Mid-cap growth stocks produced solid gains in the first quarter, despite a slowdown in the economy and uncertainty about when the Federal Reserve would begin tightening monetary policy. Reduced energy costs, low interest rates, and massive quantitative easing efforts in the eurozone and Japan were supportive for stocks, as was brisk merger and acquisition activity. Initial public offering activity cooled off, however. Companies with the highest yields underperformed (a reversal from what we saw in 2014), yet bonds continued to rise. We still believe that stocks are the best alternative for investors seeking long-term capital appreciation.
The Diversified Mid-Cap Growth Fund returned 6.32% in the quarter compared with 5.38% for the Russell Midcap Growth Index and 5.07% for the Lipper Mid-Cap Growth Funds Index. For the 12 months ended March 31, 2015, the fund returned 16.13% versus 15.56% for the Russell Midcap Growth Index and 11.85% for the Lipper Mid-Cap Growth Funds Index. The fund's average annual total returns were 16.13%, 16.23%, and 10.15% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.91% as of its fiscal year ended December 31, 2013.
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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.
The fund's relative performance versus the Russell index was driven by stock selection in several sectors, such as consumer discretionary, financials, and health care. Stock selection among information technology and materials companies detracted from our performance advantage. Our health care overweight was a positive, but other sector allocations in aggregate had little impact on relative results. We eliminated several health care holdings after they received takeover offers and added to or established small positions in biotechnology companies. We are mindful of the strong run biotechs have enjoyed in recent years, so we are managing position sizes carefully to keep the fund from becoming too overweight.
We still think this is a good environment for long-term mid-cap growth investors. Global central banks remain very accommodative, though the Fed is preparing to raise rates, and equity valuations seem reasonable relative to other asset classes. Companies are doing reasonably well, and many are more efficient than they were prior to the 2008 global financial crisis. Growth is precious, but management teams are not under significant pressure to achieve it, so they seem unlikely to take extraordinary risks. Merger activity, which tends to favor smaller companies, is likely to continue. Regardless of the environment, we remain committed to finding and investing in mid-cap growth companies with a demonstrated ability to increase revenues, earnings, and cash flow; high returns on equity; capable managements; and a sustainable competitive advantage.