Federated Hermes Inc (FHI) 2005 Q3 法說會逐字稿

Good morning, my name is Marie, and I'll be your conference facilitator today. At this time I would like to welcome everyone to the Federated Investors third quarter earnings conference call. [OPERATOR INSTRUCTIONS] Mr. Hanley, you may begin your conference.

Good morning. This morning we will have a brief presentation before answering your questions. Leading today's call will be Chris Donahue, Federated CEO and Tom Donahue, Chief Financial Officer and also here is Rich Novak from the Corporate Finance Group.

Let me say that during today's call we may make a number of forward-looking statements Federated's actual results may differ materially from these statements as a result of various risk factors. For a discussion of such risk factors see the section titled risk factors and cautionary statement in Federated's annual report on form 10K for the year-ended 12-31-04 and other reports on file with the SEC. As a result no assurance can be given as to future results. Levels of activity, performance or achievements and neither Federated nor any other person assumes responsibility for the accuracy and completeness of such statements in the future. We that I'll turn it over to Chris to talk about the third quarter.

Thank you, Ray. Good morning, all. I will start by reviewing Federated's business performance in the third quarter before turning the call over to Tom to discuss our financials. We continue to participate in settlement discussions with the regulators on the previously disclosed mutual fund trading issues. Therefore, I will be unable to make any further comments on the discussions or on the timing to resolve these issues.

Onto the business aspects, Federated's money market average assets increased from Q2 by $14 billion and period end assets grew by $2.6 billion. Reflecting both the acquisition of the Alliance assets in the mid second quarter and organic growth. During the third quarter, the broker dealer channel added $4.7 billion in money market fund assets. Higher yields have helped in this channel, as customers tend to maintain higher balances and broker dealers are able to source new cash management opportunities more effectively. We also had a couple of conversions that I'll discuss when we review the distribution channels.

With September as a corporate tax payment month. Federated experienced slight decreases in the period end money fund assets in other channels, though average assets were generally higher than the prior quarter. Continued short term interest rate increases will negatively impact near term growth prospects from the more interest rate sensitive customers such as corporations. We continue to work on functional equivalency efforts for money funds including the potential 15C 33 broker application with the SEC and are having some early success in the UK with similar type efforts.

Equity assets were up 3% from the prior quarter and 13% from the third quarter of '04. Market appreciation accounted for most of the growth, off set partially by net negative fund sales. Importantly, however, Federated's equity managed account product grew by 14% from the prior quarter to reach $1.5 billion and Amcore acquisition added $142 million in equity assets during the third quarter. As we noted during the last quarter's discussion. Q3 included a $220 million redemption from a large cap value fund due to a client's mandate change in their retirement program.

The Federated Market Opportunity Flexible Fund Category, Muni's and Stock Advantage Fund, Strategic Value Fund and Kaufmann Small Cap Fund continued to produce solid inflows. Out flows remain concentrated in our core and large cap value equity products. The managed to comp product added $207 million in Q3 gross sales and $160 million in net sales that are not reported or included in our fund sales results.

On the fixed income side, net redemptions continued with ultra short bonds accounting for about half of the net out flows. Net out flows however, were lower than they were in the second quarter. As of October 26, our managed assets were approximately $209 billion, including $157 billion in money market, $29 billion in equity and $23 billion in fixed income. Through the first three weeks of October, equity fund net redemptions were running lower than the Q2 level and bond fund net redemptions were running higher. As always we caution against drawing conclusions for the quarter from the early data.

Turning to investment performance. 47% of Federated's actively managed equity mutual funds have beaten their benchmarks and 53% were in the top half of their peer group rankings for year to date 2005. Highlights in this period include the very competitive performance in the Capital Income Fund, Muni Stock Advantage Fund, Mid Cap Growth Fund, International Value Fund and Market Opportunity Fund. On the fixed income side, comparable highlights include our Total Return Government Bond Fund, Total Return Bond Fund and Intermediate Muni Fund.

