Essex Growth Fund

Third Quarter 2008

In health care, the Fund benefited from its overweight position, but weak stock selection more than offset that contribution. Elan Corp. was a significant detractor during the quarter. The company took a big hit when data for their Alzheimer’s drug did not meet investor expectations. This and other news prompted a liquidation of our position. Genentech Inc. was one highlight, bouncing back from a disappointing second quarter. The company is expected to be acquired by Roche Holding at a premium. We expect health care to continue to be an area of relative strength in the last part of the year. Biotechnology companies in particular should receive a seasonal boost from several important medical meetings and year-end product approvals.

The Fund’s technology stocks were mostly disappointing for the quarter, and losses were broad. Brocade Communications Systems Inc. and Research In Motion Ltd. were laggards in the communications technology space. Weak gross margins in its most recent quarter and below consensus gross margins guidance for the next several quarters had a negative impact on Research in Motion despite continued strong BlackBerry® sales. We continue to emphasize companies in the wireless data, productivity enhancing software, and Internet services areas, which we believe have strong secular growth prospects. 

The Fund’s holdings in basic materials and industrials also detracted from performance, as these sectors reversed course this past quarter, hurt by slowing developed economies and fears of a deceleration in the developing world. While the macroeconomic concerns are genuine, many stocks in these areas are discounting a significant downturn and are selling near trough valuations. We believe this pullback is largely unfounded and an economic slowdown is likely to affect demand far less than investors fear. Thus, we maintain our positions in companies such as Potash Corp. of Saskatchewan Inc. and Quanta Services, which detracted from the Fund’s quarterly performance.

In energy, the Fund’s underweight position was beneficial, as stocks in this sector came under pressure in the third quarter, retracing a significant portion of the gains they earned in the first half of the year. Weak stock selection, however, partially offset the allocation benefits. Peabody Energy Corp. was the largest detractor from performance, but we believe the mining outlook is strong and thus have maintained a position. Over the long term, we remain positive on the energy services and drilling companies as well as solar and wind equipment suppliers.

Going forward, we will be watching several indicators, including corporate bond spreads, mortgage spreads, and LIBOR rates, as evidence that the government’s rescue package and Federal Reserve’s initiatives are alleviating the credit crisis. While the timing of the plan’s implementation remains unclear, what is likely is that Treasury bond yields will remain low and the Federal Reserve will remain accommodative, particularly since inflation fears have receded with the drop in fuel and food prices. We also know that equity markets historically bottom well in advance of the economy. Price/earnings ratios have been compressed, cash is building on the sidelines, and corporations have announced sizeable stock buybacks, all traditional indicators of market troughs. In this sea of doubt, we believe investors will continue to pay a premium for companies of all sizes with liquid balance sheets, high and rising cash flows, and sustainable earnings growth. 

This commentary reflects the viewpoints of the Essex Investment Management Company as of 10/08/2008.

Investors should carefully consider the fund's investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.835.3879 or download a free prospectus. Read it carefully before investing or sending money.

The performance shown represents past performance and is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. From time to time the advisor has waived fees or reimbursed expenses, which may have resulted in higher returns. The listed returns and yields on the Fund are net of expenses and the returns and yields on the indices exclude expenses. Current performance of the Fund may be lower or higher than the performance quoted.

The Fund invests in growth stocks, which may be more sensitive to market movements because their prices tend to reflect future investor expectations rather than just current profits. Growth stocks may underperform value stocks during given periods.

Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of Managers Investment Group and are not intended as a forecast or guarantee of future results. Any securities discussed may no longer be held in an account’s portfolio. It should not be assumed that any of the securities transactions discussed were or will prove to be profitable, or that the investment recommendations we make in the future will be profitable.

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