Federated Hermes Inc (FHI) 2003 Q3 法說會逐字稿

Good morning my name is Keyla and I will be your conference facilitator today. At this time I would like to welcome everyone to the Federated Investor's third quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time simply press "*" and the number "1" or your telephone keypad. If you would like to withdraw your question press the "#", Thank you. Mr. Hanley, you may begin your conference

Good morning and welcome to Federated earnings conference call. Leading today's discussion will be Chris Donahue Federated CEO, and Tom Donahue Federated Chief Financial Officer and also on the call are Dennis McCauley and Rich Novak from the Corporate Finance Group. We plan about a 20-minute presentation today before opening up for your question.

Let me add that this discussion will include forward-looking statements and actual results could vary materially. For a discussion of the factors which would cause actual results to vary from these forward-looking statements see the section title risk factors in the company's annual report on form 10-K for the year ended December 31st 2002 on file with the Securities and Exchange Commission. With that I'll turn it over to Chris to talk about the quarter.

Thank you, Ray. Good morning. I will review our business performance in the third quarter before turning the call over to Tom to discuss the financials. This morning at the same time that the earnings were released, Federated also provided an update on the inquiries into mutual fund shareholder trading. Giving that our investigation is ongoing, it would be inappropriate for me to comment beyond the information in that release.

I will briefly comment on our performance in each of the major asset classes before looking at the distribution channels. Equities were a source of strong growth in Q3 with equity assets up 8 percent from the prior quarter and up 31% over the past year.

We continue to have competitive funds in a variety of disciplines that are being successfully distributed in multiple channels. Driving both gross and net fund sales in Q3 we're the Federated Kaufman fund, which is in the multi cap growth phase, capital appreciation fund, which is large, cap blend, market opportunity fund which is strategic value and the Federated Kauffman small cap fund.

Approaching its first anniversary in December, the new small cap fund is approaching $200 million in assets backed by strong sales and very competitive performance. The original Federated Kauffman fund is over $5.5 billion compared to the $3.2 billion as at the April 2001 acquisition date.

The funds investment record continues to be outstanding both on the short and on the long term. The A, B and C share classes we developed for intermediary use have grow $2.2 billion with about two-thirds of this growth coming from net new sales. This experience is a powerful illustration of the growth that can occur when strong performance and substantial distribution are combined.

We continue to gain equity market share in assets, compared to the industry data through August 31st. Through August our equity fund assets are up 24.6% versus 21.4% for the industry. The changes we have made on the equity side have been received well by our clients, Federated began implementing the current global investment structure in August of 2002 with the goal of positioning the firm for its next phase of growth.

The initial planned build out is complete and our mission is now to develop this team to achieve superior investment performance for our clients through a discipline investment process, specifically by developing a sustainable source of alpha derived from proprietary fundamental research.

In the money market area assets in Federated mutual funds and separate accounts together decreased 6% from the prior quarter, yet remained 3% higher than Q3 of 2002. Money market fund assets continued to fluctuate at quarter ends due to normal customer actions and changes in interest rates. Federated easing in November of 2002 and late June of 2003 resulted in flows in money funds for the first two-quarter ends of '03. On a net basis, these in flows have gone back up.

From the Q3 ending total of $129 billion, money fund assets have increased in October, running at an average of about $134 billion so far this month. In addition, some of the money market asset decease from the prior quarter occurred in separate accounts due to seasonality in the large Text pool account. As we have discussed before, assets in this account have fluctuated between $11 billion and $16 billion over the course of the year. These assets tend to increase in the fourth and first quarters due to tax collections and then recede in the second and third quarters.

Turning to the fixed income side, our experience was consistent with the market and the industry in general, as some assets on the margin shifted out of bonds. Our fixed income assets decreased by 2% from the prior quarter but remained 16 percent higher than assets at the end of Q3 in '02. Modest net in flows stand multiple product categories and outflows, excuse me.

We experience net outflows in corporates, government, high yield, mortgage, global products while Munis, Splendid and our Gift (Ph) products had modest net in flows. The first three weeks of October, equity fund flows are positive and running a little higher than Q2 while fixed income flows have return to positive territory. But once again we caution against drawing hard conclusions for the quarter from this early data.

