As of 03-31-2018

Market Overview

For the first quarter of 2018, the Standard & Poor’s 500 Index (S&P 500) declined 0.8%, including dividends. The Russell 2000 Index declined 0.1% in the first quarter while the Nasdaq Composite returned 2.6%. During the quarter, Information Technology and Consumer Discretionary were the best performers from a sector perspective, while Telecommunications and Consumer Staples were the weakest.

The first quarter of 2018 experienced increased volatility in both the domestic equity and fixed income markets. Following a strong start to the quarter, domestic equity markets declined meaningfully due to inflation worries, crowded short volatility trades, and late quarter concerns in the Information Technology sector.  Volatility, as measured by the CBOE SPX Volatility Index (VIX), began the quarter at a subdued level, increased markedly in February and remained elevated for the remainder of the quarter.  The VIX began the first quarter at 11.0, ended the quarter at 20.0 and spiked to over 30 in early February.

U.S. 10‑year Treasury bond yields increased sharply in the first quarter, with yields increasing from 2.41% to 2.74% at quarter end.

The U.S. dollar weakened in the first quarter, decreasing 2.3% as measured by the U.S. Dollar Index (DXY). Gold increased 1.7% in the first quarter. Brent crude oil increased 5.1% in the first quarter while natural gas decreased 7.5%.

In the alternative investment sectors, the Alerian Master Limited Partnership Index (AMZ) decreased 11.1% in the first quarter, while the MSCI U.S. REIT Index (RMZ) decreased 8.1%.

Fund Performance

Federated Prudent Bear Fund’s first quarter 2018 return was 0.32% (A Shares at NAV). The fund managers varied net short exposure throughout the quarter, ranging from a high of 79% to a low of 40%. 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 first quarter was helped the most by long positions in the Information Technology and Health Care sectors, by short positions in the Consumer Staples and Real Estate sectors and by the performance of our derivatives positions.

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 60% and closed the first quarter with net short exposure at approximately 76%.

At the end of the first quarter, total non-S&P 500 short positions represented 86% short exposure and S&P 500 short positions represented roughly 57% short exposure to total 143% gross fund short exposure. At the end of the first quarter, total long positions represented 59% long exposure and S&P 500 call options positions represented roughly 8% (delta-adjusted) of fund long exposure to total 67% gross fund long exposure.