Federated Hermes Inc (FHI) 2004 Q2 法說會逐字稿

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  • Operator

  • My name is Marilyn and I I will be your conference facilitator today. At this time I would like to welcome everyone to the Federated Investors second 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. If you would like to ask a question during this time, simply press star, then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Hanley, you may begin your conference.

  • - Director of Investor Relations

  • Good morning and welcome.

  • Leading today's call will be Chris Donahue, Federated's CEO and Tom Donahue, Chief Financial Officer. Also on the call will be Rich Novak and Stacey Friday from the corporate finance group. We plan a brief presentation before opening it up to your questions.

  • And by way of Safe Harbor, let me say that this discussion 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, 2003 on file with the Securities and Exchange Commission.

  • And with that, I'll turn it over to Chris.

  • - President and CEO

  • Thank you, Ray.

  • Good morning. On today's call, I will review our business performance in the second quarter before turning the call over to Tom to discuss the financials. I'll start with the comments on the assets and flows in each asset class before looking at the distribution channels.

  • Equity assets were up slightly, overall, from the prior quarter, and up up 28% for the last 12 months, as a result of asset appreciation and consistent net positive flows over the period. While equity fund flows continued to be positive in Q2, they decreased from Q1 reflecting industry trends.

  • Net flows were also negatively impacted by index fund net redemptions which increased from minus 70 million in Q1, to minus 186 in Q2.

  • On the fixed income side, the quarter was challenging against the back drop of rising market interest rates. Outflows occurred in nearly all categories, except our capital preservation fund.

  • Net redemptions from lower fee alter short bond funds accounted for about a third of net redemptions with high yield and government mortgage backed products also showing increased net outflows during the quarter.

  • Turning to the money market area, assets in Federated's mutual funds and separate accounts decreased from the prior quarter and from Q2 of '03. It is important to note Q2 average money fund assets of 122.1 billion, were about the same as the Q1 ending level of 121.8 billion. In our money market mutual funds assets decreased to 117.5 billion, at quarter-end, and have have averaged about 120 billion so far in July. We believe that the most interest rate sensitive balances shifted to direct market alternative products in Q1, and to a lesser extent, in Q2, as the Fed hike was well telegraphed and we saw assets from some customers move in anticipation of the actual increases.

  • In addition to the impact of tax payments, Q2 saw a decrease of approximately 1 billion from a broker client reallocation, we continue to expect about a billion to go out due to companies on bankruptcy exits. On the plus side, we added a large corporate cash management mandate about 500 million. Our market share share for money market mutual funds was about the same at the end of Q1, and it was about 6.02 in mid-July, compared with about 6.07% at March 31 of '04.

  • Seasonality in the text pool accounts drove the reported decrease in money market separate accounts. These accounts peek in Q1 as taxes are collected and then decrease in subsequent quarters. This year's Q2 decrease is about the same as last year's. We continue to actively pursue new money market applications for the longterm. Including functional equivalency applications previously discussed. 15c33 broker capital accounts, finalization of the OCC, DTC application, growth of the commodities futures application, and efforts in England. We are also actively pursuing acquisition opportunities and competing for broker-dealer corporate and other other institutional mandates.

  • In terms of total assets, as of July 23rd, our managed assets were 183.2 billion. Including 131.8 billion in money market assets, 25.4 billion in equites, and 26.0 billion in fixed income.

  • For the first three weeks of July, equity fund flows are running just about break-even. And bond fund net redemptions are down considerably. As usual, we caution against drawing conclusions for the quarter from this early data.

  • Turning to investment performance, we are well-positioned with competitive equity products across a variety of disciplines. Among funds rated by Morningstar, as of the most recent data, which is which is the end of May, our percentage of assets in equity funds rated 4 or 5 stars, increased from 63 to 64%, from the prior 3-month period, and our percentage of 3, 4 or 5-star rated assets remained at 72%. In the fixed income area, 4 and 5 star rated assets increased from 24% to 27%, and assets in funds rated 3, 4 or 5, were at 75%, up from 65%. In total, 35 funds were rated four or five stars up from 32 in the prior quarter. Of these funds, 14 were equity and 21 were bonds.

  • Turning to distribution, in the trust market, money market assets were stable during the quarter. Fixed income redemptions increased in anticipation of rate hikes. Equity fund sales decreased in line with other channels in the industry. The bank managed account product continues to grow equity assets by adding new distribution platforms and accounts. During the quarter, these equity assets grew by 12% to 162 million, and we expect to continue to grow this product substantially over the coming quarters and years. Over the last 12 months we have more than doubled the number of bank trust clients and accounts for these products. The Number of banks has moved from 19 to 44.

