Financial services stocks stalled in the second quarter and in the first half of the year; they produced mild gains but lagged the broad S&P 500 Index. The sector was hurt by a number of factors, including historically low market volatility, continued low interest rates, legal and regulatory overhangs, and uncertainty surrounding global growth.
The Financial Services Fund returned 0.43% in the quarter compared with 2.32% for the Russell 3000 Financial Index and 0.94% for the Lipper Financial Services Funds Index. For the 12 months ended June 30, 2014, the fund returned 18.24% versus 18.32% for the Russell 3000 Financial Index and 19.64% for the Lipper Financial Services Funds Index. The fund's average annual total returns were 18.24%, 15.82%, and 5.08% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.88% as of its fiscal year ended December 31, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
Insurance companies were our top absolute contributors to performance during the quarter, driven by property and casualty (P&C) firms. P&C companies have performed well in recent years, but we believe that the industry will continue to move further into a "soft market" for pricing and that returns on equity will contract. In a reversal from the first quarter, banks were the largest absolute detractors. However, we believe certain money center banks are earning less than they could and have significant upside potential. Also, we have built large positions in other companies, such as trust banks and securities exchanges, that we believe are currently under-earning their business models as a result of temporary factors.
After a very strong 2012 and 2013, it is not surprising that financial stocks were slow out of the gate in 2014. Stocks in the financials sector are not as cheap as they were two years ago. We are more excited about individual stock opportunities than we are about the broad market or the financials sector overall. We believe the economy will continue to gradually improve, and we believe your fund is well positioned in the companies and stocks that will benefit most from this backdrop.