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Third Quarter 2009

In the third quarter of 2009, the Global Emerging Markets Fund underperformed its benchmark, the MSCI Emerging Markets Index. The country performance within the index was uneven--Brazil, South Korea and Russia’s equity indices outperformed the MSCI benchmark, while India, South Africa, Mexico and China’s underperformed.

Strengths

  • The fund was overweight Russian equities, which outperformed during the quarter as the ruble strengthened and energy and commodity prices staged a comeback.
  • Brazil’s economic performance continued to be among the best in Latin America, with eight consecutive months of Industrial Production growth. A cut in Brazilian interest rates--to 8.75 percent from 9.25 percent--added to the positive momentum for the equity market.
  • The third quarter witnessed numerous upgrades of the GDP forecast for South Korea in 2009 and 2010 on belief that Europe and the U.S.--South Korea’s main export destinations--will recover faster than had been expected.

Weaknesses

  • The fund was underweight Brazil, which was the best-performing market during the third quarter (up 32.7 percent).
  • The fund was overweight China, which was the worst performer (down 5.7 percent) among the main constituents of the Index. Following aggressive lending by commercial banks in the first half, various market participants expected tightening by the Central Bank, which did not materialize. We expect a slow-down in lending in the second half of the year.
  • The fund was underweight South Korea, which was the second-best-performing market (up 30.3 percent).

Opportunities

  • Rio de Janeiro was selected to host the 2016 Summer Olympics, which we believe will provide an additional stimulus to the Brazilian economy for the next few years. The country has been enjoying a flurry of M&A activity with bids for GVT Holding--first by Vivendi and later by Telesp--and a successful IPO by Santander Brazil.
  • We have seen a gradual pick-up in traffic activity for the three major airport groups in Mexico following massive declines earlier in the year due to the swine flu scare and effects of a global economic slowdown. Some market participants are expected to raise earnings estimates for those airport groups.

Threats

  • The biggest threat for emerging markets stems from general economic activity slowing. A destocking phase has occurred for many goods and now the question is whether the recovery will stall or build upon the recent bounce in activity.
  • The proposed tax reform in Mexico is receiving mixed reactions from different industry groups. For example, the beer manufacturers are believed to be contemplating an 11 percent price increase for their products should the proposed tax increases be implemented. Higher prices are also expected for telecom services, which are likely to feed into the Consumer Price Index (CPI) and weigh on the equity markets.

Past performance does not guarantee future results.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The MSCI Emerging Markets Total Net Return Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in emerging market countries on a net return basis (i.e., reflects the minimum possible dividend reinvestment after deduction of the maximum rate withholding tax). The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.

Holdings in the Global Emerging Markets Fund as a percentage of net assets as of 9/30/09: GVT Holding 0.00%, Vivendi 0.00%, Telesp 0.00%, Santander Brazil 0.00%


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