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Russell Investment Funds

Filed: 5 Mar 09, 7:00pm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

 

Investment Company Act file number: 811-05371

 

 

 

 

 

 

 

Russell Investment Funds

(Exact name of registrant as specified in charter)

909 A Street, Tacoma Washington 98402

(Address of principal executive offices) (Zip code)

 

 

Gregory J. Lyons, Assistant Secretary

Russell Investment Funds

909 A Street

Tacoma, Washington 98402

253-439-2406

(Name and address of agent for service)

 

Registrant’s telephone number, including area code: 253-572-9500

 

Date of fiscal year end: December 31

 

Date of reporting period: January 1, 2008 to December 31, 2008


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Item 1.Reports to Stockholders


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LOGO

 

2008 ANNUAL REPORT

 

 

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

 

 

DECEMBER 31, 2008

FUND

Moderate Strategy Fund

Balanced Strategy Fund

Growth Strategy Fund

Equity Growth Strategy Fund

 

LOGO


Table of Contents

 

 

Russell Investment Funds

Russell Investment Funds is a series investment company with nine different investment portfolios referred to as Funds. These financial statements report on four of these Funds.


Table of Contents

 

Russell Investment Funds

LifePoints® Funds

Variable Target Portfolio Series

Annual Report

December 31, 2008

Table of Contents

 

   Page
To Our Shareholders  3
Market Summary  4
Moderate Strategy Fund  10
Balanced Strategy Fund  16
Growth Strategy Fund  22
Equity Growth Strategy Fund  28
Statements of Assets and Liabilities  33
Statements of Operations  34
Statements of Changes in Net Assets  36
Financial Highlights  38
Notes to Financial Highlights  40
Notes to Financial Statements  41
Report of Independent Registered Public Accounting Firm  48
Tax Information  49
Basis for Approval of Investment Advisory Contracts  50
Shareholder Requests for Additional Information  54
Disclosure of Information about Fund Trustees and Officers  55
Adviser, Money Managers and Service Providers  59


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Russell Investment Funds - LifePoints® Funds Variable Target Portfolio Series

Copyright© Russell Investments 2009. All rights reserved.

Russell Investments is a Washington, USA corporation, which operates through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual Life Insurance Company.

Fund objectives, risks, charges and expenses should be carefully considered before investing. A prospectus containing this and other important information must precede or accompany this material. Please read the prospectus carefully before investing.

Securities products and services offered through Russell Financial Services, Inc. (effective June 2, 2008, the name changed from Russell Fund Distributors, Inc.), member FINRA, part of Russell Investments.

Indices and benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Index return information is provided by vendors and although deemed reliable, is not guaranteed by Russell Investments or its affiliates.

Russell Investments is the owner of the trademarks, service marks, and copyrights related to its respective indexes.

Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.


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To Our Shareholders

We are pleased to provide you with the Russell Investment Funds 2008 Annual Report. It includes portfolio management discussions and fund-specific details that will give you an in-depth understanding of fund performance for the fiscal year ended December 31, 2008.

It would be an understatement to say that 2008 has been a difficult year and the market crisis of the past couple of months has defied all predictions. Virtually no sector of the financial industry or the economy has been spared.

All of us at Russell want you to know that we are sensitive to investor concerns. While market events have impacted the performance of the funds, we believe that investors are well-served by remaining focused on long-term disciplined investing in well-diversified, asset allocated portfolios.

The Russell Investments team has years of experience in managing people’s money through various market cycles, trends and turnarounds. As always, we are monitoring our investment managers closely to ensure their adherence to their long-term strategies despite the recent disruptions.

As we all collectively weather this storm, we believe now is the perfect time for you to talk with your financial advisor to ensure that your portfolio remains aligned with your long term goals.

Each and every day we strive to improve financial security for people. We will not waiver in that commitment and sincerely appreciate your continued support.

Best regards,

LOGO

Greg Stark

Chief Executive Officer, Chairman and President

Russell Investment Management Company

 

To Our Shareholders 3


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Russell Investment Funds

Market Summary as of December 31, 2008 (Unaudited)

U.S. Equity Markets

For the fiscal year ending December 31, 2008, U.S. equity markets were remarkably weak, with the broad market Russell 3000® Index posting a 37.3% drop amid the worst financial crisis in almost a century. Major bankruptcies, the freezing of credit markets, and the widespread global recession fears which ensued — particularly during the third quarter and first half of the fourth quarter — drove investors to sell riskier assets as fear and panic pervaded the market.

The economic crisis stemmed from issues in the financial sector. The U.S. housing market stood at the center of the financial sector’s problems. The housing slowdown that began in the summer of 2006 and continued in 2007 intensified throughout this fiscal year and led to rising loan default rates and home foreclosures which, in turn, led to further housing weakness. As home prices dropped and default rates increased, the value of derivative instruments, such as mortgage-backed securities, whose values were based on these mortgages, plummeted. This forced banks to take massive write-downs of book values as required by mark-to-market accounting. With the lack of certainty about the real book value of assets on the balance sheets of banks, banks have been unable and/or hesitant to lend funds to other banks. Despite aggressive interest rate cuts by the Federal Reserve Board (the “Federal Reserve”), which took the Federal Funds rate from 5.25% (in third quarter 2007) to a range between 0% and 0.25% (at fiscal year end), mortgage and other lending rates did not come down as quickly as banks used the wider lending spread to offset their substantial write-downs on book values. Over the last month and a half of the year, however, these rates did start to drop sharply. In addition to higher interest rates, banks having stricter lending standards had a profound impact on the availability of affordable credit for potential homebuyers, small businesses, and other borrowers.

Due to write-downs, dwindling capital bases and a crisis of confidence in their businesses, several large banks, brokers, mortgage companies and insurance companies filed for bankruptcy, were seized by the federal government and resold, or were bailed out by the government during the fiscal year, with the most notable ones being Countrywide Financial, Bear Stearns, IndyMac Bancorp, Lehman Brothers, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), American International Group (AIG), Washington Mutual and Wachovia. Amid concerns of additional bankruptcies and uncertainty surrounding which institutions may be bailed out by the government, the fear-driven environment has persisted. In addition, there have been a number of problems at hedge funds, leading to massive deleveraging, or forced selling of assets, in order to meet client redemptions. This forced selling of assets has put severe downward pressure on many securities, particularly the highly-liquid larger cap U.S. stocks, regardless of those securities’ fundamentals.

After more than four years of strong growth, corporate profits had dipped fairly sharply by the end of 2008, especially in the financial services sector. The growth rate of gross domestic product also fell, although it stayed marginally positive until the third quarter report which showed a contraction of 0.5%, the worst since the 2001 recession. There was significant deterioration since then, as fourth quarter GDP estimates are -4.2% on average. A significant reduction in consumer spending had the most substantial negative impact on the GDP number, as consumers became fearful due to rising unemployment levels, declining home values and increased difficulty in getting loans. The Consumer Confidence Index released by the Conference Board decreased to 38 in October — the lowest value in the history of the Index (started in February 1967). It increased slightly in November, before dropping back to the all-time low of 38 in December. The first half of the year also featured the negative impact of higher energy prices on consumer spending. Oil prices reached $147/barrel in mid-July before dropping sharply to below $40/barrel in December.

Although the domestic economy slowed during the fiscal year, some segments of the U.S. equity market were helped in the first half of the year by strong exports to faster-growing, developing, non-U.S. economies. With approximately 40% of U.S. corporations’ revenues derived from international customers, the declining U.S. dollar in the first half of 2008 provided increased demand for U.S. products abroad. During the second half of the year, however, the U.S. dollar rallied and the global economy slowed considerably. After being rewarded in the first half of 2008, exposure to companies tied to the global economy underwent a strong reversal that began in July 2008 and has been swift and dramatic. Higher valuation cyclical (more linked to the economic cycle) companies and those with more debt on their balance sheets were among the most negatively impacted over the course of the year. Companies that have high forecasted growth rates have also been hit hard as investors have become less confident that these growth rates can be sustained going forward.

 

4 Market Summary


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In the wake of these powerful macroeconomic forces, the fiscal year presented a very difficult active management environment which was marked by three distinct themes: 1) largely indiscriminate selling of U.S. stocks by panic-driven, risk-averse investors concerned first about a U.S. recession and then about a global recession, 2) intense selling of financial stocks for a majority of the period, and 3) the strength of global companies for roughly the first half of the fiscal year as multinational companies with exposure to developing markets outpaced domestically-driven companies and commodity-related companies (especially energy) outperformed the general market by a wide margin.

The weakening of the global economy over the last half of the year caused oil prices to fall from their record highs and led the other energy sector to sell off sharply. Over the course of the year, the worst performing sectors in the Russell 3000® Index were other energy -53.6%, financial services -51.1%, the other sector (which is dominated by GE and contains other large conglomerates, (-50.9%), and materials & processing -47.3%. Meanwhile, the best performing sectors in the Russell 3000® Index were those that are considered to be more defensive. The slower-growing, less economically-sensitive consumer staples sector was the best relative performer -17.7%, followed by integrated oils -21.7%, health care -22.4%, and utilities -29%.

Weakness was experienced across investment styles as well as the capitalization spectrum. While both the growth and value investment styles were down substantially, value outperformed growth in the small cap segment (Russell 2000® Value -28.9%, Russell 2000® Growth -38.5%) and to a lesser degree in the large cap segment (Russell 1000® Value -36.9%, Russell 1000® Growth -38.4%). In general, small cap stocks outperformed large caps (-33.8% and -37.6% for the Russell 2000® Index and Russell 1000® Index, respectively). Midcap and microcap stocks underperformed by the widest margins with the Russell Midcap® Index down 41.5%, and the Russell Microcap® Index down 39.8%.

During 2008, the market environment was largely hostile for active management as investors sold stocks regardless of fundamentals, the basic determinants of a stock’s value. Small cap fund managers had the most difficult time relative to their benchmark. Growth managers across the capitalization spectrum also struggled as the shift away from higher growth stocks came quickly and sharply. Core, or market-oriented, managers struggled less than style-focused managers in fiscal year 2008. The Lipper® Small Cap Core Funds Average trailed the Russell 2000® Index by 2.7%, the Lipper® Small Cap Growth Funds Average underperformed the Russell 2000® Growth Index by 3.6% and the Lipper® Small Cap Value Funds Average underperformed the Russell 2000® Value Index by 4.9%. The Lipper® Large Cap Core Funds Average outperformed the Russell 1000® Index by 0.1%, the Lipper® Large Cap Growth Funds Average underperformed the Russell 1000® Growth Index by 1.8% and the Lipper® Large Cap Value Funds Average underperformed the Russell 1000® Value Index by 0.6%.

Real Estate Securities Market

For the fiscal year ending December 31, 2008, U.S. real estate investment trusts (REITs) generated a 37.7% loss, as measured by the FTSE NAREIT Equity Index (Index). During this period, REITs performed slightly better than the broader equity market, which finished down 37.3% as measured by the Russell 3000 Index. The negative REIT performance was accompanied by an unprecedented amount of volatility during the period. Not only were monthly returns erratic, demonstrated by the worst and best monthly returns in the history of the Index occurring in October -31.7% and December 16.4%, respectively, but the largest percentage gain and loss achieved in a single day also both occurred during the year.

Following the sharp decline in the commercial mortgage-backed securities market and escalating problems in the credit market, investors began 2008 more risk averse. As recessionary fears began to emerge, the Federal Reserve became active in an attempt to stave off concerns of a recession by cutting rates aggressively, twice in January alone, and injecting liquidity into the financial markets through a variety of initiatives. First and second quarter REIT earnings held up well, although many companies took the opportunity to revise 2009 estimates downwards.

By September 2008, consumer spending had slowed, the unemployment rate was climbing and both corporate and consumer credit markets remained tight. The collapse of Lehman Brothers Holdings Inc. on September 15 sparked panic within the financial markets and REITs were heavily sold off over the ensuing weeks. Mirroring the broader equity market, REITs traded down sharply through October and most of November. A marked change in investor sentiment occurred in December as investors became less defensive and REITs staged a modest recovery as the year closed.

An overriding theme during the year was the elevated correlation between REITs and the financial services sector of the broader equity market. This is due to the fact that most broad equity indexes include REITs in the financial services sector. This weighed heavily on REIT performance during the period, as many general equity investors avoided financial services stocks and other investors took short positions in individual stocks and exchange traded funds in the financial

 

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services sector. This was also a contributing factor to the exceptionally high volatility observed in the REIT market during the fiscal year.

Another key trend during the year was a flight towards quality REIT names, with the market especially rewarding companies that have made a concerted effort to mitigate risk. Companies with the lowest leverage levels, limited near term refinancing needs and limited development pipelines held up the best. Neither dividend yield nor market capitalization appeared to be contributing factors to differences in individual company performance.

During the year, returns were disappointing across all property sectors. The poorest performing sectors were industrial and regional malls. Leverage ratios for the industrial and regional malls companies tend to be higher than the overall REIT universe, which has negatively impacted those stocks. In addition, meaningful development pipelines in the leading industrial companies have put added pressure on earnings forecasts due to weaker leasing market conditions. Two of the better performing property sectors were self storage and health care. Due to the stable nature of the cash flows embedded in many health care leases, investors sought out this defensive sector given the slowing economy. The self storage sector is generally driven by the performance of one company that dominates the sector, Public Storage, which was one of the few stocks to post a positive return for the year. Public Storage held up well due to its strong balance sheet, including minimal leverage and high levels of cash.

The U.S. REIT market outperformed relative to the international real estate securities market by a wide margin during the fiscal year. The largest price correction occurred in the Asia Pacific region, with smaller corrections taking place in Continental Europe and the United Kingdom. While the effects of the global economic slowdown and credit crisis have spread to the other regions, the U.S. REIT market has fared relatively better, mirroring trends in the broader global equity markets.

Non-U.S. Developed Equity Markets

Non-U.S. developed stocks fell 43.38% as measured by the MSCI EAFE® Index for the fiscal year ended December 31, 2008. Appreciation of the U.S. dollar relative to foreign currencies, mainly as a result of the flight to safety in the second half of the fiscal year ended, exacerbated already weak non-U.S. equity returns. In local currencies, the MSCI EAFE® Index fell 40.27% over the 12-month period.

The market struggled under increasing concern over the health of the global financial system. While these concerns affected markets for nearly the full 12 months, most of the decline in equity values came in September and October 2008, as several prominent financial companies in the U.S. and Europe encountered financial distress. In nearly all cases, government “bailouts” were necessary for these companies to avoid bankruptcy.

The additional impact of already declining global economic growth increasingly weighed on markets during the period. Expectations for global economic growth were revised downwards throughout the year. The latter part of the fiscal year experienced contraction in economic output in Europe and Asia. Output growth of 5% in 2007 slowed sharply for 2008 with abbreviated expectations for growth in developed economies in 2009.

The change in market conditions was evident in a marked increase in market volatility as investors’ complacency towards risk was quickly replaced by acute risk aversion. Stocks with prices most directly tied to high, long-term growth prospects suffered some of the steepest declines, as investors doubted the ability of these companies to post strong growth in a decelerating economic environment. However, due to the sharp declines of financials, the largest sector of the value index, value lagged growth by 1.39% in the period (the MCSI EAFE Growth Index lost 42.70% and the MSCI EAFE Value Index lost 44.09%).

Market sectors most leveraged to global economic growth or in the nexus of the financial sector meltdown were the most severely impacted, though no areas of the market were immune. Financials ended the 12-month period down 55.21% (as measured by the MSCI EAFE Index financials sector grouping). The strong gains of materials early in the period were quickly reversed. The sector ended the period down nearly 53.02% as measured by the MSCI EAFE materials sector grouping. Energy stocks also fell sharply as the price of a barrel of oil fell from a high of more than $145 to below $36. However, the sector’s one-year stock price decline of 38.18% (as measured by the MSCI EAFE energy sector) was better than all but the traditionally defensive sectors. Among the defensive sectors of the market, health care, led by pharmaceutical stocks, held up best with a decline of 18.95% as measured by the MSCI EAFE health care sector. Utilities and consumer staples, down 28.16% and 31.33% as measured by the MSCI EAFE utilities and MSCI EAFE consumer staples sector groupings, respectively, were the next best performers. Sector groupings are based on the Global Industry Classification Standard definitions.

 

6 Market Summary


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Regional results were generally tied to sensitivity to global economic conditions. The MSCI Pacific ex-Japan® Index declined the most, down 50.50%. MSCI Europe ex-United Kingdom® Index fell 45.54%, while the MSCI United Kingdom® Index fell 48.34%. In all three regions, currency impact had a pronounced impact on returns with the regions down 42.17%, 43.24%, and 28.48%, respectively, in local currencies. MSCI Japan® Index fell 42.56% in yen, but had one of the few currencies that managed to appreciate versus the U.S. dollar and fell only 29.21% in U.S. Dollars.

Emerging Markets

During 2008, the MSCI Emerging Markets Index (“Index”) declined 53.18%, the biggest calendar year decline in the history of the asset class with large return dispersions across sectors and countries. The turmoil in the world’s financial system meant increasing risk aversion, growing macro risks and heightened levels of volatility and dispersion across countries, sectors and currencies. Emerging Markets in general may be better positioned and more resilient to a downturn than developed economies, however, as the crisis changed from financial to economic, emerging markets faced massive asset de-leveraging and indiscriminate selling as investors adopted a zero tolerance to risk. Price momentum (i.e. stocks exhibiting trending relative price appreciation) benefited from the continued rally of commodity-related sectors through the latter part of 2007 and well into 2008 but this reversed as global equity markets began falling sharply. The faltering global economy and the steep pull-back in commodity prices affected cyclical areas of the market including industrials, materials and energy sectors while defensive sectors such as healthcare, consumer staples and utilities were relative safe havens during the period. From a country perspective, smaller markets in general held up relatively better than the larger markets. In addition to the weak equity returns, most emerging markets currencies depreciated against the U.S. Dollar with some, such as the South African Rand, Korean Won, Turkish Lira and Brazilian Real, losing in excess of 30% over the course of the year as investors fled to quality and more liquid currencies.

In terms of regions, Latin America was the top performer, down 51.28% (as measured by the MSCI EM Latin America Index), supported by the relative outperformance from Mexico and the smaller Latin countries. The Asia region (-52.77% as measured by the MSCI EM Asia Index) finished behind Latin America but ahead of the broader market. The Europe, Middle East and Africa region (-55.60% as measured by the MSCI EM Europe, Middle East and Africa Index) underperformed the broader market due in large part to the significant underperformance from Russia. The BRIC (Brazil, Russia, India and China) economies, with the exception of China, underperformed the broader Index. China held up reasonably well over the period due to favorable monetary and fiscal policies during the latter half of the year in an effort to shore up its slowing economy. Other notable relative underperformers included Pakistan (-74.05% as measured by the MSCI Pakistan Index) and Turkey (-62.10% as measured by the MSCI Turkey Index).

U.S. Fixed Income Markets

The Barclays Capital U.S. Aggregate Bond Index, a broad measure of U.S. investment grade fixed income securities, returned 5.24% for the year ended December 31, 2008. Similar to the prior year, the index and its major sectors trailed equivalent-duration U.S. Treasuries, as the subprime mortgage crisis that started in the summer of 2007 deepened and developed into a severe liquidity crisis, the size and scope of which had not been seen since the U.S. Great Depression of the 1930s. During 2008, investors moved their capital away from riskier investments to the safest possible investments (i.e., U.S. Treasuries), continuing the “flight to quality” trend started in the prior period.

Throughout 2008, in an effort to deal with credit market illiquidity and a slowing economy, the Federal Reserve lowered the target Federal Funds rate eight times, including two non-scheduled “surprise” cuts of 0.75% in January and 0.50% in October. The target rate started the year at 4.25% and ended at a 0.00% to 0.25% range after the eighth rate cut on December 16, 2008.

The downward shift in the yield curve started in 2007 and continued in earnest in 2008, with the curve “steepening” significantly below the 10-year mark; i.e., yields on shorter-maturity Treasuries declined by a greater degree than longer-maturity Treasuries, resulting in a steeper, upward sloping curve. The change was driven by the Federal Reserve’s lowering of rates (affecting the short end) and investors’ increasing demand for safe haven U.S. Treasuries (driving down longer-maturity yields). In 2008, yields on 2-year Treasuries declined by 2.28% to 0.76% while 10-year Treasuries declined by 1.81% to 2.21%.

The subprime mortgage crisis and deflating housing market were still major issues throughout the year. Home price depreciation continued to accelerate. By the end of October, the average U.S. national home price as tracked by the S&P/Case-Shiller Composite 20 Index, had declined 18% from the end of 2007, reaching a level that was down 23% from its July 2006 peak. Subprime mortgage foreclosures increased from 8.65% at the end of December 2007 to 12.55% at the end of September 2008, the most recent available data from the Mortgage Bankers Association. Total foreclosures increased from 2.04% to 2.97% during the same period. Writedowns on the values of mortgages had a large negative

 

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impact on bank balance sheets. During the year, writedowns at financial institutions world-wide amounted to approximately $930.3 billion, bringing total writedowns since the start of the subprime crisis to approximately $997.4 billion.

During the early months of 2008 the market continued its downward trend, which was capped in mid-March by Bear Stearns receiving emergency funding from the Federal Reserve and JPMorgan Chase as a three-day run on the bank depleted its cash reserves. Two days later JPMorgan Chase acquired Bear Stearns for seven percent of its market value in a sale brokered by the Federal Reserve and the U.S. Department of the Treasury (U.S. Treasury). Investors took this as a sign that the U.S. government would stand behind financial institutions and credit markets rallied for the next few months.

During the first part of the year, the U.S. government had become increasingly concerned that the credit crisis would significantly slow the U.S. economy — particularly the spending of consumers, who account for approximately two-thirds of GDP. In April, the U.S. Internal Revenue Service started distributing tax rebates as part of a $168 billion economic stimulus plan.

However, markets continued to weaken as illiquidity reached extreme levels and the financial crisis became global in scope. In July, IndyMac Bancorp, the then-second-biggest independent U.S. mortgage lender, was seized by federal regulators after a run by depositors depleted its cash. In August, Commerzbank AG agreed to buy Allianz SE’s Dresdner Bank for 9.8 billion euros in Germany’s biggest banking takeover in three years.

September started with the U.S. government seizing control of Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies. In the middle of the month, the U.S. government did not arrange a deal or otherwise bail out Lehman Brothers, and the 158-year old firm filed the largest bankruptcy in U.S. history. This was followed by the bankruptcy of 119-year old Washington Mutual. AIG accepted an $85 billion loan from the Federal Reserve to avert what would have been the worst financial collapse in history, with the U.S. government taking a substantial ownership stake in AIG.

In the same month, the investment banking business model fundamentally changed, with Goldman Sachs and Morgan Stanley receiving approval to become deposit-taking commercial banks regulated by the Federal Reserve, as tight credit markets forced Wall Street’s two remaining independent investment banks to widen their sources of funding. Similar events occurred in Europe and throughout the world, with large financial institutions either merging or with governments providing support in return for equity stakes.

September finally ended with the U.S. Treasury proposing the Financial Market Rescue Bill, including the Troubled Asset Relief Program (TARP), which authorized the U.S. Treasury to spend up to $700 billion to buy mortgages and other distressed assets. The House initially rejected the bill, but subsequently passed it. The bill was signed into law in early October.

The events of September contributed to the extreme market illiquidity in October, evidenced by spikes in overnight and three-month LIBOR (the rates at which banks lend to one another). The Federal Reserve took significant steps to improve liquidity in the short duration markets, which included the creation of the Commercial Paper Funding Facility (CPFF) and the Money Market Investor Funding Facility (MMIFF).

In November, the U.S. Treasury gave additional support to AIG by announcing the purchase of $40 billion in new preferred stock. The U.S. Treasury then guaranteed $306 billion in residential and commercial mortgage-backed securities of Citi® in exchange for $7 billion in preferred stock. In addition, the U.S. Treasury purchased another $20 billion in preferred stocks from Citi. Shortly thereafter, the Government Sponsored Enterprise (GSE) Debt and Mortgage-Backed Security Purchase Program was announced stating that the Federal Reserve will buy $100 billion in Fannie Mae, Freddie Mac and the Federal Home Loan Bank debentures and $500 billion in agency mortgage-backed securities. Simultaneously, the Term Asset-Backed Securities Loan Facility (TALF) was announced by the U.S. Treasury offering to provide $200 billion in three-year loans to U.S. companies who can provide high quality AAA-rated auto loans, student loans, credit card loans or small business loans as collateral.

This trend continued in December as Congress agreed to provide $13.4 billion in short term loans to General Motors and $4 billion to Chrysler in an effort to aid the suffering auto industry.

December ended on an up note with a majority of fixed income sectors outperforming equivalent-duration Treasuries. Most notably, the commercial mortgage-backed securities sector (CMBS) returned 16.98% (15.14% above equivalent-duration Treasuries) during the month. The year ended with the Barclays Capital U.S. Aggregate Bond Index returning 5.24%, underperforming by 7.10% U.S. Treasuries.

 

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Russell Investment Funds

Moderate Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

LOGO

 

Moderate Strategy Fund     
   Total
Return
 

1 Year

    (20.39)%

Inception*

    (10.92)%§

 

Barclays Capital U.S. Aggregate Bond Index ** 
   Total
Return
 

1 Year

    5.24%

Inception *

    6.05

 

Russell 1000® Index*** 
   Total
Return
 

1 Year

    (37.60)%

Inception *

    (24.45)%§

 

 

* The Fund commenced operation on April 30, 2007.

 

** On October 31, 2008, Barclays Capital, which acquired the Lehman family of indexes in September 2008, announced that it would be re-branding Lehman indexes under the Barclays Capital name; the underlying index structures are to remain unchanged. As a result, the Lehman Brothers Aggregate Bond Index has been renamed the Barclays Capital U.S. Aggregate Bond Index.

Barclays Capital U.S. Aggregate Bond Index is composed of securities from Barclays Capital U.S. Government/Corporate Bond Index, Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.

 

***

 

Russell 1000® Index includes the 1,000 largest companies in the Russell 3000® Index. The Russell 1000® Index represents the universe of stocks from which most active money managers typically select. The Russell 1000® Index return reflects adjustments from income dividends and capital gain distributions reinvested as of the ex-dividend dates.

 

§ Annualized.

The performance shown in this section does not reflect any Insurance Company Separate Account or Policy Charges. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results.

 

10 Moderate Strategy Fund


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Russell Investment Funds

Moderate Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

 

The Fund is a fund of funds that invests in other Russell Investment Funds and Russell Investment Company mutual funds (the “Underlying Funds”). The Underlying Funds allocate most of their assets among multiple money managers. Russell Investment Management Company (“RIMCo”), as the Underlying Funds' advisor, may change the allocation of the Underlying Funds' assets among money managers at any time. An exemptive order from the Securities and Exchange Commission (SEC) permits RIMCo to engage or terminate a money manager in an Underlying Fund at any time, subject to the approval by the Underlying Fund’s Board without a shareholder vote.

What is the Fund’s investment objective?

The Moderate Strategy Fund (“Fund”) seeks to provide high current income and moderate long term capital appreciation.

How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2008?

For the fiscal year ended December 31, 2008, the Moderate Strategy Fund lost 20.39%. This compared to the Barclays Capital U.S. Aggregate Bond Index, which gained 5.24% during the same period. The Fund’s performance includes operating expenses, whereas the Index returns are unmanaged and do not include expenses of any kind. The Fund was negatively impacted by its allocation to all equity Underlying Funds and the fixed income Underlying Fund’s overweight to non-Treasury sectors.

For the year ended December 31, 2008, the Moderate Strategy Lipper Composite – lost 20.53%. This result serves as a peer comparison and is expressed net of operating expenses.

Each Underlying Fund has a benchmark reflective of its respective asset class. These benchmarks may be different than the Fund’s benchmark. The Fund’s benchmark represents the largest asset class of the Underlying Funds in which it invests.

How did the market conditions described in the Market Summary report affect the Fund’s performance?

The Fund is a fund of funds and its performance is based on the performance of the Underlying Funds in which it invests. The Fund’s performance was negatively impacted by the financial crisis that affected virtually all asset classes during the fiscal year. The Fund’s benchmark relative performance was negatively impacted by the fixed income Underlying Fund’s overweight to non-treasury sectors.

The largest impact on the Fund’s underperformance relative to its benchmark was from its exposure to large cap U.S. equities and non-U.S. developed market equities. The performance of the equity Underlying Funds (approximately 40% of the Fund) detracted from returns relative to the Fund’s all-fixed income benchmark, the Barclays Capital U.S. Aggregate Bond Index.

The extreme volatility of the financial markets during the fiscal period created a headwind for most active managers. In this challenging environment, all underlying equity asset class funds lagged their respective benchmarks but one; yet, four of

eight Underlying Funds outperformed their peers within their asset classes as measured by their respective Lipper® Averages. The Barclays Capital U.S. Aggregate Bond Index, the benchmark for the RIF Core Bond Underlying Fund, was the only Underlying Fund benchmark with a positive absolute return. The returns of this index benefited from the inclusion of Treasuries. The RIF Core Bond Underlying Fund held a significant underweight to Treasuries relative to the benchmark. In absolute terms, bonds as measured by the Barclays Capital U.S. Aggregate Bond Index performed better than equities.

How did the investment strategies and techniques employed by the Fund and its money managers of the Underlying Funds affect the Fund’s performance?

At the Fund level, all Underlying Funds contributed negatively to the Fund’s returns relative to the Barclays Capital U.S. Aggregate Bond Index. The RIF Core Bond Underlying Fund, however, detracted less from the Fund’s benchmark-relative performance than the equity Underlying Funds.

By far, the largest affect on the fixed income Underlying Fund’s underperformance relative to its benchmark was from the re-pricing of risk (i.e., the market demanding increased compensation for assuming a given level of risk), the fundamental concern regarding the consumer’s ability to make mortgage payments, and the negative impact that market and credit issues had on virtually all non-Treasury segments of the fixed income markets. This Underlying Fund had a material overweight to mortgage-backed securities. This contributed significantly to this Underlying Fund’s benchmark-relative underperformance. The decrease in interest rates across the yield curve had little impact on that Underlying Fund’s performance as its money managers implemented offsetting duration strategies. Yet, as the Federal Reserve decreased the federal funds target rate, short-term yields declined relative to intermediate- and long-term yields resulting in a yield curve “steepening.” Several of the Underlying Fund’s money managers anticipated the change and varied the maturities of their securities accordingly, positioning their portfolios to benefit from these changes.

The U.S. equity Underlying Funds maintained an overall preference for companies with above-average growth rates and attractive valuations. This positioning was not rewarded in 2008 where investors were driven by fear, looking for relative safety and selling stocks regardless of fundamentals. U.S. large cap managers in the Underlying Fund using quantitative investment strategies added to returns by shorting several of the financial stocks that underperformed in the fiscal period. Yet, this was offset by managers employing growth and momentum strategies, which underperformed in this environment.

Managers in the small cap U.S. equity Underlying Fund negatively impacted the Fund by underweighting the financials sector and overweighting the other energy sector. Small cap financials rebounded from their lows as the Federal Reserve and Treasury offered wide ranging forms of financial support. The prices of other energy stocks fell as the price of oil fell.


 

Moderate Strategy Fund 11


Table of Contents

Russell Investment Funds

Moderate Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

 

Managers in non-U.S. developed markets Underlying Fund performed better than managers in global equity and emerging markets Underlying Funds. Yet the Fund’s higher allocation to the Non-U.S. developed markets Underlying Fund resulted in larger negative impact on the Fund’s benchmark relative performance. This Underlying Fund’s multi-style discipline provided some risk control during the fiscal period given the extreme variability in investment style and market leadership. More defensive strategies helped moderate the negative impact of strategies more focused on deteriorating economic conditions.

In emerging markets, the returns of emerging markets Underlying Fund declined along with the returns of the asset class, which experienced its biggest calendar year decline in the history of the asset class. The asset class endured massive asset deleveraging and extreme levels of market volatility. Commodity-related sectors suffered most as the global economic slowdown cut demand.

The real estate Underlying Fund focused primarily on the larger and more liquid REITs during the fiscal year. With the exceptional volatility experienced during the period due to the global economic crisis and cash outflows, this positioning hurt Fund performance. The Underlying Fund’s exposure to non-U.S. REITs, though beneficial in the last quarter of the fiscal period, negatively impacted returns for the year.

The Funds’ performance shown throughout this report was based on the Underlying Funds’ valuations calculated in accordance with Generally Accepted Accounting Principles (GAAP) and in accordance with a newly effective accounting statement (SFAS 157), reflects the December 31, 2008 market value of the pooled investment vehicle in which the Underlying Funds invested their cash collateral received in securities lending transactions. The market value was lower than the vehicle’s amortized cost per unit. This had a negative impact on the Fund’s benchmark relative performance.

 

Describe any changes to the Fund’s structure or allocation to the Underlying Funds.

In September, 2008, certain of the Underlying Funds in which the Fund invested (the “Former Underlying Funds”) changed as set forth below as the result of the reorganization (the “Reorganizations”) of the Former Underlying Funds into other Russell Investment Company Funds (the “New Underlying Funds”).

 

Former Underlying Fund New Underlying Fund

Quantitative Equity Fund

 Russell U.S. Quantitative Equity Fund

The New Underlying Fund has the same investment objective, principal investment strategies, investment policies and principal risks as the Former Underlying Fund which it replaced and the allocation of the Fund’s assets to the New Underlying Fund is the same as it was to the Former Underlying Fund.

The views expressed in this report reflect those of the portfolio managers only through the end of the period covered by the report. These views do not necessarily represent the views of RIMCo, or any other person in RIMCo or any other affiliated organization. These views are subject to change at any time based upon market conditions or other events, and RIMCo disclaims any responsibility to update the views contained herein. These views should not be relied on as investment advice and, because investment decisions for a Russell Investment Fund (RIF) or Russell Investment Company (RIC) Fund are based on numerous factors, should not be relied on as an indication of investment decisions of any RIF or RIC Fund.


 

12 Moderate Strategy Fund


Table of Contents

Russell Investment Funds

Moderate Strategy Fund

Shareholder Expense Example — December 31, 2008 (Unaudited)

 

 

 

Fund Expenses

The following disclosure provides important information regarding each Fund’s Expense Example, which appears on each Fund’s individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund.

Example

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2008 to December 31, 2008.

Actual Expenses

The information in the table under the heading “Actual Performance” provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The information in the table under the heading “Hypothetical Performance (5% return before expenses)” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading “Hypothetical Performance (5% return before expenses)” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The fee and expenses shown in this section do not reflect any Insurance Company Separate Account or Policy Charges.

 

   Actual
Performance
  Hypothetical
Performance
(5% return
before expenses)
    

Beginning Account Value

    

July 1, 2008

  $1,000.00  $1,000.00

Ending Account Value

    

December 31, 2008

  $834.70  $1,024.58

Expenses Paid During

    

Period*

  $0.51  $0.56

 

*Expenses are equal to the Fund’s annualized expense ratio of 0.11% (representing the one-half year period annualized), multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed. Without the waiver and/or reimbursement, expenses would have been higher.

 

Moderate Strategy Fund 13


Table of Contents

Russell Investment Funds

Moderate Strategy Fund

Schedule of Investments — December 31, 2008

Amounts in thousands (except share amounts)

 

   Shares    Market
Value
$
 
      
Investments -100.1%      

Other Russell Investment Funds
(“RIF”) and Russell Investment
Company (“RIC”) Series Mutual
Funds

    
Bonds - 60.2%      

RIF Core Bond Fund

  1,244,532    11,616 
        
Domestic Equities - 26.0%      

RIF Aggressive Equity Fund

  79,710    572 

RIF Multi-Style Equity Fund

  213,609    1,923 

RIF Real Estate Securities Fund

  62,369    580 

RIC Russell U.S. Quantitative Equity Fund

  91,374    1,942 
        
      5,017 
        
International Equities - 13.9%      

RIF Non-U.S. Fund

  230,326    1,724 

RIC Russell Emerging Markets Fund

  38,863    383 

RIC Russell Global Equity Fund

  100,888    579 
        
      2,686 
        
Total Investments - 100.1%
(identified cost $23,496)
      19,319 
Other Assets and Liabilities,
Net - (0.1%)
      (11)
        
Net Assets - 100.0%      19,308 
        

 

See accompanying notes which are an integral part of the financial statements.

 

14 Moderate Strategy Fund


Table of Contents

 

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Table of Contents

Russell Investment Funds

Balanced Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

LOGO

 

Balanced Strategy Fund 
   Total
Return
 

1 Year

    (27.70)%

Inception*

    (16.30)%§

 

Barclays Capital U.S. Aggregate Bond Index** 
   Total
Return
 

1 Year

    5.24%

Inception*

    6.05

 

Russell 1000® Index*** 
   Total
Return
 

1 Year

    (37.60)%

Inception*

    (24.45)%§

 

MSCI EAFE® Index Net (USD)**** 
   Total
Return
 

1 Year

    (43.38)%

Inception*

    (27.88)%§

 

* The Fund commenced operation on April 30, 2007.

 

** On October 31, 2008, Barclays Capital, which acquired the Lehman family of indexes in September 2008, announced that it would be re-branding Lehman indexes under the Barclays Capital name; the underlying index structures are to remain unchanged. As a result, the Lehman Brothers Aggregate Bond Index has been renamed the Barclays Capital U.S. Aggregate Bond Index.

 

     Barclays Capital U.S. Aggregate Bond Index is composed of securities from Barclays Capital U.S. Government/Corporate Bond Index, Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.

 

***

 

Russell 1000® Index includes the 1,000 largest companies in the Russell 3000® Index. The Russell 1000® Index represents the universe of stocks from which most active money managers typically select. The Russell 1000® Index return reflects adjustments from income dividends and capital gain distributions reinvested as of the ex-dividend dates.

 

**** Morgan Stanley Capital International Europe, Australia, Far East (MSCI EAFE) Index is an index composed of an arithmetic, market value-weighted average of the performance of approximately 1,600 securities listed on the stock exchange of the countries of Europe, Australia, and the Far East. The index is calculated on a total-return basis, which included reinvestment of gross dividends before deduction of withholding taxes.

 

§ Annualized.

The performance shown in this section does not reflect any Insurance Company Separate Account or Policy Charges. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results.

 

16 Balanced Strategy Fund


Table of Contents

Russell Investment Funds

Balanced Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

 

The Fund is a fund of funds that invests in other Russell Investment Funds and Russell Investment Company mutual funds (the “Underlying Funds”). The Underlying Funds allocate most of their assets among multiple money managers. Russell Investment Management Company (“RIMCo”), as the Underlying Funds' advisor, may change the allocation of the Underlying Funds' assets among money managers at any time. An exemptive order from the Securities and Exchange Commission (SEC) permits RIMCo to engage or terminate a money manager in an Underlying Fund at any time, subject to the approval by the Underlying Fund’s Board without a shareholder vote.

