As of 09-30-2018

Market Overview

For the third quarter of 2018, the Standard & Poor’s 500 Index (S&P 500) increased 7.7%, including dividends. The Russell 2000 Index increased 3.6% in the third quarter while the Nasdaq Composite returned 7.4%. During the quarter, Health Care and Industrials were the best performers from a sector perspective, while Materials and Energy were the weakest.

The third quarter of 2018 saw continued strong domestic equity market returns, diverging from the majority of international equity markets, which performed more modestly. This differential was partially affected by strength in the U.S. dollar in addition to a sharp move higher in the 10-year U.S. Treasury yield. The broad U.S. stock market was able to increase in the quarter despite increased global trade tensions. Corporate earnings growth has been impressive, and significantly lower corporate tax rates have provided a robust tailwind. Volatility, as measured by the CBOE SPX Volatility Index (VIX), began the quarter at a moderate level, yet was subdued for the bulk of the quarter. The VIX began the third quarter at 16.1 and ended the quarter at 12.1.

U.S. 10‑year Treasury bond yields increased in the third quarter, with yields rising from 2.86% to 3.06% at quarter end.

The U.S. dollar strengthened in the third quarter, increasing 0.7% as measured by the U.S. Dollar Index (DXY). Gold decreased 4.9% in the third quarter, Brent crude oil increased 4.1% in the third quarter while natural gas increased 2.9%.

In the alternative investment sectors, the Alerian Master Limited Partnership Index (AMZ) increased 6.6% in the third quarter, while the MSCI U.S. REIT Index (RMZ) increased 1.1%.

Fund Performance

Federated Prudent Bear Fund’s third quarter 2018 return was -7.53% (A Shares at NAV). The fund managers varied net short exposure throughout the quarter, ranging from a high of 92% to a low of 53%. The net short position oscillated throughout the quarter due primarily to the delta adjusted exposure values of our derivatives positions.

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.

The fund’s performance in the third quarter was helped the most by short positions in the Health Care and Industrials sectors and hurt the most by long positions in the Health Care and Information Technology sectors.

The fund managers continued to own equity securities in businesses that we believe are undervalued and to sell short equity securities that we believe trade at higher prices than are warranted.

Positioning and Strategy

The fund managers commenced the reporting period positioned with net short exposure at approximately 90% and closed the third quarter with net short exposure at approximately 60%.

At the end of the third quarter, total non-S&P 500 short positions represented 60% short exposure and S&P 500 short positions represented roughly 42% short exposure to total 102% gross fund short exposure. At the end of the third quarter, total long positions represented 38% long exposure and S&P 500 call options positions represented roughly 5% (delta-adjusted) of fund long exposure to total 43% gross fund long exposure.