Federated Hermes Inc (FHI) 2008 Q1 法說會逐字稿

Greetings, and welcome to the Federated Investors first quarter earnings conference call. At this time, all participants are in a listen-only mode. A 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 for Federated Investors Management Company. Thank you. You may begin.

Good morning, and welcome. As usual today we will have some remarks on the quarter before opening up for your questions. Leading today's call will be Chris Donahue, Federated CEO, Tom Donahue, Chief Financial Officer, and with us are Dennis McCauley and Lori Henceler from the Corporate Finance Group.

Let me say that certain statements in our presentation 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 risk factor section in Form 10-K for the year ended 12-31-07 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 responsible for the accuracy and completeness of such statements in the future. With that, I will turn it over to Chris to talk about Q1.

Thank you, Ray, and good morning. I will begin by reviewing Federated's recent business performance before turning over the call to Tom to discuss our financials. Starting with the cash management business, money market assets grew by nearly $41 billion, or 17% from the prior quarter, an increase of $92 billion, or 49% since Q1 '07. In addition, the strong growth in the money market mutual funds we added the $10 billion Florida cash mandate last month. Money market assets have continued to grow, adding another 5 billion or so, so far in April. Generally, we see money market asset declines in the industry and at Federated in April due to tax payments before beginning to grow again. We also have some seasonality related to the collection and usage of tax receipts by government entities that impacts cash separate accounts. Typically, we see a decrease in these assets in Q2 and Q3 before building up again in Q4 and Q1 and so on. We continued to see growth across channels and much of the inflows coming from the wealth management and trust channel. Fed easings and the prospects for further rate cuts are helpful, but are only part of the overall equation.

Our client base considers the quality of our products and services and the strength of our credit work is key points in determining the placement of assets they control. Our highly experienced team of portfolio managers, analysts, traders, continued to perform exceptionally well in the tough market conditions of the last several months. There's been a lot of attention on SIV investments with recent questions coming on the sigma structure. We have continued to see the winding down of this position as the notes mature. We have received all payments, when and as due, and expect to continue to be paid in full from these investments. Our remaining exposure is approximately 1.2 billion and we will be down to about 650 million by the end of May, with the remaining exposure gone in August. We continue to believe that credit quality within the sigma structure remains strong.

We remain comfortable with the credit quality of all of our money market investments. In terms of market share, we believe that we have continued to gain share. As always, we think that longer views of market share are more useful than short-term figures, and we expect to continue to grow our market share over time. Now, the persistency of the assets that we have gained recently is difficult to forecast. In past periods of accelerated money market growth, we have, however, experienced higher highs and higher lows. And we expect this type of trend to continue. Turning to equities, assets decreased from the prior quarter due mainly to market depreciation. Net outflows from equity-neutral funds decreased from the prior quarter. For equity mutual funds, net redemptions were 291 million, down significantly from the prior couple of quarters. Interestingly, about two-thirds of this total was from our index funds so that our actively managed mutual funds were not far from break-even on net sales during an especially difficult quarter in the market. Of course our goals remain higher than break-even because returning to positive equity flows remains among our highest goals for 2008.

We hit an important target in Q1, with average monthly combined gross sales of equity and bond funds averaging over $1 billion per month, up from an average of about 850 per month during the last couple of years. Each sales channel recorded significant increases in sales from the prior quarter and from Q1 '07. Among mutual funds, the Intercontinental Fund was our top selling equity fund on a net basis during the first quarter. Launched in August following the acquisition from Rock Dale, the fund is a key addition to our international fund product line. Assets are well over 900 million up from 366 million at acquisition. The new Kaufmann Large Cap Fund was launched in Q1 and was added to the various selling agreements with intermediaries during the quarter. Outstanding first quarter performance has been logged and though it is early, we are seeing positive flows, about $17 million in this product. The contrary and market opportunities fund returned to net inflows in the first quarter. Outflows remain concentrated in the index funds, as I mentioned, and in large cap value. Overall, net outflows of our equity funds are running on a lower pace for the first three weeks of April compared to the first quarter. Turning to equity separate accounts, we won four MDT institutional accounts within Q1 that will fund for about $300 million. We continue to see a lot of interest from consultants and institutional investors in the MDT strategies. We had one client reallocate about 100 million from one of our institutional equity separate accounts in Q1 due to an asset allocation decision.

