United States
Securities and Exchange Commission
Washington, D.C. 20549
Form N-CSR
Certified Shareholder Report of Registered Management Investment Companies
811-3387
(Investment Company Act File Number)
Federated U.S. Government Securities Fund: 2-5 Years
_______________________________________________________________
(Exact Name of Registrant as Specified in Charter)
Federated Hermes Funds
4000 Ericsson Drive
Warrendale, Pennsylvania 15086-7561
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
Peter J. Germain, Esquire
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
(Notices should be sent to the Agent for Service)
Date of Fiscal Year End: 01/31/20
Date of Reporting Period: 01/31/20
| Item 1. | Reports to Stockholders |
Annual Shareholder
Report
January 31, 2020
| Share Class | Ticker | R | FIGKX | Institutional | FIGTX | Service | FIGIX |
Federated U.S. Government
Securities Fund: 2-5 Years
Fund Established 1983
IMPORTANT NOTICE
REGARDING REPORT DELIVERY
Beginning on January 1,
2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund's shareholder reports like this one will no longer be sent by mail, unless you specifically request paper
copies of the reports from the Fund or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report
is posted and provided with a website link to access the report.
If you already elected
to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by contacting your financial intermediary (such as a broker-dealer or bank); other shareholders may call the Fund at 1-800-341-7400, Option 4.
You may elect to receive
all future reports in paper free of charge. You can inform the Fund or your financial intermediary that you wish to continue receiving paper copies of your shareholder reports by contacting your financial intermediary
(such as a broker-dealer or bank); other shareholders may call the Fund at 1-800-341-7400, Option 4. Your election to receive reports in paper will apply to all funds held with the Fund complex or your financial
intermediary.
Not FDIC Insured ■ May Lose Value ■ No
Bank Guarantee
J. Christopher
Donahue
Donahue
President
Federated U.S. Government
Securities Fund: 2-5 Years
Letter from the
President
Dear Valued
Shareholder,
I am pleased to present
the Annual Shareholder Report for your fund covering the period from February 1, 2019 through January 31, 2020. This report includes Management's Discussion of Fund Performance, a complete listing of your fund's
holdings, performance information and financial statements along with other important fund information.
In addition, our website,
FederatedInvestors.com, offers easy access to valuable resources that include timely fund updates, economic and market insights from our investment strategists, and financial planning tools.
Thank you for investing
with us. I hope you find this information useful and look forward to keeping you informed.
Sincerely,
J. Christopher Donahue,
President
Management's Discussion
of Fund Performance (unaudited)
The total return of
Federated U.S. Government Securities Fund: 2-5 Years (the “Fund”), based on net asset value for the 12-month reporting period ended January 31, 2020, was 4.75% for Class R Shares, 5.52% for Institutional
Shares and 5.27% for Service Shares. The 5.52% total return of the Institutional Shares for the reporting period consisted of 2.33% in taxable dividends and 3.19% of price appreciation in the net asset value of the
shares. The ICE BofAML 3-5 Year US Treasury Index (BAML3-5T),1 the Fund's broad-based securities market index, returned 6.24% during the same period. The total return of the Morningstar
Short Government Funds Average (MSGFA),2 a peer group average for the Fund, was 3.61% during the same period. The Fund's and the MSGFA's total returns for the most
recently completed fiscal year reflected actual cash flows, transaction costs and other expenses, which were not reflected in the total return of the BAML3-5T.
During
the reporting period, the Fund's investment strategy focused on: (a) duration3 (i.e., the price sensitivity of the portfolio to changes in interest rates); (b) yield curve positioning (i.e., selection of
similar securities with different maturities); and (c) security and sector selection (i.e., allocation of the portfolio among securities with similar issuers). These were the most significant factors affecting the
Fund's performance relative to the BAML3-5T.
The
following discussion will focus on the performance of the Fund's Institutional Shares.
MARKET OVERVIEW
During the reporting
period, the main storyline was the trade tensions between the U.S. and China. Trade tensions were high at the outset of the reporting period and peaked in late summer 2019 before a truce and the eventual signing of an
initial trade deal in January 2020. These negotiations impacted U.S. Treasury prices, risk markets and global economic growth. The global manufacturing sector bore the brunt of economic pain of the trade dispute.
Increased costs, supply chain uncertainty and ambiguity regarding future trade agreements forced contraction in the sector. The resulting global slowdown increased fears that the weakness would spread to other sectors
of the economy. However, the Federal Reserve (the “Fed”) reacted to the trade tensions and resulting weakness in manufacturing and lowered the overnight lending rate three times for a total cut of 75 basis
points. The Fed described its cuts as a mid-cycle adjustment to support the economy and to keep the expansion intact. Domestic economic indicators continued their trend of the last several years with strong employment
gains, robust consumer spending and docile inflation prints.
Annual Shareholder Report
1
During
the reporting period, interest rates fell across the U.S. Treasury curve. The 2-year U.S. Treasury yield fell 114 basis points while the 5-year U.S. Treasury yield decreased by 112 basis points.4 5-year breakeven rates (i.e., the yield difference between 5-year U.S. Treasury bonds and 5-year Treasury
Inflation-Protected Securities (TIPS)) finished the reporting period at 1.59%.
Duration
The Fund spent most of
the reporting period with a neutral interest rate sensitivity to the BAML3-5T. However, during summer 2019, duration was increased to capture the fall in interest rates. Duration added to the Fund's performance.
Yield Curve
The yield curve was a
small drag on Fund performance versus the BAML3-5T. The Fund was overweight the front of the Treasury curve versus long-end holdings of mortgage-backed securities (MBS)5 and Treasury futures.6
SECURITY AND SECTOR SELECTION
The Fund had positions in
U.S. Treasuries, TIPS, agency debt and agency MBS. The Fund exited the TIPS sector during spring 2019 without any material impact on performance. Agency debt added to Fund performance. MBS underperformed Treasuries as
lower rates increased refinancing opportunities for outstanding mortgages. Security selection subtracted from Fund performance due to positions in the shorter end of the Treasury curve and underperformance of Treasury
futures versus Treasury bonds.
| 1 | Please see the footnotes to the line graph under “Fund Performance and Growth of a $10,000 Investment” below for the definition of, and more information about, the BAML3-5T. |
| 2 | Please see the footnotes to the line graph under “Fund Performance and Growth of a $10,000 Investment” below for the definition of, and more information about, the MSGFA. |
| 3 | 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 other securities of shorter durations. |
| 4 | Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. |
| 5 | The value of some mortgage-backed securities may be particularly sensitive to changes in the 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. |
| 6 | The Fund's use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional instruments. |
Annual Shareholder Report
2
FUND PERFORMANCE AND GROWTH OF A
$10,000 INVESTMENT
The graph below
illustrates the hypothetical investment of $10,0001 in Federated U.S. Government Securities Fund: 2-5 Years from January 31, 2010 to January 31, 2020 compared to the ICE BofAML
3-5 Year US Treasury Index (BAML3-5T)2 and the Morningstar Short Government Funds Average (MSGFA).3 The Average Annual Total Return table shows returns for each class averaged over the stated periods.
Growth of a $10,000 Investment
Growth of $10,000 as of January 31,
2020
The Fund offers multiple
share classes whose performance may be greater than or less than its other share class(es) due to differences in sales charges and expenses. See the Average Annual Total Return table below for the returns of
additional classes not shown in the line graph above.
Average Annual Total Returns for
the Period Ended 1/31/2020
Annual Shareholder Report
3
Performance data 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. Mutual fund performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance and after-tax returns, visit
FederatedInvestors.com or call 1-800-341-7400. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Mutual funds are not obligations
of or guaranteed by any bank and are not federally insured.
| 1 | The Fund's performance assumes the reinvestment of all dividends and distributions. The BAML3-5T and MSGFA have been adjusted to reflect reinvestment of dividends on securities in the index and the average. |
| 2 | The BAML3-5T is a subset of ICE BofAML US Treasury Index including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 5 years. ICE BofAML US Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government in its domestic market. The BAML3-5T is not adjusted to reflect sales charges, expenses or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The index is unmanaged and, unlike the Fund, is not affected by cash flows. It is not possible to invest directly in an index. |
| 3 | Morningstar figures represent the average of the total returns reported by all the funds designated by Morningstar as falling into the respective category indicated. They do not reflect sales charges. The Morningstar figures in the Growth of $10,000 line graph are based on historical return information published by Morningstar and reflect the return of the funds comprising the category in the year of publication. Because the funds designated by Morningstar as falling into the category can change over time, the Morningstar figures in the line graph may not match the Morningstar figures in the Average Annual Total Returns table, which reflect the return of the funds that currently comprise the category. |
Annual Shareholder Report
4
Portfolio of Investments
Summary Tables (unaudited)
At January 31, 2020, the
Fund's portfolio composition1 was as follows:
| Portfolio Composition |
Percentage of
Total Net Assets |
| U.S. Treasury Securities | 58.5% |
| Government Agencies | 26.5% |
| Mortgage-Backed Securities | 6.1% |
| Collateralized Mortgage Obligations | 5.2% |
| Other Security Type2,3 | 0.0% |
| Derivative Contracts4 | 0.1% |
| Cash Equivalents5 | 3.2% |
| Other Assets and Liabilities—Net6 | 0.4% |
| TOTAL | 100.0% |
At January 31, 2020, the
Fund's effective maturity schedule7 was as follows:
|
Securities With an
Effective Maturity of: |
Percentage of
Total Net Assets |
| Less than 2 Years | 13.8% |
| 2-5 Years | 80.1% |
| Greater than 5 Years | 2.4% |
| Other Security Type2,3 | 0.0% |
| Derivative Contracts4 | 0.1% |
| Cash Equivalents5 | 3.2% |
| Other Assets and Liabilities—Net6 | 0.4% |
| TOTAL | 100.0% |
| 1 | See the Fund's Prospectus and Statement of Additional Information for a description of the principal types of securities and derivative contracts in which the Fund invests. |
| 2 | Other Security Type consists of a purchased put option. |
| 3 | Represents less than 0.1%. |
| 4 | Based upon net unrealized appreciation (depreciation) or value of the derivative contracts as applicable. Derivative contracts may consist of futures, forwards, options and swaps. The impact of a derivative contract on the Fund's performance may be larger than its unrealized appreciation (depreciation) or value may indicate. In many cases, the notional value or amount of a derivative contract may provide a better indication of the contract's significance to the portfolio. More complete information regarding the Fund's direct investments in derivative contracts, including unrealized appreciation (depreciation), value and notional values or amounts of such contracts, can be found in the table at the end of the Portfolio of Investments included in this Report. |
| 5 | Cash Equivalents include any investments in money market mutual funds and/or overnight repurchase agreements. |
| 6 | Assets, other than investments in securities and derivative contracts, less liabilities. See Statement of Assets and Liabilities. |
| 7 | For callable investments, “effective maturity” is the unexpired period until the earliest date the investment is subject to prepayment or repurchase by the issuer (and market conditions indicate that the issuer will prepay or repurchase the investment). For all other investments “effective maturity” is the unexpired period until final maturity. |
Annual Shareholder Report
5
Portfolio of
Investments
January 31, 2020
|
Principal
Amount, Contracts or Shares |
Value | ||
| U.S. TREASURIES—58.5% | |||
| U.S. Treasury Notes—58.5% | |||
| $5,000,000 | 1.375%, 1/31/2025 | $5,012,909 | |
| 10,000,000 | 1.625%, 8/15/2022 | 10,079,459 | |
| 10,000,000 | 1.750%, 5/15/2022 | 10,095,118 | |
| 10,000,000 | 1.750%, 12/31/2024 | 10,202,124 | |
| 10,000,000 | 2.625%, 6/30/2023 | 10,438,811 | |
| 18,000,000 | 2.750%, 4/30/2023 | 18,822,164 | |
| 10,000,000 | 2.750%, 7/31/2023 | 10,489,444 | |
| 10,000,000 | 2.750%, 8/31/2023 | 10,500,213 | |
| 2,500,000 | 2.875%, 11/15/2021 | 2,565,856 | |
| 13,000,000 | 2.875%, 9/30/2023 | 13,723,664 | |
| 10,000,000 | 1 | 2.875%, 10/31/2023 | 10,567,486 |
| 10,000,000 | 2.875%, 11/30/2023 | 10,579,591 | |
|
TOTAL U.S. TREASURIES
(IDENTIFIED COST $117,826,741) |
123,076,839 | ||
| COLLATERALIZED MORTGAGE OBLIGATIONS—5.2% | |||
| Federal National Mortgage Association—1.9% | |||
| 4,061,655 | 2 | REMIC, Series 2013-67, Class KF, 2.060% (1-month USLIBOR +0.400%), 7/25/2043 | 4,060,748 |
| Government National Mortgage Association—3.3% | |||
| 2,673,439 | REMIC, Series 2011-135, Class QE, 2.000%, 6/16/2041 | 2,681,328 | |
| 4,090,163 | REMIC, Series 2014-6, Class JA, 2.750%, 6/20/2042 | 4,177,840 | |
| TOTAL | 6,859,168 | ||
|
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(IDENTIFIED COST $10,658,674) |
10,919,916 | ||
| GOVERNMENT AGENCIES—26.5% | |||
| Federal Home Loan Bank System—14.2% | |||
| 3,950,000 | 1.840%, 10/25/2023 | 3,950,082 | |
| 5,000,000 | 2.780%, 3/8/2024 | 5,064,894 | |
| 15,000,000 | 3.000%, 10/12/2021 | 15,404,153 | |
| 5,000,000 | 3.375%, 9/8/2023 | 5,347,227 | |
| TOTAL | 29,766,356 | ||
| Federal Home Loan Mortgage Corporation—0.9% | |||
| 2,000,000 | 1.800%, 9/16/2025 | 2,004,174 |
Annual Shareholder Report
6
|
Principal
Amount, Contracts or Shares |
Value | ||
| GOVERNMENT AGENCIES—continued | |||
| Federal National Mortgage Association—11.4% | |||
| $8,000,000 | 1.625%, 1/7/2025 | $8,085,576 | |
| 15,000,000 | 2.875%, 9/12/2023 | 15,795,627 | |
| TOTAL | 23,881,203 | ||
|
TOTAL GOVERNMENT AGENCIES
(IDENTIFIED COST $53,798,714) |
55,651,733 | ||
| MORTGAGE-BACKED SECURITIES—6.1% | |||
| Federal Home Loan Mortgage Corporation—3.4% | |||
| 2,617,298 | 3.500%, 5/1/2032 | 2,750,294 | |
| 4,111,402 | 3.500%, 7/1/2033 | 4,290,771 | |
| TOTAL | 7,041,065 | ||
| Federal National Mortgage Association—2.7% | |||
| 2,660,814 | 3.500%, 6/1/2031 | 2,803,505 | |
| 2,817,826 | 3.500%, 9/1/2033 | 2,964,534 | |
| TOTAL | 5,768,039 | ||
|
TOTAL MORTGAGE-BACKED SECURITIES
(IDENTIFIED COST $12,215,283) |
12,809,104 | ||
| PURCHASED PUT OPTION—0.0% | |||
| 20 |
United States Treasury Note 5-Year Futures, Notional Amount $2,406,400, Exercise Price $118.00, Expiration Date
2/21/2020
(IDENTIFIED COST $7,545) |
20 | |
| INVESTMENT COMPANY—3.2% | |||
| 6,691,379 |
Federated Government Obligations Fund, Premier Shares, 1.49%3
(IDENTIFIED COST $6,691,379) |
6,691,379 | |
|
TOTAL INVESTMENT IN SECURITIES—99.5%
(IDENTIFIED COST $201,198,336)4 |
209,148,991 | ||
| OTHER ASSETS AND LIABILITIES - NET—0.5%5 | 1,029,243 | ||
| TOTAL NET ASSETS—100% | $210,178,234 |
Annual Shareholder Report
7
At January 31, 2020, the Fund had
the following outstanding futures contracts:
| Description |
Number of
Contracts |
Notional
Value |
Expiration
Date |
Value and
Unrealized Appreciation |
| 6United States Treasury Note 5-Year Long Futures | 250 | $30,080,078 | March 2020 | $276,759 |
At January 31, 2020, the Fund had
the following outstanding written options contracts:
Net Unrealized Appreciation on
Futures Contracts and the value of Written Option Contracts is included in “Other Assets and Liabilities—Net.”
Affiliated fund holdings are
investment companies which are managed by the Adviser or an affiliate of the Adviser. Transactions with the affiliated fund holding during the period ended January 31, 2020, were as follows:
|
Federated Government
Obligations Fund, Premier Shares |
|
| Balance of Shares Held 1/31/2019 | 1,099,929 |
| Purchases/Additions | 87,024,923 |
| Sales/Reductions | (81,433,473) |
| Balance of Shares Held 1/31/2020 | 6,691,379 |
| Value | $6,691,379 |
| Change in Unrealized Appreciation/Depreciation | NA |
| Net Realized Gain/(Loss) | NA |
| Dividend Income | $56,757 |
| 1 | All or a portion of this security is pledged as collateral to ensure the Fund is able to satisfy the obligations of its outstanding futures contracts. |
| 2 | Floating/variable note with current rate and current maturity or next reset date shown. |
| 3 | 7-day net yield. |
| 4 | Also represents cost for federal tax purposes. |
| 5 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
| 6 | Non-income-producing security. |
Note: The categories of investments
are shown as a percentage of total net assets at January 31, 2020.
Annual Shareholder Report
8
Various inputs are used in
determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level
1—quoted prices in active markets for identical securities.
Level
2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost.
Level
3—significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).
The inputs or methodology used for
valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the
inputs used, as of January 31, 2020, in valuing the Fund's assets carried at fair value:
| Valuation Inputs | ||||
|
Level 1—
Quoted Prices |
Level 2—
Other Significant Observable Inputs |
Level 3—
Significant Unobservable Inputs |
Total | |
| Debt Securities: | ||||
| U.S. Treasuries | $— | $123,076,839 | $— | $123,076,839 |
| Collateralized Mortgage Obligations | — | 10,919,916 | — | 10,919,916 |
| Government Agencies | — | 55,651,733 | — | 55,651,733 |
| Mortgage-Backed Securities | — | 12,809,104 | — | 12,809,104 |
| Purchased Put Option | 20 | — | — | 20 |
| Investment Company | 6,691,379 | — | — | 6,691,379 |
| TOTAL SECURITIES | $6,691,399 | $202,457,592 | $— | $209,148,991 |
| Other Financial Instruments | ||||
| Assets | ||||
| Futures Contracts | $276,759 | $— | $— | $276,759 |
| Liabilities | ||||
| Written Options Contracts | (27,735) | — | — | (27,735) |
| TOTAL OTHER FINANCIAL INSTRUMENTS | $249,024 | $— | $— | $249,024 |
The following acronyms are used
throughout this portfolio:
| LIBOR | —London Interbank Offered Rate |
| REMIC | —Real Estate Mortgage Investment Conduit |
See Notes which are an integral part
of the Financial Statements
Annual Shareholder Report
9
Financial Highlights–Class R Shares
(For a Share Outstanding
Throughout Each Period)
| Year Ended January 31 | 2020 | 2019 | 2018 | 2017 | 2016 |
| Net Asset Value, Beginning of Period | $10.67 | $10.65 | $10.88 | $11.04 | $11.20 |
| Income From Investment Operations: | |||||
| Net investment income | 0.16 | 0.15 | 0.061 | 0.051 | 0.061 |
| Net realized and unrealized gain (loss) | 0.34 | 0.01 | (0.22) | (0.15) | (0.16) |
| TOTAL FROM INVESTMENT OPERATIONS | 0.50 | 0.16 | (0.16) | (0.10) | (0.10) |
| Less Distributions: | |||||
| Distributions from net investment income | (0.16) | (0.14) | (0.07) | (0.06) | (0.06) |
| Net Asset Value, End of Period | $11.01 | $10.67 | $10.65 | $10.88 | $11.04 |
| Total Return2 | 4.75% | 1.54% | (1.52)% | (0.90)% | (0.87)% |
| Ratios to Average Net Assets: | |||||
| Net expenses | 1.32% | 1.32% | 1.31% | 1.30% | 1.26% |
| Net investment income | 1.51% | 1.37% | 0.61% | 0.47% | 0.51% |
| Expense waiver/reimbursement3 | 0.21% | 0.18% | 0.13% | 0.00%4 | 0.01% |
| Supplemental Data: | |||||
| Net assets, end of period (000 omitted) | $7,752 | $7,288 | $7,681 | $12,341 | $13,697 |
| Portfolio turnover | 33% | 249% | 182% | 125% | 233% |
| 1 | Per share numbers have been calculated using the average shares method. |
| 2 | Based on net asset value. |
| 3 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
| 4 | Represents less than 0.01%. |
See Notes which are an integral part
of the Financial Statements
Annual Shareholder Report
10
Financial Highlights–Institutional Shares
(For a Share Outstanding
Throughout Each Period)
| Year Ended January 31 | 2020 | 2019 | 2018 | 2017 | 2016 |
| Net Asset Value, Beginning of Period | $10.67 | $10.66 | $10.89 | $11.05 | $11.20 |
| Income From Investment Operations: | |||||
| Net investment income | 0.24 | 0.23 | 0.151 | 0.131 | 0.131 |
