Federated Hermes Inc (FHI) 2003 Q2 法說會逐字稿

Good morning. My name is Kelly, and I will be your conference facilitator today. At this time, I would like to welcome everyone to this Federated Investors analyst call. (CALLER INSTRUCTIONS).

Good morning and welcome to the call. Today we plan about a 20 minute presentation before getting to your questions. Leading today's call will be Chris Donahue, Federated's Chief Executive Officer, and Tom Donahue, Chief Financial Officer. Also here today are Denis McAuley and Stacey Friday from corporate accounting group.

By way of Safe Harbor, let me say that this discussion will include forward-looking statements, and actual results could vary materially. For a discussion of the factors which could cause actual results to vary from these forward-looking statements, see the section titled Risk Factors in the Company's annual report on form 10-K for the year ended December 31st, 2002 on file with the SEC.

And with that, I will turn it over to Chris.

Good morning and welcome. I will start with a summary of our performance in the quarter before turning over the call to Tom to talk about the financials.

As our press release noted, we ended the quarter at $202 billion in managed assets, twice the level we had at the end of the second quarter of 1998. Having accomplished our goal of doubling our managed assets in five years as we had done in going from 50 to 100 billion, we now set our sights on doing it again. We are also proud of passing $50 billion in combined equity and fixed-income managed assets.

Looking at our recent growth, we have continued to gain market share in equity, bond and money market funds this year. As in the late 1990s, we are gaining market share of equity fund assets during a period of strong market growth, and we believe that we are well-positioned for various market conditions including up equity markets.

I will briefly comment on our performance in each major asset class before looking at the distribution channels. In the money market area, assets in Federated's mutual funds and separate accounts increased 7 percent for the twelve-month period and were up 1 percent for sequential quarters. The late quarter Fed easing led to inflows in our money funds late in the quarter. Average money market assets decreased compared to the prior quarter as is typically the case since the second quarter is negatively impacted by both individual and corporate tax payments. Money fund assets stood at about 136 billion coming into this week.

As we discussed last quarter, the recent Fed easing meant that a small portion of our money market fund managed assets, approximately 3 billion, has reached the point where some of the fees for the services provided to these funds are being weighed in order to keep the yields in those funds positive. We continue to believe that the impact to Federated is approximately 1 cent, maybe getting to 2, in the earnings over the next twelve months, recognizing that the actual impact depends on many variables including the length and magnitude of any fee waivers and the asset levels in the funds.

Among our equity funds in Q2, we continue to have strong sales inflows in the Federated Kaufmann Fund, the Federated Capital Appreciation Fund and the Federated Market Opportunity Fund. The newly launched Federated Kaufmann Small Cap bond is off to a fast start. Since its December '02 launch, the fund has grown to over 70 million and has come out of the gate with exceptional performance in the top 5 percent of its Lippert group year-to-date. Index fund growth and net sales decreased from the prior quarter, while actively managed funds showed gains in both gross and net sales.

Turning to fixed-income. Asset growth and sales results were solid, though down from the very strong pace of the prior couple of quarters. Although sales of ultrashort products remain high, these funds had net outflows of about 70 million for the quarter. Sales inflows in spread products such as high yield and blended funds continue to be strong as were munis (ph).

Through the first three weeks of July, both equity and bond funds net sales are positive with each running about the same pace as in Q2. As usual, we caution against drawing conclusions for the quarter from this early data. It may be also interesting to note that the ratio of bond fund nets to equity nets are running about 3 to 1 in favor of the bond funds similar to past recent history.

Turning to investment performance. Among funds rated by Morningstar, our percentage of assets in equity funds rated four or five stores increased modestly from 48 to 49 percent from the first quarter, and our percentage of three, four or five-star rated assets went from 59 percent to 63 percent. In the fixed-income area, four and five-star rated assets increased from 22 to 25 percent, while assets in the funds rated three, four or five increased from 69 to 74 percent. In total, 21 of our funds were rated four and five stars, up from 20 in Q1, and of the 21, 6 are equity, 15 are bond.

At June 30, 55 percent of our domestic equity assets, 60 percent of our bond assets, and 84 percent of the money market assets were ranked in the first or second quarter by Lippert based on one year total return. Two-thirds of our eligible stock and bond funds ranked as Lippert leaders in one or more categories at the end of the quarter. And these categories are important to our customers. These categories include total return, consistent return, preservation, tax efficiency, and expenses.

