Federated Prudent DollarBear Fund (A) PSAFX
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|C IS||Mutual Fund||Alternative and Objective-Based||World Bond|
The second quarter of 2014 provided a continuation of extraordinary global policymaking, economic and market backdrops. Throughout much of the reporting period, global risk markets traded with a notable “risk on” speculative dynamic, supported by chronic ultra-loose policies from the world’s major central banks.
Global equities and bond markets for the most part provided another quarter of solid returns. U.S. stock indices pushed further into record territory, having posted gains for six consecutive quarters. U.S. credit markets continued to boom. Bolstered by an increasingly dovish European Central Bank (ECB), the historic collapse in European periphery yields ran unabated. Emerging equities and bonds were notably robust in the face of ongoing economic headwinds coupled with a deteriorating geopolitical backdrop.
Since September 2008, the Federal Reserve’s (the Fed’s) balance sheet has ballooned from about $900 billion to almost $4.4 trillion. Quantitative easing (QE) is expected to end in several months with the Fed’s balance sheet nearing $4.5 trillion. This would leave the latest round of QE totaling almost $1.7 trillion, with the Fed’s balance sheet having expanded 60% in two years. Fed assets will have grown $3.6 trillion, or 400%, over the past six years. Repercussions from this historic liquidity onslaught were on full display during the reporting period.
The booming mergers-and-acquisition (M&A) market posted the strongest activity since 2007. Second quarter global M&A volume of $1.06 trillion was up 72% from the year ago period. In the U.S., M&A more than doubled year-on-year to $473 billion, pushing record first-half volume to $749 billion. The proliferation of deals was fueled by the loosest credit conditions in years. First-half global corporate bond issuance hit an all-time high $2.29 trillion. A record $286 billion of non-investment grade bonds were issued globally, as average junk-bond yields traded to the lowest level ever. At $642 billion, first-half U.S. investment-grade company bond sales easily posted an all-time high. The first six months of 2014 also saw record issuance of collateralized loan obligations. A record number of global initial public offerings (IPOs) were sold in the first half, with $90.6 billion of offerings 54% above comparable 2013. Led by technology and biotechnology issues, U.S. IPO sales enjoyed the strongest first half since the height of the technology bubble back in 2000.
From the management team’s perspective, global markets have been distorted by a prolonged period of unprecedented monetary stimulus. Central bank liquidity backstops have for years incentivized risk-taking and speculation. Ongoing strong investment returns have engendered deep-seated market complacency. To that end, dismal first-quarter U.S. economic performance, slowing global growth and an alarming geopolitical backdrop were viewed positively in the markets. Fragile underpinnings were seen securing ongoing extreme monetary accommodation.
Market perceptions of endless loose monetary policies were supported by aggressive new liquidity measures from the ECB. So far, the Bank of Japan (BOJ) has yet to even broach the subject of tapering its money-printing operations. Moreover, dovish Fed chair Yellen stated her clear preference for “macroprudential” measures above the “blunt tool” of monetary tightening in the event the Fed addresses lending and speculating excess.
Throughout the reporting period, market participants were challenged by what seemed a global central bank contest to realize the weakest currency. The euro suffered at the hands of a dovish ECB, only to benefit from surprising dovishness from central banks in Sweden and Norway. The U.S. dollar traded relatively well against most major currencies for much of the reporting period before a resolutely dovish Janet Yellen weighed on dollar sentiment.
In general, currency markets remained unsettled with a wide dispersion of currency returns. For the second quarter of 2014, the US Dollar index (USD Index) declined 0.41%. The Canadian dollar rallied 3.55% versus the dollar. The Australian dollar gained 1.82% and the New Zealand dollar increased 1.10% against the U.S. currency. The Japanese yen gained 1.88% and the Singapore dollar increased 0.87%. The British pound advanced 2.66% versus the U.S. dollar. For the most part, European currencies were under pressure. The euro posted a 0.56% decline versus the dollar, with the Swiss franc down 0.25%. The Norwegian krone dropped 2.36% and the Swedish krona sank 3.15% versus the dollar.
The second quarter 2014 return for Federated Prudent DollarBear Fund was 0.90% (Class A Shares at NAV). The return for the inverse of the USD Index was 0.41% for the same period. Fund performance benefited from U.S. dollar weakness versus the majority of currencies, as well as from gains in gold stocks.
The fund’s gold positions somewhat underperformed the 9.72% second quarter gain in the NYSE Arca Gold Bugs (“HUI”) Index. Gold bullion advanced $43 during the reporting period, or 3.4%. The fund’s overall gold allocation ended the quarter at 6.1% of fund assets.
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 benefited from gains in the Canadian dollar, British pound, Japanese yen, Australian dollar, New Zealand dollar, Singapore dollar and gold stocks. Fund performance was hurt by declines in the euro, Swiss franc, Norwegian krone and Swedish krona.
The fund’s performance relative to the USD Index benefited during the second quarter of 2014 from above-index allocations to the Canadian dollar, Australian dollar, New Zealand dollar and gold stocks, along with a significant underweight in the euro. Performance versus the USD Index was hurt by above-benchmark allocations to the Norwegian krone and Swedish krona.
Positioning and Strategy
The fund remained somewhat defensively positioned throughout the second quarter. The allocation to U.S. dollars began the quarter at 18.4% of fund assets. The fund managers increased U.S. dollar exposure 230 basis points during the quarter to end the reporting period at 20.7% of fund assets. The significant allocation to U.S. dollars was primarily in response to the fund managers’ unfavorable view of the euro and European currencies more generally.
During the quarter, the fund managers adjusted holdings throughout the portfolio. Allocations were reduced 390 basis points to the euro, 380 basis points to the Swiss franc, 190 basis points to the Norwegian krone and 80 basis points to the Swedish krona. Disappointing economic performance coupled with an increasingly dovish posture taken by the ECB and fellow European central banks weighed on the continent’s currencies.
The allocation to the Canadian dollar was increased 610 basis points on the managers’ view that Canada’s economy was well-positioned to benefit from heightened geopolitical risks and elevated energy prices. The allocation to the Japanese yen increased 340 basis points. The allocation to British pounds increased 70 basis points. The fund’s allocation to gold stocks was boosted 110 basis points during the reporting period. Bullion and gold-related equities were notably volatile throughout the quarter. Gold stocks were under pressure early in the quarter before rallying strongly in June. The managers were encouraged that gold appeared to be regaining safe haven status and that bullion performed well during periods of dollar weakness.
The fund managers anticipate no imminent resolution to extraordinary global financial and economic uncertainties. Throughout the reporting period, the policy and liquidity backdrop remained constructive for “risk on.” But the managers fear highly speculative global markets are addicted to extreme monetary stimulus and central bank liquidity backstops. The fund managers will continue to closely monitor unfolding fragilities in China, overheated U.S. and global risk markets, and a leveraged speculating community struggling with ongoing performance issues. The managers also see mounting geopolitical risks–from the Ukraine to the Middle East to the South and East China Seas–as accidents in the making. And especially with the Fed winding down QE, the fund managers will be on guard for subtle shifts in the market liquidity and risk-taking backdrop.
The fund managers continue working diligently to navigate through a very 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.