Now, MDT's SMA strategies did have net outflows in the first quarter, as we continue to work to increase sales following the '07 reopening in the major broker platforms. MDT total managed assets closed the quarter at 8.1 billion, up about 1.4 billion from the acquisition in mid 2006. As we discussed last quarter, we have expanded distribution for our strategic value SMA product with this recent addition to two of the top wire house broker programs. Flows were negative in the first quarter, reflecting market conditions for portfolios like strategic value that emphasize dividend-paying stocks. Federated's total SMA assets stood at 9.4 billion at quarter end, which is down about 10% from year-end. Overall, equity separate accounts including the SMAs and the institutional accounts had about a $400 million net outflow during the first quarter. On the fixed income side, Federated continued to navigate difficult credit markets very successfully. During the first quarter, our fixed income net fund sales turned positive, hitting $263 million to the goods. Our total return bond strategy continues to be highly ranked in its Lipper categories. Top 28% for Q1, top quintile for the one-year, top decile for the three, five and ten years all ended 3-31-08 and this produced very solid inflows. Our U.S. Government, one to three and two to five-year funds also have had very strong performance records and produced solid net inflows.

As of April 23, our managed assets were approximately 344 billion, including 280 billion in money market, 38 billion in equities, and 24 billion in fixed income. Money market mutual fund assets stand at about 247 billion. Looking at investment performance, we continue to see strong results in a number of areas, in both equity and fixed income. Using quarter end Lipper rankings for Federated's Equity Funds, 78% of rated assets are in the first or second quartile over the last year, 80% over three years, 78% over five years, and 63% over 10 years. For bond fund assets, the comparable first and second quartile percentages are 71% for one-year, 78% for three years, 81% for five years, and 77% for ten years. Let's discuss distribution. In the wealth management and trust market, money market assets grew by over 19 billion, driven by gains from institutional clients in the bank trust and Capital Markets channels.

In the broker/dealer channel, money market assets continue to grow, gaining about 4 billion during the quarter, including additional growth from Edward Jones and others. In the global institutional channel, assets grew by 14 billion, including the $10 billion cash mandate from the state of Florida. We have launched an active effort in Florida to communicate with the investors and the local government pools. Our goal is to restore confidence in the program and enable the assets to come back into the program. We are also actively seeking cash management mandates from other states. Beyond cash, we continue to have elevated activity for RFPs and finals presentations, reflecting the strong investment performance in a number of areas. Within equities, the MDT strategies continue to compete well for new institutional equity mandates, as I mentioned. On the acquisition front, we continue to evaluate candidates for both consolidation and center of excellence deals. Tom? Thank you, Chris. For the first quarter, revenues increased 16% compared to Q1 '07 and 2% from the prior quarter. Increases were due mainly to higher money market assets, offset by lower equity assets due mainly to declines in the equity markets. One fewer day in Q1 resulted in 4.3 million less in revenues compared to the prior quarter. This revenue decrease was partially offset by 1.2 million in lower related marketing and distribution expense from the one less day. The mix shift caused by significant growth in money market assets combined with decreases in equity assets led to a reduction in our blended realization revenue rate. Compared to the prior quarter, Federated voluntarily waved an additional 1.9 million in potential Q1 fee revenue to absorb higher money market fund expenses, primarily for registration expense related to the growth of assets in these funds. These voluntary waivers were done for competitive purposes and were not done in order to maintain positive yields. Federated incurred a net reduction in operating income of approximately $70,000 from fee waivers and related expense reductions over a couple of days in mid March in order to maintain positive yields on a handful of funds with significant treasury-backed repo investments. The yields on these investments temporarily dropped to record lows due to unusual conditions in the treasury repo market. These conditions have not recurred since, and we do not expect them to occur again.