As this morning's announcement of the addition of four more equity analysts indicates, we continue to invest in our equity research team as we build a structure that reflects a greater emphasis on proprietary research and becomes more focused on beating benchmark. The most recent hires fill out our initial team structure plan for this group. Our clients have responded very favorably to our new model, and the experienced new portfolio managers and analysts we have added have built-up an already strong team.

Let us talk about distribution. In the trust market, we continue to leverage our relationships to find new assets. We continue to have success with our fixed-income products as yield remains the key consideration in the trust channel. As our bank clients look for yield beyond the treasury market, we are gaining business in spread products. We continue to have success converting common trust funds into our mutual funds, adding a $70 million conversion in the second quarter into the Federated total return bond fund. We announced last week that we expect to pick up about $470 million of assets in the funds managed by Riggs (ph) Bank, and we continue to look for other similar opportunities.

We anticipate that the previously announced DTC options clearing corp money fund initiative will become operational this quarter. This will enable OCC options clearing corp clients to pledge margin collateral using Federated money market funds for transactions through the DTC platform. Collateral levels for this type of business are in the tens of billions, and we expect some portion of that will begin to use our funds in lieu of individual securities in order to capture operational efficiency and a competitive yield.

In this early stages, the bank managed account products is growing accounts and assets nearing the $50 million stage. In the broker-dealer channel now, we are experiencing strong sales momentum and are on pace to have a record year for stock and bond fund sales. We have gained share of sales on the platforms of multiple major brokerages where we are increasingly in the top 10, and in some cases the top five, third-party mutual funds providers.

We continue to see signs of growth in the managed account product among the brokers. We were recently added to the platforms at Lehman, Legg Mason, and Janney Montgomery Scott, and we are experiencing accelerating sales through our major providers which include LPL and Raymond James. We continue to work on adding our product to the platforms of the major wire houses. This remains an important goal which we have spoken about numerous times before. We are nearing 100 million from the broker channel and expect accelerating sales as we gain traction on these new platforms.

June was our best sales month at Edward D. Jones in nearly two years. Our sales in that channel are nearly 50-50 equity and bond funds. Our sales at Jones continue to run about at a 4 percent market share with a target for '03 of reaching 6 percent.

On the institutional side, for fixed-income we continue to win mandates from our German institutional business and from domestic companies with about 250 million funding during the second quarter. Separate account money markets decreased from seasonality in the assets from textpool. The new prime money market product we launched for the textpool clientele last last year has grown to more than 200 million. We added seven new cash management customers, mostly corporations, who came onboard during the second quarter. These customers ended the quarter with about 275 million in new assets.

Now briefly an update on new products and key initiatives. Our managed account product has grown to over 150 million in its very early stages. A key goal as mentioned is to penetrate the large wire house programs with our strongest products and to leverage our bank relationships to grow this product. Coming into the year, our target for '03 was a billion with a key assumption we would gain entry to one or more of the major wire houses during the year. While we are gaining momentum, a more realistic goal for '03 is 500 million.

We launched our 529 Plan. This is an offering in partnership with the Schoolhouse Capital State Street organization. We offered this starting in the second quarter and are in the process of signing of intermediators and promoting the product. In Germany, our sales continue to grow, and assets in the retail funds in our LVM (ph) partnership are now over 335 million.

During the second quarter, we entered into an arrangement with Noramco (ph), a German bond distribution company. We have created three fixed-income and money market funds on a private-label basis for Noramco (ph), which they will distribute to their 50,000 customers who have more than EUR1 billion already invested in other Noramco (ph) products.

We have also added an additional wholesaler in Germany on the institutional side. We plan to launch a tax favored income fund later this year with a portfolio comprised of municipal bonds and dividend paying stocks.

Let us comment on the '03 outlook. At the beginning of ' 03, we stated that although we continue to expect to achieve long-term EPS growth of 15 percent or more, a realistic range for '03 was 7 to 10 percent given the headwind created by the downdrafts in the equity markets over the past three years.

At the end of the first quarter, we noted that since we had not received the early lift from the equity markets that we had hoped for, it would be more difficult to produce the earnings growth we initially targeted. So we said that reaching the low end of our range, the 7 percent EPS growth, was still possible given future favorable equity and steady bond market conditions for the rest of the year. While the equity markets were positive for '02, our average equity assets in the quarter were still a little over $2.5 billion or 12 percent less than the average equity assets for the second quarter a year ago, which reflected in the quarter over quarter revenue decrease.

