U.S. large-cap indexes logged a small advance for the quarter. Non-U.S. stock markets posted steep losses, attributed mainly to the strength of the U.S. dollar. U.S. bond returns were mixed, although long-term Treasury interest rates declined to their lowest levels in more than a year. High yield bonds declined, underperforming investment-grade issues, as credit spreads widened due to risk aversion and supply-weakened demand. Overall, global equities were mixed and volatility picked up against a backdrop of geopolitical strife in Ukraine, the Middle East, and Hong Kong; the impending end of Federal Reserve asset purchases; and the specter of higher U.S. interest rates.
The Balanced Fund returned −1.08% in the quarter compared with −0.57% for the Lipper Balanced Funds Index. For the 12 months ended September 30, 2014, the fund returned 10.81% versus 10.52% for the Lipper Balanced Funds Index. The fund's average annual total returns were 10.81%, 10.78%, and 7.35% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.68% 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.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
Total return information before August 31, 1992 reflects performance by managers other than T. Rowe Price.
Our exposure to non-benchmark, diversifying sectors detracted the most from relative performance, particularly to real assets equities, which underperformed as energy and materials prices fell. High yield bonds hurt relative performance as the sector lagged its asset class benchmark. Security selection within our large-cap value and core equity portfolios also detracted from relative performance as each underperformed its style-specific benchmark. Our non-U.S. equity portfolio outperformed its style-specific benchmark, primarily due to security selection; however, our decision to overweight non-U.S. equities compared with U.S. equities hurt relative results. Our decision to underweight real asset equities, however, helped relative performance. At this time, we favor the reasonable valuations in non-U.S. equities over U.S. equities, which appear to be at or above historical valuations. Within our domestic allocation, we are overweight growth versus value stocks. Among out-of-benchmark allocations, we are overweight to high yield versus investment-grade bonds for their significant yield advantage.
Our global growth expectations are modest. The U.S. is likely to be the strongest economy as diminishing fiscal headwinds, higher spending by state and local governments, rising consumer and business demand, and moderate job growth support a gradually improving growth. In contrast, European economic growth remains pressured by high debt loads and unemployment and deflation worries. In Japan, growth and inflation have stalled due to the impact of last April's sales tax increase, stubbornly low real wages, and the lack of progress on structural reforms. Slowing growth in China, Brazil, and other emerging economies continues to weigh on overall global trade. These divergent conditions bolster our belief that the portfolio's broad diversification and diligent fundamental research can enhance our ability to produce good long-term returns.