Federated Global Strategic Value Dividend Fund (A) GVDSX

Share Classes Product Type Asset Class Category
Mutual Fund Intl/Global Global
As of 03-31-2018

Highlights

  • The Federated Global Strategic Value Dividend Fund provided a 30-day SEC yield of 3.87% (A Shares at MOP) and a gross weighted average dividend yield of 4.84% at quarter end.
  • For the rolling one-year period, 43 companies raised their dividends, accounting for 49 increases overall and one dividend reduction.
  • The portfolio's Q1 return lagged that of the broad market due to investors' near-term preference for low-yielding, high-beta equities.

Looking Back

In Q1 2018 the fund remained committed to meeting its goals of delivering high dividend income and moderate dividend growth as it ended the quarter with a gross weighted average dividend yield of 4.84%.  This was well ahead of the 2.45% weighted average yield provided by the MSCI World Index and the 3.89% yield provided by its benchmark, the MSCI World High Dividend Yield Index.  Consistent with the Fund’s dividend growth goal, a total of 21 portfolio holdings raised their dividends in the quarter.  Highlights from the period included the announcement of five double-digit dividend increases. In February Abbvie announced its second dividend increase in the past three months, bringing its year-over-year dividend growth rate to 50%. Staples holdings Pepsi, Altria and British American tobacco also provided exceptional dividend growth in the period, raising their dividends by 15.2%, 14.8% and 11.8% respectively. And Canadian midstream energy company TransCanada announced a 10.4% increase to its distribution. Separately one portfolio holding, Luxembourg based satellite company SES group, announced a 40% reduction to its Euro-denominated dividend. SES’s lower payout in 2018 is related to company-specific circumstances that included lower-than-expected guidance for the year and the unexpected replacement of the company’s CEO and CFO. The impact to U.S.-based shareholders of SES is expected to be softened by the recent appreciation of the Euro. But in spite of such company-specific dividend variations, the outlook for the overall portfolio’s dividend growth remains positive, aided in part by strong organic dividend increases from the majority of portfolio holdings, a weaker U.S. Dollar, and accretive trades that have been executed over the course of the last twelve months. In the trailing twelve month period, 43 companies within the portfolio have raised their dividends, accounting for 49 separate increases, one dividend reduction, and two special dividends (National Grid and Singapore Telecom).

As the global equity market reversed its advance in Q1, international stocks underperformed their U.S. counterparts, with the MSCI World ex-U.S. index lagging the S&P 500’s returns by 128bp.  In spite of the equity market drawdown experienced in Q1, performance in the period continued to favor more cyclical areas of the broad market, as Technology and Consumer Discretionary shares posted the period’s most resilient sector returns. Meanwhile, some of the most historically defensive segments of the economy, including Consumer Staples and Telecommunications, lagged the board market.  Investors also continued to prefer lower-yielding equities in the quarter, with the MSCI World Index’s lowest-yielding quintile outperforming its highest-yielding quintile by 996bp in the period. And in spite of the return of market volatility combined with a sharp correction in share prices, higher-beta equities remained in favor in Q1, as the broad market’s highest-beta quintile outperformed its lowest-beta quintile by 234bp. The result was a market environment that was challenging in the near term for low-volatility, income-focused strategies. While near-term investor preferences such as these can affect the performance of our fund, the Federated Global Strategic Value Dividend Fund remains firm in its focus on the key long-term drivers of total return – dividend yield and dividend growth. As such, it is committed to owning companies primarily in defensive sectors that provide the best opportunities to reach these goals over a full business cycle.

Performance

The Federated Global Strategic Value Dividend Fund ended the first quarter with a return of -7.02% (Class A shares at NAV), while the MSCI World High Dividend Index and the MSCI World Index posted returns of -3.15% and -1.28% respectively.  With the portfolio’s investments in the dividend income-producing segments of the worldwide equity markets, which tend to have a lower beta versus the MSCI World Index, the strategy’s short-term returns are not expected to move in line with the broad market.