  • In the broker-dealer channel, money market assets decreased in large part, from a client-reallocation that I mentioned earlier. Fixed-income redepmtions also increased which we attribute to the rate environment. In addition to continued sales of our flagship equity fund products we're seeing strong sales of our managed account product among brokers including bank broker dealers. During the quarter, we were added to the to the platform of AG Edwards, one of the top separate managed account providers in the industry. Don't forget our major platforms include Raymond James, Legg Mason, Lehman, Bank of America, LPL, GE Private Asset Management.

  • Separate account assets in this channel grew 21% in the quarter to reach 575 million. As we continue to expand platforms and deepen our penetration of existing platforms we expect to see substantial growth in this product over the next few years. Over the last 12 months, the number of broker-dealer clients went from 22 to 48.

  • In the Jones channel, our year-to-date sale of stock and bond fund product is the same at the comparable '03 period. We continue to sell a fairly broad mix of products through the Jones system.

  • Money market assets in the institutional area decreased by about 2.4 billion, from the prior quarter and are down about 6 billion from the Second Quarter of '03, due largely to the uptick in interest rates, which temporarily favors the yields offered by direct market alternatives. This rate difference is a factor for some, but by no means all of our clients. We also continue to look and to see the regular pattern of late-quarter withdrawals followed by subsequent influx.

  • We continue to grow cash-management relationships and added five new institutional cash-management customers with initial funding of about 600 million during Q2. This included a 500 million account from a fortune 500 corporation in June. Also, in the institutional channel. We added our first core equity separate account, as well as a small balanced account. As expected, another client ended the 1 billion dollar fixed- income high yield mandate in Q2. We've discussed the managed account product at the channel level, total assets in this product, when both of those channels are added together, reached 756 million at quarter end, up 69% from year end. Recall that our target for '04 is 1 billion, and billions in the years ahead.

  • In Germany, our sales continue to grow and assets in the retail funds in our LVM partnership were up to 462 million, up 10% from year end. We also continue to actively seek acquisition opportunities as I have discussed before, both for centers of excellence, and for roll-ups.

  • At this point, I would ask Tom to comment on the financials. Thank you, Chri and good morning, everyone.

  • Before commenting on our core business performance, I want to comment on a few significant items. The Q2 results include 5 million of expenses related to our internal review of past mutual fund trading issues including 2.9 million addition to the accrual established in prior quarters. This accrual represents our current best estimate of the costs to be incurred in order to complete this review and could, however, change.

  • The other 2.1 million was largely for expenses incurred in the second quarter, including fees for professional services in connection with the sale of the transfer agency business, cost-related to responding the shareholder lawsuits, and additional requests for information and costs associated with additional compliance activities. We cannot project a run-rate for these types of costs, though we do expect most of these to continue and others to come into play.

  • We completed the sale of the transfer agency agency function to Boston Financial on June 30th. Therefore, the results from this activity are now shown as discontinued operations, net of tax, in our financials. The press release contained more details on this item and we have posted supplemental financials for 2003 quarters, and 2001 through 2003, the years, showing these discontinued discontinued operations on our website. The press release also included a necessary detail on the impact to both revenue and expenses, from the change in our beef share related accounting and accounting contracts. Apart from these items, Q2 revenues increased 4% compared to Q2 2003, and decreased 3% from the prior quarter. The increase from Q2 '03 was due mainly to growth and average equity assets, offset partially by lower average money market and fixed income assets. Lower money market and fixed income assets also drove the decrease in revenue from the prior quarter.

  • Looking forward on revenues we expect to see decreased administrative service fee revenues due to changes in the mix of bank clients for funds administrative services. In Q3, we expect about 7 billion in administered assets from three banks who will transition from Federated. One bank is transitioning due to the selection of a new service provider. A second is moving due to an acquisition of the bank. While a third is exiting the fund business. In the case of the third, we will manage some of their assets. We expect that the 2004 revenue impact from these changes will be approximately $1 million, with an additional $2 million impact in 2005.

  • On the expense side, the remaining operating expenses increased by 2% from Q2 '03 and decreased 2% from the prior quarter. Lower compensation and related expense was due to downward adjustments to accruals for incentive compensation. The decrease from the prior quarter included 1.3 million in lower Kaufman earnout accruals as the accrual has been at the rate of two year's worth of payments and now has gone back to one year.

