Federated Hermes Inc (FHI) 2011 Q1 法說會逐字稿

Greetings and welcome to the Federated Investors First Quarter 2011 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 Raymond Hanley, President of Federated Investors Management Company. Thank you Mr. Hanley, you may begin.

Good morning and welcome. Thank you for joining us.

Today the call will be led by Chris Donahue, Federated CEO, and Tom Donohue, Chief Financial Officer. We also have Debbie Cunningham, who is Chief Investment Officer for Money Markets, who will join us with some commentary on market activity and interest rate outlook and participate in our Q&A.

And by 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 from 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 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 at cash management, money market average assets increased from the prior quarter for both our funds and our separate accounts. As mentioned last call, expected outflows early in Q1 mainly from flows that came in late in the year led to lower period-end fund assets.

Growth in average money fund assets was mainly from wealth management and trust channel while money market separate accounts growth reflected tax seasonality. While market conditions remain challenging, our cash management business is strong and stable with our market share steady at around 8.8%. Debbie will comment later on the recent market conditions, which have further impacted yields and fee waivers, which Tom will also address.

On the regulatory front, money funds continue to be an active topic of discussion. Federated and others support the liquidity bank proposal advanced by the industry through the ICI. This enhancement would complement the new liquidity provisions of 2a-7 and would not socialize credit risk.

We do not agree with suggestions that favor bank-like regulation or bank-like capital requirements, which in our view are far off the point and are more likely to do significant harm than enhance the resiliency of money funds, an important stated objective.

In terms of the potential for systemic risk designation, we don't believe that we will, nor should, be designated and have submitted commentary and support for our opinions to the regulators.

Looking now at our equity business, we are focused on a series of strategies that have solid performance characteristics and are well suited to meet the particular demands in the market. Leading in this area is Strategic Value Dividend, a strategy that continues to produce strong flows and expanded distribution opportunities for both mutual funds and separate accounts.

We added an international version of this strategy in mid-2008 and it has achieved strong one-year and quarterly results, ranking in the top 3% of its peer group. The Clover Small Value strategy had solid three- and five-year results. This is an area we see as good growth opportunity in part because other successful products in this space in the market place have closed to new investors.

At the other end of the cap spectrum, the Kaufmann Large Cap Fund also has a strong three-year record and is garnering solid flows. The International Leaders and InterContinental Funds had positive flows in Q1. InterContinental recently received a Lipper Fund Award for its category leading ten-year consistent return results. The Federated Emerging Market Debt Fund was also recognized as the leading fund on the same basis for its three-year record.

While we usually direct our comments to longer-term performance records, with the difficulties that quant strategies across the industry including ours experienced over the last couple of years, we did want to note that our MDT quant team had very strong performance in the first quarter. The primary strategy All Cap Core brought its record to the top quartile for the one-year period and had a top 1% ranking for the first quarter. All seven of the MDT managed accounts strategies beat their benchmarks in the first quarter, and six of seven have outperformed since inception.

Negative equity fund flows in Q1 and in the first couple of weeks of Q2 are due mainly to our alternative strategies, which are market ops and Prudent Bear, and to the Kaufmann Fund. Looking at early Q1 results for the first -- I mean early Q2 results for the first few weeks, equity fund flows have been modestly negative.

As regards to the Kaufmann Fund, one short comment. Their approach continues to be to focus on high-quality growth companies and to use extensive proprietary research in a bottoms-up style with high conviction and low turnover. It is very much a long-term approach.

Turning to the fixed income strategies, the Capital Preservation Fund led results for both gross and net sales. And I will comment further on that shortly. High Yield Funds and our Strategic Income blended product were among a series of funds that had positive flows. Our Total Return Bond Fund had outflows due mainly to the redemption we mentioned on our last call from a client who reached their maximum fund concentration levels. We also saw outflows in municipal bond funds.

We are continuing to look -- we are looking for good results from two recently launched products -- our Unconstrained Bond Fund and our Floating Rate Strategic Income Fund. Bond fund flows are negative in the first couple of weeks of April. Muni bond funds continue to have net outflows.

We have also seen some clients reducing their fixed income allocations as a part of re-risking strategies. This led to a few lumpy outflows in the first quarter and a $200 million redemption this month in Total Return Bond Fund.

Turning to fund performance, and looking at the quarter-end Lipper rankings for Federated's equity funds, 22% of the assets are rated in the first or second quartile over the last year, 16% over three years, 26% over five years and 84% over 10 years. For bond fund assets the comparable first and second quartile percentages are 35% one year, 51% three years, 70% for five years and 68% for 10 years.

Looking at MorningStar rated funds, 20% of the rated equity assets are in four- and five-star product as of 3/31 and two-thirds are in three-, four- and five-star products. Interestingly, 96% of our international equity assets are in the top two quartiles for the first year, one-year, and 21% for three years, 78% for five years and 78% also for 10 years.

At quarter end we had 11 equity funds with top quartile one-year performance including our Strategic Dividend, domestic and international, Asset Allocation, InterContinental and International Leaders Funds, along with several of the MDT funds.

We also had a half a dozen funds with top quartile three-year records and nine funds with top five-year records, plenty of excellent product that is selling in the market place.

