Stocks of financial services companies underperformed the broad market in the first quarter amid occasional bouts of volatility due to uncertainty about when the Federal Reserve will begin tightening monetary policy. Corporate merger activity, reduced energy costs, low interest rates, and massive quantitative easing efforts in the eurozone and Japan supported stock prices in general. However, the disappointing earnings of money center banks weighed on the financials sector's performance.
The Financial Services Fund returned 1.26% in the quarter compared with −0.32% for the Russell 3000 Financial Index and 0.00% for the Lipper Financial Services Funds Index. For the 12 months ended March 31, 2015, the fund returned 9.50% versus 11.41% for the Russell 3000 Financial Index and 6.33% for the Lipper Financial Services Funds Index. The fund's average annual total returns were 9.50%, 10.89%, and 5.31% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.88% as of its fiscal year ended December 31, 2013.
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Capital market companies contributed strongly to the fund's performance, especially asset managers and exchanges. Regional banks and property and casualty insurance companies also added value, while money center banks detracted. Securities exchange operators that were able to manage their expenses benefited from increased fourth-quarter volatility in the oil, currency, and high yield bond markets. Among regional banks, we favor well-run small- and mid-cap banks trading at reasonable valuations, in part because of the potential for them to be acquired. The nation's largest banks reported weaker-than-expected quarterly earnings, as a slow trading environment weighed on results. Also, during the first quarter, long-term interest rates declined, reducing the profitability of their lending businesses. However, we see meaningful improvements as management teams make better strategic decisions and control expenses.
After the significant rally over the last several years, it is increasingly difficult to find attractively valued financial stocks. Although the sector is no longer broadly cheap, we are still identifying some promising individual stocks over a multiyear investment horizon. In general, we favor companies that are well positioned to achieve their goals without relying on macroeconomic improvement. We believe that the current moderate pace of economic growth makes our commitment to researching individual stocks increasingly vital to achieving superior long-term returns.