Federated Hermes Inc (FHI) 2008 Q4 法說會逐字稿

Greetings and welcome to the Federated Investors fourth quarter earnings conference call. At this time all participants are in listen-only mode. The question-and-answer session will follow a formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Raymond J. Hanley, President for Federated Investors management.

Today we plan some brief remarks before opening up for your questions. Leading today's discussion will be Chris Donahue, Federated's CEO; Tom Donahue, Chief Financial Officer;and with us are Denis McAuley; Lori Hensler; and Stacy Friday from the Corporate Finance Group; and we also have Debbie Cunningham, Chief Investment Officer for the money market area to participate in Q&A.

Let me say that certain statements in this presentation including those related to asset levels, investment and financial performance constitute forward-looking statements which involve known and unknown risks that may cause the actual results to differ from any future results implied by such forward-looking statements. For a discussion of risk factors see Federated's SEC filings. 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 will turn it over to Chris.

Thank you, Ray, and good morning. I will begin by reviewing Federated's recent business performance before turning the call over to Tom to discuss our financials.

Starting with the cash management business money market assets grew by $68 billion, or 24% from the prior quarter. And increased by $119 billion, or 50% for the full year 2008. The Q4 growth came in mutual funds while the money market separate accounts were about flat for the quarter. We've continued to see a money fund growth in January with assets averaging about $334 billion excluding our separate account. Money fund asset growth has been strongest in the wealth management and trust channel, with solid growth in the broker dealer channel. We peg our market share at about 8.5% at year end, up from just under 7% at the end of 2007.

Market conditions in the fourth quarter continued to drive demand for government money funds and treasury funds in particular. At year end, Federated's money market mutual funds by type were $92 billion in treasuries, $122 billion in government agencies, $78 billion in prime, and $35 billion in municipal funds. During the fourth quarter, treasury funds grew by $22 billion, about 30%. Government agency funds added $34 billion, just under 40%. Prime funds gained $7 billion, 10%, and muni funds added $6 billion, a little over 20%.

Now, so far in January, prime funds have led asset growth. Prime funds have added about $6 billion. Treasuries are roughly flat. Agencies are up $3 billion. And the munis are up $1 billion. Market conditions remain challenging, and our investment managers and traders continue to do an excellent job for our clients. We're managing our funds with a focus on providing daily liquidity at par as we continue to provide high quality cash management for our customers. Reflecting demand and the resulting yields available in the market, treasury securities and thereby treasury fund yields, have decreased to record lows.

In certain products, the gross yield is not sufficient to cover all of the fund's normal operating expenses, and so fee waivers have been used to maintain positive or even zero net yield. During the fourth quarter, the impact of these waivers to Federated was $1.5 million in reduced operating income. The 11 classes of shares affected in the fourth quarter had $15 billion in assets at year end. So far through January 21, we have had about $560,000 of operating income impact from these waivers, generated from 20 classes of shares with approximately $29 billion in assets. We expect these waivers to increase going forward.

Now, we cannot predict the impact of the waivers due to the number of variables and the range of potential outcome. Variables include yield levels available in the marketplace, changes in assets within the fund, actions by the fed, changes in expenses of the fund, the mix of customer assets, and our willingness to continue the waivers. It is important to remember that while waivers reduce income from what it would have been without the waivers, the growth of money market assets and related growth in money market revenues net of waivers has made it possible for Federated to perform well and to continue to grow during a period of extremely difficult market conditions.

Money market funds continue to be a critical part of the capital markets, and we continue to see strong demand from investors with balances now well in excess of the insured amounts from mid-September. Going forward, we believe that the core structure of the money market mutual fund will remain intact, and it is important to their ongoing use by investors. Core features include amortized costs, which is how dollar in/dollar out daily liquidity at par works, diligent independent credit work to avoid securities do not meet the minimum standards of minimal credit risks, and adherence to other key components of rule 2a-7 that are essential to the success of these product. Investors understand that money market funds are investment products, and that investment products involve risk. Money market funds operate within a strict regulatory framework designed to reduce risk.

Investors continue to increase their usage of these products because they want the benefits that money funds provide, including the aforementioned daily liquidity of par, diversification, credit analysis, competitive yields and convenience. These are the core value propositions of the money market mutual fund, and they have been so for over three decades, and we believe that it will transcend the difficult market conditions that we are experiencing now.

