Federated Hermes Inc (FHI) 2011 Q2 法說會逐字稿

Greetings and welcome to the Federated Investors Management Company second quarter 2011 quarterly 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's now my pleasure to introduce your host, Mr. Raymond 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 we also have Debbie Cunningham, the Chief Investment Officer for Federated Money Market Group, who will give us some remarks on money market conditions and participate in the Q&A. During today's call we may make forward-looking statements and we want to note that Federated 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 future results and Federated assumes no duty to update any of these forward-looking statements. With that I will turn it over to Chris.

Thank you and good morning. I will start with a brief review of Federated recent business performance before turning the call over to Tom to discuss the financials. Looking first at cash management, money market average assets decreased from the prior quarter due mainly to tax seasonality in separate account assets. Money market mutual fund average assets were nearly the same as the prior quarter. Our market share remains steady at around 8.8%. Debbie will comment later on recent money market conditions, including the impact of the debt ceiling and European banks. Tom will address related fee waivers. On the regulatory front, money funds continue to be an active topic of discussion. Based on comments from the SEC and the FSOC, the regulators believe that further changes should be considered and are under review.

We are unable to make any predictions on any particular outcome or a particular timeline. We do note, however, that the industry, issuers, and investors in money funds are opposed to a fluctuating NAV. In our view there is no evidence that a floating NAV would positively impact investor redemption patterns or improve the resiliency of money funds. In fact, we believe fluctuating NAV's would have the opposite affect. Capital buffers are not necessarily responsive to the severe liquidity crisis that negatively impacted money funds and other investors in 2008. Our initial reaction to ideas like the [Squam Lake] capital buffer, before the results of the voluminous studies necessary to adequately research such a concept with this level of complexity, is that it's probably not a practical solution.

One outcome could end up being to compress or even eliminate the spread between prime and government fund yields, which would be just another way of ending prime funds, which is not the goal of the entire operation. We believe that money funds were meaningfully and sufficiently strengthened by last year's extensive revisions to 2a7 and we are seeing those changes help now, as we deal with the noise created around the perception of risk in prime money funds from European bank exposure. We remain favorably disposed to improvements that would enhance the resiliency of money funds by addressing the primary issue faced during the financial crisis, namely a marketwide liquidity crunch. Now turning to our equities business, we have 6 actively managed strategies in a variety of styles that have top quartile three year records and are well positioned for growth.

Capital income [Prudent Bear] International Leaders, International Strategic Value, Kaufman Large Cap and Strategic Value Dividend. In particular, the strategic value dividend strategy is well suited for investor demand for high quality dividend income. It continues to produce strong flows with over $1.2 billion of year-to-date net inflows to funds and Separate Accounts combined. The international version of this strategy reached its 3 year anniversary during the second quarter and achieved 5 stars, as it ranked in the top 13% of its peer group for the trailing 3 years. This strategy, along with the intercontinental and international leaders strategies, provides a solid position in international equities with positive flows in the second quarter and lots of room for growth. Overall, equity fund net flows were negative in April and May and positive in June and slightly negative here in the first three weeks of July.

Flows in equity Separate Accounts were negative, mainly due to a $315 million redemption from an absolute return mandate, an area where we recently changed portfolio managers. Net sales of the strategic value dividend strategy were solidly positive. And we saw another quarter of lower net redemptions in the MDT [Quan] strategies, or SMA's, which improved from about minus $300 million in Q4 to minus $200 million in Q1 to minus $77 million in Q2. On the Kaufman Funds. The Kaufman Fund performance improved in the second quarter, as the fund ranked in the top third of its Lipper category, similar in Morning Star. The Kaufman Large Cap Fund ranked in the top decile of its category and the Small Cap Fund ranked in the top 14% for the quarter.

The core Kaufman team and investment process remain intact. The team's approach is to focus on high quality growth companies and use extensive proprietary research in a bottoms up style with high conviction and low turnover, obviously a long-term approach. So, that if we looked at the 22 rolling 3 year performance periods beginning with 1986, the fund was ranked in the first quartile 14 times and was ranked in the fourth quartile only four times, three of which were in the '98, '99 and 2000 period. Interestingly, past periods of underperformance were followed by substantial outperformance. Turning to fixed income. Fund flows were negative in April and May and then turned positive in June. These flows are positive through the first 3 weeks of July, led by the total return bond fund and the return to positive Muni fund flows.

During the second quarter, Total Return Bond Fund showed modest outflows due largely to a couple of significant asset allocation changes made by investors in April and May that combined for about $360 million in lumpy redemptions. The fund returned to modestly positive inflows for June and into July. We also saw reduced outflows in municipal bond funds during the second quarter and inflows in July, as I mentioned. The strategies with positive second quarter flows include Total Return Government Fund, High Yield, International, and Stable Value. We also had solid inflows into two recently launched funds, our Federated Unconstrained Bond Fund and our Federated Floating Rate Strategic Income Fund. Turning to investment performance. Looking at quarter end Lipper rankings for Federated equity funds, 27% of rated assets were in the first or second quarter over the last year, 38% 3 years, 24% 5 years, 80% 10 years.

