Stocks of financial services companies produced modest gains in the first quarter. Shares broadly tumbled in January as the Federal Reserve started to taper its monthly asset purchases and as emerging markets equities and currencies declined in anticipation of reduced global liquidity. Stocks rebounded strongly in February, however, amid stabilization in emerging markets and mostly favorable U.S. corporate earnings. Volatility persisted in March due to Russia's annexation of Ukraine's Crimean peninsula and concerns that the Fed, now led by Janet Yellen following the retirement of Chairman Ben Bernanke, might consider raising short-term interest rates sooner than expected.
The Financial Services Fund returned 1.02% in the quarter compared with 2.06% for the Russell 3000 Financial Index and 1.06% for the Lipper Financial Services Funds Index. For the 12 months ended March 31, 2014, the fund returned 25.41% versus 22.44% for the Russell 3000 Financial Index and 25.42% for the Lipper Financial Services Funds Index. The fund's average annual total returns were 25.41%, 21.12%, and 4.85% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.94% as of its fiscal year ended December 31, 2012.
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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.
High-quality regional banks and money center banks were among our top performance contributors. Rising interest rates and a pick-up in loan growth are expected to lead to accelerating earnings growth over time for these companies. Capital markets companies, especially online brokers and asset managers, also added to performance. We have tilted the portfolio toward companies with significant equity market exposure, as we believe mergers and acquisitions, retail investor activity, and equity issuance will grow in 2014. On the downside, interest rate-sensitive life insurance names hurt our results, as long-term rates pulled back from two-and-a-half-year highs at the end of 2013. Our holdings within the property and casualty insurance sector also detracted.
The U.S. economy is continuing to improve, the political environment in Washington has become more cooperative, and company balance sheets are flush with cash. All of these factors should increase businesses' willingness to invest, which could lead to increased loan growth. The potential for rising rates is also a positive for interest rate-sensitive companies. However, valuations in the financial services sector are much higher than they were a couple of years ago, and we do not expect returns for your fund to be as high in 2014 as they were in either of the previous two years.