What is the Fund’s investment objective?

The Balanced Strategy Fund (“Fund”) seeks to provide above average capital appreciation and a moderate level of current income.

How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2008?

For the fiscal year ended December 31, 2008, the Balanced Strategy Fund lost 27.70%. This compared to the Barclays Capital U.S. Aggregate Bond Index, which gained 5.24% during the same period. The Fund’s performance includes operating expenses, whereas the Index returns are unmanaged and do not include expenses of any kind. The Fund was negatively impacted by its allocation to all equity Underlying Funds and the fixed income Underlying Fund’s overweight to non-Treasury sectors.

For the year ended December 31, 2008, the Balanced Strategy Lipper Composite lost 27.65%. This result serves as a peer comparison and is expressed net of operating expenses.

Each Underlying Fund has a benchmark reflective of its respective asset class. These benchmarks may be different than the Fund’s benchmark. The Fund’s benchmark represents the largest asset class of the Underlying Funds in which it invests.

How did the market conditions described in the Market Summary report affect the Fund’s performance?

The Fund is a fund of funds and its performance is based on the performance of the Underlying Funds in which it invests. The Fund’s performance was negatively impacted by the financial crisis that affected virtually all asset classes during the fiscal year. The largest impact on the Fund’s underperformance relative to its benchmark was from its exposure to large cap U.S. equities and non-U.S. developed market equities. The performance of the equity Underlying Funds (approximately 60% of the Fund) detracted from returns relative to the Fund’s all-fixed income benchmark the Barclays Capital U.S. Aggregate Bond Index.

The extreme volatility of the financial markets during the fiscal period created a headwind for most active managers. In this challenging environment, all but one underlying equity asset class funds lagged their respective benchmarks; yet, four of eight Underlying Funds outperformed their peers within their asset classes as measured by their respective Lipper®

Averages. The Barclays Capital U.S. Aggregate Bond Index, the benchmark for the RIF Core Bond Underlying Fund, was the only Underlying Fund benchmark with a positive return. The returns of this index benefited from the inclusion of Treasuries. The RIF Core Bond Underlying Fund held a significant underweight to Treasuries relative to the benchmark. In absolute terms, bonds as measured by the Barclays Capital U.S. Aggregate Bond Index performed better than equities.

How did the investment strategies and techniques employed by the Fund and its money managers of the Underlying Funds affect the Fund’s performance?

At the Fund level, all Underlying Funds contributed negatively to the Fund’s returns relative to the Barclays Capital U.S. Aggregate Bond Index. The RIF Core Bond, however, detracted less from the Fund’s benchmark-relative performance than the equity Underlying Funds.

The U.S. equity Underlying Funds maintained an overall preference for companies with above-average growth rates and attractive valuations. This positioning was not rewarded in 2008 where investors were driven by fear, looking for relative safety and selling stocks regardless of fundamentals. U.S. large cap managers in the Underlying Fund using quantitative investment strategies added to returns by shorting several of the financial stocks that underperformed in the fiscal period. Yet, this was offset by managers employing growth and momentum strategies, which underperformed in this environment.

Managers in the small cap U.S. equity Underlying Fund negatively impacted the Fund by underweighting the financials sector and overweighting the other energy sector. Small cap financials rebounded from their lows as the Federal Reserve and Treasury offered wide ranging forms of financial support. The prices of other energy stocks fell as the price of oil fell.

Managers in the non-U.S. developed market Underlying Fund performed better than managers in global equity and emerging markets Underlying Funds. Yet the Fund’s higher allocation to the Non-U.S. developed markets Underlying Fund resulted in a larger negative impact on the Fund’s benchmark relative performance. This Underlying Fund’s multi-style discipline provided some risk control during the fiscal period given the extreme variability in investment style and market leadership. More defensive strategies helped moderate the negative impact of strategies more focused on deteriorating economic conditions.

In emerging markets, the returns of emerging markets Underlying Fund declined along with the returns of the asset class, which experienced its biggest calendar year decline in the history of the asset class. The asset class endured massive asset deleveraging and extreme levels of market volatility. Commodity-related sectors suffered most as the global economic slowdown cut demand.

The real estate Underlying Fund focused primarily on the larger and more liquid REITs during the fiscal year. With the exceptional volatility experienced during the period due to the


 

Balanced Strategy Fund 17


Table of Contents

Russell Investment Funds

Balanced Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

 

global economic crisis and cash outflows, this positioning hurt Fund performance. The Underlying Fund’s exposure to non-U.S. REITs, though beneficial in the last quarter of the fiscal period, negatively impacted returns for the year.

By far, the largest affect on the fixed income Underlying Fund’s underperformance relative to its benchmark was from the re-pricing of risk (i.e., the market demanding increased compensation for assuming a given level of risk), the fundamental concern regarding the consumer’s ability to make mortgage payments, and the negative impact that market and credit issues had on virtually all non-Treasury segments of the fixed income markets. This Underlying Fund had a material overweight to mortgage-backed securities. This contributed significantly to this Underlying Fund’s benchmark-relative underperformance. The decrease in interest rates across the yield curve had little impact on that Underlying Fund’s performance as its money managers implemented offsetting duration strategies. Yet, as the Federal Reserve decreased the federal funds target rate, short-term yields declined relative to intermediate- and long-term yields resulting in a yield curve “steepening.” Several of the Underlying Fund’s money managers anticipated the change and varied the maturities of their securities accordingly, positioning their portfolios to benefit from these changes

The Funds’ performance shown throughout this report was based on the Underlying Funds’ valuations calculated in accordance with Generally Accepted Accounting Principles (GAAP) and in accordance with a newly effective accounting statement (SFAS 157), reflects the December 31, 2008 market value of the pooled investment vehicle in which the Underlying Funds invested their cash collateral received in securities lending transactions. The market value was lower than the vehicle’s amortized cost per unit. This had a negative impact on the Fund’s benchmark relative performance.

 

Describe any changes to the Fund’s structure or allocation to the Underlying Funds.

In September, 2008, certain of the Underlying Funds in which the Fund invested (the “Former Underlying Funds”) changed as set forth below as the result of the reorganization (the “Reorganizations”) of the Former Underlying Funds into other Russell Investment Company Funds (the “New Underlying Funds”).

 

Former Underlying Fund New Underlying Fund

Quantitative Equity Fund

 Russell U.S. Quantitative Equity Fund

The New Underlying Fund has the same investment objective, principal investment strategies, investment policies and principal risks as the Former Underlying Fund which it replaced and the allocation of the Fund’s assets to the New Underlying Fund is the same as it was to the Former Underlying Fund.

The views expressed in this report reflect those of the portfolio managers only through the end of the period covered by the report. These views do not necessarily represent the views of RIMCo, or any other person in RIMCo or any other affiliated organization. These views are subject to change at any time based upon market conditions or other events, and RIMCo disclaims any responsibility to update the views contained herein. These views should not be relied on as investment advice and, because investment decisions for a Russell Investment Fund (RIF) or Russell Investment Company (RIC) Fund are based on numerous factors, should not be relied on as an indication of investment decisions of any RIF or RIC Fund.


 

18 Balanced Strategy Fund


Table of Contents

Russell Investment Funds

Balanced Strategy Fund

Shareholder Expense Example — December 31, 2008 (Unaudited)

 

 

 

Fund Expenses

The following disclosure provides important information regarding each Fund’s Expense Example, which appears on each Fund’s individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund.

Example

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2008 to December 31, 2008.

Actual Expenses

The information in the table under the heading “Actual Performance” provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The information in the table under the heading “Hypothetical Performance (5% return before expenses)” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate

of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading “Hypothetical Performance (5% return before expenses)” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The fee and expenses shown in this section do not reflect any Insurance Company Separate Account or Policy Charges.

 

   Actual
Performance
  Hypothetical
Performance
(5% return
before expenses)

Beginning Account Value

    

July 1, 2008

  $1,000.00  $1,000.00

Ending Account Value

    

December 31, 2008

  $773.77  $1,024.73

Expenses Paid During

    

Period*

  $0.36  $0.41

 

*Expenses are equal to the Fund’s annualized expense ratio of 0.08% (representing the one-half year period annualized), multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed. Without the waiver and/or reimbursement, expenses would have been higher.

 

Balanced Strategy Fund 19


Table of Contents

Russell Investment Funds

Balanced Strategy Fund

Schedule of Investments — December 31, 2008

Amounts in thousands (except share amounts)

 

   Shares    Market
Value
$
 
      
Investments - 100.0%      

Other Russell Investment Funds
(“RIF”) and Russell Investment
Company (“RIC”) Series Mutual
Funds

    
Bonds - 39.3%      

RIF Core Bond Fund

  2,535,119    23,663 
        
Domestic Equities - 39.6%      

RIF Aggressive Equity Fund

  337,912    2,427 

RIF Multi-Style Equity Fund

  1,007,644    9,069 

RIF Real Estate Securities Fund

  337,627    3,138 

RIC Russell U.S. Quantitative Equity Fund

  431,619    9,172 
        
      23,806 
        
International Equities - 21.1%      

RIF Non-U.S. Fund

  1,131,869    8,472 

RIC Russell Emerging Markets Fund

  183,498    1,808 

RIC Russell Global Equity Fund

  422,530    2,425 
        
      12,705 
        
Total Investments - 100.0%
(identified cost $81,252)
      60,174 
Other Assets and Liabilities,
Net - (0.0%)
      (16)
        
Net Assets - 100.0%      60,158 
        

 

See accompanying notes which are an integral part of the financial statements.

 

20 Balanced Strategy Fund


Table of Contents

 

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Table of Contents

Russell Investment Funds

Growth Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

LOGO

 

Growth Strategy Fund     
   Total
Return
 

1 Year

    (34.73)%

Inception*

    (21.55)%§

 

Russell 1000® Index**     
   Total
Return
 

1 Year

    (37.60)%

Inception*

    (24.45)%§

 

MSCI EAFE® Index Net (USD)***     
   Total
Return
 

1 Year

    (43.38)%

Inception*

    (27.88)%§

 

Barclays Capital U.S. Aggregate Bond Index**** 
   Total
Return
 

1 Year

    5.24%

Inception*

    6.05

 

* The Fund commenced operation on April 30, 2007.

 

**

 

Russell 1000® Index includes the 1,000 largest companies in the Russell 3000® Index. The Russell 1000® Index represents the universe of stocks from which most active money managers typically select. The Russell 1000® Index return reflects adjustments from income dividends and capital gain distributions reinvested as of the ex-dividend dates.

 

*** Morgan Stanley Capital International Europe, Australia, Far East (MSCI EAFE) Index is an index composed of an arithmetic, market value-weighted average of the performance of approximately 1,600 securities listed on the stock exchange of the countries of Europe, Australia, and the Far East. The index is calculated on a total-return basis, which included reinvestment of gross dividends before deduction of withholding taxes.

 

**** On October 31, 2008, Barclays Capital, which acquired the Lehman family of indexes in September 2008, announced that it would be re-branding Lehman indexes under the Barclays Capital name; the underlying index structures are to remain unchanged. As a result, the Lehman Brothers Aggregate Bond Index has been renamed the Barclays Capital U.S. Aggregate Bond Index.

 

     Barclays Capital U.S. Aggregate Bond Index is composed of securities from Barclays Capital U.S. Government/Corporate Bond Index, Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.

 

§ Annualized.

The performance shown in this section does not reflect any Insurance Company Separate Account or Policy Charges. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results.

 

22 Growth Strategy Fund


Table of Contents

Russell Investment Funds

Growth Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

 

The Fund is a fund of funds that invests in other Russell Investment Funds and Russell Investment Company mutual funds (the “Underlying Funds”). The Underlying Funds allocate most of their assets among multiple money managers. Russell Investment Management Company (“RIMCo”), as the Underlying Funds' advisor, may change the allocation of the Underlying Funds' assets among money managers at any time. An exemptive order from the Securities and Exchange Commission (SEC) permits RIMCo to engage or terminate a money manager in an Underlying Fund at any time, subject to the approval by the Underlying Fund’s Board without a shareholder vote.

What is the Fund’s investment objective?

The Growth Strategy Fund (“Fund”) seeks to provide high long term capital appreciation with low current income.

How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2008?

For the fiscal year ended December 31, 2008, the Growth Strategy Fund lost 34.73%. This compared to the Russell 1000® Index, which lost 37.60% during the same period. The Fund’s performance includes operating expenses, whereas the Index returns are unmanaged and do not include expenses of any kind. The Fund’s performance was negatively impacted mostly by its allocation to all equities. This was partly offset by the Fund’s allocation to fixed income.

For the year ended December 31, 2008, the Growth Strategy Lipper Composite lost 34.19%. This result serves as a peer comparison and is expressed net of operating expenses.

Each Underlying Fund has a benchmark reflective of its respective asset class. These benchmarks may be different than the Fund’s benchmark. The Fund’s benchmark represents the largest asset class of the Underlying Funds in which it invests.

How did the market conditions described in the Market Summary report affect the Fund’s performance?

The Fund is a fund of funds and its performance is based on the performance of the Underlying Funds in which it invests. The Fund’s performance was negatively impacted by the financial crisis that affected virtually all asset classes during the fiscal year. The largest positive contribution to the Fund’s performance relative to its all-equity benchmark was from its exposure to fixed income through its investment in the RIF Core Bond Underlying Fund. The performance of the equity Underlying Funds (approximately 80% of the Fund) detracted from returns relative to the Fund’s benchmark, the Russell 1000® Index.

The extreme volatility of the financial markets during the fiscal period created a headwind for most active managers. In this challenging environment, all but one underlying equity asset class funds lagged their respective benchmarks; yet, four of eight Underlying Funds outperformed their peers within their asset classes as measured by their respective Lipper® Averages. The Barclays Capital U.S. Aggregate Bond Index, the

benchmark for the RIF Core Bond Underlying Fund, was the only Underlying Fund benchmark with a positive absolute return. The returns of this index benefited from the inclusion of Treasuries. The RIF Core Bond Underlying Fund held a significant underweight to Treasuries relative to the benchmark. In absolute terms, bonds as measured by the Barclays Capital U.S. Aggregate Bond Index performed better than equities.

How did the investment strategies and techniques employed by the Fund and its money managers of the Underlying Funds affect the Fund’s performance?

At the Fund level, exposure to the RIF Multi-Style Equity, RIF Non-U.S. and Russell U.S. Quantitative Equity Underlying Funds dampened returns relative to the Russell 1000® Index. The RIF Core Bond Underlying Fund contributed positively to the Fund’s benchmark-relative performance.

The U.S. equity Underlying Funds maintained an overall preference for companies with above-average growth rates and attractive valuations. This positioning was not rewarded in 2008 where investors were driven by fear, looking for relative safety and selling stocks regardless of fundamentals. U.S. large cap managers in the Underlying Fund using quantitative investment strategies added to returns by shorting several of the financial stocks that underperformed in the fiscal period. Yet, this was offset by managers employing growth and momentum strategies, which underperformed in this environment.

Managers in the small cap U.S. equity Underlying Fund negatively impacted the Fund by underweighting the financials sector and overweighting the other energy sector. Small cap financials rebounded from their lows as the Federal Reserve and Treasury offered wide ranging forms of financial support. The prices of other energy stocks fell as the price of oil fell.

Managers in the non-U.S. developed markets Underlying Fund performed better than managers in global equity and emerging markets Underlying Funds. Yet the Fund’s higher allocation to the Non-U.S. developed markets Underlying Fund resulted in a larger negative impact on the Fund’s benchmark relative performance. This Underlying Fund’s multi-style discipline provided some risk control during the fiscal period given the extreme variability in investment style and market leadership. More defensive strategies helped moderate the negative impact of strategies more focused on deteriorating economic conditions.

In emerging markets, the returns of emerging markets Underlying Fund declined along with the returns of the asset class, which experienced its biggest calendar year decline in the history of the asset class. The asset class endured massive asset deleveraging and extreme levels of market volatility. Commodity-related sectors suffered most as the global economic slowdown cut demand.

The real estate Underlying Fund focused primarily on the larger and more liquid REITs during the fiscal year. With the exceptional volatility experienced during the period due to the


 

Growth Strategy Fund 23


Table of Contents

Russell Investment Funds

Growth Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

 

global economic crisis and cash outflows, this positioning hurt Fund performance. The Underlying Fund’s exposure to non-U.S. REITs added to the Fund excess weighted performance relative to the benchmark for the year.

While the fixed income Underlying Fund contributed positively to the Fund’s benchmark relative performance, this Underlying Fund underperformed its benchmark. By far, the largest affect on the Underlying Fund’s underperformance relative to its benchmark was from the re-pricing of risk (i.e., the market demanding increased compensation for assuming a given level of risk), the fundamental concern regarding the consumer’s ability to make mortgage payments, and the negative impact that market and credit issues had on virtually all non-Treasury segments of the fixed income markets. This Underlying Fund had a material overweight to mortgage-backed securities. This contributed significantly to this Underlying Fund’s benchmark-relative underperformance. The decrease in interest rates across the yield curve had little impact on that Underlying Fund’s performance as its money managers implemented offsetting duration strategies. Yet, as the Federal Reserve decreased the federal funds target rate, short-term yields declined relative to intermediate- and long-term yields resulting in a yield curve “steepening.” Several of the Underlying Fund’s money managers anticipated the change and varied the maturities of their securities accordingly, positioning their portfolios to benefit from these changes.

The Funds’ performance shown throughout this report was based on the Underlying Funds’ valuations calculated in accordance with Generally Accepted Accounting Principles (GAAP) and in accordance with a newly effective accounting statement (SFAS 157), reflects the December 31, 2008 market value of the pooled investment vehicle in which the Underlying Funds invested their cash collateral received in securities lending transactions. The market value was lower than the vehicle’s amortized cost per unit. This had a negative impact on the Fund’s benchmark relative performance.

 

Describe any changes to the Fund’s structure or allocation to the Underlying Funds.

In September, 2008, certain of the Underlying Funds in which the Fund invested (the “Former Underlying Funds”) changed as set forth below as the result of the reorganization (the “Reorganizations”) of the Former Underlying Funds into other Russell Investment Company Funds (the “New Underlying Funds”).

 

Former Underlying Fund New Underlying Fund

Quantitative Equity Fund

 Russell U.S. Quantitative Equity Fund

The New Underlying Fund has the same investment objective, principal investment strategies, investment policies and principal risks as the Former Underlying Fund which it replaced and the allocation of the Fund’s assets to the New Underlying Fund is the same as it was to the Former Underlying Fund.

The views expressed in this report reflect those of the portfolio managers only through the end of the period covered by the report. These views do not necessarily represent the views of RIMCo, or any other person in RIMCo or any other affiliated organization. These views are subject to change at any time based upon market conditions or other events, and RIMCo disclaims any responsibility to update the views contained herein. These views should not be relied on as investment advice and, because investment decisions for a Russell Investment Fund (RIF) or Russell Investment Company (RIC) Fund are based on numerous factors, should not be relied on as an indication of investment decisions of any RIF or RIC Fund.


 

24 Growth Strategy Fund


Table of Contents

Russell Investment Funds

Growth Strategy Fund

Shareholder Expense Example — December 31, 2008 (Unaudited)

 

 

 

Fund Expenses

The following disclosure provides important information regarding each Fund’s Expense Example, which appears on each Fund’s individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund.

Example

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2008 to December 31, 2008.

Actual Expenses

The information in the table under the heading “Actual Performance” provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The information in the table under the heading “Hypothetical Performance (5% return before expenses)” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading “Hypothetical Performance (5% return before expenses)” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The fee and expenses shown in this section do not reflect any Insurance Company Separate Account or Policy Charges.

 

   Actual
Performance
  Hypothetical
Performance
(5% return
before expenses)
    
    

Beginning Account Value

    

July 1, 2008

  $1,000.00  $1,000.00

Ending Account Value

    

December 31, 2008

  $714.01  $1,024.94

Expenses Paid During Period*

  $0.17  $0.20

 

*Expenses are equal to the Fund’s annualized expense ratio of 0.04% (representing the one-half year period annualized), multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed. Without the waiver and/or reimbursement, expenses would have been higher.

 

Growth Strategy Fund 25


Table of Contents

Russell Investment Funds

Growth Strategy Fund

Schedule of Investments — December 31, 2008

Amounts in thousands (except share amounts)

 

   Shares    Market
Value
$
 
      
Investments - 100.0%      

Other Russell Investment Funds
(“RIF”) and Russell Investment
Company (“RIC”) Series Mutual
Funds

    
Bonds - 20.3%      

RIF Core Bond Fund

  755,265    7,050 
        
Domestic Equities - 52.9%      

RIF Aggressive Equity Fund

  288,062    2,069 

RIF Multi-Style Equity Fund

  796,729    7,171 

RIF Real Estate Securities Fund

  237,447    2,207 

RIC Russell U.S. Quantitative Equity Fund

  325,489    6,917 
        
      18,364 
        
International Equities - 26.8%      

RIF Non-U.S. Fund

  785,740    5,881 

RIC Russell Emerging Markets Fund

  140,727    1,386 

RIC Russell Global Equity Fund

  360,983    2,072 
        
      9,339 
        
Total Investments - 100.0%
(identified cost $52,231)
      34,753 
Other Assets and Liabilities,
Net - (0.0%)
      (11)
        
Net Assets - 100.0%      34,742 
        

 

 

See accompanying notes which are an integral part of the financial statements.

 

26 Growth Strategy Fund


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Table of Contents

Russell Investment Funds

Equity Growth Strategy Fund

Portfolio Management Discussion — December 31, 2008 (Unaudited)

 

 

LOGO

 

Equity Growth Strategy Fund        
   Total
Return

1 Year

    (41.18)%

Inception *

    (26.66)%§

 

Russell 1000® Index **        
   Total
Return

1 Year

    (37.60)%

Inception *

    (24.45)%§
MSCI EAFE® Index Net (USD) *** 
   Total
Return
 

1 Year

    (43.38)%

Inception *

    (27.88)%§

 

 

* The Fund commenced operation on April 30, 2007.

 

**

 

Russell 1000® Index includes the 1,000 largest companies in the Russell 3000® Index. The Russell 1000® Index represents the universe of stocks from which most active money managers typically select. The Russell 1000® Index return reflects adjustments from income dividends and capital gain distributions reinvested as of the ex-dividend dates.

 

*** Morgan Stanley Capital International Europe, Australia, Far East (MSCI EAFE) Index is an index composed of an arithmetic, market value-weighted average of the performance of approximately 1,600 securities listed on the stock exchange of the countries of Europe, Australia, and the Far East. The index is calculated on a total-return basis, which included reinvestment of gross dividends before deduction of withholding taxes.

 

§ Annualized.

The performance shown in this section does not reflect any Insurance Company Separate Account or Policy Charges. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results.

 

28 Equity Growth Strategy Fund


Table of Contents

Russell Investment Funds

Equity Growth Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

 

The Fund is a fund of funds that invests in other Russell Investment Funds and Russell Investment Company mutual funds (the “Underlying Funds”). The Underlying Funds allocate most of their assets among multiple money managers. Russell Investment Management Company (“RIMCo”), as the Underlying Funds' advisor, may change the allocation of the Underlying Funds' assets among money managers at any time. An exemptive order from the Securities and Exchange Commission (SEC) permits RIMCo to engage or terminate a money manager in an Underlying Fund at any time, subject to the approval by the Underlying Fund’s Board without a shareholder vote.

What is the Fund’s investment objective?

The Equity Growth Strategy Fund (“Fund”) seeks to provide high long term capital appreciation.

How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2008?

For the fiscal year ended December 31, 2008, the Equity Growth Strategy Fund lost 41.18%. This compared to the Russell 1000® Index, which lost 37.60% during the same period. The Fund’s performance includes operating expenses, whereas the Index returns are unmanaged and do not include expenses of any kind. The Fund’s performance was negatively impacted mostly by its allocation to the large cap and non-U.S equity asset classes, which are not included in the Fund’s benchmark.

For the year ended December 31, 2008, the Equity Growth Strategy Lipper Composite – lost 39.68%. This result serves as a peer comparison and is expressed net of operating expenses.

Each Underlying Fund has a benchmark reflective of its respective asset class. These benchmarks may be different than the Fund’s benchmark. The Fund’s benchmark represents the largest asset class of the Underlying Funds in which it invests.

How did the market conditions described in the Market Summary report affect the Fund’s performance?

The Fund is a fund of funds and its performance is based on the performance of the Underlying Funds in which it invests. The Fund’s performance was negatively impacted by the financial crisis that affected virtually all asset classes during the fiscal year. The largest impact on the Fund’s weighted excess return relative to the Russell 1000® Index was negative from its exposure to the RIF Multi-Style Equity, RIF Non-U.S., RIF Emerging Markets, Russell Global Equity and the RIF Aggressive Equity Underlying Funds.

The extreme volatility of the financial markets during the fiscal period created a headwind for most active managers. In this challenging environment, all but one underlying equity asset class funds lagged their respective benchmarks; yet three of seven Underlying Funds outperformed their peers within their asset classes as measured by their respective Lipper® Averages.

 

How did the investment strategies and techniques employed by the Fund and its money managers of the Underlying Funds affect the Fund’s performance?

The U.S. equity Underlying Funds maintained an overall preference for companies with above-average growth rates and attractive valuations. This positioning was not rewarded in 2008 where investors were driven by fear, looking for relative safety and selling stocks regardless of fundamentals. U.S. large cap managers in the Underlying Fund using quantitative investment strategies added to returns by shorting several of the financial stocks that underperformed in the fiscal period. Yet, this was offset by managers employing growth and momentum strategies, which underperformed in this environment.

Managers in the small cap U.S. equity Underlying Fund negatively impacted the Fund by underweighting the financials sector and overweighting the other energy sector. Small cap financials rebounded from their lows as the Federal Reserve and Treasury offered wide ranging forms of financial support. The prices of other energy stocks fell as the price of oil fell.

Managers in the non-U.S. developed markets Underlying Fund performed better than managers in global equity and emerging markets Underlying Funds. Yet the Fund’s higher allocation to the Non-U.S. developed markets Underlying Fund resulted in a larger negative impact on the Fund’s benchmark relative performance. This Underlying Fund’s multi-style discipline provided some risk control during the fiscal period given the extreme variability in investment style and market leadership. More defensive strategies helped moderate the negative impact of strategies more focused on deteriorating economic conditions.

In emerging markets, the returns of the emerging markets Underlying Fund declined along with the returns of the asset class, which experienced its biggest calendar year decline in the history of the asset class. The asset class endured massive asset deleveraging and extreme levels of market volatility. Commodity-related sectors suffered most as the global economic slowdown cut demand.

The real estate Underlying Fund focused primarily on the larger and more liquid REITs during the fiscal year. With the exceptional volatility experienced during the period due to the global economic crisis and cash outflows, this positioning hurt Fund performance. The Underlying Fund’s exposure to non-U.S. REITs added to the Fund excess weighted performance relative to the benchmark for the year.

The Funds’ performance shown throughout this report was based on the Underlying Funds’ valuations calculated in accordance with Generally Accepted Accounting Principles (GAAP) and in accordance with a newly effective accounting statement (SFAS 157), reflects the December 31, 2008 market value of the pooled investment vehicle in which the Underlying Funds invested their cash collateral received in securities lending transactions. The market value was lower than the


 

Equity Growth Strategy Fund 29


Table of Contents

Russell Investment Funds

Equity Growth Strategy Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

 

vehicle’s amortized cost per unit. This had a negative impact on the Fund’s benchmark relative performance.

Describe any changes to the Fund’s structure or allocation to the Underlying Funds.

In September, 2008, certain of the Underlying Funds in which the Fund invested (the “Former Underlying Funds”) changed as set forth below as the result of the reorganization (the “Reorganizations”) of the Former Underlying Funds into other Russell Investment Company Funds (the “New Underlying Funds”).

 

Former Underlying Fund New Underlying Fund

Quantitative Equity Fund

 Russell U.S. Quantitative Equity Fund

The New Underlying Fund has the same investment objective, principal investment strategies, investment policies and principal risks as the Former Underlying Fund which it replaced and the allocation of the Fund’s assets to the New Underlying Fund is the same as it was to the Former Underlying Fund.

The views expressed in this report reflect those of the portfolio managers only through the end of the period covered by the report. These views do not necessarily represent the views of RIMCo, or any other person in RIMCo or any other affiliated organization. These views are subject to change at any time based upon market conditions or other events, and RIMCo disclaims any responsibility to update the views contained herein. These views should not be relied on as investment advice and, because investment decisions for a Russell Investment Fund (RIF) or Russell Investment Company (RIC) Fund are based on numerous factors, should not be relied on as an indication of investment decisions of any RIF or RIC Fund.

 

30 Equity Growth Strategy Fund


Table of Contents

Russell Investment Funds

Equity Growth Strategy Fund

 

Shareholder Expense Example — December 31, 2008 (Unaudited)

 

 

 

Fund Expenses

The following disclosure provides important information regarding each Fund’s Expense Example, which appears on each Fund’s individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund.

Example

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2008 to December 31, 2008.

Actual Expenses

The information in the table under the heading “Actual Performance” provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The information in the table under the heading “Hypothetical Performance (5% return before expenses)” provides information

about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading “Hypothetical Performance (5% return before expenses)” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The fee and expenses shown in this section do not reflect any Insurance Company Separate Account or Policy Charges.

 

   

Actual

Performance

  Hypothetical
Performance
(5% return
before expenses)

Beginning Account Value

    

July 1, 2008

  $                 1,000.00  $                1,000.00

Ending Account Value

    

December 31, 2008

  $                    657.02  $                1,024.94

Expenses Paid During

    

Period*

  $                        0.17  $                        0.20

 

*Expenses are equal to the Fund’s annualized expense ratio of 0.04% (representing the one-half year period annualized), multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed. Without the waiver and/or reimbursement, expenses would have been higher.

 

Equity Growth Strategy Fund 31


Table of Contents

Russell Investment Funds

Equity Growth Strategy Fund

Schedule of Investments — December 31, 2008

Amounts in thousands (except share amounts)

 

   Shares    Market
Value
$
 
      
Investments - 100.1%      

Other Russell Investment Funds
(“RIF”) and Russell Investment
Company (“RIC”) Series Mutual
Funds

    
Domestic Equities - 65.3%      

RIF Aggressive Equity Fund

  122,594    881 

RIF Multi-Style Equity Fund

  363,495    3,272 

RIF Real Estate Securities Fund

  97,129    903 

RIC Russell U.S. Quantitative Equity Fund

  149,420    3,175 
        
      8,231 
        
International Equities - 34.8%      

RIF Non-U.S. Fund

  385,493    2,885 

RIC Russell Emerging Markets Fund

  63,499    625 

RIC Russell Global Equity Fund

  153,703    882 
        
      4,392 
        
Total Investments - 100.1%
(identified cost $20,009)
      12,623 
Other Assets and Liabilities,
Net - (0.1%)
      (10)
        
Net Assets - 100.0%      12,613 
        

 

See accompanying notes which are an integral part of the financial statements.

 

32 Equity Growth Strategy Fund


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Statements of Assets and Liabilities — December 31, 2008

 

Amounts in thousands Moderate Strategy
Fund
  Balanced Strategy
Fund
  Growth Strategy
Fund
  Equity Growth
Strategy Fund
 
    

Assets

    

Investments, at identified cost

 $23,496  $81,252  $52,231  $20,009 

Investments, at market

  19,319   60,174   34,753   12,623 

Receivables:

    

Investments sold

  65          

Fund shares sold

  6   42   8   6 

From Transfer Agent

        2   1 

Prepaid expenses

     1       
                

Total assets

  19,390   60,217   34,763   12,630 
                
    

Liabilities

    

Payables:

    

Investments purchased

     42   9   5 

Fund shares redeemed

  71          

Accrued fees to affiliates

  1   5   2   1 

Other accrued expenses

  10   12   10   11 
                

Total liabilities

  82   59   21   17 
                
    

Net Assets

 $19,308  $60,158  $34,742  $12,613 
                
Net Assets Consist of:    

Undistributed (overdistributed) net investment income

 $172  $80  $8  $32 

Accumulated net realized gain (loss)

  (901)  (1,155)  (481)  (1,063)

Unrealized appreciation (depreciation) on investments

  (4,177)  (21,078)  (17,478)  (7,386)

Shares of beneficial interest

  25   88   57   23 

Additional paid-in capital

  24,189   82,223   52,636   21,007 
                

Net Assets

 $19,308  $60,158  $34,742  $12,613 
                

Net Asset Value, offering and redemption price per share:

    

Net asset value per share*

 $7.67  $6.80  $6.11  $5.42 

Net assets

 $19,308,456  $60,158,172  $34,742,243  $12,612,657 

Shares outstanding ($.01 par value)

  2,515,767   8,846,816   5,685,013   2,328,684 

*      Net asset value per share equals net assets divided by shares of beneficial interest outstanding.

        

  

 

See accompanying notes which are an integral part of the financial statements.

 

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Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Statements of Operations — For the Fiscal Year Ended December 31, 2008

 

Amounts in thousands Moderate Strategy
Fund
  Balanced Strategy
Fund
  Growth Strategy
Fund
  Equity Growth
Strategy Fund
 
    

Investment Income

    

Income distributions from Underlying Funds

 $674  $1,568  $669  $128 
                
    

Expenses

    

Advisory fees

  35   111   71   28 

Administrative fees

  9   28   18   7 

Custodian fees

  15   19   17   14 

Transfer agent fees

  1   2   2   1 

Professional fees

  21   23   22   21 

Trustees’ fees

     1   1    

Offering fees

  5   5   5   5 

Miscellaneous

  5   5   4   6 
                

Expenses before reductions

  91   194   140   82 

Expense reductions

  (72)  (150)  (126)  (76)
                

Net expenses

  19   44   14   6 
                

Net investment income (loss)

  655   1,524   655   122 
                
    

Net Realized and Unrealized Gain (Loss)

    

Net realized gain (loss) on:

    

Investments

  (990)  (1,448)  (675)  (1,102)

Capital gain distributions from Underlying Funds

  121   330   214   87 
                

Net realized gain (loss)

  (869)  (1,118)  (461)  (1,015)

Net change in unrealized appreciation (depreciation) on investments

  (4,012)  (19,597)  (15,965)  (6,201)
                

Net realized and unrealized gain (loss)

  (4,881)  (20,715)  (16,426)  (7,216)
                

Net Increase (Decrease) in Net Assets from Operations

 $(4,226) $(19,191) $(15,771) $(7,094)
                
                 

 

See accompanying notes which are an integral part of the financial statements.

 

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Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Statements of Changes in Net Assets — For the Fiscal Years Ended December 31,

 

  Moderate Strategy
Fund
 
Amounts in thousands 2008  2007* 
  

Increase (Decrease) in Net Assets

  

Operations

  

Net investment income (loss)

 $655  $194 

Net realized gain (loss)

  (869)  142 

Net change in unrealized appreciation (depreciation)

  (4,012)  (165)
        

Net increase (decrease) in net assets from operations

  (4,226)  171 
        

Distributions

  

From net investment income

  (482)  (207)

From net realized gain

  (160)  (2)
        

Net decrease in net assets from distributions

  (642)  (209)
        

Share Transactions

  

Net increase (decrease) in net assets from share transactions

  15,522   8,692 
        

Total Net Increase (Decrease) in Net Assets

  10,654   8,654 

Net Assets

  

Beginning of period

  8,654    
        

End of period

 $19,308  $8,654 
        

Undistributed (overdistributed) net investment income included in net assets

 $172  $ 

 

*For the period April 30, 2007 (commencement of operations) to December 31, 2007.

 

See accompanying notes which are an integral part of the financial statements.

 

36 Statements of Changes in Net Assets


Table of Contents

 

Balanced Strategy
Fund
  Growth Strategy
Fund
  Equity Growth Strategy
Fund
 
2008  2007*  2008  2007*  2008   2007* 
      
      
      
$1,524  $889  $655  $638  $122   $347 
 (1,118)  1,114   (461)  1,101   (1,015)   709 
 (19,597)  (1,481)  (15,965)  (1,513)  (6,201)   (1,185)
                        
 (19,191)  522   (15,771)  226   (7,094)   (129)
                        
      
 (1,462)  (901)  (647)  (651)  (89)   (358)
 (1,120)  (2)  (1,109)     (748)    
                        
 (2,582)  (903)  (1,756)  (651)  (837)   (358)
                        
      
 46,234   36,078   24,879   27,815   7,538    13,493 
                        
 24,461   35,697   7,352   27,390   (393)   13,006 
      
 35,697      27,390      13,006     
                        
$60,158  $35,697  $34,742  $27,390  $12,613   $13,006 
                        
$80  $  $8  $  $32   $ 

 

See accompanying notes which are an integral part of the financial statements.

 

Statements of Changes in Net Assets 37


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Financial Highlights

For a Share Outstanding Throughout the Period.

 

       
$
Net Asset Value,
Beginning of
Period
 $
Net
Investment
Income (Loss)
(a)(b)
 $
Net Realized
and Unrealized
Gain (Loss)
  $
Total Income
(Loss) from
Operations
  $
Distributions
from Net
Investment Income
  $
Distributions
from Net
Realized Gain
 

Moderate Strategy Fund

      

December 31, 2008

 9.99 .33 (2.32) (1.99) (.23) (.10)

December 31, 2007*

 10.00 .46 (.11) .35  (.36) (g)

Balanced Strategy Fund

      

December 31, 2008

 9.93 .23 (2.88) (2.65) (.21) (.27)

December 31, 2007*

 10.00 .47 (.20) .27  (.34) (g)

Growth Strategy Fund

      

December 31, 2008

 9.90 .15 (3.46) (3.31) (.14) (.34)

December 31, 2007*

 10.00 .45 (.24) .21  (.31)  

Equity Growth Strategy Fund

      

December 31, 2008

 9.83 .07 (3.92) (3.85) (.05) (.51)

December 31, 2007*

 10.00 .50 (.38) .12  (.29)  

 

See accompanying notes which are an integral part of the financial statements.

 

38 Financial Highlights


Table of Contents

 

$
Total
Distributions
  $
Net Asset Value,
End of
Period
 %
Total
Return
(c)
  $
Net Assets,
End of Period
(000)
 %
Ratio of Expenses
to Average
Net Assets,
Net
(d)(e)(f)
 %
Ratio of Expenses
to Average
Net Assets,
Gross
(d)(e)
 %
Ratio of Net
Investment Income
to Average
Net Assets
(c)(f)
 %
Portfolio
Turnover Rate
(c)
       
(.33) 7.67 (20.39) 19,308 .11 .53 3.77 39
(.36) 9.99 3.54  8,654 .11 2.01 5.37 24
       
(.48) 6.80 (27.70) 60,158 .08 .35 2.75 16
(.34) 9.93 2.73  35,697 .08 .74 5.37 11
       
(.48) 6.11 (34.73) 34,742 .04 .40 1.85 10
(.31) 9.90 2.13  27,390 .04 .84 5.05 3
       
(.56) 5.42 (41.18) 12,613 .04 .58 0.87 24
(.29) 9.83 1.25  13,006 .04 1.36 5.59 6

 

See accompanying notes which are an integral part of the financial statements.

