International Equity Fund

Third Quarter 2008

Foreign equity markets experienced a very difficult third quarter. The global credit crisis spread fears throughout the world that frozen credit markets would have potentially disastrous implications for the global economy. Performance suffered across all sectors, most notably in previous stalwarts, energy and materials, where slowing demand pushed commodity prices significantly off their previous highs in a relatively short time period. Traditional defensive sectors such as consumer staples and health care were, somewhat expectedly, the best performers during this period, although they still delivered negative returns. Meanwhile, the U.S. Dollar continued to strengthen relative to a broad basket of developed market currencies, which resulted in weaker returns for U.S.-based investors into foreign currencies. These investors haven't seen this phenomenon for quite some time, and have long benefitted from their foreign equity exposure, at least partially, by the strengthening of the underlying currency of foreign-based companies relative to the U.S. Dollar.

During the third quarter, the Fund delivered disappointing absolute and relative returns, underperforming the MSCI EAFE Index. The primary driver of the relative underperformance was weak stock selection in several sectors, including consumer discretionary and financials. Although the energy holdings within the Portfolio fared no worse than those within the MSCI EAFE Index, they were among the biggest detractors to performance; several emerging-market energy holdings, such as China Shenhua and Petroleo Brasileiro, returned worse than -35%. In fact, the Portfolio struggled from non-benchmark exposure in Canada and the emerging markets, primarily due to several natural resource holdings that were big positive contributors to Fund performance prior to the start of the third quarter.

On the positive side, the Fund benefitted from several of its financial holdings bouncing back after a difficult start to the year. Most notably, larger holdings BNP Paribas and Societe Generale outperformed the broader market. In addition, several health care holdings such as GlaxoSmithKline and Sanofi-Aventis did quite well as investors flocked to the perceived safety of these pharmaceutical companies.

As the markets have become increasingly more precarious and volatile, the portfolio managers have been presented with more opportunities, as a significant amount of bad news has been priced by investors. By our estimation, valuations for foreign equities, in general, look as compelling as they have in years, even with slower growth and muted earnings expectations added to the equation. Even within the heavily maligned and constantly changing financial sector, there remain many high-quality companies with sound balance sheets and diverse revenue streams that are now selling at attractive valuations. Despite the difficulty of global commodities in the third quarter, the portfolio managers continue to believe that supply constraints, along with long-term secular demand, bode well for the prospects of these holdings, as they now sell at more attractive valuations after their recent price declines. Overall, the increased volatility of the global capital markets provides the portfolio managers increased opportunity to add value going forward, as such volatility leads to more mispricings across a variety of stocks in different countries and sectors.

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.

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.

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.