Federated Muni and Stock Advantage Fund (IS) FMUIX

Share Classes Product Type Asset Class Category
Mutual Fund Multi-Asset Asset Allocation
As of 09-30-2018

Highlights

  • Fears of a full-blown global trade were shrugged off by domestic investors
  • Muni bonds underperformed Treasuries, while in equities, growth outperformed value
  • The focus likely will shift temporarily from tariffs to midterm elections heading into the final quarter of 2018

Looking Back

Shrugging off fears of a global trade war, domestic equity markets climbed higher in the third quarter, with both the S&P 500 and the Dow Jones Industrial Average reaching all-time highs in September, led by Health Care, Industrials, and Information Technology stocks. During the quarter, the U.S. Federal Reserve (Fed) unsurprisingly raised the fed funds target rate another 25 basis points to a range of 2-2.25% on the heels of continued strong economic data. Overall market sentiment also got a lift from S&P 500 earnings-per-share, which posted a roughly 25% year-over-year gain in the second-quarter reporting season; 4.2% annualized growth in second-quarter gross domestic product; continued strong consumer confidence; and the easing of tariff and trade tensions with Mexico and Canada.

Municipal bond yields increased with Treasury yields amid the continued strong expansion and further Fed tightening. Municipal Market Data (MMD) 2-, 10- and 30-year AAA tax-exempt yields increased 33, 12 and 25 basis points, respectively, while yields on 2-, 10- and 30-year Treasury securities increased 29, 20 and 22 basis points. Losses in emerging markets (EM) and U.S. trade policy risks seemed to restrain U.S. Treasury yields early until each of these risks eased closer to quarter-end, when EM performance improved and the U.S. reached a new trade agreement with Canada and Mexico.

During the quarter, the S&P 500 Index returned 7.71%, the Russell 1000 Value Index returned 5.70% and the S&P Municipal Bond Index returned -0.14%. The 3-year component of the muni bond index returned -0.02%, the 10-year component returned 0.10% and the portion of the index maturing in 22 years and longer returned -0.51%. The AAA- and A-rated components of the index were down 0.30%, 0.13%, respectively, while the BBB-rated component returned +0.24%. The S&P Intermediate Municipal Bond Index was effectively flat, while the S&P High Yield Municipal Bond Index returned 1.07% but only 0.48% when excluding outperforming Puerto Rico bonds.

Performance

Federated Muni & Stock Advantage Fund A Shares returned 1.40% at Net Asset Value for the third quarter of 2018, underperforming the 2.18% return of the fund’s benchmark comprising of 40% Russell 1000 Value Index and 60% S&P Municipal Bond Index.

The fund’s bond portfolio modestly underperformed the S&P Municipal Bond Index and the fund’s equity portfolio underperformed the Russell 1000 Value Index. 

Performance data 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. Performance does not reflect the maximum 5.5% sales charge for the A shares. If included, it would reduce the performance quoted. 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 information on quality ratings and the fund’s top 10 holdings.

Performance Contributors

  • A relative underweight in Energy and positive stock selection in the Energy and Industrials sectors
  • A relative overweight in Microsoft Corp. and Apple Inc.
  • Overweight exposure to outperforming BBB-rated and below-investment-grade securities in fixed income

Performance Detractors

  • Stock selection in the Information Technology and Materials sectors
  • A relative underweight in the Health Care sector and a relative overweight in the Consumer Discretionary sector
  • Sector allocation and security selection in fixed income

How We Are Positioned

As we begin the final quarter of 2018, we expect the midterm elections to dominate the narrative over the first month or so leading to the early November election. Coupled with the election will be the third-quarter earnings season, in which we expect another strong round of reports from our companies. We will be looking for commentary on if and how the tariffs with China are affecting management’s capital investment plans, the supply chain and pricing, and if prices for end consumers are rising, which could drive inflation. We also expect the revised Nafta agreement with Canada and Mexico to be ratified by Congress, a market positive as it moves the trade war largely to a one-front war with China.

We remain broadly diversified within equity market sectors, with a prudent approach to balancing income, risk and long-term total return. Given relative market valuations and considering risks, we believe a balanced portfolio of cyclical and defensive companies that generate a qualified dividend-income stream and exhibit strong cash flow, balance sheets and improving fundamentals will continue to help navigate the current choppy investment landscape. 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.

On the bond side, the bond portfolio manager attempts to add incremental return through active management of duration and credit risk, sector allocation, yield-curve positioning and security selection. The bond portfolio manager also strives to balance the fund’s primary objective of tax-advantaged income and secondary objective of total return, and remains focused on intermediate and long-term securities and the tactical use of mid-to-lower credit quality bonds to enhance income and total return.