- Government-bond yields increased around the developed world, with long-term government rates growing by more than short-term rates.
- We believe that an ebb and flow of assorted concerns in the coming months will continue to spark volatility across financial markets. Such periods of instability are expected in any long-term investing plan; as such, at SEI, we are prepared as always to navigate the current wave of deep uncertainty.
Strong equity-market performance continued around most of the world in August, led by Hong Kong, Japan and the U.S. Europe and the U.K. followed at a distance despite generating elevated one-month returns. Latin America suffered a sharp decline during the period as COVID-19 cases appeared to plateau at high levels there. A steep selloff in early September offset part of August’s gains, particularly among the U.S. companies that had led the rally.
The S&P 500 Index (a broad measure of U.S. stocks) registered a new all-time high in late August, marking the fifth consecutive month of gains since the dramatic early-2020 selloff. The U.S. dollar continued to fall versus a basket of major currencies during August, albeit at a slower pace compared to its sharp July decline, settling at its lowest level in more than two years.
Government-bond yields increased around the developed world. In the U.S., U.K. and eurozone, long-term government rates rose by more than short-term rates, leading to steeper yield curves.
The U.S. presidential election cycle formally progressed to its final phase before Election Day, as President Donald Trump accepted the Republican Party’s nomination and former Vice President Joe Biden accepted the Democratic Party’s nomination at their respective quadrennial conventions during August. Fresh off the July commencement of the United States–Mexico–Canada Agreement (USMCA), the Trump administration announced in August a re-imposition of a 10% tariff on Canadian aluminum that was suspended in May 2019 during USMCA negotiations.
Tensions between the U.S. and China spilled into the social-media sphere as the Trump administration took a series of actions to wrest control of the U.S. branch of TikTok, a popular video-sharing app owned by Beijing-based Bytedance. In early August, President Trump signed an executive order to bar Americans from conducting business with ByteDance after mid-September. Several major U.S. companies in the software, retail and private-equity industries announced intentions to bid on TikTok’s U.S. operations; by late August, ByteDance sued the U.S. government over its impending ban and forced sale. China, for its part, contended that any sale of TikTok assets to a U.S. company is subject to Chinese government approval.
Aside from social-media drama, the U.S.-China relationship was strained after a recent Beijing-imposed national-security law drove the Trump administration to end its extradition treaty with Hong Kong. In addition, the U.S. imposed sanctions on senior government officials in China and Hong Kong, including Hong Kong’s Beijing-appointed Chief Executive Carrie Lam, over their suppression of political dissent in the territory. Finally, the U.S. formalized accounting rule changes, mandating that U.S.-traded Chinese firms comply with U.S. accounting standards by 2022 or else de-list from U.S. securities exchanges. With regard to the ongoing global pandemic, the U.S. and Hong Kong each reported their first confirmed case of COVID-19 re-infection.
U.K. and EU representatives made only marginal progress toward a trade deal during August. Negotiations hit an apparent impasse as the EU made two demands that had previously been declared non-starters by U.K. negotiators: (1) continued EU fishing rights in U.K. waters, and (2) U.K. adherence to EU state-aid rules that would limit the likelihood of anti-competitive subsidies to U.K. industry.
In late August, Japanese Prime Minister Shinzo Abe announced his intention to resign due to issues with his personal health. Abe is the longest-serving prime minister in Japan’s history and a chief proponent of a multi-pronged approach to fiscal and monetary policy designed to boost the country’s economic revival, which was dubbed “Abenomics.”
- U.S. manufacturing activity improved during August on July’s modest growth, despite a persistent contrast between strong new orders and shrinking employment. A preliminary report showed that activity in the services sector accelerated during August after halting in the prior month. New U.S. jobless claims briefly dipped below 1 million per week in mid-August before rising back to about 1.1 million later in the month. Existing U.S. home sales surged by 24.7% in July amid historically low mortgage rates; by contrast, the number of delinquent mortgages insured by the Federal Housing Administration reached 16% in August, the highest level on record since 1979.
