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Equity markets pulled off their August low but were still down on the month, closing out their worst quarter in four years as investor fears over China, lower oil and a potential global slowdown outweighed generally better economic data at home. The Federal Reserve (Fed) added to the uncertainty and volatility, choosing to put off liftoff at its September meeting, rattling the markets even though futures had put the odds of a move at well below even.
On the economic front, much of the news was good. The final read on second-quarter GDP revised growth up again to 3.9%, led by a big jump in consumer outlays. Sentiment and confidence data also surprised to the upside, suggesting Main Street wasn’t all that wrapped up in the events that were shaking up Wall Street. The Philly Fed’s gauge of states showed growth accelerating in 41 states; state and local tax revenues also suggested broad improvement, with individual income taxes rising at their fastest pace in almost two years.
August nonfarm payroll growth disappointed somewhat, but it’s a quirky month that historically has experienced significant upward revisions. Jobless claims were still very low, and September’s ADP payroll survey came in at a better-than-expected increase of 200,000 jobs. Elsewhere, auto sales remained very strong and housing’s momentum continued, with new home sales hitting a seven-year high and permits keeping the construction pipeline filled going into fall. The only fly in the ointment was manufacturing, where a stronger dollar and energy cutbacks continued to weigh on exports and overall activity.
Regardless of the recent volatility in the markets, Federated Strategic Value Dividend Fund remains focused on its goal of providing investors with dividend income, dividend growth and lower downside risk. The fund finished the third quarter of 2015 with a 30-day SEC yield of 3.4% (A shares at maximum offering price) and a weighted average dividend yield of 4.6%. The portfolio yield stands well above the yield of the 10-Year U.S. Treasury bond (2.1%), the broad-market S&P 500 Index (2.3%) and even the Dow Jones Select Dividend Index (4.0%) that attempts to represent the domestic dividend-paying universe. Robust dividend growth helped the portfolio sustain its high yield, as seven of the portfolio’s holdings raised their dividends in the third quarter alone. The most notable dividend increases came courtesy of Altria Group, Inc. and Reynolds American, which raised their dividend payments by 8.7% and 7.5%, respectively. Kinder Morgan increased its dividend payment in July by 2.1%, the fourth increase in the last 12 months, for an aggregate increase of 14.0% for the trailing 12 months. Over that same 12-month period, 31 companies within the portfolio raised their dividend, accounting for 36 increases overall. The investments in the portfolio have a strong history of increasing their dividend, as 46% have raised dividends each year for the past 20 years; 34% have done so for the past 30 years and 9% have commendably done so each year for the past 50 years.
For the third quarter of 2015, Federated Strategic Value Dividend Fund posted a return of -1.6% (Class A Shares at NAV). The S&P 500 Index returned -6.4% and the Dow Jones Select Dividend index returned -2.3%. The risk-off theme was dominant in the third quarter as the apparent flight-to-safety preferences for high-quality, large cap, low-beta stocks prevailed. Dividing the S&P 500 into fifths, highest quality outperformed lowest quality by 12.3%; large cap beat small cap by 5.2%; and low beta surpassed high beta by 11.9%. The equity selloff that began in August continued into September with every sector in the S&P 500 (with the exception of Utilities) posting negative returns for the quarter. Energy, Materials and Health Care were notably penalized by investors, delivering returns of -17.5%, -16.9% and -10.7%, respectively. The defensive, dividend-friendly Utilities sector posted the only positive return of 5.4%. Consumer Staples, the second best performer in the broad market, posted a return of -0.2% and while still negative, the sector outperformed the broad equity market by 6.2%.
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 Class A Shares. If included, it would reduce the performance quoted.
Click the Performance tab for standard fund performance.
Within the portfolio, the strongest contributing sector was Consumer Staples, which posted a return of 4.4% (This was notably better than the equity market’s return of -0.2%) and Utilities (+7.7%). Reynolds American and Altria drove the Consumer Staple performance, posting double digit returns of 19.6% and 12.4%, respectively. Strong pricing, the completion of the federal tobacco buyout program and lower gas prices, which generated increased traffic in convenience stores, helped propel their performance upward. Reynolds also recently announced plans to sell its international rights to the Natural American Spirit franchise to Japan Tobacco, valued at approximately $5.0 billion, which amounts to 34 times 2014 sales! Utilities experienced a dramatic bounce after the Fed announced that it would not be raising its target rate in September. The portfolio’s defensive tilt with notable weights in Staples and Utilities and avoidance of cyclical sectors such as Materials, significantly shielded the portfolio from the equity market’s notable decline.
Energy continued to be the largest detractor in both the portfolio and the broad market, declining more than 17% for the quarter. Oil prices have been cut in half over the last 12 months, driven by oversupply concerns and weakness in China. Our holdings within Energy continue to cut capital expenditures to improve liquidity and save cash while maximizing profits in downstream operations. They have also committed to rebalancing their financial frameworks to manage through a period of low oil prices while maintaining dividends as a top priority within that framework. The portfolio’s holdings in these industries are very supportive of an income-oriented investment strategy, as evidenced by their weighted average dividend yield of 6.4%. Separately, Pharmaceuticals & Biotech were also down for the quarter (-7.7%), as share prices plunged after Hillary Clinton announced a plan to address “price gouging” in the industry, triggering a selloff.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
It was a relatively strong quarter for Federated Strategic Value Dividend Fund, as it brought forth the importance of a high-quality dividend strategy and active management, as well as emphasized the potential for reduced volatility. The portfolio’s high yield has provided investors with a consistent dividend stream, while the dividend increases among the portfolio’s holdings have allowed that income stream to rise over time. This has provided some insulation against market volatility and future inflation prospects, as no matter what the market has done, our investors still received their dividend checks each month. Historically, dividend yield and dividend growth have been significant drivers of total return, and consistent dividend-paying and increasing stocks have exhibited less volatility than the broad market. As such, Federated Strategic Value Dividend Fund may meet a wide range of investor needs, all thanks to its consistent, unwavering dividend-oriented investment approach.