Federated Investors' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Federated Investors (FII)

Q1 2012 Earnings Call

April 27, 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 A. Cunningham - Chief Investment Officer of Taxable Money Markets, Senior Vice President and Senior Portfolio Manager

Analysts

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

Matthew Kelley - Morgan Stanley, Research Division

William R. Katz - Citigroup Inc, Research Division

Michael Carrier - Deutsche Bank AG, Research Division

Rahul Nevatia - JP Morgan Chase & Co, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Edwin G. Groshans - Height Analytics, LLC

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Greetings, and welcome to the Federated Investors First Quarter 2012 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 J. Hanley, President of Federated Investors Management Company. Thank you. Mr. Hanley, you may begin.

Ray Hanley

Good morning, and welcome. We will make some remarks this morning before opening up for questions. Leading today's discussion will be Chris Donahue, Federated's CEO and President, and Chief Financial Officer, Tom Donahue. And also joining us on the call is Debbie Cunningham, who is our Chief Investment Officer for Money Markets. And let me say that during today's call, we will make forward-looking statements. And we want to note that our actual results may be materially different in the results implied by such statements. We invite you to review the 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 will turn it over to Chris.

John Christopher Donahue

Thank you, Ray, and good morning. I will start with a brief review of Federated's business performance before returning the call over to Tom to discuss our financials.

Looking at cash management. Average money market fund assets were up $2.5 billion from the prior quarter. While the quarter end total's decreased by $11 billion to $245 billion or about the same level as at the end of the third quarter.

Money fund asset balances grew over the latter part of Q4 and then decreased in Q1, a pattern that we've experienced before. With the impact of expected tax seasonality this month and the recent closing of our acquisition of Prime Rate Capital Management, money market fund asset levels are running at approximately $245 billion this week and our market share remains over 9%.

Higher yields for government securities and repo in the first quarter led to lower yield related fee waivers. Tom will comment further on the impact of these waivers and Debbie will discuss money market conditions and our expectations going forward.

During the last few quarters' conference calls, I've made comments and answered questions concerning potential SEC proposals for further regulation of money funds. I discussed Federated's belief that money funds were meaningfully, sufficiently and properly strengthened by the extensive regulatory revisions to Rule 2a-7 in 2010 and that these enhancements were tested and worked successfully through a series of challenges in 2011 that included the U.S. debt ceiling crisis, credit downgrade at the U.S, as well as worries over Greek defaults and European bank solvency.

As you well know, our position is in opposing the SEC's draconian proposals for floating the NAV and/or instituting redemption restrictions and capital requirements. We are, among our group, a broad group in fact of businesses, state, local government agencies, trade association, public-interest groups and financial institutions that believe these proposed rules will destroy the functionality, utility, effectiveness and the very essence of money market funds, which are so vital to our economy. I want to take a few minutes on this call to take a look at some of the myths that have been promulgated and that continue to be spread by regulators and many in the media.

The first one that we continually hear is that money market funds were either at the center of, or significantly exacerbated the financial crisis of 2007, 2008. This is not true. However, if one accepts this falsehood, then arguments in favor of preserving the utility of money funds for 50 million investors and the multitude of municipalities, corporations and other entities who depend on money funds for efficient funding, can be politely ignored.

The facts, however, tell a different story. The meltdown occurred because of certain financial institutions placing enormous leverage bets on the sub-prime housing market, amplified in many cases by derivatives, by the Fed's easy money policy. And when those bets went bad, the complex web of counterparty arrangements between different institutions threatened to cause a general collapse of the system. Importantly, only one money market fund lost its $1 NAV in September of '08. And that was only after an 18-month period that saw the failure of dozens of banks, mortgage lenders and other financial institutions causing the credit markets to freeze up. This is often paired with the falsehood that money funds are susceptible to runs and were bailed out by taxpayers. One run does not make susceptible.

The reserve fund failure in September of '08 followed an unprecedented period that saw the collapse of Lehman Brothers and a number of major financial institutions on the brink, and inconsistent responses to these events by the government. As counterparty risk perception increased, institutional investors redeemed 15% of their prime money fund shares, followed by large inflows into money funds backed by government debt. For every dollar that left the prime funds, $0.63 float into government money market funds.

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