For bond assets, bond fund assets, the comparable first and second quartile percentages are 29% 1 year, 50% 3 years, 70% 5 years, and 75% for 10 years. Looking at Morning Star rated funds, 25% of rated assets are in the 4 and 5 Star products. And as of 6/30 an 82% are in 3 and 4 and 5 Star product. At quarter end, we had 10 equity funds with Morning Star top quartile one year performance, including International Strategic Value Dividend, Capital Income, Asset Allocation, Intercontinental and International Leaders Funds along with several MDT funds. We also had seven equity funds with top quartile 3 year records and 7 funds with top quartile 5 year records. As of July 27, managed assets were approximately $349 billion, including -- $265 billion in money market; $31 billion in equities; $53 billion in fixed income, including our liquidation portfolios. Money market mutual fund assets stand at about $237 billion.

So far in July, money market fund assets have ranged between $237 billion and $241 billion and have averaged $239 billion. Looking at some of our distribution highlights, year-to-date gross sales of equity funds and Separate Accounts on a combined basis increased about 19% compared to the same period in 2010. We continue to invest in distribution capabilities and are in the process of adding 12 new sales personnel to the broker dealer sales division. We are encouraged by sales success in this area over the last 3 years. Since 2008, broker dealer sales have increased from approximately $6.4 billion to $12 billion. And the number of advisors doing significant business with us has increased from 29,000 to 35,000. The added resources will enable us to penetrate additional mid-sized broker dealer firms. We've also recently hired 3 new consultant relation reps in our institutional area to broaden our reach within the institutional consultants and planned sponsors.

We are also modestly investing in advertising, with an initial focus on the strategic value dividend strategy. We ran print and web campaign advertisements over the last couple of months. We have been pleased with the results and plan to run additional ads later in the year. Regarding acquisitions. We remain focused on developing an alliance to further advance our business outside of the United States. As we work on this, we are also having success abroad for cash management. During the second quarter we added $2 billion in new business from a large offshore client. We are also working on 2 new money market portal opportunities in the UK and have received approval in Ireland for our sterling denominated money fund that will launch in Q3. In the US, we are actively seeking consolidation deals and recently completed the 2 deals we announced last quarter, with the EquiTrust Funds and Tributary International Equity Fund adding about $600 million in new assets in a variety of strategies. Now for the financials, I will turn it over to Tom.

Thank you, Chris. And as Chris mentioned, conditions for money market funds continue to be challenging in the second quarter and into the third quarter here. Money fund yield waivers reduced pre tax income by $19.4 million for the quarter compared to $13.1 million in the prior quarter. Line items impacted are covered in the press release. Yields decreased during the quarter which led to waivers exceeding the April calculation based on then current market conditions. Yields have generally trended lower, as the market deals with the debt ceiling issue and concerns over European debt. Based on recent market conditions and asset levels, these waivers could reduce income by approximately $23 million in Q3 for Federated. More recently, we have seen an uptick in rates for repo and T-bills, which impact waiver levels in the government funds. We expect these rates to move off of the extremely low levels in the first couple of weeks of July, as we move towards some resolution of the debt ceiling issue.

We have seen some upward movement over the last couple of days and Debbie will review this in a few minutes. 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 levels and a 25 basis point increase would reduce the impact by about two-thirds. Looking at total revenue. The decrease from the prior quarter was due to higher money fund waivers, partially offset by one additional day in the quarter and by higher equity and fixed income related revenues. We continue to properly manage expenses and continue to invest for growth. The operating margin was higher in Q2 than in the prior quarter, calculated before the litigation settlement expense booked in the first quarter. The operating margin was also higher compared to Q2 2010 calculated before unusual items related to an insurance recovery and impairment charges.

We amended our restated -- we amended and restated our term credit facility in the second quarter. The revised facility contains a $200 million revolver to replace the previous facility, which was scheduled to expire later this year. On the term portion we were able to lower interest expense and we expect to save about $8 million in interest expense over the life of the facility. We expect interest expense in the third quarter will be approximately $3.6 million down from $4.2 million in Q2. Looking at our balance sheet, cash and marketable securities totaled $294 million at quarter end. This, combined with expected additional cash flows from operation and availability under present debt facility, 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 product seeds and other investments, capital expenditures and debt repayments. Before we take questions, we would like to have Debbie comment on the recent market in money market world.

Thanks, Tom. I thought I would cover just 3 quick topics -- our outlook and what's happening from a short-term rate perspective; what the current state of affairs from a European bank exposure perspective; and then the most -- the newest item of concern is the debt ceiling negotiations for the US Treasury. From a rate outlook perspective, if you look at the yield curve for money market securities today versus a quarter ago it's relatively steeper, but it is steeper for wrong reason. It is steeper because the shortest end of the yield curve has actually lost a few basis points in yield. 1 to 3 months is basically 2 to 3 basis points more expensive, with lower yields than where we were a quarter ago, while the back end of the yield curve, which nobody is really buying too much at the point, 6 to 12 months has remained flat.

