Mid-cap growth stocks produced very strong returns in the third quarter, extending this year's stellar rally, even as corporations struggled to increase revenue growth. The equity market also overcame an increase in long-term interest rates, which was driven by expectations that the Federal Reserve would begin reducing its asset purchases after its September 17-18 monetary policy meeting. The central bank surprised many investors by deciding to delay the taper until it receives more evidence that the economic recovery will continue. Investors displayed risk-seeking and speculative behavior during the quarter, as "momentum" stocks of companies with high growth expectations and high valuations were among the market's best performers.
The Diversified Mid-Cap Growth Fund returned 10.29% in the quarter compared with 9.34% for the Russell Midcap Growth Index and 10.12% for the Lipper Mid-Cap Growth Funds Index. For the 12 months ended September 30, 2013, the fund returned 26.44% versus 27.54% for the Russell Midcap Growth Index and 26.84% for the Lipper Mid-Cap Growth Funds Index. The fund's average annual total returns were 26.44%, 13.34%, and 8.72% for the 1-, 5-, and Since Inception (12/31/2003) periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.97% as of its fiscal year ended December 31, 2012.
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.
Good stock selection among health care companies, especially in the biotechnology industry, and information technology companies helped our relative performance, but stock selection in consumer staples and consumer discretionary detracted. Sector weightings generally added to relative performance, especially our consumer staples underweighting. Our stock selection is based on a combination of fundamental, bottom-up analysis and quantitative strategies in an attempt to identify companies with superior long-term appreciation prospects. We usually invest in leading companies in their respective niches and do not chase after overvalued stocks that could quickly reverse course if fundamentals or expectations deteriorate. Our preference is to use our valuation discipline and invest in companies that have more reasonable valuations and a more favorable risk/reward trade-off.
In light of the stock market's substantial gains over the last year, equity investors should not be surprised to see a period of milder returns, though we do not believe this is the time to be risk averse. Over the long term, the environment for equity investing should remain favorable for patient investors who are willing to take prudent risks. On the other hand, bond investors should be prepared for negative returns as interest rates return to more normal levels in the years ahead.