Tools & Resources▼
|Share Classes||Product Type||Asset Class||Category|
|A B C R IS||Mutual Fund||Balanced/Hybrid||Allocation-30% to 50% Equity|
The biggest story of the fourth and final quarter of 2016 was, without question, the U.S. presidential election and Republican sweep in Washington. In addition, investors throughout the quarter also were focused on macroeconomic data, OPEC and the U.S Federal Reserve (Fed).
On the domestic front, U.S. equity markets rebounded sharply post-October weakness on November 8’s fairly surprising election results, soaring to all-time highs in the subsequent six weeks. With Donald Trump winning the presidency and the GOP sweeping both houses of Congress, investors looked optimistically toward an economic environment with reduced regulation, tax cuts for individuals as well as corporations, and an increase in spending on defense and infrastructure. The Financials sector led the way as a combination of anticipated regulatory relief and a steeper yield curve proved to be a strong catalyst. Another impetus for the post-election rally was robust macroeconomic data as consumer confidence, jobs, wages, business sentiment, manufacturing and GDP all produced strong data in November and December. The improving macro data and uptick in inflation led the Fed to raise the fed funds target rate a quarter point, its first increase in a year, and signal potentially three rate hikes in 2017.
Looking abroad, much of the news including the much-anticipated Italian referendum seemed to have a more muted effect on equity markets relative to the U.S. presidential election. However, the market was somewhat surprised by OPEC’s decision to cut crude oil production by even more than had been suggested at a meeting a few months prior. Oil prices staged a strongly rally as a result, with Brent Crude finishing the year in the mid-$50 per-barrel range, just off its high for the year and well above the sub-$30 where it traded in the first month of the year.
The first quarter of 2017 could be volatile as the market, anticipating a rush of activity, awaits the January 20 inauguration of President-elect Trump to see if he and Congress can deliver in his first 100 days in office. Debates over the Affordable Care Act and tax reform are expected to take center stage, but inflation and tariffs also bear watching, as do prospects for an errant Tweet. The Fed also will likely stay front and center as investors remember policymakers came into 2016 forecasting four rate hikes, but only delivering one. The new year also should prove eventful in Europe with the actual triggering of Brexit, German elections in Germany and a European Central Bank (ECB) confronting whether to begin tapering its bond-buying program all on the docket.
Given relative equity market valuations that no longer are cheap, we believe a balanced portfolio of cyclical and defensive companies that have strong cash flow, balance sheets and improving fundamentals has helped navigate the changing tide that we have been experiencing.
On the fixed income side, the fourth quarter was a period of negative total returns for almost all major U.S. fixed-income markets except high yield for much the same reasons equities were impacted: the Fed’s decision not only to raise rates but signal three more moves in 2017, and more significantly, Trump’s unanticipated election as president.
U.S. Treasury yields across all maturities rose on expectations that tax cuts and ramped-up infrastructure spending will increase federal deficits, inflation and growth. The largest yield increases occurred in longer-dated securities, causing the U.S. Treasury curve to steepen. For example, rates in the five-year to 10-year part of the Treasury curve increased by 60 basis points while 30-year Treasury rates increased by 75 basis points. The increase in Treasury rates led to a negative total return for the Bloomberg Barclays US Treasury Index. Agency mortgaged-backed securities (MBS), commercial MBS, U.S. investment-grade corporates and emerging-market (EM) bonds also experienced negative returns during the quarter. However, all of these fixed-income markets except agency MBS outperformed U.S. Treasuries on a duration-adjusted basis.
For the fourth quarter of 2016, the Bloomberg Barclays Aggregate Index returned -2.98%, the Bloomberg Barclays Treasury Index returned -3.84%, the Bloomberg Barclays Mortgage Index returned -1.97%, the Bloomberg Barclays Commercial Mortgage Index returned -3.03%, the Bloomberg Barclays Investment Grade Corporate Index returned -2.83%, the Bloomberg Barclays High Yield 2% Issuer Capped Index returned 1.75%, and the Bloomberg Barclays Emerging Markets USD Aggregate Index returned -2.61%. In addition, the S&P 500 Index returned 3.82% and the Russell 1000 Value Index return 6.68%.