- The U.K.’s healthy rebound in manufacturing activity accelerated during August. A preliminary report on activity in the services sector during the same month depicted an increase in the U.K.’s already-strong growth. U.K. mortgage approvals jumped to 66,300 in July from 39,900 in June, while consumer credit grew by £1.2 billion in July after contracting during the prior month; both measures exceeded consensus expectations for July.
- The eurozone’s recovery in manufacturing activity remained slow during August. Services sector activity eased to a near standstill, according to an early report. The number of loans granted to non-financial corporations increased by 7% in July, keeping pace with the prior two months. The eurozone unemployment rate inched higher from 7.7% to 7.9% in July.
- The Federal Open Market Committee (FOMC) did not hold a meeting in August; however, it announced major updates to its monetary-policy approach. The most significant change centered on the central bank’s new average inflation target, which highlights its explicit willingness to allow above-target inflation following periods of below-target inflation. This change indicates that the FOMC will let the U.S. economy run hotter than in the past before taking policy action to temper growth.
- The Bank of England’s Monetary Policy Committee voted to leave its key lending rate unchanged at 0.1% and to maintain its existing level of asset purchases at £745 billion. The central bank also lowered its economic outlook—from expecting a complete recovery by mid-2021 to anticipating a return to pre-pandemic levels of economic activity no earlier than late 2021.
- Neither the European Central Bank (ECB) nor the Bank of Japan (BOJ) held monetary policy meetings in August after having both made no changes at their respective mid-July meetings.
U.S. equities delivered a major positive performance in August, led by large-cap companies. Our U.S. large-cap strategies1 produced substantial absolute returns for the month, but lagged their benchmarks. U.S. large-cap leadership continued to be dominated by a small group of mega-cap growth stocks, so our tilt toward value stocks and away from mega-cap stocks held back performance. Our small-cap strategies produced a similar outcome in which their absolute returns were far above average monthly performance, but nevertheless trailed their benchmarks. From a sector perspective, selection in information technology and healthcare were the largest detractors. Overseas, our international developed-market equity strategy also delivered a large one-month absolute return despite underperforming its benchmark. Here, value stocks rallied while our momentum and stability alpha sources faced headwinds, and the positive performance of our value exposures was not enough to offset the drawbacks elsewhere. Our emerging-market equity strategy’s positive performance lagged its benchmark during August as well. Underperformance was primarily due to value and dividend-stock exposures, while exposure to faster-growing companies with more durable fundamental outlooks was not enough to offset the performance gap.
Our cored fixed-income strategy outperformed its benchmark during August as non-government fixed-income sectors led comparable U.S. Treasurys. An overweight to corporate bonds enhanced our relative performance as shorter-term maturities outperformed longer maturities. An overweight to asset-backed securities (ABS) contributed, particularly its largest allocation to student loans. Agency mortgage-backed securities (MBS) performed well, boosting an overweight, and selection in specified mortgage pools outperformed more generic security types. A higher-quality bias within commercial MBS (CMBS) detracted as lower-quality tranches outperformed. Our U.S. high-yield strategy outperformed during August primarily on the strength of its allocation to collateralized loan obligations (CLOs). An underweight to and selection in telecommunications, as well as selection within basic industry, were also top contributors. Overall positioning in real estate and transportation, and an underweight to energy, were the top detractors. Our emerging-market debt strategy outpaced its blended benchmark’s essentially flat performance in August. Overweights to higher-yielding countries such as Argentina, Egypt and Ukraine contributed, as did a large overweight to Mexico. An underweight to Poland detracted from performance, as did overweights to Russia and Brazil amid their respective August selloffs.
Manager Positioning and Opportunities
The entire economic rebound is essentially dependent on how governments respond to COVID-19 public health and economic crises. Financial markets have been reflecting positive developments ranging from massive fiscal stimulus, a potential future vaccine, and a belief that the worst is over, but it is not yet clear whether the trough of the recession has been reached. We expect volatility in markets to remain elevated and dependent on a successful reopening of the economy. Ultimately, reactivation of a “business as usual” economy will depend on the success of containing the disease, as well as the severity of a potential second outbreak.
