The U.S. equity market continued its upward trend during the fourth quarter as investors were encouraged by U.S. dollar strength, more certainty in Federal Reserve policy, and the potential for higher consumer spending due to falling gasoline prices and low interest rates. There was cause for concern as the conflict between Russia and Ukraine persisted, and weak economic data from Europe and Japan dampened global growth prospects. The Fed's bond-buying program ended in October, and many investors believe that actual monetary tightening won't occur until the second half of 2015. Interest rates have remained low, making the equity market attractive relative to other asset classes.
The Equity Income Fund returned 3.02% in the quarter compared with 4.93% for the S&P 500 Index and 3.89% for the Lipper Equity Income Funds Index. For the 12 months ended December 31, 2014, the fund returned 7.49% versus 13.69% for the S&P 500 Index and 10.69% for the Lipper Equity Income Funds Index. The fund's average annual total returns were 7.49%, 13.33%, and 6.83% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.67% as of its fiscal year ended December 31, 2013.
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Sector performance was mostly positive during the fourth quarter, with the utilities, consumer discretionary, and consumer staples sectors delivering the strongest returns. Investors sought higher yield amid low interest rates, and lower gasoline prices raised expectations for increased consumer spending. The health care sector continued its strong four-year run, driven by health care equipment and supplies companies, and real estate investment trusts drove gains in financials. On the downside, energy was the weakest sector due to higher supply and lower demand for oil and natural gas, followed by telecommunication services and materials. The portfolio's highest sector allocations were to financials, industrials and business services, energy, and consumer discretionary.
Given the continued strength in the equity market, notwithstanding recent volatility, we remain cautious in the near term, as it has been some time since we have seen a significant correction. The market's appreciation has generally outpaced fundamentals, making valuations a somewhat neutral factor. We expect the U.S. economy to continue to strengthen while remaining somewhat muted compared with previous recoveries. Despite the runup in valuations, we are focusing on companies that are priced below their intrinsic value, seeking quality companies at attractive prices, and maintaining a longer-term horizon to allow the market to recognize the value of the portfolio's holdings.