Federated Hermes Inc (FHI) 2007 Q3 法說會逐字稿

Welcome to the Federated Investors Management Company Q3 2007 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 planned some brief remarks before getting to the questions. Anthony, we have some feedback in the line. Is that coming through?

It sounds good on our end, sir.

Okay. We will keep going then. Leading today's call will be Chris Donahue, Federated's CEO, and Tom Donahue, Chief Financial Officer. Also here are Dennis McCauley and Laurie Hensler, from the corporate finance group, and we have Debbie Cunningham, our Chief Investment Officer for the tactical money market fun here to join us for the Q&A portion of the call. Now let me say that certain statements in this presentation, including those related to money market assets, investment performance, sales, new products and acquisitions will 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 in Federated's annual report on Form 10K for the year ended 2006 and on 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. And with that I'll turn it over to Chris.

Thank you, Ray. And good morning. I will begin by reviewing -- excuse me -- Federated's recent business performance before turning the call over the Tom to discuss our financials. Starting with the cash management business, money market fund assets grew by nearly $18 billion or 10% from the prior quarter and have increased $43 billion or 29% from Q3 of '06. Assets increased rapidly in August and September against the backdrop of uncertain credit markets. We initially saw strong inflows into our government money funds, while the prime funds stayed in a relatively narrow asset bandwidth. Assets have continued to grow adding another $8 billion so far here in October. The more recent growth has been driven by the prime fund, which have benefited from improved credit markets and from yield advantages compared to government money market investments, and to a lesser extent, to the direct market. Q3 growth was strongest in our wealth management channel, which includes our institutional cash management clients from bank trust, capital markets, corporations and other institutional accounts. Retail assets sourced through broker dealers also continued to grow while cash separate accounts had a seasonal decrease of about $1 billion.

There was, of course, concern in the quarter about the impact of disruptions in the credit markets on money market and mutual funds. There was also a fair amount of misinformation about problems with products that were confused with money market and mutual funds. Our money market mutual funds performed very well throughout the quarter and continue to do so. Our long-standing focus on credit quality and research and the strength of our portfolio managers, analysts and traders were important to this strong performance. We remain comfortable with the credit quality of all of our money fund holdings and our funds are managed prudently within the requirements of Rule 2a-7, which by the way we helped to develop. We have maintained frequent contact with our clients in particular throughout August and September in order to keep them apprised of Federated's view of the credit market issues and to reassure them that our money market funds remained a shelter from the money market storms and attractive investment products. As the asset totals indicate, our clients continued to express confidence in our money funds. In terms of market share, we are at about 6.7% at the end of Q3 compared to about 6.8% in Q2 and 6.6% at year end. As always we think longer views of market share with these statistics are more useful than the short-term figures, which can be distorted by short-term asset flows. We continue to grow our market share over time.

Now an update on our functional equivalency efforts for money funds shows that the CFTC application ended the quarter at about $500 million while the OCC grew to more than $1 billion. We continue to work through legislative efforts to enact the changes that we have been seeking with the SEC, around the 15C33, which is broker cash effort. A bill has been introduced in the House, bill number 1171, and we are developing Senate support on this issue as well. The cash funds international multi-currency product, with BNP Paribas Investment Partners, and Henderson Global Investors, has grown to over $2 billion in Q3, and we continue to roll out the product to prospective customers in various countries outside the U.S.

Turning now to equities, assets were up slightly from the prior quarter. The increase came from market appreciation and the Rochdale acquisition related to the Federated intercontinental fund, which was offset by net outflows in mutual funds and separate accounts. Equity mutual fund outflows increased from the prior quarter. The increase was due largely to higher outflows from the market opportunity fund and a change in flows for our highly successful strategic value product. Strategic value has consistently produced strong inflows and performance since its inception two and a half years ago. The fund, like other dividend oriented portfolios, lags the overall market this year as dividend paying stocks have been less favored than techs and other stocks that do not tend to emphasize dividend income or increasing dividend income. The fund is outperforming its dividend focused peers and indices and it continues to expand its distribution opportunities. Capital appreciation fund, although it continued to post net redemptions had significant performance improvement, including top decile performance for the year ended September 30. We expect the fund's performance will lead to positive flows and were encouraged by the addition of their product to an important annuity wrapped program by a major broker early here in the fourth quarter. The Kaufmann fund had modest net outflows in the third quarter but has had positive flows so far here in the fourth quarter. The Kaufmann small cap fund continued to produce net inflows. The recent signs of re-return to growth funds should help flows in these two funds.

