Federated Hermes Inc (FHI) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Federated Investors Incorporated fourth-quarter 2006 earnings conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Ray Hanley, President of Federated Investors Management Company. Thank you, Mr. Hanley, you may begin.

Good morning and welcome.

Today, we've planned a brief presentation before getting to your questions. Leading today's discussion will be Chris Donahue, Federated's CEO, Tom Donahue, Chief Financial Officer. And with us today include Dennis McCauley and Lori Hensler from the Corporate Finance Group.

In regard to forward-looking statements, 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 and on Form 10-Q for the year ended December 31, 2005, 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 will turn it over to Chris.

Thank you, Ray. Good morning. I will begin by reviewing Federated's business performance in the fourth quarter before turning the call over to Tom to discuss our financials.

Starting with the cash business, money market mutual fund assets grew by more than 8 billion from the prior quarter and have grown another 3 billion here in January. The Q4 growth was once again largely from the broker/dealer retail channel, though trust, capital markets and corporate increased as well.

Cash separate accounts added another 2.5 billion in assets, reflecting both seasonality and growth in our enhanced cash product. Cash continues to be a favorite investment option, and we're benefiting from the breadth of our product line and the scope of our distribution effort, particularly from our leading position for cash management products offered as sweep vehicles by broker/dealers.

On the institutional side, the same interest rate and yield situation that we discussed last quarter remains in place. The net yields on our institutional prime funds are a few basis points below the overnight rates. With the money fund portion of the yield curve essentially flat, we expect this situation to persist until either the curve steepens or the Fed begins to ease rates.

In terms of market share, we are at about 6.5% as of the end of the year. As in Q3, during Q4, we gained market share, measured against the ICI's retail money market data, and lost institutional share. We believe that the same money market competitive situation that we discussed last quarter remains in effect. On the institutional side, certain competitors have picked up assets, largely by waving fees or offering lower-cost products. We have experienced this competition consistently over our (technical difficulty) history and have found that these assets do not tend to have persistency. The impact of these lower fees is meaningful at this point on the yield curve for certain more interest-rate-sensitive investors, since the lower fees enable some funds to offer net yields greater than the overnight rate.

As we have discussed before, we think it's better to look at market share over time, given the significant fluctuations that occur over shorter periods. Going back to 2000, our share was around 5%. We increased share to approximately 6% during the Fed easing cycle from '01 to '03. We increased our share again to just over 7% in '05 from the Alliance acquisition and organic growth during that period. We expect that we will continue to gain share over time.

We continue to work on functional equivalency for money funds. The CFTC application ended the quarter at about 1.3 billion, while the OCC stands at about 260 million. We have recently begun legislative efforts to further the [15C33] effort, which is for broker cash.

We received our first trade in January in the new cash initiative in Europe we discussed last quarter called Cash Funds International, or CFI. This client was over $100 million in size. For this product, we have partnered with BNP Paribas Asset Management and Henderson Global Investors to launch a multi-currency cash management product designed for institutional customers. With regulatory changes such as Basel II, we expect to see opportunities for Money Market Fund growth overseas.

Turning to equities, assets have increased by about 2.6 billion from the prior quarter. The growth came from market appreciation and from positive flows in separate accounts, offset by net outflows in Mutual Funds. Equity Mutual Fund outflows increased from the prior quarter. While we continue to build a strong group of income-oriented equity products and to build flows in the MDT Mutual Funds, our large-cap blend and large-cap Value Funds continue to show negative outflows despite recent performance improvement. The contrarian Market Opportunity Fund performed as expected in an up-market quarter and reversed from solid inflows in Q2 and Q3 to net outflows in Q4. Despite continued outstanding performance, the Kaufmann Fund showed modest net outflows in Q4, consistent with industry results for the category of domestic growth funds, while on the other hand the Kaufmann Small Cap Fund continued to produce inflows in roughly an offsetting amount to its older and larger sibling.

Reflecting the recent pattern of lumpy outflows in the beginning of the quarter, net flows in our actively managed equity funds ran at a higher rate for the first three weeks of January compared to Q4. However, the most recent flow data in January showed improvement from the beginning period data.