| Net realized and unrealized gain (loss) | 0.34 | (0.00)2 | (0.24) | (0.15) | (0.14) |
| TOTAL FROM INVESTMENT OPERATIONS | 0.58 | 0.23 | (0.09) | (0.02) | (0.01) |
| Less Distributions: | |||||
| Distributions from net investment income | (0.24) | (0.22) | (0.14) | (0.14) | (0.14) |
| Net Asset Value, End of Period | $11.01 | $10.67 | $10.66 | $10.89 | $11.05 |
| Total Return3 | 5.52% | 2.19% | (0.81)% | (0.20)% | (0.12)% |
| Ratios to Average Net Assets: | |||||
| Net expenses | 0.59% | 0.59% | 0.59% | 0.59% | 0.58% |
| Net investment income | 2.24% | 2.09% | 1.33% | 1.18% | 1.18% |
| Expense waiver/reimbursement4 | 0.15% | 0.16% | 0.15% | 0.13% | 0.12% |
| Supplemental Data: | |||||
| Net assets, end of period (000 omitted) | $181,032 | $227,168 | $282,757 | $394,544 | $441,379 |
| Portfolio turnover | 33% | 249% | 182% | 125% | 233% |
| 1 | Per share numbers have been calculated using the average shares method. |
| 2 | Represents less than $0.01. |
| 3 | Based on net asset value. |
| 4 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
See Notes which are an integral part
of the Financial Statements
Annual Shareholder Report
11
Financial Highlights–Service Shares
(For a Share Outstanding
Throughout Each Period)
| Year Ended January 31 | 2020 | 2019 | 2018 | 2017 | 2016 |
| Net Asset Value, Beginning of Period | $10.67 | $10.65 | $10.89 | $11.05 | $11.20 |
| Income From Investment Operations: | |||||
| Net investment income | 0.22 | 0.22 | 0.121 | 0.111 | 0.101 |
| Net realized and unrealized gain (loss) | 0.34 | (0.00)2 | (0.24) | (0.16) | (0.14) |
| TOTAL FROM INVESTMENT OPERATIONS | 0.56 | 0.22 | (0.12) | (0.05) | (0.04) |
| Less Distributions: | |||||
| Distributions from net investment income | (0.22) | (0.20) | (0.12) | (0.11) | (0.11) |
| Net Asset Value, End of Period | $11.01 | $10.67 | $10.65 | $10.89 | $11.05 |
| Total Return3 | 5.27% | 2.05% | (1.13)% | (0.43)% | (0.35)% |
| Ratios to Average Net Assets: | |||||
| Net expenses | 0.82% | 0.82% | 0.82% | 0.82% | 0.81% |
| Net investment income | 2.01% | 1.84% | 1.10% | 0.95% | 0.95% |
| Expense waiver/reimbursement4 | 0.09% | 0.13% | 0.10% | 0.08% | 0.08% |
| Supplemental Data: | |||||
| Net assets, end of period (000 omitted) | $21,394 | $22,046 | $37,028 | $51,778 | $54,610 |
| Portfolio turnover | 33% | 249% | 182% | 125% | 233% |
| 1 | Per share numbers have been calculated using the average shares method. |
| 2 | Represents less than $0.01. |
| 3 | Based on net asset value. |
| 4 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
See Notes which are an integral part
of the Financial Statements
Annual Shareholder Report
12
Statement of Assets and Liabilities
January 31, 2020
| Assets: | ||
| Investment in securities, at value including $6,691,379 of investment in an affiliated holding* (identified cost $201,198,336) | $209,148,991 | |
| Cash | 10,178,741 | |
| Income receivable | 1,176,059 | |
| Income receivable from an affiliated holding | 4,984 | |
| Receivable for shares sold | 130,877 | |
| Receivable for variation margin on futures contracts | 64,441 | |
| TOTAL ASSETS | 220,704,093 | |
| Liabilities: | ||
| Payable for investments purchased | $10,193,419 | |
| Payable for shares redeemed | 106,184 | |
| Written options outstanding (premium $22,544), at value | 27,735 | |
| Income distribution payable | 46,785 | |
| Payable for investment adviser fee (Note 5) | 3,767 | |
| Payable for administrative fee (Note 5) | 450 | |
| Payable for distribution services fee (Note 5) | 1,945 | |
| Payable for other service fees (Notes 2 and 5) | 27,049 | |
| Accrued expenses (Note 5) | 118,525 | |
| TOTAL LIABILITIES | 10,525,859 | |
| Net assets for 19,083,334 shares outstanding | $210,178,234 | |
| Net Assets Consist of: | ||
| Paid-in capital | $233,279,761 | |
| Total distributable earnings (loss) | (23,101,527) | |
| TOTAL NET ASSETS | $210,178,234 | |
| Net Asset Value, Offering Price and Redemption Proceeds Per Share: | ||
| Class R Shares: | ||
|
Net asset value per share ($7,752,294 ÷ 704,122 shares outstanding),
no par value, unlimited shares authorized |
$11.01 | |
| Institutional Shares: | ||
|
Net asset value per share ($181,031,807 ÷ 16,436,655 shares outstanding),
no par value, unlimited shares authorized |
$11.01 | |
| Service Shares: | ||
|
Net asset value per share ($21,394,133 ÷ 1,942,557 shares outstanding),
no par value, unlimited shares authorized |
$11.01 |
| * | See information listed after the Fund's Portfolio of Investments. |
See Notes which are an integral part
of the Financial Statements
Annual Shareholder Report
13
Statement of Operations
Year Ended January 31, 2020
| Investment Income: | |||
| Interest | $6,924,873 | ||
| Dividends received from an affiliated holding* | 56,757 | ||
| TOTAL INCOME | 6,981,630 | ||
| Expenses: | |||
| Investment adviser fee (Note 5) | $984,639 | ||
| Administrative fee (Note 5) | 195,653 | ||
| Custodian fees | 13,975 | ||
| Transfer agent fee (Note 2) | 240,412 | ||
| Directors'/Trustees' fees (Note 5) | 8,144 | ||
| Auditing fees | 30,199 | ||
| Legal fees | 9,716 | ||
| Portfolio accounting fees | 98,433 | ||
| Distribution services fee (Note 5) | 38,166 | ||
| Other service fees (Notes 2 and 5) | 209,049 | ||
| Share registration costs | 51,913 | ||
| Printing and postage | 24,529 | ||
| Miscellaneous (Note 5) | 30,530 | ||
| TOTAL EXPENSES | 1,935,358 | ||
| Waivers and Reimbursements: | |||
| Waiver/reimbursement of investment adviser fee (Note 5) | $(45,394) | ||
|
Waiver/reimbursements of other operating expenses
(Notes 2 and 5) |
(325,492) | ||
| TOTAL WAIVERS AND REIMBURSEMENTS | (370,886) | ||
| Net expenses | 1,564,472 | ||
| Net investment income | $5,417,158 |
Annual Shareholder Report
14
Statement of Operations–continued
| Realized and Unrealized Gain (Loss) on Investments, Futures Contracts and Written Options: | |||
| Net realized gain on investments | $2,084,504 | ||
| Net realized gain on futures contracts | 1,479,657 | ||
| Net realized loss on written options | (25,450) | ||
| Net change in unrealized appreciation of investments | 4,256,141 | ||
| Net change in unrealized appreciation of futures contracts | 185,372 | ||
| Net change in unrealized appreciation of written options | (5,191) | ||
| Net realized and unrealized gain (loss) on investments, futures contracts and written options | 7,975,033 | ||
| Change in net assets resulting from operations | $13,392,191 |
| * | See Information listed after the Fund's Portfolio of Investments. |
See Notes which are an integral part
of the Financial Statements
Annual Shareholder Report
15
Statement of Changes in Net Assets
| Year Ended January 31 | 2020 | 2019 |
| Increase (Decrease) in Net Assets | ||
| Operations: | ||
| Net investment income | $5,417,158 | $5,833,597 |
| Net realized gain (loss) | 3,538,711 | (7,003,918) |
| Net change in unrealized appreciation/depreciation | 4,436,322 | 6,635,247 |
| CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | 13,392,191 | 5,464,926 |
| Distributions to Shareholders: | ||
| Class R Shares | (114,952) | (98,894) |
| Institutional Shares | (4,872,450) | (5,096,739) |
| Service Shares | (423,196) | (549,103) |
| CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS | (5,410,598) | (5,744,736) |
| Share Transactions: | ||
| Proceeds from sale of shares | 83,589,326 | 49,148,682 |
| Net asset value of shares issued to shareholders in payment of distributions declared | 4,837,608 | 5,115,892 |
| Cost of shares redeemed | (142,731,694) | (124,949,593) |
|
CHANGE IN NET ASSETS RESULTING
FROM SHARE TRANSACTIONS |
(54,304,760) | (70,685,019) |
| Change in net assets | (46,323,167) | (70,964,829) |
| Net Assets: | ||
| Beginning of period | 256,501,401 | 327,466,230 |
| End of period | $210,178,234 | $256,501,401 |
See Notes which are an integral part
of the Financial Statements
Annual Shareholder Report
16
Notes to Financial
Statements
January 31, 2020
1. ORGANIZATION
Federated U.S. Government Securities
Fund: 2-5 Years (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as a diversified, open-end management investment company. The Trust consists of one
portfolio of the same name (the “Fund”). The Fund offers three classes of shares: Class R Shares, Institutional Shares and Service Shares. All shares of the Fund have equal rights with respect to voting,
except on class-specific matters. The investment objective of the Fund is current income.
2. SIGNIFICANT ACCOUNTING
POLICIES
The following is a summary of
significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).
Investment Valuation
In calculating its net asset value
(NAV), the Fund generally values investments as follows:
| ■ | Fixed-income securities are fair valued using price evaluations provided by a pricing service approved by the Fund's Board of Trustees (the “Trustees”). |
| ■ | Derivative contracts listed on exchanges are valued at their reported settlement or closing price, except that options are valued at the mean of closing bid and asked quotations. |
| ■ | Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Trustees. |
| ■ | Shares of other mutual funds or non-exchange-traded investment companies are valued based upon their reported NAVs. |
| ■ | For securities that are fair valued in accordance with procedures established by and under the general supervision of the Trustees, certain factors may be considered, such as: the last traded or purchase price of the security, information obtained by contacting the issuer or dealers, analysis of the issuer's financial statements or other available documents, fundamental analytical data, the nature and duration of restrictions on disposition, the movement of the market in which the security is normally traded, public trading in similar securities or derivative contracts of the issuer or comparable issuers, movement of a relevant index, or other factors including but not limited to industry changes and relevant government actions. |
If any price, quotation, price
evaluation or other pricing source is not readily available when the NAV is calculated, if the Fund cannot obtain price evaluations from a pricing service or from more than one dealer for an investment within a
reasonable period of time as set forth in the Fund's valuation policies and procedures, or if information furnished by a pricing service, in the opinion of the valuation committee (“Valuation Committee”),
is deemed not representative of the fair value of such security, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund
could obtain the fair value assigned to an investment if it sold the investment at approximately the time at which the Fund determines its NAV per share.
