Federated Strategic Value Dividend Fund (IS) SVAIX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Value
As of 12-31-2016

Market Overview

The post-election equity rally that began immediately after November 8’s Republican sweep carried over into December, with all major indexes—Dow, S&P 500, Nasdaq and Russell 2000—closing significantly up for the month despite a pullback in the year’s waning days. The large-stock Dow Jones Industrial Index had the best December run of the four indexes, rising nearly 4%, while the Russell 2000 had the best year, up nearly 20%.

Lifting the market’s spirits were expectations for a business-friendly Washington under President-elect Donald Trump and a GOP Congress. While the speed and magnitude of change remain to be seen, economic and investment analysts have been revising up forecasts for GDP and earnings growth for 2017 and beyond, citing a “Trumponomics” agenda of tax cuts and reform, regulatory relief and infrastructure spending.

U.S. stocks also got a boost from a rash of relatively robust December data. A range of consumer and business sentiment gauges soared, led by the Conference Board Consumer Confidence Index reaching a 15-year high. Manufacturing and services activity picked up, oil prices held well above $50 a barrel and the final read on real gross domestic product (GDP) growth came in at an above-consensus 3.5% for the third quarter, its best showing in two years.

Not all was bright. While ok, consumer spending was hardly surging as the holiday season got into full swing. Housing’s momentum came under pressure as mortgage rates shot up on both the post-election spike in bond yields (although yields did retrace toward month’s end) and the Federal Reserve’s decision to raise the target funds rate and signal as many as three more hikes in 2017. A stronger dollar presented headwinds to the stronger economic and earnings growth scenarios.

Fund Performance and Strategy

Federated Strategic Value Dividend Fund remained unwaveringly focused on providing investors with a high and rising income stream from high-quality business assets. The fund ended the year with a 30-day SEC yield of 2.7% (A Shares at Maximum Offering Price) and a gross weighted average dividend yield of 4.1%, significantly higher than both the S&P 500 (2.1%) and the Dow Jones Select Dividend Index (3.5%), which aims to represent the domestic dividend-paying universe.  It also bested the yield of the 10-year Treasury (2.45%), which experienced a notable increase recently. In addition to its high yield, the 40-stock portfolio experienced 37 dividend increases from 33 holdings during 2016, including 11 in the fourth quarter. Some of the more notable dividend raises during the quarter came courtesy of Abbvie (12.3%), Dominion Resources (7.9%), and Crown Castle (7.3%).

For the full year, the fund posted a total return of 10.4% (A Shares at net asset value). The fund posted a total return of -1.3% (A Shares at net asset value) for the fourth quarter. During the same time period, the Dow Jones Select Dividend Index produced a total return of 4.1% and the S&P 500 Index had a total return of 3.8%. The unexpected election results coupled with the rate hike in December triggered a strong “risk-on” trade as high-beta investments dominated investor preferences.  In fact, when quintiling the S&P 500, high beta notably outperformed low beta by 10.5%.  From a sector perspective, Financials was the top performer in the broad market, followed by the cyclical sectors of Energy and Industrials.  The Financials sector surged (posting a 21.1% return for the quarter) on investor optimism that financial institutions may be a beneficiary under a Trump presidency due to the potential for lower corporate taxes and deregulation.   Industrials and Energy advanced in response to Trump’s rhetoric on infrastructure spending, which has the potential to improve earnings in these areas. 

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.

The pronounced cyclical tilt of the market proved to be the greatest headwind to the fund, as the largest detractors to absolute performance were REITs, Utilities and Health Care, posting returns of -7.9% , -3.9% and -2.8%, respectively.  Defensive sectors such as REITS and Utilities have come under near-term price pressure associated with the strong “risk-on” trade and the rate hike in December.  The Health Care sector has been constrained by uncertainty surrounding the prospect of drug pricing regulation.

The fund’s international exposure has been a further drag on performance as the British pound declined 4.9% for the quarter.   This put pressure on National Grid and Vodafone, which declined 11.4% and 8.1% in the local market.  We continued to believe that both are highly supportive of an income-oriented investment strategy as evidenced by their dividend yields of 4.6% and 6.2%, respectively, and their long history of consecutive dividend payments.

In contrast, Energy and Consumer Discretionary contributed positively to performance, posting returns of 8.5%, and 8.6%, respectively. Energy benefitted from the improvement in oil prices and OPEC’s pledge to cut production beginning January 1, 2017.   The fund’s sole Discretionary holding, McDonalds, returned 8.6% as strong third quarter results continued through the end of the year, driven by the success of All Day Breakfast and the introduction of Chicken Nuggets with no artificial preservatives.   Additional names that have contributed notably to the quarterly performance are Reynolds American +14.1%, Altria +7.9%, AT&T +6.0% and Verizon +3.9%.

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

Our investment style remained focused on high-quality assets with the potential to deliver a high and rising income stream. Historically, dividend yield and dividend growth have been the primary drivers of total return. In addition, consistent dividend-paying and dividend-growing stocks have displayed considerably less volatility than the broader market—as reflected in the fund’s beta of 0.63 (Wilshire three-year beta versus the S&P calculated using the monthly return).