Federated Hermes Inc (FHI) 2006 Q1 法說會逐字稿

I would like to welcome everyone to the Federated Investors first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you, Mr. Hanley. You may begin your conference.

Good morning and welcome. Today we plan about a 15 minute presentation followed by your questions. Leading today's discussion will be Chris Donahue, Federateds CEO; Tom Donahue, Chief Financial Officer; Dennis McCauley and others from the finance group are here as well. Let me say that certain statements in this presentation including those related to money market assets, investment performance, sales, new products, and acquisitions constitute forward-looking statements which involve known and unknown risks and other factors that may cause actual results to be materially different from any future results implied by such forward-looking statements. For for a discussion of the risk factors, see the section titled risk factors and cautionary statements in Federated's annual report on Form 10-K for the year-ended 12/31/05 and other reports on file with the SEC. As a result, no assurance can be given as to future results and neither Federated nor any other person assumes responsibility for the accuracy and completeness of such statements in the future. I will turn it over to Chris to talk about the first quarter.

Thank you, Ray. Good morning. I will start by reviewing Federated's business performance in the first quarter before turning the call over to Tom to discuss our financials. Federated's money market assets increased from Q4 by $3 billion and average assets grew by $6.6 billion. The growth was weighted towards institutional accounts and reflects seasonality as our largest account as measured by assets peaks with tax collections at this time of year. As in prior years, this is likely to be the high watermark for this pod of assets for the next couple of quarters.

Money market fund assets grew slightly in the quarter. As noted in our press release, our market definitions have changed reflecting a reorganization of our sales force coming in to 2006. In the new wealth management and trust division which includes trust banks, registered investment advisors, capital markets which is really institutional brokerage and institutional cash. Money market assets were up about $2 billion during the quarter and are up 16% over last year. Money market fund assets decreased by about $1 billion in the broker dealer channel. In this channel, we had growth from many of our broker cash management customers. However, this growth was offset by the loss of a $2 billion broker cash account due to that firm's acquisition by a wire house firm with its own proprietary money market products. In addition, we had about $1 billion redeemed in Q1. From normal seasonality related to year-end assets parked in tax free money funds.

While higher yields have helped in the broker channel, the potential for further short term rate increases continues to weigh on some of the more rate sensitive customers such as corporations. In addition, April is impacted by tax related redemptions. Looking at the 331 industry numbers. We believe we gained share, but prefer to look at those measurements over longer periods since the end of period figures can fluctuate quite a bit for any individual measurement time period.

We continue to work on our functional equivalency efforts for money funds and are seeing related asset gains. Assets from the commodity futures trading organization application grew from about 1 billion in Q4 to about 1.6 billion in Q1 of '06. We are working with our clients to help them solve an issue related to their required accounting for money market fund balances that we think will accelerate growth from our option clearing corp. application. This is still roughly $25 million from two to three customers. We continue to develop the potential for 15 C 33 application which is broker cash. We are also moving forward with our early efforts in the UK for functional equivalency and cash management opportunities.

Turning to equities. Assets grew 6% during Q1 and are up 11% from Q1 of '05. The growth came from market appreciation. The closing of two acquisitions with 376 million in assets and positive flows in our equity separately managed account product. Offset partially by net redemptions from equity mutual fund. Equity fund net redemptions were lower than the previous two quarters and are running lower so far in early Q2 results. More than half of the net outflows in Q1 occurred in January and our gross sales in March were the highest in two years. The Federated Kauffman and Kauffman small cap fund, strategic value, and muni stock advantage fund continue to product solid inflows. Outflows remained concentrated in our core equity and large cap value products. The equity managed account product added about 205 million in Q1 gross sales and about 90 million in net sales and these are not reported in our fund results. The strategic value equity product was added to two major bank platforms and a large regional broker. We are beginning to roll out our first fixed income products in the managed account lineup.