Annual Shareholder Report
17
Fair Valuation Procedures
The Trustees have ultimate
responsibility for determining the fair value of investments for which market quotations are not readily available. The Trustees have appointed a Valuation Committee comprised of officers of the Fund, Federated
Investment Management Company (the “Adviser”), and certain of the Adviser's affiliated companies to assist in determining fair value and in overseeing the calculation of the NAV. The Trustees have also
authorized the use of pricing services recommended by the Valuation Committee to provide fair value evaluations of the current value of certain investments for purposes of calculating the NAV. The Valuation Committee
employs various methods for reviewing third-party pricing-service evaluations including periodic reviews of third-party pricing services' policies, procedures and valuation methods (including key inputs, methods,
models and assumptions), transactional back-testing, comparisons of evaluations of different pricing services, and review of price challenges by the Adviser based on recent market activity. In the event that market
quotations and price evaluations are not available for an investment, the Valuation Committee determines the fair value of the investment in accordance with procedures adopted by the Trustees. The Trustees
periodically review and approve the fair valuations made by the Valuation Committee and any changes made to the procedures.
Factors considered
by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions,
indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation).
Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a “mid” evaluation). The Fund normally uses bid
evaluations for any U.S. Treasury and Agency securities, mortgage-backed securities and municipal securities. The Fund normally uses mid evaluations for any other types of fixed-income securities and any OTC
derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the
Trustees.
Repurchase Agreements
The Fund may invest in repurchase
agreements for short-term liquidity purposes. It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund's custodian or sub-custodian eligible securities or cash with a
market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which
the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value
of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be
transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
The insolvency of
the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase
agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
Annual Shareholder Report
18
The Fund may enter
into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund's Adviser
and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of
proceeds from any repurchase or other disposition of such securities.
Investment Income, Gains and
Losses, Expenses and Distributions
Investment transactions are
accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Dividend income and distributions
to shareholders are recorded on the ex-dividend date. Positive or negative inflation adjustments on Treasury Inflation-Protected Securities are included in interest income. Distributions of net investment income, if
any, are declared daily and paid monthly. Non-cash dividends included in dividend income, if any, are recorded at fair value. Amortization/accretion of premium and discount is included in investment income. Gains and
losses realized on principal payment of mortgage-backed securities (paydown gains and losses) are classified as part of investment income. Investment income, realized and unrealized gains and losses, and certain
fund-level expenses are allocated to each class based on relative average daily net assets, except that select classes will bear certain expenses unique to those classes. The detail of the total fund expense waivers
and reimbursements of $370,886 is disclosed in various locations in this Note 2 and Note 5. For the year ended January 31, 2020, transfer agent fees for the Fund were as follows:
|
Transfer Agent
|
Transfer Agent
Fees Reimbursed |
|
| Class R Shares | $34,073 | $— |
| Institutional Shares | 190,929 | (139,685) |
| Service Shares | 15,410 | — |
| TOTAL | $240,412 | $(139,685) |
Dividends are declared separately
for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
Other Service Fees
The Fund may pay other service fees
up to 0.25% of the average daily net assets of the Fund's Institutional Shares and Service Shares to unaffiliated financial intermediaries or to Federated Shareholder Services Company (FSSC) for providing services to
shareholders and maintaining shareholder accounts. Subject to the terms described in the Expense Limitation note, FSSC may voluntarily reimburse the Fund for other service fees. For the year ended January 31, 2020,
other service fees for the Fund were as follows:
Annual Shareholder Report
19
Federal Taxes
It is the Fund's policy to comply
with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is
necessary. As of and during the year ended January 31, 2020, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income
tax expense in the Statement of Operations. As of January 31, 2020, tax years 2017 through 2020 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America and the
Commonwealth of Massachusetts.
When-Issued and Delayed-Delivery
Transactions
The Fund may engage in when-issued
or delayed-delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed-delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market
conditions or the failure of counterparties to perform under the contract.
Futures Contracts
The Fund purchases and sells
financial futures contracts to manage duration and yield curve risks. Upon entering into a financial futures contract with a broker, the Fund is required to deposit with a broker, either U.S. government securities or
a specified amount of cash, which is shown as due from broker in the Statement of Assets and Liabilities. Futures contracts are valued daily and unrealized gains or losses are recorded in a “variation
margin” account. The Fund receives from or pays to the broker a specified amount of cash based upon changes in the variation margin account. When a contract is closed, the Fund recognizes a realized gain or
loss. Futures contracts have market risks, including the risk that the change in the value of the contract may not correlate with the changes in the value of the underlying securities. There is minimal counterparty
risk to the Fund since futures contracts are exchange traded and the exchange's clearinghouse, as counterparty to all exchange traded futures contracts, guarantees the futures contracts against default.
Futures contracts
outstanding at period end are listed after the Fund's Portfolio of Investments.
The average
notional value of long and short futures contracts held by the Fund throughout the period was $56,849,488 and $7,873,694, respectively. This is based on amounts held as of each month-end throughout the fiscal
period.
Securities Lending
The Fund participates in a
securities lending program providing for the lending of government securities to qualified brokers. The term of the loans within the program is one year or less. The Fund normally receives cash collateral for
securities loaned that may be invested in affiliated money market funds, other money market instruments and/or repurchase agreements. Investments in money market funds may include funds with a “floating”
NAV that can impose redemption fees and liquidity gates, impose certain operational impediments to investing cash collateral, and, if the investee fund's NAV decreases, result in the Fund recognizing losses and being
required to cover the decrease in the value of the cash collateral. Collateral is maintained at a minimum level of 100% of the market value of investments loaned, plus interest, if applicable. In accordance with the
Fund's securities lending agreement, the market value of securities on loan is determined each day at the close of business and any
Annual Shareholder Report
20
additional collateral required to cover the value
of securities on loan is delivered to the Fund on the next business day. Earnings on collateral are allocated between the borrower of the security, the securities lending agent, as a fee for its services under the
program and the Fund, according to agreed-upon rates. The Fund will not have the right to vote on securities while they are on loan. However, the Fund will attempt to terminate a loan in an effort to reacquire the
securities in time to vote on matters that are deemed to be material by the Adviser. There can be no assurance that the Fund will have sufficient notice of such matters to be able to terminate the loan in time to vote
thereon.
As of January 31,
2020, the Fund had no outstanding securities on loan.
Option Contracts
The Fund buys or sells put and call
options to seek to increase income and total return and to manage duration and yield curve risks. The seller (“writer”) of an option receives a payment or premium, from the buyer, which the writer keeps
regardless of whether the buyer exercises the option. When the Fund writes a put or call option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the
current value of the option written. Premiums received from writing options which expire are treated as realized gains. The Fund, as a writer of an option, bears the market risk of an unfavorable change in the price
of the underlying reference instrument. When the Fund purchases a put or call option, an amount equal to the premium paid is recorded as an increase to the cost of the investment and subsequently marked to market to
reflect the current value of the option purchased. Premiums paid for purchasing options which expire are treated as realized losses. Premiums received/paid for writing/purchasing options which are exercised or closed
are added to the proceeds or offset against amounts paid on the underlying reference instrument to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the
premium paid. Options can trade on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Most exchanges require investors to maintain margin accounts
through their brokers to cover their potential obligations to the exchange. This protects investors against potential defaults by the counterparty.
Purchased put
option contracts outstanding at period-end are listed in the Fund's Portfolio of Investments and written option contracts outstanding at period end are listed after the Fund's Portfolio of Investments.
The average market
value of purchased put and call options held by the Fund throughout the period was $2,030 and $2,569, respectively. This is based on amounts held as of each month-end throughout the fiscal period.
The average market
value of written call options held by the Fund throughout the period was $2,133. This is based on amounts held as of each month-end throughout the fiscal period.
Annual Shareholder Report
21
Additional Disclosure Related to
Derivative Instruments
| Fair Value of Derivative Instruments | ||||
| Asset | Liability | |||
|
Statement of
Assets and Liabilities Location |
Fair
Value |
Statement of
Assets and Liabilities Location |
Fair
Value |
|
|
Derivatives not accounted for as
hedging instruments under ASC Topic 815 |
||||
| Interest rate contracts |
Receivable for
variation margin on futures contracts |
$276,759* | $— | |
| Interest rate contracts | $— |
Written option
contracts outstanding, at value |
$27,735 | |
| Interest rate contracts |
Purchased options,
Investment in securities at value |
$20 | $— | |
|
Total derivatives not accounted for as hedging
instruments under ASC Topic 815 |
$276,779 | $27,735 | ||
| * | Includes net cumulative appreciation of futures contracts as reported in the footnotes to the Portfolio of Investments. Only the current day's variation margin is reported within the Statement of Assets and Liabilities. |
The Effect of Derivative
Instruments on the Statement of Operations for the Year Ended January 31, 2020
| Amount of Realized Gain or (Loss) on Derivatives Recognized in Income | ||||
|
Futures
Contracts |
Purchased
Option Contracts1 |
Written
Option Contracts |
Total | |
| Interest rate contracts | $1,479,657 | $(3,986) | $(25,450) | $1,450,221 |
| 1 | The net realized loss on Purchased Option Contracts is found within the Net realized gain on investments on the Statement of Operations. |
| 2 | The net change in unrealized appreciation of Purchased Option Contracts is found within the Net change in unrealized appreciation of investments on the Statement of Operations. |
Annual Shareholder Report
22
Other
The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could
differ from those estimated. The Fund applies investment company accounting and reporting guidance.
3. SHARES OF BENEFICIAL
INTEREST
The following tables summarize share
activity:
| Year Ended January 31 | 2020 | 2019 | ||
| Class R Shares: | Shares | Amount | Shares | Amount |
| Shares sold | 192,715 | $2,095,686 | 193,872 | $2,050,371 |
| Shares issued to shareholders in payment of distributions declared | 9,459 | 102,825 | 8,523 | 90,122 |
| Shares redeemed | (181,210) | (1,971,877) | (240,384) | (2,543,748) |
| NET CHANGE RESULTING FROM CLASS R SHARE TRANSACTIONS | 20,964 | $226,634 | (37,989) | $(403,255) |
| Year Ended January 31 | 2020 | 2019 | ||
| Service Shares: | Shares | Amount | Shares | Amount |
| Shares sold | 518,073 | $5,638,898 | 788,762 | $8,357,130 |
| Shares issued to shareholders in payment of distributions declared | 34,817 | 378,519 | 46,189 | 488,570 |
| Shares redeemed | (676,202) | (7,331,364) | (2,244,326) | (23,712,235) |
| NET CHANGE RESULTING FROM SERVICE SHARE TRANSACTIONS | (123,312) | $(1,313,947) | (1,409,375) | $(14,866,535) |
| NET CHANGE RESULTING FROM TOTAL FUND SHARE TRANSACTIONS | (4,952,403) | $(54,304,760) | (6,697,330) | $(70,685,019) |
4. FEDERAL TAX INFORMATION
The tax character of distributions
as reported on the Statement of Changes in Net Assets for the years ended January 31, 2020 and 2019, was as follows:
| 2020 | 2019 | |
| Ordinary income | $5,410,598 | $5,744,736 |
Annual Shareholder Report
23
As of January 31, 2020, the
components of distributable earnings on a tax-basis were as follows:
| Undistributed ordinary income | $212,501 |
| Net unrealized appreciation | $7,845,179 |
| Capital loss carryforwards | $(31,159,207) |
The difference between book-basis
and tax-basis net unrealized appreciation is attributable to differing treatments for mark-to-market of derivative instruments and straddle loss deferrals.
