Small-cap growth stocks rose in the second quarter but lagged large-caps and small-cap value stocks in a topsy-turvy market. We saw strong outperformance by the fastest-growing small-cap stocks (especially biotechnology, Internet/social media, and software-as-a-service companies) early in the year, significant underperformance by these high-growth companies in March and April, and a pickup in June. The economy has continued showing signs of sustaining moderate growth. While the first quarter had a larger-than-expected decline in gross domestic product, many indicators are signaling better economic performance in the second quarter.
The Diversified Small-Cap Growth Fund returned 3.05% in the quarter compared with 2.33% for the MSCI US Small Cap Growth Index and 0.52% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended June 30, 2014, the fund returned 27.34% versus 28.02% for the MSCI US Small Cap Growth Index and 21.74% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 27.34%, 23.80%, and 10.25% for the 1-, 5-, and 10-year periods, respectively, as of June 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 information technology, industrials and business services, and health care sectors. However, our investments in the consumer discretionary, financials, and materials sectors underperformed their benchmark peers. The fund's sector allocations, which typically resemble those of the index, had little impact on relative performance. Having neutral sector weights helps us avoid risks due to large moves in any one sector. 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.
Small-cap growth stocks have performed very well over the last five years, but given the small-cap valuation premium versus large-cap stocks, we believe that investors should temper their performance expectations. There are some signs of excess and high-risk behavior in parts of the capital markets, such as heightened initial public offering and merger activity, which should encourage investors to embrace a healthy dose of caution. Also, given the significant appreciation we've seen in recent years, we are finding it somewhat more difficult to find small growth companies with attractive attributes and reasonable valuations.