U.S. stocks were mixed in the third quarter amid turmoil in the Middle East and Ukraine, an economic slowdown overseas, and continued Fed tapering. Large-caps edged upward with support from favorable U.S. economic data and good corporate fundamentals. Increased risk aversion and valuation concerns punished small- and mid-cap shares. Earnings grew modestly and appear to be in line with a gradual economic recovery. Forward earnings estimates are still positive but have moderated from earlier expectations. The health care sector saw good gains and fared best within the S&P 500 Index, followed closely by information technology. As measured by various Russell indexes, growth stocks outpaced value shares across all market capitalizations.
The Tax-Efficient Equity Fund returned 0.62% in the quarter compared with 0.88% for the Russell 3000 Growth Index and 0.46% for the Lipper Multi-Cap Growth Funds Index. For the 12 months ended September 30, 2014, the fund returned 13.54% versus 17.87% for the Russell 3000 Growth Index and 16.13% for the Lipper Multi-Cap Growth Funds Index. The fund's average annual total returns were 13.54%, 15.68%, and 8.45% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.89% as of its fiscal year ended February 28, 2014.
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 Tax-Efficient Equity Fund charges a 1%
redemption fee on shares held less than 365 days.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
Materials stocks account for a relatively small position in the portfolio, but they produced good absolute returns. As with energy companies, we do not make investments in the sector based on commodity price movements, which can be highly volatile. Rather, we seek differentiated companies that are well positioned for the long term, with a concentration in the chemical industry. Information technology stocks were our weakest overall performers, and our global payment processing companies underperformed. However, we still think the payment processors will benefit from a business model that has high barriers to entry, good secular growth rates, and high incremental margins.
We remain reasonably optimistic about the long-term environment for equities. The U.S. economy should continue to grow modestly, supported by broadly accommodative monetary policy, solid corporate fundamentals, and decent consumer spending. Corporate earnings are growing at a pace in keeping with modest economic expansion, and stocks appear fairly valued despite the gains seen over the past few years. With that said, the previous strong pace of stock price appreciation is unlikely to continue. We believe equity investors would do well to maintain a diversified portfolio of companies with good long-term business prospects that trade at reasonable valuations, keep performance expectations in check, and wait patiently for sustainable gains to accumulate over time.