Federated Strategic Value Dividend Fund (IS) SVAIX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Value
As of 06-30-2014

Market Overview

June was a lot like May, with the U.S. equity market again setting new highs. Signs of a strengthening recovery mounted, with business and housing activity up sharply from a weather-worn first quarter that, according to the government’s final take, saw GDP shrink a much worse-than-expected 2.9%. The markets all but ignored that report, focusing instead on a slew of new data that appeared to show the economy on track to grow at its fastest pace of the post-recession era, with forecasts predicting real GDP to expand at 3%-plus rate in the year’s final three quarters.

On the employment front, payroll gains came in above 200,000 a fourth straight month, the first time that’s happened in 14 years. In manufacturing, various regional and national gauges suggested spring’s bounce was accelerating. The Michigan and Conference Board surveys showed consumers’ confidence continuing to climb, though outside of robust auto sales, overall consumer spending has been weak. Perhaps most notable, new and existing home sales spiked, as did the forward-looking pending sales index. Combined with rising starts and builder confidence, the data indicate housing may become a significant contributor to the recovery again after being a missing ingredient for much of it.

There were sniffs of inflation as oil and gas prices rose over concerns in the Mideast and Ukraine, food prices jumped on weather- and disease-related issues, and wages began exhibiting an upward bias. Still, the Federal Reserve was dismissive of any inflation threat after the mid-June meeting, where policymakers signaled plans to stay accommodative for a long time. This view was reinforced by the Treasury market, where 10-year yields traded in a narrow 2.50%-2.60% range for much of June. The equity market also appeared rather blasť about it all as volatility continued to hover around multi-year lows.

Performance & Strategy

Regardless of the commotion that occurs in the economy or stock market, Federated Strategic Value Dividend Fund’s principles remain unchanged as it continues to focus on providing investors with a high and rising income stream while also targeting lower downside risk. The fund finished the quarter with a 30-day SEC yield of 2.9% and a gross weighted average dividend yield of 4.1%. The fund’s yield not only exceeded the yield of the Dow Jones Select Dividend Index(3.4%), a proxy of the domestic dividend-paying universe, as well as the S&P 500 Index (2.0%), but it continues to be greater than the 10-Year U.S. Treasury bond (2.5%). Regarding dividend growth in the second quarter, there were 12 dividend increases, with Williams Companies increasing its dividend twice in the period. Williams Companies increased their dividend in May by 5.6% and again in June by 31.8% for its third increase this calendar year, generating an impressive 47.4% increase year-to-date. Procter and Gamble and Chevron, both having paid consecutive dividends for more than 100 years, also announced notable increases during the quarter, each raising their dividends by 7%. For the trailing 12 months, 35 companies within the portfolio raised their dividends, accounting for 38 increases overall. Of the 39 stocks in the portfolio, 79% have paid consecutive annual dividends for the past 20 years, 74% have paid consecutive dividends for the past 30 years, 69% have for the past 50 years and 18% have done so for the past 100 years! The investments in the portfolio also have a strong history of increasing their dividends, as 49% have increased their dividends each year for the past 10 years, 33% have raised dividends each year for the past 20 years, 26% have done so for the past 20 years and 8% have commendably done so each year for the past 50 years.

Federated Strategic Value Dividend Fund posted an impressive total return of 8.5% (Class A Shares at net asset value) for the quarter, outperforming both the Dow Jones Select Dividend Index (5.9%) and also the S&P 500 (5.2%). In a continuation of May’s performance, the broad market repeatedly hit record highs in June, tempting investors to take greater risks that further perpetuated a low-quality, cyclical-led rally. Of note, when quintiling the S&P 500 Index for the quarter, small caps outperformed large caps by 1.2% and low quality outperformed high quality by 4.5%. Other market signals were rather mixed, indicating that some investors were still cautious about the market, as long-term Treasury bonds kept pace with the S&P 500 Index and high yield outperformed low yield by 1.7% in the broad market. The mixed-factor performance continued to signal that some investors remained wary of the market, regardless of the record highs repeatedly achieved over the period. Of interest, the best-performing sectors in the broad market were the dividend-friendly sectors, Energy and Utilities posted returns of 12.1% and 7.8%, respectively. The laggards in the broad market were the Financials (2.3%) and Consumer Discretionary (3.5%) sectors where scant dividend opportunity exists.

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.

The portfolio posted strong positive returns across all sectors, generating the highest returns in Energy (19.1%) and Consumer Staples (8.9 %). The top-performing investments were William Companies and ConocoPhillips posting remarkable returns for the quarter of 44.8% and 22.9%. Williams Companies performance was driven by a deal to expand its stake in Access Midstream Partners and its subsequent dividend increase. ConocoPhillips, among the fund’s other Energy investments, benefited from rising commodity prices associated with unrest in the Middle East.

The portfolio’s international investments positively contributed to performance, as collectively the foreign holdings returned 9.6% for the quarter. This was driven by the fund’s French and U.K. investments, which returned 11.3% and 9.5%, respectively.

The only notable negative performance in the quarter was found in Bristol-Myers-Squibb and Vodafone, posting returns of -6.0% and -5.4%, respectively. In each, both stocks gave back modestly on strong gains realized in the prior year.

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

Whether or not the market continues its upward surge, Federated Strategic Value Dividend Fund remains devoted to achieving its goals to provide its investors with a high and growing income stream from low volatility assets. As a result, Federated Strategic Value Dividend Fund seeks to position its clients to achieve compelling long-term total returns while providing natural lower downside risk as evidenced by the portfolio’s low beta of 0.48 (Wilshire three-year beta versus the S&P 500 calculated using the monthly return). So whether an investor is looking for dependable dividend income that increases, a way to achieve superior long-term returns or a strategy that largely abstains from the cyclicality of the market, Federated Strategic Value Dividend Fund presents a worthwhile opportunity.

Key Investment Team

Senior Portfolio Manager, Head of Strategic Value Team
Senior Portfolio Manager
Portfolio Manager

 
 
 
 
 
 
 
 
 
 
 

The dividend yield represents the average yield of the underlying securities within the portfolio. The average yield is a weighted average calculated by assigning a weight to each of the underlying securities in the portfolio based upon the portion of total assets of the portfolio each underlying security represents.

Mutual funds are subject to risks and fluctuate in value. Click on Performance for fund specific risks.
This material must be preceded or accompanied by a prospectus.

For additional information, including definitions of related terms and indexes, see the Financial Glossary and Benchmark Index Glossary.

If this is distributed in hard copy, it must be accompanied by a copy of the Performance tab.

Federated Securities Corp., Distributor
Copyright © 2014 Federated Investors, Inc.

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