Looking at the 930 Lipper rankings for Federated's domestic equity funds 56% of the rated assets are in the first or second quartile funds over the last year. 48% over the last three years. 2/3rds over five years and 61% over ten years. For Bond Fund assets the comparable first and second quartile percentages are 69% for the one year, 74% for three years, 68% for five years and 60% for ten years.

Turning to distribution. In the trust market which includes the Bank Capital Markets area for reporting purposes. Money market funds continued to grow through August before decreasing slightly in September. Again, likely related to corporate tax payments. But have rebounded here in October. Bank trust and capital market equity assets is a managed account product and continued their steady growth. Assets here were up about 11% in the quarter to nearly $500 million. In the broker dealer channel, money market assets were up almost $5 billion in the quarter. About 2/3rds of the increase came from a couple of sizeable asset conversions. We are generally seeing high cash balances from brokers as yields on these products have increased over the last 12 to 18 months.

Distribution of the managed account equity product continues to increase in the broker channel as well. Assets here grew 17% in the quarter to $934 million. In the Jones channel Federated continued to increase its market share for equity and fixed income sales. Federated's income oriented products are beginning to gain some momentum in this channel, lead by Muni and Stock Advantage Fund, which was recently added to the recommended list and is now our top selling product at Jones. Our market share is just under 3% up from 2.7% in June. After dipping to slightly below 2% a year ago.

In the institutional channel, money market assets decreased slightly in September. Again, likely from tax payments and have since rebounded. We added one new corporate cash management customer with initial funding of about $5 million during the third quarter. Our investment performance remains solid in this area. We are optimistic that when the train -- the rate tightening cycle ends we will be very well positioned to capture assets when corporations increase their allocations of assets to money market products.

Now for an update on some new products and initiatives. As we've discussed the manage account product at the channel level. Our target total for '05 remains at $2 billion. We continue to have strong sales momentum and expansions of the distribution of this product. We are working on the addition of fixed income products to the managed account line up early in '06. We launched a new Strategic Value Mutual Fund in March. This fund crossed $100 million in about six months.

We recently launched an enhanced cash product to expand our already broad menu of cash management products. e also continue to see heightened interest on the M&A front. We continue to discuss transactions similar to Amcore deal with banks and other parties. While timing of course is impossible to predict and deals tend to take a long time to come together. We are looking at more potential opportunities for both the roll up and the center of excellence variety.

With that I will turn this discussion over to Tom to comment on the financials. Thank you, Chris, and good morning. For Q3 revenues increased 18% compared to Q3 of 2004 and 9% from the prior quarter. The increases were due mainly to higher money market and equity assets. The money market asset increase included both the Alliance acquisition and organic growth. Lower revenue from fixed income assets and from third party fund administrative fees partially off set the increases. Aside from the Alliance transaction, revenue, all other revenues increased 4% from the prior quarter and increased 6% from Q3, '04.

On the expense side, Federated recognized $23.6 million insurance recovery of investigation related expenses. And recorded $1.7 million of additional investigation and related expenses during the third quarter. The recovery was recorded as a reduction to the various expense line items originally charged. Most of this, about $22 million impacted professional service fees. Approximately $1.3 million, impacted the office and occupancy line due to reimbursement of related costs. The full quarter of expenses from the Alliance transaction accounted for $20.7 million of marketing and distribution expense and $1.8 million of amortization expense. Roughly twice the level of the prior quarter.

Operating expenses after Alliance, the investigations, and the insurance reimbursement items increased by 10% from Q3, '04 and were up 5% from the prior quarter. Compensation and related included approximately $2 million of nonrecurring bonus expense in the third quarter. The GAAP operating margin for the quarter was 45% which reflected the 10% impact of the insurance reimbursement.

On the balance sheet, cash and short term investments stood at about $303 million as of September 30th. e anticipate that future uses of cash will include dividends, share repurchases, settlement payments and acquisitions. We did not buy shares in the open market during Q3, due to the ongoing settlement discussions. We expect to resume share repurchase post settlement but we are not able to forecast the share repurchase levels. The press release noted the sale of InvestLink Technologies subsidiary and this results in a loss of discontinued operations of $1.8 million or about $0.02 per share from the net cost of writing off associated assets. The impact to future earnings is not material. We will now open up the call for discussion and questions.

