Stocks recorded modest overall gains in the second quarter, but only after enduring significant volatility at the end of the period. Mid-caps outperformed large-caps but trailed small-caps, and mid-cap growth stocks trailed their value counterparts by some margin. Performance in the Russell Midcap Growth Index was led by energy, telecommunication services, and consumer staples, while consumer discretionary and industrials and business services were the biggest laggards.
The Mid-Cap Growth Fund returned 1.94% in the quarter compared with 1.56% for the Russell Midcap Growth Index and 2.45% for the Lipper Mid-Cap Growth Funds Index. For the 12 months ended June 30, 2016, the fund returned 0.26% versus −2.14% for the Russell Midcap Growth Index and −5.33% for the Lipper Mid-Cap Growth Funds Index. The fund's average annual total returns were 0.26%, 11.92%, and 10.15% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.77% as of its fiscal year ended December 31, 2015.
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Health care holdings provided the largest boost to returns in the period. Recently, we have been reducing our investments in therapeutics companies in favor of service provider and equipment firms, and our largest industry exposure is to health care equipment and supplies. Consumer discretionary holdings weighed the most on results. While consumer spending has increased modestly in recent years, we anticipate that growth will remain modest as many households continue to shore up their balance sheets while other consumers have modified their spending as a response to the financial crisis and resulting recession. As a result, we are cautious in our investment in the consumer discretionary sector, and our overall allocation is lower than it has been historically.
Generally, the market is still discounting slow but continued economic growth and decent but unexciting earnings prospects for most mid-cap growth companies. A subset of our investment universe seems to be under the cloud of imminent recession, however. This "recession bin," as we think of it, includes a number of cyclical stocks (such as auto suppliers and retailers and travel and leisure firms) where valuations appear to reflect a very bad outcome in 2017. An imminent recession seems unlikely but is certainly possible, and many of these firms would suffer a large hit to earnings if it occurs. With the negative outcome already built into their share price, however, the stocks of these firms may well hold up better than many other segments that are priced for smooth sailing ahead. As a result, we are spending part of our time sorting through the recession bin in the hunt for new opportunities, a strategy that may present some short-term downside but should favor our long-term and patient investment approach.