Mid-cap growth stocks produced strong returns in the fourth quarter of 2013, capping an excellent year. Favorable corporate fundamentals and highly accommodative monetary policies, including $85 billion in monthly Federal Reserve asset purchases, supported the advance. When the central bank announced in mid-December that it would start to reduce its asset purchases in January 2014, equity investors were assuaged by the Fed's pledge to keep short-term interest rates low as long as inflation remains contained.
The Diversified Mid-Cap Growth Fund returned 7.91% in the quarter compared with 8.33% for the S&P MidCap 400 Index and 8.50% for the Lipper Mid-Cap Growth Funds Index. For the 12 months ended December 31, 2013, the fund returned 34.57% versus 33.50% for the S&P MidCap 400 Index and 36.52% for the Lipper Mid-Cap Growth Funds Index. The fund's average annual total returns were 34.57%, 22.75%, and 9.32% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.97% as of its fiscal year ended December 31, 2012.
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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 financials and energy stocks helped the fund's relative performance, but stock selection in health care and consumer staples detracted. Sector allocations in aggregate had a marginal negative impact. 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 prefer to own stocks of companies that consistently produce solid earnings growth and have reasonable valuations. We believe these will prove to be better long-term investments than companies whose share prices soar like a rocket for a time but eventually crash because they cannot meet increasingly extreme earnings expectations.
Stocks performed very well in 2013 and over the last five years, despite a weaker-than-average economic recovery. Equity valuations, while higher than they have been for several years, remain quite reasonable, but we believe investors should expect more modest equity returns in the near term. While there are some pockets of speculation and excessive valuations, the core of the market is still reasonably valued. The most attractive companies, in our opinion, are those with solid earnings growth and reasonable valuations. In fact, they have become somewhat easier to identify because they have significantly lagged the short-term performance of companies with the fastest anticipated growth.