Health care stocks posted strong third-quarter gains and handily outperformed the broad stock market. Buoyed by hopes for continued monetary stimulus and a rebound in the global economy, investors bid up stocks despite hints of slowing revenue and earnings growth. Within the Lipper Variable Annuity Underlying Health/Biotechnology Funds Average, which returned nearly 12% for the quarter, biotechnology and pharmaceutical stocks generated strong gains. The services segment, another large component in the Lipper average, and products and devices manufacturers were weakest.
The Health Sciences Fund returned 16.70% in the quarter compared with 5.24% for the S&P 500 Index and 14.49% for the Lipper Health/Biotechnology Funds Index. For the 12 months ended September 30, 2013, the fund returned 35.77% versus 19.34% for the S&P 500 Index and 36.16% for the Lipper Health/Biotechnology Funds Index. The fund's average annual total returns were 35.77%, 20.44%, and 15.35% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.79% as of its fiscal year ended December 31, 2012.
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Biotechnology, the portfolio's largest allocation, was the best absolute contributor. We favor biotechnology companies, which are generally smaller than pharmaceuticals companies, because the introduction of one successful new product can materially affect a company's revenues and earnings. We believe that the discovery, development, manufacture, and commercialization of medicines remain the long-term drivers of value in health care, and favor therapeutics companies. The portfolio's pharmaceuticals holdings generated strong absolute results, and stock selection in the sector generated a strong relative performance contribution. The portfolio's health care services stocks posted gains, but an overweight allocation detracted from our comparison with the benchmark. We favor managed care companies that demonstrate an ability to hold down costs and improve outcomes.
We believe that health care can remain a strong performer despite the uncertainties in Washington at this point. There are no indications that the economy will experience a sudden resurgence, and in the slow-growth scenario that we expect, health care could continue to perform well. Despite the strong advance over the past 18 months, valuations do not appear stretched, and the sector remains underrepresented in many investors' portfolios. We are paying close attention to the strong run in the biotech space over the past few years, as well as the rollout of the Affordable Care Act health care exchanges. We remain optimistic about the long-term prospects for health care stocks. However, in light of the portfolio's exceptional year-to-date performance, we believe that returns are unlikely to remain as strong going forward, and we have tempered our expectations for the rest of the year.