Assets in Federated MDT Equity Mutual Funds grew 28% in the quarter and are now approaching 500 million. We also had success with MDT in the institutional area, winning five new accounts with initial funding of about 116 million expected by the end of Q1. MDT total managed assets are now more than $1 billion higher than at acquisition, meaning they stand at 7.8 billion as of January 24, versus 6.7 billion at acquisition in mid-July. Recently, MDT's investment and management team recommended that the SMA strategies be reopened in their wire house programs and that additional growth in SMAs would not impact the capacity for growing Mutual Funds and institutional accounts in the near future. We agreed, and we anticipate opening soon. We also continued to expand distribution and produce solid net inflows in our strategic value equity SMA products. We recently announced the addition of this strategy to Wachovia's Master's Program, one of the top SMA products in the industry. Overall, equity separate accounts produced 154 million in net inflows in the fourth quarter.

Turning to the fixed-income side, net redemptions decreased from the prior quarter. For the first time in many quarters, flows in ultrashort products were slightly positive. We also had positive flows in our total return and total return Government Bond Funds, and our fixed-income performance remains strong in most products.

As of January 24, our managed assets were approximately $243 billion, an all-time high for Federated. This includes 179 billion in money markets, 41 billion in equities, and 23 billion in fixed-income. Money Market Mutual Funds have averaged about 157 billion in January.

Turning to investment performance, Q4 was another solid quarter for most of Federated's actively managed Equity Funds. Two-thirds of these funds were in the first or second quartile for the quarter; five of these funds were in the top decile or of their Lipper peer group. Highlights include very competitive performance in the Strategic Value Fund, Capital Appreciation Fund, Federated Stock Trust, American Leaders Fund, and the Kaufmann Fund.

On the fixed-income side and using the lowest share class, the lowest expense share class, 42% of the Funds were in the top quartile in the fourth quarter and 50% are top quartile for the full year, including our Total Return Bond Fund and our Strategic Income Fund.

Looking at the 12-31 Lipper rankings for Federated's Domestic Equity Funds, two-thirds of the rated assets are in the first or second-quartile Funds over the last year. And over three years, five years and ten years, the number hovers around 60%. For Bond Fund assets, the comparable first and second-quartile percentages are 80% for one and three years, 86% for five years, and 73 years for ten years.

Regarding distribution, in the Wealth Management and Trust Market, we added four new institutional cash management customers with initial assets of $218 million. We also saw solid growth in the equity managed account product, with assets up 17% in the quarter and up 41% for the year to over 740 million.

In the broker/dealer channel, distribution of the SMA equity products continued to increase. Assets grew 10% in the quarter to 8.8 billion and were up 85% for the full year, excluding the MDT acquisition.

Within Edward Jones, our Money Market Fund effort remains a strong, integral part of the Jones system. Even though our net sales were negatively impacted by the change from preferred to focused lists, fluctuating assets were up during the quarter. We have increased our distribution resources, calling on Jones' financial consultants, and continue to develop new business opportunities at Jones. We believe our market share of Jones' total Fund sales remained about 2%. We are also the leading seller among the focused firms and believe our sales are higher than a couple of the preferred firms.

In the global institutional channel, we won several institutional accounts in Q4, including the five MDT equity accounts I mentioned and two additional fixed-income [with]. Total assets funded from these wins will be about 250 million, roughly half funded in Q4 and half expected in Q1. We continue to experience elevated RFP activity and to reach more finals presentations for institutional accounts opportunities since our MDT acquisition.

Finally, we of course remain interested in additional acquisition opportunities and continue to have discussions for both consolidation and Center of Excellence deals.

Tom?

Thank you, Chris.

For the fourth quarter, revenues increased about 9% compared to Q4, 2005 and 6% from the prior quarter. The increases were due mainly to higher money market and higher equity assets, partially offset by lower revenue from lower fixed-income assets. In addition, the MDT acquisition impacted year-over-year totals.

On the expense side, the increase, comp and related expense from the prior quarter was mainly from incentive compensation accruals. For the full year, the increase was primarily from MDT, higher incentive compensation, severance expense, higher stock-based compensation from the adoption of FAS 123R, and from higher outstanding restricted stock awards.

Marketing and distribution expense increased from the prior quarter, due largely to money market fund growth, in particular in the broker/dealer channel, where products are structured to pay distribution and service fees. The Q4 expense included a non-recurring, $1.5 million credit or about $0.01 net per share from squaring up estimates made earlier in the year when certain distribution contracts were changed.

