U.S. stocks rose modestly in the second quarter, extending record-high levels, as investors anticipated that a gradually improving economy would sustain corporate earnings growth. The U.S. economy unexpectedly shrank at an annualized 2.9% pace in the first quarter, its worst quarterly performance in five years, but most economists blamed severe winter weather for the slowdown and anticipate stronger growth for the rest of the year. Mid-cap stocks slightly lagged large-cap stocks but outperformed small-caps, according to various Russell indexes. Value stocks outpaced growth shares in the mid-cap space.
The Mid-Cap Value Fund returned 5.74% in the quarter compared with 5.62% for the Russell Midcap Value Index, and 4.79% for the Lipper Mid-Cap Value Funds Index 4.77% for the Lipper Multi-Cap Value Funds Index. For the 12 months ended June 30, 2014, the fund returned 27.23% versus 27.76% for the Russell Midcap Value Index, and 26.83% for the Lipper Mid-Cap Value Funds Index 24.72% for the Lipper Multi-Cap Value Funds Index. The fund's average annual total returns were 27.23%, 19.72%, and 10.34% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.80% as of its fiscal year ended December 31, 2013.
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The portfolio's sector allocations remained broadly unchanged over the quarter. Consumer staples represents the largest overweight sector versus the benchmark. We continue to find attractive opportunities in the food products industry and in food and staples retailing, areas that comprise the bulk of the portfolio's investments in the sector. The portfolio is also significantly overweight in energy. We have lately added to energy holdings after finding some attractively valued companies, including some where activist investors have improved shareholder value. The biggest underweight is financials, where we lately pared exposure for valuation reasons, followed by information technology, which typically leans toward growth-oriented companies. We are particularly interested in good companies that have underperformed their best operating potential, as these often end up being the best performers over the long term.
The year-to-date surge in merger and acquisition activity has positively affected our portfolio. Some holdings have acquired other companies, others have been taken out themselves, and at least one has direct exposure to rising M&A activity worldwide. In most cases, the market response to news of the transactions has been favorable for both buyers and sellers. The rise in shareholder activism has also had a generally positive impact on holdings. Because we buy undervalued or underperforming assets, some of the portfolio's holdings are bound to draw the attention of activist shareholders who seek to unlock value through a change in management practices. While shareholder activism can invite unfavorable attention on a company, we believe it can also serve as a catalyst for management to improve fundamental performance and create shareholder value.