Federated Investors Inc. ( FII)

Q3 2010 Earnings Call

October 29, 2010 9:00 am ET


Christopher Donahue – President, Chief Executive Officer

Thomas Donahue – Chief Financial Officer

Deborah Cunningham – Chief Investment Officer, Money Markets

Raymond J. Hanley – President, Federated Investors Management Company


Michael Carrier – Deutsche Bank

Robert Lee – Keefe, Bruyette & Woods

Michael Kim – Sandler O’Neill

Roger Freeman – Barclays Capital

Ken Worthington – JP Morgan Chase

Cynthia Mayer – Bank of America – Merrill Lynch

Marc Irrizary – Goldman Sachs

William Katz – Citigroup

Brendan Hawkin – Collins Stewart



Greetings and welcome to the Federated Investors Third Quarter 2010 Earnings call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Raymond J. Hanley, President for Federated Investors Management Company. Thank you, Mr. Hanley. You may begin.

Raymond J. Hanley

Good morning and welcome to our Q3 earnings call. Leading today’s call will be Federated’s CEO, Chris Donahue, and Chief Financial Officer, Tom Donahue; and joining us for the Q&A portion is Debbie Cunningham, Chief Investment Officer for Federated’s money market group.

Let me say that during today’s call we will make a number of 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 and we say that 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.

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 at the cash management portion of our business, money market assets were up slightly from the prior quarter as the 11 billion increase from the first phase of conversions from the SunTrust acquisition was largely offset by late quarter decreases in our money fund assets and by expected seasonal decreases in money market separate account assets. Assets had been fairly stable here in October as our money fund assets have ranged between 229 and 235 billion, and have averaged about 232 billion.

Through mid-September, money market fund assets were up slightly from the prior quarter. With the mid-September corporate tax payment date and other redemptions, money market fund assets, excluding the SunTrust acquisition, decreased by about 8 billion with most of this occurring during the last couple weeks of the quarter.

The SunTrust conversions will continue with an additional 3.5 billion expected in the fourth quarter for a deal total of 14.5 billion. We continue to have active discussions with other money market fund sponsors for these types of arrangements.

The third quarter saw further relief in money fund yield waivers. Tom will comment on this in his remarks. We continue to expect that additional relief will not happen until short-term interest rates begin to move up, and Debbie will discuss this part of our rate outlook later. Our money fund market share at the end of the third quarter was about 8.3%.

On the regulatory front, the President’s working group report on money market reform options was issued last week. We were pleased to see that the report noted the important role of money market funds and the role they play in our financial system. Among the options discussed was the liquidity bank which Federated strongly supports.

The implementation of the extensive changes recently made by the SEC to Rule 2a-7 continues. We look forward to working with the regulators and other money market fund providers in our industry to shape any additional measures that further strengthen the resiliency of money funds.

Turning to other products, our equity investment performance generally improved in the quarter, and we believe that we are well-positioned with an array of quality equity fund products to generate excellent sales results. Our equity mutual fund flows were positive in the third quarter, led by the Strategic Value Dividend Fund and the Prudent Bear Fund. We also saw positive flows into the Kaufmann Large Cap and Clover Small Value funds. Our equity gross sales increased 16% from the prior quarter while redemptions declined 14%.

Looking at results through most of October, equity fund flows have remained positive.

Within equity separate accounts, outflows were largely due to net redemptions in quant products, mainly our MDT, SMA, and institutional accounts.

Looking at bond funds, our sales continue to be solid in the third quarter with gross sales of 3.6 billion and net sales of 826 million. Our total return bond fund showed another quarter of solid inflows, about 374 million. Ultra-short products were also positive and we saw inflows in our high-yield funds as well. Bond fund flows are also positive here in October.

In fixed income separate accounts, we had a solid quarter of net inflows of about 280 million, and we expect another 1.1 billion from recent wins, the Fund in Q4 and into 2011.

Turning to investment performance and looking at the quarter-end Lipper rankings for Federated’s equity funds, 58% of rated assets per in the first or second quartile over the last year, 61% over three years, 71% over five years, and 81% over 10 years. For bond fund assets, the comparable first and second quartile percentages are 34% for one year, 68% three years, 72% five years, and 81% for 10 years.

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