U.S. stocks posted mixed returns in the third quarter amid improving U.S. economic signals and encouraging corporate profits. But the disparity of returns was notable, with large-caps managing gains and small-caps declining markedly. Small-caps, which led returns in 2013, have retreated in 2014. While small-cap valuations have declined, they remain above their long-term averages and are often subject to sell-offs during market swoons. As measured by various Russell indexes, growth stocks outperformed value across all market capitalizations.
The Small-Cap Stock Fund returned −6.09% in the quarter compared with −7.36% for the Russell 2000 Index and −5.46% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended September 30, 2014, the fund returned 6.32% versus 3.93% for the Russell 2000 Index and 1.98% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 6.32%, 17.19%, and 10.14% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.91% as of its fiscal year ended December 31, 2013.
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.
Financials represents the portfolio's largest sector weight. The portfolio has a sizable position in regional banks, which feature reasonable valuations and strong and improving balance sheets. Slowly improving credit quality should also benefit bank shares. We have maintained a large allocation to real estate investment trusts, though the portfolio's position size is lower than that of its benchmark. Among industrials and business services, another top sector allocation, we favor machinery and commercial services and supplies. In the consumer discretionary sector, the portfolio has exposure to companies that we believe are more likely to weather slow economic times better than their competitors and should outperform during economic expansions. We have invested in a variety of businesses, including retailers, media companies, homebuilders, hotels, and restaurants.
While small-cap stocks retreated from their March peak, we would not be surprised by continued selling pressure due to their premium valuations versus large-caps. Other warning signs include a robust initial public offering market; outflows from small-cap exchange-traded funds; and recent weakness in the high yield market, which is often a leading indicator for small-cap shares. We are mindful of valuation metrics as we continue to seek out durable growth and value companies that should benefit from improving economic conditions.