U.S. stocks rose modestly during a volatile first quarter of 2015, as some worrisome economic data suggested that stocks faced a greater threat from falling demand than from higher interest rates. Several measures showed a slowdown in the manufacturing sector and declining business spending, while gains in retail sales and the housing sector remained meager despite continued improvement in the labor market. Small-cap stocks recorded solid gains, helped in part by their lower exposure to foreign markets, which have become more challenging for U.S. firms because of the strong U.S. dollar. As measured by various Russell indexes, growth stocks strongly outperformed value stocks across all market capitalizations.
The Small-Cap Stock Fund returned 3.90% in the quarter compared with 4.32% for the Russell 2000 Index and 5.74% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended March 31, 2015, the fund returned 8.82% versus 8.21% for the Russell 2000 Index and 8.34% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 8.82%, 16.86%, and 10.62% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.91% as of its fiscal year ended December 31, 2013.
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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.
Total return information before August 31, 1992 reflects performance by managers other than T. Rowe Price.
Our sector positions did not change dramatically during the first quarter. We have a large overweight versus our benchmark in industrials and business services through exposure to commercial services, road and rails, and machinery. Financials represents the fund's largest sector weight. The fund holds a large position in regional banks, which, in our view, have reasonable valuations and feature improving credit quality. We also have sizable positions in the insurance and capital markets industries. Our allocation to consumer discretionary is concentrated among specialty retail and hotels, restaurants, and leisure. In information technology, we have a large exposure to the software industry, which features a number of high-quality service providers. We remain cautious with regard to the energy sector, and believe weakness will persist for some time.
We believe small-cap valuations have improved on a relative basis versus large-caps due to the strong performance of larger companies in recent quarters. However, as the performance of small-caps has been solid and earnings have slipped, we believe that small-caps remain expensive on an absolute basis. For that reason, a market pullback would likely affect small-caps more than large-caps. We are mindful of valuation metrics as we continue to seek out durable growth and value companies that should benefit from improving economic conditions.