  • Today, our expectation is that the run rate for the next two quarters will be approximately 42.5 million for the comp end-related line item. On the balance sheet, our cash and short term investments stood at 192 million at June 30th. During the quarter, we paid $80 million in earnouts from our Kaufman acquisition, we repurchased 1.4 million slayers for the quarter and paid out our recently increased dividend. The diluted share count could increase by up to 740,000 shares in the third quarter, due to option exercises as we discussed last quarter. This share count comment does not take into account any additional share repurchases we may make in the third quarter.

  • That completes our formal presentation and we would like to open up the conference call for any questions now. .

  • Operator

  • At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone key pad. We'll pause for just a moment to compile the Q and A roster. . And your first question is from Cynthia Mayer.

  • - Analyst

  • Hi, good morning.

  • - President and CEO

  • Good morning.

  • - Analyst

  • Just on the share account issue, I'm wondering would you anticipate them doing extra share repurchases to offset that?

  • - President and CEO

  • We would consider doing more reshare purchases for the purpose of doing more research share purchases, not necessarily to try to correct that issue. But right now, we're obviously, on blackout period so we're not active. When we're allowed allowed to be active we remain active and committed to purchasing the shares back.

  • - Analyst

  • Okay. And on the added legal costs, I guess a little over 2 million, how much of that would you expect to continue? .

  • - President and CEO

  • You know, it's hard for us to guess or estimate, but we expect some number around there to continue. It's more than legal. It's compliance and, you know, other regulatory things that we have to do.

  • - Analyst

  • Uh-huh.

  • - President and CEO

  • And we kind of made the same comment, Cynthia, last quarter, that we had spent a similar amount of money and we don't see it going going away, although it's for different things each quarter.

  • - Analyst

  • Is this the kind of expense you think that would, eventually go away once regulatory issues clear up? Or by not going going away, you think this is just sort of a permanent part of the landscape for the industry? And for you guys?

  • - President and CEO

  • Well, for us is what we'll talk about. And,you know, if we're dealing in quarters we don't see it going away. I'll comment on the industry, yes. In other words, there are higher costs due to all of these things for the industry.

  • Unidentified

  • Okay.

  • - President and CEO

  • That shouldn't have surprised you.

  • - Analyst

  • Right.

  • - President and CEO

  • Just to give you a little more on it. We have to, you know hire a lot more compliance people and while some of these things are legal costs now, they're going to turn into compliance expenses in the future. It's just one way of looking at it.

  • - Analyst

  • Got you. Okay. And just one more question on money market flows. Given a lot of the interest rate sensitive money is out, what would a series of small rate rises from here do you think, in terms of outflows?

  • - President and CEO

  • Well, though it's impossible to predict a series of small rate rises we do not think would have a humongous effect on us. And the reason is, that when you have a 45-day average maturity portfolio, and you pause at modest interest rate rises over say the rest of the year. A, the money market fund has a good bit of time to catch up, especially if it's in a bar belt format. But more important then that, is the fact that the underlying assets are there because of a cash management service motif. And it's interesting to note that during the quarter, the trust cash numbers were about flat. And that's because you have a lot of cash management service going on there, and that is not disrupted by modest disparities between the yield on money funds and the potential yield in the direct instruments. For many customers, that spread has to get pretty enormous before they disrupt their operating business. And the funds give them a lot more benefits then simply yield. There are a lot of other factors involved. For example, state tax-free. There are corporate trust clients and certain funds that require certain types of securities. And there are many of these money funds that are integral to the actual operating businesses of of some of our clients. So, we are not too concerned about slow, steady increases by the Fed.

  • - Analyst

  • Okay. Great, thanks a lot.

  • Operator

  • Your next question comes from Bill Katz from Buckingham Research.

  • - Analyst

  • Good morning, guys.

  • - President and CEO

  • Good morning.

  • - Analyst

  • Couple of questions for you. I'm curious, you have good performance, you have all this account growth. But we're not really seeing it translate into meaningful asset flows and I certainly recognize the tough quarter we just came through. But do you feel like you're being marginized in any way of the distribution platforms and that maybe you're on there, but you're really out of focus on some of the advisors that might be selling funds broadly?

