As of 09-30-2017

Market Overview

Equity markets continued their ascent in 2017’s third quarter, driven by accelerating global growth and strong corporate earnings that continue to rise at the fastest pace in five years.

For the quarter, the MSCI All Country World Index was up 5.31%, with international markets continuing to outperform the U.S. International developed markets as measured by the MSCI World ex-USA index returned 5.70% for the three-month period, while emerging markets as measured by the MSCI Emerging Market Index rose 8.01%. The Russell 1000, by comparison, returned 4.48%, while the Russell 2000 rose 5.67%.

Markets were able to achieve these solid returns despite heightened geopolitical risk stemming from North Korea, repeated failures on health-care reform, a slew of natural disasters and less accommodative monetary policy from the U.S. Federal Reserve, which unveiled plans for the start of balance-sheet normalization.

U.S. Treasury yields ended the third quarter largely unchanged, though there were broad swings during the reporting period. The bellwether 10-year Treasury yield, for example, traded in a 2.04-2.39% range.

Most credit asset classes outperformed risk-free, maturity-matching Treasuries for the quarter, despite a soft August when credit spreads actually widened due to political risks. Based on Bloomberg Barclays data, emerging-market (EM) bonds returned 2.27% in the quarter, followed by U.S. high-yield (HY) bonds (+1.98%) and investment-grade (IG) corporates (+1.34%). The U.S. Treasury Index only returned 0.38%.

Fund Performance

Federated Global Allocation Fund A Shares returned 4.32% at net asset value during the third quarter of 2017, 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 Barclays Global Aggregate Bond Index, returned 3.82%.

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 both the equity and fixed-income core strategies. On the equity side, the international stock selection strategy and the domestic large-cap strategy outperformed their respective benchmarks driven by security selection, while the domestic small-cap strategy modestly underperformed.

On the fixed-income side, the domestic bond strategy outperformed, while the international bond strategy was essentially in-line with its benchmark return. The outperformance on the domestic side was primarily driven by an overweight in spread products such as HY and IG bonds. These sectors significantly outperformed Treasury bonds, as noted above. The impact of our duration and yield-curve positioning was modest. The portfolio stayed within 92.5-95% of the interest-rate sensitivity of the index during most of last three months. This shorter duration was slightly beneficial as interest rates only moved up a few basis points during the quarter.

Current Strategy

The fund enters the fourth quarter with an overweight allocation to stocks vs. bonds, consistent with our view that equities will continue to outperform in the context of improving global growth, strong earnings and the potential for fiscal policy stimulus in the U.S.

From a fixed-income perspective, the fund begins the quarter with duration at 95% of the benchmark as we continue to anticipate upward pressure on U.S. Treasury yields. The fund remains overweight in most credit sectors of the bond market, including IG, HY and commercial mortgage-backed-securities (MBS). We remain underweight Treasuries and agency MBS. 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 HY energy and metals/mining issuers.