Federated Hermes Inc (FHI) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Federated Investors fourth-quarter 2010 earnings call and webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

Good morning and welcome. Leading today's call will be Chris Donahue, Federated's CEO; and Tom Donahue, Chief Financial Officer. And they will give some brief remarks before we open up for questions.

Joining us for the Q&A will be Debbie Cunningham, CIO of Federated's Money Markets.

And in the way of forward-looking statements, let me say that during today's call we may make forward-looking statements, and we want to note that Federated's actual results may be materially different than the results implied by such statements. We invite you to review our risk disclosures in our SEC filings. No assurance can be given as to the future results and Federated assumes no duty to update any of these forward-looking statements. And with that, I will turn it over to Chris.

Thank you, Ray, and good morning. I will start with a brief review of Federated's recent business performance before turning the call over to Tom to discuss our financials.

Looking first at cash management, money market assets were up $15 billion from the prior quarter, with about $3 billion of this coming from the completion of the SunTrust money market acquisition.

As you can see by looking at the average assets, inflows came in later in the quarter, as we've seen at other year ends.

So far in January, money market assets are down slightly. While market conditions continue to be challenging, our cash management business remains well-positioned, strong and stable.

The fourth quarter saw an uptick in money fund yield waivers to just beyond the high side of our calculation last quarter. Tom will comment on the waiver impact in his remarks. We continue to expect that these waivers will not change much until a clear path to higher short-term rates and Fed increases emerges. Debbie will talk about our rate outlook a bit later.

Our money market fund share at the end of the year was about 8.8%. This compares with about 8.5% at year-end '09 and year-end '08, and about 7% for '07 and about 5% at the beginning of the year 2000.

On the regulatory front, Federated and many others have responded to the SEC's request for comments, the options discussed in the President's Working Group report. In our view, the changes made in 2010 to Rule 2a-7 -- which are still being implemented by the industry -- have further strengthened the framework that has worked exceptionally well for over 30 years. We believe that it would be appropriate to allow these measures to be fully implemented and evaluated over a longer time frame, before considering the adoption of additional regulatory changes.

We continue to support the liquidity bank measure that was proposed by the industry through the ICI working group. We see this as an option that will enhance money fund resiliency, by offering a source of additional liquidity for high-quality investments, but importantly does not socialize credit risk and does not provide for a guarantee on money funds, which we believe is neither practical nor necessary.

Turning to other products, we have a variety of equity funds with solid records that we expect to gather assets as the market conditions continue to improve.

Gross and net sales in the fourth quarter were strongest in our Strategic Value Dividend Fund, which is well-positioned as investors increasingly look for income from equity investments.

The Kaufman Large Cap Fund recently marked its three-year anniversary, and with its strong performance achieved strong ratings and positive flows. The Kaufman Small Cap Fund also had positive flows during the fourth quarter.

Our international group has produced some very solid performance over the last year. We saw positive flows into the international leaders and International Strategic Value Funds, in the fourth quarter.

On the value side, the Clover Small Value Fund has performed well and has produced positive flows in the fourth quarter.

While our gross equity fund sales increased about 7% in the fourth quarter from the prior quarter, flows were negative due mainly to outflows in the Prudent Bear Fund. Now we've positioned this fund as an overall enhancement to a portfolio over market cycles, and we believe that this is how most of the shareholders use the fund. Yet we have seen that the fund tends to acquire assets in down markets and experience outflows in up markets.

This fund had inflows of $216 million in the third quarter, and then moved to outflows of $295 million in the fourth quarter, for a swing of over $500 million.

Now looking at the first-quarter results for the first few weeks, equity flows have been modestly negative. Within equity separate accounts, outflows were largely due to net redemptions in [quant] products -- MDT, SMA, and Institutional accounts.

We won a small-cap growth institutional mandate that we expect to fund next quarter with about $120 million.

Looking at bond funds, our gross sales were up slightly in Q4, while net sales decreased from Q3, consistent with industry trends. However, our Total Return Bond Fund showed higher gross and net sales compared to Q3, and our High Yield Funds remained in positive flows.

