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During the second quarter of 2015, the U.S. stock market continued struggling to find direction as the market entered a crossroads for the year. Headwinds persisted throughout the quarter with expectations that the U.S. Federal Reserve (the Fed) would begin raising interest rates as positive economic data could support a move from emergency levels of monetary accommodation. U.S. gross domestic product (GDP) growth in the first quarter was negative for the second time in twelve months, adding to worries for investors about the sustainability of the recovery. This also led to worries about companies’ earnings growth potential for 2015. Despite these issues, the broader market was higher quarter-over-quarter heading into the seasonally weak (going back to 1928) third quarter. We expect the lower U.S. unemployment rate of 5.5%, signs that wages have bottomed and still historically low interest rates will help boost the U.S. economy and potentially support earnings growth for companies in the second half of 2015.
During the quarter, small-cap stocks outperformed the S&P 500 Index while mid-and large-cap stocks trailed the S&P 500 Index. The S&P 500 Index returned 0.28% while the Russell 2000 Index, representing small-cap stocks, returned 0.42%; the Russell 1000 Index, representing large-cap stocks, gained .11% and the Russell Midcap Index, representing mid-cap stocks, lost 1.54%. Positive-performing Russell large-cap sectors were Health Care, up 3.98%, followed by Consumer Discretionary, up 2.91%, and Information Technology, up 0.30%. The worst-performing sectors were Utilities, down 12.44%, followed by Industrials, down by 5.04%, and Telecom Services, down 3.23% for the quarter.
Federated Kaufmann Large Cap Fund (Class A shares at NAV) returned 0.52% while its benchmark, the Russell 1000 Growth Index, returned 0.12% in the second quarter of 2015. Sector weightings drove most of the outperformance in the quarter according to our attribution analysis. Having approximately 5% in cash did not materially impact performance of the fund despite this being on the high end of the fund’s historic weighting of cash. We expect that our team’s ability to select stocks that we believe have the characteristics to potentially outperform the benchmark over time will continue to work well in the current environment.
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.
The strongest stock contributors to performance were Gilead Sciences, Inc., T-Mobile US, Inc., Incyte Pharmaceuticals, Illumina and Amazon. These companies benefitted from the strong execution of their business models as well as mergers and acquisitions in their respective sectors. Companies that hurt performance during the quarter were Micron Technology, Sprouts Farmers Market, Whirlpool Corp., Pioneer Natural Resources and Idexx Labs, Inc. Micron and Pioneer have had some near-term headwinds, but we believe their management teams will be able to execute their strategies to create shareholder value over the longer term.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
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. The sector weightings of the portfolio are a byproduct of our bottom-up stock selection strategy with a team of sector-specialist portfolio managers. We seek to find companies that have company-specific catalysts for growth rather than develop macro themes to construct sector weightings. This quarter we had approximately 74% of the portfolio invested in four sectors: Health Care, Information Technology, Consumer Discretionary and Financials. These sectors have historically provided good opportunities for bottom-up growth investors. The average cash position of the fund was approximately 5%. 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.