We expect to incur approximately 2.6 million in additional expenses in the second quarter to cover costs related to making certain changes in fund prospectus language. On the expense side, comp and related decreased from the prior quarter due mainly to the $15 million expense in the prior quarter from the new Kaufmann contracts. Q1 included 1.7 million of related payments, which are expected to continue at this level each quarter for four years. Q1 also included $1.2 million in additional expense related to the 2007 incentive compensation payouts. These were higher than the level we accrued for in 2007 due to improvements in investment performance, assets, and earnings. Marketing and distribution expense increased from the prior quarter and from Q1 '07, largely due to money market fund asset growth and to a lesser extent, from changes in the terms of distribution contracts with certain intermediary customers. The reported operating margin for the quarter was 29.8%, a loss of equity revenues in Q1 mainly from the market decline lowered the reported margin by about 3.6%.

On the balance sheet, cash and short-term investments were 183 million at the end of the quarter. We raised our dividend again, setting the payout at $0.24, a 14% increase. We continue to generate strong free cash flow and expect that we will continue to use cash for acquisitions, dividends, share repurchases, and capital expenditures. We would now like to open the call for your questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from William Katz with Buckingham Research. Please state your question.

Okay, thank you. Good morning. I got a couple actually. In the text of the press release, you talk about some changes on the expense related to changes in distribution arrangements with some of the distributors. Could you give maybe a little more detail around what those changes are and the magnitude of those changes?

Well, we referred to it as a minor part of the change there, and, you know, it's just redoing contracts with, with our clients and we don't really want to go into the details in them though, Bill.

Have you raised the distribution trailer?

Yes.

Bill, this is Ray. There's nothing new or different there. I mean that's the fee pressure essentially from the intermediaries on distribution of all products, sort of permanent support.

Second question I have goes back to the state of Florida mandate. I guess that's been sort of priced out about 2.5 basis points. Just sort of curious if you could talk about the strategy around chasing that kind of product. Is that profitable, or is this very much like what you try to do in Georgia, where you try to get the account and then cross-sell product, because I think that one had mixed results if I recall correctly.

You mean Texas?

Texas.

We would be happy to manage money for Georgia as well, but Texas has been very successful, Bill. If you look at the track record there, we talked about seasonality. That account initially would range between 11 and 15 or 16 billion, and now that's more like the low end of the range, and it goes up into the 20s and you see that in our institutional separate account line. We did expand the product line there, but with one additional fund. But the bulk of the growth there has been in the original mandate and it's come through, great results, great service, and a notable absence of issues over the last couple of months when the markets have been very volatile in this area. Florida is another opportunity like that. The numbers are well known, how large that pool had been, and what it started off at for us. And so we look at that as a tremendous opportunity to pick up additional assets by restoring confidence in the pool and doing what we do with our other large institutional clients.

Okay.

Bill, we think it was a good win and that it opens additional opportunities, leveraging off what we did do in Texas, and it is good competitive business and as Ray's pointing out, the potential for growth of that account, if you can actually do a good and worthy service for the state of Florida, namely help them to restore confidence in the program, this is an all around good in and of itself. In addition to being good business from our point of view. This is still profitable business to you, even at these yields? Yes.

Okay, and then just another question, just as I look at the earnings progression of the company in the last year or so, given the prolific growth in the money markets, I know markets have been volatile behind that. If money market cycle feels like it's coming to the end here, what's going to be the driver to earnings growth, if you really didn't grow earnings that dramatically, given the sizable growth in the money markets in the last year or so, just sort of struggling to see how earnings look from here.

Well, Bill, the money market cycle never ends. It is an endless cycling of this and that and the next thing up and down and all around, but to get to your question about, as maybe the Fed goes into pause mode or maybe the fed starts at some later time going the other way, who knows what they will do and when they will do it, once again, we go back to the steady Eddy growth of money market funds as a business, as a percent of the money stock in the United States. We have never looked at the money market fund business as needing or relying on Fed easings in order to make the growth rate. Yes, that takes the growth rate into numbers like, if you remember our charts of 14% growth rate in money market funds since 1994. Well, what I've always said is that on a steady Eddy basis it's a high single-digit number. Over the last five years, it's grown to 12%. So, yes, it has made the highs higher, because of the Fed easings. So the first thing is, the money fund business to us is still a steady Eddy grower, no matter what the fund is doing.

