Federated Floating Rate Strategic Income Fund (A) FRSAX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Bank Loan
As of 06-30-2018

Market Overview

During the second 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 0.78%. Loan-market performance during the quarter downshifted from “coupon-like” returns from prior quarters as risk-asset volatility crept into the picture during May and June. Loan risk spreads as measured by the discount margin (3-year) on the Credit Suisse Leveraged Loan Index (CSLLI) finished the quarter slightly wider at 4.00%, versus 3.96% at the beginning.

The overall backdrop of favorable economic conditions and solid credit fundamental metrics continued to provide a solid underpinning to the U.S. loan market. Strong employment trends and the expectation of higher GDP growth in the second quarter were key components to the macroeconomic picture. Corporate earnings performance was encouraging and leveraged-finance default experience remained low by historical standards.

Negative loan-market volatility in the latter stages of the quarter was attributable to two key factors. First, global jockeying on trade and tariffs between the largest economic regions created angst in risk markets as the negative impact of trade wars moved closer to reality. In addition, a new-issue supply glut in the loan market, driven mainly by new acquisition financings, led to some downward pressure on secondary trading levels. In general, investor demand for leveraged loans remained strong, evidenced by positive fund flows and collateralized loan obligation (CLO) formation.

The 3-month London interbank offered rate (Libor), a common benchmark rate for floating-rate assets, ticked a bit higher, ending the quarter at 2.34%. The recent higher movement in short term rates flowed through to floating rate assets, increasing the overall yield level in the loan market during the quarter.

Fund Performance

Federated Floating Rate Strategic Income Fund Institutional Shares had a total return of 0.65% at net asset value (NAV) for the quarter ending June 30, 2018. On a gross basis, the portfolio return outperformed its blended benchmark during the second 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.

During the quarter, the fund maintained its slight overweight to the domestic non-investment-grade sector, which outperformed higher quality sectors. Security selection detracted from performance versus this segment of the blended benchmark as the loan sub-portfolio underperformed the CSLLI.

The fund also maintained a slight overweight to the foreign fixed-income sector consisting of trade-finance instruments, loans and corporate bonds from foreign-domiciled issuers. Outperformance of this sector against the relevant sector of the blended benchmark was driven primarily by the positive contribution from trade-finance instruments, partially offset by underperformance from foreign issuer loans.

Relative performance against the blended benchmark was enhanced by the fund’s underweight positioning to the lower-returning domestic investment-grade (IG) sector. Positive credit selection in floating-rate corporate bonds and mortgage floaters aided performance versus the relative 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 IG (agency mortgage, asset-backed, and loan/corporate). Sector allocation and security selection are key drivers of performance relative to the fund’s blended benchmark.

At the end of the second quarter, fund management maintained a modest overweight to the domestic non-investment-grade sector. The U.S. credit markets continued to benefit from healthy credit fundamentals and a favorable macroeconomic backdrop. In addition, the shift higher in short-term rates has enhanced the relative value proposition of floating-rate assets, including leveraged loans, given attractive current yield levels and limited interest-rate duration risk offered by these assets. Risk market volatility may continue as trade rhetoric and actions were elevated at the end of the quarter. Despite the policy concerns, fund management maintained a constructive view of the U.S. leveraged-loan market relative to other fixed income options.

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