As of 09-30-2017

Market Overview

For the third quarter of 2017, the Standard & Poor’s 500 Index (S&P 500) returned 4.5%, including dividends. The Russell 2000 Index returned 5.7% in the third quarter and the Nasdaq Composite returned 6.1%. During the quarter, Information Technology and Energy were the best performers from a sector perspective, while Consumer Discretionary and Consumer Staples were the weakest.

The third quarter of 2017 saw gains continue for the broad market, as investors continued to purchase high-growth technology stocks.  Volatility as measured by the CBOE SPX Volatility Index (VIX) remained low for most of the quarter.  The VIX began the third quarter at 11.2 and ended the quarter at 9.5, although it did increase meaningfully in mid-August on geopolitical concerns in North Korea.

U.S. 10‑year Treasury bond yields increased marginally in the third quarter, with yields increasing from 2.30% to 2.33% at quarter end.

The U.S. dollar weakened in the third quarter, decreasing 2.7% as measured by the U.S. Dollar Index (DXY). Gold increased 3.1% in the third quarter. Brent crude oil increased 20.1% in the third quarter while natural gas decreased 0.9%.

In the alternative investment sectors, the Alerian Master Limited Partnership Index (AMZ) decreased 4.8% in the third quarter, while the MSCI U.S. REIT Index (RMZ) was unchanged.

Fund Performance

Federated Prudent Bear Fund’s third quarter 2017 return was -4.85% (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 108% and ended the quarter at 102% while the gross long position started the quarter at 45% and ended the quarter at 42%. 

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 long positions in the Materials sector and by short positions in the Consumer Staples and Consumer Discretionary 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 63% and closed the third quarter with net short exposure at 60%. The volatility of the fund’s short positions is typically higher than its long positions, and this was again the case throughout the third quarter of 2017.

During the third quarter, individual company, sector and non-S&P 500 Index shorts were increased from approximately 43% to approximately 47%. At quarter-end, S&P 500 short positions represented roughly 55% of fund exposure.