Net outflows of our equity funds are running at about the same pace for the first three weeks of October as compared to the third quarter. The new Federated intercontinental fund launched near the end of August and was a positive contributor to net funds sales. With the strong performance record and rankings from its predecessor Rochdale Atlas fund in the international equity category, we expect this product to help fund flows, as it strengthens our position in this key area. The fund recently hit $500 million in assets after starting at $366 million at the end of August. Turning to MDT, our MDT products generally had solid performance in Q3. MDT's model analyzes fundamental variables linked to a quantitative decision making process. It is very different from the quantitative products that had problems in Q3. MDT's model does not use leverage and is currently a [long-only] product. We expect that its solid performance in difficult conditions will be benefit to both current clients and to future sales. MDT mutual funds contributed positively to fund flows. Assets in the Federated MDT equity mutual funds increased 8% in the quarter to reach $812 million, more than half of the growth from net sales.

We also continued to have success with MDT in the institutional area, winning two new accounts in the third quarter with funding of about $65 million expected here in the fourth quarter. The MDT strategies are ahead of their benchmarks and we continue to see a lot of interest from consultants and institutional investors. MDT's SMA strategies had net outflows as we continue to work to increase sales from the early 2007 re-opening in the major broker programs. In summary, MDT's total managed assets closed the quarter at $8.8 billion, up $2.1 billion from acquisition a year ago where the assets stood at $6.7 billion. We saw net inflows in our strategic value SMA product, though the level was down from prior quarters. This strategy continues to perform well within its discipline and its objective. We continued to see institutional interest in this product, including a new $60 million account from an investment advisor added during the third quarter. We were recently were informed by one of the top broker platforms that strategic value has been approved for their SMA wrapped fund and sub advised mandates. This win reflects the excellent investment record in this product as -- and is an example of cross-sell success from the MDT acquisition. We expect this additional to be operational late in the fourth quarter. Federated's total SMA assets reached $10.8 billion in Q3, up about 14% year to date, placing us safely in the top 20 of providers in this space.

On the fixed income side, Federated navigated the difficult credit conditions of the third quarter very successfully. Our total return bond strategy improved its already strong performance rankings during the quarter, benefiting from its underweight position on credit. This strategy is very competitive compared to the comparable strategies of the biggest bond managers. Within our [various] multi-sector strategies we were significantly underweight credit exposure, including high yield and emerging markets. Our fixed income performance remains strong and our fund flows have improved to roughly neutral for the first part of the fourth quarter. We did have two separate account redemptions however in the third quarter of about $365 million. As of October 24th, our managed assets were approximately $284 billion, including $218 billion in money market area, $43 billion in equities, and $23 billion in fixed income. Of this amount, money market mutual funds stand at about $198 billion.

Looking at investment performance and using the September 30 Lipper rankings for Federated's equity funds, 63% of rated funds are in the first or second quartile over the last year, 72% over two years, 62% over five years and 49% over 10 years. For bond fund assets, the comparable first and second quartile percentages are: 75% for one year, 90% for three years, 85% for five years and 76% for 10 years. Looking at distribution, in the wealth management and trust market, money market assets grew by nearly $15 billion, driven by gains from institutional clients in capital markets, bank trusts and corporate channels, as I mentioned at the beginning of our call. In the broker-dealer channel, money market assets continued to grow, gaining about $2 billion during the quarter. Within Edwards Jones, money market assets continued to grow. In the global institutional channel, we continue to have success winning three new accounts in the third quarter. We expect to see about $75 million from these wins during the fourth quarter. Two of the wins were MDT all cap core mandate and one of the wins was a high yield mandate. As mentioned earlier we successfully closed the Rochdale transaction during the third quarter, and we remain interested in additional acquisition opportunities and continue to have discussion for both consolidation and center of excellence deals. Now for the discussion of the financials, I will turn it over to Tom. Thank you, Chris. For Q3, revenues increased about 17% compared to Q3 '06 and 3% from the prior quarter. The increases were due mainly to higher money market and higher equity assets. Also Q3 had one more day than Q2. On the expense side marketing and distribution expense growth increased from the prior quarter and from Q3 '06, largely due to money market fund growth especially in the broker-dealer channel where products are structured to pay distribution and service fees to the intermediaries. The additional day in Q3 also added expense compared to the prior quarter. Professional service fee expense decreased from the prior quarter due to -- due largely to lower legal fees, consulting fees and professional search firm fees.

