Federated Equity Advantage Fund (A) FEKAX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Small Cap
As of 09-30-2018

Market Overview

For the three months ended September 30, 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 1.52% in the quarter versus the 3.57% return of the Russell 2000 Index, the 5.00% return of the Russell Mid Cap Index and the 7.42% return of the Russell 1000 Index.

Returns in the broad equity markets were driven by strong earnings growth by U.S. corporations and expectations for continued economic expansion. Earnings growth in the quarter was driven by above-trend gross domestic product growth and tax reform. The backdrop of a strong job market and rising consumer and business confidence provided investors with a belief that the economy would continue to grow at a healthy pace. While holders of risk assets continue to be concerned by rhetoric on tariffs and trade wars as well as the Fed’s policy action to push short rates higher, the strength in earnings seemed to outweigh these concerns. High yield credit fundamentals, a driver of leveraged company stock performance, remained positive as strong earnings growth, tempered default activity and limited new issue supply provided technical support.

Within the small cap segment of the stock market, the largest contributing industries relative to the Russell 2000 Index were: Health Care Equipment & Supplies, Internet Software & Services and Machinery. The sectors which detracted the most from performance relative to the Russell 2000 Index were:  Banks, Oil Gas & Consumable Fuels and Internet & Direct Marketing Retail. 

Within the leveraged company segment of the stock market, the largest contributing industries relative to the Credit Suisse Leveraged Equity Index were: Health Care, Media/Telecom and Aerospace The sectors which detracted the most from performance relative to the Russell 2000 Index were:  Transportation, Housing and Metals/Minerals.

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’s style had a significant negative impact on its performance. The fund only invests in companies with high balance sheet leverage, and balance sheet leverage was the worst-performing style factor in the quarter. The fund was also significantly overweight value stocks, and value-oriented stocks underperformed growth-oriented stocks by approximately 400 basis points in the quarter. Relative to the Credit Suisse Leveraged Equity Index, the fund’s value-style overweight had a significant negative impact on performance.

Specific stocks held by the portfolio that substantially outperformed the index included: Mallinckrodt, Eldorado Resorts and Aramark. Specific stocks held by the portfolio that substantially underperformed the index included Diebold Nixdorf, Lear and Newell Brands.

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.

How We Are Positioned

We continue to believe that earnings growth, along with the potential for equity multiple expansion and tightening high-yield spreads, provide a favorable backdrop for leveraged company stock returns. Considerable economic momentum, strong corporate earnings and positive event risk will be weighed against geopolitical issues, rising interest rates and discussions about how long the current economic expansion can continue. While trade negotiations with China could lead to heightened headline and volatility risk, we believe markets will ultimately focus and trade on the strengthening economy.