In addition, the investments we are making for equity research, the potential for paying two years worth of a Kaufmann earnout, and and this is good because it means revenue targets are being met, and the impact of fee waivers for money fund presents challenges to the earnings growth for this year. While still remaining possible, it will be a challenge to reach the low-end of the range of 7 percent EPS growth with the key factors, of course, including continued favorable equity markets, stable bond markets, and stable short-term interest rates.

With that, I will turn it over to Tom to discuss the financials.

Thank you, Chris. Revenue in Q2 increased 5 percent from the prior quarter due to increase in average equity and fixed-income assets and additional day in the quarter, offset by lower money market average assets as is typical in the second quarter. Compared to Q2 of last year, revenue was down due to lower equity average assets, lower fee realization rates from money market products due to increased demand for lower fee products and changes in customers for fund administration services, offset by increased revenue from bond funds.

On the expense side, as we discussed last quarter, compensation and related expense increased from the prior quarter reflecting a full accrual of earnouts related to the Kaufmann acquisition as Chris mentioned. Professional service fees increased from the prior year due to the previously discussed legal outsourcing arrangement that began in Q4 of '02, and the expiration of a mid Q4 in mid Q4 of a credit that we were receiving on outsourced portfolio accounting services.

Systems and communications expenses decreased year-over-year due to lower equipment leasing costs. We were able to reduce maintenance costs, and we were also able to replace equipment at lower costs. Other expenses increased due to a variety of miscellaneous items, from which it would be difficult to construct any type of trend. Marketing and promotional expenses trended as expected. We continue to expect full year marketing and promotional expenses to be higher than 2002's total.

On the balance sheet, our cash and short-term investments stood at 119 million at quarter end. During the quarter, we used 33 million for share repurchases and about 8 million for dividends, up from the prior quarter since we increased our dividend by 23 percent in April. Based on our strong financial position and performance and factoring in the change in the tax treatment for dividends, our Board approved a 21 percent increase in our quarterly dividends. With the two increases this year, our quarterly dividend has increased 49 percent. In addition to opportunistic share repurchases and selective acquisitions, the dividend provides a key way to add to shareholder value.

That concludes the financials, and we will now open up the presentation for questions.

(CALLER INSTRUCTIONS). Henry McVey, Morgan Stanley.

Good morning. A couple of quick questions. One, the tax rate I think you guys had said was a little bit higher last quarter (inaudible) came in around 34.8 percent. Can you give us some guidance there? Second, just with your earnings forecast of the low end of 7 to 10 percent, can you talk about capital management? In the context of that, whether you are still going to stay at the high-level of your purchases? Then, I missed the part -- I think you guided down from a billion to 500 million on separate accounts. I just want to make sure I heard that correctly and if you can detail why?

Well, we will go in reverse order. We had a target of a billion, it is 500 million, because we are not going to reach the billion, and part of the reason is we are not currently on the bigger programs. So we are pretty happy with the breakdown of 100 million in broker-dealer and 50 million in trust.

In trust, it is a slow pace. It was a year ago when it was first introduced in a meeting, and we started putting accounts on it at year-end, and so it is working. So we are still happy with it, but we are not going to hit the billion, but we do think we will hit the 500 million.

On capital management, whatever we are doing on the earnings, we are not altering how we are thinking about managing the capital in terms of buying shares or as our recent actions indicate in terms of dividends. So we continue to look at the stock, be active in the stock, and really don't negatively affect our ability to want to buy the stock by what is going on on what we said in terms of earnings.

What I am trying to understand, the markets have actually appreciated since then obviously during the quarter. And if the guidance is 7 to 10 and you are increasing your buybacks and then exceeding our expectation, I am trying to get in context what is changing in your outlook that is making you revise downward, and why would you not be more aggressive on the capital management side?

Well, I am not sure -- we are very careful how we phrase what we are saying on this guidance. I am not sure that we guided downward. We pretty much repeated what we said the last time, that it would be a challenge to reach the low-end of the range. That is exactly what we said from the last quarter.

