Federated Hermes Inc (FHI) 2006 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Federated Investor second quarter earnings call. [OPERATOR INSTRUCTIONS]

Mr. [Handley], you may begin your conference.

Good morning and welcome. Today we plan a brief presentation before opening up for your questions. Leading today's discussion will be Chris Donahue, Federate CEO, and Tom Donahue, Chief Financial Officer. And also with us [Dennis McCauley] and [Lori Hensler] from the Corporate Finance group.

By way of disclaimer, 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 the actual results to be materially different from any future results implied by such forward looking statements. For a discussion of the risk factors, see the section titled risk factors and cautionary statements in Federated's annual report on form 10K 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. With that I'll turn it over to Chris.

Thank you, [Ray] and good morning. I will start by reviewing Federated business performance in the second quarter before turning the call over to Tom in order to discuss our financials. Q2 was an important quarter for Federated as we announced and worked towards completion of the MDT Advisers transaction which closed on July 14th. We believe that through this acquisition, we have greatly improved our equity product offering in the critical areas. And are excited by the early reaction from our sales force and clients. And we are happy to welcome the talented MDT team to Federated.

Now turning could quickly to Federated's money market business, we continue to see a fair amount of fluctuation in the period end assets, while average assets present a better picture of regular activity. Let me give you an example. Our money market fund assets as taxes were paid dipped to about 140 in April. By late June, they reached 144. By the end of June, the reporting period, they stood at 142. By July 6th, a mere few trading days into the next quarter, they were back at 145. Period end assets decreased from Q1 by about 5 billion while average assets decreased by about 3 billion.

Looking just at the money market funds, assets decreased to about 4 billion, and were back up 2 to 3 billion here in July. And the 2 to 3 billion depends on whether I quote you numbers on Tuesday, Wednesday, or Thursday. Average money market fund assets decreased by about 2 billion in the second quarter. As we've discussed previously, the second quarter typically has this tax related money market fund outflows which I mentioned a little earlier. The point-to-point money-market fund asset decrease during Q2 was concentrated in the capital markets area. And to a lesser extent, the corporate area. Both reported in our Wealth Management and Trust channel.

Capital Markets is comprised largely of institutional brokerage clients and includes some large accounts with money fund balances that tend to fluctuate around period end. We also see heightened interest rate sensitivity in some of these clients here as well as in the corporate channel. The continued rate increases in the corner--in the quarter and the then outlook for further rate increases that heightened during the quarter, resulted in certain customers moving assets to direct securities. Money market fund assets in the Bank Trust segment were nearly unchanged in the quarter while broker dealer assets grew about 5%, reflecting increased retail cash balances in money market products.

The second quarter also included the regular seasonal decrease in separate account money market assets. As we noted last quarter, these assets peak at the end of Q1 due to tax collection and then decline in subsequent quarters. These assets decrease to about 1.3 billion in the second quarter. We continue to expect that a Fed pause and rate increases will be beneficial to our money market business.

However Federate's current view is that the Fed will rate raise rates again in August. In terms of money market share, we are just under 7% as of the end of May. The most recent industry data available. We think of course, as I've mentioned before, that it's better to look at these figures over time given the significant fluctuations that occur over short periods. Going back to 2000, our market share was around 5%. We increased share to over 6% during the Fed easing cycle from '01 to '03 and we increased share again to just over 7% in '05 with the Alliance acquisition coupled with strong organic growth.

We continue to work on functional equivalency efforts for money fund, the CFTC application ended the quarter at about 1.5 billion, down slightly while the old OCC application grew from 25 to nearly 200 million. We are also working through the SEC process to facilitate money market use in both the OCC and for 15C 33, which is broker cash. We also continue to work on new applications in Europe.

Turning to equity. Assets decreased by about $1 billion, or 3% from the prior quarter, but are up 6% from Q2 of '05. Market depreciation accounted for most of the decrease. Equity fund outflows were down from the levels of the last couple of quarters, and have continued to improve here in July. The Federated Market Opportunity Fund, Kaufmann and Kaufmann small cap funds, Strategic Value Fund, and Muni and Stock Advantage Fund each continued to produce solid inflows. Outflows remain concentrated in our core equity and large cap value products.

In the core space, the MDT all cap core fund dramatically improves our positioning in this important discipline. We expect that sales of the MDT funds will further improve our equity sales results. We are encouraged by the reception of our clients to these products. For example, Everett Jones added 6 of the funds to their focus list and we've had other success in expanding distribution into new brokers and firms where the funds were not previously sold.