Turning to investment performance, among funds rated by Morning Star, our percentage of assets in equity funds rated 4 or 5 stars increased from 49% to 51% from the second quarter and our percentage of 3, 4, 5 star fund assets rated for a increased from 63% to 65%. In the fixed income area, 4 and 5 star rated assets remained at 25% and assets in funds rated, 3, 4, 5 stars remained at 74%.

As at September 30th, our funds ranked by Lappet (Ph), 52% of our domestic equity funds and 54% of our bond fund assets and 80% of our money fund assets were ranked in the first or second quarter based on one year total return. Two-thirds of our eligible stock and bond funds ranked at Lappet leaders in one or more categories at quarter end. These categories include total return, consistent return, preservation, tax efficiency and expenses.

Let's turn to distribution. In the trust market our focus remains finding ways to work with our clients to grow assets. We announced last month the closing of our acquisition of the $465 million in mutual fund assets from funds previously managed by Rigs (Ph) bank and continue to look for similar opportunities. Money fund assets continue to fluctuate in the trust channel as the yield benefits from the Fed easing in late June dissipated during Q3.

While money market assets decreased by $7 billion, these assets have subsequently increased by $5 billion so far in October. We continue to develop new functional equivalency applications for money market funds. We're in the final stages of implementing the previously announced DTC, OCC, money market fund initiative and expect to add assets from this initiative during the fourth quarter.

Our functional equivalency efforts in England are also showing promising signs though it's too early to attach assets to this initiative. In its early stages the bank managed account product is adding new distribution, growing accounts and raising assets. We were recently added to the separate account programs and another of the top 5 US banks. During the third quarter assets doubled to more than $100 million and we expect this to grow substantially over the coming quarters and years.

Let's turn to the broker dealer channel. We have continued to have strong sales momentum and are in pace to have a record year for stock and bond fund sales. Year to date, equity and bond mutual fund sales in this channel are up 42% and equity fund sales for the third quarter increased 66% from the third quarter of 2002.

Strong selling equity products in this channel include the Federated Investor's Kauffman and Funds, the capital appreciation fund, the market opportunities fund and the Kauffman small cap fund. We continue to gain market share of sales on the platforms of multiple major brokerages where we are increasingly in the top 10 and in some cases the top 5 of third party mutual fund providers.

In addition to growth in fund sales we are seeing accelerate sales of our managed account product among brokers, including bank broker dealers. We are now on platforms, which include the programs at Lehman, Legg Mason, Raymond James, LPL, Janney Montgomery Scott.

Assets in this channel nearly doubled to over $160 million during the third quarter and we expect to see substantial growth in this product over the next couple of years. We continue to navigate the process of adding our products to the platforms of the major wire house programs and this remains an important goal.

In the Jones channel, we're on pace to increase fund sales by about 15% this year an we are selling a wide range of equity and bond products. Our sales at Jones are running at about 3.5% market share down from Q2 as a result of increase in equity fund sales in this channel where our share is lower for bond funds.

On the institutional side we added 7 new cash management customers with about $200 million assets at quarter end. New customers included public entities, corporations and a large account from one of the top universities in the US. In addition to the normal ABS in flows of corporate customer, cash balances we expect that approximately $2 billion in money market assets will be withdrawn during the fourth quarter in first quarter of 2004 from companies who are existing bankruptcy.

Administered assets increased by nearly $6 billion during the quarter, due largely to an acquisition made by one of the third party banks for whom we provide fund administrative services. Now, briefly an update on some new products and some key initiatives.

We have discussed the manage account product at the channel level. Total assets are now at about $300 million, twice the level reached in Q2. We remain optimistic about reaching $500 million in 2003 and look forward to growing to billions from there.

We launched our 5-29 plan product in the second quarter and continue to sign up intermediaries and promote the product. Our variable annuity re launch effort is not showing much momentum as the product struggled to get attraction in a tough competitive market for variable annuities. In Germany our sales continue to grow and assets in the retail funds in our LVM partnership are now over $350 million, up 28% year to date. We will selectively start new fund products like the Federated Kauffman's small cap fund.

