Federated Hermes Inc (FHI) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Federated Investors fourth-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) Mr. Hanley, you may begin your conference.

Good morning and welcome. Today we plan a brief presentation before opening it up for your questions. Leading today's call will be Chris Donahue, Federated's CEO, and Tom Donahue, Chief Financial Officer. Denis McAuley and Rich Novak (ph) from the corporate finance group are here as well.

By way of Safe Harbor let me say that this discussion will include forward-looking statement 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 31, 2003, on file with the Securities and Exchange Commission.

With that I will turn it over to Chris to talk about the fourth quarter.

Good morning. Thank you, Ray. On today's call, I will review our business performance for the fourth quarter, before turning the call over to Tom to discuss the financials. We recently announced that we have begun settlement discussions with the regulators on the previously disclosed mutual fund trading issues. Accordingly, I will be unable to make further comments on the discussions or on the precise timing to resolve these issues.

I will start with comments on assets and flows in each asset class before looking at the distribution channels. Equity assets were up 11 percent overall from the prior quarter, and up 13 percent for the full year. In mutual funds, net sales and exchanges in the fourth quarter were about even, and the asset gain was due to market appreciation.

For the full year, net fund sales and exchanges added nearly 700 million or about 22 percent of the total asset growth. Our equity managed account product added another $151 million in net flows for Q4, and 571 million for the full year. Among funds our strongest inflows in the quarter were in the Federated Market Opportunity Value Fund, and the Kaufmann and Kaufmann Small Cap Funds. The Muni and Stock Advantage Fund also had solid inflows.

The Kaufmann Fund continues to have solid sales, but we have had some noise in the flow numbers. During Q4, one client redeemed 65 million due to a change in their pension fund strategy. In January, two clients redeemed about 32 million due to changes in their investment mechanics. Beyond these occurrences, we think the underlying sales in January indicate a stronger run rate so far for the quarter than we saw over the last 2 quarters of '04.

On the fixed income side, net redemptions decreased about 50 percent from the prior quarter, dropping from 823 to 416 million. About 3/4 of the net redemptions were in ultrashort bond funds. During the fourth quarter, ultrashorts were 24 percent of gross bond sales, 356 out of 1.4 billion, and had net outflows of 300 million. In Q3, they were 32 percent or 519 million of gross, and had net outflows of 490 million.

During the fourth quarter, assets in Federated's Money Market Mutual Funds and Money Market separate accounts decreased slightly from the prior quarter, and were down about 13 percent from the year-end '03 total. This was in advance of the beginning of the current Fed tightening cycle. Q4 average money fund assets of 112 billion were about the same as the Q3 ending asset level. Money fund assets averaged about 110 billion in January.

Looking forward, continued rising short rates in '05 will make it more challenging to increase money market assets from existing customers. We continue to work to add new customers, develop new money market products and applications, and pursue acquisitions for growth.

The acquisition of Alliance Capital's cash management business is moving forward on the time frame that we expected. We expect to have our first conversion late in the first quarter, and to continue to convert customers over the next couple of quarters. We continue to experience heightened interest and activities related to new money market acquisition and consolidation opportunities, and remain opportunistic; and we remain optimistic that more of these deals will move forward for Federated even though we cannot forecast the timing or the specific level of activity.

In terms of new applications, we are continuing to make progress on various functional equivalency efforts for money market funds. Our initiatives with the OCC went live this week. We continue to make progress with the SEC on potential 15c3-3, which is broker free cash balances, application; but we cannot put a specific time frame or asset estimate on this opportunity.

Repatriation of earnings presents another growth opportunity as do new product launches.

Our market share for money market funds was down slightly at the end of Q4. While we are generally among the leaders in institutional money fund yields, we lagged a bit at year-end. As a result, we did not attract the more yield-sensitive assets at year-end. Given the overall short duration of these fund yields, yield differences tend to be temporary.

