U.S. stocks rose in the third quarter, with economically sensitive sectors generally outperforming defensive, noncyclical segments. The market overcame an increase in long-term interest rates, which was driven by expectations that the Federal Reserve would begin reducing its asset purchases after its September 17-18 monetary policy meeting. The Fed surprised many investors by deciding to delay the taper until it receives more evidence that the economic recovery will be sustained. Investment-grade U.S. bond returns were modestly positive; high yield bonds outperformed. Long-term rates rose to two-year highs in early September; the 10-year Treasury yield briefly reached 3%. Yields declined as the Fed decided to delay the taper. Also weighing on yields were concerns about the underlying strength of the economy and the growing probability of a federal government shutdown and debt ceiling showdown in October.
The Capital Appreciation Fund returned 4.48% in the quarter compared with 5.24% for the S&P 500 Index and 5.36% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. For the 12 months ended September 30, 2013, the fund returned 17.28% versus 19.34% for the S&P 500 Index and 14.83% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. The fund's average annual total returns were 17.28%, 10.90%, and 9.56% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.73% as of its fiscal year ended December 31, 2012.
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.
Overall stock allocation changed little during the quarter. We added some high-quality, higher-dividend-paying stocks, particularly within the consumer staples, utilities, and financials sectors. On the other hand, we trimmed select holdings in the technology and consumer discretionary sectors. We reduced the portfolio's cash position to opportunistically purchase fixed income securities. As interest rates rose, we bought some higher-quality, higher-yielding securities with longer duration (a measure of interest rate sensitivity). In addition, we invested in U.S. Treasuries for the first time in a few years. We reduced exposure to shorter-duration investment-grade corporate bonds in favor of longer-duration corporates.
Looking across the asset class spectrum, we still believe the equity market looks attractive relative to other asset classes, though less so as the market has advanced considerably this year. We continue to seek opportunities to add to equity positions on market pullbacks, when prices of high-quality companies with defensive characteristics fall due to earnings disappointments or when attractive risk/reward opportunities present themselves.