U.S. stocks capped an excellent year in the fourth quarter amid favorable economic data, a decline in the national unemployment rate to 7% in November, and a two-year bipartisan federal budget deal. Financial stocks performed mostly in line with the broad market. The Federal Reserve's mid-December announcement that it will begin to curtail its $85 billion monthly asset purchases in January was well received. The Fed assured investors that smaller bond purchases will continue to provide stimulus by suppressing long-term interest rates. The central bank also indicated that short-term rates would stay low even after the unemployment rate falls below 6.5%, assuming inflation remains contained.
The Financial Services Fund returned 11.18% in the quarter compared with 10.14% for the Russell 3000 Financial Index and 11.12% for the Lipper Financial Services Funds Index. For the 12 months ended December 31, 2013, the fund returned 38.93% versus 34.46% for the Russell 3000 Financial Index and 38.14% for the Lipper Financial Services Funds Index. The fund's average annual total returns were 38.93%, 16.82%, and 5.04% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.94% as of its fiscal year ended December 31, 2012.
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Capital markets companies, especially those with assets tied to the U.S. equity market, contributed significantly to the fund's absolute performance. Several regional and money center banks were also strong contributors. We believe smaller banks could benefit from a wave of mergers in the next several years, as valuations become more reasonable for sellers but still not too high for buyers, and small banks face increasing regulatory costs. Real estate-related stocks lagged amid higher mortgage rates and reduced refinancing activity.
As we enter 2014, we are less enthusiastic about the likelihood of returns matching the very strong results of the past two years. Price/earnings multiples have expanded because stock prices have increased more than earnings, which puts financial stocks, and the broader market, in a much more precarious position. However, we believe that the underpinnings for solid U.S. economic growth are in place. Investing in financial stocks is a levered call on the underlying economy of the financial institutions' home market. As such, we have a positive outlook for U.S. financial stocks thanks to our belief in the U.S. economy.