Small-cap growth stocks rose strongly in the fourth quarter, capping an excellent year, amid favorable economic data and a two-year bipartisan federal budget deal. Equities shrugged off a federal government shutdown and debt ceiling showdown in October. The most notable macroeconomic event was the Fed's decision to start tapering its asset purchases in January, which was welcomed by the market because the central bank also pledged to keep short-term interest rates low even if unemployment falls below 6.5%, as long as inflation remains contained. Consequently, the 10-year Treasury note yield rose to 3.03% by the end of 2013.
The Diversified Small-Cap Growth Fund returned 9.29% in the quarter compared with 9.03% for the MSCI US Small Cap Growth Index and 7.82% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended December 31, 2013, the fund returned 44.19% versus 44.50% for the MSCI US Small Cap Growth Index and 40.99% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 44.19%, 25.56%, and 10.59% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.91% as of its fiscal year ended December 31, 2012. Investors should note that the fund's short-term performance is highly unusual and unlikely to be sustained.
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 and financials sectors. However, our health care investments lagged their benchmark peers. In aggregate, the fund's sector allocations, which are usually similar to those of the benchmark, had little impact on relative performance. 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. Our strategy of having neutral sector weights versus our benchmark helps us avoid risks due to large moves in any one sector.
The budget deal reached in December reduces fiscal policy uncertainty and should help corporations develop and execute business plans in the near term with greater confidence. We will have a change at the top of the Federal Reserve, but we expect to see a continuation of the central bank's current policies. Risks to the financial markets could arise if economic growth is not sustained or if interest rates increase quickly in anticipation of faster growth or inflation. Historically, rising rates have accompanied economic growth and have not hurt stocks until they are significantly above their cyclical lows. However, it is possible that the equity market has already priced in a stronger economic recovery, as suggested by full valuations for stocks, particularly small-caps.