Essex Small/Micro Cap Growth Fund

Third Quarter 2008

Health care was a bright spot in a gloomy market last quarter, as investors gravitated towards companies relatively immune from the credit crisis. Our overweight position was beneficial, but was offset by weak stock selection. Medical supply companies Thoratec Corp. and Volcano Corp. were the largest contributors to per-formance. Thoratec reported significant upside in the quarter, driven by sales of its new HeartMate II pump. Biolase Technology Inc. was a detractor, as it continued to experience revenue pressure. We expect health care to continue to be an area of relative strength in the last part of this year.

The Fund’s technology stocks were mostly disappointing for the quarter, with substantial weakness in the semiconductor industry. Within semiconductors, ANADIGICS Inc. and AXT Inc. were notable detractors from performance. ANADIGICS lowered earnings expectations, a result of a decrease in demand in the wireless headset end market. We are retaining our position, as recent management changes may help reverse the com-pany’s difficulties. In software, Concur Technologies Inc. posted positive results, benefiting from continued execution in the travel and expense management market, as well as investor enthusiasm for the company’s announced partnership with American Express.

The Fund’s industrial holdings detracted substantially from performance, as concerns over slowing eco-nomic growth weighed on returns. The most notable detractor from performance was A-Power Energy Genera-tion Systems Ltd., which experienced considerable weakness in its stock price as alternative energy trades were unwound. American Superconductor was another notable detractor, declining after the company issued disappointing earnings guidance, primarily driven by below-the-line items. On a positive note, DXP Enterprises Inc. was a contributor in the quarter, as the stock responded favorably to quarterly results that exceeded ex-pectations and to the company’s completion of an accretive acquisition.

Stocks in the energy sector came under pressure in the third quarter, retracing a significant portion of the gains they earned in the first half of the year. Our underweight position in traditional energy thus had a signifi-cantly positive impact on returns. Within the sector, GMX Resources Inc. traded down with the energy group, as investors grew increasingly concerned about downside potential in commodity prices. While the near-term outlook is uncertain, we maintain our focus on companies exposed to growth in alternative energy, as we think these companies help solve the energy independence and environmental issues associated with traditional fossil fuel consumption.

In the months ahead, 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 his-torically 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 10/08/08.

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 is subject to the special risks associated with investments in micro-cap companies such as relatively short earnings history, competitive conditions, less publicly available corporate information, and a reliance on a limited number of products.

The Fund is subject to risks associated with investments in small capitalization companies, such as erratic earnings patterns, competitive conditions, limited earnings history, and a reliance on one or a limited number of products.

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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