At January 31,
2020, the cost of investments for federal tax purposes was $201,198,336. The net unrealized appreciation of investments for federal tax purposes was $7,845,179. This consists entirely of net unrealized appreciation
from investments for those securities having an excess of value over cost of $7,845,179. The amounts presented are inclusive of derivative contracts.
As of January 31,
2020, the Fund had a capital loss carryforward of $31,159,207 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby
reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, these net capital losses retain their
character as either short-term or long-term and do not expire.
The following
schedule summarizes the Fund's capital loss carryforwards:
| Short-Term | Long-Term | Total |
| $31,159,207 | $— | $31,159,207 |
The Fund used capital loss
carryforwards of $3,719,926 to offset capital gains realized during the year ended January 31, 2020.
At January 31,
2020, for federal income tax purposes, the Fund had $113,001 in straddle loss deferrals.
5. INVESTMENT ADVISER FEE AND
OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
The advisory agreement between the
Fund and the Adviser provides for an annual fee equal to 0.40% of the Fund's average daily net assets. Subject to the terms described in the Expense Limitation note, the Adviser may voluntarily choose to waive any
portion of its fee and/or reimburse certain operating expenses of the Fund. For the year ended January 31, 2020, the Adviser voluntarily waived $43,494 of its fee and voluntarily reimbursed $139,685 of transfer agent
fees. The Adviser has agreed to reimburse the Fund for certain investment adviser fees as a result of transactions in other affiliated investment companies. For the year ended January 31, 2020, the Adviser reimbursed
$1,900.
Annual Shareholder Report
24
Administrative Fee
Federated Administrative Services
(FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. For purposes of determining the appropriate rate breakpoint, “Investment Complex” is
defined as all of the Federated Hermes Funds subject to a fee under the Administrative Services Agreement. The fee paid to FAS is based on the average daily net assets of the Investment Complex as specified below:
| Administrative Fee |
Average Daily Net Assets
of the Investment Complex |
| 0.100% | on assets up to $50 billion |
| 0.075% | on assets over $50 billion |
Subject to the terms described in
the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended January 31, 2020, the annualized fee paid to FAS was 0.079% of average daily net assets of the Fund.
In addition, FAS
may charge certain out-of-pocket expenses to the Fund.
Distribution Services Fee
The Fund has adopted a Distribution
Plan (the “Plan”) pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. (FSC), the principal distributor, from the daily net assets of the
Fund's Class R Shares and Service Shares to finance activities intended to result in the sale of these shares. The Plan provides that the Fund may incur distribution expenses at the following percentages of average
daily net assets annually, to compensate FSC:
|
Percentage of Average Daily
Net Assets of Class |
|
| Class R Shares | 0.50% |
| Service Shares | 0.05% |
Subject to the terms described in
the Expense Limitation note, FSC may voluntarily choose to waive any portion of its fee. For the year ended January 31, 2020, distribution services fees for the Fund were as follows:
|
Distribution Services
Fees Incurred |
Distribution Services
Fees Waived |
|
| Class R Shares | $38,166 | $(14,714) |
For the year ended January 31, 2020,
FSC did not retain any fees paid by the Fund.
When FSC receives
fees, it may pay some or all of them to financial intermediaries whose customers purchase shares. For the year ended January 31, 2020, the Fund's Service Shares did not incur a distribution services fee; however, it
may begin to incur this fee upon approval of the Trustees.
Other Service Fees
For the year ended January 31, 2020,
FSSC received $4,121 and reimbursed $171,093 of the other service fees disclosed in Note 2.
Annual Shareholder Report
25
Expense Limitation
The Adviser and certain of its
affiliates (which may include FSC, FAS and FSSC) on their own initiative have agreed to waive certain amounts of their respective fees and/or reimburse expenses. Total annual fund operating expenses (as shown in the
financial highlights, excluding interest expense, extraordinary expenses and proxy-related expenses paid by the Fund, if any) paid by the Fund's Class R Shares, Institutional Shares and Service Shares (after the
voluntary waivers and/or reimbursements) will not exceed 1.32%, 0.59% and 0.82% (the “Fee Limit”), respectively, up to but not including the later of (the “Termination Date”): (a) April 1, 2021;
or (b) the date of the Fund's next effective Prospectus. While the Adviser and its applicable affiliates currently do not anticipate terminating or increasing these arrangements prior to the Termination Date, these
arrangements may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Trustees.
Directors'/Trustees' and
Miscellaneous Fees
Certain Officers and Trustees of the
Fund are Officers and Directors or Trustees of certain of the above companies. To efficiently facilitate payment, Independent Directors'/Trustees' fees and certain expenses related to conducting meetings of the
Directors/Trustees and other miscellaneous expenses are paid by an affiliate of the Adviser which in due course are reimbursed by the Fund. These expenses related to conducting meetings of the Directors/Trustees and
other miscellaneous expenses may be included in Accrued and Miscellaneous Expenses on the Statement of Assets and Liabilities and Statement of Operations, respectively.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments,
excluding long-term U.S. government securities and short-term obligations, for the year ended January 31, 2020, were as follows:
| Purchases | $14,429,426 |
| Sales | $11,975,013 |
7. LINE OF CREDIT
The Fund participates with certain
other Federated Hermes Funds, on a several basis, in an up to $500,000,000 unsecured, 364-day, committed, revolving line of credit (LOC) agreement. The LOC was made available to finance temporarily the repurchase or
redemption of shares of the Fund, failed trades, payment of dividends, settlement of trades and for other short-term, temporary or emergency general business purposes. The Fund cannot borrow under the LOC if an
inter-fund loan is outstanding. The Fund's ability to borrow under the LOC also is subject to the limitations of the Act and various conditions precedent that must be satisfied before the Fund can borrow. Loans under
the LOC are charged interest at a fluctuating rate per annum equal to the highest, on any day, of (a) (i) the federal funds effective rate, (ii) the one month London Interbank Offered Rate (LIBOR), and (iii) 0.0%,
plus (b) a margin. The LOC also requires the Fund to pay, quarterly in arrears and at maturity, its pro rata share of a commitment fee based on the amount of the lenders' commitment that has not been utilized. As of
January 31, 2020, the Fund had no outstanding loans. During the year ended January 31, 2020, the Fund did not utilize the LOC.
Annual Shareholder Report
26
8. INTERFUND LENDING
Pursuant to an Exemptive Order
issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Hermes, Inc., may participate in an interfund lending program. This program provides an
alternative credit facility allowing the Fund to borrow from other participating affiliated funds. As of January 31, 2020, there were no outstanding loans. During the year ended January 31, 2020, the program was not
utilized.
9. SUBSEQUENT EVENTs
An outbreak of respiratory disease
caused by a novel coronavirus was first detected in China in December 2019 and subsequently spread internationally. As of the date of the issuance of these financial statements, this coronavirus has resulted in
closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains, workflow operations and customer activity, as well as general concern
and uncertainty. The impact of this coronavirus may be short term or may last for an extended period of time and result in a substantial economic downturn. The impact of this outbreak, and other epidemics and
pandemics that may arise in the future, could negatively affect the worldwide economy, as well as the economies of individual countries, individual companies (including Fund service providers) and the market in
general in significant and unforeseen ways. Any such impact could adversely affect the Fund's performance.
Effective on or
about June 29, 2020, the name of the Trust and Fund will change to Federated Hermes Short-Intermediate Government Trust and Federated Hermes Short-Intermediate Government Fund, respectively.
Annual Shareholder Report
27
Report of Independent
Registered Public Accounting Firm
TO THE SHAREHOLDERS AND THE BOARD
OF TRUSTEES OF FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS:
Opinion on the Financial
Statements
We have audited the
accompanying statement of assets and liabilities of Federated U.S. Government Securities Fund: 2-5 Years (the “Fund”), including the portfolio of investments, as of January 31, 2020, and the related
statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund at
January 31, 2020, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the
period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial
statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits
in accordance with standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund's internal control over financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no
such opinion.
Annual Shareholder Report
28
Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of January 31, 2020, by correspondence with the custodian and
others or by other appropriate auditing procedures where replies from others were not received. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the
auditor of one or more Federated Hermes investment companies since 1979.
Boston, Massachusetts
March 23, 2020
March 23, 2020
Annual Shareholder Report
29
Shareholder Expense Example
(unaudited)
As a shareholder of the
Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or other service fees and other Fund expenses. This Example is intended to help you to understand
your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. It is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period from August 1, 2019 to January 31, 2020.
ACTUAL EXPENSES
The first section of the
table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR
COMPARISON PURPOSES
The second section of the
table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided
to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the
other funds.
Annual Shareholder Report
30
Please
note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds.
|
Beginning
Account Value 8/1/2019 |
Ending
Account Value 1/31/2020 |
Expenses Paid
During Period1 |
|
| Actual: | |||
| Class R Shares | $1,000 | $1,021.20 | $6.72 |
| Institutional Shares | $1,000 | $1,025.00 | $3.01 |
| Service Shares | $1,000 | $1,023.80 | $4.18 |
| Hypothetical (assuming a 5% return before expenses): | |||
| Class R Shares | $1,000 | $1,018.50 | $6.72 |
| Institutional Shares | $1,000 | $1,022.20 | $3.01 |
| Service Shares | $1,000 | $1,021.10 | $4.18 |
| 1 | Expenses are equal to the Fund's annualized net expense ratios, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half-year period). The annualized net expense ratios are as follows: |
| Class R Shares | 1.32% |
| Institutional Shares | 0.59% |
| Service Shares | 0.82% |
Annual Shareholder Report
31
Board of Trustees and
Trust Officers
The Board of Trustees is
responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The following tables give information about each Trustee and the senior
officers of the Fund. Where required, the tables separately list Trustees who are “interested persons” of the Fund (i.e., “Interested” Trustees) and those who are not (i.e.,
“Independent” Trustees). Unless otherwise noted, the address of each person listed is 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Trustees listed is 4000 Ericsson Drive,
Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2019, the Trust comprised one portfolio(s), and the Federated Hermes Fund Family consisted of 41 investment companies (comprising 135
portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Trustee oversees all portfolios in the Federated Hermes Fund Family and serves for an indefinite term. The Fund's
Statement of Additional Information includes additional information about Trust Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
Interested Trustees
Background
|
Name
Birth Date Positions Held with Fund Date Service Began |
Principal Occupation(s) for Past Five Years,
Other Directorships Held and Previous Position(s) |
|
J. Christopher Donahue*
Birth Date: April 11, 1949 President and Trustee Indefinite Term Began serving: August 2000 |
Principal Occupations: Principal Executive Officer and President of certain of the Funds in the Federated Hermes Fund Family; Director or Trustee of the Funds in the Federated Hermes Fund Family; President,
Chief Executive Officer and Director, Federated Hermes, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment
Management Corp.; Chairman and Trustee, Federated Equity Management Company of Pennsylvania; Trustee, Federated Shareholder Services Company; Director, Federated Services Company.