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

Performance Contributors

  • Health Care was the fund’s top performing sector in Q1, with a weighted average total return of 1.14%. Longtime holding GlaxoSmithKline led the sector’s performance in the period, with a return of 11.24%. GSK’s returns were buoyed by the news that the company would consolidate its consumer joint venture with Novartis and forego a bid for Pfizer’s consumer assets.
  • The Real Estate sector also provided more defense than the broad market in the period, as shares of the fund’s sole REIT holding, Crown Castle, remained relatively stable with a -0.32% total return.
  • The fund’s holdings in the Financials sector were also a source of defensiveness in the period, with a weighted average return of -1.08%. Performance was led by two of the portfolio’s insurance holdings, Zurich Insurance and Munich Re, which returned 7.53% and 7.01% respectively.

Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.

Performance Detractors

  • Overall, high-dividend equities that are central to the strategy remained out of favor in the quarter, as the highest-yield quintile of the MSCI World Index underperformed the lowest-yield quintile by 996bp.
  • Weakness was noted in the Consumer Discretionary sector, as Luxembourg-based satellite company SES returned -13.52% due to weaker-than-expected 2018 guidance and the surprise replacement of the company’s senior management team.
  • In spite of continuing to exhibit generally solid fundamentals, the fund’s Consumer Staples and Energy holdings also made negative contributions to performance in the quarter, generating weighted average returns of -11.25% and -8.73%. Laggards from the Consumer Staples sector included General Mills and Imperial Brands, which returned -23.37% and -18.73% each. Declines in the Energy sector were particularly strong in the Canadian midstream space, with Enbridge returning -18.83% and TransCanada declining -14.41%, owing to regulatory changes that impacted the companies’ ability to recover income tax allowances from their customers.

How We Are Positioned

Trade-war worries were the flavor of the month in March, replacing February’s fears about inflation and interest rates, as stocks sold off again, sending the major domestic and international indexes down for a second month. Among the hardest-hit were the sweetheart Technology sector, the market leader for much of this past year’s leg up. Its selloff came as issues over Facebook’s data sharing cast a cloud over the entire tech universe.

Ironically, the economic data going into quarter-end was generally good. February nonfarm payrolls surprised everyone, up more than 300,000 for the best monthly gain in nearly two years. Consumer confidence and sentiment also were very strong, hitting multi-decade highs. Manufacturing accelerated, housing hinted at a spring rebound and the final read on fourth-quarter GDP was revised up much more than expected to 2.9%, as already robust consumer spending was nudged up even higher. That said, consumer spending appears to have weakened in Q1, and the massive trade gap widened, feeding into the Trump administration’s decision to slap tariffs on imported steel and aluminum and China. Whether a negotiating ploy or not, the actions spooked the markets as they recalled past efforts at protectionism that failed miserably, the most obvious example being Smoot-Hawley early in the Great Depression.

Overseas markets also stumbled through the quarter, partly on what was happening in the U.S. but also on a rash of negative economic surprises that suggested a slowing in much of Europe and Asia. Reports late in the quarter showed the euro area’s private sector growing at its slowest pace in 14 months, Japanese manufacturing losing steam and German business confidence falling to its weakest level in almost a year. Escalating trade tensions brought on by the Trump administration also disrupted a Group of 20 meeting in Buenos Aires, where finance chiefs failed to reach a truce over trade, prompting concerns of a potential breakout of tit-for-tat trade actions.

While macroeconomic data points such as these can impact share price movements in the near term, the Federated Global Strategic Value Dividend Fund remains committed to its focus on long term drivers of total return: Dividend yield and dividend growth.  To achieve those goals, the Fund remains concentrated in Consumer Staples, Integrated Energy, Health Care Pharmaceuticals, Telecom Services, Utilities and high quality Banks and Insurers. These segments of the economy contain the type of high-quality dividend-friendly stocks that the portfolio seeks out, enabling the Fund to provide investors with the opportunity for a high dividend yield complemented with dividend growth. That dividend growth can help the portfolio both sustain its high yield and outpace inflation. Such investments also tend to be less volatile than the broad market, offering the potential for lower downside risk characteristics for the portfolio.

Regardless of current market conditions, the Federated Global Strategic Value Dividend Fund will remain committed to its goals of providing a high and rising income stream from high quality business assets and will not alter its investment style based on near-term market preferences.