  • - President and CEO

  • I don't think we're being marginalized at all. If you're talking specifically about the broker-dealer platforms I'll jump quickly into our discussion on the separate accounts where we have been increasing both our attractiveness on the platform and the underlying numbers of accounts that we have with those groups. And the assets are up pretty smartly. So we think we're getting, you know, a pretty good reception with that. We think we're on track for our goals for the year, which I mentioned in our comments. And when you look at the underlying accounts, they're growing pretty smartly, too. The number of accounts went from about 1600 in the first quarter, to over 2,000 here at the second quarter. That's underneath all of the accounts that are on those programs. So I don't think we're in any sense, being marginalized.

  • - Analyst

  • Just on that being sort of curious. You continue to suffer from the overhang on market timing and late trading. What are you hearing from the institutional client base and maybe the consultants more broadly that nothing has gotten worse but you haven't been able to get out from underneath the cloud. Has that impacted the [INAUDIBLE] in any way?

  • - President and CEO

  • I would have to say it would be better if it weren't there. But it's very difficult to go through and to categorize with numbers anything more than I did on the last call last quarter, which we did. We said, hey, we have a handful of accounts we felt we lost because of that. We're not seeing that now. And what I reported before was that you know, we had been put on watch lists and things like that with various clients and they had hit the pause button on putting us on lists and things. And those unraveled as of after the February press announcements. Obviously, it would be better to be more growth if we would have the entire picture resolved. But we're not seeing you know, large types of negatives from that in the marketplace.

  • - Analyst

  • Okay. Sort of final question coming back to the expense story. I understand that the price from seasonality and then the lack of doubling up of accrual for Kaufman impacted the sequential decline. But still, I know you don't run the franchise this way, but your comp as a percentage of revenue are relatively low. I'm curious, given your performance, are you worried that your comp rate may not be high enough in the second half of the year to protect from any kind of attrition?

  • - President and CEO

  • No. The quick answer. We go through and run that every quarter and what we think we're going to have to pay and then, you know there's obviously quarterly things that happen. And, you know the first area that gets done would be the research area and the investment people and you know, we've redesigned. Kim Schappert has redesigned the whole program there. And in terms of his point of view of making it more relevant to drive performance and to drive drive all of the things he wants to do to manage the portfolio. So he's happy with the program as he's put in and the comp numbers are matching up up within how he wants it to work. So I don't think the answer is no.

  • - Analyst

  • I'm sorry. I do have one final question. You went very quickly. I don't know if I got it down right. On the 7 or 8 billion you'll lose on the administrative side, has that already all gone out or is that still yet to occur?

  • - President and CEO

  • None of it has gone out yet. It's still to occur.

  • - Analyst

  • Is that the lower fee fee rate then what's currently being booked or at a similar level?

  • - President and CEO

  • We gave you the revenue, Bill. It's about a million and then another 2 million for a full year '05 on the assets so, it would be comparable. Each client using us in that area, you know, hit the different point on a fee schedule based on assets.

  • - Analyst

  • Okay. Thanks guys.

  • Operator

  • Your next question comes from Mark Constant from Lehman Brothers.

  • - Analyst

  • Good morning, guys. A couple of things. Is there any related expense savings on those 7 billion of admin assets or is that a pure marginal revenue chunk of business?

  • - President and CEO

  • You know the way we've approached that business for the last number of years Mark, is that it's ancillary business to our trust business. And you know, there used to be a much bigger group in there that handled that business and it has you know, shrunk down over the last two years and is really becoming more and more part of the trust sales thought process. So, I don't think you're going to see lots and lots of dollars that we can take out of there. I think it's already happened.

  • - Analyst

  • Got it. Okay. And the bond fund flows. From time to time you've described as, in certain pieces of it at least, sort of resembling longer duration money fund assets and their flow behavior. Is there a similar dynamic with those ultrashort bond funds to what we've seen over the last several quarters with money market funds in terms of outflows right at the end of the quarter for any particular reason? Or is that dynamic relating to money funds?

  • - President and CEO

  • I haven't seen that and I'm looking around the room here and I'm not seeing any heads nodding. I haven't seen that precise technique being employed in the ultrashort funds.

  • - Analyst

  • So it's really just a straight rate dynamic with those funds?

  • - President and CEO

  • Right. The Ultrashorts though did occupy about a third of the net negative flows during the quarter. You know, so it was the biggest piece of the negative flows on the bond fund side. What we really see with the ultrashorts were that, '01 and into '02 as the money fund rate dropped, the ultrashorts really kicked in as people went out a bit longer and picked up additional additional yield. And there have been less use of them in '04, so both the sales are down and redemptions are up. It really felt like an '02 and '03 kind of , where those products were really in big demand and that's kind of cooled off a bit.

