U.S. small-cap growth stocks lost considerable ground in the quarter, significantly underperforming both large- and mid-cap shares. However, small-cap growth stocks did not drop as steeply as small-cap value shares, as the Russell 2000 Growth Index fell 6.13% while the Russell 2000 Value Index declined 8.58%. The quarter's decline pushed the broad Russell 2000 Index of small-cap stocks into negative territory for the year to date. There were a variety of signals during the quarter that the U.S. economy was picking up speed, so much of the sell-off in small-cap stocks may have resulted from investors growing more concerned about the elevated valuations in the asset class.
The New Horizons Fund returned −3.77% in the quarter compared with −6.13% for the Russell 2000 Growth Index and −5.46% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended September 30, 2014, the fund returned 7.81% versus 3.79% for the Russell 2000 Growth Index and 1.98% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 7.81%, 20.99%, and 12.25% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.80% as of its fiscal year ended December 31, 2013.
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Information technology and consumer discretionary continue to be the portfolio's largest sector allocations, although it is slightly underweight to information technology and significantly overweight to consumer discretionary relative to the benchmark index. However, our bottom-up investment process focuses on picking individual stocks, which drives the portfolio's 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 are firms 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.
The recent sell-off in small-cap growth stocks helped moderate the extreme valuation levels that we saw in the asset class after its rapid price appreciation through early 2014, but valuations remain high by historical standards. As a result, we are wary of a continuing period of price adjustment that would further reduce valuations. On the positive side, we anticipate moderate U.S. economic growth, with low inflation. The Federal Reserve is likely to start raising interest rates next year, but we believe that the rate hikes will occur at a modest pace. We remain confident in our ability to find smaller companies that are poised to grow rapidly and to hold them for the long term.