Federated Capital Income Fund (F) CAPFX
|Share Classes||Product Type||Asset Class||Category|
|A B C IS R||Mutual Fund||Balanced/Hybrid||Conservative Allocation|
In the second quarter of 2014, U.S. equity markets continued to move higher as the S&P 500 and the Dow Jones reached all-time highs, supported by a bounce-back in the U.S. economy from an unusually severe winter. However, the Chinese economy’s ongoing slowdown, geopolitical tensions in Ukraine and the Middle East, and an unexpectedly large negative first-quarter U.S. Gross Domestic Product (GDP) revision kept investor enthusiasm at bay.
On the domestic front, equities began the quarter at a measured pace before gathering momentum on better economic data, including employment, manufacturing, retail sales, auto sales and consumer sentiment. The first half also saw mergers and acquisition (M&A) announcements increase substantially, adding to overall market momentum. Despite the sharp 2.9% contraction in real first-quarter GDP and 10-year Treasury yields that surprised many to the downside by falling roughly 50 basis points during the year’s first six months, the Federal Reserve (Fed) stayed the course and continued tapering its monthly bond purchases.
Looking abroad, the European Central Bank (ECB) made headlines when it introduced a series of measures—including a negative interest rate on reserve deposits—designed to curb deflation risk and stimulate growth in the eurozone. In Asia, the Chinese economy continued to exhibit signs of softening.
As we look to the second half of 2014, we remain optimistic U.S. economic growth will accelerate. We believe the housing market to grow moderately, auto sales to trend positively and capital expenditures by companies to increase. We also expect corporate earnings to improve the remainder of the year and anticipate additional M&A activity, dividend increases and share buyback announcements due to strong balance sheets and free cash flows from the fund’s portfolio companies. Globally, we believe Europe’s economy will keep improving as it slowly works through its growth challenges, and that the longer-term growth story for China and the overall emerging markets will remain positive.
In fixed income, despite a rebound from the weather-impacted first quarter, U.S. Treasury rates declined and the yield curve flattened in the second quarter. The 10-year Treasury yield traded in the 2.60%-2.80% range from February through the middle of May, before dropping to the mid-2.40% range on geopolitical concerns, the lack of inflationary pressure and on both announced and expected monetary policies from the Fed and the ECB. While inflation data did creep higher toward the quarter’s end, Fed Chair Janet Yellen dismissed the readings as “noise” and emphasized inflation is still running below the central bank’s long-term target of 2%. For the remainder of this year, we expect Treasury rates to trend higher as the economy improves and both unemployment and inflation move closer to the Fed’s targets.
During the quarter, the S&P 500 Index returned 5.23%, the Nasdaq Composite Index returned 5.32%, and the Dow Jones Select Dividend Index returned 5.90%. Growth stocks outperformed value stocks, with the Russell 1000 Growth Index returning 5.13% while the Russell 1000 Value Index returned 5.10%.
For the second quarter of 2014, the Barclays High Yield Index returned 2.41%, the Barclays Emerging Markets Index returned 4.49%, and the Barclays Mortgage Index returned 2.41%.
For the second quarter, Federated Capital Income Fund Class A Shares returned 4.66% at net asset value (NAV), outperforming the 4.22% return of the fund’s benchmark comprising of 40% Dow Jones Select Dividend Index, 20% LBHY2%ICI, 20% LBMB and 20% LBEMB 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 fund’s equity holdings, stock selection added to the fund’s performance while sector allocation detracted from the fund’s performance. Relative to the benchmark, the fund’s three best contributing sectors were Energy, Health Care, and Information Technology. The two sectors that most negatively contributed to fund performance were Utilities and Industrials.
On an absolute basis, the five securities contributing most to performance Astrazeneca, Crescent Point Energy, Total SA, Micron Technology, and Royal Dutch Shell. The five positions detracting most from performance were Pfizer, Hollyfrontier, R.R. Donnelley & Sons, Siemens, and ArcelorMittal.
The portfolio’s fixed-income holdings continued to generate substantial income in the second quarter but underperformed their benchmark. The fixed-income component’s underperformance was due primarily to a duration position less than the benchmark and an underweight to agency mortgages.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
Positioning and Strategy
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 continues to aim for high yield and consistent dividend growth. Sector overweight positions relative to the fund’s benchmark include Energy, Health Care, and Information Technology. The fund’s largest underweight positions include Utilities, Consumer Staples, and Industrials.
Within the fixed-income portfolio, we increased the duration from approximately 78% to 83% of the benchmark, but still believe that interest rates may be trending higher over the remainder of the year. The portfolio had an effective duration of 3.76 years vs. the benchmark at 4.53 years. The fund maintained its yield-curve flattening bias, and an underweight to the 7-year part of the yield curve.
We adjusted our allocations slightly at the end of the second quarter. The high-yield allocation was reduced to 46.0% of the fixed income portfolio from 48.4%, emerging rose to 40.0% from 39.2%, and MBS rose to 14% from 12.4%.