As of 06-30-2018

Market Overview

The second quarter of 2018 was defined by a tug-of-war between strong fundamentals including surging corporate earnings, an ever-tighter labor market and near-record confidence measures versus a carousel of concerns from an inflation scare to a flattening yield curve, trade wars, political uncertainty in Europe and regulatory uncertainty surrounding giant technology stocks.

For the quarter, the MSCI All Country World Index returned 0.75%. U.S. performance was stronger: large caps as measured by the Russell 1000 index returned 3.57% and small caps as measured by the Russell 2000 index were up 7.75%. Internationally, emerging markets (EM) were quite weak. Suffering from the impact of trade tensions, the MSCI Emerging Market Index was down 11.34%.The decline in international developed stocks as measured by the MSCI World ex USA Index was a more modest -0.41%.

Within fixed income, there was quite a bit of performance divergence among major asset classes. On the positive side, the Bloomberg Barclays U.S. High Yield Index returned 1.03%, outperforming duration-equivalent Treasuries by 96 basis points in the quarter. High yield (HY) bonds, which have less interest rate sensitivity and are more domestically focused, were supported by a slow pace of supply and a favorable macro backdrop, including a significantly rebounding U.S. economy, fading concerns about inflation spikes, still-accommodative global central banks and strong corporate earnings. On the other hand, investment grade (IG) and EM bonds were the biggest underperformers. IG credit spreads widened 14 basis points in the three months as the market got overwhelmed by political volatility in Italy, rising trade tensions and heavy supply amid weaker demand. EM performance was even worse as the Bloomberg Barclays EM USD index lost 2.40% in the quarter. In addition to trade, EM weakness also reflected tighter global funding conditions, rising U.S. rates and concerns about increased inflationary pressures amid a strengthening dollar and surging oil prices.

Expressing strong confidence in the economy, the Federal Reserve (Fed) raised its target rate a second time this year in June and signaled two more hikes were likely in 2018. This helped push up market interest rates, especially at the front end of the yield curve, with 2-year Treasury yields rising 26 basis points during the 3-month period even as longer rates remained somewhat in check. The result was the flattest Treasury curve since 2007.

Fund Performance

The Federated Global Allocation Fund A Shares returned -0.57% at net asset value (NAV) during the second quarter of 2018, while the fund’s blended benchmark, which consists of 60% of the return from the MSCI All Country World Index and 40% of the return of the Bloomberg Barclays Global Aggregate Bond Index, returned -0.78%.

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 the Performance tab. Performance does not reflect the maximum 5.5% sales charge for A Shares. If included, it would reduce the performance quoted.

Click the Performance tab for standard fund performance.

During the quarter, the fund saw outperformance from core security selection strategies in domestic large cap, international and domestic small cap stocks while the EM equity strategy modestly underperformed. On the bond side, domestic fixed income strategy contributed to performance while the international fixed-income strategy underperformed. On the positive side of the ledger, interest-rate exposure ranged from 90-95% of the index during a period in which interest rates rose, resulting in less price depreciation relative to the index. Additionally, the fund benefitted from an overweight to HY, which outperformed Treasuries. An overweight to Treasury Inflation-Protected Securities (TIPS) also helped as TIPS outperformed nominal Treasuries as core inflation moved closer to the Fed’s 2% target. On the other hand, a yield-curve steepening bias and overweights to EM and IG corporates detracted.

An overweight to stocks relative to bonds provided a slight boost to performance, as equity markets were modestly positive.

The tactical overlay strategies were mixed but ultimately detracted from performance during the quarter. The global equity strategy was a significant detractor, while the currency and bond strategies were moderately positive.

Positioning and Strategy

The fund continues to favor stocks versus bonds but, at of the end of the second quarter, had pared the overweight allocation to equities from 11% to 5% on the potential for a summer correction driven by uncertainty surrounding trade, the Fed and the midterm elections. But the fund remains bullish on equities and look to potentially redeploy capital at more attractive levels.

From a fixed-income perspective, the fund is keeping interest-rate sensitivity (duration) at 95% of the benchmark on expectations rates are more likely to grind higher, abetted by signs of improved eurozone cohesion, solid U.S. growth, a gradualist Fed and inflation pressures arising from tightening labor market. As for the yield curve, the fund had shifted from a steepener to neutral by quarter end, lacking conviction of a move either way. The fund also maintained small overweights to HY and IG corporates in anticipation of potential spread tightening.