Major U.S. equity indexes rallied strongly in the latter part of the first quarter, erasing steep early-year losses, stemming from renewed evidence of a sharp economic slowdown in China and lackluster global growth. Small-cap stocks exited bear market territory during the late-quarter rally, in line with the bounce in riskier asset classes, which was led by the reversal of some of the most beaten-down areas of financial markets, including stocks, high yield bonds, and oil. While overall small-cap valuations rose a bit in line with the February recovery, absolute valuations (forward P/E) rode the bounce to levels that are now back above average. Relative to large-caps, small-cap valuations are nearly in line with long-term averages.
The Small-Cap Stock Fund returned −0.16% in the quarter compared with −1.52% for the Russell 2000 Index and 1.52% for the Lipper Small-Cap Core Funds Index. For the 12 months ended March 31, 2016, the fund returned −6.97% versus −9.76% for the Russell 2000 Index and −6.28% for the Lipper Small-Cap Core Funds Index. The fund's average annual total returns were −6.97%, 8.97%, and 7.41% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.90% as of its fiscal year ended December 31, 2015.
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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 first quarter. We have a large overweight versus our benchmark in industrials and business services and an underweight to the financials sector. Even so, financials remains the portfolio's largest sector. The portfolio holds a large position in regional banks, which we believe to have moderate valuations, reasonably strong and improving balance sheets, and improving credit quality. We maintain a large allocation to real estate investment trusts, though we are significantly underweight to the large index exposure to the industry. During the period, our biggest net purchase was in industrials, adding to our already large position in machinery and also to the road and rail industry.
Heightened market volatility and U.S. monetary policy tightening have historically been negative factors for the relative performance of small-cap stocks versus large-caps. On a valuation basis, neither small-cap growth nor value stocks seem more compelling. We believe it would take a significant shift in the economic growth outlook to change this balance. More encouragingly, while we expect interest rates will rise, the pace of rate increases by the Federal Reserve is likely to be gradual and measured. The earnings outlook for most sectors (excluding commodity-related segments) appears favorable. We remain confident in our ability to find smaller companies that are poised to grow rapidly and to hold them through the downturns and valuation adjustments that are part of every market cycle.