Federated Hermes Inc (FHI) 2005 Q2 法說會逐字稿

Good morning. My name is Vonda and I'm will be your conference facilitator today.

At this time I would like to welcome everybody to the Federated Investors Q2 2005 conference call. After the speak's remarks there will be a Q&A period. Mr. Handly you may begin your conference. Good morning and welcome. Today we plan a brief presentation before getting to your questions.

Leading today's call will be Chris Donahue, Federated CEO and Tom Donahue, CFO and also on the call are Dennis MCCAULEY and Rich Novak from the Corporate Financial Group. In regarding to forward looking information, certain statements in this presentation including those related to settlement discussion, money market fund anisitives , projections for the managed account business and develop of new products, M&A in operating margins constitute forward-looking statement, which involve known and unknown known risks and other factors that may cause actual results to different materially from any future results.

Among other risks and uncertains, the cost associated with the settlement will be impacted by the cost to implement any operational changes, the ability to implement money market fund enicative, grow the managed account business, develop new products, complete M&A activities and maintain operating profits are impacted by market condition, the ability to create products, the ability to identify and complete cost-effective M&A activity, for discussion of such risk factors see the section titled risk factors and cautionary statements in federated annual report on form 10-K for the year ended December 31st, 2004 and either reports on file with the SEC. As a result no assurance can be given as to future results, level of activity, performance or achievement and neither Federated or any other person assumes responsibility for the acridity and completeness for such statements in the future. With that preamble I will turn it over to Chris to talk about good things in the future.

I think that is the warmest introduction I have ever had. Good morning everybody, I will start by reviewing Federated's business performance in the second quarter before turning the call over to Tom to discuss our financials. We continue to participate in the settlement discussions with the regularitiors on the previously disclosed mutual fund timing issues. Therefore I will be unable to make further comments on the discussions or on the timings to resolve these issues. Tom will comment on the related expenses in the second quarter.

Federated's money market assets showed substantial growth during the second quarter from the Alliance acquisition, as well as strong organic growth for the quarter. These assets grew by $26 billion with about $18. 4 billion coming from Alliance and the remaining $7 .6 billion from growth in each our major distrabution channels. Growth was concentrated in the bank capital market, trust and broker retail markets. The institional corporate channel increased as well, but is still challenged by the expectation of additional rate hike. We continue to also work on functional eqivancy efforts for our money funds. Our initive with the OEC has produced nominal asset float, which we expect to increase. We continue to work with the SEC on the potential 15C33 application.

The CFTC passed rule changes that have permitted us to recently introduce a more conpetive yielding product to capture more of the assets used for collateral in future's trading. We gained market share for money funds, even excluding the Alliance assets, pushing our market share up over the 7% mark for the first time. Equity assets were up 2% from the prior quarter, and were up 9% from the second quarter of '04. Market appreciation accounted for the growth offset partially by modest negative net fund sales. Positive equity flows from our managed account products offset a good portion of the negative equity fund flows.

The Federated market opportunity flexible fund, muni and stock advantage. Newly launched statistic value and the Kaufman small cap fund all showed solid inflows. Outflows were some what concentrated in a our blend and value equity products. We did receive a notice from a client that a redemption of approximately $220 million will occur this quarter from a large cap value fund as a result of a mandate change in their retirement program. While we had performance challenges in the past in this area, we added personnel and made other changes, which are improving the performance. We had a strong second quarter as our large cap value funds were in the top decile and are above median year-to-date. Our equity managed product added about $170 million in Q2 gross sales that are not reported in our fund sales results. Net sales were about $111 million.

We continue to have strong sales momentum and expansion of distribution for this product. Turning to the fixed income side, net redemption continued with ultra short bond funds, accounting for about half of net outflows. We are working on developing fixed income product for our managed account line. As of July 27th, our managed assets were in total approximately $207 billion, which includes 153 billion in money markets, 30 billion in equities and 24 billion in fixed income. Through the first part of July, equity fund net redemption were running higher than the Q2 level and bond fund net redemption were running lower than the Q2 level. As always we caution against drawing conclusions from the quarter from this early data.

