Strong ‘risk-on’ environment delivers positive relative performance in fixed income, but valuation-focused investors continued to have their patience and discipline tested.

Market Overview

Investor sentiment took a 180-degree turn in the New Year. Government bond rates declined in the UK, eurozone and US during the first three months of the year. Longterm rates generally fell by more than short-term rates in the UK and eurozone, and German 10-year government bond yields dropped back below zero. The US treasury yield curve inversion continued to deepen over the quarter, with the yield on the 10- year treasury ultimately falling below those of treasuries with the shortest maturities.

Meanwhile, stock markets rallied around the globe through most of the first quarter, reclaiming much of the fourth quarter’s losses. The S&P 500 Index delivered its best quarterly performance since 2009. West Texas Intermediate crude oil topped USD60 per barrel at the end of the quarter after climbing by more than 30%.

The Bank of England’s Monetary Policy Committee took no action in either of its two meetings this quarter. Its post-meeting statements expressed continued bias toward gradually tightening monetary policy (depending, of course, on the Brexit outcome).

The original Brexit Day (29 March) came and went without fanfare, as the EU granted an extension to the UK in hopes of avoiding a no-deal departure. Prime Minister Theresa May’s deal was defeated in Parliament three separate times during the quarter, as were additional options that legislators debated and voted upon in late March (and again on 1 April).

British manufacturing growth cooled through January and February before rebounding convincingly in March; services sector growth slowed to a standstill in January, reaccelerated in February and then contracted in March. Claimant-count unemployment edged up to 2.9% in February after a flat January. The UK economy grew by 0.2% during the fourth quarter and 1.4% year-over-year.

The European Central Bank (ECB) said it intends to maintain current eurozone interest rate levels at least until the end of the year and continue re-investing proceeds from its asset purchase programme for just as long if not longer. The ECB also announced the scheduled September revival of its targeted longer-term refinancing operation to provide banks with funding for credit to households and businesses.

Conditions in eurozone manufacturing deteriorated during the first quarter, starting in slow-growth territory, contracting modestly in February and tumbling further in March. Eurozone services sector activity picked up from slow growth to healthier levels over the same three-month period. Eurozone unemployment ticked down to a rate of 7.8% in January, where it remained in February. The eurozone economy expanded by 0.2% during the fourth quarter and by 1.1% for all of 2018, recording the softest year-over-year expansion in five years.

The US Federal Open Market Committee took a dovish turn during the quarter, with new economic projections that showed zero interest rate increases in 2019. It also unveiled a plan to start slowing the reduction of its balance sheet in May—before halting reduction altogether in September and converting its allocation of mortgagerelated assets to treasuries.

The US and China continued to negotiate the terms of a trade agreement after President Donald Trump’s administration waived an early-March deadline to impose tariffs in the absence of a deal. China’s negotiators provided assurances toward the end of the quarter that foreign companies will have greater access to Chinese investments.

On the US domestic front, the government remained partially shuttered for most of January due to an impasse between Congress and the Trump administration about whether to fund a multi-billion dollar wall on the US-Mexico border championed by the president. The Trump administration received a measure of resolution in March, when the special counsel investigating the 2016 election determined that the Trump campaign did not conspire with Russia to sway the election.

US manufacturing conditions oscillated between modest and healthy growth during the quarter, while US services sector activity showed firmer strength. The US unemployment rate declined to 3.8% in February, and the labour-force participation rate increased; more Americans joined or returned to the labour market amid an increase in average earnings. The US economy expanded by a 2.2% annualised rate during the fourth quarter, propelled by strong consumer spending.

Selected Asset Class Commentary

Global Short Duration Asset Class: The asset class performed well during the quarter. Contributors included off-benchmark exposures to corporate bonds and US, Japan, and UK inflation-linked bonds. An underweight to duration in the core markets was the primary detractor. Schroder Investment Management benefited from overweight positons to core eurozone duration, Australia, and off-benchmark corporate bonds.

Global Managed Volatility Equities Asset Class: The asset class achieved meaningful risk reduction in the first quarter of 2019 as the markets moved strongly upward. In relative terms, the asset class underperformed the broad market index as expected on the back of the alpha source weakness. All three managers underperformed but also individually achieved meaningful risk reduction at cost of lagging in rallying markets. The asset class is designed to provide downside protection in stressful market environment with a cost of not rising as much when the market rallies. By design, the most important return driver this quarter was still the asset class’ constant focusing on risk reduction through allocations to low volatility securities.

