U.S. stocks were mixed in the third quarter, which was a period of interesting crosscurrents. Large-cap shares produced slight gains, but mid-cap growth stocks declined, especially stocks of companies with high earnings expectations. There are some pockets of fear, so the environment is not too speculative. Initial public offerings (IPOs) and merger and acquisition (M&A) activity were robust and corporate fundamentals were generally favorable, but economic growth remained modest, and the extraordinary low interest rate environment persisted. In fact, long-term Treasury rates fell to levels not seen in more than a year, despite the Fed's tapering of its asset purchases.
The Diversified Mid-Cap Growth Fund returned −0.21% in the quarter compared with −0.73% for the Russell Midcap Growth Index and −2.23% for the Lipper Mid-Cap Growth Funds Index. For the 12 months ended September 30, 2014, the fund returned 12.58% versus 14.43% for the Russell Midcap Growth Index and 10.64% for the Lipper Mid-Cap Growth Funds Index. The fund's average annual total returns were 12.58%, 16.15%, and 9.66% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.91% as of its fiscal year ended December 31, 2013.
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 in the health care, financials, and information technology sectors helped the fund's relative performance versus the Russell benchmark. Our health care overweight was also beneficial, but other sector allocations in aggregate had a minimal impact on relative results. On the downside, our consumer staples stocks underperformed their benchmark peers, hurting our results. We are underweighting this sector because we believe most consumer staples companies are fairly valued and some are too expensive.
While the environment for long-term equity investing generally remains favorable, especially in comparison with fixed income alternatives, we encourage investors to be cautious about expected returns, which are likely to be modest in an environment of slow global growth. The recent outperformance of large-cap stocks could continue for some time, however, if performance-chasing investors "pile on." Nevertheless, we remain committed to investing in mid-cap companies that consistently produce solid earnings growth over time and have reasonable valuations and relatively low earnings variability. We are willing to wait patiently for sustainable gains to accumulate over time.