Federated Investors, Inc. (FII)

FII 
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Federated Investors (FII)

Q4 2010 Earnings Call

January 28, 2011 9:00 am ET

Executives

Ray Hanley - Analyst

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

John Donahue - Chief Executive Officer, President, Director and Member of Executive Committee

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

Analysts

William Katz - Citigroup Inc

Michael Kim - Sandler O'Neill & Partners

Michael Carrier - Deutsche Bank AG

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

Kenneth Worthington - JP Morgan Chase & Co

Cynthia Mayer - BofA Merrill Lynch

Roger Freeman - Barclays Capital

Presentation

Operator

Greetings and welcome to the Federated Investors fourth quarter 2010 earnings call and webcast. [Operator Instructions] It is now my pleasure to introduce your host, Ray Hanley, President of Federated Investors Management Company. Thank you. Mr. Hanley, you may begin.

Ray Hanley

Good morning, and welcome. Leading today's call will be Chris Donahue, Federated's CEO; and Tom Donahue, Chief Financial Officer. And they'll give some brief remarks before we open up for questions. Joining us for the Q&A will be Debbie Cunningham, CIO of Federated Money Markets.

In the way of forward-looking statements 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 our risk disclosures in our SEC filings. No assurance can be given as to the 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 Donahue

Well and 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 cash management, Money Market assets were up to $15 billion from the prior quarter, with about $3 billion of this coming from the completion of the SunTrust Money Market acquisition. As you can see, by looking at the average assets, inflows came in later in the quarter as we've seen at other year ends. So far in January, Money Market assets are down slightly. While market conditions continue to be challenging, our cash management business remains well-positioned, strong and stable.

The fourth quarter saw an uptick in money fund yield waivers to just the beyond the high side of our calculation last quarter. Tom will comment on the waiver impact in his remarks. We continue to expect that these waivers will not change much until a clear path to higher short-term rates and Fed increases emerges. Debbie will talk about our rate outlook a bit later.

Our Money Market fund share at the end of the year was about 8.8%. This compares to about 8.5% at year-end '09 and year-end '08, and about 7% for '07 and about 5% at the beginning of the year 2000. On the regulatory front, Federated and many others have responded to the SEC's request for comments to the options discussed in the President's working group report. In our view, the changes made in 2010 to Rule 2a-7, which are still being implemented by the industry have further strengthened the framework that has worked exceptionally well for over 30 years. We believe it would be appropriate to allow these measures to be fully implemented and evaluated over a longer time frame before considering this option of additional regulatory changes.

We continue to support the liquidity bank measure that was proposed by the industry through the ICI Working Group. We see this as an option that will enhance money fund resiliency by offering a source of additional liquidity or high-quality investments, but importantly, it does not socialize credit risk and does not provide for a guarantee on money funds, which we believe is neither practical nor necessary.

Turning to other products, we have a variety of equity funds with solid records that we expect to gather assets as the market conditions continue to improve. Gross and net sales in the fourth quarter were strongest in our strategic value dividend fund, which is well-positioned as investors increasingly look for income from equity investments. The Kaufmann Large Cap Fund recently marked its three-year anniversary and with its strong performance, achieved strong ratings and positive flows. The Kaufmann Small Cap fund also had positive flows during the fourth quarter.

Our International group has produced a very solid performance over the last year. We saw positive flows into the international leaders and international strategic value funds in the fourth quarter. On the value side, the Clover Small Value Fund has performed well and has produced positive flows in the fourth quarter.

While our gross equity fund sales increased about 7% in the fourth quarter from the prior quarter, flows were negative due mainly to outflows in the Prudent Bear fund. But we position this fund as an overall enhancement to a portfolio over market cycles. And we believed that this is how most of the shareholders use the fund. Yet, we have seen that the fund tends to acquire assets in down markets that experienced outflows in up markets. This fund had inflows of $216 million in the third quarter and then moved to outflows of $295 million in the fourth quarter for a swing of over $500 million.

By looking at the first quarter results for the first few weeks, equity flows had been modestly negative. Within equity separate accounts, outflows were largely due to net redemptions in Quant products, MBT, SMA and institutional accounts. We won the small-cap growth institutional mandate that we expect to fund next quarter with about $120 million.

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