U.S. stocks recorded stellar gains as major indexes set record highs on improving economic growth and strong corporate profits despite sluggish consumer spending. The U.S. Federal Reserve boosted sentiment when it decided to taper its asset purchases beginning January 2014, while Europe's central bank cut its key lending rate in November. Non-U.S. developed markets stocks turned in good results, though they lagged U.S. shares. Emerging markets stock returns were lackluster. The 10-year Treasury yield reached over 3.00% after the taper announcement, ending the year at 3.03%. Investment-grade corporate bonds gained, though their returns paled next to those of high yield debt.
The Balanced Fund returned 6.39% in the quarter compared with 5.48% for the Lipper Balanced Funds Index. For the 12 months ended December 31, 2013, the fund returned 19.25% versus 16.39% for the Lipper Balanced Funds Index. The fund's average annual total returns were 19.25%, 14.63%, and 7.23% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.69% as of its fiscal year ended December 31, 2012.
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Total return information before August 31, 1992 reflects performance by managers other than T. Rowe Price.
Positive security selection in large-cap growth and large-cap value stocks aided returns for the quarter. Our out-of-benchmark allocation to high yield bonds also helped performance. Our current strategy favors stocks over bonds, and we have increased our overweight to non-U.S. equities over domestic stocks on attractive relative valuations. In the U.S, we prefer growth shares, as they tend to depend less on a strong economy to generate rising corporate earnings. In fixed income, we continue to favor high yield over U.S. investment-grade bonds for their added yield and lower duration. While the terms in some recent deals have become less favorable to investors, high yield bonds remain attractive relative to other fixed income sectors in a low-yield environment, particularly given prospects for a gradually improving economy.
Our expectations for global growth remain modest. The U.S. economic recovery continues, supported by a strengthening housing market, improving employment, subdued energy prices, and the Fed's low interest rate policy. While the eurozone has emerged from recession, economic headwinds continue, and Japan's government will continue to face challenges as it attempts to undertake reforms to bolster the country's economy. Emerging markets economies face slower growth than in recent years and remain vulnerable to potential rising U.S. rates. Although uncertainty about the impact of Fed tapering may periodically elevate market volatility, we believe that the uneven global recovery and heightened volatility driven by the Fed's change in monetary policy underscore the value of the fund's broad diversification.