U.S. stocks rose in the second quarter, adding to first-quarter gains and lifting large-cap indexes to new all-time highs in June. Equities climbed amid signs that the U.S. economy was recovering from a weather-driven contraction in the first quarter and hopes that new stimulus measures in Europe would boost eurozone economies. Corporate merger activity and falling long-term interest rates were supportive. High yield and investment-grade bonds produced moderate returns, even as the Federal Reserve continued tapering its asset purchases. Leveraged loans produced milder gains.
The Capital Appreciation Fund returned 4.02% in the quarter compared with 5.23% for the S&P 500 Index and 3.83% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. For the 12 months ended June 30, 2014, the fund returned 18.79% versus 24.61% for the S&P 500 Index and 18.52% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. The fund's average annual total returns were 18.79%, 15.57%, and 9.17% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.71% as of its fiscal year ended December 31, 2013.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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With equity valuations stretched and many market participants complacent and overly optimistic about the future, we became more conservative in our portfolio positioning. During the quarter, we reduced equity exposure, and the overall risk profile of the portfolio's equity holdings has become lower. We added slightly to cash reserves and purchased some high yield bonds rated BB, which is one of the higher-quality tiers of the high yield universe. These bonds have relatively attractive valuations compared with other fixed income asset classes and solid underlying corporate fundamentals.
Given valuations, complacency in the equity and fixed income markets, and signs of speculative excess, such as leveraged loans with limited covenants and merger activity fueled by low-cost debt and high stock prices, we believe the conditions are in place for a meaningful correction. However, our views are not intended to signal that we believe a correction is imminent. In fact, equities could continue rising due to the lack of attractive alternatives given the prevailing low interest rate environment. Our fundamental job right now is to try to balance keeping up with the market as best as we can in the near term while making sure we limit downside volatility when the market inevitably corrects.