The Fund registered gains for the quarter but underperformed the benchmark Russell Midcap Growth Index. Most 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 consumer discretionary and technology sectors contributed most significantly to gains. Stock selection decisions in the industrials, health care and technology sectors contributed most significantly to underperformance of the benchmark. Security selection in consumer discretionary, consumer staples and materials contributed positively to 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.

In the industrials sector, shares of engineering and construction firm URS fell as an analyst downgraded the stock, indicating that the impact from federal stimulus spending came later than what had been expected, hurting companies such as URS that are involved in construction design work. However, the report said the company remains well positioned to benefit as stimulus spending and the 2010 federal budget becomes available.

Among health care stocks, uncertainty resulting from public debate over the provision of health services in the U.S. suppressed returns. Shares of medical laboratory operator Quest Diagnostics declined in the period on concerns of slowing profit growth and expectations that lab operators may get lower prices for their services next year due to an expected cut in Medicare payment rates. Shares of health benefits provider Coventry Health Care declined in the closing weeks of the period on news of a class action lawsuit alleging that the company made materially false and misleading statements to investors about the success of its Medicare Private-Fee-For-Service business.

Within the technology sector, shares of Akamai Technologies declined in the period after the company reported second-quarter adjusted profits that missed estimates. An analyst downgrade also hurt Akamai’s share price. The company provides technology for managing Internet traffic

A number of holdings in the consumer discretionary sector contributed positively to relative returns, including kitchenware company Williams-Sonoma and clothing retailer Guess. Shares of Williams-Sonoma rose after an analyst upgraded the stock, citing expected improvement in the company’s profit margins on merchandise from improved cost management. Williams-Sonoma reported that second-quarter profits fell but beat analyst expectations. Shares of Guess climbed as the company reported fiscal 2010 second-quarter profits and revenue improvement, especially in Europe. The company said expenses fell and the clothing supplier posted strong product margins.

In the consumer staples sector, shares of Whole Foods Market rose in the period after the organic foods grocery chain reported better-than-expected growth in quarterly profits and raised full-year earnings guidance. Analysts said the earnings gain could be an indication of an improvement in consumer spending as shoppers are more willing to spend money on higher-priced food items.

Within materials, shares of chemical maker Ashland rose after analysts boosted the company’s stock price target, citing Ashland’s robust free cash flow. The company reported a decline in quarterly net income due to weak sales volumes. However, analysts believe earnings will recover in 2010 amid expected improvement in the global economy and company efforts to reduce debt.

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.