Within our U.S. large-cap strategies, we continue to underweight some of the largest capitalization stocks in favor of more attractively valued opportunities further down the capitalization spectrum. We remain overweight the healthcare, consumer staples and financials sectors on profits expectations and reasonable valuations. Within our U.S. small-cap strategies, we favor value due to its historically inexpensive valuations, and the stability alpha source due to our cautious stance on the market and its stretched valuations. Our international developed-market equity strategy is overweight sectors offering strong growth opportunities, like information technology and industrials, and underweight defensive sectors like utilities, consumer staples and real estate where growth opportunities are limited and valuations are elevated. It’s slightly overweight Europe and North America, and underweight Japan, the UK and Pacific Basin countries. Our emerging-market equity strategy is also overweight information technology and industrials, and underweight financials, communication services and real estate. Taiwan, Brazil and South Korea are overweights, while China and Saudi Arabia are underweight.
With long-term yields remaining near historically low levels, our core fixed-income strategy has been gradually reducing its overweight to the 25-to-30 year segment of the yield curve, while positioning within the 7-to-10 year segment has been increased. We’ve decreased an overweight to the corporate sector by trimming exposure to industrials. Overweights to ABS and CMBS remained, with a higher-quality bias, due to their attractive risk-adjusted yields. We’ve maintained an allocation to non-agency MBS and an overweight to agency MBS, which had been reduced in recent months as its overweight to corporates expanded. Our high-yield strategy’s largest position remained an allocation to CLOs, followed at a distance by an overweight to basic industry. Energy remained the strategy’s largest underweight, followed by capital goods, telecommunications, consumer goods, automotive and services. Our emerging-market debt strategy remained overweight local-currency assets. Top country overweights were Mexico, Egypt and Russia, while top underweights were Philippines, Poland and Taiwan.
Despite mounting rates of infection, hospitalization and death amid an ongoing pandemic, and the unprecedented side effect of a frozen global economy—stock markets around the world have managed to make a resounding recovery.
Our working assumption is that there will likely be another significant wave of infections going into the so-called flu season throughout autumn and winter in the northern hemisphere. The question is, how disruptive will it be to the global economy?
Even if a sustainable economic recovery gets under way, investors seem to be ignoring the possibility that it may be a long time before most companies achieve previous levels of profitability. The after-tax profit margins of U.S. domestic businesses were already on a declining trend before the onset of the virus and shelter-in-place orders.
Profit margins around the globe will likely remain well below their previous peaks as long as COVID-19 remains a severe health threat. Most businesses are expected to endure varying degrees of lower sales, higher costs and a decline in productivity. There also will probably be an extra burden on industries that anticipate needing extra inventory on hand in the event of future shortages and supply-chain disruptions caused by periodic flare-ups of the virus. “Just-in-time” inventory management will likely turn into “just-in-case” inventory management, thereby tying up cash. Supply chains will likely be diversified over time, a process that was already under way as a result of the trade war between China and the U.S.
The extraordinary March-to-April economic lockdown in the U.S. necessitated fiscal measures unparalleled in both scope and speed of implementation. The result has been a tsunami of red ink. As of September 2, 2020, the Congressional Budget Office projected the deficit will reach 16% of U.S. GDP in 2020, and improve to 8.6% of U.S. GDP in 2021. U.S. debt relative to GDP is forecast to rise to 104.4% by the end of fiscal year 2021 versus 79.2% at the end of fiscal year 2019.
These are unsettling numbers. Many investors may wonder whether such a surge in government debt will provoke an economic crisis even after the pandemic runs its course. We don’t think that it will. The U.S. has a large, dynamic economy and deep capital markets.
The policies pursued by the Federal Reserve have also served to keep interest rates low. Its balance sheet has ballooned this year, far exceeding the increases logged by the ECB or the BOJ.
