U.S. stock markets generated solid gains in the first quarter, lifting several major indexes to multiyear highs. Investors appeared to react favorably to improving economic conditions and the Federal Reserve's decision to continue stimulus measures until the jobless rate meaningfully declines. Corporate earnings were generally strong and merger activity gained momentum, though it remained below peak levels. Mid- and small-cap stocks surpassed large-caps. In the small-cap space, growth stocks outperformed value, as measured by various Russell indexes.
The New Horizons Fund returned 13.42% in the quarter compared with 13.21% for the Russell 2000 Growth Index and 11.73% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended March 31, 2013, the fund returned 13.63% versus 14.52% for the Russell 2000 Growth Index and 12.50% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 13.63%, 13.74%, and 14.30% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.81% as of its fiscal year ended December 31, 2011.
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Information technology represents the portfolio's largest allocation, as we believe long-term trends favor the sector. The portfolio owns innovators in mobile computing, online advertising and commerce, and cloud computing. Consumer discretionary holdings are concentrated among small companies that we believe can become leaders in their respective markets. In health care, the portfolio owns a number of biotechnology firms that should benefit from the development of new therapies. The portfolio also has exposure to health care companies that have an ability to make end markets more efficient. These include service providers and pharmacy benefit managers.
The U.S. economy should continue to expand at a moderate pace, propelled by the improved housing and labor markets. The Federal Reserve is also likely to keep its stimulus programs in place until employment significantly improves. Nonetheless, fiscal policy remains unsettled, which could result in renewed market volatility. Corporate balance sheets are healthy and there are indications that capital spending levels are improving. Small-cap valuations remain at a premium relative to large-caps, and we believe smaller-cap companies will face significant challenges outperforming larger-cap shares. Valuations appear more appealing among growth companies versus their value counterparts and we are continuing to find solid opportunities in the small-cap space.