Federated Hermes Inc (FHI) 2009 Q2 法說會逐字稿

Greetings, and welcome to the Federated Investors second quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A brief questions-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. Thank you for joining us today. Today we plan some brief remarks on the second quarter before getting to your questions. Leading today's call will be Chris Donahue, Federated's CEO, and Tom Donahue, Chief Financial Officer. Also joining us are Debbie Cunningham, the Chief Investment Officer for our money market operation, Dennis McAuley, Laurie Hensler, and Stacy Friday from the corporate finance group.

Let me say that certain statements in this presentation, including those related to asset level sales and financial performance, will 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, please 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'll turn it over to Chris to talk about the quarter.

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, overall money market assets decreased by $14 billion from the prior quarter, though the average assets were essentially flat. Money market funds decreased about $16 billion, or 5% from the prior quarter, and were up more than $72 billion, or 30% from the second quarter of '08. So far in July, our money fund assets have ranged between $308 billion and $318 billion and have averaged about $312 billion.

The second quarter has some seasonality that affects money fund flows. In addition to the April 15 tax payments, June 15 is a corporate tax payment date, which impacts many of our institutional clients. Also, certain customers have used cash for other transactional purposes. Improved market conditions for stocks and bonds likely led to lower money fund balances at Federated and across the industry. Better markets and solid investment performance across a wide array of fixed income and equity products helped Federated's sales force to achieve strong results this quarter. Money market separate account assets increased, reversing the typical Q2 tax-related seasonal pattern. Results in this area included the previously announced subadvisory win from a major insurance company that added about $6 billion in April. Our money market fund share was about 8.5% at quarter end.

Within money fund categories, we are seeing migration from treasury and government agency funds into prime funds. Muni funds have also added assets. At quarter end, Federated's money market funds by type were $52 billion in treasuries, $114 billion in government agency funds, $108 billion in prime funds, and $38 billion in municipal funds. During the second quarter, treasury funds decreased by $15 billion. Agency funds decreased by $17 billion. Prime funds increased by $14 billion, and muni funds increased by $2 billion. Low market interest rates continued to impact yields and fee waivers for money funds. Tom will provide more color and depth on these waivers in his remarks.

In terms of money market regulation and enhancement, the SEC recently announced proposed changes designed to strengthen money funds. The Administration also put forth considerations that seek to strengthen liquidity, lessen risk, and increase transparency. We welcome a careful consideration of these ideas, many of which are in line with the way we have always operated our business at Federated.

Turning to equities, assets increased about $3 billion, or 12% during the second quarter. While most of the increase was due to market appreciation, we were pleased to produce a quarter of positive net equity fund flows. We are seeing good sales levels in a variety of funds, including alternative strategies offered in the Prudent Bear and market opportunity funds, our capital appreciation core equity fund, and the dividend-oriented strategic value fund. Our equity mutual fund flows continue to be positive for the first couple of weeks of July, though as always, we caution about drawing conclusions from limited data. Within equity separate accounts, outflows were largely due to net redemptions in SMA products, while the institutional equity accounts saw modest inflows.

On the fixed income side, fund flows were strong, with sharp increases in both gross and net sales. Gross bond fund sales increased 46% from the prior quarter while redemptions decreased slightly. Positive net sales were achieved in all bond fund categories, including corporate, global, government, mortgage back high yield municipals and multisector. Our flagship total return bond fund gross and net sales continued to increase.

We also saw strong inflows into ultra short bond funds. We continue to have success winning new fixed income institutional business. In the second quarter, we won a series of mandates, some of which went into mutual funds rather than separate accounts. We have about $170 million in wins yet to be funded into separate accounts going into the third quarter. Solid investment performance across multiple styles in both equities and fixed income is enhancing sales growth.

