The Fund registered double digit gains for the quarter, outperforming its benchmark, the Russell 2000 Growth Index. All sectors with the exception of telecommunications 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 energy sectors contributed most significantly to gains. Stock selection decisions in these sectors and in the financials sector as well as an overweighting in energy helped the Fund outperform the benchmark. Stock selection decisions in health care, telecommunications and consumer staples detracted from relative performance.

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 energy stocks, higher oil prices triggered share price increases for the Fund’s holdings in exploration and production companies. In this environment, the Fund’s positions in Quicksilver Resources and Petroquest Energy advanced. Although gas prices have not rebounded to the extent oil has, Quicksilver advanced on news of promising natural gas tests from its first completed well in the Horn River Basin in British Columbia. Shares of Petroquest Energy rose as one analyst raised expectations based on confidence in the company’s cost-cutting measures. Production rose 4% from the comparable period of 2008.

In the technology sector, shares of Web analytic company Omniture rose sharply in the period on the announcement it would be purchased by Adobe, which makes graphic design software such as Flash, Acrobat and Photoshop. The acquisition is expected to create a one-stop shop for software services that can display ads and collect data from them. Shares of Teradyne also rose as one analyst upgraded the chip testing equipment maker's stock, citing a key new contract and cost cutting. The new contract is to provide equipment for Qualcomm, the wireless communications chip maker

In the health care sector, uncertainty from public debate over the provision of health services in the U.S. suppressed returns. In this environment, shares of Amag Pharmaceuticals, a biopharmaceutical company with proprietary nanoparticle technology, reported losses in revenues that were primarily the result of a decrease in license fee revenues and product sales. Analysts also downgraded the stock warning of a slow launch for the company's iron replacement therapy Feraheme.

Among consumer staples holdings, shares of Smart Balance, maker of butter-like spreads, were volatile and detracted from performance. Shares fell despite higher earnings, volume growth in case shipments and sustained higher pricing that carried over from the prior year. Earnings improvements were attributable to lower financing-related costs.

We expect moderate equity returns in coming quarters as companies confront stiff challenges in achieving the top-line growth necessary for sustained earnings improvement. Consumer confidence remains poor, reflecting at least in part, a weak outlook for jobs growth. Despite this, stock valuations remain reasonable, interest rates are low and companies continue to revise earnings upward. The depreciation of the dollar continues to benefit U.S. exporters, including technology companies. We believe this environment will favor companies exhibiting superior fundamental strengths and managers with proven stock selection skills. We continue to encourage portfolio diversification and active management for investors seeking long-term appreciation and preservation of capital.