We have launched the Federated Muni and stock advantage fund, a tax favored income fund on September 24th and expect that this product will appeal to investors looking to realize tax advantaged income as well as the potential for capital appreciation. We also continue to actively seek acquisition opportunities as I have discussed before, both in terms of centers of excellent and roll ups. And now for a look at the financials, I'll turn it over to Tom.

Thank you, Chris. Revenues increased 6% from Q3 2002 and 3% from the prior quarter. The year over year increase was due to growth in averaged equity and fixed income assets, while the sequential increase was due to higher equity assets and additional day in the quarter, upset by lower money market and fixed income average assets.

On the expense side, as we discussed last quarter, compensation and related expense increased from Q3 2002 and from the prior quarter, reflecting the full accrual of 2 year's worth of earn outs related to the acquisition an new hires and additional incentive compensation in our equity management area. The Kauffman accrual increased by about 600 thousand compared to Q2 since the earn out was accrued over the full quarter in the third quarter.

Professional service fees increased from last year due to previously discussed legal outsourcing arrangement that began last October and the expiration in mid Q4 of a credit that we were receiving on outsources portfolio accounting services. Also impacting year over year and sequential quarter increases were approximately $1.1 million of expenses related to the various regulatory inquiries. These costs are expected ongoing as the investigation and inquiries continue.

On the balance sheet, our cash and short-term investment stood at $174 million at the end of the quarter, during the quarter we used $7 million for share repurchases and $9 million for dividends. Year to date we have used $143 million for share repurchases dividends, an increase of $81 million for the same period in 2002.

An accounting update on Fin-46. On October 8, Federated announced a delay in the effective date for Fin-46 to the end of 2003. Fin-46 as issued would resolve in a consolidation of approximately $1 billion in assets and liabilities from the 3 collaterals bond obligation products we managed.

This would occur despite our having no claim to the assets of these products and no liability for the debt issued by the CBO entities. We have accounted for the minority investments made by Federated in these products, which had a remaining book value of approximately 550,000 at September 30th. We have prepared to consolidate as necessary though we continue to examine other courses of action.

We are hopeful that through this delay by Federated, that they will reconsider and may be amend the rules that as proposed. We have recently agreed to terms to extend our B share-funding program for another three-year term beginning January 1, 2004. The new financing should be in place by year-end. We will now open up the conference call for questions.

At this time, would I like to remind you to please press "*"and then number 1 on the telephone keypad. We'll pause for just a moment to compile the Q and A roster. First question comes from Ken Worthington of CIBC World Markets.

Hello, good morning. This is actually Gorf Bubor from CIBC. I just had two quick questions. The first one on the bank trust channel. How fast do you expect this business to grow going forward and in particular is there any reason it decline so much from the 2 Q levels and I guess following that, would we expect a rebalancing of equity assets in the money for assets to benefit this channel going forward?

In terms of the rebalancing, we'll answer that question first, because we are dealing with our customers on an on the bush (Ph) basis, we don't see precisely the moves on the rebalancing. We do, however, see assets moving as I mentioned from bond funds out of our bond funds.

But we don't see the money going right back in, the same dollars into equity funds although we do see assets increasing on the equity fund side. So it's very hard for us to follow the bouncing ball on the rebalancing. Overall, I think that when people are shifting, those are opportunities for us to expand our business. In terms of the bank trust business, how do we expect this business to grow going forward in to us, the bank trust is still a very good excellent growth business going forward, and that's true in several areas.

On the cash side we have less than 10% of the cash of trust departments of their discretionary cash in total, and we think that we can still expand that. On the equity and fixed income side, we have an in infinite attention of market share so that even though you don't see strong growth rates in the underlying assets or balances of trust departments because of our relationships, our products and our focus in terms of trying to sell those banks on using our products like the managed account product, we think these are excellent growth opportunities into the future. It would be very difficult to put a precise number on that, though.

OK, and I know you had some comments but any comments as to why the levels declined from Q2?