In terms of total assets, as of February 2, our managed assets were 178.2 billion, including 124.3 billion in money market, 28.5 billion in equity, and 25.4 billion in fixed income. In January, equity funds flows were negative by about 92 million. This can be explained by looking at the negative $65 million flows in index funds and the 32 million I mentioned from two clients in the Kaufmann Fund. Bond fund net flows were also negative by about 125 million, 70 million of which was in ultrashorts. As usual, we caution against drawing conclusions for the quarter from this early data.

Turning to investment performance, we continue to offer competitive equity products across a variety of disciplines. Looking at 12/31 Lipper rankings for our domestic equity funds, 46 percent of our rated assets are in the first or second quartile funds over the last year; 68 percent over the last 3 years; 67 percent over 5 years; and 61 percent over 10 years. For taxable bonds, the comparable first and second quartile percentages are 71 percent for 1 year; 78 percent for 3 years; 59 percent for 5 years; and 72 percent for 10 years.

Interestingly, during the fourth quarter, almost all of Federated's equity funds beat their benchmarks. Looking at the full year of '04, our top performing funds were the Federated Kaufmann Small Cap Fund, top 3 percent; Mid-cap Growth Strategies, top 17 percent; Capital Income, 28 percent; Muni Stock Advantage, 32 percent; Technology, 35 percent; Kaufmann, 38; Equity Income Fund, the top 42; and International Equity, 43.

Some of these funds also have competitive long-term records, while others have shown good progress in turning around sub-par periods of past performance. So we expect to see improved flow results for many of these funds going forward.

Our fixed income fund performance is solid, including top quartile performance over the last year in important products like our Total Return Bond Fund, Federated Bond Fund, High Yield Trust, and High Yield Muni.

Distribution. In the trust market, money market assets were down slightly in Q4, down about 700 million. Equity fund sales increased 22 percent from the prior quarter and were down 8 percent for '04 versus '03. In the broker-dealer channel, money market assets were up due to conversions of new accounts, as we discussed last quarter, and to seasonal inflows in certain state tax-free funds. We will have about 600 million in new money market assets from a new broker-dealer customer's convert in the first quarter.

For equity funds, sales increased 18 percent from the prior quarter, and were up 5 percent for the full year. The managed account equity product continues to grow well in the broker channel. These equity assets increased 166 million or 24 percent, up to 848 million in the quarter. We continue to broaden the client base and to add new accounts as we expand distribution. During the fourth quarter, our Strategic Value product was added to the managed account program at one of the top 5 U.S. banks for their retail broker platform.

Other major platforms include A.G. Edwards, Raymond James, Legg Mason, Lehman, Bank of America, and LPL. During 2004, the number of broker-dealer clients including bank broker and capital markets grew from 35 to 61. The number of accounts has grown from a little over 1,000 to a hair under 3,000.

In the Jones channel, we continue to see some success from a newer 401(k) plan offering geared to smaller companies. Overall, we continue to sell a fairly broad mix of fund products led by Market Opportunities Fund, the Kaufmann Fund, and the Muni and Stock Advantage Fund. Our business is up slightly in January versus December. Our market share remains at approximately 2.25 percent, which is up slightly over the previous 2 months.

In the institutional channel, money market assets decreased by about 1 billion from the prior quarter. We added one new institutional cash management customer with initial funding of about 100 million during the fourth quarter. We are viewing repatriation as an opportunity in this channel for '05. Also in the institutional channel, we won a couple of small fixed income separate accounts and saw some new cash flows from existing insurance company fixed income accounts. This totaled about 58 million from two accounts; one new 8 million, and one existing 50 million.

Now if we take a look at new products and initiatives, we have discussed the Managed Account product at the channel level. Total assets in this product at year end were over the billion dollar target we set for '04, having more than doubled during the year. Our target for '05 is 2 billion, with billions to follow in the future years.

In Germany, our sales continue to grow; and assets in the retail funds in our LVM partnership reached 612 million, up 46 percent from '03. We are also continuing to work on new products, including an absolute return style mutual fund, a new Strategic Value mutual fund, based on the successful Managed Account product that we have offered, and new money market products among others for launching in 2005.

I will turn it over to Tom in order to discuss the financials.

