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ederated
Finding Your
Way Through
the Bond Market
Federated Fixed-Income Capabilities
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK GUARANTEE
40515_text 6/10/2016 8:47 AM Page 1
Fixed-Income Investments
Investors are living in an uncertain world
Consider Greece. Or Russia. Or even Japan. Every few months, it seems,
geopolitical tensions and economic stumbles
arise in this part of the world or that, raising questions about the
stability of specific countries and entire regions.
Or consider interest rates, despite rising public debt and an
expanding
economy—factors that historically have put upward pressure on
interest rates—they have remained relatively low across the yield curve.
Or consider U.S. stocks. Even though the carnage of the past decade is
behind them—the S&P 500, the Dow and the Nasdaq have all set new highs
unconvinced as many domestic equity
mutual funds continue to experience net outflows.
In this seemingly skittish environment, today’s bond market offers
a broad array of opportunities to meet what many individual
—retail investors appear
investors may be looking for—a place to invest their money that may be relatively
less volatile than other asset classes.
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Benefits of having bonds in a portfolio
Bonds may reduce risk.
Generally, bonds don’t move in tandem with stocks, so they may reduce
the overall risk of an investment portfolio. That makes bonds an important
diversification tool.
In Periods of Stock Market Decline of 15% or More, Bonds Outperformed
Source: Morningstar, Inc.
Past performance is no guarantee of future results. This chart is for illustrative purposes only and is not representative
of performance for any specific investment.
Stocks are represented by the S&P 500 Index. Bonds are represented by the Barclays U.S. Aggregate Bond Index.
Bonds may provide a regular source of income.
Virtually all of the interest income received by a bond portfolio is distributed
to shareholders each month. That’s real income that investors
can use or reinvest.
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Diversification does not assure profit nor protect against loss.
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Bonds have the potential for less volatility.
The worst declines in bonds were modest compared to the worst doubledigit drops in stocks over the past 15 years.
In addition, bond portfolios may hold dozens or even hundreds of securities
of differing maturities, credit quality and market sectors. As a result of
this diversification, the effect of one bond’s loss in value on the entire
portfolio is not nearly as great as it would be for an investor who held
only a single bond.
Bonds Less Volatile Than Stocks
40%
30%
Total Return (%)
11.63%
10%
-10%
26.47%
21.03%
20%
0%
32.37%
28.67%
-0.82%
15.78%
10.87%
8.44%
10.25%
-11.88%
15.08%
6.97%
4.91%
4.10%
4.34%
2.43%
4.33%
2003
2004
2005
2006
5.24%
5.49%
13.66%
7.84%
5.93%
6.54%
2.09%
1.38%
15.99%
5.97%
4.22%
0.55%
-2.02%
-9.10%
-20%
-22.09%
-30%
-40%
1999
2000
2001
2002
2007
-36.99%
2008
2009
2010
2011
2012
2013
2014
2015
Source: Lipper, Inc. (12/31/98-12/31/15)
Past performance is no guarantee of future results. This chart is for illustrative purposes only and is not
representative of performance for any specific investment.
Stocks are represented by the S&P 500 Index. Bonds are represented by the Barclays U.S. Aggregate
Bond Index.
Bonds can deliver tax benefits.
Income from municipal bonds is exempt from federal taxes, and for
individuals who live in the same state as the agency issuing the bond,
the income may be exempt from their state income tax, too. Some bonds
also pursue interest income that is exempt from the federal alternative
minimum tax (AMT).
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Seeking income in more ways
Through the creation and use of a growing set of products and strategies
to meet investors’ varying needs, today’s bond market is ever-changing
and complex.
There are ultrashort bond funds1 that offer a place for investors to park cash
and potentially receive a return; government and government-backed mortgage
bonds that offer the potential to outpace future inflation while generating
current income; municipal bonds that offer tax advantages; corporate bonds that
offer a way to participate in the private sector with potentially less risk than with
stocks; and multi-sector, high-yield and emerging-market bonds that carry more
risk for the potential benefit of higher income and appreciation.
Bonds Offer Various Returns With Different Risks2
1
Ultrashort bond funds are not “money market” mutual funds. A money market mutual fund attempts to
maintain a stable net asset value through compliance with relevant Securities and Exchange Commission
(SEC) rules. Ultrashort bond funds are not governed by those rules, and their shares will fluctuate in value and
loss of principal is possible.
2
Without regard to changes in interest rates of the bond market.
Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.
High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks, and may be
more volatile than investment-grade securities.
International investing involves special risks, including currency risk, increased volatility, political risks
and differences in auditing and other financial standards. Prices of emerging markets securities can be
significantly more volatile than the prices of securities in developed countries and currency risk and
political risks are accentuated in emerging markets.
The value of some mortgage-backed securities may be particularly sensitive to changes in prevailing interest
rates, and although the securities are generally supported by some form of government or private insurance,
there is no assurance that private guarantors or insurers will meet their obligations.
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Making sense of the bond market
In such a wide-ranging market, it can be difficult for investors to understand
all of their options and gain access to valuable opportunities. Interest-rate
changes, yield-curve uncertainties, domestic and global economic conditions
and other variables can further complicate matters.
That is why successful fixed-income management demands a flexible
approach that can effectively navigate a complex marketplace—together
with substantial resources and experience—to uncover opportunities
that add value.
Learn more about Federated’s distinctive approach to providing investors
with the ability to weather the market’s ups and downs with a broad range
of fixed-income solutions.
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An experienced team
Alpha Pod Team Chairs
Federated’s approach to managing fixed-income portfolios is guided
by the experience and insight of our fixed-income investment team,
with more than 38 portfolio managers averaging 25 years of experience.
