The U.S. equity market continued to rally through the fourth quarter against a backdrop of stabilizing fiscal policy, positive economic data, improving investor sentiment, and the Federal Reserve's decision to taper its monthly asset purchases. A government budget deal provided some fiscal clarity for the first time in four years, while improving labor and housing data led to the Fed's decision to reduce asset purchases starting in January 2014. Positive sentiment seemed to build as cash flows into stocks accelerated into the end of the year.
The Equity Income Fund returned 8.73% in the quarter compared with 10.51% for the S&P 500 Index and 8.97% for the Lipper Equity Income Funds Index. For the 12 months ended December 31, 2013, the fund returned 29.75% versus 32.39% for the S&P 500 Index and 28.70% for the Lipper Equity Income Funds Index. The fund's average annual total returns were 29.75%, 16.92%, and 7.56% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.68% as of its fiscal year ended December 31, 2012.
During the quarter, our stock selection in the energy, consumer staples, and information technology sectors detracted from portfolio results. Stock selection in financials and industrials and business services, plus an overweight allocation to the latter, was beneficial. The portfolio also has fairly high exposure to the consumer discretionary sector, which is composed of a diverse group of industries, including retailers, media companies, diversified consumer services, and automakers. We particularly favor the media industry, where the portfolio holds companies that produce or distribute content and typically generate strong cash flow, much of which is returned to shareholders in the form of dividends and stock buybacks.
We remain cautious on the near-term outlook for the U.S. equity market after a nearly uninterrupted rise in stock prices throughout the year. While earnings continue to be largely supportive, the market's ascent has outpaced improvement in corporate fundamentals. Balance sheets remain healthy, with low debt and high cash levels, but top-line growth is muted and profit margins are near their highest levels in decades. Stock valuations are slightly above their long-term averages. We would, therefore, not be surprised to see a correction sometime in 2014. However, we remain constructive on the outlook for equities over the long term, as generally sound fundamentals, improving economic data, and more confident consumers have set the stage for a continuation of the bull market.
