Federated Hermes Inc (FHI) 2004 Q1 法說會逐字稿

Good afternoon. My name is Dawn and I will be your facilitator this morning. At this time I would like to welcome everyone to the Federated Investors first-quarter 2004 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. (OPERATOR INSTRUCTIONS) Thank you. Mr. Hanley, you may begin your conference.

Thank you and welcome. Leading today's call will be Chris Donahue, Federated's CEO and Tom Donahue, Federated's Chief Financial Officer. Also on the call will be Rich Novak and Stacey Friday from the Corporate Finance Group. Let me add that this discussion will include forward-looking statements and actual results could vary materially. For a discussion of the factors that 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 31, 2003 on file with the Securities and Exchange Commission.

We have about a twenty minute presentation today before opening it up for your questions, and with that I will turn it over to Chris.

Thank you, Ray. On today's call, I will review our business performance in the first-quarter before the turning the call over to Tom to discuss the financials. Before I start, though, I would like to welcome and mention that we are proud to have David Kelly the CEO of Matthews International join our Board as of this morning, and he attended his first Board meeting with the Company this morning.

Now I will start our comments on the business with our performance in each asset class before looking at the distribution channels. Equity assets were up three percent overall from the prior quarter and up 52 percent for the full year. Our sequential quarter performance was stronger on the fund side where equity assets grew by 5.2 percent. While overall equity fund flows were down very slightly from the prior quarter, net sales increased in our actively managed portfolios while index fund net redemptions increased. A key element of our growth strategy is to come by competitive funds in a variety of disciplines with a strong discipline in channels to grow equity assets. We have a group of particularly strong equity products that we are having success with across channels. These include the Federated Crossman Fund, which is multi-cap growth, capital appreciation fund, large cap blend, market opportunity fund, which is strategic value, the Federated Small Cap fund which is up to $334 million at quarter and.

We are also having good sales results in the Federated Muni and Stock Advantage Fund launched in September of '03, which is now reached $134 million at quarter end. Turning to the money market area, assets in Federated's mutual funds in separate accounts decreased from the prior quarter and from Q1, '03. Coming off of a 50 basis point Fed easing late in '02, these assets hit record highs a year ago at a brief midyear inflows from the last rate cut in June and gradually declined since.

Our market share on money market funds was six percent coming into '03; hit 6.28 percent at year-end and more recently was at 6.08 percent. We expect that these assets will further decline this month due to the regular seasonal impact of tax payments net. April assets versus March decreased by 4 billion in '03 and April assets versus March decreased by 3 billion in '02. In addition, we expect to see a decrease related to bankruptcy exits of approximately $1.5 billion this quarter. By the way this was delayed from our Q1 expectation. And then another approximately $1 billion from a broker-dealer client.

Money fund outflows were partially offset by seasonal inflows into the text pool accounts, which drove the 3 billion sequential quarter increase in separate account money market assets. These assets typically peak with tax collections during the quarter, sort of the opposite of what happens in the rest of our business.

As we've analyzed money market activity by distribution channels, we have found that the recent fund outflows have occurred mainly from institutional/corporate clients, both direct and through banks. We have previously identified these clients as having a greater degree of sensitivity to the slightly higher rates offered by certain direct market instruments. I will review money fund activity in each channel in the distribution comments.

We continue to actively pursue new money market applications, including functional equivalency applications like 15c3-1 which is broker-dealer free cash balances; finalization of the OCC and DTC application, growth of the commodities futures application and our efforts across the pond in England. We are also actively pursuing acquisition opportunities and competing for broker-dealer corporate and other institutional mandates.

On the fixed income side, we had net outflows for the quarter with high yield and mortgage-backed funds accounting for most of the flows out. Ultra short products returned to positive flows for the first quarter but have again turned negative here in the beginning in the second quarter. For the first part of April, equity flows are on about the same pace as Q1, while bond fund redemptions are up a bit due to the ultra short products. And as usual, we caution against drawing conclusions for the quarter from the early data.

In terms of total assets, as of April 15th our managed assets were 194 billion, including 138.5 billion in money market, 26.7 billion in equities and 29.1 billion in fixed income.

Turning to investment performance, we continue to be encouraged by the strides we're making in the implementation of our new equity model, which is building strength upon strength. Our plan is to use this model to further develop our performance records over time that will then put Federated in a position to continue to grow steadily in the equity managed assets area and in market share. We are well-positioned with competitive equity products, some of which I have mentioned, and it’s across a wide variety of disciplines. We continue to see funds moving forward in their peer rankings and in performance versus benchmarks.