On the fixed income side, net redemptions continued with ultra short bonds accounting for just under half of the net out flows. The three ultra short funds have just over $1 billion in assets down from a peek of about 4 billion in 2003. As of April 26, our managed assets were approximately 213 billion including 159 billion in money market, 32 billion in equities and 22 billion in fixed income. So far in April money market fund assets have averaged around 146 billion with assets generally above that average for the first part of the month and below more recently due to tax payments. As I mentioned equity fund outflows are running lower so far than Q1 and bond outflows are running higher than the Q1 level. As always we caution against drawing conclusions for the quarter from the early data.

Turning to investment performance, 44% of Federated's actively managed equity funds beat their benchmarks for the first quarter and trailing one year. 39% were in the top half of their peer group for the Q1 and 44% in the top half on a trailing year basis. Highlights include very competitive performance in the capital income fund, the strategic value fund launched last March that reached its first anniversary with top quintile performance and over 250 million in assets. Of course the muni stock advantage funds. The Federated Kauffman products continued to perform well, the Kauffman small cap fund remains the number one LIPOR small cap growth fund among 455 funds over the past three years and the flagship Kauffman fund is in the top third of its category over the trailing year and top 8% for the trailing three years. The mid cap growth strategies fund also has a very competitive track record.

Federated's International small company fund continued to produce small absolute returns and competitive relative returns. International products are attracting significant flows in the industry. This fund has gathered substantial assets in the past and we hope to grow from a recent total of about 500 million as this fund has experienced slightly positive net flows in April after negative in the first quarter. On the fixed income side, performance highlights include the Federated bond fund, total return bond fund, strategic income fund, intermediate corporate, and muni fund, California muni income fund, and all three of our ultra short products. All were in the top quartile for Q1 and the trailing one year.

Looking at the 331 LIPOR rankings for Federated's domestic equity funds. 55% of the assets here, we are talking about assets are in the first or second quartile over the last one and three years, 67% over five years, and 64% over 10 years. For bond fund assets the comparable first and second quartile percentages are 70% for one year, 79% for three years, and 80% for five years, and 64% for 10 years.

Let's turn our attention to distribution. In the wealth management and trust market. Equity mutual fund gross sales grew 45% from the prior quarter and were up 9% from the first quarter of '05. Equity fund redemptions decreased compared to Q4 and Q1 of '05. We added three new institutional cash management customers with initial funding of approximately $5 million. In the broker dealer channel, equity fund gross sales grew 17% from the prior quarter and 8% from the first quarter of '05. Distribution of the managed account equity product continues to increase in the broker channel. Assets here grew 13% in the quarter. To over $1.1 billion.

In the Edward Jones channel our sales are weighted to the Kauffman fund and to our value and income oriented products. Our market share of fund sales has been running in the 3 to nearly 4% range over the last several months. After running at about the 2% range for most of '05. In our sales reorganization. The new global institutional channel includes traditional large institutional accounts like text pool cash management account, International, retirement and SMA oversight. For our first quarter, our bundled retirement plan customers we successfully transitioned the bulk of our record keeping work to our outsource partner. We have retained 90% of the assets we manage in these plans and are now approaching the market with a small package of bundled plans targeted for various size plans as well as investment only options.

Our institutional accounts sales efforts are centered around an alpha transfer strategy, we currently manage this strategy for a handful of domestic and German accounts and are looking to win more business of this type. We are also broadening our offshore product line this year. Adding three equity funds to our present mix of fixed money market and fixed income funds with about $6 billion in assets. The new mandates are similar to our strategic value our Kauffman and our market opportunity offerings.

As an update on some other new products and initiatives. We've discussed the managed account product at the channel level. The total assets in this product at quarter end were about $1.7 billion. With the addition of fixed income products for '06, we are targeting year end assets to reach 2.5 billion which would be up $1 billion from the a year-end figures. We just launched a new series of target maturity funds. 2015, 2025, and 2035 for our retirement product. These products will invest primarily in exchange traded funds and will adjust their asset allocations as they progress towards their maturity target. The ETS offer an efficient method of obtaining broad market exposure to domestic and International sectors.

