The Fund registered double-digit returns for the quarter, underperforming its benchmark the Russell Midcap Value Index. All 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 financials and industrials sectors contributed most to gains for the period. Stock selection decisions in the consumer discretionary, financials, industrials and energy sectors detracted from the Fund’s performance relative to the benchmark. Stock selection decisions in health care and technology benefited returns versus the benchmark.

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 value indexes, all sectors registered positive returns with stocks in the financials and industrials sectors contributing most significantly to gains. Utilities and telecommunications stocks posted positive returns but underperformed value indexes.

Within the consumer discretionary sector, shares of McGraw-Hill fell as the company reported lower second-quarter profit, partly hurt by a restructuring charge related to job cuts. The company publishes textbooks and owns BusinessWeek magazine and Standard & Poor’s. Its profits report beat Wall Street expectations. But a ruling that Standard & Poor’s must face fraud charges over certain security ratings pressured the company’s share price and the publisher lowered the high end of its full-year adjusted profit guidance. The Fund’s position in H&R Block delivered positive returns for the period but underperformed broadcasters, publishers and other media companies that rebounded from multiple quarters of declines. The tax preparation company reported a quarterly loss in the period but affirmed forecasts for profits for the year.

Signs of a nascent economic recovery and an upturn in demand served to boost share prices for companies in the industrials sector, which had been extremely hard hit by recession. The Fund’s position in refuse hauler Waste Management contributed to gains for the period but underperformed some of the sector’s leaders in commercial printing, defense contracting and transportation. The Fund’s position in Fluor Corp declined as the engineering firm experienced a slowdown in U.S. construction projects. Fluor builds large, complex industrial and infrastructure projects. Despite some volatility it has remained profitable throughout the recession and reported positive quarterly earnings during the period.

In health care, shares of McKesson Corporation rose as the supplier of information and care management products and services company reported better-than-expected quarterly profits. The pharmaceuticals wholesaler noted that strong cash flow and cost management enabled it to raise its full-year earnings forecast, which helped send share prices higher. Shares of Shire Pharmaceuticals also advanced on a positive quarterly earnings report. The company is in talks with the Food and Drug Administration about bringing a drug for a rare disease to U.S. patients, as rival Genzyme Corp. faces shortages for its best-selling treatments. The Shire drugs are alternatives to treatments made by Genzyme, which is having trouble supplying the drugs since its Boston manufacturing plant was shut down in June following a viral contamination.

Gains in the Fund’s technology holdings reflected improved consumer confidence. Communications and information technology company Harris Corp. reported earnings results that topped Wall Street expectations and the company offered a strong forecast, sending the stock up for the period. The company cited new contract wins, improved order rates, and a solid pipeline of new opportunities. CA Inc also posted earnings results that beat Wall Street's expectations and the business-software maker raised its fiscal-year forecast.