Small-cap growth stocks fell sharply in the third quarter. One of the reasons was a general downturn in global financial markets because of events in China, including a small but unexpected currency devaluation. Small-cap valuations were high at the beginning of the quarter, and, thus, did not provide any support as investors turned risk averse. Some investors expected the Federal Reserve to start raising short-term interest rates in September, but the Fed decided to delay a rate hike due to events in other countries and unsettled markets.
The Diversified Small-Cap Growth Fund returned −10.41% in the quarter compared with −12.76% for the MSCI US Small Cap Growth Index and −11.20% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended September 30, 2015, the fund returned 4.55% versus 0.44% for the MSCI US Small Cap Growth Index and 2.97% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 4.55%, 15.72%, and 9.26% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.85% as of its fiscal year ended December 31, 2014.
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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.
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 the information technology, health care, and industrials and business services sectors helped fund performance versus the MSCI benchmark. However, our investments in the financials sector detracted from relative results. Sector allocations made a marginal contribution to performance; usually, they have little or no 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 third quarter was one of the worst quarters for small-cap stocks in many years, with market volatility increasing and investors moving away from risky assets. The economic recovery has been progressing at a moderate pace during the year, and wage pressures have been largely absent despite low unemployment. Low oil prices are good for consumers and many businesses, but there are stresses in the energy and materials sectors. While some Fed officials have indicated that they expect a rate hike this year, low global inflation and a recent slowdown in U.S. job growth relative to the brisk pace earlier this year might result in a further delay. 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.