As of 06-30-2018

Market Overview

For the second quarter of 2018, the Standard & Poor’s 500 Index (S&P 500) increased 3.4%, including dividends. The Russell 2000 Index increased 7.8% in the second quarter while the Nasdaq Composite returned 6.6%. During the quarter, Energy and Consumer Discretionary were the best performers from a sector perspective, while Industrials and Financials were the weakest.

The second quarter of 2018 experienced strong domestic equity market returns, led by the Information Technology sector.  Concerns regarding data privacy and its impact on Technology sector business models proved fleeting, as the Nasdaq significantly outperformed the S&P 500.  The broad U.S. stock market was able to counteract concerns of a stronger U.S. dollar and increased global trade tensions with better-than-expected first quarter corporate earnings and employment growth.  Volatility, as measured by the CBOE SPX Volatility Index (VIX), began the quarter at a heightened level, yet was subdued for the bulk of the quarter.  The VIX began the second quarter at 20.0 and ended the quarter at 16.1.

U.S. 10‑year Treasury bond yields increased modestly in the second quarter, with yields increasing from 2.74% to 2.86% at quarter end.

The U.S. dollar strengthened meaningfully in the second quarter, increasing 5.0% as measured by the U.S. Dollar Index (DXY). Gold decreased 5.5% in the second quarter. Brent crude oil increased 13.1% in the second quarter while natural gas increased 7.0%.

In the alternative investment sectors, the Alerian Master Limited Partnership Index (AMZ) increased 11.8% in the second quarter, while the MSCI U.S. REIT Index (RMZ) increased 10.1%.

Fund Performance

Federated Prudent Bear Fund’s second quarter 2018 return was -8.30% (A Shares at NAV). The fund managers varied net short exposure throughout the quarter, ranging from a high of 82% to a low of 61%. 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 second quarter was hurt the most by short positions in the Consumer Discretionary 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 76% and closed the second quarter with net short exposure at approximately 82%.

At the end of the second quarter, total non-S&P 500 short positions represented 77% short exposure and S&P 500 short positions represented roughly 66% short exposure to total 143% gross fund short exposure. At the end of the second quarter, total long positions represented 57% long exposure and S&P 500 call options positions represented roughly 5% (delta-adjusted) of fund long exposure to total 62% gross fund long exposure.