Federated Hermes Inc (FHI) 2009 Q1 法說會逐字稿

Greetings and welcome to the Federated Investors Q1 2009 earnings conference call. All participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

Good morning, and welcome. Today we'vee planned a brief series of remarks before opening up for your questions. Leading today's call will be Chris Donahue, Federated CEO, and Tom Donahue, Chief Financial Officer. We also have Denis McAuley, Laurie Hensler and Stacy Friday from the Corporate Finance area.

Let me say that certain statements in this presentation, including those related to asset level, investment and financial performance, constitute forward-looking statements which involve known and unknown risks that may cause the actual results to be materially different from future results implied by such forward-looking statements. For a discussion of the 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 to talk about Q1.

Thank you, Ray. 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 $4.5 billion from the prior quarter with about two thirds of the growth in separate accounts and one third in funds. Market conditions continue to fluctuate during the quarter. With equity markets declining in the first part of the quarter, our money market funds showed faster growth. In February and March, uses of cash by investors and better equity market conditions were factors in money funds returning to levels slightly above the elevated year end figures. So far in the second quarter, we have seen expected patterns with early quarter inflows followed by mid-month outflows most likely from April tax payments. Our money market fund assets in April have ranged between $325 billion and $335 billion and have averaged about $331 billion.

Money market separate accounts showed seasonal increases in the first quarter and for the first part of the second. We expect these assets to decrease due to tax-related seasonality during Q2 and Q3. New business trends are favorable here as we continue to benefit from consolidation and outsourcing of market management. We added a new $6 billion separate account to subadvise money fund assets in early April from a major insurance company. Our money market fund market share was about 8.5% at quarter end compared to just under 7% at the end of 2007 and up from about 5% back in the year 2000. Consistent with industry patterns, we have seen a migration from treasury money funds to government agency and prime funds. At quarter end Federated's money market funds by type were $67 billion in treasury funds, $131 billion in government agency funds, $94 billion in prime and $36 billion in Muni. During the first quarter, treasury funds decreased by $25 billion, government agency funds added $9 billion, prime funds added $16 billion and Muni funds added $1 billion. In April, we have continued to see treasury funds continue to decrease and agency funds have slightly decreased and prime funds have continued to increase.

Low market interest rates continue to impact yields for money funds and Federated continues to incur waivers in certain money funds in order to maintain positive or zero net yields. During the first quarter, the impact of these waivers to Federated was a little over $5 million in reduced operating income. Based on current market conditions, we expect waivers to impact operating income by about $1.5 million to $2 million per month over the next several months. Of course there remains a wide spectrum of potential outcomes given the multiple variables involved including: yield levels available in the market, changes in assets within the funds, actions by the Fed, changes in expenses of the funds, mix of customer assets and our willingness to continue the waivers. Through April 20th, we have had about $850,000 of operating income impact from these waivers.

In terms of money market regulations and enhancements, Q1 saw an important development with the issuance of the ICI Working Group report on money market funds. Federated played an active and significant role as did most of the top money funds the US. Federated supports the recommended enhancements of the report and will work to implement the enhancements in the few areas where we are not already in conformance. We will of course keep the interest of funds shareholders foremost in the evaluation of all enhancements. We believe that the report makes a vital contribution to the discussions on the important role of money market funds in our capital markets, with a focus on enhancements designed to further strengthen the resiliency of money funds. Recent comments from Fed Chairman, Bernanke, Treasury Secretary, Geithner, and SEC Chair, Shapiro, indicate that the government of the regulators appreciate the role of money funds and the importance of strengthening these funds.

Turning to equities. Assets decreased about $3 billion or 12% during the first quarter. Most of the decrease was due to market depreciation. Net sales of equity mutual funds improved significantly from the prior couple of quarters, they were still modestly negative. The Prudent Bear Fund had it's first full quarter since the December acquisition and showed strong growth in gross and net sales. Strategic value and capital appreciation funds each showed positive net sales. Our equity mutual fund flows are slightly negative for the first couple of weeks of April, those always we caution about drawing conclusions from limited data. Within our equity separate accounts, outflows were largely due to net redemptions in the SMA products. Researchers have noted higher redemption rates in SMAs recently as compared to mutual funds. Large scale changes at major brokers offering SMA products have contributed to the redemptions as SMA assets are not as portable at mutual funds.

In addition, the performance of our MDT strategies used in the SMA programs was challenged over the last three quarters by difficult market conditions. In the development of this model over the last 18 years, MDT has adjusted to other downdrafts with solid performance and we expect this to happen again. Their quantitative benchmark focus style provides products that are likely to be in demand by institutional investors looking for a transparent, replicable and explainable process that can generate alpha in multiple investment styles. In fact MDT just won a new small cap subadvisory mandate this week.

