Concerns about the global economy and the emergence of the sovereign debt crisis in Europe weighed on market performance during the quarter. Disappointing Chinese and European manufacturing statistics, along with unexpectedly weak U.S. home sales and gross domestic product results, further contributed to the market pullback. However, the emerging markets outperformed on the strength of improving economic fundamentals for most countries in the asset class. The U.S. dollar strengthened during the quarter, which was unfavorable for U.S. investors in the emerging markets. While the MSCI Emerging Markets Index fell 8.37% when measured in U.S. dollars, it lost only 5.61% in local currency terms.

At the country level, returns were led by Indonesia, Peru and Colombia, which gained 4.22%, 4.20% and 3.58%, respectively. Hungary and Poland were the worst performing countries, with returns of -30.24% and -21.80%. At the sector level, materials, energy and information technology were the worst performing sectors with returns of -13.93%, -11.40% and -10.07%. Consumer staples stocks were flat for the quarter, while consumer discretionary shares returned -2.52%.

If you are a long-term investor seeking access to the total return potential of emerging markets equities, this Fund may be right for you. Emerging markets exposure may be appropriate for investors with an above-average tolerance for market volatility who seek a global component for a broadly diversified investment portfolio.

• Select stocks on the basis of quantitative analysis with the aim of producing a portfolio that will approximate the performance of the MSCI Emerging Markets Index.
• Maintain industry diversification, country weightings, market capitalization and other financial characteristics similar to the Index.
• Buy and sell securities in response to changes in the Index.