Our expectation from a outlook perspective for Fed tightening has been pushed into 2012 and that's reflective of the slower growth that we have been experiencing from a economic perspective. We do continue to believe, though, that there will be some yield curve steepening in the second half of 2011, with the back end of the yield curve backing up to some degree and more opportunity in the marketplace to buy some better relative value positions as the second half of 2011 proceeds. From a European bank perspective a couple things have happened in the recent times. The stress tests for those banks by the EU have been completed with some amount of success afforded to that completion.

The package for Greek debt restructuring has also been reached and although it is not a quick fix in the marketplace, we never thought it would be, this is going to take up to a decade to proceed smoothly and get completed, but it has received fairly good market impact. And by that, I look at the spreads that we see on the European banks and, again, we use 22 different banks, highest quality banks within the Eurozone, high quality ratings, diverse underlying of their loan portfolio, and affectively these banks have stayed the same from a spread perspective in the marketplace to widening maybe 2 to 3 basis points.

From a Federated Prime Fund exposure, we have currently and will still maintain or still maintaining somewhere in neighborhood of between 40% and 45% of our prime funds to exposure with these European banks. Again, we have no direct exposure to the Greek banks. But the European banks that we use, do have some exposure on a secondary basis to the sovereign Greek nation. And again, we are continuing to be comfortable with the ownership of these banks. We post that on our website on an every 2 week basis, so you can get the most quarterly information there when you are looking for it.

The third item is the debt ceiling issue and the potential concerns in the market place about a default, a downgrade and then looking at just the market quick conditions and liquidity in the marketplace. From a default perspective, we think this is a very remote likelihood. It would require, if it actually did happen from our perspective, fund Board of Directors' action. We would need to make, as an advisor, a recommendation to the Board of Directors based on the underlying credit quality of the nation itself, market valuations, the fact that this is not an insolvency issue, but rather a willingness to pay and a political theater issue, all of those. At this point it would mean that if we had to come to a situation, our recommendation would be to maintain the ownership of these technically defaulted instruments at that point, again, thinking this is a very remote possibility.

On the other side of the equation, is a downgrade. There has been lines drawn in the sand from the rating agencies as to what to expect from a debt cut perspective in order for the AAA ratings to be maintained. We think this is less remote, obviously, than a default, but still we don't think this is probable. First thing to note is the downgrade is on a potential basis for long-term ratings only, not short-term ratings. Nothing would be affected from the short-term ratings perspective for the securities that are held within money market funds. What this would do is basically raise the level off which spreads are measured.

Treasury securities are still the largest, with the most volume, most liquid, the highest quality instruments in the world, not surpassed by Johnson and Johnson, not surpassed by Wal-Mart and some of the others in the marketplace that have been noted. And certainly not surpassed by bank deposits where, in fact, the backing of those banks comes from the US Government. These would still maintain their liquidity in the market place, but with a price volatility that would be a little bit more stringent than what it has been in the past and at a base level off which the rest of the market would price that's slightly higher than it is today. From a Federated funds perspective, despite the outlook for negative potential downgrade for the long-term ratings for the US Government debt, the Federated money market funds have been affirmed with their AAA rating. So, even if the US debt was downgraded to AA, AA plus, AA minus, whatever it would happen to be, at this point the AAA ratings for our Federated funds would be maintained.

From a market conditions perspective, we are looking at Treasury bill rates that are actually finally paying us something in the context of this negotiation and the extended time period that it's taking. And perversely, it has a little bit of a positive effect overall on the underlying yields of our portfolios. The Treasury curve, which had been flat to negative out to 3 months just a week and a half ago, now stands anywhere between 9 and 15 basis points. So, we are actually getting paid for taking the risk of ownership of Treasury securities during the months of August, September and October.

Lastly, from a Federated funds perspective and a flow stand point, you noticed in the July assets; the assets for money market funds are not markedly changed. We are not seeing clients moving with negative outflows due to these issues. A few are, but certainly not in any widespread form and not in anyway, shape or form requestive of any kind of a problem. The liquidity in these products is high, the weighted average maturity is low, positions ourselves well for what we think is a second half steepening of the yield curve and it provides ourselves with a lot of comfort for our shareholders in the context of liquidity that might be needed. With that I will turn it back to Ray.

We will open up for questions now, please.

(Operator Instructions) Craig Siegenthaler, Credit Suisse.

I understand that you are limiting your comments around regulation, however, shouldn't the risk of certain regulations be impacting overall capital management decisions in the near term? I'm relating this question to your comments on M&A and also the lower levels in net cash you hold versus some of your peers.

In terms of M&A, the strategy that we have of doing both consolidation deals and international deals we do not feel ought to be impacted by a regulatory ideas. We have been looking at these ideas for several years now and it is a constant situation where because money market funds are not perfect, people keep coming up with ideas. And there is a lot more ideas that people could come up that will still be studied.

I would say that it would be wise for somebody like Federated to not allow that to restrain us from moving forward. We don't think they are going to be doing anything that would kill the money market fund business in any event.