Turning to equities, assets decreased about 16% or $5 billion during the quarter on a net basis, and this includes the $2.7 billion added from Prudent Bear and Clover Capital acquisitions. The decline was largely due to market depreciation and to a lesser extent, net redemption. About half of the net redemptions in equity mutual funds occurred in October, consistent with industry results we saw outflows in many of our equity funds. However, we he did see net inflows into our capital appreciation, strategic value, Kaufman large cap funds, as well as in certain MDT funds. Our equity mutual fund flows are about flat for the first couple weeks of January, though, as always, we caution about drawing conclusions from this limited data. Within our equity separate accounts outflows were driven by net redemptions in our SMA products.

Turning to the fixed income side our investment performance remains solid as our investment personnel continue to navigate difficult market conditions successfully. Fund flows turned modestly negative in the fourth quarter reflecting market conditions and industry results. Most of the net outflows occurred in October with flows back to positive in December. Our flagship total return bond fund continued to produce positive flows. We also saw inflows net of expected asset sales in a previously discussed distressed asset portfolio in our institutional separate account. We have recently won six fixed income separate account mandates totaling approximately $500 million that have not yet funded. Fixed income fund plows are positive for the first weeks of January.

As of January 21, our managed assets were approximately $419 billion, including $368 billion in the money market area, $25 billion in equities, and $26 billion in fixed income. Now our money market mutual fund assets included in these figures obviously stand at about $337 billion. Looking at investment performance, and using the quarter end Lipper rankings, for our equity assets, our comparative performance results are solid, with 87% of the rated assets in the first or second quartile over the last year, 88% over three years, 86% over five years, and 77% over 10 years. For the bond fund assets, the comparable first and second quartile percentages are 64% for one year, 75% for three years, 83% for five years, and 70% for 10 years.

On the distribution side, on the wealth and trust market, combined net sales of equity and bond funds were positive. We continue to have success with the total return bond fund in this channel and money market products continue to increase. In the broker dealer channel, money market assets increased $5 billion. In the global institutional channel, we're having success with institutional fixed income accounts including the new business I just mentioned.

On the acquisition front, we closed three deals in the fourth quarter, adding nearly $5 billion from Prudent Bear, Clover Capital, and Fifth Third transactions. And we continue to pursue acquisition opportunities. At this point I would turn it over to Tom to talk about the financials.

Thank you, Chris. Federated's revenue increased 8.5% in 2008 from 2007. For Q4, revenues decreased 1% compared to the prior quarter. The growth for the full year was due mainly to higher money market assets, partially reduced by lower equity assets, largely from market declines. The decrease from the prior quarter was primarily due to the decrease in average equity assets partially offset by higher average money market assets.

Money market waivers to support positive or zero yields in certain products impacted revenue by $3.4 million in the fourth quarter. These waivers were partially offset by $1.9 million in related lower marketing and distribution expense which made the operating income reduction from these waivers $1.5 million. Compensation and related expense decreased from the prior quarter due mainly to revised estimates of 2008 incentive compensation expense. The prior quarter also included $1.6 million of compensation expense related to the special dividend payment. Marketing and distribution expense increased from the prior quarter due mainly to higher average money market fund assets. Amortization of deferred sales commissions decreased due to lower B share assets. Non operating expense increased from the prior quarter due mainly to lower interest and dividends and to higher recourse debt expense with Q4 as the first full quarter of our term loan facility started in mid-August.

The tax rate was lower in Q4 due to lower deferred tax expense from an adjustment to the deferred tax liability from certain fully amortized B share deferred sales commission assets. For the full year 2009, we expect our tax rate to be between 37 and 38%. On the balance sheet, cash and short-term investments were $59 million at the end of the year, and recourse debt was $177 million. We continue to generate strong free cash flow and expect that we will continue to use cash and our revolver to fund the acquisitions, dividends, share repurchase, capital expenditures, and debt repayment. We would now like to open the call up for questions.

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Our first question comes from Craig Siegenthaler with Credit Suisse. Please state your question.

First question, I just wanted to touch on the C waivers with Debby, which were still quite minimal in the fourth quarter. With short-term treasuries now yielding around zero, and if this yield remains flat or even goes down a little bit, I'm just wondering what's the risk to revenues assuming -- because there are a few variables that are assuming AUM more or less stays flat?

