As the quarter began, U.S. stocks continued their bounce off February lows and ended the quarter in positive territory despite the volatility created by the UK's unexpected vote to exit the European Union (EU). Following the vote, forecasts for growth, especially in the UK and EU, were revised lower and expectations for U.S. interest rates hikes pushed out. The Russell 2000 ended higher despite a short-term plunge following the Brexit results. Small-caps led during the quarter, reversing a trend of large-cap dominance, and value outperformed growth across capitalization styles.
The New Horizons Fund returned 5.16% in the quarter compared with 3.24% for the Russell 2000 Growth Index and 3.66% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended June 30, 2016, the fund returned −2.21% versus −10.75% for the Russell 2000 Growth Index and −8.45% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were −2.21%, 13.03%, and 10.63% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.79% as of its fiscal year ended December 31, 2015.
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 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, consumer discretionary, and the health care sector are the portfolio's largest allocations.
We expect markets are likely to remain volatile in the wake of the Brexit vote. However the turbulence could also create opportunities for bottom-up fundamental investors. Overall we expect modest growth in the second half of the year. Small-cap stocks have now underperformed large-cap companies since 2014, bringing valuations down and close to longer-term averages. The price-to-earnings ratio of the fund's holdings at the end of June was 31.1, which was down slightly from 31.6 on December 31, 2015. Small-cap growth valuations are still modestly elevated relative to large caps, however. For example, the fund's P/E ratio relative to the same measure for the S&P 500 Index on expected 12-month forward earnings was 1.88 at the end of June, down from 1.95 at the end of 2015. Heightened market volatility has historically been negative factors for the relative performance of small-cap stocks versus large caps. However, 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.