 

Financial Highlights 39


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Notes to Financial Highlights — December 31, 2008

 

 

 

*For the period April 30, 2007 (commencement of operations) to December 31, 2007.
(a)Average month-end shares outstanding were used for this calculation.
(b)Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the Underlying Funds in which the Fund invests.
(c)Periods less than one year are not annualized.
(d)The ratios for periods less than one year are annualized.
(e)The calculation includes only those expenses charged directly to the Fund and does not include expenses charged to the Underlying Funds in which the Fund invests.
(f)May reflect amounts waived and reimbursed by RIMCo and RFSC.
(g)Less than $.01 per share.

 

See accompanying notes which are an integral part of the financial statements.

 

40 Notes to Financial Highlights


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Notes to Financial Statements — December 31, 2008

 

 

 

1. Organization

Russell Investment Funds (the “Investment Company” or “RIF”) is a series investment company with nine different investment portfolios referred to as Funds. These financial statements report on four of these Funds (each a “Fund” and collectively the “Funds”). The Investment Company provides the investment base for one or more variable insurance products issued by one or more insurance companies. These Funds are offered at net asset value to qualified insurance company separate accounts offering variable insurance products. The Investment Company is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. It is organized and operates as a Massachusetts business trust under an amended and restated master trust agreement dated October 1, 2008. The Investment Company’s master trust agreement permits the Board of Trustees (the “Board”) to issue an unlimited number of shares of beneficial interest.

Russell Investment Management Company (“RIMCo”) is the Funds’ adviser and Russell Fund Services Company (“RFSC”), a wholly-owned subsidiary of RIMCo, is the Funds’ administrator and transfer agent.

The Funds seek to achieve their objective by investing in a combination of Russell Investment Company (“RIC”) funds and other of the Investment Company’s funds (the “Underlying Funds”) as set forth in the table below. RIMCo may modify the target asset allocation for any Fund and/or the Underlying Funds in which the Funds invest. From time to time, each Fund may adjust its investments within the ranges below based on RIMCo’s outlook for the economy, financial markets generally and relative market valuation of the asset classes represented by each Underlying Fund. Additionally, each Fund may deviate from the ranges when, in RIMCo’s opinion, it is necessary to do so to pursue the Fund’s investment objective. In the future, the Funds may also invest in other funds which are not currently Underlying Funds.

 

   Asset Allocation Targets as of April 30, 2008 
Asset Class/Underlying Funds  Moderate
Strategy Fund
  Balanced
Strategy Fund
  Growth
Strategy Fund
  Equity Growth
Strategy Fund
 
     

Bonds

     

RIF Core Bond Fund

  55-65% 35-45% 15-25% 0%

Domestic Equities

     

RIF Aggressive Equity Fund

  0-8  0-9  1-11  2-12 

RIF Multi-Style Equity Fund

  5-15  10-20  16-26  21-31 

RIF Real Estate Securities Fund

  0-8  0-10  1-11  2-12 

RIC Russell U.S. Quantitative Equity Fund

  5-15  10-20  15-25  20-30 

International Equities

     

RIF Non-U.S. Fund

  14-24  9-19  12-22  18-28 

RIC Russell Emerging Markets Fund

  0-7  0-8  0-9  0-10 

RIC Russell Global Equity Fund

  0-8  0-9  1-11  2-12 

 

2. Significant Accounting Policies

The Funds’ financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) which require the use of management estimates and assumptions at the date of the financial statements. Actual results could differ from those estimates. The following is a summary of the significant accounting policies consistently followed by each Fund in the preparation of its financial statements.

Security Valuation

The Funds value their portfolio securities, the shares of the Underlying Funds, at the current net asset value per share of each Underlying Fund.

The Underlying Funds value portfolio securities according to Board-approved securities valuation procedures and pricing services which include market value procedures, fair value procedures and a description of the pricing services used by the Underlying Funds. Money market fund securities are priced using the amortized cost method of valuation, as are debt obligation securities maturing within 60 days at the time of purchase, unless the Board determines that amortized cost does not represent market value of short-term debt obligations. The Board has delegated the responsibility for administration of the securities valuation procedures to RFSC.

Ordinarily, the Underlying Funds value each portfolio security based on market quotations provided by pricing services or alternative pricing services or dealers (when permitted by the market value procedures). Generally, Underlying Fund securities are valued at the close of the market on which they are traded as follows:

 

  

U.S. listed equities, equity and fixed income options and Rights/Warrants: Last sale price; last bid price if no last sale price.

 

Notes to Financial Statements 41


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Notes to Financial Statements, continued — December 31, 2008

 

 

 

  

U.S. over-the-counter equities: Official closing price; last bid price if no closing price.

 

  

Listed ADRs/GDRs: Last sale price; last bid price if no last sale price.

 

  

Municipal bonds, U.S. bonds, Eurobonds/foreign bonds: Evaluated bid price; broker quote if no evaluated bid price;.

 

  

Futures: Settlement price;

 

  

Bank loans and Forwards: mean between bid and asking price.

 

  

Investments in other mutual funds are valued at their net asset value per share, calculated at 4 p.m. Eastern time or as of the close of the New York Stock Exchange, whichever is earlier;

 

  

The value of swap agreements is equal to the Funds’ obligation (or rights) under swap contracts which will generally be equal to the net amounts to be paid or received under the contracts based upon the relative values of the positions held by each party to the contracts.

 

  

Equity securities traded on a national foreign securities exchange or a foreign over the counter market are valued on the basis of the official closing price, or lacking the official closing price, at the last sale price of the primary exchange on which the security is traded.

If market quotations are not readily available for a security or if subsequent events suggest that a market quotation is not reliable, the Underlying Funds will use the security’s fair value, as determined in accordance with the fair value procedures. The effect of fair value pricing is that securities may not be priced on the basis of quotations from the primary market on which they are traded, but rather may be priced by another method that the Board believes reflects fair value. The fair value procedures may involve subjective judgments as to the fair value of securities. The use of fair value pricing by an Underlying Fund may cause the net asset value of its shares to differ significantly from the net asset value that would be calculated using normal pricing methods. Fair value pricing could also cause discrepancies between the daily movement of the value of Underlying Fund shares and daily movement of the benchmark index if the index is valued using another pricing method.

This policy is intended to assure that the Underlying Funds’ net asset values fairly reflect security values as of the time of pricing. Events or circumstances affecting the values of Underlying Fund securities that occur between the closing of the principal markets on which they trade and the time the net asset value of Underlying Fund shares is determined may be reflected in the calculation of net asset values for each applicable Underlying Fund (and each Fund which invests in such Underlying Fund) when the Underlying Funds deem that the particular event or circumstance would materially affect such Underlying Fund’s net asset value. Underlying Funds that invest primarily in frequently traded exchange-listed securities will use fair value pricing in limited circumstances since reliable market quotations will often be readily available. Underlying Funds that invest in foreign securities are likely to use fair value pricing more often since significant events may occur between the close of foreign markets and the time of pricing which would trigger fair value pricing of the foreign securities. Underlying Funds that invest in low-rated debt securities are also likely to use fair value pricing more often since the markets in which such securities are traded are generally thinner, more limited and less active than those for higher rated securities. Examples of events that could trigger fair value pricing of one or more securities are: a material market movement of the US securities market (defined in the fair value procedures as the movement by a single major US Index greater than a certain percentage) or other significant event; foreign market holidays if on a daily basis, Fund exposure exceeds 20% in aggregate (all closed markets combined); a company development; a natural disaster; or an armed conflict.

Because foreign securities can trade on non-business days, the net asset value of a Fund’s portfolio that includes an Underlying Fund which invests in foreign securities may change on days when shareholders will not be able to purchase or redeem fund shares.

The Funds adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), effective January 1, 2008. In accordance with SFAS 157, fair value is defined as the price that the Funds would receive upon selling an investment in a timely transaction to an independent buyer in the principal or most advantageous market of the investment. SFAS 157 established a three-tier hierarchy to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value including a pricing model and/or risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

42 Notes to Financial Statements


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Notes to Financial Statements, continued — December 31, 2008

 

 

 

The three-tier hierarchy of inputs is summarized in the three broad levels listed below.

 

 Level 1 — quoted prices in active markets for identical investments

 

 Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

 

 Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

Inputs used in valuing the Funds’ investments for the period ended December 31, 2008, were as follows:

 

   Moderate
Strategy Fund
  Balanced
Strategy Fund
  Growth
Strategy Fund
  Equity Growth
Strategy Fund
    Investments in
Securities
  Investments in
Securities
  Investments in
Securities
  Investments in
Securities
        

Level 1

  $  $  $  $

Level 2

   19,319,025   60,174,298   34,752,751   12,623,205

Level 3

            
                
  $19,319,025  $60,174,298  $34,752,751  $12,623,205
                

As of December 31, 2008, there were no Level 3 securities held by the Funds.

Investment Transactions

Investment transactions are recorded on a trade date basis. Realized gains and losses from securities transactions, if any, are recorded on the basis of specific identified cost.

Investment Income

Distributions of income and capital gains from the Underlying Funds are recorded on the ex-dividend date.

Federal Income Taxes

Since the Investment Company is a Massachusetts business trust, each Fund is a separate corporate taxpayer and determines its net investment income and capital gains (or losses) and the amounts to be distributed to each Fund’s shareholders without regard to the income and capital gains (or losses) of the other Funds.

It is each Fund’s intention to qualify as a regulated investment company and distribute all of its taxable income and capital gains. Therefore, no federal income tax provision is required for the Funds.

In accordance with provisions set forth in the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”), adopted by the Funds on January 1, 2007, management has reviewed the Funds’ tax positions for all open tax years, and concluded that adoption had no effect on the Funds’ financial position or results of operations. At December 31, 2008, the Funds have recorded no liabilities for net unrecognized tax benefits relating to uncertain income tax positions they have taken or expect to take in future tax returns.

Each Fund files a U. S. tax return. While the statute of limitations remains open to examine the Funds’ U.S. tax returns filed for the fiscal years ending December 31, 2005, through December 31, 2007, no examinations are in progress or anticipated at this time. The Funds are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.

Dividends and Distributions to Shareholders

Income dividends and capital gain distributions, if any, are recorded on the ex-dividend date. Income dividends are generally declared and paid quarterly. Capital gain distributions are generally declared and paid annually. An additional distribution may be paid by the Funds to avoid imposition of federal income and excise tax on any remaining undistributed capital gains and net investment income.

The timing and characterization of certain income and capital gain distributions are determined in accordance with federal tax regulations which may differ from GAAP. As a result, net investment income and net realized gain (or loss) from investment transactions for a reporting period may differ significantly from distributions during such period. The differences between tax regulations and GAAP relate primarily to investments in the Underlying Funds sold at a loss, wash sale deferrals and capital loss

 

Notes to Financial Statements 43


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Notes to Financial Statements, continued — December 31, 2008

 

 

 

carryforwards. Accordingly, the Funds may periodically make reclassifications among certain of their capital accounts without impacting their net asset value.

Expenses

Expenses included in the accompanying financial statements reflect the expenses of each Fund and do not include those expenses incurred by the Underlying Funds. Because the Underlying Funds have varied expense and fee levels and the Funds may own different proportions of the Underlying Funds at different times, the amount of the fees and expenses incurred indirectly by the Funds will vary. Most expenses can be directly attributed to the individual Funds. Expenses which cannot be directly attributed to a specific Fund are allocated among all Funds principally based on their relative net assets.

Guarantees

In the normal course of business the Funds enter into contracts that contain a variety of representations which provide general indemnifications. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, the Funds expect the risk of loss to be remote.

 

3. Investment Transactions

Securities

During the period ended December 31, 2008, purchases and sales of the Underlying Funds (excluding short-term investments) were as follows:

 

Funds  Purchases  Sales
    

Moderate Strategy

  $22,507,185  $6,839,969

Balanced Strategy

   54,479,438   8,963,036

Growth Strategy

   27,506,639   3,505,289

Equity Growth Strategy

   10,289,401   3,369,110

 

4. Related Party Transactions, Fees and Expenses

Adviser and Administrator

RIMCo is the Funds’ investment adviser and RFSC is the Funds’ administrator. RFSC is a wholly-owned subsidiary of RIMCo. RIMCo is a wholly-owned subsidiary of Frank Russell Company (a subsidiary of The Northwestern Mutual Life Insurance Company). Frank Russell Company provides ongoing money manager research and trade placement services to RIC and RIMCo.

RIMCo has contractually agreed to waive, at least through April 29, 2009, its 0.20% advisory fee for each Fund. RIMCo and RFSC have contractually agreed to waive and/or reimburse, at least through April 29, 2009, each Fund for other direct Fund-level expenses to the extent that direct Fund-level expenses exceed 0.11%, 0.08%, 0.04% and 0.04% of the average daily net assets of the Moderate Strategy, Balanced Strategy, Growth Strategy and Equity Growth Strategy Funds, respectively, on an annual basis. Direct Fund-level expenses for the Funds do not include the expenses of other investment companies in which the Fund invests which are borne indirectly by the Fund. These arrangements may not be terminated during the relevant period except at the Board’s discretion.

The Administrative fee of 0.05% is based upon the average daily net assets of each Fund.

For the period ended December 31, 2008, the fees waived and reimbursed by RIMCo and RFSC amounted to:

 

Funds  RIMCo  RFSC  Total
      

Moderate Strategy

  $34,738  $37,363  $72,101

Balanced Strategy

   110,766   39,259   150,025

Growth Strategy

   70,744   55,262   126,006

Equity Growth Strategy

   28,041   47,590   75,631

RIMCo and RFSC do not have the ability to recover amounts waived or reimbursed from previous periods.

Transfer and Dividend Disbursing Agent

RFSC is the Transfer and Dividend Disbursing Agent for the Investment Company. For this service, RFSC is paid a fee for transfer agency and dividend disbursing services provided to the Funds. RFSC retains a portion of this fee for its services provided to the Funds and pays the balance to unaffiliated agents who assisted in providing these services.

 

44 Notes to Financial Statements


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Notes to Financial Statements, continued — December 31, 2008

 

 

 

Accrued Fees Payable to Affiliates

Accrued fees payable to affiliates for the period ended December 31, 2008, were as follows:

 

    Moderate Strategy
Fund
  Balanced
Strategy Fund
  Growth Strategy
Fund
  Equity Growth
Strategy Fund
        

Administration Fees

  $785  $4,705  $1,399  $494

Transfer Agent Fees

   69   214   124   44

Trustee Fees

   20   113   134   59
                
  $874  $5,032  $1,657  $597
                

Distributor

On June 2, 2008, Russell Fund Distributors, Inc., a wholly-owned subsidiary of RIMCo, changed its name to Russell Financial Services, Inc. (“Distributor”). The Distributor serves as distributor for RIF, pursuant to the Distribution Agreement with the Investment Company. The Distributor receives no compensation from the Investment Company for its services.

Board of Trustees

The Russell Fund Complex consists of RIC, which has 38 Funds, and RIF, which has nine Funds. Each of the Trustees is a Trustee of both RIC and RIF. During the period, the Russell Fund Complex paid each of its independent Trustees a retainer of $60,000 per year, $6,500 for each regular quarterly meeting attended in person, $2,500 for each special meeting attended in person, and $2,500 for each Audit Committee meeting, Nominating and Governance Committee meeting, Investment Committee meeting or any other committee meeting established and approved by the Board that is attended in person. Each Trustee receives a $1,000 fee for attending the quarterly and special meetings and a $500 fee for attending the committee meeting by phone instead of receiving the full fee had the member attended in person. Trustees’ out of pocket expenses are also paid by the Russell Fund Complex. The Audit Committee Chair and Investment Committee Chair are each paid a fee of $12,000 per year and the Nominating and Governance Committee Chair is paid a fee of $6,000 per year. The chairman of the Board receives additional annual compensation of $52,000.

Transactions With Affiliated Companies

An affiliated company is a company in which a Fund has ownership of at least 5% of the voting securities or under common control. Transactions during the period ended December 31, 2008, with Underlying Funds which are an affiliated company or under common control are as follows:

 

Affiliate  Market
Value
  Purchases
Cost
  Sales
Cost
  Realized Gain
(Loss)
  Income
Distributions
  Capital Gains
Distributions
           

Moderate Strategy Fund

           

RIF Core Bond Fund

  $11,616,680  $12,045,579  $4,650,835  $(283,992) $605,092  $75,808

RIF Aggressive Equity Fund

   572,565   794,728   250,889   (65,586)  5,503   102

RIF Multi-Style Equity Fund

   1,922,578   2,597,647   724,308   (127,238)  24,657   14,651

RIC Russell U.S. Quantitative Equity Fund

   1,941,688   449,330   162,091   (61,456)  11,977   

RIF Real Estate Securities Fund

   579,739   869,806   404,619   (92,663)  10,253   

RIC Russell Emerging Markets Fund

   382,802   605,880   171,290   (47,356)     18,228

RIC Russell Global Equity Fund

   579,098   798,632   207,118   (36,795)  9,201   

RIF Non-U.S. Fund

   1,723,875   2,276,651   630,329   (158,774)     12,557

RIC Quantitative Equity Fund (1)

      2,068,932   628,900   (116,550)  7,312  
                        
  $19,319,025  $22,507,185  $7,830,379  $(990,410) $673,995  $121,346
                        
           

Balanced Strategy Fund

           

RIF Core Bond Fund

  $23,663,254  $17,824,158  $6,424,844  $(480,454) $1,252,067  $141,698

RIF Aggressive Equity Fund

   2,427,255   2,453,632   225,239   (51,919)  22,766   333

RIF Multi-Style Equity Fund

   9,069,268   8,898,053   714,019   (113,565)  110,869   53,562

RIC Russell U.S. Quantitative Equity Fund

   9,171,902   1,716,415   129,494   (61,804)  54,900   

RIF Real Estate Securities Fund

   3,138,362   3,447,419   1,128,447   (318,787)  54,603   

RIC Russell Emerging Markets Fund

   1,807,454   2,286,358   156,160   (52,488)     86,370

RIC Russell Global Equity Fund

   2,425,322   2,494,605   155,153   (21,707)  37,741   

RIF Non-U.S. Fund

   8,471,481   8,563,152   731,474   (197,105)     47,603

RIC Quantitative Equity Fund (1)

      6,795,646   745,714   (149,679)  34,877  
                        
  $60,174,298  $54,479,438  $10,410,544  $(1,447,508) $1,567,823  $329,566
                        

 

Notes to Financial Statements 45


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Notes to Financial Statements, continued — December 31, 2008

 

 

 

Affiliate  Market
Value
  Purchases
Cost
  Sales
Cost
  Realized Gain
(Loss)
  Income
Distributions
  Capital Gains
Distributions
           

Growth Strategy Fund

           

RIF Core Bond Fund

  $7,049,778  $4,288,231  $2,087,711  $(166,477) $397,423  $46,107

RIF Aggressive Equity Fund

   2,069,177   1,742,315   101,844   (22,719)  21,059   377

RIF Multi-Style Equity Fund

   7,170,930   5,916,805   456,660   (74,873)  102,571   56,648

RIC Russell U.S. Quantitative Equity Fund

   6,916,638   887,839   95,505   (47,164)  42,950   

RIF Real Estate Securities Fund

   2,207,150   1,812,228   419,571   (121,596)  41,786   

RIC Russell Emerging Markets Fund

   1,386,160   1,586,734   119,980   (36,724)     66,347

RIC Russell Global Equity Fund

   2,072,044   1,828,431   105,741   (11,290)  32,870   

RIF Non-U.S. Fund

   5,880,874   5,080,230   406,274   (113,410)     44,109

RIC Quantitative Equity Fund (1)

      4,363,826   386,473   (80,217)  30,180  
                        
  $34,752,751  $27,506,639  $4,179,759  $(674,470) $668,839  $213,588
                        
           

Equity Growth Strategy Fund

           

RIF Aggressive Equity Fund

  $880,602  $713,306  $281,798  $(66,220) $9,247  $194

RIF Multi-Style Equity Fund

   3,271,627   2,624,719   1,043,658   (198,054)  51,215   30,967

RIC Russell U.S. Quantitative Equity Fund

   3,175,181   568,631   184,893   (77,051)  19,265   

RIF Real Estate Securities Fund

   902,850   928,295   743,554   (204,398)  18,909   

RIC Russell Emerging Markets Fund

   625,469   666,124   211,439   (67,862)     29,500

RIC Russell Global Equity Fund

   882,254   714,480   224,435   (40,902)  13,700   

RIF Non-U.S. Fund

   2,885,222   2,302,751   901,903   (264,119)     26,476

RIC Quantitative Equity Fund (1)

      1,771,095   879,244   (183,208)  15,351  
                        
  $12,623,205  $10,289,401  $4,470,924  $(1,101,814) $127,687  $87,137
                        

 

(1)Quantitative Equity Fund merged into Russell U.S. Quantitative Equity Fund as of September 22, 2008.

 

5. Federal Income Taxes

At December 31, 2008, the following Fund had net tax basis capital loss carryforwards which may be applied against any net realized taxable gains in each succeeding year or until their respective expiration dates, whichever occurs first. Available capital loss carryforwards and expiration dates are as follows:

 

Funds  12/31/2016  Totals
    

Equity Growth Strategy

  $134,219  $134,219

At December 31, 2008, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long-term capital gains for income tax purposes were as follows:

 

    Moderate
Strategy Fund
  Balanced
Strategy Fund
  Growth
Strategy Fund
  Equity Growth
Strategy Fund
 
     

Cost of Investments for Tax Purposes

  $24,524,329  $82,502,736  $52,768,220  $20,937,830 
                 

Unrealized Appreciation

  $  $  $  $ 

Unrealized Depreciation

   (5,205,304)  (22,328,438)  (18,015,469)  (8,314,625)
                 

Net Tax Unrealized Appreciation (Depreciation)

  $(5,205,304) $(22,328,438) $(18,015,469) $(8,314,625)
                 

Undistributed Ordinary Income

  $237,035  $79,930  $7,955  $31,779 

Undistributed Long-Term Gains (Capital Loss Carryforward)

  $62,862  $96,500  $56,058  $(134,219)

Tax Composition of Distributions:

     

Ordinary Income

  $482,474  $1,443,808  $646,736  $95,429 

Long-Term Capital Gains

  $159,653  $1,138,562  $1,108,503  $741,432 

 

6. Fund Share Transactions (amounts in thousands)

Share transactions for the periods ended December 31, 2008 and December 31, 2007 were as follows:

 

   Shares  Dollars 
   2008  2007*  2008  2007* 
     

Moderate Strategy Fund

     

Proceeds from shares sold

  2,261  950  $21,043  $9,530 

Proceeds from reinvestment of distributions

  71  22   642   209 

Payments for shares redeemed

  (682) (106)  (6,163)  (1,047)
               

Total net increase (decrease)

  1,650  866  $15,522  $8,692 
               

 

46 Notes to Financial Statements


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Notes to Financial Statements, continued — December 31, 2008

 

 

 

6. Fund Share Transactions (amounts in thousands) (continued)

 

   Shares  Dollars 
   
   2008  2007*  2008  2007* 
     

Balanced Strategy Fund

     

Proceeds from shares sold

  5,802  3,701  $50,702  $37,178 

Proceeds from reinvestment of distributions

  306  91   2,582   903 

Payments for shares redeemed

  (856) (197)  (7,050)  (2,003)
               

Total net increase (decrease)

  5,252  3,595  $46,234  $36,078 
               
   Shares  Dollars 
   2008  2007*  2008  2007* 
     

Growth Strategy Fund

     

Proceeds from shares sold

  3,050  2,762  $25,915  $27,787 

Proceeds from reinvestment of distributions

  212  66   1,755   651 

Payments for shares redeemed

  (344) (61)  (2,791)  (623)
               

Total net increase (decrease)

  2,918  2,767  $24,879  $27,815 
               
   Shares  Dollars 
   2008  2007*  2008  2007* 

Equity Growth Strategy Fund

     

Proceeds from shares sold

  1,334  1,332  $10,149  $13,593 

Proceeds from reinvestment of distributions

  100  37   837   358 

Payments for shares redeemed

  (428) (46)  (3,448)  (458)
               

Total net increase (decrease)

  1,006  1,323  $7,538  $13,493 
               

 

*For the period April 30, 2007 (commencement of operations) to December 31, 2007.

 

7. Interfund Lending Program

The Investment Company Funds have received permission from the Securities and Exchange Commission to participate in a joint lending and borrowing facility (the “Credit Facility”). Portfolios of the Funds may borrow money from each other for temporary purposes. All such borrowing and lending will be subject to a participating Fund’s fundamental investment limitations. Typically, Funds will borrow from the RIC Russell Money Market Fund. The RIC Russell Money Market Fund will lend through the program only when the returns are higher than those available from an investment in repurchase agreements or short-term reserves and the portfolio manager determines it is in the best interest of the RIC Russell Money Market Fund. The Investment Company Funds will borrow through the program only when the costs are equal to or lower than the cost of bank loans. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business day’s notice. A participating fund may have to borrow from a bank at a higher interest rate if an interfund loan is called or not renewed. Any delay in repayment to the RIC Russell Money Market Fund could result in a lost investment opportunity or additional borrowing costs. For the period ended December 31, 2008, the Funds presented herein did not borrow through the interfund lending program.

 

8. Record Ownership

As of December 31, 2008, the following table includes shareholders of record with greater than 10% of the total outstanding shares of each respective Fund. The Northwestern Mutual Life Insurance Company accounts were the largest shareholders in each Fund.

 

Funds  # of Shareholders  %
    

Moderate Strategy

  1  97.7

Balanced Strategy

  1  97.2

Growth Strategy

  1  98.3

Equity Growth Strategy

  1  97.9

 

Notes to Financial Statements 47


Table of Contents

 

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders

of Russell Investment Funds:

In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Moderate Strategy Fund, Balanced Strategy Fund, Growth Strategy Fund, and Equity Growth Strategy Fund (four of the portfolios constituting the Russell Investment Funds, hereafter referred to as the “Funds”) at December 31, 2008, the results of each of their operations for the year then ended, and the changes in each of their net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2008 by correspondence with the transfer agent, provide a reasonable basis for our opinion.

 

LOGO

Seattle, Washington

February 12, 2009

 

48 Report of Independent Registered Public Accounting Firm


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Russell Investment Funds

Tax Information — December 31, 2008 (Unaudited)

 

 

 

For the tax year ended December 31, 2008, the Funds hereby designate 100% or the maximum amount allowable, of its net taxable income as qualified dividends taxed at individual net capital gain rates.

The Form 1099 you receive in January 2009 will show the tax status of all distributions paid to your account in calendar year 2008.

The Funds designate dividends distributed during the fiscal year as qualifying for the dividends received deduction for corporate shareholders as follows:

 

Moderate Strategy

  12.0%

Balanced Strategy

  17.6%

Growth Strategy

  35.0%

Equity Growth Strategy

  100.0%

Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the following amounts as long-term capital gain dividends for their taxable year ended December 31, 2008:

 

   Long-Term
Capital Gains
  

Moderate Strategy

  159,653

Balanced Strategy

  1,138,562

Growth Strategy

  1,108,503

Equity Growth Strategy

  741,432

Please consult a tax adviser for any questions about federal or state income tax laws.

 

Tax Information 49


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Basis for Approval of Investment Advisory Contracts (Unaudited)

 

 

 

Approval of Investment Advisory Agreement

The Board of Trustees, including all of the Independent Trustees, last considered and approved the continuation of the advisory agreement with RIMCo (the “RIMCo Agreement”) and the portfolio management contract (collectively, the “portfolio management contracts”) with each Money Manager of the funds in which the Funds invest (the “Underlying Funds”) at a meeting held on April 22, 2008. During the course of a year, the Trustees receive a wide variety of materials regarding the investment performance of the Funds, sales and redemptions of the Funds’ and Underlying Funds’ shares, and the management of the Funds and the Underlying Funds by RIMCo. In preparation for the annual review, the Independent Trustees, with the advice and assistance of their independent counsel, also requested and the Board considered (1) information and reports prepared by RIMCo relating to the services provided by RIMCo (and its affiliates) to the Funds and the Underlying Funds; and (2) information (the “Third-Party Information”) received from an independent, nationally recognized provider of investment company information comparing the performance of each of the Funds and the Underlying Funds and their respective operating expenses over various periods of time with other peer funds (“Comparable Funds”) not managed by RIMCo believed by the provider to be generally comparable in investment objectives and size to the Funds and the Underlying Funds. The foregoing information requested by the Trustees or provided by RIMCo is collectively called the “Agreement Renewal Information.” The Trustees’ evaluations also reflected the knowledge and familiarity gained as Board members of the Funds and other funds in the same complex with respect to services provided by RIMCo, RIMCo’s affiliates and each Money Manager. The Trustees received a memorandum from counsel to the Funds discussing the legal standards for their consideration of the continuations of the RIMCo Agreement and the portfolio management contracts and the Independent Trustees separately received a memorandum regarding their responsibilities from their independent counsel.

On April 21, 2008, the Independent Trustees met to review the Agreement Renewal Information in a private session with their independent counsel at which no representatives of RIMCo or management were present. At the April 22 meeting of the Board of Trustees, the Board, including the Independent Trustees, reviewed the proposed continuance of the RIMCo Agreement and the portfolio management contracts with management and independent counsel to the Independent Trustees. Presentations made by RIMCo to the Board as part of this review encompassed the Funds and all other RIMCo-managed funds for which the Board has supervisory responsibility. Following this review, but prior to voting, the Independent Trustees again met in a private session with their independent counsel to evaluate additional information and analyses received from RIMCo and management at the Board meeting. The discussion below reflects all of these reviews.

In evaluating the portfolio management contracts, the Board considered that the Underlying Funds, in employing a manager-of-managers method of investment, operate in a manner that is distinctly different from most other investment companies. In the case of most other investment companies, an advisory fee is paid by the investment company to its adviser which in turn employs and compensates individual portfolio managers to make specific securities selections consistent with the adviser’s style and investment philosophy. RIMCo has engaged multiple unaffiliated Money Managers for all Underlying Funds.

The Board considered that RIMCo (rather than any Money Manager) is responsible under the RIMCo Agreement for allocating assets of each Fund among its Underlying Funds and for determining, implementing and maintaining the investment program for each Underlying Fund. The assets of each Fund are invested in different combinations of the Underlying Funds pursuant to target asset allocations set by RIMCo. RIMCo may modify the target asset allocation for any Fund and/or the Underlying Funds in which the Funds invest. Assets of each Underlying Fund generally have been allocated among the multiple Money Managers selected by RIMCo, subject to Board approval, for that Underlying Fund. RIMCo manages directly a portion of certain Underlying Funds’ assets employing a “select holdings strategy,” as described below, and directly manages the investment of each Underlying Fund’s cash reserves. RIMCo also may manage directly any portion of each Underlying Fund’s assets that RIMCo determines not to allocate to the Money Managers and portions of an Underlying Fund during transitions between Money Managers. In all cases, assets are managed directly by RIMCo pursuant to authority granted by the RIMCo Agreement.

RIMCo is responsible for selecting, subject to Board approval, Money Managers for each Underlying Fund and for actively managing allocations and reallocations of its assets among the Money Managers. RIMCo’s goal is to construct and manage diversified portfolios in a risk aware manner. Each Money Manager for an Underlying Fund in effect performs the function of an individual portfolio manager who is responsible for selecting portfolio securities for the portion of the Underlying Fund assigned to it by RIMCo (each, a “segment”) in accordance with the Fund’s applicable investment objective, policies and restrictions, any constraints placed by RIMCo upon their selection of portfolio securities and the Money Manager’s specified role in an Underlying Fund. RIMCo is responsible for communicating performance expectations to each Money Manager; supervising compliance by each Money Manager with each Underlying Fund’s investment objective and policies; authorizing Money Managers to engage in certain investment strategies for an Underlying Fund; and recommending annually to the Board whether portfolio management contracts should be renewed, modified or terminated. In addition to its annual recommendation as to the renewal, modification or termination of portfolio management contracts, RIMCo is responsible for recommending to the Board additions of new Money Managers or replacements of existing Money Managers at any time when, based on RIMCo’s research and ongoing review and analysis, such actions are

 

50 Basis for Approval of Investment Advisory Contracts


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Basis for Approval of Investment Advisory Contracts, continued (Unaudited)

 

 

 

appropriate. RIMCo may impose specific investment constraints from time to time for each Money Manager intended to capitalize on the strengths of that Money Manager or to coordinate the investment activities of Money Managers for an Underlying Fund in a complementary manner. Therefore, the performance of individual Money Managers for an Underlying Fund may reflect the roles assigned to them by RIMCo in the Underlying Funds’ investment activities and any constraints placed by RIMCo upon their selection of portfolio securities. In light of the foregoing, the overall performance of each Underlying Fund over appropriate periods reflects, in great part, the performance of RIMCo in designing the Underlying Fund’s investment program, structuring an Underlying Fund, selecting an effective Money Manager with a particular investment style or sub-style for a segment that is complementary to the styles of the Money Managers of other Underlying Fund segments, and allocating assets among the Money Managers in a manner designed to achieve the objectives of the Underlying Fund.

The Board considered that the prospectuses for the Funds and the Underlying Funds and other public disclosures emphasize to investors RIMCo’s role as the principal investment manager for each Underlying Fund, rather than the investment selection role of the Underlying Funds’ Money Managers, and describe the manner in which the Funds or Underlying Funds operate so that investors may take that information into account when deciding to purchase shares of any Fund.

The Board also considered the demands and complexity of managing the Underlying Funds pursuant to the manager-or-managers structure, the special expertise of RIMCo with respect to the manager-of-managers structure of the Underlying Funds and the likelihood that, at the current expense ratio of each Underlying Fund, there would be no acceptable alternative investment managers to replace RIMCo on comparable terms given the need to continue the manager-of-managers strategy of each Underlying Fund selected by shareholders in purchasing their shares of a Fund or Underlying Fund.

In addition to these general factors relating to the manager-of-managers structure of the Underlying Funds, the Trustees considered, with respect to each Fund and Underlying Fund, various specific factors in evaluating renewal of the RIMCo Agreement, including the following:

 

1.The nature, scope and quality of the services provided to the Fund and the Underlying Fund by RIMCo;

 

2.The advisory fee paid by the Fund or the Underlying Fund to RIMCo and the fact that it encompasses all investment advisory fees paid by the Fund or Underlying Fund, including the fees for any Money Managers of such Underlying Fund;

 

3.Information provided by RIMCo as to other fees and benefits received by RIMCo or its affiliates from the Fund or Underlying Fund, including any administrative, transfer agent, cash management and securities lending fees, soft dollar arrangements and commissions in connection with portfolio securities transactions;

 

4.Information provided by RIMCo as to expenses incurred by the Fund or the Underlying Fund; and

 

5.Information provided by RIMCo as to the profits that RIMCo derives from its mutual fund operations generally and from the Fund or Underlying Fund.

As noted above, RIMCo pursuant to the terms of the RIMCo Agreement directly managed a portion—up to 10%—of the assets of the RIF Multi-Style Equity Fund and the Russell Investment Company (“RIC”) Quantitative Equity Fund (each a “Participating Underlying Fund”) during the past year utilizing a select holdings strategy, the actual allocation being determined by each Participating Underlying Fund’s RIMCo portfolio manager. The select holdings strategy utilized by RIMCo in managing such assets for a Participating Underlying Fund is designed to increase the Participating Underlying Fund’s exposure to stocks that are viewed as attractive by multiple Money Managers of that Participating Underlying Fund. The Board reviewed the results of the select holdings strategy in respect of each Participating Underlying Fund since implementation taking into account that the strategy has been utilized for a limited period of time. With respect to each Participating Underlying Fund, the Trustees considered that RIMCo is not required to pay investment advisory fees to a Money Manager with respect to assets for which the select holdings strategy is utilized and that the profits derived by RIMCo generally and from the Participating Underlying Fund consequently may increase incrementally. The Board, however, also considered RIMCo’s advice that it pays certain Money Managers additional fees for providing information and other services in connection with the select holdings strategy and incurs additional costs in carrying out the select holdings strategy, the limited amount of assets that are managed directly by RIMCo pursuant to the select holdings strategy, and the fact that the aggregate investment advisory fees paid by the Participating Underlying Fund are not increased as a result of the select holdings strategy.

In evaluating the reasonableness of the Funds’ and Underlying Funds’ investment advisory fees in light of Fund and Underlying Fund performance, the Board considered that RIMCo, in the Agreement Renewal Information and at past meetings, noted differences between the investment strategies of certain Underlying Funds and their respective Comparable Funds in pursuing their investment objectives, including Fund strategies which seek to achieve a lower tracking error (i.e., the difference, whether positive or negative,

 

Basis for Approval of Investment Advisory Contracts 51


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Basis for Approval of Investment Advisory Contracts, continued (Unaudited)

 

 

 

between the return of a fund and its benchmark) and resulting lower return volatility than Comparable Funds. According to RIMCo, these strategies may be expected to result, and for certain Underlying Funds during the periods covered by the Third-Party Information did result, in lower performance of the Funds than that of some of their respective Comparable Funds. According to RIMCo, the strategies pursued by the Underlying Funds, among other things, are intended to result in less volatile, more moderate returns relative to each Fund’s performance benchmark rather than more volatile, more extreme returns that its Comparable Funds may experience over time.

The Board considered for each Fund and Underlying Fund whether economies of scale have been realized and whether the fees for such Fund or Underlying Fund appropriately reflect or should be revised to reflect any such economies. The Board determined that, after giving effect to any applicable fee or expense caps, waivers or reimbursements, the investment advisory fees for each Fund or Underlying Fund appropriately reflect any economies of scale realized by such Fund, based upon such factors as the variability of Money Manager investment advisory fees and other factors associated with the manager-of-managers structure employed by the Underlying Funds. The Trustees considered that fees payable to RIMCo by institutional clients with investment objectives similar to those of the Funds and other funds under the Board’s supervision, including the Underlying Funds are lower, and may, in some cases, be substantially lower, than the rates paid by funds supervised by the Board, including the Funds. The Trustees considered the differences in the scope of services it provides to institutional clients and the funds under its supervision, including the Underlying Funds. In response to the Trustees’ inquiries, RIMCo has previously noted, among other things, that institutional clients have fewer administrative needs than the Funds. RIMCo has in the past noted that since the Funds must constantly issue and redeem their shares, they are more difficult to manage than institutional accounts, where assets are relatively stable. Accordingly, the Trustees did not regard these fee differences as relevant to their deliberations.

