Federated Investors, Inc. (FII)

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Federated Investors (FII)

Q1 2011 Earnings Call

April 29, 2011 9:00 am ET


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 and Director

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


William Katz - Citigroup Inc

Craig Siegenthaler - Crédit Suisse AG

Michael Kim - Sandler O'Neill & Partners

Michael Carrier - Deutsche Bank AG

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

Kenneth Worthington - JP Morgan Chase & Co

Marc Irizarry - Goldman Sachs Group Inc.

Roger Smith - Macquarie Research

Cynthia Mayer - BofA Merrill Lynch

Roger Freeman - Barclays Capital



Greetings, and welcome to the Federated Investors First Quarter 2011 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond J. Hanley, President of Federated Investors Management Co. Thank you, Mr. Hanley, you may begin.

Ray Hanley

Good morning, and welcome. Thank you for joining us. Today, the call will be led by Chris Donahue, Federated CEO; and Tom Donahue, Chief Financial Officer. And we also have Debbie Cunningham, who is Chief Investment Officer for Money Markets who will join us with some commentary on market activity and interest rate outlook and participate in our Q&A.

And by 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 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

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 at cash management. Money Markets average assets increased from the prior quarter for both our funds and our separate accounts. As mentioned in the last call, expected outflows early in Q1, mainly from flows that came in late in the year, led to lower period-end fund assets. Growth in average money fund assets was mainly from wealth management and trust channel, while Money Market's separate accounts growth reflected tax seasonality. While market conditions remained challenging, our cash management business is strong and stable, with our market share steady at around 8.8%. Debbie will comment later on the recent market conditions, which have further impacted yields and fee waivers, which Tom will also address.

On the regulatory front, money funds continue to be an active topic of discussion. Federated and others support the liquidity bank proposal advanced by the industry through the ICI. This enhancement would compliment that new liquidity provision of 2a-7 and would not socialize credit risk. We do not agree with suggestions that favor bank-wide regulation or bank-wide capital requirements, which in our view are far off the point and are more likely to do significant harm than enhance the resiliency of money funds, an important stated objective. In terms of the potential for a systemic risk designation, we don't believe that we will nor should be designated, and have submitted commentary in support for our opinions to the regulators.

Looking now at our Equity business. We are focused on a series of strategies that have solid performance characteristics and are well suited to meet the particular demands in the market. Leading in this area is strategic value dividend, a strategy that continues to produced strong flows and expanded distribution opportunities for both mutual funds and separate accounts. We added an international version of this strategy in mid-2008 and it has achieved strong one-year and quarterly results ranking in the top 3% of its peer group. The Clover Small Value strategy has solid 3 and 5-year results. This is an area that we see as good growth opportunity, in part because other successful products in this space in the marketplace have closed to new investors. At the other end of the cap spectrum, the costs in large cap funds also has a strong 3-year record and is garnering some solid flows. The International Leaders and InterContinental Funds had positive flows in Q1. InterContinental recently received the Lipper Fund Award for its category leading 10-year consistent return results. The Federated Emerging Market Debt Fund was also recognized as the leading fund on the same basis for its 3-year record.

While we usually direct our comments to longer-term performance records, with the difficulties that quant strategies across the industry including ours, experienced over the last couple of years, we did want to note that our MDT quant team had very strong performance in the first quarter. The primary strategy, all-cap core, brought its record to the top quartile for the one-year period, and had a top 1% ranking quarter for the first quarter. All 7 of the MDT managed accounts strategies beat their benchmarks in the first quarter, and 6 of 7 have outperformed since inception. Negative equity fund closed in Q1 and in the first couple of weeks of Q2, are due mainly to our alternative strategies, which are market ops and Prudent Bear, and to the Kaufmann fund. Looking at early Q1 results for the first -- I mean, early Q2 results for the first few weeks, equity fund flows have been modestly negative. As regards to Kaufmann Fund, one short comment, their approach continues to be the focus on high-quality growth company and to use of extensive proprietary research and a bottoms-up style, with high conviction and low turnover. It is very much a long-term approach.

Turning to the fixed income strategies. The Capital Preservation Fund led results for both gross and net sales, and I'll comment further on that shortly. High-yield funds and our strategic income blended product were among a series of funds that had positive flows. Our Total Return Bond Fund had outflows due mainly to the redemption we mentioned on our last call from a client who reached their maximum fund concentration level. We also saw outflows in municipal Bond Funds. We are continuing to look -- we are looking for good results from 2 recently launched products: our Unconstrained Bond Fund and our Floating Rate Strategic Income Fund. Bond Fund flows are negative in the first couple of weeks of April. The Uni Bond Funds continue to have net outflows. We have also seen some clients reducing their fixed income allocation as a part of re-risking strategies. This led to a few lumpy outflows in the first quarter and a $200 million redemption this month in Total Return Bond Fund.

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