Spurred by concerns about European debt contagion, the lack of progress toward a solution to the debt crisis, and a progressively more cautious view toward global growth, international small-cap markets tumbled during the quarter. For the full quarter, the S&P® Developed ex-U.S. SmallCap benchmark declined by double digits. The performance of the Munder International Small-Cap Fund reflected the negative stock market environment, as the Fund performed in line with its benchmark. Not surprisingly; Greece was the worst performing country within the benchmark, as continued fear over a potential sovereign debt default sent Greece down 38.8%. There was no place to hide within continental Europe, as all eleven developed markets within the European Monetary Union underperformed the overall index. The largest economy, Germany, a bright spot in the second quarter, was penalized for being at the forefront of any perceived rescue plan and declined 29.6%. German business confidence dropped to its lowest level in more than a year and the German economic recovery appears to be stalling. Switzerland fell 24.5% despite the Swiss Central Bank’s unexpected rate cut and the initiation of an exchange rate ceiling to curb the Swiss franc’s appreciation versus the dollar and euro. Japan was the best performing country and returned 0.4%. Japanese GDP shrank less than forecast, indicating the country is continuing to rebound from March’s earthquake disaster. Canada was down 21.7% as the Bank of Canada left interest rates on hold and announced that the need to withdraw stimulus has diminished, signaling that growth prospects had weakened.

Sector returns once again reflected the market’s smaller appetite for risk as two defensive sectors, consumer staples (-9.2%) and telecommunication services (-13.7%), were the best performers. Energy (-28.5%) was the worst performing sector as the price of oil fell due to the expectation of a recovery in Libyan oil output and lower expected global growth.

Strategy Review

Overall security selection was positive within both countries and sectors, and was responsible for the Fund’s outperformance. Excess return was generated in three of the five geographic regions and in five of the ten economic sectors. Notable outperformance for the quarter came from health care, consumer discretionary, and information technology. Within the Fund’s health care sector, performance was boosted by two Japanese holdings in particular. Ship Healthcare Holdings, Inc. (0.9% of the Fund) returned 36.2%. The Japanese medical equipment distributor has seen better than expected contributions from large projects for its hospital consulting business, and expanded capital investment by medical facilities. Also within health care, Japanese hospital administrator and home nursing provider, Nichii Gakkan Co. (0.4% of the Fund) was up 29.8%, based on reported solid earnings and the announcement of an overseas acquisition to boost its educational division. Consumer discretionary outperformance was boosted by British apparel retailer Next PLC (0.4% of the Fund), which returned 5.7%. The company was able to overcome rising input costs and falling consumer confidence to deliver strong first half earnings and boost its earnings guidance for the full year because of improving online sales and solid international growth. Within the Fund’s information technology sector, Korean internet service provider Daum Communications Corp. (0.6%) returned 17.1% as the company has benefited from a surge in mobile advertising. Also within technology, Japanese computer network system designer Net One Systems Co., Ltd. (0.5%) finished the quarter up 40.3%. The company raised full year earnings forecasts due to strong demand for higher capacity wireless networks and interest in cloud computing services.

In contrast to these positive factors, security selection within the Fund’s industrials sector detracted from relative performance as some of the more cyclical holdings suffered from the weakening macro environment. The share price of Swedish industrial machinery company Trelleborg AB (0.7%) dropped 41.3% due to concern over a shortfall in public spending from probable government austerity measures in Western Europe. Finnish marine and terminal equipment manufacturer Cargotec Corp. (0.4%) dropped 52.0% after the company reported mixed second quarter results, with margins better than expected in marine cranes and disappointing in port terminal equipment. The global economic outlook has reduced expectations for margin improvements in the coming year.

Market Outlook

Despite enhanced European sovereign debt concerns and a string of disappointing macroeconomic reports late in the quarter, international small-cap markets managed to finish in positive territory. In addition to posting solid absolute performance, the Munder International Small-Cap Fund had strong relative performance, handily outperforming its S&P benchmark. Concern over potential sovereign debt default left Greece down 17.9% as the runaway worst performing country. Canada dropped 5.9% and Australia fell -3.8% as the mineral-rich countries suffered from declining commodity prices and concerns over a slowdown in exports to China. Despite widespread fears of contagion from peripheral European countries, there were notable bright spots within Europe. The two largest economies, Germany (+6.9%) and France (+5.8%) both reported strong first quarter Gross Domestic Product (GDP) figures due to higher exports and domestic spending. The German central bank, Bundesbank, raised its forecasts for German economic growth, as it believes Germany has entered a broad and prolonged upswing. The U.K. (+4.8%) benefited from a surge in reported retail sales and an improved consumer confidence reading in April. Sector returns reflected the market’s smaller appetite for risk as defensive sectors, such as telecommunication services (+6.4%), and consumer staples (+4.3), outperformed the more cyclical energy (-6.0%) and materials sectors (-2.1%).

