Federated International Small-Mid Company Fund (C) ISCCX

Share Classes Product Type Asset Class Category
Mutual Fund Intl/Global Foreign Small/Mid Cap
As of 06-30-2018

Highlights

  • Global GDP growth continues
  • Global interest rates normalize
  • Thawing of tensions related to North Korean aggressions
  • Impacts from U.S. tariffs on global trade
  • Italian and Spanish elections
  • U.S. dollar strength

Looking Back

In the second quarter of 2018, global equity markets’ performance was mostly negative with developed markets outperforming emerging markets -1.24% versus -4.13% as measured by MSCI EAFE Index and the MSCI Emerging Markets Index, respectively. While global economic data including employment, manufacturing and investment pace of growth slowed they all remained expansionary. However, geopolitical risk, potential trade wars and U.S. dollar strength weighed on returns.

Across Europe, economic growth continued as manufacturing and services remained expansionary and unemployment fell to its lowest level in nearly 10 years. However, manufacturing growth eased amid concerns over the potential impacts stemming from proposed tariffs on goods imported to the U.S. The eurozone manufacturing PMI fell from 56.6 at the start of the quarter to 55.5 in May. Despite mixed economic data, the European Central Bank (ECB) announced that it will reduce its monthly net asset purchase plan from €30B to €15B between October and December before ending its easing program as it moves down the path towards rate normalization. Geopolitical concerns led to increased market volatility following Spain’s ousting of PM Rajoy, the coalition negotiations between Italy’s Five-Star Movement and Northern League for control of the government and the ongoing Brexit negotiations in the U.K.

In Asia, tensions over the denuclearization of North Korea subsided after President Trump and North Korean leader Kim Jong un met in Singapore. While no concrete agreement was reached, the two agreed to begin dialogue towards improved relations and peace on the Korean peninsula. Fear of a trade war dominated talks between the U.S. and China as the prospect for import tariffs were left unresolved. The tariffs threaten to dampen China’s exports to the U.S. that continue to expand on strong global demand. External demand for China’s goods remain important as its domestic economy slowly moderates.

The U.S. economic picture remained robust during the quarter led by manufacturing which surged on strong output and new orders. Industrial production and capacity utilization remained near three-year highs while unemployment fell to an 18-year low. Headline inflation remained above the 2.0% target level hitting 2.8% in May, its highest point in six years. Following the strong data, the Federal Reserve increased its policy rate by 0.25% at its June meeting. Higher rate expectations helped push the U.S. Dollar Index up 5.96% during the quarter. Despite the positive economic environment, concerns over import tariffs still linger.

Performance

Federated International Small-Mid Company Fund (A Shares at NAV) returned -3.88% for the quarter ending June 30, 2018. That compares to its benchmark, the MSCI All Country World ex-U.S. SMID Index, which returned -2.18% 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

  • Stock selection in the Health Care and Information Technology sectors
  • Italian biotechnology company DiaSorin SpA was the fund’s top overall contributor, returning over 30% during the reporting period
  • Information Technology holdings Talend SA, Sea Ltd., and Solutions 30 SE were all top-5 contributors
  • IPOs were a positive contributor to performance, led by the strong debut of the Japanese based online marketplace Mercari Inc., which returned over 78% during the reporting period

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

Performance Detractors

  • The Industrials sector was the largest detractor as the fund’s underweight position wasn’t enough to offset negative stock selection
  • Two of the fund’s Japanese warehouse automation holdings, Daifuku Co. and THK Co., reversed several quarters of outperformance as demand from their consumer electronics customers began to moderate
  • The fund’s second-largest detractor was German-based lighting company Osram Licht AG, which was impacted by a more negative outlook for the automotive industry and uncertainty from tariffs on autos

How We Are Positioned

We expect global growth to continue through the year; however the pace of growth will slow as economic indicators reach multi-year highs. The risks to our growth thesis remain the same: If growth becomes too strong with rising wages stoking inflation, we will see global central banks step in and tighten rates to moderate growth. We are also monitoring the threat of a global trade war. With many companies dependent on the global supply chain, any disruption to the supply chain will negatively impact company earnings.

The fund remains overweight developed markets, most notably France, Germany and Japan. In Europe, unemployment rates remain near multi-year lows while sentiment remains near historic highs with continued solid domestic demand. Japanese equities continue to be supported by an economy that is near full employment and continued asset purchases by the Bank of Japan. The IPO pipeline has been robust and remains an additional source of opportunity for the fund.