Brian Rogers' T. Rowe Price Equity Income Fund Second Quarter 2013 Commentary
The Equity Income Fund returned 2.63% in the quarter compared with 2.91% for the S&P 500 Index and 2.53% for the Lipper Equity Income Funds Index. For the 12 months ended June 30, 2013, the fund returned 23.66% versus 20.60% for the S&P 500 Index and 20.52% for the Lipper Equity Income Funds Index. The fund's average annual total returns were 23.66%, 7.37%, and 7.64% for the 1-, 5-, and10-year periods, respectively, as of June 30, 2013. The fund's expense ratio was 0.68% as of its fiscal year ended December 31, 2012.
The portfolio is significantly overweight in industrials and business services, where it is invested in companies with solid business models and an ability to generate strong cash flows. We are currently finding value in late-cycle names, as well as companies with aerospace exposure. The portfolio's largest exposure in the sector is to industrial conglomerates. The consumer discretionary sector is well represented in the portfolio, consisting of a diverse group of industries, including retailers, media companies, diversified consumer services, and auto manufacturers. It is also well exposed to financials with positions in commercial banks, diversified financial services, and insurance industries. The economically sensitive sector has rebounded strongly from its lows during the financial crisis, but we still find reasonable valuations among select companies in the group.
We are encouraged by recent economic strength, but we are somewhat cautious on the near-term outlook for U.S. stocks. While earnings have largely been supportive of the overall move in equities, the market's ascent appears to have outpaced the improvement in corporate fundamentals. Corporate balance sheets are in outstanding condition with low debt and high cash levels, but revenue growth remains muted and earnings estimates appear overly optimistic. We are finding fewer opportunities in the current environment and have been content to build a cash position and await more compelling prospects. We expect economic growth to persist at a modest pace throughout 2013, as the housing and labor markets continue to mend and the effects of the sequestration work their way through the system. The U.S. budget deficit has improved dramatically, but this is largely because of cyclical factors; long-term structural reform is still necessary. We expect this issue to resurface later in the year.