Ultrashort products swung from positive in the third quarter to slightly negative in the fourth quarter. On the MUNI bond side, gross sales were higher in Q4 than Q3, but we saw negative flows in the group compared to the positive flows in Q3.

Bond flows are negative in the first couple of weeks of January, due in part to a $200 million redemption from Total Return Bond fund, from a client reaching its fund asset concentration limit. We've also seen a pickup in MUNI bond fund redemptions.

In fixed-income separate accounts we had a solid quarter of net inflows -- over $800 million -- and we expect about $350 million of new assets to fund in the first quarter.

Turning to fund investment performance and looking at year-end Lipper rankings for Federated Equity Funds, 25% of rated assets are in their first or second quartile over the last year, 21% three years, 65% five years, and 83% 10 years.

For Bond Fund assets, the comparable first and second quartile percentages are 31% one year, 65% three years, 74% five years, and 66% 10 years.

As of January 26, our managed assets were approximately $356 billion, including $274 billion in money markets, $31 billion in equities, and $51 billion in fixed income -- including our liquidation portfolios.

Money market mutual fund assets stand at about $241 billion. So far in January, our money fund assets have ranged between $236 billion and $245 billion, and have averaged right about $241 billion.

Regarding acquisitions, we continue to look for an alliance to further advance our business outside the US as a component of our strategy to expand globally. We remain active in looking for consolidation deals including money market business. As always, we cannot predict the probability or timing of any potential deals.

Tom?

Thank you, Chris.

As mentioned in the press release, our results this quarter were impacted by a non-cash impairment charge. Operating income was up from Q3 by $4 million. Excluding the $3.2 million impairment charge, it would have been up by $7.2 million.

EPS of $0.45 would have been $0.47 excluding the impairment charge, up from $0.42 for Q3.

Money fund yield waivers reduced revenues by about $6 million more in Q4 than in Q3, with about $5 million of this offset by lower related distribution expense. These waivers reduced operating income by $12.3 million for the quarter compared to $11.2 million in the prior quarter. Based on current market conditions and asset levels, we expect these waivers to reduce operating income by about the same amount in the first quarter. We do not expect the impact from waivers to change materially from this level until the market begins to factor in the potential for Fed increases, and then again when the Fed actually begins to increase interest rates. As Chris said, Debbie will comment and give our rate outlook in a few minutes.

Looking forward, we estimate that gaining another 10 basis points in gross yields will likely reduce the impact of these waivers by about one third from the current level, and a 25-basis-point increase would reduce the impact by about two thirds.

Turning to expenses, compensation and related expense was down by $5 million from Q3. Late in the fourth quarter, the Board of Directors approved a change to the Executive Compensation Program for 2010 that resulted in a greater percentage of incentive compensation to be paid in the form of restricted stock than previously estimated. The compensation expense from the restricted stock program will be recorded over the next three years as the stock vests.

This change was made only for 2010 and was made up -- and made the majority of the reduction in comp compared to Q3.

For Q1, we currently expect compensation and related expense will be in a range of $64 million up to $66 million. Of course there are a number of factors that could move Q1 compensation outside of this estimate.

Distribution expense was flat, despite higher money market fund assets due to higher yield waivers.

The impairment charge recorded was due to a decrease in the fair value of certain assets from the acquisition of MDT Advisors, our quantitative equity group. We have approximately $3.5 million in remaining book value in the amortizable assets from this acquisition.

Looking at our balance sheet, cash and marketable securities totaled $334 million at year end. This, combined with the expected additional cash flows from operations and availability under present debt facilities, provides us with significant liquidity to be able to take advantage of acquisition opportunities when they arise, as well as the ability to fund related contingent payments, share repurchases, dividends, new product seeds and other investments, capital expenditures and debt repayments.

Before we open up the call for questions, Debbie, could you please comment on Federated's interest rate outlook?

Sure, Tom.

We still are in a range of 0 to 0.25 on the Fed Fund target basis, in case anybody missed the [SOMC] announcements this week.

The yield curve for money market securities has begun to steepen a tad bit, maybe 2 to 3 basis points at this time. It ranges from 20 basis points on average on an overnight basis, out to about 80 basis points for one-year paper. So again, slightly steeper as that curve ended in the 75 to 78 basis points area a quarter ago.