[OPERATOR INSTRUCTIONS] We will pause for a moment to compost the Q&A roster. Your first question comes from Bill Katz with Buckingham Research.

Thank you. Good morning. On the money market business it sounds like things have rebounded nicely into the new quarter and I appreciate the math on the average versus the point in time. As you look around the industry a little bit, you are seeing companies like Dreyfus, Mellon, and even BlackRock you are starting to seeing a faster point to point acceleration with comparable discussion, is it mix or businesses. Anything sort of going on that might be resulting in faster growth elsewhere?

Bill, it is Ray. I -- I -- We look at our market share for the quarter. It is basically about flat. If you did it on average assets, my guess is it would be up. You have different -- at times, given the size of the assets in each of the companies, you can have point to point changes that don't really reflect any particular underlying trend. Our products are performing very well -- are positioned very well in each of the distribution channels. The flavor this past quarter was a little more retail. We talked about September with tax payments and we think we are very competitive in that area.

Bill, I just, it is very hard to ascribe some macro point to differences between the companies you've mentioned and us on almost any point to point deals. There are variations in performance and positioning and it's just very tough to draw macros out of those moment to moment changes in the money market fund business.

I mean to just further elaboration on the market share. Through August, we would have been up in share and then in September with the likely with the concentration on corporations, it came back down to being about flat. It's hard to do the point in time analysis. And over time we have gained share.

Okay. Fair point. Just going back, Chris, to your comments-- you sort of enumerated a number of things are going well on the equity and fixed income side in terms of either the managed account business or the expansion of the business. But then you look at your flow numbers and even absent the one chunky account loss. Still pretty negative annualized rates of loss and just trying to reconcile your commentary here with the overall totality of the negative flows. Could we start to see a more decisive up turn? Do we need to wait for the market timing settlement to take in? Is there a greater competition? Just trying to get my hands around what has been eliminating the growth.

As I mentioned the negative redemptions. The negative net sales are primarily piled up in the value equity area and core area. So we are not satisfied with the overall net flows in our business. t there are a lot of good things to relate to, now as it relates to the performance in those particular funds and what our opinions are. Well, we have bet rather heavily on large cap positions in the performance of those fund and let's put it this way, we are convicted but I think we were early. We got hurt more than the average bear with some -- buying entities and on the insurance side but we are willing at this point to go the whipsaw route of chasing that which we are against with which we are convicted on. And in the meantime, what we have is in over all approach and we have good people, good system and good science and over the long haul this will win out especially in those areas. And then on other areas we have some turn around cases which are excellent.

The case of the Capital Income Fund is exceptional. Here is a fund that was in the bottom debt tile and it's now in the top debt tile over a three year period, due to changes from taking it a -- from an Utility Fund into the Capital Income Fund that it is today. The performance is exceptional. And as I mentioned in the call, we have many new products. Muni Stock Advantage, the Strategic Value, Small Cap Kaufmann just to name three and then we have a good core of -- shall we say old standbys. The Big Kaufmann Fund, Mid Cap Strategies and Market Opportunity and we are seeing some good things in some of our International funds. On a gross basis the Small Cap International Fund is excellent performance and remains in the top half of its gang. And some pretty good lights on the International value side. So what's driving those redemptions are those fund that I mentioned and I think those are the primary reasons. Yes, if you lifted the lid on the settlement, that would be helpful. But we have got to face the reality of the performance regardless of anything having to do with the settlement.

Okay. Just two follow ups. On your commentary that sort of the pipeline is picking up and consider both roll ups and areas of excellence, what do you think you would be focusing on, in terms of the areas of equity.

Well, we would be focusing on equity assets. This is what drives us to look at things. However, you will note from the Alliance that when we see a big opportunity in the money funds we do not shy from hitting the bid. It is very much of an opportunistic flavor on the execution of these deals, even though we are looking for opportunities on the equity side.

