Stocks of financial services companies produced strong results in the fourth quarter, buoyed by economic and jobs growth, favorable U.S. financial market performance, increased capital markets activity, and new stimulus measures in overseas countries even as the Federal Reserve concluded its monthly asset purchases in October. In addition, expectations that the Fed is getting closer to start raising short-term interest rates-possibly sometime in 2015-lifted shares of companies that are likely to benefit from rising rates.
The Financial Services Fund returned 7.16% in the quarter compared with 8.42% for the Russell 3000 Financial Index and 6.53% for the Lipper Financial Services Funds Index. For the 12 months ended December 31, 2014, the fund returned 9.24% versus 14.06% for the Russell 3000 Financial Index and 7.45% for the Lipper Financial Services Funds Index. The fund's average annual total returns were 9.24%, 13.10%, and 4.64% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.88% as of its fiscal year ended December 31, 2013.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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Capital markets companies contributed strongly to the fund's absolute performance, especially securities brokers and dealers, securities exchanges, and asset managers. Insurance companies and regional and money center bank stocks also added value, while non-U.S. banks detracted. We have built large positions in companies that have been under-earning their business models as a result of temporary factors, such as low short-term rates or low volatility. Also, we remain optimistic about the need for industry consolidation and hold a number of companies that we believe could be acquired. The two areas that are least attractive to us are real estate investment trusts (REITs) and large "super-regional" banks. REITs, which have above-average dividend yields, have benefited from investors seeking income-producing alternatives to bonds amid declining long-term rates. Super-regional banks have solid near-term fundamentals and decent earnings visibility, but we believe most are trading close to fair value.
After a very strong 2012 and 2013, financial stocks had a solid 2014. Although the sector is not as broadly cheap as it was three years ago, we still see some very attractive individual stocks over a multi-year investment horizon. In fact, we are more excited about the individual stock opportunities we see than we are in the broad market or the financials sector overall. We believe that the economy will continue to improve gradually and that your fund is well positioned in the companies and stocks that should benefit most from this backdrop.