Federated Strategic Value Dividend Fund (IS) SVAIX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Cap
As of 03-31-2018

Highlights

  • Federated Strategic Value Dividend Fund provided a 30-day SEC yield of 3.4% (A at MOP) and a gross-weighted average dividend yield of 4.67% as of the end of March
  • There was robust dividend growth during the quarter as 15 companies increased their dividend payments
  • The most notable dividend increases came courtesy of Abbvie (35.2%), PepsiCo (15.2%), British American Tobacco (11.8%) and UPS (9.6%). Abbvie increased its dividend twice in the trailing 12 months for a cumulative increase of 50%
  • For the rolling one-year period, 33 companies raised their dividends, accounting for 40 increases overall
  • Markets were sluggish in the quarter as the only sectors to end in positive territory were Information Technology, 3.6%, and Consumer Discretionary, 3.1%
  • Characteristics that are conducive to a high-quality dividend strategy, such as low beta and high yield, continued to notably underperform, even with the reversal in investor preferences in late March when the Tech-led beta chase lapsed

Looking Back

The fund’s core goals of providing investors with a stable, high and rising income stream from high-quality investments remains the focus, evidenced by the fund’s 30-day SEC yield of 3.4% (A at MOP) and a gross-weighted average dividend yield of 4.67% at quarter end. This exceeded not only the broad market represented by the S&P 500 Index with its 1.96% yield, and the 10-year U.S. Treasury Note (2.74%), but it also surpassed the 3.96% yield of the Dow Jones Select Dividend Index, which aims to reflect the domestic high-dividend-paying universe. Further enhancing the dividend yield, there has been robust dividend growth as 33 companies within the fund raised their dividends, accounting for 40 increases in the trailing 12 months.

Volatility resurfaced in the quarter driven by heightened concerns surrounding Federal Reserve rate hikes, escalating trade tensions and the Tech sell off in late March. Although there was a reversal in investor preferences in late March, the overall quarter was dominated by the notable “risk-on” trade.  Of note, when quintiling the S&P 500, low yield outperformed high yield by 10.4% and high beta outperformed low beta by 8.4% for the quarter. These investor preferences were also apparent during the quarter in the sector performance as the only two sectors to post positive returns were the cyclical:  Information Technology and Consumer Discretionary.  The notable laggards for the quarter were the defensive, dividend-friendly Telecomm and Consumer Staples, which declined by 7.5% and 7.1%, respectively

Performance

Federated Strategic Value Dividend Fund ended the quarter with a return of -6.63% (A Shares at NAV), while the Dow Jones Select Dividend Index and the S&P 500 posted returns of -2.54% and -0.76%, 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.

Performance Contributors

  • Health Care helped performance, posting a 3.5% total return, mainly attributable to GlaxoSmithKline, which generated an 11.2% return
  • Financials posted a positive return of 1.0% driven by Munich RE, which generated a 7.0% return attributable to raising its 2018 profit forecast
  • Despite the decline in Energy, Total SA posted a positive return of 3.8% for the quarter as a result of reporting solid earnings for the fourth quarter of 2017 and its strategy of embracing capital discipline

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

Performance Detractors

  • High yield and low beta underperformed during the quarter, which challenge a high-yield dividend strategy
  • Utilities, REITS, Telecom and Consumer Staples all posed a drag on performance as the “risk-on” trade and an increase in the 10-Year Treasury put short-term pricing pressure on these defensive, dividend-fertile sectors
  • Energy detracted from performance due to oil price volatility, oversupply and weak earnings results

How We Are Positioned

Trade-war worries were the flavor of the month in March, replacing February’s fears about inflation and interest rates, as stocks sold off again, sending the major domestic and international indexes down for a second month. Among the hardest hit was the sweetheart Technology sector, the market leader for much of this past year’s leg up. Its sell-off came as issues over Facebook’s data sharing cast a cloud over the entire tech universe.

Ironically, the economic data on the quarter was generally good. February nonfarm payrolls surprised everyone, up more than 300,000 for the best monthly gain in nearly two years. Consumer confidence and sentiment also were very strong, hitting multi-decade highs. Manufacturing accelerated, housing hinted at a spring rebound and the final read on fourth-quarter GDP was revised up much more than expected to 2.9%, as already robust consumer spending was nudged up even higher. That said, consumer spending appears to have weakened in the first quarter, and the massive trade gap widened, feeding into the Trump administration’s decision to slap tariffs on imported steel and aluminum and China. Whether a negotiating ploy or not, the actions spooked the markets as they recalled past efforts at protectionism that failed miserably, the most obvious example being Smoot-Hawley early in the Great Depression. Going into the second quarter of 2018, earning season is expected to be very strong with both strong positive results and guidance.  Combined with the strong underlying economic fundamentals, this should be a positive boost for the market. 

The fund remains concentrated in Consumer Staples, Integrated Energy, Pharmaceuticals, Telecom Services and Utilities. These segments contain the dividend-friendly stocks that the fund seeks, enabling the strategy to provide investors with the opportunity for a high dividend yield complemented with dividend growth. That dividend growth can help the fund both sustain its high yield and outpace inflation. Furthermore, stocks that consistently pay and increase their dividends have tended to have lower volatility, as reflected in the fund’s beta of 0.60 (Factset 3-year beta versus the S&P calculated using the monthly return). Notwithstanding current market conditions, Federated Strategic Value Dividend Fund will remain committed to its goals of providing a high and rising income stream from high-quality business assets and will not alter its investment style based on near-term market preferences.