Thank you, Chris, and good morning, everyone. The earnings we released are preliminary. We have begun settlement discussions with the regulators on the past mutual fund trading issues. As these discussions progress, they will likely impact final 2004 results.

The press release includes the necessary detail on the impact to both revenue and expenses from 2004 B-share or change in B-share accounting and portfolio accounting contracts. Apart from these items, Q4 revenues decreased 5 percent compared to Q4 2003, and increased 2 percent from the prior quarter. The decrease from Q4 '03 was due mainly to lower money market and fixed income assets, partially offset by higher equity assets.

For the full year, revenue increased 2 percent. Higher equity assets led to the sequential quarter and year-over-year revenue increases.

As we have reviewed over the last couple of quarters, the level of assets we administer for funds sponsored by third parties were 37 billion at year-end and has since decreased as expected to about 19 billion. This, combined with lower assets in our money funds, drove the reported decreases in administrative service fees. As we mentioned last quarter, we expect a 3 to 3.5-cent negative impact in the administered assets area for the year.

Turning to the expense side, operating expenses, excluding the impact of changes related to B-share accounting, portfolio accounting contracts, and internal investigation and related costs, decreased by 3 percent from Q4 '03 and were down less than 1 percent from the prior quarter. For the full year, these expenses were up 2 percent.

Compensation and related expense decreased from Q4 '03 due to lower Kaufmann earnout accruals. Since the prior-year accrual was for 2 years' worth of payments, the current accrual is for 1 year. Marketing and distribution expense decreased from Q4 '03 and from the prior quarter due mainly to lower assets.

Professional service fees decreased from Q4 '03 due to previously mentioned change in portfolio accounting contracts and from higher investigation-related expenses incurred a year ago. The increase from the prior quarter was from higher investigation-related expenses. In Q4 investigation and related expense was approximately 3 million, up from 1.3 million in Q3. We have previously stated to expect about 2 million per quarter in those expenses.

In the other expense category, Q4 decreased year-over-year due to the restoration provision taken last year, and decreased from the prior quarter due to lower nonrecurring expenses from remedial actions related to various funds transactions and trading issues.

The tax rate is up because of New York State taxes; and this relates to the success that we are having in the Kaufmann Fund.

During Q4, we repurchased 617,000 shares, bringing our total for 2004 to 4.2 million shares purchased.

As Chris indicated, the first closing and conversion of business related to the Alliance money market acquisition is proceeding on schedule. We will have more specific information after Q1 on timing and amount of assets converted. We continue to expect that this business will add 2 to 3.5 cents per share to our 2005 earnings, and 3 to 5 cents on a full-year basis.

One other area of impact to 2005 earnings is the impact of option expenses. We adopted FAS 123 in January 2003 and will be required to adopt 123R for Q3 2005. While we have not finalized our methodology, it looks like the impact to reported earnings based on our present outstanding options will be about 1 cent per share for each of the third and fourth quarters of 2005, and 3 to 4 cents on an annual basis for the next couple of years.

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

(OPERATOR INSTRUCTIONS) Bill Tanona from J.P. Morgan.

In your past experience with rising interest rates, what have you guys noticed in terms of when the money flows tend to abate or start coming back in? Is it directly after the Fed stops raising rates? Or is it typically sometime before?

It's Ray. I would say it is typically sometime before. But the prior cycle that most closely resembled this cycle would have been 1994. There we had outflows for a couple of quarters, probably about into the third quarter, before flows started positive.

But our business mix was different. We had virtually none of the direct corporate business. That was in fact about the time that we started to call on corporations directly. As we have said frequently the direct corporate uses of money market tend to be the most rate-sensitive.

So if you put that part of the business aside, which over the last year has gone from kind of an 18 billion down to 10 billion, 9 or 10 billion level with the rising rates, the rest of the business actually performed similar to how it did back in '94. Some decrease in trust, but that seems to have largely abated. The broker-dealer money is actually up due to some conversions that Chris mentioned.

Okay, that is helpful. In terms of the institutional equity progress, can you give us an update there?

In terms of? Say it again?

Progress you guys might be making in terms of institutional equity mandates.