As of April 27 our managed assets were $353 billion including $268 billion in money market, $32 billion in equities, $53 billion in fixed income -- which includes our liquidation portfolios. Money market mutual fund assets stand at about $237 billion. So far in April our money fund assets have ranged between $235 billion and $245 billion, and the average has been about $239 billion.

As regards to distribution, our retirement business which we have been investing in by adding sales staff in the DCIO area is strong and growing. As mentioned, we added $1.2 billion into the Capital Preservation Fund in Q1 by competing successfully in a high-level RFP process with one of our major distributors. As a result we have gained product position in about 700 new retirement plans, with an estimated 100,000 participants.

We expect these assets to grow each quarter based on regular plan contributions. We're also working to gain additional accounts and to grow the new accounts by adding new strategies into these plans.

Excluding these conversions we saw a 4% increase in Q1 defined contribution gross sales compared to the first quarter of 2010.

Now generally across our channels we see modest re-risking activity as our clients are looking to take on more risk, but are moving cautiously. In this environment Strategic Value Dividend offers a solid step out strategy by providing equity exposure supported by a solid base of dividends. Flow improvement in equity separate accounts was driven by higher sales of the Strategic Value Dividend strategy and by lower redemptions in the MDT strategies. As a result, we saw positive flows in first-quarter equity separate accounts after running negative in 2010.

Fixed-income separate account flows continue to be positive and we see the potential for $500 million to $1 billion of new flows in this area over the next couple of quarters.

We enhanced our product marketing effort in the first quarter with the launch of a campaign designed to initially promote the Strategic Value strategy through a series of web and print ads. We also recently launched a redesigned website to showcase the insights of our investment professionals and better deliver product and market information and tools to our clients.

Regarding acquisitions, we're focused on developing an alliance to further advance our business outside the United States. We are also actively seeking consolidation deals and recently announced an agreement to transition $515 million from the Equity Trust Funds in Q3. These were from FBL Financial Group in Iowa.

Now, obviously we cannot predict the probability or timing of any other potential deals. But we are active in our analysis and focusing on developing further of these types of alliances.

Now I would like to turn it over to Tom to discuss our financials.

Thank you Chris. Excluding the $0.11 of litigation settlement and related expense, EPS of $0.32 would have been $0.43. This expense was $18.2 million pretax, nearly all in professional service fees.

Money fund yield waivers reduced pretax income by $13.1 million for the quarter compared to $12.1 million in the prior quarter. The line items impacted are covered in the press release.

Based on current market conditions and asset levels, these waivers would reduce income by approximately $17.5 million in the second quarter. Lower short-term interest rates in particular for repurchase agreements impacted these waivers so far in April. Looking forward, we estimate that gaining 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 income increase would reduce the impact by about two-thirds.

Looking at revenues, the decrease from the prior quarter was due mainly to two fewer days in the first quarter which impacted the number by approximately $6.9 million, and to higher money fund yield waivers as average assets actually increased for money market, Equity and Fixed Income while liquidation portfolios decreased.

Turning to operating expenses, compensation and related expenses in Q1 was in line with the estimate we gave us quarter. Q1 included a credit of approximately $2 million of prior-year incentive compensation. Distribution expense was down due mainly to higher money fund yield waivers and was also impacted by fewer days, which caused a reduction of approximately $2.5 million.

Looking at our balance sheet, cash and marketable securities totaled $317 million at quarter end. This, combined with 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 as well as the ability to fund related contingent payments, share repurchases, dividends, new products, other investments, capital expenditures and debt repayments.

We would now like to ask Debbie Cunningham to comment on Federated's interest rate outlook.

Thanks Tom. Our interest rate outlook has actually not changed too much from the past two quarters. But it has been impacted in a short-term fashion by some of the regulatory changes that have just come into fruition. Namely for April 1 -- from the beginning of April 1, what we have seen on an FDIC assessment base change is lower overnight fed funds rate, which are the driver for lower overnight repo rates than in the marketplace.

What essentially in 2010 was an average repo rate that was probably in the low to mid-20s, in the first quarter became somewhere in the neighborhood of the mid-to high teens. And looking forward into the second quarter of 2011 it will be likely in the high single digit area. As such, that will impact how the overall portfolios to some degree are aligned on a composition basis with less in the space that is required to -- that will be impacted by that overnight rate and the FDIC assessment changes.

Having said that, though, liquidity is the main characteristic of money market funds. And as such, we will continue to keep large amounts in liquidity products going forward. So overnight rates are impacted in the first quarter slightly, but it will be more so in the second quarter by the FDIC charge assessments.

On an outlook basis, however, for the overall curve for money market assets, it has actually seen a little bit of improvement. And a few more people that were in the rate raising environment for 2013 and late 2012 have moved much closer to our end of the estimation, which is the end of 2011. We do believe, and obviously that was confirmed by Fed Chairman Bernanke earlier in the week, that the overall QE2 process will be completed.

So we will continue to see the purchase of Treasury securities out of the marketplace to the level that (inaudible) mentioned and for the amount of time that was mentioned. But soon that will change, and it will be something that at the end of June, beginning of July will turn into something that is really an overall level that becomes much more characteristic of a rising rate environment. So rising rates are what we would start to see and expect and see it on a [QT], I will call it quantitative tightening basis beginning in the third quarter.

