U.S. stocks finished the quarter in positive territory in the second quarter despite the volatility created late in the quarter by the UK's unexpected vote to exit the European Union. Following the vote, forecasts for growth, especially in the UK and EU, were revised lower and expectations for interest rate hikes pushed out, causing financials to trade lower. As a result, performance for the broader financial services sector was muted compared with other sectors.
The Financial Services Fund returned −0.10% in the quarter compared with 0.51% for the Lipper Financial Services Funds Index and 2.35% for the Russell 3000 Financial Index. For the 12 months ended June 30, 2016, the fund returned −13.76% versus −8.50% for the Lipper Financial Services Funds Index and −1.30% for the Russell 3000 Financial Index. The fund's average annual total returns were −13.76%, 9.00%, and 2.83% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.95% as of its fiscal year ended December 31, 2015.
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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, led by asset managers and security brokers and dealers, hampered absolute performance during the quarter. Retail brokers were also hurt as their earnings could be impacted by the lower-for-longer rate environment. UK and EU banks were hardest hit following Brexit, and we used this opportunity to seek out higher-quality European banks with strong management teams that suffered in the selloff. Our holdings in insurance companies and real estate helped results.
Brexit is a real negative development for financial stocks, especially those that are positively affected by rising interest rates. We are now likely to see further quantitative easing among central banks outside the U.S., which will push rates lower globally, strengthen the U.S. dollar, and limit the Fed's ability to increase interest rates. The good news, however, is that the global financial system is far stronger than it was in 2008. Banks have taken significant steps to strengthen their balance sheets in the wake of the financial crisis, as regulatory requirements increased and stress tests became the norm.