On the fixed income side, fund flows turned solidly positive with more than $1.1 billion of net sales. Gross bond fund sales increased 45% from the prior quarter while redemptions decreased 13%. Positive net sales were achieved in nearly every bond fund category including: corporate, governments, mortgage-backed high yield municipals and the multi-sectors. Ultra short bond funds accounted for a little less than half of the net flows. Our flagship total return bond fund gross and net sales accelerated significantly. Gross sales were up about 50% while redemptions declined slightly from the prior quarter. We continue to have success winning new fixed income institutional mandates. In Q1, we won three new fixed income mandates for about $150 million expected to fund during the second quarter. We've split out our liquidation portfolios in our flow data to differentiate certain accounts with planned liquidation mandates and distressed portfolios like an ABS/CDO that unwound during the first quarter.

We also recently won a large mandate for a fixed income distressed asset portfolio from our global distribution operation. Further details to follow later. We are actively seeking this type of business to leverage the strong credit and performance experience of our fixed income teams. We are very optimistic about the growth prospects of our institutional business and in particular for fixed income in both mutual funds and separate accounts.

Fixed income fund inflows have accelerated in the first weeks of April, and we continue to have elevated activity for institutional RFPs. We are also submitting an application to the Treasury for the PPIP as another way to potentially leverage our strong fixed income capabilities.

Solid investment performance across multiple styles in both equity and fixed income is an important ingredient in driving our sales improvement. Looking at the quarter end Lipper rankings for Federated's equity funds, 85% of the rated assets are in the first or second quartile over the last year, 82% over the three years, 90% over five years and 74% over ten years. For bond assets the comparable first and second quartile percentages are 73% on the one year, 69% on the three years, 76% on the five year and 73% on the ten year. Our recent acquisitions add to this investment strength. The Prudent Bear team and products combined with our market opportunity group gives Federated a strong alternative strategy group. We believe that this will be an area of growth as investors make favors successful alternative strategies packaged with the protections and transparencies, if not the beauty of the 40 act structure.

Clover Capital's relative performance in core equity value areas remains very strong. We recently launched three new Federated Clover mutual funds and are looking at other ways to leverage the skills and record of the group. As of April 22nd, our managed assets were approximately $412 billion including $361 billion money market assets, $24 billion equity assets and $27 billion fixed income assets. Our money market mutual fund assets stand at about $325 billion.

Let's turn to distribution. After strong growth in 2008, our gross sales results have accelerated significantly. For the full year 2008, gross sales of equity and fixed income mutual funds increased 32% from the prior yield. These sales exceeded $13 billion and therefore averaged about $1.1 billion per month. In the first quarter, these sales averaged $1.5 billion per month for another 30% increase over the strong 2008 pace. Our sales force has produced these increases despite massive disruptions in the markets and in the intermediary distribution channels. We have been able to leverage solid investment performance across a range of styles and high-quality customer service in difficult market conditions to continue to grow sales. This is an excellent illustration of the balance and strength of Federated and positions us well for going forward once again during various market conditions.

In the wealth, management and trust market net sales of both equity and bond funds were positive. In the broker dealer channel combined net sales of equity and bond funds were positive as net inflows in bond funds exceeded equity fund outflows. In the global institutional channel, we are having success with institutional fixed income accounts and liquidation portfolios including the new business that I mentioned earlier. Also on the global front, Federated has committed senior resources to further development and growth of our nonUS business. We recently [apported]-- appointed Gordy [Saracino] as President Federated International Management. Gordy is an industry veteran who joined Federated on 2006 with the MDT acquisition where he was the CEO. In his new role, Gordy will oversee the development and growth of Federated International product distribution efforts. We'll have more to report going forward as we develop our plans to accelerate Federated's growth in international markets.

Finally a comment on acquisitions. We have made good progress on the integration of Prudent Bear and Clover Capital. With these additions we believe we have substantially completed the development of our investment centers of excellence. While further deals remain always possible, we are not actively seeking to add any specific styles. We do however continue to evaluate multiple acquisition opportunities to add further assets including money market consolidation deals. As always, we cannot predict the probability or timing of any potential deals, Tom? Thank you, Chris. I want to comment first on the impairment charges we book. The bulk of the charges-- the bulk of the charge relates the reductions in the accounting value of the customer relationship intangible assets created in the MDT and Rockdale acquisitions in 2006 and 2007. In those deals, a portion of the purchase price was assigned to existing customer relationships. At the end of the first quarter, the value of those assets was determined to be lower than their carrying value due largely to Q1s decreases in the equity market and net redemptions. As a result, we had an accounting impairment. We continue to work to expand distribution for MDT products. As Chris mentioned, we recently won another new institutional separate account.