So we do think that the Fed will start on a reverse repo basis putting some of their securities back out into the market place beginning in the third quarter. And that will then lead to something that is eventual true tightening by an increase in the fed funds rate by the end of the year 2011.

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

(Operator Instructions) Roger Freeman, Barclays Capital.

Good morning. Actually, Debbie, I just want to come back to the comments you were making just to sort of understand your thinking here. I guess it seems, at least to me, the message from the Fed this week was rates aren't going up. And we're basically holding the balance sheet fairly constant here.

And I guess it sounds like you're suggesting the balance sheet is shrinking and that we do see -- if I heard you correctly we would see a Fed hike late this year. It seems like the market has actually been pushing that out as fed funds futures for December have actually come down quite a bit in terms of the likelihood of rate hikes. I'm just curious; it seems like there's a bit of a difference there.

Sure. Absolutely. What we're convinced at this point is that the Fed is going to tread lightly from a market perspective. QE2 is something -- well, QE to begin with was something that was -- it was and continues to be a grand experiment. And in the context of [unwind], that grand experiment will continue.

Having said that, as a market that is starved for collateral -- i.e. repo, FDIC changes, lower amounts of collateral available because much of it is sitting on the balance sheet of the Fed. The Fed will be encouraged as soon as their process is concluded on the purchase out of the equation, I believe they're ready to do the unwind portion of it from at least a temporary basis with the number of reverse repo counterparties that they have in the marketplace.

Obviously they're not just talking about dealing with the primary dealers anymore. They've got -- I think at the end of the day they're going to have somewhere around [80-some] counterparties from a money market fund standpoint. And as such, they have lots of capacity. And I think what they're going to find is there's lots of demand for that collateral.

So although it is temporary in nature, it is reverse repo. It's not actually putting those securities back out into the marketplace on a sale basis, on a permanent sale basis. I do believe that they will head down the path of beginning that project. And once they do, they're going to find very happy recipients of it in the marketplace, and as such, that will encourage them to continue going.

The other side of the question from our perspective that leads us to still an end of the year 2011 is just the strength in the economic picture that we have seen. Although our GDP in the first quarter is going to be less than what has maybe been expected, slow growth is something that from a money market perspective is almost nirvana. So we really think that slow growth and slow tightening process is something that will be well-received from the marketplace, certainly off the lows we're in right now and have been for the last 2.5 years.

I actually think as it begins, and as the Fed sees sort of the demand for it, and the recipients in the marketplace being very positive that leads us to the conclusion where we are, which is we think it will be in the second half of 2011.

Okay, that is helpful. And then just on the effective fed funds rate, (inaudible) about at 9 basis points right now. Can you just explain how the FDIC assessments are weighing on that? And then is that something that persists? And as you look at the upward biased rates that this is going to have some sort of a depressing impact or whatever that trajectory of increase at the front of the curve is going to be?

Sure. And the FDIC assessment charges are something that, they didn't just happen on April 1. Everybody knew they were going to happen.

The market was very wrong about what the impact would be. And the reason for that is the Fed [in its] assessment changes is not really changing the amount of intake, the amount of money coming into the FDIC fund. Instead, what they were doing was repositioning it so that more of it was being paid by larger banks and less by smaller banks.

So the focus on the market place when looking at the impact last quarter, basically, and the quarter before that, was one of the big banks. So people were looking at JPMorgan, BofA, Citi and seeing with the impact of those banks would be, and therefore that impact on the marketplace. And that was sort of what was built into the expectation.

What was really overworked and underestimated what the power of the smaller banks in this equation. Many, many smaller banks, tens of dozens of smaller banks who traditionally had put repo -- or put collateral out into the repo market place on a daily basis, keeping that supply at the level that it was, decided that because of the assessment changes and the impact on their fee process, it no longer was a profitable thing. They couldn't even breakeven in doing that.

So the immediate impact on April 1 was for a sizable amount. Again, on an individual bank by bank basis it wouldn't have made a hill of beans difference. But on a collective basis, (technical difficulty) the impact of the size of the withdrawal pretty much collectively of those smaller banks from putting that collateral into the market place is what caused the rates to plummet.

Now they plummeted too far, and what you essentially saw was something that was a retreat back to what was a fairly normal level. The foreign banks aren't affected by this and yet they were being impacted in a very positive way because they're getting such great funding rates. Now that has kind of leveled itself out back again.

But what you're seeing on that fed funds rate of 9 basis points is effectively what I was saying in my commentary earlier, that we had been in the low to mid-20s in most of 2010. First quarter we were in the mid to high teens and the expectation for this quarter is in the single digits -- the high single digits area.

Now there are two things that are exacerbating this, which make it a little bit worse at this point. Number one is the balanced budget issue and the elimination on the supplementary financing bill. And the withdrawal of that collateral from the market place because of the debt ceiling and the potential for hitting that.

So as those negotiations continue to go forward and hopefully as they come to an successful end, [various] discussion about bringing that supplemental financing bill back into the market place which would produce more supply, which would be a good thing, which would cause rates to go up in that sector.