Professional service fee expense decreased from the prior quarter, which included $2.3 million related to the 2005 SEC settlement distribution process. Cost remained elevated here due to ongoing civil litigation and the ongoing process to distribute the SEC settlement. The total level of these cost remain undetermined, as does related insurance reimbursements.

In the other expense line item, the Q4 increase was due primarily to increases in certain fund-related expense assumption assumed by Federated and some other miscellaneous items. Approximately $750,000 of these costs are non-recurring.

The operating margin for the quarter was 32.6% and was 31.5% for the full year. We look to grow margins if markets remain favorable, money market assets continue to grow, and equity and bond products net sales improve.

I want to note that there are a number of headwinds that impact Q1 earnings compared to Q4. Due to a shorter quarter, revenues are seasonally lower. With 90 days in Q1 compared to 92 days in Q4, and based on Q4's average daily revenue of $2.8 million, revenue in Q1 would be $5.6 million lower, all else being equal. Marketing and distribution expense is also impacted by fewer days, though these expenses would be about $1.5 million less. Of course, comp and related expenses are not based on the number of days and tend to increase in Q1 due to seasonal factors like payroll taxes and benefit costs, as well as from the resetting of incentive compensation accruals.

The Q4 tax rate was 36.2%, lower than the full-year rate of 37.3. The lower rate was due to a number of factors, including our annual update of certain the state tax apportionment factors in Q4 and a reduction of certain valuation allowances related to capital loss carryforwards and state tax net operating loss carryforwards. The 2007 tax rate is currently estimated at 37 to 38%.

On the balance sheet, cash and short-term investments were 135 million at the end of the year. We recently paid 8 million to complete the upfront portion of the MDT acquisition. We are expecting to make an additional acquisition-related payment to Alliance in the second quarter of approximately 13 million. The first potential contingent payment for MDT is in the third quarter of 2007, and it can be up to $43 million.

That concludes our presentation. We would now like to open the call up for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Niamh Alexander, CIBC.

Thanks so much. Good quarter. I just had a quick question on the compensation first. I'm just wondering how to think about this going forward, now that MDT is kind of fully consolidated and maybe some merit increases in next year. Is that any kind of guidance you can give us here as to how to think about this?

Yes, it's Ray. Obviously, (indiscernible) the second half of the year, MDT would have been fairly fully reflected. It came in in mid-July. The hard part of course is resetting the comp accruals, so it's hard for us to giving a specific dollar guidance, but I think if you looked at the last half of the year, it would give you a starting point to--until we get a little further along in our process here.

Okay, that's fair. Then just another question on the money market business--I'm hearing more about money market portals in the institutional side of the business being an opportunity. Is that something that's affected your flow at all or maybe an opportunity for you outside of the U.S.?

We will divide this into two parts. One is international and one domestic. The existence of portals domestically has been around for many, many, many years and we participate in most if not all of the portals. It changes how the business works, but it doesn't change the fact that an underlying client wants a Money Market Fund for their cash management business. So it changes things around and has over the last several years done that.

On the international side, that's one of the reasons we put together our Cash Funds International arrangement, was so that we could better participate in a cash management effort, because we were discovering, as were our two partners, that a lot of the larger clients wanted to be able to do their cash transactions in any currency with one player. None of the three of us had sufficient assets in the others' category in order to make that possible, and so that's why we put that arrangement together.

Okay, that's helpful. Just to refresh, in your commentary, you mentioned that you are already seeing some better flows January to date in the international business. Is that fair?

Yes. Yes, we just seen--we've seen the beginning of people starting to use the product. Obviously, with money market assets, flows come in a short-term but we are seeing more interest in the product and more activity with our partners.

Okay, that's helpful. I will get back in the queue. Thanks.

Cynthia Mayer, Merrill Lynch.

Good morning. I'm wondering if you can give a little more color on the reopening of the MDT SMA accounts. I didn't quite catch that and I'm not sure what the potential is there. What kinds of flows have those had in the past?

They've had pretty significant flows, because it took them about three or four years to grow the assets up to around 6.5 billion from a base of about 30 million. So, the potential, though, is there are constraints on the asset level and on the operations side of running the portfolios. But really, the max dollar amount that we're looking to be available there is about 2.5 billion. What's the time frame for when that would happen? I just do not know. We think it will be well-received. The product and their management style has been well-received in the programs that they've been on, and so we are looking for this to work out pretty well.