Turning to investment performance, a majority of our actively managed equity funds have beaten their benchmark and were in the top half their peer group ranking for the first half the '05. Highlights include very competitive performance in the market opportunity funds, mid cap growth strategies, muni and stock advantage, capital income and Kaufman small cap funds. Looking at June 30 Lipper ranking for our domestic equity funds, 45% of our rated assets are in first or second aquatile funds over the last year. 46% over the last three years, 2/3rds over five years, and 72% over ten years.

For bond fund assets, their confertible first and second quartile percentages are 62% for the one year, 76% for the thee years, 69% for five years and 63% for ten years. Let's discuss distribution. In the trust market, which includes the bag capital markets for reporting purposes, money market assets increased about $7 billion during the second quarter. Bank trust and capital market equity assets in the managed account product continued their steady growth. Assets here were up about 5.5% during the quarter.

In the broker dealer channel, money market assets were up about $19 billion in the quarter, with a little over $18 billion coming from the Alliance acquisition as we discussed a moment ago and the rest from conversions and other organic growth. Distribution of the managed account equity product continues to increase in the broker channel as assets grew here 18% during the quarter. In the Edwards Jones channel our assets were up slightly in the second quarter, led by gains in our equity funds. Our number of accounts is at an all time high and we have increased our market share in each of the last three-quarters. The market shares are approximately 2.7% in June, after declining to just under 2%.

We are having increased success in this channel and in other channels with income-oriented equity products. We have launched a focused marketing initiative, using the theme of the power of income, featuring dividend paying stock and bond funds. In the institutional channel, money market assets increased about 650 million from the prior quarter. We added three new corporate cash management customers with initial funding of about 20 million during the second quarter.

Our investment performance has been strong in this area and we are optimistic when the rate-tightening cycle ends, we will be very well persistioned to capture assets when corporations increase their allocation of assets to money-market fund products. Now an update on some new products and initiatives. We've discussed the managed account product at the channel level. Total assets in this product at quarter end were about $1.3 billion and our target for '05 remains $2 billion. We successfully launch a new mutual fund which reached $64 million in just over three months. We recently launched an enhanced cash product to expand our already broad menu of cash managed products.

We continue to see heightened interest on the M&A front. The Alliance transaction proceeded very smoothly, thanks to strong, dedicated efforts by employees from both organizations. We announced an acquisition with Amcore Financial, to transition a 164 million in equity assets into Federated funds and we continue to discuss similar potential transactions with banks and other parties. Now to discuss the financial, I will turn it over to Tom Thank you, Chris. As noted in our press release, Federated earnings were impacted by additional charges related to settlement discussions with regulators on past mutual fund trading issues. While the ongoing nature of these discussions restrict further commentary, I do want to note, that no regulator has passed on the settlement charges and these amounts are subject to further revision.

The total Q2 pre-tax net charge was 6.6 million, with settlement-related expenses of 5 million booked in the other expense line item and the rest mainly in professional service fees. The high tax provision for the quarter was impacted by our assumptions on tax treatment of potential settlement components. Our normalized tax rate is still around 37%. The $0.09 of settlement charge impact from the press release includes additional tax assumptions on the potential settlement charges, portions of which are not tax deductible.

Moving to the business results, revenues increased 4% compared to Q2 '04 and 7% from the prior quarter. The increases were due mainly to higher money market assets from the Alliance acquisition. Compared to Q2 '04 equity-related revenue was up. Lower revenue from fixed income and money markets X Alliance and lower third-party fund admintastrative fees partially offset the increases from the Alliance assets and higher equity assets. On the expense side, investigation and related expenses all other operating increased by 12% from Q2 '04 and were up 14% from the prior quarter, due mainly to increases distribution expense from the newly acquired assets in the Alliance transaction. Excluding these expenses, all other expenses increased by 3%, compared to Q2 '04 and by 5% from the prior quarter.