|
Annual Shareholder Report
32
|
Name
Birth Date Positions Held with Fund Date Service Began |
Principal Occupation(s) for Past Five Years,
Other Directorships Held and Previous Position(s) |
|
John B. Fisher*
Birth Date: May 16, 1956 Trustee Indefinite Term Began serving: May 2016 |
Principal Occupations: Principal Executive Officer and President of certain of the Funds in the Federated Hermes Fund Family; Director or Trustee of certain of the Funds in the Federated Hermes Fund Family; Vice
President, Federated Hermes, Inc.; President, Director/Trustee and CEO, Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated
Investment Counseling, Federated Investment Management Company; President of some of the Funds in the Federated Hermes Fund Family and Director, Federated Investors Trust Company.
|
| * | Reasons for “interested” status: J. Christopher Donahue and John B. Fisher are interested due to their beneficial ownership of shares of Federated Hermes, Inc. and due to positions they hold with Federated Hermes, Inc. and its subsidiaries. |
INDEPENDENT Trustees
Background
|
Name
Birth Date Positions Held with Fund Date Service Began |
Principal Occupation(s) for Past Five Years,
Other Directorships Held, Previous Position(s) and Qualifications |
|
John T. Collins
Birth Date: January 24, 1947 Trustee Indefinite Term Began serving: October 2013 |
Principal Occupations: Director or Trustee of the Federated Hermes Fund Family; formerly, Chairman and CEO, The Collins Group, Inc. (a private equity firm) (Retired).
|
Annual Shareholder Report
33
|
Name
Birth Date Positions Held with Fund Date Service Began |
Principal Occupation(s) for Past Five Years,
Other Directorships Held, Previous Position(s) and Qualifications |
|
G. Thomas Hough
Birth Date: February 28, 1955 Trustee Indefinite Term Began serving: August 2015 |
Principal Occupations: Director or Trustee, Chair of the Audit Committee of the Federated Hermes Fund Family; formerly, Vice Chair, Ernst & Young LLP (public accounting firm) (Retired).
|
|
Maureen Lally-Green
Birth Date: July 5, 1949 Trustee Indefinite Term Began serving: October 2013 |
Principal Occupations: Director or Trustee of the Federated Fund Family; Associate General Secretary, Diocese of Pittsburgh;
Adjunct Professor of Law, Duquesne University School of Law. |
|
Charles F. Mansfield, Jr.
Birth Date: April 10, 1945 Trustee Indefinite Term Began serving: January 1999 |
Principal Occupations: Director or Trustee of the Federated Hermes Fund Family; Management Consultant and Author.
|
Annual Shareholder Report
34
|
Name
Birth Date Positions Held with Fund Date Service Began |
Principal Occupation(s) for Past Five Years,
Other Directorships Held, Previous Position(s) and Qualifications |
|
Thomas M. O'Neill
Birth Date: June 14, 1951 Trustee Indefinite Term Began serving: August 2006 |
Principal Occupations: Director or Trustee of the Federated Hermes Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting).
|
|
P. Jerome Richey
Birth Date: February 23, 1949 Trustee Indefinite Term Began serving: September 2013 |
Principal Occupations: Director or Trustee of the Federated Hermes Fund Family; Management Consultant; Retired; formerly, Senior Vice Chancellor and Chief Legal Officer, University of Pittsburgh and Executive
Vice President and Chief Legal Officer, CNX Resources Corporation (formerly known as CONSOL Energy Inc.).
|
|
John S. Walsh
Birth Date: November 28, 1957 Trustee Indefinite Term Began serving: January 1999 |
Principal Occupations: Director or Trustee, and Chair of the Board of Directors or Trustees, of the Federated Hermes Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary
heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc.
|
Annual Shareholder Report
35
OFFICERS
|
Name
Birth Date Address Positions Held with Fund Date Service Began |
Principal Occupation(s) for Past Five Years
and Previous Position(s) |
|
Lori A. Hensler
Birth Date: January 6, 1967 TREASURER Officer since: April 2013 |
Principal Occupations: Principal Financial Officer and Treasurer of the Federated Hermes Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated
Securities Corp. and Edgewood Services, Inc.; and Assistant Treasurer, Federated Investors Trust Company. Ms. Hensler has received the Certified Public Accountant designation.
|
|
Peter J. Germain
Birth Date: September 3, 1959 CHIEF LEGAL OFFICER, SECRETARY and EXECUTIVE VICE PRESIDENT Officer since: January 2005 |
Principal Occupations: Mr. Germain is Chief Legal Officer, Secretary and Executive Vice President of the Federated Hermes Fund Family. He is General Counsel, Chief Legal Officer, Secretary and Executive Vice
President, Federated Hermes, Inc.; Trustee and Senior Vice President, Federated Investors Management Company; Trustee and President, Federated Administrative Services; Director and President, Federated Administrative
Services, Inc.; Director and Vice President, Federated Securities Corp.; Director and Secretary, Federated Private Asset Management, Inc.; Secretary, Federated Shareholder Services Company; and Secretary, Retirement
Plan Service Company of America. Mr. Germain joined Federated Hermes in 1984 and is a member of the Pennsylvania Bar Association.
|
|
Stephen Van Meter
Birth Date: June 5, 1975 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Officer since: July 2015 |
Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Hermes Fund Family; Vice President and Chief Compliance Officer of Federated Hermes, Inc. and Chief Compliance Officer
of certain of its subsidiaries. Mr. Van Meter joined Federated in October 2011. He holds FINRA licenses under Series 3, 7, 24 and 66.
|
Annual Shareholder Report
36
|
Name
Birth Date Address Positions Held with Fund Date Service Began |
Principal Occupation(s) for Past Five Years
and Previous Position(s) |
|
Robert J. Ostrowski
Birth Date: April 26, 1963 Chief Investment Officer Officer since: May 2004 |
Principal Occupations: Robert J. Ostrowski joined Federated Hermes in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of Federated Hermes' taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. Mr. Ostrowski became an Executive Vice President of the Fund's Adviser in 2009 and served as a Senior Vice President of the Fund's Adviser from 1997 to 2009. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
Annual Shareholder Report
37
Evaluation and Approval
of Advisory Contract–May 2019
Federated U.S. Government
Securities Fund: 2-5 Years (the “Fund”)
At its meetings in May
2019, the Fund's Board of Trustees (the “Board”), including a majority of those Trustees who are not “interested persons” of the Fund, as defined in the Investment Company Act of 1940 (the
“Independent Trustees”), reviewed and unanimously approved the continuation of the Fund's investment advisory contract for an additional one-year term. The Board's decision regarding the contract reflects
the exercise of its business judgment after considering all of the information received on whether to continue the existing arrangements.
At the
request of the Independent Trustees, the Fund's Chief Compliance Officer (the CCO) furnished to the Board in advance of its May 2019 meetings an independent written evaluation presenting on the topics discussed below.
The Board considered the CCO's independent written evaluation (the “CCO Fee Evaluation Report”), along with other information, in evaluating the reasonableness of the Fund's management fee and in deciding
to approve the continuation of the investment advisory contract. The CCO, in preparing the CCO Fee Evaluation Report, has the authority to retain consultants, experts or staff as reasonably necessary to assist in the
performance of his duties, reports directly to the Board, and can be terminated only with the approval of a majority of the Independent Trustees. At the request of the Independent Trustees, the CCO Fee Evaluation
Report followed the same general approach and covered the same topics as that of the report that had previously been delivered by the CCO in his capacity as “Senior Officer,” prior to the elimination of
the Senior Officer position in December 2017.
The
Board also considered judicial decisions concerning allegedly excessive investment advisory fees in making its decision. Using these judicial decisions as a guide, the Board observed that the following factors may be
relevant to an adviser's fiduciary duty with respect to its receipt of compensation from a fund: (1) the nature and quality of the services provided by an adviser to a fund and its shareholders (including the
performance of the fund, its benchmark, and comparable funds); (2) an adviser's cost of providing the services (including the profitability to an adviser of providing advisory services to a fund); (3) the extent to
which an adviser may realize “economies of scale” as a fund grows larger and, if such economies of scale exist, whether they have been shared with a fund and its shareholders or the family of funds; (4)
any “fall-out” financial benefits that accrue to an adviser because of its relationship with a fund (including research services received from brokers that execute fund trades and any fees paid to
affiliates of an adviser for services rendered to a fund); (5) comparative fee and expense structures (including a comparison of fees paid to an adviser with those paid by similar funds both internally and externally
as well as
Annual Shareholder Report
38
management fees charged to institutional
and other advisory clients of the adviser for what might be viewed as like services); and (6) the extent of care, conscientiousness and independence with which the fund's board members perform their duties and their
expertise (including whether they are fully informed about all facts the board deems relevant to its consideration of an adviser's services and fees). The Board noted that the Securities and Exchange Commission (SEC)
disclosure requirements regarding the basis for the Board's approval of the Fund's investment advisory contract generally align with the factors listed above. The Board was aware of these factors and was guided by
them in its review of the Fund's investment advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.
The
Board considered and weighed these factors in light of its substantial accumulated experience in governing the Fund and working with Federated Investment Management Company (the “Adviser”) and its
affiliates (collectively, “Federated”) on matters relating to the funds advised by Federated (each, a “Federated Fund”). The Independent Trustees were assisted in their deliberations by
independent legal counsel.
In
addition to the extensive materials that comprise and accompany the CCO Fee Evaluation Report, the Board received detailed information about the Fund and the Federated organization throughout the year, and in
connection with its May meetings at which the Board's formal approval of the advisory and subadvisory contracts occurred. In this regard, Federated provided much of this information at each regular meeting of the
Board, and furnished additional information specifically in connection with the May meetings. In the months preceding the May meetings, the Board requested and reviewed written materials prepared by Federated in
response to requests on behalf of the Independent Trustees encompassing a wide variety of topics. At the May meetings, in addition to meeting in separate sessions of the Independent Trustees without management
present, senior management of the Adviser also met with the Independent Trustees and their counsel to discuss the materials presented and such additional matters as the Independent Trustees deemed reasonably necessary
to evaluate the advisory and subadvisory contracts. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose.
