Stocks of financial services companies rose but lagged the broad U.S. market in the third quarter, as investors favored more cyclical sectors. Longer-term interest rates increased through early September, which is helpful to companies that need higher rates to lift their profits, such as banks and insurers, but yields retreated from two-year highs and the U.S. dollar weakened as the Fed unexpectedly delayed its reduction of asset purchases. As the quarter ended, the market sagged amid concerns about the underlying strength of the economy and the growing probability of a federal government shutdown and debt ceiling showdown in October.
The Financial Services Fund returned 4.83% in the quarter compared with 2.87% for the Russell 3000 Financial Index and 5.55% for the Lipper Financial Services Funds Index. For the 12 months ended September 30, 2013, the fund returned 29.79% versus 28.13% for the Russell 3000 Financial Index and 28.42% for the Lipper Financial Services Funds Index. The fund's average annual total returns were 29.79%, 9.08%, and 5.27% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.94% as of its fiscal year ended December 31, 2012.
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Our securities brokers and dealers performed very well during the third quarter, benefiting from increased trading volumes and equity issuance in the capital markets. Our positions in several non-U.S. banks also did well, as stronger foreign currencies boosted returns in dollar terms. Regional banks were also solid contributors to performance. The industry is experiencing decent loan growth, which, coupled with higher long-term interest rates and ultra-low short-term rates, is leading to better net interest margins. On the downside, our real estate-related stocks generally declined, as rising interest rates elevated concerns that homebuilding momentum would wane due to higher mortgage costs and reduced refinancing activity. During the quarter, we trimmed some of our positions in large money center banks in favor of large regional banks. We also added to our positions in European banks.
Financials continued their upward momentum in the third quarter, aided by housing market gains and an improving interest rate environment. Regulatory headwinds are slowly diminishing, although regulatory sentiment toward the country's largest institutions appears to be getting worse. In general, we believe that the current valuations in the financials sector are still reasonable relative to their historical average. While the economic recovery may remain supportive for financials, a protracted government shutdown could materially reduce fourth-quarter economic growth.