So, finally, I was wondering if you could comment sort of the penetration of the Institutional channel away from retail managed accounts and where you might stand in terms of being able to market those products a little bit more aggressively

Which products, Bill, are you talking about?

Some of the traditional institutional channels for the Fixed Income Equity Business.

The business there is pretty tough as I mentioned on the last call. Until you are able to get the three year record up to par. It is pretty tough and so we have not been able to make many inroads on that. We have been focused on developing the records there but I don't see near term where we are going to be able to report to you robust asset growth on that side.

Okay. Thank you.

Your next question comes from Daniel Goldberg with Bear Stearns.

Good morning.

Good morning.

You mentioned about rebounding in October in terms of the performance and flows. Any more color there? So far now that we are almost through October?

Well, if you take a look at the asset figures, total asset figure which we gave you through the end -- excuse me, through October 26th. $157 billion in money markets. So, that's up off the -- off the numbers that are in the press release summary. And that's a pretty good indication of at least some of that rebound. The number in the press release would be about $154 billion.

Okay. Any specific trends that you are seeing that is helping that improvement versus what we saw in the third quarter.

There is nothing exceptional here. I think the scuttle butt is still the same. The Fed is running out of gas. They have a few more modest or 25 basis point increases left in them and we will just wait for that to unroll.

Okay. On the International. You mentioned briefly the performance there. What is the strategy going forward. Assets have been relatively flat on two to three billion for awhile. What is your strategy outside the U.S. for assets.

The strategy outside the U.S. for assets, if you are talking about raising assets in Germany and in London, in Germany, we have a joint venture with the LVM insurance company which has now grown to greater than $600 million in their fund family. They are having the best sales year that they have ever had. And this is an arrangement sold through their three million customers by their actual sales people. And the performance of the fund has improved and the people this year who have been buying these fund have had good results. So there is a lot of enthusiasm inside the LVM organization for this product. In fact, a bunch of their wholesalers were in Pittsburgh within the last week in order to pick up on some of the training on that. So, our strategy there is to grow that family of funds.

We continue also to have an institutional business in Germany and we have a couple of billion dollars there and we continue to try to sell mandates to institutional clients, primarily in German speaking Europe. But we have also begun to step out into other places as well on a investigatory basis. In London, we have one wholesaler and has begun an effort in which I hinted at in my comments to create opportunities for money funds to prove functional equivalency. This is a lot of words about getting money market funds eligible under various British regulations for use. And there is a lot of lawyer work here which is why I am not giving you specific numbers or things like that. We are setting the stage for growing assets there as well. Over all we tend to to do a little bit of hunting for other partners like LVM but that's a very, very difficult thing to find. You don't hear me talking about that very often. We don't have anybody that hot on the pipeline for that schedule.

Okay. Many of your peers are looking to completely grow their non U.S. assets, how big of an opportunity is that or focus of Federated?

I think that overall it is an excellent opportunity for us. The way we tend to approach this is to find partners in areas where we can grow assets and see the whites of the eyes. So that we don't exactly go in and say, oh well, we are going to spend a lot of money and do the advertising and if you build it, they will come. We tend to want to see the assets and then put the expense and the sales effort into it when we see what we can actually do. And so that is kind of the footprints you have seen in Germany and in London. Our wholesaler has been there for over two years, and it has taken that kind of time in order to develop the legal in such a way that we think that we can start to build on those opportunities.

Okay. Great. Lastly, be curious of our thoughts on the recent announcement in terms of Fidelity and Lehman in terms of their strong dollar, hard dollar arrangement and any impact on the industry.

Well, I think that Fidelity is perfectly capable of doing an excellent job of managing their own book and managing their own business to their own end. As regards to others, I think it is important for the widespread industry to have as many different opportunities for structures, and for boutique or smaller brokerages or to get research advice. If you are the biggest research house around, then everyone else having less research is a better deal for you. On the other hand, for smaller players or players who want to have a variety of input in terms of research, maintaining the research is important. Whether or not you can separate those businesses, for the entire industry, remains to be seen.