Cynthia, another important point is that we see it as being additive to the Mutual Fund effort. It keeps the profile of the products high in those wire house programs. That's obviously very important, and so we are confident that reopening will help on the Fund side as well.

Okay. Moving over to Kaufmann, are you expecting any bump in comp this year due to Kaufmann as the noncompetes roll off?

Well, I wouldn't relate it to the noncompetes rolling off; they rolled off--I'm sorry. Non-competes do roll off this year.

Yes, the contracts ended, the employment contracts ended but there was a noncompete that carried to this year.

We wouldn't review it relating to the noncompete at all, but we would review it related to their performance and the products that they manage, and the incentive comp. If they do well, they get paid more, so we expect them to continue to do well and continue to bump-up their comp.

Okay. What's the outlook for any more CDOs?

We think it's favorable. Like closed-end funds, they are hard to predict, when you have everything cone together, acquiring the collateral and making sure that the market conditions are right. So timing is hard to predict but we would expect to do at least one more during 2007.

But none planned this quarter?

No. We're working on them but it's unlikely anything would be launched this quarter.

Okay. Thanks a lot.

Prashant Bhatia, Citigroup.

You talked about--you know, obviously, the money market business is competitive, but I'm just wondering. Now ,that two large fixed-income managers own big pools of money market assets, do you think that going forward changes the competitive dynamic and do you think it might be better or worse from your point of view?

It changes it slightly, but not in a meaningful way. It isn't as if we haven't had big players with big competition on the Money Market Fund side for a long time, so you get new ones and different ones. That's all fine.

What remains is that our position in that industry is still very, very strong. Our ability to compete, to produce the kinds of performance that is necessary to grow in this business remains strong. The relationships with the clients remain strong and our focus on the underlying business, which is overwhelmingly a cash management oriented business, remains a very, very important strength of the Company. So yes, they will be there and I guess they will have things to say and things to do into the future, but it's not like we haven't seen this act before.

Okay, okay, that's fair enough. In terms of the Jones platform where you talked about being moved from I guess the top tier to the second tier, when do you get a shot at moving back up to the top tier? How does that process work?

They have an internal process of review that they currently have on an annual basis, and they have a group of people who analyze the funds and analyze the Jones system and make those determinations. So every time that comes up, we will petition to go back in.

Okay. When is it, when is it up for review? I guess when is the next--?

I don't know what exactly their cycle is. Obviously last year, their cycle was that I think it was in August when we received a notification about the results of the effort, so I don't know exactly what their time frame is.

Okay. Then just finally on the ultrashorts, I guess, historically, the last couple of years has been a source of outflows but we're starting to see some stability there. I guess, looking out into '07, is it fair to say that should probably be probably more flat and if we get some steeping in the curve, we could see some meaningful inflows there? So is the worst kind of behind you there?

Well, it's certain that--when you say the worst, in other words, the speakers) large unwinding of that trade. It's not a bad thing when people put money with you and there in the marketplace (indiscernible) it should go out and it goes out. But you know, I think we've had something well in excess of $3 billion worth of redemptions in that space, and so obviously that redemption effort is behind us; that is correct.

Into the future, I think you've understood the trade pretty well, so you know, you can judge how people will look at longer-term use of cash.

Okay, great. Thank you. That's helpful.

Marc Irizarry, Goldman Sachs.

It's actually Marc Irizarry; that's close enough. How are you guys doing? Great quarter.

On the competitive landscape, I just wanted to drill down a little more. Have you given any thought to kind of more aggressively competing in some of these kind of waving of fees, if you will? Then also, in which channels are you seeing the greatest competitive pressures kind of on a co-forward basis?

Well, your question was do we consider this concept of waving fees? Well, I guess I have the philosophy that, considering it is not the same as committing it, Jimmy Carter to the contrary notwithstanding. So yes, we talk about it but we don't do it, and we haven't done it for over a quarter of a century, so we are unlikely to do it into the future. The reason is it's pretty simple to look at our book of business, both in terms of the size of the assets and the size of the funds, and therefore the cost of the waiver, and then look at the underlying clients and the nature of the relationship you have and why they have the money with us, and we are not willing to alter the relationship economically we have with our clients in order to attract these more interest-rate-sensitive clients at a given time in the cycle. We realize that, in terms of that particular time, that costs us a certain small percentage, tenths of points of market share, but I would ask you to consider, even though the numbers are not done, market share of revenues in the business. We tend to do pretty well on that.