Turning to our operating results. Federated's revenue increased 3% in Q1 from the prior quarter and 2% from Q1 2008. The press release contains the details by asset category. Essentially growth in money market revenues was partially offset by decreases in equity-related revenues. We also had our first full quarter of results, including Prudent Bear and Clover, which impacted a number of line items. The revenue from these two acquisitions was about $8 million in Q1. Two fewer days in the first quarter impacted operating income by about $4.4 million versus the prior quarter. Money market fund waivers to keep positive or zero yield impacted revenues by about $10 million in the first quarter partially offset by $5 million in lower marketing and distribution expenses, which made the operating income impact about $5 million. We think this is a reasonable estimate of the impact for the next coup of quarters, of course actual waivers will depend on a number of variables and could vary significantly from this estimate.

Administration fee revenues decreased due to higher managed mutual funds asset levels. Going forward we expect a reduction of about $600,000 per quarter in administration fee revenues due to the determination of most of the remaining administrative service contracts with third party fund complexes. Comp and related expense increased from the prior quarter due mainly to Q4 including the net impact of the reversal of approximately $2 million of previously accrued incentive comp expense due to lower than expected actual payments for 2008. In addition, the reset of these accruals in Q1 added about $3 million including new Prudent and Clover programs as we estimate incentive comps for 2009. Incremental payroll tax and benefit expense due mainly to seasonality added $2.3 million, higher share-based comp expense added $2 million including the $1.5 million noncash catch up amortization expense we recognized from a change in the model used to amortize our long-term restricted share compensation programs. The rest of the variance is largely due to having a full quarter of comp expense from Prudent Bear and the Clover acquisitions.

Though our business mix and acquisitions have allowed Federated to continue to increase revenues, we have implemented a number of new expense management initiatives for 2009. These include executive levels base pay reductions of 10%, no merit pay increases for employees, an increase of 2.5 hours in the workweek, restrictions on new or replacement hiring outside of investment management and the implementation of a number of other expense savings ideas generated by employees and managers. Marketing and distribution expense increased from the prior quarter due mainly to higher average money market fund assets offset partially by lower expense due to intermediary sharing of money market fund waivers to produce positive or zero yields.

Excluding the impairment charges, amortization of intangibles ran at $4.7 million. Going forward, we expect amortization to run at $4 million to $4.3 million per quarter for the rest of 2009. The reported tax rate was lower in Q1 due to the affect of the adoption of FAS160, which changed the deduction of minority interest from pretax to after tax earnings. This affectively increased our pretax earnings but did not change tax expense thus lowering the reported tax rate for Q1. The tax rate including the impairment charge was 35.5%. For the full year 2009 we expect our tax rate to be between 36% and 37%. We did adopt EITF 3-6-1 for Q1 which impacted the diluted EPS calculation. The diluted EPS was 6/10 of $0.01 lower than the prior method would have yielded.

On the balance sheet, cash and short-term investments were $71 million at the end of the quarter and recourse debt was $165 million. We continue to generate strong free cash flow and expect that we will continue to use our cash and our revolver to fund acquisitions, dividends, share repurchases, capital expenditures and debt repayments. We would now like to open the call up for questions.

Thank you, sir. (Operator Instructions). Our first question today comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your question.

Thanks, and good morning.

Good morning.

First question, I just wanted your thoughts on the kind of money market industry net flows, because if you look at the data, it looks like we hit a peak in the fourth quarter. And what I'm wondering is if this is the normal cyclical pattern of downed money market assets for a year or two, do you think Federated can continue to take market share there and actually deliver net inflows on that business despite negative flows for the industry?

Craig, I think we can continue to grow market share, and the reason is because of the consolidations that we're seeing and people who are throwing in the towel and actually running a small type of money funds. And that comment would apply regardless of the cycle of overall movement of cash in and about the marketplace.

Got it. And my second question on the money market fund business really relates to capital charges. And you just commented on kind of the government's recent comments in the ICIs Working Group. I'm wondering when the insurance wrapper goes away this fall, if you-- how you frame that risk of capital charges now in light of those decisions? And also if there's a rise corporate bankruptcies which could impact some CP programs, maybe this summer, I'm wondering if you think that could impact anything?

