As of 12-31-2017

Market Overview

Economic momentum accelerated in the fourth quarter on the tailwinds of a synchronized upswing in global growth, strong corporate earnings and still supportive global monetary policy. These forces, combined with December’s passage of U.S. tax reform, helped equity indexes reach all-time highs.

Performance was solid across equity markets, as the MSCI All Country World Index rose 5.82% for the quarter. Within the U.S., large-caps led the way, with the Russell 1000 index up 6.58% and the small-caps as measured by the Russell 2000 index up 3.33%. Internationally, emerging markets (EM) were the big winners with the MSCI Emerging Market Index up 7.34%. International developed stocks as measured by the MSCI World ex USA Index returned 4.23%.

On the fixed-income side, major credit asset classes outperformed risk-free, maturity-matching Treasuries for the quarter. Based on Barclays data, investment grade (IG) corporates returned 1.17% in the quarter, followed EM bonds (+0.62%) and U.S. high yield (+0.47%). By comparison, the U.S. Treasury Index only returned 0.05%.

On the interest-rate front, rates sold off broadly in the quarter, with strong yield-curve flattening. Even though disappointing inflation readings and still dovish global central banks kept long-end interest rates somewhat in check, the front end of the curve rose significantly as the Federal Reserve continued to hike interest rates due to tightening labor market and buoyant financial conditions. The 2-year/10-year yield curve (the spread between 10-year and 2-year Treasury yields) plunged more than 32 basis points during the quarter.

Fund Performance

Federated Global Allocation Fund A Shares returned 3.68% at net asset value during the fourth quarter, while the fund’s blended benchmark, which consists of 60% of the return from the MSCI All Country World Index and 40% of the return of the Bloomberg Barclays Global Aggregate Bond Index, returned 3.85%.

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

Click the Performance tab for standard fund performance.

During the quarter, the fund saw outperformance from fixed-income core strategies, but more mixed performance on the equity side. Both the domestic and international fixed-income strategies outperformed. The main reason for this outperformance relative to the benchmark was our overweight in spread products such as high-yield and investment-grade bonds. These sectors significantly outperformed Treasury bonds, as noted above. The impact of our duration and yield-curve positioning also was positive. The portfolio stayed within 92.5-95% of the interest-rate sensitivity of the index most of the quarter. This shorter duration was beneficial as the Treasury Index yield rose over 25 basis points during the quarter.

On the equity side, the domestic large-cap strategy outperformed, but the international developed large-cap strategy and domestic small-cap strategies underperformed.

Among the tactical overlay strategies, the fund generated positive performance from the global equity and global fixed-income strategies, while the global currency and U.S. vs. EN allocation were modest detractors. The fund also benefitted from the stock vs. bond allocation, which was overweight equities throughout the quarter.

Current Strategy

The fund enters 2018 with a meaningful overweight allocation to stocks vs. bonds, consistent with our view that equities will continue to outperform in the context of improving global growth, double-digit earnings growth and the tailwind of fiscal stimulus. We have a neutral allocation to the EM relative to the U.S.

From a fixed-income perspective, the fund begins 2018 with a duration position that is 95% of neutral on expected upward pressure on U.S. Treasury yields. The fund remains overweight in most credit sectors of the bond market, including investment-grade and high yield, since we believe the ultimate low in yield spreads in those sectors relative to comparable-maturity Treasuries is still ahead of us. And it is still underweight Treasuries and agency mortgage-backed securities. In terms of security selection, the fund maintains a down-in-credit quality bias consistent with its positive view on credit, is overweight 30-year corporates and Treasury Inflation-Protected Securities and underweight high-yield energy and metals/mining issuers.