U.S. equities generated mixed third-quarter returns against a backdrop of geopolitical strife, the impending end of Federal Reserve asset purchases, and the specter of higher U.S. interest rates. Large-caps generally advanced while small- and mid-cap shares posted losses. Across the entire market cap spectrum, growth stocks outperformed value shares. Developed non-U.S. stock markets posted steep losses, attributed mainly to the strength of the U.S. dollar, while emerging markets declined to a lesser extent. Within the U.S. bond market, investment-grade securities outperformed. Long-term Treasury bonds posted gains as yields declined to their lowest levels in more than a year. High yield bonds declined due to risk aversion. Developed non-U.S. bond markets also fell, due to the U.S. dollar's strength versus almost all currencies.
The Personal Strategy Growth Fund returned −1.55% in the quarter compared with −1.21% for the Combined Index Portfolio* and −0.87% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. For the 12 months ended September 30, 2014, the fund returned 12.11% versus 11.91% for the Combined Index Portfolio* and 11.51% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. The fund's average annual total returns were 12.11%, 12.66%, and 8.02% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.90% as of its fiscal year ended May 31, 2014.
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Our exposure to non-benchmark, diversifying sectors was the largest detractor from relative performance in the quarter. Real asset equities underperformed as energy and materials prices fell. Non-U.S. and high yield bonds also detracted as each lagged our fixed income benchmark. Overall, security selection hurt the portfolio's relative results, although stock selection generated a positive contribution in our non-U.S. developed and U.S. large-cap growth portfolios. Asset allocation decisions benefited relative returns. Our underweight to U.S. small-caps and real assets equities contributed to relative performance. At this time, we favor non-U.S. over U.S. equities and emerging over developed markets equities. We are also overweight to U.S. growth versus value stocks. And we favor investment-grade over nondollar bonds but remain overweight to high yield versus investment-grade bonds for their significant yield advantage.
Our global growth expectations are modest. The U.S. economy is likely to be strongest as diminishing fiscal headwinds, higher spending by state and local governments, rising consumer and business demand, and moderate job growth support a gradually improving economy. In contrast, European growth remains pressured by high debt loads and unemployment and deflation worries. In Japan, growth and inflation have stalled due to the impact of last April's sales tax increase, stubbornly low real wages, and the lack of progress on structural reforms. Slowing growth in China, Brazil, and other emerging economies continues to weigh on global trade. These divergent conditions bolster our belief that our highly diversified portfolios and diligent fundamental research can enhance our ability to produce good long-term returns.