As of 09-30-2018

Highlights

  • After a strong second quarter, small-cap stocks took a backseat to large-cap stocks in the third quarter of 2018.
  • Small caps have continued to exhibit strong earnings growth with multiple macroeconomic tailwinds in place.
  • The fund added to its recent gains, but trailed the Russell 2000 Value benchmark.

Looking back

Economic growth continued to accelerate in the third quarter of 2018, and most equity indices followed suit by adding to their recent gains. The S&P 500 Index climbed nearly 8% during the quarter, surpassing its own high-water mark from January of this year. Investors rallied around positive data such as strong corporate earnings growth, as well as deals with Mexico and Canada, which seemed to alleviate global trade tensions (although China still loomed large in that respect). The Federal Reserve also signaled confidence in the economy with its third rate hike of the year, describing the current situation of strong growth and benign inflation as a “particularly bright moment.” With midterm elections just weeks away, bitter partisan politics intensified, but left financial markets largely unscathed.

Performance

Federated Clover Small Value Fund (Institutional Shares, NAV) returned 0.76% for the quarter. This compares to a return of 1.60% for the Russell 2000 Value Index during the same period.

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.

Click the Performance tab for standard fund performance.

Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.

Performance Contributors

  • Relative performance was led by the Health Care sector, with strong results from several holdings including health care equipment manufacturer NuVasive and life science firm Medpace Holdings
  • The Financials sector was also a source of strength, with notable contributions from Radian Group and IberiaBank
  • The fund’s stock selection in the Consumer Staples sector also contributed positively with healthy snack manufacturer Simply Good Foods leading the way.

Performance Detractors

  • Stock selection in the Technology sector detracted from benchmark-relative performance, as several of the portfolio’s hardware and equipment holdings turned in a weak quarter
  • Weakness among the portfolio’s transportation holdings weighed upon performance in the Industrials sector
  • The Consumer Discretionary sector, and retail in particular, was also a net detractor during the period

How We Are Positioned

As we’ve noted before, earnings have outpaced stock price gains this year. As a result, the valuation multiple (i.e., the P/E ratio) for the overall market has compressed. As value-minded investors, we think this marks a healthy development for the market. With the monumental tax cuts a year ago, investor sentiment may have gotten a little ahead of itself. Now that earnings are “catching up,” valuations are more fundamentally justified. We remain focused on the fundamentals, and as such we see many opportunities in today’s market. Fundamentals and valuations are at the core of our investment process, and while asset prices can deviate from these factors over the short term, their reliability over the long term is what value investing is all about.