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The third quarter of 2015 revealed a pronounced sign of seasonality as the stock market demonstrated its weakest quarter since 2011. The initial catalyst for the selloff was the Chinese economy showing signs of weakness throughout the quarter, sending stocks around the world lower as worries of slower global GDP growth hit equities. The S&P 500 Index outperformed large-cap stocks as well as mid- and small-cap stocks. The S&P 500 Index lost 6.44% while the Russell 1000 Index, representing large-cap stocks, lost 6.83% followed by the Russell Midcap Index, representing mid-cap stocks, which lost 8.01%. The Russell 2000 Index, representing small-cap stocks, lost 11.92%. The only positive sector in the Russell Large-Cap Growth Index was Consumer Staples, up 1.35%. The worst-performing sectors were Energy, down 27.83%, followed by Materials, down by 15.54% and Health Care, down 12.16% for the quarter.
During the third quarter, an extended multiyear rally without a significant correction and a strong dose of the seasonal trade brought volatility back to the U.S stock market. The third quarter historically has been the weakest quarter for the stock market going back to 1928. Fears about a major slow-down in China created uncertainty around global growth, which has been evident in the commodity market for some time. These worries also played into the U.S. Federal Reserve’s (Fed) decision to hold off raising interest rates. Although positive U.S. economic data could support a rate hike, global uncertainty and still-depressed inflation levels led the Fed to postpone yet again. The U.S. GDP growth in the second quarter accelerated to 3.9%, showing signs of resiliency for the recovering economy. This growth was driven by a stronger consumer 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 the end of 2015 and carry into 2016.
Federated Kaufmann Large Cap Fund (Class A Shares at NAV) lost 8.08% while its benchmark, the Russell 1000 Growth Index, lost 5.29% in the third quarter of 2015. Sector weighting and some stock selection drove the underperformance in the quarter according to our attribution analysis. Having approximately 5.8% in cash did not materially impact performance of the fund despite this being on the high end of the fund’s historic cash weighting. It is the management team’s view that our ability to select 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 Amazon, Chipotle Mexican Grille, Google Inc., Vantiv and Martin Marietta Materials. These companies benefitted from company-specific catalysts and their U.S.-centric business exposure. Laggard companies that hurt performance during the quarter were Valeant Pharmaceuticals, Biogen Idex, Vertex Pharmaceuticals, Sherwin Williams and Eaton Corp.
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 76% of the portfolio invested in four sectors: Health Care, Information Technology, Consumer Discretionary and Financials. These sectors historically have provided good opportunities for bottom-up growth investors. The average cash position of the fund was approximately 6% at quarter end. 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.