Despite ongoing unrest in the Middle East and Ukraine and the Fed's tapering of its asset purchases, large-cap stocks rose slightly in the third quarter, supported by generally favorable U.S. economic data and corporate fundamentals and falling long-term U.S. interest rates. However, small-cap growth stocks stumbled amid concerns about valuations and risks following several years of robust returns.
The Diversified Small-Cap Growth Fund returned −2.92% in the quarter compared with −5.81% for the MSCI US Small Cap Growth Index and −5.46% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended September 30, 2014, the fund returned 8.89% versus 6.93% for the MSCI US Small Cap Growth Index and 1.98% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 8.89%, 18.94%, and 10.80% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.82% 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.
The Diversified Small-Cap Growth Fund charges a 1%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
Fund performance versus the MSCI benchmark was helped by good stock selection in the health care, consumer discretionary, and industrials and business services sectors. However, our investments in the consumer staples sector eroded our performance advantage. The fund's sector allocations usually have little or no impact on relative performance because they are similar to those of the benchmark. While stock selection is based on a quantitative model, we also take into consideration T. Rowe Price's fundamental equity research and, given the unusual economic environment, macroeconomic conditions. The fund has benefited from an increase in takeovers this year. Many of the characteristics we seek in our investments, such as high and stable free cash flows, are also attractive for private equity investors and strategic acquirers.
After multiple years of strong performance, small-cap stocks underperformed large-caps in the third quarter and for the year-to-date period. This is not surprising in light of the high valuation differential between small- and large-caps going into 2014. Small-cap valuation multiples have declined from their peaks earlier this year, and currently we think small-cap valuations are fair. The markets have become more volatile in recent weeks, in part because investors expect the Federal Reserve to start raising short-term interest rates sometime around mid-2015. However, the decline in the labor participation rate and sluggish wage growth are factors that could influence the pace and timing of Fed rate hikes. In any event, we continue to favor high-quality stocks of companies that generate good cash flows and are judicious in deploying capital. We believe that such companies will distinguish themselves over time with superior performance.