Most U.S. equities advanced during the first quarter in a volatile session characterized by a sell-off in emerging market currencies, increased geopolitical tensions, and the transition of leadership at the Federal Reserve. Economic data were mixed, influenced by unusually cold weather across the country. Investors grew concerned about potential deflation in Europe and a larger-than-expected slowdown in the Chinese economy. Sector performance was uneven, as some areas that provided leadership in 2013 pulled back while others rose. The utilities sector was strongest, with investors seeking income-producing stocks, while health care, information technology, and financials also did well. Consumer discretionary, energy, and industrials and business services shares were laggards.
The Equity Income Fund returned 1.59% in the quarter compared with 1.81% for the S&P 500 Index and 2.04% for the Lipper Equity Income Funds Index. For the 12 months ended March 31, 2014, the fund returned 18.55% versus 21.86% for the S&P 500 Index and 18.76% for the Lipper Equity Income Funds Index. The fund's average annual total returns were 18.55%, 21.26%, and 7.52% for the 1-, 5-, and10-year periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.68% as of its fiscal year ended December 31, 2012.
Sector allocations were the main deterrents to portfolio performance in the quarter, as modestly cyclical positioning detracted in a largely defensive market. The financials and information technology sectors contributed most to results, aided by good stock selection in those areas, while the consumer discretionary sector detracted due to an overweight and stock selection. An underweighting in health care was also a drag since the sector performed well. The financials sector remained the portfolio's largest exposure at more than 19% of net assets at the end of the period, followed by industrials and business services, energy, consumer discretionary, and information technology.
Stocks rallied last year on the back of an accommodative Fed policy, historically high profit margins, and an expansion of price/earnings multiples. In 2014, we expect to see more focus on company fundamentals. Economic conditions seem to be firming, and the severe weather events of the first quarter are unlikely to disrupt the recovery. Improving payroll trends, declining unemployment, and better manufacturing data provide compelling reasons to believe that the economy is on a path to modest growth through the year. We expect stocks to provide more moderate returns this year than they did in 2013. Corporate earnings growth is good, and we believe companies will continue to buy back shares and increase dividends. We will remain diligent in our search for the best investment ideas, while not sacrificing our valuation discipline.