Now the next question was where do you see that competition? Well, the competition there is in the corporate area, the securities lending business and areas like that where basically you have a lot of loving people who I'm sure are going to have a high spot in heaven but they would trade their mother and everybody else for a couple of basis points. You know, those are not the people that we go after aggressively. We are happy to have them when the time is right but we're not going to alter the business in order to get there. That's where the most competition comes in.

Great. I may have missed this but what kind of tax rate should we assume going forward?

We said 37 to 38% for '07.

Okay, great. Thanks.

Ken Worthington, JPMorgan.

Good morning. On the CFTC cash equivalent opportunity, you're at 1.3 billion; that's great. It seems like that opportunity is much, much larger. Are there any headwinds that you're facing in terms of trying to build up business, either given where we are in the interest rate cycle or is there some competing products? It seems like there's so much money going into futures, I think that product would be growing like a weed.

Okay, some of the same dynamics that Chris was running through on the channels come into play in CFTC so to some degree, the relative yield is important. I would say that that's impacted the growth in CFTC.

I do share your enthusiasm for thinking it ought to grow like a weed. The way we've looked at this overall piece of the business, it is roughly a $50 billion amount of cash floating around. And so, we look like--we believe that we should be getting more of it as well. But as Ray said, it's really tough to push that string uphill given the current rate environment and the kinds of comments we've made on institutional rate situation right now.

Okay, great, thank you. Then on the Kaufmann Fund, the big fund, the performance top decile again almost across the board, yet sales are kind of anemic. Is there any explanation for the weak sales or you know, I guess maybe are there any programs that you guys plan to use to jump start growth here? I guess for awhile, it's just the K shares that were seeing redemptions, but now we're seeing some small redemptions in all the share classes. What turns that around?

Well, first of all, the use of the word "anemic" on sales in Kaufmann we wouldn't exactly share. The fact that the flows went negative, okay, then that we could have pejorative words for that. But the sales remain strong, and all that we can do is look at the overall category of what's going on in the industry, which is much, much worse and much, much more severe in terms of both lower sales and higher redemptions in that space in the industry. So here you have the Kaufmann Fund with the great record you've talked about, who is--if you looked at market share of large--of growth funds, they would be gaining market share rather considerably. Now, I haven't looked at those figures but that's what would happen because we are pretty much able to hold our own there. So you know, that would be at least a part reaction to the Kaufmann question.

Okay, fair enough. Thank you very much.

Robert Lee, KBW.

Good morning, everyone. I have a quick question. You know, Chris, maybe you could give us some color on this. You know with your crosstown neighbors doing their merger and I know you distribute a bunch of money funds through Pershing. You know, how do you think of the risks to some of those assets from the merger? Is it possible to get any sense of what you think may be at risk if that (technical difficulty) assuming they replace it with, you know, Dreyfuss or something?

Well, first of all, the relationship that we have with Alliance originally in the purchase, then with (indiscernible), now with Pershing, is outstanding. Our relationship with Pershing goes back some 15 years, good personal contacts and good, strong relationships, and most importantly, really good performance in the field among the broker/dealers who use our products. That is very critical in terms of these kinds of discussions.

Next, the people running the Pershing operation are very attuned to an open-choice-oriented program inside their cash management. We have met with these people for years and know their commitment to this particular part of the business. Now, I can't predict what will happen inside a merger. I think that merger is planned to close sometime roughly in July, and I'm sure there will be hunt for synergies, etc. But our view would be that the most important thing, as articulated by Mr. [Kelly], has been to retain all clients throughout; he has made this one of his themes. One of the best ways to retain the clients is to give them the choices that the marketplace offers and have them be able to select the people that they think are the best ones to handle their cash, which of course is us. So we would remain strongly optimistic that we would be able to retain that business.

Great. Just one simple modeling question--I'm assuming that we should see the normal seasonal bump-up in (indiscernible) money fund assets from the tax pool?

Yes, Rob, some of that happened already in Q4, since it correlates to the tax payment cycle and collection of taxes by municipalities. So, you saw that in a separate account money-market number in Q4. The pattern over the years would be for that to continue to rise through April and then to come down a bit in the rest of the second quarter and into the third quarter before repeating the pattern.