In terms of institutional equity mandates, until you have solid 3-year records, you don't really get to too many finals. So in terms of those institutional records, I don't see us in any finals right now. We are still working on the records.

Just to add onto that, the fact that, as Chris mentioned, that in the fourth quarter we had nearly all of our equity funds taken out the balance and the hybrids beat their benchmark, that is the kind of quarters that we need to string along, in order to advance the ball institutionally.

That is a pretty good mark. If we can keep doing that, then we would expect that to lead to some success. But it will take some additional quarters of that.

Okay. That's understandable. Just in terms of what is the earliest you think that realistically you could start coming into some finals? Are we still 24 months away from that, or 12 months?

I would hope we would beat that. But, boy, that is a tough one to put a time on. You look at the records historically and you draw your charts. And you say, okay, if we do this for so many quarters on this record then you can begin to get into the finals. Each one of those records is like an individual child that has its own patterns. So it is very difficult to put an exact time on it. It is just like Ray said; you have got to keep slogging through the quarters, doing the basic blocking and tackling and stay on task in order to make it work.

Okay, fair enough. Thanks guys.

Bill Katz, Buckingham Research.

A couple questions if I may. You mentioned in the press release, Chris, that you want to build out the equity in the fixed income businesses. I suspect you mean leveraging past investments. I am sort of curious; is there any step up in expense this year to build that business out?

We don't have any meaningful build-out in expense plan for '05 in those areas. There are of course individual moves we might make, adding a person here, there, or the next place. But there are no meaningful expenses that we are thinking about. There are certainly opportunities in the marketplace to do acquisitions. So those remain on the table as well.

Okay. Just double-checking; that was my thought. I was just confused by the wording. Second question is, just sort of curious. You are another quarter in; it sounds like you're very close to a settlement or seemingly close to a settlement with the regulators. Have you rethought your advertising budget for this year?

We have not yet rethought the advertising budget for '05. I will not comment on your comments on how we are doing in terms of our discussions with the regulators. I don't wish people to interpret by my silence or whatever a comment on that.

I wasn't trying to put you in a bad light. I was just trying to see if you had spent a little more time on the ad budget, more than anything else.

Last question, just sort of curious. I think I got it from your comments, but you look at a company like BlackRock, they had a very strong surge in net inflows in the money market business this quarter. You guys had a little bit of a weak showing. Just sort of curious. Is it really all just rate, as you suggested, in terms of right at the end of the year? Or is there any kind of competitive repositioning issue going on there that might be pushing some headwinds there in terms of (multiple speakers)?

We have looked at this, and we are aware of the other calls and whatnot. We are not aware of any structural or intrinsic changes that have occurred in that business at all. That is why we put the comments in there about the yield lags, and the comments that I made in my remarks. So I think that was what occasioned that difference.

Okay, thank you very much.

Ken Worthington, CIBC World Markets.

You have done a very good job over the years at lobbying the expanded use of money market funds. Can you give us a little bit of an update on the number of customer accounts you are opening for the Commodities Future Trading Commission kind of funds that you have? With the DTC business kind of coming online, what are your expectations for the next quarter or 2 there?

On the CFTC, that initiative is a couple years old, and the assets have ranged from a couple hundred million to 1.5 billion, and it fluctuates. I don't know the number of accounts.

One thing that we are doing there, there have been some additional products approved for use there. They are changing some of the standards that they had in place in a way that we think will benefit us. But we cannot attach specific assets to it. It just gives us hope that we will be able to take that up a few notches in 2005.

The DTC -- or DTC is the platform at the Options Clearing Corp. that just went live. That is literally in the last couple days. Once again there is a fair amount of collateral in that system, anywhere in 50 billion or upwards of 50 billion.

How much of that goes into money market funds, and then how much of the money-market total that ends up in our funds, would be another thing that we just don't want to -- could not hazard a specific guess on. But we would expect to get our share and more.

On 15c3-3, that is the biggest total in terms of the amount of money that is out there. It is north of 100 billion. But that is the one we're still working on with the SEC.