All of the ideas are always couched in terms of study more and then even the FSOC recently mentioned things like in order to increase stability market discipline and investor confidence things should be studied.

I think when the verdict comes in of all the studies, you will find the money market funds standing there, though they are in their imperfect position, withstanding the resiliency, demonstrating the resiliency they have to customers and in the marketplace.

That would be how I would look at the issue of money market fund regulation versus M&A activity. I will let Tom handle the other part of your question.

If you look at our balance sheet, we have net debt of somewhere around $100 million and we have a revolver availability and we certainly have an excellent bank group that is ready, willing and able to increase our debt levels if we need to for an acquisition or for any other reasons that you might think.

Having flexibility is one of the things that we want to maintain here and we look through and you know we've paid special dividends in the past and we purchased shares back, larger at sometimes and smaller at other times, and we will factor all those things in with what is going on in today's environment.

Michael Kim, Sandler O'Neill.

First to follow up on the regulatory environment. Chris, I understand you don't think floating NAVs are the answer, but it does seem like the regulators are leaning toward instituting some incremental changes. Curious to get your take on what proposals seem more likely now that the proposed liquidity bank doesn't seem to have all that much support.

Well, it's very, very hard, for us to make a judgment about which one of these things can work when we don't initially perceive their workability. They didn't like the sort of polite capital ideas that Fidelity had with 40 or 50 basis points of buffer. They didn't like the liquidity bank, which took care of the major problem that occurred in 2008, namely liquidity of the whole system.

So they get down to ideas which have not shown themselves to be workable. Several percentage points of capital is neither economic nor viable in terms of maintaining the existence of prime funds. It's hard for me to try and say which one of these things is ahead of the others. If you look at some of the phrases they've used, they talk about something called deterrents to redemption. I don't know what exactly they mean by that, that's a quote out of FSOC.

But if what they are talking about are some pretty legitimate ideas that we think could work, for example, the way we did the Putnam deal back in the day was that the Putnam board decided to hit pause on redemptions for a week and then turn the whole fund over to us and there was plenty of liquidity in the system because the Fed opened up the windows to buy good paper. So, notice there was no credit maneuver here, it was all on liquidity.

If you give the Board the right to do that without forcing a liquidation, that would be an interesting one. Another would be, what about redemption in kind. It's been discussed many times and there is an example of a fund, the AMR Fund, who basically said they were going to do a redemption in kind and that ended the redemptions. I don't know if that's what they have in mind or not.

One other idea which was put out early on that had to do with this was to say if you run into reserve funds, then take the 3% and set that aside and give everybody else daily liquidity at par on the 97% of the funds that's there and proceed down that road and maybe that's a -- what they mean by deterrents to redemption. But at this point there is a lot of work that has to be done if they are thinking about doing the things that Squam Lake has been talking about.

Maybe a question for Debbie. Doesn't sound like it, but are you repositioning your money market fund portfolios to get more liquid in front of a potential step up in redemptions related to the issues here in the US and then presumably that would put additional pressure on yields, which could push the waivers even higher. Just curious to see if you think that dynamic is playing out.

We have become more liquid. You will see higher overnight and 7-day liquidity positions within our portfolios, as well as shorter weighted average maturities, which is also reflective of that additional liquidity. Not so much because of concern out of shareholder redemption, but it plays nicely into our strategy of thinking that later in the year we are going to see better yield curve opportunities and have better relative value decisions that can be made at that point.

What is also interesting at this point, when I was mentioning what is happening from a Treasury bill perspective, a lot of the reasons why we weren't investing, and there were periods of time during the month of July when we actually just had cash in our government portfolios, because all that was available to buy at that point in time in the marketplace for the duration of securities that we were looking for were at zero to negative yields. So it seemed like less risky of a strategy to just simply leave it in cash.

That's not the case with today's portfolios. And that's a reflection of the fact that many who were sitting on the sidelines or were in our market from a cash perspective have left, as such when those investors have left the marketplace, yields on Treasury and repo securities have started to lift.

What has been overnight Treasury and mortgage-backed repo rates of 1 and 3 basis points pretty consistently during the month of June and early July turned into something that's more like 9 to 15 basis points. What had been zero to negative yields on 3-month and under Treasury bills are now anywhere from 9 to 15 basis points.

As I was saying before, a little bit perversely in this case, our liquidity position and shorter weighted average maturity, which generally speaking in a market that is not yet experiencing a rising rate environment, would cause yields on the funds to be lower. And the fact, though, due to market conditions that are current, that's not the case. You will have seen, if you looked at our reported deals over the course of this week, they have been basically rising each day.

Then just a final question for Tom. Can you talk about the economic impact related to some of these initiatives in terms of hiring new salespeople and maybe the pick-up in advertising?

It's more than just the salespeople, there is some back office people that go along with that. Probably for the next year, from now, that's roughly dependent on when we are able to fill them, that is somewhere around $2 million cost item. When they are fully in, it's roughly a $3 million per year number. The advertising probably for the rest of the year will be somewhere around $1 million or so, about the same run rate that we ran in the first half of the year.

Ken Worthington, JPMorgan.

