U.S. large-cap stocks produced solid gains in the fourth quarter, supported by steady U.S. economic growth and new stimulus efforts in the eurozone and Japan. Stocks in developed non-U.S. markets declined in dollar terms due to the further weakening of non-U.S. currencies, particularly the euro and the yen. U.S. bond returns were mostly positive, as high-quality issues appreciated but lower-quality bonds declined. Long-term Treasury bonds performed best, as long-term interest rates and inflation expectations declined. High yield bonds declined primarily due to risk aversion and falling oil prices, which weighed on energy companies that compose a substantial percentage of issuers.
The Balanced Fund returned 1.75% in the quarter compared with 2.32% for the Lipper Balanced Funds Index. For the 12 months ended December 31, 2014, the fund returned 5.97% versus 7.21% for the Lipper Balanced Funds Index. The fund's average annual total returns were 5.97%, 10.33%, and 6.80% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 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 growth stock and U.S. investment-grade bond portfolios detracted from relative performance as each underperformed its style-specific benchmark. Our decision to overweight non-U.S. equities hurt relative performance. We are overweight to non-U.S equities as we feel valuations are more attractive than U.S. equities. Within our domestic allocation, we are overweight growth stocks versus value stocks. Within fixed income, we favor high yield versus investment-grade bonds for their significant yield advantage.
Our global growth expectations remain modest over the next several quarters. Gradual improvement in the U.S. economy is supported by diminishing fiscal headwinds, increased state and local government spending, improving private sector demand, and moderate job growth. In contrast, Japanese and European growth momentum has moderated recently, with Japan slipping back into recession and Europe remaining hindered by high debt loads, high unemployment, and deflation worries. Slowing growth in China, Brazil, and other emerging economies also weighs on 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.