  • - Analyst

  • The canary in the coal mine in both directions, I guess.

  • - President and CEO

  • Yeah.

  • - Analyst

  • With respect to the share count that you mentioned last quarter, and I think maybe in the preceding quarter, the 740, if I remember correctly. That's excluding all impact of share repurchase not just third quarter but also like in the fact of the second quarter, too, is that right?

  • - President and CEO

  • Yes.

  • - Analyst

  • Naturally, your third quarter share count would go down on a weighted average basis because of the second quarter repurchases too even if you didn't [INAUDIBLE] anything recorded.

  • - President and CEO

  • I was trying to comment comment only on the option exercise.

  • - Analyst

  • Just on the CFC, okay. And then, I'm sorry if I missed this detail in your remarks, Chris but the final question. Could you elaborate, I think you said that were pursuing equivalency finalization of a DTC side in trying to ramp up the commodity futures? Did I get that right? Will those two stand?

  • - President and CEO

  • On the OCC, DTC we continue to try to get that to the finish line and we're working through. We continue to work through kind of what we believe our final issues for that to happen. But I can't give you a precise time frame of when that one would go live. It's not live at this point. Commodities future is live and we continue to look at what we're doing there with products and customers. But it's remained in about the billion-dollar range. The 15c33 is a bit more active and we we're continuing to push that one forward. It's not live either but we think we're making good progress. That's pretty much an SEC focused effort. We met with the appropriate people and we're proceeding to work on it. Is SEC has, however been a little busy.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Your next question comes from Ken Worthington from CIBC.

  • - Analyst

  • Good morning.

  • - President and CEO

  • Good morning.

  • - Analyst

  • In the past you've highlighted the potential for acquisition of money fund assets if rising rates cause some concentrated institutional funds to break the buck. With the Fed raising rates, did any money funds get into trouble recently? And do you still consider this to be kind of an opportunity to grow the money fund business?

  • - President and CEO

  • I don't ever recall having an acquisition idea because someone was going going going to break the buck. However, changes in interest rates, you know, do give us opportunities to look at other money funds. So, I am not aware of of anybody being close to breaking a buck. I'm not aware of any scuttle butt on the subject, either. I am still of the view that large money fund assets are the way to go for the future in this business. And one of the determinates is if a money fund has X hundreds of millions in it, and as long as the money fund [INAUDIBLE] also controls the cash flow, they don't have any problems that fund can go on indefinitely. But, if they get a big redemption and a big redemption is declared to be one that wipes out your repo position, now you've altered your your average maturity and put the fund in the position where the PM is going to be most nervous. So, it depends on what those cash flows are and the rights of the shareholders to redeem. And we have had situations and seen situations where once they get a large request for redemption, then they're interested in jumping on to a bigger ship, such as the Federated ship. So, I think, over time, the oligopoliesation of the money fund business will continue.

  • - Analyst

  • Okay. So just to put this back to you, no scuttlebutt on any funds getting into trouble recently but you still consider it to be an opportunity to grow longer term?

  • - President and CEO

  • Yes.

  • - Analyst

  • Okay, great.Thank you. Can you talk about your money fund customers reacted to the rate increase versus your expectations. Were there any customers who you consider to be rate sensitive that didn't move to the direct market or vice versa?

  • - President and CEO

  • The way the customers reacted was unique this time, only in the sense that the Fed had done an exceptionally good job of telegraphing what was going to happen. So much so, that the rates moved in anticipation. And thereby, the clients that were so inclined, i.e. more rate sensitive clients, moved out more in Q1 and then followed up with some subsequent movements in Q2, but not to the likes of Q1, because of what had happened in the marketplace. So once the Fed had made it very clear and then, very, very diligently went through with exactly what they said, this was about what one could have anticipated from those rate-sensitive clients. So we didn't see any shocks there.

  • - Analyst

  • Great, thank you very much.

  • Operator

  • At this time, I'd like to remind everyone, again, if you'd like to ask a question, please press star, then the number one on your telephone key pad. Your next question comes from Jeff Hopson from A.G. Edwards.

  • - Analyst

  • Hi. You've recently done a small deal, I guess, with Citizens. Curious if you think that there will be other transactions of this type going forward, given what's happening with some of the smaller mutual fund players?