On the basis of the Agreement Renewal Information, and other information previously received by the Board from RIMCo during the course of the current year or prior years or presented at the April 22 Board meeting by RIMCo, the Board, in respect of each Fund and Underlying Fund, found, after giving effect to waivers and/or reimbursements and considering differences in the composition and investment strategies of their respective Comparable Funds (1) the advisory fee charged by RIMCo to be reasonable in light of the nature, scope and quality of the services provided to the Funds or Underlying Funds; (2) the relative expense ratio of each Fund and Underlying Fund was comparable to those of its Comparable Funds; (3) RIMCo’s methodology of allocating expenses of operating funds in the complex was reasonable; and (4) RIMCo’s profitability with respect to the Fund and each Underlying Fund was not excessive in light of the nature, scope and quality of the services provided by RIMCo.

The Board further concluded that, under the circumstances, the performance of each of the Funds supported continuation of the RIMCo Agreement. In evaluating performance, the Board considered each Fund’s and Underlying Fund’s absolute performance and its performance relative to appropriate benchmarks and indices and its Comparable Funds. In assessing performance, the Board also considered RIMCo’s investment strategy of managing the Underlying Funds in a risk aware manner.

After considering the foregoing and other relevant factors, the Board concluded that continuation of the RIMCo Agreement on its current terms and conditions would be in the best interests of the Funds and their respective shareholders and voted to approve the continuation of the Agreement.

At the April 22 Board meeting, with respect to the evaluation of the terms of portfolio management contracts with Money Managers for the Underlying Funds, the Board received and considered information from RIMCo reporting, among other things, for each Money Manager, the Money Manager’s performance over various periods; RIMCo’s assessment of the performance of the Money Manager; any significant business relationships between the Money Manager and RIMCo or Russell Financial Services, Inc., the Funds’ and Underlying Funds’ underwriter; and RIMCo’s recommendation to retain the Money Manager at the current fee rate, to retain the Money Manager at a reduced fee rate or to terminate the Money Manager. RIMCo recommended that each Money Manager be retained at its current fee rate. RIMCo has advised the Board that it does not regard Money Manager profitability as relevant to its evaluation of the portfolio management contracts with Money Managers because the willingness of Money Managers to serve in such capacity depends upon arm’s-length negotiations with RIMCo; RIMCo is aware of the fees charged by Money Managers to other clients; and RIMCo believes that the fees agreed upon with Money Managers are reasonable in light of the anticipated quality of investment advisory services to be rendered. The Board accepted RIMCo’s explanation in light of the Board’s findings as to the reasonableness of the aggregate investment advisory fees paid by each Fund and Underlying Fund and the fact that each Money Manager’s fee is paid by RIMCo.

Based substantially upon RIMCo’s recommendations together with the information received from RIMCo in support of its recommendations at the April 22 meeting, the Board concluded that the fees paid to the Money Managers of each Underlying Fund are reasonable in light of the quality of the investment advisory services provided and that continuation of the portfolio management contract with each Money Manager of each Underlying Fund would be in the best interests of the Fund and its shareholders.

 

52 Basis for Approval of Investment Advisory Contracts


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Basis for Approval of Investment Advisory Contracts, continued (Unaudited)

 

 

 

In their deliberations, the Trustees did not identify any particular information as to the RIMCo Agreement or, other than RIMCo’s recommendation, the portfolio management contract with any Money Manager for an Underlying Fund that was all-important or controlling and each Trustee attributed different weights to the various factors considered. The Trustees evaluated all information available to them on a Fund-by-Fund basis and their determinations were made in respect of each Fund and Underlying Fund.

Subsequently, the Board of Trustees received the following proposals from RIMCo: (1) at a meeting held on May 20, 2008, to effect a money manager change for the Russell Global Equity Fund; (2) at a meeting held on August 26, 2008, to effect a money manager change for the Russell U.S. Quantitative Equity Fund; and (3) at a meeting held on October 10, 2008, to effect a money manager change for the Multi-Style Equity Fund resulting from a change of control of one of the Fund’s Money Managers. In the case of each such proposed change, the Trustees approved the terms of the proposed portfolio management contract based substantially upon RIMCo’s recommendation to hire the Money Manager at the proposed fee rate; any significant business relationships between the Money Manager and RIMCo or Russell Financial Services, Inc. the Fund’s underwriter; RIMCo’s explanation as to the lack of relevance of profitability to the evaluation of portfolio management contracts with money managers because the willingness of Money Managers to serve in such capacity depends upon arm’s-length negotiations with RIMCo; RIMCo’s awareness of the fees charged by the Money Manager to other clients; and RIMCo’s belief that the proposed investment advisory fees would be reasonable in light of the anticipated quality of investment advisory services to be rendered. The Trustees also considered their findings at their April 22, 2008 meeting as to the reasonableness of the aggregate investment advisory fees paid by the Fund, and the fact that the aggregate investment advisory fees paid by the Fund would not increase as a result of the implementation of the proposed money manager change because the money managers’ investment advisory fee is paid by RIMCo.

 

Basis for Approval of Investment Advisory Contracts 53


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Shareholder Requests for Additional Information — December 31, 2008 (Unaudited)

 

 

 

A complete unaudited schedule of investments is made available generally no later than 60 days after the end of the first and third quarters of each year. These reports are available (i) free of charge, upon request, by calling the Funds at (800) 787-7354, (ii) on the Securities and Exchange Commission’s website at www.sec.gov, and (iii) at the Securities and Exchange Commission’s public reference room.

The Board has delegated to RIMCo, as RIF’s investment adviser, the primary responsibility for monitoring, evaluating and voting proxies solicited by or with respect to issuers of securities in which assets of the Funds may be invested. RIMCo has established a proxy voting committee (“Committee”) and has adopted written proxy voting policies and procedures (“P&P”) and proxy voting guidelines (“Guidelines”). The Funds maintain a Portfolio Holdings Disclosure Policy that governs the timing and circumstances of disclosure to shareholders and third parties of information regarding the portfolio investments held by the Funds. A description of the P&P, Guidelines, Portfolio Holdings Disclosure Policy and additional information about Fund Trustees are contained in the Funds’ Statement of Additional Information (“SAI”). The SAI is available (i) free of charge, upon request, by calling the Funds at (800) 787-7354, and (ii) on the Securities and Exchange Commission’s website at www.sec.gov.

Financial Statements of the Underlying Funds can be obtained at no charge by calling the Funds at (800) 787-7354.

If possible, depending on contract owner registration and address information, and unless you have otherwise opted out, only one copy of the RIF prospectus and each annual and semi-annual report will be sent to contract owners at the same address. If you would like to receive a separate copy of these documents, please contact your Insurance Company. If you currently receive multiple copies of the prospectus, annual report and semi-annual report and would like to request to receive a single copy of these documents in the future, please call your Insurance Company.

Some Insurance Companies may offer electronic delivery of the Funds’ prospectus and annual and semiannual reports. Please contact your Insurance Company for further details.

 

54 Shareholder Requests for Additional Information


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Disclosure of Information about Fund Trustees and Officers — December 31, 2008 (Unaudited)

 

 

 

The following tables provide information for each officer and trustee of the Russell Fund Complex. The Russell Fund Complex consists of Russell Investment Company (“RIC”), which has 38 funds, and Russell Investment Funds (“RIF”), which has 9 funds. Each of the trustees is a trustee of both RIC and RIF. The first table provides information for the interested trustee. The second table provides information for the independent trustees. The third table provides information for the trustees emeritus. The fourth table provides information for the officers.

 

Name,
Age,
Address
 Position(s) Held
with Fund and
Length of
Time Served
 Term
of
Office*
 Principal Occupation(s)
During the
Past 5 Years
 No. of
Portfolios
in Russell
Fund
Complex
Overseen
by Trustee
 Other
Directorships Held
by Trustee

INTERESTED TRUSTEES

      

#Greg J. Stark

Born May 3, 1968

 

909 A Street

Tacoma, Washington

98402-1616

 

President and Chief Executive Officer since 2004

 

Trustee since 2007

 

Appointed until successor is duly elected and qualified

 

Until successor is chosen and qualified by Trustees

 

•  President and CEO RIC and RIF

•  Chairman of the Board, President and CEO, RIMCo

•  Chairman of the Board, President and CEO, Russell Fund Services Company (“RFSC”)

•  Chairman of the Board, President and CEO, Russell Financial Services, Inc.

•  Chairman of the Board and President, Russell Insurance Agency, Inc. (insurance agency (“RIA”))

•  Until 2004, Managing Director, of Individual Investor Services, FRC

•  2000 to 2004 Managing Director, Sales and Client Service, RIMCo

 47 None

INDEPENDENT TRUSTEES

     

Thaddas L. Alston

Born April 7, 1945

 

909 A Street

Tacoma, Washington

98402-1616

 Trustee since 2006 Appointed until successor is duly elected and qualified 

•  Senior Vice President, Larco Investments, Ltd. (real estate firm)

 47 None
       

Kristianne Blake,

Born January 22, 1954

 

909 A Street Tacoma, Washington 98402-1616

 

Trustee since 2000

 

Chairman since 2005

 

Appointed until successor is duly elected and qualified

 

Annual

 

•  Director and Chairman of the Audit Committee, Avista Corp.

•  Trustee and Chairman of the Operations Committee, Principal Investors Funds and Principal Variable Contracts Funds

•  Regent, University of Washington

•  President, Kristianne Gates Blake, P.S. (accounting services)

•  February 2002 to June 2005, Chairman of the Audit Committee, RIC and RIF Trustee and Chairman of the Operations and Distribution Committee, WM Group of Funds, 1999–2006

 47 

•  Director, Avista Corp; (electric utilities)

•  Trustee, Principal Investors Funds (investment company);

•  Trustee, Principal Variable Contracts Funds (investment company)

 

#Mr. Stark is also an officer and/or director of one or more affiliates of RIC and RIF and is therefore an Interested Trustee.

 

Disclosure of Information about Fund Trustees and Officers 55


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Disclosure of Information about Fund Trustees and Officers, continued —

December 31, 2008 (Unaudited)

 

 

 

Name,
Age,
Address
 Position(s) Held
With Fund and
Length of
Time Served
 Term
of
Office*
 Principal Occupation(s)
During the
Past 5 Years
 No. of
Portfolios
in Russell
Fund
Complex
Overseen
by Trustee
 Other
Directorships Held
by Trustee

INDEPENDENT TRUSTEES (continued)

     

Daniel P. Connealy

Born June 6, 1946

 

909 A Street

Tacoma, Washington

98402-1616

 

Trustee since 2003

 

Chairman of Audit Committee since 2005

 

Appointed until successor is duly elected and qualified

 

Appointed until successor is duly elected and qualified

 

•  June 2004 to present, Senior Vice President and Chief Financial Officer, Waddell & Reed Financial, Inc.

•  2001–2003, Vice President and Chief Financial Officer, Janus Capital Group Inc.

 47 None
       

Jonathan Fine

Born July 8, 1954

 

909 A Street

Tacoma, Washington

98402-1616

 

Trustee

since 2004

 Appointed until successor is duly elected and qualified 

•  President and Chief Executive Officer, United Way of King County, WA

 47 None
       

Raymond P. Tennison, Jr.

Born December 21, 1955

909 A Street

 

Tacoma, Washington

98402-1616

 

Trustee

since 2000

 

Chairman of the Nominating and Governance Committee since 2007

 

Appointed until successor is duly elected and qualified.

 

Appointed until successor is duly elected and qualified

 

•  President, Simpson Investment Company and several additional subsidiary companies, including Simpson Timber Company, Simpson Paper Company and Simpson Tacoma Kraft Company

 47 None
       

Jack R. Thompson,

Born March 21, 1949

 

909 A Street

Tacoma, Washington

98402-1616

 Trustee since 2005 Appointed until successor is duly elected and qualified 

•  September 2003 to present, Independent Board Chair and Chairman of the Audit Committee, Sparx Asia Funds

•  September 2007 to present, Director, Board Chairman, and Audit Committee Chairman, LifeVantage Corporation (health products company)

•  May 1999 to May 2003, President, Chief Executive Officer and Director, Berger Financial Group, LLC

•  May 1999 to May 2003, President and Trustee, Berger Funds

 47 

•  Director, Sparx Asia Funds (investment company)

•  Director, Board Chairman, and Audit Committee Chairman, LifeVantage Corporation (health products company)

       

Julie W. Weston,

Born October 2, 1943

 

909 A Street

Tacoma, Washington

98402-1616

 

Trustee

since 2002

 

Chairperson of the Investment Committee since 2006

 

Appointed until successor is duly elected and qualified

 

Appointed until successor is duly elected and qualified

 

 

•  Retired

 47 None

 

*Each Trustee is subject to mandatory retirement at age 72.

 

56 Disclosure of Information about Fund Trustees and Officers


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Disclosure of Information about Fund Trustees and Officers, continued — December 31, 2008 (Unaudited)

 

 

 

Name,
Age,
Address
 Position(s) Held
with Fund and
Length of
Time Served
 Term
of
Office
 Principal Occupation(s)
During the
Past 5 Years
 No. of
Portfolios
in Russell
Fund
Complex
Overseen
by Trustee
 Other
Directorships Held
by Trustee

TRUSTEES EMERITUS

      

*George F. Russell, Jr.,

Born July 3, 1932

 

909 A Street

Tacoma, Washington

98402-1616

 Trustee Emeritus and Chairman Emeritus since 1999 Until resignation or removal 

•  Director Emeritus, Frank Russell Company (investment consultant to institutional investors (“FRC”)); and RIMCo

•  Chairman Emeritus, RIC and RIF; Russell Implementation Services Inc. (broker-dealer and investment adviser (“RIS”)); Russell 20-20 Association (non-profit corporation); and Russell Trust Company (non-depository trust company (“RTC”))

•  Chairman, Sunshine Management Services, LLC (investment adviser)

 47 None
       

Paul E. Anderson,

Born October 15, 1931

 

909 A Street

Tacoma, Washington

98402-1616

 Trustee Emeritus since 2007 Five year term 

•  President, Anderson Management Group LLC (private investments consulting)

•  February 2002 to June 2005, Lead Trustee, RIC and RIF

•  Trustee of RIC and RIF until 2006

•  Chairman of the Nominating and Governance Committee 2006

 47 None
       

William E. Baxter,

Born June 8, 1925

 

909 A Street

Tacoma, Washington

98402-1616

 Trustee Emeritus since 2004 Five year term 

•  Retired since 1986

•  Trustee of RIC and RIF until 2004

 47 None
       

Lee C. Gingrich,

Born October 6, 1930

 

909 A Street

Tacoma, Washington

98402-1616

 Trustee Emeritus since 2006 Five year term 

•  Retired since 1995

•  Trustee of RIC and RIF until 2005

•  Chairman of the Nominating and Governance Committee 2001–2005

 47 None
       

Eleanor W. Palmer,

Born May 5, 1926

 

909 A Street

Tacoma, Washington

98402-1616

 

Trustee Emeritus

since 2004

 Five year term 

•  Retired since 1981

•  Trustee of RIC and RIF until 2004

 47 None

 

*Mr. Russell is also a director emeritus of one or more affiliates of RIC and RIF.

 

Disclosure of Information about Fund Trustees and Officers 57


Table of Contents

Russell Investment Funds

LifePoints® Funds Variable Target Portfolio Series

Disclosure of Information about Fund Trustees and Officers, continued — December 31, 2008 (Unaudited)

 

 

 

Name,
Age,
Address
 Position(s) Held
with Fund and
Length of
Time Served
 Term
of
Office
 Principal Occupation(s)
During the
Past 5 Years

OFFICERS

    

Cheryl Wichers

Born December 16, 1966

 

909 A Street

Tacoma, Washington

98402-1616

 Chief Compliance Officer since 2005 Until removed by Independent Trustees 

•  Chief Compliance Officer, RIC

•  Chief Compliance Officer, RIF

•  Chief Compliance Officer, RIMCo

•  Chief Compliance Officer, RFSC

•  April 2002–May 2005, Manager, Global Regulatory Policy

     

Greg J. Stark,

Born May 3, 1968

 

909 A Street

Tacoma, Washington

98402-1616

 President and Chief Executive Officer since 2004 Until successor is chosen and qualified by Trustees 

•  President and CEO, RIC and RIF

•  Chairman of the Board, President and CEO, RIMCo

•  Chairman of the Board, President and CEO, Russell Financial Services, Inc.

•  Chairman of the Board, President and CEO, RFSC

•  Chairman of the Board and President, Russell Insurance Agency, Inc. (insurance agency (“RIA”))

•  Until 2004, Managing Director of Individual Investor Services, FRC

•  2000 to 2004, Managing Director, Sales and Client Service, RIMCo

     

Mark E. Swanson,

Born November 26, 1963

 

909 A Street Tacoma, Washington 98402-1616

 Treasurer and Chief Accounting Officer since 1998 Until successor is chosen and qualified by Trustees 

•  Treasurer, Chief Accounting Officer and CFO, RIC and RIF

•  Director, Funds Administration, RIMCo, RFSC, RTC and Russell Financial Services, Inc.

•  Treasurer and Principal Accounting Officer, SSgA Funds

     

Peter Gunning,

Born February 22, 1967

 

909 A Street

Tacoma, Washington

98402-1616

 Chief Investment Officer since 2008 Until removed by Trustees 

•  Chief Investment Officer, RIC, RIF

•  1996 to 2008 Chief Investment Officer, Russell, Asia Pacific

     

Gregory J. Lyons,

Born August 24, 1960

 

909 A Street

Tacoma, Washington

98402-1616

 Secretary since 2007 Until successor is chosen and qualified by Trustees 

•  Associate General Counsel and Assistant Secretary FRC and RIA

•  Director and Secretary, RIMCo, RFSC and Russell Financial Services, Inc.

•  Secretary and Chief Legal Counsel, RIC and RIF

 

58 Disclosure of Information about Fund Trustees and Officers


Table of Contents

LifePoints® Funds Variable Target Portfolio Series

Russell Investment Funds

909 A Street, Tacoma, Washington 98402

(800) 787-7354

 

 

 

Interested Trustees

Greg J. Stark

Independent Trustees

Thaddas L. Alston

Kristianne Blake

Daniel P. Connealy

Jonathan Fine

Raymond P. Tennison, Jr.

Jack R. Thompson

Julie W. Weston

Trustees Emeritus

George F. Russell, Jr.

Paul E. Anderson

William E. Baxter

Lee C. Gingrich

Eleanor W. Palmer

Officers

Greg J. Stark, President and Chief Executive Officer

Cheryl Wichers, Chief Compliance Officer

Peter Gunning, Chief Investment Officer

Mark E. Swanson, Treasurer and Chief Accounting Officer

Gregory J. Lyons, Secretary

Adviser

Russell Investment Management Company

909 A Street

Tacoma, WA 98402

Administrator and Transfer and Dividend Disbursing Agent

Russell Fund Services Company

909 A Street

Tacoma, WA 98402

Custodian

State Street Bank and Trust Company

Josiah Quincy Building

200 Newport Avenue

North Quincy, MA 02171

Office of Shareholder Inquiries

909 A Street

Tacoma, WA 98402

(800) 787-7354

Legal Counsel

Dechert LLP

200 Clarendon Street, 27th Floor

Boston, MA 02116-5021

Distributor

Russell Financial Services, Inc.

909 A Street

Tacoma, WA 98402

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP

1420 5th Avenue

Suite 1900

Seattle, WA 98101

Money Managers of Underlying Funds as of December 31, 2008

RIF Core Bond Fund

Goldman Sachs Asset Management, L.P., New York, NY

Metropolitan West Asset Management, LLC, Los Angeles, CA

Pacific Investment Management Company LLC, Newport Beach, CA

RIF Aggressive Equity Fund

ClariVest Asset Management LLC, San Diego, CA

DePrince, Race & Zollo, Inc., Winter Park, FL

Gould Investment Partners LLC, Berwyn, PA

Jacobs Levy Equity Management, Inc., Florham Park, NJ

PanAgora Asset Management, Inc., Boston, MA

Ranger Investment Management, L.P., Dallas, TX

Signia Capital Management, LLC, Spokane, WA

Tygh Capital Management, Inc., Portland, OR

RIF Multi-Style Equity Fund

Arnhold and S. Bleichroeder Advisers, LLC, New York, NY

Columbus Circle Investors, Stamford, CT

DePrince, Race & Zollo, Inc., Winter Park, FL

Institutional Capital LLC, Chicago, IL

Jacobs Levy Equity Management, Inc., Florham Park, NJ

Montag & Caldwell, Inc., Atlanta, GA

Suffolk Capital Management, LLC, New York, NY

Turner Investment Partners, Inc., Berwyn, PA

RIC Russell U.S. Quantitative Equity Fund

Aronson+Johnson+Ortiz, LP, Philadelphia, PA

Franklin Portfolio Associates, LLC, Boston, MA

Goldman Sachs Asset Management, L.P., New York, NY

INTECH Investment Management, LLC, West Palm Beach, FL

Jacobs Levy Equity Management, Inc., Florham Park, NJ

RIF Real Estate Securities Fund

AEW Management and Advisors, L.P., Boston, MA

Cohen & Steers Capital Management, Inc., New York, NY

Heitman Real Estate Securities LLC, Chicago, IL

INVESCO Institutional (N.A.), Inc. which acts as a money manager to the Fund through its INVESCO Real Estate division, Dallas, TX

RREEF America L.L.C., Chicago, IL

RIC Russell Emerging Markets Fund

AllianceBernstein L.P., New York, NY

Arrowstreet Capital, Limited Partnership, Boston, MA

Genesis Asset Managers, LLP, London, United Kingdom

Harding, Loevner LLC, Somerville, NJ

T. Rowe Price International, Inc., Baltimore, MD

UBS Global Asset Management (Americas) Inc., Chicago, IL

RIC Russell Global Equity Fund

ClariVest Asset Management LLC, San Diego, CA

Gartmore Global Partners, London, United Kingdom

Harris Associates, L.P., Chicago, IL

Tradewinds Global Investors, LLC, Los Angeles, CA

T. Rowe Price International, Inc., Baltimore, MD

RIF Non-U.S. Fund

Altrinsic Global Advisors, LLC, Stamford, CT

AQR Capital Management, LLC, Greenwich, CT

MFS Institutional Advisors, Inc., Boston, MA

Wellington Management Company, LLP, Boston, MA


 

This report is prepared from the books and records of the Funds and is submitted for the general information of shareholders and is not authorized for distribution to prospective investors unless accompanied or preceded by an effective Prospectus. Nothing herein contained is to be considered an offer of sale or a solicitation of an offer to buy shares of Russell Investment Funds. Such offering is made only by Prospectus, which includes details as to offering price and other material information.

 

Adviser, Money Managers and Service Providers 59


Table of Contents

 

Russell Investment Funds  909 A Street    800-787-7354
  Tacoma, Washington 98402    Fax: 253-591-3495
      www.russell.com

 

LOGO

LOGO

LOGO

36-08-195


Table of Contents

LOGO

 

2008 ANNUAL REPORT

 

 

Russell Investment Funds

 

 

DECEMBER 31, 2008

FUND

Multi-Style Equity Fund

Aggressive Equity Fund

Non-U.S. Fund

Core Bond Fund

Real Estate Securities Fund

 

LOGO


Table of Contents

 

 

Russell Investment Funds

Russell Investment Funds is a series investment company with nine different investment portfolios referred to as Funds. These financial statements report on five of these Funds.


Table of Contents

 

Russell Investment Funds

Annual Report

December 31, 2008

Table of Contents

 

   Page
To Our Shareholders  3
Market Summary  4
Multi-Style Equity Fund  10
Aggressive Equity Fund  20
Non-U.S. Fund  36
Core Bond Fund  52
Real Estate Securities Fund  80
Notes to Schedules of Investments  88
Statements of Assets and Liabilities  89
Statements of Operations  91
Statements of Changes in Net Assets  92
Financial Highlights  94
Notes to Financial Highlights  96
Notes to Financial Statements  97
Report of Independent Registered Public Accounting Firm  114
Tax Information  115
Basis for Approval of Investment Advisory Contracts  116
Shareholder Requests for Additional Information  120
Disclosure of Information about Fund Trustees and Officers  121
Adviser, Money Managers and Service Providers  125


Table of Contents

 

Russell Investment Funds

Copyright © Russell Investments 2009. All rights reserved.

Russell Investments is a Washington, USA corporation, which operates through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual Life Insurance Company.

Fund objectives, risks, charges and expenses should be carefully considered before investing. A prospectus containing this and other important information must precede or accompany this material. Please read the prospectus carefully before investing.

Securities products and services offered through Russell Financial Services, Inc. (effective June 2, 2008, the name changed from Russell Fund Distributors, Inc.), member FINRA, part of Russell Investments.

Indices and benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Index return information is provided by vendors and although deemed reliable, is not guaranteed by Russell Investments or its affiliates.

Russell Investments is the owner of the trademarks, service marks, and copyrights related to its respective indexes.

Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.


Table of Contents

 

To Our Shareholders

We are pleased to provide you with the Russell Investment Funds 2008 Annual Report. It includes portfolio management discussions and fund-specific details that will give you an in-depth understanding of fund performance for the fiscal year ended December 31, 2008.

It would be an understatement to say that 2008 has been a difficult year and the market crisis of the past couple of months has defied all predictions. Virtually no sector of the financial industry or the economy has been spared.

All of us at Russell want you to know that we are sensitive to investor concerns. While market events have impacted the performance of the funds, we believe that investors are well-served by remaining focused on long-term disciplined investing in well-diversified, asset allocated portfolios.

The Russell Investments team has years of experience in managing people’s money through various market cycles, trends and turnarounds. As always, we are monitoring our investment managers closely to ensure their adherence to their long-term strategies despite the recent disruptions.

As we all collectively weather this storm, we believe now is the perfect time for you to talk with your financial advisor to ensure that your portfolio remains aligned with your long term goals.

Each and every day we strive to improve financial security for people. We will not waiver in that commitment and sincerely appreciate your continued support.

Best regards,

LOGO

Greg Stark

Chief Executive Officer, Chairman and President

Russell Investment Management Company

 

To Our Shareholders 3


Table of Contents

 

Russell Investment Funds

Market Summary as of December 31, 2008 (Unaudited)

U.S. Equity Markets

For the fiscal year ending December 31, 2008, U.S. equity markets were remarkably weak, with the broad market Russell 3000® Index posting a 37.3% drop amid the worst financial crisis in almost a century. Major bankruptcies, the freezing of credit markets, and the widespread global recession fears which ensued — particularly during the third quarter and first half of the fourth quarter — drove investors to sell riskier assets as fear and panic pervaded the market.

The economic crisis stemmed from issues in the financial sector. The U.S. housing market stood at the center of the financial sector’s problems. The housing slowdown that began in the summer of 2006 and continued in 2007 intensified throughout this fiscal year and led to rising loan default rates and home foreclosures which, in turn, led to further housing weakness. As home prices dropped and default rates increased, the value of derivative instruments, such as mortgage-backed securities, whose values were based on these mortgages, plummeted. This forced banks to take massive write-downs of book values as required by mark-to-market accounting. With the lack of certainty about the real book value of assets on the balance sheets of banks, banks have been unable and/or hesitant to lend funds to other banks. Despite aggressive interest rate cuts by the Federal Reserve Board (the “Federal Reserve”), which took the Federal Funds rate from 5.25% (in third quarter 2007) to a range between 0% and 0.25% (at fiscal year end), mortgage and other lending rates did not come down as quickly as banks used the wider lending spread to offset their substantial write-downs on book values. Over the last month and a half of the year, however, these rates did start to drop sharply. In addition to higher interest rates, banks having stricter lending standards had a profound impact on the availability of affordable credit for potential homebuyers, small businesses, and other borrowers.

Due to write-downs, dwindling capital bases and a crisis of confidence in their businesses, several large banks, brokers, mortgage companies and insurance companies filed for bankruptcy, were seized by the federal government and resold, or were bailed out by the government during the fiscal year, with the most notable ones being Countrywide Financial, Bear Stearns, IndyMac Bancorp, Lehman Brothers, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), American International Group (AIG), Washington Mutual and Wachovia. Amid concerns of additional bankruptcies and uncertainty surrounding which institutions may be bailed out by the government, the fear-driven environment has persisted. In addition, there have been a number of problems at hedge funds, leading to massive deleveraging, or forced selling of assets, in order to meet client redemptions. This forced selling of assets has put severe downward pressure on many securities, particularly the highly-liquid larger cap U.S. stocks, regardless of those securities’ fundamentals.

After more than four years of strong growth, corporate profits had dipped fairly sharply by the end of 2008, especially in the financial services sector. The growth rate of gross domestic product also fell, although it stayed marginally positive until the third quarter report which showed a contraction of 0.5%, the worst since the 2001 recession. There was significant deterioration since then, as fourth quarter GDP estimates are -4.2% on average. A significant reduction in consumer spending had the most substantial negative impact on the GDP number, as consumers became fearful due to rising unemployment levels, declining home values and increased difficulty in getting loans. The Consumer Confidence Index released by the Conference Board decreased to 38 in October — the lowest value in the history of the Index (started in February 1967). It increased slightly in November, before dropping back to the all-time low of 38 in December. The first half of the year also featured the negative impact of higher energy prices on consumer spending. Oil prices reached $147/barrel in mid-July before dropping sharply to below $40/barrel in December.

Although the domestic economy slowed during the fiscal year, some segments of the U.S. equity market were helped in the first half of the year by strong exports to faster-growing, developing, non-U.S. economies. With approximately 40% of U.S. corporations’ revenues derived from international customers, the declining U.S. dollar in the first half of 2008 provided increased demand for U.S. products abroad. During the second half of the year, however, the U.S. dollar rallied and the global economy slowed considerably. After being rewarded in the first half of 2008, exposure to companies tied to the global economy underwent a strong reversal that began in July 2008 and has been swift and dramatic. Higher valuation cyclical (more linked to the economic cycle) companies and those with more debt on their balance sheets were among the most negatively impacted over the course of the year. Companies that have high forecasted growth rates have also been hit hard as investors have become less confident that these growth rates can be sustained going forward.

 

4 Market Summary


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Russell Investment Funds

 

In the wake of these powerful macroeconomic forces, the fiscal year presented a very difficult active management environment which was marked by three distinct themes: 1) largely indiscriminate selling of U.S. stocks by panic-driven, risk-averse investors concerned first about a U.S. recession and then about a global recession, 2) intense selling of financial stocks for a majority of the period, and 3) the strength of global companies for roughly the first half of the fiscal year as multinational companies with exposure to developing markets outpaced domestically-driven companies and commodity-related companies (especially energy) outperformed the general market by a wide margin.

The weakening of the global economy over the last half of the year caused oil prices to fall from their record highs and led the other energy sector to sell off sharply. Over the course of the year, the worst performing sectors in the Russell 3000® Index were other energy -53.6%, financial services -51.1%, the other sector (which is dominated by GE and contains other large conglomerates, (-50.9%), and materials & processing -47.3%. Meanwhile, the best performing sectors in the Russell 3000® Index were those that are considered to be more defensive. The slower-growing, less economically-sensitive consumer staples sector was the best relative performer -17.7%, followed by integrated oils -21.7%, health care -22.4%, and utilities -29%.

Weakness was experienced across investment styles as well as the capitalization spectrum. While both the growth and value investment styles were down substantially, value outperformed growth in the small cap segment (Russell 2000® Value -28.9%, Russell 2000® Growth -38.5%) and to a lesser degree in the large cap segment (Russell 1000® Value -36.9%, Russell 1000® Growth -38.4%). In general, small cap stocks outperformed large caps (-33.8% and -37.6% for the Russell 2000® Index and Russell 1000® Index, respectively). Midcap and microcap stocks underperformed by the widest margins with the Russell Midcap® Index down 41.5%, and the Russell Microcap® Index down 39.8%.

During 2008, the market environment was largely hostile for active management as investors sold stocks regardless of fundamentals, the basic determinants of a stock’s value. Small cap fund managers had the most difficult time relative to their benchmark. Growth managers across the capitalization spectrum also struggled as the shift away from higher growth stocks came quickly and sharply. Core, or market-oriented, managers struggled less than style-focused managers in fiscal year 2008. The Lipper® Small Cap Core Funds Average trailed the Russell 2000® Index by 2.7%, the Lipper® Small Cap Growth Funds Average underperformed the Russell 2000® Growth Index by 3.6% and the Lipper® Small Cap Value Funds Average underperformed the Russell 2000® Value Index by 4.9%. The Lipper® Large Cap Core Funds Average outperformed the Russell 1000® Index by 0.1%, the Lipper® Large Cap Growth Funds Average underperformed the Russell 1000® Growth Index by 1.8% and the Lipper® Large Cap Value Funds Average underperformed the Russell 1000® Value Index by 0.6%.

Real Estate Securities Market

For the fiscal year ending December 31, 2008, U.S. real estate investment trusts (REITs) generated a 37.7% loss, as measured by the FTSE NAREIT Equity Index (Index). During this period, REITs performed slightly better than the broader equity market, which finished down 37.3% as measured by the Russell 3000 Index. The negative REIT performance was accompanied by an unprecedented amount of volatility during the period. Not only were monthly returns erratic, demonstrated by the worst and best monthly returns in the history of the Index occurring in October -31.7% and December 16.4%, respectively, but the largest percentage gain and loss achieved in a single day also both occurred during the year.

Following the sharp decline in the commercial mortgage-backed securities market and escalating problems in the credit market, investors began 2008 more risk averse. As recessionary fears began to emerge, the Federal Reserve became active in an attempt to stave off concerns of a recession by cutting rates aggressively, twice in January alone, and injecting liquidity into the financial markets through a variety of initiatives. First and second quarter REIT earnings held up well, although many companies took the opportunity to revise 2009 estimates downwards.

By September 2008, consumer spending had slowed, the unemployment rate was climbing and both corporate and consumer credit markets remained tight. The collapse of Lehman Brothers Holdings Inc. on September 15 sparked panic within the financial markets and REITs were heavily sold off over the ensuing weeks. Mirroring the broader equity market, REITs traded down sharply through October and most of November. A marked change in investor sentiment occurred in December as investors became less defensive and REITs staged a modest recovery as the year closed.

An overriding theme during the year was the elevated correlation between REITs and the financial services sector of the broader equity market. This is due to the fact that most broad equity indexes include REITs in the financial services sector. This weighed heavily on REIT performance during the period, as many general equity investors avoided financial services stocks and other investors took short positions in individual stocks and exchange traded funds in the financial

 

Market Summary 5


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Russell Investment Funds

 

services sector. This was also a contributing factor to the exceptionally high volatility observed in the REIT market during the fiscal year.

Another key trend during the year was a flight towards quality REIT names, with the market especially rewarding companies that have made a concerted effort to mitigate risk. Companies with the lowest leverage levels, limited near term refinancing needs and limited development pipelines held up the best. Neither dividend yield nor market capitalization appeared to be contributing factors to differences in individual company performance.

During the year, returns were disappointing across all property sectors. The poorest performing sectors were industrial and regional malls. Leverage ratios for the industrial and regional malls companies tend to be higher than the overall REIT universe, which has negatively impacted those stocks. In addition, meaningful development pipelines in the leading industrial companies have put added pressure on earnings forecasts due to weaker leasing market conditions. Two of the better performing property sectors were self storage and health care. Due to the stable nature of the cash flows embedded in many health care leases, investors sought out this defensive sector given the slowing economy. The self storage sector is generally driven by the performance of one company that dominates the sector, Public Storage, which was one of the few stocks to post a positive return for the year. Public Storage held up well due to its strong balance sheet, including minimal leverage and high levels of cash.

The U.S. REIT market outperformed relative to the international real estate securities market by a wide margin during the fiscal year. The largest price correction occurred in the Asia Pacific region, with smaller corrections taking place in Continental Europe and the United Kingdom. While the effects of the global economic slowdown and credit crisis have spread to the other regions, the U.S. REIT market has fared relatively better, mirroring trends in the broader global equity markets.

Non-U.S. Developed Equity Markets

Non-U.S. developed stocks fell 43.38% as measured by the MSCI EAFE® Index for the fiscal year ended December 31, 2008. Appreciation of the U.S. dollar relative to foreign currencies, mainly as a result of the flight to safety in the second half of the fiscal year ended, exacerbated already weak non-U.S. equity returns. In local currencies, the MSCI EAFE® Index fell 40.27% over the 12-month period.

The market struggled under increasing concern over the health of the global financial system. While these concerns affected markets for nearly the full 12 months, most of the decline in equity values came in September and October 2008, as several prominent financial companies in the U.S. and Europe encountered financial distress. In nearly all cases, government “bailouts” were necessary for these companies to avoid bankruptcy.

The additional impact of already declining global economic growth increasingly weighed on markets during the period. Expectations for global economic growth were revised downwards throughout the year. The latter part of the fiscal year experienced contraction in economic output in Europe and Asia. Output growth of 5% in 2007 slowed sharply for 2008 with abbreviated expectations for growth in developed economies in 2009.

The change in market conditions was evident in a marked increase in market volatility as investors’ complacency towards risk was quickly replaced by acute risk aversion. Stocks with prices most directly tied to high, long-term growth prospects suffered some of the steepest declines, as investors doubted the ability of these companies to post strong growth in a decelerating economic environment. However, due to the sharp declines of financials, the largest sector of the value index, value lagged growth by 1.39% in the period (the MCSI EAFE Growth Index lost 42.70% and the MSCI EAFE Value Index lost 44.09%).

Market sectors most leveraged to global economic growth or in the nexus of the financial sector meltdown were the most severely impacted, though no areas of the market were immune. Financials ended the 12-month period down 55.21% (as measured by the MSCI EAFE Index financials sector grouping). The strong gains of materials early in the period were quickly reversed. The sector ended the period down nearly 53.02% as measured by the MSCI EAFE materials sector grouping. Energy stocks also fell sharply as the price of a barrel of oil fell from a high of more than $145 to below $36. However, the sector’s one-year stock price decline of 38.18% (as measured by the MSCI EAFE energy sector) was better than all but the traditionally defensive sectors. Among the defensive sectors of the market, health care, led by pharmaceutical stocks, held up best with a decline of 18.95% as measured by the MSCI EAFE health care sector. Utilities and consumer staples, down 28.16% and 31.33% as measured by the MSCI EAFE utilities and MSCI EAFE consumer staples sector groupings, respectively, were the next best performers. Sector groupings are based on the Global Industry Classification Standard definitions.

 

6 Market Summary


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Russell Investment Funds

 

Regional results were generally tied to sensitivity to global economic conditions. The MSCI Pacific ex-Japan® Index declined the most, down 50.50%. MSCI Europe ex-United Kingdom® Index fell 45.54%, while the MSCI United Kingdom® Index fell 48.34%. In all three regions, currency impact had a pronounced impact on returns with the regions down 42.17%, 43.24%, and 28.48%, respectively, in local currencies. MSCI Japan® Index fell 42.56% in yen, but had one of the few currencies that managed to appreciate versus the U.S. dollar and fell only 29.21% in U.S. Dollars.