Well in terms of the capital charges it's our view in the ICI Working Groups view that the marketplace should be in a good enough position to enable that insurance to lapse and that we go back to the way we had successfully run money funds for 35 plus years. And I think you've seen a number of funds already move in that direction, primarily the Treasury funds, as many of the large operators including ourselves have decided to shed that insurance at the recent time frame when it was-- when you had to reup. So you're seeing a lot things in the marketplace that give you some confidence that those views are going to be correct as well. So that's our view on the insurance.

In terms of capital charges, once again, we think those are both unnecessary and unwarranted in this business. Our idea is to focus on the confidence of credit work and knowledge of your customer and all of the other things that the ICI put together in order to, as Bernanke calls it, enhance the resiliency of money funds.

As to the other portion, corporate bankruptcies and the like are a part of the cycle and have been so, we have been through these many many times over the years and that is why I mentioned about credit work. So I don't see that as a new item in analysis of money market securities.

Is there any chance, because I think there's very different risk quality between the Treasury and Government-sponsored funds and then also the prime funds, the CP funds, is there any chance they differentiate between the two and apply capital charge to the prime business, and--- or in FDIC insurance premium on the prime business and not the government business? Because I agree it makes no sense on the government side.

Anything is possible by somebody who wants to brainstorm this. Our view is, as I said, that the idea of putting capital charges on any of these funds is unwise and unnecessary. These are investment products and should be evaluated as such.

Great, thanks for taking my questions.

Thank you. Ladies and gentlemen, our next question comes from the line of Keith Walsh with Citigroup. Please proceed with the question.

Hey good morning everyone. Maybe just a follow up on Craig's question there a little bit. I mean the bottom line with the ICI proposal, what's the game plan here if capital requirements did get implemented, if you could just answer that question? Thanks.

You have to have some description is you're going to say that they are implemented to what they might be. And I keep saying that I don't think they're going to do it, so I don't know what they would be. I will venture into this a little bit hearing what others in the industry have said, that if there's a rather modest one put on that would be about a basis point or so, it isn't going to be a big deal. If on the other hand you're talking about putting up bank style capital for a $4 trillion industry, somebody has to say where the $400 billion of capital is going to come from and why it's necessary to run this business with $400 billion worth of capital and why that capital we have devoted to that project would make a viable economic return, which I don't think it would. And so that's why you see me keep coming back to the idea that I just don't think it's realistic for this to occur.

Okay, and then just thinking about expenses here with money funds slowing, your equity AUM back to levels not seen since probably 2002, 2003, why is head count at its current levels where it needs to be? Thanks.

Our head count has been roughly in this tight range for a considerable amount of time. And what we have been able to do, because of the dynamic model that we have, is not have to face any reductions in that because we've had pretty good revenues. If you recall over history since we've gone public, we have shed many of the other businesses that were not directly related to investment management, distribution and service of customers to include transfer agent, portfolio accounting, warehousing our sales [literature], producing software for others to buy and sell, 401(k) processing, and even the legal department was outsourced. So we think we're in pretty good shape in terms of the number of people and in terms of where their focused in our business. So we're not at all concerned about the level of people given the size of business where we are now.

Pardon me, Mr. Walsh, do you have any further questions, sir?

No, I'm done, thanks.

Thank you. sir. Our next question comes from the line of Ken Worthington with JPMorgan. Please proceed with your question.

Hi, this is Tim Shea filling in for Ken. The first question that we had is I know that you had given a bunch of detail on the fee waivers, just wondering if you could give a breakout of sort of the shape of those fee waivers over the course of the first quarter, whether or not they were higher in the first part of the quarter or in the latter part of the quarter or if it was pretty even?

Tim, it's Ray. The-- they actually decreased. And my comments are on the net operating income impact, not with what should-- would get you to the same place, they were just over $1 million in January, just over $2 million in February and just under $2 million in March, and that yielded the $5.1 million number. We actually expect a modest reduction a little under $5.1 million in Q2 and then likely a little over $5 million in Q3. And what we're seeing underneath the gross numbers are that the treasury waivers have been reduced, the impact of those waivers, because of the asset migration that Chris talked about as well as an improvement in the yields relative to what they were at year end and at the very beginning of the year. April's tightened up a bit. There have been some technical factors in the treasury market with supply and demand. But we expect that to back off again in May. So the treasuries have actually improved, the agency funds have incurred it's more waivers than what we saw some months ago. But we're very comfortable that-- with the range that we talked about earlier, $1.5 million to $2 million per month of net operating income. And we really haven't seen anything very, very modest activity out of Munis and prime fund.

