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The fourth quarter of 2015 began with a bounce in the stock market, demonstrating the resilience in investor sentiment regarding the health of the global economy despite many headwinds building. The S&P 500 Index led large-, mid- and small-cap indexes by gaining 7.03% during the quarter. The Russell 1000 Index, representing large-cap stocks, gained 6.49%, followed by the Russell Midcap Index, representing mid-cap stocks, which gained 3.62%, followed by the Russell 2000 Index, representing small-cap stocks, which gained 3.59%. The best-performing sectors in the Russell Large-Cap Growth Index were Health Care, up 9.30%, followed by Materials, up 9.26%, and Information Technology, up 8.43%. The worst-performing sectors were Energy, down 17.19%, followed by Industrials, up 4.29%, and Consumer Discretionary, up 5.88% for the quarter.
During the fourth quarter, stocks rebounded from the previous quarter’s sell-off, but in a very narrow fashion with the largest market cap companies responsible for the majority of the returns throughout the quarter as well as the year. The commodity rout continued despite fears over China subsiding as its government attempted to navigate a soft landing. A resilient U.S. economy led to the U.S. Federal Reserve’s (Fed’s) decision to raise interest rates for the first time in nine years as the Federal Open Market Committee believed positive U.S. economic data supported a rate increase of 25 basis points in December. The U.S credit markets continued to worry investors as the commodity sell-off potentially could begin to impact other parts of the economy. We remain positive on the U.S. economy driven by a stronger consumer and helped by depressed energy prices and a low unemployment rate along with still-historically-low interest rates. These factors should help boost the U.S. economy further and potentially support earnings growth for companies into 2016.
Federated Kaufmann Large Cap Fund (Class A Shares at NAV) gained 3.64% while its benchmark, the Russell 1000 Growth Index, gained 7.32% in the fourth quarter of 2015. Stock selection and sector weighting drove the underperformance during the quarter according to our attribution analysis. Having approximately 9.52% cash negatively impacted performance of the fund. We expect that our team’s ability to utilize this excess capital in stocks that we believe have the characteristics to potentially outperform the benchmark over time will 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 Genmab As, Amazon, Alexion Pharmaceuticals, Alphabet Inc Cl-A, and Vertex Pharmaceuticals. Companies that hurt performance during the quarter were Valeant Pharmaceuticals, Chipotle Mexican Grille, Vmware Inc, Martin Marietta Materials and Biogen Idec.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings
Our mission at Federated Kaufmann is to pursue 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 a sector weighting. This quarter we had approximately 75% 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 9.5%. We continue to seek 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, can provide investors with the opportunity for superior returns over the long term.