The operating margin for the quarter was 34.2% and was 32.7% year to date. With our rapid growth in institutional money market assets during the quarter, our margins expanded. In the nonoperating area, Federated realized a loss in a capital investment unrelated to sub prime or credit quality in an enhanced reserve private placement product. This product is not a mutual fund and is offered only to accredited investors in the private placement market. It is designed to be an alternative short-term investment option for qualified institutional investors. Since it is not a mutual fund, it is not subject to the stringent requirements of Rule 2a-7. We have no credit downgrades or defaults in the portfolio. The loss was due to combination of investor redemptions, which we encouraged near the end of the quarter due to expected yield decreases and resulting sales of securities into difficult market conditions at the time. The product had not reached critical mass and its limited size led to certain clients redeeming assets, in some instances, due to policies that limited the percentage of the product that they may hold. There were no client losses in the product.

On the balance sheet, cash and short-term investments were $86 million at the end of Q3. During the third quarter, we paid the first of three potential contingent payments from the MDT transaction. As Chris mentioned, the assets have increased 33% from $6.7 billion to approximately $8.8 billion today. Based on related revenue growth, we made the maximum year-one payment of $43 million. The Rochdale acquisition in Q3 included upfront purchase payment of $5.75 million. We also -- or we will pay Rochdale contingent purchase amount over five years based on revenue growth and investment performance. The newly formed intercontinental fund is off to a great start. As Chris mentioned, again, the assets are this week past $500 million. Other significant uses of cash in the quarter included $61 million to repurchase 1.9 million shares and our dividend payments which totaled $21 million. That concludes our remarks and we will now open up the call for questions.

Thank you. We will now conduct the question-and-answer session. (OPERATOR INSTRUCTIONS) One moment as we poll for questions. Our first question comes from the line of Ken Worthington with JPMorgan. Please proceed with your question.

Hi, good morning. Your money market funds have a number of investment in SIVs. Some SIVs have been blowing up. You are obviously very comfortable with the investments that you are in. But what do you say to investors that question investments in SIVS? And can you give us a little bit of a better description of maybe K2 and Sigma? I think you've got meaningful investments there? Why should we be not -- why should we as investors in Federated stock not be worried about your investments in these particular investment vehicles?

Kevin -- Ken, the main thing here is the credit work that has been done on these securities. There are some 30 of these that are available and we own four of them and I will have Debbie Debbie Cunningham, the portfolio manager, talk to the two that you mentioned. The main thing is to do the credit work on these in order to decide what we think is really highest of best quality. And that is why we have a lot of comfort and confidence in the securities that we continue to own and in our money fund. And I'll have Debbie talk about the two that you mentioned.

Hi, Ken. This is Debbie Cunningham. And just to give you a little bit of background, from a structured investment vehicle standpoint, they have been in the marketplace since 1989. Federated was one of the first investors in the first program that was in that marketplace, so we have nearly 20 years of history in this product. As Chris mentioned, due diligence and our internal credit process is the key to making sure for all of our investments inclusive of those in the SIV marketplace that we are importantly buying only securities that represent minimal credit risks within the context of Rule 2a-7 requirements, but in addition meet our own stringent internal credit requirements that definitely differ in the context of what other investors are using in the marketplace.

From Sigma and K2's perspective, both of these issuers have been in the marketplace since the early 1990's. They are probably the original ones -- two of the original five entrants into this marketplace. They have strong systems and control supports -- risk control supports within their management and process of investing the assets. We have reviewed in the context of their capital structure, their liquidity structure, their management structure, and then on a monitoring basis, we receive from them monthly reports that allow us to continue to make the determinations on a regular basis that they continue to offer minimal credit risk and high quality within the context of the securities that we own in the portfolios that we manage. So it is a process by which we are daily receiving updates. We are not concerned about the underlying credit quality of their portfolio and hence the portfolios that we own, K2 and Sigma.

Okay. Thank you. Did -- have you added to your investments or in any of the SIVs? And what is the capital structure like? How well capitalized are these SIVs?

Ken, it's Ray, we continue to be supportive of the programs and we look at that every day. In terms of the capital structure, Debbie, you could speak to that.