A disciplined investment process
MARK DURBIANO
Sector Allocation
We employ a disciplined investment process that’s transparent, repeatable
and focused on creating the best balance between risk and reward.
Federated’s fixed-income management team assembles each portfolio
bond by bond. Our fundamental research puts us in close contact with
bond issuers across market sectors, and our quantitative portfolio teams
have the experience to evaluate them.
DON ELLENBERGER
Yield Curve Strategy
R.J. GALLO
Duration Management
IHAB SALIB
Currency Management
6 Federated
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Follow the “pods”
In managing fixed-income portfolios, Federated seeks the balanced application of critical decision-making
tools or, as we refer to them, alpha pods.
Alpha pods are built around five crucial factors in bond fund strategy:
duration management, sector allocation, yield curve strategy,
currency management and security selection.
We isolate and approach the pods as separate management decisions—each headed by a different
member of our fixed-income team—with a goal of generating maximum alpha, or return, from each
pod. Individual pod decisions are then incorporated into the portfolio-building process.
The objective is to extract alpha from each stage of the decision-making process, using a diversified
source of alpha generation that is not reliant on any one major factor or one particular point in the
economic cycle. This approach, which is abetted by team members who have worked together for
years, creates a dynamic that encourages portfolio managers, analysts and traders to interact and engage
in the security evaluation and selection. This collaboration encourages the best thinking of our
experienced professionals, enhancing their ability to help investors meet their goals of preserving
and growing their wealth.
Proprietary research is critical to virtually all of our investment decisions. Research analysts gather and
interpret data using models developed and honed over decades. Working closely with portfolio managers,
they provide a constant stream of financial analysis and insight that is used to help build portfolios that seek
attractive returns at appropriate levels of risk.
Security Selection
▼
Currency Management
▼
Yield Curve Strategy
Based on an evaluation of security categories that the team believes can
deliver the most reward for the amount of risk taken.
▼
Sector Allocation
The measure of a security’s particular sensitivity to interest-rate changes.
A key determinant in how the fixed-income team structures their portfolios
is based on how they believe the interest-rate yield curve may reshape.
▼
Duration Management
The team seeks to exploit inefficiencies in currency values, interest rates
and market trends to maximize performance in our bond portfolios.
▼
Taxable Fixed-Income Decision Tools
Decisions are made only after an intensive, fundamentally focused review
of every potential holding.
Alpha measures a fund’s risk-adjusted performance. It represents the difference between a fund’s actual returns and its expected performance,
given its level of risk. A positive value for alpha implies that the fund has performed better than would have been expected given its volatility.
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Federated’s time-tested approach
Building diversified portfolios through disciplined processes and
proprietary fundamental research has long been Federated’s calling
card. Our time-tested approach to fixed-income management and
the ability of our experienced portfolio managers, analysts and traders
to successfully navigate tumultuous credit markets have proven
beneficial to our clients. The fact that Federated fixed-income
portfolios were managed through the credit crisis with a relatively
low tracking error to the major indexes is testimony to our
commitment to both monitor and seek to reduce risk for our clients.
8 Federated
40515_cover 6/10/2016 8:41 AM Page 1
ederated
Finding Your
Way Through
the Bond Market
Federated Fixed-Income Capabilities
ederated
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
40515 (6/16)
Federated Securities Corp., Distributor
Federated is a registered trademark of
Federated Investors, Inc.
2016 ©Federated Investors, Inc.
Investors should carefully consider the fund’s investment objectives, risks,
charges and expenses before investing. To obtain a summary prospectus
or prospectus containing this and other information, contact us or visit
FederatedInvestors.com. Please carefully read the summary prospectus
or prospectus before investing.
Past performance is no guarantee of future results.
Duration is a measure of a security’s price sensitivity to changes in interest rates. Securities with
longer durations are more sensitive to changes in interest rates than securities of shorter durations.
Diversification does not assure a profit nor protect against loss.
Barclays U.S. Aggregate Bond Index is an unmanaged index composed of securities from the Barclays
U.S. Government/Corporate Bond Index, the Mortgage-Backed Securities Index and the Asset-Backed
Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market capitalization.
Investments cannot be made directly in an index.
S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure
performance of the broad domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK GUARANTEE
To learn more about fixed-income investments call 1-800-341-7400
or visit FederatedInvestors.com.
40515_cover 6/10/2016 8:41 AM Page 1
ederated
Finding Your
Way Through
the Bond Market
Federated Fixed-Income Capabilities
ederated
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
40515 (6/16)
Federated Securities Corp., Distributor
Federated is a registered trademark of
Federated Investors, Inc.
2016 ©Federated Investors, Inc.
Investors should carefully consider the fund’s investment objectives, risks,
charges and expenses before investing. To obtain a summary prospectus
or prospectus containing this and other information, contact us or visit
FederatedInvestors.com. Please carefully read the summary prospectus
or prospectus before investing.
Past performance is no guarantee of future results.
Duration is a measure of a security’s price sensitivity to changes in interest rates. Securities with
longer durations are more sensitive to changes in interest rates than securities of shorter durations.
Diversification does not assure a profit nor protect against loss.
Barclays U.S. Aggregate Bond Index is an unmanaged index composed of securities from the Barclays
U.S. Government/Corporate Bond Index, the Mortgage-Backed Securities Index and the Asset-Backed
Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market capitalization.
Investments cannot be made directly in an index.
S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure
performance of the broad domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK GUARANTEE
To learn more about fixed-income investments call 1-800-341-7400
or visit FederatedInvestors.com.