I think, as Chris mentioned in the prepared remarks, our waivers definitely have increased during the first several weeks of January, compared to the end of December. Having said that, the market for treasuries has actually become a little bit more -- a little less punitive, let's call it, in the last week and a half. Just to give you some information that you can kind of extrapolate that from, during the second half of December, and into the first week of January, treasury yields were in the negative 4 to 2 basis point range for the majority of treasury securities that we would be purchasing, and certainly our nonrepo treasury fund, and even to some degree in our repo treasury fund. So negative 4 to 2 basis points for the better part of December and into the first week in January. Treasury-backed repo rates during that time period were also at zero. There were a few days that were positive but for the most part they were at zero during that time period.

Last week the fed actually added collateral back into the system which was what caught -- the opposite of that when they took collateral out of the system in the beginning parts of December is what caused those very, very low and negative rates to occur. They reversed that last week. They didn't do it with any, number one, informational content associated with it, to get it -- to garner whether it was done intentionally, nor did they do it or follow-up with any kind of informational content that would give us an idea as to whether it was done purposely and the results were as expected. But effectively, what happened last week when they added that collateral was, the treasury securities that we had been buying -- or that had been offered, I won't say that we had been buying, but had been offered into the marketplace, at minus 4 to 2 basis points, are now in a range that's more like 4 to 14 basis points. And this goes out from the one week to the three-month sector of the treasury curve.

Repo backed by treasuries went from 0 to 20 to 30 basis points. So there's a vast difference in what we're seeing reflected in purchasable yields in the marketplace today than was even the case in the first week in January. I can't give you any -- I don't have any good information as to whether that's going to hold or not. What we're looking at right now with a target rate of 0 to 25 basis points is, number one, something that's unprecedented in that it's range, so we don't even have a real number to peg it off of. You could pick a number in that range, pick halfway, 12.5 basis points. We were certainly operating way under it for a period of time. We now seem to be operating over it. Is the target really 25 now? I don't know the answer to that. So that's one thing that's historic. Secondly is the fact that ultimate rates themselves are at levels that we've not seen in many decades. So I can't give you a real good prediction, but based on some of that information maybe you can kind of extrapolate from there.

Debbie, I'm thinking here's an easy way to think about it. What was the run rate of fee waivers maybe on a weekly basis, or if you want to say a monthly basis, over the last few weeks?

Craig, that was the number we gave you at the -- for the month to date, at approximately $560,000. So that was three weeks worth of data.

And that was net or is that notional?

That's net of the reduction in the related marketing and distribution expense. So that's the net impact reduction to operating income to Federated.

Got it. Okay.

And we see daily fluctuation in that number, and that's why we went through the factors that influenced it, because it truly is -- you've got five or six variables at work.

Got it. And then my second question was more of a -- more a strategy question. I'm just thinking about reserving capital requirements in the money market industry, because there seems to be a little bit of disagreement between some competitors in this space. I'm just wondering, maybe timing wise, when the insurance policy that the government has provided goes away, I think it's September, October of next year, how likely do you think it is, policy being put in place for charges here and then what are your thoughts on the level of this capital charge, maybe as a percentage of AUM?

I wouldn't assume that there's going to be a capital charge. It is still a very justiciable or debatable issue. Let's try to break this into several questions. First of all what about the insurance. No one can tell right now whether it' going to continue -- well, they know that this insurance program can't continue, because, by statute, the pool that they are using at the treasury ends on that date is September 19. So someone is going to have to do some statutory work to have new insurance. It's interesting that in the industry, and for us, too, there have been substantial tens of billions of dollars for us, and hundreds of billions of dollars in the industry, that have come in, that are, in fact, not insured because the insurance is limited to certain funds, and certain assets. There have also been some people who have declined to reup the insurance on some of their funds, and that's certainly a consideration that all of us are looking at.

So the insurance has its own way of looking at it, and our clients, at least, have looked more at the competence and the product as opposed to the insurance. And when this was first put in, a lot of the industry comments at the time were, well, we don't know that we really need this, we don't really know that we want this, and what about paying for it, et cetera. So there is a healthy debate on the insurance.