The other side of the question is QE2 itself, so that has a definitive end to it at the end of June. Once the Fed stops buying basically all the two- to ten-year treasuries out of the market place and holding them on their balance sheet, where we get no use off that. That will again create supply.

But it is something I am looking as not a second quarter item. We're looking to those sort exacerbation items not being corrected, if you will, until the third quarter.

Okay. Thanks for the commentary.

Michael Kim, Sandler O'Neill.

First, now that short-term rates have kind of come in again more recently, I'd just be curious get your thoughts on kind of money market fund flows across the industry. Do you think we could see kind of a second wave of redemptions as investors maybe go back to bank deposit accounts? Or do you feel like most of that money has already left the funds at this point?

At this point the rates that the customer was actually experienced haven't really changed all that much. A lot of those funds were at zero or one and have remained at that kind of a level. And if people before were interested in higher rates, they have moved off.

So we haven't seen a meaningful wave of departures. That is why we go through the ranges and the averages of the assets that we're looking at. Now certainly there is some amount of re-risking which we have alluded to. But it is really hard to detect in terms of a movement of these short-term rates.

Just to add to that, the prime funds have not been impacted in the same way that Debbie mentioned in particular by the Treasury situation. So we have seen during the quarter some shifting, actual increase in the prime fund assets. It has been more of a government fund impact, so there is -- remains better yield prospects in the prime money funds.

Got it. Okay. And then assuming short-term rates start to move higher at some point down the road, how do you see the dynamic playing out where maybe you have some institutional redemptions just given kind of higher rates in the spot market? But at the same time maybe a step up in inflows from retail clients, just given the higher yields -- kind of net/net, how would you expect that dynamic to play out?

Well, there will be less of each of those factors you just mentioned because of the reasons we just talked about. Namely that those that were really driven or incented by whatever the yield was have already made their moves. And so that is why we have been talking on the last several calls about a kind of leveling from our perspective in the assets of money market funds that we have.

You see it bouncing around a couple of billion figure on a gross basis and on an average basis, and that is about as good as I could go in terms of a future look at things. Historically, the comments we have made have been that throughout these cycles we end up with higher highs and higher lows as we get through the cycle. So far over the last several quarters, including this one, we think that is playing out.

Okay. And maybe just a final question for Tom. If we kind of back out the effects of the money market fund fee waivers, looks like your margins have been pretty consistently running in kind of the high 20%, low 30% range over the last few years across what has been a pretty volatile period. So just looking ahead, is there anything out there that could meaningfully move the margin in either direction? Or is it mostly just a function of mix at this point?

Did you say excluding the waivers?

Yes.

Because obviously if the waivers come back, things could improve. But you've got to remember to go through and we get revenue and then we pay out distribution fees, so what is the mix on that. I don't see any dynamic -- to really answer your question on dynamic changes in the waiver situation for the obvious things if equity and fixed income increase.

Okay. Thanks for taking my questions.

Michael Carrier, Deutsche Bank.

Just on the equity side, it looks like separate accounts -- you saw the improvement in the quarter. I think you mentioned the two big drivers would be the Strategic Value and MDT redemptions declining. I guess within the separate accounts, any way to size those two impacts to the net flows?

And then I guess on the performance side, it seems like on the equities you gave -- one, three, five on average, like [only] 25% or so of the assets or the funds are outperforming. So any issues there, anything that needs to be changed from like a personnel? Or is it just certain under some, but long-term the ten-year still looks pretty good?

Just on the flow composition, the MDT strategies in total have about $3 billion of assets and about two-thirds of that would be -- actually more than two-thirds of it would be in separate accounts. And to be clear there, what we saw was a diminution in net redemptions in sequential quarters. So those products are still negative from a flow standpoint but less so, and that improvement would have been around $125 million of improvement.

The real story is the growth on the Strategic Value side. And there, the improvement in net flows would've been more like $250 million, maybe a little less than that. We had, if not our best quarter ever, certainly one of the best in terms of both gross and net sales in that product. It is very well-positioned in a number of high-quality SMA platforms and it is clearly a strategy that is resonating with moderate re-risking activity that we see.

In terms of the second question, what drives those numbers in view of our size, of $32 billion in equities and a $7 billion plus in the Kaufmann fund, when the Kaufmann fund assets move from one category to another, that really tilts those figures. And so that is one point.

Now as regards the Kaufmann fund on that point, we remain committed to the fact that this group is excellent investors in selecting good stocks over the long haul. The one fact I will give you that we've used with our independent directors and others is that there have been 22 rolling three-year performance periods since they started the fund. And of those 22 rolling three-year periods, fourteen of them have found the Kaufmann Fund in the first quartile while they have been in the fourth quartile four times and in the third quartile three times, and almost never in the second quartile.

What is going on here is that this team is dedicated to finding stocks they believe in for the long haul. And it is also reminiscent of the time when we bought the Fund in 2001 coming off some relative tough performance in the late 1990s and 2000. And they snapped back quickly after the 2001 technology breakdown.

So, this is just the way that that Kaufmann Fund it does their investing and the way it impacts our overall performance profile. So we're certainly not looking at making any other changes there.

