U.S. stocks rose in the third quarter despite moderating corporate fundamentals. The market overcame an increase in long-term interest rates, which was driven by expectations that the Federal Reserve would begin to reduce its asset purchases after it receives more evidence that the economic recovery will be sustained. We were somewhat surprised by the strength of the market through most of the quarter. Investors are more comfortable with the idea that the economy is on a self-sustaining path, though growth is still not that strong. An increase in rates is not necessarily bad for growth as investors seem to favor rapidly growing companies, which is a different environment than we have seen over the past few years.
The Growth Stock Fund returned 11.86% in the quarter compared with 8.11% for the Russell 1000 Growth Index and 10.98% for the Lipper Large-Cap Growth Funds Index. For the 12 months ended September 30, 2013, the fund returned 23.03% versus 19.27% for the Russell 1000 Growth Index and 21.31% for the Lipper Large-Cap Growth Funds Index. The fund's average annual total returns were 23.03%, 13.38%, and 8.87% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.70% as of its fiscal year ended December 31, 2012.
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In the energy sector, the future looks brighter for exploration and development companies than for refiners, and we have positioned the portfolio accordingly. We also like key biotech stocks since the fundamentals have improved, there has been a series of successful launches in big markets, pipelines remain in place, and there is less fear of competition. Stock valuations in the industry are not as attractive as previously, but merger and acquisition activity has supported stock prices. The sector is not economically sensitive, which is another positive factor. Prolonged political wrangling in Washington could increase stock market volatility, but so far this has not influenced our investment decisions.
Global economic activity is accelerating, investors are confident that Europe is on the path to recovery, and China's growth rate seems to have stabilized at lower levels. The Federal Reserve signaled that it will maintain its accommodative policies in the near term, at least, and will take a more cautious approach to tapering its asset purchase program than previously expected. Because the recovery has been tepid so far, no big excesses have been built up in the economy. Lower commodity inflation indicates that the Fed is likely to stay on course, putting less stress on the consumer. The economy is still in the process of deleveraging, so there is less overall risk in that regard. We believe the current environment should be better for our style of investing, and stock valuations in general do not seem overextended.