U.S. small-cap stocks fell sharply in the third quarter of 2015, and other major benchmarks fared poorly during a turbulent period marked by China's economic slowdown and its decision to allow its currency to devalue. While small-caps are more insulated from export-related shocks than large-caps, their loftier valuations make them more susceptible to market volatility. Within small-caps, value stocks held up better than growth stocks.
The Small-Cap Stock Fund returned −10.31% in the quarter compared with −11.92% for the Russell 2000 Index and −10.10% for the Lipper Small-Cap Core Funds Index. For the 12 months ended September 30, 2015, the fund returned 0.92% versus 1.25% for the Russell 2000 Index and 0.32% for the Lipper Small-Cap Core Funds Index. The fund's average annual total returns were 0.92%, 13.50%, and 8.42% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.91% as of its fiscal year ended December 31, 2014.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
Total return information before August 31, 1992 reflects performance by managers other than T. Rowe Price.
Our sector allocations did not change dramatically during the third quarter. We have a large overweight versus our benchmark in industrials and business services, and trimmed some holdings that had reached fair valuation levels. The portfolio has considerable exposure to the machinery industry, and has large positions in some commercial services companies. Financials remains the fund's largest sector, though we are underweight its benchmark's significant allocation. The fund holds a large position in regional banks, which, in our view, have reasonable valuations and feature improving credit quality. We also have sizable positions in high-quality real estate investment trusts. In information technology, we have a large exposure to the software industry, though we recently trimmed this exposure. Our allocation to consumer discretionary is concentrated among specialty retail and hotels, restaurants, and leisure.
The recent market correction weighed more heavily on small-caps than large-caps, thereby pulling down valuations of small-caps relative to large-caps. However, we believe that on an absolute basis, small-caps remain expensive. For that reason, a market pullback would likely impact small-caps more than large-caps. We are mindful of valuation metrics as we continue to seek out durable growth and value companies that should benefit from improving domestic economic conditions.