U.S. stocks declined in the third quarter amid concerns about China's economy and the timing of Federal Reserve rate hikes. Large-cap indexes experienced their first correction in four years. Evidence of China's decelerating economy and its unexpected currency devaluation sparked a sharp sell-off in Chinese stocks, which weighed on global equity markets and commodity prices and fueled demand for safe-haven assets, such as the U.S. dollar and U.S. Treasuries. Even though the Fed failed to raise short-term U.S. interest rates, the central bank's mid-September concerns about "global economic and financial developments" weighed on world markets as the quarter ended.
The Balanced Fund returned −5.62% in the quarter compared with −4.59% for the Lipper Balanced Funds Index. For the 12 months ended September 30, 2015, the fund returned −1.26% versus −1.06% for the Lipper Balanced Funds Index. The fund's average annual total returns were −1.26%, 8.52%, and 6.07% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.68% as of its fiscal year ended December 31, 2014.
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Total return information before August 31, 1992 reflects performance by managers other than T. Rowe Price.
The portfolio's out-of-benchmark allocations to diversifying sectors and its exposure to real assets equities weighed on results as did the inclusion of high yield bonds. Security selection within both the U.S. large-cap equity and non-U.S. equity portfolios, the overweight to non-U.S. equities relative to U.S. equities, and an overweight to high yield bonds relative to U.S. investment-grade bonds also weighed on relative performance.
The U.S. stock market's third-quarter loss is not surprising given the magnitude of its advance over the past six years. In the near term, we expect to see muted equity returns coupled with higher volatility, which has lately created more opportunities to buy high-quality companies at cheaper prices. Valuations in large-cap stocks are now trading closer to their historical averages. While certain areas of the market remain overvalued, we are finding select companies that are priced below their intrinsic value with relatively limited downside risk.