I think that the biggest player maybe able to get the capital and attention because of the size of their trades without the necessity of doing the research as well. But others may not find it exactly that way. So, I have no problem with them doing their deal and that's fine with them and I don't know how far that will go in the industry. That remains to be seen. For us. It is no big deal either way. The amount of soft dollars that we do is less than $5 billion and it has been on a declining slope for the last several years and we have beefed up our advisor and analyst group as part of our whole commitment on the equity side. So, if somehow we get hit with a requirement it isn't going to be a huge problem for us because of our commitment to the research. But I wouldn't really want to see that because I think the diminution in variety of research opportunities would be a negative to the whole market.

Okay. Great. Thank you

Your next question comes from Jeff Hopson with A.G. Edwards.

Hi, can you talk a little bit about the money market business and the bank trust area and how it is similar/different in terms of recent trend versus the others.

As a general rule, in the bank trust world, it is as much a cash management service as it is an investment. In our numbers though. We put both capital markets and bank trust together. And the capital markets are more of a rate sensitive kind of a market. And so, you have those two blended in our numbers. In pure bank trust it is very much a steady type business through rate cycles, there will be slight differences. And the reason is if you look at the fed numbers. Historically trust departments have maintained 20% of their assets in cash whether they are fully invested or defensive about the market, no matter what. And the portion -- we have less than a 10% of all that money at Federated and we have by far the largest market share.

Although it remains a steady basis, the steady real competition is the outside market. And the difference between this business and say the broker dealer business, the broker dealer business is punctuated by brokers who have customers who are trying to get a bigger share of wallet for their customers. Therefore, when they see higher rates, not necessarily, competitive -- it doesn't necessarily matter that they are competitive or not with repo rates, or what the Fed is doing. When the rates are slightly higher then the broker has a slightly easier time getting more money into the money fund. If you look at the rates right now and compare them, you have money funds with a free handle in front of them. You have a ninety day C.D.s with a two handle in front of them and some of the money market fund with the banks with one handle in front of them. What you are seeing there is, in fact, is how the banks are basically slower at increasing those rates in the market place and of course, than a 40 day average maturity money fund. So the brokers get a little more opportunity to increase their size of wallet at that time. What I am trying to show you is that in the broker world, it is a very steady tight business because it is primarily a service and setting the stage for writing tickets and taking care of the whole investment portfolio. And in the money market fund part of it is very much an add on to the whole relationship. Those would be some of the primary differences between bank trust on the one hand and capital markets and the brokers.

Okay. Great. Thanks.

Your next question comes from Mark Constant of Lehman Brothers.

Good morning, guys. Just a couple of things I want to follow up on. I missed when you talked about your acquisition in the pipeline for lack of a better term. I didn't hear you highlight Alliance type transactions. Have you seen any more discussion, I think you mentioned to import type transactions and what about pure scale money fund type deals

Mark, we are trying to move forward on a number of fronts. You know, the market place kind of knows that we are interested in those and we encourage that and , I am not talking about a pipeline move. We are definitely in discussion on a number of fronts there.

But not a lot of delta in terms of the nature of those discussions or frequencies.

I think this year, those discussions all year have been active and I think they remain in the same level of activity as they have been at the beginning of the year and now. Just takes time to get those -- to get firms to move on those things.

I Understand. And then last little piece. Based in your comments you highlighted, as one of the best selling equity products. The Small Cap Fund. That's your flagship product for lack of a better description. This is the date I am looking at it is still crushing the category year after year after year. $1 million is that just an asset capacity problem or perceived as a capacity problem that is sort of stalled out of the flows there or is there something else? Is there, incentive issue in terms of sales and distribution? More color would be helpful

On the big Kaufmann Fund. I think the facts will show they have slight net redemptions in the quarter. That means about $17 million. That's pretty slight in a $8 billion fund. If you peel behind the onion a little bit the intermediary distributed classes that we created after we acquired the fund had positive net sales while the original share class was in net redemptions and that overcame the positive efforts on the other side.

