(As of June 30, 2010)

Market Overview
Concerns about Greece’s fiscal situation and the contagion effect on other peripheral European countries intensified in April and May.  Policy makers within the European Union, Central Bank and the IMF attempted to assuage these concerns through a €750 billion (approximately $950 billion) aid package meant to address not only Greece’s immediate debt crisis but also ensure additional liquidity to deal with future potential crises as well.  As a result of these key issues, investors focused on the impact of Europe’s woes on size and strength of the emerging economic recovery.  Coincident with these concerns, the US dollar strengthened against most currencies as risk aversion increased, and concerns spread about the Euro.  The global equity market shed nearly 12% during the second quarter, with the worst performance occurring in both Western and Eastern Europe.  Greece fell nearly 39%, while the rest of the “PIIGS” countries each fell around 20%, exacerbated by US dollar strength during the period.  Pacific ex-Japan and the UK were also weak performers, falling 14% and 13%, respectively.  Japan was the best performing developed region, falling just over 9% during the quarter while the US returned   -11.45%.  Emerging markets, which were hampered by concerns about overheating earlier in the year, outperformed their developed counterparts during the quarter, falling 8.18%, led by Asia, which was down just over 5%, offsetting weak performance by Central/Eastern Europe and Brazil. 

The defensive Staples, Telecom Services and Utilities sectors outperformed in the second quarter while Materials and Energy suffered due to concerns about a slowdown in home construction in emerging markets, coupled with an overall global slowdown.  Financials were hampered globally due to investors’ concerns about the European ramifications and additional regulation on prospective sector earnings. 

Within this context, the Fund outperformed during the quarter due to strong stock selection and fundamental performance by Fund holdings, coupled with overall sector and regional positioning.  Second quarter performance was driven by the overweighting and stock selection in Discretionary and Industrials, while the Fund’s conservative positioning and stock selection in Financials, particularly within Europe  added value.  In addition, stock selection within Energy and IT were also additive to performance.  Regionally, the Fund added significant value in Japan, Developed Europe and emerging markets stocks. 

The Fund’s overall positioning did not substantially change during the quarter, with its focus remaining in Discretionary and Industrials at the expense of Materials and Financials.  Regionally, the Fund remained underweighted in developed market financials due not only to concerns emanating from the European situation and potential regulatory changes, but also from a growth perspective relative to other opportunities.  While Europe was slightly underweighted versus the Index, it was significantly underweighted in the Euro region, although we used market movements as an opportunity to increase exposure in the export-oriented Industrials sector, which stood to benefit not only from stabilizing/improving demand in its end markets, but also a lower cost basis given the declining  Euro.  Emerging markets exposure remained at approximately 28%, above the market weighting due to good corporate fundamentals and long term growth outlook.