Sure. They're different I cannot give you the exact capital structures of each one. If you would like that as a follow up, we can absolutely do that for you. But I can tell you the general structure has junior, as well as senior underlying subordinated notes that are in fact the credit support behind the underlying -- the senior note holders, the capital and medium -- the commercial paper and medium term holders. There is also liquidity support in the form of back-up bank lines, repurchase agreement facilities and different types of what I'll call breakable deposits and investments that allow them to gain liquidity in the marketplace. So -- and again, the specifics on each of these two programs, as well as the other two that we own, we can make available to you, but I will not do this in this call.

Okay. Thank you. And then, with regard to the charge this quarter, the charge, were you forced to buy assets? What's -- can you give us a little bit more on the nature of this charge? I didn't quite get that from your prepared remarks.

Sure, Ken. This is Tom. We had a product that has longer securities in it, and as the credit markets were -- the liquidity and the issues in August and September, and this thing really wound itself in late September. As the clients started calling in and saying we want to take our money out of this product and we looked at the marketplace and looked at this -- at the yields that people would be getting if they stayed in and we essentially (inaudible) a call with all the clients in there and asked them to redeem so that we would put the fund basically in incubation. No, we did not buy any securities out of the enhanced product. And we continued to basically to incubate to look to see if there are other ways that we should restructure this product to see if there's something we want to bring it back out at a later date.

Okay. Perfect. Thank you. And then lastly, in terms of [known boni], I don't think anything has happened yet. Is there just a really good chance that Pershing doesn't do anything and you keep all these assets and maybe the fears in the market are just overdone? Any update there would be very helpful. Thank you.

Well, Ken, we work hard to make that more than a mere enthusiastic possibility. So far we have been able to maintain and enhance our overall relationship and the assets with Bank of New York Mellon. And part of the reason for is, is if you listen to their call and follow the things that we have said, we have brought excellent people into the relationship with that organization. We have an excellent partnership with them, and the funds that we offer have excellent performance and this has enabled them in at least our part to help them be able to make statements like the integration is going very well because we have been able to help with their clients inside Pershing. You'll recall as I have said before that Mr. Kelly's comments have been that he did not want to lose any clients on this whole transaction and their open architecture inside Pershing is very important for that and we like that as well. And you will notice one other thing that since they are a growing organization, when they talked about adding $20 billion of new flows into their suite platform, they say, yes, they put more than half of that into a proprietary product. Well, by the subtraction method, that means that almost 50% of it went into other products such as Federated's. And so this continues to be a source of growth because they are growing as well. Of course, like every client, they have the right to pool the money, change the money, and all of those things. But we work very hard on loving and keeping our clients and our partners in good shape with us.

Great. Thank you very much.

Our next question comes from Preshant Bhatia with Citigroup. Please proceed with your question.

Hi. Just real quick, on the $18 billion of flows, I think this quarter and you said $8 billion so far -- or $18 billion last quarter and $8 billion so far this quarter, do you have a feeling how much is related to just the arbitrage between -- as a result of the fed fund cut and the direct markets?

Preshant, it's Ray. The $18 billion was weighted towards inflows into government money market products early in the quarter, as Chris had mentioned. And that was against a backdrop of the August credit markets. The fed cut happened in the middle of September, and the more recent inflows have been weighted towards the prime funds. The money that came into the government funds has continued to be there. It did not come, at least visibility, from any of our products, so it looked like clients allocating money from elsewhere into the security of the government money market funds. On the prime funds, the 50 basis point decrease, the yield differential there has taken a little bit of time to develop. Because if you go back to the middle of September, obviously, the direct market alternative investments still had pretty elevated yields at that point. They have come in a bit since then, so we are seeing a positive spread between the yields of prime money funds and the direct market alternatives. So we are encouraged by the recent trends of growth on the prime side.

Okay. So that money will tend to stick over time on the prime side?

It is hard to say. Historically, we have done well in periods when the fed is easing.

And what our charts have shown, Preshant, is that -- if you recall them is that basically we have been able to get higher highs and higher lows throughout the cycles with the fed. That once we are able to enhance our asset position, we do a very good job of service, products, sharing, the whole nine yards of the business of money market funds with these clients. And so we are optimistic that we can keep a lion's share of the money. We know we can keep all the clients as clients.

The other backdrop, we talked about some new applications, and new developments, new products that are getting some footing like CFI. So there is more than a rate differential going on there.