The U.S. certainly is not alone in engaging in a huge fiscal response that is then monetized by the central bank. In our opinion, governments are treating the fight against COVID-19 like they would a war. As many resources as possible are being thrown into the fight, supported by debt issuance that is absorbed primarily by the central banks.
Those who remember the 1970s are understandably worried by the inflationary potential of such extraordinary debt monetization. If it does lead to inflation, it probably won’t be any time soon, in our opinion. Given our view that the economy will remain below full utilization of labor or productive capacity for the next few years, we believe inflation is unlikely to break out of the 0%-to-3% range of much of the past decade.
Investors do not seem too concerned about the speed of Europe’s economic recovery or the impact of the health crisis on countries’ fiscal positions. The bond yields of the most economically-fragile countries remain close to those of German bund yields, although spreads have widened from pre-pandemic levels. The ECB has been quite successful in short-circuiting the liquidity crisis and flight-to-safety that threatened the euro area’s financial structure.
COVID-19 has pushed Brexit concerns off the front pages. Yet as the December 31, transition deadline nears, the post-divorce settlement could become an economic factor nearly as important as a second wave of the virus. The U.K. and EU should probably reach a deal on their trading relationship by at least October 31 to allow time for countries to approve the treaty into law before the end of 2020. Any free-trade agreement would require the U.K. to agree to permanently align its rules and regulations to those of the EU on an array of matters. The U.K. would essentially bear much of the EU membership cost without having a voice at the table that sets the rules. It is becoming increasingly likely that there either will be a modest agreement that includes tariffs, or (in the worst-case scenario) a no-deal result that falls back on the World Trade Organization’s most-favored-nation rules.
While many factors determine equity performance, it has correlated in the emerging-market space with the extent of economic disruption caused by the virus. Asian and central European countries have pulled back the most on their mandates to restrict movement and social interaction. Latin America and India have eased some of those constraints, but not nearly as much as the other two regions. We continue to keep close tabs on China, as it was the first to mandate lockdowns and first to unlock activity. We expect recovery patterns elsewhere in the world to follow that of China.
Central banks in the emerging world are also doing their part to help restore their economies. Interest rates have come down in almost every country in recent months, to record-low levels in many cases. In addition, a long list of emerging-country central banks—including those with shakier reputations, such as South Africa and Turkey—are either buying or planning to buy their government’s debt. We think this debt-monetization may lead to a future inflation problem.
It’s been said many times that bull markets climb a wall of worry. Maybe now they must learn to swim through waves of worry that include:
- The possibility of a second wave of COVID-19 infections (or, arguably, a continuation of the first wave in some countries) that may force another round of extensive lockdowns and shelter-in-place orders, which could lead to a double-dip recession
- A possible breakdown of political consensus regarding the way forward as economies struggle to regain strength
- The likelihood that economic recovery will take at least a year, and likely longer—and that few economies are apt to rebound to pre-pandemic levels, even if most countries manage to avoid a disruptive second wave of the virus
- Expectations that companies will face higher costs and increased inefficiencies as taxes will almost certainly rise across many economies in the years ahead, and bankruptcies and defaults will climb after government aid programs expire
We believe that an ebb and flow of assorted concerns in the coming months will continue to spark volatility across financial markets. Such periods of instability are expected in any long-term investing plan; as such, we are just as prepared as always at SEI to navigate the current wave of deep uncertainty.
1 Individual holdings will differ between strategies. Not representative of our passive strategies.
Glossary of Financial Terms
- Alpha source: Alpha source is a term used by SEI as part of our internal classification system to categorize and evaluate investment managers in order to build diversified fund portfolios. An alpha source is the investment approach taken by an active investment manager in an effort to generate excess returns. Another way to define an alpha source is that it is the inefficiency that an active investment manager seeks to exploit in an effort to generate excess returns.
- Stability Alpha Source: The investment manager seeks to benefit from investor tendency to undervalue lower-risk, higher-stability businesses—resulting from a focus on short time horizons and overconfidence in forecasts for momentum-driven stocks. Stability-oriented stocks have the power to exceed market expectations by consistently outperforming (rather than reverting to average market returns) and through the power of stable, long-term compounding.