Our outlook is still that we will not see actual Fed increases until later in the second half of 2011, but we do continue to expect some yield improvement beginning probably in the summer of 2011, based on what will be an expectation of increasing rates and a steeper yield curve that ensues at that point.

We have begun to reduce the average maturity of our money market funds in anticipation of that steeper yield curve, which we feel is more imminent today that it might have been at all during the 2010 time period.

We think also that the credit situation in the marketplace is improving, and that also should play through to a bit of a steeper and more positive positively developed yield curve as the year goes on. And from a regulatory perspective, Chris mentioned the PWG but there are a whole host of other regulations and implications, from FSOP, the FDIC, Moody's and others that are developing in a pretty positive sense for the industry and for Federated's money market fund franchise in particular.

We continue to work diligently on these topics.

Thank you, Debbie.

We'd like to open the call up for questions now.

Thank you. (Operator Instructions). Roger Freeman with Barclays Capital.

Good morning. Actually, just to come back, Debbie, to your comments you just made.

Do you really think the Fed is -- your working assumption is that the Fed is hiking the second half of the year? Because I mean, their commentary this week suggested that the economy is not growing fast enough to bring unemployment down, so it just seems like that might be a little optimistic now.

We are looking at the latter part of the second half, so towards the end of the year. But again, in anticipation, we think the yield curve will start to steepen out before that, and that will play through positively to the yields in the fund.

We are basing that on some of the strengths that we are seeing in the economy today. We continue to see it gather a little bit of steam.

Importantly, looking at the FOMC comments, what has not gained as much strength as the Fed would like to see is the employment situation. That's obviously the one that -- the big monitoring item at this point, and we continue to see improvements there but not to the degree that the Fed would like.

QE2 seems to be also a focus of the Fed, and that's one that I think is probably a little more positive in the context of when we might see a rate hike begin to develop, in that a good portion of that program is behind us at this point. And although the beginning of it met with some resistance from the bond fund perspective with increasing longer term rates initially, that seems to have developed in a little bit more positive of a sense at this point. So I think the Fed is probably a little bit more comfortable with that side of the equation, in that such with the economy continuing to make improvements on most fronts -- including the employment front, although not as much as wanted -- we were still looking towards the end of the second half of 2011 at this point.

Okay, that's helpful; thanks.

And I guess just more broadly on money market flows, can you sort of comment on where you think it sort of -- you know, obviously drove the inflows at the end of the year, and I haven't had a chance to go back and look at the pattern historically. Although I seem to recall that where you have these inflows at the end of the year, it kind of starts to come out again at the beginning of the year, because there is some sort of year-end balance-sheet management.

It sounds like that hasn't really happened, and it just seems to conflict a little with the more moves to -- into riskier assets and better equity flows.

Well, Roger, we have seen inflows late in prior years; that's been not an every year occurrence but certainly a regular occurrence. And in other years, we've seen some of that money drift back out as the year progresses. And I think it is much more of a balance sheet and a cash-management service orientation then it is money moving to the sidelines and then moving back to the market. And that's based on the composition of our customer base.

One thing I would comment on, Roger, is that the movement of, say, $4 billion in money market fund assets at Federated from year-end till today, is not really all that significant as a trend director. And if you look at the average assets, I already told you the average assets for the month have been about $241 billion. Well, the average assets for all of last year were about $239 billion, and up from the prior quarter about $237 billion. So these are all rather small types of changes. So yes, you will see these little blips but I think it is better to look at them in terms of, or at least it is worthy to look at them in terms of averages, because it gives you a longer-term picture.

Yes, no, I totally agree. And then just last question as a follow-up to that -- I mean, what are your thoughts as to why, given the rate environment, money market balances across the industry have remained as high as they have? Obviously, we've (inaudible - background noise) but are money market strategies had expected this to come down a whole lot more. There seems to be an awful lot of resiliency.

Yes, there's enormous resiliency, and the reason is that especially among our client base, these products are as much a cash management service as they are an investment. And they are an integrated part of an entire cash management system, and therefore efficiency and the type of products they are in are very, very important to this client base.