We continue to have solid net inflows in our SMA products. Net sales were about 108 million, driven by strategic value equity product. We added our first fixed income SMA account and are presenting this product to more clients as we speak. As part of the MDT acquisition, we have combined our SMA Sales Specialist with the MDT wholesalers. We are now better positioned for SMAs with a broader product line of equity and fixed income mandates, as well as improve its distribution opportunities for the MDT products.

On the fixed income side, net redemptions increased from the prior quarter. While we had positive flows, in our total return bond fund and certain other products, outflows increased in government and mortgage backed funds. And ultrashort products continue to have outflows. The three ultra short funds now have just under $1 billion in assets down from a peak of over $4 billion in '03. As of July 25th, our managed assets were approximately 219 billion, including 161 billion in money market, 37 billion in equities, and 21 billion in fixed income. Money market mutual funds have averaged about 144 billion in July. Equity and bond fund outflows are running lower so far in this quarter than in the second quarter. As always, we caution against drawing firm conclusions for the entire quarter from this early data.

Turning to investment performance, equity highlights include very competitive performance in the Market Opportunity Fund, the Muni Stock Advantage Fund, the Capital Income Fund, Strategic Value Fund, Kaufmann small cap, and of course the flagship Kaufmann Fund. The Equity Income Fund continued to show substantially improved performance as well. The MDT all cap core fund finished in the top 35% of its category for the quarter and trailing year. It's three year ranking is top quintile. The industry domestic equity flows have been concentrated in multi cap products and this fund gives us a strong offering in this space.

The MDT balanced fund was in the top quartile for the quarter and top decile for the trailing three years. Other MDT highlights for the second quarter include the mid cap growth fund finishing in the top 2% of its peer group, the large cap growth fund ranking in the top 7%, and the small cap growth fund in the top quintile. Looking at the June 30 [lipor] rankings for Federated's domestic equity funds, 61% of the rated assets are in the first or second quartile funds over the last year. 58% over three years, 68% over five years, and 61% over 10 years. For bond assets, the comparable first and second quartile percentages are 74% on the one year, 80% on the three years, 82% on the five years, and 65% for the 10 years.

Regarding distribution in the Wealth and Trust market, we added two new institutional cash management customers with initial funding of about 45 million. We also saw growth in the equity managed account product with assets up 4% in the quarter and up 13% year-to-date. In the broker dealer channel, distribution of the managed account equity product continued to increase. Assets here grew 8%in the quarter to over 1.2 billion, and are 22% year-to-date.

In the Jones organization, our sales remain weighted towards Kaufmann market opportunity and muni stock advantage funds. Our market share of fund sales has been around 3% after running around 2% for 2005.

In the global institutional channel, we have a couple of small institutional account wins in the 10 to 35 million range with planned additional funding for these accounts. We continue to see growth from our smaller 401K program as well. We are also broadening our offshore product line this year adding three equity funds to our present mix of six money market and fixed income funds, with about $6 billion in assets. Finally, we continue to see interest on the M&A front and continue to have active discussions for both consolidation and center of acquisition opportunities. At this point, I would turn it over to Tom to discuss the financials. Thank you, Chris. For the quarter, revenues increased 9% compared to Q2 2005 and were down 1% from the prior quarter. This 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 partially offset these increases. On the expense side, compensation and related increased 4% from Q2 '05 and decreased 10% from the prior quarter. The year-over-year increase was primarily from higher stock based comp expense from the adoption of FAS 123R and from higher outstanding restricted stock awards. The decrease from the prior quarter includes the 2 million severance expense in Q1, the adjustment of could incentive compensation accruals for Q2, and seasonally lower payroll tax expense.

We expect costs and related to run between 45 and 47 million X the MDT acquisition, so of course changes in results will impact incentive compensation. Marketing and distribution expenses increased from Q2 '05 due to the Alliance acquisition and organic money fund growth. Higher equity assets also impacted this line item. Professional service fees increased 12% compared to Q2 '05 due to new cost from the outsourcing of retirement plan record keeping. We have had some offsetting savings and other line items and are still working through the transition of this function. The 11% increase in professional fees from the prior quarter was from the same factor as well as higher legal and compliance costs.