Strategy Review

Security selection was strong within both countries and sectors, and was responsible for all of the Fund’s relative outperformance. Excess return was generated in nine of ten sectors, with notable outperformance coming from the Fund’s consumer discretionary, health care and information technology sectors. Within the consumer discretionary sector, Japanese electronic retailer K’s Holding Corp. (1.0% of the Fund) was up 48.6% and Hong Kong-based apparel distributor Giordano International Ltd. (0.5% of the Fund) rose by 43.5% due to reported strong earnings that beat analysts’ estimates. Also in the consumer discretionary sector, De’Longhi S.p.A. (0.5% of the Fund), the Italian manufacturer of small household appliances and a new position in March, returned 22.6% as sales were boosted by an improved product portfolio and emerging markets’ demand. In the health care sector, Japanese medical equipment distributor Ship Healthcare Holdings, Inc. (0.6% of the Fund) was up by 45.3% with fourth quarter earnings that exceeded expectations. The company benefited from better than expected contributions from large projects for the hospital consulting business, and expanded capital investment by medical facilities. Information technology holding Sopra Group (0.6% of the Fund), with an 18.6% return, posted double-digit revenue growth with stable margins in a recovering French IT service market. The company also announced a new strategy to unlock value by separating its IT service and software operations, spinning off the latter.

In contrast to these positive factors, security selection within the Fund’s energy sector detracted from relative performance. Oil exploration company TransGlobe Energy Corp. (0.4% of the Fund) fell by 24.7% after reporting two failed exploration wells, along with the impact that civil unrest in Egypt and Yemen has had on the company’s oil production.

Market Outlook

Despite geopolitical turmoil in the Middle East and the devastating earthquake, tsunami and subsequent nuclear radiation crisis in Japan, international small-cap equity markets posted positive returns in the first quarter of 2011. The Munder International Small-Cap Fund also posted a positive return but slightly trailed its S&P® Developed ex-U.S. SmallCap benchmark. Performance was the strongest in Europe, as certain fiscally constrained countries saw their markets post double-digit returns after the European Union widened the scope of the rescue facility for the region’s most indebted countries. Spain (+18.6%) was the top performer, while Greece returned 10.0%. France (+13.5%) was also strong after the January reading of business sentiment advanced to a three-year high. Small cap stocks in Hong Kong (-2.8%) and Singapore (-2.7%) were the worst performing on concerns over a slowdown in exports to China, after China raised interest rates for the third time since October. Not surprisingly, Japan (-1.1%) also finished the quarter in negative territory as the market sold off following the March 11th earthquake and tsunami. The price of oil surged over 20% in the quarter as fighting between Libyan rebels and troops loyal to Muammar Qaddafi intensified. This was reflected in sector returns as energy (+9.2%) was the top performing sector. Telecommunication services was the worst performing sector, brought down by several disappointing earnings reports.

Fund Review

All ten sectors ended the quarter in positive territory. While security selection within the Fund’s sectors was a drag on relative performance overall, there were several bright spots. Relative performance within the health care sector was strong as the Fund benefited from being overweight in the health care technology industry. Within that group, pharmacy benefit provider SXC Health Solutions Corp. (0.5% of the Fund) rose 26.8% after the company reported excellent fourth quarter earnings and cited its strong sales pipeline. The Fund’s information technology holdings also generated solid relative performance, outperforming the corresponding benchmark sector by 2.4%. The Fund’s holding of Japan’s Dainippon Screen Manufacturing Co., Ltd. (0.6%), a global market leader in semiconductor wafer cleaning equipment, advanced 48.7% due to greater than anticipated order flow, primarily from Taiwanese contract chipmakers. While the stock suffered a 20% correction after news of the earthquake, it has since recovered all lost ground as the company’s production operations have been unaffected.

Security selection in the Fund’s energy sector detracted from relative performance in the quarter. Oil exploration company Gulfsands Petroleum PLC (.4%) sold off by 22% due to the political turmoil in the Middle East, as the company’s main operations are in Syria. The company also released a disappointing drilling result in early February. Volatility in the Japanese equity market spiked dramatically following news of the devastation in northern Japan. The Fund’s Japanese holdings outperformed the benchmark’s Japanese holdings for the quarter, and we will continue to assess holdings for the mid- and long-term impact.

Market Outlook