Federated Investors, Inc. (FII)

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Federated Investors, Inc. (FII)

Q3 2009 Earnings Call

October 23, 2009 9:00 am ET


Raymond J. Hanley - President

J. Christopher Donahue - Chief Executive Officer

Thomas R. Donahue - Chief Financial Officer

Deborah A. Cunningham - Chief Investment Officer, Money Market Operations


Michael Kim - Sandler O’Neill

Keith Walsh - Citigroup

Marc Irizarry - Goldman Sachs

Robert Lee - Keefe, Bruyette & Woods

Craig Siegenthaler - Credit Suisse

Cynthia Mayer - BAS-ML

Ken Worthington - JP Morgan

Roger Freeman – Barclays Capital

William Katz - Buckingham Research Group

Mike Carrier - Deutsche Bank



Greetings and welcome to the Federated Investors Q3 2009 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Raymond J. Hanley, President, Federated Investors Management Company.

Raymond J. Hanley

Good morning and welcome. Today we plan some brief remarks before opening up for your questions. Leading today's call will be Chris Donahue, Federated's CEO and Tom Donahue, Chief Financial Officer. Dennis McCauley, Laurie Hensler, and Stacy Friday are here from the Corporate Finance Group, and Debbie Cunningham, our Chief Investment Officer for Money Markets will join us for questions, as well.

Let me start by saying that certain statements in the presentation, including those related to investments and financial performance and asset levels will constitute forward-looking statements, which involve known and unknown risks that may cause the actual results to be materially different from future results implied by such forward-looking statements. For a discussion of risk factors, please see Federated's SEC filings. No assurance can be given as to future results and neither Federated nor any other person assumes responsibility for the accuracy and completeness of such statements in the future.

With that, I will turn it over to Chris.

J. Christopher Donahue

Good morning. I will begin by reviewing Federated's recent business performance before turning the call over to Tom to discuss our financials.

Starting with the Cash Management business, money market assets decreased by $28.0 billion, or 8%, from the prior quarter with most of the decrease coming from money market funds. However, money market assets at quarter end were $30.0 billion higher compared with the third quarter of 2008. We saw elevated redemptions in September, in particular at mid-month, around the September 15 corporate tax payment date.

As in Q2, more favorable market conditions for stocks and bonds likely led to lower money fund balances at Federated and across the industry. Federated also has benefitted from better market conditions, as evidenced by our solid sales of bond of equity funds and asset and revenue growth in these areas during the third quarter.

Low interest rates continue to impact yields and fee waivers for money funds. Tom will provide some more information during his remarks.

As we look at money market asset levels over the last several quarters, we have a different take than those lamenting the recent outflows. To us it is clear that money funds are a vital part of the financial system and offer efficient cash management services to investors through all types of market conditions. Changes in volumes are a natural part of how this business operates.

During the past two years money funds generally provided an attractive haven during the worst of the market swings and credit crisis issues. In-flow levels were unprecedented and it is not unexpected that some of these assets would move around as market conditions improve.

Federated has operated successfully through other high and low cycles over decades of cash management experience. We tend to look beyond event-driven peak and profit asset levels to focus on the strength of our underlying cash management service business.

Federated retains its strong core client base, who depend on our money market products as an essential component of cash management services. We expect this core business to continue to grow over time, with higher highs and higher lows during particular cycles, as we have experienced over the last 30+ years in this business. As the cycle turns, we are in close contact with clients to help them as they navigate changing market conditions. Our sales personnel are emphasizing our full product line so that as customers consider asset reallocations, we are responding to the full sweep of products.

Our high-quality fixed income strategies, ranging from short-duration bonds to total return, international high yields, are winning business in both funds and separate accounts. Within equities we see traction in the alternative and dividend income strategies reflecting a defensive stance even as investors begin to rethink their allocations.

We have a variety of products in multiple areas that are well positioned for higher sales. Our efforts are paying off, as evidenced by share-gaining bond and equity fund sales. For bond funds, our share of industry gross sales increased from under 0.5% in 2007 and 2008 to just under 1.5% in for the first eight months of 2009. Our equity gross fund sales share has also increased in 2009 compared to 2007 and 2008.

Based on strategic insight data, Federated ranks 11th in the industry for year-to-date combined fixed income and equity fund net sales and has produced an 18% annualized organic growth rate for net flows in fixed income and equity funds in 2009.

Thus, we welcome improved market conditions for bonds and equities and believe that we are well positioned to capture close as investors consider reallocations from a variety of sources.

Looking more specifically at equities, assets increased by about $3.0 billion, or 11%, during the third quarter. Equity fund flows were positive and increased from the prior quarter. Alternative strategy mutual funds were responsible for most of the net positive flows, with good results from both the Prudent Bear and Market Opportunity funds. The Strategic Value Dividend Oriented Fund continues to show solid flows, as does the Kaufmann Small Cap Fund.

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