Amortization of deferred sales commissions decreased from the prior quarter due to lower average B share assets. The alliance transaction and other acquisitions drove the year-over-year increase in the amortization of intangible expenses. On the MDT acquisition, we are still working through the intangible asset valuation. Based on current estimates, we expect that the acquisition will be neutral for book earnings for the first year.

Looking at the impact of the acquisition of specific line items, the assets at closing produced a run rate of about 7.5 million per quarter, primarily in advisory fee revenue. On a quarterly basis, we currently expect about 3 million in compensation and related expenses, 2 million in amortization of intangible expense, and 1.1 million in other line items. Lower investment income from using cash for the acquisition reduces non-operating income by about 1.2 million. The reported operating margin for the quarter was 32%. We said last quarter that we were targeting margins to be closer to 34% in the next couple of quarters, subject to market and other variables. The down equity market in Q2 and continued Fed tightening and the MDT deal make this a difficult target.

On the balance sheet, cash and short term investments were 191 million at the end of Q2. In July, we used 102 million for the up front payment to acquire MDT and will pay an additional 8 million in the first half of 2007 to complete the acquisition. Then the first potential contingent payment is going to be in Q3 2007. During the second quarter, we repurchased 2.5 million shares leaving 1.8 million shares in our previously approved a program. The Board approved a new 7.5 million share repurchase program to run through 2008, making our total authorized share repurchase amount 9.3 million shares. Restricted stock awards of 456,000 shares were issued at the end of Q2, and will be fully reflected in the third quarter diluted share count. That completes our presentation, and we will now open the conference call up for questions.

Is the operator present?

Yes sir. [OPERATOR INSTRUCTIONS] Your first question is from the line of [Bill Cat] with Buckingham Research.

Okay, thank you. Good morning. A couple of questions. Chris, can you just sort of remind me when you acquired Kaufmann, how long did that take to really ramp their product sales through your distribution channel? It's obviously analogous story, I want to see what kind of lead lag you're talking about.

Well, as you know, we've taken that fund from when we bought it, it was about 3.2 billion, and now it's over 9. So it has almost tripled in the time frame. When we took that found on, we had to create a bunch of classes, which we did, and so the initial offering of that fund did not occur right out of the box. In terms of those other classes. So right now the MDT sales are running higher than the initial burst out of the gate by the Kaufmann fund. [Bill] another way to look at that is the first year they got their contingent payments, the second year they did not get their contingent payment, and the third year they got their contingent payment for the third year and for the second year. And really a lot of that was linked to the market it was obviously a much different environment, buying them in 2001, mid '01, and then having the first years of sales in '02 and '03. Maybe not so different, given the second quarter, but that was -- essentially we were able to sell that fund through some tough markets. A couple of other things, [Bill]. We have a lot more funds here and a more diverse product offering. That was one fund in a small, mid category. So this is a much broader thing, and as Chris said earlier on, we've had pretty good reception.

Okay. I guess that sort of ties in my second question. Your discussion, excluding the noise of the severance and so forth and the seasonality with Social Security, your comment that you reduced incentive compensation just sort of curious how that sort of squares with your competitors who are in many cases having very good organic growth and flows and earnings growth. Is there any kind of potential risk that you might lose a key portfolio manager or analyst given that dynamic that's going on right now?

Well [Bill], the way our programs work, we set them up and think that they are highly competitive in the marketplace. And then we're just looking at the performance, the performance of the Company, the performance of the fund, and matching them up to the pay that's earned in those programs so everybody knows what's going on. And it's across the board, not -- not specific to investment management. It's across the board. The way I looked at that, [Bill], is those programs are designed and work so that the excellent, great superior performers are paid in an excellent, great, superior way. And everybody knows that's how it works. If people make decisions, career decisions, etcetera, it isn't for those reasons it would be for other reasons.

Okay, thank you.

Your next question is from the line of Ken Worthington with J.P. Morgan.

Hi, good morning.

Good morning.

Can you discuss any restructuring within your equities department? What it, if any changes you're making and how this will impact both the investment process and if there are any changes in expenses we should expect?

In terms of the investment department, the addition of MDT is at a very important situation because we get to add a lot of different mandates, a different methodology, but importantly, a good, strong, cohesive, high quality team with excellent results that have been repeatable overtime and over different kinds of markets. Now, that is not to say that -- and we importantly treat this as an area of excellence. So we likened it unto Kaufmann as we've already discussed here this morning. And that adds an important flavor to the overall Federated operation.

