As of 06-30-2017

Market Overview

For the second quarter of 2017, the Standard & Poor’s 500 Index (S&P 500) returned 3.1%, including dividends. The Russell 2000 Index returned 2.5% in the second quarter and the Nasdaq Composite returned 4.2%. During the quarter, Health Care and Industrials stocks were the best performers from a sector perspective, while Telecom and Energy were the weakest.

The second quarter of 2017 saw gains continue for the broad market, as investors responded favorably to the French presidential election result. Volatility as measured by the CBOE SPX Volatility Index (VIX) remained low throughout the quarter, falling below 10 in early June.  The VIX began the second quarter at 12 and trended lower for most of the quarter, ending at 11.

U.S. 10‑year Treasury bond yields decreased marginally in the second quarter, with yields declining from 2.39% to 2.30% at quarter end.

The U.S. dollar weakened in the second quarter, decreasing 4.7% as measured by the U.S. Dollar Index (DXY). Gold decreased 0.6% in the second quarter. Brent crude oil fell 9.3% in the second quarter while natural gas decreased 4.9%.

In the alternative investment sectors, the Alerian Master Limited Partnership Index (AMZ) decreased 6.3% in the second quarter, while the MSCI U.S. REIT Index (RMZ) increased 1.7%.

Fund Performance

Federated Prudent Bear Fund’s second quarter 2017 return was -3.06% (A Shares at NAV). The fund managers varied net short exposure throughout the quarter, ranging from a high of 69% to a low of 58%. The gross short position started the quarter at 105% and ended the quarter at 109% while the gross long position started the quarter at 37% and ended the quarter at 45%.

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 second quarter was helped the most by long positions in the Industrials and Consumer Staples sectors and by short positions in the Consumer Discretionary and Energy sectors.

The fund managers continued to own mostly dividend-paying equity securities in businesses that we believe are relatively stable and whose stocks have historically shown resilience in times of market stress 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 67% and closed the second quarter with net short exposure at 64%. The volatility of the fund’s short positions is typically higher than its long positions, and this was again the case throughout the second quarter of 2017.

During the second quarter, individual company, sector and non-S&P 500 Index shorts were decreased from approximately 46% to approximately 43%. At quarter-end, S&P 500 short positions represented roughly 65% of fund exposure.