Federated Strategic Value Dividend Fund (IS) SVAIX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Cap
As of 05-31-2018

Highlights

  • Federated Strategic Value Dividend Fund provided a 30-day SEC yield of 3.36% (A Shares at MOP) and a gross- weighted average dividend yield of 4.71% at the end of May.
  • This exceeded not only the broad market represented by the S&P 500 Index. with its 1.95% yield, and the 10-year U.S. Treasury Note (2.83%), but it also surpassed the 3.91% yield of the Dow Jones Select Dividend Index, which aims to reflect the domestic high-dividend-paying universe.
  • There was one notable dividend increase during the month courtesy of Imperial Brands, which increased its dividend payment by 10.0%.  For the rolling one-year period, 35 companies raised their dividends, accounting for 42 increases overall.
  • Volatility was injected back into the market in May, triggered by heightened political risk. Strengthening U.S. data continued to increase consumer confidence as high yield and low beta continued to underperform.  Broad market performance was dominated by the Information Technology rally that accounted for 76% of the S&P 500’s total performance.

Looking Back

During May, the 10-Year Treasury reached its highest level since 2011, peaking at 3.07%, which placed some short-term price pressure on Telecomm, Utilities and Staples.  High yield and low beta continued to underperform, as noted when quintiling the S&P 500; low beta underperformed high beta and high yield underperformed low yield by 3.2% and 4.1%, respectively.  When noting the S&P quality ratings, highest quality (A+) underperformed lowest quality (C&D) by -6.6%.  The notable Information Technology rally dominated the performance of the broad market accounting for 76% of the S&P 500’s performance with a 7.4% return.  Apple, Facebook, Microsoft and Alphabet had a combined average weight of 12% and accounted for 61% of the Information Technology performance for May.

Performance

The fund ended the month with a flat return of -0.23% (A Shares at NAV), while the Dow Jones Select Dividend Index and the S&P 500 posted returns of 1.38% and 2.41%, 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

  • Energy was the fund’s top performer +3.6%, as oil prices continue to rise, coupled with strong positive earnings for Occidental Petroleum, which posted a return of 9.0%
  • Surprisingly, given the strong risk-on environment, REITS helped performance, posting a total return of 5.3%, as all of our REIT investments posted strong positive returns.
  • Health Care contributed positively to performance, posting a 2.2% return, driven by AstraZeneca and GlaxoSmithKline, with total returns of 3.5% and 2.0%, respectively.

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

Performance Detractors

  • High yield, low beta and high quality all underperformed during the month, which challenges a high-yield dividend strategy.
  • The increasing 10-year Treasury rate, which peaked at 3.07% during May, has placed price pressure on Telecomm, Utilities and Staples, creating a short-term headwind.
  • The fund’s 29% average international exposure detracted from performance as the international holdings posted a return of -2.0%.  Vodafone was the largest detractor declining 12.4% as shares fell after the company announced a CEO change which overshadowed positive earnings.

How We Are Positioned

Stocks started strong but struggled home in May, still rising on the month even as worries about Italy, trade and emerging markets weighed on investors. Led by a robust month for Technology, the S&P 500 closed up 2.2%, its best month since January, lifting it into positive territory year-to-date (YTD). Nasdaq jumped 5.3%, bringing its YTD gain to 7.8%. And the Dow rose 1% but was still down on the year. Globally, the MSCI World Ex-US Index slipped 2% as data out of Europe softened and “Italexit” entered the lexicon.

In the U.S., May jobs surprised to the upside, with broad-based gains across industries, more hints of wage growth and a 3.8% unemployment rate, matching the lowest since Neil Armstrong walked on the moon. Regional and national manufacturing gauges notably strengthened, consumer spending perked up after an early spring lull, construction spending surprised led by increasing residential activity and consumer confidence held near multi-decade highs. The only real negative was a slowdown in home sales, as the headwinds of rising prices, higher mortgage rates and limited supply discouraged buyers.

Overseas, Europe’s expansion slowed as sentiment weakened and manufacturing activity decelerated, with growth in Germany’s vast factory sector hitting a 15-month low. The possibility of a populist, anti-euro government in Italy also weighed on the markets late in the month, although concerns about political continuity in that country are hardly new—Italy has had five presidents the past six years. Rising interest rates and a stronger dollar also weighed on emerging markets, offsetting to some extent the benefits of rising global demand for oil and other resources.

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 fund to provide investors with the opportunity for a high dividend yield complemented with dividend growth. That dividend growth may help the fund both sustain its high yield and outpace inflation. Furthermore, stocks that consistently pay and increase their dividends tend to have lower volatility, as reflected in the fund’s beta of .59 (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.