- Bull market: A bull market refers to a market environment in which prices are generally rising (or are expected to rise) and investor confidence is high.
- Congressional Budget Office (CBO): The U.S. CBO produces independent, nonpartisan analyses of budgetary and economic issues to support the U.S. Congressional budget process through reports and cost estimates for proposed legislation.
- Debt issuance: Debt issuance is when companies or governments raise funds by borrowing money from lenders. The borrower, or issuer, agrees to pay the lender (or bondholder) interest along with full repayment in the future.
- Federal Open Market Committee (FOMC): The FOMC is responsible for the open market operations of the U.S. Federal Reserve’s monetary policy tools.
- Fiscal policy: Fiscal policy relates to decisions about government revenues and outlays, like taxation and economic stimulus.
- Fiscal Stimulus: Fiscal stimulus refers to government spending intended to provide economic support.
- The United States–Mexico–Canada Agreement (USMCA): USMCA is a trade deal struck by the three named counties, which took effect on 1 July, thereby replacing the North American Free Trade Agreement (NAFTA).
- Monetary Policy: Monetary policy relates to decisions by central banks to influence the amount of money and credit in the economy by managing the level of benchmark interest rates and the purchase or sale of securities. Central banks typically make policy decisions based on their mandates to target specific levels or ranges for inflation and employment.
Index and Benchmark Descriptions
- All indexes are quoted in gross performance unless otherwise indicated.
- The Bloomberg Barclays 1-10 Year US TIPS Index measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of 1 to 10 years.
- The Bloomberg Barclays US Asset Backed Securities (ABS) Index measures the performance of ABS with the following collateral types: credit and charge card, auto and utility loans. All securities have an average life of at least one year.
- The Bloomberg Barclays Global Aggregate Index is an unmanaged market-capitalization-weighted benchmark, tracks the performance of investment-grade fixed-income securities denominated in 13 currencies. The Index reflects reinvestment of all distributions and changes in market prices.
- The Bloomberg Barclays Global Aggregate ex-Treasury Index is an unmanaged market index representative of the total-return performance of ex-Treasury major world bond markets.
- The Bloomberg Barclays Global Treasury Index is composed of those securities included in the Bloomberg Barclays Global Aggregate Bond Index that are Treasury securities.
- The Bloomberg Barclays US Corporate Bond Index is a broad-based benchmark that measures the investment-grade, fixed-rate, taxable corporate bond market.
- The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index measures the performance of investment-grade, fixed-rate, mortgage-backed, pass-through securities of Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and Freddie Mac (FHLMC).
- The Bloomberg Barclays US Treasury Index is an unmanaged index composed of U.S. Treasurys.
- The ICE BofA U.S. High Yield Constrained Index contains all securities in The ICE BofA U.S. High Yield Index but caps exposure to individual issuers at 2%.
- The ICE BofA U.S. High Yield Index tracks the performance of below-investment-grade, U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
- The Chicago Board Options Exchange Volatility Index (VIX) tracks the expected volatility in the S&P 500 Index over the next 30 days. A higher number indicates greater volatility.
- CBOE Volatility Index (VIX Index): The VIX Index tracks the expected volatility in the S&P 500 Index over the next 30 days. A higher number indicates greater volatility.
- The Dow Jones Industrial Average is a widely followed market indicator based on a price-weighted average of 30 blue-chip New York Stock Exchange stocks that are selected by editors of The Wall Street Journal.
- The FTSE All-Share Index represents 98% to 99% of U.K. equity market capitalization. The Index aggregates the FTSE 100, FTSE 250 and FTSE Small Cap Indexes.
- The JPMorgan EMBI Global Diversified Index tracks the performance of external debt instruments (including U.S. dollar-denominated and other external-currency-denominated Brady bonds, loans, eurobonds and local-market instruments) in the emerging markets.
