U.S. small-cap stock indexes gained in the fourth quarter of 2015. The Federal Reserve's decision to begin normalizing interest rates in December was seen as a vote of confidence in the strength of the U.S. economy. However, a strong U.S. dollar and a supply/demand imbalance in oil reduced the revenues of many energy-related companies. Small- and mid-cap stocks lagged large-caps, while growth stocks outperformed value, extending a long run of impressive growth-style dominance.
The Small-Cap Stock Fund returned 4.73% in the quarter compared with 3.59% for the Russell 2000 Index and 2.80% for the Lipper Small-Cap Core Funds Index. For the 12 months ended December 31, 2015, the fund returned −3.18% versus −4.41% for the Russell 2000 Index and −4.23% for the Lipper Small-Cap Core Funds Index. The fund's average annual total returns were −3.18%, 10.93%, and 8.57% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2015. The fund's expense ratio was 0.91% as of its fiscal year ended December 31, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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 allocation to the financials sector is the portfolio's largest weighting, followed by industrials and business services. Within financials the portfolio has a large position in regional banks, where valuations are moderate, balance sheets are reasonably strong and improving, and where we expect credit quality to slowly improve. Among industrials, we favor attractively valued companies with durable businesses and solid management teams. The portfolio's largest allocation is in machinery industry. We also have a significant position in information technology. We have a favorable long-term view of the sector as innovation is accelerating at a rapid pace. We also hold sizable positions in health care and consumer discretionary stocks.
In 2015, small-cap stocks underperformed for the second year in a row and got off to a rocky start in 2016. In fact, the Russell 2000 declined almost 8% in the first five trading days of the year. Not since 2008 have we seen the year begin with such losses. The Russell 2000, in our view, is now trading at fair value. However, stocks tend to overshoot fair value on both the up and down sides. We are not yet ready to forecast small-cap outperformance in 2016, because we believe the market will be oversold and that before this cycle is over, small-caps will once again trade at a significant discount versus their large-cap peers.