Federated Hermes Inc (FHI) 2014 Q3 法說會逐字稿

Greetings, and welcome to the Federated Investors third-quarter 2014 analyst call and webcast.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ray Hanley, President, Federated Investors. Thank you, Mr. Hanley, you may now begin.

Good morning and welcome. Leading today's call will be Chris Donahue, Federated's President and CEO; and Tom Donahue, Chief Financial Officer. Joining us for the Q&A is Debbie Cunningham, who is the Chief Investment Officer for Federated Money Markets.

Let me say that during today's call we may make forward-looking statements. We want to note that Federated's actual results may be materially different than the results implied by such statements. We invite you to review the 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 briefly review Federated's business performance and then Tom will comment on our financial results. I will begin by reviewing another strong quarter for our equities business.

Federated was able to navigate challenging markets well in the third quarter, posting solid equity sales, flows and performance results. Our equity fund organic growth rate of 16% for the third quarter annualized was among the best in the industry. Based on Strategic Insight's data, our third quarter equity fund net flows ranked in the top 2% of the industry. Using annualized growth rates from the third quarter data, Federated's equity fund net flowed growth rate ranked seventh for firms with equity assets of $5 billion or more. That means seventh out of 119 firms.

On a year-to-date basis, our equity funds have produced $2.8 billion in net flows. Equity separate account net sales are up 10% for the same timeframe. Strong equity results in 2014 reflect many years of focus in investment in this area. Success factors include solid investment performance, effective and growing distribution, a wide range of well developed products in areas of investor interest and high quality marketing and customer service efforts.

Looking at overall equity performance, more than half of our strategies were in the top quartile for the trailing three years at quarter end, while nearly 3/4 were in the top half for the same period. Eight of our strategies or over 30% are in the top decile on the trailing three-year basis at quarter end. Looking at the trailing one year, half of our strategies are in the top quartile and nearly 70% are above median. On the trailing three-year basis the Kaufmann Large Cap Growth fund and the MDT stock value fund are both in the top 1% of their respective categories. The International Leaders Fund is in the top 2% of foreign large-blend category. Our Capital Income Fund is in the top decile among conservative allocation funds.

We achieved solid sales results with 16 funds in multiple categories producing positive net sales in the third quarter. The Strategic Value Dividend Fund continues to be our top-selling fund. International Strategic Value Dividend Fund also had solid net sales in the third quarter. I'd like to highlight some other funds that have grown substantially over the last couple of years. Two years ago, the Capital Income, International Leaders and Kaufmann Large Cap Funds together had assets of $1.3 billion. They have grown to nearly $6 billion, again together, at the end of the quarter and are well positioned for further growth.

Our innovative Muni and Stock Advantage Fund just crossed $1 billion in assets this week up from about $500 million two years ago. Equity separate account net sales were solidly positive. Growth in this area was again led by the domestic and international strategic value dividend strategies in our SMA product line. The SMA business continues to be an excellent area of growth. Total SMA assets were nearly $15 billion at quarter end with most of this in equities. Total SMA assets are up 31% in the last year and have more than doubled over the past three years. Early Q4 equity fund net sales are approximately $200 million led by these same products.

Now turning to fixed income. Q3 net fund sales of $238 million compared favorably to net outflows of $615 million in the second quarter. Separate accounts just about broke even for net sales and improved substantially from the prior quarter. Our Total Return Bond Fund led net bond fund inflows. The Ultrashort Bond Fund and Muni Ultrashort Fund also produced solid inflows. We are seeing an uptick in interest in sales in our Total Return Bond Fund from investors interested in upper-left risk profile. This is an approach that seeks risk-adjusted returns while minimizing tracking error relative to the benchmark.

Our approach emphasizes transparency, risk controls and a team structure, based on our four Alpha Pods: duration management, yield-current strategy, sector allocation and security selection. This approach resonates with fiduciaries, intermediaries and institutions. In fact, this week we were selected by a consultant as the recommended total-return strategy option for their clients. As a result, we expect to see several hundred million dollars in new assets move into our Fund product over the next couple of months.

At quarter end, we had six fixed income strategies with top-quartile three-year records, including high yield, Short Intermediate Total Return Bond and Short Intermediate Duration Muni. Fixed income fund flows are positive early in the fourth quarter led by Total Return Bond Fund, Floating Rate Strategic Income and Capital Preservation Fund.

Now, looking at money markets. Period-end fund assets increased by about $3 billion. Average money market fund assets decreased by about $8 billion from the prior quarter. Our market share at quarter end was approximately 8.3%, about the same as at the end of the prior quarter. Money market separate account assets were down reflecting seasonality. We, of course, are working on various projects related to the SEC rules that were issued in July. We expect to have products in place to meet the needs of all of our money fund clients.

These are likely to include prime and Muni money market funds modified to meet the new requirements, government money funds, separate accounts and offshore money funds. We are also working on developing privately placed funds that will likely mirror existing Federated money market funds to serve the needs of groups of qualified investors unable to use the money funds that have been modified by the new rules. As we have discussed, the new rules are subject to a lengthy implementation period. The floating NAV requirement for institutional prime and Muni funds takes effect in October 2016.

