Domestic equities were volatile in the first quarter, but most major indexes were little changed, as a sharp rally starting in mid-February significantly pared early-quarter losses. New stimulus measures from central banks in Europe and Japan helped support the rally. In the U.S., value stocks outperformed growth stocks across all market capitalizations. "Yield-chasing" was rather pronounced, as low fixed income yields and reduced expectations for Federal Reserve rate increases this year prompted income-seeking investors to favor higher-yielding equities, such as utilities. Initial public offering (IPO) activity was low; in fact, it was the slowest quarter for IPOs since 2009.
The Diversified Mid-Cap Growth Fund returned −0.22% in the quarter compared with 0.58% for the Russell Midcap Growth Index and −1.52% for the Lipper Mid-Cap Growth Funds Index. For the 12 months ended March 31, 2016, the fund returned −4.21% versus −4.75% for the Russell Midcap Growth Index and −7.18% for the Lipper Mid-Cap Growth Funds Index. The fund's average annual total returns were −4.21%, 9.56%, and 7.56% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.87% as of its fiscal year ended December 31, 2015.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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Stock selection in the materials sector helped our performance versus the Russell benchmark, but our financials sector holdings underperformed their peers in the index. Health care stock selection also worked against us; biotechnology stocks, which have performed quite well for a few years, fared poorly during the quarter. We diversify our biotech holdings broadly to reduce risks. Overweighting health care and underweighting consumer discretionary shares also detracted from our relative performance. While our mid-cap holdings may not always be exciting or high-profile businesses, we believe they are steady, reliable growth companies that have many desirable attributes and can be held for long periods.
Stock prices have been quite volatile thus far this year. Despite new stimulus measures overseas and a postponement of U.S. interest rate hikes, global economic growth concerns remain. In the U.S., the economy is likely to grow modestly in 2016. Year-over-year corporate earnings have declined primarily due to severe energy sector weakness, but the equity market seems to be fairly valued. We continue to expect equity market returns in the years ahead to be lower than historical norms. Compared with low-yielding fixed income investments, however, we still believe equities have better long-term return potential. We remain focused on quality companies whose earnings are still growing that can also generate steady growth over time. We believe that, in a slow-growth world, the market will recognize the value of what we favor: companies with a demonstrated ability to increase revenues, earnings, and cash flow consistently; capable management; attractive business niches; and a sustainable competitive advantage.