Mid-Cap Value Equity

Performance Update:
The Russell Midcap Value Index returned 5.21%, underperforming its growth counterpart (Russell Midcap Growth Index), which returned 6.69% for the quarter. The Mid-Cap Value Equity Fund I Shares advanced 5.04% for the fourth quarter, underperforming the Russell Midcap Value Index benchmark by 0.17%. However, on a YTD basis the Mid-Cap Value Equity Fund I Shares returned 46.98% outperforming the Russell Midcap Value Index benchmark by 12.77%.

Contributors:
During the quarter, Information Technology had the largest contribution relative to the benchmark as the sector benefited from stock selection. Harris Corp. outperformed as orders for its key product, Falcon radios, started to pick up, beating expectations for significant declines. Analog Device Inc. outperformed as semi conductor sales continued to rebound and the strong ISM numbers should lead to a rebound in industrial segment revenues and lift overall corporate margins. In Consumer Staples, Estee Lauder Cos. outperformed due to management's successful efforts to improve the sales execution and profitability of the company. Safeway, Inc. outperformed as the market realized the stock had been discounting a permanent impairment to the company's profitability that was unrealistic in view of the company's investments in store remodels and better competitive pricing in addition to a recovering consumer spending environment. In Health Care, Cooper Cos. outperformed as the new management team's productivity initiatives began to exhibit results as both margins and cash flows rebounded in fourth quarter. The company also provided 2010 guidance that was slightly above consensus expectations. Becton Dickinson & Co. outperformed as the stock recovered from prior losses when the company released its official guidance that was better that its preliminary guidance. In Consumer Discretionary, Abercrombie & Fitch Co. outperformed due to growing investor enthusiasm for the company's international growth investments that are beginning to contribute significantly to its profitability.

Detractors:
During the quarter, Financials were the largest detractor to relative performance as a result of stock selection. In Financials, Marshall & Illsley Corp. lagged as the Company raised capital in October to solidify capital ratios which priced at a discount based on an uncertain economic outlook and negative sentiment toward commercial real estate exposure in the loan portfolio. Northern Trust Corp. underperformed as reduced investor risk appetite and a prolonged low interest rate environment constrained earnings. In Materials, Ashland Inc. underperformed due to disappointment that the company was not more optimistic on the sustainability of peak margins in their Valvoline business. However, margins remain at very healthy levels relative to history and the stock remains undervalued. FMC Corp. lagged as a result of concerns over volume and pricing in their Industrial Chemicals business. In Industrials, Fluor Corp. lagged as construction trends remain weak causing limited improvement in the stock price. SPX Corp, underperformed because of fears of a downward backlog revision due to funding issues in South Africa for power projects pressured the stock.

Strategy and Outlook:
During the quarter, the equity markets continued to show resiliency despite discouraging data points and credit concerns in Dubai. Early in the quarter fears relating to strength and sustainability in the economy weighed heavily on equities despite better than expected third quarter earnings reports. By December, those fears were muted when the economy showed signs of recovery as GDP was better than expected and industrial production and retail sales showed healthy gains. We remain cautious as we still see headwinds for the economy, such as high consumer debt levels, ballooning federal deficits, and potentially higher taxes and interest rates.

During the quarter, the Fund remained overweight in Energy based on our bullish outlook on commodities. Also, the Fund increased its position in Financials as we are warming up to bank stocks. The Fund reduced its weighting in Utilities over concerns that higher interest rates and higher taxes on dividends will negatively impact the group.

We will continue to adhere to our Value process, which uncovers stocks that pay secure dividends, trade at or near the lower third of historical valuation and possess financial stability. The Fund will not abandon or massage the process to capture short-term performance, as history has shown, valuation disconnects tend to revert back to normalcy.

Securities mentioned (% of portfolio): Harris Corporation (0.90), Estee Lauder Companies (CI A) (No longer in portfolio), Astoria Financial Corporation (2.20), Williams Companies (1.07), Abercrombie & Fitch Company (CI A) (No longer in portfolio), Valero Energy Corporation (2.01), SUPERVALU Incorporated (2.39), Marshall & Ilsley Corporation (1.55), Northern Trust Corporation (2.62), Zions Bancorp (No longer in portfolio), Ashland (2.31), Fluor (2.74), SPX (2.03), FMC (.97), Becton Dickenson (No longer in portfolio), Cooper Cos (.99), Analog Device (1.00).

Stocks are more volatile and carry more risk and return potential than other forms of investments. Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value. Mid-capitalization funds typically carry additional risks as smaller companies generally have a higher risk of failure. Mutual fund investing involves risk, including the possible loss of principal.

Beta is a means of measuring the volatility of a security or portfolio of securities in comparison with the market as a whole. A beta of 1 indicates that the security will move with the market; greater than 1 indicates that it's more volatile than the market, and less than 1 indicates that it's less volatile than the market.

The Russell Midcap Value Index measures the performance of those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values. Investors cannot invest directly in an index.

The views expressed by the Fund's managers are as of the quarter-end specified. This information is subject to change without notice as market conditions change, and is not intended to predict the performance of any individual security, market sector, or RidgeWorth Fund.

Past performance does not guarantee future results.