Large-cap growth stocks posted good gains in the third quarter, adding to their strong first-half returns. Buoyed by hopes for continued monetary stimulus and a rebound in the global economy, investors bid up stocks despite the prospect of slower revenues and earnings growth. After alarming investors in May and June by signaling that it might soon dial back its asset purchases, the Federal Reserve surprised the markets late in the quarter by maintaining the pace of its stimulus, which bolstered investor sentiment. The pace of U.S. job growth slackened during the quarter, yet investors generally seemed to interpret the data in a positive light, assuming that the slowdown might further stay the Fed's hand in tightening monetary policy.
The Blue Chip Growth Fund returned 11.94% in the quarter compared with 5.24% for the S&P 500 Index and 10.98% for the Lipper Large-Cap Growth Funds Index. For the 12 months ended September 30, 2013, the fund returned 24.49% versus 19.34% for the S&P 500 Index and 21.31% for the Lipper Large-Cap Growth Funds Index. The fund's average annual total returns were 24.49%, 13.46%, and 8.70% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.76% as of its fiscal year ended December 31, 2012.
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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.
The portfolio has large allocations in economically sensitive sectors, including consumer discretionary, information technology, and industrials and business services. We favor companies that can generate durable earnings and stable cash flow growth. We largely avoid traditionally defensive sectors, including consumer staples, telecommunication services, and utilities, which we believe will be challenged to generate steady, above-average growth. The portfolio's holdings in the consumer discretionary, information technology, and health care sectors were the best absolute and relative performance contributors in the third quarter. Although industrials and business services holdings posted strong absolute returns, stock selection detracted from the portfolio's comparison with the benchmark. We do not make big portfolio shifts based on economic forecasts; bottom-up stock selection largely determines the portfolio's allocations.
We believe that the valuations for many high-quality companies remain reasonable. U.S. consumer sentiment has benefited from a period of deleveraging, a modest inflation environment, and significant gains in household net worth. Despite the strong year-to-date rally, the earnings and free cash flow yields on stocks are compelling. We think that there is room for high-quality, large-cap growth stocks to continue to appreciate in price and deliver attractive returns relative to other financial investments. We will attempt to take advantage of market volatility and investor uncertainty to buy fundamentally sound companies that can generate double-digit earnings and durable cash flow growth when they are out of favor.