The increase in system and communications expense included approximately 500,000 in uneven quarterly expenses. Generally these technology costs have increased as we invest additional resources into investment management and trading systems. Travel and related was up from the prior quarter due to seasonality, in addition, to settlement charges. Other expense included and impairment charge of 500,000 pre-tax, related primary to software development assets. Amortizeization of intangibles was higher due to the Alliance transaction and as we discussed previously, the Alliance transaction caused Federated to have a lower operating margin. The margin was 33% in Q2, including a 3% impact from investigation-related cost. We expect the operating margin going forward to continue to be in this range.

On the balance sheet, our cash and short-term investment stood at 240 million at June 30th, Uses of cash in the quarter included 24 million for the Alliance transaction, 33 million for the Kaufman earnout payment. Ongoing settlement discussions made share re-purchases difficult in the quarter. In early July through an employee restricted stock program, we issued about 450,000 shares. On the call with a few more details from the Alliance transaction.

Total assets converted were 19 .3 billion, total upfront purchase price payment to Alliance $25 million, and most of this occurred in second quarter. Based on retaining this level of assets, an additional 59 million would be paid over five years for a total of about 84 million payments. Actually amounts paid will depend on the asset and related revenues over of the next five years. We expect this business addition to add $0.02 to $0.03 per share to 2005 earnings and $0.03 to $0.05 on a full year basis. The impact to the second quarter earnings was about 1/2 of a cent per share and that concludes the financial presentation and we would now like to open the call up for questions.

At this time I would like to remind everyone if you would like to ask a question press star and the No. 1 on your telephone key pad. We'll pause pause for just a minute. Your first question comes from Bill Katz with Buckingham Research.

Thanks, good morning. I had a couple of questions this morning. Chris, wondering from a big-picture perspective maybe answer this question and just curious of the margin and if money markets are starting to reexcellarate, and sounds like again in the quarter, any thought of money market acquisition potential actually slowing with maybe some other weaker players saying hey, now is not a good time to sell after all?

In fact, we haven't seen that kind of of a reversal. Intellectually, I guess it's possible, but I think people tend to look at those kinds of businesses with a broader idea and look back at the recent time frames and say, do I really want to be in this?

A lot of experience we've seen from some of the people we talk to, including banks and others, is that how are they really going to grow it if assets are going up when they competing against some pretty big players with some pretty good performances and some pretty strong array of products? So its set the stage for asking the question that still remains to be asked.

And I don't think a longer term potential increase in money fund assets is really going to stop that question from being asked. Okay. Second question is just sort of curious, what do you think it's going to take to turn the retail business and gain share? I guess the way I'm thinking about it, looks like there is about 7% annualize loss rate in the quarter, accounts for $55% of revenues between bonds and equities and -- and what I am trying to assess really is the earnings leverage as the money market re-builds?

In fact, what, I did not follow your math there, Bill.

I guess the basic question is what it it's going to take to turn the retail business and gain market share?

In fact, when you talk about retail business, you are you talking about broker-dealer trust or you talking about money funds, fixed income, equity?

In fact, by product, maybe do the discussion that way, by equity and fixed income.

Okay. I will go off the idea, as we mentioned on the call, that the flows in both of those areas for us are negative.

Okay.

And what it's going to take in there is what I mentioned in the call was a focused approval to us selling income-oriented equity products. We have been able to increase our market share in the Jones' system because of that, and I think increasingly American investors are looking to that as people get closer to retirement, they don't want -- that they are looking more for income and it's a common thread.

Also we continue to work on the investment performance in some of those key funds that we have been working on in the past, such as our value equity and I think we have seen some good results here over of the last couple of quarters, and even into the third quarter here. So it's a combination of good marketing and good salesmanship, along with the investment performance, and since we have always had the service going, it's when you create a better confluence among those first two, that you will be able to increase the market shares.

Okay. And a question to Tom, curious on your margin guidance is that based on reported numbers? Should we be backing out the charge, in fact, there is a lot of lumpiness in the revenue expense line this quarter and maybe some help there?

I think the reason why I said what I said, we had only approximately half a quarter of the Alliance effect on decreasing the margins. So as we go into the third quarter we'll have the full effect of impact of decreased margin there, and I think that that will drive it down and know, we would expect not as much in investigation costs, but who knows?

In fact, down from?

In fact, 33 was what it was and we are saying we expect it to be around 33.