One item that was announced early this morning was that we did have a change in senior portfolio manager at the Capital Appreciation Fund with Jimmy Grefenstette joining Dean Kartsonas in now running that Fund and that group into the future. And then the other factor which we mentioned is the MDT, and I don't have to repeat all of the articles you read about what has happened to quant managers and the springback has happened so far this year that I went over in the remarks. So that is pretty much a quick synopsis on your second question.

Okay, that makes sense. Just last one. When I look at the revenue change and this is sequentially -- just for the fewer days and the waivers. And it looks like, despite like the overall asset mix being more favorable in terms of long-term versus money markets, revenues were a bit lighter.

So it looks like maybe within the long-term products you have some shift going on in terms of different products, different fees. So I guess just in terms of like the fixed income complex, if you could give us any insight into short duration if you're getting inflows there. Just what the fee rate on those products are for like versus the overall income average. And then same thing in equity just on something like Kaufmann or Prudent Bear where you see some more volatility versus the overall average.

It's just more helpful in terms of when we were looking forward just what were the fee rates are likely to head. Thanks.

Sure Mike. On composition -- and the changes would've been very modest in terms of looking at the blended overall realization rates. But on Fixed Income, it would be reflective of some of the shorter duration products and also growth in separate accounts. And at the margin separate accounts for both Equity and Fixed Income would generate lower fees than the Funds.

On the Equity side I would agree with where -- the spirit of your question. Across an array of Equity products, the Kaufmann and the Prudent Bear would be higher than say average fees. And so decreases there would impact the realization rate a bit.

Craig Siegenthaler, Credit Suisse.

On the fee rate itself, just to follow up on the last question, can you help us quantify what the change in either the fee rate was or the management fees were when you exclude the fee waiver? Because it looked like there was some deterioration this quarter. I was wondering if you could add a little more color around that.

In terms of a change from, say, the prior quarter and looking at advisory fees, it would have been about 0.5 basis points on Equity and about 0.3 basis points on Fixed Income. So again the changes would've been very modest, and if you want to go through them further we could probably do that off-line more effectively.

All right, perfect. A follow-up on capital management. How are you looking at it at this point with your debt levels and your cash flow and your cash? How should we think you use those proceeds for?

Well, we continue as Chris mentioned looking for acquisitions, so that is our number one objective. And of course we're going to continue to pay dividends and looking at buying the shares back. But we would hope to use that in an acquisition.

Got it, so really no change there.

Okay?

All right guys, thanks.

Ken Worthington, JPMorgan.

Sorry if you hit this, but on the expense side you were able to keep compensation and other expenses flat or lower year-over-year. And I guess my question is, can you continue to hold expenses in check for the rest of 2011? And particularly on compensation what are the tactics you are using to really keep that from rising?

Well, a big portion of the comp is incentive-based. And so we hope not to keep that in -- down, because if it goes up, it will be because we have had excellent sales and better performance than what we are projecting in there to calculate out what that number -- what we expect it will be.

Okay, so I was trying to be polite. But is it basically flat because the performance is down and the bonus pool is down? Is that what is going on?

Yes, when we do our calculations we look at -- there's a lot of things, moving parts in there. But we have to make a forecast for the year what we think all the parts add up to be the total. And when it's the same as where it was last year's first quarter everything -- although each one of them is different it's kind of the same outlook.

And then on the non-legal-based non-comp expense, again, same thing. It's like airline tickets are going up, so travel I guess would be getting more expensive and yet you're holding the line on these other costs as well. Possible to kind of keep holding the line?

We worked very diligent to manage things effectively on a cost basis. We recognized the waiver situation that is going on and how it is affecting us and are trying to react to that where we can. Yet still allowing proper sales efforts and proper distribution and investing in the Company.

Just a modeling question. How is the money market fee waiver revenue impacting of $63.4 million split between investment advisory and other service fees?

The split was $36 million advisory fee, and $27.5 million of other service fee.

Okay. Great, that's it for me. Thank you.

Roger Smith, Macquarie Bank.

Thanks. I want to talk a little bit about the systemic risk. Can you tell us how you are participating in these discussions in determining what is systemically important? And it is that directly? Or are you basically utilizing the ICI or some other type of lobbying group to make your point about money markets not being systemically important entities?

Roger, this is more or less an across-the-board exercise by us. It involves me. It involves other senior executives at Federated personally making pitches to the SEC, to the FDIC. Then it also involves participating on the committees and with the ICI.

It also involves writing extensive commentary letters, which I think have been well-respected and well received, demonstrating our views that the criteria that have been established for designation are simply not applicable. And really, not met by money market funds specifically or mutual funds in general. And it is primarily because none of these enterprises are on leverage. There other reasons as well.

So if you check the records down in Washington, you will see us showing up periodically making this case because it is very important to us and to our investors.

Great. And then I know it is still early, but can you give us any kind of sense in how the sentiment of the view from the regulators is changing? Would you say that as you make this lobbying effort that you get the sense that they agree with you? Or are they holding the poker facing you can't really tell? Or is there any kind of change that you can give us some kind of idea about?

I would say your characterization of poker face is the end result. The cordiality, respect and honest discussions, though, have been what we experienced. I think you can see in the press as well as anybody that there are certain of the people who are on FSOC who want to designate a lot, and then the Treasury and the Fed basically saying designate a few. And there were a number of speeches within the last weeks on those subjects.

