Considering the low absolute level of yields and the Fed's intent to move rates higher in 2015, we remain guarded about overextending ourselves for yield alone. The two- to five-year portion of the yield curve remains most at risk for a sell-off when the Fed begins to tighten monetary policy. The precise timing of the Fed's move is uncertain, as it will need to be cautious as it transitions from a period of extraordinary easing to one of even, gradual tightening. The central bank does not want to act too quickly and slow the economy back into a recession. The economic data in the months ahead should provide us with greater clarity as to the Fed's timing and pace, and we expect this period to be a critical time for fixed income markets.
The Equity Income Fund returned −1.68% in the quarter compared with 1.13% for the S&P 500 Index and −0.62% for the Lipper Equity Income Funds Index. For the 12 months ended September 30, 2014, the fund returned 13.44% versus 19.73% for the S&P 500 Index and 16.10% for the Lipper Equity Income Funds Index. The fund's average annual total returns were 13.44%, 13.84%, and 7.46% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.67% as of its fiscal year ended December 31, 2013.
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.
Stock selection in the information technology and financials sectors, plus an underweight position in the latter group, was the major detractor from portfolio performance during the quarter. Utilities contributed positively to results, thanks to key holdings in the sector. Stock selection in materials and telecommunication services also added to the quarterly return. Regarding sector allocations, in addition to an underweight in financials, the portfolio was also underweight in health care but maintained overweight allocations to energy and industrials and business services at the end of the period.
We maintain our cautious outlook as the equity market continued its upward path during the year. The equity market runup since 2011 has come on the back of accommodative Fed policy, historically high profit margins, and general multiple expansions. Current equity market valuations are roughly in line with their long-term averages, so we expect a closer focus on company fundamentals going forward. Wage growth and single-family housing starts remain tepid, suggesting weak aggregate demand. We believe that equity returns will continue to moderate in the coming months, as prices have risen to the point where values are more difficult to find. In addition, there are a number of unpredictable areas of geopolitical tension that could rattle investor confidence at some point, and we prefer to err on the side of caution after an extended period of strong stock performance.