U.S. stocks advanced in the first quarter despite occasional bouts of volatility and uncertainty about when the Federal Reserve would begin tightening monetary policy. Small-cap stocks strongly outperformed large-cap shares, and small-cap growth stocks outpaced their value counterparts. The market was supported by corporate merger activity, reduced energy costs, low interest rates, and massive quantitative easing efforts in the eurozone and Japan. Smaller-cap stocks also benefited from their lower exposure to foreign markets, which have become more challenging for U.S. firms because of the strong U.S. dollar.
The Diversified Small-Cap Growth Fund returned 8.21% in the quarter compared with 6.40% for the MSCI US Small Cap Growth Index and 5.74% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended March 31, 2015, the fund returned 15.57% versus 9.48% for the MSCI US Small Cap Growth Index and 8.34% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 15.57%, 19.03%, and 11.36% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.82% as of its fiscal year ended December 31, 2013.
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.
Fund performance versus the MSCI benchmark was helped by good stock selection in the health care, financials, and materials sectors. However, our investments in the energy sector detracted slightly from relative results. As usual, sector allocations in aggregate had little impact on relative performance because they are fairly 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.
Although some recent data might suggest that there was a first-quarter slowdown in U.S. GDP growth, we believe the economic recovery is sustainable. Wage gains are still subdued, and inflation is being suppressed by falling oil prices and a rising dollar, which reduces import costs. These factors will allow the Federal Reserve to raise rates slowly in any rate increase campaign. The investment landscape is constantly changing, but our investment strategy remains the same. 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.