As of 06-30-2018

Highlights

  • U.S. equity and fixed-income markets continued to be volatile during the quarter
  • High yield (HY) and investment grade (IG) outperformed emerging market (EM) bonds, while growth outpaced value style in equities
  • 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.

On the domestic front, fears of the effects of a full-blown trade war with China ebbed and flowed as the quarter progressed with no new agreement on Nafta and the initiation of steel and aluminum tariffs between a number of countries. Strong economic data on the home front was a bright spot for investors, with healthy manufacturing, consumer confidence, wage growth and unemployment numbers posted throughout the quarter. In fact, the unemployment rate in the U.S. fell to an 18-year low of 3.8% in May. Corporate earnings also were very robust, further boosting the market. The Federal Reserve (Fed) took note of the strong macroeconomic data, as well, raising its target funds rate another 25 basis points in June for the second time this year, and signaling that two additional increases are likely by the year-end.

During the quarter, the Bloomberg Barclays Aggregate Index returned -0.16%, the Bloomberg Barclays Mortgage Index returned 0.24%, the Bloomberg Barclays HY 2% Issuer Cap Index returned 1.03%, and the Bloomberg Barclays EM USD Aggregate Index returned -2.40%. In addition, the S&P 500 Index returned 3.43% and the Russell 1000 Value Index returned 1.18%.

Performance

Federated Capital Income Fund A Shares returned 0.33% at net asset value for the second quarter of 2018, outperforming the 0.24% return of the fund’s benchmark comprising of 40% Russell 1000 Value Index, 20% BBHY2%ICI, 20% BBMB and 20% BBEMB Index.

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 A Shares. If included, it would reduce the performance quoted.

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

Click the Performance tab for standard fund performance.

Performance Contributors

  • Portfolio asset allocation of overweight equities
  • Equity stock selection and a relative underweight in the Financial sector
  • Overweight in HY and lower-than-benchmark duration in fixed income

Performance Detractors

  • EM debt allocation in fixed income was impacted by geopolitical and tariff uncertainties as well as a rising U.S. dollar
  • Value underperforming growth was a structural headwind for equities
  • Within equities, Consumer Discretionary, Industrials and Technology sectors also were impacted by tariff uncertainties

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.

We remain broadly diversified within equity market sectors, with a prudent approach to balancing income, risk and long-term total return. 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. The fund continues to strive to achieve its primary goal of current income and long-term growth of income, with capital appreciation as a secondary objective.

In fixed income, the fund remains constructive on the fixed-income spread sectors including HY, EM and IG corporates. We continue to hold the fixed-income portfolio’s duration below that of the benchmark, as strong economic growth, moderate inflation, a tightening Fed and increasing federal deficits should act to drive U.S. Treasury rates higher. We ended the second quarter with a neutral yield curve position.