U.S. stocks produced strong gains in the fourth quarter, capping a sixth consecutive year of positive returns for the S&P 500. The market was supported by steady U.S. economic growth and new stimulus efforts in the eurozone and Japan. Investment-grade bonds did well as long-term interest rates declined amid low inflation and losses in the high yield market, which stemmed from plunging oil prices. Leveraged loans held up better than high yield bonds. Stocks in overseas markets declined in U.S. dollar terms amid global economic weakness and dollar strength versus other currencies.
The Capital Appreciation Fund returned 4.82% in the quarter compared with 4.93% for the S&P 500 Index and 2.13% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. For the 12 months ended December 31, 2014, the fund returned 12.25% versus 13.69% for the S&P 500 Index and 7.04% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. The fund's average annual total returns were 12.25%, 13.16%, and 8.69% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.71% as of its fiscal year ended December 31, 2013.
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We have been lowering exposure to U.S. equities given heightened valuations, positive investor sentiment, and the potential for earnings growth to decelerate. With the 10-year Treasury yield hovering around 2%, we have sold all of our Treasuries and some of the portfolio's longer-duration investment-grade corporate bonds, but we have been adding to higher-quality high yield bonds. While valuation levels in most asset classes are well above normal, high yield bonds are closer to their long-term median. In addition, we have purchased some non-U.S. equities, taking advantage of poor sentiment and weak stock prices to scoop up some bargains. Also, we initiated futures positions in two European indexes that give us additional exposure to the European equity market, but we have effectively hedged much of the currency risk associated with these investments.
We are more concerned today than we have been in past years about the U.S. equity market. The recent decline in oil prices is likely a net positive for U.S. economic growth, based on the composition of earnings for the S&P 500, but it is a clear negative for S&P 500 earnings growth. While we are finding fewer U.S. equities with an attractive risk/reward trade-off than we have at any time since 2007, we remain focused on identifying high-quality companies trading at compelling valuations with defensive characteristics, i.e., names with lower earnings volatility, high free cash flow generation, and strong records of value creation through capital allocation decisions.