Robust fourth-quarter gains for U.S. stocks capped an exceptionally strong year in which several major indexes climbed to record highs. A strengthening economy helped equities shrug off a federal government shutdown and debt ceiling showdown in October. The Federal Reserve's mid-December announcement that it would begin to taper its asset purchase program in January removed an element of uncertainty from markets, with the Fed further assuring investors that smaller purchases will provide appropriate stimulus. Large-cap shares posted the biggest gains, followed by small-caps and mid-caps. As measured by various Russell indexes, value stocks narrowly outperformed growth stocks among small- and mid-caps, while large-cap growth stocks fared marginally better than large-cap value shares.
The Tax-Efficient Equity Fund returned 10.07% in the quarter compared with 10.25% for the Russell 3000 Growth Index and 9.93% for the Lipper Multi-Cap Growth Funds Index. For the 12 months ended December 31, 2013, the fund returned 35.47% versus 34.23% for the Russell 3000 Growth Index and 36.52% for the Lipper Multi-Cap Growth Funds Index. The fund's average annual total returns were 35.47%, 21.63%, and 8.25% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.98% as of its fiscal year ended February 28, 2013.
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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.
Portfolio performance was positive across all sectors, with financials, information technology, and consumer discretionary our top-performing sectors for the period. Utilities, energy, and telecommunication services managed more modest gains. Information technology remains our largest sector allocation, with an emphasis on information technology services companies and Internet service companies that stand to benefit from the increasing reliance on technology by consumers and businesses as the economy gradually expands. Health care is among the more attractive of the traditional defensive sectors, and consistent with our position in information technology, we are focused on service providers that should benefit from growing demand as the economy strengthens.
We remain reasonably optimistic about U.S. equities in 2014 against the backdrop of modest economic growth. The housing market continues to strengthen, and credit growth is rebounding. North American crude oil production is driving down energy costs, and the budget deficit problems appear to have been resolved, at least for the near term, removing a drag from economic growth. While valuations have become somewhat stretched after recent strength, equities are still attractive relative to other asset classes, and inflows should be steady. However, we would not be surprised to see a pickup in market volatility after several months of gains and are mindful of potential risks, including elections in November, execution of Fed tapering, and potential hiccups in growth in Europe, Japan, and key emerging markets.