As of 09-30-2018

Highlights

  • Fears of a full-blown global trade were shrugged off by domestic equity investors
  • Strong U.S. economic data and earnings were major tailwinds for equities, high yield and investment-grade credit during the third quarter
  • The focus likely will shift temporarily from tariffs and trade to midterm elections as we head into the final quarter of 2018

Looking Back

In the third quarter of 2018, domestic equity markets continued to shrug off fears of a global trade war and were able to climb higher as both the S&P 500 Index and the Dow Jones Industrial Average reached all-time highs in September, led by Health Care, Industrials and Information Technology stocks. During the quarter, the U.S. Federal Reserve (Fed) unsurprisingly raised the fed funds target rate by another 25 bps to a range of 2-2.25% on the heels of continued strong economic data. Helping overall market sentiment were S&P 500 earnings-per-share, which posted a roughly 25% year-over-year gain in the second-quarter reporting season; 4.2% annualized growth in second-quarter gross domestic product; continued strong consumer confidence; and an easing of tariff and trade tensions with Mexico and Canada.

Treasury yields generally increased across the yield curve, although the curve continued to flatten as yields increased on the 2 year Treasury bond approximately 30 basis points versus only 20 points on the 10-year Treasury. Interest-rate volatility also increased meaningfully during the quarter.

For the quarter, the Bloomberg Barclays Aggregate Index returned 0.02%, the Bloomberg Barclays Mortgage Index returned -0.12%, the Bloomberg Barclays HY 2% Issuer Cap Index returned 2.40% and the Bloomberg Barclays Emerging Markets USD Aggregate Index returned 1.61%. On the equity front, the S&P 500 Index returned 7.71% and the Russell 1000 Value Index returned 5.70%.

Performance

Federated Capital Income Fund A Shares returned 1.85% at Net Asset Value for the third quarter of 2018, underperforming the 3.06% return of the fund’s benchmark comprising of 40% Russell 1000 Value Index, 20% BBHY2%ICI, 20% BBMB, and 20% BBEMB Index.

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

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

Performance Contributors

  • Portfolio asset allocation overweighting equities
  • Equity stock selection in the Energy and Industrial sectors and a relative underweight in the Energy and Financial sectors
  • Underweight the investment-grade (IG) fixed-income sector and positive security selection in emerging market (EM) and IG fixed income

Performance Detractors

  • Value underperforming growth was a structural headwind for equities
  • Negative stock selection within the Information Technology and Materials sectors
  • Underweight equity allocation to the Health Care sector and overweight allocation to the Consumer Discretionary sector

How We Are Positioned

As we begin the final quarter of 2018, we expect the midterm elections to dominate the narrative over the first month or so leading to the early November election. Coupled with the election will be the third-quarter earnings season, in which we expect another strong round of reports from our companies. We will be looking for commentary on if and how the tariffs with China are affecting management’s capital investment plans, the supply chain and pricing, and if prices for end consumers are rising, which could drive inflation. We also expect the revised Nafta agreement with Canada and Mexico to be ratified by Congress, a market positive as it moves the trade war largely to a one-front war with China. Regarding China, we do not foresee a swift resolution and anticipate additional tariffs to go into effect in 2019. We expect the U.S economy to continue its strong path and unemployment to remain low, and the Fed to raise rates again in December.

We remain broadly diversified within equity market sectors, with a prudent approach to balancing income, risk and long-term total return. Given relative market valuations and considering risks, we believe a balanced portfolio of cyclical and defensive companies that have strong cash flow, balance sheet strength and improving fundamentals will continue to help navigate the current choppy investment landscape. The fund continues to strive to achieve its primary goal of current income and long-term growth of income with capital appreciation as a secondary objective.

In fixed Income, we continue to expect the U.S. economy will remain robust over the short and intermediate term. That said, we are also mindful of certain trends occurring beneath the surface that could create headwinds for fixed-income assets down the road. These issues include a growing fiscal deficit, a potential shift in future inflation expectations, global trade issues and finally valuation levels of credit-sensitive securities.

The performance of high-yield and IG corporate bonds during the quarter reduced the risk premium, referred to as the spread over Treasuries, to new cycle lows and very close to historical lows. While we expect corporate debt generally will outperform Treasuries while the economy remains strong, returns likely will be more correlated to moves in interest rates and the potential for outperformance will generally be less than in past quarters. As a result, at the end of the quarter, the fixed income portfolio’s duration remains slightly less than the duration of the benchmark, the yield curve positioning is neutral and we remain slightly overweight high yield and EM debt.