Federated Equity Advantage Fund (IS) FEKIX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Small Cap
As of 06-30-2018

Market Overview

For the three months ended June 30, 2018, leveraged company stocks underperformed small-cap stocks but outperformed mid- and large-cap stocks. For example, the Credit Suisse Leveraged Equity Index, an index comprised of leveraged company stocks, returned 4.43% in the quarter versus the 7.75% return of the Russell 2000 Index, the 2.82% return of the Russell Mid Cap Index and the 3.57% return of the Russell 1000 Index.

The quarter was marked by considerable volatility, driven by strong corporate earnings and the expectation of well above trend second quarter GDP growth on the positive side juxtaposed against fears that U.S. trade policy and tariffs would negatively impact future earnings and economic growth. 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.  Broader economic indicators uniformly painted a picture of considerable economic momentum.  However, valuations to the rich side of historical levels provided little support when tariff rumors and pronouncements hit the tape.

Within the small-cap segment of the stock market, the strongest-performing sectors relative to the Russell 2000 Index were: Energy, Health Care Equipment & Services and Real Estate.  The worst-performing sectors relative to the Russell 2000 Index were:  Automobiles & Components, Transportation and Semiconductors & Semi Equipment. 

Within the leveraged company segment of the stock market, Netflix, the largest constituent in the mid-cap weighted Credit Suisse Leveraged Equity Index, was responsible for most of the index’s outperformance relative to the Russell Mid Cap Index.

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 negatively impacted by security selection in the Materials, Information Technology and Consumer Discretionary sectors.  Underweights to the Banking and Industrials sectors, along with an overweight to the Consumer Discretionary sector, partially offset some of the security selection.

Specific stocks held by the portfolio that substantially outperformed the index included: B&G Foods, Hanesbrands and WPX Energy. Specific stocks held by the portfolio that substantially underperformed the index included: Clearwater Paper, CommScope and Owens-Illinois.

The fund’s total return for the period also reflects actual cash flows, transaction costs and other expenses which 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 and equity multiple expansion, along with 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, valuation levels 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.