Global Equities Asset Class: The first quarter of 2019 saw strong equity market returns, in stark contrast to fourth quarter of 2018. Mega-caps, particularly in the US, posted even stronger gains, all in spite of weakening economic outlook. The asset class lagged its benchmark, suffering from an overweight position to value in particular, but also poor stock selection in the UK. All of the value managers lagged substantially over the period, with METROPOLE Gestion and Jupiter Asset Management detracting the most. Poplar Forest Capital, SNAM, and Maj Invest all detracted due to their orientation towards value. The momentum managers, INTECH Investment Management and Lazard Asset Management, both strongly outperformed their lagging alpha source, providing diversification at the building block level.

Manager Changes

None for the period.

Outlook

At the end of last year, SEI correctly forecasted that global equity markets were poised to robustly recover from their late December lows. The  assumption was that the sharp price correction sustained during the fourth quarter overstated the weakness in economic fundamentals and the various uncertainties that plagued markets throughout much of 2018, and that most global markets were deeply oversold.

Today, there’s no denying that a synchronised global growth slowdown is underway. However, it does not mean that the world economy is in recession or that it will soon fall into one. China and the UK, for example, are the third and fourth worstperforming countries, according to the Organisation for Economic Co-operation and Development’s composite leading indicators. Yet China continues to post gross domestic product growth in the vicinity of 6%, while the UK recorded an increase of 1.3% last year, in inflation-adjusted terms.

As has been widely reported, the spread between 3-month and 10-year US treasuries went negative in March after narrowing throughout much of the expansion. Recession historically occurs within 12 to 18 months of the yield curve either narrowing to 25 basis points or inverting. The only time recession did not follow a yield curve inversion was in the 1966-to-1967 period, although US economic growth slowed dramatically.

Deeper recessions usually cause sharper share-price declines, as was the case in 1973. More expensive stock markets, as seen following the 1998-to-2000 tech bubble, also are more vulnerable. But the time between an initial yield curve inversion and the emergence of a bear market can be extremely long.

The US Federal Reserve’s change in rhetoric at the start of the year certainly has been a helpful catalyst in sparking the risk-asset rally and credit-spread narrowing. By stressing patience and data dependence, the central bank signalled that the pace of US interest rates increases will slow considerably from that of the past two years.

SEI continues to see plenty of opportunities in emerging equities as investors gain confidence that the worst is behind us for the asset class. But a sustained improvement depends on better global growth. In SEI’s view, China is the linchpin; optimism is retained that the country’s economic conditions will improve as it begins to feel the lagged impact of easier economic and monetary policies.

China and the US could reach a broader trade agreement than most observers currently expect. This is a more optimistic view than SEI expressed three months ago. Since that time, the Trump administration has deferred tariff increases. Both sides now recognise the damage that the trade standoff has caused to their respective economies and financial markets.

A more expansive trade agreement would provide a much-needed boost to the Chinese economy. It also would benefit nations that have high export exposure to China, both directly and through the supply chain network. China, South Korea and Taiwan now account for 57% of market capitalisation of the MSCI Emerging Markets Index, so its performance will depend on their economic fortunes.

Investor pessimism about Europe appears overwhelming. The European Central Bank recently cut its forecast for 2019 eurozone gross domestic product growth to 1.1% from 1.7% just three months ago. It’s a wonder that the year-to-date performance of European equities managed to nearly keep pace with that of US equities.

Many of Europe’s problems are structural and difficult to improve. Its demographic profile, for example, looks rather bleak. Europe is the only major region where the population is expected to contract between now and 2050. The unemployment rate for Europeans aged 25 to 29 is still in double digits. By comparison, the average annual unemployment rate in the US for this age group is approximately 4%.

The EU extended the Brexit deadline for the UK to decide on its course of action, with the understanding that the UK will fundamentally rethink its position. A long delay could entail another referendum or even a change of government. It also means that the UK must participate in EU Parliament elections starting 23 May.

The uncertainty surrounding Brexit outcomes and timing remains a depressant for economic growth in the UK and the rest of Europe. Bottom-up analysts expect UK earnings to decelerate to just 2% in 2019, which is in stark contrast with last year’s surprisingly strong rate of 10.8%.

