U.S. stocks declined in the third quarter, and the large-cap S&P 500 Index experienced its first "correction," which is a drop of at least 10% from recent highs, in four years. A steep drop in Chinese stock prices stemming from China's decelerating economy and uncertainty regarding policy responses dragged global equity markets lower. Uncertainty about when the Federal Reserve will begin to raise short-term interest rates also weighed on the equity market. Investment-grade bonds produced positive returns, but high yield bond prices fell as credit spreads widened and investors favored lower-risk fixed income securities. Bank debt, or leveraged loans, held up better than high yield issues.
The Capital Appreciation Fund returned −2.77% in the quarter compared with −6.44% for the S&P 500 Index and −5.89% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. For the 12 months ended September 30, 2015, the fund returned 5.70% versus −0.61% for the S&P 500 Index and −2.01% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. The fund's average annual total returns were 5.70%, 12.28%, and 8.28% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.70% as of its fiscal year ended December 31, 2014.
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The portfolio's stock investments held up better than the broad equity market during the quarter, but its fixed income allocation, about half of which is in the high yield market, underperformed the investment-grade bond market, as measured by the Barclays U.S. Aggregate Index. As stock prices fell during the quarter, we trimmed our cash position to opportunistically add to select equities whose valuations became less stretched. The overall fixed income allocation was essentially unchanged, but we added to high yield and investment-grade corporate bond positions while trimming leveraged loan holdings. With Treasury yields still very low, we are favoring shorter-duration corporate bonds given our concern about interest rates rising over the intermediate term.
While the scale of recent market volatility has been extraordinary, we were not surprised to see a market pullback following several years of significant gains that had pushed stock valuations to above-average levels. The downturn has enabled us to identify some "idiosyncratic" investment ideas. While we remain cautious on equities given mounting global uncertainty and the aging U.S. economic expansion, we anticipate improved earnings growth next year if headwinds from oil-price, euro, and yen weakness begin to fade. As always, we remain committed to finding the best risk-adjusted opportunities across all asset classes to balance our objectives of preserving invested capital and generating equity-like returns over the long term with less risk than the broad equity market.