Looking at the quarter end Lipper rankings for Federated's equity funds, 82% of rated assets are in the first or second quartile over the last year, 74% over three years, 89% over five years, and 70% over 10 years. For bond fund assets, the comparable first and second quartile percentages are 65% one year, 69% three years, 68% for five years, and 74% for 10 years. As of July 22, our managed assets were approximately $400 billion, including $343 billion in money market assets, $27 billion in equity assets, and $30 billion in fixed income. Money market mutual fund assets stand at about $309 billion.

Turning to distribution, our sales force produced outstanding results, again, in the second quarter. Building from strong growth in 2008 and the first quarter of '09, the second quarter saw another step in the pace of our fund sales results. For the full year '08, gross sales of equity and fixed income mutual funds increased 32% from the prior year. These sales exceeded $13 billion and averaged about $1.1 billion per month. In the first quarter, sales averaged $1.5 billion per month, up over 30% from the 2008 pace. In the second quarter, stock and bond fund sales averaged $1.9 billion per month, up 27% from the first quarter and up 73% from the average in 2008.

Finally, a brief comment on acquisitions. We continue to make good progress on the full integration of Prudent Bear and Clover Capital. While further center of excellence deals always remain possible, we are not actively seeking to add any specific styles. We 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. Federated's revenues decreased about 1% in Q2 from the prior quarter and from Q2 2008. Compared to the prior quarter, low revenues from money market funds were partially offset by higher revenues from fixed income and equity. The Q2 revenue impact of money fund waivers to keep yields positive or zero was $17 million, partially offset by $11.4 million in related lower marketing and distribution expense. The impact to operating income from these waivers was $5.6 million compared to $5.1 million in the first quarter. The recent run rate of these waivers has increased. Based on current market conditions and current assets, we expect the impact to Q3 operating income to be approximately $8.5 million to $9 million. The increase from the second quarter rate is due mainly to the decline in yields for government agency funds. The Q4 run rate could be higher than Q3 based on current conditions and current asset levels.

Waivers could reach $11 million to $12 million of operating income impact with the increase due to prime funds where yields have also come in meaningfully. I want to emphasize that there remains a wider 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 and treasury, changes in expenses of the funds, mix of customer assets, and our willingness to continue the waivers.

On the expense side, we continue to be diligent in our efforts to properly manage expenses at Federated. We are on track to realize substantial savings in our operating expenses, which were down substantially from the prior quarter, even factoring in the impairment expenses from Q1. Expenses were down slightly compared to Q2 '08, even though we completed two acquisitions in Q4 '08 that added about 50 new employees to Federated.

On the balance sheet, cash and short-term investments were $64 million at the end of the quarter and recourse debt was $155 million. We continue to generate strong free cash flow and expect that we will continue to use cash and our revolver to fund acquisitions, dividends, share repurchase, capital expenditures, and debt repayment.

We would now like to open the call up for questions.

(Operator Instructions) Our first question is from the line of Robert Lee with Keefe, Bruyette & Woods. Please go ahead with your question.

Thanks, good morning, everyone. Just real quickly, I guess a question for you, Chris. In the fixed income business, clearly sales have picked up, as you said, very noticeably, but the redemption rate, which tends to run high in that sector, in that business has also picked up and seems like it's remained high. Would you attribute that predominantly just towards an increasing mix towards the ultra short products? And maybe if we can get color towards what proportion of either sales or assets that's running at. My sense is those assets can be a little more flighty over time.

Over time, you're exactly right. During the quarter, the sales of ultra short funds were a little over $2 billion and the redemptions were just under $500 million. So you can figure out what the net was there of positive sales that contributed to the $2.6 billion. This money when it comes in tends to come in and then when it goes out, it tends to go out. So the $500 million against the $2 billion is really not as meaningful as when people want to buy the ultra shorts, they really want to buy the ultra shorts.

Okay, and maybe a follow-up on the institutional business. You talked about the successes you're seeing in the institutional fixed income business. Can you maybe talk a little bit more, you mentioned $170 million mandates the fund. Can you talk a little bit more about the RFP pipeline, what you're hearing from potential clients out there, if you see the RFP pipeline actually building at this point some more?