Next, we continue to see heightened interest on the M&A front. We closed the Mason Street index fund deal with Northwestern Mutual and the Wayne Hummer growth fund transactions in March for about 375 million in combined equity fund assets. We continue to have active discussions for both consolidation type and center of excellence type opportunities. Tom?

Thank you, Chris. To review the financials, earnings were impacted by some unusual items. With the sale of our clearing business, we now account for this as discontinued operations. For Q1, the net income effect was approximately $1 million or $0.01 per share. We expect to complete this sale in a series of closings in the second quarter and expect a gain of approximately 6 million in Q2 with the potential for additional contingent consideration in the year 2008. We also adjusted a tax valuation allowance based on the expected capital gain in Q2. The reduction was 1.8 million and impacted net earnings by $0.02 per share. It is included in discontinued operations since the related capital gain will also be there.

For Q1 revenues increased 18% compared to Q1, 2005 and were about the same as a prior quarter. The year-over-year increase was 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 administration fees partially offset these increases. For comparison to the prior quarter, it is important to remember that the lower number of days in Q1 versus Q4 caused revenues to be about $5.4 million lower. Growth in revenue from higher assets was offset by fewer days and by settlement fee reductions. On the expense side, cost and related increased 15% from Q1 2005 and 20% from the prior quarter. In addition to severance, and 123R, the option expense rules. The year-over-year variance from lower incentive comp expense in Q1, 2005. Higher based pay in particular. Higher base pay for investment management and compliance related personnel and higher stock based compensation.

The increase from the prior quarter was due to severance, 123R, higher base pay, higher incentive cost accruals and seasonal payroll and benefit plan resets. We expect the comp to run at around 47 to 48 million per quarter in 2006. Of course, this number will adjust based on the incentives that are used to calculate compensation. Marketing and distribution expense increased from Q1 '05 due to the Alliance acquisition and organic money market growth. Higher equity fund assets also impacted this line item. Due to the variance from the prior quarter about half was due to higher assets. Most of the rest was related to certain contractual changes that were fully offset by related decreases in professional service, fee expense, and minority interest expense. Although the net effect was a wash, these changes reduced operating income by about 1.4 million and reduced the operating margin by 60 basis points.

Amortization of deferred sales commissions increased and nonrecourse debt expense decreased due to the write off last quarter of 85 million of deferred sales commission assets and related nonrecourse debt liability. The application of B share cash flows to the now lower related balance sheet assets and liabilities resulted in higher amortization expense and lower debt expense. Both items are effectively new run rates. These changes reduced operating income by 1.4 million and the operating margin by 60 basis points. The net effect of the B share income statement remains roughly a wash for net income.

The reported margin for the quarter was 31%. The decrease from the prior quarter was due largely to fewer days in Q1. Resulting in 170 basis points. Higher incentive comp accrual which would be 80 basis points, severance costs 70 basis points, marketing and distribution contractual changes 60 basis points, Q4 B share write down 60 basis points, 123R 50 basis points, and higher costs related to outsourcing retirement plan record keeping, 40 basis points, the cumulative impact of these items was about 5%. Going forward, we continue to believe that our margin will be in the mid 30s but more likely around 34% near term.

Now, of course that is dependent on asset levels and many other variables. On the balance sheet, cash and short term investments were 296 million at the end of Q1. We repurchased 632,000 shares during the quarter leaving 4.2 million shares in our current program still to be purchased. In addition the Board has approved a 20% increase in the quarterly dividend from $0.15 to $0.18. Our tax rate was 37.4% and based on current rates this is a reasonable estimate for the full year. We will now open up the call for discussion and your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Bill Katz.

Chris I wondered if we could go back to the functional equivalency of the money markets. When do you think you might in aggregate see a more decisive step up in money markets. It seems like we have been talking about the broker dealer and the OCC efforts for quite awhile now and when can we start to see a pick up in flows.

