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.