Federated Equity Advantage Fund (A) FEKAX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Small Cap
As of 03-31-2018

Market Overview

For the three months ended March 31, 2018, leveraged company stocks underperformed small-, mid- and large-cap stocks. For example, the Credit Suisse Leveraged Equity Index, an index comprised of leveraged company stocks, returned -1.40% in the quarter versus the -0.69% return of the Russell 1000 Index, the -0.46% return of the Russell Mid Cap Index and the -0.08% return of the Russell 2000 Index.

Synchronized global economic growth continued to be the dominant factor impacting markets.  On the plus side, a strong and expanding economy led to earnings growth in the quarter, while tax reform and cycle-high business and consumer confidence fueled investors’ expectations for continued strong economic and earnings growth.  However, on the negative side, volatility returned to risk markets as investors weighed strong global economic growth against already rich valuations, contemplated U.S. trade actions and pondered potentially more increases in interest rates as the Federal Reserve slowly shifts its focus from stimulating growth to fighting inflation.

Within the small-cap segment of the stock market, the strongest-performing sectors relative to the Russell 2000 Index were: Software & Services, Health Care Equipment & Services and Household & Personal Products.  The worst-performing sectors relative to the Russell 2000 Index were: Energy, Food & Staples Retailing and Automobiles & Components.

Fund Performance

The fund primarily invests in stocks of companies with leveraged balance sheets.  Market capitalizations ranging from micro to mid are targeted, but the fund does not focus on a particular investment style (growth or value).  Given the fund’s “go anywhere” approach, it does not fit neatly into a size/style basket. The fund’s primary benchmark is the Russell 2000 Index based on the fund’s long-term composite, which has been historically biased toward small-cap stocks.  The fund’s secondary benchmark is the Credit Suisse Leveraged Equity Index.  This index is weighted toward the mid-cap range of the market.

The fund underperformed both the Russell 2000 Index and the Credit Suisse Leveraged Equity Index in the quarter.  Relative to the Russell 2000 Index, the fund was positively impacted by strong security in the Energy and Semiconductors sectors, along with an underweight to the Real Estate sector.  The fund was negatively impacted by weak security selection and an overweight in the Media and Materials sectors and an underweight to the Software & Services sectors.

Specific stocks held by the portfolio that substantially outperformed the index included:  Tenet Healthcare Corporation, Microsemi Corporation and Urban One, Inc. Specific stocks held by the portfolio that substantially underperformed the index included:Mallinckrodt Plc, Gray Television and Goodyear Tire & Rubber Company.

The fund’s total return for the period also reflected actual cash flows, transaction costs and other expenses that were not reflected in the total return of either benchmark.

Past performance is no guarantee of future results.

Click on the Performance tab for standard fund performance.

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

Outlook

Despite the sell-off in risk assets during the quarter, we believe that equity markets have not peaked and high-yield spreads have not troughed as economic expansion and that strong corporate earnings growth should continue to support fundamentals and valuations.  However, volatility has returned to the markets and will most likely remain higher than in recent quarters as investors weigh strong economic conditions against rising interest rates and government policy actions.  Given our expectation for stable core inflation and gradual interest rate hikes, along with a negotiated trade deal with China, we believe markets will refocus on the fundamentals and push equity multiples higher.