Federated Kaufmann Large Cap Fund (A) KLCAX
The third quarter of 2014 was volatile for U.S. stocks. Large-cap stocks outperformed, while mid-cap stocks and small-cap stocks fell during the quarter. The S&P 500 Index gained 1.13% while the Russell 1000 Index, representing large-cap stocks, returned 1.49%. The Russell Midcap Index, representing mid-cap stocks, lost 7.3%, and the Russell 2000 Index, representing small-cap stocks, lost 7.36%. Not all sectors had positive performance for the quarter. The best-performing Russell 1000 growth sectors were Health Care, up 7.98%, followed by Information Technology, up 4.06%, while Energy was down 10.28% for the quarter.
The U.S. economy continued its “Goldilocks” growth trend during the third quarter as broad economic growth, while moderate, had been slow but consistent, keeping government bonds low: for example, a 10-year Treasury yield at 2.5% with inflation remaining moderate. The U.S. real GDP for the second quarter of 2014 was revised up to 4.6% along with other positive economic data supports and a continuation of steady growth helped by tailwinds such as lower commodity prices and strong corporate balance sheets. Despite persistent geopolitical headwinds such as within Ukraine and the Middle East, foreign economies were generally growing, albeit slowly, while policymakers around the world continued to lean towards stimulus, which drove the Dollar Index to a four-year high.
The European Central Bank continued to show support for the eurozone, as the European Central Bank Governing Council reduced all three of its main interest rates by 10 basis points, the refinancing operations to 0.05%, the marginal lending rate to 0.3% and the deposit facility to 2%. Asian economies continued to report further expansion aided by stimulus and global economic recovery, for example, second quarter real GDP for the Philippines was at 8.6%, India 8.4%, China 7.5%, Taiwan 4.9% and Indonesia at 4.9%.
We believe four conditions form a positive combination for asset prices: global economic expansion, for example, U.S. employment and global composite PMI; restrained inflation, with U.S. average hourly earnings only modestly higher than last year; continued monetary stimulus, from the European Central Bank, Bank of Japan, China, Mexico, and Turkey, and developed countries’ yields remaining towards the low end of historical ranges.
Federated Kaufmann Large Cap Fund (Class A Shares at NAV) returned 1.75% while its benchmark, the Russell 1000 Growth Index, returned 1.49% in the third quarter of 2014. According to performance attribution analysis, sector selection was the primary contributor to outperformance. Approximately 86% of the outperformance was due to sector selection and the remainder due to stock selection. Strong cash flows into the fund allowed us to continue to invest in companies we find attractive. The strongest stock contributors to performance were Alibaba Group, Pharmacyclics, Gilead Sciences, Regeneron Pharmaceuticals, Facebook, LyondellBasell, Shire, Premier, Inc., Kansas City Southern and Chipotle. Laggard companies that hurt performance during the quarter were OSRAM Licht AG, Las Vegas Sands, Incyte Pharmaceuticals, Pioneer Natural Resources, Eaton Corp., Noble Energy, Delphi, Sprouts, Halliburton and Illumina.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than what is stated. Other share classes may have experienced different returns than the share class presented. To view performance current to the most recent month-end and for after-tax returns, click on the Performance tab. Performance does not reflect the maximum 5.5% sales charge for Class A Shares. If included, it would reduce the performance quoted.
Click the Performance tab for standard fund performance.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
Positioning and Strategy
Our mission at Federated Kaufmann is to achieve superior long-term performance by investing in promising large-cap growth companies trading at attractive valuations through proprietary fundamental research. Approximately 74% of the portfolio is currently invested in four large sectors: Information Technology, Health Care, Consumer Discretionary and Financials. These sectors have historically provided good opportunities for bottom-up growth investors. The average cash position of the fund is less than 2.2%. We continue to find attractive large cap growth investment opportunities—companies that are dominant competitors and that have strengthening fundamentals delivering both near-term and long-term growth in sales and earnings. We believe that such strong growth companies, if purchased at attractive prices, will provide investors with the opportunity for superior returns over the long term.