Rob, it's Ray. The RFP pipeline has built during 2009. It's probably up about 33% and it has shifted over the last four quarters from being two-thirds equity and one third fixed to just about the opposite now. So the fixed income RFP pipeline in particular has built up and it's very active. We're in more finals. We're winning more business. As we mentioned, a number of the wins actually end up going into institutional fixed income products. But we're certainly seeing increased activity there and the investment performance has been a key factor there. And we've added resources to the institutional sales operation at Federated and it's another example of how we've been able to invest in the business and grow over a period where many other companies were pulling back resources. We've been able to add some very talented, experienced people into that part of the operation and we see it paying dividends.

Okay. Maybe one last question. You recently announced that you had one from, I can't remember the name of the German bank, but a portfolio to manage down for them. Is it possible to get a sense of when you expect that to fund and maybe some sense of the size or fee structure on it?

On this one, Rob, due to the privacy and the importance of our relationship with our partner, we're just going to stick with what we said in the press release last week.

Okay, but will we see that show up in AUM, or is that going to not show up there and just the revenues flow through?

We haven't determined that yet, Rob. It, it is money that we're managing, but we haven't figured out how we're going to report it this quarter.

Okay. Thanks, guys.

Our next question is from the line of Ken Worthington of JPMorgan Chase. Please go ahead with your question, sir.

Hi, good morning. Couple questions on the fee waivers. You gave guidance, which is great, but just want to understand some things behind it. In the first quarter, I think you paid about 50% of the lower fee waivers to distribution. In the second quarter, you passed almost all of the incremental fee waivers on to distribution. Why did that dynamic change?

Ken, it's Ray. It has to do really with the mix of products and the fraction in terms of the distributor share varies by product. I think we've been through the numbers in the past. On average, we have about half of the revenue that we book is paid back out through marketing and distribution expense. But the proportion varied by product and so the numbers that you're pointing to will move around a bit.

Okay, and are you, in terms of passing on the fee waivers to the distribution, are you following industry practice? Are you deviating any way from what the competition is doing in terms of passing those waivers on?

I'm not really cognizant of how exactly others are doing their fee waivers, so I wouldn't be able to say how we're doing compared to others. Our basic theory of doing this is that after you add up the core expenses, which includes the administrative fee and the third party expenses, then we share the waivers based on a pro rata relationship with our intermediaries based on what the sharing was. And I'm just not aware of what others in the industry have done or how they do it.

Separately, you mentioned that fee waivers not associated with low fund yields fell $4.2 million this quarter. What led to that decline? Did someone in the industry exit the business, or what are the competitive dynamics that led to that benefit for Federated?

Ken, this is Tom. Basically we meet every month on all the products at Federated and review expenses and fund projections for the year and all the funds have, or many of the funds have different year ends. So it's the ebb and flows of managing our whole complex. And you can't grab onto any one thing and say, this is what's going to happen. We just were able to, that was the result of a couple of quarters of meetings.

And Ken, I would add to that, if you look at our filings, we talk about, I mean literally each year we have hundreds of millions of dollars of waivers. There's a lot of attention on the portion that has recently been for money fund yield-related. But against a backdrop of the size of waivers that we have as a regular part of our business, that change is not particularly significant.

Okay. Fair enough. And then just lastly, you mentioned seeing SMA redemptions this quarter. I think you guys said that last quarter as well, and there's definitely reasons why. But do you know, did redemptions pick up or did they call off in SMA first quarter to second quarter?

They went down meaningfully second quarter compared to first quarter.

Okay, great.

And one other thing that's happening within SMAs is, the comments from last quarter and the answer relates mostly to the equity SMAs, but we're actually beginning to get some traction on the fixed income side with SMAs as well.

Okay, great. Thank you very much.

Our next question is coming from the line of Mike Carrier with Deutsche Bank. Please go ahead with your question, sir.

