U.S. equities continued their steep ascent amid growing evidence of an economic recovery and stronger than expected corporate profits. The Russell 3000 Growth Index, a broad market growth yardstick, gained during the third quarter. Risk tolerances increased during the quarter. Investors continued to move money out of cash and low yielding money market mutual funds into higher-yielding, riskier investments in the equity, debt, and currency markets.

Stocks climbed higher despite doubts surrounding the rally. Many investors had anticipated a correction given the magnitude and speed of the market recovery that began in March. However, the Russell 3000 Growth Index ended the quarter near its highest level for the year.

Broad based gains extended across all sectors in the Russell 3000 Growth Index. Financial stocks were among the leaders of the third quarter rally one year after the collapse of Lehman Brothers. Industrials, technology, materials, and consumer discretionary sectors were also among the best performing sectors. Defensive consumer staples, health care, and utilities segments joined energy and telecommunication services as the relative laggards. Emerging market equities outperformed developed markets and in the U.S., mid caps and small caps outperformed large caps and value outperformed growth.

Stocks appreciated as the economy showed broad signs of improvement. The majority of economic data released during the quarter came in above expectations. Manufacturing reports were largely positive, a slew of housing reports showed signs of stabilization, and consumer confidence improved overall. While the global recession appears to be over, the labor market is still weak and a disappointing manufacturing report and a consumer confidence report led to modest market declines during the last two trading days of the month.

Companies cut costs aggressively during the economic downturn. These efforts helped over 70% of companies in the S&P 500 Index report second quarter profits that beat consensus earnings estimates. Analysts’ expectations were low going into the quarter and have been steadily revised higher. Following a two year streak of profit declines, analysts are now expecting a steep earnings recovery.

Mergers and acquisitions picked up after a two year decline in activity. Major deals were announced including Walt Disney’s purchase of Marvel Entertainment and Dell’s acquisition of Perot Systems. Low interest rates, improving credit markets, and high levels of corporate cash provided a favorable environment for deal making.

The Allianz RCM Strategic Growth Fund delivered a strong absolute return during the third quarter, but underperformed the Russell 3000 Growth’s return. Technology and health care were the biggest areas of strength in the Fund. This was offset by weakness in the industrials and energy sectors.

In technology, exposure to chipmakers Marvell Technology Group and Intel contributed positively to the Fund’s relative returns. Marvell posted strong quarterly earnings that exceeded its positive preannouncement as bookings improved across all product segments throughout the quarter. Similarly, Intel boosted its guidance for the fiscal third quarter. Revenue and gross margin expectations were raised as the result of stronger than expected demand for microprocessors and chipsets.

Asset manager Invesco was also a top performer in the Fund. The company reported a second quarter profit that exceeded analyst expectations as strong investment performance and a stock market rally helped the company attract $4.7 billion from investors. Invesco ended the quarter with a high level of cash, which should leave the company well positioned for strategic opportunities in a favorable acquisition environment.

Conversely, energy holding First Solar detracted from relative returns. First Solar is the world’s biggest maker of thin-film solar power modules. The company reported an exceptional second quarter; however, the results were not enough to outweigh investors’ fears that increased competition from Chinese manufacturers would continue to pressure modular prices. First Solar introduced a rebate program targeted at some customers in Germany.

Industrials holding Quanta Services also held back relative returns. The engineering and construction company’s shares declined after its third quarter forecast fell short of analyst expectations. Quanta purchased an energy services provider in North America and intends on making more acquisitions this year.

Major equity indices retreated at the end of September and early October, highlighting investors’ uncertainty about the stock market rally following the steep and swift recovery experienced since March. The Russell 3000 Growth Index and the S&P 500 Index each have gained since reaching a multi-year low on March 9.

However, we believe the market will continue to move moderately higher in the intermediate-term as the economy modestly expands over the next four quarters. Government spending, low interest rates, high levels of cash on the sidelines, and positive earnings revisions help support our positive outlook. Over 60% of the government’s $787 billion fiscal stimulus package is unspent and a surge of spending expected in 2010 should help the economy grow.

Corporate profits have exceeded analysts’ expectations for the last 2 quarters, lifted by aggressive cost cutting efforts. We believe profits will continue to top expectations as demand returns and companies benefit from the high leverage in their cost structure.