The 2003 decline was concentrate in money market funds, the equity funds were up a little bit and fixed income were off a little bit but it was essentially money funds and remember that in that channel we also include the bank Capital Markets group which is not trust department money, it's the institutional brokerage area of some of the larger banks and it's about 25% of that channel.

In that subgroup of bank trust and then in the rest of the bank trust world, we had decreases in money fund assets that were not particularly unusual. It was money moving, essentially into the direct market and as we have mentioned a good bit of that has already come back in the first couple weeks of October. But there were no significant customer disruptions that we would phrase that's kind of a normal transaction patterns in that channel.

OK, and one last question. On the ongoing internal investigation, have you been able to identify whether the late training activity or frequent training activity was with Kauffman funds or, can you comment to that?

Well, I'm not going to comment on that. The investigation continues, and rather than try to list certain funds and not other funds, I think it's best that we take the position that the investigation is continuing and that, you know, we're taking the steps to ensure that the fund policies in all of the funds are being adhered to.

OK, thank you very much.

Next question comes from Cynthia Mayer Salomon Smith Barney.

Hello, good morning. Just to clarify something really quick, you mentioned that administered assets decreased, are you think

No, increased.

Oh, increased. OK, I didn't catch the amount on that

$6 billion.

OK, as a result of -- and do you see, are there any other acquisitions coming up which would cause that number to move that you see?

Those kinds of acquisitions are where we're doing the administered business for a propriety fund group run by, say a bank, and so if that bank is doing an acquisition of another bank and that another bank that's acquired has an fund family, then they merge it in with there's. So we would not be privy to the acquisition activities even of our bank partners until after it was made public, so I just would say I don't know.

And there's nothing pending that's been made public that you see?

Correct.

OK. Just on a couple of other things, on the operating margins you have been mentioning for a few quarters now that you saw, the -- I guess the year ago level is the high water mark and I'm wondering if you still see that as a high water mark that you won't be reaching anytime soon and in general just where the operating margins are going

What I said before is that the those, I think it was the last quarter of last year, the 47% was the high water mark and we are still sticking with that, and we're still sticking with looking at margins in the mid 40s as being where we are.

OK, and on the Edward Jones channel, I know your goal had been 6% but it sounds like that's partly a function of what type of assets are being sold at the moment. Given that, is your goal still 6% or do you think its going to realistic?

The 6% is an intermediate goal. The real goal, if you look at the Jones organization, they have 7 providers and therefore the true goal is to get a proper share, which is 15%. But that is a very, very long-term thing. So yes, the goal is system to drive to 6% but that's then on the way to getting 10 and then subsequently on the way to getting 15. We don't put a time frame on the 15 or the 10 but we're certainly working on trying to get the 6. And it is influenced by what products are sold at a given time. But that doesn't change our goal.

Right. It sounded as though overall you were gaining market share in equity sales but I guess not in particular at the Jones channel?

That is correct.

OK. And then just on a Fin-46, you mentioned that you might take some other courses of action. I'm just wondering if there are any particular ones you can mention?

Well, we have tried to study other, what other firms have done and we're still in the process, but other firms have decreased their management fees in order to work through the aberrance (Ph) of the rules in order to not consolidate. That's one issue, one thing that we are studying.

Like decreasing the performance fees, for instance?

Yes.

Great. Thank you.

Your next question comes from Robert Lee of KBW.

Good morning every one. Quick question, I guess this is for Tom at first. I think I missed a what do we about the Kauffman accrual and comp and then you know, the follow-up to that, if I remember correctly there's also a fairly large potential contingent payment that isn't going to flow through comp but you know could come due. I think it was March or April next year. Could you just refresh my memory on, you know, the size of that and you know, the conditions under which it had to be paid?

Sure. On the comp first, in '02 we had been accruing through the year in anticipation of paying that and then, you know, near the end of the year -- I'm sorry when we got to the end of the year and looked, we had to reverse it in the first quarter of this year because they didn't hit it.

And so now, when we go back in and run the models to whether we're going to have to pay 2003's comp or incentive comp, we realize we're going to have to pay it, and the way the agreement works, we're also going to pay last year's that didn't get paid. So we're kind of on the double for the incentive comp that's tied to the deal. And where they didn't get it last year, they are going to get it this year and get last year's, too.