Now, on the other funds, we have a lot of other funds that are doing a very excellent job, and we will continue to operate them in the teams that we are working on. We are always looking inside the organization to see if we can improve it, but we are not prepared at this time to talk about, any kinds of wholesale reorganizations etcetera. I think what we are prepared to talk about is the continual effort to get the funds that are on plans for improvement, namely our value equity and our CapEx to follow the line that has been followed by the capital income fund, which was a bottom quartile performer and now has a strong three year, one year, one quarter record and the equity income fund which has come out of the third and fourth quartile and into the first quartile over certain time frames. And so we are continually working on that as best as we can.

Importantly, we remain committed to fundamental and quantitative research in those products. We're not going to just do everything on the [inaudible] style that the MDT has, and that ought to be pretty obvious because of our commitment to the Kaufmann enterprise and to the other funds that are managed out of Pittsburgh that are doing quite well

Okay, great. Thank you very much.

Your next question is from the line of Daniel Goldberg with Bear Stearns.

Good morning.

Good morning.

Chris, I think you mentioned that of as of July 25th, assets were at 219 billion. I'm guessing 6 to 7 billion are from the MDT acquisition and then you have I guess about 2 billion remaining. Anyway to break that down between market verses flows. I guess you mentioned they're still in that outflows on equity and fixed income but if there's any more color there?

Daniel, it's [Ray] the--on terms of flows, as we mentioned on the money market, fund side, we've had inflows. So that's been anywhere from 2 to 3 billion, depending on whatever day you look at. And that's really been across channels though weighted toward the capital markets and corporate channel, which again reflects the fluctuation we tend to get around exiting a quarter, and then entering a quarter. In terms of flows, we mentioned both the equity and the fixed income being improved. We would not point that at any particular channel. I think that's -- the past trends would be reflective, and it's only a couple weeks of data.

Okay, thanks. In terms of, I guess, Tom's comments where you have been targeting 34% margin and then I think his comment was it might be difficult to reach that in the current environment, is that a changing guidance or is that just kind of highlighting where we are at this point?

Well, I think it's kind of highlighting where we are. I mean when you lose equity assets based on the last few months, and you have the Fed, still tightening, it's just difficult to get there.

Okay. And then just lastly, in terms of Capital Management, you obviously have the new $7.5 million buyback program through 2008. And then you also talk about doing additional potential bulk on acquisitions. Can you just talk about maybe the priority there in terms of cash usage which you'd be more interested and aggressively buying back stock up front or would consolidation be more interesting?

Well, the A use of cash is for purchases in the consolidation or area of excellence. And of those, you can have a reasonable debate as to which one is the better. The less risk of the consolidation, the more growth into the future of the area of excellence. The area of excellence are less frequent and so we work aggressively on both of those. That is the A use of cash. We remain committed to the dividend, as you can tell, and so that is very, very important, and we're very very happy with where we are in the dividend, and we like buying the stock back and remain active when we're not put on the sidelines in terms of buying it back. The but if you ask us to rate them, we would rate the acquisitions as the A uses of cash.

And is there any particular level where you get more aggressive in the terms of your share price in buying back stock?

Yes of course there is, but I'm not going to tell you that.

Okay, thought I'd ask. Thank you.

Your next question is from the line of Cynthia Mayer with Merrill Lynch.

Hi, good morning.

Good morning, Cynthia.

Just a couple of questions. One is as you go out on MDT, should we expect a bump in advertising? In any way are you going to-- would that feed into that line are just the lines that you give us?

Well, we're not looking at any outside expenses there. Where it fits into the financials, I'll let Tom and Ray talk about, but we don't have any, big hairy millions of dollars marketing programs that aren't already baked in the cake.

Fine, okay. Go ahead.

I was say, we're just -- the marketing dollars are spent on our wholesalers going out around and taking the product to our customers.

Right. Within the normal structure. Okay. Also you recently made a payment to Alliance, as I understand it, for the money market assets. I'm just wondering if you could talk a little about how the retention went and were that payment came out in terms of the range?

I think the payment was a full, full payment. And the max that they could get. So we were pretty satisfied with the retention level and so were they. Actually, I mean the payment level could fluctuate. It could go even higher if there were more assets. But it clearly reflected growth. I mean we had guided to, based on -- we had guided they're expecting out your payments in the $10 million range, and that's about what occurred. But that was clearly based on both retention and growth. And again with, we've talked -- if you look at our money market business, the growth over the last year and a half has been in the retail channel, which for us is through broker dealer, not direct retail, and so this acquisition improved our position in that channel and was part of that growth.

