Federated Strategic Value Dividend Fund (IS) SVAIX
New month, same story: Stocks ground higher again in March on a continuing stream of data indicative of modest economic strengthening and on Federal Reserve Policy that remains fully accommodative. Washington abetted the upward move – or at least didn’t deter it – by pushing potential fiscal showdowns down the road.
It wasn’t a great month, economically speaking. Regional and state-wide manufacturing surveys across the US indicated manufacturing’s expansion was choppy. Consumer confidence and sentiment gauges plunged, seemingly on concerns about the $85 billion in sequester spending cuts. Home sales slowed. Overseas, markets also experienced turbulence as a bailout of Cypriot banks forced large depositors and bondholders to take significant haircuts. This stoked contagion fears, as well as concerns that the Eurozone’s contraction may worsen, particularly among struggling southern-tier members.
But for every negative, there seemed to be a positive. Consumer spending, as measured by personal consumption, core retail, and auto sales, was relatively robust, with annualized vehicle sales near a four-year high. Manufacturing activity in the aggregate remained solid, with future orders on the rise. In Europe, German retail sales unexpectedly rose a second straight month, suggesting the EU’s dominant economy could be improving, and Cypriot banks reopened to relative calm after a nearly two-week hiatus.
As for housing, the primary factor behind slowing US home sales was a lack of available supply – a supply-demand imbalance that served to accelerate the rise in home prices, which based on the Case-Shiller gauge, are increasing at their fastest pace in nearly seven years. This bodes well not only for future home sales and construction as higher prices carry over to household finances and demand, but also for related spending on building supplies, furnishings, and appliances.
Performance & Strategy
The Federated Strategic Value Dividend Fund completed the first quarter of 2013 with the same dedicated focus that it has always had of achieving its income-based objectives for its investors. The fund’s weighted average dividend yield was 4.5% at the end of the quarter, outpacing both the broad-market S&P 500 Index (2.1% yield) and the Dow Jones Select Dividend Index (3.8% yield), which endeavors to represent the US dividend-paying universe. The fund also had a 30-day SEC yield of 2.9% for Class A shares. In addition to its high yield, the Federated Strategic Value Dividend Fund aims to provide dividend growth. Of its 38 holdings, the fund experienced 7 dividend increases in the first quarter. The largest of the increases came from General Mills, Inc., which raised its dividend by 15.2% in March. Coca-Cola Co. had the second largest dividend increase, bumping its distribution up by 9.8%. The fund did experience a dividend cut from CenturyLink, Inc. when the company’s management team unexpectedly chose to pursue a different capital allocation strategy. Following the announcement of the dividend cut, CenturyLink, Inc. was sold out of the fund, since it was no longer supportive of a dividend-based investment strategy.
Through the first quarter, the fund provided a total return of 9.2% to its investors (Class A shares at net asset value). During the same time frame, the S&P 500 Index returned 10.6% and the Dow Jones Select Dividend Index returned 11.8%. Equities began the year in rally mode, which persisted throughout the quarter as the broad market kept advancing, led by small cap stocks. Even though the fund did not invest in small cap stocks (it prefers to invest in large, high quality, low beta stocks), it still participated in almost all of the market’s upside during the quarter. The fund’s Health Care and Consumer Staples holdings showed the strongest performance during the period, returning 14.7% and 14.5% respectively. Bristol-Myers Squibb Co. was the best performer within Health Care (27.7% return) due to investor enthusiasm in their product pipeline and H.J. Heinz Co. (25.7% return) led the way among Consumer Staples holdings following the buyout offer from Warren Buffett and 3G Capital. The fund also benefitted from its absence in the broad market’s worst performing sectors, Information Technology and Materials. The fund did not have any investments in these sectors since they typically contain cyclical, dividend-unfriendly stocks that do not align with an income-oriented investment strategy.
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.
Energy was the sole sector where the fund’s holdings registered a negative return on the quarter (-0.7%). The fund’s three foreign holdings within Energy lagged as investors preferred US holdings to foreign holdings. However, it should be noted that each of these three well-established, global, integrated oil companies had attractive dividend yields of 5.15% (BP PLC), 5.18% (Royal Dutch Shell PLC) and 5.37% (Total SA). Another factor that partially offset the fund’s quarterly gains was the negative investor reaction to CenturyLink, Inc.’s dividend cut and strategic change of direction. CenturyLink, Inc. returned -15.6% before its sale, making it the worst performing stock for the fund’s first quarter.
Click the Portfolio Characteristics tab for the fund’s top 10 holdings.
As the newsflow and commotion swirl regarding whether the market will continue its upward surge, the Federated Strategic Value Dividend Fund remains devoted to achieving its objectives to provide its investors with a high and growing income stream. In order to do this, the fund seeks to invest in financially-strong companies that have both the ability and the inclination to pay a high and rising dividend to their shareholders. Companies that fit into this mold tend to be global, well-established firms that can generate solid cash flows in both good and bad economic times. These investments typically rise with market upswings (possibly at a slower rate) and provide downside protection in an environment of falling prices. The fund’s low beta of 0.53 (3 year monthly-linked Wilshire calculated beta vs. the S&P 500 Index) reflects its investments in such stocks. We believe the fund also appears to be positioned to achieve superior long term total returns for its investors, since dividend yield and dividend growth have historically been the primary drivers of total returns in equities. Altogether, the Federated Strategic Value Dividend Fund seeks to provide investors of all ages with an option that may provide a multitude of benefits including income generation, capital preservation, and positioning for superior long-term total returns.