U.S. stocks rose in the first quarter of 2015 despite occasional bouts of volatility and uncertainty about when the Federal Reserve would begin tightening monetary policy. Corporate merger activity, reduced energy costs, low interest rates, and massive quantitative easing efforts in the eurozone and Japan were supportive. Bonds produced positive returns amid weak inflation readings and decelerating economic growth. High yield issues and leveraged loans were among the better-performing areas.
The Capital Appreciation Fund returned 3.21% in the quarter compared with 0.95% for the S&P 500 Index and 2.02% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. For the 12 months ended March 31, 2015, the fund returned 12.66% versus 12.73% for the S&P 500 Index and 7.25% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. The fund's average annual total returns were 12.66%, 12.59%, and 9.08% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.71% as of its fiscal year ended December 31, 2013.
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The portfolio's equity holdings significantly outperformed the S&P 500 during the quarter. Health care was one of the strongest areas, helped by merger and acquisition activity, but stock selection in the information technology and consumer discretionary sectors also contributed to the portfolio's outperformance. We opportunistically trimmed select holdings and decreased equity exposure while adding to the portfolio's cash position. The fixed income allocation marginally increased as we added investment-grade corporate bonds to the portfolio. With long-term interest rates so low, we have been selling longer-duration holdings in favor of shorter-duration bonds. High yield remains the portfolio's largest fixed income allocation; we tend to favor the highest-quality issues in the high yield universe.
We continue to believe that the attractiveness of the U.S. equity market has diminished given elevated valuations, positive investor sentiment, and the prospect of decelerating earnings. While finding investments with a favorable risk/reward trade-off has become more difficult, we remain focused on high-quality companies with low earnings volatility, high free cash flow generation, and strong records of value creation through capital allocation decisions. We will look for opportunities to add to the portfolio's equity position on market pullbacks, when quality companies with defensive characteristics have more compelling valuations, and when attractive risk/reward opportunities present themselves.