Next point, with the increase in sales that I talked about, from 850 to a billion a month, back to reaching the goals that we had set for last year, that is a big positive. We're seeing the fixed income flows positive. We're seeing the equity flows less negative, that we're looking forward to enhancing the core business in the equity and fixed income business here in '08. We said that many times on the call, so that's what we're looking for in addition. Now, if you also get a turnaround in the market where you get a good move in valuations related to the stock market or specifically to growth funds, well, then that would be quite good for us in addition.

Now, there are other products that we are talking about, too. We never really leave the area of, of new products, witness the large cap Kaufmann growth fund, and some other things that we filed that we can't get into a whole lot of detail on, but there's new products as well.

Okay. Just one last question. Thanks for taking all my questions. In the fixed income business, I was sort of curious, some of your peers have been shifting to a more decisive credit stance more recently and just sort of wondering where you stand in terms of that business.

Well, Bill, if you look at our fixed income product line, we tend to have funds that are dedicated to certain sectors and then we, of course, have a total return strategy as well. I, sitting here today, I wouldn't be able to tell you about any kind of decisive move into more credit exposure. We certainly have improved our standing in fixed income from already high levels over the last seven or eight months, but we would not make any realtime comments about the direction of the portfolio.

Okay, thank you.

Our next question comes from Mike Carrier with UBS. Please state your question.

Good morning, thanks. This is actually one other question on the skill in the business. I think if you looked year-over-year, your assets are up like 35% and the margin's down maybe 2 percentage points and you're still able to generate the 10% earnings growth. I think I remember back on the Alliance deal, there was a similar concept, meaning you can get some new business and then over time you gain additional business and you could potentially see margins expand. I think you can definitely see you guys gaining more business, but at some point given how much growth you've seen in your asset levels, should we expect the margins to improve over time? And if not, is it all the distribution costs that's weighing on it, or are there other costs in the P&L that are also going up that you just can't bring down?

Yes, Mike, the first comment is to me the glaring one that the loss in the market value of the equity products, which I mentioned cause 3.6 percentage change in our margin, is just a big glaring thing in there, yet when we lose that, there's not much you can do about that in a quarter basis, then it's going to affect your margins big time. Now, all your other comments in terms of what else we can do, where else we can grow are all relevant, but where are we going to go from here, that will have a absolutely have a significant impact on it.

Okay, and then just one other question on the sales. You made some changes on the long-term side of the business, both in equities and fixed income, and you have seen improvement in some of the performance areas and a noticeable pickup in the sales, particularly on the mutual fund products. Just trying to get a sense, do you view this as some of the changes that you made on the distribution and the sales side of the business starting to take effect? Is it the improved performance, or is it some of the new products that you put in place? And then just channel wise, where are you seeing most of that growth coming from?

Well, as you might expect, it is a confluence of beautiful circumstances. The confluence is, of course, adding new products, centers of excellence, improving old products, example, capital appreciation fund, continuing good performance in old products as well, consider total return bond fund, and then the changes inside the various sales areas. So all of these things have to March together in order to advance the ball. And so it's very difficult to say, oh, well, it would have been this, would have been that. I can tell you that if you don't have a good sales program and a good performance program, then you will not advance the ball. So you need all of them, but to try and lean on one of the other moment to moment is pretty tough when all of them have to function well and that's what we're looking at right now.

Okay, thanks.

Our next question comes from Craig Siegenthaler with Credit Suisse Group. Please state your question.

Thanks, and good morning.

Good morning.

First question, on the back of your comments on the seasonality of money market flows in the second and third quarter, I was just wondering about the institutional channel, which I don't believe is impacted by this dynamic. How are institutional money market flows holding up in March and April, and we've known these have been a very big driver of asset s over the last nine months I'm just trying to see how--

Craig, it's Ray. On the institutional channel actually does have the bulk of the seasonality because we talked about the state of Texas account and the growth there in Q4 and Q1 comes from collection of taxes, and then usage of those funds brings the balances down on a regular basis in Q2 and Q3. So, so you see that on the institutional side. There is also some seasonality in Q2 from tax payments. Now, tax payments happen all during the year for corporate taxes, but of course the April 15 deadline has typically meant in the industry a couple of percentage point decrease in money market asset and we generally have some impact from that, but that tends to be short-lived and so far that does not look, that that's going to be very consequential, but that hasn't fully cleared yet either.