The fund met its primary goal of current income and long-term growth of income during the fourth quarter 2016. The fund’s 12-month yield for A Shares at end of quarter was 4.23% at net asset value, with a 30-day SEC yield of 3.01%. The fund’s yield was well above the 12 month yields for the S&P 500 yield at 1.97%, Russell 1000 Value Index at 2.38%, 10-year Treasury yield at 2.45% and Morningstar Conservative Allocation average at approximately 2.30%. The fund received nine dividend increases during the fourth quarter, including Texas Instruments, Sysco and Merck.
For the fourth quarter, Federated Capital Income Fund A Shares returned 1.05% at net asset value, underperforming the 2.10% return of the fund’s benchmark comprising of 40% Russell 1000 Value Index, 20% BBHY2%ICI, 20% BBMB and 20% BBEMB Index.
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 Performance tab. Performance does not reflect the maximum 5.5% sales charge for Class A Shares. If included, it would reduce the performance quoted.
Click the Performance tab for standard fund performance.
Within the equity markets, value stocks outperformed growth stocks the final three months of 2016. For the quarter, the Russell 1000 Value Index returned 6.68% while the Russell 1000 Growth Index returned 1.01%. In terms of asset allocation, the Russell 1000 Value Index outperformed both the broader Bloomberg Barclays U.S. Aggregate Index and the Bloomberg Barclays U.S. Treasury Index. The fund is overweight equities at 47% of its asset allocation relative to its neutral 40% equity index exposure and class. The equity relative overweight, which has helped performance since 2010, was a positive contributor during the quarter.
In the equity portfolio, stock selection added to while sector weight detracted from the fund’s overall performance. Relative to the fund’s Russell 1000 Value Index benchmark, the three best-performing sectors were Industrials, Energy and Consumer Staples. The three sectors that most negatively contributed to fund performance were Financials, Utilities and Consumer Discretionary.
On an absolute basis the five securities contributing most fund performance were Bank of America, JPMorgan Chase, Discover, PNC and Morgan Stanley. The five positions detracting most from performance were Alibaba (Conv. Pfd.), Dynegy (Conv. Pfd.), Teva Pharmaceutical (Conv. Pfd.), Merck and GlaxoSmithKline.
Click on the Portfolio Characteristics tab for the fund’s top ten holdings.
The fixed-income portfolio return of -0.43% outperformed its blended benchmark by 19 basis points during the quarter and materially outperformed the higher quality Bloomberg Barclays U.S. Treasury and Bloomberg Barclays U.S. Aggregate indices by 337 and 251 basis points, respectively. Duration was the largest positive contributor to performance due to being on average 87% of fixed income blended benchmark’s duration. Yield curve was the largest negative contributor to performance.
Positioning and Strategy
The fund has continued to strive to achieve its primary goal of current income and long-term growth of income, with capital appreciation as a secondary objective.
We remain broadly diversified within equity market sectors, with a prudent approach to balancing income, risk and long-term total return. The fund’s equity holdings are positioned within a diversified portfolio of income-producing securities and dividend-growing stocks with favorable valuations, strong balance sheets and improving business fundamentals. The portfolio has continued to aim for high yield and consistent dividend growth.
Sector overweight positions relative to the fund’s Russell 1000 Value Index benchmark include Information Technology, Telecom and Utilities. The fund’s largest underweight positions include Financials, Energy and Industrials.
The fixed-income portfolio remains slightly overweight high yield, neutral in EM and slightly underweight the higher quality corporate and mortgage markets relative to the fixed income portfolio’s blended benchmark. The portfolio had an average effective duration of 3.77 years vs. the benchmark at 4.33 years. The fixed-income portfolio is positioned neutral relative to the yield curve.