  • - President and CEO

  • Yes, I think I hinted at it in my comment on money funds, that running small fund groups is going to become increasingly difficult due in no small part to the increase in regulations and scrutiny required to function. And what got this round going was the October 5th date that's in the SEC rule, where you have to have a new compliance officer and you have to have reviewed and have your compliance programs all organized for inspection at that time. And so, that added a whole level of cost and liability and responsibility and that triggered a lot of action inside some of these smaller fund groups. And some have decided to outsource that function. And others have decided to unwind their businesses. And I think increasingly, as you move ahead, the economics, the compliance features to these businesses will cause others to come to similar conclusions. And so, those that do not have large fund complexes, will be inclined to jump onto a bigger ship of stake.

  • - Analyst

  • And do you think that those deals can be done with positive economics to you?

  • - President and CEO

  • Yes. We do believe they can be done on positive economics to us because if you pause at merging smaller funds into our larger funds, it puts us in a pretty good position to be able to have a profitable enterprise, whereas some of the smaller fund groups may be struggling to make a profit. And therefore, there's a pretty good spread in the negotiations that allow for a proper arrangement to be negotiated.

  • - Analyst

  • Okay. Very good, thank you.

  • Operator

  • Your next question comes from Matt Snowling from Friedman Billings.

  • - Analyst

  • I guess my question question relates to the market distribution line. With the sales pull back and the asset levels being down so much, excuse me, I was expecting to see that drop a little more. I was wondering how we should look at that line line going forward?

  • - President and CEO

  • Well, that's as you identified, a function of sales, it can also be a function of assets. It dropped quarter-to-quarter, but year-over-year, it's up and that's really a function primarily, of the equity assets being up. So, you know, I think going forward, you should look for that to move with changes in assets and sales. And it's been relatively, you know, relatively narrow range for each one of the last four quarters.

  • - Analyst

  • Yeah, but we had a particularly big pull-back in equity sales.

  • - President and CEO

  • It doesn't just shift on a dime.

  • - Analyst

  • No. I understand that. I was just wondering with the asset levels being down, are you saying that it would serve more by the higher year-over-year asset levels in equites?

  • - President and CEO

  • I'm comparing it back to the same quarter of a year ago, that would have been the driver from the prior quarter. It's down because of the decrease in assets and sales that you've identified.

  • - Analyst

  • Okay, thanks.

  • Operator

  • Your next question comes from David Haus Fox Fib Kelton.

  • - Analyst

  • Good morning.

  • - President and CEO

  • Good morning.

  • - Analyst

  • Just a question quick on the status of the equity buildout longer term assets. Can you give us an update there to maybe reflect on if you've seen any turnover there or if things going as planned?

  • - President and CEO

  • Things are going as planned on the equity buildout. We have approximately 79, 80 people in that whole buildout. We have increased the number of stocks being covered. Our goal is to get to 700. We were 400 at year end. We're about at 550 now. We've been increasing the fit of those selections by analysts into the portfolios An that's been good. The cooperation camaraderie is working well. As Tom already mentioned the new comp system has been put in. We call call it a balance score card and there's a stock component, built into the bonus, the bonus feature there as well. In terms of of turnover, I think we have had one person leave during the quarter. And you know, I think we added one, so. That's kind of like the regular scheme of business.

  • - Analyst

  • Okay and then second, just to follow up on the money market side. If you had to look at an environment that would cause players to become more rate-sensitive on the money market side, what would that look like? Would it be a flatter yield curve or would it be the absolute level of interest rates?

  • - President and CEO

  • Historically, those that are more interest-rate sensitive, merely look at the spread to the fund to the direct market. Whether it is a yield curve issue or an absolute issue. Most of the time, the absolute level of rates matters much less then the relative rate of the spot market versus the money market fund itself. And this would be true all the way down to the point of you know, the net yields on money funds being 1% or even less than 1%. And we just came through that period before. So, it really isn't so much the absolute level of rates as it is the disparity, which you know, depending on how you look at that yield curve and where that disparity gets built in, you have different customers who are willing to go further out the yield curve than others and some even jump into the ultrashorts. So that's more of a client-specific issue at that point.

  • - Analyst

  • Okay. That's great, thank you.

  • Operator

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

  • - Director of Investor Relations

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

  • Operator

  • This concludes today's Federated Investors Second Quarter 2004 earnings conference call. You may now disconnect.