Okay, that's helpful. And then just another follow up on the fee waivers is do you think it would be possible to pass on a higher portion of the waivers to distribution maybe even up to 100%, or is that unrealistic?

Well that's a noble idea but it's unrealistic. The sharing is more or less divided by what you get on the way up and what you get on the way down, and that's about as fair as we can do it.

Okay, that's answers that then. So we're all set, thank you.

Thank you. Ladies and gentlemen our next question comes from the line of Robert Lee with Keefe, Bruyette & Woods. Please proceed with your question.

Thanks, good morning, guys.

Hi, Rob.

I have a couple of maybe little technical questions to start. But now the-- I'm just curious, the new subadvised money fund separate account, is that funding-- did that fund or is that funding this quarter and are the kind of your fee structure and that kind of similar to the other money cash management of separate accounts?

Yeah Rob, it's Ray. It has funded and it's tough to go into pricing, but yeah, I think you could look at the other separate accounts as somewhat of a guide.

Okay. And maybe a question for Tom, I think I missed that you kind of ran through some of the cost savings initiatives, could you maybe, just for my benefit, just kind of run through those again, and maybe give-- is there's anymore color you can give on kind of the magnitude of the impacts you expect from it?

Sure. We had executive level pay reductions of 10%, and that's somewhere around the $0.5 million savings on a yearly basis. We had no pay increases for 2009. So you're not going to see any reduction there, but you're not going to see an increase there. We increased the work hours, and so that's helping us dealing with not having or having us making it very difficult to get replacements and new hires. You're not going to see-- so you'll see a bit of overtime reduction there but not something that you might calculate out. And then we have expense savings, ideas that we've actually got from employees with a little program that's running and from managers, that we think we've been able to reduce about $6 million, we're looking at for the year about $6.5 million to $8 million of expenses.

Okay. Great that's helpful. Let's see the-- Chris I-- I had a question for you on the institutional RFP activity and fixed income. Is that-- are you seeing, is that predominantly in your kind of core bond strategy or are you seeing it in a broader range of strategies?

Well it is in the core bond strategies but there are others as well.

Okay. And lastly, I guess one more financial question. If memory serves me you had some contingent payments that normally would have been due to MDT, maybe Rockdale coming up in the next quarter or two, with -- should we assume that those are going to be a lot smaller than they were say in the last year or so? I would assume given that-- what assets have done. But-- or are those-- or are there not even going to be contingent payments?

Rob, on MDT, when we have to accrue what we think we're going pay, and we're not accruing anything right now on the MDT deal. On Rockdale, that's interesting because I mentioned that as one of the impairments and we will be making a payment there. So it's an accounting anomaly that we're taking a write-off yet the assets are above when we bought them because the deal worked as we thought. In other words we sold it in our distribution, yet when we did accounting and we had to take specific customers, we have an impairment.

All right. Great. That was all my questions, thanks, guys.

Thank you. Ladies and gentlemen, our next question comes from the line of Cynthia Mayer with Banc of America/Merrill Lynch. Please proceed with your question.

Hi, good morning. Can you talk about how you think your money market balances would be affected if equity markets continue to bounce back this year? In other words, how much of your money market assets are really assets which are in hiding from riskier assets as opposed to money market assets which are used as a cash management tool.

Cynthia it's tough to be precise on that for a couple of reasons. One, we deal with our clients with (inaudible) accounts and therefore we don't know exactly what those numbers are. The comment that I like to make is that I look forward to higher highs and higher lows which has been what has happened to us historically. If you look historically, there were some occasions where there was some percentage of the funds, these are on our charts that are on our web site that you could take a look at back in the 2001 tame frame and subsequently, where some of the assets that came in then, then went back out and into the market. But what we've discovered overall is that because of the importance of the cash management service aspects of this business, that basically the cash portion is a percentage of the overall portion of a person's investments and therefore when the market goes up, the component of money fund assets and dollars also goes up. So that that's what gives us the confidence in saying that we expect higher highs and higher lows even though we would expect the top half of some of those charts to go back into the market.

Okay. Because seems like so far this month your money market balances are up in the middle of the pretty good equity move, right?

Correct. There are other factors as well. Funding a large account, I mean the funding of a large account, and then the normal activity of adding various accounts where people are getting out of the business, so that's not necessarily a quarter issue but that's over the long haul, that will also help our balances.

Okay. And just to go back to the expense initiatives. Maybe you said this and I missed it, but is there a way to sort of quantify the impact of those, you mentioned $6.5 million to $8 million expenses for the year. Is that something that you were talking about a run rate, reaching that run rate by the fourth quarter and does that include everything you've mentioned? If you totaled everything you mentioned from the executive pay cuts and stuff like that what sot of expense cuts are you talking about?

