Federated Strategic Value Dividend Fund (IS) SVAIX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Value
As of 03-31-2016

Market Overview

Global equities, and risk markets generally, had one of their worst starts to a year in modern times on concerns that falling oil prices, slowing emerging-market (EM) economies and a struggling U.S. manufacturing sector might spill over into the broader U.S. economy, further challenging earnings. However, risk assets rallied strongly in March, lifting both the Dow and S&P 500 into positive territory on the year and helping high-yield and EM securities experience one of their best months in years. Recent positive performance reflected the combination of reduced global recession fears, a rebound in oil prices, highly stimulative central banks and extremely dovish comments from Federal Reserve (Fed) Chair Janet Yellen that seemed to put Fed hawks back in their cage.

March’s data wasn’t strong, just good enough to ease recession talk that had rattled markets earlier in the year. Outside of a robust job market, most U.S. metrics improved marginally—pending home sales and housing starts were a bit better; manufacturing appeared to be improving and consumer spending rose, though only slightly. Overseas, firming oil/commodity prices helped give a lift to many EM countries while in Europe, the European Central Bank surprised with a larger-than-expected new round of stimulus.

It could be a respite from the storm—a lot of the attention during the month was focused on central banks and oil, not China. But the latter remains the gorilla in the room, and there’s little to suggest it’s getting better. Moreover, March’s improvements were modest at best. The reality is the global economy remains fragile, with high debt levels, subpar income growth and still-low oil and commodity prices representing burdens that could bring an end to the market’s early spring cheeriness.

Fund Performance

During the first quarter of the year, the U.S. equity market oscillated between extremes, plummeting in January on fears of a recession, only to snap back in March in response to the Fed’s dovish tone regarding interest rate policy. Amidst it all, Federated Strategic Value Dividend Fund remained steadfastly focused on providing its investors with a high and rising dividend income stream.

The portfolio finished the quarter with a 30-day SEC yield of 2.58% for A shares at maximum offering price and a gross weighted average dividend yield of 4.0% at quarter-end (excluding a special dividend from GlaxoSmithKline), which exceeded the yields of the 10-Year U.S. Treasury Note (1.8%), the broad-market S&P 500 Index (2.2%) and the Dow Jones Select Dividend Index (3.5%), which aims to represent the domestic high-dividend-paying universe. Complementing its high yield, the portfolio experienced impressive dividend growth as 10 holdings raised their dividends in the first quarter. The most notable increases came from Reynolds American, PepsiCo and Coca-Cola with increases of 16.7%, 7.1% and 6.1%, respectively. Reynold’s first quarter increase was the company’s second dividend raise over the past 12 months, amounting to a cumulative increase of 25.4%. Over the trailing 12 months, 30 companies within the portfolio raised their dividends, accounting for 34 increases overall. Additionally, GlaxoSmithKline declared a special cash distribution, valued at GBP 0.20 per share, or approximately $0.58/share, payable on 5/15/2016.

During the first quarter, Federated Strategic Value Dividend Fund produced a total return of 8.0% (A Shares at net asset value), outperforming the S&P 500 Index, which returned 1.4%. The Dow Jones Select Dividend Index returned 9.6%, benefitting from the strong quarterly performance in Utilities stocks, where the Index had a 35.1% exposure. This large concentration significantly exceeds the 18.8% weighting of the Federated Strategic Value Dividend Fund in the sector.

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.

Overall, investor preferences aligned well with the portfolio’s dividend-based strategy, as high-quality, high-yield and low-beta investments outperformed. Partiality for these characteristics benefitted defensive investments, demonstrated by the performance of the Telecom Services, Utilities and Consumer Staples sectors. These sectors posted the quarter’s highest returns while non-defensive stocks, such as Biotech and Banks, declined.

The portfolio posted positive returns across all of the sectors that it was invested in, with the strongest contributions coming from Consumer Staples (+8.4%), Telecom Services (+12.8%) and Utilities (+10.7%). Phillip Morris (PM) was the best performer among the portfolio’s Consumer Staples holdings, posting a total return of 12.8% as investors took comfort in PM’s earnings guidance for 2016. Within Telecom, Verizon, AT&T and BCE all posted strong double-digit total returns of 18.5%, 15.4% and 20.1%, respectively, as defensive, cash flow-generative companies were in favor. The same can be said for the portfolio’s Utilities holdings, whose rally was further fueled by the Fed’s dovish tone regarding future interest rate hikes.

The portfolio’s lowest-performing sectors were Health Care and Energy, which posted returns of 1.7% and 4.0%, respectively. While each sector of the portfolio produced a total return that exceeded that of the overall S&P 500 Index, there were several individual holdings that experienced negative returns on the quarter. Sanofi and Royal Dutch Shell fell into this category, posting quarterly total returns of -5.4% and -13.4%, respectively. Sanofi, a recent addition to the portfolio, sports a high yield (4.1% at quarter-end) and has encouraging dividend growth prospects, but the company must work through several headwinds within their diabetes business. Royal Dutch Shell was eliminated from the portfolio during the quarter on concerns that its pending acquisition of BG Group could impede the company’s ability to continue paying a rising dividend.

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


The first quarter of 2016 was a volatile period in the market, but this was not apparent in the performance of Federated Strategic Value Dividend Fund. This exemplifies the advantage of owning non-cyclical, well-established companies that seek to generate reliable cash flows and pay high and rising dividends. As reflected in the portfolio’s beta of just 0.67 (Wilshire 3-year beta versus the S&P calculated using the monthly return), high-quality, dividend-paying companies typically have experienced notably less volatility than stocks whose returns are solely reliant on their stock prices. Such characteristics allow Federated Strategic Value Dividend Fund to meet a broad range of investor needs.