Federated Capital Income Fund (A) CAPAX
During the first quarter, the equity markets continued to move higher with strong performance, very similar to the first quarters of 2012, 2011 and 2010. The rally was spurred on by signs of continued steady economic recovery in the U.S., temporary resolution of the U.S. debt ceiling and hope of a compromise on the sequestration.
In the U.S., Washington was able to compromise on the fiscal cliff, for the most part, and avoid a large “cliff”-like GDP contraction. Also during the quarter, Congress temporarily raised the debt ceiling with further review of the issue in the upcoming quarters; and the automatic spending sequester was signed into law on March 1, including $85 billion in spending cuts through the end of the current fiscal year, and an additional $1.1 trillion in spending cuts coming over the next decade. On the U.S. economic front we continue to see improvement at a slow but steady pace. Job creation modestly picked up throughout the quarter, housing continues to show improvement, manufacturing in the aggregate remained solid, and personal consumption and auto sales were strong.
In Europe, during the quarter, stability was more difficult to achieve as economic recovery still eludes most European countries. More specifically, in Italy, an inconclusive election raised fears that governance was poised to become increasingly unpredictable and that the country would veer away from reforms previously enacted. In Cyprus, a bailout of Cypriot banks forced large depositors and bondholders to take significant haircuts, which stoked contagion fears as well as concerns that the eurozone’s contraction may worsen, particularly among struggling southern-tier members.
As we look to the remainder of 2013, we remain optimistic for steady but slow U.S. economic growth. Over the next several months we will look for the employment, auto and housing recovery to continue; however, our expectations are balanced by the continued fiscal policy uncertainty and impact of automatic spending sequester. Even among this uncertainty, we still expect corporate America’s earnings in the first quarter to be mostly positive, albeit management’s cautious outlook. Also, we anticipate further dividend increases and share buyback announcements due to strong balance sheets and free cash flows from our companies. Globally, we believe that Europe will continue to slowly work through its sovereign debt, fiscal, and growth challenges and China’s growth story to remain a positive one.
In fixed income, interest rates finished the quarter up marginally. Interest rates made two attempts to go higher, but failed to start a new trend higher, probably the result of continued Fed buying to hold interest rates down. The 5-year Treasury yield rose 4 basis points during the first quarter to end at 0.76%.
During the quarter, the S&P 500 Index returned 10.61%, the Nasdaq Composite Index returned 8.51%, and the Dow Jones Select Dividend Index returned 11.78%. Value stocks outperformed growth stocks with the Russell 1000 Value Index returning 12.31% while the Russell 1000 Growth Index returned 9.54%.
For the first quarter of 2013, the Barclays High Yield Index returned 2.89%, the Barclays Emerging Markets Index returned -1.46%, and the Barclays Mortgage Index returned -0.05%.
For the first quarter, Federated Capital Income Fund (Class A Shares at NAV) returned 4.29%, underperforming the 4.89% return of the Blended Index comprising of 40% Dow Jones Select Dividend Index, 20% LBHY2%ICI, 20% LBMB and 20% LBEMB Index.
Within the fund’s equity holdings, both sector allocation and stock selection negatively contributed to the overall performance. Relative to the Blended Index, the fund’s three best contributing sectors were Industrials, Health Care, and Materials. The three sectors that most negatively contributed to fund performance were Energy, Utilities, and Financials.
On an absolute basis, the five securities contributing most to performance were 2010 Swift Mand Comm Exch, Conv. Pfd., Continental Finance Trust Conv. Pfd., Bristol Myers Squibb, Pfizer, and Meredith Corp. The five positions detracting most from performance were Anglogold Ashanti Holdings Conv. Pfd., McGraw Hill, Centurylink, Goodyear Tire and Rubber Conv. Pfd., and Barrick Gold Corp.
The fixed-income portion of the portfolio continued to generate substantial income and the performance slightly outperformed the Blended Index for the quarter.
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 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.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
Positioning and Strategy
The fund’s equity holdings are positioned within a diversified portfolio of dividend-paying stocks with favorable valuations, strong balance sheet and improving business fundamentals. The portfolio continues to aim for high yield and consistent dividend growth. Sector overweight positions relative to the Blended Index include Health Care, Telecom Services and Energy. The fund’s largest underweight positions include the Utilities, Industrials and Materials.
During the quarter, the fund shortened its portfolio duration in an effort to protect the portfolio against any unforeseen rise in interest rates. The yield curve stance also changed during the quarter to position the portfolio for a yield-curve steepening. That certainly helped performance during the quarter. The portfolio had an effective duration of 3.81 years versus the Blended Index at 4.81 years, or about 79% of the Blended Index.