What we did Cynthia when we had our budget process we looked at the things that we felt were controllable through efforts in the firm. And so I'm not talking about the bonus programs, I'm not talking abut intangibles, I'm not talking about marketing and distribution. And so we took somewhere around 260 or so expenses and said we wanted to have a reduction in there as opposed-- instead of a growth in those line items. And our reduction goal was about a 3% reduction in those line items and that was-- that's where we striving to get for the year. It's going to be hard for the outside world to go in and figure out that we accomplished that but we're well on the way to achieving it.

Okay. And then I guess just on the bond fund sales obviously those are really good and you're winning institutional mandates, but it seems like the mandates are still at a relatively small size. And I'm wondering what would it take to compete and win some of the really larger mandates, is there an issue of you have to have a certain amount of scale before you can compete or is there some other issue?

No we think we're making progress there, and we think we are going to be winning some bigger accounts. It is like repeating the sounding joy and like keep blocking and tackling and keep winning all the little ones and keep getting in on the RFPs and keep up the performance. So there's no new catalyst that comes in. But we think we're in a pretty good shape on some larger accounts as well.

Okay. And last thing, can you just talk about potential acquisitions, where if any do you think you still have holes, and would you be more inclined to look for money market assets or maybe equity assets to make up for the market depreciation?

We would be more inclined to look for equity type assets. However, what shows up are a good bit of money market opportunities which we would not decline to take advantage of. We have this sense of being owner operators and liking the availability to these money market funds despite the fact that it continues to alter the fraction of our business from money funds. In terms of the over all issue of where we would be shopping strategically, we think we've done a very good job of filling out the centers of excellence. And even though we could add various assets in some of those groups if opportunities came along, we're not currently on a search for a center of excellence that I would list, I have listed for you on these calls many times since we've been public.

Great, thanks a lot.

Thank you. Ladies and gentlemen our next question comes from the line of John Fox with Fenimore Asset Management. Please proceed with your question.

Okay. Thank you, good morning, everyone.

Good morning, Tom.

First question is for Tom. Can you just help us think about the compensation expense? I mean obviously every year we have the FICA reset and those type of things in the first quarter, so you said there was $2.3 million of seasonality , does that go I way going forward? And then the $1.5 million of catchup amortization expense, is that one time or is that a new level of expense going forward?

Yeah the catch-- the $1.5 million was a one time catchup. The seasonality will drift off and we'll be looking at the comp, the bonus and the incentive compensation programs every quarter and trying to get right what we think the payments will be at the end of the year, so that depends on all the variables.

Right, sure. Okay. And the $6 million to $8 million or $6.5 million to $8 million, that's not in the compensation line? That's in all the other areas of the business, is that correct?

Part is in the compensation line. That's why I say, you're not going to able to figure out it because when we talk about that we don't talk about the incentive comp plan.

Okay. And then for Chris, could you, if you can expand, you mentioned I guess applying for the PIT program or being involved in some of these asset management with the government. Could you just talk a little bit about your thoughts there and how you might be involved? Thank you.

Well the world has been invited to apply, and there were certain criteria that were put out initially regarding the amount of assets you had under management and things like that.

Right.

And then there was some push back and then there was some statements that well we will consider people even though they don't quite meet that criteria, that's where we would fit. And we think that it is a worthy idea if these programs get off the ground that a closed end type fund would be a nice way to do it. Now there are certain challenges with that because it's very difficult for a closed end fund in a mutual fund setting with 2-to-1 leverage available to it under the 40 act to compete with someone that has 6-to-1 leverage on the other side, the way they have this set up which is bidding for the assets that come in to be purchased.

Right.

So there are some challenges there that we want to be in a position to be ready and able to go if these challenges are successfully worked out and if the banks, after taking a look at their assets decide to participate by putting the securities up for sale, some of which some of the larger banks have said they're not going to do.

Okay. Thank you.

Thank you. Ladies and gentlemen, our next question comes from the line of Marc Irizarry with Goldman Sachs. Please proceed with your question.

Great, thanks. Chris, if you take a look at what the Fed is doing with quantitative using a lot of collateral obviously coming out of the systems pushing yields lower on-- for money market fund industry, broadly, and I guess maybe if you're-- if there's more a credit risk being taken somewhere along the line you can maybe gain share through some higher yield. But generally it would seem like your guidance for the fee waivers despite what we're seeing for the Fed and what we're seeing for money market fund yield is about the same, maybe a little bit higher than it's been. But what sort, what sort of the outlook if we do continue to see collateral taken out of the systems and pressure on yields in this business I mean what's sort of the sensitivity around those fee waivers?