Now, on the issue of potential capital, various numbers are thrown out, various concepts are thrown out. At the end of it, the mutual fund industry, in money market funds with $3.8 trillion, is not in a position to guarantee the investments, and never has been, and won't be. And this is the reality. That's why I make the comment that these are investment products, and you have heard me also say, they're cash management product as well, but they are also investment products, which means they are going to have risks, and which means that you have to evaluate the expertise and competence and your commitment to the work that's being done, and not just ho-hum, there's somebody at the end of the day who will take care of this.

So a lot of people are brainstorming a lot of ideas, which is certainly fine. But remember that we've been through this for more than three decades with all sorts of opinions about how these business ought to be structured going all the way back to the 70s, and it was some of the same players then, I might add.

Got it. Thanks a lot for the color.

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

Hi, good morning. So to follow-up on Craig's first one, if the world stays the same in terms of yield, as it is today, and assets in your funds stay as they are today, for the next 12 months, or 13 months, so everything gets reinvested at today's rates, how big are fee waivers -- how big are fee waivers in that scenario? I know the world seems to be getting a little bit better from a yield perspective, and Debbie pointed that out and that makes sense, but If things stay the same, how big are they?

One of the reasons we gave that figure for the first several weeks was to give you a way to deal with that. And so it's really tough for us to calculate that when we see clients already moving. And I know you are saying, well, assume everything stays the say. But it's still a pretty tough calculation when you don't know all of the different variables. And that's why we gave you, if everything stays the same as it was in the first several weeks, then you can take that number and multiply it, and that's everything staying the same.

Yes, but the problem with that is, everything is being reinvested now at much lower rates, and you've got securities that were purchased 12 months ago at 5% yield being reinvested at 40 basis points. So that's why I was trying to set up a different scenario.

You are now talking about the variables. I will let Debbie comment a little bit on the comment about the maturities, which is a true factor.

I think, Ken, from a maturity perspective, to reinvest at this point, the only troubling sector, if you will, from a low rate side of the equation for reinvestment of maturities into the portfolios is the treasury sector. It's less troubling than it was two weeks ago, but it is still a problematic sector in the context of the ultimate rate there. But if you go out beyond that to government agency products, if you go beyond that to prime product, even in the context of the tax-free world and municipal products, there is no -- there's not a problem, from a rate perspective, on a reinvest and being unable with that reinvest, in the current market environment, to cover the core cost of the product.

Okay.

This is Tom. If you just take our $90 billion or so in treasuries, and then start dealing with -- think of it in that way, and try to model it out, you can model it out any different way you want, and we just don't want to do that. I mean, there's so many different variables. Where are customers going to go? What's going to happen? How are we going to be able to reinvest it? For how long? For how long? For how long?

No, your comments helped, so I appreciate that. I'll move on to number two. You mentioned in the release, I think in the comments, about fee waivers to maintain the competitiveness of money market fund product. And I think you indicated that those types of waivers increase for the quarter, which is kind of surprising given the challenges that the money fund business is having on the fee waiver side, or the rate side, anyway. Can you tell us a little bit more about the nature of those fee waivers and what the outlook is? Are those really going to continue in this kind of environment, or is that competitiveness going to fall off?

Ken, it's Ray. We separated the waivers into two components in the press release, mainly because of the interest in the number that for maintaining zero or positive yield. The rest is a number that typically occurs every quarter, and it's more a function of the volume of assets that go into particular products than it is active price management. We say for competitive reasons because by definition you could say the waiver of any fee is for competitive reasons. It's to have your yield and your expense ratio where you think you can sell the products in the market. So I wouldn't tell you there's been any particular change. The new entrant, of course, is the waiver for zero or positive yields, but otherwise I would tell you there really hasn't been any particular pricing or competitive change. It's more a reflection of the demand for particular product and what does that result in, in terms of the waiver levels that are more or less built into those products to some degree.

Got you. Thank you very much.

Our next question comes from Marc Irizarry with Goldman Sachs. Please state your question.

Can you just clarify the 560,000 average, that's cumulative for the period so far through January?

Yes. It's for the first three weeks of January. We literally see this on a daily basis.

Okay. And then, maybe Chris you can talk a little bit about the consolidation opportunities that you are seeing out there, you continue to see some others get out of the money fund business, money market fund business, saying that it's either noncore or just not profitable enough. How do you sort of view the consolidation in the business going forward?