The plunge in risk assets during the fourth quarter and subsequent bounce back in the first quarter of this year is a reminder that one should always expect the unexpected when it comes to investing. Cash was king in 2018, providing a 2.1% return. However, cash was consistently one of the worst performers in most other years going back to 2009. Emerging equities fell at the other end of the performance spectrum in 2018, sustaining a total-return loss of 14.6%, but was the strongest category in 2017 and posted a double-digit return in 2016.

In a world where the best- and worst-performing asset classes tend to dominate the headlines, it can be easy to forget that diversification has historically been the most reliable approach for meeting long-term investment goals, especially when looking through the lens of risk-adjusted returns. While a diversified portfolio rarely wins from one year to the next, it also rarely loses, and therein lies its beauty.










Important Information on Performance

Past Performance is not a reliable indicator of future results. Standardised performance is available upon request. All data is as at 31 March 2019.

Asset class performance discussed is based on the majority SEI fund underlying the asset class. This does not include analysis of the manager pools, hedged share class investments within SEI Funds, additional SEI funds or any third-party funds within the Strategic Portfolios. As a result, performance for the total asset class allocation may vary. Not all asset classes discussed are included in all Strategic Portfolios. All asset class comparative performance is relative to the benchmark of the specific SEI fund representing the majority of the asset class investment.

IMPORTANT INFORMATION

The SEI Strategic Portfolios are a series of the SEI Funds and may invest in a combination of other SEI and Third-Party Funds as well as in additional manager pools based on asset classes. These manager pools are pools of assets from the respective Strategic Portfolio separately managed by Portfolio Managers which are monitored by SEI. One cannot directly invest in these manager pools.

This material is not directed to any persons where (by reason of that person’s nationality, residence or otherwise) the publication or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not rely on this information in any respect whatsoever. Investment in the funds or products that are described herein are available only to intended recipients and this communication must not be relied upon or acted upon by anyone who is not an intended recipient.

SEI Investments (Europe) Limited acts as distributor of collective investment schemes which are authorised in Ireland pursuant to the UCITS  regulations and which are collectively referred to as the “SEI Funds” in these materials. These umbrella funds are incorporated in Ireland as limited liability investment companies and are managed by SEI Investments Global Limited, an affiliate of the distributor. SEI Investments (Europe) Limited utilises the SEI funds in its asset management programme to create asset allocation strategies for its clients. Any reference in this document to any SEI funds should not be construed as a recommendation to buy or sell these securities or to engage in any related investment management services. Recipients of this information who intend to apply for shares in any SEI fund are reminded that any such application must be made solely on the basis of the information contained in the prospectus (which includes a schedule of fees and charges and maximum commission available). Commissions and incentives may be paid and if so, would be included in the overall costs.) A copy of the prospectus can be obtained by contacting your financial adviser, SEI relationship manager or by using the contact details shown below.

The funds may invest substantially in other funds. The risks described below may apply to the underlying assets of the products into which they invest: Investment in equity securities in general are subject to market risks that may cause their prices to fluctuate over time; fixed-income securities are subject to credit risk and may also be subject to price volatility and may be sensitive to interest rate fluctuations; bonds or money market instruments are sensitive to inflation rate trends; Absolute return investments utilise aggressive investment techniques which may increase the volatility of returns. If the correlation between absolute return investments and other asset classes within the fund increases, absolute return investments’ expected diversification benefits may be decreased. 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.

Past performance is not a reliable indicator of future results. Investments in SEI funds are generally medium to long-term investments. The value of an investment and any income from it can go down as well as up. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Investors may get back less than the original amount invested. SEI funds may use derivative instruments which may be used for hedging purposes and/or investment purposes. 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.

The views and opinions in this brochure are of SEI only and are subject to change. These views and opinions should not be construed as investment advice. This information is issued by SEI Investments (Europe) Limited (“SIEL”), 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. This document and its contents are directed at advisers of regulated intermediaries in accordance with all applicable laws and regulations. SIEL is authorised and regulated by the Financial Conduct Authority.

Allocations shown are SEI’s target strategic asset allocations, which are based on our long-term expectations for the global markets and are derived from our capital market assumptions. In the short term, we may over- or underweight these positions as part of our active asset allocation, which aims to take advantage of short-term market opportunities. Please refer to the most current fact sheets for the funds’ target active allocations, which more closely reflect the funds’ current allocations.

SEI sources data directly from FactSet, Lipper, and BlackRock, unless otherwise stated.