U.S. stocks rallied strongly in the latter part of the first quarter, reducing earlier losses stemming from evidence of a sharp economic slowdown in China and lackluster global growth. New stimulus measures from central banks in Europe and Japan helped support the rally. The financials sector significantly underperformed the broad market, as higher U.S. interest rates, which had been widely anticipated and would benefit lenders and other businesses in the sector, failed to materialize. In fact, the Federal Reserve lowered expectations for interest rate increases this year due to global risks to the U.S. economy.
The Financial Services Fund returned −7.29% in the quarter compared with −5.46% for the Lipper Financial Services Funds Index and −3.30% for the Russell 3000 Financial Index. For the 12 months ended March 31, 2016, the fund returned −9.03% versus −5.21% for the Lipper Financial Services Funds Index and −2.34% for the Russell 3000 Financial Index. The fund's average annual total returns were −9.03%, 7.77%, and 2.70% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.95% as of its fiscal year ended December 31, 2015.
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Capital markets companies, especially security brokers and dealers, hurt fund performance, as they have earnings leveraged to rising interest rates. Asset managers also detracted. Bank stocks generally fell, especially money center banks. On the plus side, real estate investment trusts generally did well, as income-seeking investors sought higher-yielding investments in the equity market. Insurance companies also contributed to our performance, led by property and casualty insurers. Insurance stocks are perceived to be a safe haven in the financials sector due to their defensive nature and low interest rate exposure.
While headwinds in the financials sector include "lower for longer" U.S. interest rates, increasing credit losses, and the impact of low energy prices, we remain constructive on financials. Compared with 2008, bank balance sheets are stronger, there is more capital and liquidity, and there is more regulatory oversight. We also believe that the uncertainty around the economic environment has created an opportunity to make selective, thoughtful, and long-term oriented investments in some high-quality companies trading at very attractive valuations. To be sure, we are not seeking to make a "call" on the economic environment. Rather, we are seeking "idiosyncratic" investments that we expect to be solid performers in most economic and interest rate scenarios. These include companies that we believe could be acquisition targets. We think that the probability of negative U.S. interest rates is low, but we are closely watching the effects of negative rates in Europe and Japan.