Federated International Strategic Value Dividend Fund (A) IVFAX

Share Classes Product Type Asset Class Category
Mutual Fund Equity ; Intl/Global Foreign Large Cap
As of 09-30-2017

Highlights

  • Federated International Strategic Value Dividend Fund provided a gross weighted average dividend yield of 4.8% at quarter end (30 day SEC yield, A shares at MOP: 3.43%).
  • For the rolling one-year period, 32 companies in the portfolio raised their dividends, accounting for 36 increases overall.
  • The portfolio’s third quarter return lagged the broad market due to investors’ near-term preferences for cyclical, higher-beta equities. Although these investor preferences are not conducive to a high-quality dividend strategy, the fund still posted a positive return of 2.0 % (A Shares at NAV).

Looking Back

The fund remained committed to meeting its goals of delivering a high level of dividend income and moderate dividend growth as it ended the quarter with a gross weighted average dividend yield of 4.8%. This was well ahead of the 3.0% weighted average yield provided by the MSCI World ex-U.S. Index and ahead of the 3.7% yield provided by its benchmark, the MSCI World High Dividend Yield Index. Consistent with the fund’s dividend growth goal, a total of six portfolio holdings raised their dividends in the quarter. The portfolio’s largest dividend increase during the period was contributed by British American Tobacco, which raised its distribution by 12.0%.  The portfolio also received exemplary increases from two of its Canadian companies—Utility holding Emera raised its dividend by 8.1% and Financial holding CIBC raised its dividend for the third time over the past 12 months for a cumulative 7.4% increase.

Year-to-date, 26 of the portfolio’s 42 holdings have increased their dividend distributions, while two holdings (National Grid and Walmex) paid special dividends. In the trailing 12-month period, 32 companies within the portfolio have raised their dividends, accounting for 36 increases overall.

The performance of the international equity market was positive during the quarter the MSCI World ex-U.S. Index outpacing the S&P 500 returns by 114 basis points. Investor preferences were dominated by a strong “risk-on” trade during the quarter as high beta and low yield outperformed.  During the quarter high-beta companies outpaced their low-beta counterparts by 378 basis points as Energy, Materials and Technology led the markets higher, while Health Care, Staples and Telecome lagged.  The result was a market environment that was challenging in the near term for an income-focused fund, demonstrated by higher-yielding equities lagging their lower-yielding counterparts by 118 basis points in the quarter. Though such changes in investor preferences may affect the near-term performance of our strategy, Federated International Strategic Value Dividend Fund remains firm in its focus on the key long-term drivers of total return: dividend yield and dividend growth. As such, it is committed to owning companies primarily in defensive sectors that provide the best opportunities to reach these objectives over a full business cycle.

Performance

The fund generated a total return of 2.0% (A Shares at NAV). This compares to a return of 4.5% for the MSCI World ex-U.S. High Dividend Index and a 5.6% return for the broad-based MSCI World ex-U.S. Index. With the portfolio’s investments in the dividend-income-producing segment of the international market and its 3-year beta versus the MSCI World ex-U.S. Index of 0.69%, the strategy’s short-term returns are not expected to move in line with the broad market.

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.

Performance Contributors

  • Norway provided the fund’s highest country return at 28.0% for the quarter (contributed by the strategy’s sole Norwegian holding, telecommunications provider Telenor). Brazil was also a noteworthy contributor as Ambev provided a return of 20.0%.
  • Strong performance was noted across the fund’s energy holdings as crude prices rose during the quarter. Energy contributed a weighted average return of 8.8%, as integrated energy holdings BP and Total SA provided returns of 13.2% and 10.1%. respectively.
  • Financials contributed positively to performance, generating a 6.3% return (versus 5.7% for the broad market). Top-performing financial holdings included Swedbank, Toronto-Dominion Bank and CIBC, which returned 13.4%, 12.5% and 8.7%, respectively.

Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.

Performance Detractors

High yield and low beta underperformed during the quarter, which can provide a near-term headwind for a high-yield dividend strategy.

Weakness was noted in Consumer Staples driven by tobacco names after the U.S. FDA announced that it would begin a public dialogue on the prospects of lowering the nicotine levels in cigarettes. As a result, Consumer Staples holdings posted a weighted average return of -1.8% for the period as a solid return from the above-mentioned Ambev was offset by Japan Tobacco, British American Tobacco and Phillip Morris International, which returned -6.7%, -6.7% and -4.6%, respectively.

Additional names that detracted from performance were Australian holding Sonic Healthcare (-9.8%) and global satellite provider SES, which returned -6.5%.

Looking Ahead

Global equity markets continued to grind higher into quarter end amid encouraging economic news, solid earnings, accommodative central banks and prospects for potential tax reform in the U.S. Both the S&P 500 and Nasdaq closed the quarter at record highs. Outside of the U.S., stocks as measured by the MSCI World Ex-US Index finished off their mid-September highs but rose 5.6% for the quarter, outpacing the S&P 500.

Outside of the U.S., the European economy continued to improve with German unemployment falling to a record low and broader eurozone joblessness holding at post-crisis lows. Led by an increase in business investment, the U.K. began to exhibit signs of improvement after a soft patch that battered the pound. In Asia, China chugged along as both its manufacturing and services PMIs surprised to the upside, while in South Korea, increased trade lifted industrial production as exports hit a record high. Japan saw manufacturing sentiment reach a 10-year high amid ongoing expansion and confidence in the policies of Prime Minister Shinzo Abe, who faces re-election in October. As for Canada, growth stalled somewhat in mid-summer, ending an eight-month run that made it the fastest-growing economy of the G-7 countries; however, year-over-year growth still rose a very robust 3.8%.

Regardless of the short-term trends, Federated International Strategic Value Dividend Fund remains committed to its focus on long-term drivers of total return: dividend yield and dividend growth. To achieve these goals, the portfolio remains concentrated in Consumer Staples, Integrated Energy, Health Care, Pharmaceuticals, Telecom Services and Utilities. These sectors contain the dividend-friendly stocks that the portfolio seeks out, enabling the fund to provide investors with the opportunity for a high dividend yield complemented with dividend growth. That dividend growth can help the portfolio both sustain the opportunity for high yield and outpace inflation. Such investments also tend to be less volatile than the broad market, offering the potential for lower downside risk for the portfolio. Regardless of current market conditions, Federated International Strategic Value Dividend Fund will remain committed to pursuing its objectives of providing a high and rising income stream from high-quality business assets and will not alter its investment style based on near-term market preferences.