Emerging Markets

During 2008, the MSCI Emerging Markets Index (“Index”) declined 53.18%, the biggest calendar year decline in the history of the asset class with large return dispersions across sectors and countries. The turmoil in the world’s financial system meant increasing risk aversion, growing macro risks and heightened levels of volatility and dispersion across countries, sectors and currencies. Emerging Markets in general may be better positioned and more resilient to a downturn than developed economies, however, as the crisis changed from financial to economic, emerging markets faced massive asset de-leveraging and indiscriminate selling as investors adopted a zero tolerance to risk. Price momentum (i.e. stocks exhibiting trending relative price appreciation) benefited from the continued rally of commodity-related sectors through the latter part of 2007 and well into 2008 but this reversed as global equity markets began falling sharply. The faltering global economy and the steep pull-back in commodity prices affected cyclical areas of the market including industrials, materials and energy sectors while defensive sectors such as healthcare, consumer staples and utilities were relative safe havens during the period. From a country perspective, smaller markets in general held up relatively better than the larger markets. In addition to the weak equity returns, most emerging markets currencies depreciated against the U.S. Dollar with some, such as the South African Rand, Korean Won, Turkish Lira and Brazilian Real, losing in excess of 30% over the course of the year as investors fled to quality and more liquid currencies.

In terms of regions, Latin America was the top performer, down 51.28% (as measured by the MSCI EM Latin America Index), supported by the relative outperformance from Mexico and the smaller Latin countries. The Asia region (-52.77% as measured by the MSCI EM Asia Index) finished behind Latin America but ahead of the broader market. The Europe, Middle East and Africa region (-55.60% as measured by the MSCI EM Europe, Middle East and Africa Index) underperformed the broader market due in large part to the significant underperformance from Russia. The BRIC (Brazil, Russia, India and China) economies, with the exception of China, underperformed the broader Index. China held up reasonably well over the period due to favorable monetary and fiscal policies during the latter half of the year in an effort to shore up its slowing economy. Other notable relative underperformers included Pakistan (-74.05% as measured by the MSCI Pakistan Index) and Turkey (-62.10% as measured by the MSCI Turkey Index).

U.S. Fixed Income Markets

The Barclays Capital U.S. Aggregate Bond Index, a broad measure of U.S. investment grade fixed income securities, returned 5.24% for the year ended December 31, 2008. Similar to the prior year, the index and its major sectors trailed equivalent-duration U.S. Treasuries, as the subprime mortgage crisis that started in the summer of 2007 deepened and developed into a severe liquidity crisis, the size and scope of which had not been seen since the U.S. Great Depression of the 1930s. During 2008, investors moved their capital away from riskier investments to the safest possible investments (i.e., U.S. Treasuries), continuing the “flight to quality” trend started in the prior period.

Throughout 2008, in an effort to deal with credit market illiquidity and a slowing economy, the Federal Reserve lowered the target Federal Funds rate eight times, including two non-scheduled “surprise” cuts of 0.75% in January and 0.50% in October. The target rate started the year at 4.25% and ended at a 0.00% to 0.25% range after the eighth rate cut on December 16, 2008.

The downward shift in the yield curve started in 2007 and continued in earnest in 2008, with the curve “steepening” significantly below the 10-year mark; i.e., yields on shorter-maturity Treasuries declined by a greater degree than longer-maturity Treasuries, resulting in a steeper, upward sloping curve. The change was driven by the Federal Reserve’s lowering of rates (affecting the short end) and investors’ increasing demand for safe haven U.S. Treasuries (driving down longer-maturity yields). In 2008, yields on 2-year Treasuries declined by 2.28% to 0.76% while 10-year Treasuries declined by 1.81% to 2.21%.

The subprime mortgage crisis and deflating housing market were still major issues throughout the year. Home price depreciation continued to accelerate. By the end of October, the average U.S. national home price as tracked by the S&P/Case-Shiller Composite 20 Index, had declined 18% from the end of 2007, reaching a level that was down 23% from its July 2006 peak. Subprime mortgage foreclosures increased from 8.65% at the end of December 2007 to 12.55% at the end of September 2008, the most recent available data from the Mortgage Bankers Association. Total foreclosures increased from 2.04% to 2.97% during the same period. Writedowns on the values of mortgages had a large negative

 

Market Summary 7


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impact on bank balance sheets. During the year, writedowns at financial institutions world-wide amounted to approximately $930.3 billion, bringing total writedowns since the start of the subprime crisis to approximately $997.4 billion.

During the early months of 2008 the market continued its downward trend, which was capped in mid-March by Bear Stearns receiving emergency funding from the Federal Reserve and JPMorgan Chase as a three-day run on the bank depleted its cash reserves. Two days later JPMorgan Chase acquired Bear Stearns for seven percent of its market value in a sale brokered by the Federal Reserve and the U.S. Department of the Treasury (U.S. Treasury). Investors took this as a sign that the U.S. government would stand behind financial institutions and credit markets rallied for the next few months.

During the first part of the year, the U.S. government had become increasingly concerned that the credit crisis would significantly slow the U.S. economy — particularly the spending of consumers, who account for approximately two-thirds of GDP. In April, the U.S. Internal Revenue Service started distributing tax rebates as part of a $168 billion economic stimulus plan.

However, markets continued to weaken as illiquidity reached extreme levels and the financial crisis became global in scope. In July, IndyMac Bancorp, the then-second-biggest independent U.S. mortgage lender, was seized by federal regulators after a run by depositors depleted its cash. In August, Commerzbank AG agreed to buy Allianz SE’s Dresdner Bank for 9.8 billion euros in Germany’s biggest banking takeover in three years.

September started with the U.S. government seizing control of Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies. In the middle of the month, the U.S. government did not arrange a deal or otherwise bail out Lehman Brothers, and the 158-year old firm filed the largest bankruptcy in U.S. history. This was followed by the bankruptcy of 119-year old Washington Mutual. AIG accepted an $85 billion loan from the Federal Reserve to avert what would have been the worst financial collapse in history, with the U.S. government taking a substantial ownership stake in AIG.

In the same month, the investment banking business model fundamentally changed, with Goldman Sachs and Morgan Stanley receiving approval to become deposit-taking commercial banks regulated by the Federal Reserve, as tight credit markets forced Wall Street’s two remaining independent investment banks to widen their sources of funding. Similar events occurred in Europe and throughout the world, with large financial institutions either merging or with governments providing support in return for equity stakes.

September finally ended with the U.S. Treasury proposing the Financial Market Rescue Bill, including the Troubled Asset Relief Program (TARP), which authorized the U.S. Treasury to spend up to $700 billion to buy mortgages and other distressed assets. The House initially rejected the bill, but subsequently passed it. The bill was signed into law in early October.

The events of September contributed to the extreme market illiquidity in October, evidenced by spikes in overnight and three-month LIBOR (the rates at which banks lend to one another). The Federal Reserve took significant steps to improve liquidity in the short duration markets, which included the creation of the Commercial Paper Funding Facility (CPFF) and the Money Market Investor Funding Facility (MMIFF).

In November, the U.S. Treasury gave additional support to AIG by announcing the purchase of $40 billion in new preferred stock. The U.S. Treasury then guaranteed $306 billion in residential and commercial mortgage-backed securities of Citi® in exchange for $7 billion in preferred stock. In addition, the U.S. Treasury purchased another $20 billion in preferred stocks from Citi. Shortly thereafter, the Government Sponsored Enterprise (GSE) Debt and Mortgage-Backed Security Purchase Program was announced stating that the Federal Reserve will buy $100 billion in Fannie Mae, Freddie Mac and the Federal Home Loan Bank debentures and $500 billion in agency mortgage-backed securities. Simultaneously, the Term Asset-Backed Securities Loan Facility (TALF) was announced by the U.S. Treasury offering to provide $200 billion in three-year loans to U.S. companies who can provide high quality AAA-rated auto loans, student loans, credit card loans or small business loans as collateral.

This trend continued in December as Congress agreed to provide $13.4 billion in short term loans to General Motors and $4 billion to Chrysler in an effort to aid the suffering auto industry.

December ended on an up note with a majority of fixed income sectors outperforming equivalent-duration Treasuries. Most notably, the commercial mortgage-backed securities sector (CMBS) returned 16.98% (15.14% above equivalent-duration Treasuries) during the month. The year ended with the Barclays Capital U.S. Aggregate Bond Index returning 5.24%, underperforming by 7.10% U.S. Treasuries.

 

8 Market Summary


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Table of Contents

Russell Investment Funds

Multi-Style Equity Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

LOGO

 

Multi-Style Equity Fund 
   Total
Return
 

1 Year

  (41.15)%

5 Years

  (2.92)%§

10 Years

  (2.80)%§

 

Russell 1000® Index ** 
   Total
Return
 

1 Year

  (37.60)%

5 Years

  (2.04)%§

10 Years

  (1.09)%§

 

* Assumes initial investment on January 1, 1999.

 

**

 

Russell 1000® Index includes the 1,000 largest companies in the Russell 3000® Index. The Russell 1000® Index represents the universe of stocks from which most active money managers typically select. The Russell 1000® Index return reflects adjustments from income dividends and capital gain distributions reinvested as of the ex-dividend dates.

 

§ Annualized.

The performance shown in this section does not reflect any Insurance Company Separate Account or Policy Charges. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results.

 

10 Multi-Style Equity Fund


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Russell Investment Funds

Multi-Style Equity Fund

Portfolio Management Discussion — December 31, 2008 (Unaudited)

 

 

 

The Multi-Style Equity Fund (the “Fund”) allocates most of its assets among multiple money managers. Russell Investment Management Company (“RIMCo”), as the Fund’s advisor, may change the allocation of the Fund’s assets among money managers at any time. An exemptive order from the Securities and Exchange Commission (SEC) permits RIMCo to engage or terminate a money manager at any time, subject to the approval by the Fund’s Board without a shareholder vote. Pursuant to the terms of the exemptive order, the Fund is required to notify its shareholders within 60 days of when a money manager begins providing services. The Fund currently has eight money managers.

What is the Fund’s investment objective?

The Fund seeks to provide long term capital growth.

How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2008?

For the fiscal year ended December 31, 2008, the Multi-Style Equity Fund lost 41.15%. This compared to the Russell 1000® Index, which lost 37.60% during the same period. The Fund’s performance includes operating expenses, whereas Index returns are unmanaged and do not include expenses of any kind.

For the year ended December 31, 2008, the Lipper® Large-Cap Core Funds (VIP) Average lost 38.29%. This result serves as a peer comparison and is expressed net of operating expenses.

RIMCo may assign a money manager a specific style or capitalization benchmark other than the Fund’s index. However, the Fund’s primary index remains the benchmark for the Fund and is representative of the aggregate of each money manager’s benchmark index.

How did the market conditions described in the Market Summary report affect the Fund’s performance?

During the year, investors sought relative stability and safety found in more liquid stocks and avoided any stocks perceived as risky. Investors sold riskier assets as fear and panic took over the markets, which put severe downward pressure on many stocks, particularly the highly liquid larger cap U.S. stocks, regardless of those stocks’ fundamentals.

The consumer staples sector was the strongest performing sector in the Russell 1000 Index for the period, losing 17.57%, where solid, well-known household names, such as Proctor & Gamble, Colgate and Clorox were seen as safe havens. Integrated oils and health care stocks also performed well compared to other sectors, losing 21.67% and 22.40%, respectively. Other energy, which had been a strong performer for the first half of 2008, fell off sharply in the second half of the year and ended the year down -53.64%, as energy equipment and coal producers were hit hard by the drop in oil prices. Financial services stocks bore the brunt of investor apprehension as write-downs, dwindling capital and a crisis of investor confidence led to the bankruptcy, government seizure and rescue packages for many financial institutions. This sector ended the year down 51.09%.

 

These unprecedented events created market conditions which were very difficult for active managers in general and for the Fund. The Fund was positioned toward attractively valued companies with higher growth rates, higher beta (beta is the volatility of a given security compared to the volatility of the market as a whole) and lower yielding stocks. This positioning was not rewarded by the market.

The Fund’s strategy of being fully invested and exposing cash reserves to the performance of appropriate markets by purchasing equity securities and/or derivatives was a drag on performance relative to peers that held larger cash positions as the Russell 1000® Index was down over 37%.

How did the investment strategies and techniques employed by the Fund and its money managers affect its performance?

Over the past year, the Fund maintained its positioning towards companies with above-average growth rates and lower yields that are selling at attractive valuations. This positioning was not rewarded in this period where investors were driven by fear and sold stocks regardless of attractive fundamentals.

The Fund’s underperformance resulted from a combination of sector weighting decisions and stock selection. Underweights to both the integrated oils and utilities sectors detracted from returns as those sectors performed better. Weak stock selection in the consumer discretionary, technology, integrated oils and health care sectors was also detrimental to returns.

The Fund’s managers had a difficult time in the risk adverse market environment. Six of the eight managers underperformed their respective style benchmarks, with one manager essentially even with its index. Higher-growth and momentum manager, Turner Investment Partners, Inc.’s more aggressive positioning was not rewarded in this environment, which was to be expected in this market environment. Weak selection in the consumer discretionary and technology sectors led Turner to significantly trail its benchmark, the Russell 1000® Growth Index. Growth manager, Columbus Circle Investors, also struggled in this market environment. Given the economic environment, Columbus’ move to reduce the cyclicality and high level of forecast growth within its portfolio moderated the level of its underperformance in the period. Columbus’ holdings in technology, health care and financial services were the main drivers of its underperformance. Montag & Caldwell, Inc. is a larger-cap growth manager with a high quality consistent growth focus. As expected, Montag performed better in this difficult environment and provided some downside protection. Market-oriented manager, Suffolk Capital Management, LLC also detracted from results as its focus on companies with positive earnings estimate revisions became less effective due to the dramatic decline in companies experiencing such revisions. Suffolk’s performance lagged primarily from an overweight to the financial services sector and an underweight to integrated oils, as well as from stock selection within those sectors.

RIMCo currently employs a “select holdings” strategy for a portion of the Fund’s assets that RIMCo determines not to


 

Multi-Style Equity Fund

 11


Table of Contents

Russell Investment Funds

Multi-Style Equity Fund

Portfolio Management Discussion — December 31, 2008 (Unaudited)

 

 

 

allocate to the money managers. Pursuant to this strategy, RIMCo analyzes the holdings of the Fund’s money managers in their Fund segments to identify particular stocks that have been selected by multiple money managers. RIMCo uses a proprietary model to rank these stocks. Based on this ranking, RIMCo purchases additional shares of certain stocks for the Fund. The strategy is designed to increase the Fund’s exposure to stocks that are viewed as attractive by multiple money managers. Over the period, the strategy outperformed as it had exposure to many of the stocks that were perceived by investors to be less risky.

At the stock selection level, the Fund benefited from overweights to Gilead, McDonald’s and Qualcomm. However, a significant underweight to Exxon Mobil was the largest single stock detractor from performance over the one year period. Additionally, overweights to Morgan Stanley, Halliburton and Google were detrimental to returns.

The Fund’s performance shown throughout this report was based on valuations calculated in accordance with Generally Accepted Accounting Principles (GAAP) and in accordance with a newly effective accounting statement (SFAS 157), reflects the December 31, 2008 market value of the pooled investment vehicle in which the Fund invested its cash collateral received in securities lending transactions. This market value is lower than the vehicle’s amortized cost per unit. This had a negative impact on the Fund’s benchmark relative performance.

Describe any changes to the Fund’s structure or the money manager line-up.

There were no changes to the Fund’s structure or money manager line-up during the year.

 

 

Money Managers as of
December 31, 2008
 Styles
Arnhold and S. Bleichroeder Advisers, LLC Market-Oriented
Columbus Circle Investors Growth
DePrince, Race & Zollo, Inc. Value
Institutional Capital LLC Value
Jacobs Levy Equity Management, Inc. Value
Montag & Caldwell, Inc. Growth
Suffolk Capital Management, LLC Market-Oriented
Turner Investment Partners, Inc. Growth

The views expressed in this report reflect those of the portfolio managers only through the end of the period covered by the report. These views do not necessarily represent the views of RIMCo, or any other person in RIMCo or any other affiliated organization. These views are subject to change at any time based upon market conditions or other events, and RIMCo disclaims any responsibility to update the views contained herein. These views should not be relied on as investment advice and, because investment decisions for Russell Investment Funds (RIF) are based on numerous factors, should not be relied on as an indication of investment decisions of any RIF Fund.


 

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Russell Investment Funds

Multi-Style Equity Fund

Shareholder Expense Example — December 31, 2008 (Unaudited)

 

 

 

Fund Expenses

The following disclosure provides important information regarding each Fund’s Expense Example, which appears on each Fund’s individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund.

Example

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2008 to December 31, 2008.

Actual Expenses

The information in the table under the heading “Actual Performance” provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The information in the table under the heading “Hypothetical Performance (5% return before expenses)” provides information about hypothetical account values and hypothetical expenses

based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading “Hypothetical Performance (5% return before expenses)” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The fee and expenses shown in this section do not reflect any Insurance Company Separate Account or Policy Charges.

 

   Actual
Performance
  Hypothetical
Performance
(5% return
before expenses)
    

Beginning Account Value

    

July 1, 2008

  $1,000.00  $1,000.00

Ending Account Value

    

December 31, 2008

  $664.53  $1,020.76

Expenses Paid During Period*

  $3.64  $4.42

 

*Expenses are equal to the Fund’s annualized expense ratio of 0.87% (representing the one-half year period annualized), multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed. Without the waiver and/or reimbursement, expenses would have been higher.

 

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Russell Investment Funds

Multi-Style Equity Fund

Schedule of Investments — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    Market
Value
$
      
Common Stocks - 90.0%      
Auto and Transportation - 1.6%    

Arkansas Best Corp. (Ñ)

  2,600    78

Autoliv, Inc.

  6,700    144

Con-way, Inc. (Ñ)

  3,500    93

CSX Corp.

  31,950    1,038

Delta Air Lines, Inc. (Æ)

  70,714    810

Old Dominion Freight Line, Inc. (Æ)(Ñ)

  1,900    54

Skywest, Inc.

  5,300    99

Toyota Motor Corp. - ADR (Ñ)

  7,500    491

TRW Automotive Holdings Corp. (Æ)(Ñ)

  12,300    44

Union Pacific Corp. (Ñ)

  30,054    1,437

United Parcel Service, Inc. Class B

  7,150    394
       
      4,682
       
Consumer Discretionary - 11.4%    

Activision Blizzard, Inc. (Æ)

  59,060    510

Amazon.com, Inc. (Æ)(Ñ)

  10,000    513

American Eagle Outfitters, Inc. (Ñ)

  72,200    676

AnnTaylor Stores Corp. (Æ)(Ñ)

  8,400    48

Apollo Group, Inc. Class A (Æ)

  2,210    169

AutoNation, Inc. (Æ)(Ñ)

  13,100    129

Avis Budget Group, Inc. (Æ)

  13,500    9

Black & Decker Corp. (Ñ)

  8,900    372

Boyd Gaming Corp. (Ñ)

  7,300    35

Brinker International, Inc.

  53,200    561

Callaway Golf Co.

  4,900    46

CBS Corp. Class B (Ñ)

  88,700    726

Clear Channel Outdoor Holdings, Inc. Class A (Æ)

  84,978    523

Comcast Corp. Class A

  19,660    332

Costco Wholesale Corp. (Ñ)

  25,580    1,343

DIRECTV Group, Inc. (The) (Æ)

  40,559    929

Eastman Kodak Co. (Ñ)

  16,800    111

Electronic Arts, Inc. (Æ)

  37,700    605

Foot Locker, Inc.

  13,700    101

FTI Consulting, Inc. (Æ)(Ñ)

  4,670    209

Gannett Co., Inc. (Ñ)

  31,200    250

Guess ?, Inc.

  14,580    224

Home Depot, Inc.

  13,400    308

Intercontinental Hotels Group PLC - ADR

  30,759    257

International Speedway Corp. Class A

  2,300    66

Jack in the Box, Inc. (Æ)(Ñ)

  1,400    31

Jarden Corp. (Æ)(Ñ)

  4,700    54

JC Penney Co., Inc. (Ñ)

  29,600    583

Kimberly-Clark Corp.

  6,240    329

Kohl’s Corp. (Æ)(Ñ)

  7,270    263

Limited Brands, Inc.

  64,200    645

Lowe’s Cos., Inc.

  76,300    1,642

Macy’s, Inc. (Ñ)

  69,300    717

Manpower, Inc.

  3,600    122

McDonald’s Corp.

  55,100    3,427

McGraw-Hill Cos., Inc. (The)

  9,800    227

Men’s Wearhouse, Inc. (The) (Ñ)

  3,600    49

MPS Group, Inc. (Æ)

  7,400    56

New York Times Co. (The) Class C (Ñ)

  12,400    91

Newell Rubbermaid, Inc.

  38,200    374
   

Principal

Amount ($)
or Shares

    Market
Value
$

News Corp. Class A

  165,662    1,506

Nike, Inc. Class B

  39,401    2,009

Office Depot, Inc. (Æ)

  22,800    68

OfficeMax, Inc. (Ñ)

  67,600    516

Regis Corp.

  1,200    17

Robert Half International, Inc. (Ñ)

  12,500    260

RR Donnelley & Sons Co.

  33,300    452

Staples, Inc. (Ñ)

  20,480    367

Starwood Hotels & Resorts Worldwide, Inc. (Ñ)

  26,400    473

Target Corp. (Ñ)

  26,900    929

United Stationers, Inc. (Æ)(Ñ)

  2,200    74

Urban Outfitters, Inc. (Æ)(Ñ)

  10,330    155

Vail Resorts, Inc. (Æ)(Ñ)

  2,900    77

Viacom, Inc. Class B (Æ)

  66,800    1,273

Wal-Mart Stores, Inc. (Ñ)

  122,244    6,853

Walt Disney Co. (The) (Ñ)

  32,400    735

Williams-Sonoma, Inc. (Ñ)

  50,600    398

Wyndham Worldwide Corp.

  13,200    86

Yum! Brands, Inc.

  5,930    187
       
      34,097
       
Consumer Staples - 7.4%      

Chiquita Brands International, Inc. (Æ)(Ñ)

  5,600    83

Clorox Co.

  16,280    904

Coca-Cola Co. (The) (Ñ)

  126,650    5,733

Coca-Cola Enterprises, Inc.

  15,200    183

Colgate-Palmolive Co.

  16,760    1,149

ConAgra Foods, Inc.

  38,400    634

General Mills, Inc.

  29,000    1,762

Hershey Co. (The) (Ñ)

  13,700    476

Hormel Foods Corp. (Ñ)

  4,600    143

JM Smucker Co. (The)

  14,524    630

Kroger Co. (The)

  9,300    246

Lorillard, Inc.

  9,500    535

Molson Coors Brewing Co. Class B

  21,150    1,035

NBTY, Inc. (Æ)

  1,500    23

Pepsi Bottling Group, Inc. (Ñ)

  11,000    248

PepsiCo, Inc.

  97,850    5,359

Procter & Gamble Co.

  32,940    2,036

Sara Lee Corp.

  29,000    284

Spartan Stores, Inc. (Ñ)

  2,200    51

SUPERVALU, Inc.

  16,000    234

Sysco Corp.

  7,300    167

Tyson Foods, Inc. Class A (Ñ)

  16,800    147

Walgreen Co.

  6,300    155
       
      22,217
       
Financial Services - 14.3%      

ACE, Ltd.

  28,800    1,524

Allied Capital Corp. (Ñ)

  11,200    30

Allied World Assurance Co. Holdings, Ltd.

  2,400    97

Allstate Corp. (The)

  11,700    383

American Capital, Ltd. (Ñ)

  31,200    101

Annaly Capital Management, Inc. (ö)(Ñ)

  47,100    748

Arch Capital Group, Ltd. (Æ)

  2,200    154

Arthur J Gallagher & Co.

  7,100    184

 

14 Multi-Style Equity Fund


Table of Contents

Russell Investment Funds

Multi-Style Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    Market
Value
$
      

Bank of America Corp.

  114,150    1,607

Bank of Hawaii Corp. (Ñ)

  5,200    235

Bank of New York Mellon Corp. (The)

  88,976    2,521

BlackRock, Inc. Class A (Ñ)

  1,630    219

Brandywine Realty Trust (ö)

  11,300    87

Camden Property Trust (ö)(Ñ)

  4,300    135

Capital One Financial Corp. (Ñ)

  30,700    979

CBL & Associates Properties, Inc. (ö)(Ñ)

  9,200    60

Charles Schwab Corp. (The)

  75,600    1,222

Chubb Corp.

  6,200    316

Citigroup, Inc.

  52,400    352

CME Group, Inc. Class A (Ñ)

  1,900    395

CNA Financial Corp.

  3,100    51

Comerica, Inc. (Ñ)

  27,300    542

Commerce Bancshares, Inc. (Ñ)

  3,360    148

Conseco, Inc. (Æ)(Ñ)

  13,800    72

Cullen/Frost Bankers, Inc.

  4,300    218

Deluxe Corp.

  5,300    79

Developers Diversified Realty Corp. (ö)(Ñ)

  4,500    22

Discover Financial Services (Ñ)

  28,900    275

East West Bancorp, Inc. (Ñ)

  3,100    50

Endurance Specialty Holdings, Ltd. (Ñ)

  5,400    165

Federal National Mortgage Association

  409,746    311

Fifth Third Bancorp (Ñ)

  77,400    639

First American Corp. (Ñ)

  2,700    78

First Horizon National Corp. (Ñ)

  14,461    153

General Growth Properties, Inc. (ö)(Ñ)

  36,300    47

Goldman Sachs Group, Inc. (The)

  4,615    390

Hartford Financial Services Group, Inc. (Ñ)

  38,200    627

Hospitality Properties Trust (ö)(Ñ)

  14,400    214

HRPT Properties Trust (ö)

  23,400    79

Huntington Bancshares, Inc. (Ñ)

  29,000    222

Jefferies Group, Inc. (Ñ)

  27,800    391

Jones Lang LaSalle, Inc. (Ñ)

  2,900    80

JPMorgan Chase & Co.

  157,515    4,966

Keycorp

  79,900    681

Lincoln National Corp.

  24,100    454

M&T Bank Corp. (Ñ)

  3,900    224

Mack-Cali Realty Corp. (ö)

  7,600    186

Marsh & McLennan Cos., Inc.

  14,400    350

Marshall & Ilsley Corp. (Ñ)

  37,600    513

Mastercard, Inc. Class A (Ñ)

  7,500    1,072

Mercury General Corp. (Ñ)

  16,500    759

Merrill Lynch & Co., Inc.

  52,000    605

MetLife, Inc.

  38,083    1,328

MF Global, Ltd. (Æ)(Ñ)

  13,000    27

Morgan Stanley

  72,500    1,163

National Penn Bancshares, Inc. (Ñ)

  8,000    116

PartnerRe, Ltd. - ADR (Ñ)

  5,000    356

Piper Jaffray Cos. (Æ)(Ñ)

  1,300    52

PNC Financial Services Group, Inc.

  12,900    632

Prologis (ö)(Ñ)

  12,700    176

Prosperity Bancshares, Inc. (Ñ)

  4,000    118

Protective Life Corp.

  27,900    400

Prudential Financial, Inc.

  14,600    442

Regions Financial Corp. (Ñ)

  66,400    529

State Street Corp.

  16,332    642
   

Principal

Amount ($)
or Shares

    Market
Value
$

SunTrust Banks, Inc. (Ñ)

  28,500    842

T Rowe Price Group, Inc. (Ñ)

  11,740    416

Travelers Cos., Inc. (The)

  25,200    1,139

UDR, Inc. (ö)(Ñ)

  10,800    149

United Rentals, Inc. (Æ)(Ñ)

  6,114    56

Visa, Inc. (Ñ)

  19,694    1,033

Washington Real Estate Investment Trust (ö)(Ñ)

  5,100    144

Wells Fargo & Co. (Ñ)

  164,735    4,856

Western Union Co. (The)

  33,500    480

Wilmington Trust Corp. (Ñ)

  27,100    603

WR Berkley Corp.

  10,200    316

Zions Bancorporation (Ñ)

  33,600    824
       
      42,851
       
Health Care - 14.7%      

Abbott Laboratories

  49,967    2,667

Aetna, Inc.

  17,300    493

Alexion Pharmaceuticals, Inc. (Æ)(Ñ)

  11,440    414

Allergan, Inc.

  20,500    827

AMERIGROUP Corp. Class A (Æ)(Ñ)

  7,200    213

AmerisourceBergen Corp. Class A

  5,700    203

Amgen, Inc. (Æ)

  14,500    837

Baxter International, Inc.

  51,810    2,776

Bristol-Myers Squibb Co.

  36,500    849

Cardinal Health, Inc.

  3,800    131

Centene Corp. (Æ)

  1,900    37

Covidien, Ltd.

  26,770    970

CVS Caremark Corp.

  144,740    4,160

Eli Lilly & Co.

  4,000    161

Express Scripts, Inc. Class A (Æ)

  21,170    1,164

Forest Laboratories, Inc. (Æ)

  13,400    341

Genzyme Corp. (Æ)

  6,630    440

Gilead Sciences, Inc. (Æ)(Ñ)

  84,740    4,334

Health Net, Inc. (Æ)(Ñ)

  9,100    99

Intuitive Surgical, Inc. (Æ)(Ñ)

  4,800    610

Johnson & Johnson

  42,050    2,516

King Pharmaceuticals, Inc. (Æ)(Ñ)

  17,100    182

Life Technologies Corp. (Æ)(Ñ)

  25,200    587

Magellan Health Services, Inc. (Æ)(Ñ)

  3,900    153

McKesson Corp.

  20,100    778

Merck & Co., Inc.

  20,900    635

Mylan, Inc. (Æ)(Ñ)

  94,600    936

Novartis AG - ADR

  37,200    1,851

Owens & Minor, Inc. (Ñ)

  1,600    60

Pfizer, Inc.

  103,200    1,828

Schering-Plough Corp.

  181,057    3,083

Sequenom, Inc. (Æ)(Ñ)

  24,000    476

St. Jude Medical, Inc. (Æ)

  11,970    395

Stericycle, Inc. (Æ)(Ñ)

  7,880    410

Stryker Corp.

  24,600    983

Thermo Fisher Scientific, Inc. (Æ)

  46,900    1,598

UnitedHealth Group, Inc.

  9,000    239

Vertex Pharmaceuticals, Inc. (Æ)(Ñ)

  27,300    829

WellPoint, Inc. (Æ)

  8,100    341

Wyeth

  111,000    4,164
       
      43,770
       

 

Multi-Style Equity Fund 15


Table of Contents

Russell Investment Funds

Multi-Style Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    Market
Value
$
      
Integrated Oils - 5.0%      

BP PLC - ADR

  8,700    407

Chevron Corp.

  12,000    888

ConocoPhillips

  24,600    1,274

Exxon Mobil Corp.

  48,900    3,904

Marathon Oil Corp.

  110,000    3,009

Occidental Petroleum Corp.

  72,950    4,376

Total SA - ADR

  18,100    1,001
       
      14,859
       
Materials and Processing - 5.8%    

Air Products & Chemicals, Inc.

  25,600    1,287

Alcoa, Inc. (Ñ)

  50,800    572

Archer-Daniels-Midland Co.

  62,550    1,803

Ashland, Inc. (Ñ)

  35,917    378

Avery Dennison Corp. (Ñ)

  15,100    494

BHP Billiton, Ltd. - ADR (Ñ)

  4,380    188

Bunge, Ltd. (Ñ)

  5,300    274

Cabot Corp.

  24,800    379

Celanese Corp. Class A

  39,100    486

Century Aluminum Co. (Æ)(Ñ)

  7,400    74

Ceradyne, Inc. (Æ)(Ñ)

  800    16

Chemtura Corp.

  12,900    18

Cytec Industries, Inc.

  5,300    112

Domtar Corp. (Æ)(Ñ)

  39,000    65

Dow Chemical Co. (The)

  23,800    359

Ecolab, Inc.

  4,580    161

EI Du Pont de Nemours & Co.

  53,550    1,355

Fluor Corp. (Ñ)

  32,000    1,436

HB Fuller Co. (Ñ)

  5,000    81

International Paper Co. (Ñ)

  16,400    194

Lubrizol Corp.

  14,700    535

Masco Corp. (Ñ)

  69,800    777

Monsanto Co.

  12,054    848

Mosaic Co. (The)

  15,600    540

Newmont Mining Corp.

  16,200    659

Nucor Corp.

  3,300    152

OM Group, Inc. (Æ)(Ñ)

  4,000    84

Potash Corp. of Saskatchewan

  2,300    168

PPG Industries, Inc.

  7,200    306

Praxair, Inc.

  6,400    380

Precision Castparts Corp.

  14,000    833

Quanta Services, Inc. (Æ)(Ñ)

  31,800    630

RPM International, Inc.

  35,850    476

Sherwin-Williams Co. (The) (Ñ)

  4,630    277

Smurfit-Stone Container Corp. (Æ)

  11,100    3

Steel Dynamics, Inc.

  11,100    124

United States Steel Corp. (Ñ)

  900    34

Valspar Corp. (Ñ)

  17,700    320

Weyerhaeuser Co. (Ñ)

  11,000    337
       
      17,215
       
Miscellaneous - 2.2%      

Berkshire Hathaway, Inc. Class B (Æ)

  523    1,681

Fortune Brands, Inc.

  7,200    297

General Electric Co.

  98,000    1,588

Honeywell International, Inc.

  54,900    1,802
   

Principal

Amount ($)
or Shares

    Market
Value
$

Johnson Controls, Inc. (Ñ)

  34,300    623

Tyco International, Ltd.

  31,500    680
       
      6,671
       
Other Energy - 5.1%      

Anadarko Petroleum Corp.

  19,900    767

Apache Corp.

  10,600    790

Baker Hughes, Inc.

  42,100    1,350

Berry Petroleum Co. Class A (Ñ)

  6,100    46

BJ Services Co. (Ñ)

  10,900    127

Cabot Oil & Gas Corp.

  4,000    104

Cameron International Corp. (Æ)

  46,540    954

Chesapeake Energy Corp.

  20,600    333

Cimarex Energy Co. (Ñ)

  8,600    230

Devon Energy Corp.

  48,800    3,207

Dynegy, Inc. Class A (Æ)(Ñ)

  36,500    73

Halliburton Co.

  39,600    720

Helix Energy Solutions Group, Inc. (Æ)(Ñ)

  13,800    100

Mariner Energy, Inc. (Æ)

  12,000    123

NRG Energy, Inc. (Æ)

  7,336    171

PetroHawk Energy Corp. (Æ)(Ñ)

  11,340    177

Schlumberger, Ltd.

  40,890    1,731

Southwestern Energy Co. (Æ)

  15,110    438

Stone Energy Corp. (Æ)(Ñ)

  5,400    60

Sunoco, Inc.

  16,200    704

Swift Energy Co. (Æ)(Ñ)

  4,600    77

Transocean, Ltd. (Æ)

  17,600    832

Unit Corp. (Æ)(Ñ)

  1,200    32

Valero Energy Corp.

  12,640    274

Williams Cos., Inc.

  45,605    660

XTO Energy, Inc.

  32,100    1,132
       
      15,212
       
Producer Durables - 4.9%      

American Tower Corp. Class A (Æ)

  12,100    355

Applied Materials, Inc.

  215,950    2,188

Centex Corp.

  10,300    110

Deere & Co.

  3,400    130

DR Horton, Inc. (Ñ)

  9,200    65

Emerson Electric Co.

  62,400    2,284

Gardner Denver, Inc. (Æ)

  3,400    79

Herman Miller, Inc.

  5,300    69

Illinois Tool Works, Inc. (Ñ)

  3,800    133

Ingersoll-Rand Co., Ltd. Class A

  25,600    444

Lam Research Corp. (Æ)

  16,780    357

Lexmark International, Inc. Class A (Æ)

  6,600    178

Lockheed Martin Corp.

  29,840    2,509

Northrop Grumman Corp.

  16,300    734

NVR, Inc. (Æ)(Ñ)

  920    420

Parker Hannifin Corp.

  10,099    430

Pentair, Inc.

  9,060    214

Pitney Bowes, Inc.

  20,400    520

Plantronics, Inc.

  2,300    30

Pulte Homes, Inc. (Ñ)

  27,140    297

Raytheon Co.

  14,600    745

Sunpower Corp. (Æ)(Ñ)

  18,261    556

 

16 Multi-Style Equity Fund


Table of Contents

Russell Investment Funds

Multi-Style Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    Market
Value
$
      

Terex Corp. (Æ)(Ñ)

  5,700    99

United Technologies Corp.

  30,100    1,613
       
      14,559
       
Technology - 15.5%      

ADC Telecommunications, Inc. (Æ)(Ñ)

  13,200    72

Adobe Systems, Inc. (Æ)

  8,850    188

Amphenol Corp. Class A

  73,288    1,758

Analog Devices, Inc.

  33,000    628

Apple, Inc. (Æ)(Ñ)

  49,660    4,239

Avnet, Inc. (Æ)

  3,000    55

Broadcom Corp. Class A (Æ)

  32,590    553

Cisco Systems, Inc. (Æ)

  237,024    3,864

Citrix Systems, Inc. (Æ)

  7,000    165

Computer Sciences Corp. (Æ)(Ñ)

  3,000    105

Corning, Inc. 2008 (Ñ)

  59,800    570

Emulex Corp. (Æ)

  3,000    21

F5 Networks, Inc. (Æ)(Ñ)

  12,520    286

First Solar, Inc. (Æ)(Ñ)

  6,370    879

Garmin, Ltd. (Ñ)

  27,200    521

General Dynamics Corp.

  25,604    1,475

Google, Inc. Class A (Æ)(Ñ)

  14,400    4,430

Hewlett-Packard Co.

  187,278    6,796

Ingram Micro, Inc. Class A (Æ)

  8,900    119

Intel Corp.

  52,500    770

International Business Machines Corp.

  20,710    1,743

Jabil Circuit, Inc.

  97,700    660

JDS Uniphase Corp. (Æ)

  6,200    23

Juniper Networks, Inc. (Æ)(Ñ)

  81,200    1,422

Maxim Integrated Products, Inc.

  80,300    917

McAfee, Inc. (Æ)(Ñ)

  5,470    189

Microsoft Corp.

  36,800    715

Motorola, Inc.

  93,100    412

Qualcomm, Inc.

  208,986    7,488

Research In Motion, Ltd. (Æ)

  16,900    686

Rockwell Automation, Inc.