Well, on the broker dealer cashes I think I mentioned for as long as we have been talking about this which is many, many quarters. The 15 C 33 application is a request for an SEC exemptive order which has not been noted. And until they decide to notice that then that is not going to happen. So we are continuing to work on that, we are optimistic that we can get it done because we have both clients and even some support of the SEC in order to get that done. It is just not something that has reached the top priority down there. It is impossible to put a date on that one. On the OCC and if we can knock this latest accounting idea off then we should be able to see more assets coming in there. Once again, it is tough to predict how that will function as a catalyst and in which quarter. Naturally we are trying to do it as quickly as possible. Because more money to the home team sooner is always better and it is always better for the client. To try and put numbers on it, Bill, is just, and time is quite difficult.

Second question is on the bundled account initiative. Can you walk me through the strategy to gain share in this channel. It is a pretty competitive channel to start with and a lot of the market share is concentrated on the much bigger players. What are you going to do to supplant the T. Rowe's and the Fidelity's of the world?

Well, I don't know about supplanting those guys. Our idea is to offer our clients the services that we think are the best and we felt that we could do a much better job with our new partner because they are the one of the top 10 performers in both size and quality in terms of offering these kinds of services. So we want to offer our clients the best things that we can find. Another example of this is our Paychecks program inside the Jones system. Paychecks has come up with a very nifty program of offering smaller companies that have a handful of employees , a dozen or so, a very viable 401-K offering. So we have done some pretty good things in there with Paychecks in terms of growing our business there.

Bill, I would just add to that. One differentiator for us is that we are approaching the retirement plan market place through the intermediary relationships that we have so the programs that Chris is talking about, are leveraged off the relationships in the bank trust world which is significant obviously for retirement purposes and in the broker world where retirement sales are clearly part of of their business mix and we have some programs like the Paychecks program that are very competitive for them and have been very well received.

One last question. Could you size the large cap value and core growth exposure and then related to that, sort of capacity. Could you talk a little bit about how much big Kauffman can get. It seems to be a pretty big part of the sales.

I will take the second one and Ray will get you the stats on the first one. In terms of the Kauffman enterprise, the small cap Kauffman fund will run up against the cap at some point. Whether that is 2 billion or something in that neighborhood is just hard to tell. The decision that we will make is when as and if the investment professionals in that fund determine that the size of positions et cetera, that they are working on and how they do their investment expertise runs into difficulty. So that fund could be looking at a cap somewhere like that.

In terms of the bigger fund, we have not run into those challenges as of yet and I have no particular number or thought at this time. It is certainly possible. But once again the test will be, when do the investment advisory people say that gaining the size of the positions is too much of a problem. Right now, we don't for see that.

Bill, on the styles that you mentioned, they are both in the $3 billion range in terms of fund assets and there are additional assets on the separate account side. But the bulk of the assets would be in funds.

Okay. Thank you very much.

Your next question comes from Daniel Goldberg with Bear Stearns.

Good morning.

Good morning, Daniel.

Can you talk a little bit about, you gave us an update in terms of April, what you are seeing so far. As it seems like we are getting closer and closer to potential set cause. I know you talked about that being a positive to the business. If you are seeing anything in the Corporate channel that would kind of come to fruition, the fact that if a fed does pause, he gets additional assets.

Well, it is just a little too early. He makes those statement that they may decide to take no action at one or more meetings, the article writers talk about potential pause mode, but that has not yet reflected itself as of yesterday into numbers that we are seeing or into something that I can talk about. Say, oh, here this points to it. However, we remain convinced that that point is still true. And the reason is that in the past. When pause mode has been hit, then those corporate assets tend to come back home into the money fund areas and we remain confident that kind of activity will continue when and if pause mode is hit.

Okay. And can you give us a sense of potentially how long or what the timing would be around a pausing cycle.