In terms of what would get paid next year, you know, as determined by the assets and the revenues on April 21st, it -- again, it will be a, and this does not show up in the financials, it goes through goodwill basically, it will be about $60 million if they get the full payment, both years for 30 each year.

OK. And the amount, just to quantify that, again I apologize for missing it, the amount of that accrual for comp with in comp is about 600,000 at this point?

Well that -- what happens is when we start accruing in the second quarter, remember the deal is April 20th, so it doesn't have the full number of days. And the third quarter has the full quarter in it, so it's just a math how many days are in the third quarter and subtract off the days that aren't in the second quarter.

OK.

Again is that you -- you wanted to know?

Yes. That's great. Just following up on Kauffman, you know, with -- I would see assets up around $5.5 billion and presume you can hold on to that. I don't know the exact formula but there's probably a decent likelihood you have to pay out $60 million to them, you know what is the you know, how is this impacting how, you know, will it have any impact over the next couple of quarters in terms of how you think about using cash for share repurchases or further differences in the dividend. And then maybe in the the follow to that, how much time is left on their employment contracts?

OK the first one, the cash flow of the company with the money that we have on our balance sheet right now leaves us enough money to pay that and to continue if we desire to make stock purchases and to pay our dividend. I don't think that's an issue.

In terms of how much time is left on the deal, the -- from the beginning of the deal, their payments get paid over five years and then they have an opportunity to get paid on the sixth year if they didn't make it in the fifth year. In terms of their employment contracts, I forget, I think those were, you know, a little less than five years in terms of the time frames from the original deal.

Ana a let me just think in the longer term just speaking with my last question I promise on the contingent, potential contingent payments, but I think longer term, you know, they would be even after this April, there's other contentious -- possibility of other contingent payments that could become due. If they hit targets would those roughly amount to $30 million a year or so if they (inaudible)

It's in two buckets. It's the comp, which is around, you know, $10 million a year, and then it's the $30 million that we just talked about, which really is 60 because it's doubled.

Thank you.

I'd like to add one other comment to that is that when you ask about the impact of this, the impact is in my judgment first a very good one because these payments are triggered off of increases in revenues. There are thresholds built in that allow these payments to go out. So I wouldn't want people who aren't familiar with all of the intricacies of this to think that these payments aren't anything but a good thing for us to fund and everybody around the table.

Thank you, Chris.

Your next questions comes from Mark Constant of Lehman Brothers.

Good morning. I know this is a very sensitive issue and don't expect you to make disclosures that you couldn't make an early release. You know, my personal impression from your reaction to the initial allegations that were levied by Elliot Spencer(ph) and the comments she made in her conference to investigators.

Frankly, Chris, that you were just as surprised as most of the rest of the industry and we were even working as most of the industry has been to deter market timing and if I recall correctly we were talking about the board having approved, I can't remember whether it's earlier pricing or short term trading redemption fees, that type of thing over the next couple of months.

s it fair then for me to assume from your reaction that, and again speaking for yourself, Chris, that you had no personal knowledge of approvals of the quote few exceptions for (inaudible) limits or the late trace that you found?

Christopher Donahue One of the reasons that John and I are on that committee is precisely because of the fact that, you know, we were as surprised as many people to find out that this whole thing was going on. So that's where we are.

At the Lehman conference, you recall that question that came up, and there were three of us on the conference there and I was the beneficiary of getting to answer that question first and said that, you know, we had received the subpoenas, I don't remember if we had gotten the SEC thing yet by then but anyway, and that we were responding to it and then I made a general comment about how I thought the industry was an excellent industry over the long haul.

But getting back to your question, the main thing that we are doing right now is continuing an ongoing investigation into getting to all of the facts. And you know, this is a top priority for the company, we have devoted substantial resources, and this is something that is attracting a lot of the resources of the company in order to get to the bottom of this stuff. So that's about as far as I could go with you on that, Mark.

