U.S. stocks continued their 2013 rally through the fourth quarter as many major equity indexes reached record or multiyear highs. The Federal Reserve delayed the taper of its asset purchase program until January and reiterated that it expects to keep short-term rates at very low levels for an extended period of time, which boosted market sentiment. The Russell 2000 Growth Index of small-cap growth stocks gained an impressive 8.17% for the quarter. However, in a reversal of style leadership from earlier in the year, growth underperformed value within the small-cap sector
The New Horizons Fund returned 8.70% in the quarter compared with 8.17% for the Russell 2000 Growth Index and 7.82% for the Lipper Small-Cap Growth Funds Index. For the 12 months ended December 31, 2013, the fund returned 49.11% versus 43.30% for the Russell 2000 Growth Index and 40.99% for the Lipper Small-Cap Growth Funds Index. The fund's average annual total returns were 49.11%, 29.05%, and 12.68% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.80% as of its fiscal year ended December 31, 2012. Investors should note that the fund's short-term performance is highly unusual and unlikely to be sustained.
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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.
Consumer discretionary, information technology, and health care continue to represent the portfolio's biggest sector allocations. However, our bottom-up investment process focuses on picking individual stocks rather than sectors, so company selection drives the sector allocations. We strive to select companies that are either early-stage innovators that have the potential to grow from the small-capitalization category into large caps, or that are firms that can durably grow over time as a result of the advantages of scale, a new technology, or an ability to increase efficiency in their respective markets. To find early-stage innovators, which account for about one-third of the portfolio's holdings, we concentrate on firms involved in corporate technology, consumer Internet media, health care information technology, genomics, financial payments technology, and collaborative "big data" businesses.
Although there have been recent indicators of improvement in U.S. economic growth, a reduction in the level of unemployment, and resilience in the recovering housing market in the face of higher mortgage rates, we caution that a better economic environment does not guarantee superior stock market performance. In light of the very strong 2013 gains by small-cap growth stocks, price-to-earnings ratios have reached levels that appear quite high by historical standards. While stock market gains were broad in 2013, going forward we anticipate that identifying cases in which a company's stock price underestimates its earnings potential will become more important in attaining superior long-term returns in small-cap growth shares.