  22,900    738

SanDisk Corp. (Æ)(Ñ)

  15,450    148

Seagate Technology

  90,200    400

Seagate Technology (Æ)

  2,300    

Siemens AG - ADR

  6,210    470

Sun Microsystems, Inc. (Æ)

  33,300    127

Symantec Corp. (Æ)

  35,900    485

Tellabs, Inc. (Æ)(Ñ)

  34,800    143

Texas Instruments, Inc.

  81,500    1,265

Tyco Electronics, Ltd. Class W

  19,433    315

Vishay Intertechnology, Inc. (Æ)(Ñ)

  14,300    49

Xilinx, Inc. (Ñ)

  16,850    300
       
      46,189
       
Utilities - 2.1%      

American Electric Power Co., Inc.

  11,600    386

AT&T, Inc.

  20,300    579

Atmos Energy Corp.

  1,800    43

Avista Corp. (Ñ)

  2,500    48
   

Principal

Amount ($)
or Shares

    Market
Value
$
 

Consolidated Edison, Inc.

  10,200    397 

DTE Energy Co.

  9,600    342 

Duke Energy Corp.

  20,500    308 

Embarq Corp.

  8,500    306 

Frontier Communications Corp.

  41,900    366 

MetroPCS Communications, Inc. (Æ)(Ñ)

  20,630    306 

New Jersey Resources Corp. (Ñ)

  3,600    142 

NiSource, Inc.

  20,300    223 

Northwest Natural Gas Co. (Ñ)

  1,500    66 

Pepco Holdings, Inc.

  14,000    249 

Pinnacle West Capital Corp.

  9,600    308 

Progress Energy, Inc. - CVO

  1,300     

Qwest Communications International, Inc. (Ñ)

  43,800    159 

Southwest Gas Corp. (Ñ)

  2,900    73 

US Cellular Corp. (Æ)

  900    39 

Verizon Communications, Inc.

  1,800    61 

Vodafone Group PLC - ADR

  88,350    1,806 
        
      6,207 
        
Total Common Stocks
(cost $344,298)
      268,529 
        
Short-Term Investments - 9.4%    

Russell Investment Company
Money Market Fund

  27,918,000    27,918 
        
Total Short-Term Investments
(cost $27,918)
      27,918 
        
Other Securities - 16.9%      

State Street Securities Lending Quality Trust (×)

  53,419,861    50,487 
        
Total Other Securities
(cost $53,420)
      50,487 
        
Total Investments - 116.3%
(identified cost $425,636)
      346,934 
Other Assets and Liabilities,
Net - (16.3%)
      (48,723)
        
Net Assets - 100.0%      298,211 
        

 

See accompanying notes which are an integral part of the financial statements.

 

Multi-Style Equity Fund 17


Table of Contents

Russell Investment Funds

Multi-Style Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except contracts)

 

Futures Contracts    Number of
Contracts
    Notional
Amount
    

Expiration
Date

 

Unrealized
Appreciation

(Depreciation)
$

              
Long Positions              

Russell 1000 Mini Index

    43    USD 2,089    03/09 18

S&P 500 E-Mini Index (CME)

    265    USD 11,926    03/09 32

S&P 500 Index (CME)

    53    USD 11,926    03/09 63

S&P Midcap 400 E-Mini Index (CME)

    118    USD 6,339    03/09 341
               

Total Unrealized Appreciation (Depreciation) on Open Futures Contracts

              454
               

 

 

Presentation of Portfolio Holdings — December 31, 2008

 

Portfolio Summary    % of Net
Assets
 
    

Auto and Transportation

    1.6 

Consumer Discretionary

    11.4 

Consumer Staples

    7.4 

Financial Services

    14.3 

Health Care

    14.7 

Integrated Oils

    5.0 

Materials and Processing

    5.8 

Miscellaneous

    2.2 

Other Energy

    5.1 

Producer Durables

    4.9 

Technology

    15.5 

Utilities

    2.1 

Short-Term Investments

    9.4 

Other Securities

    16.9 
      

Total Investments

    116.3 

Other Assets and Liabilities, Net

    (16.3)
      
    100.0 
      

Futures Contracts

    0.2 

 

See accompanying notes which are an integral part of the financial statements.

 

18 Multi-Style Equity Fund


Table of Contents

 

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Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

LOGO

 

Aggressive Equity Fund 
   Total
Return
 

1 Year

  (44.16)%

5 Years

  (4.15)%§

10 Years

  (0.19)%§

 

Russell 2500™ Index ** 
   Total
Return
 

1 Year

  (36.79)%

5 Years

  (0.99)%§

10 Years

  4.08

 

 

* Assumes initial investment on January 1, 1999.

 

**

 

Russell 2500 Index is composed of the bottom 500 stocks the Russell 1000® Index and all the stocks in the Russell 2000® Index. The Russell 2500 Index return reflects adjustments for income dividends and capital gains distributions reinvested as of the ex-dividend dates.

 

§ Annualized.

The performance shown in this section does not reflect any Insurance Company Separate Account or Policy Charges. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results.

 

20 Aggressive Equity Fund


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Portfolio Management Discussion — December 31, 2008 (Unaudited)

 

 

 

The Aggressive Equity Fund (the “Fund”) allocates most of its assets among multiple money managers. Russell Investment Management Company (“RIMCo”), as the Fund’s advisor, may change the allocation of the Fund’s assets among money managers at any time. An exemptive order from the Securities and Exchange Commission (SEC) permits RIMCo to engage or terminate a money manager at any time, subject to the approval by the Fund’s Board without a shareholder vote. Pursuant to the terms of the exemptive order, the Fund is required to notify its shareholders within 60 days of when a money manager begins providing services. The Fund currently has eight money managers.

What is the Fund’s investment objective?

The Fund seeks to provide long term capital growth.

How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2008?

For the fiscal year ended December 31, 2008, the Aggressive Equity Fund lost 44.16%. This compared to the Russell 2500™ Index, which lost 36.79% during the same period. The Fund’s performance includes operating expenses, whereas Index returns are unmanaged and do not include expenses of any kind.

For the year ended December 31, 2008, the Lipper® Small-Cap Core Funds (VIP) Average lost 36.02%. This result serves as a peer comparison and is expressed net of operating expenses.

How did the market conditions described in the Market Summary report affect the Fund’s performance?

The financial crisis that unfolded in 2008 directly impacted Fund performance. Throughout the year, the Fund was underweight regional banks, because of concerns about credit and the value of their loan portfolios. Despite investor concerns, the regional banks industry outperformed the broader index by over 20% as the Federal Reserve and U.S. Treasury offered wide ranging means of support (cutting interest rates, instituting the Troubled Assets Relief Program (TARP) funds and acquiring of troubled securities). An overweight to other energy hurt the Fund as the prices of energy stocks fell as the price of oil fell. Additionally, stock selection within producer durables and technology sectors hurt the Fund as consumer demand for related products in these sectors slowed. Stocks that started the year with higher estimated growth (a typical overweight within the Fund) underperformed as many securities with these characteristics saw forward earnings estimates decreased significantly.

The Fund’s strategy of being fully invested and exposing cash reserves to the performance of appropriate markets by purchasing equity securities and/or derivatives was a drag on performance relative to peers that held larger cash positions as the Russell 2500™ Index was down over 35%.

 

How did the investment strategies and techniques employed by the Fund and its money managers affect its performance?

The Fund employs eight managers: three growth, two market-oriented, and three value managers. PanAgora Asset Management Company LLC was the only manager to outperform its benchmark. The remaining managers underperformed by varying degrees. Those managers on the style extremes, with larger sector deviation, detracted the most from performance. Signia Capital Management, LLC, which was added to the Fund in March, has underperformed since being added to the Fund.

Gould Investment Partners LLC, Ranger Investment Management, L.P., and Signia were the worst performing managers. Gould, a high-growth manager, underperformed as a result of an overweight to other energy in addition to negative stock selection within producer durables and consumer discretionary. Gould’s high-growth process was not rewarded during the year.

Ranger’s underperformance was driven by stock selection within the technology, materials and processing and health care sectors. Like Gould, Ranger’s exposure to the highest growth stocks detracted from its performance.

Signia, a deep value manager, benefited from stock selection in the materials and processing sector. However, this was offset by weak stock selection in the health care and technology sectors, and an underweight to the financial service sector.

PanAgora modestly outperformed. PanAgora’s lower-beta (beta is the volatility of a given security compared to the volatility of the market as a whole) investment strategy was rewarded during the volatile year. The portfolio benefited from being equally distributed along the capital spectrum and investing in moderately valued stocks.

The Fund’s performance shown throughout this report was based on valuations calculated in accordance with Generally Accepted Accounting Principles (GAAP) and, in accordance with a newly effective accounting statement (SFAS 157), reflects the December 31, 2008 market value of the pooled investment vehicle in which the Fund invested its cash collateral received in securities lending transactions. This market value is lower than the vehicle’s amortized cost. This had a negative impact on the Fund’s benchmark relative performance.

Describe any changes to the Fund’s structure or the money manager line-up.

In March of 2008, Signia Capital Management, LLC was hired to replace David J. Greene and Company, LLC.


 

Aggressive Equity Fund 21


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Portfolio Management Discussion — December 31, 2008 (Unaudited)

 

 

 

 

Money Managers as of
December 31, 2008
 Styles
ClariVest Asset Management LLC Market Oriented
DePrince, Race, & Zollo, Inc. Value
Gould Investment Partners LLC Growth
Jacobs Levy Equity Management, LLC Value
PanAgora Asset Management Company LLC Market Oriented
Ranger Investment Management, L.P. Growth
Signia Capital Management, LLC Value
Tygh Capital Management, Inc. Growth

 

The views expressed in this report reflect those of the portfolio managers only through the end of the period covered by the report. These views do not necessarily represent the views of RIMCo, or any other person in RIMCo or any other affiliated organization. These views are subject to change at any time based upon market conditions or other events, and RIMCo disclaims any responsibility to update the views contained herein. These views should not be relied on as investment advice and, because investment decisions for Russell Investment Funds (RIF) are based on numerous factors, should not be relied on as an indication of investment decisions of any RIF Fund.


 

22 Aggressive Equity Fund


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Shareholder Expense Example — December 31, 2008 (Unaudited)

 

 

 

Fund Expenses

The following disclosure provides important information regarding each Fund’s Expense Example, which appears on each Fund’s individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund.

Example

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2008 to December 31, 2008.

Actual Expenses

The information in the table under the heading “Actual Performance” provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The information in the table under the heading “Hypothetical Performance (5% return before expenses)” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading “Hypothetical Performance (5% return before expenses)” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The fee and expenses shown in this section do not reflect any Insurance Company Separate Account or Policy Charges.

 

   Actual
Performance
  Hypothetical
Performance
(5% return
before expenses)
    

Beginning Account Value

    

July 1, 2008

  $1,000.00  $1,000.00

Ending Account Value

    

December 31, 2008

  $622.46  $1,019.86

Expenses Paid During Period*

  $4.28  $5.33

 

*Expenses are equal to the Fund’s annualized expense ratio of 1.05% (representing the one-half year period annualized), multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed. Without the waiver and/or reimbursement, expenses would have been higher.

 

Aggressive Equity Fund 23


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
      
Common Stocks - 91.3%      
Auto and Transportation - 3.9%    

Allegiant Travel Co. (Æ)(Ñ)

  6,400    311

American Railcar Industries, Inc. (Ñ)

  500    5

AMR Corp. (Æ)(Ñ)

  20,500    219

Arctic Cat, Inc. (Ñ)

  1,800    9

Arkansas Best Corp. (Ñ)

  8,341    251

ArvinMeritor, Inc. (Ñ)

  9,700    28

Autoliv, Inc.

  3,268    70

BorgWarner, Inc. (Ñ)

  1,458    32

Con-way, Inc. (Ñ)

  7,800    208

Cooper Tire & Rubber Co. (Ñ)

  51,400    317

Expeditors International of Washington, Inc. (Ñ)

  5,307    177

Force Protection, Inc. (Æ)

  3,700    22

Forward Air Corp. (Ñ)

  2,400    58

FreightCar America, Inc.

  2,000    37

Genesee & Wyoming, Inc. Class A (Æ)

  13,040    398

Global Ship Lease, Inc. (Ñ)

  16,200    46

Goodyear Tire & Rubber Co. (The) (Æ)

  8,400    50

Greenbrier Cos., Inc. (Ñ)

  2,200    15

Hawaiian Holdings, Inc. (Æ)(Ñ)

  4,188    27

Kirby Corp. (Æ)(Ñ)

  3,323    91

Lear Corp. (Æ)(Ñ)

  10,200    14

Navistar International Corp. (Æ)

  6,493    139

Old Dominion Freight Line, Inc. (Æ)

  40    1

Oshkosh Corp. (Ñ)

  165    1

Pacer International, Inc.

  10,188    106

PHI, Inc. (Æ)(Ñ)

  8,136    114

Polaris Industries, Inc. (Ñ)

  2,975    85

Republic Airways Holdings, Inc. (Æ)

  1,819    19

Saia, Inc. (Æ)

  2,300    25

Skywest, Inc. (Ñ)

  20,840    388

Stoneridge, Inc. (Æ)(Ñ)

  1,600    7

Strattec Security Corp.

  7,607    125

Superior Industries International,
Inc. (Ñ)

  17,140    180

Tenneco, Inc. (Æ)(Ñ)

  6,800    20

Tidewater, Inc. (Ñ)

  3,850    155

TRW Automotive Holdings
Corp. (Æ)(Ñ)

  11,200    40

US Airways Group, Inc. (Æ)(Ñ)

  14,900    115

UTI Worldwide, Inc.

  13,676    196

Visteon Corp. (Æ)(Ñ)

  5,500    2

Wabash National Corp.

  2,800    13

Wabtec Corp. (Ñ)

  13,542    538

Werner Enterprises, Inc. (Ñ)

  9,398    163

YRC Worldwide, Inc. (Æ)(Ñ)

  7,800    22
       
      4,839
       
Consumer Discretionary - 15.1%    

4Kids Entertainment, Inc. (Æ)

  55,840    109

99 Cents Only Stores (Æ)(Ñ)

  23,120    253

Aaron Rents, Inc. (Ñ)

  6,600    176

Abercrombie & Fitch Co. Class A (Ñ)

  1,925    44

Administaff, Inc.

  872    19

Advance Auto Parts, Inc. (Ñ)

  5,422    182

AFC Enterprises, Inc. (Æ)

  2,800    13

American Eagle Outfitters, Inc. (Ñ)

  24,900    233
   Principal
Amount ($)
or Shares
    Market
Value
$

American Greetings Corp. Class A

  5,700    42

American Public Education, Inc. (Æ)

  4,500    167

American Woodmark Corp.

  800    15

AnnTaylor Stores Corp. (Æ)(Ñ)

  9,215    53

Apollo Group, Inc. Class A (Æ)

  4,836    371

Asbury Automotive Group, Inc.

  7,300    33

AutoNation, Inc. (Æ)(Ñ)

  8,600    85

Avis Budget Group, Inc. (Æ)(Ñ)

  13,500    9

Bally Technologies, Inc. (Æ)(Ñ)

  7,682    185

Barnes & Noble, Inc.

  2,300    35

Bebe Stores, Inc. (Ñ)

  47,700    356

BJ’s Wholesale Club, Inc. (Æ)(Ñ)

  4,789    164

Blockbuster, Inc. Class A (Æ)(Ñ)

  34,500    43

Blyth, Inc. (Ñ)

  2,400    19

Brightpoint, Inc. (Æ)(Ñ)

  19,585    85

Brink’s Co. (The)

  1,152    31

Brink’s Home Security Holdings, Inc. (Æ)

  1,318    29

Brinker International, Inc.

  14,300    151

Brown Shoe Co., Inc. (Ñ)

  3,400    29

Buckle, Inc. (The) (Ñ)

  3,900    85

Build-A-Bear Workshop, Inc. Class A (Æ)(Ñ)

  3,900    19

Cabela’s, Inc. (Æ)(Ñ)

  4,000    23

Capella Education Co. (Æ)(Ñ)

  5,641    331

Career Education Corp. (Æ)(Ñ)

  5,989    107

Carter’s, Inc. (Æ)(Ñ)

  15,450    298

CDI Corp.

  1,100    14

Central European Distribution Corp. (Æ)(Ñ)

  1,700    34

Charlotte Russe Holding, Inc. (Æ)

  3,300    21

Charming Shoppes, Inc. (Æ)(Ñ)

  3,867    9

Chemed Corp. (Ñ)

  174    7

Childrens Place Retail Stores, Inc. (The) (Æ)

  2,100    46

Chipotle Mexican Grill, Inc. Class A (Æ)(Ñ)

  950    59

Chipotle Mexican Grill, Inc. Class B (Æ)(Ñ)

  1,310    75

Christopher & Banks Corp.

  1,739    10

Churchill Downs, Inc. (Ñ)

  4,195    170

Cintas Corp.

  3,327    77

CKE Restaurants, Inc. (Ñ)

  20,800    181

Conn’s, Inc. (Æ)(Ñ)

  500    4

Copart, Inc. (Æ)(Ñ)

  15,686    427

Corrections Corp. of America (Æ)

  27,622    452

CRA International, Inc. (Æ)(Ñ)

  411    11

Cracker Barrel Old Country Store,
Inc. (Ñ)

  8,000    165

CSS Industries, Inc.

  710    13

DeVry, Inc.

  9,537    548

Dice Holdings, Inc. (Æ)(Ñ)

  2,009    8

Dick’s Sporting Goods, Inc. (Æ)(Ñ)

  11,147    157

Dillard’s, Inc. Class A

  2,900    12

Dollar Tree, Inc. (Æ)(Ñ)

  16,230    678

Domino’s Pizza, Inc. (Æ)(Ñ)

  900    4

DSW, Inc. Class A (Æ)(Ñ)

  2,100    26

Earthlink, Inc. (Æ)(Ñ)

  33,600    227

Eastman Kodak Co. (Ñ)

  6,100    40

Ethan Allen Interiors, Inc. (Ñ)

  4,000    57

EW Scripps Co. Class A (Ñ)

  28,759    64

Ezcorp, Inc. Class A (Æ)

  15,800    240

 

24 Aggressive Equity Fund


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
      

Fastenal Co. (Ñ)

  2,509    87

Finish Line (The) Class A

  9,400    53

Foot Locker, Inc. (Ñ)

  8,658    64

Fred’s, Inc. Class A (Ñ)

  6,900    74

FTI Consulting, Inc. (Æ)(Ñ)

  3,586    160

Furniture Brands International, Inc. (Ñ)

  7,300    16

G&K Services, Inc. Class A (Ñ)

  1,637    33

GameStop Corp. Class A (Æ)

  10,074    218

Gannett Co., Inc. (Ñ)

  12,700    102

Gap, Inc. (The)

  19,190    257

Genesco, Inc. (Æ)(Ñ)

  3,086    52

Geo Group, Inc. (The) (Æ)(Ñ)

  13,523    244

Group 1 Automotive, Inc. (Ñ)

  4,400    47

Harman International Industries,
Inc. (Ñ)

  6,224    104

Haverty Furniture Cos., Inc. (Ñ)

  1,700    16

Heidrick & Struggles International,
Inc. (Ñ)

  5,460    118

Helen of Troy, Ltd. (Æ)

  14,600    253

Hewitt Associates, Inc. Class A (Æ)

  10,300    292

Hooker Furniture Corp. (Ñ)

  1,300    10

HOT Topic, Inc. (Æ)(Ñ)

  8,300    77

IAC/InterActiveCorp (Æ)(Ñ)

  1,375    22

infoGROUP, Inc. (Ñ)

  3,315    16

Infospace, Inc.

  685    5

Insight Enterprises, Inc. (Æ)(Ñ)

  6,800    47

Interval Leisure Group, Inc. (Æ)(Ñ)

  561    3

ITT Educational Services, Inc. (Æ)(Ñ)

  2,852    271

Jackson Hewitt Tax Service, Inc.

  4,050    64

Jarden Corp. (Æ)(Ñ)

  10,400    120

Jo-Ann Stores, Inc. (Æ)(Ñ)

  2,200    34

Journal Communications, Inc.
Class A (Ñ)

  8,000    20

K12, Inc. (Æ)(Ñ)

  1,125    21

Kelly Services, Inc. Class A (Ñ)

  4,400    57

Kenneth Cole Productions, Inc.
Class A (Ñ)

  13,727    97

La-Z-Boy, Inc. (Ñ)

  5,600    12

Lakeland Industries, Inc. (Æ)

  16,885    137

Leggett & Platt, Inc. (Ñ)

  3,482    53

LIN TV Corp. Class A (Æ)(Ñ)

  3,900    4

LKQ Corp. (Æ)(Ñ)

  10,999    128

LS Starrett Co.

  4,234    68

Maidenform Brands, Inc. (Æ)

  1,700    17

Manpower, Inc. (Ñ)

  2,516    86

MAXIMUS, Inc.

  556    20

McClatchy Co. Class A (Ñ)

  6,600    5

Media General, Inc. Class A (Ñ)

  2,681    5

Men’s Wearhouse, Inc. (The) (Ñ)

  11,300    153

Meredith Corp. (Ñ)

  2,790    48

MPS Group, Inc. (Æ)(Ñ)

  2,800    21

Navigant Consulting, Inc. (Æ)(Ñ)

  2,503    40

Netease.com - ADR (Æ)(Ñ)

  9,800    217

New York & Co., Inc. (Æ)(Ñ)

  4,000    9

Nu Skin Enterprises, Inc. Class A (Ñ)

  4,300    45

O’Charleys, Inc. (Ñ)

  13,446    27

O’Reilly Automotive, Inc. (Æ)(Ñ)

  8,903    274

Office Depot, Inc. (Æ)

  43,500    130

OfficeMax, Inc.

  9,900    76

On Assignment, Inc. (Æ)

  15,800    90

Oxford Industries, Inc.

  2,300    20
   Principal
Amount ($)
or Shares
    Market
Value
$

Panera Bread Co. Class A (Æ)(Ñ)

  1,056    55

Pantry, Inc. (The) (Æ)(Ñ)

  4,400    94

Parlux Fragrances, Inc. (Æ)

  35,017    102

PC Connection, Inc. (Æ)

  2,000    10

Perry Ellis International, Inc. (Æ)(Ñ)

  2,200    14

PetMed Express, Inc. (Æ)(Ñ)

  7,000    123

PF Chang’s China Bistro, Inc. (Æ)(Ñ)

  1,647    35

Phillips-Van Heusen Corp.

  1,435    29

Pool Corp. (Ñ)

  5,150    93

Pre-Paid Legal Services, Inc. (Æ)(Ñ)

  285    11

Prestige Brands Holdings, Inc. (Æ)

  20,939    221

PRG-Schultz International, Inc. (Æ)

  4,989    20

Quiksilver, Inc. (Æ)

  14,500    27

RadioShack Corp. (Ñ)

  5,710    68

RC2 Corp. (Æ)(Ñ)

  3,806    41

Red Lion Hotels Corp. (Æ)

  24,355    58

Rent-A-Center, Inc. Class A (Æ)

  7,200    127

Republic Services, Inc. Class A

  22,048    547

Revlon, Inc. Class A (Æ)

  1,110    7

Ross Stores, Inc. (Ñ)

  8,522    253

RR Donnelley & Sons Co.

  1,899    26

Ruby Tuesday, Inc. (Æ)(Ñ)

  8,300    13

Rush Enterprises, Inc. Class A (Æ)(Ñ)

  3,091    27

Rush Enterprises, Inc. Class B (Æ)

  122    1

Scholastic Corp. (Ñ)

  4,286    58

School Specialty, Inc. (Æ)(Ñ)

  643    12

Shanda Interactive Entertainment, Ltd. - ADR (Æ)(Ñ)

  5,000    162

Shoe Carnival, Inc. (Æ)

  1,400    13

Sinclair Broadcast Group, Inc.
Class A (Ñ)

  9,200    29

Skechers U.S.A., Inc. Class A (Æ)

  4,400    56

Sohu.com, Inc. (Æ)(Ñ)

  1,697    80

Sonic Automotive, Inc. Class A (Ñ)

  7,400    29

Spherion Corp. (Æ)

  2,900    6

Stage Stores, Inc.

  4,000    33

Stanley Works (The)

  2,726    93

Starbucks Corp. (Æ)(Ñ)

  11,220    106

Stewart Enterprises, Inc. Class A (Ñ)

  65,000    196

Strayer Education, Inc. (Ñ)

  2,124    455

Take-Two Interactive Software,
Inc. (Æ)(Ñ)

  11,800    89

Talbots, Inc. (Ñ)

  1,000    2

Tech Data Corp. (Æ)

  7,858    140

Tempur-Pedic International, Inc.

  5,300    38

thinkorswim Group, Inc. (Æ)(Ñ)

  12,800    72

Ticketmaster Entertainment, Inc. (Æ)(Ñ)

  184    1

Timberland Co. Class A (Æ)(Ñ)

  1,601    19

Toro Co. (Ñ)

  613    20

Tractor Supply Co. (Æ)(Ñ)

  2,405    87

Tuesday Morning Corp. (Æ)(Ñ)

  7,200    12

Tween Brands, Inc. (Æ)(Ñ)

  2,500    11

United Online, Inc. (Ñ)

  57,381    348

United Stationers, Inc. (Æ)

  4,384    147

Universal Electronics, Inc. (Æ)

  338    5

Universal Technical Institute, Inc. (Æ)

  8,400    144

Urban Outfitters, Inc. (Æ)(Ñ)

  7,000    105

Valassis Communications, Inc. (Æ)(Ñ)

  6,200    8

Waste Connections, Inc. (Æ)(Ñ)

  18,907    597

 

Aggressive Equity Fund 25


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
      

Watson Wyatt Worldwide, Inc. Class A

  1,842    88

WESCO International, Inc. (Æ)

  4,431    85

Wet Seal, Inc. (The) Class A (Æ)(Ñ)

  45,100    134

Williams-Sonoma, Inc. (Ñ)

  24,700    194

WMS Industries, Inc. (Æ)(Ñ)

  7,915    213

Wolverine World Wide, Inc.

  8,400    177

Wyndham Worldwide Corp. (Ñ)

  15,600    102
       
      18,537
       
Consumer Staples - 2.7%      

Casey’s General Stores, Inc.

  2,387    54

Chiquita Brands International, Inc. (Æ)(Ñ)

  12,946    191

Church & Dwight Co., Inc. (Ñ)

  15,234    855

Constellation Brands, Inc. Class A (Æ)

  4,877    77

Dean Foods Co. (Æ)(Ñ)

  1,462    26

Del Monte Foods Co.

  71,321    509

Diamond Foods, Inc. (Ñ)

  3,268    66

Fresh Del Monte Produce, Inc. (Æ)

  11,100    249

Green Mountain Coffee Roasters, Inc. (Æ)(Ñ)

  6,750    261

Imperial Sugar Co.

  900    13

Lance, Inc. (Ñ)

  1,100    25

Molson Coors Brewing Co. Class B

  3,206    157

Monterey Gourmet Foods, Inc. (Æ)(Å)

  125,695    133

Nash Finch Co. (Ñ)

  1,100    49

NBTY, Inc. (Æ)(Ñ)

  4,704    74

Omega Protein Corp. (Æ)

  2,600    11

Ralcorp Holdings, Inc. (Æ)

  2,280    133

Schweitzer-Mauduit International, Inc.

  2,700    54

Spartan Stores, Inc. (Ñ)

  1,700    40

SUPERVALU, Inc.

  2,100    31

Tootsie Roll Industries, Inc. (Ñ)

  4,434    114

TreeHouse Foods, Inc. (Æ)(Ñ)

  5,080    138

Weis Markets, Inc.

  1,986    67
       
      3,327
       
Financial Services - 18.0%      

Advance America Cash Advance Centers, Inc. (Ñ)

  7,833    15

Affiliated Managers Group, Inc. (Æ)(Ñ)

  7,197    302

Alexandria Real Estate Equities, Inc. (ö)(Ñ)

  1,235    75

Alliance Data Systems Corp. (Æ)(Ñ)

  9,360    436

Allied Capital Corp. (Ñ)

  33,097    89

Allied World Assurance Co. Holdings, Ltd.

  5,400    219

American Capital Agency Corp. (ö)(Ñ)

  4,650    99

American Equity Investment Life Holding Co. (Ñ)

  20,500    143

American Financial Group, Inc.

  6,223    142

Amerisafe, Inc. (Æ)

  3,776    78

Amtrust Financial Services, Inc. (Ñ)

  7,185    83

Anchor Bancorp Wisconsin, Inc. (Ñ)

  2,500    7

Annaly Capital Management, Inc. (ö)(Ñ)

  11,200    178

Anthracite Capital, Inc. (ö)(Ñ)

  9,700    22

Anworth Mortgage Asset Corp. (ö)(Ñ)

  51,700    332

Apartment Investment & Management Co. Class A (ö)(Ñ)

  455    5

Arbor Realty Trust, Inc. (ö)(Ñ)

  4,700    14
   Principal
Amount ($)
or Shares
    Market
Value
$

Arch Capital Group, Ltd. (Æ)(Ñ)

  6,400    449

Ares Capital Corp.

  23,605    149

Arthur J Gallagher & Co. (Ñ)

  8,500    220

Ashford Hospitality Trust, Inc. (ö)(Ñ)

  9,100    10

Asset Acceptance Capital Corp. (Æ)(Ñ)

  2,400    12

Astoria Financial Corp. (Ñ)

  9,659    159

Bancfirst Corp. (Ñ)

  1,000    53

Banco Latinoamericano de Exportaciones SA Class E

  4,800    69

Bancorp, Inc. (Æ)(Ñ)

  400    1

Bancorpsouth, Inc. (Ñ)

  9,079    212

Bank of Hawaii Corp. (Ñ)

  5,866    265

Bank of the Ozarks, Inc. (Ñ)

  2,201    65

Berkshire Hills Bancorp, Inc.

  3,300    102

BioMed Realty Trust, Inc. (ö)(Ñ)

  8    

BOK Financial Corp. (Ñ)

  1,271    51

Brandywine Realty Trust (ö)(Ñ)

  15,500    120

Calamos Asset Management, Inc. Class A (Ñ)

  4,300    32

Capital City Bank Group, Inc. (Ñ)

  600    16

Capitol Bancorp, Ltd. (Ñ)

  2,600    20

Capitol Federal Financial (Ñ)

  1,788    82

CapLease, Inc. (ö)(Ñ)

  4,100    7

Capstead Mortgage Corp. (ö)

  18,817    203

Cash America International, Inc.

  3,229    88

Cathay General Bancorp (Ñ)

  8,300    197

Cedar Shopping Centers, Inc. (ö)

  2,000    14

Center Financial Corp. (Ñ)

  11,175    69

Central Pacific Financial Corp. (Ñ)

  6,500    65

Cigna Corp.

  12,100    204

Citizens Republic Bancorp, Inc. (Ñ)

  14,900    44

City Holding Co. (Ñ)

  3,148    109

CNA Surety Corp. (Æ)

  4,038    78

Colonial Properties Trust (ö)(Ñ)

  8,200    68

Columbia Banking System, Inc. (Ñ)

  2,400    29

Commerce Bancshares, Inc. (Ñ)

  7,203    317

Community Bank System, Inc. (Ñ)

  9,773    238

Community Trust Bancorp, Inc. (Ñ)

  1,000    37

Conseco, Inc. (Æ)(Ñ)

  18,600    96

Cullen/Frost Bankers, Inc. (Ñ)

  2,229    113

Cybersource Corp. (Æ)(Ñ)

  11,250    135

Delphi Financial Group, Inc. Class A

  14,829    273

Deluxe Corp. (Ñ)

  19,497    292

Digital Realty Trust, Inc. (ö)(Ñ)

  1,102    36

Dime Community Bancshares (Ñ)

  5,453    73

Discover Financial Services

  7,788    74

DuPont Fabros Technology, Inc. (ö)

  12,139    25

East West Bancorp, Inc. (Ñ)

  560    9

Eaton Vance Corp. (Ñ)

  1,070    22

Electro Rent Corp. (Ñ)

  25,627    286

EMC Insurance Group, Inc. (Ñ)

  900    23

Employers Holdings, Inc.

  3,300    54

Encore Capital Group, Inc. (Æ)

  1,700    12

Endurance Specialty Holdings, Ltd. (Ñ)

  7,600    232

Equity Lifestyle Properties, Inc. (ö)(Ñ)

  1,047    40

Evercore Partners, Inc. Class A (Ñ)

  12,700    159

FBL Financial Group, Inc. Class A (Ñ)

  1,800    28

 

26 Aggressive Equity Fund


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
      

Federal Realty Investment Trust (ö)(Ñ)

  724    45

Federated Investors, Inc. Class B (Ñ)

  4,230    72

FelCor Lodging Trust, Inc. (ö)(Ñ)

  11,200    21

Fidelity National Information Services, Inc.

  3,126    51

First American Corp.

  9,300    269

First Bancorp (Ñ)

  10,200    114

First Cash Financial Services,
Inc. (Æ)(Ñ)

  4,475    85

First Community Bancshares, Inc. (Ñ)

  400    14

First Financial Bancorp (Ñ)

  3,100    38

First Financial Bankshares, Inc. (Ñ)

  407    22

First Horizon National Corp. (Ñ)

  21,895    231

First Industrial Realty Trust, Inc. (ö)(Ñ)

  5,500    42

First Marblehead Corp. (The) (Æ)(Ñ)

  9,800    13

First Midwest Bancorp, Inc. (Ñ)

  7,800    156

First Niagara Financial Group, Inc. (Ñ)

  6,300    102

FirstFed Financial Corp. (Æ)(Ñ)

  3,200    6

Flushing Financial Corp.

  8,200    98

Franklin Street Properties Corp. (ö)(Ñ)

  17,308    255

General Growth Properties, Inc. (ö)(Ñ)

  21,500    28

Genworth Financial, Inc. Class A

  15,400    44

Getty Realty Corp. (ö)(Ñ)

  1,818    38

Glimcher Realty Trust (ö)(Ñ)

  5,800    16

Green Bankshares, Inc. (Ñ)

  2,019    27

H&E Equipment Services, Inc. (Æ)(Ñ)

  3,200    25

H&R Block, Inc.

  2,779    63

Hallmark Financial Services (Æ)

  835    7

Hanmi Financial Corp. (Ñ)

  3,300    7

Hanover Insurance Group, Inc. (The)

  2,100    90

Hatteras Financial Corp. (ö)

  7,700    205

HCC Insurance Holdings, Inc.

  1,350    36

Health Care REIT, Inc. (ö)(Ñ)

  3,555    150

Heartland Payment Systems, Inc. (Ñ)

  259    5

Hercules Technology Growth Capital, Inc. (Ñ)

  21,900    173

Hersha Hospitality Trust (ö)

  4,400    13

Horace Mann Educators Corp. (Ñ)

  16,300    150

Hospitality Properties Trust (ö)(Ñ)

  15,000    223

HRPT Properties Trust (ö)(Ñ)

  5,667    19

Huntington Bancshares, Inc. (Ñ)

  29,800    228

Huron Consulting Group, Inc. (Æ)(Ñ)

  2,790    160

Hypercom Corp. (Æ)

  91,030    98

IBERIABANK Corp. (Ñ)

  1,000    48

Independent Bank Corp. (Ñ)

  2,300    5

Independent Bank Corp.

  200    5

Inland Real Estate Corp. (ö)(Ñ)

  3,500    45

Interactive Data Corp.

  985    24

Intersections, Inc. (Æ)

  27,069    141

Investors Bancorp, Inc. (Æ)

  4,500    60

IPC Holdings, Ltd.

  8,900    266

Janus Capital Group, Inc. (Ñ)

  4,069    33

JER Investment Trust, Inc. (Æ)(Þ)

  9,200    9

Knight Capital Group, Inc.
Class A (Æ)(Ñ)

  22,902    370

LaBranche & Co., Inc. (Æ)(Ñ)

  16,300    78

Lexington Realty Trust (ö)(Ñ)

  7,200    36

Life Partners Holdings, Inc. (Ñ)

  6,525    285

LTC Properties, Inc. (ö)

  3,429    70

MainSource Financial Group, Inc. (Ñ)

  5,600    87
   Principal
Amount ($)
or Shares
    Market
Value
$

MarketAxess Holdings, Inc. (Æ)(Ñ)

  25,209    206

Marshall & Ilsley Corp. (Ñ)

  7,900    108

Meadowbrook Insurance Group, Inc.

  5,485    35

MF Global, Ltd. (Æ)(Ñ)

  5,400    11

Midwest Banc Holdings, Inc. (Ñ)

  3,844    5

MVC Capital, Inc. (Ñ)

  1,000    11

National Financial Partners Corp. (Ñ)

  4,600    14

National Health Investors, Inc. (ö)(Ñ)

  106    3

National Interstate Corp. (Ñ)

  326    6

National Penn Bancshares, Inc. (Ñ)

  14,963    217

National Retail Properties, Inc. (ö)(Ñ)

  14,485    249

Nationwide Health Properties,
Inc. (ö)(Ñ)

  3,178    91

Navigators Group, Inc. (Æ)(Ñ)

  1,745    96

NBT Bancorp, Inc. (Ñ)

  2,074    58

New York Community Bancorp,
Inc. (Ñ)

  5,029    60

NewAlliance Bancshares, Inc. (Ñ)

  110    1

NGP Capital Resources Co.

  2,100    18

NorthStar Realty Finance Corp. (ö)(Ñ)

  3,899    15

Odyssey Re Holdings Corp.

  1,060    55

Old National Bancorp (Ñ)

  11,658    212

Old Second Bancorp, Inc. (Ñ)

  800    9

Omega Healthcare Investors, Inc. (ö)(Ñ)

  5,553    89

OneBeacon Insurance Group, Ltd. Class A (Ñ)

  2,300    24

optionsXpress Holdings, Inc. (Ñ)

  5,312    71

Oriental Financial Group, Inc. (Ñ)

  24,796    150

Pacific Capital Bancorp NA (Ñ)

  4,800    81

PacWest Bancorp (Ñ)

  4,300    116

Parkway Properties, Inc. (ö)(Ñ)

  3,400    61

PartnerRe, Ltd. - ADR (Ñ)

  3,500    249

PennantPark Investment Corp. (Ñ)

  40,320    146

Pennsylvania Real Estate Investment Trust (ö)(Ñ)

  3,700    28

Penson Worldwide, Inc. (Æ)

  2,633    20

People’s United Financial, Inc. (Ñ)

  2,275    41

Phoenix Cos., Inc. (The)

  3,200    10

Piper Jaffray Cos. (Æ)(Ñ)

  10,066    400

Platinum Underwriters Holdings, Ltd.

  7,900    285

PMA Capital Corp. Class A (Æ)(Ñ)

  1,700    12

PMI Group, Inc. (The) (Ñ)

  15,700    31

Potlatch Corp. (ö)(Ñ)

  10,200    265

Prosperity Bancshares, Inc. (Ñ)

  269    8

Protective Life Corp.

