U.S. stocks advanced strongly in the third quarter. Buoyed by hopes for continued monetary stimulus and a rebound in the global economy, investors bid up stocks despite slowing profit growth. The Federal Reserve played a strong role in bolstering sentiment. After alarming investors in May and June by signaling that it might soon dial back on its asset purchases, Fed officials surprised financial markets in September by deciding to maintain the pace of its monetary stimulus. Most of the major stock indexes moved further into record territory after the Fed's announcement before pulling back late in the period. Small-cap stocks, which typically see bigger price swings than large-caps, fared particularly well. Within the Russell 2000 Growth Index, energy, health care, and information technology were the best performing sectors, while the utilities sector was a notable laggard.
The New Horizons Fund returned 14.32% in the quarter compared with 12.80% for the Russell 2000 Growth Index and 12.86% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended September 30, 2013, the fund returned 36.10% versus 33.07% for the Russell 2000 Growth Index and 30.91% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 36.10%, 19.51%, and 13.24% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.80% as of its fiscal year ended December 31, 2012.
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Consumer discretionary, information technology, and health care continue to represent the portfolio's biggest sectors. Among discretionary stocks, we are focused on companies that we think have the potential to become leaders over the long term. In the IT sector, we seek out companies with growing market share, strong management, and superior growth prospects regardless of the economic and technology spending environment. We are focused on drivers of technological change, such as mobile computing, online advertising and commerce, software and computing resources delivered online, and the ability to sift through and leverage vast amounts of information, otherwise known as "big data." As for health care, we believe the long-term outlook is attractive despite recent uncertainty due to government reform. Beneath the short-term uncertainty, however, we are interested in small companies that are developing new drugs for serious unmet medical needs. We also focus on companies with the advantages of scale, a new technology, or an ability to increase efficiency in their respective markets.
We believe investors will see heightened volatility in the near term as investors anticipate a shift in Federal Reserve policy. In the U.S., we are concerned about the polarization in Washington and a pattern of fiscal impasses since the debt ceiling crisis of 2011. Overseas, we are mindful of risks such as instability in the Middle East, slowdowns in major emerging markets, and other developments that have weighed on investor sentiment. Notwithstanding Fed-induced volatility, we believe that rising stock prices, the improving housing market, and steady job gains should support a moderate-growth economy. We would caution, however, that 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 in the near term.