The
Board's consideration of the investment advisory contract included review of the CCO Fee Evaluation Report, accompanying data and additional information covering the following matters, among others: the Adviser's
investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short-term and long-term performance (in absolute terms, both on a gross basis and net of
expenses, as well as in terms relative to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate) and comments on the reasons for performance;
the Fund's investment objectives; the Fund's expenses, including the advisory fee and the overall expense structure of the Fund (both
Annual Shareholder Report
39
in absolute terms and relative to
similar and/or competing funds), with due regard for contractual or voluntary expense limitations; the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the
nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders; the
entrepreneurial and other risks assumed by the Adviser in sponsoring the Fund; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in
the mutual fund industry; the Fund's relationship to the Federated Funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are generally available for
exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated Funds and the Federated companies that service them (including communications from regulatory
agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated Funds and/or Federated are responding to them. The Board's
evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
While
mindful that courts have cautioned against giving too much weight to comparative information concerning fees charged by other advisers for managing funds with comparable investment programs, the Board has found the
use of such comparisons to be relevant to its deliberations. In this regard, the Board was presented with, and considered, information regarding the contractual advisory fee rates, net advisory fee rates, total
expense ratios and each element of the Fund's total expense ratio (i.e., gross and net advisory fees, custody fees, portfolio accounting fees and transfer agency fees) relative to an appropriate group of peer funds
compiled by Federated using data supplied by independent fund ranking organizations (the “Peer Group”). The Board received a description of the composition and methodology used to select the Peer Group.
The Board focused on comparisons with other similar mutual funds more heavily than non-mutual fund products or services because it is believed that they are more relevant. For example, other mutual funds are the
products most like the Fund, in that they are readily available to Fund shareholders as alternative investment vehicles. Also, they are the type of investment vehicle, in fact, chosen and maintained by the Fund's
investors. The range of their fees and expenses, therefore, appears to be a relevant indicator of what consumers have found to be reasonable in the marketplace in which the Fund competes.
The
Board reviewed the contractual advisory fee rate and other expenses of the Fund and noted the position of the Fund's fee rates relative to its Peer Group. In this regard, the Board noted that the contractual advisory
fee rate was below the median of the relevant Peer Group and the Board was satisfied that the overall expense structure of the Fund remained competitive.
Annual Shareholder Report
40
For
comparison, the CCO reviewed the fees charged by Federated for providing advisory services to products other than the Federated Funds (e.g., institutional separate accounts and third-party unaffiliated mutual funds
for which Federated serves as sub-adviser) (referenced to as “Comparable Funds/Accounts”). With respect to Comparable Funds/Accounts other than third-party mutual funds, the CCO concluded that they are
inherently different products. Those differences include, but are not limited to, different types of targeted investors; different applicable laws and regulations; different legal structures; different average account
sizes and portfolio management techniques made necessary by different cash flows and different associated costs; and the time spent by portfolio managers and their teams, as well as personnel in the Funds Financial
Services, Legal, Compliance and Risk Management departments, in reviewing securities pricing, addressing different administrative responsibilities, addressing different degrees of risk associated with management and a
variety of different costs. The CCO also reviewed the differences in the nature of the services required for Federated to manage its proprietary mutual fund business versus managing a discrete pool of assets as a
sub-adviser to another institution's mutual fund, and that Federated generally performs significant additional services and assumes substantially greater risks in managing the Fund and other Federated Funds than in
its role as sub-adviser to an unaffiliated third-party mutual fund. The CCO did not consider the fees for providing advisory services to Comparable Funds/Accounts to be determinative in judging the appropriateness of
the Federated Funds' advisory fees.
Following such evaluation, and full deliberations, the Board concluded that the fees and expenses of the Fund are reasonable and supported renewal of the Fund's investment advisory contract.
The
Board considered the nature, extent and quality of the services provided to the Fund by the Adviser and the resources of the Adviser and its affiliates dedicated to the Fund. In this regard, the Board evaluated, among
other things, the Adviser's personnel, experience, track record, financial resources, overall reputation and willingness to invest in personnel and infrastructure that benefit the Fund. In addition, the Board reviewed
the qualifications, backgrounds and responsibilities of the portfolio management team primarily responsible for the day-to-day management of the Fund and the Adviser's ability and experience in attracting and
retaining qualified personnel to service the Fund. The Board noted the investment research and company engagement capabilities of the Adviser and its affiliates. The Board also noted the compliance program of the
Adviser and the compliance-related resources provided to the Fund by the Adviser, including the Adviser's commitment to respond to rulemaking initiatives of the SEC. The Fund's ability to deliver competitive
performance when compared to its Peer Group was also deemed to be relevant by the Board as a useful indicator of how the Adviser is executing the Fund's investment
Annual Shareholder Report
41
program. The Adviser's ability to
execute this program was one of the Board's considerations in reaching a conclusion that the nature, extent and quality of the Adviser's investment management services warrant the continuation of the investment
advisory contract.
In
evaluating the Fund's investment performance, the Board considered performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board considered
detailed investment reports on the Fund's performance that were provided to the Board throughout the year and in connection with the May meetings. The CCO also reviewed information regarding the performance of other
mutual funds in the Peer Group, noting the CCO's view that comparisons to fund peer groups may be helpful, though not conclusive, in evaluating the performance of the Adviser in managing the Fund. The Board
considered, in evaluating such comparisons, that in some cases there may be differences in the funds' objectives or investment management techniques, or the costs to implement the funds, even within the same Peer
Group.
The
Fund's performance fell below the median of the relevant Peer Group for the one-year, three-year and five-year periods covered by the CCO Fee Evaluation Report. The Board discussed the Fund's performance with the
Adviser and recognized the efforts being taken by the Adviser in the context of other factors considered relevant by the Board.
Following such evaluation, and full deliberations, the Board concluded that the performance of the Fund supported renewal of the Fund's investment advisory contract.
The
Board also received financial information about Federated, including information regarding the compensation and ancillary (or “fall-out”) benefits Federated derived from its relationships with the
Federated Funds. This information covered not only the fees under the investment advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated Funds under
separate contracts (e.g., for serving as the Federated funds' administrator and distributor). In this regard, the Board considered that certain Federated subsidiaries provide distribution and shareholder services to
the Federated Funds, for which they may be compensated through distribution and servicing fees paid pursuant to Rule 12b-1 plans or otherwise. The information also detailed any indirect benefit Federated may derive
from its receipt of research services from brokers who execute Federated Fund trades. In addition, the Board considered the fact that, in order for a Federated Fund to be competitive in the marketplace, the Adviser
and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to Federated Fund investors and/or indicated to the Board their intention to do so in the future. Moreover, the Board receives
regular reporting as to the institution, adjustment or
Annual Shareholder Report
42
elimination of these voluntary waivers.
The Board considered Federated's previous reductions in contractual management fees to certain Federated Funds in response to the CCO's recommendations in the prior year's CCO Fee Evaluation Report.
Federated furnished information, requested by the CCO, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies
specified by the CCO. The CCO noted that, while these cost allocation reports apply consistent allocation processes, the inherent difficulties in allocating costs continues to cause the CCO to question the precision
of the process and to conclude that such reports may be unreliable, since a single change in an allocation estimate may dramatically alter the resulting estimate of cost and/or profitability of a Federated Fund and
may produce unintended consequences. The allocation information, including the CCO's view that fund-by-fund estimations may be unreliable, was considered in the evaluation by the Board.
The
Board and the CCO also reviewed information compiled by Federated comparing its profitability information to other publicly held fund management companies, including information regarding profitability trends over
time. In this regard, the CCO concluded that Federated's profit margins did not appear to be excessive. The CCO also noted that Federated appeared financially sound, with the resources necessary to fulfill its
obligations under its contracts with the Fund.
The CCO
Fee Evaluation Report also discussed the notion of possible realization of “economies of scale” as a fund grows larger, the difficulties of calculating economies of scale at an individual fund level, and
the extent to which potential scale benefits are shared with shareholders. In this regard, the Board considered that Federated has made significant and long-term investments in areas that support all of the Federated
Funds, such as personnel and processes for the portfolio management, shareholder services, compliance, internal audit and risk management functions, as well as systems technology (including technology relating to
cybersecurity) and that the benefits of these investments (as well as any economies of scale, should they exist) were likely to be shared with the Federated Fund family as a whole. The Board noted that Federated's
investments in these areas are extensive. In addition, the Board considered that the Adviser and its affiliates have frequently waived fees and/or reimbursed expenses and that this has allowed potential economies of
scale to be shared with shareholders. The Board also considered that such waivers and reimbursements can provide protection from an increase in expenses if a Federated Fund's assets decline. Federated, as it does
throughout the year, and specifically in connection with the Board's review of the advisory and subadvisory contracts, furnished information relative to revenue sharing or adviser-paid fees. Federated and the CCO
noted that this information should be viewed to determine if there was an incentive to either not apply breakpoints, or to apply breakpoints at higher levels, and should not be viewed to determine the
Annual Shareholder Report
43
appropriateness of advisory fees. The
Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the CCO Fee Evaluation Report) is compounded by the lack of any common industry practice or
general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as a fund attains a certain size.
The CCO
stated that his observations and the information accompanying the CCO Fee Evaluation Report supported a finding by the Board that the management fee for the Fund was reasonable. Under these circumstances, no changes
were recommended to, and no objection was raised to the continuation of, the Fund's investment advisory contract. The CCO also recognized that the Board's evaluation of the Federated Funds' advisory and subadvisory
arrangements is a continuing and on-going process that is informed by the information that the Board requests and receives from management throughout the course of the year and, in this regard, the CCO noted certain
items for future reporting to the Board or further consideration by management as the Board continues its on-going oversight of the Federated Funds.
In its
decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a
result of a decision to terminate or not renew an investment advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing
and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the investment advisory contract reflected the fact that
it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund. The Board concluded that, in light of the factors summarized above, including the nature, quality and scope of
the services provided to the Fund by the Adviser and its affiliates, continuation of the investment advisory contract was appropriate.
The
Board based its decision to approve the investment advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and
considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve
the continuation of the contract reflects its view that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangement.
Annual Shareholder Report
44
Voting Proxies on Fund
Portfolio Securities
A description of the
policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A
report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available via the Proxy Voting Record (Form N-PX) link associated with the Fund and
share class name at www.FederatedInvestors.com/FundInformation. Form N-PX filings are also available at the SEC's website at sec.gov.
Quarterly Portfolio
Schedule
Each fiscal quarter, the
Fund will file with the SEC a complete schedule of its monthly portfolio holdings on “Form N-PORT.” The Fund's holdings as of the end of the third month of every fiscal quarter, as reported on Form N-PORT,
will be publicly available on the SEC's website at www.sec.gov within 60 days of the end of the fiscal quarter upon filing. You may also access this information via the link to the Fund and share class name at
www.FederatedInvestors.com.
Annual Shareholder Report
45
Mutual funds are not bank
deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
Investment in mutual funds involves investment risk, including the possible loss of principal.
This Report is authorized
for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.