The consolidation will be and is an ongoing trend, and it isn't -- sometimes consolidation is always viewed, oh, A has to buy B. Well, sometimes B can leave the field, and the assets then come to a collection of A, C, and D. And so you have some of that as well. And you end up maybe by the subtraction method with consolidation as well. And we're seeing both types, where we're looking at various opportunities for money market fund assets, and we're seeing other players leave the field for exactly the reasons you're talking about. We had felt for a long, long time that many of these players did not have sufficient assets or devotion of resources to play in this game the way the major players played in this game. And so this is a natural result or a cleansing of this kind of a market, and we would expect it to continue.

Okay. Then just in terms of the fee waivers, and if you just look at the expense ratio, I guess there's obviously a piece of it that's borne by the distribution side versus the investment management side. How do you -- is that relationship fixed, meaning that, is the distribution channel going to -- is there going to be a point where the investment manager ends up taking the brunt of the fee waivers, where as right now maybe that distribution side is taking a little bit more?

Well, what we have done is developed a pro rata relationship with our intermediary. But, that pro rata relationship is different for every customer in terms of the arrangements made with each of them. So, the sharing of the decline moves in lockstep each between us and them between our investment advisory fee and the moneys that they share. Now, Ray can put some additional color on that as well.

When you see the 560, that, of course, is net of the sharing, and as Chris mentioned, it varies by customer. When you aggregate all of that at the product level, it varies by fund. Then if you pool that all the way up to the complex level, the guidance we would give you would be that you would see waivers approximately three-quarters to the intermediary and one quarter to Federated. But that can fluctuate, again, based on individual products and how the assets move between products.

Okay, great, thanks.

Our next question comes from Cynthia Mayer with Banc of America. Please state your question.

Hi, good morning. Just one more on fee waivers, if you can stand it, which is, I know they change every day, but I'm wondering if you can give us a sense of what they were at their worst run rate, maybe right at the start of the year?

They would have been actually not that much different in late December and early January, because again, the assets have already shifted around a bit, so I would tell you we haven't really seen that much of a fluctuation in the daily rate.

Okay. You mean by shifted around there was already some money going into prime funds?

Yes.

Right. Okay. And in your earnings release you mentioned one of the factors affecting the fee waivers is your willingness to do them. What's the alternative to that? Were you implying at some point if it reverted and it got worse, you would close the funds, or allow the yields to go negative or something like that?

There are an enormous range of potential alternatives that could be brainstormed. The willingness is a way to underscore the voluntary nature of what goes on. One of the traps we wish to avoid is the trap of no good deed goes unpunished. In other words, our willingness, on a voluntary basis to do certain things now does not imply that that is some future situation or some -- in terms of the revenues that we receive. So we always like to underscore that. But we also could look at a lot of other alternatives. Others have closed funds, create new funds, and there are a lot of other ideas that people have been kicking around that are all part of the brainstorming on this subject.

Okay. And just to follow-up on the question on consolidation, does the fact that some are just voluntarily quitting the business make you less likely to go out and buy the assets, and what is happening to the pricing of the assets?

Well, in terms -- I'll let Tom comment on the pricing, but in terms of our willingness, either structure depends, as it does in all of the acquisitions we do on the mutual fund side, on a precise look at the contents of the assets, how they got there what they are, and what's in the portfolio. So the fact that some people would be leaving the field does not negatively impact our willingness to, for example, do a Putnam type transaction. And so those two don't relate. What really matters is the hard-core work of looking at the shareholders, how they got in, who they are, what their characteristics are, looking at the portfolio and what's in it and how we think about it. And I'll let Tom comment on the pricing.

Cynthia, from a pricing point of view, we haven't changed really our views on this even back to when we did the Alliance transaction, which is, the money market assets can leave every day, so how are you going to pay for this, and how does somebody want to get paid for it? We continue to look at it as an over time payment if we get revenue out of it, then the negotiation is what is the sharing arrangement, and it hasn't really changed.

Okay. Makes sense. Just one last one. The fed insurance program of September 18, I'm just curious whether, would that make those assets more sticky than usual, and would there be any danger when that expired that those assets would leave? It sounds like you think those clients are not there for the insurance, they're there for the quality of the management, but I'm just curious about that?

Well, certainly we can't predict the future on that, but our institutional clients, by their actions, would indicate that they're willing to put more money in that they absolutely know for certain are not insured. And so that shows a willingness to own the portfolio in an uninsured environment. And so that's why some people have decided to not reup the insurance on their treasury fund and why that's a consideration that I'm sure others are going through as well.