Our own view is that if they designate anybody it will be a very, very few. And we don't think they will designate any money market funds or mutual funds. But we don't control it.

And I wish I could say that all of our efforts -- you could reflect and say, oh well, boy, we really won that one. But that is just not the way this works. So we make our pitches. We repeat the [sounding joy]. We write it out in detail and we expect that the proper result will follow.

This is my last question on this topic. Is there any change in the argument by the people that want more systemic designations around the money markets? Or has the argument been the same all along? Is there any change on why they believe this business might be more systemically important?

No, there have been no new arguments. It's like old friends. We look at it and say, yes, there was a challenge in the money market fund industry when reserve broke the buck. And that was addressed by the Treasury, by the Fed with its liquidity features and by the SEC in how we did the Putnam transaction.

How we did the Putnam transaction was basically infused into 2a-7 to make an industry solution that did not require federal money. The liquidity bank that we have spoken of and I referred to in my remarks addressed the liquidity that was -- a private liquidity system that was requested by the President's working group. And so we think that addresses all of the issues. But that really hasn't changed as the basic arguments.

Okay, great, and I just had one last question on the fixed income mutual fund business. Can you give us an idea of what products? And I might have missed this -- what products are actually getting the traction? Because I will to you from the industry data we get I would not have thought it would've been as good as it came out this quarter.

Well, Roger, we have seen interest in high yield products. And short duration has had some flows as well.

On the ultra-short side we talked about the outflows on the muni side, and somewhat surprisingly there has been a -- the muni ultra-short fund has had outflows. Given its placement, we feel like that just kind of gets swept up into the general market sentiment about munis. But -- so it has still been the short duration, the high yield, and certain of the blended products.

Even as -- for example, the Total Return Fund that we mentioned has had a few of the lumpy outflows where people have done reallocations, there continues to be a strong level of sales and other people entering into the product.

Great, thanks very much.

Robert Lee, KBW.

Maybe a follow-up question on capital management. If I think back to your first special dividend two-plus years ago, you took down some leverage, funded the special dividend. Paid down debt for kind of the next five, six quarters or so, announced another special dividend, took down some debt. Now here we are about five, six quarters later. You have been amortizing down some debt.

Is it reasonable to assume as we get to the latter part of this year that your thinking about a special dividend could pick up?

Well, the way I would answer that is the exactly how I answered the last question on that. Our first choice is to look to growth through acquisitions. And on the international side Gordon Ceresino is out traveling around searching.

But to come back to specifically your question, we look at what are we going to do with our capital and have made those decisions, like you have pointed out various times. And if you want to call it eclectic we're always looking or trying to look for what is in the best interest of our shareholders and how to get them the best return. And we've paid two special dividends and thought that was a proper thing to do for our shareholders. We could come to that conclusion again.

Okay. Fair enough. Maybe a question for Chris, can you maybe just update us on -- you talked a little bit on the call about your efforts in the DCIO market. But maybe update us on some your efforts through -- I guess I will call it more traditional or other distribution channels.

Are there any particular platforms or places where you think you feel like you had more success getting more products on the shelf? I know for a long time you used to talk about Jones, but I guess we haven't talked about that in a while. Maybe just update us on how you think your positioning is in some of the other key distribution platforms and where some of your initiatives are to maybe improvement.

One of the biggest ones we already mentioned which was the $1.2 billion in capital preservation. That was with a major -- one of these major distributors. And when you are looking at 700 new plans and 100,000 new participants, that is a pretty good step up in basically what is available.

I think what we are looking at here is opportunities in the broker-dealer space to increase the number of our sales people who are actually able to get their clients, meaning the intervening broker-dealers, to write $100,000 tickets. And then another way to express that is doing more than just one particular mandate, but doing two or three. And right now we're looking at an examination of the sales force to see how we can expand that a little bit to make that more possible.

And it's because of some of these successes we have had. If you look at our Equity sales, they are running comfortably above [500] a month on average. Back in 2008 and 2007 they were in the low [400s] a month. So we're looking at that as a pretty good situation.

The new products that we've come out with have also -- give us some enthusiasm. The results to the low duration products and the unconstrained bond funds have been pretty good.

And that is why we have opened up an advertising campaign. If you check in your Investment News or your Barron's, you will start seeing ads from Federated which have not seen for a while. And that is all part of the effort.

William Katz, Citigroup.

Just a couple questions here, just on the fee waiver discussion, you've been very optimistic about rates for a bit of time. And in fairness you've been wrong for a bit of time as well. Any thoughts of hedging the risk at this point in time, if you are wrong and rates and policy tends to be a little bit looser than you anticipate?

No.

No? Okay. Second question is, as [your] discussion (inaudible) on the topline seems to be somewhat cautious in my view just given the adverse mix shift and your lack of really unit growth for the Company. Is there a chance here you might have an opportunity to take out expenses if the topline earnings power continues to be an issue?

Well, from my look at it, we spent the last couple of years when the market was challenging to deal with a lot of expenses in the Company, but didn't go far to cut into the core of things. And we are investing and continuing to invest in the new products that we have done, and technologies and websites and things that we need to be prepared for when the market comes back stronger and when we come back stronger. So my look at it is, we are sitting here with a pretty good expense profile and ready to reap the benefits of growth.

