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March closed out a roller-coaster quarter for equities as signs of improving, stimulus-fed economies in Europe and Japan were dampened by weather-led softness in the U.S., where hints of a modest improvement in the labor market continued to provide the only consistently positive source of data. The major indices in the U.S. closed down modestly on the month, ending the first three months of 2015 roughly where they began the year, with the Dow and S&P 500 up fractionally and the NASDAQ advancing 3.5%. Shares in Europe, however, pushed higher amidst further currency declines, with the DAX finishing the first quarter of the year up 22%.
Among the forces weighing on U.S. markets were concerns about the upcoming earnings season. During the first quarter, lower oil prices dampened business investment and hammered the Energy sector. A stronger dollar also threatened to cut into to the results of U.S.-based multinationals, which account for roughly half of S&P 500 profits. Also, the combination of West Coast port shutdowns, bitter cold and record storms slowed economic activity in the U.S. as supplies couldn’t move and Americans stayed home, awaiting warmer temperatures. Meanwhile, U.S. investors also remained largely on the sidelines, hopeful that a similar thaw would hit revenues and earnings.
Federated Strategic Value Dividend Fund strives to provide a high- and rising-income stream, and the portfolio did just that in the first quarter, finishing with a 30-Day SEC yield of 2.9% (Class A Shares at Maximum Offering Price) and a gross weighted average dividend yield of 4.2%. The portfolio’s yield was notably above that of the broad market S&P 500 Index (2.0%) and the Dow Jones Select Dividend Index (3.7%), which aims to reflect the domestic high-dividend-paying universe. The fund’s high yield was further complemented by its dividend growth, as 11 names increased their dividends in the first quarter of the year. The most notable dividend increases came from Coca-Cola (8.2%), Dominion Resources (7.9%), Pepsi Co (7.3%) and General Mills (7.3%). For the trailing twelve months, 33 of the portfolio’s holdings increased their dividends, accounting for 39 total increases.
For the first quarter of the year, Federated Strategic Value Dividend Fund posted a total return of 0.3% (Class A Shares at net asset value). The S&P 500 Index and the Dow Jones Select Dividend Index returned 1.0% and -1.0%, respectively, over the same period. March turned out to be a continuation of February as the “risk-on” trade dominated investor preferences. The “high-beta” trade started to unwind in March, but for the overall quarter, equity investors still favored low-yield, low-quality, small-cap names. When examining the S&P 500 Index, high-yield stocks underperformed low-yield stocks by 5.9%; high-quality stocks underperformed low-quality stocks by 6.6% and large-cap stocks underperformed small-cap stocks by 2.6%. These characteristics are contradictory to a high-quality, dividend-focused fund like Federated Strategic Value Dividend Fund.
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.
From a sector perspective, the portfolio’s highest returns came from within Consumer Staples (4.8%). This was driven by Kraft, which posted a one-day return of 35.6% on March 25 following the announcement of its merger agreement with Heinz. Under the terms of the deal, current Kraft shareholders will own 49% of the new company while existing Heinz shareholders will own 51%. Outside of Consumer Staples, the portfolio’s investments in Health Care added a positive return of 5.6%. Partially offsetting this outperformance, the portfolio’s Utilities holdings returned -8.0% for the quarter. Utilities experienced price pressure early in the quarter, triggered by recent signals from the Federal Reserve that it is preparing to soon raise its target for the federal funds rate. For Federated Strategic Value Dividend Fund, the long-term investment thesis for its Utilities holdings remains intact, demonstrated by their yield of 4.2%, their beta of only 0.20 and their high-quality characteristics, all of which align with the portfolio’s dividend-based strategy.
From a geographic standpoint, the portfolio’s international holdings detracted from performance, as they posted a collective return of -2.2%. The principal reason for this underperformance was the continued strengthening of the U.S. dollar relative to foreign currencies. Investments in Canada and the U.K. felt the greatest impact as National Grid, Royal Dutch Shell and BCE posted returns of -10.3%, -9.1% and -7.0%, respectively.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
In a market environment consumed with noise catalyzed by press releases, earnings announcements, oil price fluctuations, currency movements, etc., Federated Strategic Value Dividend Fund remains unwavering in its focus and commitment to seeking to provide an investment that can offer a meaningful and increasing source of income coupled with lower downside risk. By investing in non-cyclical, well-established companies that generate reliable cash flows and pay high and rising dividends, investors can be reassured that the portfolio has the potential to meet its income objectives regardless of the market outlook. Additionally, the portfolio is able to offer lower downside risk, evidenced by its low beta of 0.69 (Wilshire three-year beta versus the S&P calculated using the monthly return). So whether an investor is looking for a rising source of income, a way to achieve superior long-term total returns or a fund that largely avoids the cyclicality of the market, Federated Strategic Value Dividend Fund may present a compelling investment opportunity.