Federated Capital Income Fund (F) CAPFX
|Share Classes||Product Type||Asset Class||Category|
|A B C IS R||Mutual Fund||Balanced/Hybrid||Conservative Allocation|
During the third quarter, U.S. stocks reached all-time highs before drawing back slightly in September. Along with these new highs, the equity markets also saw an up-tick in volatility during the quarter, which was driven in large part by the uncertainty revolving around the U.S. Federal Reserve, the continued fear of a pending government shutdown and debt ceiling debate.
The market’s focus in the third quarter was again squarely fixated on the Federal Reserve. At its September meeting, the Fed chose to continue its current program of purchasing securities, which came as a major surprise to a market that fully anticipated a tapering of bond purchases. Fed chairman Ben Bernanke cited concerns about what is happening in Washington, the spike in mortgage rates that have seemingly slowed housing’s acceleration and lackluster job growth as primary arguments against tapering. While it remains likely that the Fed will cut back its bond purchases, the timetable for when this will occur remains unclear. In terms of the next Fed chairman’s position, President Obama was looking to replace Bernanke with Larry Summers, but the former Treasury Secretary removed his name from consideration as several liberal senators have objected to his ties to the financial-services industry. It now seems likely that Obama will nominate Fed Vice-Chair Janet Yellen. While she is not expected to make any deep-seated changes to current monetary policy, uncertainty remains and is thus causing an increase in market volatility. Another notable piece of news from Washington that has affected the market is the threat of a U.S. government shut down and upcoming debate over funding and the debt ceiling.
Looking abroad, growth in the Eurozone looked better as it appeared to finally be pulling out of the recession it has been in since 2011. Meanwhile, in Germany, the re-election of Angela Merkel has eliminated some political risk surrounding the region. Despite this progress, sovereign debt issues still remain largely unsolved and are expected to be a headwind for the foreseeable future. Outside of the eurozone, we see that emerging markets as a whole had a mixed quarter. In China, the economy appears to be rebounding slightly, but its growth remains tepid relative to past years as it transitions from an export and investment-driven economy to a consumption-driven model.
As we look to the final quarter of 2013, we continue to remain optimistic for steady but moderate U.S. economic growth. Over the next few months we will look for the employment, auto and housing recovery to continue; however, our expectations are balanced by the continued monetary policy uncertainty surrounding the timing and the degree of which the Federal Reserve will taper and the fiscal uncertainties in Washington. Even with this uncertainty, we still expect corporate America’s earnings in the third quarter to be mostly positive, albeit management’s cautious outlook. Also, we anticipate further dividend increases and share buyback announcements due to strong balance sheets and free cash flows from our companies. Globally, we believe that Europe will continue to slowly work through its sovereign debt, fiscal, and growth challenges, while China and the Emerging Markets’ longer term growth story will remain positive.
In fixed income, short- to intermediate-term interest rates eased while long-term rates continued to move higher as inflation worries picked up on the continuation of the Fed’s QE program. Investors are concerned that excessive monetary stimulus to the economy will cause inflation to pick up. The 5-year Treasury yield was unchanged during the third quarter while the 30-year Treasury rose 19 basis points to end at 3.69%.
During the quarter, the S&P 500 Index returned 5.24%, the Nasdaq Composite Index returned 11.20%, and the Dow Jones Select Dividend Index returned 4.52%. Value stocks underperformed growth stocks with the Russell 1000 Value Index returning 3.94% while the Russell 1000 Growth Index returned 8.11%.
For the third quarter of 2013, the Barclays High Yield Index returned 2.28%, the Barclays Emerging Markets Index returned 1.38%, and the Barclays Mortgage Index returned 1.04%.
For the third quarter, Federated Capital Income Fund (Class A Shares at NAV) returned 3.84%, outperforming the 2.78% 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 and sector allocation both added to the fund’s performance. Relative to the benchmark, the fund’s three best contributing sectors were Consumer Discretionary, Consumer Staples and Utilities. The three sectors that most negatively contributed to fund performance were Financials, Materials and Industrials.
On an absolute basis, the five securities contributing most to performance were Best Buy, Safeway, Total SA, Whirlpool, and Garmin. The five positions detracting most from performance were Metlife, Hewlett-Packard, Abercrombie & Fitch, Tesoro and Anglogold Ashanti.
The fixed-income holdings of the portfolio continued to generate substantial income and the performance modestly outperformed the benchmark for the quarter. The fund’s outperformance was due to an overweight to high-yield bonds and emerging market bonds. Our underweight to MBS relative to CMBS hurt performance as MBS had significant excess returns during the quarter while CMBS performed like similar duration Treasuries.
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 sheet 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 Consumer Discretionary. The fund’s largest underweight positions include Utilities, Industrials and Consumer Staples.
Within the fixed income portfolio, we lengthened portfolio duration after the September FOMC meeting to protect the portfolio against any unforeseen decline in interest rates. The portfolio had an effective duration of 4.30 years versus the benchmark at 4.71 years, or about 91% of the benchmark. We also moved our yield curve stance to laddered after a significant steepening in the yield curve. We participated in the new issue corporate market during the quarter. Verizon had a huge corporate bond offering near quarter end with a number of maturities available that were priced at very attractive 30-year yield of 6.55% for a A-/BBB+/Baa1-rated credit. We also participated in new issue 7-year offering from Anglogold Ashanti Holdings at a yield of 8.50%.
Click on the Portfolio Characteristics for information on quality ratings.