Federated Floating Rate Strategic Income Fund (R6) FFRLX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Bank Loan
As of 09-30-2017

Market Overview

During the third quarter of 2017, leveraged-finance asset classes delivered positive returns, including a domestic leveraged-loan market that delivered a “coupon-like” return for the quarter. For example, loan risk spreads as measured by the discount margin (3-year) on the Credit Suisse Leveraged Loan Index (CSLLI) contracted modestly, beginning the quarter at 4.42% and ending at 4.32%. Accordingly, the return of the CSLLI for the three months ended Sept. 29 was 1.06%, driven primarily by the current income stream generated by leveraged loans.

Positive performance from leveraged-finance assets again were led by favorable economic conditions and healthy credit fundamentals. The economic cycle in the U.S. continued to demonstrate positive albeit modest growth with relatively subdued inflation and healthy employment levels. In addition, relatively positive economic indicators from Europe and China offered further evidence that a global synchronized economic expansion had taken hold. Corporate credit quality remained healthy in this environment as leveraged borrowers benefited from solid fixed-charge coverage metrics and balance-sheet positioning, leading to relatively low defaults by historical standards. In general, risk assets performed well given this backdrop including equity markets which achieved new highs.

Despite firm economic underpinnings, certain exogenous and geopolitical events created some volatility during the quarter. The active hurricane season experienced during the quarter impacted resource deployment and operations for many companies in affected areas. Inflamed rhetoric related to North Korea and political policy gyrations in the U.S. created uncertainty. While these factors are difficult to quantify, risk markets chugged along finishing the quarter on a strong note.

The three-month London interbank offered rate (Libor), a common benchmark rate for floating-rate assets, inched higher and finished the quarter at 1.33%. At this level, 3-month Libor exceeded the average “floor” rate in the U.S. leveraged-loan market.

Fund Performance

Federated Floating Rate Strategic Income Fund Institutional Shares had a net total return of 0.99% in the third quarter. On a gross basis, the portfolio outperformed its blended benchmark, comprised of the following mix: 55% CSLLI; 30% 1-year U.S. Treasury Note Index and 15% 1- month Libor.

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.

Click the Performance tab for standard fund performance.

The fund maintained its overweight to the domestic non-investment-grade sector during the quarter, benefitting performance against the blended benchmark. Performance from the fund’s domestic non-investment-grade sector was aided by solid security selection and contribution from holdings in short-duration high-yield bonds.

The fund also maintained a slight overweight to the foreign fixed-income sector, which consists of trade-finance instruments, loans, and corporate bonds from foreign-domiciled issuers. Outperformance of this sector against the relevant sector of the blended benchmark was driven by positive contribution from corporate bonds and loans of foreign issuers. This was partially offset by softer performance from the trade-finance portfolio, which underperformed the relevant sector return in the blended benchmark.

Relative performance against the blended benchmark was enhanced by the fund’s underweight positioning to the lower returning domestic investment-grade sector. Positive credit selection in corporate bonds and loans aided performance versus the relative portion of the blended benchmark.

The fund’s short positions in U.S. Treasury futures contracts contributed modestly to overall fund performance during the quarter.

Click on the Portfolio Characteristics tab for information on quality ratings and the fund’s top 10 holdings.

Positioning and Strategy

Fund assets are allocated across three broad sectors: domestic non-investment-grade (leveraged loans and high-yield corporates); foreign fixed income (trade finance and loan/corporate); and domestic investment-grade (agency mortgage, asset-backed and loan/corporate). Sector allocation and security selection are key drivers of performance relative to the fund’s blended benchmark.

At the start of the fourth quarter, the U.S. credit markets were benefitting from a healthy economic backdrop and solid credit fundamentals. While spreads in the loan market continue to track modestly inside of the long-term median level, overall valuation appeared to be reasonable given the solid fundamental backdrop. Geopolitical concerns and unpredictability from the administration have the potential to create volatility moving forward. In addition, the length of the current credit cycle and creditor protection standards in leveraged-finance markets bear monitoring. Based on fund management’s view of the fundamental and macro drivers in the U.S., the fund remained positioned overweight credit. It also maintained short positions in U.S. Treasury futures contracts as part of its duration-management strategy.