  18,500    265

Provident Financial Services, Inc. (Ñ)

  15,783    241

PS Business Parks, Inc. (ö)(Ñ)

  609    27

Pzena Investment Management, Inc. (Ñ)

  8,300    35

Raymond James Financial, Inc. (Ñ)

  4,841    83

Rayonier, Inc. (ö)(Ñ)

  1,271    40

Reinsurance Group of America, Inc.

  2,700    116

RenaissanceRe Holdings, Ltd.

  500    26

S1 Corp. (Æ)

  8,700    69

Sandy Spring Bancorp, Inc. (Ñ)

  1,700    37

Santander BanCorp (Ñ)

  1,900    24

SCBT Financial Corp.

  500    17

SeaBright Insurance Holdings, Inc. (Æ)

  1,700    20

Senior Housing Properties Trust (ö)(Ñ)

  5,000    90

South Financial Group, Inc. (The) (Ñ)

  8,900    38

 

Aggressive Equity Fund 27


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
      

Southside Bancshares, Inc. (Ñ)

  1,200    28

Southwest Bancorp, Inc.

  2,276    29

StanCorp Financial Group, Inc. (Ñ)

  7,388    309

Sterling Bancorp (Ñ)

  6,200    87

Stewart Information Services Corp. (Ñ)

  3,000    70

Stifel Financial Corp. (Æ)(Ñ)

  3,872    178

Strategic Hotels & Resorts, Inc. (ö)(Ñ)

  10,900    18

Sun Bancorp, Inc. (Æ)(Ñ)

  1,575    12

Sunstone Hotel Investors, Inc. (ö)(Ñ)

  10,500    65

SVB Financial Group (Æ)(Ñ)

  6,047    159

SY Bancorp, Inc. (Ñ)

  900    25

Synovus Financial Corp. (Ñ)

  20,100    167

Tanger Factory Outlet Centers (ö)(Ñ)

  752    28

Texas Capital Bancshares, Inc. (Æ)(Ñ)

  11,910    159

Tompkins Financial Corp. (Ñ)

  600    35

Tower Group, Inc. (Ñ)

  5,400    152

Transatlantic Holdings, Inc. (Ñ)

  1,866    75

Trico Bancshares (Ñ)

  3,300    82

United America Indemnity, Ltd. Class A (Æ)

  2,000    26

United Financial Bancorp, Inc. (Ñ)

  7,000    106

United Rentals, Inc. (Æ)(Ñ)

  8,977    82

United Western Bancorp, Inc.

  5,400    51

Universal American Corp. (Æ)(Ñ)

  8,007    71

Unum Group

  14,343    267

Validus Holdings, Ltd.

  12,745    333

Ventas, Inc. (ö)(Ñ)

  3,416    115

ViewPoint Financial Group

  8,400    135

Waddell & Reed Financial, Inc. Class A

  18,658    288

Washington Federal, Inc. (Ñ)

  6,384    96

Washington Real Estate Investment Trust (ö)(Ñ)

  3,600    102

Webster Financial Corp. (Ñ)

  16,300    225

WesBanco, Inc. (Ñ)

  2,200    60

Westamerica Bancorporation (Ñ)

  1,000    51

Westfield Financial, Inc. (Ñ)

  108    1

Wilmington Trust Corp. (Ñ)

  11,117    247

Wilshire Bancorp, Inc. (Ñ)

  13,000    118

Wintrust Financial Corp. (Ñ)

  1,000    21

World Acceptance Corp. (Æ)(Ñ)

  568    11

WR Berkley Corp.

  2,477    77

Zenith National Insurance Corp. (Ñ)

  5,450    172
       
      22,104
       
Health Care - 16.1%      

Affymetrix, Inc. (Æ)(Ñ)

  98,931    296

Albany Molecular Research, Inc. (Æ)

  8,200    80

Alliance Imaging, Inc. (Æ)(Ñ)

  10,500    84

Amedisys, Inc. (Æ)(Ñ)

  4,373    181

American Medical Systems Holdings,
Inc. (Æ)(Ñ)

  6,714    60

AMERIGROUP Corp. Class A (Æ)

  7,500    221

AmerisourceBergen Corp. Class A (Ñ)

  887    32

Analogic Corp. (Ñ)

  5,599    153

Angiodynamics, Inc. (Æ)(Ñ)

  1,580    22

Assisted Living Concepts, Inc. (Æ)(Ñ)

  4,897    20

athenahealth, Inc. (Æ)(Ñ)

  5,450    205
   Principal
Amount ($)
or Shares
    Market
Value
$

Bio-Rad Laboratories, Inc. Class A (Æ)

  2,540    191

BioScrip, Inc. (Æ)

  98,509    219

Candela Corp. (Æ)

  163,824    87

Capital Senior Living Corp. (Æ)(Ñ)

  4,655    14

Cardiac Science Corp. (Æ)

  5,218    39

Catalyst Health Solutions, Inc. (Æ)

  7,876    192

Centene Corp. (Æ)

  14,845    293

Cephalon, Inc. (Æ)(Ñ)

  7,860    606

Charles River Laboratories International, Inc. (Æ)(Ñ)

  4,060    106

Computer Programs & Systems, Inc. (Ñ)

  2,846    76

Corvel Corp. (Æ)(Ñ)

  1,027    23

Coventry Health Care, Inc. (Æ)

  1,900    28

Cubist Pharmaceuticals, Inc. (Æ)(Ñ)

  10,555    255

CV Therapeutics, Inc. (Æ)(Ñ)

  1,722    16

Datascope Corp.

  350    18

DaVita, Inc. (Æ)

  7,858    390

Depomed, Inc. (Æ)(Ñ)

  2,767    5

Edwards Lifesciences Corp. (Æ)(Ñ)

  3,239    178

Emergency Medical Services Corp. Class A (Æ)

  2,300    84

Endo Pharmaceuticals Holdings,
Inc. (Æ)(Ñ)

  11,150    289

eResearchTechnology, Inc. (Æ)(Ñ)

  30,482    202

Gen-Probe, Inc. (Æ)

  5,827    250

Genomic Health, Inc. (Æ)(Ñ)

  2,200    43

Genoptix, Inc. (Æ)

  2,740    93

Gentiva Health Services, Inc. (Æ)(Ñ)

  7,537    221

Haemonetics Corp. (Æ)(Ñ)

  4,360    246

Hanger Orthopedic Group, Inc. (Æ)(Ñ)

  1,400    20

Harvard Bioscience, Inc. (Æ)(Ñ)

  49,156    130

Health Net, Inc. (Æ)(Ñ)

  1,700    19

Healthsouth Corp. (Æ)(Ñ)

  2,623    29

Healthspring, Inc. (Æ)(Ñ)

  18,688    373

Henry Schein, Inc. (Æ)(Ñ)

  365    13

Hill-Rom Holdings, Inc. (Ñ)

  6,214    102

HMS Holdings Corp. (Æ)(Ñ)

  23,184    731

Hologic, Inc. (Æ)(Ñ)

  20,193    264

Icon PLC - ADR (Æ)

  7,577    149

Idexx Laboratories, Inc. (Æ)(Ñ)

  3,517    127

Illumina, Inc. (Æ)(Ñ)

  22,814    594

Immucor, Inc. (Æ)

  22,951    610

Immunomedics, Inc. (Æ)

  647    1

Intuitive Surgical, Inc. (Æ)(Ñ)

  655    83

Isis Pharmaceuticals, Inc. (Æ)(Ñ)

  6,535    93

Kendle International, Inc. (Æ)(Ñ)

  2,964    76

Kensey Nash Corp. (Æ)(Ñ)

  3,731    72

Kindred Healthcare, Inc. (Æ)

  8,033    105

Kinetic Concepts, Inc. (Æ)(Ñ)

  1,017    20

King Pharmaceuticals, Inc. (Æ)(Ñ)

  67,264    714

Laboratory Corp. of America
Holdings (Æ)

  3,312    213

LHC Group, Inc. (Æ)(Ñ)

  8,215    296

Life Technologies Corp. (Æ)(Ñ)

  8,227    192

LifePoint Hospitals, Inc. (Æ)(Ñ)

  1,871    43

Lincare Holdings, Inc. (Æ)(Ñ)

  12,915    348

Luminex Corp. (Æ)(Ñ)

  11,600    248

Magellan Health Services, Inc. (Æ)

  7,466    292

 

28 Aggressive Equity Fund


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
      

Martek Biosciences Corp. (Æ)(Ñ)

  1,400    42

Masimo Corp. (Æ)(Ñ)

  17,090    510

Medical Action Industries, Inc. (Æ)

  566    6

Medicis Pharmaceutical Corp.
Class A (Ñ)

  4,994    69

Mednax, Inc. (Æ)

  5,337    169

Mentor Corp. (Ñ)

  9,200    285

Merit Medical Systems, Inc. (Æ)

  19,077    342

Molina Healthcare, Inc. (Æ)(Ñ)

  6,325    111

Myriad Genetics, Inc. (Æ)

  4,200    278

Nabi Biopharmaceuticals (Æ)(Ñ)

  15,600    52

Natus Medical, Inc. (Æ)(Ñ)

  17,020    220

NPS Pharmaceuticals, Inc. (Æ)(Ñ)

  12,211    76

NuVasive, Inc. (Æ)(Ñ)

  6,604    229

Odyssey HealthCare, Inc. (Æ)

  3,000    28

Omnicare, Inc. (Ñ)

  11,928    331

OSI Pharmaceuticals, Inc. (Æ)(Ñ)

  2,623    102

Par Pharmaceutical Cos., Inc. (Æ)(Ñ)

  6,400    86

Parexel International Corp. (Æ)

  4,674    45

Patterson Cos., Inc. (Æ)

  5,209    98

PDL BioPharma, Inc. (Ñ)

  7,861    49

Perrigo Co. (Ñ)

  15,852    512

Pharmaceutical Product Development, Inc. (Ñ)

  3,538    103

PharMerica Corp. (Æ)(Ñ)

  5,500    86

Phase Forward, Inc. (Æ)(Ñ)

  9,800    123

Psychiatric Solutions, Inc. (Æ)(Ñ)

  23,285    649

Quality Systems, Inc. (Ñ)

  7,200    314

RehabCare Group, Inc. (Æ)

  4,300    65

Res-Care, Inc. (Æ)(Ñ)

  3,483    52

Resmed, Inc. (Æ)

  6,569    246

Retractable Technologies, Inc. (Æ)(Å)

  72,750    62

Sirona Dental Systems, Inc. (Æ)(Ñ)

  3,801    40

Somanetics Corp. (Æ)

  300    5

SonoSite, Inc. (Æ)(Ñ)

  1,591    30

Stericycle, Inc. (Æ)(Ñ)

  15,607    813

STERIS Corp.

  9,627    230

SurModics, Inc. (Æ)(Ñ)

  92    2

Techne Corp.

  8,046    519

Thoratec Corp. (Æ)(Ñ)

  6,875    223

Triple-S Management Corp. (Æ)(Ñ)

  900    10

United Therapeutics Corp. (Æ)(Ñ)

  1,418    89

Universal Health Services, Inc. Class B

  1,900    71

VCA Antech, Inc. (Æ)(Ñ)

  9,099    181

Viropharma, Inc. (Æ)(Ñ)

  20,436    266

Watson Pharmaceuticals, Inc.
Class B (Æ)(Ñ)

  21,311    566
       
      19,860
       
Integrated Oils - 0.1%    

Vaalco Energy, Inc. (Æ)

  23,900    178
       
Materials and Processing - 7.7%    

Aceto Corp.

  11,311    113

Acuity Brands, Inc. (Ñ)

  1,759    61

Aecom Technology Corp. (Æ)

  4,100    126

Airgas, Inc.

  7,907    308

Andersons, Inc. (The) (Ñ)

  2,700    45
   Principal
Amount ($)
or Shares
    Market
Value
$

Armstrong World Industries, Inc. (Ñ)

  2,167    47

Ashland, Inc.

  8,107    85

Beacon Roofing Supply, Inc. (Æ)(Ñ)

  795    11

Brady Corp. Class A (Ñ)

  1,746    42

Buckeye Technologies, Inc. (Æ)(Ñ)

  8,200    30

Cabot Corp. (Ñ)

  13,600    208

Carpenter Technology Corp. (Ñ)

  2,862    59

Celanese Corp. Class A (Ñ)

  3,237    40

Century Aluminum Co. (Æ)(Ñ)

  9,401    94

Ceradyne, Inc. (Æ)(Ñ)

  5,470    111

CF Industries Holdings, Inc.

  269    13

Chemtura Corp. (Ñ)

  7,027    10

Clean Harbors, Inc. (Æ)(Ñ)

  800    51

Clearwater Paper Corp. (Æ)(Ñ)

  585    5

Comfort Systems USA, Inc. (Ñ)

  9,800    105

Commercial Metals Co. (Ñ)

  14,200    169

Compass Minerals International, Inc.

  2,800    164

Cytec Industries, Inc.

  10,700    227

Domtar Corp. (Æ)(Ñ)

  52,691    88

Dycom Industries, Inc. (Æ)

  11,394    94

Eagle Materials, Inc. (Ñ)

  11,700    215

Ecolab, Inc.

  6,806    239

EMCOR Group, Inc. (Æ)

  15,152    340

Encore Wire Corp. (Ñ)

  4,600    87

Energizer Holdings, Inc. (Æ)(Ñ)

  3,951    214

Energy Conversion Devices,
Inc. (Æ)(Ñ)

  2,700    68

EnerSys (Æ)

  2,480    27

Exide Technologies (Æ)(Ñ)

  24,200    128

Facet Biotech Corp. (Æ)(Ñ)

  1,572    15

FMC Corp. (Ñ)

  8,635    386

Glatfelter (Ñ)

  21,100    196

Haynes International, Inc. (Æ)(Ñ)

  4,040    100

HB Fuller Co. (Ñ)

  8,800    142

Hecla Mining Co. (Æ)(Ñ)

  18,600    52

IAMGOLD Corp.

  51,257    313

Innophos Holdings, Inc. (Ñ)

  6,716    133

Innospec, Inc. (Ñ)

  4,791    28

Insituform Technologies, Inc.
Class A (Æ)(Ñ)

  19,951    393

Insteel Industries, Inc.

  2,465    28

Jacobs Engineering Group, Inc. (Æ)(Ñ)

  5,690    274

KapStone Paper and Packaging
Corp. (Æ)

  1,000    2

Koppers Holdings, Inc.

  2,360    51

Layne Christensen Co. (Æ)

  6,456    155

Lennox International, Inc. (Ñ)

  3,457    112

Lydall, Inc. (Æ)(Ñ)

  4,521    26

McDermott International, Inc. (Æ)

  6,006    59

MeadWestvaco Corp.

  4,060    45

Mercer International, Inc. (Æ)(Ñ)

  1,500    3

Myers Industries, Inc. (Ñ)

  16,300    130

Neenah Paper, Inc. (Ñ)

  10,800    96

Olympic Steel, Inc. (Ñ)

  3,300    67

OM Group, Inc. (Æ)(Ñ)

  14,705    310

Owens-Illinois, Inc. (Æ)

  3,050    83

PAN American Silver Corp. (Æ)(Ñ)

  12,746    218

Perini Corp. (Æ)(Ñ)

  4,900    115

PolyOne Corp. (Æ)

  3,100    10

 

Aggressive Equity Fund 29


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
      

Quaker Chemical Corp.

  1,000    16

Quanta Services, Inc. (Æ)(Ñ)

  8,188    162

Reliance Steel & Aluminum Co.

  11,519    230

Richmont Mines, Inc. (Æ)(Ñ)

  3,994    7

Rockwood Holdings, Inc. (Æ)(Ñ)

  3,541    38

Schulman A, Inc.

  4,222    72

Shaw Group, Inc. (The) (Æ)(Ñ)

  2,875    59

Silgan Holdings, Inc.

  4,100    196

Sims Metal Management, Ltd. - ADR (Ñ)

  9,034    112

Smurfit-Stone Container Corp. (Æ)

  36,900    9

Sonoco Products Co.

  2,525    59

Spartech Corp.

  2,400    15

Standard Register Co. (The) (Ñ)

  2,100    19

Symyx Technologies (Æ)(Ñ)

  44,248    263

Terra Industries, Inc.

  4,973    83

Texas Industries, Inc. (Ñ)

  800    28

Titanium Metals Corp. (Ñ)

  13,513    119

Tredegar Corp.

  1,393    25

Universal Forest Products, Inc. (Ñ)

  3,100    83

URS Corp. (Æ)

  15,275    623

US Concrete, Inc. (Æ)(Ñ)

  4,200    14

Valspar Corp. (Ñ)

  917    17

Xerium Technologies, Inc. (Æ)

  2,112    1
       
      9,416
       
Miscellaneous - 1.3%      

Carlisle Cos., Inc. (Ñ)

  5,800    120

Castlepoint Holdings, Ltd. (Þ)

  30,900    419

GenTek, Inc. (Æ)(Ñ)

  133    2

Kaman Corp. Class A (Ñ)

  10,600    192

Lancaster Colony Corp.

  5,114    176

Teleflex, Inc.

  9,726    487

Trinity Industries, Inc. (Ñ)

  10,100    159

Walter Industries, Inc. Class A (Ñ)

  167    3
       
      1,558
       
Other Energy - 3.8%      

Allis-Chalmers Energy, Inc. (Æ)(Ñ)

  3,070    17

Alpha Natural Resources, Inc. (Æ)

  6,700    108

Arena Resources, Inc. (Æ)(Ñ)

  3,830    108

Atwood Oceanics, Inc. (Æ)(Ñ)

  2,105    32

Brigham Exploration Co. (Æ)(Ñ)

  26,724    86

Bronco Drilling Co., Inc. (Æ)(Ñ)

  3,178    21

Callon Petroleum Co. (Æ)(Ñ)

  224    1

Cameron International Corp. (Æ)

  7,650    157

CARBO Ceramics, Inc. (Ñ)

  9,540    339

Cimarex Energy Co. (Ñ)

  13,519    362

Clayton Williams Energy, Inc. (Æ)

  579    26

Complete Production Services, Inc. (Æ)(Ñ)

  7,427    61

Comstock Resources, Inc. (Æ)

  1,088    51

Concho Resources, Inc. (Æ)(Ñ)

  8,635    197

Contango Oil & Gas Co. (Æ)(Ñ)

  400    23

Continental Resources, Inc. (Æ)(Ñ)

  10,419    216

Core Laboratories NV

  2,072    124

Dawson Geophysical Co. (Æ)(Ñ)

  6,568    117

Dynegy, Inc. Class A (Æ)(Ñ)

  4,300    9

Encore Acquisition Co. (Æ)

  2,092    53
   Principal
Amount ($)
or Shares
    Market
Value
$

Energy Partners, Ltd. (Æ)(Ñ)

  7,267    10

Energy XXI Bermuda, Ltd.

  14,500    11

EXCO Resources, Inc. (Æ)(Ñ)

  18,777    170

Exterran Holdings, Inc. (Æ)(Ñ)

  4,588    98

FMC Technologies, Inc. (Æ)(Ñ)

  2,174    52

Foundation Coal Holdings, Inc.

  2,141    30

Frontier Oil Corp. (Ñ)

  24,000    303

Geokinetics, Inc. (Æ)

  23,010    57

Gran Tierra Energy, Inc. (Æ)(Ñ)

  9,001    25

Helmerich & Payne, Inc. (Ñ)

  7,450    169

Hornbeck Offshore Services, Inc. (Æ)(Ñ)

  8,641    141

Key Energy Services, Inc. (Æ)

  3,458    15

Mariner Energy, Inc. (Æ)(Ñ)

  8,649    88

Massey Energy Co. (Ñ)

  1,185    16

Matrix Service Co. (Æ)(Ñ)

  2,006    15

McMoRan Exploration Co. (Æ)(Ñ)

  2,151    21

Meridian Resource Corp. (Æ)

  4,900    3

Newpark Resources (Æ)

  32,300    119

NV Energy, Inc.

  6,137    61

Oceaneering International, Inc. (Æ)

  4,026    117

Oil States International, Inc. (Æ)

  1,800    34

Parker Drilling Co. (Æ)

  13,800    40

Patterson-UTI Energy, Inc. (Ñ)

  17,744    204

Penn Virginia Corp.

  3,328    86

Penn Virginia GP Holdings, LP (Ñ)

  272    3

Precision Drilling Trust (Ñ)

  2,960    25

Reliant Energy, Inc. (Æ)

  4,000    23

Rowan Cos., Inc. (Ñ)

  5,693    91

Stone Energy Corp. (Æ)(Ñ)

  5,167    57

Superior Energy Services, Inc. (Æ)

  6,924    110

Swift Energy Co. (Æ)(Ñ)

  3,900    66

Targa Resources Partners, LP (Ñ)

  13,242    103

TXCO Resources, Inc. (Æ)(Ñ)

  3,500    5

Union Drilling, Inc. (Æ)(Ñ)

  1,300    7

Unit Corp. (Æ)(Ñ)

  5,675    152

W&T Offshore, Inc. (Ñ)

  3,032    43

Western Refining, Inc. (Ñ)

  6,500    50
       
      4,728
       
Producer Durables - 5.7%      

Actuant Corp. Class A (Ñ)

  3,879    74

Aerovironment, Inc. (Æ)(Ñ)

  8,100    298

AGCO Corp. (Æ)(Ñ)

  14,365    339

Alliant Techsystems, Inc. (Æ)(Ñ)

  198    17

AM Castle & Co. (Ñ)

  1,308    14

Ametek, Inc.

  2,800    85

AO Smith Corp. (Ñ)

  4,400    130

Argon ST, Inc. (Æ)(Ñ)

  2,600    49

ATMI, Inc. (Æ)(Ñ)

  164    2

Baldor Electric Co. (Ñ)

  13,000    232

Bucyrus International, Inc. Class A (Ñ)

  2,671    49

Cascade Corp. (Ñ)

  2,100    63

Centex Corp. (Ñ)

  17,700    188

Chart Industries, Inc. (Æ)

  3,295    35

Cognex Corp. (Ñ)

  2,154    32

Cohu, Inc. (Ñ)

  10,650    129

Columbus McKinnon Corp. (Æ)

  800    11

 

30 Aggressive Equity Fund


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
      

Covanta Holding Corp. (Æ)(Ñ)

  770    17

Crane Co.

  5,332    92

CTS Corp. (Ñ)

  6,282    35

Cummins, Inc.

  1,227    33

Donaldson Co., Inc. (Ñ)

  4,100    138

Dover Corp. (Ñ)

  2,237    74

DR Horton, Inc. (Ñ)

  39,200    277

Ducommun, Inc.

  1,900    32

Electro Scientific Industries, Inc. (Æ)(Ñ)

  39,870    271

EnPro Industries, Inc. (Æ)

  500    11

Esterline Technologies Corp. (Æ)

  2,503    95

Federal Signal Corp. (Ñ)

  10,400    85

Flowserve Corp.

  3,286    169

Gardner Denver, Inc. (Æ)(Ñ)

  5,661    132

GrafTech International, Ltd. (Æ)

  14,767    123

Hardinge, Inc. (Ñ)

  1,400    6

Herman Miller, Inc. (Ñ)

  9,721    127

Hovnanian Enterprises, Inc.
Class A (Æ)(Ñ)

  11,900    20

Hubbell, Inc. Class B (Ñ)

  2,846    93

Itron, Inc. (Æ)(Ñ)

  4,854    309

Joy Global, Inc. (Ñ)

  8,452    193

Kimball International, Inc. Class B (Ñ)

  36,861    317

Ladish Co., Inc. (Æ)

  5,000    69

Lam Research Corp. (Æ)(Ñ)

  4,221    90

Lexmark International, Inc.
Class A (Æ)(Ñ)

  11,636    313

Lincoln Electric Holdings, Inc. (Ñ)

  1,743    89

LTX-Credence Corp. (Æ)

  7,232    2

MasTec, Inc. (Æ)(Ñ)

  12,100    140

MDC Holdings, Inc.

  1,971    60

Meritage Homes Corp. (Æ)

  4,200    51

Mettler Toledo International,
Inc. (Æ)(Ñ)

  1,684    113

NVR, Inc. (Æ)(Ñ)

  529    241

Orbital Sciences Corp. (Æ)

  1,722    34

Park-Ohio Holdings Corp. (Æ)

  1,100    7

Perceptron, Inc. (Æ)

  40,269    136

Plantronics, Inc. (Ñ)

  9,623    127

Powerwave Technologies, Inc. (Æ)(Ñ)

  17,000    8

Pulte Homes, Inc. (Ñ)

  15,247    167

Regal-Beloit Corp. (Ñ)

  255    10

Ritchie Bros Auctioneers, Inc. (Ñ)

  15,305    328

Robbins & Myers, Inc. (Ñ)

  4,085    66

SBA Communications Corp.
Class A (Æ)(Ñ)

  12,126    198

Standex International Corp.

  57    1

Steelcase, Inc. Class A (Ñ)

  317    2

Symmetricom, Inc. (Æ)(Ñ)

  783    3

Technitrol, Inc.

  3,100    11

Tecumseh Products Co. Class A (Æ)(Ñ)

  4,519    43

Terex Corp. (Æ)

  1,700    29

Thermadyne Holdings Corp. (Æ)(Ñ)

  3,575    25

Thomas & Betts Corp. (Æ)

  1,725    41

Ultratech, Inc. (Æ)

  2,739    33

Waters Corp. (Æ)

  4,819    177
       
      7,010
       
Technology - 11.8%      

3Com Corp. (Æ)(Ñ)

  52,949    121

Acxiom Corp.

  24,106    195
   Principal
Amount ($)
or Shares
    Market
Value
$

Adaptec, Inc. (Æ)(Ñ)

  91,165    301

ADC Telecommunications, Inc. (Æ)(Ñ)

  19,000    104

Adtran, Inc. (Ñ)

  5,900    88

Affiliated Computer Services, Inc. Class A (Æ)

  6,800    312

American Reprographics Co. (Æ)

  6,488    45

American Science & Engineering,
Inc. (Ñ)

  2,650    196

Amkor Technology, Inc. (Æ)(Ñ)

  30,300    66

Amphenol Corp. Class A

  12,295    295

Ansys, Inc. (Æ)(Ñ)

  7,976    222

Applied Micro Circuits Corp. (Æ)(Ñ)

  16,900    66

Arrow Electronics, Inc. (Æ)

  10,750    203

Autodesk, Inc. (Æ)(Ñ)

  1,804    35

Avnet, Inc. (Æ)

  5,750    105

Avocent Corp. (Æ)(Ñ)

  3,052    55

AVX Corp. (Ñ)

  30,600    243

Benchmark Electronics, Inc. (Æ)

  16,600    212

BMC Software, Inc. (Æ)(Ñ)

  3,508    94

Bookham, Inc. (Æ)(Ñ)

  5,800    3

Broadcom Corp. Class A (Æ)(Ñ)

  8,303    141

Cadence Design Systems, Inc. (Æ)(Ñ)

  6,911    25

Cavium Networks, Inc. (Æ)(Ñ)

  3,800    40

Celestica, Inc. (Æ)(Ñ)

  18,350    85

Ciber, Inc. (Æ)(Ñ)

  23,200    112

Computer Sciences Corp. (Æ)

  2,159    76

Compuware Corp. (Æ)(Ñ)

  24,708    167

COMSYS IT Partners, Inc. (Æ)(Ñ)

  1,500    3

Comtech Telecommunications
Corp. (Æ)(Ñ)

  4,200    192

Concur Technologies, Inc. (Æ)(Ñ)

  7,800    256

Constant Contact, Inc. (Æ)(Ñ)

  8,950    119

CSG Systems International, Inc. (Æ)(Ñ)

  10,097    176

Cubic Corp. (Ñ)

  4,300    117

Digital River, Inc. (Æ)

  3,440    85

Emulex Corp. (Æ)

  3,000    21

Equinix, Inc. (Æ)(Ñ)

  6,280    334

Extreme Networks (Æ)(Ñ)

  1,508    3

F5 Networks, Inc. (Æ)(Ñ)

  3,776    86

Flextronics International, Ltd. (Æ)(Ñ)

  72,775    186

Flir Systems, Inc. (Æ)(Ñ)

  9,330    286

Hittite Microwave Corp. (Æ)(Ñ)

  5,891    174

Hutchinson Technology, Inc. (Æ)(Ñ)

  3,600    12

II-VI, Inc. (Æ)(Ñ)

  78    1

Imation Corp. (Ñ)

  2,366    32

Informatica Corp. (Æ)(Ñ)

  13,950    192

Ingram Micro, Inc. Class A (Æ)

  25,371    340

Integrated Device Technology,
Inc. (Æ)(Ñ)

  34,200    192

InterDigital, Inc. (Æ)(Ñ)

  2,089    57

International Rectifier Corp. (Æ)

  19,233    260

Intersil Corp. Class A

  16,000    147

Interwoven, Inc. (Æ)

  10,900    137

Intuit, Inc. (Æ)(Ñ)

  7,375    175

Jabil Circuit, Inc.

  43,300    292

JDA Software Group, Inc. (Æ)

  3,700    49

JDS Uniphase Corp. (Æ)(Ñ)

  31,979    117

LSI Corp. (Æ)(Ñ)

  5,066    17

Mantech International Corp.
Class A (Æ)

  3,400    184

Mentor Graphics Corp. (Æ)(Ñ)

  8,702    45

 

Aggressive Equity Fund 31


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
      

Methode Electronics, Inc.

  2,900    20

Micrel, Inc. (Ñ)

  38,090    278

Micros Systems, Inc. (Æ)(Ñ)

  12,614    206

Microsemi Corp. (Æ)

  1,078    14

MicroStrategy, Inc. Class A (Æ)(Ñ)

  1,621    60

Monolithic Power Systems, Inc. (Æ)(Ñ)

  8,490    107

NAM TAI Electronics, Inc.

  30,100    166

National Semiconductor Corp. (Ñ)

  5,757    58

NCR Corp. (Æ)

  10,787    152

Ness Technologies, Inc. (Æ)

  2,700    12

NetApp, Inc. (Æ)

  5,375    75

Netezza Corp. (Æ)

  4,050    27

Netlogic Microsystems, Inc. (Æ)(Ñ)

  8,117    179

Nice Systems, Ltd. - ADR (Æ)

  21,404    481

Novatel Wireless, Inc. (Æ)

  3,400    16

Novell, Inc. (Æ)

  1,100    4

OSI Systems, Inc. (Æ)

  13,248    183

PerkinElmer, Inc.

  5,997    83

Perot Systems Corp. Class A (Æ)

  1,080    15

QLogic Corp. (Æ)(Ñ)

  9,100    122

Quantum Corp. (Æ)(Ñ)

  17,500    6

Rackspace Hosting, Inc. (Æ)

  10,956    59

SAIC, Inc. (Æ)

  15,778    307

Sanmina-SCI Corp. (Æ)(Ñ)

  119,573    56

Sapient Corp. (Æ)(Ñ)

  1,968    9

Silicon Image, Inc. (Æ)(Ñ)

  9,653    41

Solera Holdings, Inc. (Æ)

  13,402    323

Standard Microsystems Corp. (Æ)

  167    3

Stanley, Inc. (Æ)(Ñ)

  6,600    239

Sunpower Corp. Class A (Æ)(Ñ)

  800    30

Sybase, Inc. (Æ)(Ñ)

  17,078    423

Synaptics, Inc. (Æ)(Ñ)

  1,756    29

Syniverse Holdings, Inc. (Æ)

  36,615    437

SYNNEX Corp. (Æ)(Ñ)

  5,600    63

Synopsys, Inc. (Æ)

  5,870    109

TeleCommunication Systems, Inc. (Æ)

  13,700    118

Tellabs, Inc. (Æ)

  57,700    238

Teradata Corp. (Æ)

  2,282    34

TIBCO Software, Inc. (Æ)(Ñ)

  14,555    76

Tier Technologies, Inc. Class B (Æ)

  54,387    294

Trimble Navigation, Ltd. (Æ)(Ñ)

  6,061    131

TTM Technologies, Inc. (Æ)(Ñ)

  3,400    18

Tyler Technologies, Inc. (Æ)(Ñ)

  7,600    91

Utstarcom, Inc. (Æ)(Ñ)

  10,141    19

Varian Semiconductor Equipment Associates, Inc. (Æ)(Ñ)

  7,745    140

Verint Systems, Inc. (Æ)(Ñ)

  6,327    44

Vignette Corp. (Æ)(Ñ)

  3,820    36

Vishay Intertechnology, Inc. (Æ)

  74,595    255

Vocus, Inc. (Æ)(Ñ)

  10,952    199

Western Digital Corp. (Æ)

 ��15,258    175

White Electronic Designs Corp. (Æ)

  96,057    352
       
      14,506
       
   Principal
Amount ($)
or Shares
    Market
Value
$
Utilities - 5.1%      

AGL Resources, Inc. (Ñ)

  9,529    299

Allete, Inc.

  3,300    106

Alliant Energy Corp.

  9,733    284

Atlantic Tele-Network, Inc.

  1,600    42

Atmos Energy Corp.

  18,517    439

Avista Corp.

  11,984    232

California Water Service Group

  3,400    158

CenturyTel, Inc. (Ñ)

  12,256    335

Cleco Corp. (Ñ)

  11,096    253

CMS Energy Corp. (Ñ)

  13,600    137

Constellation Energy Group, Inc. (Ñ)

  1,783    45

El Paso Electric Co. (Æ)

  2,000    36

Embarq Corp.

  1,415    51

Energen Corp.

  2,926    86

Frontier Communications Corp.

  2,179    19

Hawaiian Electric Industries, Inc. (Ñ)

  2,400    53

Idacorp, Inc. (Ñ)

  12,685    374

Integrys Energy Group, Inc. (Ñ)

  600    26

Iowa Telecommunications Services, Inc. (Ñ)

  5,815    83

Laclede Group, Inc. (The)

  2,800    131

Leap Wireless International, Inc. (Æ)(Ñ)

  4,316    116

MDU Resources Group, Inc.

  5,037    109

MGE Energy, Inc. (Ñ)

  300    10

New Jersey Resources Corp. (Ñ)

  9,550    376

Nicor, Inc. (Ñ)

  4,400    153

NII Holdings, Inc. (Æ)(Ñ)

  7,400    134

Northwest Natural Gas Co. (Ñ)

  2,300    102

NTELOS Holdings Corp.

  50    1

OGE Energy Corp. (Ñ)

  4,506    116

Oneok, Inc.

  1,300    38

Otter Tail Corp. (Ñ)

  6,600    154

Pepco Holdings, Inc.

  2,500    44

Portland General Electric Co.

  4,900    95

Premiere Global Services, Inc. (Æ)

  20,015    172

SCANA Corp. (Ñ)

  2,519    90

Southwest Gas Corp. (Ñ)

  13,840    349

Southwest Water Co. (Ñ)

  2,500    8

TECO Energy, Inc. (Ñ)

  7,600    94

Telephone & Data Systems, Inc.

  1,100    35

UGI Corp.

  27,478    671

US Cellular Corp. (Æ)

  1,100    48

USA Mobility, Inc. (Æ)

  3,600    42

Westar Energy, Inc.

  2,318    47

Windstream Corp. (Ñ)

  7,562    70
       
      6,263
       
Total Common Stocks
(cost $145,506)
      112,326
       
Short-Term Investments - 9.5%    

Russell Investment Company Russell
Money Market Fund

  11,729,000    11,729
       
Total Short-Term Investments
(cost $11,729)
      11,729
       

 

32 Aggressive Equity Fund


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   Principal
Amount ($)
or Shares
    Market
Value
$
 
      
Other Securities - 39.2%      

State Street Securities Lending Quality
Trust (×)

  51,074,560    48,271 
        
Total Other Investments
(cost $51,075)
      48,271 
        
Total Investments - 140.0%
(identified cost $208,310)
      172,326 
Other Assets and Liabilities,
Net - (40.0%)
      (49,238)
        
Net Assets - 100.0%      123,088 
        

 

A portion of the portfolio has been fair valued as of period end.

 

See accompanying notes which are an integral part of the financial statements.

 

Aggressive Equity Fund 33


Table of Contents

Russell Investment Funds

Aggressive Equity Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except contracts)

 

Futures Contracts    Number of
Contracts
    Notional
Amount
    Expiration
Date
 Unrealized
Appreciation
(Depreciation)
$
              
              
Long Positions              

Russell 2000 Mini Index (CME)

    274    USD 13,642    03/09 643
               

Total Unrealized Appreciation (Depreciation) on Open Futures Contracts

              643
               

 

 

Presentation of Portfolio Holdings — December 31, 2008

 

Portfolio Summary    % of Net
Assets
 
    

Auto and Transportation

    3.9 

Consumer Discretionary

    15.1 

Consumer Staples

    2.7 

Financial Services

    18.0 

Health Care

    16.1 

Integrated Oils

    0.1 

Materials and Processing

    7.7 

Miscellaneous

    1.3 

Other Energy

    3.8 

Producer Durables

    5.7 

Technology

    11.8 

Utilities

    5.1 

Short-Term Investments

    9.5 

Other Securities

    39.2 
      

Total Investments

    140.0 

Other Assets and Liabilities, Net

    (40.0)
      
    100.0 
      

Futures Contracts

    0.5 

 

See accompanying notes which are an integral part of the financial statements.

 

34 Aggressive Equity Fund


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Table of Contents

Russell Investment Funds

Non-U.S. Fund

Portfolio Management Discussion and Analysis — December 31, 2008 (Unaudited)

 

 

LOGO

 

Non-U.S. Fund 
      Total
Return
 

1 Year

    (42.79)%

5 Years

    0.93

10 Years

    0.94

 

MSCI EAFE® Index Net (USD) ** 
      Total
Return
 

1 Year

    (43.38)%

5 Years

    1.66

10 Years

    0.80

 

 

* Assumes initial investment on January 1, 1999.

 

** Morgan Stanley Capital International Europe, Australia, Far East (MSCI EAFE) Index is an index composed of an arithmetic, market value-weighted average of the performance of approximately 1,600 securities listed on the stock exchange of the countries of Europe, Australia, and the Far East. The index is calculated on a total-return basis, which includes reinvestment of gross dividends before deduction of withholding taxes.

 

§ Annualized.

The performance shown in this section does not reflect any Insurance Company Separate Account or Policy Charges. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results.

 

36 Non-U.S. Fund


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Portfolio Management Discussion — December 31, 2008 (Unaudited)

 

 

 

The Non-US Fund (the “Fund”) allocates most of its assets among multiple money managers. Russell Investment Management Company (“RIMCo”), as the Fund’s advisor, may change the allocation of the Fund’s assets among money managers at any time. An exemptive order from the Securities and Exchange Commission (SEC) permits RIMCo to engage or terminate a money manager at any time, subject to the approval by the Fund’s Board without a shareholder vote. Pursuant to the terms of the exemptive order, the Fund is required to notify its shareholders within 60 days of when a money manager begins providing services. The Fund currently has four money managers.