And what percent of your money market assets are institutional versus retail?

Well, the institutional dollars are in the low 30s on a cash side. That would be primarily Texas and Florida, Texas in the low 20s and Florida around 10.

What about in terms of other defined business, endowment, foundations, do you have a lot of that type of business, or is it mostly on the retail and treasury business?

Well, retail -- the labels are tough. I mean you could go through the rest of our channels. The biggest -- the comments I made on the institutional side would have been on the separate account money market side, Within the mutual funds, the biggest areas would be the wealth management and trust, and then the broker/dealer, which broker/dealer would be close to what people think of as retail. Of course there is a broker intermediary. That's about 87 billion at the end of Q1. And then most of the rest of the 242 billion, in fact all of the rest of the 242 billion comes out of wealth management, which is the bank channel, the institutional brokerage channel, the corporate channel, and some other applications.

Okay. Second question on the compensation expense, just broke out about 4 million of items that caused the first quarter to be a little higher than you probably expected. Should we view these as really kind of unusually high and take them out when we think about a run rate to build for the second quarter, or is some going to be in there?

The only one I want to take out is the 1.2 million that was additional expense in Q1 related to the 2007 bonuses, where the improvement in performance and in sales and asset growth and earnings led to higher bonus payouts than what we had accrued for. So that was a catchup essentially in Q1. There is some seasonality in payroll tax and benefits. We've mentioned that at about 1.8 million, but that tends to drift down during the year, so the only number I would be thinking of taking out of the run rate is the 1.2 million catchup accrual. And then actually just one final question on the fee waivers. We saw a little bit in the first quarter. Do you think this is going to -- you're going to experience more fee waivers in the second quarter based on where interest rates are, or do you think we're pretty much done with that?

If you're talking about the fee waivers related to the very low interest rates that were in effect for purchase of repo, a number of weeks ago, that is over, and I don't -- we don't expect to see any of that coming onstream here either. And that's because we don't think the Fed will go down to the 1% level in terms of reducing rates, which is where that issue would come back up again. But if the government repo market gets down to where we were buying repo at 28 basis points and numbers like that, then you could have a couple of days of that kind of thing, which is what we had, I guess it's a month ago now. But we don't foresee that happening.

And, Craig, I mentioned, although not a fee waiver, I mentioned the 2.6 million in additional expenses for fund prospectus language changes. It's not a fee waiver, but it's additional expense that will come through.

It's essentially a cost of the advisor for some changes we're making to broaden the spectrum of investments that some of the funds can use. So it's a positive thing, but it's going to hit in Q2 as an expense.

Got it, and is that the distribution expense line, or is that G&A?

It will be in G&A, likely be--

It will be in advertising and promotional and then--

It will hit in a couple of space, because there's some printing expense and some production expense for the materials. So think of it as G&A.

So we think about 2Q now, we take out roughly 1.2 million from the -- then we add back really the 2.6, so it will be a one-time advertising expense.

One time, I would certainly call it an unusual expense.

Got it. Okay. All right. Thanks a lot for taking my questions.

Sure.

Our next question comes from Ken Worthington with JPMorgan Chase. Please state your question.

Hi, good morning. Most have been answered. Just more generically, fund performance in equity land has improved I think broad-based and kind of nicely over the last year or two years. You've made a number of changes within the research department and probably some others as well. Can you just highlight what you've changed and anything in terms of compensation to help us kind of understand why things have changed for the better and how sustainable that really is.

Ken, what we've changed is John Fisher went in a couple of years ago, so that would be under the label of leadership. One of the things that he put in was leveraging the professional. So you got to have the people and the expertise, the professionals. And then organizing them according to teams so that if you look at the success of, say, the Kaufmann Enterprise or the MBT Enterprise, those were all teams with excellent professionals aimed toward the common mandate. So we reorganized the equity department to have the analysts and the portfolio managers, many cases even the traders, participate as teams towards the mandates. So it's the combination of the leadership, the professionals working in teams, and yes, we did -- we're always tweaking the compensation. We think we've got a very good program, but we've increased the amount that's related to the performance and we think that all of that has come together to add to the better performance. And therefore, we have confidence that would continue into the future. But as you know, investment performance is, is the least guaranteeable thing going future because of the lively markets.