Okay, thank you very much. Your next question comes from David Haas with Fox-Pitt Kelton.

Good morning.

Good morning just a quick question on the Alliance Capital license that came over. I think when the deal was announced there was the thought of around 26 to 27 billion coming over and only about 18.5 billion came over. Is this sort of the nature of these bigger cash management deals where there may be a good fluxation in what actually gets retained upon acquisition?

In fact, I think that is a good take on it. What the clients had been with Alliance for a long period of time and they used this opportunity to go out and basically re-bid them, and we were not able to retain a number of them and that is kind of of the biggest jump, you know, 75 or so percentage of the decrease down. There is another portion of it is that the assets in those funds before we acquired them just declineded in sort of in a natural order.

And another portion of the assets that we -- well we did the transactions primarily through a negative consent, there was some level assets that we were not able to do that way, and so we can't say hey we know we got those and converted them over, but we believe we are getting them, but I can't report it. And David, it was about close to 19.5 billion because we had about 800 million that came in at near the end of Q1 and 18.5 billion in Q2 and it was a little better than where you started.

Got you. I guess going forward do you see an amount of those assets that are maybe at a higher risk of leaving?

In fact, what--the answer to that is right now, the assets that we have from the transaction are higher than when we closed.

Okay.

We have to track that, because we make payments based on the assets. So the assets have gone up since we closed.

Good. Second question, and I know you can't comment on the litigation at all, but theoretical on share buybacks going forward, you have been running at a healthy clip in the past few years, a few million a year is there any sort of change thinking about share buybacks in light of a more robust M&A environment for some of your other products?

Well the first answer is, it was difficult for us to do it because of settlement discussions, and we have not changed our thought process. Without the settlement we had not had any big changes that would have stopped us from buying and that would allow us the ability to still buy in our thought process. I like buying the stock, but we can't do it.

Okay. Fair enough. Can you also talk about a number of calls this quarter have talked about the Legg City deal and I am just curious with them layering in a fair amount of liquidity assets and do you see them as a greater competitor in the money market side versus your products?

In fact, we haven't seen them operate in the market place as yet. Certainly, that is a possibilities, but we've got a lot of good solid competition in our space already, with a lot of big players who have been hammering at us for going on 30 years now. So it's not something we are especially concerned about in any way, and we would expect they would try to do some things to compete, but we haven't seen it as of yet.

Okay. That is great. Thanks.

Your next question comes from Dan Goldberg with Bear Stearns.

Good morning.

Good morning.

Can you just comment when I do the calculation investment management fee per average asset seems it fell a bit in the quarter versus the first quarter. I'm assuming it's just an additional mix shift to where it's the money market assets but is there anything else in there that would have caused that decline?

In fact, no, Dan. It's a mix shift money market assets, obviously accelerated by Alliance and other [voice over]. On the subject of the mixed shift, do note however, that the equity assets basically produced about 39% of the revenues and money market were at 40% of revenues. If you are doing a blend realization rate, then there was a little bit of a shifting there. But with any category would been really not a big change within categories, but across the categories that you have the change.

Okay. On the July flows, Chris, you talked about during your prepared remarks you said, I think, the equity outflows have increased abit and the fixed income outflows had improved a bit?

In fact, right.

Anything there that might be driving why the equities worsened a little bit in July versus the first quarter, I'm sorry the second quarter?

In fact, no, the trend lines the funds are the same, it's just that the numbers are slightly higher. No new characters on the list or no real change in which funds are doing what activity. And Dan, that is literally three-weeks of data and at the times of the beginning of quarters, you have more pronounced inflows or outflows when you have things like 401K plan changes or plan relocated and there weren't anything visible big thing we would point to at then under that there was a lot of activity at the front of the quarter. We have up in the quarter significantly and what should we think about there as a run rate going forward? In fact, a lot of the Alliance expenses show up in that line item so they will continue and we had Alliance roughly in there for half of the quarter. The revenue will step up as well. Alliance would work the same way, the fact that we weren't there for the full quarter, it will work the same way for revenue and expenses. Underneath Alliance, we had other marketing and distribution expenses go up and it's a function of higher assets and you know even on the money market side, that shows up in that line item. So, you should look for it to not to go down, adjusted for Alliance and then step up, as Tom mentioned. It's going to stay in the range that you are seeing, we expect.