Okay. Great. And then just in terms of the competitive dynamic, we have seen obviously similar trends at some places, at some places we have not seen money market flows. Is there any kind of dynamic in the marketplace that is different? I know you said pricing is a constant in this market. Is there anything else that is different in terms of the competitive dynamic? People having some riskier in the money markets or anything that is driving flows at even a larger pace to you versus peers?

We aren't exactly in a position to comment on what others have in their money market funds in order to try and assess whether we're receiving flows or someone else isn't receiving flows by what they have. So that is a pretty tough one for us to do. In terms of competitors, it is like the regular crowd shuffles in. It has been the same gang that we have been competing against for a considerable amount of time, doing the same kinds of things and we are responding in the marketplace much like we always do.

And the other thing, Preshant, the performance does matter. You get ebbs and flows, and among that group that Christ mentioned, at times you have rate advantages and at times you don't. So in a near term sense, you have that kind of competitive thing happening that people don't so much associate with money markets, but it does exist.

Okay. And then just in terms of the margin, it looks like it has obviously picked up nicely with the flows coming in. Is that something while the feds in cutting mode, that we should anticipate will just continue or at least stay at current levels?

Preshant, it is Tom. It is just -- it's tough to predict where the margin is going go. What we said in the past, if we get outsized asset flows that is how the margin can go up. Well, that is exactly what just happened. We got outsized flows and the margin went up. Now what is going happen and where is the money going come and in what form, we just -- again, if we get outsized flows, it could maintain itself.

Okay. Okay. And then just you talked about the SIVs, two things on that, you addressed the credit quality being very high. Is there any type of liquidity? We are seeing pretty good securities in the marketplace, but no liquidity in some cases so obviously prices would not reflect that. But is it fair to say that is a nonissue based on the size of the funds that you have? And two, in terms of the super SIV that is being formed, is there any role that you would end up playing in that?

This is Debbie Cunningham again. From -- just from a general SIV liquidity perspective. Liquidity in that marketplace is definitely not returned to a normal state since probably the end of July. And although the fed rate cut helped in September, it helped a lot more on other types of asset backed programs and not as much on the SIV marketplace. Having said that, again, the four issuers that we use within our portfolios remain liquid and remain -- and with the ability to be traded in the marketplace and to roll over securities as they are needed to do that. What I'd say, just in the context of M-LEC, which is the Super Conduit as you referred to it, Federated has been involved in those discussions at the request of the Treasury Department since mid-September. And it's again, a reflection of the comments I just made is that their liquidity was pretty much restored to somewhat normal levels in most of the CP marketplace including what I call the multi-seller traditional types of asset backed commercial paper issuers. But SIVs to some degree were not as responsive. And there's -- the treasury department was concerned about that so they asked a group of investors, issuers, and bankers to come in and see if we could figure out a solution as to why that was happening. And from an investor perspective it was concern about liquidity in the marketplace.

And so what is -- our role from Federated perspective in this discussion of this treasury facilitated discussion about M-LEC and the current draft propose that is in the marketplace is providing input as to what we would see or need to see in a structure going forward that would allow us to feel that this marketplace would return to what I'd call somewhat normal levels of liquidity. Liquidity in the SIV marketplace has traditionally come from partial support in bank lines and other types of traditional liquidity facilities, but a portion has been due to the ability to liquidate at market value the highly rated public securities that they hold within their portfolios. The volatility and the illiquidity associated with those exact securities in the August and September time frame have effectively removed a portion of that liquidity from these SIV issuers just simply because of the third standard deviation in spreads that we saw in that marketplace occur during those time periods. So effectively what we are attempting to council on in the context of our input is how that liquidity can be regained into these structures.

Okay, okay. Thank you. That is very helpful.

Our next question comes from the line of Robert Lee with KBW. Please proceed with your question.

Thank you. Good morning, guys. I have a quick question on the use of debt. Chris, I know in the past, you have mentioned that if you found an opportunity, you wouldn't -- you would be willing to put some leverage on the balance sheet, but if you look over the past quarter or so, you've had several of your competitors decide to take advantage of some favorable rates and put more permanent or longer term debt on their balance sheet. Is that something you would consider? What are you thoughts in doing that?