Thank you. We have seen money market fund rate -- a number of money-market -- a number of rate hikes thus far. Are you seeing changes in customer activity surrounding those rate increases as we move from when the Fed was raising from a 1 percent base to now, when the Fed is moving off a 2 percent and change base?

The short answer is no. The Fed for over a year now has telegraphed what they are going to do. The word measured is probably the most important word in that release, other than perhaps their view of inflation being balanced. But as long as there is the measured in there, then the customers know what they are talking about.

So they tend to manage their cash according to managing their cash, and not according to what they would be worried about, which would be spikes in short-term interest rates that would catch them off guard. So you will get people making moves driven primarily by their corporate interest, but with the full knowledge of what the rates are going to look like.

Part 2 is that we don't believe nor have we seen historically much significant difference in how our customers approach the money-market fund or the short-term environment based on the relative level of rates as long as they are positive. So we don't have to get back into the discussion of what happens of rates go meaningfully below 1 percent, because we are not there.

There just isn't that much difference in their decision-making between absolute rates being at 1 percent or being at 2.5. The real difference is how spiky that was to get there; and then their decisions about looking at what alternatives are at the time. Since the whole market moves together, in a measured pace, you don't get those big kinds of immediate swings.

Great, thank you very much.

Mark Constant, Lehman Brothers.

Just 2 quick little things I still wanted to follow-up on. 1, you gave a specific number for the first time I can recall on the separate account flows this quarter, the 151 million for the quarter, 571 for the year for the equity separate accounts. Are you getting close, I guess I should say, to where you need to be in terms of disclosing the flow breakdown for those separate account categories?

We are closer, Mark, on that particular product line, where we have --.

On the equity product line you mean?

On the managed account, the smaller separate accounts. Actually the larger ones (technical difficulty) that have not been systemized enough for us to put it formally into the reporting. But I think you can expect updates on the separate account business going forward.

Great. I was trying to reconcile, I know if you look at the by-product-type versus by-market-categories, my recollection is that the money market separate accounts, which have the seasonal uptick in tax pool, looked like about $1 billion or so this quarter; that those are included in the other category, for by-market. But by-market was still down about 1 billion.

Just trying to understand what of the other, it looks like about 5 billion remaining, what was the other presumably $2 billion swing to the negative there?

Most of that, Mark, would have been money-market assets that we would have had from products that we sponsor, so essentially the cash balance portions. Those move around, and there is some part of that that is typically in our funds. That would have accounted for that (multiple speakers).

Sponsored products like CDOs, you mean?

No, I'm talking about the cash portion of mutual funds primarily.

I'm sorry. You have equity or fixed-income funds that portfolio managers may have invested. Okay, got you. That was it. Thank you.

David Haas, Fox-Pitt, Kelton.

Just a quick question, you spoke about the equity business in the institutional channel. I just wanted to touch base on sort of the more retail channel managed accounts, separately managed accounts. Are there any sort of structural changes you're seeing in your ability to sell through those channels, as we get a little bit more scrutiny on preferred provider lists, so on and so forth?

On the separate account side, the answer is no. Because it is a separate account it has not been under the mutual fund investigation part of that whole movement that you're referring to. We have not seen anything in terms of that kind of business.

Remember what is going on there is that an investment advisor is basically selecting a provider of a given type of mandate, as among many different types of providers. Then that provider buys the list of securities, that then the customer owns directly.

In the other area where you are talking about preferred lists, in terms of our relationship with Jones, we have not noted any changes there. As I mentioned in our remarks, we have been selling a lot of different products through their system. We have not seen any hint of a change in their basic business model. What is happening -- and the focus has been on the disclosure of the economics and of what the deals are in a more robust fashion. That is what is being called for in those cases.

I think there's a lot to be said for the business model that has a preferred list. Because you have a group of institutions; and then they have individuals who are evaluating various fund groups and various funds as among the 8 or 10,000 mutual funds, in order to do a better service for their client. So I think those kinds of lists and services are likely to continue.

Okay. I guess just sort of a follow-up on -- we have some sort of sense of the time frame on a potential ramp-up in the institutional equity product. It seems like the retail product has sort of been flattish as well on an organic growth standpoint. Can you give us a sense what the sort of relative time frame you're expecting for flows to start ramping up there as well?

