Health care stocks posted solid second-quarter gains but lagged the broad market as measured by the Standard & Poor's 500 Index. The health care sector has been volatile, especially in the biotechnology segment, which plunged about 20% after an early-year rally and then surged late in the second quarter. All of the industry groups within the Lipper Health/Biotech Index posted positive second-quarter results, with pharmaceuticals and life sciences generating the best returns. The services and products and devices makers segments were weakest.
The Health Sciences Fund returned 4.39% in the quarter compared with 5.23% for the S&P 500 Index and 4.17% for the Lipper Health/Biotechnology Funds Index. For the 12 months ended June 30, 2014, the fund returned 40.45% versus 24.61% for the S&P 500 Index and 38.22% for the Lipper Health/Biotechnology Funds Index. The fund's average annual total returns were 40.45%, 27.98%, and 15.26% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.79% as of its fiscal year ended December 31, 2013. Investors should note that the fund's short-term performance is highly unusual and unlikely to be sustained.
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Our biotechnology holdings, which remained the portfolio's largest industry allocation, generated solid absolute and relative performance thanks to stock selection. However, we are significantly underweight, at 31% of total net assets, versus the nearly 43% allocation in the benchmark. We opportunistically trimmed several of our richly priced biotechnology holdings in the second quarter, but we remain bullish on the segment because we believe that the discovery, development, manufacture, and commercialization of medicines remain the long-term drivers of value in health care. The services industry is our second-largest allocation at approximately 26% of assets. The majority of these holdings are managed care companies. Stock selection hurt our results in the life sciences industry.
It appears that the pace of drug approval is accelerating, which should improve the profitability of biotech companies. Insurers are benefiting from growing enrollment, thanks to the Affordable Care Act. Additionally, the sector is benefiting from an increase in merger and acquisition activity. Acquisition-related tax inversions allow an acquiring company to domicile its operations in a lower-tax jurisdiction. At a time when most companies are generating peak operating margins and limited top line growth, lower taxes are an immediate windfall for shareholder value. Almost every one of our profitable companies that has been a recent top performer has benefited from merger activity. Although we are somewhat concerned about the sector's recent volatility and rich valuations following its meteoric advance over the past five years, we remain optimistic about the long-term prospects for health care stocks. However, we believe that returns are unlikely to remain as strong going forward.