And if there say full quarter of Alliance, then should we presume it may go up from the 52 million in the quarter?

In fact, yes. Alliance was about $11.5 million in Q2 and may not be quite twice that, but it will be in that range. But remember the associated revenue will go up as well.

Okay. Great. Thank you.

Your next question comes from Ken Worthington with CIBC World Markets.

Hi good morning, I apologize for the background noise. You had particular success in the mutual fund business within the trust channel this quarter, can you just talk about the dynamics that drove the success there?

In fact, Ken, the trust channel, there is no particular single thing we would point to. I would tell you over the last couple of years, when the rates last year and a half, where the rates have worked against us, they are not underlaying customer changes, but allocation decisions made on the margin in the banks, and trust also includes capital markets or institutional brokerage areas, so it's not pure trust.

That factor has begun to diminish and we continue to have excellent relationships and excellent sales effort in that area. So as conditions have improved, we are not surprised to get the money back, now on the other hand we wouldn't want to trend that quarter of activity out in those channels. We are not making any prediction on that.

Isn't it seasonally just a weak quarter, even in that channel? In fact, it just seems surprising that you had such strength there?

It has tended to be typically will be down on a complex level, 1, 2, even, as much as 3%. In April we'll get some of that back by at the end of the quarter, but you are right. Typically the second quarter has seasonably been down. So it was even more welcome. Our June 30, '04 number in trust was almost identical to the June 30, '05 number in trust. And so yes, it's up from the prior quarter, which is great, but with it still hanging as what we look at as $91 billion and it's $100 billion business and as it it's just not there right now. You can applaud the growth from quarter to quarter, but until it stays comfortably over 100, I won't by cheering success.

Well, thank you very much for taking my question, and I will probably follow-up up after. Thank you.

Your next question from Cintha Mayer with Merrill Lynch.

Hi, good morning.

Good morning.

I'm just wondering if you could tell us the size of our wholesaling force and any changes you have there and in general just talk about the higher patterns where you would be focusing people, or if you are just happy at the size you are at right now?

In fact, the wholesaling staff is approximately 183-185 right in that neighborhood. It's been between 180 and 190 since we went public and that is pretty good evidence that we are pretty happy with that amount of sales force. The growth there occurred between 1995 and 1998 or '94 and '98 when we more than doubled the sales force and had a major effort to increase it, and we did that, trying to size it based on what we thought the future of these channels would look like.

So even though we do some shifting inside, we are pretty happy right where we are in those numbers. So I would not look for a dramatic increases or dramatic decreases in those numbers. Now the second part, were you asking about our philosophy of hiring people or?

In fact, just growth and head count over all?

Growth and head count over all, there has not been growth and head count overall and it's been particularly flat

And you expect to keep it that way?

Yes.

And just to make sure, were there any integration cost associated with the Alliance assets coming over, which were in the quarter?

Yeah, we had, I wouldn't view them as one-time integration cost, except for things we put in the deal. Technology and connect our technology with their technology and we view that more as ongoing and we've had a number of people we moved around and restructured in order to handle the business. Okay So nothing we would really see diminish in the next quarter? In fact, no, I don't believe so. Not materially.

And last question is -- when when I look at the numbers it looks like actually from the Kaufman fund have accelerated and I am wondering if you could talk about what you attributing that and turn it around and more generally, where does Kaufman and the center of excellence fit into a greater focus on income-oriented equity?

To answer the last part, the Kaufman fund is the Kaufman fund and would not be subject to a new marketing program called "income and equity". Those fellows are going to do their thing and that is the way it's going to be. Now as it relates to the primarily question, which is the Kaufman fund flows and what is going on, let's set up a few facts, the Kaufman fund did show slight net redemption during the quarter, about $23 million, but it's important to understand how it got there. The intermediately distributed classes, IE the ones we created after we acquired it, had positive net sales.