Thanks. One other question on just the fee waivers. In terms of the guidance when you look at the third and fourth quarter, given where you expect some of the pressure to come by product, do you have some expectation in terms of what you're going to be able to pass on to the distributors? Or maybe, put another way, what the operating income impact will be versus the revenue impact?

Yes, Mike, this is Tom again. The first thing is guidance, it's where rates are today and assets are today, and run that out. So what we gave is the result of a set of assumptions that we don't really expect to happen. We know won't happen. Assets are going to change and rates are going to change, but we wanted to give some feel for what happened if things carried on exactly as they are today. Now, in terms of which, which funds and how that happens, as we talked about, it's pro rata sharing, as Chris went over.

Okay. No, that's helpful. I understand. Things are going to change every day. And then just on the long-term products, fixed income definitely seeing very good traction on the sales side. On the equity side, the performance is there and you have gotten into positive territory on the funds side. I guess it's in line with the industry, meaning the industry is still overweighted towards fixed income flows, but I guess from your perspective, what you are learning from the traction you're gaining on the fixed income side, anything else you need to do on the equity side in terms of resources, distribution channels or platforms to get on? Or is it just industry flows need to pick up and continue to maintain the performance?

Well, what it really is is repeat the sounding joy, repeat the sounding joy, repeat the sounding joy. In football terms, it's basic blocking and tackling and telling the story and telling the story. So that's what it is. Getting on platforms that you mentioned is very, very important. And we have been increasing the numbers of platforms we've been on over the last months and quarters and that's starting to show itself, but we have to continue to do that as well. So there are no magic things or magic resources or whatever that need to be added to the pot. We've reorganized the sales force. They are performing beautifully with a lot of enthusiasm and the performance is excellent and now it's just repeat the sounding joy.

All right, thanks a lot.

Our next question is from the line of William Katz, Buckingham Research. Please go ahead with your question.

Good morning. Chris, if I could start with you. The SEC is recently out with some new rules, out for comment, pretty much embrace much of the ICI working group initiatives, if you will. Just wondering if you could talk a little bit about how you see if any change in the industry over the next couple years and how Federated is positioned there.

We think that the SEC proposals are very good, heading in the right direction. And we are working vigorously on our comment letter, as is, I assume, others in the industry to include the ICI working group. The main thing that's going on here is the strengthening of the resiliency of money funds. And so within that context, we can have a little ebb and flow on questions or comments. I don't think you are going to see any serious changes or harm or whatever to money market funds because the directive from the White House was specifically to be careful not to harm funds, and the statements in the document that the SEC produced specifically said their goal was to strengthen money funds. Now, if you want to talk about some of the specific ones, specific provisions, we certainly can, but that's an overall answer.

I would actually be curious of two aspects. One is one of your competitors has continued to sound the drum beat for capital. Just wanted to get your updated views there. And then the one area out for comment remaining with the SEC is shifting from a fixed to a variable NAV. Wondering if you could maybe provide comments on both.

Sure. On the idea of capital, some people just continually talk about this, but I don't think it's all that real at this point. If you're talking about real capital for money market funds, think of somebody else. Think of JPMorgan. They have $400 billion of assets. That would require $40 billion to have real capital, 10%. Someone will say 5%, 20%. There is no $40 billion or $30 billion or $20 billion of capital.

Next point, there's no economic model that I'm aware of that enables money market funds with $10 billion, $20 billion, $30 billion or $40 billion worth of capital for $ 400 billion to have an economic model that has it make any sense. The ideas of having 1 or 1.5 basis points of capital, which is a completely different idea, would be fine. That's not even a big issue. And if that works to satisfy things, then that would be okay. And don't forget that there has been some directive from the White House to work on a liquidity feature that is being worked on, that we're not prepared to talk about what that's like, but that's another angle in this whole discussion. So we don't think that's real. You'll also notice that in none of the proposals, going all the way back to Mary Shapiro, Geitner, Bernanke, the White House, there are no proposals for capital requirements on money funds.

