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The second quarter of 2016 ended with the market refocused on geopolitical concerns. Europe was the culprit yet again, but there was little impact on returns after the initial reaction. Since the global recession ended in 2009, years of persistent, slow economic growth throughout the developed world has had consequences that have led to unsteady markets. Two factors have led to the geopolitical uncertainty that may dominate the headlines for the remainder of 2016. 1. Many countries’ dependence solely on monetary policy to generate sustainable growth has allowed fiscal policy makers to largely ignore many structural problems that exist in much of the Western world. 2. The low levels of economic growth and, therefore, low interest rates caused by monetary dependency has led to an unequal recovery for many citizens, causing great resentment. Compounding the problem is the failure for fiscal policy makers to adjust to the environment, which has led to a political drive toward nationalism, anti-trade policies and a general frustration with governments globally. These problems surfaced to influence financial markets when a major referendum by the British people surprised the markets when they voted to separate from the European Union. The steep sell off of equities followed by a quick rebound added to the record level of uncertainty by investors who are similarly frustrated with monetary and fiscal policy makers’ short-term focus. Despite these macro concerns, the focus on company-specific catalysts allowed Federated Kaufmann Large Cap Fund to outperform its benchmark, the Russell 1000 Growth Index, during the second quarter of 2016.
Large-cap value stocks outperformed large-cap growth stocks for the second consecutive quarter. Small-cap stocks had their best relative quarter in over a year with the Russell 2000 Index outperforming the Russell Mid Cap Index, the Russell 1000 Index, as well as S&P 500 Index, by gaining 3.79%. The Russell Midcap Index, representing mid-cap stocks, gained 3.18% followed by the Russell 1000 Index, representing large-cap stocks, gaining 2.54%, followed by the S&P 500 Index, gaining 2.46% for the quarter.
The best-performing sectors in the Russell 1000 Growth Index were Energy, up 20.2%, followed by Telecom Services, up 5.54%, and Utilities, up 4.70%. The worst-performing sectors were Information Technology, down 3.52%, followed by Consumer Discretionary, down 0.19%, and Industrials, up only 0.62% for the second quarter of 2016.
During the second quarter, most global stock markets remained resilient despite macro concerns. The European geopolitical threat to further slow global economic growth was met with nearly unilateral central bank support. Most large economies remain in expansionary mode, with global Purchasing Manager Indexes continuing to reaccelerate from the swoon seen last year. Oil prices rebounded nearly 100% from their February bottom signifying a possible balance in supply and demand after the nearly two year sell-off. The U.S. economy remains a beacon of strength with steady consumer spending and job growth despite some slowing in the trend. All of these positive factors reiterate the positive stance on equities longer term for the fund.
Federated Kaufmann Large Cap Fund A Shares at NAV gained 2.84% while its benchmark, the Russell 1000 Growth Index, gained 0.61% for the second quarter of 2016. Stock selection was the primary contributor to outperformance, but sector weighting also drove outperformance according to our attribution analysis. Despite macro headwinds, the company-specific focus paid off in performance. The sectors that have historically been significant sectors for the strategy, Information Technology and Health Care, had a significant positive relative performance for the fund. The portfolio held approximately 2.92% in cash on average during the quarter, which had a minor negative impact on the fund.
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 A Shares. If included, it would reduce the performance quoted.
Click the Performance tab for standard fund performance.
Stocks that made a positive contribution to performance included Genmab As, Ulta Salon Cosmetics, Amazon, Crown Castle Inc, and Idexx Labs Inc. Laggard companies that hurt performance during the quarter included Alexion Pharmaceuticals, Aercap Holdings Nv, Allergan Plc, Alphabet Inc. and Whirlpool Corp.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
Fund Positioning and Strategy
Our mission at Federated Kaufmann is to pursue superior long-term performance by investing in promising large-cap growth companies trading at attractive valuations identified through proprietary fundamental research. The sector weightings of the portfolio are a byproduct of our bottom-up stock selection strategy by 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 79% 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. Despite the volatility in the last few quarters, the fund remained true to its focus and made a significant rebound in performance during the second quarter.
We continue to seek attractive growth investment opportunities—companies that are dominant competitors and that have strengthening fundamentals, capable of 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.