We should note, though, that we've consistently settled on higher highs and higher low through that cycle by expanding the use of the product and by some great performance within those systems. Even the cash managers there have choices; they are not required to use (indiscernible) so it is a competitive situation. We've been able to grow that business through some strong things on the product side and so that's working quite well.

Great, those are my questions. Thanks, guys. Nice quarter.

Bill Kats, Buckingham Research Group.

Good morning. Chris, I'm trying to reconcile the good performance against your investments in terms of Mutual Funds, plus sort of what seems to be some early momentum with MDT. With your observation that your particularly important month like January, that your equity sales, Mutual Fund sales, or the attrition accelerated I should say and in the first three weeks, it's moderated a little bit here. But just why the disconnect between the good performance, particularly with the improvement in the blend and the value which seems to be dominating industry fund flows, and the inability to capture any of that share? What am I missing?

Let's tear into some of these things specifically. In terms of the good performance in American Leaders and Star Trust, those have been the last quarter, two quarters' performance. And that has not turn the one-year number around very far and hasn't turned the three-year number around much at all. The three year number is really the key.

So you know, it's good to have the good performance for that time frame because of the new teams and the confidence we have in what we're doing there, but it hasn't turned it in such a way that it has put up damper on those redemptions.

On the Capital Appreciation Fund, Carol Miller has done a great job moving that fund now into the top quartile for a one-year basis, including good performance obviously during '06. Once again, that hasn't been enough to meaningfully move the three-year number. The three-year number is just in the top half know, in the high 40s. You know, that's a lot better but once again not enough to stem the kinds of redemption roles that are going on there.

The third point would be, the scissors effect of what happened in market opportunity, especially in the fourth quarter, was very important. Here was a fund that had strong sales and strong net sales in Q2 and Q3. Remember that market opportunity is basically our house bear fund, and when the market does well, that fund isn't going to fare as well. So it had both decreasing sales and increasing redemptions. That scissors effect basically offset the--but for that--I think but for that we would have had pretty much flat flows for the quarter. So that's what's happening there.

Now, I do share your desire to see positive flows on the equity side in this company. That's one of the most important things we have on our agenda for every day, and especially for '07, because that's a key ingredient to growing the Company, a key ingredient in the composition of the PE as a company and a key ingredient on our messages into the marketplace. So we continue to push that as much as we can.

I take it, from your commentary, and I know it's difficult given the [Omnibus] relationship you have with most of your clients, but are you seeing any kind of style shifts then? Because it seems like you are more growth-centric in nature so I would take it that you haven't seen any kind of style shift.

No, it's hard to see, at least we haven't seen it here in January or in December. I would say what you see in the industry, you know, we are seeing in our business as well in terms of what you're talking about, style shift.

Okay, and then in the money-market business, Ray or Tom, what's the mix now between retail and institutional? Is it about 85/15%?

Well, you know, those are imprecise terms, especially institutional. The closest we would get on institutional would be our corporate channel and portions of our capital markets channel. Those two things combined would be about 20 to 25 billion of our total assets. You could have a pretty good debate about whether the Trust channel is institutional or retail. The underlying accounts include personal Trust assets but also include corporate Trust, employee benefit, and we don't really even see those underlying designations.

The cleanest number I can give you would be, for us, the broker/dealer channel, which has about mid-50s billion of money-market assets--would be largely retail, the cash sweep money in those systems.

Okay. Just one other questions, Chris, back to you on this one perhaps. Again, not to look specifically look at names, however Legg Mason on their conference call yesterday indicated I think that their pipeline for money markets or liquidity assets this quarter is about $8 billion on an asset that is a bit lower than years. I just had a question. It seems like they have been somewhat aggressive on pricing and your desire not to change the pricing, I can understand that. But do you think, structurally, the markets have changed, that you're going to have to change the economics of the business? (multiple speakers)

No, I don't. I don't think the market has changed structurally. I think that the market has stayed at this level without movement from the Fed for almost a full quarter know, maybe even longer. That's just what we take as a given in the marketplace. So I don't see structural changes in the marketplace.

In terms of just the overall pricing dynamics of the industry, you don't think that there's been a general reset down of sustainable yields?

Well, I don't think--well, you said (multiple speakers).

Apart from Fed impact?