As background, as you know well, that back in '89, when we bought ourselves back from Aetna we had a considerable amount of debt as relates to the total balance sheet of Federated. So, it is not exactly fear of the dark that keeps us in our current position. We have worn this dress before. So what we have to look at is where do you have a proper confluence for the reason for doing that and the interest of the shareholders for inc. and perhaps the shareholders of the funds or in acquisition. And we just haven't seen that confluence yet. Are we open to do that? Yes. Have we discussed it over the last several years when all of these various booklets would come in to us from various people? Yes, we have discussed it. There is no prohibition against doing it, but we just have not decided to do it yet because we have not determined it to be in the best interest of the fund and the fund shareholders and the inc. shareholders at this given time. Okay. Just to follow up on that, during the quarter, we announced that we have $86 million in cash, and that has been low. That is a low number for us in the last few years. So, if something happened on a smaller term, we would be right into our lines if we needed to.

Okay. Fair enough. I did have also a question on compensation. You've been doing a pretty good job on the margin and if I look at compensation expense, considering the revenue growth you've had, sequentially year over year, it has been pretty modest. Should we be thinking that there is potential for any type of catch up accrual, or what have you, come true-up from the Q4 on comp expense or is this a good run rate?

Well we have to go through every quarter and put dow best estimate for the year and sign all our lives away to say that is our best estimate for the year. So as we look, that is our best estimate right now. Something happens in the fourth quarter to make performance better and sales better and make the growth of the company better, then it would move up.

Okay. Great. Thank you, guys.

Our next question comes from the line of William Katz from Buckingham Research. Please proceed with your question.

Okay. Thank you very much. I want to come back to the SIV discussion for a second. I appreciate that you have great credit and the Treasury has asked you to sort of step in. But then I counter balance that against the fact that you had to absorb a loss on this enhanced money market or bond fund. And I'm just trying to understand, from the outside looking in, what kind of stress test or what type of metrics should we be looking at that might point to an issue potentially developing for the SIVs at this point in time?

Let's just make sure we separate these two before Debbie talks. The longer enhanced reserved product was really an issue with our clients saying they want out of that product. And because of the marketplace at the time where they were valuing those securities, we took the loss there. In terms of the SIV, Debbie can answer the rest of that.

Sure, it is interesting when you look at the overall SIV marketplace and those that have been most recently in the headline as the riskiest assets in that particular class, and you look as those SIV managers and what they owned, their portfolios, their profiles are vastly different than the bulk majority of that marketplace. If you look at the likes of [Cheney] and [Ryanbridge] and several others that are either in default in that industry or have been downgraded severely and will likely go in default -- into default in a relatively short period of time, their portfolios were comprised of roughly 50% in sub prime mortgage related assets underlying. That is not at all the profile of certainly the four SIV issuers that we own within our portfolios, nor is it the profile of again the vast majority of the marketplace. Yet, a very broad brush is being painted. If you look at the four issuers that we own, two of them have absolutely no sub prime exposure, the other two have less 1% in sub prime exposure. And that's inclusive of direct sub prime as well as indirect sub prime through CDOs of any sort that might own them also in those portfolios. So, it is a vastly different profile when you look at what I would call the traditional SIV marketplace and those that have been profiled in the marketplace as being representative of the industry when in fact that has not been the case. What has been the result however has been sort of a volatile and illiquid marketplace from a pricing perspective. And so that is where we are continuing to focus our efforts to make sure that in fact that part of the equation gets restored.

Okay. That is very helpful. Chris, I hate to be the downer on these calls. But coming back to the equity in the fixed income platforms for a second. (inaudible) your equity retail footprint has been in outflow for 12 sequential quarters and the fixed income has been in outflow for 17 quarters. And each quarter you get on these conference calls and you talk about these little wins here and there. But structurally what is going shift you out of this ongoing attrition mode to be a more competitive player in both those platforms? I just struggle with the big picture a little bit.

Well, the big picture, Bill, is a lot of work and a lot of basic blocking and tackling over time. It includes adding products like the Rochdale product, the intercontinental fund in space which we had been missing the last several years. You had an industry where the biggest bunch of flows was in that space and we did not have the broad-based products that were able to accept the flows that were there. So now that's been repaired. There are several funds that needed to be repaired. And we've been through these. We can go through each one of them again. But the nature of it is to repair each one, one at a time and get it right. Now with capital appreciation, which is a pretty good example, it takes a while in a mutual fund to turn the corner on the net redemptions. And it does not turn exactly when you get the performance right. It just doesn't work that fast. I wish that it would and I wish that were the silver bullet to do it, but that is not what happens. So we continue to maintain the fiduciary duties of the fund and the shareholders and improve performance and then the flows will come eventually back into those products that hit speed bumps. Because of a very competitive world, when you hit those speed bumps, you get put in the penalty box for a while.