Okay and just looking at the change in assets, by market it looked like the biggest decrease was in the Wealth Management and Trust. Is there anything special going on there? Is that just where most of the money markets was?

As you recall the picture of some of our charts, we had a category called Bank Capital Markets, which I referred to as Capital Markets, which is institutional brokerage accounts. And that is now combined with Bank Trust. And so the best way to look at that and the best way to look at what's been going is as [Ray] just kind of hinted and as I tried to say in my remarks, the Bank Trust business is basically flat in the quarter. The broker dealer business was up and then the capital markets business was down the 5 billion. And because that's included Wealth Management and Trust, that takes that number down. So that's why we were so focused on the segmenting of those numbers.

Right. That's the interest rate sensitive part?

That is correct.

Okay, great. And just-- I'm just curious, since you said that the Federated view is that the Fed is going to raise rates one more, what's the Federated--what's Federated's view on when the Fed is going to stop?

I have had sold to me the same view almost for, I don't how long, a very long time, which is well, one more and then maybe a 50% shot on the next one after that. And they've been rolling this ahead for so long that -- I think eventually they will pause, but that's basically the House view.

Great. Thanks a lot.

Your next question is from the line of Robert Lee with KBW.

Thanks, good morning everyone.

Good morning, Rob.

A couple of quick questions. The first one is of your competitors suggested earlier in the week that in the liquidity business, this is probably mainly outside the U.S., but suggested that there were some competitors out there, effectively cutting pricing and trying to take some market share. Are you seeing much of that?

One answer I would give you to that, Rob, is that since 1970's, I don't think there's ever been two or three quarters in a row when somebody hasn't tried that stunt. So this is a constant thing where people get the idea that if they reduce the number of basis points, they can grab up some assets. And so do we experience it? Yes. Was there some of that going on in the quarter? Yes. Your reference to the international, I just can't -- I don't know what that's about. So I'm only talking in terms of the domestic side on that point. But to us, it is a constant 30 year effort of others to come in at different pricing at different times.

Okay. And the other two questions I have is, first one can you give us some color around MDT's, how their business has held up the last month or two with the rocky market? Have you seen much change in direction there?

And the second question is in the past year, you've had a change and CIO, change in individual running your marketing operations. Are you happy with where you are in Senior Management and particularly on the marketing side? I mean, do you see any changes taking place there that you think are going to help in restructuring that you think may help sales trends going forward?

I'll take the last part and [Ray] might be able to give you some color on the MDT assets in the short timeframe. The but we are very happy with the team that we have put together. And don't forget that the leadership there in the form of Tom Territ has only been at Federated for 23 years. And knows everybody, has the respect of everybody, and worked for me before when we were doing some skunk works for [Edna] back in the mid '80s. And I think his review of things, his ideas, the fresh approach, we're looking forward with the combination of the MDT for some strong sales performance. This is an important thing for Federated. In order to get these flows back right, not just in terms of the business, but also in terms of the valuation. And so we are optimistic about it.

And the same on -- on the investment management side. John Fisher has settled into that position. Again, he's been with the Company since the [inaudible] contrary, and I think he's gained a lot of respect, brought the entire organization closer together, and has a lot of good ideas the terms of things to do along the lines that I mentioned earlier in the call. So we're very happy with the -- with the Management set up that we have, and that's one of the reasons we're optimistic about buying the stock. [Ray's] going to comment a little on the numbers. Or Tom. Before [Ray] goes, on MDT, when we announced the deal in May, they had about 7 billion, and when we closed, it was down to 6.7 and that was the market, hitting their products kind of across the board. Since we bought them the assets are up and that's a slight, positive flows, and equity improvement since we bought them. The performance of the funds has maintained their positive position. And [Ray's] got any more details on that?

No, just in the very short period that we've begun in sales, that we've seen a pickup in the rate of sales, but it's just awful early to attach any numbers or any more color to that.

Okay now just to--

That's on the funds site, by the way, which is we're focused today with that.

Okay, and then just a geography question. Once you consolidated, are you going to change any of the reporting since I guess most of the and MDT assets are in separate accounts if I remember correctly. Is that going to be broken out in more detail at all?

As I mentioned on the call, Rob, we already did what we're going to do, which was we consolidated the SMA sales efforts at MDT and Federated under the leadership of [Mike Baford] who had been the sales individual at MDT. And so we have consolidated that, and that has already occurred. In terms of the investment side, the reporting is to John Fisher, and the organization, the team, stays intact and we're not going to change that.