Okay. And just my last topic is around capital. I was curious if you could talk about -- you have been mentioning non-US property now for a bit of time as well. I'm just sort of wondering what might be the hold-up at this time point in time. Is it pricing? Is it the right fit? Is it just -- where are you still looking in terms of geographic?

And then secondly, how might you finance that? And I ask that question that if there is no deal and you were to contemplate a special dividend by levering the balance sheet, is that something you are willing to strategically risk in light of just ongoing regulatory uncertainty around both the money market business and systematic risks? Thanks.

I will talk about the international acquisition ideas and Tom will talk about the financing there. The concept of hold-up isn't exactly how I would describe what is going on there. What we have discovered, no surprise to us really, is that it takes a long time to develop good relationships, to be in the right spot at the right time to do a deal that is a cultural fit that meets our criteria.

So this is not just a power shopping deal where we want to get something checked off. We want to look and get something that is going to really work for the long-term. And that has proven more challenging than perhaps we thought going in, but the pattern of it is very similar. And the attitude we have is very similar to that which we had domestically.

So we continue to look for it. And I don't think that in the list of things that you mentioned -- like oh, is it pricing, no [this] isn't pricing. It's finding the right group with the right culture. And I don't think even when we get there that the pricing will really be the issue, nor do I think it will be the financing, which Tom can talk about.

A year ago we took out our $425 million loan from the banks, a five-year deal. What we said at the time was we are raising that. We liked where rates were and we wanted to have the capital.

We did not -- we have a pretty significant amount of the dollars that we raised still on our balance sheet and invested through seeding and other investments. I went through with Rob, well, would we consider a dividend or share buybacks or acquisitions. And our answer to those are yes.

That doesn't mean that we have a plan to change the fact that we wanted to raise money for what I've called risk management to have the capital here. It was not fun to go through those couple of years and try to talk about borrowing. And so to have it already borrowed is, as a finance guy to have the money available for what our business people want to do is part of what I view my job as.

So if we do come to the conclusion to use up a lot of that, I still want to have the view that we have capital available to do the things that we want to do to grow the Company.

Cynthia Mayer, BofA Merrill Lynch.

Coming back to the expense control, if it's not too much, clearly it has been really strong. But aside from the variable comp, which I guess is influenced by other things like performance, is it possible that when fee waivers begin to come off you'll ramp up some of the controllable expenses? Are there projects you deferred which you think you will need to accelerate?

In other words, how we think about the returning revenue? And how much of it drops to the bottom line, other than the distribution offset?

(multiple speakers) when you go the distribution you can do your (multiple speakers) calculate your margins on that and figure it out pretty readily.

Other than the distribution, are there other things that are sort of pent-up that you will need to fund?

We have a technology committee that goes through and gets enormous technology requests, and we go through a prioritization and processing and have actually the business people in each group determine their own priority. And then if there's a real problem we send -- we have the tech committee decide what we're going to do. There is always and there has always been pent-up demand there. If you follow these systems and communications line we haven't really cut that and we continue to invest in there. We think it's just -- it has the right feel to it.

If we had absolute demands where we had to get stuff done and we -- we would either cut something else out, at least that's how we have done it. Or not cut it out, but delay it until the next time around. So I don't feel like there is a big-time pent-up demand of things we haven't done. And I don't expect, if the waivers come back, we will have any kind of explosion on expenses.

We already mentioned -- or Chris mentioned, we're testing out some advertising on the dividend strategy fund, and if that works well, we could do more. That could be an area that would increase and we hope would match that up, increase because we saw successes with it.

Cynthia, I would like to add a little bit. Regardless of the margin of the waiver moves, in this first quarter we did have a modest expansion in some of our institutional sales efforts. We've hired two of the three that we wanted to add.

And this is basically calling on the research gatekeepers and consultants, which kind of allows the sales reps to focus on the sponsors and then these guys focus on the consultants and that kind of a deal. So there will be isolated efforts on the distribution side where we think we can expand.

And to us there are some, quote, pent-up needs like I was talking about in response to some earlier questions, in terms of other distribution opportunities that we may see. But it isn't like oh, well, we have deferred maintenance or something like that.

Great. That's helpful. And then just a modeling question. It looks like the tax rate was a bit lower this quarter, but I wasn't sure because of the one-time expense. What kind of tax rate are you expecting?

We really haven't changed there, Cynthia. It was pretty much right on 37% and we have said 37% to 38%. So we kind of hold in that range.

Okay. Just to clarify on the Fixed Income flows, it sounds like you're having outflows from the Fixed Income Funds but you're expecting good inflows to the separate accounts. Is that differences just because the separate accounts are more weighted towards strategic value?

Strategic value is leading the pack there. But it isn't the -- that isn't the only area.

The product mix is much different in terms of funds and separate accounts. So the biggest thing you would point to at strategic value would have a higher weighting relative to other strategies in the separate accounts as compared to the funds.

Okay, great. And then lastly just circling back to the regulatory questions. What sort of mileposts are coming up that we should be looking for? And what kind of timing are you expecting?

I wish I would know the mileposts. I do not, and I can't say exactly what will happen. I heard rumors that they will do some designations maybe in the summer. But I don't have a firm understanding of exactly what the time frames will be.

