Federated Strategic Value Dividend Fund (IS) SVAIX
The equity rally resumed in September, before settling back in the final weeks over worries about Washington’s fiscal follies and on uncertainty surrounding the Federal Reserve (the Fed). Investor concern rose as a result of September’s debate over whether the nation was headed for a government shutdown over a resolution to continue to fund the budget. The debate in reality served as a proxy for a showdown over the Affordable Care Act, which House Republicans vowed to defund and the White House and Senate Democrats vowed to protect at all costs. Once this gets resolved, it’s on to a potentially more contentious fight over the debt ceiling, with the Treasury facing an Oct. 17 deadline to avoid possible default.
Fiscal cliff aside, the Fed tossed its own wrinkle into the mix by foregoing the start of tapering that virtually everyone expected to come after the Sept. 17-18 meeting of policymakers. Instead, the Fed cited concerns about what’s happening in Washington, the spike in mortgage rates that appears to have somewhat slowed housing’s acceleration and the lack of quality job growth as reasons to wait a little longer before beginning to reduce the Fed’s $85 billion in monthly bond purchases.
In any case, the events from mid-September have set the stage for an interesting finish to the year. Will the U.S. economy avoid tumbling down the fiscal cliff again? Will the Fed start to taper in the fall or wait until year-end or even early 2014? Will nonfarm jobs start to reflect the sustained decline in initial jobless claims? Will consumers open their pocketbooks over the holidays or remain subdued as has been the case since the global financial crisis ended? And will companies be able to generate relatively robust profits without relatively robust top-line growth? The answers to these questions should contribute importantly to determining the market outlook for 2014.
During the third quarter of 2013, Federated Strategic Value Dividend Fund achieved results in line with its objectives of delivering a high dividend yield, consistent dividend growth, while affording less downside risk. At the end of September, the fund finished the third quarter with a 30-day yield of 3.25% for Class A Shares and a gross weighted average dividend yield of 4.55%, which greatly exceeded the yield of the 10-Year U.S. Treasury (2.64%), the broad market S&P 500 Index (2.13%) and the Dow Jones Select Dividend Index (3.65%), which attempts to represent the domestic dividend-paying universe. Dividend growth has bolstered the yield as six of the portfolio’s holdings raised their dividend in the third quarter alone. The largest of these increases came from Phillip Morris and Vodafone with increases of 10.6% and 8.0%, respectively. For the trailing twelve months, 30 of the fund’s 37 holdings have raised their dividends, with Vodafone increasing its dividend twice over this period for a total of 31 increases overall.
Federated Strategic Value Dividend Fund produced a total return of 2.79% (Class A Shares at NAV). The broad market returned 5.2% and the Dow Jones Select Dividend returned 4.5% for the quarter. For the majority of the quarter, the economy was in a “risk on” environment, which consequently meant low- quality, high-beta, low-yielding small-cap securities were in favor. Among equities, low-quality stocks eclipsed high-quality stocks by 6.2%, high-beta stocks outperformed low-beta stocks by 6.0%, lowest- yielding stocks exceeded highest-yielding stocks by 4.7%, and small-cap stocks outperformed large- cap stocks by 3.3%. This sentiment reversed during the last two weeks of the quarter, as investors shied away from high-risk stocks as a possible government shutdown loomed.
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.
For the quarter, the sectors that posted the highest returns in the broad market were Materials (+10.3%) and Industrials (+8.9%) in which the portfolio has no exposure due to their cyclical nature and inadequate dividend opportunities. The worst performer in the broad market was Telecom (-4.4%) which was actually the third best performing sector in the portfolio (+3.8%). The portfolio’s outperformance was driven by Vodafone, which returned 22.4% during the quarter. Vodafone advanced after it was announced on September 2, that Verizon reached an agreement to acquire Vodafone’s 45% interest in Verizon Wireless for $130 Billion. The top-performing sector in the portfolio was Energy (+11.3%), driven by, Total (+20.5%), and ConocoPhillips (+16.1%), both benefitting from the increase in oil prices after recent events in Syria. The portfolio’s 20.8% position in Pharma and Biotech added 5.1%, driven by AstraZeneca (+12.2%) and Abbvie (+9.2%). A detriment to performance came from the portfolio’s 3% position in Consumer Discretionary, which returned -2.0%, driven by McDonalds. McDonald’s fell 2.0% during the quarter, due to a decline in U.S. consumers’ restaurant spending and its lack of pricing power in the U.S. as a result of slower GDP growth and inflation. McDonalds did raise its dividend in September by 5.2%.
Collectively, the portfolio’s foreign investments proved beneficial as these holdings notably outperformed their U.S. counterparts with investments in France, the United Kingdom, and Canada returning 20.5%, 8.6% and 6.0%, respectively for the quarter.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
Positioning and Strategy
With the portfolio’s low beta of 0.49 (Wilshire three year beta versus the S&P calculated using monthly return), Federated Strategic Value Dividend Fund seeks to provide a steadfast approach to investing focused on the basic principle that dividend yield and dividend growth are the drivers of long-term total returns. By focusing on non-cyclical stocks of strong, longstanding companies that produce steady cash flows and pay high and growing dividends, investors can feel confident that the portfolio will pursue its income objectives regardless of whether the overall market is in a distressed or positive state. If an investor is looking for a portfolio that offers lower downside risk with less volatility than the broad market and income to pay monthly expenses Federated Strategic Value Dividend Fund provides an option.