I'm sorry, I meant more just on a reporting basis so that we can actually see the flows and [decimays] and what not.

Rob, I think you should look for us to break out the SMA flows. We've been referring to them anecdotally, but not dropping them into the chart. So that's something you can look for.

And just one last question you commented on the capital priorities, but right now I guess post MDT payment cash is probably running is at -- I would assume at a lower level than it's been -- where you normally kept it. Do you feel a short term need to build cash levels back up somewhat or are you pretty comfortable running around current levels?

Well, we're comfortable were we are. We can always borrow money. There is plenty of money available at very good terms so that we don't feel constrained or limited in our financial flexibility right now.

Okay, great. Thank you.

Your next question is from the line of Michael Hecht with Banc of America.

Hi, good morning, guys.

Good morning.

I just want to follow up, Chris, on your comments earlier. I was just wondering if we could get a little more color on some of the money fund applications you kind of alluded to in Europe, and just possible to help us kind of size the markets there and just some of your big competitors are?

In terms of the market size, the 15C 33 is roughly $100 billion market. And as I mentioned, well now it's going on several years, of attempting to get this organized for money funds. And we have several clients who are interested in doing this, and we continue our efforts with our friends at the Securities and Exchange Commission. But that's about the size of it. There's nobody in a sense competing because it's not eligible yet. But I assume the regular crowd will trickle in when that gets made available.

On the OCC, that's about a $50 billion market, and the CFTC is about a $50 billion market as well. And that's roughly how we size them, and who the competitors are right there, I don't have a good sense of any of the particular names. I would assume it's the regular crowd shuffles in.

Okay. And some of the European fund applications you mentioned?

The European things, basically when they're shaking up things on [Basil 2] and figuring out how to rate and count money market funds, what kind of discounts, what kind of capital taxes to put on them, etcetera, not taxes, but how they will discount them in terms of counting them as capital, we think there are some very interesting opportunities and partnerships available there that we're working on. I'm not at this point prepared to give you names and numbers, but we think there are some very legitimate opportunities for us across the pond.

Okay, great. I just want to follow up also on the consolidation question. But it sounds like you're still looking at doing roll ups and potential additional centers of investment excellences. Just wonder if you kind of review for us where you guys think of as your strategic apps. and what you'd like to add in a perfect world. And perhaps talk a little bit about the competitive environment and bidding for assets today.

Well the--on the last question, the bidding for assets, it has-- the way I, we look at that is yes, there's bidding for assets. Okay, that's fine. But who are you? Who are they? And what do people want to accomplish? The reason we were able to successfully do a transaction with MDT is because they had the unique situation of a financial partner who wanted out, a great team that wanted in and wanted the funds to grow. We had a certain need and enthusiasm for their product array, both in terms of the space it occupied and the methodology that they used to get there. So it was a very, very good match.

All of a sudden, the competitive things, everybody can figure out the numbers and knows pretty much where you're going to be. But then it's these other things where we believe we are a warm and loving home for those that we think we can sell, which helps both the person that is joining the family and the family as a whole. And so this is the extra added advantage that we bring to the table. And so even though it is competitive, those things where we think we can really advance the ball, as I've discussed, we think we have a pretty good intangible advantage.

In terms of the pipeline, there are still many opportunities out there, and if you--you say okay, where are we looking? Where would be an ideal perfect 100% thing? Well, if you look at the funds where we don't have the kinds of products that we can sell or that, where were suffering some meaningful redemptions, those are areas where we would be open to looking for other types of acquisitions, perhaps international, perhaps value equity. These would be areas that would be fine. But we're also quite confident in the methodologies we have ourselves. And so we would do additive things, or different kinds of products in those spaces. But that would be where we would be inclined to focus in a perfect world.

Okay, great. Thanks. Just to follow up on MDT, and I know you guys have said kind of neutral EPS impact in the near term, but I just kind of wanted get a sense. I mean obviously, it's been a pretty high growth asset the last years, even without the benefits of Federated's distribution. I'm assuming you guys assume little growth in our modeling assumptions kind of going forward there?

We do assume growth in our assumptions there that's true. Remember that their growth was occasioned overwhelmingly in the SMA space, and our growth is occasioned overwhelmingly in the mutual fund space. They have $300 million worth of mutual fund assets and those are the ones that we want to take on to the billions and billions.

