The Fund registered gains for the quarter, finishing in line with the benchmark Russell 1000 Growth Index. All stock sectors finished higher for the quarter, extending the upturn that began in early spring as signs of an economic recovery remained mixed. On an absolute basis, holdings in the technology and consumer discretionary sectors contributed most significantly to gains. Stock selection decisions in the industrials and consumer staples sectors detracted from returns versus the benchmark. Security selections in the consumer discretionary, materials and energy sectors benefited relative returns.

Capital Markets

U.S. equity markets advanced solidly in the third quarter, adding to gains for the year and recovering more of the value lost in the 16-month bear market that ended in March. Although economic growth remained subdued, investors showed newfound enthusiasm for riskier assets, bidding up stock prices especially in the beaten-down financials and materials sectors. During the quarter, value and growth indexes spanning all capitalization segments recorded double-digit returns with value stocks somewhat more in favor. Among growth indexes, all sectors registered positive returns with stocks in the technology and consumer discretionary sectors contributing most significantly to gains. Telecommunications and utilities stocks posted positive returns but underperformed growth indexes.

Among industrials stocks, shares of the engineering and construction firm Fluor Corp. fell in the period after the company posted a steep decline in quarterly profits. Volatility in commodity prices and uncertainty in government infrastructure projects contributed to the decline. Fluor remains a best-in-class engineering and construction company with a healthy backlog.

In the consumer staples sector, shares of Kroger, the nation’s largest grocery store operator, fell in the quarter after the company reported quarterly profits declined as shoppers came into Kroger stores less frequently and bought only what they needed at the lowest prices. The company also reduced its outlook for the year amid intense competition from discount food retailers.

Within the consumer discretionary sector, shares of worldwide clothing retailer Polo Ralph Lauren climbed in the period as the company reported solid second-quarter results that beat analyst expectations. The company is expected to benefit from an anticipated pickup in retailers’ orders after cutbacks in the past year. Shares of Priceline.com also climbed in the quarter, benefiting from an analyst upgrade. The analyst said although leisure travel has held up largely because of promotions and discounts, there are signs of stabilization in the overall travel sector.

Among materials companies, shares of glass maker Owens-Illinois climbed in the quarter, benefiting from an analyst report that company profitability will likely be better next year as consumer confidence and demand for glass improve. The analyst noted that demand for glass likely reached a bottom in the first half of the year and may be poised to recover as the global economy stabilizes.

In the energy sector, shares of oil and gas services firm Cameron International rose in the period as energy stocks, led by top names in the oil services sector benefited from firmer crude-oil prices at the close of the quarter. The company raised its full-year adjusted earnings outlook and posted second-quarter earnings that beat Wall Street expectations.

We expect equity returns to moderate in coming quarters as a subdued economic expansion limits top-line growth for companies. In such an environment, one characterized by scarce growth, investors typically will pay a premium for shares of companies that deliver sustained improvements in free cash flow. Our investment philosophy and process focus on identifying reasonably valued companies with improving fundamentals likely to lead to possible earnings growth. This approach and discipline has proven rewarding for long-term investors and we remain confident that it will continue to identify and capture compelling opportunities.