Federated Investors, Inc. (FII)

FII 
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Federated Investors, Inc. (FII)

Q4 2009 Earnings Call

January 29, 2010 9:00 am ET

Executives

Raymond J. Hanley – President Investor Relations

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

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

Deborah Cunningham – Chief Investment Officer Money Market Group

Lori A. Hensler – Corporate Finance

Stacy Friday – Corporate Finance

Analysts

Michael Carrier – Deutsche Bank Securities

Michael Kim – Sandler O’Neill & Partners

Roger Freeman – Barclays Capital

Kenneth Worthington – JP Morgan

Michael Hect – JMP Securities

Marc Irizarry – Goldman Sachs

Cynthia Mayer – Bank of America Merrill Lynch

Robert Lee – Keefe, Bruyette & Woods

William Katz – Buckingham Research

Roger Smith – MacQuarie Research Equities

Presentation

Operator

Welcome to Federated Investors Q4 2009 quarterly earnings call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. (Operation 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 Management Company.

Raymond J. Hanley

Today we’ve planned some brief remarks before opening up for your questions. Leading today’s call will be Chris Donahue, Federated’s CEO; Tom Donahue, Chief Financial Officer. We also have Debbie Cunningham, Chief Investment Officer for Money Market Group and we have Dennis McAuley, Lori Hensler and Stacy Friday from the corporate finance area.

Let me start by saying that certain statements in the presentation including those related to assets, investment and financial performance constitute forward-looking statements which 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 risk factors please see our SEC filings.

No assurance can be given as to the future results and neither Federated or 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.

J. Christopher Donahue

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 about $5 billion or 2% from the prior quarter. Money market funds decreased about $6 billion and were partially offset by an increase in cash separate account assets.

We are seeing significant asset movements in our money funds over the last several weeks. We saw about $5 billion of inflows during the last week or so of December followed by outflows during January to date of approximately $22 billion. These outflows were concentrated in the middle of the month, a period where we generally see cash movement related to tax payments and other uses of cash. During the week ending January 15th outflows totaled about $15 billion. Money fund assets have been essentially flat since mid month.

Now, in addition to regular uses of cash, the outflows included the withdrawal of assets that came in late in the year which we expected. We also had some client specific actions that were planned for this period. In addition, market condition including rates and yields, regulatory uncertainty and competition from our bank products were factors. Importantly, our client base remained intact.

Low interest rates continue to impact yields and fee waivers for money funds in Q4 and the waiver impact is likely to increase in Q1 as rates fell further in January. However, we believe that we will begin to see some upward movement in rates over the next couple of months initially within the current zero to 25 basis points fed funds target range. As such, we believe that we will begin to see less impact from money fund fee waivers in the second quarter. Tom will provide more specific information in his remarks.

Our cash management business continues to be very well positioned. We expect this business to continue to grow over time with higher high and higher lows during particular cycles. Looking at this most recent cycle, our money funds grew by about $173 billion in ’07 and ’08 combined. In ’09 and here so far in ’10 we have seen about $68 billion leave our money fund.

Now, the SEC’s adoption of new money market rules was a welcome development. We believe that the changes announced will strengthen the regulatory framework that money funds operate within and do what all of the regulators and governmental officials have said is their goal, enhance the resiliency of money funds. It was clear to us that the SEC carefully considered the comments made by Federated and others at arriving a these changes. We anticipate that these changes will not materially alter the way we manage our funds or even the yields of our products as we have generally applied these standards already.

We are encouraged by the process and expect that any future changes follow the path of preserving the key characteristics of money funds the enable those products to play a vital role in our capital markets. Beyond cash, we have a broad array of solid products in both bonds and equities. Our sales growth in ’09 of 64% for combined bond and equity mutual fund gross sales was a result of a combination of solid performance and successful product distribution. We gained market share in ’09 of gross sales for bond funds and for equity funds utilizing the industry’s most recent data.

Now, looking more specifically at equity assets, they increased slightly during Q4 to just under $30 billion at year end. Equity flows were positive. We continue to have success with alternative strategy mutual funds with good results in particular from the prudent bear fund. The strategic value dividend oriented fund continues to show solid flows as does the Kaufman small cap fund.

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