OK. A little bit different perspective on it though in terms of outcomes and again kind of getting to your personal ethical consideration. I guess I've known you about 8 years now and never anticipated you to be a person of ethical lapses. If these investigations uncover individual wrongdoing within the firm would it be reasonable for us to assume that those employees would be terminated?

We are committed to taking remedial actions when and as appropriate, and so I believe that covers the area that you're questioning. And you know, I think you have characterized my attitudes pretty fairly, but it is critical that you understand that it's an ongoing investigation.

That's why I say if.

And you know, you say if, right, an taking remedial actions when and as appropriate, if any, and all those kinds of things. But that's where we are. We're submitted to taking remedial actions when and as appropriate.

OK. And last clarification on these comments, a couple of quick numbers things, there was a notable difference in what you talked about with the after 4 o'clock trading transaction versus the frequent trading issues in that you didn't use the term exceptions. Is that to imply with the lay trading instances that that could have been sort of a compliance control issue as opposed to someone in Federated proactively facilitating those transactions

I think you're parsing this in ways that I would leave to 20 lawyers. But I think all we're saying is that we have identified instances and it appears that orders for some of our fluctuating asset value funds were placed and accepted after 4 o'clock. So, you know, as I say, the investigation is continuing, so it's very hard for me to comment or to compare paragraphs, words and all of that.

Fair enough

I got kicked out of the legal department recently, because the Sarbines-Oxley they even sent me an official notice.

OK. On the number side it's a little bit related. Has it or will it constrained your purchase activity from there we can't be repurchasing while the investigation goes 10 points or anything like that?

No, this is Tom. If you quote, go and ask the legal department, they say is there any possibility that there is material information that the investigation or the company knows about and that dictates whether we are able to buy shares or not.

So I should assume that it did constrain your ability over the last month or so and that it is likely to going forward?

We purchased 252,000 shares.

Considerably less than you have been, which is why I'm asking

That's a true statement, considerably less than we have purchased before

OK. And may continue to pressure that. And the last question to the discussion of Kauffman and the accruals, when you talk about the 47% kind of magical margin feeling, I'm wondering, even if you didn't get an incremental operating leverage, even if every incremental dollar revenue had a dollar or proportional dollar rather of expenses related to it at the margin, wouldn't the ending of the double accrual for Kauffman, if nothing else, increase your margin?

Well, Chris can answer this after I answer it. I've been around here a few years and I notice our investments, particularly recently in the investment area.

Which are largely done, if I -

Right. They are largely done and we go through our budget process and they are largely done and I have heard that years before, too, that they were largely done. Right. They are largely done.

I have also heard your margin wouldn't go up, I guess that's why I'm asking.

You want to put everything in a steady thing and more assets and the margin go up mathematically that absolutely could happen. It's not what we're calling for and you know, just see things that we are going to continue to invest in.

it's really tough for me to make some comments about a margin increasing over -- up to or over 47%. Even looking at the numbers. Number 2, the reasons for this is the confluence of factors in the marketplace which mitigate against us, which is broad based desires from compensation from sales research and administrative people, desires for various forms of marketplace, marketing allowances, and the like, the new kinds of products that we have offered that, you know, don't have the same kinds of margins associated with them that others, for example the managed comp programs.

And so yes, you can single point look at one thing and say a what, this is one that would tend to increase it, but I can't look at it and say that's going to be the net because I'm looking at all these other factors and they tend to mitigate the ones that aren't to the good.

OK. Thank you, guys.

Your next question comes from Henry McVey of Morgan Stanley.

One on the fixed income out flows you guys had strong sales of kind of your alter shore bond funds. Is that not an area that felt the impact this quarter?

Henry, we actually still had a decent level of sales of the alter shore products and sales level wasn't much different than it's been in the prior couple quarters, but we had some higher than trend reductions out of that alter shore products now as Chris mentioned we have trouble tracking and saying exactly where that money goes but it's not unreasonable to have some correlation between the Bond Fund outflows and the equity fund inflows.