Of our actively managed equity funds, nearly three-quarters are in the first or second quartiles of LIPOR and that is for both the prior quarter and the trailing one-year. And two-thirds of these funds are ahead of for even with their benchmarks. Among funds rated by Morningstar as of the most recent data, our percentage of assets in equity funds rated four or five stars increased from 59 percent to 63 percent from year end; and our percentage of three, four or five star assets remained at 72 percent.

We recently announced a change in the organizational structure of our fixed income group with Bill Dawson promoted to Vice Chair of Fixed Income and the establishment of three new CIO positions for taxable bonds, taxable money market and municipals. This structure with its focus on distinct disciplines within fixed income will position Federated to continue to develop the performance needed to grow this part of our business in the competitive institutional sectors of the market. This is another area where we are building strength on strength.

In total, 32 funds were rated four or five star, up from 31 at year end. Of these funds, 14 were equity, up from 13 last quarters and for bond funds, 18 were rated four or five, the same as the prior quarter. Roughly 60 percent of our eligible stock and bond funds ranked as LIPOR 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, equity fund sales grew by 33 percent from the first quarter of '03 and 19 percent from the prior quarter. Money market assets decreased by about 4 billion with about half from trust departments and half from the bank institutional brokerage or capital markets area. We have previously seen first-quarter outflows in these areas.

We continue to have a strong money market business from banks, and we've seen no significant client losses. Banks continue to need complementary products, and we tend to be on the short list of third-party providers of money market products in large banks. We expect that April will show its usual seasoned pattern with assets further decreasing due to tax payment. Seasonally, the second half of the year has been the stronger half for money fund growth. Last year was the only year out of the last 10 to show lower second half money fund assets due to the June Fed easing and the reversal of subsequent rate sensitive assets.

The bank managed account product continues to grow by adding new distribution, growing accounts and raising equity assets. During the first quarter, these assets grew by 17 percent from 122 million to 146 million. We expect this growth to -- this total to grow substantially over the coming quarters and years.

In the broker-dealer channel, we continue to have strong sales momentum. Equity fund sales increased 51 percent from Q1 '03 and 9 percent from the prior quarter. In addition to growth in fund sales, we are seeing strong sales of our managed account product among brokers, including bank broker-dealers. Assets in this channel grew from 51 percent from the end of '03 to reach 468 million.

As we continue to expand platforms and deepen our penetration of the existing platforms, we expect to see substantial growth in this product over the next few years. We continue to work toward gaining access to the top ranked warehouse platforms and in other high-quality programs.

In the Jones channel, we are selling a range of products led by equity funds. Our fund sales here have increased about 14 percent from Q1, '03 and ran at about a 2.5 percent market share down from the prior year due largely to the overall increase in equity fund sales where our share is lower than it is for bond funds.

Turning to institutional, we added two new institutional cash management customers during the quarter with initial funding of about $76 million. Money market assets in the institutional area overall however, decreased by about 1.5 billion from the prior quarter and are down nearly 5 billion from Q1, '03. The year-over-year difference is due to the outsize growth that we had in the early part of '03 from the late 2002 Fed rate cut. More recently, institutional money fund yields in some categories has slightly lagged the direct market alternatives. And this has been in the range of about 5 to 10 basis points, which we have previously discussed as the level where we expect to see the more rate-sensitive assets shift to some direct market alternatives.

In addition, as we discussed last quarter, we still expect that approximately 1.5 billion money market assets in this channel would be withdrawn during the second quarter of '04 because the Company is exiting bankruptcy. Also in institutional channel, we experienced the loss of a $539 million equity separate account from a firm who closed all of their accounts with any firm cited in the industry investigations. We were also informed by another client that a $1 billion fixed income -- this was a high yield account -- will be terminated this quarter. We do not attribute this action to the investigation, but more so to the ebb and flow of market and client expectations. We continue to manage other assets for this client, as well.

Combined, these two accounts produce about $3.3 million in annual revenue. Importantly, we won three new fixed income mandates in the first quarter with initial funding at about $200 million.

