Small-cap growth stocks rose strongly in the first quarter of 2013, and most major U.S. equity indexes finished at or near their all-time highs. Moderate U.S. economic growth, steady job growth, and signs of a sustained housing market recovery were supportive, as was the Federal Reserve's continuing stimulus policies, including asset purchases. Equities surmounted an environment of tighter fiscal policy, as Congress addressed the "fiscal cliff" by limiting the federal tax increases at the beginning of the year and delaying spending cuts for two months.
The Diversified Small-Cap Growth Fund returned 12.56% in the quarter compared with 12.38% for the MSCI US Small Cap Growth Index and 11.73% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended March 31, 2013, the fund returned 14.18% versus 16.14% for the MSCI US Small Cap Growth Index and 12.50% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 14.18%, 11.84%, and 12.03% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 1.05% as of its fiscal year ended December 31, 2011.
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 stock selection in the consumer staples and materials sectors. However, our energy, industrials and business services, and consumer discretionary holdings underperformed their peers in the benchmark, which hurt our relative results. The fund's sector allocations are similar to those of the benchmark and generally have 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 Fed has asserted that it is willing to purchase more assets until the labor market outlook shows substantial improvement. However, there is anecdotal evidence that some pressure might be building up within the Fed to start thinking about slowing the pace of asset purchases. We have been hoping that low interest rates, which are likely to persist for some time, and fiscal policy clarity, which has been achieved to some extent, would provide an incentive for private-equity investors and leveraged buyout firms to make acquisitions. However, we have not yet seen much of a pickup in acquisitions of small-cap growth companies. Nevertheless, 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 relative to lower-quality businesses.