Federated Strategic Value Dividend Fund (A) SVAAX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Value
As of 06-30-2016

Market Overview

The U.K., through its referendum to exit the European Union (EU), dropped a Brexit bombshell on unsuspecting markets in late June, causing volatility to spike, stocks to plunge and U.S. Treasury yields to fall to near record lows. Just as quickly, however, the markets turned, with panic trading giving way to more reasoned analysis that seemed to dismiss much of the immediate worry over the U.K.’s eventual exodus from the EU—a protracted process that if not reversed will take years to carry out. In the end, a rally in the final three days of June left the Dow and S&P 500 up for the month and the second quarter and not far off their all-time highs. Bond yields, by comparison, moved little in the month’s final days and held near record lows.

To be sure, much uncertainty remains about Brexit and its impact, not only regarding the U.K. but also the rest of Europe. Near-term, downside risks include fluctuating currencies and policy unknowns, both of which may threaten business investment and profit growth. But the biggest risk may be to the cohesion of the EU where, as in the U.S., populist anti-globalization and anti-immigration forces also are stirring political turmoil in countries such as in Spain, Italy and France.

Limited direct spillover from Brexit is expected in the U.S., where exports to the U.K. are a fraction of gross domestic product (GDP). While the British pound fell sharply following the surprise vote, its impact on the trade-weighted dollar was limited, easing worries that the dollar’s moderation of the past six months may reverse and damage both economic and profit growth. As for the U.S., GDP growth has perked up from the first quarter’s subpar 1.1% annual pace on improvements in housing, inventories and consumer spending. But manufacturing continues to struggle and payroll gains have slowed amid demographic challenges such as retiring baby boomers and signs some companies were struggling to find qualified workers.

Policy uncertainty also continues to weigh on business confidence and spending, not just because of Brexit, but also because of a U.S. presidential election between two polarizing candidates whose campaigns are set to shift into high gear with this summer’s nominating party conventions. On the plus side, the futures markets now think the combination of uncertainty, a slowing labor market and Brexit will keep the Federal Reserve (Fed) at bay through the end of the year and into 2017, continuing a low-rate/low-yield environment that’s generally favorable for stocks.

Fund Performance

Notwithstanding the heightened volatility surrounding the market over Brexit, the upcoming U.S. election, and the Fed’s future decision on rate hikes, Federated Strategic Value Dividend Fund remains focused on its goals of obtaining a high and rising income stream as it ended the month with a 30 day SEC yield of 2.7% (Class A Shares at Maximum Offering Price) and a gross weighted average yield of 3.74%.  The portfolio’s yield exceeded that of the broad market represented by the S&P 500 (2.17%), the 10 year U.S. Treasury Note (1.49%) and even the Dow Jones Select Dividend Index (3.37%), which aims to represent the domestic high-dividend-paying universe.  Enhancing the portfolio’s high yield, the portfolio experienced robust growth in the second quarter as seven holdings raised their dividend.  The most notable increases came courtesy of Johnson & Johnson, Unilever and General Mills, which raised their dividend payments by 6.7%, 6.0% and 4.3%, respectively. This was the second increase for General Mills this calendar year, as the company also increased in March, for a cumulative increase of 9.1%.  Additionally, GlaxoSmithKline declared a special cash distribution, valued at 20 Great Britain pounds per share, or approximately $0.58 per share, payable on May 15, 2016. Looking at a longer time frame, 30 companies within the portfolio raised their dividends, accounting for 34 increases overall in the trailing 12-months.

For the second quarter of 2016, the fund posted a total return of 6.74% (A Shares at net asset value) outperforming both the S&P 500 (2.46%) and also the Dow Jones Select Dividend Index (5.40%).  This brings the fund’s year-to-date return to 15.23 % (A Shares at net asset value).  Factor performance for most of the quarter was mixed, but the unexpected Brexit vote caused a stampede into safe, defensive havens as high-yield and low-beta performance surged.  Consequentially, the top performers in the broad market after Energy (+11.6%) were the defensive, dividend-friendly Telecom Services (+7.1%) and Utilities (+6.8%).  Those sectors posting negative returns in the S&P 500 Index were Information Technology (-2.9%) and Consumer Discretionary (-0.9%).

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 fund’s top-contributing sector was Consumer Staples, producing a return of 7.0% (notably higher than the S&P 500 Index holdings of 4.5%).  This outperformance was driven by double-digit returns in General Mills (+13.4%), Kraft Heinz (+13.4%), and Altria (+11.0%).  Energy (+13.4%) also helped performance as the portfolio benefitted from the highest increase in U.S. crude gains in two months, climbing more than 4% after the Brexit rebound.  The portfolio’s top performer for the quarter, BP, posted a notable return of 18.6%.  The portfolio’s performance was further enhanced by the strong performance in Health Care (+8.7%), as every holding posted strong positive performance, led by Johnson and Johnson (+12.9%), Merck (+9.8%) and Abbvie (9.4%).

Consumer Discretionary was the only sector to post a negative return (-3.5%); as its sole holding, McDonalds, gave back modestly on previous gains associated with promotional activity.  Other investments to post negative returns included Omega Healthcare, (-2.2%), Coca Cola (-1.5%), and Vodafone (-0.9%).  In association with Brexit, the British pound declined 7%, creating some currency headwind for the portfolio.  However, the fund’s U.K. investments are large, defensive, multi-national companies, such as Unilever and GlaxoSmithKline, which derive their revenue streams from around the globe.  As a result, our non-U.S. investments also benefitted from the flight to safety and finished the quarter with an average positive return of 5.5%.

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

The importance of investing in high-quality, non-cyclical, mature companies is highlighted in this current period of turmoil. As reflected in the portfolio’s beta of just 0.67 (Wilshire 3-year beta versus the S&P calculated using the monthly return), high-quality, dividend-paying companies typically have experienced notably less volatility than stocks whose returns are solely reliant on their stock prices.   We believe that the portfolio’s slow and steady investment strategy presents a compelling investment option that can address a diverse range of ages and investment needs.