So now let's talk about the fixed NAV, so-called, or the amortized costs, variable NAV, however you want to phrase it. The way the SEC put this was not in terms of the rule that they are proposing, but in terms of questions. The way the White House put it was, well, let's look at the liquidity feature that we've directed you to work on in comparison with a changing net asset value. From our point of view, a changing net asset value is very, very, very bad for money funds. And the idea that you're going to say in one breath that money funds should be protected and then say they are going to have a changing NAV, a money fund is a daily liquidity at par event. And that's the product. That's the product that people want. Now, they are also investment products, as we discovered. So the SEC, we don't believe, is going to go to a variable net asset value or restrain the use of amortized costs. We, of course, will comment to this effect in response to their proposals. So these are two of the issues that we have to deal with, of course, but we think they are both very much under control.

Okay. My next question is I listened to your guidance on fee waivers, in the scheme of things, not far off where I am in terms of my own thoughts as it relates to the model of the company. Maybe I've asked this in the past, so I apologize not remembering the answer, but any thought of hedging some of this risk on a tactical basis here? Obviously if rates are going to stay low, there's certainly ways you could get some economic elsewhere in the business. What are your thoughts there?

No hedging on that.

Is it just accounting, economic reasons or is it just practical reasons? What's the gaiting here?

It would be us betting on interest rates. And we are happy to be in the business that we are in, manage our clients' money and deal with the consequences. Debbie bets on interest rates every day in order to manage the portfolio properly for our clients and we're happy to do that, but then taking the capital of the firm and choosing to do that, we think people, our shareholders and the people, executives at Federated are happy to have our ups and downs, live on how we do in the marketplace on managing the money and not on our decisions on betting on interest rates.

Okay, and just last question for you. Tom, you mentioned that you continue to identify cost savings. Could you quantify what, in terms of opportunities, you're seeing in the second half of this year?

For the second half of the year, when we went through our budget process, we were trying to look and see what we're going to go, based on each quarter and how things were going to play out and we're trying to, words we use, try to manage it diligently. We have slowed down or taken our time on hiring replacements and we spent a lot of time through a whole process of a lot of other initiatives on saving money. We are still swinging away at those things and we don't see loosening up right now certainly through the rest of the year. So we're going to remain diligent. In terms of predicting numbers we're not going to do that.

Okay. Thanks for answering all of my questions, guys.

Our next question is from the line of Craig Siegenthaler of Credit Suisse.

Thanks, and good morning. First, just to get back on the fee waivers, a follow-up to Ken's question, previous guidance for pretax after-expense impact from fee waivers is about $5 million to $6 million range. I'm wondering, did you requantify that number today? I may have missed it. I'm just wondering where we stand now following the language in the press release in the third and the fourth quarter. And also, can you talk about where the run rate is for fee waivers in July?

Yes, Craig, we did quantify it. We said that the impact in Q3 based on the current level of assets, mix of assets and present interest rates would be between $8.5 million to $9 million as compared to the $5.6 million. For July, we're at around $2 million month to date, so we'll be somewhere around $2.5 million for the full month. And what's changed over the last couple of weeks and months since we gave the last round of guidance has been that the rates have come in, in particular on the agency side, obviously the volume of assets swelled there, so during the quarter they receded a bit. It's always a question of both the rate of the market yields essentially and the volume of assets moving between categories. The number we used for Q4 was $11 million to $12 million and, again, that's math based on the portfolios and the yields as they exist today and the asset level. And at that point I think everything will have reset and it will turn into a pure volume of asset analysis.

Got it. Just to clarify, that is pretax after expense, right?

That's the operating income effect. It's the reduction in revenue offset partially by the reduction in related expenses.

Got it. And then the new SEC amendment that was proposed a month ago, is the impact from that essentially lower net yields and higher fee waivers? Could you maybe talk about the impact from that?