Can you talk about the decline in the amortization cost this quarter? The amortization's deferred commissions fell meaningfully and I know the trend has been down, but it fell a bunch more in Q2. And then on the amortization of intangibles that fell a lot, too. I think in 1Q you adjusted SunTrust, but it seems dated back to the run rate where you have been for the last couple of years. Color there would be helpful too.

On the deferred sales commission amortization, as you know we did financing arrangements there and they had defined lives and one of the tranches from that past financing rolled off. So, you can go with that new number as a run rate. And on the intangibles, we also completed amortization on a acquisition related intangible, so that rolled off. The other factor was the SunTrust in Q1, as you pointed out.

On the fee waivers, the non-controlling interest, that had a pretty big impact this quarter. What is the nature of the non-controlling interest? It more than doubled from last quarter, even though the gross revenue and distribution impact was less than 25% each, so why are the proportions off so much?

The non-controlling interest is similar to the way the distribution expense would work in that if we were not collecting fees then we would have a lower distribution expense and we would have a lower distribution through the non-controlling interest line item. It's really the same dynamic.

As to the proportions, it has to do with the underlying asset mix that would feed that non-controlling interest line being weighted more to government product and with the relative lower yields it would have pushed that up a bit. It's the same kind of dynamic as you see above the line.

Lastly, for Debbie, how were the money market funds performing? In the last quarter you had kind of talked about a view where in a quantitative tightening would begin -- could begin in 3Q or reverse repos in 3Q, true tightening by year end. Does that view actually have an impact on the way the money market funds are invested?

I don't know how quickly things can be repositioned, but did the view have an impact on performance and is there any impact from this? I'm fishing on just how performance is in these funds.

If you look at our muni and our prime funds, they are on average in the top quartile of performance. Our government funds are probably in the top third, slightly lower than the prime and the minis and that is simply a reflection of less opportunity in the marketplace and less possible items for them to invest in at this point.

The yield curve has been extremely flat. So whether you are at 38, 40 days or 50 days, didn't too much make a lot of difference on a performance basis during the second quarter. We think that in the second half it will start to make a little bit of difference.

We are shorter, as I said, at this point and have what I would call left some powder dry with the expectation that although we pushed our outlook for Fed tightening into the 2012 time period. Along with that, the quantitative tightening cycle beginning.

But we do think the anticipation of that in the context of a continued growing economy, although on a slower growth path, we will start to see some yield curve opportunities with a bit of the back end of that yield curve steepening out to some degree in the second half and giving us a little bit more opportunity for that short paper that we have in here that we would like to place further out the curve, but just don't feel like it's quite right on an opportunistic basis.

The outlook, though, really has not caused us any problems from a performance basis. The funds haven't been penalized in that form.

Roger Freeman, Barclays Capital.

I want to come back to rates in the money market space for a second, trying to understand a couple of things. On the one hand you are talking about the yield having moved lower in the third quarter and got into higher waivers, but just the T-bills are higher and I was just looking at LIBOR too, 3 months and overnight it's basically flat 3Q to 2Q. Wondering how those dynamics shake out with a down.

What we are giving you with a current market rates in short-term bill market conditions and overnight repo conditions, we have not used for our projections for third-quarter waivers. We've used more of what we saw at the beginning of July, the beginning to the middle of July.

This is recent, over the course of the last week and a half where we've seen short-term and treasury rates start to move north and even LIBOR start to tick up a fraction of a basis point at this point, but starting to move at least in a higher direction.

If this holds, you will see the yields start to go upwards and be reflective of those short-term rates.

If this is only a result of uncertainty in the marketplace at this point in time with regard to debt negotiations and the lack of a budget deal and when that in fact occurs, if you see those levels go back down again you will see the projections of the waivers as they stand today be completely realistic. It really is a reflection of what are very, very short-term conditions right now, vis-a-vis what is potentially likely if once the uncertainty in the marketplace is taken away.

When you make a decision as to whether to pull pack on fee waivers, because at some point you make a business decision as to do that, it is not an automatic close, so, you would to believe that there is some persistence to this.

Remember how we phrased this to make sure that the yields on the money funds don't go negative.

So it really works like that, that you will just keep it at whatever zero or 1 basis point, whatever they are at now, and to the extent they were going to rise higher than that, you would take every extra differential.

That's how we've done it so far.

With respect to those outflows in money markets, there has been all this press about money market funds dumping T-bills and looking at the past week of flows, $35 billion outflows and $27 billion was from government funds. So, two questions there.

Is the reason that's happening because more of the investor perceptions in funds not wanting to hold these from a PR standpoint because the US government would actually have to get downgraded something like 6 notches before it's not tier one investments or something -- why aren't you seeing that? You said you are not seeing redemptions.

If you look at our performance on a flow basis, I talked about our performance on a rate basis. But if you look at our performance on a flow basis throughout all of 2011 it's been better from a industry -- than an industry perspective. I think at this point our institutional clients and our knowledge of them and their knowledge of us is very high.