OK. Just a couple of -- not to beat a dead horse, but I guess one is just on the litigation stuff, have you guys, when you put out this press release this morning, did contact -- you have spoken with Morningstar and then second, the language shares on the late trading that was identified instances versus patterns and I'm sure that, a pattern, did you and I assume your legal department spent quite a bit of time looking at this, so I was just trying to get the -- I mean was it instances chosen as a specific word versus pattern and then 2 was, have you contacted the different, you quote lipper categories and you quoted something on Morningstar. Have you spoken with them?

On the parsing of words on the press release, I would assume as you do that lots of lawyers looked at a lot of these words and that's why we said the investigation has identified instances, which it appears that fluctuating fund trades were accepted after the 4 o'clock closing time. And so alternates where we are and the investigation continues. As regards Morningstar and lipper, I'm not aware that we have contacted them this morning and so I think they would have been, you know, the recipients of the normal public notice on the thing. And you know, it's too early. The thing went out at 7, I believe.

I know. The second -- the last thing was on the capital base, back to Mark's question. I guess I'm getting mixed messages. You mentioned that you -- in your prepared comments that you would still consider acquisitions yet given that you have had Banc of America and some other guys put up legal reserves and your share repurchases went down, I guess I'm just trying to think about what you want us to take away. I guess I'm not calculator.

On the subject of acquisitions

I mean, you can use your CAPEX dividend, buy back acquisitions and I'm trying to understand how you said to Mark, you know, that share repurchases went way down, which that was one form of capital usage but were you still interested in acquisitions.

Well, we still remain interested in acquisitions. We have current discussions ongoing all the time. We are aren't in a position to disclose what they are, who they are with, or what could happen there, but we remain active on that score. And we don't feel constrained in terms of continuing those discussions. Now, in terms of the share buyback, you know, our attitude is we like buying the shares back, but as Tom mentioned we're going to operate under the requirements that if you believe you have inside information then you're not active in the market, and we're under normal blackout periods for certain amounts of time in any event, and we will follow those outlines.

OK. Just the final thing, On the I guess on the -- you say you're conducting an ongoing investigation. I mean, are we talking weeks, months, and just how -- when did it start before the quarter ended so we can get a timetable

When it started is when we received the subpoena from the New York attorney general. So that's the easy part. When it will rap up is too tough to put a time frame on it right now. You know, there's a lot of work to be done, and it's inappropriate for me to comment on a time frame. If I were just to create a deadline because you and I both have enthusiasm for ending it as soon as possible, then I would have created an artificial, fake deadline. So we're working on getting this stuff done as expeditiously as possible.

When was the special committee formed?

When was the special committee formed? Sometime within the last month.

Henry, the expenses that I mentioned in my comments related to the investigation were $1.1 million and I think we got the peanut sometime in early September.

And so you're guessing that will still be $1.1 million or should we take that up to $3 million?

All I said was the expense will continue

If we were able to reasonably estimate what the future expenses would be, then we would have already done it, which is why we said in the release we couldn't, and therefore we won't.

OK. Fair enough. Thank you, guys.

Your next question comes from Glen Shore of UBS.

OK. I am not getting bit enough for us.

Are you still there?

One moment, please. Mr. Shore, please press "*1".

Hello? Are you there Glen?

Yes. I don't know what got cut off.

It wasn't us.

The question is just simply what's been communicated to clients and what kind of thoughts in terms of client hand holding do you have going forward, particularly the ones in the trust channel that might have a fiduciary responsibility to their clients?

Right. What has been going on since the press release was made at 7 o'clock, the contents of the press release have been presented to discuss with or in the process of discussing it with a whole list of major clients. So that's ongoing.

Who is doing that contact, is that the salesperson or are you running back to your office and getting on the horn for the rest of the day?

We have 5 thousand intermediary clients. The idea that one human being is going to do that is impossible in any kinds of time frame, therefore, numerous executives at Federated in different areas are involved in those activities.

And I guess because you can't share much more with us, you can't share much more with them and then we'll all find out on a go forward basis via press release?

What was the question, Glen?

Just assuming that you can't tell clients much more than you can tell us in the press release and on this call

You got that right

I'm assuming that we are all we will get well updates when necessary via press release, is that it?

That is correct, because it's just inappropriate to comment before we have all the facts further better than what we got working right here.

Understood. OK Thank you very much.