Apart from Fed impact? No, I don't believe so. I think we will always have competitive pressures. If you go back in history on our business in Money Funds, remember that the first Money Funds that we had had a gross charge of 100 basis points, and before long, we had a whole family of funds that had a 45-basis point gross charge and then before long, another family of funds that had a gross charge of 20 basis points, and then before long, another family of funds that had a 100 basis point gross charge on them. So there have been, over 25 years, numerous opportunities to respond to the variety of what was going on in the marketplace, some of which was taking the gross expenses down and some of it was taking it up, because of the cost of putting those kinds of programs in. So you know, there have been many of those over time and this is one that we are certainly aware of and looking at, but we don't see a structural change in the marketplace right now.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). Mike Carrier, UBS.

Just on the money-market flows, I think the big inflow on the broker/dealer channel was great. I think, given where rates are relative to where they are in the open market, do you still think, if we get a Fed cut or if the yield curve steepens--I think before, in the past, you've said that on the institutional or corporate side, you could still have something in the realm of like 10 billion of inflows. I'm just wondering. Is that still out there?

Yes.

Okay. Then on the margins, you've always targeted about a 34% margin. You had a nice bump this quarter. Is that still a target and is it more of a long-term target, '07 target? Just any color on that.

Yes, the last time we talked about that, we made a comment on our margin goal and then the next quarter, we said, well, the margins are based on the equity assets, the fixed-income and the money markets, and we are targeting it as high as we can get but we took ourselves out of the saying that 34 was our goal. You know, we are trying to manage the expenses and I think we do a pretty good job on that, as well as we can.

You know, I've thrown out the success items in the past. If you look at our view of success items in '06 versus '05, the success items accounted for about a 23% increase. All the other items were actually negative. So, what's the resulting margin? It is what it is based on where the assets come in and which area they come into and the results thereof.

Right, okay. Then just finally, on the buybacks, when you look at the cash that you guys have, about 135 million just on the balance sheet, like what amount do you need to keep as working capital? Or is your line of credit kind of enough that you can tap into? I'm just trying to get a sense of how much excess liquidity you have out there to do buybacks.

Our line of capital is absolutely available for working capital needs if we want to.

Okay.

So we could spend all the money and use the bank loan if we needed to.

Okay. Then just one final one on the Mutual Fund side-- just curious. I think your guys' flows with the industry, especially that domestic equities, aren't that strong for the overall industry, and growth is even weaker yet. It's not that surprising. But when you think of your history in the money-market channel and your relationships with those that your clients that need the money markets, is it more in the distribution side, meaning working in your way into your clients and finding people that need the long-term funds? With MDT, is that helping kind of establish those client relationships on the equity side?

The MDT is an excellent addition to the product array because it is unique and has a different flavor to it, so it does--it is very helpful right across our distribution. That's why I was able to say that the assets are pushing up against 500 million, and that's worked out well.

In response to another question, a point that Ray had made, when you have successes on the separate accounts side, be it of small separate accounts or in the institutional side, that also helps on the retail side as well because having all switches on is a meaningful positive. So yes, that does help, even with all the money-market clients. I'll give you an example. You know, Jones, we have a huge Money Market Fund relationship and they have put on six of the MDT funds as part of their focus list. We are in the midst of a rather meaningful marketing campaign on those funds right now. Because of the Money Market Fund relationship, we are in every Jones office, because they all participating in the Jones Money Fund.

Okay, that's helpful. All right, thanks a lot.

Daniel Goldberg, Bear Stearns.

Good morning. Just a follow-up on the buybacks--so should we expect you guys to continue to buy back at the current levels? I think that we've seen the diluted share count actually decrease for the last four quarters. Should we expect that in 2007?

Well, we will go close to that. You can continue to expect to see us buy back. We will not commit to any particular level, although you're welcome to look at our history and see what we have done.

A footnote--we don't believe that the PE and pricing of our stock is where it ought to be. So therefore, that inspires us to want to continue to buy the stock in and of itself.

Okay. Then you did give us a brief line or so on acquisitions but anything more there? I mean are talks active? Is there a lot of discussions going on among different asset management companies right now?

Well, if you're talking about us or the industry, if you're talking about us, yes. As I tried to indicate, we have discussions going on all the time and as you know, a lot of these arrangements take a considerable amount of time to mature. So, it's very difficult for us to give you a pipeline or a prediction or how many in the year, or any of those kinds of things, because that's not how the tempo goes.

In terms of the overall industry, well, you know, there's been a lot of activity in '06 and I don't expect there won't be continued activity in the business because of all of the changes that are going on.