Well the way it works at the very, very short end, which is different than what you've described at a little bit of the longer end, is when you pull collateral out of the system the repo rates go up. And if the repo rates go up, money market fund managers are happy because they're able is reinvest at rates of 25 basis points instead of 15 or 18. So if it continues the way you're talking about, in an odd sort of way, that would actually help the reinvestment rate on money funds.

And then just on the sensitivity to the fee waivers, what sort of scenario could you see where those come in potentially a lot lower than you're expecting or potentially there could be a negative upside surprise there?

Marc, this is ray. We've, I mean we've been through some of the traunching before, and we have about 60% of our money market assets in funds that are under 25 basis points of the expense ratio and you get up to 80% at with expenses under 50 basis points. So the vast majority of our assets are 50 basis points or less and that's why I think you're seeing the level of waiver that you're seeing. It impacts the higher fee products that have additional marketing and distribution expense built in. You'd need to see gross yields across the fund portfolios come in under 50 basis points to get -- to cover the 80% of our money market fund assets.

Okay. And then just in terms of head count again, can you give us the head count at the end of the quarter and also just remind us where it was at the end of the last year? And then if you look back I guess at the previous cycle, where you guys did have some outflows as equity markets sort of improved, is there a need for sort of resizing the business if we-- if the flow trends for your money funds look like they did back in let's say 2004?

Marc, the head count numbers are essentially flat. Down single-digits from year end excluding the affect of the acquisitions. Of course bringing on the Prudent Bear and Clover teams added new employees, but x that we're essentially flat from year end.

Marc, this is Tom. When you look at-- every day look at what we're doing and how we're doing it and are we right sized and are we ready for growth, we look at the whole Company and particularly the performance in the fixed income and the positive flows and the performance in the equity funds across the board and how successful we think we're going to be. So we don't want to get caught without being able to meet the growth.

Okay, great, that's helpful, thanks.

Thank you. Ladies and gentlemen, our next question comes from the line of William Katz with Buckingham Research. Please proceed with your question.

Okay, thank you. On the new subadvisory win that you got, I was wondering if you can also possibly quantify how sizable the entire poole of potential assets might be? Sort of wondering now that you've had one of these under your belt, how much of an incremental growth drive this could be? I recognize these are very low fee assets but incremental profit contribution seem to be pretty high. So how big of a poole could this possibly be?

I don't know how big this poole is of subadvised that we could get. I just wouldn't have a number. I'd hesitate to guess on that, Bill. And Bill, we don't, we don't want to go in to anymore details about the particular account. Bill, we had two numbers and two wins in there. There was subadvised money market that was in the $6 billion range, there's a separate account that we mentioned from the overseas, our global distribution, and we'll have more to say about that once we've worked through-- once the client is prepared to talk more about it. But I think you've seen in the market big distressed asset wins, there's a lot of this out there, it would be hard for us to mention it. But there's certainly big pooles of this type of asset both US and overseas and we intend to compete for these kind of mandates.

Chris, maybe a question for you, big picture. Given your strong bond sales and what seems to be a percolating institutional business, are you starting to see some greater leverage to the platform given your base business in the money market business and how you've sort of navigated the last couple of years. Is that filtering out sort of brand recognition and incremental market share? Or are these just sort of won off account wins?

I think that we are accomplishing a wider spread success than simply, Oh, we won an account. When you look at the numbers of accounts that were won in the fourth quarter, the continuing efforts here in the first quarter and the continuing efforts in getting into the RFPs, the feeling of it is pretty good that it's more than just a one off account. And obviously getting more accounts in the same mandate is a very good thing for the Company.

Okay and just so I just-- maybe, Tom one last question. Just so I understand the puts and takes as we think about the earnings impact here, it sounds like you're running $1.5 million a month to $2 million more conservatively in fee waivers, multiply that by some number, then you also have the offset of costs, is that correct? So at the end of the day here we're really not talking about that much of a net impact here.

When we say $5 million for the quarter, that's a net impact.

Yeah but then you have the-- sort of wondering, are you counting the cost savings against that, or is sort of a hedge against those fee waivers-- net impact of that?

Well, I hadn't looked at it that way at all. Now the waivers work themselves out, Bill, because of a formula. So the waiver is then reduced-- the gross waiver is reduced by the reduction in marketing and distribution. The expense initiatives are really reflective of, we like everyone else have taken an impact on our equity revenue, even though our total revenue has continued to increase. So we don't exactly view them as-- we would not put it on a parallel track to the net impact of the money fund waivers, it's really on its own track and will find its own levels.

