Federated Investors, Inc. (FII)

FII 
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Federal Investors, Inc (FII)

Q1 2010 Earnings Call

April 23, 2010 9:00 a.m. ET

Executives

Raymond J. Hanley - President for Federated Investors

J. Christopher Donahue - President, Chief Executive Officer & Director

Thomas R. Donahue - Chief Financial Officer, Vice President, Treasure & President FII Holdings, Inc

Susan R. Hill - Senior Vice President, Senior Portfolio Manager

Analysts

Roger Freeman - Barclays Capital

Michael Carrier - Deutsche Bank Securities

Craig Siegenthaler - Credit Suisse

Michael Kin - Sandler O'Neill

Cynthia Mayer - Banc of America - Merrill Lynch

Ken Worthington - JP Morgan Chase

William Katz - Citigroup

Robert Lee - Keefe, Bruyette & Woods

Marc Irrizary - Goldman Sachs

Presentation

Operator

Greetings and welcome to the Federated Investors first quarter 2010 quarterly earnings call and webcast. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Raymond J. Hanley, President for Federated Investors. Thank you. Mr. Hanley, you may begin.

Raymond J. Hanley

Good morning and welcome. Today we've planned some brief remarks before opening up for your questions. Leading today’s call will be Chris Donahue, Federated’s President and Chief Executive Officer; Tom Donahue, Chief Financial Officer.

Also with us are Denis McAuley, Lori Hensler and Stacey Friday from the Corporate Finance Group and Sue Hill, Senior VP and Senior Portfolio Manager from our Money Market Group will participate in the Q&A as well.

To start, let me say that certain statements in the presentation constitute forward-looking statements that involve known and unknown risk that may cause actual results to be materially different from future results implied by such forward-looking statements. For a discussion of the risk factors please see our 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’ll turn it over to Chris to talk about the quarter.

J. Christopher Donahue

Thank you, Ray, and good morning. I will start with a brief review of Federated’s recent business performance before turning the call over to Tom to discuss our financials. Looking first at the cash management portion of our business, money market assets decreased by $41 billion or 13% from the prior quarter. The decrease came from money market funds as cash separate account assets increased slightly.

We noted in our January call that money fund assets were down about $22 billion. Assets were relatively stable in February before decreasing in March and we have seen the expected tax related outflows here in April.

Unprecedented market conditions and short-term interest rates have led to unprecedented changes in client money fund balances over the last three years. In this period our clients added about $173 billion to their money fund balances in '07 and '08.

In '09 and through mid April of '10 we've seen about $100 billion leave our money funds. Money fund withdrawals have included certain assets that came in late in '09 with an intended short stay, draws outs of cash by corporations beginning to increase investment spending and increased use of certain high-yielding investments including direct market investments and bank deposit products by some investors who are more yield sensitive.

Throughout this period, including in 2010, our client relationships have remained strong, stable and, in fact, growing. Our clients have appreciated the strength and stability of our products and our willingness to keep funds open during periods when other providers closed funds, even as we waived most or, in some cases, all of our advisory fees in some of the funds.

We are confident that looking beyond the unprecedented market and interest rate environment of recent years our cash management business continues to be very well positioned. We expect this business to continue to grow over time with higher highs and higher lows during particular cycles.

Although low rates continue to impact yields and fee waivers for money funds in Q1, we believe that we saw the high water mark for these waivers in January and February. As we expected, there was some upward movement in certain rates within the current zero to 25 basis point Fed funds target range in March.

We believe that we will see less impact from money fund fee waivers beginning in the second quarter and continuing over the rest of the year. Tom will provide some more specific comments in his remarks. Importantly, our money market funds share has remained over 8% during the quarter.

Beyond cash we have a broad array of solid products in both bonds and equities. In Q1 we saw gross mutual fund tails increase to over $2 billion per month for combined equity and bond funds. This is an increase of about 7.5% from the average in 2009 and builds on the 64% growth we saw in the 2009 versus 2008 timeframe. We gained market share in 2009 on the gross sales for bond funds and for equity funds as well.

Now, looking more specifically at equities, assets increased slightly during the first quarter to just over $30 billion. Net inflows were negative in January and March and positive in February. For the first two weeks of April these flows are negative.

For the full quarter we saw positive flows in the Intercontinental Fund and in the alternative space with the Prudent Bear Fund. The Strategic Value dividend [REN] fund continues to show solid flows and net flows were also positive in the [Caughman] Large Cap Fund, the Clover Smaller Value Fund and Federated Mid-Cap Growth Strategies Fund.

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