And so, while if you looked at it only as an investment in basis points and things like that, you might come to a different conclusion if you looked at exactly the purpose of all the different 50 money funds that Federated has. You would see they are serving a lot of cash management service-type purposes.

And the next thing would be, that I think it reflects the confidence that the client base has in money funds in general and in our case, in Federated in particular, in handling this amount of money for them.

Right. So really it's as corporate start to put money back into either buybacks, acquisitions, etc. as when those cash balances come down, that's where you could potentially see another leg down in money market balances? Fair?

Well, I don't know about that. I mean, one way of looking at this is that, all the people who are really sensitive to rates are gone somewhere else already. If you are sensitive to rates, you haven't really been in money market funds for quite some time.

Roger, the other thing I'd point out is that, historically in up equity markets our money fund franchise has performed very well. There's more money coming into the market between investments. You mentioned corporations using cash. There's of course a lot of dividend payments that are generating cash.

So our experience over a lot of cycles has been that we actually get more. We get rebalancing from certain customers when the equity market is moving up. So that has been a positive for us.

Okay. Great. Thanks for the comments.

Michael Carrier with Deutsche Bank.

Just one question on the comp side. I think increasing the component on equities and having a best over three years, obviously that's favorable in terms of the current period comp. But just, for that strategy, if you think about --. Let's just say rates normalize, Debbie is right and maybe the back half of this year the broader view is right, then maybe not until 2012 or beyond.

But if you think about that, increasing the equity component and then that pushes the compensation expense further out, I guess why only do it in 2010? Meaning, if you'd do it in 2011, then you can start at a lower run rate beginning in the first quarter. And then over time, obviously, your comp is going to increase, as the vesting periods come underway.

I just wanted to get your view on the 2010 versus why not just keeping it like an ongoing program?

Yes, Mike. You know, we came up with that and the Board approved it late in 2010, just looking at how the year was going, and thought that that was an appropriate and good thing to do. It sounds like you see the wisdom in that, too. And we go through our budgeting process and looked at what we expect, and rates are sure a part of the factor. But we think that things are going to be better in 2011, and so we are going to start the year off and function like that.

You know, things are available to change later in the year, as I kind of said when we gave a range, but our plans are to run it like that.

Okay, that's helpful.

And then, just on the -- I guess an update on the M&A side. When you guys raised the debt a little while back, it seemed like one of the reasons for looking for something maybe on the international side.

So I guess one, any update there on your thoughts if anything has changed? Then second is just, if you don't see opportunities out there, what else would you want to do with that cash?

Well, first of all we continue to want to use that cash, as we said, for acquisitions and especially international. And we continue to look for them, and the fact that we don't have one doesn't mean that we aren't still looking in order to try and do that.

As a philosophy, we tend not to want to have a lot of extra spare cash laying around, although in this environment we don't feel that having that kind of cash available is really an extraordinary situation. So we are not the least bit uncomfortable in maintaining that. And besides which, the place where we've put the money [we're] bucks up against the interest rate.

Okay, that's helpful. Thanks, guys.

Michael Kim with Sandler O'Neill.

First, Chris, I would be curious to get your take on how the proposed liquidity exchange facility could potentially impact smaller money market fund players that might not necessarily have kind of the resources to deal with either an upfront capital contribution to the bank or some of the ongoing fees.

I know you've talked about having control of your redemptions as being the most important factor in terms of being in the money market fund business, but is it reasonable to think that there could be some incremental pressure on the economics of the business and therefore some of the smaller players might look to exit?

I think that certainly could be a factor. Anytime you require a payment into, in this case a liquidity bank, you could have that effect.

The charges are going to come out, though, are basically charges against the fund assets and therefore the fund yield. So that part of it, everyone will be playing with the same rates in order to be a participant in the liquidity bank. So that kind of a factor, not so much.

But overall, I think the comment that, while the most important factor is the ability to control redemptions, what I've said on that is that a person or an individual or a company can run a money market fund almost indefinitely if they control the redemptions. There are a lot more important factors, and so I'm not trying to quibble with you about the words, but I wanted to clear that up as well.

So we are strongly in favor of that liquidity bank, and yes, there could be some effect on people who don't want to put any money up at all. But we think it is worth it because of the advantages of such a liquidity bank.