Federated U.S. Government Securities
Fund: 2-5 Years
Federated Hermes Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
or call 1-800-341-7400.
Federated Securities Corp.,
Distributor
CUSIP 31428P301
CUSIP 31428P103
CUSIP 31428P202
CUSIP 31428P103
CUSIP 31428P202
30063 (3/20)
© 2020 Federated Hermes, Inc.
| Item 2. | Code of Ethics |
(a) As of the end of the period covered by this report, the registrant has adopted a code of ethics (the "Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers") that applies to the registrant's Principal Executive Officer and Principal Financial Officer; the registrant's Principal Financial Officer also serves as the Principal Accounting Officer.
(c) There was no amendment to the registrant’s code of ethics described in Item 2(a) above during the period covered by the report.
(d) There was no waiver granted, either actual or implicit, from a provision to the registrant’s code of ethics described in Item 2(a) above during the period covered by the report.
(e) Not Applicable
(f)(3) The registrant hereby undertakes to provide any person, without charge, upon request, a copy of the code of ethics. To request a copy of the code of ethics, contact the registrant at 1-800-341-7400, and ask for a copy of the Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers.
Item 3. Audit Committee Financial Expert
The registrant's Board has determined that each of the following members of the Board's Audit Committee is an “audit committee financial expert,” and is "independent," for purposes of this Item: John T. Collins, G. Thomas Hough and Thomas M. O'Neill.
| Item 4. | Principal Accountant Fees and Services |
(a) Audit Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2020 - $30,200
Fiscal year ended 2019 - $30,200
(b) Audit-Related Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2020 - $0
Fiscal year ended 2019 - $0
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.
(c) Tax Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2020 - $0
Fiscal year ended 2019 - $0
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.
(d) All Other Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2020 - $0
Fiscal year ended 2019 - $0
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.
(e)(1) Audit Committee Policies regarding Pre-approval of Services.
The Audit Committee is required to pre-approve audit and non-audit services performed by the independent auditor in order to assure that the provision of such services do not impair the auditor’s independence. Unless a type of service to be provided by the independent auditor has received general pre-approval, it will require specific pre-approval by the Audit Committee. Any proposed services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee.
Certain services have the general pre-approval of the Audit Committee. The term of the general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The Audit Committee will annually review the services that may be provided by the independent auditor without obtaining specific pre-approval from the Audit Committee and may grant general pre-approval for such services. The Audit Committee will revise the list of general pre-approved services from time to time, based on subsequent determinations. The Audit Committee will not delegate its responsibilities to pre-approve services performed by the independent auditor to management.
The Audit Committee has delegated pre-approval authority to its Chairman. The Chairman will report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Committee will designate another member with such pre-approval authority when the Chairman is unavailable.
AUDIT SERVICES
The annual Audit services engagement terms and fees will be subject to the specific pre-approval of the Audit Committee. The Audit Committee must approve any changes in terms, conditions and fees resulting from changes in audit scope, registered investment company (RIC) structure or other matters.
In addition to the annual Audit services engagement specifically approved by the Audit Committee, the Audit Committee may grant general pre-approval for other Audit Services, which are those services that only the independent auditor reasonably can provide. The Audit Committee has pre-approved certain Audit services, all other Audit services must be specifically pre-approved by the Audit Committee.
AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements or that are traditionally performed by the independent auditor. The Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor, and has pre-approved certain Audit-related services, all other Audit-related services must be specifically pre-approved by the Audit Committee.
TAX SERVICES
The Audit Committee believes that the independent auditor can provide Tax services to the Company such as tax compliance, tax planning and tax advice without impairing the auditor’s independence. However, the Audit Committee will not permit the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported in the Internal Revenue Code and related regulations. The Audit Committee has pre-approved certain Tax services, all Tax services involving large and complex transactions must be specifically pre-approved by the Audit Committee.
ALL OTHER SERVICES
With respect to the provision of services other than audit, review or attest services the pre-approval requirement is waived if:
| (1) | The aggregate amount of all such services provided constitutes no more than five percent of the total amount of revenues paid by the registrant, the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant to its accountant during the fiscal year in which the services are provided; |
| (2) | Such services were not recognized by the registrant, the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant at the time of the engagement to be non-audit services; and |
| (3) | Such services are promptly brought to the attention of the Audit Committee of the issuer and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the Audit Committee. |
The Audit Committee may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, and would not impair the independence of the auditor.
The SEC’s rules and relevant guidance should be consulted to determine the precise definitions of prohibited non-audit services and the applicability of exceptions to certain of the prohibitions.
PRE-APPROVAL FEE LEVELS
Pre-approval fee levels for all services to be provided by the independent auditor will be established annually by the Audit Committee. Any proposed services exceeding these levels will require specific pre-approval by the Audit Committee.
PROCEDURES
Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the independent auditor and the Principal Accounting Officer and/or Internal Auditor, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.
(e)(2) Percentage of services identified in items 4(b) through 4(d) that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X:
4(b)
Fiscal year ended 2020 – 0%
Fiscal year ended 2019 - 0%
Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
4(c)
Fiscal year ended 2020 – 0%
Fiscal year ended 2019 – 0%
Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
4(d)
Fiscal year ended 2020 – 0%
Fiscal year ended 2019 – 0%
Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
| (f) | NA |
| (g) | Non-Audit Fees billed to the registrant, the registrant’s investment adviser, and certain entities controlling, controlled by or under common control with the investment adviser: |
Fiscal year ended 2020 - $574,517
Fiscal year ended 2019 - $654,334
| (h) | The registrant’s Audit Committee has considered that the provision of non-audit services that were rendered to the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence. |
The registrant’s management and Audit Committee continue to believe that the registrant’s registered public accounting firm, Ernst & Young LLP (“EY”), has the ability to exercise objective and impartial judgment on all issues encompassed within their audit services. EY is required to make a determination that it satisfies certain independence requirements under the federal securities laws. Like other registrants, there is a risk that activities or relationships of EY, or its partners or employees, can prevent a determination from being made that it satisfies such independence requirements with respect to the registrant, which could render it ineligible to serve as the registrant’s independent public accountant.
In its required communications to the Audit Committee of the registrant’s Board, EY informed the Audit Committee that EY and/or covered person professionals within EY maintain lending relationships with certain owners of greater than 10% of the shares of certain investment companies within the “investment company complex” as defined under Rule 2-01(f)(14) of Regulation S-X, which are affiliates of the registrant. EY has advised the Audit Committee that these lending relationships implicate Rule 2-01(c)(1)(ii)(A) of Regulation S-X (referred to as the “Loan Rule”). The Loan Rule prohibits an independent public accountant, or covered person professionals at such firm, from having a financial relationship (such as a loan) with a lender that is a record or beneficial owner of more than 10% of an audit client’s equity securities. For purposes of the Loan Rule, audit clients include the registrant, as well as all registered investment companies advised by advisory subsidiaries of Federated Hermes, Inc., the Adviser (for which EY serves as independent public accountant), and their respective affiliates (collectively, the “Federated Hermes Fund Complex”).
EY informed the Audit Committee that EY believes that these lending relationships described above do not and will not impair EY’s ability to exercise objective and impartial judgment in connection with financial statement audits of their respective funds of the registrant and a reasonable investor with knowledge of all relevant facts and circumstances would conclude that EY has been and is capable of objective and impartial judgment on all issues encompassed within EY’s audits.
On June 20, 2016, the Division of Investment Management of the Securities and Exchange Commission (“SEC”) issued a no-action letter to another mutual fund complex (see Fidelity Management & Research Company et al., No-Action Letter) related to similar Loan Rule matters as those described above (the “Letter”). In the Letter, the SEC Staff confirmed that it would not recommend enforcement action against an investment company that relied on the audit services performed by an independent public accountant where the Loan Rule was implicated in certain specified circumstances provided that: (1) the auditor has complied with PCAOB Rule 3526(b)(1) and 3526(b)(2); (2) the Loan Rule is implicated because of lending relationships; and (3) notwithstanding such lending relationships that implicate the Loan Rule, the auditor has concluded that it is objective and impartial with respect to the issues encompassed within its engagement as auditor of the funds. The circumstances described in the Letter are substantially similar to the circumstances that implicated the Loan Rule with respect to EY and the registrant. On September 22, 2017, the SEC extended the expiration of the Letter until the effectiveness of any amendments to the Loan Rule designed to address the concerns in the Letter. On June 18, 2019, the SEC adopted amendments (effective October 3, 2019) to the Loan Rule, which, refocus the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client at any time during an audit or professional engagement period.
If it were to be determined that, with respect to the Loan Rule, the relief available under the Letter was improperly relied upon, or that the independence requirements under the federal securities laws were not complied with regarding the registrant, for certain periods, and/or given the implication of the Investment Rule for certain periods, any of the registrant’s filings with the SEC which contain financial statements of the registrant for such periods may be determined not to be consistent with or comply with applicable federal securities laws, the registrant’s ability to offer shares under its current registration statement may be impacted, and certain financial reporting and/or other covenants with, and representations and warranties to, the registrant’s lender under its committed line of credit may be impacted. Such events could have a material adverse effect on the registrant and the Federated Hermes Fund Complex.
| Item 5. | Audit Committee of Listed Registrants |
Not Applicable
| Item 6. | Schedule of Investments |
(a) The registrant’s Schedule of Investments is included as part of the Report to Stockholders filed under Item 1 of this form.
(b) Not Applicable; Fund had no divestments during the reporting period covered since the previous Form N-CSR filing.
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies |
Not Applicable
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies |
Not Applicable
| Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers |
Not Applicable
| Item 10. | Submission of Matters to a Vote of Security Holders |
No Changes to Report
| Item 11. | Controls and Procedures |
(a) The registrant’s President and Treasurer have concluded that the
registrant’s disclosure controls and procedures (as defined in rule 30a-3(c) under the Act) are effective in design and operation and are sufficient to form the basis of the certifications required by Rule 30a-(2) under the Act, based on their evaluation of these disclosure controls and procedures within 90 days of the filing date of this report on Form N-CSR.
(b) There were no changes in the registrant’s internal control over financial reporting (as defined in rule 30a-3(d) under the Act) during the registrant’s most recent fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
| Item 12. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies |
Not Applicable
| Item 13. | Exhibits |
(a)(1) Code of Ethics- Not Applicable to this Report.
(a)(2) Certifications of Principal Executive Officer and Principal Financial Officer.
(a)(3) Not Applicable.
(b) Certifications pursuant to 18 U.S.C. Section 1350.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant Federated U.S. Government Securities Fund: 2-5 Years
By /S/ Lori A. Hensler
Lori A. Hensler, Principal Financial Officer
Date March 23, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /S/ J. Christopher Donahue
J. Christopher Donahue, Principal Executive Officer
Date March 23, 2020_______________________
By /S/ Lori A. Hensler
Lori A. Hensler, Principal Financial Officer
Date March 23, 2020_______________________