On the retail side, as I mentioned in the remarks, we are looking for legitimate, good strong flows this year. Now of course you cannot predict anything. But looking at some of the improvements in some of the products which I have mentioned, you take an equity income fund that was in the bottom quartile, and then it moved into the third quartile, and now it is safely in the second quartile.

You look at our Mid Cap Growth Strategies Fund, which is firmly in the top quarter in all of its numbers, just putting together a very strong 3-year record now. You look at the Kaufmann funds, the two of them, the Small Cap Fund is number 1 in its period just released by Lipper over the last 2 years. And the big fund is still number 1 from its inception date.

If you look at the International Equity Fund, there you have a situation where Uri Landesman joins the group 22 months ago, and since he has joined he has beaten the MSCI index by 550 basis points, placing him in the top quintile of his Lipper peer group.

So you have got a lot of good stories there. I think we are working hard to get those to turn around rather quickly, and certainly well ahead of what can be accomplished on the equity answers that I gave earlier.

Okay, thanks very much.

Cynthia Mayer, with Merrill Lynch.

Just a question on comp. It looked like comp declined slightly sequentially. You are at one of your lower comp to revenues ratios at this point. I'm just wondering whether you think you could sustain that. And just in terms of seasonality, should we expect a bump-up in 1Q similar to last year?

The sequential was seasonality, Cynthia, it was mostly payroll taxes.

Coming off?

Right. Hitting their lightest point. Then of course we will have the opposite of that with the first quarter, in addition to resetting all of the bonus accruals.

Resetting the bonus accruals is a big factor.

So it sounds like a bump up. Okay. Just wondering also if you could talk a little about global sales and how they compared to, say, a year-ago.

Our global sales have been up over the past year. As I mentioned in the report, the assets are up as well.

That is still primarily the German joint venture, though. We are branching out, getting the funds registered. I think we mentioned last quarter that they were becoming registered in Spain. Not much to report; those are still very early efforts. But the German effort is up to over 600 million.

Okay. I guess also, last question, are all your money-market fund waivers off by now?

I think what you mean is are the waivers off that were put on because of the low relative, the low rates related to back when the Fed had taken the rates down to 1 percent.

Right.

I think all of those are off. But in answer to your general question, the way you put it is -- are all waivers off on money funds? The answer is no. We do a considerable amount of waiving to keep (indiscernible) of our standard money funds at say the 20 basis point level. There are standard waivers involved in that every day. So I don't think that is what you were asking about.

Yes, I was asking about the ones that the came on because of the lower rates.

Right. Right.

So those have all come off by now?

Yes.

Great. In general, I think, let me just ask one more question. I know I keep adding questions. But I think last quarter you suggested that you didn't think margins were likely to expand near-term. Are you still thinking along those lines?

I would say we don't see a big uptick in margins. I would say we would stay with our position.

Great, thanks a lot.

Robert Lee, with KWB.

Just a couple quick questions. First one, just on the tax rate. Should we expect that this is sort of a new run rate going forward? Or even with the New York State taxes, was there somewhat of a true-up in the quarter?

There was a bit of a true-up, Rob. We expect for full year of '05 it will be more in the 37 range. Could even be a little below. But 37 would be a good place to model it.

Great. Just a follow-up to one of Mark's questions, the separate account business, the money fund separate account business. There is that normal seasonality. Does that usually just come in through the quarter? Or would we have seen that already in those assets?

It will typically start before the end of the year, because the underlying accounts are municipalities that are collecting taxes. So there are tax payments prior to year end. There are tax payments up through April 15. So we would expect that you would continue to see in flows on the money-market separate accounts for Q1 into Q2, but then during Q2 it starts to go the other way. That has been kind of the regular pattern.

Right. Okay. Lastly, Chris, I know you made some comments at the top of the call about the outlook for M&A for you guys specifically. Could you maybe -- unfortunately I missed some of those comments -- but could you maybe just go over that a bit?

In particular are you seeing a noticeable increase in the number of properties or businesses or money fund businesses that are on the market? I don't know if it is at all possible to characterize. Are you seeing that the size of what may be out there on offer is increasing?

