Federated Investors, Inc. (FII)

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Federated Investors (FII)

Q2 2011 Earnings Call

July 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 Carrier - Deutsche Bank AG

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

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

Kenneth Worthington - JP Morgan Chase & Co

Cynthia Mayer - BofA Merrill Lynch

Roger Freeman - Barclays Capital



Greetings, and welcome to the Federated Investors Management Co. Second Quarter 2011 Quarterly Earnings 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 Co. Thank you, Mr. Hanley, you may begin.

Ray Hanley

Good morning, and welcome. Leading today's call will be Chris Donahue, Federated CEO; and Tom Donahue, Chief Financial Officer. We also have Debbie Cunningham, the Chief Investment Officer for Federated's Money Market Group, who will give us some remarks on money market conditions and participate in the Q&A.

During today's call, we may make forward-looking statements and we want to note that Federated's actual results may be materially different from 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, 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 the financials. Looking first to cash management. Money market average assets decreased from the prior quarter due mainly to tax seasonality in separate account assets. Money market mutual fund average assets were nearly the same as the prior quarter. Our market share remains steady at around 8.8%. Debbie will comment later on recent money market conditions, including the impact of the debt ceiling and European banks. Tom will address related fee waivers.

On the regulatory front, money funds continue to be an active topic of discussion based on comments from the SEC and the FSOC. The regulators believe that further changes should be considered and are under review. We are unable to make any predictions on any particular outcome or a particular timeline. We do note however, that the industry issuers and investors in money funds are opposed to a fluctuating NAV. In our view, there is no evidence that a floating NAV would positively impact investor redemption patterns or improve the resiliency of money funds. In fact, we believe fluctuating NAVs would have the opposite effect. Capital buffers are not necessarily responsive to the severe liquidity crisis that negatively impacted money funds and other investors in 2008. Our initial reaction to ideas like the Squam Lake capital buffer before the results of the voluminous studies necessary to adequately research such a concept with this level of complexity, is that it's probably not a practical solution. One outcome could end up being too compressed or even eliminate the spread between prime and government fund yields, which would be just another way of ending prime funds, which is not the goal of the entire operation.

We believe that money funds were meaningfully and sufficiently strengthened by last year's extensive revisions to 2a-7. And we're seeing those changes help now as we deal with the noise created around the perception of risk and prime money funds from European bank exposure. We remain favorably disposed to improvements that would enhance the resiliency of money funds by addressing the primary issue faced during the financial crisis namely a market-wide liquidity crunch.

Now turning to our equities business, we have 6 actively managed strategies in a variety of styles that have top quartile 3-year records that are well positioned for growth: Capital income, Prudent Bear, International Leaders, International Strategic Value, Kaufmann Large Cap and Strategic Value Dividend. In particular, Strategic Value Dividend strategy is well-suited for investor demand for high-quality dividend income. It continues to produce strong flows with over $1.2 billion of year-to-date net inflows to funds and separate accounts combined. The international version of this strategy reached its 3-year anniversary during the second quarter and achieved 5 stars as it ranked in the top 13% of its peer group for the trailing 3 years. This strategy, along with the InterContinental and International Leader Strategies provide a solid position in international equities with positive flows in the second quarter and lots of room for growth.

Overall, equity fund net flows were negative in April and May but positive in June and slightly negative here in the first 3 weeks of July. Flows in equity separate accounts were negative mainly due to a $315 million redemption from an absolute return mandate, an area where we recently changed portfolio managers. Net sales of the Strategic Value Dividend strategy were solidly positive. And we saw another quarter of lower net redemptions in the MDT Quant strategies for SMAs, which improved from about minus $300 million in Q4 to minus $200 million in Q1, minus $77 million in Q2.

On the Kaufmann Fund. The Kaufmann Fund performance improved in the second quarter as the fund ranked in the top third of its Lipper category similar in Morningstar. The Kaufmann Large Cap Fund ranked in the top decile of its category and the Small Cap Fund ranked in the top 14% for the quarter. The core Kaufmann team and investment process remained intact. The team's approach is to focus on high-quality growth companies and use extensive proprietary research and a "bottom's up" style with high conviction and low turnover. Obviously, a long-term approach. So that if we looked at the 22-rolling, 3-year performance periods beginning with 1986, the fund was ranked in the first quartile 14 times and was ranked in the fourth quartile only 4 times, 3 of which were in the '98, '99 and 2000 period. Interestingly, past periods of underperformance were followed by substantial outperformance.

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