We'll ask Debbie to comment on it. Obviously the regulations, they put things out for comment, so we haven't had changes per se. But, Debbie, do you want to comment on what you think those regulations might do to yields, if anything?

Sure. Craig, basically if you look at the proposals for Rule 2a-7 changes that came out about a month ago at this point, they center around five areas. Credit risk reduction, interest rate risk reduction, diversification increase, liquidity increase, and then reporting and disclosure. Four of those five topics actually do affect the investment portfolio. Reporting and disclosure is necessarily not the case, but the other four do. Overall right now, though, looking at where yields are and where they are in general, given that we're in that 0 to 0.25 range from that funds' perspective and don't expect to be there forever, we're saying that the impact on the overall portfolios will be minimal. It will increase as you go out the credit risk spectrum, so to the extent that there's minimal to no impact on the treasury funds, there will be more impact on the prime funds, and government agencies will fall somewhere in between, with muni funds on the prime fund side also. But again, not looking at this as extremely problematic from an industry perspective and just a few basis points in yield on an impact analysis.

Got it. And actually, another way to ask it is based on the amendments, would maybe Federated and even other money market managers, would they have to lower duration and increase liquidity, just based on how the funds are positioned today or do you largely believe funds are already positioned for the amendment today?

Largely the funds are well positioned in the context of the proposals as they stand today.

Great. Thanks a lot for the color.

Our next question is from the line of Michael Kim with Sandler O'Neill. Go ahead with your question, sir.

Hey, guys, good morning. First a question for Chris, when the treasury's insurance program ends in September, do you expect that to potentially serve as somewhat of a catalyst to driving a step-up in consolidation across the industry? And if not, maybe if you could give us your thoughts on where you think we currently stand and that whole process.

In terms of consolidation, I don't think that particular event will be a triggering device. I think the consolidation move is already underway and will continue and that may be a nice little additive or a point to look at. But it really isn't going to be a catalytic event, in my opinion, because the people who should get out and are looking at their economics have already come to those conclusions. So I think the consolidation theme will simply continue right through the end of that treasury program.

Okay. And then on the long-term part of the business clearly you've taken market share on the fixed income side, despite maybe not being one of the biggest players out there. Just aside from standout investment performance, I would be curious to get your thoughts on what some of the other drivers have been in terms of the rapid step-up in flows.

It is the way it always has been. It's not unlike the stories I always tell about what is Federated from Pittsburgh. It's two rivers coming together. And when you have investment performance and strong sales, which are the two rivers, then you can form the Ohio and go west, young man, go west. And that's about what it boils down to. Now, there's a lot of work on the banks of those rivers that has to go on in order to make it flow -- service, compliance, et cetera. But the main issue is getting the excellent performance and having the sales individuals with the relationships and the knowledge to, as I said before, repeat the sounding joy.

Okay, and then just finally more of a broader kind of question here, thinking about earnings contribution mix, as well as the revenue mix, where do you see that evolving over time assuming the equity markets continue to trend higher?

We would love to see the equity mix increase, our revenues from equities increase even to the point where they are more than half of our overall revenues. However, when I always mention that or go over that slide from our various analyst presentations, I will always mention that we do not really manage our acquisitions or the receiving of money from our customers to try and arrive at that fraction. But you're on the right point, that with the increase in the equity market, and should that continue, I think we could see some rather strong increases in equity revenues as a percent of our total revenues and perhaps even get back to the interesting days of yesteryear, like the first quarter of '05, where the equity revenues in that quarter exceeded the revenues from the money market funds.

Okay. Thanks for taking all my questions.

Our next question is from the line of Keith Walsh of CitiGroup. Please go ahead with your question.

Thank you, everyone. Good morning. Quick question for Tom. Assuming the current rate environment and the money market mix holds to 2010, describe to us how the fee waiver loss curve works as it moves into 2010. Thanks.

Debbie's going to predict interest rates.

Well, look, I'm trying to get some sensitivity here. I don't know why that's not a question you guys can answer.

