As of 09-30-2017

Market Overview

In the third quarter of 2017, U.S. equity markets reached all-time highs in the face of geopolitical uncertainty, severe natural disasters, continuing noise out of Washington, D.C., and the Federal Reserve’s unveiling of plans to normalize its balance sheet.

On the domestic front, stories out of Washington dominated the headlines. Failed efforts to repeal and replace the Affordable Care Act and a government shutdown that nearly came to fruition were among the primary domestic issues that investors looked past as equity markets continued to advance. Equity markets also shook off Hurricanes Harvey and Irma, some of the most devastating storms in more than a decade, as the S&P 500 finished higher for the eighth consecutive quarter while volatility continued to remain quite low. Despite all of the distractions, investors remained focused on the increasing potential for corporate tax cuts, which would provide a boost to the economy and potentially build on the strong year-to-date corporate earnings.

Looking abroad, geopolitical tensions between the U.S. and North Korea represented the main source of news throughout the quarter, creating a few short-lived episodes of weakness in equity markets that served as buying opportunities. Stronger economic data in Europe and Japan were additional tailwinds for equity investors throughout the three-month period, aided by a U.S. dollar that began to reverse its 2017 slide.

The fourth quarter of 2017 begins optimistically with a renewed hope that one of the main pillars of President Trump’s agenda—and arguably the most important for investors, tax reform—will move through Congress. The initial proposal of a 20% corporate tax rate and move to a territorial tax system would be bullish for equities. No doubt there will be tough negotiations ahead in Washington, creating volatility in the markets, but we believe a tax package ultimately will pass, helping propel stocks higher. A key item to watch will be whether Congress can pass a 2018 budget resolution.

Moving to the Fed, the balance sheet unwind is set to begin in October with a monthly $10 billion reduction ($6 billion in Treasuries and $4 billion in mortgage-backed securities, or MBS) that will increase quarterly until it reaches a $50 billion-per-month threshold. This plan had been well telegraphed by the Fed and we do not expect it to create any major market disruptions. We also continue to expect one more rate hike in December. With the economy continuing to grow steadily, we expect another solid earning season and, coupled with strong seasonality, a continued march higher in equity prices. Given relative market valuations, which are no longer cheap, 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 4.48%. Growth stocks outperformed value stocks with the Russell 1000 Growth Index returning 5.90% while the Russell 1000 Value Index returned 3.11%.

Fund Performance

For the third quarter, Federated Equity Income Fund A Shares returned 4.26% at net asset value (NAV), outperforming the 3.11% 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.

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

On an absolute basis, the five securities contributing most to performance were Abbvie, Texas Instruments, Applied Materials, Lam Research and PBF Energy. The five positions detracting most from performance were Teva Pharmaceutical, J.M. Smucker, Allergan, Quest Diagnostics and Spectrum Brands.

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

Positioning and Strategy

The fund is positioned within a diversified portfolio of dividend-paying and 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, Industrials and Consumer Discretionary. The fund’s largest underweight positions include the Health Care, Financials and Energy sectors.