Okay. And then just last question, any color on the revenue yields? It seemed to slip a little bit sequentially given the mix I guess with money fund assets kind of being down a little bit, just wondering what drove that this quarter?

Obviously during the quarter the equity went down as well and I think the change was fairly small. So I don't know that we'd have any more real color to give you on that.

That's fair enough, okay great. Thanks, guys.

Your next question is from the line of [John Foxx] with [Synmore Asset Management].

Yes,my question was answered. Thank you.

Your next question is from the line of Niamh Alexander with CIBC.

Hi, thanks for taking my question. Just to get back to MDT, I'm sorry to beat at this point. But just Ken's questionary regarded maybe expense savings and I got the impression your response was related primarily to front office. Just wondering if there's any opportunities for cost savings on the back office on the operations? Were you have two SMA platforms now and maybe there's an opportunity to whittle that down one. Thanks.

We're not looking at MDT as an expense saving proposition at all. We are looking through with what we do with our smaller back office situation, and what they do with theirs, but we don't do that as an expense saving item at all.

Okay, that's helpful. Thank you. Just to clarify, you would use borrowed cash to repurchase shares?

Within a band with, that would not be a-- something we would shy away from. If we thought the value of the stock was appropriate.

Okay. That's helpful. Thank you very much.

Your next question is from the line of Mike Carrier with UBS . Mike, your line is open.

Hello?

Yes, Mike.

Okay, thanks a lot. Just a quick question on getting back to acquisition. When you look kind of overtime at the acquisitions that you've done, and I guess more recently, like the Alliance deal, MDT, they're basically neutral to earnings. They put pressure on the pre-tax margin. And eventually, we should see growth and margin improvement. I guess I'm just wondering at some point when you look at the margin, and I know near term you got pressure because of the markets and with the Fed and no flows on them on the money market side. But at some point with these multiple acquisitions, do you take a kind of the clean look at the expense base, the cost structure, and, in a kind of clean look and see if there's areas for like efficiencies or improvements, to benefit the margin?

Mike if you go back and look at acquisitions from five years ago, and three years ago and seven years ago, and we try to pay attention as to what's going on there. Those things have been very good transactions for us. In terms of a consolidation place, basically when we're doing those, we're not taking on management team or really keeping people and so any cost that we pick up are related to handling the shareholders and selling and distributing the products. And so once you get rid of the amortization expenses, you have a pretty good situation here. Particularly if what we are able to do is grow them, and the alliance, as I mentioned earlier, we've been able to grow that. And obviously at Kaufmann we've been able to grow that and those things work out very well on a margin basis for us.

Mike, I would just add, the Alliance acquisition was a bit of an anomaly in that the structure of those products results in a good bit most of the revenue being paid back through given the product structure they're designed for the broker intermediary. And so that was unusual in its margin effect. MDT is more a comment on coming out of the gate with it. Clearly that-- our expectations there would be that it will grow and that it will eventually be added to margins. But in the near term, it doesn't help.

Okay, that's helpful thanks.

Your question is from the line of Howard Flinker with Flinker & Company.

Hi. I've got two questions. When he referred to some people trying to cut a few basis points to gain some business, were you focusing more on the money market side or the equity side?

The money market side. That was the spirit of the question in reference to other calls that have gone in the last week.

I wasn't clear.

On the domestic money market fund side.

Okay. And the second question relates to both your marketing and distribution expense and your advertising and promotional expense. One went up a lot and one went down a lot. Should we read anything into that?

The one that went up a lot because of the Alliance transaction, the marketing distribution costs.

And the ads and the promos?

Yes I don't view that that's changed a lot. That we're down, 600,000 or something. It's kind of a seasonal thing is how we would look at that.

Oh. Well, last year you have the same season. You have June in both years.

Last year was about 4.3 million I think.

In the same season. And your assets are growing. So I was wondering if you think that you can gain assets while restraining your ads and promos?

The way to look at that, that's not really driven by a discretionary ad budget in either one of those two periods. We have not done really any meaningful media spend in either of those periods. More a reflection of using literature, having marketing and promotional type of events, and we would not-- those have not been reduced there's -- one thing we did do was to get some efficiencies on the cost of some of that literature, and I think that's probably what you're seeing.

Probably that's significant.

Right.

Okay, thanks.

You have no further questions at this time.

That concludes our call. Thank you for joining us.

This concludes today's conference.