Great. Okay, thanks.

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

I have a number of questions. Number one, I'm going to ask about an equity fund. Could you talk about the reception in your plans for the Prudent Bear fund at this point?

The reception for the Prudent Bear fund has been rather outstanding.

I would think so.

As a general rule, sales forces in the mutual fund area like to focus on positive up sloping environments. However, one of the reasons we started talking to these guys a long time ago, before all this really cratered, was because of the underlying efficacy of having a portion of your investments in products that are managed by the Prudent Bear people. So the performance has been outstanding, and we are in the middle of launching and talking, and developing with clients. We see positive flows in those funds right now. But I'm not going to give you a whole bunch of numbers because we're right in the middle of the launch and the discussion with everybody on them. But they are going through the same sequence that we've gone through with our other areas of excellence in terms of bringing their story to our clients to allow our clients to build their clients' portfolios, including the Prudent Bear products.

Okay. Thank you. You mentioned a debt figure of 170 or so, and the figure on the balance sheet is like 120, so is there a piece in the credit line stuck in current liabilities?

Yes.

Okay. And as a general rule, as people move from treasury into agency or prime, because they just get sick of 0% interest, does that behavior help the fee waiver situation?

Yes, it does.

Okay. And it seems like from the January figures that you gave that that behavior is occurring?

Yes, it is.

Okay, great. And since we have the good fortune to have Debbie on the call, I wonder if she could expand -- she commented on the treasury market. Maybe go into some of the other large categories, agency, commercial paper, munis, and just kind of talk about the health of the fixed income market that she's seeing in 2009?

Certainly. Government agency backed repo at this point, which is a large component of many of our products in that space, generally, in the last week and a half, again, going back to sort of the change when the fed added collateral has been trading in the 25 to maybe 35 to 40 basis point range. So above fund target. We don't think that's sustainable. Even if you look at the range of 0 to 25 basis points, 35 and 40 is way above that, and that's -- so that's too high. We think it will come back down again. But that's where it's been in the last week and a half. Direct government agency securities, depending upon the maturity that you are looking at across the money market yield spectrum, generally are about maybe 9 basis points on the very shortest end, all the way out to about 80 basis points if you go further out the money market yield curve.

From a prime fund perspective, generally you are looking at either CDs, bank products of some sort, or commercial paper, or asset backed commercial paper. Here we're looking at yields that start on an overnight basis at about 35 basis points, and go out to the end of the money market yield spectrum in sort of the one and a half to a one seventy-five range, depending upon what issuers -- very issuer specific for names out in that sector.

Okay.

Munis, the overnight -- or the weekly rate has been holding right around 50 basis points. I think it was 45 a week and a half ago, 48, so it was a little above that before. That's down from at the end of the year, it was above 1%, which was just basically reflective of year end demand pressures in that sector. But since the beginning of January it's been holding right around the 50 basis point level, and that's a reflection of probably about 70% of the assets roughly on average that are in our muni market funds are in some way tied to that weekly rate. A spread above that but that's sort of the basis off which they trade.

Okay. And if could I just ask a follow-up, how would you characterize just the tenor of the market? Not the rate levels, but, just in terms of liquidity, fear level, have the fixed income markets gotten better? Do you feel they're the same, they're worse? How would you just categorize that?

I think definitely from a liquidity in the primary market it is much, much better. There will be an interesting test that occurs next week. One of the facilities that -- this is the Federal Reserve bank in New York put in place during the fourth quarter to kind of shore up confidence and liquidity in the marketplace when there really weren't any market makers at that point in time is a facility called the commercial paper funding facility, it was one whereby issuers of commercial paper who were unable to sell their CP into the marketplace in the normal fashion could go to the fed and sell their paper to the fed at a predescribed 90-day rate. The first maturities of that paper occur next week.

So what we've seen since October, when it came out, through next week, is just simply an increase in that program's outstandings. It's been increasing at a lesser amount every week, but nonetheless, it has been an increasing number, which it had to be, because it either had to be increasing or stay the same because nothing was maturing yet. The maturities start next week, and I think it will be a test to see whether those issuers are now able to more effectively go back to the direct market and normal participants in the marketplace and place their paper in that fashion rather than utilizing the CPSF facility. We expect that that facility's usage will go down in the weeks and months to come, based on what we think right now, as I said, is on a primary issuance basis a lot better liquidity and market acceptance for most issuers.

