Federated Strategic Value Dividend Fund (A) SVAAX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Value
As of 03-31-2017

Market Overview

The “Trump trade,’’ which propelled equities higher in January and February, hit some bumps in March, as the failure of the Republican leadership to enact Obamacare repeal-and-replace legislation sparked a risk-off move that saw stocks sell off and longer Treasuries rally amid uncertainty over prospects for the new administration’s pro-growth agenda. By month’s end, however, the equity market appeared to set aside the bulk of its worries amid improving earnings, robust consumer and business sentiment, accelerating manufacturing activity and a healthy spring housing outlook.

After topping a record 21,000 in early March, the Dow failed to recover all of its lost ground and ended down slightly on the month. The S&P 500 also slipped fractionally after setting a new high during the month, while the Nasdaq rallied in the final week to close up 1.5%, just points shy of its record close on the March’s penultimate day. For the entire first quarter, all of the indexes closed deep into the green as the combination of hopes over a Republican sweep, strong “soft’’ data and improving metrics in much of the global economy unleashed animal spirits.

While concerns about Washington and the prospects for future tax cuts, regulatory relief and infrastructure spending were drags, the markets seemed to focus more on improving macro-fundamentals and the so-called “soft’’ data—surveys that showed business and consumer optimism soaring—even as some of the “hard’’ data, such as auto sales and actual consumer and business spending, didn’t fully match with the bullish sentiment. In addition, there remained a sense that for all its early stumbles, the Trump administration and the Republican Congress would still be able to cobble together significant fiscal stimulus by late in the year or early 2018, taking over for a Federal Reserve (Fed) that is starting to lift the extraordinary monetary stimulus of the last eight years, raising its target rate in March for the second time in three months.

Performance & Strategy

During the first quarter of 2017, the market’s behavior was driven by the uncertainty of the new Trump administration, yet Federated Strategic Value Dividend Fund remained unchanged, focusing on providing a high and rising income stream from high-quality business assets.   The fund provided a 30-day SEC yield of 2.8% and a gross weighted average dividend yield of 4.1% at quarter end.  This substantially exceeded not only the broad market represented by the S&P 500 Index (a 2.0% yield), and the 10-year Treasury (a 2.4% yield), but it also surpassed the 3.6% yield of the Dow Jones Select Dividend Index, which aims to reflect the domestic high-dividend-paying universe. Complementing its high yield, Federated Strategic Value Dividend Fund saw impressive dividend growth as 11 holdings raised their dividends in the first quarter.  The most notable increases came courtesy of PepsiCo, Inc., Digital Realty Trust, Inc., Coca Cola and Kimberly Clark with increases of 7.0%, 5.7%, 5.7% and 5.4%, respectively.  For the trailing 12 months, 35 companies within the portfolio have raised their dividends, accounting for 38 increases overall. 

For the first quarter, the portfolio produced a return of 5.1% (A Shares at NAV), which outperformed the Dow Jones Select Dividend Index return of 3.9% and kept close pace with the S&P 500 Index return of 6.1%.  Looking at the quarter as a whole, investor preferences did not align with a high-quality dividend strategy, as high-quality, high-yield, low-beta investments underperformed, driven by the “risk-on” trade during the first two months of the year.  The portfolio still captured 84% of the broad market’s performance despite this headwind. There was a reversal in investor preferences in March as the sell off from the “Trump trade” triggered a flight to safety.  In the broad market, the outperformers in the quarter were Information Technology, 12.6%; Consumer Discretionary, 8.4%; and Health Care, 8.4%.  The laggards were Energy and Telecomm Services, posting returns of -6.6% and -4.0%, 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.

The highest contribution to total return was noted in Consumer Staples, which posted a return of 12.0% (almost double the broad market’s 6.3% return).  This was driven by tobacco names Phillip Morris, 24.5% and Altria, 6.5%.  Both benefited from higher-than-expected fourth quarter 2016 earnings and heightened expectations of their new product, iQOS, a specially designed smokeless cigarette that heats tobacco, creating a vapor but not the hazardous smoke or tar associated with burning tobacco. In addition, Unilever and Kraft Heinz posted double-digit returns.  Unilever posted a 17.0% return for the quarter, driven by the proposed acquisition/merger from Kraft Heinz mid-February.  We purchased Unilever in October 2008 and held the investment continuously for over 8 years as it provided annualized dividend growth of approximately 10%, which ultimately translated into price appreciation.  After its noted price advance, we sold out of Unilever.  Kraft Heinz was eliminated for similar reasons. Separately, Health Care and Utilities also contributed to the portfolio’s strong performance, generating returns of 9.0% and 6.1%, respectively. 

The portfolio’s international exposure pushed performance even higher, generating a cumulative 7.1% return as non-U.S. stocks outperformed in the first quarter. The sole holding in France (Sanofi +9.5%) and the portfolio’s U.K. investments, which posted a 7.5% return, were the top performers.

In contrast, Energy posted negative returns as oil prices declined by 6.3% during the quarter.   The portfolio’s 9.8% exposure to Integrated Energy produced a total return of -7.6%.  Negative performance was also noted in Consumer Staples, with General Mills posting a -3.7% total return and Telecom Services providers AT&T and Verizon declining -1.1% and -7.7%, respectively. General Mills came under near-term pressure due to a decline in net sales driven by adverse pricing over the past year. AT&T and Verizon posted negative returns associated with intense and increasing competition in the U.S. wireless space.

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

The news flow surrounding the new Trump administration created volatility during the year’s first quarter; however, Federated Strategic Value Dividend Fund remained dedicated to achieving its objectives. Owning non-cyclical stocks of strong, well-established companies that have the potential to generate reliable cash flows and pay high and rising dividends gives investors the reassurance that the portfolio will continue to pursue its income objectives regardless of market volatility.  Furthermore, stocks that consistently pay and increase their dividends have tended to have lower volatility, as reflected in the portfolio’s beta of .61(Wilshire 3-year beta versus the S&P calculated using the monthly return).