Sure. Remember that the portfolios are averaged at 30 to 40 day range. So they catch up rather quickly. And so, if pause mode is hit then within one cycle, or a portion of a cycle, the rates on our funds begin to be able to beat the spot rate on the repos and that's when you start to see that change occur and you can't predict when. They haven't said exactly which meeting they are going to take a rest on. But you can sort of see that within a quarter or a month or two afterwards, you would start to see the changes in the rates and the movements of some of those customers back into the money funds.

Okay. Then the question for Tom, any further impacts as we model out for FAS 123R for the rest of '06. How should we think about that?

I think each quarter that we go through and look at that, it is probably going to decrease a little bit from where we were. Because we had some things that were related to 123R that were from departures or included in the severance thing. It is not going to be as big impact in the rest of the year as it was in the first quarter.

Okay. That's helpful. Lastly, just, Chris, consolidation is obviously a big theme. I know many people have talked about there is lots of conversations going on among asset management company and you guys have talked about potentially doubling your assets under management over the next five years or so. I don't know if you can give us any more color than you mentioned in your prepared remarks but that would be helpful.

Well, we remain enthusiastic to do acquisitions in the center of excellence nature which is the Kauffmanesque type of approach where we join up with a group that has good performance and a good gang of offerings that we can put in through our distribution and in through our clients. So we are enthusiastic to do that and we remain also enthusiastic for these roll up deals, two of which we've completed during the first quarter and we continue to see a good number of properties for discussion. Naturally I can't talk about any by name or give you chapter and verse on where we are in any discussions, but we remain enthusiastic to do these kind of transactions.

I'd just add in, the bank channel, you have read a lot in the press, things going on there and it is true, they are considering what is the right strategy for them to deal with their customers and we are trying to be very active there.

Would you also consider any type of transformational deal like Black Rock or Legg Mason has recently done?

I have said from various speeches that I have given over the time frame that before we went public, yours truly went around trying to create the Black Rock structure deal but we were told it was too early or couldn't be done. If you look back at the history of Federated with a private company from '55 to '60, public from '60 to '82 and owned by Aetna from '82 to '89, bought back and private again from '89 to '98 and then public the message here is that we will wear any dress that we think is the best interest to the shareholders of ink and the shareholders of the fund. So, yes, we would consider transformational deals and we remain open for business. Talk to anybody that wants to talk.

Okay. Great. Thank you.

Your next question comes from Ken Worthington with J.P. Morgan.

Good morning. I just wanted to ask a few questions about Kauffman. Maybe you can characterize the relationship between Federated and the principles at Kauffman right now and maybe give us an insight in how that relationship continues to evolve over time. Then just in terms of the economics of the Kauffman business for Federated, can you remind us how that works and should we really continue to view Kauffman just like any other team at Federated or are they still continuing any sort of economic sharing or profit sharing between them and you?

Let's begin with the back part. There are economic sharing arrangements that continue. There will be a payment made here in the next month that Ray is now going to break down for you.

It is the same payment that we have made in the last couple of years, which is roughly $40 million. 33 million of it as additional purchase price that has already been reflected in goodwill and the rest is comp that has already been expensed. That will complete the earnout from the 2001 transaction. Going forward, there would not be that kind of an arrangement.

As regards the relationship with the people inside the investment management operation there, the relationship remains strong, don't forget that the history of that fund was up to 6 billion, then to 3, then the transaction, then up to 6, and now the combined entity is over $10 billion. This enables for a very strong relationship where both parties are doing what they said they were going to do. They manage and get the performance and we were able to sell it in through the Federated distribution.

The arrangements with the principles were renegotiated within the last two quarters and we remain very confident that hans and Larry remain happy at their task and the team remains intact. Don't forget that we also along the way merged two of our smaller funds into the larger Kauffman funds and moved one of our portfolio managers up to the New York office of the Kauffman enterprise and today the Federated, what was the Federated global office downtown is just across the street from the Kauffman office. In fact you can run a zip line between the windows if you wanted to.

