Federated Kaufmann Large Cap Fund (A) KLCAX

The stock market had strong performance for the entire first quarter of 2013. Large-cap companies underperformed mid-cap and small-cap companies on a relative basis. The S&P 500 Index returned 10.6% versus the Russell Midcap® Index, representing mid cap stocks, which returned 13.0%, and the Russell 2000® Index returned 12.4%. In terms of investment style, value stocks in the Russell 1000® Index outperformed growth stocks by 2.8% during the quarter. The best-performing Russell 1000 Growth sectors were Health Care up 15.2%, Utilities up 14.7%, and Energy up 13.5%. Laggard sectors during the quarter were Information Technology up 2.4%, Materials up 6.7%, and Financials up 10.7%.

During the first quarter, central banks around the world kept interest rates relatively low and continued bond purchase programs in order to continue to provide economic stimulus. The major economies of the U.S., China, and Japan all registered modest but positive economic growth while the troubled eurozone continued to struggle amid negative GDP growth and high unemployment reaching 12%. The U.S. dollar was essentially flat versus the euro but the yen declined significantly versus the dollar due to accelerated attempts to re-inflate the Japanese economy. Macroeconomic concerns still dominated the global news headlines. Valuations of many companies have increased from depressed levels of 2008/2009; however numerous opportunities for attractive growth stocks are still evident in the market. Clearly global economic risks still remain, however, the earnings of many of the portfolio’s holdings still remain strong and profit margins remain at historically high levels.

Federated Kaufmann Large Cap Fund (Class A shares at NAV) returned 9.0% while its benchmark, the Russell 1000® Growth Index, returned 9.5%. According to performance attribution analysis, all of the underperformance of the fund was due to cash assets averaging over 6% which dragged on performance during a rising stock market. Both stock selection and sector weighting did not materially affect performance during the period. The strongest individual contributors to performance were Gilead Sciences, Biogen, Norwegian Cruise Line, Blackrock, Nxp Semiconductor, Zoetis, Melco, Las Vegas Sands, Conagra, and Anadarko. Laggard companies that hurt performance during the quarter were Apple, Vmware, Expeditors, Central European Media, Ariad Pharmaceuticals, Whole Foods, Capital One, Eastman Chemical, Carnival, and Syngenta.

The mission at Federated Kaufmann remains the same: To seek to achieve superior long-term performance by uncovering promising growth companies trading at perceived attractive valuations through proprietary fundamental research.

Approximately 65% of the portfolio is currently invested in four large sectors: Industrials, Health Care, Financials and Information Technology. These sectors have historically provided good opportunities for bottom-up growth investors. The cash position of the fund is less than 7.0%. Fund management continues to seek attractive growth investment opportunities—companies that are dominant competitors and have strengthening fundamentals delivering both near-term and long-term growth in sales and earnings. Fund management believes that such strong growth companies, if purchased at attractive prices, can provide investors with the opportunity for superior returns over the long term.