High Yield Fund

Third Quarter 2008

The third quarter marked the worst quarter in the history of the high-yield market, as the crisis within the financial system deepened. Financial markets suffered dramatically amid unprecedented financial failures and stresses, growing recessionary concerns, general uncertainty about the actions of the Federal Reserve, and increased aversion to risk. Extreme volatility and the rippling effects of the crisis paralyzed the market, which hurt investor sentiment and caused yield spreads to widen significantly and approach all-time highs. The yield spread on the Lehman Brothers U.S. Corporate High Yield Index widened over 300 basis points (+3.00%) and topped 1,000 basis points (+10.00%) for the first time since 2002. Spreads widened as investors preferred the safety of U.S. Treasuries in the belief that a rise in bond defaults is increasingly likely as a recession looms.

The Managers High Yield Fund modestly outperformed the LB HY Index last quarter, aided by security selection in the banking, telecommunication, and consumer service sectors. The largest performance contributors during the last three months were Residential Capital, Washington Mutual, ALH Finance, MetroPCS Wireless, and Clear Channel Communications. Underperforming sectors included technology, natural gas, and home construction. More specifically, performance was hindered by positions in NXP Funding, Dex Media, SemGroup, , and General Motors. As of quarter-end, the Fund is overweight in the consumer product, telecommunication, and consumer service sectors and remains underweight in the electric, natural gas, and financial sectors. As usual, sector weightings are not based on its macro perspective, but driven by JPMorgan's view of the relative value opportunities in those sectors and/or favorable fundamental outlooks.

With spreads and yields approaching all-time levels, JPMorgan's expectations are for recessionary economic conditions for the balance of 2008 and into 2009. Market valuations appear very attractive from a historical perspective, but price improvement will be dependent on stabilizing credit conditions. In the short term, JPMorgan expects volatility to remain elevated and market liquidity to be poor, reflecting the uncertain economic environment. Sentiment swings concerning the depth of the economic weakness and the extent of the financial crisis will likely drive near-term spread levels. Longer term, JPMorgan believes current valuations will prove attractive, and expects spreads will tighten as current levels overly discount its expectation for future defaults.

Corporate default rates will almost certainly increase in 2009, but JPMorgan expects them to remain below the market's draconian expectations due to low refinancing requirements, flexible debt terms, and reasonable corporate cash flows. Compared to previous cycles, the majority of companies in the high-yield universe today have stronger balance sheets and minimal refinancing needs, unlike many credits in the investment-grade universe, which should help mitigate credit deterioration in the current economic downturn. New issuance volumes have fallen since May, and for the third quarter only 20 deals totaling $7.2 billion priced in the high-yield market, compared to 23 deals totaling $11.1 billion for the same period last year. Activity will likely remain dormant given the environment and risk-averse appetites. Security selection takes on greater emphasis in this difficult market environment, and JPMorgan will continue to rely on its bottom-up security selection process to capitalize on dislocations in relative value.

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 holds securities in which the issuer of the security may default or otherwise be unable to honor a financial obligation. The Fund holds securities rated below investment grade that are especially susceptible to this risk. These issuers may be involved in bankruptcy proceedings, reorganizations, or financial restructurings, and are not as strong financially as higher-rated issuers.

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.