Federated Investors (FII)

Q4 2011 Earnings Call

January 27, 2012 9:00 am ET


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

John Christopher Donahue - Chief Executive Officer, President and Director

Ray Hanley - Analyst

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


Matthew Kelley - Morgan Stanley, Research Division

James Howley

Michael Carrier - Deutsche Bank AG, Research Division

William R. Katz - Citigroup Inc, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

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

Edwin G. Groshans - Height Analytics, LLC

Roger A. Freeman - Barclays Capital, Research Division



Greetings, and welcome to the Federated Investors Fourth 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. Thank you. Mr. Hanley, you may begin.

Ray Hanley

Good morning, and welcome. Leading today's call will be Chris Donahue, CEO and President of Federated; and Tom Donahue, Chief Financial Officer; and participating in today's call will also be Debbie Cunningham, who is our Chief Investment Officer for the money markets. And 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 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 Christopher 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 first at cash management. Total money market assets increased by $13 billion in the fourth quarter and average money market assets were $8.5 billion higher than the third quarter levels. The growth was concentrated in our wealth management bank trust channel. Money market mutual fund average assets were $249 billion, up about $10 billion compared to the prior couple of quarters.

Our market share increased to over 9%. Growth occurred in government money fund assets as prime, and Munis were about flat. While yields remained low, our business continues to grow. Tom will comment on money market fee waivers, and Debbie will discuss market conditions and our commentaries going forward.

Looking at the regulatory front, money fund discussions continue. The Chairman of the SEC has indicated that further regulations will likely be proposed and may include fluctuating NAV; capital from sources that could include sponsors; fund shareholders and with the capital markets along with potential redemption barriers. At Federated, we are firm in our belief that money funds were meaningfully and sufficiently strengthened by the 2010 extensive regulation revisions in 2a-7. We saw those changes work successfully through a series of events in the United States, the debt ceiling crisis, and the downgrade and the Europe with Greece and European banks, among the challenges that were faced in 2011.

Investors continue to use money funds as an efficient and effective way to manage cash. The funds have ample liquidity and compliance with the revised regulations. Investors have ready access to recent portfolio data, and the SEC has a view into the holdings of all money funds. Those features were also enhanced in the 2010 improvements to rule 2a-7.

In our view, these improvements made by the SEC are working quite well in the midst of challenging market conditions. We are encouraged to see support for allowing these changes to be more thoroughly evaluated before imposing additional and potentially damaging additional regulations as expressed in a speech last month by an SEC commissioner. In another favorable development, the Commodity Futures Trading Association recently confirmed their are positive view of the liquidity and stability of money market funds for investment of customer funds. This followed an exhaustive multiyear review, taking into account a variety of factors, including the SEC's 2010 regulatory revisions. As I said before, we are favorably disposed to measures that would enhance the resiliency of money funds, while maintaining the critical features that make money funds vital to 30 million investors and to our capital markets. These 30 million investors who currently maintain $2.7 trillion in money funds, do so in large measure because they desire daily liquidity at par for their cash investments from high-quality funds and managers.

We believe the changes that fundamentally alter money funds like floating NAVs, or imposing redemption fees or 30 day holdbacks on a portion of redemptions will cause many investors to abandon money funds. This change has potentially enormous negative systemic consequences. Moving money out of money funds could be expected to move to banks, where it is ill-suited for lending and will require additional capital and FDIC insurance, while making the top banks even too bigger to fail. Perhaps money would also move to less visible, less regulated alternatives, which raises the question of adding to systemic risk.

Imposing capital requirements on a product that already has basically 100% equity capital is not necessary, nor in our view, advisable. Capital held against money funds may gave the illusion of protection to investors who are informed clearly that money funds are investment products that are not guaranteed. This concept was, of course, illustrated by the reserve fund.

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