Michael, one reminder, too -- that liquidity facility is designed for participation by all prime funds in the market place. It would not be for government funds and municipal funds.

Yes, understood.

And then second, maybe if you could just give us an update on the institutional side of the business in terms of RFP activity and what you are seeing as it relates to reallocation trends. I know you talked about the small-cap growth win that you recently had, but are you starting to see more interest on the equity side more broadly?

We have seen more interest, but interestingly we had a minor reduction in RFP activity in Q4 for fixed income, but still at about the level that it brought on the prior several quarters on average. So we are still seeing interest there.

Okay, and then just finally, any thoughts on potential changes that are being proposed requiring brokers to be held to a fiduciary standard, versus kind of the current suitability standard, and how that could potentially impact mutual fund sales across the industry or more specifically looking at your franchise?

Yes, on that subject we have been one of the thought leaders on this particular subject.

One of our attorneys here, Gene Maloney, has done an extensive work on this with the regulators and with various of our clients. And whichever way this ends up going, we think we will be fine with Federated. A lot of clients look at the whole picture, and say, Okay, what is the relationship I have with my intermediary?

And however those rules get characterized, we will be there, ready, willing and able to help them solve their challenges or respond to regulatory concerns.

Remember that a lot of our business grew out of our relationship with trust departments that was started in the '70s and has continued for these many decades, and therefore there's a very strong heritage of understanding and dealing with fiduciary requirements, that are obviously broader then suitability requirements.

I can't predict how it's going to come out. There's a nice, big, fat proposal that came out this week, but this has gone back and forth both through Dodd-Frank and through this latest iteration. And it's really tough to predict exactly how it will come out, but we don't think it will hurt us no matter which way it comes out.

Okay, that's helpful. Thanks for taking my questions.

Ken Worthington with JP Morgan.

First, a question or two for Debbie.

On the direction, the future direction of short-term rates, I know that there's a couple of programs that are changing. You mentioned the FDIC assessment. I think you were quoted in a Bloomberg article along with some others about that possibly pressing short-term rates. They may have taken that out of context but I think Merrill, Barclays, RBC think rates go down 10 bps. I think you were saying they only went down five.

And then on the supplemental financing program, it looks like that had a negative impact last time that was wound down. Do you think if that gets wound down again, that that could also have a negative impact on short-term rates?

Sure, let's talk about that supplemental financing program first, since that's a little bit more tangible and predictable, let's say.

That was announced as being wound down sooner -- this was with regard obviously to the debt ceiling which will eventually get fixed, and then the supplemental financing will be reintroduced. But in that interim time as that supplemental financing program was wound down, there will be less collateral in the marketplace, and what we will end up seeing our short-term rates on an overnight basis likely going lower, and also with regard to treasuries in the marketplace.

So we do think that will have a definitive impact; we've seen it happen before. The expectation would be it happens again. The only question is, what's the timeframe involved? Does it last for a week? Does it last for a month? How long before the debt ceiling gets fixed and then returns to a normal level?

With regard to the FDIC, we think that is much, much more intangible at this point, since there are many variations and questions about how the assessments will be levied. And as such, we really don't feel that at this point there is a quantifiable impact. If I was quoted as saying five basis points, somebody definitely took that out of context. And at this point we are really not offering any kind of guidance there, but don't think it is meaningful in any way.

Okay, great. And then separately, comments were that fee waivers would probably stay about the same levels. Kind of tracking some of your money market fund returns, we've seen Prime Funds at the very least see a declining yield throughout the quarter.

Given that ending yields are a reasonable amount lower than average yields in the fourth quarter, maybe why wouldn't fee waivers be worse, just based on the mathematics? And in that context, maybe talk about a percentage of performance fee waivers coming from prime versus MUNI versus treasury at Federated.

Let me talk just a little bit about the overall average yields.

What we've seen basically throughout the month of January is improvements in those, and I would say we again have smiling traders in that new securities that they are putting into the portfolio versus those that are maturing off, are being put on a high rate. So that's always a benefit and makes for a happy trading room with smiling faces, when you have accretive transactions that are occurring on a day-to-day basis. So I think that's probably, in general, the reason why we feel like again the steeper -- slightly steeper yield curve and the expectation for that to get steeper as we go forward into 2011, is that the impact on the waivers shouldn't change much.