Okay, thank you very much.

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

Thanks. Good morning, everyone.

Hi, Rob.

Couple quick questions, and back to the money funds. And this is not a fee waiver question, but if you look historically, ultra low rates, clearly unprecedented, at some point, has resulted in some amount of outflow from certain types of (inaudible) and I think, Chris, in the past, in your presentations, you have broken down the money funds of different kind of buckets, to give investors a sense of that bucket of assets that may be at risk, and for some reason, $20 billion is what sticks in my mind, if I look back a year or so ago. Is it at all possible to kind of size the pieces of money fund pot that you think may be most susceptible to kind of when things calm down, kind of moving because of rates?

Yes. Rob is referring to our charts that are on page eight that are on the website, if anybody is interested. But what we do is put the various sizes of the pods of assets, and we've done it both in terms of circles and pies, and in terms of regular line charts. And we divided into it bank trust, capital markets, broker dealer and corporate other. And the number that Rob is referring to of $20 billion was basically the number of those assets that we had in corporate other at year end Q4 '07. That number today is about $28 billion. And what I have said historically about those clients is that they are more attentive to the yields, the net yields, than, perhaps, the other clients, because they aren't in it as much for the customer service part of it. And, therefore, we are seeing se n more volatility in that section than in the other sections of our business, meaning the bank trust capital markets and broker dealers. And so if you were to look at that section of assets, it was $11 billion at the end of '06, $18 billion the end of '07, and $28 billion today. However, given the low rates, I don't know that that same motif necessarily applies in the near term, Rob, because right now the people who are in cash are in cash, and if they wanted to be in higher rate situations, they would have to move out the credit curve, if you will, in order to get there. So at this point I really don't see that kicking in. But that's -- you are right on with the number in our corporate and other category.

All right, great, that's helpful. And I guess another question, going back to acquisitions, obviously had a busy Q4. You mentioned that you're obviously still looking, but in the past you have talked about one of the buckets you wanted to fill was value, which, I guess to some extent you filled. Could you maybe update us on where, if you are going to use your words, power shopping, where you kind of see the holes that you are looking at now?

Well, as of now, we think that more than just, oh, we sort of feel. The Clover Capital has done our value space, and we are very happy with that acquisition and in terms of the expertise that was acquired up in Rochester. So we're not doing any more power shopping in the value space. And we really are not looking -- with the power shopping motivations for other areas. We think that with the Prudent Bear with the Clover, and with the other acquisitions we've done, we've more or less scored on the streets we wanted to score on. Now, this is not to say that we wouldn't had a sections here and there if we found opportunities, but the focus is more on roll-ups and money market assets at this time.

Okay. And one last question maybe going to the fixed income business on the fund side. Can you talk a little bit about if you are starting to see increased demand for short duration product? I think you may have mentioned you had seen some on prior calls. But are you actually seeing some investments trying to go out the yield curve a little bit more? And if not, you would assume at some point that's going to happen. Any sense that you're getting more inquiry about it?

Well, in terms of the flows, we are seeing more flows on the short intermediate side. In the fourth quarter we had pretty strong flows. So far this year, we're seeing more money come into those funds. And in total, those assets are -- they're up from year end.

We've seen the ultra short products in particular, Rob, if you break down the short intermediate buckets of the piece you probably would see people gravitate to first, would be the ultra short bond funds. You have seen over the years we've had at times significant inflows into those product, and then outflows, and it really does relate to the yield environment. But they have been more positive in the first couple of weeks of Q1 than they were even in Q4.

Rob, on the other hand, Rob, if you talk to the sales people in our budgeting process. They're not expecting the same level of growth that they had in '08, as in '09, in the ultra shorts. So you can get both answers.

All right. Appreciate it. Thanks, guys.

Our next question comes from William Katz with Buckingham Research.

Just to beat a dead horse here on the fee waivers, I just want to understand the math. If you had $560,000 for the first three weeks, if you annualize that, less than $10 million if the world didn't change. Is that the way to understand it? If that's the case that makes no adjustment for mix and the fact that volumes continue to mount. Is that correct?

