Natural Resources stocks continued to perform strongly in the third quarter, and continue to lead the broader market year to date. Stocks were driven higher by increased investor confidence in a gradually improving global economy supported by a synchronous improvement in global economic data, rising commodity prices, and rising earnings expectations. Volatility remained high, with many stocks experiencing moves during the period of 20% or more. Visibility on a resumption in earnings growth for the sector has improved materially. Many companies have taken the opportunity to further strengthen balance sheets and reduce costs in anticipation of improved demand in the future.

At current levels, we continue to find the valuations of many stocks in our universe attractive. Supply of most natural resources remains constrained, and we believe the resumption of investor confidence in the demand growth thesis is necessary to enable the stocks to recover and begin the next leg higher.

For the three months ended September 30, 2009, the Allianz RCM Global Resources Fund significantly outperformed the MSCI World Energy & Materials custom benchmark. Over the quarter, strong stock selection among energy companies as well as materials companies helped the Fund overcome the modest headwind provided by slightly negative sector allocation.

Our oil services overweight has been a consistent theme in the Fund for four years, and during the quarter several holdings in this subsector continued to rally from their lows to make a positive contribution to relative performance. Our emphasis within the sector on companies with higher exposure to international and offshore operations paid off, as National Oilwell Varco, BJ Services, and Noble Corp all delivered strong relative performance, partially offset by underperformance in Weatherford. In our view, earnings expectations for the subsector have become attainable for the current year, and may be too conservative for next year. At current levels, we believe valuations in the oil services sector are still attractive from a historical perspective. Looking over the long term, we continue to expect that strong growth in oil company capital spending on exploration and production, especially offshore and in international markets, should benefit the oil services companies.

We maintain a positive long term view of well positioned companies within the Exploration and Production segment, which was a positive contributor to performance during the quarter. Within the sector Sandridge, Carrizo, Anadarko, and Newfield Exploration were the top performers. The Fund will generally continue to favor those E&P companies that we believe will be able to deliver the highest growth in production and reserves over time, while maintaining a return on invested capital above the peer group and a strong balance sheet. Similar to the oil services sector, we believe that the valuations of the E&P sector remain attractive.

Our modest relative underweight to the Materials sector was a negative contributor to performance, but this was offset by positive stock selection. Teck Resources, Cliffs Natural Resources, Vale, and Freeport McMoRan were all very strong performers in the quarter. We have been increasing the allocation of the Fund to Materials as we anticipate continued improvement in the economic data for the consumers of materials, in particular China and the emerging markets. We believe the economic stabilization and recovery in China remains the key issue for Materials stocks, and will look for opportunities to become more involved in the sector as we continue to assess this key variable.

Over the long term, RCM believes the secular case for energy is still sound. We believe global oil supply will remain challenged by the continued depletion of existing oil fields, declining OPEC spare capacity, production growth difficulties outside of OPEC, heightened risks of supply disruptions, and in particular, significant underinvestment in the development of additional oil reserves. Global oil demand is currently declining, and will likely remain negative during 2009. We expect a modest recovery in demand to occur in 2010, driven higher by economic expansion, especially in developing countries. Over time, RCM believes the market’s long-term price expectations for oil and natural gas should continue to trend higher, which should help support valuations in the energy sector. We expect that additional climate change legislation, combined with growing consumer demand, will continue to be supportive of our position in the Alternative Energy sector. Within the Materials sector, we expect that base metals prices will also continue to fluctuate within a wide range, but higher production costs should keep prices above historic averages.