Okay, thank you. That was all.

Our next question comes from Cynthia Mayer with Merrill Lynch. Please state your question.

Hi, good morning. In terms of the possible fee waivers, can you give us a sense of what a 25-basis point fee cut would have in the way of an impact, or 50 basis-point cut?

Well, if there was a -- you're talking about a Fed cut?

Yes.

That would have no effect.

No effect. How low would it have to go to have no effect?

It would to go to where the steady state rate was about 1% the it would have some very minor effect. The reason for that is you would then expect the repo rates would be around 1% and that the yields would -- and that's about what the funds would generate. And there are some funds that we have that are in certain types of offerings, like 12 B-1 funds and some broker funds, where the expenses are 100 or 105 basis points. And therefore in order to have a positive yield, some waiving would be necessary and that's what we went through a number of years ago when the fed got rates down that low before.

Right, and that's what I recall. It was really just the retail funds, wasn't it?

That's correct.

Like in the Edward Jones channel.

That's correct.

It had the higher 12 B 1 funds that were effected, correct?

That's correct.

And what percentage of your money markets, not that high, right?

Well, the broker/dealer channel broadly is over 80 billion, but they are not all priced at a level where you would have that kind of impact. We, we can't quantify the 1% scenario for you today, but it was not of -- it was not a big amount back in '03.

Okay, and the lift in distribution costs that you talked about in the press release and went over briefly, is that all in at this point, or are there others to be negotiated, or is there a higher run rate than what we see in first quarter, or is first quarter pretty representative?

You mean the changes?

The changes, yes, the higher distribution costs, higher waivers, I mean trailers.

It's a permanent sport, as Ray said earlier, we're always in discussion and we have so many relationships that there's always something going on. If we could ever say that it was permanent, that would be tremendous.

It's not like you negotiate once -- you negotiate them all once a year and that's it for this year?

No.

No, okay. And did you renegotiate the Tex pool contract recently, and can you give us any color on that?

It's been over a year. We won the mandate again and it was essentially like the prior version. There were modest changes, but nothing significant.

Okay. So no -- that's not to be renegotiated eminently or anything like that?

No.

Okay, great. Thanks.

Our next question comes from John Fox with Fenimore Asset Management. Please state your question.

Yes, good morning. I have a number of questions. First, just from the accounting side, the 1.9 million in Blue Sky and registration expenses, et cetera, that was reflected in a reduction in Investment Management fee, is that correct?

Yes.

Okay, and do you see that continuing, or is that kind of a one-timer?

Well, if the assets grow, then we'll have to -- we'll experience it again. If they reduce, we won't experience it. You should keep it in the number. It should not jump by that amount again, but it's in the run rate more or less at this point.

Okay, and then if I understood Tom's comments, equity asset reduction was 3.6% impact on margin?

Right. We had about $11 million for the quarter in revenue impact from the equity asset decrease, which was mostly from the market.

Okay, and that was primarily Kaufmann fund, because they are higher fee, or--

Well, it would have been across all the funds, of course. If you look at the indices, Nasdaq I guess was down 12 and S&P was down 8 or 9. International I think was somewhere between there. And so it would have impacted pretty much all the funds. Kaufmann, by virtue of its size and fee rate, would have of course been a significant portion of that impact in the quarter.

I guess I just go back to the earlier questions on the call about the lack of margin, and I look at the 11 million there and the 3 million net for the extra day and you do all the math, that's $0.09. I mean it seems with the lift in equity market, there is leverage here.

We hope so.

Okay. And just wondering if you can expand some more. I don't know if Debbie's on the call, about Sigma, potential for future downgrades, how your dealings are going with them. I understand in March they were selling assets I think around $0.96, if you have any views on how that's going for them in April and just give us a little bit more on Sigma and the risks there at this point.

Well, Sigma, our comments on Sigma will be largely, in fact we'll exclusively be to repeat what the rating agencies have put out on sigma. And so if you haven't already done so, I think looking at the Moody's note in early April when they downgraded their short-term rating from P1 to P2 and then the S&P note a few days later, when they essentially reaffirmed the short-term rating, they each downgraded the long-term ratings, but with our exposure out till August and with the money market fund, we're much more focused on the short-term. But generally those notes would comment on the high asset quality, but the liquidity challenge that Sigma faces, they continue to pay on time and in full. We had a significant payment a few days ago and we talked about the exposure going down to 650 million by the end of May and so that continues to move along as it, as it has been and I don't know that we would have any comment beyond that. Given our position as an investor in it we're limited in what we can say, unless it's been out in public domain.