Yes, but you can't really do that, because as Debbie talked about before, and somebody else mentioned, you are going to have maturities of securities that were higher yielding. That's why in the press release and in Chris' terms we said we expect it to increase as we sit right here today.

Okay. All right, so in that regard, then are there any hedging strategies that you are considering as a potential economic offset?

Bill, it's Ray. From what we would -- what we're seeing, obviously the growth in the assets we've continued to have net revenue growth, and in particular, within the money market, if you strip out the decline in equity, then we're clearly winning the rate versus volume push-pull, and we would see that continuing. Doesn't mean it's going to continue forever and you couldn't -- that you can't paint a scenario where that doesn't happen, but given that push-pull between rate and volume, no, I don't think you have -- you certainly wouldn't do anything along the lines of hedging at the fund level, and at the complex level, we see this as a market situation with the yields. We're very happy with where the business is, and with the demand and how we've been able to perform in that environment, so there wouldn't be any operational hedge necessary, either.

Bill, my thought, answer to that question, is that's what our firm is, is a diversified firm. We've got our equity funds, and we've gone through the performance, and that's looking pretty good, and the fixed income is looking pretty good, and we sure have benefited from our money fund complex to a great extent, and we're going to continue to fight on that every day. That's kind of how we look at our firm, is it's a hedged firm.

Okay. Just one more small picture question, and I have two actually conceptual questions. On the runoff portfolio that's in the institutional business, can you size that in terms of assets under management and also the impact on Q4?

I believe it's around 500 million or $600 million at this point. It's had a couple hundred million of write off in each of the two quarters that we managed it. It's distressed assets, and it's designed to be sold when and as we can, and I think we gave the number -- or maybe we didn't give the number. It's about $180 million in Q4.

Chris, just two big picture questions. One of your competitors earlier this week talked about the fact that clients are demanding greater pools of liquidity generally. Is that a factor in your outsized market share gain in money markets?

What do you mean, demanding greater pools? You mean they want to be in bigger funds?

I think that's exactly the concept, right.

From our point of view, our clients have always felt that way, because when you have big clients, what they're really telling you is they want to know that they can get their 400 million or $600 million or $2 billion out of a fund without blowing up the repo position. So they look at the size of the complex and the size of the fund area as important ingredients. This is nothing new. This may be new to some players in this business, but our clients have been on this before, and many of our clients have their machinery built in where they will only be so much in a given fund, so much of a percent, and things like that. So I agree with the thesis you're advancing and say that the clients we're dealing with have been on that for many moons.

Okay, the other question is, given the success and stability of the money market business and what to date has been more of a nascent push into the fixed income and the equity side are you seeing any visible signs of cross-sell? In other words, is the success of the money market business advancing the cause here on some of the fixed income mandates or equity mandates that you otherwise would not have gotten?

I would love to be able to track and chart and say with great confidence that this money from the money funds can then be moved over into our other products. But I can't track it, and I can't say it with as much enthusiasm and confidence as I would like. However, I would mention that our performance in this space has enabled us to gain, continue our brand, our recognition in the marketplace, for being a good player with good credit work and good response to clients. So in that sense, it is very helpful. But dealing with the intermediaries, we couldn't even see the money directly move from pod A to pod B anyway, because of the mechanics. And having been in this for three decades, it's very difficult for us to make that speech, although it would be one I'd love to give.

Okay. Just last question. You did buy back a modicum of stock, it's probably just given the timing of deals, et cetera, but it is a modicum, versus where many of the peers have been flat to hunkering down. How do you think about allocation as you look out into this year between buyback, particularly where the stock is trading right now, versus power shopping, to use your vernacular, or even sizable dividends, like did you last year?

Well, I don't know about the sizable dividend, but we would continue to score on all streets. Namely, dividends, and if we saw acquisition opportunities, we would do those, and we remain open to doing the share buyback. But as with answers we've given on this before, Bill, it's really tough to say, oh, well, we're definitely going to do more of thing A or thing B, because we really truly do, and if you look at our charts, look at how we do it on a opportunistic basis during the year. So it's really hard to say exactly what we're going to -- how exactly we're going to allocate those dollars.

Okay, thanks for taking all my questions.

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

That concludes our call, and we thank you for joining us today.

Thank you. Ladies and gentlemen, you may disconnect your lines at this time. Thank you all for your participation.