I would say that we see a good number of things that are being discussed. There are a lot of ideas around. It is hard to say whether it is increasing or not. If I was forced to lean on it, I would say they're increasing.

It is the confluence of the market, the regulation, and people making individual decisions about their individual franchises. I think a lot of balls are up in the air and that there are a considerable number of opportunities to work on.

I wouldn't call them out there on the market, or for sale type of thought process. Because it is more of a customer relationship thing. In our going and talking to the potential people who we can work with, it is -- here is what we're going to do for you, and here is a relationship. It isn't something that they get a book and say -- here is our money funds for sale type of process.

Okay, great. Thank you, guys.

Glenn Schorr, UBS Warburg.

This is actually Chris Costanza calling for Glenn. Just a quick question on the institutional money-market business. Obviously it has been in decline for most of the last 2 years. Do you see light at the end of the tunnel, in the sense that it may have lost some share that it is going to take back as the Fed trails off, whenever they trail off with their rate hikes? Or do you think maybe the money-market business got a little bit ahead of itself and it is finding more of its natural level now?

I would circle A versus B in that question. That has been our history before. Remember, we went into the institutional money fund business in about 1993. If you took that business, that is a good business even though it is volatile based on changing rates. The business underneath of that, if you are imagining a chart, has continued to grow as well. We wrap the two of them together and look at it as a percentage of market share of M3. We still think that we can continue to increase our overall share of M3.

In your specific question, traditionally those institutions have lessened their involvement in money funds during this kind of a rate environment; and then when it pauses they come back. But they stick with it, they leave the accounts open. And increasingly money market funds have become a larger share of the corporate cash. Those percentages I don't recall right now, but it has continued to increase. Do you know what shares they have gotten to (multiple speakers)?

(multiple speakers) 10 years it has gone from kind of a mid single digit, 6 percent level, corporate treasurer cash use of money funds; up to a low to mid 20s rate share of treasurer wallet.

So I don't think that money funds have gotten ahead of themselves with those kinds of participations. There's still a lot more growth to happen. So the way this business goes is you keep adding accounts; okay, we added one account last quarter. Where the rates are more attuned to their interest, we will add 10 to 12 accounts per quarter.

But then we don't tend to lose clients. So when the rates change over the long haul, you tend to build the franchise and build up the corporate participation in money fund.

Specifically on M&A, specifically related to centers of excellence, I think your comments before were addressed to or I was taking them as addressed to the money-market business. Do you have any commentary on equity or fixed income lift-outs or opportunities? And also on the valuation of those opportunities, given where the group as a whole trades today?

I would demur from the use of the term lift-outs, as we don't favor that kind of activity. In terms of the spirit of your question of acquisitions on the equity and fixed income side, we remain enthusiastic about looking for them. We are seeing things, we're talking to people about it.

The comments that Tom was making, that I had made after my initial remarks, were including of and concerning those types of acquisitions as well. So we look at them both as you mentioned them, as centers of excellence, and as potential rollups (ph). As we have said before it is very hard to say any one deal will happen, or when it will happen, or to try and model or predict those things, but there are opportunities there.

Is the pricing realistic in your view?

Some of the pricing can be realistic. A lot of times, from the way that it has worked for us, is that because we dislike dilution so much, that if a property goes to auction we will tend not to be the winning bidder.

On the other hand, with carefully structured arrangements and an enthusiasm for the growth prospects at Federated, deals like Kaufmann can be put together. So we are not professional power shoppers by trade. We are selective in the kinds of things that we do. The test that we really use is not just to get the numbers right, but also to make sure that we can sell the products and that they are going to fit into the mechanism that we have here at Federated.

The pricing is so individual and so particular to a given group that it is very difficult for me to give an investment banker-esque view of the overall levels of pricing, as to whether they are improving or not improving or up or down or whatever.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) At this time, there no further questions. Mr. Hanley, are there any closing remarks, sir?

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

This concludes today's Federated Investors fourth-quarter 2004 earnings conference call. You may now disconnect.