Federated Prudent DollarBear Fund (C) FPGCX
|Share Classes||Product Type||Asset Class||Category|
|A IS||Mutual Fund||Alternative and Objective-Based||World Bond|
The fourth quarter of 2013 provided a continuation of extraordinary global policymaking, economic and market backdrops. The Federal Reserve’s (the Fed) September decision to postpone tapering spurred exuberance and signs of excess throughout U.S. risk markets. The Bank of Japan’s version of quantitative easing (QE) helped spur Japanese equities prices to multi-year highs, while significantly pressuring the yen. And after a brief QE-induced respite over the summer, emerging-market (EM) instabilities reemerged during the reporting period.
Year-end market exuberance helped push 2013 returns for the Standard & Poor’s 500 Index and Japan’s Nikkei-225 Stock Average to 32.4% and 59.3%, respectively. For the most part, global bond prices were under pressure. The 10-year Treasury yield ended December at 3.03%, as U.S. bond mutual funds faced record annual redemptions. German and French 10-year sovereign yields also ended December near 2013 highs. Bond prices slumped as well in Canada, Australia and New Zealand. Meanwhile, European periphery bond prices enjoyed year-end rallies.
Fueled by the Fed’s unprecedented $1.0 trillion non-crisis liquidity operations, U.S. securities markets enjoyed a historic 2013. The year saw record total U.S. corporate debt sales, with booming junk bond and leveraged loan volumes. Total global corporate bond issuance surpassed $3.0 trillion. Global speculative-grade bond sales approached an unprecedented $500 billion, while global initial public offering volumes jumped 37% from 2012 to $160 billion. Meanwhile, risk premiums collapsed throughout the debt markets. Widely followed credit default swap (CDS) indices for both U.S. investment-grade and junk bonds sank to levels last experienced during 2007’s fateful “still dancing” excesses.
Strong investment and “hot money” flows into “developed” markets increasingly came at the expense of EM. Key EM currencies fell under heavy selling period during the quarter, with the Brazilian real declining 6.1%, the Turkish lira declining 6.0%, the Indonesian rupiah weakening 6.3% and the Argentine peso falling 11.2%. In general, EM equities and bonds were under pressure during the quarter.
The People’s Bank of China attempted again late in the period to tighten lending conditions. This placed further pressure on commodities markets that by and large suffered a tough 2013. The so-called “commodity currencies” were under pressure. Gold bullion fell $123, or 9.3%, during the fourth quarter, boosting 2013 declines to $470, or 28.0%. The NYSE Arca Gold Bugs (“HUI”) Equities Index ended 2013 with a decline of 55.5%.
Throughout the reporting period, currency markets were buffeted by an array of policy, market and economic crosscurrents. The US Dollar Index (USD Index) was little changed for the reporting period, though currency markets were unsettled with a notably wide dispersion of currency returns.
For the fourth quarter of 2013, the USD Index declined 0.23%. The euro advanced 1.60% against the dollar. The British pound gained 2.30% and the Swiss franc increased 1.34%. Yet most currencies declined versus the dollar during the quarter. The Japanese yen dropped 6.69% and the Singapore dollar declined 0.57%. The Swedish krona and Norwegian krone declined 0.13% and 0.94%. With commodities under pressure, the Australian dollar fell 4.29%, the Canadian dollar declined 2.96%, and the New Zealand dollar declined 1.04% against the U.S. currency.
With their combined 69.5% weighting in the USD Index, gains in the euro and British pound masked the degree of overall dollar strength during the quarter.
The fourth quarter 2013 return for Federated Prudent DollarBear Fund was -1.49% (Class A Shares at NAV). The return for the inverse of the USD Index was 0.23% for the same period. Fund performance was hurt by U.S. dollar strength versus most currencies, as well as from significant gold stock weakness.
The fund’s gold positions somewhat outperformed the 14.0% fourth quarter decline in the NYSE Arca Gold Bugs (“HUI”) Index. Ending the quarter at 3.9% 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 suffered from losses in the Japanese yen, Canadian dollar, Australian dollar, New Zealand dollar, Singapore dollar, Norwegian krone, Swedish krona and gold stocks. Fund performance benefitted from gains in the British pound, euro and Swiss franc.
The fund’s performance relative to the USD Index was hurt during the fourth quarter of 2013 by a significantly below USD Index weighting in the euro and a corresponding allocation to dollar-denominated instruments, along with above benchmark holdings in Australian dollars, Canadian dollars and gold stocks. Performance versus the USD Index benefitted from the below benchmark allocation to the yen.
Positioning and Strategy
The fund remained defensively positioned throughout much of the fourth quarter. The allocation to U.S. dollars began the quarter at 14.7% of fund assets, with another 12.7% in the Hong Kong dollar that is pegged to the U.S. dollar.
The fund managers increased U.S. dollar exposure 170 basis points during the quarter to end the reporting period at 16.4% of fund assets. Dollar exposure was reduced in October and November on the Fed’s dovish stance, before being boosted in December. During the quarter, euro exposure was increased 90 basis points to end the reporting period at 7.2%. Allocations were increased 180 basis points to the British pound, to 12.8%; 180 basis points to the Swiss franc, to 6.6%; 180 basis points to the Swedish krona, to 8.9%; and 40 basis points to the Norwegian krone to 5.7%.
Discerning heightened risks to global disinflationary forces, the managers took a more cautious stance with the commodity-related currencies. Allocations were reduced to Australian dollars by 80 basis points to 2.3% and to New Zealand dollars by 160 basis points to end December at 3.1%. The allocation to Canadian dollars was reduced 70 basis points to 12.7%.
While boosting U.S. dollar exposure, the allocation to Hong Kong dollars was cut 800 basis points during the quarter to 4.7%. The managers’ saw mounting risks for a bout of global “risk off.” This view was behind the 110 basis point increase in Japanese yen, to 9.1%, and the 180 basis point increase in Singapore dollars, to end the quarter at 6.6%.
The fund managers anticipate no imminent resolution to extraordinary global financial and economic uncertainties. At this point, the managers fear global market bubbles have become dangerously addicted to extreme central bank monetary stimulus. The Fed embarked on a process to wind down its unprecedented balance sheet growth. In China, officials appeared more determined to finally rein in rampant growth of “shadow banking” and local government debt. The managers believe financial conditions have begun to meaningfully tighten in China and throughout much of EM, with signs of fragility in key EM credit and economic systems. Moreover, they believe U.S. securities markets have turned dangerously overheated. As such, the managers see the potential for especially unsettled global financial and economic conditions.
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.