Mid-cap growth stocks declined in the third quarter as investors turned risk averse in response to materially slower-than-expected growth in China. Stock valuations were higher than normal going into the quarter, which, in light of a negative skew to earnings revisions, failed to support stock prices. Merger and acquisition activity remained robust, but the market for initial public offerings has withered. Economic growth remained modest, and the Federal Reserve delayed raising short-term interest rates due to adverse "global economic and financial developments."
The Diversified Mid-Cap Growth Fund returned −8.39% in the quarter compared with −7.99% for the Russell Midcap Growth Index and −9.25% for the Lipper Mid-Cap Growth Funds Index. For the 12 months ended September 30, 2015, the fund returned 4.02% versus 1.45% for the Russell Midcap Growth Index and 1.35% for the Lipper Mid-Cap Growth Funds Index. The fund's average annual total returns were 4.02%, 13.21%, and 8.25% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.89% as of its fiscal year ended December 31, 2014.
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Stock selection in the information technology, energy, and health care sectors helped the fund's performance versus the Russell benchmark, but stock selection in the consumer staples, industrials and business services, and consumer discretionary sectors worked against us. Sector allocations in aggregate also hurt our relative results, particularly our modest energy overweight. The downturn in the energy sector over the last year has been brutal and it has also had a significant negative impact on companies in other sectors with ties to energy, such as various industrial firms. While we like our energy holdings and believe they can endure a period of low oil prices, we have pared back many of these positions to a modest size.
Mid-cap growth stocks have produced substantial gains over the last six-and-a-half years, but we believe an era of modest returns is upon us. Various crosscurrents are contributing to an increase in global market volatility and economic uncertainty. While stock prices seem likely to grind higher over time, an environment of modest global growth and slowing corporate earnings growth is frustrating to investors who are accustomed to strong returns. Still, we believe that stocks have better long-term prospects than low-yielding bonds. We also believe that an environment of modest growth and equity market returns gives us an opportunity to generate superior relative results over time by investing in quality companies with a demonstrated ability to increase revenues, earnings, and cash flow consistently; high returns on equity; capable managements; and a sustainable competitive advantage.