Federated Investors, Inc. (FII)

FII 
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Federated Investors, Inc. (FII)

Q2 2010 Earnings Call

July 23, 2010 09:00 am ET

Executives

Raymond J. Hanley - President for Federated Investors Management Company

Chris Donahue - President and CEO

Tom Donahue - President, FII Holdings, Inc., CFO and Treasurer

Debbie Cunningham - EVP and CIO

Analysts

Michael Kim - Sandler O'Neill

Roger Freeman - Barclays Capital

Mike Carrier - Deutsche Bank

Robert Lee - Keefe, Bruyette & Woods

Ken Worthington - JPMorgan

Cynthia Mayer - BofA Merrill Lynch

Craig Siegenthaler - Credit Suisse

Marc Irizarry - Goldman Sachs

Will Katz - Citigroup

Presentation

Operator

Greetings, and welcome to the Federated Investors second 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 Management Company. Thank you. Mr. Hanley, you may begin.

Raymond J. Hanley

Good morning and welcome. We'll have some brief remarks today before opening up for your questions. Leading today's call will be Chris Donahue, Federated's Chief Executive Officer; and Tom Donahue, Chief Financial Officer, and also with us are Debbie Cunningham, our Chief Investment Officer for Money Market; and from the Corporate Finance Department, Denis McAuley, Lori Hensler and Stacey Friday.

Let me start by saying that certain statements in the presentation will constitute forward-looking statements which involve risks that may cause the actual results to differ from future results implied by such statements. For a discussion of the risk factors, please see our SEC filings. No assurance can be given as the future results and Federated assumes no responsibility for the accuracy and completeness of such statements in the future.

And with that, I'll turn it over to Chris to talk about the second quarter.

Chris 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 $12 billion or 4% from the prior quarter. Money market mutual funds decreased by $9 billion and money market separate accounts decreased by $3 billion, which was due largely to tax seasonality.

Money market asset changes are best understood within the context of the unprecedented cycle we are experiencing. All our clients added $182 billion to their money fund balances in '07 and '08, and in '09 and through the end of Q2 here in '10, we've seen about $95 billion flow out, meaning, by the famous subtraction method that we are up $87 billion from the beginning of this cycle.

During Q2, we saw our money market fund assets decrease in April due largely to expected tax seasonality. These assets then increased in both May and June and average assets so far in July are higher than the June 30 period end level. Growth from clients outside of the US has helped with these results.

While market conditions continue to be challenging, our clients have remained strong, stable and growing. Our clients have appreciated the strength, the stability and the availability of our products. We remain confident that our cash management business is well positioned and we expect this business to grow overtime with higher highs and higher lows during particular cycles. We also expect further growth through consolidation.

The transaction we announced last week with SunTrust is expected to result in the transition of about $17 billion in money market assets in the Federated money market products during Q4. This is an example of our ability to work successfully with long-term clients as they make changes in their approach to cash management, and we expect to see more of these arrangements, as banks and other organizations are attracted to our long-term commitment to this business and our long-term record of providing high quality products and service that they can rely on for their client.

Turning to the money market fund yield waivers. Q2 saw some relief in the impact from these waivers. As we expected, repo rates moved in to the upper portion of the zero to 25 basis point target range. In addition, LIBOR rates further increased reflecting market condition that developed, following uncertainty in Europe. This helps to decrease the waivers more than anticipated. We expect these waivers to decrease going forward though at a slower rate than we saw in Q2 and Tom will comment further on these in his remarks.

Our money market fund share increased in the second quarter to about 8.2%, up from approximately 8.1% at the end of first quarter. For reference recall that in 2009 and2008, our market share was about 8.5%, up from about 7% in '07 and 5% at the turn of the millennium.

As we turn to other products, it is worth noting that in the midst of the difficult market conditions in Q2, Federated was able to use its broad product lineup to offer products geared to challenging equity market. A prime example is the set of alternative strategy equity mutual fund products that we have developed featuring the Prudent Bear Funds which we acquired in December of '08. This fund returned just under 10% for the quarter and produced solid gross sales of $573 million and net sales of $212 million.

It has surpassed $2 billion in assets and as of mid-July had more than doubled in size from the end of 2008. Flows in this product changed quickly with changes in the equity market. While we stressed to clients we believe this type of product should be a part of every portfolio, its value becomes most apparent during tough equity markets.

Other funds with net inflows in Q2 included the InterContinental, Strategic Value, Kaufman Large Cap and Clover Small Value funds. With these and other funds we have a solid equity fund product in growth value income, international and alternative. And we believe that these products will be attractive as equity markets improve and flows pickup.

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