And, just by type, I mean, the waivers still have been concentrated -- the impact of the waivers have been concentrated much more in the government products, the government agency and the treasuries. So the fluctuations in prime really have not been a meaningful change in our run rate of money fund waivers.

All right. And then there was one last question -- there was a comment in the call about some of the ultrashorts starting to see redemptions.

In the last fixed-income cycle, the ultrashorts and short-term funds were a real area of success for Federated, and I guess just again this cycle. Anything that you can do to kind of protect Federated in terms of, like keeping those assets either in-house as they go to different asset classes, or -- I don't know -- anything that maybe makes this cycle for transition to equities different than the last cycle? Thank you.

Basically, the theme with ultrashorts as a longer-than-money-fund type product, it really isn't an automatic flow into the other products. So when we look at them, we look at them as the top hat of our fixed income charts, and every sale we make on the equity side is an individual sale on the equity products. So there is no direct link.

Yes, we have the relationship. And if you look at the balances or the sales in ultrashorts over the last three years, they were very, very high interest and strong in '09 and as I mentioned on the call recently.

But we don't see it as a lockstep into the equity. I wish I could have you a chart like that, but it's not the way it works.

But, Ken, to your point, the ultrashorts in this cycle have been a real opportunity for us to expand our business among intermediaries and introduce Federated product to a number of intermediaries that hadn't been using us or using us as much as we would like. So we are actively trying to leverage that foothold that we've gotten through the ultrashorts, to get a bigger part of the intermediaries business if and when as they determine that that money should move. There's active marketing efforts to a greater degree than we would have had in the last cycle that you referenced.

Great. Thank you, thanks for the color.

Bill Katz with Citigroup.

Just staying on that fee waiver discussion for a moment, in this particular quarter you had a very high sort of contribution from your distributors. I'm just wondering if there's been any pushback as the duration of the fee waiver environment has extended here.

No.

No? Okay.

You went through this very quickly, Chris, and maybe I just didn't take the notes down. It looked like there was a pretty big falloff in some of the short-term performance trends. Just wondering if you could talk about the dynamics in both equities and the fixed income side.

Well, there was a falloff in some of that, although looked at another way, we have still 43% of our equity assets are four star and five star on Morningstar, I have been commenting on Lipper. And that's up from 36% from the prior quarter. And the percentage of three, four and five stars is, like, 87%, up from 82% in the third quarter.

And we have similar kinds of improvements on the fixed-income side. So yes, there are some funds that ran into some challenges. For example, the Kaufman Fund, the big Kaufman Fund -- which obviously influences the asset totals as well, has a large component in about 20% of health-care stocks, and they're basically supporting strong companies with good fundamentals, and although they participated in an increase in the fourth quarter, I think they were up a little over 9% -- the Mid Cap area was up more like 14%, and it was part of that 20% in what we consider to be good, strong fundamental growth-susceptible-type holdings. And we did not participate as much as one might have expected on cyclical stocks. We were in them, but didn't have the kind of positions that others had.

So we missed a lot of the upside there in that fourth quarter.

But [Hans] and Larry are still pretty confident about where their position is, and that's just one of the stories in the ebb and flow of investment performance.

Okay, and just one last technical one for Tom -- what's the share count at the end of the year, given the increase of restricted stock?

Well, the restricted stock won't show up until 2011 -- yes, 2011. But if you look at diluted shares, it's [999999].

Okay, thank you.

Robert Lee with KBW.

Thanks, good morning, guys.

You know, Chris, I know you made some comments as you normally do about recent new business trends. But could you maybe dive a little bit deeper? I mean, obviously you've seen demand in the equity business, the dividend fund pretty consistent with what you've heard elsewhere. But what are your wholesalers and distributors saying or thinking about retail investor re-risking?

You know, obviously there seems to be some going on, but do you think kind of some of the enthusiasm you read in the press and elsewhere is a little ahead of where the people on the ground are actually seeing or thinking?