We've provided a huge amount of communication and information to them over the course of these issues that have been sort of prominent in the money markets for all of 2011, as I said, starting with the immensely low rate environment moving into the European debt situation now focused on a pretty much centric basis at this point right around the debt negotiations and Treasury securities and a potential downgrade to those.

I think our ability to communicate, inform, provide feedback to our clients has been extremely helpful over the course of these somewhat volatile times and would continue to look for that same sort of performance from a flow perspective vis-a-vis the market going forward.

Lastly, Chris, do you think that to the extent that if we had some kind of stress in the system resulting from all this hoopla around the debt ceiling that could actually bolster your case, assuming that money market funds manage it effectively, to bolster your case around not needing incremental regulatory reform. If that could maybe (inaudible) with regulators.

The answer to that is yes. I think you already have seen it for 40 years of withstanding a lot of stuff in the marketplace and I believe that money market funds came through the 2008 crisis very, very well, though dented.

I think they came through very, very well and are coming through very well all the noise that was associated with the Greek and European situation and I think when we look back on this, whenever we are able to look back on this on the debt ceiling issue, you will find the same thing.

Part of the reason for that is the underlying resiliency of the funds themselves, coupled with the desire of the investing public to use these funds for their cash management purposes. These are powerful ingredients in helping the overall economy.

Bill Katz, Citigroup.

Just want to come back to the duration versus yield discussion again. If you were to get some kind of normal relief from debt ceiling passage or whatever, why is your assumption that yields would continue to back up? I am just trying to understand that, because what I am looking at is you have shortened your duration against the yields, so you are not catching it now. Could the reverse happen to you in the fall and therefore you could actually have a worse fee waiver outcome than you are anticipating?

I think there is 2 answers to that. The first is just a overall economic outlook. We don't think we are in a double-dip type of recessionary environment and we do think, although as I said before, growth will be slower on an economic basis in the second half, we still think it goes forward.

And as such, when the market starts to realize that and continues to focus on it, yields will -- the yield curve will become a little bit more positively sloped. The other side of the equation, what has really been problematic for money market funds, especially in the second quarter and even to some degree in the first quarter of 2011 was huge amounts of cash sitting on the sidelines and waiting for certain situations to play themselves out before they went back into their natural marketplace.

Hedge funds, sovereign debt investors were for a large part of the first half of 2011 squarely sitting in the repo and the Treasury marketplace creating more demand for a supply that is less and less from the investment banks and from the dealers in the marketplace.

It was a supply/demand thing where the demand was much greater. Once the resolution of the debt ceiling goes forward, those investors go back into their natural marketplaces and get out of our cash market, which causes that imbalance on a supply demand basis to go back to normal. Although we may not have the elevated rates in Treasuries that we see today out to 3 months, 9 to 15 basis points, we should not see the 0 to negative basis points that we were seeing for much of the months of June and July.

So, Tom, that leads us back to your guidance here a little bit. If we stay in a more static environment, is your fee waiver assumption here overly negative then relative to this discussion?

We try to put a number in there. We argue about whether we even should say a number, Bill, and we run all kind of different models and pick basis. We know what July is. July is pretty ugly. If you almost multiply July you get pretty close to our $23 million number. But we have a little less than that because we think things are going to improve. Is our number optimistic or pessimistic?

What we try to do here is in looking at the over/under is to pick exactly the middle. On today's call, the only number we can give you is the number we have and we can't say we are over/under. You ask me in a month if I am at a conference and then I'll say, well, I'm over, well, I'm under. That kind of a thing. As of today, that's our best guess given those assumptions that we have made. Everybody is welcome to have their own opinion on this as well. And I mean that seriously.

Chris, if you look back in the history of your Company over a decade and you strip out the outsize impact of '07, '08 in terms of the money market lift, your earnings have basically been dead flat. I'm curious what is going to be the callous or what is the backdrop necessary to see a more competitive rate of earnings leverage from here.

The earnings are an important ingredient in the future growth of Federated, no doubt. There are a couple of things. One is obviously the restoration of the waivers. At some point rates will go up and that's now been put off. Even Debbie thinks it's '12, fine.

The reason I spent so much time in my remarks on our regular core equity and fixed business is that we think we've got a lot of good mandates that we are betting on. That's why we are putting more salesmen on the field. We think it is going to be a good steady growth and restoration of positive flows in SMA's and direct sales and in the broker dealer area. That is something.

It doesn't qualify in the way you are talking about it in terms of an immediate catalyst, but that's what we are doing for the long haul and that's the story I'm trying to get across here. The other thing is that we are determined to continue to find something on the international side which we think will help the overall effort, the growth and how you all will look at it in terms of us scoring meaningfully on international assets, which help the overall valuation, and obviously have to add to earnings.

So I would to summarize, growth in restoration of the money fund business continue to repeat the sounding joy as we've gotten some excellent models and work in the equity and fixed income area and the international acquisitions that we continue to look for.

Allison Hefferman, Keefe, Bruyette & Woods.

Hi, it's actually Rob Lee. Maybe shifting gears a little bit, going back to the fixed income business and I apologize if you mentioned this earlier, I may have missed it. Do you have any kind of commentary around RFP activity, pipelines, from the fixed income business, institutional business?