Briefly an update on new products and initiatives. We discussed the managed account product at the channel level. Total assets in this product reached 630 million at quarter and, up 40 percent from year end. And our target for '04 is $1 billion. While we continue to be active in providing some advisory in fund products for the variable annuity products sponsored by third parties, we will be winding down Federated's proprietary VA product shortly, as we’ve discussed before. The existing accounts will continue to be serviced, and we will continue to manage the assets.

Beyond our proprietary variable annuity business, we continue to manage more than $2.5 billion in variable annuity assets for third party products and despite some recent setbacks; we continue to expect this to be an area of future growth.

In Germany our sales continue to grow and assets in the retail funds in our L. V. M. partnership were up to $450 million, up six percent from year end. And we continue to seek acquisition opportunities as I have discussed before for both centers of excellent and roll ups.

Finally, I would like to update you on our review of past fund trading issues and the related challenges ahead. In February, we announced a $7.6 million reservation fund, as well as a series of important remedial actions. We also announced a $12.4 million charge which was our best estimate at the time of the cost we would incur to complete the internal review. I said in our call last quarter that although our review was substantially completed, we continue to work on items in order to fully complete the review and respond to questions and inquiries. Tom will review the additional first-quarter expenses related to the substantial completion of the review, as well as commenting on the new expenses for legal and compliance items.

I want to emphasize the difficulty in estimating these costs as well as our desire to make sure that our review is thorough so that clients, shareholders and regulators can be confident in the integrity of our results. Beyond the internal review, as we said before, we will incur additional costs for ongoing legal matters, compliance initiatives, expenses related to the outsourcing of the transfer function and costs to respond to additional requests for information from the regulators.

Thank you Chris and I will start with details on the investigation that Chris was just referring to. When we took the 12.4 million charge last quarter, it was based on our best estimate of the cost we would incur to finish the internal review of past mutual fund trading issues and make restitution to the Federated Funds. Subsequently, the actual number of documents -- by this I mean historical, e-mailed documents -- determined to be necessary for review was higher than we estimated, and we were asked by regulators for additional information in relation to the areas under review. This drove the need to add 2.8 million to our accrual of the expenses we estimate will be incurred to complete our review. This becomes our best estimate and could, however, change.

The other 1.5 million was largely for expenses incurred in the first quarter related to shareholder lawsuits, fees for professional services in connection with the planned outsourcing of our transfer agent, costs for responding to an additional state request for information and costs associated with additional compliance activities. We cannot project a run rate for these types of costs. We do expect these types of expenses to continue, though.

Along with the information on the internal investigation and related project cost, the press release included a necessary detail on the impact to both revenue and expenses from the change in our fee share (ph) accounting and portfolio accounting contracts. Apart from these items, remaining Q1 revenues increased approximately 13 percent, compared to Q1, 2003. And were about the same as the prior quarter. The increase was due mainly to growth in average equity assets offset partially by lower average money market assets.

On the expense side, remaining operating expense expenses increased by approximately 11 percent from Q1, 2003 and by one percent from the prior quarter. Compensation and related item increased from Q1, 2003 was due mainly to the prior year's reversal and lack of accrual for the cost and earnouts incentive compensation. This year's Q1 includes an accrual for two years worth of earnouts as a strong investment in sales performance over the past year will lead to two years worth of payments next month.

Beginning April 21st, we will decrease the accrual rate since for the next few years a maximum payment is for only one year. Most of this total earnout of 40 million consists of additional goodwill.

Of the 80 million expected to be paid next month, 66 million will be treated as additional goodwill, which has already been accrued for on the balance sheet. And the rest as compensation, which has been substantially accrued for over the past year.

Our tax rate this quarter was 36.6, up from 36.1 for 2003. The rate increase is due to the impact of growth in Kaufman (ph) and the resulting higher New York taxes. We expect this trend to continue.

On the balance sheet, our cash and short-term investment stood at 271 million at March 31st. The press release includes the details of our share repurchase activity and our seventh dividend increases since the 1998 IPO, an increase of 20 percent.

Our diluted share count increased for the quarter due mainly to the lack of restrictions on restricted stock shares from 1994 that became fully vested on 1/1, 2004. And to a lesser extent, the increase in the options in the diluted share count from the increase in average share price in the quarter.

This coming July 1st an additional approximately 740,000 shares will begin to be added to the diluted share calculation as options issued in 1994 become fully vested. A diluted share calculation assumes that the Company repurchases shares with the tax benefits and purchase price proceeds upon exercise. The actual impact on diluted shares will be determined by the timing of exercises and the actual shares repurchased.

