After a very robust 2013, U.S. equities produced modest gains in the first quarter, led by mid-caps and value stocks. In some ways, trends during the quarter were the opposite of last year's. Utilities stocks and Treasuries, for example, performed well, while "momentum" stocks with high valuations and high growth expectations lagged. Initial public offering (IPO) activity was the strongest since 2000, but the quality of IPOs deteriorated as the quarter progressed. Also, merger and acquisition activity has been below normal, which is surprising given the outperformance of growth stocks in the last few years.
The Diversified Mid-Cap Growth Fund returned 2.05% in the quarter compared with 2.04% for the Russell Midcap Growth Index and 1.37% for the Lipper Mid-Cap Growth Funds Index. For the 12 months ended March 31, 2014, the fund returned 23.48% versus 24.22% for the Russell Midcap Growth Index and 23.98% for the Lipper Mid-Cap Growth Funds Index. The fund's average annual total returns were 23.48%, 23.77%, and 9.17% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2014. 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.
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Financials and materials companies helped the fund's relative performance, but stock selection among health care and industrials and business services detracted. Overweighting health care, which was one of the better-performing sectors, was beneficial; other sector allocations in aggregate had little impact on relative results. 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 companies that consistently produce solid earnings growth and have reasonable valuations. As such, the portfolio is more valuation sensitive and less aggressively postured than some competitors. Portfolio turnover has been below average; recent major sales usually reflected mid-caps becoming large-caps.
Many growth stocks had been priced aggressively going into 2013. We believe that the correction in momentum stocks, which has continued into April, was needed, as valuations had gotten ahead of themselves. In general, we believe that equities are reasonably valued and that their fundamentals are solid relative to other asset classes. We also believe that patient investors who favor what we prefer (companies with reasonable earnings, revenues, valuations, and risk/reward trade-offs) will continue to be rewarded over the long term.