What is the Fund’s investment objective?

The Fund seeks to provide long term capital growth.

How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2008?

For the fiscal year ended December 31, 2008, the Non-U.S. Fund lost 42.79%. This compared to its benchmark the MSCI EAFE® Index Net (USD), which lost 43.38%. The Fund’s performance includes operating expenses, whereas Index returns are unmanaged and do not include expenses of any kind.

For the year ended December 31, 2008, the Lipper® International Core Funds (VIP) Average lost 43.13%. This result serves as a peer comparison and is expressed net of operating expenses.

How did the market conditions described in the Market Summary report affect the Fund’s performance?

The market environment proved extremely challenging. Precipitous changes in market leadership and economic trends left few places for managers to find protection from falling prices. Increasingly negative sentiment and rising risk aversion resulted in indiscriminate selling of stocks. Nowhere was this more evident than in the financials sector where managers sought safe havens in companies with less direct exposure to the credit crisis and stronger balance sheets they believed would offer competitive advantages in the midst of deteriorating conditions.

The Fund’s larger exposure to defensive strategies and its rotation earlier in the year into more defensive sectors, which fared better in this market environment, contributed to its performance relative to the MSCI EAFE Index. The Fund’s sector positioning, in the form of an overweight to the consumer staples and health care sectors, two relative outperforming sectors contributed positively to benchmark relative performance. The Fund’s underweight and favorable stock selection in the weak performing financials sector contributed positively to benchmark-relative results.

How did the investment strategies and techniques employed by the Fund and its money managers affect its performance?

The Fund’s multi-style discipline provided some risk control in the period given the extreme variability in investment style and

market leadership during the year. More defensive strategies helped moderate the impact of strategies more focused on stronger economic conditions. Wellington Management Company, LLP, the Fund’s aggressive, high growth manager, underperformed in this market environment. The combination of downward earnings revisions (i.e., lowered growth expectations) and contraction in valuations contributed to Wellington’s underperformance. However, the Fund’s more defensive managers were more effective in moderating downside risk. MFS Institutional Advisors, Inc., the Fund’s quality growth manager, benefited from exposure to the more stable earnings trends of consumer staples and health care, but also managed to avoid much of the volatility in the financials and materials sectors with a combination of underweighted positions and more defensive stock picks. Altrinsic Global Advisors, LLC, the Fund’s value manager, provided the best performance of the Fund’s four managers. Its quality value orientation effectively gained exposure to many of the market’s less negative trends. Altrinsic was particularly effective in its financial stock selection. The firm’s emphasis on Japanese banks, which it believed to be more insulated from the housing market problems affecting U.S., U.K., and other European banks, contributed positively to performance. The firm’s large overweight to consumer staples also contributed positively to its relative performance.

The Fund’s performance shown throughout this report was based on valuations calculated in accordance with Generally Accepted Accounting Principles (GAAP) and in accordance with a newly effective accounting statement (SFAS 157), reflects the December 31, 2008 market value of the pooled investment vehicle in which the Fund invested its cash collateral received in securities lending transactions. This market value is lower than the vehicle’s amortized cost per unit. This had a negative impact on the Fund’s benchmark relative performance.

Describe any changes to the Fund’s structure or the money manager line-up.

There were no changes to the Fund’s structure or money manager line-up during the year.

 

Money Managers as of
December 31, 2008
 Styles
Altrinsic Global Advisors, LLC Value
AQR Capital Management, LLC Market Oriented
MFS Institutional Advisors, Inc. Growth
Wellington Management Company, LLP Growth

The views expressed in this report reflect those of the portfolio managers only through the end of the period covered by the report. These views do not necessarily represent the views of RIMCo, or any other person in RIMCo or any other affiliated organization. These views are subject to change at any time based upon market conditions or other events, and RIMCo disclaims any responsibility to update the views contained herein. These views should not be relied on as investment advice and, because investment decisions for Russell


 

Non-U.S. Fund 37


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Portfolio Management Discussion — December 31, 2008 (Unaudited)

 

 

 

Investment Funds (RIF) are based on numerous factors, should not be relied on as an indication of investment decisions of any RIF Fund.

 

38 Non-U.S. Fund


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Shareholder Expense Example — December 31, 2008 (Unaudited)

 

 

 

Fund Expenses

The following disclosure provides important information regarding each Fund’s Expense Example, which appears on each Fund’s individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund.

Example

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2008 to December 31, 2008.

Actual Expenses

The information in the table under the heading “Actual Performance” provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The information in the table under the heading “Hypothetical Performance (5% return before expenses)” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading “Hypothetical Performance (5% return before expenses)” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The fee and expenses shown in this section do not reflect any Insurance Company Separate Account or Policy Charges.

 

   Actual
Performance
  Hypothetical
Performance
(5% return
before expenses)
    

Beginning Account Value

    

July 1, 2008

  $1,000.00  $1,000.00

Ending Account Value

    

December 31, 2008

  $645.38  $1,019.36

Expenses Paid During Period*

  $4.76  $5.84

 

*Expenses are equal to the Fund’s annualized expense ratio of 1.15% (representing the one-half year period annualized), multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed. Without the waiver and/or reimbursement, expenses would have been higher.

 

Non-U.S. Fund 39


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Schedule of Investments — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    

Market

Value
$

      
Common Stocks - 85.7%    
Australia - 1.8%      

ABC Learning Centres, Ltd.

  5,058    2

AGL Energy, Ltd.

  2,214    24

Allco Finance Group, Ltd. (Æ)

  99,445    10

Amcor, Ltd.

  9,245    37

AMP, Ltd.

  3,583    14

Ansell, Ltd. - GDR

  9,646    85

APN News & Media, Ltd.

  3,571    6

Aristocrat Leisure, Ltd.

  3,217    9

Asciano Group

  3,522    4

Austereo Group, Ltd.

  1,180    1

Australia & New Zealand Banking Group, Ltd.

  10,048    108

AWB, Ltd.

  8,288    15

AXA Asia Pacific Holdings, Ltd.

  8,105    28

BHP Billiton, Ltd.

  24,544    517

BlueScope Steel, Ltd.

  20,491    50

Brambles, Ltd.

  12,055    63

Caltex Australia, Ltd.

  1,581    8

Centennial Coal Co., Ltd.

  1,311    3

CFS Retail Property Trust (ö)

  11,495    15

Coca-Cola Amatil, Ltd.

  2,513    16

Commonwealth Bank of Australia

  9,685    196

CSL, Ltd.

  17,686    418

Dexus Property Group (ö)

  19,680    11

Downer EDI, Ltd.

  24,211    65

Fairfax Media, Ltd.

  2,156    2

Felix Resources, Ltd.

  10,357    64

Flight Centre, Ltd.

  1,861    10

Foster’s Group, Ltd.

  35,811    138

Goodman Group (ö)

  11,147    6

GPT Group (ö)

  25,815    17

Insurance Australia Group, Ltd.

  5,003    14

Macquarie Infrastructure Group

  8,462    10

Macquarie Office Trust (ö)

  20,228    3

Metcash, Ltd.

  14,233    44

Mirvac Group (ö)

  7,928    7

Mount Gibson Iron, Ltd. (Æ)

  46,934    15

National Australia Bank, Ltd.

  38,026    557

Newcrest Mining, Ltd.

  29,968    711

Origin Energy, Ltd.

  5,224    59

PaperlinX, Ltd.

  21,919    11

Qantas Airways, Ltd.

  24,638    45

QBE Insurance Group, Ltd.

  19,514    355

Rio Tinto, Ltd.

  1,615    43

Santos, Ltd.

  4,216    44

Spotless Group, Ltd.

  2,419    5

Stockland (ö)

  8,441    24

Suncorp-Metway, Ltd.

  13,187    78

TABCORP Holdings, Ltd.

  11,727    57

Telstra Corp., Ltd.

  43,915    118

Wesfarmers, Ltd.

  3,696    47

Westfield Group (ö)

  11,911    110

Westpac Banking Corp.

  19,473    232

Woolworths, Ltd.

  7,174    134
       
      4,665
       
   

Principal

Amount ($)
or Shares

    

Market

Value
$

Austria - 0.3%      

Erste Bank der Oesterreichischer Sparkassen AG (Ñ)

  29,622    694
       
Belgium - 0.2%      

Delhaize Group

  176    11

Euronav NV

  2,483    34

Hansen Transmissions International NV (Æ)

  193,827    327

Nationale A Portefeuille

  1,525    74

Tessenderlo Chemie NV

  2,988    91

Umicore

  2,248    44
       
      581
       
Bermuda - 0.3%      

Catlin Group, Ltd.

  6,829    43

Cheung Kong Infrastructure Holdings, Ltd.

  2,000    8

Chinese Estates Holdings, Ltd.

  18,000    21

Esprit Holdings, Ltd.

  6,652    38

First Pacific Co.

  4,000    1

Giordano International, Ltd.

  11,474    3

Great Eagle Holdings, Ltd.

  1,000    1

Hongkong Land Holdings, Ltd.

  1,000    2

Jardine Matheson Holdings, Ltd.

  400    7

Li & Fung, Ltd.

  286,000    493

Mongolia Energy Co. Ltd (Æ)

  1,000    

Noble Group, Ltd.

  11,000    8

Orient Overseas International, Ltd.

  8,300    19

Pacific Basin Shipping, Ltd.

  6,000    3

Seadrill, Ltd.

  17,850    145

Texwinca Holdings, Ltd.

  16,000    7

VTech Holdings, Ltd.

  1,133    5
       
      804
       
Brazil - 0.4%      

Cia Vale do Rio Doce - ADR (Ñ)

  29,700    360

Petroleo Brasileiro SA - ADR

  19,300    472

Unibanco - Uniao de Bancos Brasileiros SA - ADR

  2,600    168
       
      1,000
       
Canada - 1.5%      

Barrick Gold Corp.

  21,100    776

Canadian National Railway Co.

  23,330    857

Canadian Natural Resources, Ltd.

  11,300    446

Potash Corp. of Saskatchewan

  5,900    432

Research In Motion, Ltd. (Æ)(Ñ)

  9,900    402

Rogers Communications, Inc.

  13,600    403

Suncor Energy, Inc.

  23,200    446
       
      3,762
       
Cayman Islands - 0.1%      

Ctrip.com International, Ltd. (Ñ)

  8,500    202

Hutchison Telecommunications International, Ltd.

  71,457    19

LDK Solar Co., Ltd. - ADR (Æ)(Ñ)

  5,300    70
       
      291
       

 

40 Non-U.S. Fund


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    

Market

Value
$

      
China - 0.2%      

China Communications Construction Co., Ltd. Class H

  295,000    369

China Merchants Bank Co., Ltd.

  104,000    195
       
      564
       
Czech Republic - 0.2%      

Komercni Banka AS (Ñ)

  2,918    449
       
Denmark - 0.3%      

AP Moller - Maersk A/S

  49    263

H Lundbeck A/S (Ñ)

  2,289    48

Novo Nordisk A/S Series B

  234    12

TDC A/S

  7    

Vestas Wind Systems A/S (Æ)

  8,856    526
       
      849
       
Finland - 0.8%      

Fortum OYJ

  15,513    333

Konecranes OYJ

  3,872    66

Nokia OYJ

  90,439    1,402

Oriola-KD OYJ

  3,393    6

Outokumpu OYJ

  5,849    69

Rautaruukki OYJ

  2,789    48

Sanoma OYJ

  1,652    22

Stora Enso OYJ Class R

  3,481    27
       
      1,973
       
France - 12.3%      

Air Liquide SA

  13,283    1,215

Alcatel-Lucent - ADR (Æ)(Ñ)

  10,008    22

Alstom SA

  853    50

AXA SA

  87,852    1,959

bioMerieux

  733    61

BNP Paribas

  18,902    798

Bouygues

  229    10

Carrefour SA (Ñ)

  39,160    1,504

Christian Dior SA

  579    33

Ciments Francais SA

  461    39

CNP Assurances

  3,062    222

Credit Agricole SA

  5,796    66

Eramet

  155    30

France Telecom SA

  42,984    1,202

GDF Suez (Ñ)

  55,393    2,743

Ipsos

  466    13

L’Oreal SA (Ñ)

  10,667    927

Lagardere SCA

  2,958    120

Legrand SA (Ñ)

  45,299    870

LVMH Moet Hennessy Louis Vuitton SA

  35,062    2,356

M6-Metropole Television

  1,694    33

Neopost SA

  2,450    222

Nexans SA (Ñ)

  1,333    80

Pernod-Ricard SA (Ñ)

  17,684    1,311

PPR (Ñ)

  2,485    162

Sanofi-Aventis SA

  48,675    3,092

Schneider Electric SA (Ñ)

  25,940    1,938
   

Principal

Amount ($)
or Shares

    

Market

Value
$

Sodexo

  876    48

Teleperformance - GDR

  13,303    371

Thales SA

  29,699    1,239

Total SA

  92,896    5,064

UBISOFT Entertainment (Æ)

  7,641    149

Unibail-Rodamco (ö)

  140    21

Valeo SA (Ñ)

  5,813    86

Vallourec (Ñ)

  385    44

Veolia Environnement

  3,912    123

Vivendi

  99,323    3,234
       
      31,457
       
Germany - 7.3%      

Allianz SE

  17,268    1,852

BASF SE

  14,826    586

Bayer AG (Ñ)

  31,705    1,862

Commerzbank AG (Ñ)

  8,596    82

Daimler AG

  3,075    117

Deutsche Bank AG (Ñ)

  5,466    218

Deutsche Boerse AG

  9,300    677

Deutsche Lufthansa AG

  5,694    90

Deutsche Postbank AG (Æ)(Ñ)

  2,274    50

Deutsche Telekom AG

  37,023    563

E.ON AG

  47,189    1,908

Fielmann AG

  357    23

Fresenius Medical Care AG & Co.

  8,643    405

Generali Deutschland Holding AG

  319    33

Hannover Rueckversicherung AG (Æ)

  14,074    448

Lanxess AG

  6,445    125

Linde AG

  24,080    2,038

Merck KGAA

  14,690    1,336

Metro AG

  21,121    856

MTU Aero Engines Holding AG

  4,491    124

Muenchener Rueckversicherungs AG

  5,451    857

Norddeutsche Affinerie AG

  340    14

RWE AG

  3,282    295

Salzgitter AG

  5,485    433

SAP AG

  38,020    1,363

Siemens AG

  13,069    979

Symrise AG

  70,217    992

ThyssenKrupp AG

  228    6

Tognum AG

  6,881    88

Volkswagen AG

  548    192

Wacker Chemie AG

  709    75

Wincor Nixdorf AG

  1,073    51
       
      18,738
       
Hong Kong - 0.7%      

BOC Hong Kong Holdings, Ltd.

  37,500    43

Cheung Kong Holdings, Ltd.

  65,340    623

China Mobile, Ltd.

  35,500    360

CLP Holdings, Ltd.

  15,500    105

Hang Lung Group, Ltd.

  8,763    27

Hang Lung Properties, Ltd. - ADR

  9,000    20

Hang Seng Bank, Ltd.

  3,200    42

Henderson Land Development Co., Ltd.

  5,000    19

Hong Kong & China Gas Co., Ltd.

  2,000    3

 

Non-U.S. Fund 41


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    

Market

Value
$

      

Hong Kong Exchanges and Clearing, Ltd.

  6,654    64

HongKong & Shanghai Hotels (The)

  1,500    1

HongKong Electric Holdings

  13,500    76

Hopewell Holdings

  9,000    30

Hutchison Whampoa, Ltd.

  19,000    96

Hysan Development Co., Ltd.

  20,000    33

Industrial and Commercial Bank of China Asia, Ltd.

  28,000    30

Link REIT (The) (ö)

  13,500    22

New World Development, Ltd.

  16,000    16

Sun Hung Kai Properties, Ltd.

  7,667    64

Swire Pacific, Ltd.

  8,000    55

Television Broadcasts, Ltd.

  9,000    30

Wharf Holdings, Ltd.

  7,000    19

Wheelock & Co., Ltd.

  13,205    29
       
      1,807
       
India - 0.2%      

Infosys Technologies, Ltd. - ADR (Ñ)

  25,620    629
       
Indonesia - 0.0%      

Telekomunikasi Indonesia Tbk PT - ADR

  1,750    44
       
Israel - 0.5%      

Teva Pharmaceutical Industries, Ltd. - ADR (Ñ)

  29,000    1,235
       
Italy - 1.7%      

Alleanza Assicurazioni SpA (Ñ)

  93,388    761

Ansaldo STS SpA

  38,948    549

Banco Popolare SC

  10,472    73

Buzzi Unicem SpA

  3,159    52

Credito Emiliano SpA

  3,435    18

Davide Campari-Milano SpA

  11,086    75

Enel SpA

  23,244    149

ENI SpA

  62,559    1,482

Fondiaria-Sai SpA

  50    1

Indesit Co. SpA

  7,935    48

Intesa Sanpaolo SpA (Æ)

  195,484    704

Maire Tecnimont SpA

  6,342    13

Mediaset SpA (Ñ)

  16,214    93

Milano Assicurazioni SPA

  6,076    19

Pirelli & C SpA

  146,470    54

Saras SpA

  4,025    14

Terna Rete Elettrica Nazionale SpA

  49,456    162

UniCredit SpA (Æ)

  11,873    29

Unione di Banche Italiane SCPA

  657    9

Unipol Gruppo Finanziario SpA

  9,537    15
       
      4,320
       
Japan - 19.1%      

77 Bank, Ltd. (The)

  5,000    27

Aeon Credit Service Co., Ltd. (Ñ)

  41,000    434

Aiful Corp. (Ñ)

  4,400    13

Aioi Insurance Co., Ltd.

  8,000    42

Aisin Seiki Co., Ltd.

  3,100    44

Alps Electric Co., Ltd.

  7,300    36
   

Principal

Amount ($)
or Shares

    

Market

Value
$

Amada Co., Ltd.

  5,000    24

Aruze Corp.

  700    7

Asahi Glass Co., Ltd.

  6,000    34

Astellas Pharma, Inc.

  13,400    545

Bank of Yokohama, Ltd. (The)

  165,366    978

Bridgestone Corp.

  3,400    51

Brother Industries, Ltd. (Ñ)

  9,700    58

Calsonic Kansei Corp.

  18,000    26

Canon Marketing Japan, Inc. (Ñ)

  7,600    123

Canon, Inc.

  98,400    3,089

Casio Computer Co., Ltd.

  5,900    37

Central Glass Co., Ltd.

  20,000    81

Central Japan Railway Co.

  4    35

Chubu Electric Power Co., Inc.

  5,300    161

Circle K Sunkus Co., Ltd. (Ñ)

  6,600    119

Coca-Cola West Co., Ltd. (Ñ)

  2,200    48

COMSYS Holdings Corp.

  5,000    46

Credit Saison Co., Ltd. (Ñ)

  1,000    14

Dai Nippon Printing Co., Ltd.

  11,000    121

Daiei, Inc. (The) (Æ)(Ñ)

  6,500    42

Daiichi Chuo Kisen Kaisha

  9,000    25

Daiichi Sankyo Co., Ltd.

  3,200    76

Daishi Bank, Ltd. (The)

  10,000    44

Daito Trust Construction Co., Ltd.

  500    26

Daiwa Securities Group, Inc. (Ñ)

  87,450    521

Denso Corp.

  7,700    128

DIC Corp.

  4,000    8

Doutor Nichires Holdings Co., Ltd.

  700    15

East Japan Railway Co. (Å)

  52    415

Ebara Corp. (Ñ)

  13,000    30

Eisai Co., Ltd. (Ñ)

  6,800    282

Exedy Corp.

  2,600    26

FamilyMart Co., Ltd.

  2,100    91

Fanuc, Ltd.

  19,600    1,394

Fuji Fire & Marine Insurance Co., Ltd. (The)

  22,000    33

Fuji Media Holdings, Inc.

  554    793

FUJIFILM Holdings Corp.

  4,800    106

Fujitsu, Ltd.

  3,000    15

Funai Electric Co., Ltd.

  1,900    39

Furukawa Electric Co., Ltd.

  2,000    10

FUTABA Corp.

  1,500    19

Glory, Ltd.

  5,100    100

Gunze, Ltd.

  5,000    16

H2O Retailing Corp. (Ñ)

  6,000    45

Hachijuni Bank, Ltd. (The) (Ñ)

  3,000    17

Hakuhodo DY Holdings, Inc.

  450    25

Higo Bank, Ltd. (The)

  9,000    57

Hino Motors, Ltd.

  8,000    16

Hirose Electric Co., Ltd. (Ñ)

  5,200    525

Hitachi Cable, Ltd.

  13,000    29

Hitachi Capital Corp.

  4,800    60

Hitachi High-Technologies Corp. (Ñ)

  2,100    34

Hitachi Software Engineering Co., Ltd.

  3,300    51

Hitachi Transport System, Ltd.

  5,000    75

Hitachi, Ltd.

  22,000    85

Hokkoku Bank, Ltd. (The) (Ñ)

  12,000    42

 

42 Non-U.S. Fund


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    

Market

Value
$

      

Honda Motor Co., Ltd.

  8,800    191

Hoya Corp.

  63,900    1,110

Inpex Holdings, Inc.

  186    1,470

Isuzu Motors, Ltd.

  47,000    60

Itoham Foods, Inc.

  22,000    80

JFE Holdings, Inc. (Ñ)

  2,300    61

JFE Shoji Holdings, Inc.

  16,000    49

JGC Corp.

  3,000    45

Joyo Bank, Ltd. (The) (Ñ)

  266,940    1,521

JSR Corp. (Ñ)

  8,200    92

Kagoshima Bank, Ltd. (The)

  12,000    100

Kaken Pharmaceutical Co., Ltd.

  6,000    66

Kamigumi Co., Ltd.

  6,000    54

Kandenko Co., Ltd. (Ñ)

  2,000    16

Kaneka Corp.

  10,000    64

Kansai Electric Power Co., Inc. (The)

  700    20

Kansai Paint Co., Ltd.

  21,000    107

Kao Corp.

  64,000    1,938

KDDI Corp.

  14    100

Keihin Corp. (Ñ)

  9,900    72

Keiyo Bank, Ltd. (The)

  2,000    10

Keyence Corp.

  3,556    728

Kinden Corp.

  4,000    36

Kintetsu World Express, Inc. (Ñ)

  1,000    20

Kobayashi Pharmaceutical Co., Ltd. (Ñ)

  500    21

Komatsu, Ltd. (Ñ)

  17,500    222

Komori Corp.

  6,800    75

Konica Minolta Holdings, Inc.

  24,000    186

Kose Corp.

  60,640    1,524

Kuraray Co., Ltd. (Ñ)

  9,000    70

Kyocera Corp.

  1,100    79

Kyoei Steel, Ltd. (Ñ)

  1,400    28

Lawson, Inc.

  1,700    98

Leopalace21 Corp.

  2,300    23

Lintec Corp.

  3,800    53

Matsumotokiyoshi Holdings Co., Ltd.

  1,000    21

Mediceo Paltac Holdings Co., Ltd. (Æ)

  1,300    16

MID Reit, Inc. Class A (ö)

  180    345

Miraca Holdings, Inc.

  1,500    33

Mitsubishi Corp.

  5,400    76

Mitsubishi Electric Corp.

  4,000    25

Mitsubishi Estate Co., Ltd.

  8,000    132

Mitsubishi Heavy Industries, Ltd.

  5,000    22

Mitsubishi Materials Corp.

  17,000    43

Mitsubishi UFJ Financial Group, Inc.

  155,992    968

Mitsubishi UFJ Lease & Finance Co., Ltd. (Ñ)

  2,610    66

Mitsui & Co., Ltd.

  13,000    133

Mitsui Fudosan Co., Ltd.

  27,000    449

Mitsui OSK Lines, Ltd.

  8,000    49

Mitsui Sumitomo Insurance Group Holdings, Inc.

  53,200    1,697

Mizuho Financial Group, Inc. (Ñ)(Å)

  168    501

Musashino Bank, Ltd. (The)

  900    35

Nachi-Fujikoshi Corp.

  3,000    6

Namco Bandai Holdings, Inc.

  5,000    55

NEC Corp. (Ñ)

  21,000    70
   

Principal

Amount ($)
or Shares

    

Market

Value
$

NEC Electronics Corp. (Æ)

  3,600    34

NGK Insulators, Ltd.

  4,000    45

Nichirei Corp.

  24,000    114

Nifco, Inc.

  3,000    31

Nintendo Co., Ltd.

  2,500    961

Nippon Building Fund, Inc. Class A (ö)

  2    22

Nippon Commercial Investment Corp. (ö)(Ñ)

  131    139

Nippon Electric Glass Co., Ltd.

  9,000    47

Nippon Express Co., Ltd.

  27,000    114

Nippon Kayaku Co., Ltd.

  11,000    57

Nippon Konpo Unyu Soko Co., Ltd.

  4,000    44

Nippon Oil Corp.

  17,000    86

Nippon Seiki Co., Ltd.

  1,000    6

Nippon Sheet Glass Co., Ltd.

  6,000    20

Nippon Shinyaku Co., Ltd.

  1,000    12

Nippon Steel Corp.

  26,000    85

Nippon Telegraph & Telephone Corp.

  30    167

Nippon Yusen KK (Ñ)

  10,000    62

Nipponkoa Insurance Co., Ltd.

  239,490    1,862

Nishimatsuya Chain Co., Ltd.

  1,600    15

Nissan Motor Co., Ltd.

  11,100    40

Nissan Shatai Co., Ltd.

  11,000    68

Nissay Dowa General Insurance Co., Ltd.

  4,000    25

Nisshin Seifun Group, Inc.

  5,000    66

Nissin Kogyo Co., Ltd.

  500    4

Nitto Denko Corp.

  2,300    44

Nomura Holdings, Inc. (Ñ)

  95,020    784

Nomura Research Institute, Ltd. (Ñ)

  69,165    1,313

NTN Corp. (Ñ)

  6,000    18

NTT DoCoMo, Inc.

  209    412

Okinawa Electric Power Co., Inc. (The)

  800    60

OKUMA Corp. (Æ)

  4,000    15

Omron Corp.

  21,700    291

Ono Pharmaceutical Co., Ltd.

  400    21

ORIX Corp.

  890    51

Osaka Gas Co., Ltd.

  25,000    115

Panasonic Corp.

  14,000    175

Promise Co., Ltd. (Ñ)

  1,150    29

QP Corp. (Ñ)

  6,800    93

Ricoh Co., Ltd.

  1,000    13

Rohm Co., Ltd.

  3,000    151

San-In Godo Bank, Ltd. (The)

  4,000    32

Sankyo Co., Ltd.

  1,900    96

SBI Holdings, Inc. (Æ)(Ñ)

  87    13

Seiko Epson Corp. (Ñ)

  2,800    45

Seino Holdings Corp.

  10,000    56

Sekisui House, Ltd.

  3,000    26

Seven & I Holdings Co., Ltd.

  43,260    1,482

Sharp Corp. (Ñ)

  7,000    50

Shima Seiki Manufacturing, Ltd. - GDR

  2,100    41

Shin-Etsu Chemical Co., Ltd.

  38,400    1,761

Shinsei Bank, Ltd. (Æ)

  18,000    28

Showa Shell Sekiyu KK

  8,000    79

SMC Corp.

  13,748    1,407

Snow Brand Milk Products Co., Ltd. (Ñ)

  11,000    42

Softbank Corp. (Ñ)

  50,600    916

Sony Corp. (Ñ)

  5,800    126

 

Non-U.S. Fund 43


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    

Market

Value
$

      

Stanley Electric Co., Ltd.

  3,300    35

Sugi Holdings Co., Ltd. - GDR (Ñ)

  43,899    1,171

Sumco Corp. (Ñ)

  3,000    38

Sumitomo Bakelite Co., Ltd. (Ñ)

  8,000    32

Sumitomo Corp.

  6,900    61

Sumitomo Forestry Co., Ltd. (Ñ)

  8,300    67

Sumitomo Metal Mining Co., Ltd.

  2,000    21

Sumitomo Mitsui Financial Group, Inc. (Ñ)

  40    179

Sumitomo Realty & Development Co., Ltd.

  2,000    30

Sumitomo Trust & Banking Co., Ltd. (The)

  202,033    1,196

Suzuken Co., Ltd.

  2,400    72

Suzuki Motor Corp.

  56,919    787

Taisho Pharmaceutical Co., Ltd.

  1,000    21

Takara Holdings, Inc.

  6,000    36

Takasago Thermal Engineering Co., Ltd.

  1,000    8

Takata Corp. (Ñ)

  2,300    16

Takeda Pharmaceutical Co., Ltd.

  7,100    368

Takefuji Corp. (Ñ)

  3,700    30

TDK Corp. (Ñ)

  1,600    59

THK Co., Ltd. (Ñ)

  30,620    322

Toagosei Co., Ltd.

  8,000    24

Toho Pharmaceutical Co., Ltd.

  2,990    41

Tohoku Electric Power Co., Inc.

  800    22

Tokai Rika Co., Ltd.

  7,800    68

Tokai Rubber Industries, Inc.

  8,100    67

Tokai Tokyo Securities Co., Ltd.

  5,000    14

Tokio Marine Holdings, Inc.

  3,800    111

Tokyo Electric Power Co., Inc. (The)

  5,400    180

Tokyo Electron, Ltd.

  8,800    309

Tokyo Gas Co., Ltd.

  27,000    137

Tokyo Steel Manufacturing Co., Ltd. (Ñ)

  8,800    92

Tokyu Land Corp.

  4,000    15

Toppan Forms Co., Ltd.

  800    10

Toppan Printing Co., Ltd. (Ñ)

  7,000    54

Toshiba TEC Corp.

  20,000    60

Toyo Ink Manufacturing Co., Ltd. (Ñ)

  3,000    9

Toyo Seikan Kaisha, Ltd.

  6,400    133

Toyoda Gosei Co., Ltd.

  2,300    27

Toyota Auto Body Co., Ltd.

  6,200    91

Toyota Motor Corp.

  15,800    517

Toyota Tsusho Corp.

  3,300    35

TS Tech Co., Ltd.

  1,135    7

TV Asahi Corp.

  5    7

Unicharm Corp.

  8,000    605

United Urban Investment Corp. (ö)

  80    316

USS Co., Ltd.

  900    48

West Japan Railway Co.

  17    77

Yahoo! Japan Corp. (Ñ)

  1,156    473

Yamaha Corp. (Ñ)

  3,700    34

Yamato Holdings Co., Ltd. (Ñ)

  5,000    65

Yamato Kogyo Co., Ltd. - GDR

  700    19
       
      48,766
       
Luxembourg - 0.0%      

ArcelorMittal (Ñ)

  3,501    84

Oriflame Cosmetics SA (Ñ)

  1,104    32

Reinet Investments SCA (Æ)

  593    6
       
      122
       
   

Principal

Amount ($)
or Shares

    

Market

Value
$

Malaysia - 0.1%      

Sime Darby Berhad

  162,317    246
       
Mauritius - 0.0%      

Golden Agri-Resources, Ltd.

  134,176    22
       
Mexico - 0.3%      

America Movil SAB de CV Series L (Ñ)

  14,700    456

Grupo Modelo SAB de CV (Ñ)

  114,500    362
       
      818
       
Netherlands - 3.8%      

Aegon NV (Æ)

  6,298    40

Akzo Nobel NV

  9,343    385

ASML Holding NV

  40,841    729

CSM

  7,091    114

European Aeronautic Defence and Space Co. NV

  7,257    122

Heineken NV

  114,438    3,516

Imtech NV

  6,926    117

ING Groep NV (Æ)

  31,975    334

James Hardie Industries NV (Æ)

  10,036    33

Koninklijke Ahold NV

  50,273    618

Koninklijke Philips Electronics NV (Ñ)

  3,785    74

Royal KPN NV

  64,142    930

SNS Reaal

  14,666    81

STMicroelectronics NV

  5,952    40

TNT NV

  57,060    1,096

TomTom NV (Æ)

  2,610    19

Unilever NV

  6,915    168

Wolters Kluwer NV

  67,990    1,284
       
      9,700
       
Netherlands Antilles - 0.0%      

Hunter Douglas NV

  1,257    41
       
Norway - 0.2%      

StatoilHydro ASA

  25,902    427
       
Portugal - 0.2%      

Energias de Portugal SA

  148,542    560
       
Singapore - 0.7%      

Ascendas Real Estate Investment
Trust (Æ)(ö)

  4,000    4

CapitaLand, Ltd.

  2,343    5

CapitaMall Trust (Æ)(ö)

  5,643    6

China Aviation Oil Singapore Corp., Ltd.

  1,000    1

ComfortDelgro Corp., Ltd.

  14,000    14

Cosco Corp. Singapore, Ltd.

  12,000    8

DBS Group Holdings, Ltd.

  65,400    388

Haw Par Corp., Ltd.

  3,000    8

Indofood Agri Resources, Ltd. (Æ)

  2,552    1

Jardine Cycle & Carriage, Ltd.

  3,800    25

Keppel Corp., Ltd.

  13,555    41

Keppel Land, Ltd.

  1,000    1

 

44 Non-U.S. Fund


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    

Market

Value
$

      

Neptune Orient Lines, Ltd.

  8,000    6

Oversea-Chinese Banking Corp., Ltd.

  15,000    52

Pacific Century Regional Developments, Ltd.

  53,000    5

Singapore Airlines, Ltd.

  5,970    47

Singapore Exchange, Ltd.

  6,000    22

Singapore Petroleum Co., Ltd.

  6,312    10

Singapore Technologies Engineering, Ltd.

  6,000    10

Singapore Telecommunications, Ltd.

  540,000    962

SMRT Corp., Ltd.

  3,000    3

United Overseas Bank, Ltd.

  6,572    59

UOL Group, Ltd.

  7,000    11

Venture Corp., Ltd.

  3,000    9
       
      1,698
       
South Africa - 0.4%      

Gold Fields, Ltd. - ADR (Ñ)

  61,740    613

MTN Group, Ltd.

  35,760    423
       
      1,036
       
South Korea - 0.5%      

KB Financial Group, Inc. - ADR (Ñ)

  9,648    253

Samsung Electronics Co., Ltd.

  3,029    1,100

STX Pan Ocean Co., Ltd. (Æ)

  400    2
       
      1,355
       
Spain - 1.2%      

Banco Bilbao Vizcaya Argentaria SA

  25,656    315

Banco Santander SA

  71,989    694

Criteria Caixacorp SA

  1,133    5

Ebro Puleva SA (Æ)

  801    11

Endesa SA

  983    40

Gas Natural SDG SA

  3,271    89

Iberia Lineas Aereas de Espana

  42,192    118

Inditex SA

  6,049    267

Prosegur Cia de Seguridad SA

  3,561    118

Red Electrica de Espana

  1,190    60

Repsol YPF SA

  12,286    262

Telefonica SA

  49,466    1,109

Union Fenosa SA

  284    7

Vertice Trescientos Sesenta Grados (Æ)

  3,257    3

Viscofan SA

  1,801    35
       
      3,133
       
Sweden - 1.3%      

Axfood AB

  2,051    44

Electrolux AB

  1,279    11

Hennes & Mauritz AB Series B
Class B (Ñ)

  13,765    538

Intrum Justitia AB

  3,441    35

Investor AB Class B

  265    4

Loomis AB (Æ)(Ñ)

  1,388    9

Nordea Bank AB

  18,703    132

SAS AB (Æ)

  7,286    35

Scania AB Class B (Æ)

  14,402    144

Securitas AB Class B

  6,527    54

Skanska AB Class B

  17,600    175
   

Principal

Amount ($)
or Shares

    

Market

Value
$

Svenska Cellulosa AB Class B

  24,676    211

Svenska Handelsbanken AB Class A

  1,051    17

Swedish Match AB

  30,949    443

Tele2 AB Class B

  17,944    159

Telefonaktiebolaget LM Ericsson Class B (Ñ)

  167,893    1,288

TeliaSonera AB

  6,039    30
       
      3,329
       
Switzerland - 8.9%      

ABB, Ltd. (Æ)

  29,262    441

Actelion, Ltd. (Ñ)

  18,298    1,031

Baloise Holding AG

  145    11

Barry Callebaut AG (Æ)

  160    104

Compagnie Financiere Richemont SA - Class A

  39,758    772

Credit Suisse Group AG

  17,113    469

Givaudan SA (Ñ)

  2,040    1,607

Helvetia Holding AG (Æ)

  884    192

Holcim, Ltd.

  786    45

Jelmoli Holding AG (Æ)

  30    56

Julius Baer Holding AG

  41,036    1,578

Nestle SA

  176,792    6,968

Novartis AG

  34,970    1,752

Roche Holding AG

  35,536    5,470

Sonova Holding AG

  4,023    243

Swiss Reinsurance

  18,389    893

UBS AG (Æ)

  50,040    726

Zurich Financial Services AG

  1,638    356
       
      22,714
       
Taiwan - 0.6%      

Taiwan Semiconductor Manufacturing Co., Ltd.

  588,500    805

Taiwan Semiconductor Manufacturing Co., Ltd. - ADR

  81,390    643
       
      1,448
       
Thailand - 0.1%      

Bangkok Bank PCL

  106,800    219
       
United Kingdom - 18.3%      

3i Group PLC

  70,392    277

Aggreko PLC

  20,368    131

AMEC PLC - GDR

  8,892    64

Anglo American PLC

  33,295    761

Antofagasta PLC

  106,300    657

ARM Holdings PLC

  408,214    511

AstraZeneca PLC

  41,539    1,683

Atkins WS PLC

  20,893    203

Autonomy Corp. PLC (Æ)

  52,100    717

BAE Systems PLC

  98,373    536

Barclays PLC

  73,696    166

BBA Aviation PLC

  68,277    68

BG Group PLC

  28,062    390

BHP Billiton PLC

  70,338    1,325

 

Non-U.S. Fund 45


Table of Contents

Russell Investment Funds

Non-U.S. Fund

Schedule of Investments, continued — December 31, 2008

Amounts in thousands (except share amounts)

 

   

Principal

Amount ($)
or Shares

    

Market

Value
$

      

BP PLC

  168,222    1,289

BP PLC - ADR (Ñ)

  32,320    1,511

British Airways PLC (Æ)

  15,490    40

British American Tobacco PLC

  24,994    649

British Land Co. PLC (ö)

  3,139    25

BT Group PLC

  90,874    179

Burberry Group PLC

  109,900    353

Cadbury PLC

  189,311    1,657

Capita Group PLC (The)

  87,323    930

Centrica PLC

  66,162    254

Close Brothers Group PLC

  13,297    102

Davis Service Group PLC

  3,306    <