That completes the financial review, and I would like to now open up the conference call for questions.

(OPERATOR INSTRUCTIONS) Mark Constant of Lehman Brothers.

A pretty exhaustive list of information, so I think that's probably why you have fewer questions today. Actually I have a couple of things. One, I didn't hear the amount you said on the high yield fund termination this quarter?

That was a billion.

And that's all going to be in the 2Q?

That's what we expect, yes.

Okay and the '94 option vesting effect to the diluted share count; is there a comparable increase in '05 from the '95 plan? My memory banks don't go back that far.

Remember the way the '94 plan works, Mark, it could -- the effect may not take place. There's essentially a year before you can see the effect. It depends on the timing of when people actually exercise the option. So I can't tell you that there won't be impact next year, but it would be from this same group that we talked about. The next group of any size would not be until '06.

Would that be a comparable size?

Yes, with the same type of a one-year forward period for exercise.

Okay. Great. I think that's all I had.

Matt Snowling with Friedman, Billings, Ramsey.

I just wanted a point of clarification here. Did you say you lost 532 million from a client in a separate account in equities?

Yes, that number is already out in the numbers reported today.

I was wondering if you could tell us, do you foresee any further outflows or do you have any sense of future redemptions in that channel?

No, we don't.

Not at this point? That's great. Thanks.

Cynthia Mayer with Merrill Lynch.

Just as a very general question about an old topic, interest rates. Given the sort of differential between the market rates and the fund rates and the amount of assets that have come out, how are you thinking about that now in terms of the amount of interest rate sensitive assets that remain? Do you sort of think of it in terms of this amount of assets would be sensitive to this differential and this amount would be sensitive to a larger differential, or are you thinking you're sort of nearing the end of those that are really interest-rate sensitive?

It's very difficult to be that precise in terms of which clients are at which interest rate level. We do suspect as is not hard to figure that the most sensitive where the first two to part the scene in the five to ten basis point level. My observation would be that the vast majority of the money market fund assets that we manage today are of the service type where they are focused on the cash management services associated with money funds. This is not to say that there aren't other customers inside primarily the corporate world who have a different threshold. So it's very, very hard to predict. Then you'll have a confluence of circumstances with whatever people are still making their maneuvers on the tax side that I know tax day is past; and it's interesting that the money fund assets are up a couple billion from what was in the press release as of Friday.

So it is very hard to be as precise as you might like to see us on the amount of assets or the amount of change in interest rates that would cause various assets to leave.

Okay. Great, thanks. Just to clarify on the separate accounts you were talking about, you mentioned one left because they left any asset manager associated with regulatory issues. Which account was that? How large was that?

That was the 539 billion or million equity account.

Okay. Were there others who may the same decision that you would lump into the same bucket or is that really only one that identified that as the primary reason?

(multiple speakers) but I imagine in the industry there may have been others.

But for you that was the only one that -- okay, thanks.

Glenn Schorr with UBS.

Just drilling down a tiny bit on the bank capital markets business within the trust channel, I just want to clarify, A, I think you said around 50 percent of the outflows related to that? Is there any way you can give us a sense of the '92-ish million -- billion on the books? What percent are related to the bank and trust capital market -- just it goes toward that whole interest rate sensitivity question?

It's about two-thirds traditional trust, and one-third institutional brokerage or capital market.

That's fair enough.

Of the money fund assets. The institutional brokerage is really limited to money fund assets, whereas trust, we are also managing equity and bond assets. So you might not quite get to that split if you're at the market totals. But among money market funds, it's about two-thirds, one-third.

That's exactly what I wanted. Is it fair enough to say that of the money market outflows that you've seen thus far, they are well below the average fee in terms of your total money market business?

I would say there is not that much of a spread around the average, so they would be -- I would characterize them as below the average, but not by -- the range isn't generally more than a couple basis points in either direction, especially as it goes to investment management fees. On some of the retail funds, you can have higher transfer agent fees because of the account structure, but the management fees are not that widely dispersed.

But your instincts are correct in that those types of corporate clients who are the most rate sensitive are generally in the lowest fee products that we have as a general proposition.

Okay. In terms of capital and buybacks, you spelled out what you did during the quarter. Is it fair enough to assume that just that at least in the next quarter or so with the double payment coming and eventually, knock on wood, a settlement with regulators, buybacks will be little light in the interim?

