Federated Strategic Value Dividend Fund (A) SVAAX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Cap
As of 06-30-2018

Highlights

  • The fund provided a 30-day SEC yield of 3.50% and a gross-weighted average dividend yield of 4.66% at the end of June
  • This exceeded not only the broad market represented by the S&P 500 Index with its 1.95% yield and the 10-year U.S. Treasury Note (2.85%) , but it also surpassed the 3.87% yield of the Dow Jones Select Dividend Index
  • Seven companies increased their dividend during the quarter, with the most notable increases courtesy of Paychex (12.0%), Imperial Brands (10.0%), Philip Morris (6.5%), Exxon Mobile (6.5%) and Procter & Gamble (4.0%)
  • For the rolling one-year period, 34 companies within the fund raised their dividends, accounting for 42 increases overall
  • Although the Tech-led beta chase lapsed in June, the overall quarter was still overshadowed by the strong performance in the FAANG stocks, which accounted for 48% of the total S&P 500 performance in the period

Looking Back

The unpredictable environment brought on by escalating trade rhetoric seemed to have dampened the market’s risk-on posture in June as investor sentiment reversed and defensive stocks were in favor for the latter part of the quarter.   Despite the late quarter reversal in investor preferences, a notable risk-on trade prevailed overall.  Of note, when quintiling the S&P 500, low yield outperformed high yield by 5.1% and high beta outperformed low beta by 0.40% for the quarter.  The performance of the S&P 500 was driven by the FAANG stocks, which accounted for 48% of the total performance of the S&P 500, while the Information Technology sector accounted for 52% of the total performance of the S&P 500.  These stocks do not meet the fund’s income-producing mandate as Facebook, Amazon, Netflix and Google do not pay a dividend and Apple’s yield is below 2%.

Performance

The fund ended the quarter with a return of 2.38% (A Shares at NAV), while the Dow Jones Select Dividend Index and the S&P 500 posted returns of 3.66% and 3.43%, respectively.

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

Performance Contributors

  • Energy was the fund’s top-contributing sector, posting a return of 15.78%, driven by the rally in oil prices.
  • Occidental Petroleum, the fund’s top performer, returned 29.98% in the quarter
  • REITs and Utilities added to performance generating returns of 7.44% and 3.47%, respectively, led by their strong performance in June when worries over trade wars drove investors to defensive stocks
  • The fund’s Health Care names enhanced performance, posting a 4.23% return for the quarter with Merck and GlaxoSmithKline contributing strong positive returns

Click on the Portfolio Characteristics tab for the fund’s top 10 holdings

Performance Detractors

  • High-dividend yield and low beta underperformed during the quarter, representing a near-term headwind to performance.
  • Consumer Staples detracted from performance driven mainly by Tobacco, as Phillip Morris International’s disappointing quarterly results in their e-cigarette segment placed short term pressure on Tobacco names.
  • Telecomm posted a 3.08% decline in the quarter. Among the defensive, dividend-fertile sectors, Telecomm experienced the largest decline in May as the 10-year Treasury hit 3.07%.

How We Are Positioned

The last month of 2018 featured a tug-of-war among various economic indicators. Remarkably strong fundamentals included surging corporate earnings, near-record confidence measures and benign inflation readings. Meanwhile, investors digested a carousel of concerns from a flattening yield curve, trade wars and political uncertainty in Europe, which brought on higher levels of volatility. But in spite of rising levels of uncertainty, both the S&P 500 and Nasdaq advanced in June. International equities, however, declined modestly as the MSCI World ex-U.S. Index posted a negative return in the period.

The fund remains concentrated in Consumer Staples, Integrated Energy, Pharmaceuticals, Telecom Services and Utilities. These segments contain the dividend-friendly stocks that the fund seeks, enabling the strategy to provide investors with the opportunity for a high dividend yield complemented with dividend growth. That dividend growth may help the fund both sustain its high yield and outpace inflation. Furthermore, stocks that consistently pay and increase their dividend tend to have lower volatility, as reflected in the fund’s beta of 0.61 (Factset 3-year beta versus the S&P calculated using the monthly return).  Notwithstanding current market conditions, Federated Strategic Value Dividend Fund will remain committed to its goals of providing a high and rising income stream from high-quality business assets and will not alter its investment style based on near-term market preferences.