As of 03-31-2018

Market Overview

Volatility returned to the markets in the first quarter of 2018 as the S&P 500 finished in negative territory for the first time in 10 quarters. Drivers for equity underperformance during the quarter include heightened fears about inflation, threat of an impending trade war and Technology sector volatility.

Inflation fears sparked the initial market sell-off in late January and early February, fueled by accelerating wages and exacerbated by high-volume, algorithm-based trading that worsened volatility. Inflation and interest-rate worries were fed further in March, when citing a healthy economy, the Federal Reserve (Fed) under new Chair Jerome Powell again raised the federal funds target rate and signaled at least two more 25 basis-point hikes are likely this year. Layered over all this was increasing talk of tariffs and potential trade wars with Europe, China and the U.S.’s Nafta partners Canada and Mexico. While those fears eased in regards to Nafta and Europe, both U.S. and international equity markets struggled toward the end of March as trade tensions ratcheted up with China. In the Information Technology sector, news of widespread data sharing of Facebook users’ information sent waves throughout the highflying sector, adding to overall volatility. Despite higher volatility and the equity sell-off, economic data for the most part was relatively strong, with nonfarm payroll growth, consumer confidence and the final reading on fourth quarter GDP surpassing expectations.

As the calendar turns to the second quarter of 2018, we expect heightened volatility to stick around. Trade and tariff rhetoric is likely to continue in fits and starts, with a possible conclusion to the Nafta renegotiation on the horizon and a wide swath of possibilities on U.S.-China trade relations. Additionally on the international stage, a potentially high-stakes meeting between the U.S. and North Korea is tentatively scheduled for later in the second quarter. There no doubt will be headlines out of that meeting if it in fact happens. On the domestic political front, midterm elections are moving closer and we expect that to begin to make headlines near the end of the quarter. We view all these geopolitical events as both sources of volatility as well as opportunities as we get back to the fundamentals. We expect another strong earnings season as companies report first quarter 2018 results and tax reform begins to work its way into the real economy. In the medium term, we anticipate companies to step up capital expenditures as they take advantage of full deprecation provisions of the new tax law, creating potentially positive second and third order effects that will show up over the coming quarters. Given relative market valuations, which are cheaper now after the correction following a strong January, we believe a balanced portfolio of cyclical and defensive companies that have strong cash flow, balance-sheet strength and improving fundamentals will help navigate the current investment landscape.

During the quarter, the S&P 500 Index returned -0.76%. In addition, growth stocks outperformed value stocks with the Russell 1000 Growth Index returning 1.42% while the Russell 1000 Value Index returned -2.83%.

Fund Performance

For the first quarter, Federated Equity Income Fund A Shares returned -0.88% at net asset value, outperforming the -2.83% return of the fund’s benchmark (Russell 1000 Value Index). Stock selection and sector allocation both added to the overall performance of the fund.

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.

Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.

Relative to the benchmark, the fund’s top contributing sectors were Industrials, Consumer Staples and Information Technology. The sectors that detracted most from performance were Consumer Discretionary, Utilities and Telecom.

On an absolute basis, the five equity stocks contributing most to performance were Hewlett Packard Enterprise, Raytheon, Western Digital, Cisco, and Comerica. The five equity stocks detracting most from performance were Cimarex Energy, Citigroup, CVS, Devon Energy, and Johnson & Johnson.

Positioning and Strategy

The fund is positioned within a diversified portfolio of dividend-paying and dividend-growing stocks with favorable valuations, strong balance sheets and improving business fundamentals. The portfolio continues to aim for relative long-term total return, above-average yield and dividend growth potential. Over the reporting period, the average sector overweight positions relative to the fund’s benchmark include Information Technology, Consumer Discretionary and Industrials. The fund’s largest underweight positions include the Financials, Health Care and Real Estate sectors.