And, yes, I come on here every time because I do believe that we are going right those flows. And that is what we spend a lot of time doing, but it is a lot of slow steady work buying things, improving products, working on the sales in order to build it up. The macro picture from our point of view is very strong. When you look at the Kaufmann and the Kaufmann products that we're talking about building, the MDT, the new intercontinental, and several of our other internal products to include capital appreciation, mid cap growth strategies, [immunity] stock, and a bunch of others, we think we have a pretty good gang of them. But as you well know, and s I mentioned in the remarks, you get some of them that go the other way that are absolute return product. The market opportunity is now leading the charge on redemptions. That was leading the charge on positive sales last year. So as I've mentioned before, our duty is to get sales up in order to be able to get over these speed bumps in flows. I do not lament your asking the question, Bill, because this is a constant discussion here and we know it is an important ingredient in our overall value and our overall growth pattern to get us to the $400 billion that we said that we would get to 2010.

And on the fixed income side, is it a parallel discussion?

Well we see a little bit light. We've actually had some weeks with positive flows and the performance, the people and the principles there are all in good shape. And so we are beginning to see those flows turn themselves around. And we have the same kind of attitude there. We don't think we need the acquisition help or the repair voyage in those funds. It is a getting the sales back to where they should be.

Okay. And then just sort of finally, Tom, I am just curious, I know it is a teeny number, but it looks like some of your other expense lines were so lumpy this quarter, particularly professional services. And I am just curious, the numbers been bouncing around, any thoughts as to how we should be thinking about that number?

Yes. It's going to continue to bounce around. The legal expenses, and they hit and you have professional or severance type things and those bounce around. I try to look at it and spread it out over a year period is how I would look at it.

Okay. Thank you.

Our next question comes from the line of Michael Hecht with Bank of America Securities. Please proceed with your question.

Hey, guys. Good morning. Just wanted to get -- I know you talked about this, Chris, in your prepared remarks, but updated thoughts on consolidation here, particular in the money fund business? Any opportunity to buy market share from maybe smaller players who maybe have having trouble navigating some of the incremental volatility on the short end of the curve these days?

Yes. There are opportunities like that that are currently being analyzed.

Okay. And then maybe switching over to the outflows from the separate accounts you saw this quarter, and it seemed like it was a combination of legacy Federated products plus some softness at MDT. With the MDT performance so strong this year as other QAM funds have kind of struggled and I know it is not a traditional QAM product, but have you been surprised that the flows have not been stronger and what do you think it's going to take to get an acceleration of flows going on?

Well we are happy we are getting flows. We think they should be stronger, and we are putting all efforts on to get on more. We are getting into more bids, we're getting into more finals, and so, we are looking into the future with optimism on being able to win a bunch of those accounts. And remember, Mike, that the bulk of the MDT assets were in the SMA world, and those strategies, they had closed them when we acquired them a year ago. We have reopened them at MDT's request in the first quarter, and so we have been working to get the sales going there again. But we're -- as Chris mentioned, we are getting traction on the institutional side. They are literally ahead in each one of their strategies in every time period. And we have won a dozen or so mandates over the last couple of quarters. They have tended to be in the $10 million to $50 million range, but we are seeing some bigger searches and some larger students and we expect to see some larger wins there as well.

Okay. That's helpful. And then just last one. And I am sorry if I missed that in your remarks, Chris. Could you talk about the trends you are seeing in adding new corporate cash management customers in the third quarter and how that compares to the last few quarters?

I will take that, Mike. We did add a handful, at least six. And we did not have the asset total, so we did not include it in the prepared remarks, but part of the growth in the quarter was from new accounts and new clients. Along the lines of what we had been seeing before, maybe elevated a bit.

Okay. Great. Thanks a lot. Nice quarter, guys.

Thank you.

There are no questions in the queue at this time. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Matt Snowling with FBR Capital Markets. Please proceed with your question.

Yes, good morning. I'm just going back to the SIV question again. Did you quantify how much exposure that you have to those four SIVs, and maybe can give us a little better detail in terms of collateral?

The SIV in total across the whole money market assets would be a couple of percentages. It varies by portfolio. And I'm sorry, what was the second part?

I'm trying to get a better sense of what the underlying collateral is.

