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The third quarter of 2016 was relatively calm as the markets braced for the effects of the looming U.S. presidential election. Most major equity indexes were positive as governments and central banks remained supportive due to the benign growth outlook. Despite continued macro worries, its focus on company-specific catalysts enabled Federated Kaufmann Large Cap Fund to outperform its benchmark, the Russell 1000 Growth Index, for the third quarter of 2016.
Large-cap growth stocks outperformed large-cap value stocks after underperforming for two consecutive quarters. Small-cap stocks continued their outperformance for another quarter, with the Russell 2000 Index returning 9.05%, outperforming the Russell Midcap Index, the Russell 1000 Index as well as the S&P 500 Index. The Russell Midcap Index, representing mid-cap stocks, returned 4.52%, followed by the Russell 1000 Index, representing large-cap stocks, returning 4.03%, followed by the S&P 500 Index, returning 3.85% for the quarter.
The best-performing sector in the Russell Large-Cap Growth Index was Technology, up 12.4%, followed by Energy, up 12.03%, and Materials, up 3.56%. The worst-performing sectors were Consumer Staples, down 4.87%, followed by Telecom, down 4.13%, and Utilities, down 1.76% for the third quarter of 2016.
During the third quarter, most global stock markets remained resilient despite continued macro concerns over growth. The European markets continued their positive momentum despite geopolitical fears potentially impacting economic growth due to central bank support. Most large economies remained in expansionary mode, with global Purchasing Manager Indexes (PMIs) continuing to accelerate from the swoon seen last year. Oil prices remained elevated after bottoming in February, signifying a possible balance in supply and demand after the nearly two-year sell-off. The U.S. economy remained the beacon of strength with steady consumer spending and job growth despite some slowing in the trend. All of these positive factors reiterated the positive stance on equities longer term for the fund.
Federated Kaufmann Large Cap Fund A Shares at NAV returned 4.66% while its benchmark, the Russell 1000 Growth Index, returned 4.58% during the third quarter of 2016. Stock selection was the primary contributor to outperformance according to our attribution analysis. Despite macro headwinds, the company-specific focus paid off in performance. The average cash position of the fund, approximately 3.99% during the quarter, had a negative impact on performance.
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 contributed positively to performance included: NXP Semiconductors, Alibaba Group, Idexx Labs, Amazon and Alphabet Inc. Companies that hurt performance during the quarter included: Tractor Supply Co, Salesforce.com, Genmab As, Bristol Myers Squibb and CVS 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 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 byproducts 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.
During the third quarter of 2016, approximately 76% of the portfolio was invested in four sectors: Health Care, Information Technology, Consumer Discretionary and Financials. These sectors have historically provided good opportunities for bottom-up growth investors. And despite the volatility in the last few quarters, the fund remained true to its focus and made a significant rebound in performance.
We continue to find attractive 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.