Equity prices in international small-cap markets rebounded nicely in March from a moderate sell-off in January and February, and the S&P® Developed ex-U.S. SmallCap Index, the benchmark for the Munder International Small-Cap Fund, posted a positive return for the first quarter of 2010. The Fund outperformed its benchmark for the quarter, largely due to strong security selection.

For what appeared to be fairly calm markets with declining volatility, there was quite a bit of dispersion among country returns. Most of the dispersion came from within the Eurozone. Greek stocks posted the largest decline, down 13% on average, while the market in Finland was up 9.0%. The net effect of the government rescue packages over the last two years has been a significant shift in leverage from the private to the public sector. Given the growing debt on government balance sheets in several countries, including Portugal, Italy, Greece and Spain, investors are growing more cautious. Returns in those countries for the quarter were negative, ranging from -4.1% to -9.2%. Japan, on the other hand, was a bright spot, as stocks there rose 8.7% during the quarter. Japanese equities were boosted in March by the Bank of Japan's announcement of continued monetary ease and by the weakness in the Japanese yen relative to the U.S. dollar.

Portfolio Review

Nine out of the ten sectors of the Fund's S&P® benchmark posted positive returns. Only the utilities sector finished in negative territory, with a return of -1.1%. Information technology (+7.3%) and telecommunications services (+7.6%) were the leaders for the quarter while financials (+1.7) trailed the overall market. In terms of the Fund's performance, security selection had a positive impact on relative performance in seven of ten sectors, with particular strength in energy. The Canadian oil exploration and production company Petrominerales Ltd. (0.6% of the Fund) was up 83.1% as they continued a successful drilling program in Colombia. Macarthur Coal Limited (0.5%), an Australian coal mining company, was another top contributor in the sector. Its stock returned 28.3% for the quarter, benefiting from higher coal prices and a conditional takeover offer from Peabody Energy Corp. The relative performance of the Fund's health care sector was boosted by SXC Health Solutions Corporation (0.3%), whose stock price rose 24.0% during the quarter after the company posted strong fourth quarter sales and raised earnings guidance for 2010. While stock selection in the Fund's consumer discretionary sector was an overall negative, ProSiebenSat.1 Media AG (0.9%), a German broadcasting company, had a positive impact on relative returns. The company continued to have positive momentum in advertising growth, while maintaining a tight grip on programming costs. Security selection in the industrials sector lagged relative to the Index, in part due to Solar Millennium AG (0.2%), a German solar thermal power plant designer whose stock price suffered from lower than anticipated margin guidance and the abrupt resignation of the CEO.

Market Outlook

International small-cap equities rebounded strongly after a rough start in the early stages of 2009. The S&P Developed ex-U.S. SmallCap® Index, the benchmark for the Munder International Small-Cap Fund, posted its second best annual return since 2003, following its worst year on record in 2008*. While international small-cap stocks lagged larger-cap stocks during the fourth quarter, they had the strongest performance for the year as a whole.

Canada, with its mineral-rich companies, was one of the top performing countries in the Fund's S&P benchmark, with a 14.1% return for the quarter and a 93.2% return for the year. The United Kingdom was up a mere 3.4% for the quarter but still stayed ahead of the European region, which fell by 1.2%. Europe had some of the best and worst performers, with Norway's stock market up 11.3% due to higher energy prices, while Ireland and Greece were down 18.8% and 12.4%, respectively, given their precarious fiscal situations. Japan lagged with a negative 6.7% return as it continued to struggle with deflation and a stronger currency.

Unlike the second and third quarters of 2009, investors began to respond to fundamentals, such as earnings growth and quality of earnings. While earnings trends improved all year, investors were more focused on valuation and low stock prices during the early months of 2009. It appears that a shift in investors' preferences is underway, with less attention being paid to lower quality and inexpensive stocks and more to companies that are expected to produce solid growth in a still uncertain environment. This shift had a positive impact on the relative performance of the Fund, which performed well ahead of its benchmark for the fourth quarter, posting outperformance in eight of ten sectors.