There may have been a little lower than prior quarters, but it was the original share class that had the net redemption and if you look tat in terms of our business, it's still a positive thing that we are carrying on with the negative flows from the original share class. In terms of the performance. The Kaufman fund was at about the median of its peer group for the second quarter and more or less over the last year, but the fund remains in the top quintile decil depending for what you look at it, for trailing 3, 5, 10 and 15-year periods. And I think we are also having a pretty good run with the Kaufman small cap funds.

So that's sort of a little review if you have other questions or I didn't touch all of them in your question please let me know.

No, that's fine. Thanks a lot.

Okay.

Your next question comes from Mark Constant with Lehman Brothers.

Good morning and sympathies to Tom for having to say due to the Alliance transaction about 600 times in his prepared remarks. It sounded like you were running out of gas there. Question about the equity performance. If I remember correctly I think you had a real good quarter for performance last quarter and I thought I'd heard a reference to good results this quarter, but then when you were running through the data table of 1, 3, 5 and 10 in a percentage of funds above Lipper median, I thought I heard you say 45 for one. Did you drop off some no good performance from what is now five quarters ago or something like that?

The references to the performance were for year-to-date and the second quarter performance was not as strong as the first quarter.

The second quarter an '05 issue, not a dropoff of the first quarter of '04

I want to go back and do some work on if it, Mark. I'm just clarifying the references that we did make.

So it was 45% for year-to-date, do you have the one-year and I think actually I missed the three-year, if you have that handy? Yeah, the three-year is 46%. And then ten year was 72. And the year-to-date references weren't Lipper references. What we said was that year-to-date we've had a majority of our actively managed equity funds being their benchmarks and in the top half of their peer group. That would be Lipper, but not attached to those percentages that you mentioned.

And last question. I just wanted to follow-up on something that came up at the beginning of the Q&A in terms of the Alliance-like transactions. One, I wanted to clarify if that was intended to be part of your reference to the acquisition pipeline, or if you were more referring to the things like the M core transaction, and then two, just thinking about the inclination of Folks to preferably get off their huff and do something like this, if, in fact, money fund flows are improving. Interesting question. My reaction or my first thought that would be, and see if it makes sense to you, that these are not the kind of folks who are putting up competitive yields, who would be in a position to get a resurgence and flows when the fed cycle turns or the bulk of inflows in something like the trust channel and my historical recollection is that the broker channel stuff isn't as much of a beneficiary of the cycle turns? Is that accurate or no?

The second part is definitely accurate, where the broker-dealers are not that subject either way to the cycle turns. In terms of trust banks being able to increase assets, put it this way, if there is a return to putting money into money funds, it is possible that some of the banks that have fledgling money funds will see increases. They will still will be losing market share rather handily, but more importantly, they really won't be adding money market fund assets because they have been adding clients or expanding their distribution. It will be simply the ebb and flow of their underlying accounts

So their underlying business hasn't really altered very much just because they get a modest uptick in either flows or assets. And once they face the music of what is the reality of this business and can we increase it, can where we distribute it, and then as you point out and I point out in response to the earlier question, what about the variety of products? What about the actual performance of the money fund and the yield, you know the questions, once they get asked, demand their own answer and hence, we're still optimistic about the future possibilities of doing these kinds of acquisitions.

So they may grow, but it still wouldn't be economic and wouldn't make your alternative any less appealing, is that a fair summary? I don't know that I can specifically say that hey are not economic, each one of them has to look at their own numbers as to what resources they are devoting to them, so I couldn't say that, but it surely isn't going to change the efficacy of our trade proposal to them.

Got it. Thank you.

Your next question comes from Chris Mayer with Morgan Stanley.

Good morning. Chris, just as a follow-up on the money market stuff, when we look at Goldman Sachs or Black Rock, it certainly doesn't appear like they had nearly as strong a quarter in money market flows. Maybe you could help us characterize the quarter for the industry as you see it relative to how you guys performed, which was clearly ahead of the industry.

Historically, sometimes we have been unable to say the same kinds of things that Black Rock says on their quarterly calls. We have had quarters where they had flows and we did not and now we have quarters where we have flows and they did not. I think I mentioned in the call that our performance has been quite helpful this quarter relative to other players. And so at the margin, we would have done better, because of that if you had me point out one thing, that is probably the one thing I would point at, but each of us of the people that you have mentioned really have different businesses.

