U.S. stocks produced strong gains in the fourth quarter. Small-cap stocks outperformed their larger peers, and small-cap growth stocks outpaced their value counterparts. The market was supported by steady U.S. economic growth and new stimulus efforts in the eurozone and Japan. Also, long-term interest rates fell amid low inflation, losses in the high yield bond market, and strong demand for attractive U.S. yields versus high-quality sovereign debt yields elsewhere. Tumbling oil prices, though unfavorable for the energy sector, were seen as a generally positive factor for the U.S., which is still a net importer of oil and petroleum products.
The Diversified Small-Cap Growth Fund returned 6.76% in the quarter compared with 6.75% 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, 2014, the fund returned 6.38% versus 4.69% 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 6.38%, 19.19%, and 10.20% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.82% 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 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 materials and consumer staples sectors. However, our investments in the health care and industrials and business services sectors detracted from our relative results. Sector allocations usually have little or no impact on relative performance because they are fairly 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 macroeconomic conditions.
Small-cap stocks produced positive returns but underperformed large-caps during 2014. This is not surprising in light of the high valuation differential between them going into 2014. Despite their underperformance, small-cap valuation multiples remain higher than large-cap multiples. Recent economic growth and employment data have been very strong, and the Federal Reserve is likely to start raising short-term interest rates sometime around mid-2015. Lower oil prices will generally benefit consumers and could temper near-term inflation readings and the pace of Fed rate hikes. However, they will hurt energy producers. Most U.S. small-cap energy companies have suffered stock declines similar in magnitude to that of oil prices.