Federated Investors, Inc. (FII)

FII 
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Federated Investors (FII)

Q3 2012 Earnings Call

October 26, 2012 9:00 am ET

Executives

Ray Hanley - Analyst

John Christopher Donahue - Chief Executive Officer, President and Director

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

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

Analysts

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

James Howley

Cynthia Mayer - BofA Merrill Lynch, Research Division

William R. Katz - Citigroup Inc, Research Division

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Roger A. Freeman - Barclays Capital, Research Division

Greggory Warren - Morningstar Inc., Research Division

Presentation

Operator

Greetings, and welcome to the Federated Investors Third Quarter 2012 Analyst Call and Webcast. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Raymond J. Hanley, President of Federated Investors Management Co. Thank you. You may begin.

Ray Hanley

Good morning and welcome. Leading today's call will be Chris Donahue, Federated CEO and President; and Tom Donahue, Chief Financial Officer. And also participating is Debbie Cunningham, Chief Investment Officer for Federated Money Markets.

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 the risk disclosures in our SEC filings. No assurances 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 Christopher Donahue

Thank you, Ray. 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 at cash management. Average money market fund assets were just about the same as in Q2, while the quarter-end totals increased by $6 billion to $245 billion. Our market share for money market funds remains over 9%. For separate account money market assets, the reported decrease in both average and period-end assets was due to the expected seasonality. The impact of yield-related fee waivers decreased again in the third quarter. Tom will comment further, and Debbie will discuss the money market conditions and our expectations going forward.

The third quarter saw a flurry of activity on the regulatory front. On August 22, the SEC Chairman issued a statement on money fund reform, including indicating that a majority of the SEC Commissioners would not support a proposal to reform the structure of money funds. This was followed by a statement from Commissioner Aguilar on the 23rd and a joint statement from Commissioners Gallagher and Paredes on the 28th.

Now we expect that the SEC will and should retain its responsibility for overseeing markets and protecting investors, including money market regulation. And it is important to note that this agency, the SEC, has an unparalleled multi-decade record of success in the regulation of money funds and is far better equipped for this mission than the FSOC.

Furthermore, the Commissioners concluded all of their statements by inviting constructive dialogue, which is obviously continuing, while noting that money funds are "squarely within the expertise and regulatory jurisdiction of the SEC." And further, "we do not intend to abdicate our responsibility to regulate money market funds, which would be unjustified and at the expense of our mission to oversee the securities markets."

There have obviously been other events that have gone on here recently. We are well aware of the report that Treasury Secretary Geithner has written, and this has stimulated other activities and some, as what was referred to earlier, constructive dialogue continues. And our position is very simple, that we will continue to champion those things than enhance the resiliency of money market funds.

Now turning to our equities business. Flows for equity mutual funds and separate accounts combined were solidly positive. In fact, on a combined basis, Federated has achieved positive equity flows in 4 of the last 5 quarters. In this timeframe, net inflows were over $2.2 billion. We continue to see solid demand for income-oriented products, especially -- particularly the strategic value dividend, both domestic and international, and the capital income strategies.

Other strategies with net inflows include our Muni and Stock Advantage Fund, Managed Volatility II product and the Clover Small Value Fund. At the end of the third quarter, we had 9 equity strategies in a variety of styles with top quartile 3-year records and 14 in the top quartile for 1 year. The 3-year group includes Capital Income, Equity Income and Strategic Value Income and International Strategic Value Dividend. It also includes Pru Bear and some international funds, our InterContinental and International Leaders, among others. On the 1-year, we're happy to say that both Kaufmann Large and Kaufmann Small and 3 of the MDT products are included in this group.

Q3 flows in equity separate accounts were positive, led again by the strategic value strategy. The Clover Small Value strategy also had inflows.

Now looking at fixed income. Net positive fund sales were $1.4 billion in the third quarter. High yield products led fixed income fund flow categories. We have some particularly strong products gaining traction in this area. We also saw strong flow results from our stable value and municipal strategies, and our Emerging Market Debt Fund had net inflows.

In multi-sector strategies, the strategic income fund had inflows. Total Return Bond Fund had modest net outflows, but has returned to net inflows here in the early part of Q4. We ended Q3 with 12 fixed income strategies with top quartile 3-year records and 7 strategies reaching the top quartile on a 1-year basis. Some of the 3-year members include fed bond, high-yield, intermediate government, emerging market debt, ultrashort bond, short intermediate muni, among others.

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