Great. With the earnout basically complete at this point is there likely to be any kind of revenue or profit sharing in the future with the Kauffman guys? Or is that relationship going to be solely salary bonus like you would consider any other portfolio management team within Federated.

At this point that's what I meant by renegotiated their compensation arrangements and that would be the focus of their comp and their payments into the future. So that will wrap up the purchase of the entire entity and then we will be back on a good solid employment relationship with that team.

Great, thank you very much.

Your next question comes from Chris Meyer with Morgan Stanley.

Chris, just on the franchise, if you look at the earnings power of Federated being around $0.45 a quarter now for what feels like about four years, isn't now the time to start thinking a bit more radically about the strategy of your company, and in particular, is the Company up for sale at the right price?

Well, we we will answer the second part and then we'll go to the first part. As I mentioned in my answer to one of the previous questions, we remain open to do what is in the best interest of shareholders. As I mentioned, in '82, the Company was sold to Aetna and if that becomes the best thing to do in the interest of shareholders then we would consider doing that. As I have said before, it is my opinion that the CEO of a public company simply doesn't have the right to just say no. So it would depend on that kind of a transaction. All of the interest of the shareholders of ink and the shareholders of the fund. So I am not eliminating that as a possibility.

Now as to a more radical approach. You have to look at Federated in terms of an intermediary model that is just shaking loose of the former troubles and yes, we have some performance things where we have some funds on plans for improvement. But overall of the 139 funds that we have. We have a lot of good solid performing products and we are back to doing the basic blocking and tackling of growing the franchise. I believe that we are in a very good position to be able to double those assets that we have now and get to the 400 million -- 400 billion within the five year time frame. Yes, we will supplement by acquisitions but no, we will not give up our disciplines in doing the acquisitions. We have been in this business a long time. There are ebbs and flows. The word radical usually means go and do something that is out of character. That is probably not what we would do but the word radical also comes from a word that means go to the root. We would go to the roots of Federated which are investment management, world class investment manager, and distribution powerhouse and rely on those features to supply the growth into the future.

But, is it really possible for you to buy a franchise that will reinvigorate the growth at the price point that you guys feel prepared to pay.

I think that those are entirely possible. It is not an accident that we were able to do the Kauffman deal. I agree that we have been more reticent than others but that is because of our confidence in our organic growth methodologies and the franchise and our dislike for dilution. So, yes, it is a worthy debate about quote over paying in order to get something done. But, we remain confident of our disciplines and confident of the underlying business model.

Okay. Fair enough. Just on buybacks. I think I'm right in saying this is the first quarter when you could get back into the buybacks. I was surprised to see it wasn't a bit larger. Anything that went into your thinking on that.

Well, we look at all three things that we are doing. Buybacks, what are the prospects for acquisitions, and what is our dividend make up and I don't think there is anything in particular that was driving that up or down. It is just basically every day we are looking at what are our prospects and that's the amount of shares that we buyback.

Okay. Is there an expected run rate you can share with us. That we should expect.

We run our models and go through and go back and look at the history over time. We have used up much of the net income that we produced since we were public. Ray's going to go through the numbers on that now.

Well,we, historically, if you look at our net income since we've been public, about 600 million of about 1.3 billion. Actually about, 625 or yes, 625 or so, has been used for share repurchase so it has obviously been our biggest use of cash and the activity level has fluctuated pretty dramatically from zero in quarters where we were restricted to millions of shares in other quarters. We don't have a particular plan on any given quarter or period. It is literally looking at it every day and balancing the factors that Tom went through.

Okay. Thanks guys.

Your next question comes from John Foxx with Skinmore Asset Management.

I have a couple of questions. First one, on the settlement on the fees which was $0.01 in the quarter. Can you refresh my memory. Is that just this quarter or does that continue throughout the year.

That will continue throughout the year for five years.

Okay. Thank you. And then, these two questions are related. Can you talk about the marketing and distribution expense which is around 69 million. How should we think about that going forward?