Fund Review

Not all sectors of the Fund's benchmark had positive returns during the fourth quarter, with both the financials and health care sectors posting negative returns. The Fund's holdings in these sectors showed relative strength, however, helping to mitigate some of the downside. The top performing sectors of the Fund's benchmark were materials and energy. Both sectors were positively impacted by the solid upward trend in commodity prices. The Fund's holdings in Mount Gibson Iron LTD (0.6% of the Fund) were up 52.9% for the quarter, while gold companies, such as Red Back Mining, Inc. (0.5%) and Alamos Gold, Inc. (0.4%), continued to provide solid earnings as a result of rising gold prices. The industrials sector was a bit of a laggard relative to other sectors for the year, but the Fund's focus on noncyclical companies that produce sustainable earnings growth provided a very nice turnaround in that sector's performance for the quarter and for the full year. Aggreko PLC (0.5%) was up 33.8% for the quarter. The U.K. company is the top provider of portable power sources in developing countries where the local power grid may have intermittent outages. Virgin Blue Holdings Ltd. (0.5%), which is an Australian regional airline, continues to see load factors increase, and we believe the company has very healthy earning prospects going forward. The strength in oil prices continued through 2009 and the Fund's relative performance benefited from overweighted positions in Pacific Rubiales Energy Corp. (0.3%) and Petrominerales Ltd. (0.4%). Both companies are based in Canada but have had drilling success in Columbia, South America. Pacific Rubiales was up 27.9% for the quarter and Petrominerales was up 34.7%, boosting the performance of the Fund's energy and Canadian holdings relative to its benchmark.

Outlook

As we closed out the first decade of this century, and for that matter the millennium, we put behind us a decade with one of the lowest returns for equity securities in developed markets since the 1930's. The U.S. and several other economic centers came dangerously close to a depression in 2009, but a global synchronized effort to keep economies from deflating seems to have worked thus far; although Japan is still wavering. One near-term risk is that too much government stimulus for too long may ignite a bout of inflation, which would be problematic with the current level of unemployment. Policy withdrawal will hopefully be timely and gradual. We would expect equity returns to be much stronger over the next ten years, since we anticipate that banking reforms will take place that will mitigate risk and leverage throughout the global market place, as well as the financial systems that support it. This should provide a much more stable environment for moderate growth around the world. All of these factors would bring longer-term stability to capital markets and that would bode well for our security selection capabilities. The Fund's strategy continues to focus on companies with stronger business momentum and attractive valuations. This is the hallmark of the Fund's style and we believe that it is the basis for generating competitive returns over the longer term.

Almost half of the countries in the Fund's S&P benchmark were up well over 30% for the third quarter. Australia led the way with a 37.9% return, after a second-quarter jump of 42.2%. Japan eked out a 7.7% increase in the third quarter. It remained the laggard year-to-date as of September 30 with only a 15.4% return, compared to an almost 45% return for the S&P Developed ex-U.S. SmallCap benchmark. Although the underweight in Japan was a plus for the relative performance of the Fund year-to-date, Japan was one of the most challenging areas for the Fund to add value in 2009. Headwinds shifted in the Fund's favor towards the end of the quarter, as security selection produced a positive contribution to relative performance in September after lagging in July and August. In any recovery, there tends to be a period when the stock price performance of lower quality companies accelerates ahead of higher quality companies. These periods have tended to be followed by a change in leadership, as investors regain their focus on fundamental factors and begin to rotate to companies that have improving business momentum and not just historically low, bargain basement prices.

All sectors of the Fund enjoyed positive returns for the quarter. The energy sector was the performance leader, producing a return of 24.9%. The utility sector, with a 13.1% return, had the weakest absolute performance. In relative terms, performance for the quarter was boosted by SXC Health Solutions Corporation (0.6% of the Fund), a Canadian health care company that advanced 83% for the quarter due to a robust second-quarter earnings announcement. In the financials sector, Korean bank positions also made a positive contribution to relative performance, advancing over 50% for the quarter because of signs of recovery in the South Korean economy.

Much of the drag on relative returns in July and August came from the consumer discretionary and industrial sectors in Japan and the U.K. In the consumer discretionary sector, an underweight in the auto components group detracted from relative returns. The performance of the Fund's industrials sector was held back by an underweight in early cyclical industrials companies with severely depressed earnings. A key reason for the underweight is that the Fund focuses on companies with improving earnings potential. This was a negative for relative performance during the quarter, as companies with earnings disappointments had a return advantage over those with earnings upgrades. We believe that earnings will be positively correlated with stock price performance when investors begin to focus on longer term fundamentals.