Major stock indexes were mixed in the fourth quarter amid uncertainty about the November elections and U.S. fiscal policy after 2012. After slumping in the first part of the quarter, shares rebounded somewhat in the hope that Congress and President Obama would agree to lessen the impact of federal tax increases and spending cuts scheduled to take effect in January. As the year ended, no final agreement had yet been reached, but both chambers of Congress finally passed a deal on taxes on New Year's Day. As measured by various Russell indexes, value stocks outperformed growth stocks across all market capitalizations, and financials were particularly robust.

The Equity Income Fund returned 1.92% in the quarter compared with −0.38% for the S&P 500 Index and 0.66% for the Lipper Equity Income Funds Index. For the 12 months ended December 31, 2012, the fund returned 17.25% versus 16.00% for the S&P 500 Index and 13.70% for the Lipper Equity Income Funds Index. The fund's average annual total returns were 17.25%, 1.58%, and 7.22% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2012. The fund's expense ratio was 0.68% as of its fiscal year ended December 31, 2011.

At the end of the quarter, financials constituted the largest sector weighting in the portfolio, followed by industrials and business services and energy stocks. Our sector weightings are the result of bottom-up stock analysis in our search for attractive investments for the fund. Our financials, industrials and business services, information technology, and materials holdings contributed strongly to fund results during the period, while energy, telecommunication services, and utilities were laggards. Individual stock selection was mostly positive.

We expect corporate earnings growth in 2013 to slow from its pace of the last year, possibly to 4% or 5% in an environment of roughly 2% economic growth. Stock valuations are still reasonable, and equities overall look attractive compared with bonds. U.S. companies enjoy healthy balance sheets, with high cash levels and low-cost debt, which could translate into increased merger-and-acquisition activity. The major headwinds facing stocks are the ongoing discussions about fiscal problems in the U.S., continuing economic stagnation in the eurozone, and economic slowing in China. If U.S. policymakers can conclude a bipartisan deal on taxes and spending cuts early this year, it could serve as a boost for investor confidence in stocks-something that has been lacking to date. As always, we advise investors not to focus on macroeconomic concerns, which are always with us in one form or another, but rather on maintaining a well-diversified portfolio designed for long-term results.

Track Gurus’ Stock Purchases Daily – Real Time Guru Picks

GuruFocus "Real Time Picks" reports the stock purchases and sales that Gurus have made within the prior 2 weeks. The report time lag can be as short as 3 days after the date of the transaction. This is just one of the features provided with GuruFocus Premium Membership.

Click Here to Try It Free!

More Gurufocus Links

Latest Guru Picks	Value Strategies
Warren Buffett Portfolio	Ben Graham Net-Net
Real Time Picks	Buffett-Munger Screener
Aggregated Portfolio	Undervalued Predictable
ETFs, Options	Low P/S Companies
Insider Trends	10-Year Financials
52-Week Lows	Interactive Charts
Model Portfolios	DCF Calculator
RSS Feed	Monthly Newsletters
The All-In-One Screener	Portfolio Tracking Tool