Federated Investors, Inc. (FII)

FII 
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Federated Investors (FII)

Q4 2012 Earnings Call

January 25, 2013 9:00 am ET

Executives

Ray Hanley - Analyst

John Christopher Donahue - Chief Executive Officer, President and Director

Thomas Robert Donahue - Chief Financial Officer, Vice President, Treasurer, President of FII Holdings Inc and President of Federated Investors Management Company

Deborah Ann Cunningham - Chief Investment Officer of Taxable Money Markets, Senior Vice President and Senior Portfolio Manager

Analysts

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Matthew Kelley - Morgan Stanley, Research Division

William R. Katz - Citigroup Inc, Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Roger A. Freeman - Barclays Capital, Research Division

Edwin G. Groshans - Height Analytics, LLC

Presentation

Operator

Greetings, and welcome to the Federated Investors, Inc. Fourth Quarter Analyst Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Raymond Hanley, President of Federated Investors Management Company. Thank you, sir. Please begin.

Ray Hanley

Good morning, and welcome. Leading today's call will be Chris Donahue, Federated's CEO and President; Tom Donahue, Chief Financial Officer; and joining us for the Q&A is Debbie Cunningham, who is the Chief Investment Officer of our money market area.

Let me say that during today's call, we may make forward-looking statements, and we want to note that Federated's actual results may be materially different than the results implied by such statements. We invite you to review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated assumes no duty to update any of these forward-looking statements.

And with that, I'll turn it over to Chris.

John Christopher Donahue

Thank you, Ray. Good morning, all. 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 to cash management. Average money market fund assets were up over $5 billion in the fourth quarter, while the quarter end totals increased by nearly $11 billion to $256 billion. Our market share for money market funds increased slightly in the fourth quarter. For separate account money market assets, the $4 billion of growth in period end assets was due to expected seasonality. The year-end expiration of the government's unlimited insurance on non-interest-bearing bank, accounts called TAG program, likely accounted for some part of the money market fund asset growth for us and for the industry. However, it is not unusual for us to see money market inflows during the fourth quarter. The impact of yield related waivers decreased in Q4, but we expect it to increase in Q1. Tom will comment on this further in his remarks.

For the regulatory front, I'll start out by noting that with the industry up $90 billion in money market assets in the fourth quarter, it's obvious that money market investors have remained confident about the product as it's presently constructed: Dollar in, dollar out; uninsured; transparent; invested in a diversified portfolio of high-quality securities; and supported by proper accounting and market valuations. Still the regulators continue on their mission to reform money funds in ways that, as presented by FSOC in their letter to the SEC in November, will raise debt costs for municipal issuers, corporations and others are causing investors to move cash to investments that are far less regulated, have far less transparency and which, in the case of the still too-big-to-fail banks, present far more systemic risks to the financial system.

With the comment period extended until mid-February on FSOC's Section 120 SEC letter, we continue to be active in informing our customers and the marketplace about the dangers of the measures outlined by the FSOC, and to offer our help to the regulators to arrive at constructive changes. Our position is straightforward. We will continue to champion those things that enhance the resiliency of money market funds, while retaining the core features of a sound product with an unparalleled long record of safety and success, namely daily liquidity at par to the market rate of interest.

And now turning to our equity business. Flows for equity mutual funds and separate accounts combined, were slightly negative for the fourth quarter and solidly positive for the full year. We continue to see solid demand for income-oriented equity products, particularly the Strategic Value Dividend, both in its domestic and international forms and the Capital Income Strategies.

Other strategies with net inflows included are Managed Volatility product in the variable annuity space, Muni and Stock Advantage, Clover Small Value, International Leaders and Kaufmann's Large Cap.

Fourth quarter flows in equity separate accounts were strongly positive led by another strong performance by our Strategic Value SMA strategy. 2012 was a strong year for equity performance at Federated. At the end of the year, we had 13 equity strategies in a variety of styles, with top quartile 3-year records and 11 in the top quartile for the 1-year period. Some of the 3-year members include Strategic Value Dividend in both international and domestic forms, Capital Income, Kaufmann Large Cap, InterContinental, International Leaders, 3 MDT Strategies, Pru Bear and others.

In 2012, we saw a continued strong performance in our international strategies. As mentioned, the International Leaders Fund was in the top 1% of its category for 2012, and in the top 10% for the 3-, 5- and 10-year periods. Federated InterContinental Fund placed in the top 15% for 1 and 3 years. Among our income strategies, is the Capital Income Fund is top quartile for 1, 3, 5 and 10 years. The Domestic and International Strategic Value Funds are top 8 and 14% for trailing 3 years in their respective categories. These funds pursue a highly specialized, highly defined income strategy targeting a 5% dividend and 5% growth in dividends. Because of this, broad category performance comparisons are much less relevant.

We also saw improvement in Kaufmann and MDT Strategies. While all 3 Kaufmann strategies we're top quintile for 2012, the Large Cap Fund was in the top 1% of its performance ranking, and the Small Cap Fund achieved results in the top 2% of its category. Three MDT Strategies were in the top 15% of their categories for 2012.

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