If there is more cash coming out of trust, it's more likely to pile up with us, than it is with either of those other two players. On the other hand, if it's some other type of business, they may have more customers in that space and win that way, but I wouldn't underestimate the importance of the performance this quarter.

Right and I know you don't want us to extrapolate that strength going forward, but you are obviously pleasantly surprised in July that despite a rarely in the equity markets you haven't seen an asset allocation away from money market back into equity.

We were certainly pleased with the uptick in organic growth in money fund assets, but we don't really look at it as as the result of some asset allocation relating to equities, when you look at at trust bank, their going to have 20% of their assets in cash, whether it's with us or in the direct market or wherever at any given time. And we're continually trying get more of that market share, regardless of their asset allocation decision.

So a market share gain rather handle it allocation?

In fact, right.

Just on alliance, you've quoted the increase in revenues and the increase in marketing expenses from the transaction, should we then assume that the $2 million or so of pre-tax assets added from the transaction, which would give you about 15% operating margin on the revenues added is about the right way to think about the profitability of that business?

You should throw in, however you want to think about it, the amortization was about 1 million. Just to complete your numbers there. And again, it's for half the period.

Okay, but it's the amortization is it about 15% operating margin business?

In fact, I mean your numbers are correct, Chris.

Only the revenue yield, you know, if the revenues were in for half of the quarter and we annualize it, it looks light revenue yield on the Alliance is about 6 basis points and could you help us to put that into context to the on your existing money market funds?

In fact, I don't know about the six basis point, but going across all the category, administration, service fees and then the other service fees which are serve I will the distribution fees that get paid out as marketing and distribution experience, the assets are more like 50 basis points.

That is across all asset classes though?

Across multiple line items of revenue, the Alliance assets.

Okay. Right.

And then just on the fact that you can't do buybacks. You have upped your payout ratio on your dividend again this quarter which is now in the mid 30% range. Is that a payout ratio we should expect to continue for dividends, or is it rally a function of you can't buyback stock at the moment? In fact, we don't drive dividend by the payout ratio though we are well a wear of it and look at it. There are other factors involved in that, so if you look at that ratio as the driver, you may not get the dividend ideas right.

Because we look at it with other factors as well. And obviously, the lack of being able to buy stock back had the logical mathematical influence on the calculation.

So if you got back into buybacks we would expect you to grow into that kind of of cents per share dividend?

Grow into it?

You would be prepared to drop the dividend payout ratio if you could do buy backs. This shouldn't be a sign that we expect higher payout ratio of buy back plus dividends going forward?

The concept of dropping the dividend payout ratio, if the fraction changed and went down, if would have gone down, but we don't really have an idea of lowering dividend and I know that is not what you are saying. I know you are talk calculation. But it's like a lot of other ratios that we simply don't drive the dividend with that ratio. So when you phrase questions that look, taste and feel like we are trying to create the dividend by that ratio, it's just not the way we think about it.

I'm just getting a signal for capital policy. Should we read this as a change?

No, you should not read this as a change because our capital policy is, we want to take the money that we earned and do the best thing we can do for shareholders and so we'll look at acquisitions, we'll look at dividends and we'll look at share buyback.

And I think if you look at the history since we been public, about the amount of monies we have used for those purposes, you will see a lot of aggressive results for shareholders, but to try and predict from us how we'll balance those, there was a re-balancing of those that occurred when the Bush tax cuts went through a couple of years ago and we substantially upped the dividend by putting an extra increase in there, because we felt that that was the right message. And so there are a lot of other factors to look at, but our policies have not been changed and the fact that we took a time-out from buying did not really change our attitudes about how to use the money that we have.

Okay. Thank you.

Your next question comes from Greg Mason with A.G. Edwards.

Good morning. Taking a look at the fixed income flows and ultra shortbond flows, accounting for about half of those and if my memory serves me correct, this has been a trend for a couple of quarters and I was wondering, is there really a macro interest rate or performance issue or how do we get these ultra short bond flows turned around?