There were various times when the performance was not as it had been historically but those were short term times and if you look at the performance for the third quarter, they were in the top third of the peer group and they were in the top 40% over the last year. Top 30% for three years and top 5% for five years and they are the top fund over 15 years. So, this is a very strong fund and where we are actually selling it through third party distribution, it continues to do well. In terms of capacity. We don't see a capacity issue at the $8 billion level or at higher levels. There maybe some levels where we hit it. I don't know exactly what that is. When we bought the investment management part of this, it was at around a little over $3 billion having spent a good bit of time at $6 billion and so, they have been at these kind of levels before and you know, we just don't think it is a problem at this point.

That sounds like the sort of the natural attrition of the original assets for sales is still overwhelming the inflows is that fair?

Well, that is a relatively recent thing, Mark, and as Chris mentioned it is barely out of the equilibrium. And the other thing that I would mention is obviously the fund would be helped by more robust flows in the growth industry category

Okay. Thank you, guys.

Your next question comes from Chris Meyer with Morgan Stanley

Chris, I thought you had said the out flows in the fixed income space were in the short duration assets. Can you tell me why. I would have thought that product would be more attractive than less attractive.

Before Chris comments on that, Chris, I will throw one thing in. With the curve generally flattening, and when you edge out to an ultra short bond fund, you pick up a bid of fluctuating in a possibility and it is not good at a rising rate environment and so I think one of the things that has happened there, the money market funds are viewed at more attractive alternative in a rising rate environment At some point there is another dynamic that comes in. That is a potential change in the net asset value in the ultra short. And these things do change their net asset value for real and this can have an effect on when people decide to go into the fund and when to go out of them. But, it is really tough on a short term basis to say oh all these things are going to move one way or another because there are so many dynamics going on inside the trust departments or the primary users of these and some people are just committed to long on cash and others are not. So, another portion of this money does tend to find itself going into the market as well

On the equity business, it seems like there is a renewed focus in the industry trying to buy in or sub advise expertise. If the performance numbers in the equity business. You are waiting for the turn around for large capital.. Why not just leveraging your stronger distribution and sub advise some relationships.

Do you mean where we would sell a sub advised arrangement?

Yes, where you would sell. Look for someone else's investment expertise.

Well, that is a challenge for us. We have done that before historically on the International side. And have found that when we did that, it didn't sell as well inside the Federated distribution. There is a culture and an essence of who Federated is that has been communicated to our client base and when we have tried to do that, it simply hasn't work as well as someone might have thought. Next, you are doing a lot of sharing on the economics support and then you're doing a lot of sharing as to who you are. So we think a better arrangement is to try and do the kind of things we have done with Kaufmann on certain areas and then to work on developing the products as I mentioned.

So the sub advised route , though we looked at some of those kind of arrangements. We would much rather build them and either build them or buy them and own them and then if we are going to put the money in them, then the shareholders are going to be the owners and the ones who enjoy the distribution splendor that occurs at the end of that.

Okay. Just to follow up with this Fidelity and Lehman. Do you get the since that the mutual fund companies that are involved in mutual fund timing scandal, which I guess you are one of them, would feel more pressure to unbundle. Just given the mutual fund boards are probably a little bit more defensive in doing the right thing in front of the regulators.

There is nothing wrong with following section 28 E and having soft dollar arrangements. It is fully approved by statute and has been a thing that has been going on for a long time legitimately and the full open field. I also don't think there is a connection between what's ever going on in the investigation on market timing. And what you are doing for the investment management in the use of the commission. And I think that most of the board certainly our Board, I believe is capable of seeing differences among issues and not just using a reaction or an emotion on one issue to therefore influence another one. I think these things are decided in what is the best interest of the fund and the fund performance and the shareholders on each individual case. And I think those judgments can continue to be made by various players in an open market place to unbundle, to keep them bundled, to use soft dollars, to use more of it, to use less of it, because the goal is to get the best deal for the customer at the end of the day.

