Federated Equity Advantage Fund (IS) FEKIX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Small Cap
As of 12-31-2017

Market Overview

For the three months ended December 31, 2017, 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 approximately 3.04% during the quarter versus the 6.58% return of the Russell 1000 Index, the 6.05% return of the Russell Mid Cap Index and the 3.33% return of the Russell 2000 Index.

Risk markets continued to benefit from a global synchronized economic expansion driven by a business-friendly administration in Washington, accommodative central bank policy outside the U.S., high levels of employment and strong levels of business and consumer confidence. The December passage of tax reform also provided a boost. However, the tax reform bill placed a cap on the deductibility of corporate interest expense, dampening its positive impact on high-yield companies. In isolation, the cap is a negative for the most leveraged segment of the high-yield market; but when accounting for the new lower corporate tax rate and the allowance to fully expense capital investments, the tax reform package should benefit most high-yield companies.

Within the small-cap segment of the stock market, the strongest-performing industries relative to the Russell 2000 Index were Automobiles, Airlines and Pharmaceuticals. The worst-performing industries relative to the Russell 2000 Index were Technology Hardware, Health Care Technology and Leisure Products.

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 outperformed both the Russell 2000 Index and the Credit Suisse Leveraged Equity Index during the quarter. Relative to the Russell 2000 Index, the fund was positively impacted by strong security in the Materials, Energy and Financials sectors. The fund was negatively impacted by weak security selection in the Health Care and Utilities sectors.

Specific stocks held by the portfolio that substantially outperformed the index included: Eldorado Resorts Inc., Penn National Gaming, Inc. and Ally Financial Inc. Specific stocks held by the portfolio that substantially underperformed the index included: Diebold Nixdorf Inc., Hanesbrands Inc. and Mallinckrodt Plc.

The fund’s total return for the period also reflects 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

We continue to believe that the global synchronized economic expansion, growing corporate earnings aided by tax reform and strong consumer and business confidence will lead to continued strength in the equity markets. In the short term, tax reform will benefit most high-yield issuers, although a subset may be negatively impacted by a limit on the deductibility of interest expense. In the intermediate term, the limits on the deductibility of interest expenses may lead those corporations to optimize their capital structures by paying down debt. Longer term, the limit on the deductibility of interest expense may lead to lower secular corporate debt levels as some of the tax benefits associated with higher debt levels is reduced.