Your next question comes from Steven Schwartz of Raymond James & Associates.

Good morning everybody.

Good morning, Steve.

Two questions. I'll be honest I was looking more at the press release than the earnings release going through those numbers, but Text pool, could you give a sense of maybe where the assets closed at Text pool at the end of the quarter versus the second quarter

They were down about $2 billion. Steve

Well about $2 billion is actually you can explore OK. And then I just want a follow-up on Mark's question to you, Chris. I'll make this simple. I take it from your statement that it would be correct to infer from your inclusion on the special committee that you were unaware of these practices?

That's a fair summary.

Are they accurate That is you were unaware, that is accurate?

Right.

Thank you.

The next question comes from Bill Katz of Putnam Lovell.

Thanks Good morning Just one more question on this regulatory probe. I was kind of curious. Could you maybe quantify on the late trading side whether or not you're looking at the retirement business versus the after market business?

Because we're in an ongoing investigation, Bill, we're not going to get into which kind of accounts and what kind of situations, you know, despite newspaper articles or whatever.

OK. Second question maybe a more meaningful question, in a separate account business I think your commentary was sort down on the billed out on the equity business, where are you in terms of lead lag or maybe the pipeline for the equity fixed income business on the institutional side and when might we start to see maybe a ramp up in this business?

In terms of the people, what we have said is that we have billed out the people part, and you're asking on the institutional mandate business and winning mandates there, is that what you're asking about, Bill?

Exactly

OK It takes in that institutional world arguably you have to have a three-year record to make a big push. This is not to say that you can't win mandates short of the 3-year record. This is also not to say that we don't have several records that are there or are in the process of getting three-year records. But overall in terms of the big push, you know, that's one of the things that you would have to discuss.

A second thing is another Federated approach that we have used successfully in the bank trust world and that is assisting clients solve problems. This is one of the reasons why Kim Shepard period brought on Mike Grenedo(ph) in order to have a thing tank type discussion, presentations and understandings of solving clients problems in certain areas which give us an edge up in terms of getting mandates in that area. So it's very difficult to say exactly when the ramp up and assets will occur. We certainly expect it to occur over time.

Maybe just get a little further into that. How much of your funds right now have a three year track record?

Chris Donahue Well, how many of the funds have a three year track record

Percentage of assets, either way.

Chris Donahue The vast majority of them do. But there's a difference between the investment record of the fund and then how an institutional client looks at that, you know, in terms of whether that's what -- that's the same mandate they are going to get.

So, we take some of those mandates and work them both ways. For example in the market opportunity fund, that mandate started out as a large separate account for an insurance company and then we took that mandate and put it into a fund and sold the fund and now, you know, continue to sell both the fund and the institutional. So, you know, that works pretty well on that scheme.

So, a lot of the funds have on the fixed income side, have you know the relevant three year good records and things for moving that ahead, but we have had pretty good success over in Germany selling those kind of things.

OK. Thank you.

Our next question comes from Guy Moszkowski of Salomon Smith Barney.

Actually it's Guy Moszkowski . I just have a question on the time line with respect to the investigation. My understanding is that you actually knew that you had enough of an issue during the quarter that it actually impacted your comfort level in buying back shares, so it impeded the buyback of shares. Why is it that there's only a press release as to this today?

Chris Donahue Guy, the press released to is the result of the fact that we have earnings and information on an ongoing investigation and without getting into the legal intricacies of it, there are different discussions about whether you are buying shares or whether you are making press releases an we have to look at all of these things in conjunction in order to run the operation.

So it's a different set of criteria you're saying as to whether you're -- you can buy back shares and whatever is going on as to whether you should issuing a press release as to people know that you sound some type of activity

Chris Donahue I think you want to talk to the 20 lawyers been about how all the provisions work on the rules of the road on governing insider trading and then on making press releases in materiality. But those things are, you know, more subjects for legal evaluation than for me.

OK. Fair enough. and to dwell on it, I know you didn't really feel comfortable talking about this stuff so thank you.

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

No, that concludes our call. Thank you for joining us.

This concludes today's third quarter 2003 earnings conference call. You may now disconnect.