index that is also known as the "fear index," has fallen from its record highs in 2008. The Index settled into a much tighter range in 2009 and ended December at just above 21. However, volatility has remained higher than its long-term average, as uncertainty still remains regarding the unwinding of stimulus packages by global governments and central banks.

Starting in March, stocks that had suffered the most during the credit crisis led the rally. This was reflected in the leadership of the cheapest stocks, particularly as measured by prices relative to book values (assets minus liabilities). Companies that had the highest levels of debt also strongly outperformed towards the end of the review year, as more of these companies overcame fears that they would not be able to secure the funding they needed to remain in business. In the third quarter, earnings releases for many companies were better than expected, pushing prices higher. However, as the rally matured, investors began to favour companies with higher-quality balance sheets and opportunities to gain market share.

In terms of sector performance, investors moved from defensive sectors to sectors that are more sensitive to movements in the broader markets (cyclical sectors) as economic recovery took hold. The Financials sector topped the list at the end of September, as it had done since the rally from the March lows, but Materials were the top performer as December drew to a close. Information Technology was another leader, as many of these companies had substantial free cash flow and stood to benefit from consumer upgrades in the form of software and services. WTI Cushing crude oil prices (a key indicator of movements in the oil market) ended the twelve months to the end of December at $79.36 per barrel, more than double the low of near $30 reached in December 2008 but well off the peak of $147 per barrel recorded in July 2008.

U.S. high-yield bonds, as measured by the Merrill Lynch U.S. High Yield Master II Index ($), had posted year-to-date gains just over 58% by the end of the year, outpacing all other sectors of the global bond markets. While the rate of defaults continued to rise, sentiment improved as earnings outlooks improved and new-issue activity was met with insatiable demand as investors searched for yield.

Despite a continued deterioration in the commercial real estate market, growing appetite for risk helped commercial mortgage-backed securities (CMBS), which are smaller commercial mortgages packaged together into single securities, sustain an impressive rally for the year from lows reached during the credit crisis. By the end of the year, the sector had posted gains of around 28%, as measured by the Merrill Lynch CMBS Fixed Rate A-AAA Rated Index ($).

Government bonds, which historically have tended to react negatively to strengthening economic data, remained fairly well supported amid expectations that, globally, inflation pressures would remain subdued and interest rates would remain very low for the foreseeable future.

Gloomy economic data was prevalent through much of the beginning of the year. In response, global central banks slashed interest rates and established bond-buying programs, helping inject liquidity into the financial system. Hopeful signs emerged in March and continued during the year, as many firms around the globe posted better-than-expected earnings results and a series of economic indicators (including business and consumer confidence surveys and manufacturing indices) suggested that the pace of deterioration has slowed. However, the labour market remained weak, causing investors to become more cautious regarding the pace of economic growth for upcoming quarters.

In SEI’s view, global equity markets should be able to continue their rally, as long as there continues to be supporting evidence that the global economy is improving and corporate profits are rising. However, SEI believes it is unlikely that the pace of gains witnessed in the beginning of the year can be sustained in 2010.

No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

If the investment is withdrawn in the early years it may not return the full amount invested. In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Products of companies in which technology funds invest may be subject to severe competition and rapid obsolescence. SEI Funds may use derivative instruments such as futures, forwards, options, swaps, contracts for differences, credit derivatives, caps, floors and currency forward contracts. These instruments may be used for hedging purposes and/or investment purposes.

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