We don't feel restrained to do the buybacks pursuant to the program. We just expanded the program for the next year, and we would tend to look at that knowing full well about the two things you mentioned. But we do have a reasonable amount of cash on hand in order to handle the payment. So we remain active on the stock despite those two items.

Fair enough. Thank you both.

Robert Lee with KBW.

Good afternoon, everybody. A couple of -- Tom -- if I -- if you could indulge me a second, I missed your comments related to the '94 option plan. Can you run through those again real quickly?

In July -- on July first, about 740,000 shares will begin to be added to the diluted share calculation. Now it doesn't come in until people exercise and they have a year to exercise so we don't know exactly when it will come in in that year, but or in that one year period.

Great. I'm just curious about the change in the portfolio accounting contract. Was this a decision taken in conjunction with the whole mutual fund timing investigations to somehow change the structure of that? Was that at one point somewhat of a profit center and then you decided to give off the income statement and sort of do a cost for the funds, is that one way to think about that change?

The -- what we had insourced fund accounting several years ago, and then another several years ago, we outsourced it back to State Street. So that whole business concept had nothing to do with any of the recent investigations. It was all due to regular straight-up business decisions. Now in terms of the accounting on it --.

But what happened now was, we were sort of in between the provider and the funds. Now we are no longer in between the provider and the funds. They are contracting directly. So all the work was transferred, like Chris said, and now we are kind of out of the middle of it.

Great. Sort of on the down the same path, I know you mentioned some added cost and change in your transfer agency relationship. Do you have a sense once you completely outsourced that to BFDS that you expect much change in your own expenses or costs at this point or do you think it will be sort of a wash? When you outsourced it from an expense perspective?

Rob, we haven't gone through and finished that because we haven't finished the transaction with Boston Financial. On the other hand, transfer agency is not a huge margin business.

Last thing I guess sort of just I'm just curious, it sounds to me like you are pretty much still in a wait and hear mode from the regulators with -- obviously there's still some investigations going on and they want information but is there any kind of settlement talk -- that is pretty much waiting to hear?

I think waiting to hear is very good terminology.

That's it, guys. Thanks a lot.

Ken Worthington with CIBC.

Can we go over the Toby (ph) One Free contract again? Are expenses now higher than revenues? And had this been a profit center before and is this going to cost you or generate a net expense going forward? Am I seeing that correct, or am I not getting it yet?

Ken, what you are seeing is in the press release there was a net negative amount between the expenses and the revenue. The actual change in the accounting of putting the funding arrangement back on to our balance sheet and into our income statement didn't really change the underlying business proposition whereby we work with a third party to fund those B- share sales. So the change is not due to the accounting. What we have a new arrangement beginning this year for the funding of those B-share sales, and as you would probably not be surprised, given the experience of the last couple of years with people who have purchased NAB-based mutual funds cash flows, the terms of the contract have changed, and it is not a net cost. But where there had been a gain on sale in the past, that gain is lower now than it has been before. And so what you are seeing in the press release is essentially the absence of that gain. But going forward we still-- it is not a net cost to finance the B-share program.

What did the gain on sale used to be? Compared to what it is now?

The terms of that contract and that arrangement with the third party prevent us from going into that in as much detail as you would probably want to have. So that's not an area we can break down for you.

I guess my other question is can you give us an update on DTC and 15c3-1 and 3 -- just about where those stand and just give us an update on your expectations about what kind of money fund assets you think you can generate over the next say twelve months if those changes go ahead as planned?

Okay. On the 15c3-3, this is something we're working actively with the SEC on, and as you all might be aware, they are actively working on a lot of things. And so we can't predict when we will come to some hopefully positive result on this matter. But we are not running into any major stumbling blocks at this point. The potential here overall would be in the $100 billion range in terms of how much money is in that system. How much money would then come to -- be available for money funds would be a portion of that and then we would be a portion of that lower number. So to us the potential and the reason we're working on it is for basically billions. Now on the other -- did you ask about the CFTC (ph) the OCC?

The DTC.

That's still in the works, and it's taken longer than we anticipated to get all of that finalized, not by DTC, the funds are eligible to be used but we are still working out the contract and the final arrangements with the Auction (ph) Clearing Corp. We continue to expect that that is a near-term event.

Okay, so OCC is more near-term. I guess the 15c3-1 and 3, that's been going on for more than a year now and no anticipation of that coming to a close in the next couple of quarters?