The vast majority, about 50% of the collateral within the issuers that we use are financial, so they are banks, brokers, insurers, the traditional financials in the three to five year space of the market. They are -- the remaining portion is then basically spread out among different sectors of the ABS marketplace.

But you mentioned less than 1% being sub prime.

That's absolutely right. And in two programs there's none at all.

Right. But we are seeing a lot of deterioration in the second lean part of the market as well. Is there any real exposure there?

Very little.

Okay. Great. Thank you.

It is more traditional ABS nonhousing related financing.

Nonhousing? Okay.

Our next question comes from the line of Jim Delisle of Cambridge Place. Please proceed with your question.

Good morning. You used a few phrases like a couple of percent and -- in referring to total owned relative funds and vast majority 50% being dot dot dot. And I am wondering if the lack of precision in those phrases indicates a lack of knowledge at your end or lack of willingness to disclose the more exact numbers to the investors.

This is Chris. The relative ranges of these things are how we handle a lot of questions that go in ebb and flow. We know exactly what the numbers are in the portfolios, thank you very much. But we are trying to give you general numbers. We told you that we were just under $200 billion in money market funds. And Ray told you it was a couple of percent that we had in exposure and SIVs. Now if you cannot figure that out, there is not much more we can do for you. Now on the other hand, we are interested in giving as much information as possible but then not being held to specific exact numbers that then stimulate more questions that we don't really think are going to be appro po, because these money funds have ebbs and flows of what they do and where these percentages are. I tend in between meetings on the subject of flows to make the same kinds of comments within ranges so the people can know roughly where we are, make good judgments, but not be hung up on what the exact numbers are at some given point in time. And Jim, just a s[mall off], the money fund portfolios are all out there on our website, so the holdings of each fun are clearly a matter of public record.

And I apologize for offending you, Chris, but I hope that you can understand that when I hear the vast majority defined at 50%, I am a little unclear as to whether a couple is 2% and thus I can do the math or something in the range. Thank you folks, good luck.

Our next question comes from William Katz with Buckingham Research. Please proceed with your question.

I just wanted to follow up on that last point. If a couple of percent is about $4 billion or so, I'm just sort of curious if there were further marks against that $4 billion? And I apologize for the naivety on this part of the question, is that a hit against net asset value or does that impact the yields? Thank you.

First of all, our positions are dynamic. They -- we have maturities as well as purchases on a regular basis. These are money market funds that we're talking about so that's why a couple of percentage points also is relative as opposed to 4.3% or 6.2% or some specific number relevant to individual funds. And with regard to the overall pricing in the marketplace, I think that is what you are asking, specifically for SIV paper. The spreads in this marketplace were at their widest during the late August time period, probably the third and fourth weeks in August. As more information has been disseminated on the healthiness on the vast majority. And again, I'm using that term. Sorry about that. But let's say 24 out of the 30 issuers in the marketplace, the healthiness and overall high credit quality of their portfolios, those spreads have been cut in by more than a half. So the widest spreads in time and thus the worst portfolio pricing in those securities within our particular portfolios where we own them is past us by about a month and a half to two months at this point. Having said that they're still wider than they have been historically. But again we don't necessarily think that is a bad thing. Spreads were at levels that were really unprecedently low in the time period leading into volatility the August marketplace. So if we are able to see a tiering in the marketplace going forward with some reward being due to those who can appropriately analyze a complex security, then I don't think that's is problematic in the marketplace. It just sort of returns it to to what I would call the normalcy of the 1990's as opposed to the abnormalcy of the 2000 type of decade so far.

Okay. I appreciate the improvement in spreads. But if in fact there was an event that would essentially widen out the spreads, you would take a negative mark. Just help me understand the economics. Is it an impact in net asset value, or does it just dim the yield?

It does not really do either one. Amortized cost pricing is exactly that. We verify our amortized cost pricing to make sure that it, on a mark-to-market basis, is reflecting actual circumstances within the marketplace. There is nothing within our portfolios that is deviating from that amortized cost pricing. Having said that, going forward, if yields are lower or higher as we have maturities in these securities and repurchase them higher in the context of spreads being wider because of this tiering I was talking about, but lower in the context of already a 50 basis point cut in the funds target rate by the fed, with potentially more coming, there will definitely be a yield impact based on what we are able to buy in these securities going forward, but not with what we own currently in the portfolios.

Okay. Thank you. I appreciate the -- all the time.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Well then that concludes our call. And we appreciate your time.

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