U.S. stocks posted solid gains in the second quarter against a backdrop of an improving labor market and healthy overall business activity. Investors appeared to shrug off the first-quarter economic contraction, which was widely attributed to a severe winter and to flaring violence in the Ukraine, Iraq, and Syria. Large-cap stocks rose to all-time highs in June and handily outperformed mid- and small-cap stock indexes. Value stocks surpassed growth stocks among small-cap names.
The Small-Cap Stock Fund returned 2.15% in the quarter compared with 2.05% for the Russell 2000 Index and 0.52% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended June 30, 2014, the fund returned 24.02% versus 23.64% for the Russell 2000 Index and 21.74% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 24.02%, 23.16%, and 10.67% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.91% as of its fiscal year ended December 31, 2013.
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Total return information before August 31, 1992 reflects performance by managers other than T. Rowe Price.
Industrials and business services continues to be our largest allocation and overweight versus the benchmark. We favor attractively valued companies with durable businesses and solid management teams. We have considerable exposure to the machinery industry and to the commercial services and supplies segments. Among financials, we favor regional banks, as valuations are reasonable and balance sheets are strong. We trimmed our exposure to real estate investment trusts amid higher valuations. Likewise, information technology stocks have limited attractive entry points. Our largest exposure is to the software industry, where we favor niche providers that offer solutions to financial services companies. We have a large position in consumer discretionary, where we are focused on companies that can become market leaders.
While small-cap stocks underperformed large-caps during the last quarter, they remain expensive versus large-caps. Other warning signs include a robust initial public offering market and outflows from small-cap exchange-traded funds. We are mindful of valuation metrics as we continue to seek out durable growth and value companies that should benefit from the continued economic expansion.