As of 12-31-2017

Market Overview

U.S. equity markets continued to soar the final three months of 2017 as the S&P 500 finished higher for a ninth consecutive quarter even as volatility remained extremely restrained—the S&P never experienced a pullback greater than 3% the entire year. Congressional passage of U.S. corporate tax reform was the primary impetus for equities in the fourth quarter, though continued solid economic and earnings data domestically and abroad aided as well.

On the domestic front, the much-anticipated corporate tax cut was finally passed by Congress in December, cutting the statutory corporate rate from 36.5% to 21% effective January 2018 and including several other measures to incentivize corporate investments. This led equity investors to shift their focus toward sectors such as Consumer Discretionary, Industrials and Financials that should benefit from the lower tax rate. U.S. stocks also rallied on solid third-quarter earnings that seemed to shrug off the effects of a destructive hurricane season; strong macroeconomic data; and robust holiday retail sales. Real GDP was revised to 3.2% for the third quarter, marking the first back-to-back 3%+ quarters of annualized GDP growth since 2014. The U.S. Federal Reserve also continued to pull back stimulus, raising its target funds rate a quarter point for a third time in 2017 to a range of 1.25-1.50% and initiating balance-sheet reduction. Looking abroad, countries in Europe and Asia also enjoyed improving economies despite several geopolitical conflicts, including continued Brexit discussions, the Catalonian vote for independence from Spain and North Korea’s ongoing provocations.

With the calendar set to turn to 2018, there were signs 2017’s momentum should continue. A number of U.S. companies announced pay increases, bonuses and capital investments on the back of the announced tax reform, and earnings estimates were trending higher as the fourth quarter wound down. Tame inflation and a still accommodative Fed also were being viewed as supportive for the risk markets. Among the clouds that could dim this bullish scenario are the potential for a surprise breakout in inflation, midterm elections in Washington as well as critical elections overseas. Infrastructure investment and possibly entitlement reform are among issues likely to garner domestic focus in coming months, while pending Italian elections and German Chancellor Angela Merkel’s struggles to form a cohesive governing coalition bear watching. Given relative market valuations, which are cheaper thanks to the tax cut but not inexpensive, we think a balanced portfolio of cyclical and defensive companies that have strong cash flow, balance sheet strength and improving fundamentals could help navigate the current investment landscape.

During the quarter, the S&P 500 Index returned 6.64%. Growth stocks outperformed value stocks with the Russell 1000 Growth Index returning 7.86% while the Russell 1000 Value Index returned 5.33%.

Fund Performance

Federated Equity Income Fund A Shares returned 6.87% at net asset value in 2017’s fourth quarter, outperforming the 5.33% 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 Industrials, Consumer Staples and Energy. The sectors that detracted most from performance were Information Technology, Materials and Health Care.

On an absolute basis, the five equity stocks contributing most to performance were Wal-Mart, Bank of America, Texas Instruments, Caterpillar, and JPMorgan Chase. The five equity stocks detracting most from performance were Walgreens, AmerisourceBergen, Kansas City Southern, CRH PLC and Xerox.

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 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 included Information Technology, Consumer Discretionary and Industrials. The fund’s largest underweight positions included the Financials, Health Care and Energy sectors.