Okay. Thank you.

Our next question comes from Robert Lee with KBW. Please state your question.

Thanks. Good morning, guys.

Good morning.

Quick question on share repurchase. A little light in the first quarter compared to kind of what your historical norms are. I don't know if there's anything in particular that may have driven that, or anything, any reason we should think you wouldn't return to kind of your normal trend going forward?

Well, having cash was a good idea, we thought, and so that is one of the factors that caused the amount of share repurchase we did in the first quarter. As to the future, we remain open and active and contemplating and thinking about and loving the idea of purchasing the stock. And so we would go through our disciplined, dedicated approach to doing that in the future as well.

Okay, and a follow-up question on flows. I mean you've talked about -- well, I mean clearly you're seeing some improvement in equity fixed income from performance, but have there been any kind of changes in how your distribution's organized or structured? I know there was a change in leadership, I guess maybe that was a year ago or so. I don't know if there's anything there that you think is helping or you expect will help, accelerate some of the improvements you've seen there.

Well, yes, Rob, it was about a couple of years ago when Tom Tarrant came in to take over the whole operation. Several months ago, we reorganized some of the responsibilities of some of the leadership on the broker/dealer side, focusing some people on cash accounts and some people on what's going on in the broker/dealer world. So we've revamped some comp in and there we think all of those things go together to improve the whole operation and we're seeing it in three dimensions because of the sales and the improvement in the net flows as well. And on an intangible, it was during the quarter that I went to our sales meeting, which we had, and there's a lot of electricity when you put 168 wholesalers together. It is an energy-generating situation and it's reflecting itself in the sales marketplace.

Okay, great. Thank you, guys.

Our next question comes from Michael Hecht with Banc of America Securities. Please state your question.

Hey, guys. Good morning, how's it going?

Good.

So I just wanted to come back to the comment on I guess flows through April. You guys said you were up about 5 billion in the money market mutual fund assets to 247 and kind of April 15 date has come and gone. Do you expect any other kind of seasonal impact in that piece of your business, setting aside the separate account side?

You can't say for sure, Mike, because it takes some time sometimes for the payments to work their way through the, tax payments to work their way through the system and fully clear, but I would tell you that the noise right around the 15th seemed low to us relative to other years.

Okay. That's helpful. And then can you talk about the trends you're seeing in money funds, prime funds versus the government money markets? I mean I guess I would just think if there was a large mix of government money funds, that might be more of the flight to quality money versus the flows you're seeing on the prime side.

As we've said all through since the credit crisis really touched off the flows, the flows have been disproportionate into the Government Funds, been the bulk of the inflows. We've had growth on the prime and on the tax-free side, but it's been weighted toward governments and has been for, for sometime. Now, when we look at this, it's impossible to predict the persistency of that, but we're not of the view that it necessarily flows out as quickly as it came in. Some of the cash management alternatives that were in favor before the crisis have now gone out of favor and money funds in general and ours in particular have come through a pretty good stress testing and so we're not, we feel pretty good about where we sit in that business, but the rate of flows of course is impossible to predict.

Okay. And then just switching over the equity separate account outflows, which have kind of been a bit of a disappointment. Can you touch on the drivers there and on the MBT side, I mean just flows there seem softer than expected. I mean is it performance? Do you think it's just products being out of favor? A little bit more on what's going on there.

In terms of the overall equity flows, as I mentioned, about two-thirds of them for the quarter were the index fund, okay. So that's a fact. There they are. The flows on American leaders remain negative and I guess they have been running about 100 million a quarter negative and continue to do so, in the large cap value equity area.

And then on the institutional side, the SMAs, we have two strategies there that have attracted the bulk of the inflows over the period where we've had significant growth there. MDTs, all cap core strategy continues to perform very well and we have a distribution challenge there because it had been closed in the major wire house platforms, reopened it just about a year ago and so we're working to get traction again there, but the performance has been very strong and we think that that will be able to write that.