In fact, I think, Greg, what you are simply getting is the other side of the growth. These things rocketed up when from rates were rapidly falling back in 2001. We put an awful lot of asset into those products in 2001 and 2002 and it's very much a ratio perhaps on institution money market, other than it just seems to continue quarter-over-quarter.

We have about 1.8 billion now of remaining assets in these products down from a peak of 4 billion or so. It's hard to give you some case for a turn around, or to say how far down do they go? But as a cash yields have improved, there is a bit of potential and actually NEV fluctuation in an ultra short bond fund that the investor doesn't face in a money market fund and with those yields up, there may be less of an appetite to be in a fluctuating product on a margin for this part of a cash allocation

Okay. And then you gave a little guidance on the trends for July and the equity and fixed income. Any change in the trends in money market from the end of quarter through July?

No, the money markets are up a bit. The money market funds have averaged about 138 billion through most of July, so it's up just a bit.

Great. Thanks.

Your next question comes from Robert Lee with KBW?

Thank you, good morning everyone.

Good morning, Rob.

Hard to believe any questions left at this point, but I still have a couple. On the terms of distribution of marketing, you talked about the next count business initiatives in the money fund business and finding new uses and new applications. Maybe update us a little bit on the other initiatives and more traditional institution businesses or subadvise businesses whether it's insurance products of 401K, can we talk about that?

We did talk about the institutional business on the last call and here, what we are trying to do is develop our our records. Some of the records we have got in the managed account are looking very favorable and some funds are coming up on three-year records. So we continue to look for the various records that can actually get in the finals on various mandate. But this is not something that is going to light the company on fire in the near future, but it's something we are constantly working on into the future.

As regards to 401K , remember the sitting that every time we have looked at it, we concludes that some number between 35 and 40 to 45% of our business is coming from retirement plans through intermediaries, but we can't track it because these clients are on those accounts, even though we have a lot of efforts on this, I can't have good charts and good flow numbers, because it doesn't track that way. In our own 401(k) business, that is going along fairly well, but it's a modest effort in terms of the total assets of the company. Fair enough.

Just had another question on capital usage and this really is more so for the securitization program and I remember correctly may have a year or two left to run and I think Ray you talked about more accounting changes Are you seeing--should we be expecting that at this point in the next couple of quarters? Do you think it's likely? In fact, and related to that are there anymore Kaufman payments left or was that the last trons of that?

On the commission financing, it does run through the end of '06 and we are a fair ways away on another decision of how to fund those commissions. The accounting has been determined, the FSP was issued and we continue to account for the funding program as a financing, though we are talking to the financing entities about changes that could lead to sales treatment. We don't really see that as an event, whether it's a sale or financing sight you have obviously seen it both ways. The underlaying mechanics and economics of the program aren't changing, so it's at least possible it will change, but it hasn't changed yet.

On the Kaufman, there is another contingent payment in '06. the second quarter if they meet all the targets. So it's almost to say that start to accrue over the coming quarters, assuming that they are on target?

Probably starting in Q4..

Okay. Thank you guys.

Thanks Rob.

Your next question comes from Bill Tanona with JP Morgan.

Good morning guys. Only the effective fee rate, so I understand that, if Alliance's management fees are all in revenues 50 basis points and yours is averaging about 30 basis point and we saw the down tick, is that because some of that revenue is actually shifted to other service fees?

In fact, yes.

I'm still a little lost.

That is exactly right, the comment made on the question I believe was specifically made on the investment visory fees. The 50 bases point from Alliance would be weight towards other service fees, could be in the neighborhood of 30 basis points, so you are correct.

Okay. Helpful. Thanks.

You have a follow-up question from Bill Katz with buckingham research.

Thanks very much. Chris, I wanted to go back to your comment that the relative performance in your money market business sounds like it was a bit better than it appears this quarter. Can you help me understand what exactly drove that? Is it an sequence of the curve to the extent that you can, is it credit? In fact, any insight would be helpful.

I think it was a portion of all the above, it was just a little bit of winning on several streets. The inverse of a perfect storm.

Okay. Thank you.

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

That concludes our call. Thank you for joining us.

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