Okay. Then just lastly on the functional equivalents on the [15C33] opportunity, any more color there? I mean, are you guys in conversations with the SEC? Maybe what's your expected timing of hearing something back (multiple speakers)?

I really wish I could give you something expected timing but I don't have an expected timing, okay? And yes, are we in contact with the SEC? Yes. And that's why we mentioned just a little bit there that we have some legislative ideas that we are working on, too, in order to try and advance this. As I said, I think now, for quite a number of quarters, that we're going to outlast them on it because I think we have the marketplace--marketplace, truth, justice and the American way on our side, and that eventually this makes a lot of sense for money funds to be available for that broker cash. But as to the timing, I just can't give you a crisp timing.

Are you aware that any of your competitors in the business or also pushing for this, or is it something that Federated is really leading the charge?

I think we're leading the charge. The way these functional equivalency things usually work is we lead the charge, we get first instigator-type benefits, but we haven't yet figured out how to make our money-market funds the only beneficiaries of our efforts, so it's where we, out of the generosity of our heart, end up sharing with our competitors.

Okay, thank you.

Michael Hecht, Banc of America.

Sorry, I was on mute. Good morning, guys. Just a quick follow-up on MDT, a couple of parts. One, I just want to get a sense for you guys. I mean, are you even surprised at how long it has taken for the product to just kind of get reception out of the Bank Trust market and maybe some of the broker/dealer areas that the product wasn't kind of already on and some of the SMA platforms?

Then the second part would be can you just talk a little bit about I guess the incremental margins you expect on the dollar kind of MDT assets versus, say, on the Money Fund side? I'm just trying to get a sense. Would they be higher than what your overall margins are?

In terms of the acceptance of the MDT and the [size] of the system, it has been very, very good and very, very strong. You have to go through each channel to see what that means.

Bank Trust has always been a slow-paced type approach. They are almost like the Clydesdale or the workhorse-type thing, so it will be slow in but also be slow out. That's the kind of pattern you're seeing there but the reception has been excellent.

On the broker/dealer side, you know, it's a little faster deal, maybe like a quarter horse or so. We are seeing good results there not only in terms of the sales but also in terms of new types of clients that we have inside the brokerage firms, more people writing tickets and things like that. So the numbers that we see that are beyond just the asset numbers are very positive to us in terms of the reception that that's getting.

Then on the institutional side, which is maybe like the race horse, the wins that we've had in terms of the five accounts, that's pretty good business right out of the box. So it would be hard for me to be critical of the level of acceptance we've gotten in the marketplace. That said, we're looking to increase these sales in each of those areas as we move through '07.

Okay. No, that's fair. I was just curious because it maybe is a different approach or (indiscernible) equity different than what people may have expected. I was just wondering if there was any pushback or anything that--or that the exceptions might just be a little bit longer as you educate people on the merits of the product. That's all.

Any thoughts on the incremental margins of that product versus, say, a money fund product or something?

Yes, Mike, we've got to go through and where (technical difficulty) sale occurs. If it occurs in the mutual funds, you have the fees related there. If it's institutional, it has the fees there. And if it's in the SMA format in a dual account, it has a fee relationship. If it's just in the regular SMA channel, it has the lower fee. That's the lowest fee out of the group. So you know, that's where we are opening it back up. So you know, it depends where the sales come in.

Right, okay, thanks.

Bill Katz, Buckingham Research Group.

Chris, just a follow-up here--your lament about the PE multiple. If you look at the industry where the greater multiples are being assigned by investors, it seems to be those that have either a bigger institutional footprint or those with an increasingly global footprint, and a lot of your acquisitions of late have been more on the domestic side. Help me square--or what should drive the multiple up via acquisition? Would you be willing to look at things outside the United States in any way? If so, how are the conversations at this point in time?

We would be willing to look at things outside of the United States. We would also be looking at things to enhance our own efforts on the domestic side with international products. The cash funds international is another way to enhance our efforts overseas, but I think the number one thing that I mentioned for us, on our PE, is to get the equity flows positive. I think a lot of good things happen when that happens. Yes, I agree with you that the international side of the business is important, and we are looking at that with our own business here.

Okay, great. Thank you. I appreciate the extra time.

Gentlemen, I'm showing no further questions in queue at this time.

Well, thank you. That concludes our call.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.