Global Bond Fund

Third Quarter 2008

Fixed income markets continued to experience extreme volatility during the third quarter, as investor concerns regarding the financial crisis and the health of corporate issuers remained extremely high. In this environment, yield spreads widened dramatically as many fixed income investors fled any and all forms of risk for the perceived safety of U.S. Treasuries. Demand for Treasuries was so strong during the quarter that the yield on the three-month T-bill briefly dipped into negative territory. The performance differential between Treasuries and investment-grade corporate bonds was pronounced, with corporate bonds trailing by almost 9% for the quarter. High-yield bonds fared even worse in this risk-averse environment.  Global bonds held up somewhat better than U.S. corporates, but returns were hampered by a strengthening U.S. Dollar, which gained over 9% relative to a standard basket of foreign currencies.

The Fund’s performance relative to the benchmark during the period was hampered primarily by its overweight to corporate positions in the U.S., U.K., and European bond markets. The majority of the relative underperfomance was realized in September, in the face of an unprecedented number of developments in the financial sector. These include the U.S. government takeover of AIG, Fannie Mae and Freddie Mac, the Lehman bankruptcy, the closing of the oldest money market fund, and Bank of America’s announced acquisition of Merrill Lynch, all of which negatively impacted bond markets globally. With respect to currencies, overweight positions in the Singapore Dollar, Indonesian Rupiah, and Malaysian Ringgit also detracted from performance as these currencies weakened relative to the U.S. Dollar. An overweight to the Icelandic Krona also dampened returns, as increased risk aversion drove selloffs in the high-yielding currency.

The Fund’s underweight to the Euro contributed positively during the quarter, as weaker economic data and concerns over European banks’ balance sheets caused a decline in the currency. Underweight positions to the Australian Dollar and Canadian Dollar also added to relative returns, as concerns over global growth and falling commodity prices caused both currencies to fall relative to the greenback during the quarter. In a reversal from the second quarter of 2008, the Fund’s top-performing issues were the highest quality issues, including U.K. Treasuries and German government bonds.

After the historic spread widening seen in the third quarter, corporate credit has never been cheaper than it is currently, as measured by spreads. Fund manager Loomis Sayles believes that the global recession is likely to be of moderate to average length and magnitude. It is also difficult to imagine greater risk aversion than we have seen in recent weeks, absent some catastrophic event. Given the record wide spread levels, Loomis continues to search for opportunities at substantial discounts that offer solid long-term value. The outlook on currencies from commodity-related countries is generally negative, and the U.S. Dollar/Euro trade is likely to be range-bound, as both regions are facing similar problems. While duration was reduced modestly during the year, it remains approximately one year longer than the benchmark. For now, weak domestic and global economic conditions will likely take precedence over inflation concerns, keeping a lid on interest rate increases for the next several quarters. If fiscal authorities are forced to ease monetary policy, Loomis may then look to shorten duration.

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.

Investments in foreign securities, even though publicly traded in the United States, may involve risks which are in addition to those inherent in domestic investments.

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.

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.