Well, one of the features, and you are touching on it, is that because we are going through intermediaries, you don't get the same quick or large response type commentary. And so, I would be inclined to agree with the drift of your question based on my discussions with our people. And that is that yes, you see some movements but it is not quick or avalanche style movements. And it is movements into things like, as you mentioned our dividend type stocks, strategic value, where people can get a healthy dividend while coming back into the market.

So although those are good they are not running down the field type positions.

Okay. Maybe just a quick question on the M&A environment just really more about the landscape, I mean, you think back clearly a couple of years ago when everything was stressed, it was for lack of a better way of putting it pretty much a buyers market, more or less, if you could get some one to sell. If you look at it today things are better, more stable. Is it more back to pre-crisis in terms of supply and demand balance? You know, a lot more buyers and a lot of -- and maybe not as many sellers? Or how do you look at that kind of landscape?

The landscape does not seem to be that much different. I think that there is going to be more things happening as you settle down and people are feeling better because nobody wants to sell in the crisis. Now that is not dealing with people who are closing down their money fund operations. That is a different subject. So the ongoing or the centers of excellence or that crowd they always are making their own decisions individually. And I'm pretty sure that they don't want to have a transaction when things are really down. And so I expect things to loosen up a little bit.

I mean, are you seeing any more competition for properties? I mean, if you think of the regulatory environment, obviously even though you've seen a lot of banks exit the money fund business these things can be so much cyclical that all of a sudden geez, this is maybe a better business than --. Any possibility or inkling that, gee, all of a sudden there is going to be new buyers out there because they need another place to try to grow?

I think that the buyers are going to be conservative and make sure that what they buy works in their system, fits in culturally and is going to create growth or are going to get enough of savings where they think it is worth it. They are going to be measured.

Just look and read the press that you have on the international operation at [Unicredit]. There is lots of interest there as you read the press.

And maybe not elsewhere. Okay, one last question for you, Chris. On distribution initiatives usually you touch on some things you have in the pipeline or works. And as you look ahead to 2011, is there any one or two initiatives on the distribution front that may be worth calling out a little bit? I guess particularly expanding -- further expansion of your distribution capability outside of M&A into Europe or different distribution channels in the US, for example, the DC I/O channel?

Well, a couple of things that might be worthy of mention. The increases in the way we are focusing on the retirement business which is basically a long-term effort of blocking and tackling and getting on more and more platforms. And we are liking how we are seeing that work out especially because that product, the strategic value dividend product, is pretty good on that front.

We are seeing also life on the broker-dealer side for the same reasons, but also inside some of the old distribution where it is basically back, or it has not really changed, from blocking and tackling. The movement that we talked about earlier of into fiduciary -- if that really switches on then many of our clients are going to need to come to us for discussion and aptitudes and training on how to deal with this new concept.

And so if that happens, then that will be another whole press. And it will be one where we think Federated will be the indispensable party in order to help explain how that goes.

Now, frankly, a lot of what has been going on if you remember by analogy, when Y2K came along and everybody had a complaint about fixing all of their computers and then it turned out that doing the housecleaning was pretty good, this whole regulatory overlay has given us the opportunity to get in with clients and get to studying things. For example, the threat on 12b-1 which we don't say really happening right now but it gives us opportunities to get in with the best clients on ways that don't show up as a distribution activity because you have you defense on the field, but yet it moves into positive type discussions.

So it is trying to make a little bit of lemonade out of the lemons that we have been dealing with. And I hesitate to call it a distribution program. But we are sure working to make it look like that as well.

Cynthia Mayer with Bank of America/Merrill Lynch.

Can you talk a little bit about maybe marketing strategies vis-a-vis the equity funds and the Kaufman Funds, because the Large Cap, it looks like it now has a five-star rating but the older and larger one has been underperforming as you talked about before with all the healthcare. So I'm just wondering if maybe you could give us some color in terms of what you are counseling your wholesalers to emphasize? Does it make more sense to try to retain assets in the large one or are you very optimistic for more sales on the Large Cap?

Well, let's [go with this]. It is obviously great to retain assets but we have discovered historically and I have mentioned on these calls many times that as much as we would like to we cannot control redemptions. Yes, you can have better performance and that will tend to help with that, but -- so we just sat that one aside.

