The equity markets suffered their worst quarterly loss since 2002 due to concerns of a US economic slowdown and continuing problems in the credit markets. The financial sector, in particular, was one of the hardest hit as further writedowns in subprime mortgages and concerns of the financial ability of bond insurers to meet their obligations took the sector lower. Throughout the quarter, the Fed tried to accommodate the markets by lowering interest rates. However, these actions failed to give support to the markets, culminating in the near collapse of Wall Street broker Bear Stearns. Despite all of the negative news, commodity related stocks performed relatively well as oil prices reached above $100 and gold traded above $1,000 during the quarter.

The best performing sector was consumer staples and the worst performing sector was telecommunication services. In terms of style, value stocks outperformed growth stocks. The fund’s best performers were oil and natural gas exploration companies EOG Resources and Southwestern Energy Company.

The fund was managed as a large-cap core strategy during 1999.

A An overall rating is based on a weighted average of the fund’s ratings for the three-, five-, and ten-year periods, if applicable. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating (based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a funds monthly performance (including the effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive five stars and the next 22.5% receive four stars. Highly rated funds are defined as those that have a four or five star Morningstar rating. Data provided by Morningstar, Inc. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Morningstar is a registered trademark of Morningstar, Inc. and is not affiliated with Paydenfunds.