U.S. stocks rose in the fourth quarter, rebounding from third-quarter weakness. Financials underperformed the broad market, however. The economy continued growing, though fourth-quarter gross domestic product (GDP) is likely to reflect some softening. The Federal Reserve finally began to raise short-term interest rates on December 16 after postponing a mid-September increase due to "global economic and financial developments." Heading into 2016, the economic backdrop is uncertain, but fear and lower valuations create an attractive environment for financial services stocks.
The Financial Services Fund returned 1.55% in the quarter compared with 5.58% for the Russell 3000 Financial Index and 3.85% for the Lipper Financial Services Funds Index. For the 12 months ended December 31, 2015, the fund returned −0.64% versus 0.68% for the Russell 3000 Financial Index and 0.26% for the Lipper Financial Services Funds Index. The fund's average annual total returns were −0.64%, 10.25%, and 4.06% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2015. The fund's expense ratio was 0.91% as of its fiscal year ended December 31, 2014.
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Money center banks and regional banks were among our best performers in the quarter in anticipation of higher loan rates stemming from the Federal Reserve's first interest increase in many years. Property and casualty insurers did well, but other insurance industry segments lagged. Among capital markets companies, security brokers and dealers were strong, but a few asset managers fared poorly. We are finding value in asset managers, trust banks, and large money center banks. In contrast, we believe that small- and mid-cap regional banks have more limited upside.
The concerns about the impact of low energy prices, moderation of growth in China, and tepid U.S. real GDP growth on the financial services sector are legitimate. However, we also believe that the economic uncertainty has created an opportunity to make selective, thoughtful, and long-term-oriented investments in some very inexpensive stocks. 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 scenarios. Many of these investments also have the potential for higher-return scenarios, such as a company sale. Amid the current market volatility, our longer-term investment horizon enables us to buy attractively valued stocks with high long-term upside potential but a lack of near-term catalysts.