In terms of RFP activity, it's stayed about the same in Q2 as Q1 and both of which would have been elevated running at about a third higher rate than what we saw through 2010. I would say our RFP activity is heightened. From a pipeline standpoint, I would say that we are in the $100 million range. We had some funding in Q2 that was masked by some other things going on with the redemptions we talked about.

The pipeline at this point we are hopeful that that will pick up just given the RFP activity and the records that we are dealing with there.

Chris, you talked earlier in the call about adding some personnel to the marketing franchise, in broker dealer channel and whatnot. Talk a little bit about your existing broker dealer penetration. Have you seen change in the last year or two? Is it pretty concentrated within one or two large franchises. Just trying to get a little more granularity on where you stand.

Overall the sales have about doubled from $6 billion and a fraction to $12 billion. Overall it's done well. Is it concentrated? That is concentrated in maybe the top 10 or so of the broker dealer community. So what you are seeing when we are talking about putting on 12 new sales individuals into broker dealer is you are seeing a contraction of the sales area that the individuals can call on based on who they can actually see.

We are creating new sales territories and that's why I mentioned that this then gives a whole new gang of individuals a whole new gang of opportunities in the smaller brokerage firm, mid-sized brokerage firms, again, based on focus. We are building off a business model we think is working and it is concentrated in the largest dealers, but this sets the stage to get to other dealers that we think we can do an excellent job with.

That is why I mentioned the fact that we've gone from calling on or having F/A's 29,000 to 35,000 and we think we can increase that. You are dealing with about 125,000 F/A's overall, depending on how you look at them, whether they are full-time or part-time and how much business. There is a lot more that can be done. That is what we are looking at.

One more question for Deborah. You mentioned earlier -- I think you attributed your ability to sustain Federal (inaudible) or near-Federal levels in part to your experience and relationship with your clients. But if you look at the industry had some outflows in the last few weeks and year-to-date. Is there anything you can point to that is a little different from what the broader industry is that maybe helps that?

If you look at the industry data, institutional products as opposed to retails products are suffering most of the outflow. You do have a fairly a large amount of retail like products, I guess, through third-party distribution. Is that causing your flow picture to be relatively better as well?

We call them institutional products, but you are absolutely right, each institutional customer has on an underlying basis through various distribution channels many retail customers underlying. I think that probably does have a very positive impact overall on our flows versus our competitors. When you think of institutional business the same way you think of corporate treasurers or some sort of state or municipal treasurers that are a single client controlling a single large sum of investment cash.

In fact, when you look at our institutional -- and don't get me wrong, we have those clients also, but generally speaking the typical institutional base that we have is much more diverse, if you will, on an underlying basis from the third party distributors that we use.

Michael Carrier, Deutsche Bank.

First maybe a question for Debbie and Chris. Given the -- whether it's headlines or maybe eventual pressures on sovereigns, banks, in the money market area are you seeing more demand -- I know the market is a lot smaller, but more demand for the corporate side of prime.

And then second, if we do get downgrade or something worse, does it bring up more pressure in the industry and maybe not for you guys, because all along you've done relative well versus peers, but there is always some players that may not be as savvy and then the regulatory calls for change start to ramp up again.

First of all, let me address the second part of the question first. In the possible but we still think fairly unlikely event of a downgrade of some of the rating agencies for the long-term section of US government debt, to some degree that might perversely be helpful. I know that seems kind of crazy, but there are 2 reasons why I say that.

Number one, effectively it doesn't take away the status of US government debt as the bellwether, the highest quality instrument, the largest volume, highest quality, most diverse, most offered, most sold instrument in the world. It is still the most liquid instrument in the world, and whether it is AA or AAA rated it will maintain that status. As a AA rating, though, it maintains that status with a slightly higher yield component.

So, we are able then to buy those Treasury securities at something that's slightly higher in yield. There is nothing on a mandated basis from a regulatory perspective nor from our prospectuses within those products that say we have to buy only Treasury bills that are AAA rated; it just says we have to buy Treasury securities. That doesn't effect what we can buy and in some way, shape or form it could actually increase the yields of those instruments.

The other side of the equation is there are some customers in the marketplace that do need AAA's. It's part of their investment policy. It could be tied through part of their regulatory requirements and as such, if the Treasury bill no longer meets that AAA requirement, our money funds are still rated AAA. And they will maintain a AAA even without a AAA rating for the underlying holdings of Treasury securities.

So to some degree the money fund would become a choice for those who potentially were using direct instruments themselves. Certainly a downgrade is not something that we would welcome, look forward to, think is a high likelihood on a probability basis, but there are some positive outcomes and consequences that could be as a result of it.

Back to the first part of your question when you were talking about the differentiation between sovereigns and corporates and financials in the marketplace and are people looking more towards the corporate side of the equation. There is a couple different things on a dynamic basis that are working there.

