As of 09-30-2017


  • Global GDP growth continued to improve.
  • All 27 countries in the eurozone have shown positive year-to-date economic growth.
  • Japan’s unemployment rate falls to an all-time low of 2.8%.

Looking Back

In the third quarter of 2017, global equity markets’ performance was broadly positive as economic activity continued to benefit from strong manufacturing growth and personal consumption expenditures. Across Europe, economic growth was better than expected due to a strong labor market and improving credit conditions, while U.S. dollar weakness and higher commodity prices contributed to strong performance within emerging equity markets. In August, the global manufacturing PMI reached a six-year high of 53.1 on solid new order growth as many of the major global economies remained in expansionary territory. During the quarter emerging markets, as measured by the MSCI Emerging Markets benchmark, returned 7.89%, outperforming the MSCI EAFE benchmark, which returned 5.40%. At the sector level, semiconductor companies benefitted from increased demand in autos and mobile phones while media and pharmaceuticals trailed.

Data out of Japan continued to indicate that its economy is on solid footing after reporting its ninth straight quarter of expansion. Inflation remained positive as did export growth, private consumption and public spending. Household spending increased during the quarter for the first time in 16 months despite a slip in wage growth of -0.3% due to lower bonus payments, the first drop in over a year. In September, Prime Minister Shinzo Abe announced that he would dissolve Parliament and called for an early election. The announcement was interpreted as an attempt to consolidate power and take advantage of the disarray among opposition parties and the popular support for Abe following his handling of North Korea’s aggressions.


Federated International Small-Mid Company Fund (A Shares at NAV) returned 8.19% for the quarter ending September 30, 2017. That compares to its benchmark, the MSCI All Country World ex-U.S. SMID Index, which returned 6.51% during the period.

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

The fund’s outperformance during the reporting period was driven almost entirely by stock selection, with the majority of the outperformance coming from stock selection within four sectors: Industrials, Financials, Consumer Staples and Health Care. Industrial companies had the largest positive contribution to the overall fund performance. Japan’s Daifuku Co., Ltd. was up over 65% and was the fund’s top contributor overall. The company, which manufactures automated material handling equipment, continues to benefit from strong structural growth drivers including e-commerce and warehouse automation. Rheinmetall AG, a German military defense and automotive supplier, continued its strong multi-year run and was a top five contributor. Transportation-related names within Industrials also contributed to the sector’s outperformance. Localiza Rent a Car SA, the leading car rental provider in Brazil, continued to report accelerating growth as it benefits from improving economic conditions. Jost Werke AG is a recent IPO and had a strong debut as the outlook for the global truck market improved.

Stock selection within the Financials sector was also a large positive contributor. Dutch insurance and investment management company NN Group N.V. was the strongest contributor within the sector. NN Group N.V. continued to report stronger-than-expected profitability driven through synergies captured from its Delta Lloyd acquisition and ongoing cost savings initiatives.

The fund’s Consumer Staples holdings also generated positive performance. Outperformance was evenly distributed between the fund’s holdings in retailers and food ingredient companies. X5 Retail Group N.V. in Russia and Japanese drug store chains Matsumotokiyoshi Holdings Co., Ltd. and Kusuri no Aoki Holdings Co., Ltd. were the top-performing retailers while Kerry Group PLC drove performance in food ingredients.

Advanced Accelerator Applications SA (AAAP) and Lonza Group AG were the top contributors in Health Care. AAAP’s shares gained during the quarter on take-out speculation, while Lonza Group continued to report results that exceeded analyst’s expectations.

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

Performance Detractors

The largest detractor to the fund’s performance for the quarter was Korea Aerospace Industries, Ltd. Despite heightened geopolitical tensions in the region, the stock underperformed as the administration of new South Korean President Moon Jae In has scrutinized the company’s billing practices. A new management team is now in place and we believe they’ll be able to restore the trust of the market.  

Intertrust NV, a provider of fund and corporate services, was the second largest detractor for the quarter as the CEO will be stepping down next year. This, combined with a profit warning, has caused some uncertainty around the name. 

Looking Ahead

We remain constructive on the international equity markets. After five years of austerity in the eurozone, we are seeing real economic growth and growing demand.  The eurozone’s banking crisis is in the rear view mirror allowing the banks to free up capital to further stimulate the economy.  In terms of potential headwinds, we continue to watch the European Central Bank which will likely start tapering early in 2018. Stronger growth and increased expectations for a taper has led to a rally in the euro which could eventually act as a drag to the export-dependent countries in the eurozone.

With the yen remaining weak relative to the U.S. dollar, the Japanese equity market remains attractive. In addition, the structural reforms initiated by the Abe government are producing positive results.  We are seeing continued job growth and a slight uptick in wages, causing growing consumer demand.  Overall, the international equity markets look attractive and we are finding new opportunities to consider. The initial public offering pipeline remains active and has been another source of opportunity for the fund.