Large-cap U.S. stocks rose slightly in the second quarter. For most of the period, the market was supported by merger activity, a strengthening economy, and better-than-expected first-quarter corporate earnings, but the quarter ended on a weak note due in part to developments in Greece and China. U.S. bond returns were mostly negative as longer-term interest rates increased, but high yield bonds outperformed investment-grade issues with flat returns.
The Capital Appreciation Fund returned 0.48% in the quarter compared with 0.28% for the S&P 500 Index and −0.06% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. For the 12 months ended June 30, 2015, the fund returned 8.83% versus 7.42% for the S&P 500 Index and 3.22% for the Lipper Mixed-Asset Target Allocation Growth Funds Index. The fund's average annual total returns were 8.83%, 14.38%, and 8.98% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. The fund's expense ratio was 0.70% as of its fiscal year ended December 31, 2014.
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During the quarter, the portfolio's equity holdings outperformed the S&P 500, and its equity weight increased as we rotated into the consumer staples and utilities sectors. Higher-yielding stocks in these sectors experienced a modest correction due to the rise in longer-term interest rates. Conversely, we reduced exposure to the consumer discretionary sector and trimmed select energy and financials companies. In fixed income, we reduced investments in select high yield issues on strength, while other names were called away. Given our concerns about rising interest rates, we are keeping the fixed income portfolio's duration, a measure of its interest rate sensitivity, low.
As we look at the financial markets, we are still cautious. Equity market valuations remain elevated versus history. There are clear signs of irrational euphoria in pockets of the market. In addition, merger and acquisition (M&A) activity is on pace to equal or potentially surpass the 2007 cyclical peak, and M&A peaks tend to occur near the end of bull markets. While U.S. interest rates have increased, they are still too low for us to begin buying longer-duration fixed income credits. The good news is that we have the ability to go where we see value, and there are still pockets of opportunity in the equity and fixed income markets. These opportunities are clearly less plentiful and offer less upside than they did coming into 2009 or in the fall of 2011, but there are still reasonable risk/reward opportunities in the marketplace.