Assuming that rates stay where they are and what's it going to look like, what's our waiver situation going to look like in 2010?

Yes.

By then, all the current holdings in the money funds will be reset to whatever the rates are.

Should be the same as what it is in the fourth quarter at that point.

Yes, Keith, we made a comment earlier that by then everything would have reset. And so the fourth quarter math answer of $11 million to $12 million would be about what the run rate would be.

Really, if rates stay down low where they are, and that's what's happening, if it happens in the fourth quarter and continues to stay down where they are, then the prime funds are going to come into play in terms of the rates being down, and if it stays down there, we will still experience waivers and what we said, $11 million to $12 million is our guess and so it will continue until rates go back up.

Okay. I just wanted to just see when we reach that plateau. That's helpful. Thank you. And then the second question would be just as we see money market deposit account yields from banks getting more competitive or much more competitive versus money market mutual fund, is there a risk of disintermediation, losing these assets to banks?

Historically, and I'm now talking we are in our fourth decade of looking at this phenomenon, we have in our business model attracted those customers who are interested in a cash management service where yield does not drive the truck. And so we have not historically found that whatever the yields are on MMDAs has impacted seriously our money market fund business and that is true today, as well. This is not to say that some players don't decide to use MMDAs for various purposes, but we're looking at our assets, our clients, our market share, and looking at it over various cycles historically, and the MMDA rates just haven't been the main issue. Part of the reason for that is that when you're looking at a cash management service from an intermediary or large institutional client with a lot of underlying accounts, they want the services, the availability to switch among various money funds, and they like the idea of the daily liquidity at par through the systems that we have set up. And don't alter those mechanisms based on whatever the MMDA yields happen to be week to week or whatever.

Great. Thank you very much.

Our next question is coming from the line of Cynthia Mayer, Banc of America. Please go ahead with your question.

Hi, thanks. Just another quick follow-up on the fee waivers, if you don't mind. It sounds like you're not assuming in your projections any further shift from government to prime, and I'm just wondering where that trend stands. Do you think it will continue and to what extent could that offset some of the waivers?

Yes, Cynthia, you know, we've seen lots of money over the last year go into treasuries and we've seen money go into governments. Now we've seen money go into the prime funds. And based on what's going on in the marketplace, we're happy to try to accommodate all the clients. What do we think is going to happen? It seems like, as the economy maybe improves, people will go out further on the rate spectrum, and so that's prime now. But will that change around? I don't know. Debbie, do you know?

I think it's really hard to predict where client movement is. We've had many, many discussions with clients about the potential, their potential of moving out of treasury products and into other government agency or prime products. A lot of that has come to fruition during the first half of 2009. You've seen that shift occur. To try to predict the continued shift of that going forward though is very, very difficult. So our assumptions are based on current mix as it stands. If you assume that more is going to go back out into the treasury and government agency and leave prime, you would increase those waivers. If you assume the mix changes towards the prime side where prime continues to gain versus their treasury or government agency counterparts, you could reduce that waiver. But that's not something that we're just comfortable predicting based on the ability of our clients to know exactly what our clients are going to do.

Right, great, thanks. As you look around for the money market consolidation deals that you mentioned, what are the main impediments in getting those done now and how much are you seeing available and how much competition are you seeing?

In terms of impediments, it isn't like an impediment. It's the purveyor of the other money fund coming to the view that now is the time to make a transaction. As I have discussed on these calls before, the extent to which some of these players control or have great influence over the redemption process, that's the extent to which they don't have to make a move. So there is no catalyst in the hands of the other players other than the long-term understanding that they maybe don't want to be in this business. So it's very, very difficult to say what timing will be used. And in terms of how much money, what we do is look at all of the list of players, of which there are hundreds, and basically call on all of them. These can be sizable ones and very small ones. So we look at it as a very large field of opportunity.

Okay. Do you see the proposed regulations at all as influencing people one way or another, maybe tipping them toward getting out of money markets, or not particularly?

