Small-cap growth stocks posted gains in the fourth quarter but underperformed their large-cap peers. Despite the gains, the markets remained jittery, partially reflecting the persistent weakness in the natural resources and industrials sectors. The valuations in the small-cap universe, albeit slightly lower than earlier in the year, were still high at year-end. The economic recovery has been progressing at a steady pace, and the Federal Reserve finally started the monetary tightening cycle on December 16 by raising the fed funds target rate range to 0.25% to 0.50%; it had been 0.00% to 0.25% since December 2008.
The Diversified Small-Cap Growth Fund returned 4.50% in the quarter compared with 3.04% for the MSCI US Small Cap Growth Index and 3.51% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended December 31, 2015, the fund returned 2.33% versus −3.05% for the MSCI US Small Cap Growth Index and −1.15% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 2.33%, 13.02%, and 9.36% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2015. The fund's expense ratio was 0.85% as of its fiscal year ended December 31, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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 Diversified Small-Cap Growth Fund charges a 1%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
Good stock selection in several sectors, especially health care, helped fund performance versus the MSCI US Small Cap Growth Index. Sector allocations had very little impact on relative performance because they are similar to those of the benchmark. We believe having neutral sector weights versus our benchmark helps us avoid risks due to large moves in any one sector. While stock selection is based on a quantitative model, we also take into consideration T. Rowe Price's fundamental equity research and macroeconomic conditions.
The Fed is likely to raise rates a few times in 2016. However, the continuing softness of the global economy and the weakness in many emerging markets could lead to a slower pace of tightening than earlier expectations. Continued low interest rates would be supportive of economic and corporate fundamentals and could encourage capital markets activity, especially mergers and acquisitions. Falling oil prices are good for consumers and many businesses, but the stress they create in the oil and commodity segments of the market is likely to lead to production shutdowns before global demand and supply come into balance. Low oil prices also hurt many industrial firms that sell products to the energy sector. In any event, we continue to favor high-quality stocks of companies that generate good cash flows and are judicious in deploying capital. We believe that such companies will distinguish themselves over time with superior performance relative to lower-quality businesses.