Federated Muni and Stock Advantage Fund (IS) FMUIX

Share Classes Product Type Asset Class Category
Mutual Fund Multi-Asset Asset Allocation
As of 06-30-2018

Highlights

  • U.S. equity and municipal bond markets continued to be volatile during the quarter
  • Muni bonds outperformed Treasuries, while in equities growth outperformed value
  • The focus on trade and tariffs in the first half of 2018 is likely to persist for investors into the final six months of the year

Looking Back

In the second quarter of 2018, equity markets rebounded from a weak first quarter despite the persistence of several sources of volatility. Though an impending trade war has weighed on the sentiment of investors for much of the year and dominated headlines in the second quarter, U.S. equities were able to rebound from a negative first quarter with the S&P 500 closing up over 3%, led by Energy, Consumer Discretionary and Information Technology sector stocks.

Strong economic data on the home front was a bright spot for investors, with healthy manufacturing, consumer confidence, wage growth and unemployment numbers posted throughout the quarter. In fact, the unemployment rate in the U.S. fell to an 18-year low of 3.8% in May. Corporate earnings also were very robust, further boosting the market. The Federal Reserve (Fed) took note of the strong macroeconomic data, as well, raising its target funds rate another 25 basis points in June for the second time this year, and signaling that two additional increases are likely by the year-end.

In the municipal bond market, yields were little changed even as Treasury yields moved higher amid the continued economic expansion, somewhat higher inflation and another Fed increase. Generally stable demand against a backdrop of only modest gross new issuance—down 25% year-to-date through June 2018 versus the average mid-year level of the prior three years—supported municipal bond outperformance relative to Treasuries for the quarter. Issuance was off as a result of tax reform, which eliminated the use of tax-exempt advance refunding bonds effective this year, causing a rush of issuance late last year to beat the deadline.

During the quarter, the S&P 500 returned 3.43%, and the Russell 1000 Value Index returned 1.18%. The S&P Municipal Bond Index returned 0.91%, with the 3-year component returning 0.60%, the 10-year component returning 0.78% and the portion of the index maturing in 22 years and longer returning 1.39%. The AAA-, A- and BBB-rated components of the index returned 0.67%, 0.89%, 1.42%, respectively. The S&P High Yield Municipal Bond Index returned 2.99%.

Performance

Federated Muni & Stock Advantage Fund A Shares returned 0.50% at net asset value for the second quarter of 2018, underperforming the 1.02% 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 mildly outperformed the S&P Municipal Bond Index while the fund’s equity portfolio underperformed the Russell 1000 Value 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 A Shares. If included, it would reduce the performance quoted.

Click on 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

  • Overweight equities relative to fixed income
  • Stock selection in the Health Care and Consumer Staples sectors
  • Overweight exposure to outperforming BBB-rated and below-investment-grade securities in fixed income

Performance Detractors

  • Stock selection in the Consumer Discretionary and Information Technology sectors
  • A relative underweight in the Energy sector and overweight in the Information Technology sector
  • Negative sector allocation in fixed income

How We Are Positioned

As we end the second quarter of 2018, we expect continued volatility driven by political rhetoric centered on trade and tariffs. The possibility that tensions escalate further before any real solutions are agreed is a real possibility, and we do not expect the market to react well if in fact tit-for-tat moves ramp up. The third quarter also should see much more focus on the upcoming midterm elections in regards to control of the House and Senate, with the intensity reaching a feverish pitch as the third quarter comes to a close.

While media headlines will continue to focus on the tariffs and upcoming elections, we expect the coming second-quarter earnings season to once again surprise to the upside and will be closely monitoring management commentary for further insight into fundamentals. Our companies continue to tell us that business is very strong, but many cite the uncertainty around tariffs and their potential inflationary impact as reasons to potentially be more cautious about their outlook for the second half of the year.

We remain broadly diversified within equity market sectors, seeking a balanced portfolio of cyclical and defensive companies with strong cash flow, balance-sheet strength and improving fundamentals that can help navigate the current choppy investment landscape. On bond front, the focus remains on adding incremental return through active management of duration and credit risk, with a tactical use of mid-to-lower credit quality bonds to enhance income and total return.