Large-cap growth stocks posted strong fourth-quarter returns, capping a stellar year for blue chips. Signs that the U.S. economy had regained some traction were key in driving the market's gains. Many companies reported expanding profit margins and earnings, although revenue growth continued to lag. All 10 S&P 500 sectors posted positive returns, with only the defensive telecommunications and utilities segments lagging significantly. Small- and mid-cap stocks, which outperformed large-caps for the year, surrendered market leadership to large-caps in the fourth quarter.
The Blue Chip Growth Fund returned 12.78% in the quarter compared with 10.51% for the S&P 500 Index and 10.74% for the Lipper Large-Cap Growth Funds Index. For the 12 months ended December 31, 2013, the fund returned 41.57% versus 32.39% for the S&P 500 Index and 35.41% for the Lipper Large-Cap Growth Funds Index. The fund's average annual total returns were 41.57%, 23.08%, and 8.81% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.76% as of its fiscal year ended December 31, 2012. Investors should note that the fund's short-term performance is highly unusual and unlikely to be sustained.
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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.
While bottom-up stock selection largely determines the portfolio's sector allocations, we favor and have maintained large positions in economically sensitive segments, including consumer discretionary, information technology, and industrials and business services. These sectors include companies that we believe can generate durable earnings and stable cash flow growth. We believe that the high-quality, consistent-growth companies we seek to hold in the portfolio could perform well even if the economy only experiences modest growth. Because of our focus on growth, the portfolio has modest allocations to defensive sectors, including consumer staples, telecommunication services, and utilities.
Even after recording strong gains this year, we believe that the valuations for many high-quality companies remain reasonable. U.S. consumer sentiment has benefited from a period of deleveraging, a low inflation environment, and significant gains in household net worth. In 2013, equities rallied on an expansion in price/earnings multiples and a shift to owning stocks from Treasuries and other fixed income securities. Looking forward, we see a continuation of this trend taking place, and we believe that there is room for high-quality, large-cap growth stocks to continue to appreciate and deliver attractive returns relative to other financial investments, although at a more moderate pace. 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.