In terms of purchasing stock and trying to factor that into the equation, you know in the first quarter we bought 2.9 million shares and was around $25 a share. So that is what we call that opportunistic. We thought that the price was very compelling, and so we picked up the pace.

In the second quarter, we bought 1,225,000 shares, and it was $26.83 the average price, and we did not buy as much as when it was at 25. So what is going to happen in the future in terms of the price and what are we going to be willing to buy, we will see.

Just the last one is tax and then also details on Rigg's (ph) consolidating?

On the tax rate, you should look for between 35.5 to 36 for a full year tax rate. It has moved around quarter to quarter, but to model out the whole year, we would put you in that range.

What did you mean by Riggs (ph) consolidating?

I am just trying to -- I wanted to know just for a model it hits in 3Q, right?

From a modeling standpoint, we anticipate there will be a shareholder vote late in Q3, so the earliest you would see any change in revenues would be the fourth quarter. Remember that we are already providing administrative services to those funds, so there is essentially a netting of the revenue between the assets that shift over, revenue moving to investment management fees from administrative service fees.

It is difficult to forecast. We know the asset level now. We will want to wait and see how much actually converts over and when that happens before being able to be more specific on the revenue impact.

Ken Worthington, CIBC.

A couple of questions. You said you are dropping fees and about 3 billion of assets. What has been the willingness of distributors to share these fee reductions with you?

The willingness has been very very good, and we have not met, to the best of my knowledge, any opposition to do in the sharing.

Are they sharing it 50 percent (multiple speakers)?

No. Our theme is they are sharing it more or less pro rata as to who is receiving the money. So if it is 50-50, it is 50-50. If it is 70/30, it is 70/30 depending on the sharing.

With regard to Riggs (ph), the majority of assets from Riggs (ph) were money assets. Should we expect to see more money fund acquisitions in the future? Is the drop in rates by the Fed having any impact at all on the willingness of firms to sell or outsource money fund assets?

We are trying to build this trend that you just described into a faster bigger trend. I believe there will be more of the coming along for the reasons that you have indicated. A lot of these money funds were put together as part of packages of proprietary funds that in in a different environment where you could grow them, worked out. But now they are not working out very well from either the point of view of the business managers or the shareholders because a mutual fund screams and cries for growth growth. That is what it's life blood is.

So when you don't have that, then you have expense issues and then you have performance issues, you create the kinds of trends you're talking about, and then those are exacerbated by the low-level of rates on money funds, and the ability of the smaller players to make long-term viable products. So I think it is going to increase.

Actually a quick question to add a little bit more. Should we expect to see acquisitions about the same size in the few hundred million dollar range for the money funds, or do you expect to see some bigger ones as well, like $1 billion maybe a little bit more than a billion?

It is really tough to put sizes on those things because each one of those deals is unique unto itself. My best analogy that I have used before is we have eight kids and each one of them is unique, and each one of these deals has those kinds of unique flavors. So it's very difficult to say, oh, well this one is almost 500 now (technical difficulty) --. It is to unique to the deal.

I think what you can say, however, is that if you look at the list of bank players that are on the back half of that list, you would have to ask yourself about how those are doing and how they fit in strategically into the bank, and then you could look at the various sizes of those and you could get a pretty good flavor for what we are looking at.

Great. One final question. Any plans to integrate Kaufmann more fully into Federated? Can you talk a little bit about the contracts that the principals are under, and are there any transition plans for the Kaufmann assets if those principals decide to leave?

I will talk about the integration, and Tom can comment on the other subjects. In terms of the integration, this has been one of most beautiful things in acquisition history from my point of view in that the sales operation has been very very effective at selling this fund. Federated's client base, which had not had any experience with the Kaufmann Fund enterprise because they were sold direct mail and telemarketing and not through intermediaries, so we added A,B and MC shares to this fund and shifted gears completely, and yet are able to have a very very successful offering. To us this was the key integration point was to make sales get the company to grow.

In terms of integrating into the rest of the operation, we have a couple of operations up in New York, one is downtown and one is at midtown. There are always lease provisions, and we are looking at those with an idea of having one location as compared to having two. But that is down the road and to be determined. Perhaps that would give us a better flavor for other parts of your question, but on the key points, revenue raising and growth I think this has been a pretty good integration.

On contracts?