Certainly not the next quarter. Beyond that I can't foresee. But we're still working on it. It's really hard to try and nail it down.

And when talking about $100 billion, you said a portion of that goes in the money funds in the portion of the money funds is something you can capture. Do you think a 5 billion opportunity for you guys? Is it 10 billion, is it 2 billion is it 20 billion?

It’s multi-billions. That's what it is. We would not be satisfied if it came at a billion or two. That would not be why I keep talking to you guys about this.

Okay. Thank you. Final question is on the $4.3 million charge, broken out into the 2.8 and 1.5 million; where is that allocated? I couldn't figure it out from looking at your income statement. Is that all going into professional service fees or other, or how is that broken out?

It is fairly well spread out Ken. There is some professional service fees; there would be some in systems and communications from the cost of retrieving information from systems. That would really be the two categories which would catch most of it.

Great. Thank you very much.

William Tanona from J.P. Morgan.

A couple of quick ones. Going back to the B-shares, should we be thinking about those expenses and revenues as kind of being reoccurring at the same level going forward?

Yes.

Okay. And in terms out if I were to look at those revenues, I assume that was all included in other service fees?

Yes.

If you exclude those revenues you guys were down about $3 million. Can you tell us what was driving that? Quarter-over-quarter?

The rest of it would have been the change in the portfolio accounting fees. That's where they would have been booked.

Okay.

And by the lower professional service fees in that related to portfolio accounting.

Okay, and correspondingly in the office and occupancy expense, that dropped down considerably as well. Was there anything in particular that is driving that and how should we think about that going forward?

We had a recapture in the first quarter, a small recapture, half million or so. So probably take a number in the quarter and add roughly half million four to it. In the future.

And then finally, in terms of the high yield withdrawal, you said that it wasn't due to what you thought was the investigation. Can you give us some sense as to why that might have occurred? Was it just an asset allocation shift or was it performance driven?

What I said was that the ebb and flow of the market and client expectations, it is very hard to discern exactly what it was. We remained with some pretty good performance over the timeframe. On the high yield side, the funds returned a little over 21 percent for the one year and that put them in the second -- that was for the one year and they ranked in the second quarter for the two years. And so it is not really a performance. Now obviously there were performance people who did better if we were in the second quarter; and so that is why I made this statement that I did that it was related to the ebb and flow of the markets and trying to meet clients expectations. And the fact that we still have other moneys with this client is still helpful to us.

Bill Katz with Buckingham Research.

Good afternoon. Just curious if you could think about any other outsourcing that there might be to help manage the expenses and then a follow-up question.

On outsourcing as -- if you've followed us as I know you have Bill, for several years, we are always turning over the rocks and looking at things they can be done to focus on our business and improve the operation. And over time we have, as I think you're aware, outsourced our warehouse, our legal department, fund accounting and now the transfer agent. And it is very difficult, however, to give you a list of things which might be outsourced. You can imagine the impact that that has on a human beings doing work on the strategies that you would employ if you wanted to do that and the timing of how those things are accomplished if at all. And so all I can say is that we remain interested in looking at various opportunities to improve the operation for exactly the reasons that you have offered, but also to enhance the overall focus on growing the assets and growing the EPS.

And the other question and I have is just in terms of compensation, excluding the impact of Kaufman, given what's been similar of the uneven track record so far in the institutional side. Do you think there could be some further upward pressure to try and lock in some better performance to make you a little bit more competitive with some of your peers?

That question again?

Just wondering if you could sort of comment on whether or not you can see conversations start to accelerate a little bit to maybe improve performance and so look at the high yield portfolio for instance, you had sort of second tier performance this quarter. You have been notorious to having a little bit lower than average comps in that revenue ratio, so I wondered if there are some open pressure there to maybe gain some expertise in across the platform.

The way we build our bonus programs, which is the quickest and the largest accelerant to comp on the investment side are already structured that they incent the performance and then reward the performance. We have called them success items in the past. And so that has already baked in the cake. We've put together the balance scorecard on both the equity and the fixed income side, and so we've already got that in there. So if we get the good performance, we're going to have more money going out and we are all going to enjoy it.

And Bill, on the way you're asking the question, and just to follow-up on Chris, baked in the cake, but in the last three or four years we have increased it -- increased what they could earn with a given level of performance, sort of consistently over the last three or four years.