The other changes on the strategic value side and again, the performance within its category has been strong. The mutual fund strategic value hit four stars in Q1 and -- but it's a dividend-paying strategy and with the requisite financial exposure and it's a product that was up 30% in 2006, attracted a lot of money into 2007 and had the kind of year, that dividend paying portfolios with financial exposure had in 2007. We've seen some of that money that hadn't been in the product as long, turned out to not have as much persistency as we would have hoped. Now, having said that, the performance has been so strong that when you talk to intermediaries and gate keepers about the product, we've expanded its distribution opportunities. It's recently been put into a couple of the top tier, top four broker level, a broker wire house programs, and so we think that the seeds are sown for good growth there, when and as that strategy comes back into favor. And if you look at a dividend-paying strategy over time, you can find a lot of support for people thinking that that will be an important part of what investors want with retirement and other trends looking for income.

Okay, and just last question on consolidation. You guys have been surprised that there hasn't been more activity consolidation in the money funds space in particular, and given all the volatility at the short-end, are you seeing any pickup in kind of discussions with folks and what's it going to take to actually have some deals take place?

Well, we're seeing -- we're having discussions, as I mentioned, in my remarks. There are various things that are out there, but don't forget that as I've said before, that as long as an organization does not have un-toward redemptions, you can run a money market fund almost at any size into the future, and so it takes more than 5 minutes for the whole episode to settle in and then decide what to do, whether managing a money market fund makes a lot of sense for some of these players. We can look at it from our perch on the tree and say with great confidence that it makes no sense for many of these players to be in this business and that they ought to be doing it with us. But our view does not necessarily control as quickly as we would like. So we keep knocking on the doors and I don't have an event that will tell you when, as and if more of these would come onstream. It's really hard to put them on the calendar, but we are still optimistic that things like that are going to break loose for us.

Okay. Fair enough. Thanks a lot.

Our next question comes from Robert Lee with KBW. Please state your question.

Thanks. I had one quick follow-up, really a modeling question. But is there any reason that we should expect that the pretty rapid decline in the deferred commission sales asset isn't going to continue? Maybe with the pickup in sales volumes, you you're going to see more sea share sales and that's going to start plateau and maybe the, sort of the run rate in the DSC may flatten out?

Rob, I would tell you it's unlikely to flatten out. I mean we think it will continue to trend downward. The B shares, of course, have diminished in relative proportion of sales and further in our last funding arrangement, more of the sale of that deferred sales commission asset now qualifies for sale treatment. So significantly less of the asset comes onto the balance sheet to be amortized. The other thing I would point out is that the decrease there in the amortization expense would also, you'll also see the decrease on the non-recourse debt expense and there's a corresponding reduction in the other service fee revenue line item, all of which roughly net out on the income statement. If you were to isolate the B share portion of those three line items, you would see them roughly netting out and all of them in decline, and that's another factor when you look at the other service fee revenue line item to keep in mind, that those fees are going down. Of course all of that is noncash to us, by virtue of the funding arrangement we have.

Okay, great. Thanks.

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

Hi. Just a couple follow-ups. Could you quantify the exposure to the American leaders strategic value in the index funds?

The index funds are about $2 billion. The American leaders is-- Is 1.2 billion, what other on were you asking?

The strategic value.

The strategic value, the mutual fund is about 920 million in the mutual fund.

And the separate accounts side?

Separate account is north of 2 billion. I don't have the, I don't have the number readily available, but it's north of 2 billion.

And the other question I have, just back to the -- maybe I didn't understand correctly, just want to clarify. When you gather those assets, the incremental growth on those assets -(inaudible) - has it been tangible evidence of growth on other product?

That is it. There's two different money market funds, but that is a money market cash management operation. That's for the municipalities in those jurisdictions, and it is cash management operation.

I understand that. Just want to make sure, had I been able to cross-sell longer-term product within that population of investors.

No.

So the strategic value's about 2.2 billion on the SMA side.

Okay, great. Thank you very much.

Ladies and gentlemen, there are no further questions at this time. I till turn the conference back to management for closing comments.

Well, that concludes our call, and thank you for joining us today.

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