On the contracts, when we did the deal, they had five-year contracts. But the major sticking power at least from the deal sense in the beginning was that basically half the money was paid upfront, and we would expect half of the money to be paid over the next five years, and then if it is not all paid in five years, there is a sixth year. So that leaves four more years where there is potentially huge dollars still to be paid for them. So it keeps all of our interest aligned together, and as the payments by the way are made, every time a payment is made that means a growth target was hit, and all sides are happy with it.

One other thing on the integration that Chris talked about, on the new Kaufmann Small Cap fund, there is a gentleman who used to run our Small Cap fund here as a co-PM (ph) with Hans and Larry on that fund. We have gone back and forth and mixed things and shared and things like that.

Bill Katz, Putnam Lovell.

I just wanted to get an update on the institutional business and the equity buildout. (inaudible) announcement of your adding four more analysts this morning. I was curious where are you in terms of the hiring front? It sounded like you said you mostly filled out. Secondly, give us an update within this channel in terms of how performance is holding up and what the pull has been or the acceptance in the consultant community? And I have a follow-on question.

In terms of the buildout, yes, we are pretty much finished. I am not saying we won't hire anybody else, but we are more or less complete where we want to be. So we think we are in pretty good shape on that.

What was your question about performance?

I was curious in the institutional channel where you in terms of seasoning of the pipeline of new business either from a performance perspective, or if you can give some kind of thought or comments on the pipeline?

Well, in terms of what we mentioned in the call, the $250 million that we got during the second quarter, we continue to be optimistic about continuing to sell those kinds of mandates both in Germany and the United States. Those are fixed-income mandates, and we don't see any reason why we cannot continue. But I cannot talk to you in terms of that being a $250 million pipeline for the third-quarter. I just don't know, so I cannot put a number on that for you.

Okay. The other question I have is to come back to the guidance discussion. It looks consensus is right around $1.83, which would be about 4 5 percent. I don't mean to pin you down to a specific number, but are you comfortable with the consensus estimate, or (multiple speakers) -- 7 percent would pencil out to about $1.85-ish.

We have learned our lesson in terms of making statements, and we are going to try to stick with what we said, which was we look at it and say it will be a challenge, but it is still possible to reach that 7 percent number, but it is going to be a challenge. So you guys have to figure out the rest of it. So do we, by the way, because we don't know either.

I appreciate your enthusiasm for trying to get us to pin down on a number. Just one follow-on there. What is your outlook for conversation either on an absolute basis or relative revenues over the second half of the year? And then how much flexibility -- what kind of market assumption are you making to support your view for the 7 percent to 10 percent range?

I can answer the second part of that. We are not going to get into as we got into before batting back and forth the projections on what will happen in the market here and there as it relates to the income statement for Federated. We find that to be an unfruitful discussion.

I will let Tom handle the comp.

I would expect the comp to go up from this quarter.

Did you quantify how we should think about that? 5 percent increase? 2 percent increase?

I don't have a percentage increase. We just hired these four new guys, and if things are going, sales and performance are going, our bonus accruals are going to have to. And so that fits a wide -- no, I don't have a 1 percent or 2 percent. I would just expect it to be higher than this quarter's.

mark Constant, Lehman Brothers.

I just wanted to clarify a couple of things. One, the growth at Kaufmann. At what point if any in the foreseeable future would those guys start to fill capacity constrained in the small to midcap marketplace?

Well, we have not had a discussion with them on the subject of a constraint. Remember that fund was in excess of $6 billion however many years ago. (multiple speakers)

I assume they did not feel it then?

They did not feel anything then. If you talk to Jim Guest (ph) about it, who is the Head of Sales, he has numbers higher than that in mind.

To say they did not feel it then, we did not own it then, but they added more analysts. There are eight analysts right now that are underneath Hans and Larry and Peter.

Then they were not closing funds?

No.

Something just surprised me. For all the talk about people being dissatisfied with money fund yields, the one place we seem to have actually seen that behavior manifest itself as opposed to jumping into equity funds and other stuff as folks like to suggest is actually the fact that people have gone off the curve and bought some of the ultrashort products over the last several quarters.

It looks from what you described in areas of strength and fixed-income flows like that did not happen this quarter. I wonder if there is any thought as to why that was not the case?

What you are talking about is the ultrashort fund and the fact that we put it in. Even though the sales -- if you look at the sales numbers, you are going to end up with a picture that is still very very active. On a net flow basis, we are net I think it was 70 million we said negative on that particular fund.