And Bill, if I could add one more layer to it. In revamping those comp programs, they are very much industry competitive. We've had success at dramatically expanding the research investment side, on the equity side, that have hired some real top-notch people. So we think we have the underlying programs and compensation methodology in place to attract and incent performance. We don't feel that's something that where you could draw a line between today's comp ratio and today's performance.

Okay, and last final question and I apologize for coming back. Just curious Chris, if you have seen any sort of change in the competitive positioning of either from you guys either specific to the market timing issues for you or just more broadly an industry either on the managed account platform or even in the bank trust channel. I know you gave a lot of statistics before and sort of a look quarter to quarter. But what are the conversations going like in terms of qualitatively with clients? Are they more or less receptive to hear from you these days?

I would say that they are delightfully accepting of our conversations. If you take on the managed account side, either on the brokerage side or on the bank side, we haven't perceived running into meaningful stumbling blocks (indiscernible) investigation. And the growth figures that we've had there are pretty good, and we remain on our pattern of getting $1 billion for the year; we are over 650 now. So that gives us a lot of confidence in that. It's always, however, on that one and on others to say oh well, could you have been running faster? Could you have been doing more if you hadn't been going through the troubles, and I would have to say yes, we could have been doing better.

On the trust side, when you are in a business for over a quarter of a century and you have long-standing, good solid relationships with a lot of good products that have serviced trust customers in appropriate ways for a lot of years, you've built up a lot of goodwill. And so it should not be surprising that we continue to have those strong relationships and that those relationships enable us to get over the speed bump that we experienced in the third and fourth quarter of last year. And so we remain welcome in the trust departments. The sales individuals continue to make their calls and have their experiences, and the highlight would be the continued increase in equity sales, which I mentioned in the call.

Tim Foley (ph) with Columbia Management (ph).

I just have a question about the dividend. Over the last year you have had a nice pickup in the dividend. I am just interested in how you're thinking about it now given that you have quite a bit of cash flow and you probably have some room to maneuver there.

The dividend is viewed as part of an overall analysis of how to best use money for shareholder value. So we are looking at buying shares back, paying dividends, looking at the acquisition marketplace and reinvesting in the Company. And I think you've seen the footprints of that action over our history as we have bought $450 million worth of stock back; you've seen us talk about over the last several quarters the reinvestment in the equity area especially. You've seen the dividend pop up almost 50 percent last year, another 20 percent with this one this year. So we like playing on all streets and making the judgments as we go as to the best usages of the cash. On the dividend specifically, we've moved it up 20 percent, which we've done over the past years, and I think that maintains our position in the industry and gets us a little closer to average that you would expect from S&P type companies.

Tim, one more comment. As you're looking through dividends and share buy backs and we do all of the proper analysis and corporate finance work to see what we believe is the best use of our resources. But we also at the Board meeting extended the share buyback program through next year, and it's approximately 5 million shares available through next April.

Thank you.

Michael Lipper with Lipper Advisory Services.

Good afternoon. Could you give us any rough contrast to the number of senior people that you might add for the rest of this calendar year versus what you added last year and roughly what areas they might be in?

The numbers of people that we would be expecting to add would probably be less than a handful. We're looking at a compliance officer now. There may be one or two things left to be done on the investment side, and that would be pretty much it on the senior side. I would say it's going to be less than a handful. And those numbers would be less than what we had done in prior years when as Ray was referencing before, we built out the equity area and brought in some very experienced portfolio managers, very experienced analysts in order to put together that 79-person force.

Any change in the marketing side?

No. I think what you see there, we have approximately 180 wholesalers. When we went public I think that number was around 190, and it has been between 180 and maybe the low 90s since doubled that sales force before we went public in 1998. And we did that in the mid-90s because we tried to figure out what was the right size get that sales force, and then improved and call and fill in and that. So you will have turnover in that area, just regular normal type turnover in the single digit percentage. And so if you count that as change there, yes, that -- you know, you have that ongoing. But compared to prior years we don't foresee a lot of meaningful moves there.

In other words, your senior group or going down further gives you plenty of capacity to handle substantially more assets if and when they came?

Yes. That is correct. And we also have a lot of flexibility underneath the 180. And we have made moves in terms of structuring sales groups, in terms of rearranging sales groups, better focusing their attention. And we are doing those kinds of changes. But they don't reflect themselves in terms of dramatic increases in the total number of salespeople. But there are changes underneath that are more reflective of where we think there may be opportunities.

Thank you.

At this time there are no further questions.

Thank you. That concludes our call.

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