- JPMorgan GBI-EM Global Diversified Index tracks the performance of debt instruments issued in domestic currencies by emerging-market governments.
- The MSCI ACWI Index is a market-capitalization-weighted index composed of over 2,000 companies, representing the market structure of 48 developed- and emerging-market countries in North and South America, Europe, Africa and the Pacific Rim. The Index is calculated with net dividends reinvested in U.S. dollars.
- The MSCI ACWI ex-USA Index includes both developed- and emerging-market countries, excluding the U.S.
- The MSCI Emerging Markets Index is a free float-adjusted market-capitalization-weighted index designed to measure the performance of global emerging-market equities.
- The MSCI Emerging Markets Latin America Index captures large- and mid-cap representation across five emerging-market countries in Latin America.
- The MSCI EMU (European Economic and Monetary Union) Index is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of countries within EMU. The Index consists of the following 10 developed-market country indexes: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal and Spain.
- The MSCI Europe ex-UK Index is a free float-adjusted market-capitalization-weighted index that captures large- and mid-cap representation across 14 developed-market countries in Europe (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland). The Index covers approximately 85% of the free float-adjusted market capitalization across European developed markets excluding the U.K.
- The MSCI Pacific ex Japan Index captures large- and mid-cap representation across four of five developed-market countries in the Pacific region (excluding Japan).
- The MSCI Japan Index is designed to measure the performance of the large- and mid-capitalization stocks in Japan.
- MSCI United Kingdom Index is designed to measure the performance of the large- and mid-cap segments of the U.K. market.
- MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the U.S. market.
- The MSCI World Index is a free float-adjusted market-capitalization-weighted index designed to measure the equity market performance of developed markets. The Index consists of the following 23 developed-market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the U.K. and the U.S.
- The MSCI World ex-USA Index is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S.
- The NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on the National Association of Securities Dealers Automated Quotations (NASDAQ) system.
- Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values.
- The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth values.
- The Shenzhen Stock Exchange Composite Index tracks performance of A share stocks (which are denominated in renminbi, the local currency) and B share stocks (which are denominated in Hong Kong dollars, an offshore currency) on China’s Shenzhen Stock Exchange.
- The S&P 500 Index is a market-capitalization-weighted index that consists of 500 publicly-traded large U.S. companies that are considered representative of the broad U.S. stock market.
- The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The Index is supplemented by the subindexes of the 33 industry sectors. The Index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.
Corresponding Indexes for Fixed-Income Performance Exhibit
- U.S. High Yield - ICE BofA U.S. High Yield Constrained Index
- Global Sovereigns - Bloomberg Barclays Global Treasury Index
- Global Non-Government - Bloomberg Barclays Global Aggregate ex-Treasury Index
- Emerging Markets (Local) - JPMorgan GBI-EM Global Diversified Index
- Emerging Markets (External) - JPMorgan EMBI Global Diversified Index
- U.S. Mortgage-Backed Securities (MBS) - Bloomberg Barclays US Mortgage Backed Securities Index
- U.S. Asset-Backed Securities (ABS) - Bloomberg Barclays US Asset Backed Securities Index
- U.S. Treasurys - Bloomberg Barclays US Treasury Index
- U.S. Treasury Inflation-Protected Securities (TIPS) - Bloomberg Barclays 1-10 Year US TIPS Index
- U.S. Investment-Grade Corporates - Bloomberg Barclays US Corporate Bond Index
Corresponding Indexes for Regional Equity Performance Exhibit
- United States - S&P 500 Index
- United Kingdom - FTSE All-Share Index
- Pacific ex Japan - MSCI Pacific ex Japan Index (Net)
- Japan - TOPIX, also known as the Tokyo Stock Price Index
- Europe ex U.K. - MSCI Europe ex UK Index (Net)
- EM Latin America - MSCI Emerging Markets Latin America Index (Net)
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 SEI’s portfolios or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.
There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments.
Diversification may not protect against market risk. Past performance does not guarantee future results. Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.
Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).