As of 06-30-2018

Highlights

  • U.S. equity markets continued to be volatile during the quarter
  • Growth continued to outperform value with cyclical stocks coming under pressure as tariff rhetoric ramped up
  • 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.

During the quarter, the S&P 500 Index returned 3.43%. In addition, value stocks underperformed growth stocks with the Russell 1000 Value returning 1.18% while the Russell 1000 Growth returned 5.76%

Performance

Federated Equity Income Fund A Shares at net asset value (NAV) returned 0.73% for the second quarter of 2018, underperforming the 1.18% return of the fund’s benchmark (Russell 1000 Value).

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.

Performance Contributors

  • Stock selection within the Health Care and Consumer Staples sectors
  • A relative underweight in Financials
  • A relative overweight position in Marathon Oil Corp. and a relative underweight in Phillip Morris International

Performance Detractors

  • Stock selection in the Consumer Discretionary and Information Technology sectors
  • A relative underweight in the Real Estate sector
  • Overweight positions in Lam Research Corp. and Applied Materials (non-benchmark names)

How We Are Positioned

As we enter the third 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.

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.

Given relative market valuations and considering risks, we believe a balanced portfolio of cyclical and defensive companies that have strong cash flow, balance-sheet strength and improving fundamentals will continue to help navigate the current choppy investment landscape.