What happens is that first of all is within the bandwidth of what would be normally happening. So it is not anything surprising or out of bounds from our point of view in the ebb and flow of institutions making these decisions. The second point is that that fund in particular as any of those ultrashort funds has various times when it experiences a net asset value change because it's out of the yield curve, and there are a lot of changes that has to face.

Then, you get a lot of these players who get in there for a while, and they are happy doing it, and then they get an NAV change, and then they decide that the either want to go back to cash or go to something else. This just happens on a lumpy basis.

Another factor is that it really depends a lot on the management of these funds as to whether and how you play the high-yield market. Because if you play it right, you get a good bang for yield, and if you get out before it drops, then you are in pretty good shape. But you still have -- relatively it is very minor volatility, but compared to a money market fund, it is a lot more volatility. So you have that factor in on that fund as well.

Would you characterize them as being more or less aggressive than their peers over the last year or year and a half?

I would characterize the ultrashort fund as having reduced its aggressiveness over the last six or seven months. That is how I would characterize that.

So to some degree perhaps trading some of the attractive yields for the conservative posture?

Right.

Just to add onto that, so far in the third quarter those flows have returned to a positive position.

Cynthia Mayer, Merrill Lynch.

Just a couple of questions. One is just to clarify in terms of compensation, what sort of assumptions does that contain in terms of earnouts to Kaufmann? You mentioned that it would be difficult to make the low-end of the range in part because of that.

Well, I mean it is all formula driven, the comp part of it, and if they hit the full 12 percent compound annual growth rate, they get their full payment. You mean what are the dollars in our numbers that relate to that?

Well, you mentioned that it would be a little difficulty to hit the low-end because you might two years worth of the Kaufmann earnout if that is contained in there.

When we made the payment for year two, which was required to be paid in May, the payment was zero. Then, the way that the deal works if you did not get your payment in year two, you had a chance to earn it back in year three if you got the proper growth rates.

So if you look at the fund being up, I forget 24 percent or something year-to-date, and you go through from the beginning and calculate do they hit the payments, we are accruing on a full basis which means that they are going to get going to get year two's payments and year's three payments. We expect it anyway next May. So we have to factor all those dollars in starting now, and it will increase next year.

Right. Okay. So that portion of comp would not shift upwards from here?

It will shift upwards because in this quarter we close the deal on April 21st, and so we do this on a date from the closing forward, and so the first 21 days of the quarter were not included, so you get a little bit of a shift upward in the third quarter.

Okay. A quick question on other expense. I know you said that it contains a whole lot of items which are difficult to put into any kind of a trend, but in general do you expect it to stay at this level? There is no reason it would shift particularly?

Let me give you a couple of these so you get a flavor for it. Textpool, special custody fee, a closed-end fund fee, LBM servicing fees, some blue sky things, some NASD salesmen things, lobbying efforts, some special audiovisual things, some error payments, bad debt expense, contributions, insurance expense, and I can go in and have a look at each one of them and say, is that one going to continue? I don't know. Is that one going? That is a onetime one. Each one of them is different, and we try to summarize it saying, we have things that happen, and that is why that category is then there. You just cannot say you are going to have a trend, that this is going to be higher or lower.

Okay. That is why you call it other. Last question is just in terms of managed accounts, I am wondering how you are positioning your products versus the competition and what style, if any, you are emphasizing?

The first way we are positioning it versus the competition is to go into the trust departments at all. We are one of the few people who are actually offering this kind of a product line to the trust world. We, of course, feel that we are pretty well- positioned to have a success there because of our long-term business and our very strong relationships. So that is first.

The offerings that we have in the space are a market are basically the market opportunity, which you know is the Market Opportunity Fund, which is a MidCap value kind of an orientation, that has been pretty successful. We are also looking at our value equity offering on our total return bond fund offering and our Cap Ap (ph) offering, and it is basically clones of this gang are the ones we are positioning. So they will all have good records.

Great. Thanks a lot.

Robert Lee, Keefe Bruyette.

A couple of quick questions. The first one back to one of the capital issues. I guess at the end of this year your conduit with your securitizer is up. Clearly how you decide to renew that or discipline these shares yourselves will impact your use of capital. Can you update us on where that stands in your current thinking? And then I have some follow-up questions.

You are right. It expires at the end of or in December. We are starting the process to work on, look at it and analyze, and we would anticipate renewing it. That is basically how we are thinking about it.

