Tools & Resources▼
|Share Classes||Product Type||Asset Class||Category|
|A B F R IS||Mutual Fund||Balanced/Hybrid||Allocation-30% to 50% Equity|
Following the initial volatility brought on by United Kingdom’s Brexit vote at the end of the second quarter 2016, equity markets rebounded in the subsequent three months, exhibiting unusual calm for much of the third quarter. The decisions of various global central banks and OPEC, U.S. economic data and the upcoming U.S. elections were primary sources of interest for investors throughout the quarter.
On the domestic front, considerable attention was paid to monthly economic data with the thought that the Federal Reserve (Fed) could raise its target funds rate as early as September. Though the data was generally strong enough to allay any fears of a potential recession, it still was not quite enough in the Fed’s eyes to hike rates. Most data points (such as housing, consumer spending and payrolls) remained healthy while manufacturing continued to show signs of weakness. With September off the table, investors will be focusing on a possible Fed move in December to close out the year. November’s U.S. election also looms for investors as the outcome for the presidential race and maybe more importantly Congress could have a significant effect on markets and individual equity sectors heading into 2017 and beyond.
Looking abroad, initial concerns over the surprise Brexit vote and emerging-market (EM) countries such as China seemed to temporarily fade as post-Brexit global equity markets rebounded. Although stability of the European Union (EU), European banks and growth prospects in Japan remain in the backdrop, the central banks once again stepped in to mitigate volatility as actions by the European Central Bank and Bank of Japan calmed the markets – for a little while at least. OPEC also created a headline surprise at the end of the third quarter, agreeing to cut oil production for the first time in eight years. Even though oil prices surged higher to close out September, the legitimacy of OPEC’s announcement was received with some skepticism as individual country oil output allocations have been pushed to the November meeting.
As the year winds down, the final three months could prove volatile as markets navigate the U.S. election, Italian referendum on that country’s constitution and a likely December Fed rate hike. In addition, a number of other European countries are holding elections amid concerns about the stability of the European financial system. We expect central bank actions to continue to heavily influence the capital markets globally for the foreseeable future even as an undercurrent of concern around policy efficacy is rising. At this point, given relative market valuations – which are no longer cheap – we believe a balanced portfolio of cyclical and defensive companies that have strong cash flow, balance sheets and improving fundamentals will help weather through the uncertain waters we continue to navigate.
On the fixed income side, U.S. Treasury rates increased for all maturities during the third quarter. The largest yield increases occurred in the 2-to-10 year portion of the Treasury, where rates increased from 12 to 18 basis points, compared to only 3 basis points for the 30-year Treasury. As a result, the total return of the Barclays U.S. Treasury Index during the quarter was -0.28%. Despite the increase in U.S. Treasury rates, other sectors of the U.S. fixed-income market, including agency and commercial mortgage-backed securities (MBS), investment-grade and high-yield corporates, and EM bonds were all able to produce positive total returns for the third quarter, outperforming the U.S. Treasury market on a total return basis.
For the third quarter of 2016, the Barclays Aggregate Index returned 0.46%, the Barclays Treasury Index returned -0.28%, the Barclays Mortgage Index returned 0.60%, the Barclays Commercial Mortgage Index returned 0.59%, the Barclays Investment Grade Corporate Index returned 1.41%, the Barclays High Yield 2% Issuer Capped Index returned 5.55%, and the Barclays Emerging Markets USD Aggregate Index returned 3.13%. In addition, the S&P 500 Index returned 3.85%, the Russell 1000 Value Index return 3.48%, and the Dow Jones Select Dividend Index returned 1.37%.
The fund met its primary goal of current income and long-term growth of income during the third quarter. The fund’s 12-month yield for A Shares at net asset value (NAV) was a net 4.83% at quarter-end, with an SEC yield of 3.48%. The fund’s yield is well above the S&P 500 yield at 2.04%; Russell 1000 Value Index at 2.51%; 10 year Treasury yield at 1.59% and Morningstar Conservative Allocation average at approximately 2.22%. The fund received 5 dividend increases during the third quarter, including Republic Services, Altria, and Verizon.
For the third quarter, Federated Capital Income Fund A Shares at NAV returned 1.83%, underperforming the 2.89% return of the fund’s benchmark comprising of 40% Russell 1000 Value Index, 20% BHY2%ICI, 20% BMB and 20% BEMB Index.
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 Performance tab. Performance does not reflect the maximum 5.5% sales charge for Class A Shares. If included, it would reduce the performance quoted.
Click the Performance tab for standard fund performance.
Within the equity markets, value stocks underperformed growth stocks during the quarter, with the Russell 1000 Value Index returning 3.48% and the Russell 1000 Growth Index 4.58%. In terms of asset allocation, the Russell 1000 Value Index outperformed both the broader Barclays Aggregate Index and the Barclays Treasury Index. The fund is overweight equities at 45% of its asset allocation relative to its neutral 40% equity index exposure and class. The equity relative overweight, which has helped performance since 2010, was a positive contributor during the quarter.
In the equity portfolio, stock selection and sector weight both detracted from the fund’s overall performance. Relative to the fund’s Russell 1000 Value Index benchmark, the three best performing sectors were Information Technology, Real Estate and Materials. The three sectors that most negatively contributed to fund performance were Financials, Consumer Staples and Utilities.
On an absolute basis the five securities contributing most fund performance were Alibaba (Conv., Pfd.), Stanley Black & Decker (Conv., Pfd), Microsoft, Cisco Systems and Leidos Holdings. The five positions detracting most from performance were Dynegy (Conv. Pfd.), Verizon, Altria, Post (Conv. Pfd.) and Exelon.
Click on the Portfolio Characteristics tab for the fund’s top ten holdings.
The fixed-income portfolio’s 3.44% return outperformed its blended benchmark by 23 basis points and materially outperformed the higher quality Barclays U.S. Treasury and Barclays U.S. Aggregate indices by 372 and 298 basis points, respectively. Duration was the largest positive contributor to performance, at an average 91% of the fixed-income blended benchmark’s duration. Sector was the largest negative contributor to performance due to being lower quality in emerging markets relative to the blended benchmark.
Positioning and Strategy
The fund continues to strive to achieve its primary goal of current income and long-term growth of income with capital appreciation as a secondary objective.
We remain broadly diversified within equity market sectors, with a prudent approach to balancing income, risk and long-term total return. The fund’s equity holdings are positioned within a diversified portfolio of income-producing securities and dividend-growing stocks with favorable valuations, strong balance sheets and improving business fundamentals. The portfolio continues to aim for high yield and consistent dividend growth.
Sector overweight positions relative to the fund’s Russell 1000 Value Index benchmark include Information Technology, Utilities and Telecom. The fund’s largest underweight positions include Financials, Energy and Materials.
The fixed-income portfolio remains slightly overweight high yield, neutral in EM and slightly underweight the higher quality corporate and mortgage markets relative to the fixed-income portfolio’s blended benchmark. The portfolio had an average effective duration of 3.83 years versus the benchmark at 4.19 years. The fixed-income portfolio is positioned neutral relative to the yield curve.