Okay. Good. Thanks

Your next question comes from Cynthia Mayer with Merrill Lynch.

Hi, good morning.

Good morning.

Just wondering since you mentioned the tax payments at the end of the quarter. If you could quantify those and maybe compare them to what is normal for September.

Actually, Cynthia, the impact of the tax payments comes in the middle of the month. It is a September 15th event. And for us it was about $6 billion of out flows over a couple of days centered around the 15th and a couple of days following. And then as the month went on we recovered a portion of that. If you looked in the industry numbers I think you would see a dip in the September number as well. Now, we can't precisely tie it back to tax payments. The customers don't tell us why they are adding or pulling money, but it is a significant tax payment date for fiscal year files.

Okay. And just generally, as the money market balances improve in the industry, it's obviously a lot of business that a lot of people would like to get. Do you foresee any fee pressure?

Well, we haven't seen much in the lines of fee pressure recently or historically. And I don't see any connection between the features you just mentioned. There by causing fee pressure. I think with more consolidation in the big money funds, where you tend to see the fee even being discussed is when big hairy mandates are up for bid. But not so much in the day to day business of money fund life.

Okay. Fine. And just a small one, I guess on the income statement looks like systems went down. I didn't hear that mentioned as one of the buckets for the one time.

We talked last quarter about, there were some things that hid in there that probably weren't going to be in as part of the run rate. I think we talked about a couple hundred thousand of the last quarter. We still would have expected it to be somewhere around $5 million. And it came in a little lower. I wouldn't read too much into that. I think it's within a fairly narrow range, plus or minus around $5 million is a good place to look for that going forward.

Great. Thanks a lot

Your next question comes from Michael Hecht with Bank of America.

Good morning, guys.

Good morning. Good morning.

Quick question to follow up on the $5 billion in the broker channel. And are those coming from the Alliance purchase. Are you seeing any kind of backlog or pipeline on account of that activity?

It is I wouldn't comment on particular customers for that. But I would say that the acquisition has been helpful for us and we have been able to grow the assets post acquisition. In terms of a pipeline. These opportunities come up periodically. And we win some of them and at times we have out flows related to that them. I wouldn't want to draw a kind of a trend from that either. They will happen periodically but it is difficult to forecast.

Also noticed a little pick up in the administer assets after trending downward after the last few quarters. I mean, can you just share with us your out look for the third party administration business from here?

I think that that is a pleasant little increase in regular customers that are with us. But it does not reflect a strategic imperative that will result in growing those assets and will not result in a major change in the way we are approaching that business. If you look at it over a 20 year trend. Back in the mid 80s. No banks were doing mutual fund. Starting in the late 80s and early 90s. More than a hundred banks put those funds together and now you are seeing it go the other way and the majority of the people who have them are getting out of them. This is not to say that at sometime down the road customers may decide they want to try it again. So, I would never say never. But in terms of looking at the business right now, there are not efforts under way to make those assets increase.

Last question on the operating margin. You mentioned the one timers running around 35% this quarter versus 33% last quarter. How should we think about the traction from here? Particularly money funds. They need to chug along as they go in October.

It is a difficult thing to forecast because you go through what happens with fixed income, money markets and equity assets. We don't see any big investment dollars that are, that should throw things off. And so the answer on what the margin is going to be is what is going to happen with asset. Not really an answer. Again, we don't see any big changes on the expense side to throw that off.

Your next question comes from Robert Lee with KBW Asset Management.

Thank you. Good morning, everyone. Real quick question. Most of them were answered. On the tax rate, I guess I am trying to back in what the underlying tax rate is excluding everything. I am coming up with maybe it a little lower than what it has been running recently. Is that correct or are there any moving parts in there outside of the insurance recovery?

We think it is around 37% basically.

Is that what it was in the quarter? That's what I am coming up with.

If you take it over a longer period then the nonsettlement charges for the numbers are out of whack but underneath that we think we have a 37% rate and that's good to use going forward.

That was it, thanks, guys.

