Major U.S. stock indexes rose to multiyear, if not all-time, highs in the first quarter. Despite tighter fiscal policy stemming from some federal tax increases in January and automatic budget cuts in March, shares advanced as the economy continued expanding, the labor market improved somewhat, and the Federal Reserve persisted with its asset purchase plans to suppress interest rates. Investment-grade bonds were mostly flat in the first quarter, but high yield bonds significantly outperformed as investors continued seeking securities with attractive yields.
The Capital Appreciation Fund returned 7.64% in the quarter compared with 10.61% for the S&P 500 Index and 6.58% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. For the 12 months ended March 31, 2013, the fund returned 12.75% versus 13.96% for the S&P 500 Index and 10.99% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. The fund's average annual total returns were 12.75%, 7.94%, and 10.38% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.73% as of its fiscal year ended December 31, 2011.
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.
Benchmark Definitions
We still consider equities to be the most appealing asset class in which we are currently investing, but their risk-adjusted return potential is less compelling than it was last year. The portfolio's equity exposure increased slightly during the quarter as we added to high-quality names with low earnings volatility (and thus less downside risk) that have recently underperformed. We see limited value and real risk of losses in traditional fixed income securities, as we believe interest rates are much more likely to rise than decline over the next few years. Fixed income allocation declined slightly as the yield differences between higher- and lower-quality securities continued to narrow. In general, we exchanged some securities with longer durations (i.e., higher interest rate sensitivity) for shorter-duration, higher-quality issues. We also trimmed our high yield and bank debt investments.
We see value among companies that deploy capital wisely through reasonable dividends, stock repurchases, and good acquisition strategies. The portfolio continues to own several companies that should benefit from rising rates. In addition, the portfolio own's some companies that have the potential for value to be unlocked by being acquired, going private, or breaking apart into pieces. In fixed income, exposure to holdings with short durations and to floating rate securities should help protect our holders from rising rates.
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