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 spite of increased volatility, U.S. equities once again reached all-time highs in the first quarter of 2014. The elevated volatility was a product of several events but was generally spurred on by worse-than-expected economic data, developments within the Federal Reserve, concerns about emerging-market countries and tensions in Ukraine.
As it entered the New Year, the U.S. equity market found it difficult to carry on the momentum from last year as economic data, particularly employment and housing figures, fell short of expectations. A considerable amount of the disappointment was a direct result of the unusually cold weather that enveloped much of the country in January and February, cutting into consumer spending, housing activity and auto sales. The Fed remained a key focus, starting with the arrival of Janet Yellen as the first woman to take over the reins of the central bank as chair. Despite this transition, the Fed stayed the course on tapering–it pared quantitative easing’s monthly purchases of Treasury and mortgage-backed securities an additional $10 billion—and maintained the target funds rate at historic lows, moves that provided support for the market to continue its advance.
Events abroad weren’t as kind to equities, as concerns about slowing growth and currency declines in some emerging-market countries prompted an equity market sell-off early in the quarter. But the equity market quickly recovered as the S&P 500 reached a new all-time high in February and eked out further gains over the course of the quarter. Along with global growth concerns, the market struggled late in the quarter with an ongoing geopolitical crisis in Ukraine. Many investors feared the impact on Europe and the rest of the world as the prospect of war between Ukraine and Russia over the control of Crimea played out via military and political channels.
As we look to the remainder of 2014, we remain optimistic for improving U.S. economic growth. We believe the housing market should accelerate, despite the recent weather-related weakness, and that auto sales will continue to trend positively. We also expect companies to increase capital expenditures, further supporting growth prospects, and for corporate America’s first-quarter earnings to be mostly positive, albeit with cautious management outlooks. Also, we anticipate further dividend increases and share buyback announcements due to strong balance sheets and free cash flow. Globally, we believe Europe will continue to show positive economic improvement and slowly work through its growth challenges, while China and the overall emerging-markets’ longer-term growth story will remain positive.
On the fixed-income side, interest rates were mixed during the first quarter, with short to intermediate-term interest rates up 5-10 basis points and long-term rates down 15-40 basis points. The 10-year Treasury yield fell 31 basis points during the quarter to 2.72%, still very low by historical standards. Short rates moved higher during the quarter as the policy-setting Federal Open Market Committee continued quantitative easing’s slow unwind. Interest rates were volatile during the quarter due to crosscurrents from bad weather, which investors feared could have a significant negative impact on the economy, financial and political stability in a handful of emerging-market countries including the Ukraine, and Fed tapering. As the quarter wore on, those worries appeared to dissipate.
While life under Yellen is still unfolding, we think time will prove her to be a very competent and able Fed chair. We also believe both higher interest rates are in the cards for 2014 and that inflation should remain fairly subdued.
During the quarter, the S&P 500 Index returned 1.81%, the Nasdaq Composite Index returned 0.84% and the Dow Jones Select Dividend Index returned 3.75%. Value stocks outperformed growth stocks with the Russell 1000 Value Index returning 3.02% while the Russell 1000 Growth Index returned 1.12%.
For the first quarter of 2014, the Barclays High Yield Index returned 2.98%, the Barclays Emerging Markets Index returned 2.82%, and the Barclays Mortgage Index returned 1.60%.
For the first quarter, Federated Capital Income Fund (Class A Shares at NAV) returned 2.31%, underperforming the 3.00% return of the fund’s benchmark comprising of 40% Dow Jones Select Dividend Index, 20% Barclays High Yield 2% Issuer Capped Index, 20% Barclays Mortgage-Backed Securities Index and 20% Barclays Emerging Market Bond 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 Health Care, Consumer Staples and Materials. The three sectors that most negatively contributed to fund performance were Utilities, Industrials and Consumer Discretionary.
On an absolute basis, the five securities contributing most to performance AstraZeneca, Merck, Total SA, Garmin, and Ameren. The five positions detracting most from performance were Best Buy (ELN), Unisys, Transocean, R.R. Donnelley & Sons and Tesoro Pete (ELN).
The fixed-income holdings of the portfolio continued to generate substantial income. For the first quarter, they outperformed the benchmark by a wide margin due to an overweight to high-yield bonds and emerging-market bonds.
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, Information Technology, and Health Care. The fund’s largest underweight positions include Utilities, Consumer Staples and Industrials.
Within the fixed-income portfolio, we held portfolio duration steady during the quarter at around 78% of the benchmark as we believe that interest rates may be trending higher over the remainder of the year. The portfolio had an effective duration of 3.55 years vs. the benchmark at 4.54 years. We moved our yield-curve stance to barbelled on the expectation that the new Fed Chair would not be timid in proceeding with tapering the Fed’s quantitative-easing program, resulting in a significant flattening in the yield curve. We are moved to underweight the 7-year part of the yield curve during the quarter, as this area seems most vulnerable to higher interest rates.
We adjusted our allocations slightly during the first quarter. High yield was reduced to 45.6% of the fixed-income portfolio from 48.5%, Emerging rose to 43.2% from 41.9%, CMBS fell to 2.0% from 2.8%, and MBS rose to 3.3% from 2.8%.