[OPERATOR INSTRUCTIONS] Your next question comes from David Haas with Fox-Pit Kelton.

Good morning. I know you talked about sort of capital usage and haven't bought back in the quarter and I am thinking about going forward. The fact that you are out of the market and it causes you to back fill what you haven't done. Is there any way that you can talk about the, from the capital budget decision procedures after you are allowed to get back into the market.

We will score on all three streets. Meaning buying shares back, paying dividends, and doing acquisitions. And as between those in terms of a capital budget decision we don't make one in advance that says we will do some of thus percent of this and some other percent of that. We like the dividend and increasing the dividend when we think it is appropriate. We like the acquisitions and we like buying the stock. The easiest thing to say on the stock is, when we feel we are back on the field again, then we still have a, I think we still have a $5 million program available to us -- that is already a $5 million share program that is already there. e will be active again on buying the stock with the same exact approach that we've before. But it is very, very difficult to give you a chapter and verse percentages as to how we will score on all three of the streets. That's not even the way we think about it.

Thank you. And just back on the money market environment and understanding a cyclical nature of money market flow. Can you sort of point to a couple of things that are different today about when the money markets become reasonable. That is what's different today than to the last time. Rates started to get toward their peak on the short end.

One of the things that is going right now for us is that we are much better positioned in previous times, I am thinking about in '94. We had only just begun to develop relationships with corporations and then not even started the capital market sections of our business. So, we have really a much better position in this market to take advantage of that than we had previously.

Okay. And in terms of sort of the general business itself. Are there any sort of opportunities today. I know you talk about 15 CC 3 but aside from that any opportunities today, that make the landscape different versus back in sort of the mid 90s.

I think that the money market fund has become even more ingrained in both the capital market side of the business and as an investment alternative, so you have had, if we are looking at that decade, a situation where money funds grew from being oh, what is that, a mere flash in the pan. Et cetera, to where they were a meaningful part of the structures to when we started to get into the institutional side. Others were doing this as well. Now, they are very much a go to part of the business. When the Fed was looking at lowering interest rates, one of the factors that they considered as to how low they would go is the effect it would have on the money market funds because of the potential disruption inside the capital markets where money market funds were supplying or buying a lot of the paper at the liquidity crunches of the different arrangements. So that is one difference. That I could comment on.

Okay. Thank you very much.

Your next question comes from Ken Worthington with CIBC.

Hi, good morning. Thank you for taking my question. First question is on the Kaufmann Fund. The contracts are, I believe, up shortly. How are the contract discussions with Hans going?

The contracts were up awhile ago and they continue to be successful employees here and if we want to sign new contracts we will sign new contracts. As Hans has said, he wants to end his career here.

Okay. It was my understanding that contracts -- the latest rounds of contracts were up shortly. Did I misunderstand that?

Their contracts ended, I believe in June.

Okay. And then my second question is on Edward Jones, is it possible to quantify the size of that distribution relationship in terms of both sales and assets.

Well, in terms of assets, it is approximately $17 billion with the bulk of that $13 billon or so in money market assets and the rest in equity and bonds. Sales would want to step back before we quantify that. I don't have a number immediately on hand with that.

Okay. Great. Thank you very much.

[OPERATOR INSTRUCTIONS] The next question comes from Peter Crane with High Money Net.

Hi, guys. I wanted to ask -- there's been a lot of talk about these bankerage or brokerage banks. Do you have something in the works or do you have a offering in that section or are you benefiting from the possible move away from that?

Well, at this point we don't have such a product. And what we have seen historically is that some of the larger brokerage firms as you mentioned put together some of these type arrangements for their cash and Merrill Lynch comes to mind and I think Lehman did it, too. at means that is not a game for us to play because they are doing it themselves. In terms of what we see with our regional brokerage. Periodically people will talk about this issue but the vast, vast bulk of the money stays in the money funds and when you get a picture of rates, which I reviewed earlier in the call, it would be most unusual to have this be the time when those kind of products started to score in roads on the money fund.

Yes, I agree. Thanks very much.

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

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

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