John, on the marketing and distribution, it went up more than usual from the prior quarter, there were some technical things that happened in there, some contractual changes some of which were offset by lower expenses in professional service fees and down in minority interest. About half of the sequential increase was fully offset by decreases in those two line items and most of the rest would have been from normal activity in terms of growth in assets, sales, and new customer relationships. And so the answer to your question would be that that is a new base line from which to do a run rate. Obviously that is an area that has grown over the past, it's been one of our success item, line items that grows with the business but I would not look at this quarter as having anything unusual that is going to get reversed in the near term.

But the offsets in professional and minority interest should also continue?

Yes.

My last question, given Tom's comments earlier and if I say this wrong, I apologize. But kind of the near term operating margins around 34% which is significantly higher than what it was in the quarter and given that marketing and distribution is going to kind of stay at this level or go up based on success, kind of what has to happen to get up to this 34% operating margin level? Thank you.

Well, John a couple of things there, the 31% was low because of some nonrecurring and seasonal items and the severance was as mentioned about 70 basis points. We have about 200 basis points from comp being at its high point in terms of things like payroll taxes and benefits and you have the resetting of incentive comp which of course can vary going forward and then I think importantly the impact in revenue and the number of days. The comp was about 200 basis points and the revenue was about 170 basis points of margin impact. So you have about 4.5% from these things that are either nonrecurring or were at a seasonal high point for Q1 and then going through the other items we had about 200 basis points that were more like technical changes or new things like 123R that are going to stay in there.

Right. Sure.

So I think out of the 440 basis points that's where we are saying that would take us above 34% but some of that doesn't go back down and remember, these are estimates.

Right, I understand. But it is a long way from 31 so I wanted to ask.

Yes.

Thank you.

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

Thank you, I may have missed this but the ultra short product, what was the negative impact on flows this quarter and what are the remaining assets there and then I guess, I am not sure or don't understand the higher incentive cost going up this quarter when the, I guess revenues were more flattish.

During the first quarter, the ultra shorts were about 9 or 10% of the gross sales. Okay. That is one side of it. And then on the net outflows, they were minus just a hair under 200 million. In the fourth quarter they were again about % of the gross and they had outflows, net outflows of about 250 million. So you can see how that trend is going. And then the broader trend which I mentioned was that those funds were up at the $4 billion mark and are now at the $1 billion mark and just recall that the ultra short funds are basically a long cash kind of a play and this is a very logical situation to develop with the ultra short funds.

Jeff, on the comp, in the first quarter of 2005, there was about 1.2 million, that was from the year before basically, under accrual from the year before. So that the number -- we are comparing it to a number that is unofficially low in the '05 period. Then, when we reset and look at the new incentive plans, new incentive plans and how we expect them to happen this year. We have to run and calibrate those to what we see is happening and as Chris goes through the performance and talks about a few of the core funds, equity funds not doing well. Well, there is a lot of other funds that are doing really well and we are going to have to face paying the compensation which we are happy to do when performance is going well. You also heard them mention that the sales have picked up a little bit. So we just have to reflect that and we are happy to reflect that.

Thank you.

[OPERATOR INSTRUCTIONS] Your final question comes from Howard Flinker from Flinker and Company.

That settlement expense of $0.01 a share per quarter. Was that about 1.6 million pretax?

No. It was actually 1 million. It is 4 million per year.

I see. There's no tax benefit to it?

Howard, it's a revenue item.

It is a revenue item, it's not an expense item?

Reduction of revenue.

I see. Okay. And finally, in the investment income of 3.2 million against 1.6 million were there any capital gains in there or was that just interest rates which I don't believe doubled over the year?

Higher cash balances and interest rates and interest rates, the combination of the two it would not have been capital gains.

Your cash balances weren't up. I am looking at December. I wasn't looking at last March. Okay. That's it. Thanks.

Thank you.

If there are no further questions, that concludes our call for today. Thank you for joining us.

This concludes today's conference call and you may now disconnect.