Federated Floating Rate Strategic Income Fund (A) FRSAX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Bank Loan
As of 09-30-2018

Market Overview

During the third quarter of 2018, the primary U.S. dollar-denominated leveraged-finance asset classes produced positive total returns. For example, the total return on the Credit Suisse Leveraged Loan Index (CSLLI) was 1.93%. Positive leveraged-loan performance was driven by a steady current income stream, coupled with modest average price appreciation of performing loans in the market during the quarter. Loan risk spreads as measured by the discount margin (3-year) on the CSLLI migrated tighter, finishing the quarter at 3.81%, versus 4.00% at the beginning.

Once again, favorable economic conditions in the U.S. and healthy credit fundamental metrics were key drivers of the strong leveraged-finance performance during the quarter. Strong employment trends and rising consumer confidence fueled the positive macroeconomic landscape. Tax reform and ongoing regulatory relief also contributed to healthy levels of business confidence and investment. Positive credit fundamentals were driven by strong earnings growth and cash flow, leading to continued subdued leveraged-loan default experience relative to historical averages.

Holders of risk assets continued to be bothered by geopolitical jockeying between global economic powers. Strong rhetoric on trade wars and tariffs were unsettling to the investor mindset, leading to small pockets of volatility. In general, risk markets appeared to process these concerns as more “transitory” in nature and the aforementioned positive factors mitigated the negative impact during the quarter.

The fed funds target rate was hiked again by 25 basis points at the end of the quarter in a well-telegraphed move. In conjunction with the Federal Reserve tightening trend, the 3-month London interbank offered rate (Libor) edged higher, ending the quarter at 2.40%. The outlook for rising short term interest rates in the U.S. continued to stimulate strong technical demand for floating-rate assets, including leveraged loans.

Fund Performance

Federated Floating Rate Strategic Income Fund Institutional Shares had a total return of 1.60% at net asset value for the quarter ending Sept. 30, 2018. On a gross basis, the portfolio return outperformed its blended benchmark during the third quarter. The blended benchmark return is comprised of the following mix: 55% CSLLI; 30% 1-year U.S. Treasury Note Index and 15% 1-month Libor.

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.

The fund finished the quarter close to its neutral setting in the domestic non-investment-grade sector, which outperformed higher-quality sectors. Security selection, including tactical positions in short duration high-yield corporate bonds, contributed positively to outperformance versus this segment of the blended benchmark.

The fund also maintained a modest overweight to the foreign fixed-income sector, which consists of trade-finance instruments, term loans and corporate bonds from foreign-domiciled issuers. Outperformance of this sector against the relevant sector of the blended benchmark was driven by steady “coupon-like” performance from the trade-finance sub-portfolio.

Relative performance against the blended benchmark was enhanced by the fund’s underweight positioning to the lower returning domestic investment-grade sector. Positive credit selection in floating-rate corporate bonds aided performance against the relevant portion of the blended benchmark.

The fund’s short positions in U.S. Treasury futures contracts contributed positively to overall fund performance.

Click on the Portfolio Characteristics tab for information on quality ratings and the fund’s top 10 holdings.

Positioning and Strategy

Fund assets are allocated across three broad sectors: domestic non-investment-grade (leveraged loans and high-yield corporates); foreign fixed income (trade finance and loan/corporate); and domestic investment-grade (agency mortgage, asset-backed and loan/corporate). Sector allocation and security selection are key drivers of performance relative to the fund’s blended benchmark. The flexible and nimble approach of a multi-sector floating-rate portfolio enables fund management to position assets across the risk spectrum based on our macro and fundamental views.

As of the end of the third quarter of 2018, the fund was in line with its neutral setting in the domestic non-investment-grade sector, modestly overweight the foreign fixed-income sector, and modestly underweight the domestic investment-grade sector. Given the healthy U.S. economy and solid credit fundamentals in the leveraged-finance markets, fund management remained constructive on the leveraged-loan market relative to other income options as rates continue to rise. With that said, the positioning of the highest yielding domestic non-investment-grade sector was closer to the neutral level given the recent spread tightening in leveraged-finance markets and valuation metrics relative to historical levels. Fund management has chosen to diversify broadly across the three primary sectors as the long-running credit and economic cycles continued to chug along as of quarter end.

As of quarter-end, the fund maintained short positions in U.S. Treasury futures contracts as part of its duration-management strategy.