The regulations, since we know that they are just proposals and they haven't been implemented, will add to the same kinds of features that people are thinking about in terms of whether they are really committed to this business. To give you just one example, the need both from a regulatory standpoint and an investment standpoint to do credit work is critical. But people now see the beauty of this. And the rules underscore this. But the rules were always there requiring it anyway. So, yes, it accelerates, underscores, and reemphasizes the things that were necessary in order to run a money market fund. And if you're not prepared to do that, then you're going to get tripped up and maybe the SEC's going to find it on an inspection and maybe that does accelerate people's desires, because they have got to say, hey, do I really want to commit to have a proper credit analysis staff, given whatever assets I have, and how are they going to play it? So I think it is a modest help in the overall consolidation effort.

Okay, and last question, you mentioned the seasonality inherent in 2Q with the June 15 tax payment. Is there anything in 3Q we should be on the lookout for, September 15, or anything else as we watch the money market flows?

September 15 is another tax date. Beyond that, nothing comes to mind in Q3.

Great. Thanks a lot.

Our next question is from the line of Mike Holton of The Boston Company.

I just missed the number earlier. When you said manage assets total as of July 22, did you say it was $400 billion?

Yes.

Okay. So just down a little bit from the end of the quarter and I imagine that's all money market?

Yes.

Okay. Thanks.

Our next question is from the line of Stephen Wharton of JPMorgan. Please go ahead with your question, sir.

I just wanted to know if I could get a head count update, the number of employees as of this quarter, the end of last quarter, and the year ago quarter?

Yes, 1,370 at the end of June, and at the end of March, 1,379.

And the year-ago quarter?

We don't have that number in front of us, but it would have been at least 50 less due to the acquisitions we did in Q4.

50 more, you mean? Oh, 50 less, right, I got it. All right, thank you.

Our next question is from the line of Roger Smith with Fox-Pitt Kelton. Please go ahead with your question, sir.

Thanks very much. I just want to go back to the acquisition story on the money market side. Is there a capacity constraint at Federated right now or how much assets do you think you could bring over on the money market side through acquisitions? And how many types, could this be multiple deals that can get done in a short period of time?

We don't look at ourselves as having a capacity constraint at this time. At our market share of 8.5%, we think there's plenty more to go. I don't have a cap on it and wouldn't even start to address some kind of theoretical issue there.

I'll address one. From an integration standpoint, dependent on what transaction we were talking about, we would not try to sink ourselves in taking on too much from an integration standpoint.

But when you do that on the money market side, is it really just transferring the assets from someone else's platform onto your platform, or is there more integration risk that we should be thinking about?

Depending on what the structure is of the money coming in, there is integration issues that have to be addressed. For example, what are the funds? What are the structure of the funds inside their portfolios? Who are the customers? How did they get there? Why are they there? And how does that all work? Those things are critical. For example, when we did the Alliance transaction, which was $19 billion to $20 billion, we brought over some of the actual funds and began running them here, as well. Others, we merged or moved assets into our other funds. So every one of these questions has to be answered if you have a large money fund deal. And they are important questions.

Great. And then when I think about the costs associated with doing these type of deals, should we think about it more similar to what was done with the Alliance transaction? Which I believe my understanding there is a lot of the fee for the deal was on more of an earnout structure. Is that what we should think about?

Yes, yes, that pattern was very strong then and remains strong from our point of view in looking at money fund deals that because it's daily liquidity at par, it doesn't take a wizard to figure out that paying over time might be a smart idea.

Got you. So then that's really how most of the deals end up getting talked about. So from a capital point of view, doing acquisitions, having capital on hand isn't overly important.

No, it's not in doing those kinds of deals. Although in the Alliance deal there was an upfront payment, and then over time, and certainly that's, given a certain deal, that's a worthy structure as well.

Great. Thanks very much.

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

Thank you for joining us today. That concludes our call.

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