Okay.

There is some probability that we would still finance that, and we would reduce capital, and we would do that because we made the determination that was a better return for our dollar than using the securitization. I would say we would be leaning toward renewing it.

Great.

Just to be clear on the technicals, we are not actually doing securitization. We are selling off essentially the rights to certain fees from the B shares, and so that all happens away from us.

The other thing is I know you talked about -- I am just curious in the prebilling of funds where you have had to have some fee concessions to your distributors. I am just curious, what kind of yield do you target in those? Do you just leave it at zero, and does the fee concession get you to 10 basis points or 20? I am sure you have had some sort of target level in mind.

We currently look to maintain an 05 in yield. We are always considering whether 05 is the right answer or whether 01 is the right answer or some other number of basis points. So that is how we target it.

Right. Lastly, I am just curious when you talk about the opportunity in the managed account channel -- excuse me, the trust channel managed accounts -- SCI (ph) investments has talked about I think they signed some kind of deal with Citizens where they want the whole trust department outsourced and bring in their sub-advised products. Do you see that as being -- are you running into them at all or seeing that much of a challenge in that aspect of your business?

Not exactly on competition with what we are talking about. But overall, you have put your finger near some things that are going on in the trust world, which is they are reevaluating how to do their business. They are reevaluating it because they are being asked both by their clients in effect and by their own business sense what is the best model for each one of those banks.

So there is going to be a lot of change going on in that space. So other products such as the type that you are mentioning are being considered, and the things that we are doing are being considered. The earlier trends that we talked about in terms of getting out of some of the proprietary business and open architecture, all of these are part of this overall evaluation and re-evaluation of the trust departments and how to best present products for their clients and for their own business.

If you could indulge with one last question. One of the other companies that announced this morning that (inaudible) comment in their release that they are seeing a more favorable climate for midsize funds looking at concession planning transition issues, just sort of saying that the deal market may be heating up some for at least midsize funds. Are you seeing the same thing? Are you seeing your sense that activity may pick up and that there are sellers and buyers are getting a little closer than they had been a year or two ago?

Well, I think one comment I would make is when many people believe that they can see the end of the recession, the end of the deteriorating stock market, that then they come to a position where they can make a decision. That seemed to be the thing that hit the pause button on a lot of these deals to date. So if people get some sort of clarity, then they can close the deals that they have been discussing for quite some time.

Our experience has been that each one of these deals is unique, has unique aspects to it, unique timing, and is it really hard to press them into a broader trend. I don't disagree that more people are willing to make decisions now, but it is hard to see a trend. Sure. Layman (ph) and New Berger (ph) make an announcement, and Federated says we did Riggs (ph) and that comes out within a couple of days, but it's hard to say that, therefore, that is a trend. Although we continue to talk to more people about the kinds of things like we did with Riggs (ph). So that would be my response.

Thanks a lot.

(CALLER INSTRUCTIONS). Matt Snowling, Friedman, Billings, Ramsey and Company.

Good morning. You mentioned earlier that you are looking at a 1 to 2 cent impact from the waiver of the money market fees. I was wondering if you could walk us through your assumptions, and a follow-up, if the Fed does cut again, what could that go to?

We have commented on this before in the second question that it could go to a nickel if they drop it another quarter, and that is a nickel over the next ensuing twelve months. The 1 cent to 2 cents is based on a whole raft of assumptions.

We are not going to get into all the details of it, but it had to do with what monies you get in when the Fed drops rates, and then you have a positive experience over the short-term. Then over a longer-term, your rates begin to catch up and what happens? Then you look at the various funds that we have to breakdown the mix between funds that are more retail-oriented, that have higher expenses versus institutional funds, which really don't get into this neighborhood of negative yield, and you just try to make some judgments about it along the way. That is how we came up. It will be something a little bit more than a penny, but right now we would not see it getting to 2.

In your assumptions, are you projecting that some of your distributors shared some of the pain with you?

Yes, which they are.

That is beyond the assumption stage. It is actually occurring.

Michael Pober (ph).

My question has been answered.

At this time, there are no further questions. Mr. Haley, are there any closing remarks?

That concludes our call. Thank you for joining us.

This concludes today's Federated Investors conference call. You may now disconnect.

(CONFERENCE CALL CONCLUDED)