Federated Prudent DollarBear Fund (A) PSAFX
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|C IS||Mutual Fund||Alternative and Objective-Based||World Bond|
The third quarter of 2013 provided a continuation of extraordinary global policymaking, economic and market backdrops. In the face of heightened global market instability, the Federal Reserve (the Fed) early in the reporting period was already backing away from previous talk of reducing its $85 billion monthly quantitative easing (QE) program. Most notable were Fed chairman Bernanke’s comments that “highly accommodative monetary policy for the foreseeable future is what’s needed” and “if financial conditions were to tighten to the extent that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that.”
Chinese officials also appeared to step back from their belated attempt to rein in a runaway credit boom with mounting excesses in mortgage lending and “shadow banking.” Meanwhile, the Bank of Japan remained steadfast with its historic experiment in monetary reflation.
QE uncertainties and policy flip-flops only added to what were already unsettled global markets. The emerging markets (EM) remained volatile throughout much of the quarter before rallying strongly into quarter-end. U.S. equities posted strong gains during the quarter and major market indices rallied to record highs in September. Currency markets remained highly unsettled throughout the reporting period. The U.S. dollar posted strong gains early in the quarter. However, the dollar fell under significant pressure late in the reporting period after the Fed shocked markets with its decision to postpone tapering. Treasury bond prices also reversed higher on prospects for extended QE measures.
For the third quarter of 2013, the U.S. Dollar Index (USD Index) declined 3.41%. The euro advanced 3.97% against the dollar. The British pound jumped 6.40% and the Swiss franc gained 4.43%. The Swedish krona and Norwegian krone increased 4.21% and 0.93%. So-called commodity currencies rallied. The New Zealand dollar jumped 7.26%, the Australian dollar gained 1.97%, and the Canadian dollar rose 2.05% against the U.S. dollar. Versus the U.S. currency, the Singapore dollar increased 0.96% and Japanese yen gained 0.89%. Gold recovered some of the heavy losses incurred the previous quarter, with spot bullion up $94, or 7.6%, during the reporting period.
With a 57.6% weighting in the USD Index, the euro’s 3.97% gain somewhat masked the degree of overall dollar weakness during the quarter.
The third quarter 2013 return for Federated Prudent DollarBear Fund was 1.98% (Class A Shares at net asset value). The return for the inverse of the USD Index was 3.41% for the same period. Fund performance benefited from U.S. dollar weakness against most currencies. The fund’s gold equities holdings posted modest gains after suffering significant losses over recent quarters.
The fund’s gold positions outperformed the 0.8% third quarter gain in the NYSE Arca Gold Bugs (“HUI”) Index. Ending the quarter at 4.1% of assets, the overall gold allocation remained at the low end of its traditional range.
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 4.5% sales charge for Class A Shares. If included, it would reduce the performance quoted.
Click the Performance tab for standard fund performance.
Fund performance benefitted from strong gains in the New Zealand dollar, British pound, Swiss franc and Swedish krona, as well as from advances in the Canadian dollar, Norwegian krone, Singapore dollar, Japanese yen and the euro.
The fund’s performance relative to the USD Index was hurt during the third quarter of 2013 by a significantly below USD Index weighting in the euro and a corresponding allocation to dollar-denominated instruments, largely U.S. Treasury securities. Below benchmark allocations to the British pound and the Japanese yen also hurt performance versus the USD Index.
Positioning and Strategy
The fund remained defensively positioned throughout much of the third quarter. The allocation to U.S. dollars began the quarter at 24.0% of fund assets, with another 13.8% in the Hong Kong dollar that is pegged to the U.S. dollar. This defensive positioning was maintained through the end of August. However, with the Fed adopting an even more dovish posture, the managers moved in September to meaningfully reduce the fund’s U.S. dollar allocation.
The fund managers reduced U.S. dollar exposure 960 basis points during September to end the reporting period at 14.7% of fund assets. During the quarter, euro exposure was increased 480 basis points to end the reporting period at 6.3%. With the Fed and Chinese officials erring on the side of policy accommodation, the managers boosted exposure to so-called commodity currencies. A position in Australian dollars was reestablished in September at 3.1% of fund assets.
Along with reducing U.S. dollar exposure, the allocation to Hong Kong dollars was trimmed 110 basis points during the quarter to 12.7%. The managers’ less constructive U.S. dollar view was behind the 160 basis point increase in Japanese yen, to 8.0%, and the 140 basis point increase in British pounds, to end the quarter at 11.0%. The allocation to the Norwegian krone was reduced 90 basis points to 5.3%, as the managers took a less favorable view of Norway’s economic backdrop.
The fund managers anticipate no imminent resolution to extraordinary global financial and economic uncertainties. In the face of unprecedented stimulus, “developed” world economic struggles have proven largely intractable. Key “developing” economic booms have faltered, while a protracted Chinese boom is for now sustained by historic credit expansion. Seemingly everywhere, unrelenting financial and economic fragilities ensure policymakers remain locked into extreme monetary measures. And especially after the Fed in September backtracked from tapering, market participants approach risk-taking further emboldened with the view that policymakers will counter any weakness with even greater market-supporting monetary stimulus.
The managers see a world awash in liquidity, with myriad problematic market distortions and bubbles inflating around the globe. For years now, excesses have accumulated throughout global bond markets. Increasingly, the U.S. equities market has succumbed to late-cycle speculative excess. At the same time, maladjusted “emerging” markets and economies have shown heightened vulnerability to any tightening of global liquidity.
The Fed has stated its intention to “push back” against what it views as a tightening of financial conditions. Market instability did resurface back in June. Yet the managers view such bouts of risk aversion as inevitable consequences of an extended period of excessively loose financial conditions and attendant market excess. Moreover, they believe the longer central bankers cling to extreme policy measures the greater the difficulty of weaning markets from addiction to liquidity abundance and market backstops.
The fund managers continue working diligently to navigate through an extremely challenging environment. With a disciplined approach to risk management, a sound analytical framework, and a keen focus on market dynamics, the managers believe the fund is prepared for ongoing market challenges and opportunities. And with a well-diversified global portfolio of highly-rated short-term government debt instruments, the fund managers believe the fund is well-positioned for unstable global markets.