First of all, there are more corporates in the marketplace and although we are not growing very quickly from a economic perspective, we are going forward on a economic basis and if you just look at earnings in the corporate sector, they have been vastly positive and the credit metrics of those institutions have actually been improving. So they have more need on a customer and a growth basis underlying to borrow in the short-term market for their working capital purposes. So there is an increased amount of supply in that type of paper.

I think there is more to choose from than there may be was 2 years ago when the US was in a recession. The other side of the equation is you have to think, you have to know, it maybe is not intuitive, but you have to know that if the US suffers some sort of a debt downgrade, Wal-Mart suffers in some way, shape or form, too. Johnson and Johnson suffers in some way, shape or form, too. Exxon Mobil suffers in some way, shape or form, too.

So it's not a safe haven that takes the place of what would be a downgraded US Treasury security at that point. It would likely also have some flow-through effects to those corporates and potentially cause a reduction in what they need from a short-term financing perspective.

But right now they are doing well from a credit quality and analysis perspective and in such an economic situation that we are currently in, they are needing a little bit more funding. So both of those dynamics are positive, but I don't think it's a replacement in any way, shape or form for what happens or what we use US government debt for in our portfolios.

Tom, on the investments. It makes sense given some of the traction that you have been experiencing on the long-term side in terms of equity and fixed income. Given the environment, how do you guys balance -- there are some firms that are starting to pull back a bit, given the weaker growth flows into the industry have been a bit softer. How do you balance that and are there any areas where you could pull back if the growth trajectory or the inflows in the industry do start to weaken?

Yes. I think what has happened around here in the last couple of years we did pull back and we've relatively maintained that, although we've invested with a number of new products and we continue to invest in technology and when we are doing this expansion of the broker-dealer side of things and we continue to replace people when we need them.

We are staying in there and continuing to invest in the business. If you looked at the press release you saw that from last year the equity funds and the fixed incomes both grew in double-digit numbers. It's a worthy business to continue to allow it to grow.

Cynthia Mayer, Banc of America.

I have one more money market question. For a while you have been saying that a 10 basis point increase in gross yields would reduce the impact to waivers by one-third and 25 basis points by two-thirds. Since the yields have gone down the waivers have increased, wouldn't that relationship change in some way so it would take a smaller increase in yields at this point to have a bigger impact?

Not really, Cynthia. Because the decrease in yields have been concentrated in particular in the government funds, the proportions still hold true. The underlying dollars would be different. Remember that's kind of a guideline, just the main point out of that being that it obviously doesn't take very much upward movement to remove most of two-thirds of the waivers. It's more an indicator than a precision thing.

Then just one more question on the possible downgrade. If the ratings of US short-term debt remain AAA, but the long-term didn't, would that cause investors to crowd into the short end and pressure those yields?

I think investors generally go to the short end of the yield curve when there is uncertainty in their normal marketplace. If you are talking about longer term investors going straight into the money market, it's only at a point in time when they are very uncertain about the conditions of that longer term sector.

If in fact the downgrade occurs, if there ends up being a split rating with some at AAA, some at AA, if it is solidly in the AA rating camp, whatever the rating agencies finally opine based on whatever debt deal is negotiated that uncertainty will go away and the resulting change in yield spreads and the yield curve itself will likely attract the natural bond investors back out into the bond curve. I don't think, generally speaking, a Treasury bond investor would be in Treasury cash just simply because the difference between a highest quality long-term rating versus a highest quality short-term rating. I think it's really more reflective of uncertainty that they would go into that cash positioning.

Over on the fixed income side, it looked like in the quarter there was a $1.8 billion exchange out of separate accounts and a $1.8 billion exchange into fixed income funds and I'm just wondering what that was and is there any fee change in there?

There is no fee change, Cynthia. That was something we were able to work through to solve an issue for a client operationally who needed to have the holdings in the fund format rather than in direct securities. So we actually transitioned that into a collective fund to accommodate what the client needed to do.

Roger Freeman, Barclays Capital.

I just had one follow-up. On the growth in your sales force, I wanted to see if you could just put a couple of those numbers you gave us in context. So there is 12 new folks in the broker-dealer division. How many were there? What percentage increase is that and, particularly relative to regional. I guess your point is that they focus on regional because you are splitting up the territories. But what 12 of whatever the baseline is. And then also the 3 in the consultant relations, what kind of increase is that?

The overall number which we have been using about since we went public was about 190 or so wholesalers. It's an increase off of that.

Specifically, Roger, we would say that of that 190, a little less than a third would be specifically in broker-dealer and we have another third of the total is in internal sales, so that you could think of as being cross-functional. But if you looked at the assignment of broker-dealer you'd get about 54 of that roughly 190, so the 12 would be increase to that 54 number.

And then in terms of the consultant relations positions, we have about 30 people total in our institutional sales and retirement services sales force. They do a variety of things. There is about a dozen that specifically would be in institutional sales. So the 3 would be added to that roughly 12.

There are no further questions in queue at this time, I would like to turn the call back over to Mr. Hanley for closing comments.

Thank you for joining us and that concludes our call today.

This concludes today's teleconference, you may disconnect your lines at this time and thank you for your participation.