The counseling of our wholesalers is a different issue. Some of the clients that we have, the intermediaries, are looking at us to fill sandboxes or to provide the sandbox is that they play on and then others are looking for a more of a total concept like total return bond funds. So it depends on which branch of advisor you are talking about.

And the -- our wholesaler, who is dealing with someone who is looking at us as supplying different sandboxes for them to make the decisions, they are defending the efficacy of each one of those sandboxes and showing how they work and exactly the kinds of stories that I was telling you on the Mid Cap Kaufmann Fund. And if they're looking for a large-cap growth fund then obviously the Kaufmann Fund is a good entry.

So that is what it depends on. It is not exactly a deal where we set up on Mount Olympus and try to direct the salesman who are the wholesalers as to what has to happen. It has to be a collaborative event with the intermediary to set them up to make the presentation to the actual client.

Right. So you don't change the profitability of selling one fund or the other in terms of --?

Well first of all, we can't change the profitability but if you mean we orient ourselves based on the profitability, we don't do that either. You have the pricing is done on the one hand and then what you can -- what can be sold in the marketplace is really going to be based on the marketplace and on where our intermediaries are wanting to go and our explanations of how these things all fit together.

But it really --. It is really difficult to just drive it by whatever the pricing is.

Got it. Okay, and on the separate account side you have talked in the past quarters about growing scale and winning mandates and total return bond. So if institutional investors start opting a little more for equity, where would you see the most opportunities there and is there a separate account version of, say, the Kaufmann Large Cap or of the strategic dividend, strategic (multiple speakers)?

Well, we have seen the strategic dividend, a big one. The Clover Small Cap is another pretty good one that shows up very well. And our international leaders has been a great offering. We have not seen that much institutional interest in it but the numbers have been compelling and I think it has potential there.

Okay. Great. That is it for me. Thank you.

Bill Katz. Citigroup.

Could you just highlight or just to mention a couple of buckets. What is left in MDT? How big the ultrashorts are and the MUNIs? And did you also say $234 billion is the retail money market as of yesterday or two days ago?

Okay. We will go in reverse order. The money market mutual funds are about 240 (multiple speakers) 241. If you want to know numbers it is $240.7 billion. Okay? That is the recent number. What I said was those other numbers were basically average assets. For example the average assets for the current quarter are right about $240 billion, right on top of about where the assets are today. And the prior year's average assets were $239 billion. That is what I mentioned. We will have everyone else try to scroll through the other questions that you put out.

Bill, on MDT it's about $2.9 billion. The ultrashorts are about $5.5 billion. The MUNI bonds are just under $6 billion. Recognize that some of that overlaps, of course. ultrashorts have a municipal flavor as well.

Okay. And then just one last one for Debbie, I'm sorry to beat this one to death but when you talk about to the end of the year can you quantify exactly when you are modeling? And then historically how quickly does the market itself start to discount potential absolute rate hike?

Generally speaking, the markets usually precede the Fed by anywhere from three to six months which is why we are looking towards the summer when we actually start to see some yield advancements on a steeper yield curve basis in anticipation. On a modeling basis we are really looking more towards the end of the year, so one of the last two Fed meetings.

Roger Freeman. Barclays Capital.

Just two quick ones. One -- I don't know if you have talked about this. It's small travel related expense of a bit and the fourth quarter and it's usually -- has sort of been recently $2.5 million and $3 million. It was $3.5 million. Is there anything (multiple speakers) time in there?

That is just cyclical. The fourth quarter is usually like that.

Okay. And then on MUNI flows did you say earlier in the commentary that the redemptions had picked up? Was that a January comment or was that end of year comment?

We have seen them pick up. They picked up a bit December versus November and looking at January it looks like they would be a little bit higher in January compared to December.

So --. Because some of the others that have reported have said that flows -- redemptions have been lower the last few weeks. That sounds like that is not what you have been saying?

We have not seen a dramatic change but it is a bit higher.

Okay. If I think about your MUNI -- just going back to your comment about the overlap between the ultrashorts, the average duration of your MUNI products is on the shorter end I would assume, right?

Yes.

Thank you. Mr. Hanley, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

We thank you for joining us today and that will conclude our call.

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