Okay and I apologize, just one last question, Chris back to you. Given where your stock is trading relative to earnings and then relative to its peers, sort of wondering how you could think about buy back versus new product growth versus acquisition at this point?

Well once again we'd like to score on both of those street acquisition and buy backs, not to discount dividends either. But I would still give you Chris' speech on CEO the [meant], that our relative PE is not where it should be and therefore I have this inclination to want to buy the stock and to score on that street. So it's-- as you've seen from our history, it's pretty tough to predict where we will go with that because we look at those opportunities as they present themselves every day. But we are well aware of the relative disparity of our PE versus the marketplace. And we're also well aware of the performance and the sales activities here at Federated that give us a good deal of confidence.

Okay. Thank you for taking all my questions.

Thank you. Ladies and gentlemen, our next question comes from the line of Roger Smith with Fox-Pitt Kelton. Please proceed with your question.

Thanks very much. And the first thing I just want to understand is on the fee waiver guidance where you talked about a little under $5 million in the second quarter, and a little over in the third quarter. What's really sort of the assumptions that you're building in there on the rate markets and is there really any kind of continued shift in the assets in-- built into those numbers?

Roger, that's really based on the present conditions both in terms of where the assets are and where the yields are in the market. And that's why we go through the multiple factors that could change, money could-- but we're not really factoring in further shifting or changes in yields beyond the present reinvestment rates. And so that-- those would continue to be variable.

Got you. Okay and then back to the acquisition side, when you talked about sort of the money market opportunities that are out there, is it more a function of really scale on the smaller side? And how much of that is really increasing, are we seeing a lot more of like $5 billion type of opportunities out there?

If you take a look at the list of all the money fund operators you get 130 or some firms doing money market funds. And you can imagine how skewed that is to the people that have more than $50 billion or some number like that. And so everybody below that to us is a worthy opportunity for acquisition. And so are there other $5 billion pods? Yes, but once again, it isn't the way you're putting it exactly a question of "scale".

What it really is, it's a question of business commitment of ability to do the credit work and to understand how these money funds work, know your customer and things like that. And it's a question of whether or not you have any say over the redemptions in your fund. And I've said this many times before, that if someone is running a money fund of any size, and they can control the redemptions, then if you don't blow the credit, you're-- you don't have to do anything with that money fund, it will work along great because you don't have the redemption. It is that once you step out into areas where you don't know your customer or you don't know the redemptions you're going to get that you need to have a large operation with a lot of different pricing vehicles, a lot of different vehicles themselves, in order to give people what they want which is different forms of daily liquidity at PAR.

Got you. And then, still in that acquisition side, it does seem like a lot more bigger properties are for sale from banks that might have long-term assets as well as money market assets. What's your thought sort of on making a larger acquisition or is there any potential even there to sort of bifurcate the long-term assets from the money market assets and sort of work with any of those platforms?

I think there would be opportunities to, as you say to bifurcate, the assets. Us doing a larger deal is certainly something we would consider, but would have to be the right kind of situation. So we wouldn't foreclose that discussion, but it would be, it would be a challenging one, as I say we would foreclose it but bifurcating might be a way to go too.

Got you, thanks. And then just the last question I have is really back to the government plans. And what I-- it sounds like you guys are interested in participating and that there are some challenges that need to be overcome, I just want to understand though, are you in that position already? I mean have you guys been spending a lot of time really working to participate in that, or is this something that you're sort of still waiting to see where those challenges come out or how the plans actually develop before you put a lot of effort and resources into it?

Well we did apply for the prior opportunities when they were presented by Paulson back in, back in last year. And so it is a I would say a constant effort by us to apply to see if there are opportunities for us. Now if you say well how much resources are you devoting it, well there's not a whole lot of resource commitment, because you've got to see if this program is going to come about. But it's got to be enough of resources to demonstrate legitimacy and properly fill out the detailed RFP requests that are required. And Roger, I would say our effort would be comparable to where a number of other firms are. We've completed the PPIP application, we're in discussions with the investment bankers and firms who could create these types of products, and so everybody is sort of noodling around for a way to get something to work here.

Great, thanks very much.

Thank you. Ladies and gentlemen, we have no further questions, so at this time I'd like to turn the call back to Management.

Well thank you, that concludes our call, and we appreciate your joining us today.

Once again, ladies and gentlemen, this concludes today's teleconference, and you may disconnect your lines at this time. Thank you for your participation.