Fremont Bond Fund

Third Quarter 2008

Fixed income securities, along with other financial assets, lost ground during the third quarter, as global financial markets were rocked by the most severe credit crisis since the 1930s. Massive deleveraging triggered by the subprime debacle produced an upheaval in the U.S. financial system and an unprecedented level of intervention by the Federal Reserve and the Treasury. This intervention came after 225 basis points (2.25%) of easing and an extraordinary expansion of the Fed’s lending facilities earlier in the year failed to unfreeze credit markets. The month of September featured a succession of shocking events, including the Treasury’s bailout of mortgage agencies Fannie Mae and Freddie Mac and insurer AIG, as well as the realignment of the biggest U.S. investment banks via bankruptcy, merger, recapitalization, or transformation into bank holding companies. The turmoil extended to money markets, where interbank lending rates soared to record highs as banks hoarded cash amid concern about each other’s credit quality.

Starting with interest rate strategies, an emphasis on short maturities in the U.S. and the U.K. added to returns as the yield curves in both countries steepened; however, implementation of this strategy via money market futures had a negative effect on performance as interbank lending rates rose. An overweight to agency mortgage pass-throughs was positive for performance, as, overall, these high-quality assets outperformed the mortgage market. An underweight to corporate securities contributed to performance, but an overweight to bank and brokerage securities was significantly negative as contagion from subprime-related deleveraging swept through the sector despite unprecedented government support. Modest holdings of municipal bonds also detracted from performance, as yield ratios relative to Treasuries widened to historic levels as investors flocked to the safety of Treasuries.

Looking ahead, PIMCO believes the crisis in credit and financial markets will cause developed economies to operate well below potential for some time. Emerging economies are likely to fare better but will not enjoy a complete decoupling from the credit-induced slowdown in the U.S., Europe, and the U.K. With the global economy mired in the most serious economic crisis since the Great Depression, policymakers are struggling to find responses that are both necessary and sufficient to cope with the problems. Inherent in a crisis of this magnitude are heightened risks associated with the left tail of the probability distribution -- that is, events that seem unlikely but could have highly negative and very destabilizing consequences.

During this period of extreme market stress, PIMCO will continue to employ defensive strategies while focusing on high-quality assets in an effort to mitigate tail risk. PIMCO will, for the time being, remain neutral to slightly overweight duration, as it believes rates are unlikely to rise as the economy weakens. With global yield curves expected to remain steep, PIMCO plans to emphasize the short end of the U.S., Europe, and the U.K. yield curves to benefit from potential central bank easing and a continued flight to high-quality, short-maturity assets. PIMCO plans to overweight agency mortgage pass-throughs, which offer relatively high yields and strong credit quality. Lastly, PIMCO will hold its positions in bonds of financial companies despite recent losses, as its exposure is focused on companies deemed to be under the Fed’s umbrella, which should ultimately benefit in the longer term from recapitalization, deleveraging, and greater balance sheet transparency.

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 risks associated with investments in debt securities, such as default risk and fluctuations in the perception of the debtor's ability to pay its creditors.

The Fund may use derivative instruments for hedging purposes or as part of its investment strategy.  There is a risk that a derivative intended as a hedge may not perform as expected.  The main risk with derivatives is that some types can amplify a gain or loss, potentially earning or losing substantially more money than the actual cost of the derivative or that the counterparty may fail to honor its contract terms, causing a loss for the Fund.  Use of these instruments may also involve certain costs and risks such as liquidity risk, interest rate risk, market risk, credit risk, management risk and the risk that a fund could not close out a position when it would be most advantageous to do so.

High yield bonds (also known as “junk bonds”) are subject to additional risks such as the risk of default.

Changing interest rates may adversely affect the value of an investment. An increase in interest rates typically causes the value of bonds and other fixed income securities to fall.

Investments in international securities are subject to certain risks of overseas investing including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. These risks are magnified in emerging markets.

Many bonds have call provisions which allow the debtors to pay them back before maturity. This is especially true with mortgage securities, which can be paid back anytime. Typically debtors prepay their debt when it is to their advantage (when interest rates drop making a new loan at current rates more attractive), and thus likely to the disadvantage of bondholders, who may have to reinvest prepayment proceeds in securities with lower yields. Prepayment risk will vary depending on the provisions of the security and current interest rates relative to the interest rate of the debt.

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.

Unlike the Fund, the Index is unmanaged, is not available for investment and does not incur expenses. Please see Index Definitions for all our funds' benchmarks.