U.S. stocks advanced in the third quarter as the Federal Reserve played a strong role in lifting sentiment. After alarming investors in May and June by signaling that it might soon dial back on its monthly asset purchases, Fed officials unexpectedly announced the central bank would maintain the pace of its stimulus. Most of the major stock indexes moved further into record territory on the Fed's news before pulling back late in the period. Developed non-U.S. stock markets generated strong returns, with developed European markets outperforming most markets in Asia and the Americas. Investment-grade bond returns were mostly flat as price gains in September offset earlier losses. Bond prices fell and yields rose for most of the quarter as investors anticipated a shift in monetary policy, but the unexpected delay in Fed tapering lifted bond market sentiment, particularly for higher-risk sectors. Treasury prices rallied and yields declined after the Fed's decision, but by quarter-end, longer-term Treasury yields were still higher than they were on June 30.
The Balanced Fund returned 6.02% in the quarter compared with 4.58% for the Lipper Balanced Funds Index. For the 12 months ended September 30, 2013, the fund returned 13.88% versus 11.70% for the Lipper Balanced Funds Index. The fund's average annual total returns were 13.88%, 9.42%, and 7.49% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.69% as of its fiscal year ended December 31, 2012.
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Total return information before August 31, 1992 reflects performance by managers other than T. Rowe Price.
Positive security selection in large-cap growth and large-cap value stocks aided returns for the quarter. Our out-of-benchmark allocation to high yield bonds also helped performance after the Fed's September announcement sparked a rally in riskier credits. Our current strategy favors stocks over bonds. Stock prices have risen yet remain reasonably valued, while the current low-yield environment is less favorable for bond returns. We are slightly overweight to non-U.S. equity markets given the more attractive valuations outside the U.S. As for fixed income, we continue to favor high yield over U.S. investment-grade bonds for their added yield and lower duration. While the terms in some recent deals have become less favorable to investors, high yield bonds remain attractive relative to other fixed income sectors in a low-yield environment, particularly given prospects for a slowly improving economy.
Our global growth expectations remain modest for the next several quarters. In the U.S., the housing recovery and moderate job growth are supporting a gradual improvement in economic activity, but the contractionary impact of fiscal policy weighs on the recovery. On the bright side, U.S. corporate balance sheets and profit margins remain healthy. Earnings and revenue growth in the low to mid-single digits are consistent with modest economic growth, and equity valuations are reasonable relative to historical levels based on several measures. Overseas, European economies are hindered by debt loads but have begun to benefit from a shift in policy to ease back on austerity. The eurozone reemerged from recession with a slight gain in second-quarter economic growth, though challenges continue to plague periphery countries. Japan's fiscal and monetary policies have revived consumer spending and economic output, though its sustainability will depend on structural reforms. We believe that the uneven global recovery and heightened volatility driven by the Fed's change in monetary policy underscore the value of the fund's broad diversification.