Federated Investors (FII)

Q1 2011 Earnings Call

April 29, 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 and Director

Compare to:
Previous Statements by FII
» Federated Investors' CEO Discusses Q4 2010 Results - Earnings Call Transcript
» Federated Investors CEO Discusses Q3 2010 - Earnings Call Transcript
» Federated Investors, Inc. Q2 2010 Earnings Call Transcript

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

Craig Siegenthaler - Crédit Suisse AG

Michael Kim - Sandler O'Neill & Partners

Michael Carrier - Deutsche Bank AG

Jason Weyeneth - Sterne Agee & Leach Inc.

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

Presentation

Question-and-Answer Session

John Donahue

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when you say pass-through, the structure of it is that the advisor would put in, in our case I guess, about $17 million to start with. And that can't be passed through because there's no mechanism for passing through. And then the funds themselves would put some number of basis points in, which comes on queue and there. You have to be careful to maintain the proper spread between government funds, agency funds and prime funds. If at the end of the day you really want to have corporate issues to be able to issue commercial paper and have Money Market funds participate in that in other words enhance resiliency of money funds. So there's no way to recapture any kind of money. Now today when there's hardly any yield available, yes, that makes all of these things little more problematic. But getting them in at this point is probably a worthy idea because in case you get a structure set up for when the rates eventually do go up. And we're talking about long-term solutions and long-term responses, much the same as we did when we were enthusiastic about the changes to 2a-7, because we're in this business for the long haul and our clients have demonstrated overwhelmingly that they're in the funds for the long haul.

Jason Weyeneth - Sterne Agee & Leach Inc.

Okay, that's helpful. And then just, Chris, the worst -- as you kind of kind of look at that step down there, the incrementally worse economics around the Money Markets at present, do you think that changes the decision tree at all with the skilled players that might accelerate anymore to want to get out of this business?

John Donahue

As we said before in this, Roger, if an individual group controls the redemption where the right to redeem or knows the people who can control the right to redeem and can influence them, then you can run a Money Market fund for a long time. But I think every one of these moves just adds to the burden that money funds have to carry. And therefore, like it or not, enhances the oligopolization of the business. But it never does it in such a way that it creates an avalanche or a cliff were all of a sudden, oh well now everyone has to go do something. It hasn't happened in that yet and I don't think that's the way it will go. But there are a steady stream of people, we're talking to some now, who are looking to exit the Money Fund business and I think it'll just be a continuing effort.

Roger Smith - Macquarie Research

Okay. Last question. Coming to your -- back to your comments around some re-risking on the part of investor day, I'm looking at the Prudent Bear fund actually looks like it's kind of better flows, at least March looks like it's actually positive. Does that suggest at all any increase in risk aversion?

John Donahue

The Prudent Bear fund is a unique fund. And it is best sold when it is sold as a 5% or 10% part, permanent part, long-term part of an existing portfolio. And to-date, a lot of people tend to use that fund with higher percentages or bigger amounts based on where they think -- or where they think the market is going or where it has just been. And so, it's pretty difficult to make a direct assessment to re-risking from the flows on the Pru Bear fund. If you just -- It's just tough to do it now. We make those judgments more based on the commentary of the sales force, backed up by flows in some of the other products and talking to the sales leadership and that sales individuals that rather than specialty of those on Prudent Bear.

Operator

Our last question is from the line of Marc Irizarry with Goldman Sachs

Marc Irizarry - Goldman Sachs Group Inc.

On the fee waivers. If I look at the sequential change in operating income relative to the sequential change in revenue, it looks like the dynamics -- I'm trying to understand the dynamics there of the operating income delta versus the change in the fee waiver revenue? And how does that relate to the 33% uptick in the fee rate sequentially?

Thomas Donahue

You mean just go through the numbers in the press release where -- are you asking how much of this impact is from the waiver? Or how much is from everything else? I don't follow your question.

Marc Irizarry - Goldman Sachs Group Inc.

So, yes. The question is when you think about the 7, the guidance on the fee waiver's moving up, is there a change in -- or what's accounting for the change in the operating income delta versus the change in the fee waiver revenue, some sort of that margin or the operating income loss per dollar of lost fee waiver revenue. Are you sharing more the burden with the channel? Is there a mixed shift that's impacting it?

Thomas Donahue

Okay. The repo rate that are down are exactly what's calling it, and we're either sharing it with the channel just as always. It's lower rates and we're sharing like Chris said earlier that the customer's not really having too much of an impact. It's impacting us.

Marc Irizarry - Goldman Sachs Group Inc.

Okay. And your share of that share, so to speak, that's not changing?

Thomas Donahue

No. I mean, it's moved around a little bit, Marc, but within a relatively narrow bandwidth and plus or minus around 75%, depending on the mix of the product, but we haven't seen any significant change there.

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