Okay, great. Thanks a lot.

Roger Freeman, Barclays Capital.

Just a couple of follow-ups actually on the regulation. Chris, I guess on milestones, it looks like at least as far as the potential liquidity [bullets that] the SEC is doing a roundtable here soon, May 10. And then ICI has a big summit coming up on the 16th. I guess on that topic, how do you -- is the most likely outcome maybe -- or can you weight the outcome between having a liquidity pool and ultimately nothing?

And separately whether the whole designation issue factors in here, i.e. is there sort of more push for this are there money market funds that are designated systemically important versus not?

Well, as I told you, I don't think they're going to designate any money market funds. It's very difficult for me to hypothesize or make book on what comes out of these sessions.

We've had a lot of study -- the president's working group, the responses. And there are some good people going to be testifying. I have read the drafts of the testimonies for these meetings that are coming up and I think we make some outstanding points, consistent with what I have said here before. So all of this information doesn't change where I think it comes out.

But again, I don't control the outcome. And obviously we are big money market fund providers and so we think we have this thing pretty well wrapped and understood. So I would hope and expect that they do do the liquidity bank, but I can say that they will.

Okay. And if they do that, I guess the proposal is that that will get built up through payments that you and others make into it and likely pass on through fees to the end customer. But given the economics in the money market business right now, and depending on how long that ends up running, is that even something that could be passed through? Or is that something firms like yours have to absorb?

Well, when you say pass through, the structure of it is that the advisor would put in -- in our case I guess about $17 million to start with. That can't be passed through because there is no mechanism for passing through. And then the funds themselves would put some number basis points in, which comes out of the yield.

And there, you have to be careful to maintain a proper spread between government funds, agency funds and prime funds if at the end of the day you really want to have corporate issuers be able to issue commercial paper and have money market funds participate in that. In other words enhance the resiliency of money funds. So there is no way to recapture any kind of money.

Now, today when there is hardly any yield available, yes, that makes all of these things a little more problematic. But getting them in at this point is probably a worthy idea, because it gives you time to get the structures set up for when the rates eventually do go up. And we are talking about long-term solutions and long-term responses, much the same we did when we were enthusiastic about the changes to 2a-7, because we're in this business for the long haul. And our clients have demonstrated overwhelmingly that they are in the funds for the long haul.

Okay, that's helpful. And Chris the worst -- as you look at the step down there, the incrementally worse economics around in money markets at present, do you think that changes the decision tree at all with subscale players that might accelerate anymore, don't want to get out of this business? (multiple speakers)

As we said before on this Roger, if an individual group controls the redemption or the right to redeem, or knows people who can control the right to redeem and can influence them, then you can run a money market fund for a long time. But I think every one of these moves just adds to the burden that money funds have to carry. And therefore, like it or not, enhances the oligopolization of the business.

But it never does it in such a way that it creates an avalanche or a cliff where all of the sudden, oh well, now everyone has to go do something. It hasn't happened to that yet and I don't think that is the way it will go. But there is a steady stream of people, we're talking to some now, who are looking to exit the money fund business. And I think it will just be a continuing effort.

Okay. Last question, coming back to your comments around some re-risking on the part of the investor base. I'm looking at the Prudent Bear Fund, actually, looks like it's kind of better flows. At least March looks like it is actually positive. It seems to -- does that suggest that all any increase in risk aversion?

The Prudent Bear Fund is a unique fund. And it is best sold when it is sold as a 5% or 10% part -- permanent part, long-term part of an existing portfolio. And to date a lot of people tend to use that fund with higher percentages or bigger amounts based on where they think the market is going or where it has just been.

And so it is pretty difficult to make a direct assessment to re-risking from the flows on the Prudent Bear Fund. It's just tough to do it [from that]. We make those judgments more based on the commentary of the sales force, backed up by flows in some of the other products and talking to the sales leadership and the sales individuals, rather than especially the flows on Prudent Bear.

Marc Irizarry, Goldman Sachs.

On the fee waivers, if I look at the sequential change in operating income relative to the sequential change in revenue, it looks like the dynamics -- I'm trying to understand the dynamics there of the operating income delta versus the change in the fee waiver revenue. How does that relate to the 33% uptick in the fee waivers sequentially?

You mean just going through the numbers in the press release where -- are you asking how much of the (multiple speakers) impact is from the waiver and how much is from everything else? I don't follow your question.

The question is, when you think about the guidance on the fee waivers moving up, is there a change in or what is accounting for the change in the operating income delta versus the change in the fee waiver revenue? So, sort of the margin or the operating income loss per dollar of lost fee waiver revenue; are you sharing more of the burden with the channel? Is there a mix shift that is impacting it?

Okay. The repo rates that are down are exactly what is calling it, and we are sharing it with the channel just as always. So, it's lower rates and we are sharing. Like Chris said earlier, the customer is not really having too much of an impact. It's impacting us.

Okay, and your share of that share so to speak -- that is not changing?

No.

It has moved around a little bit within a relatively narrow bandwidth, plus or minus around 75% depending on the mix of the products. But we have not seen any significant change there.

Great, thanks.

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

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

You may now disconnect your lines at this time. Thank you very much for your participation.