Small-cap growth stocks sold off sharply in the third quarter. The Russell 2000 Growth Index declined more than 13% for the quarter, falling more than large- or mid-cap equities as well as small-cap value shares. Turmoil in the Chinese equity market and doubts about China's ability to manage an economic slowdown, coupled with continuing uncertainty about the timing of the Federal Reserve's first interest rate hike since 2006, made investors more risk-averse and weighed heavily on small-cap growth equities. The Fed did not raise rates at its September policy meeting, citing adverse global financial conditions, which hurt sentiment toward riskier asset classes.
The New Horizons Fund returned −7.78% in the quarter compared with −13.06% for the Russell 2000 Growth Index and −11.20% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended September 30, 2015, the fund returned 6.32% versus 4.04% for the Russell 2000 Growth Index and 2.97% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 6.32%, 18.10%, and 10.46% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.79% as of its fiscal year ended December 31, 2014.
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.
Our bottom-up investment process focuses on picking individual stocks, which drives sector allocations. We strive to select companies that are either early-stage innovators with the potential to grow from the small-capitalization category into large-caps or that can durably grow over time as a result of the advantages of scale, a new technology, or an ability to increase efficiency in their markets. Information technology (27% of portfolio assets) and consumer discretionary (23%) are the fund's largest sector allocations; both are overweights relative to the benchmark. The next-largest allocation is to the health care sector (20%), which is a significant underweight compared with the benchmark.
Small-cap stocks have underperformed large-cap companies since 2014, but small-cap growth valuations are still modestly elevated relative to large caps. As a result, there is room for small-cap equities to fall further to bring their valuations into line with other segments. In addition, heightened market volatility and U.S. monetary policy tightening have historically been negative factors for the relative performance of small-cap stocks versus large caps. We remain confident in our ability to find smaller companies that are poised to grow rapidly and to hold them for the long term, even through the downturns and valuation adjustments that are part of every market cycle.