Taking a look, now, at our most recent asset totals as of October 22. Managed assets were approximately $349 billion, including $243 billion in money markets, $49 billion in equities and $58 billion in fixed income including liquidation portfolios. Money market mutual fund assets stand at about $213 billion. October average money fund assets are running at about $212 billion.

Looking at distribution, in the broker/dealer channel we continue to leverage our investment in additional wholesalers and related resources. We have seen good progress from newer wholesalers increasing their production levels and expect further growth as additional seasoning occurs and we add a few more reps. We continue to expand distribution for SMAs with the International Strategic Value Dividend strategy added to two major platforms in the third quarter. We expect two more additions in the fourth quarter.

In the wealth management and trust channel we have seen considerable new business and interest in our Total Return Bond strategy. In addition, we won a $500 million active-cash separate account in this channel in Q3 that has already funded here in Q4. In the institutional channel, we won a $650 million high yield separate account that is expected to fund this quarter and we expect to add a couple more separate accounts in Q4. The separate account wins total approximately $1.2 billion of anticipated new assets in the fourth quarter.

Now, going in the other direction, we were informed by a client that they will be making a manager change for a small-cap equity portfolio of approximately $780 million in November. We continue to have success at expanding retirement channel distribution with the International Leaders, Capital Income and Kaufmann large-cap strategies, which were added to multiple programs in the third quarter. We have also seen the addition of Clover and MDT products to various retirement platforms. RFP activity remains high, with interest in Kaufmann, Clover, MDT, Strategic Value and International strategies for equity and high yield, short duration, Core Broad, and Trade Finance for fixed income.

Regarding international channels, we added sales resources this year to accelerate growth we have seen in Canada for both retail and institutional markets. We hired an institutional salesperson in the second quarter and filled an internal sales position. We are seeing good early-stage institutional interest and RFP activity from our efforts with RJ, which is Raymond James Delta, in Chile. In Asia PAC, we have closed the small office we opened in 2012. We are maintaining our licenses and registrations and continue to be receptive to deals that would enable us to penetrate this region. We also continue to seek alliances and acquisitions to advance our activities in Europe.

Tom?

Thank you, Chris. Revenue was up from both the prior quarter and from Q3 2013 as equity-related revenue growth more than offset lower money market revenue. The growth from the prior quarter included the impact of an additional day. Equities comprised 46% of our Q3 revenues the highest percentage among the various asset classes and combined equity and fixed income revenues were just about 70% of our Q3 total revenues. Operating expenses increased from the prior quarter due mainly to higher distribution expense from an additional day in the quarter and higher equity assets offset by lower money market fund average assets.

The increase in office and occupancy was due to a lease termination. The increase from Q3 2013 was driven by higher compensation expense reflecting higher sales and strong investment results. The operating margin increased to 28% compared to both the prior quarter and Q3 2013 as we continue across the Firm to successfully manage expenses while investing for growth.

Money fund minimum yield waivers of $30 million were about the same as the prior quarter and Q3 2013. Based on current assets and current rates, the impact of these waivers to pretax income in Q4 would be about the same. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 45%, and a 25 basis point increase would reduce the impact by about 70%.

Multiple factors impact waiver levels and we expect these factors and their impact to vary. These factors include changes in fund assets, available yields for investments, action by regulators, changes in the expense level of the funds, changes in the mix of customer assets, changes in distribution fee arrangements with third parties, Federated's willingness to continue the fee waivers, and changes in the extent to which the impact of the fee waivers is shared by third parties.

Non-operating income decreased from the prior quarter and from Q3 2013 due to lower gains on investments, including consolidated products, partially offset by lower debt expense from the refinance of our long-term credit facility and from lower debt balances. The Q3 effective tax rate was 37.3% and reflected certain state tax refunds. We expect the effective rate going forward to be about 38%. Looking at our balance sheet cash and investments totaled $352 million at quarter end of which about $271 million is available to us.

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

(Operator Instructions)

Michael Kim, Sandler O'Neill.

Chris, I know it is still early, but just as you continue to work on putting together products to retain institutional prime money market fund assets that might be at risk down the road, any color or updates on the discussions you're having with clients in terms of their thinking and potential receptivity to some of these alternative vehicles, if you will?

The LCR component has added a lot of color to our discussions with our bigger clients because the LCRs are causing our bank clients to reevaluate the cash on their balance sheet and evaluate which clients are now deemed good and which clients are now deemed to need a warm-and-loving home like Federated. That has added another whole dimension to it that in effect accelerates their decision process as to what to do. Of course as I mentioned, since the implementation of the new rules, the two-year period started last week. There's a lot of good use of institutional prime funds for a substantial part of that time, so that has added a lot to it.

In terms of where I think you were going, which was which products are leading and how do we look at it, perhaps the 60-day fund has inched ahead of the private funds as answers for people who don't qualify to stay in the existing funds. The separate accounts are not having as big a reception as we thought they might get. The variable net asset value fund, as per the rule, we still don't think has a lot of legs. That would be a little bit of an update on how those products are doing in the ebb and flow of who is ahead.

Great. That's helpful. Just be curious to get your take on what you're seeing in terms of the M&A landscape these days, in terms of deal flow? Was any pricing trends, particularly as it relates to the firms that might be more in demand like international equity or alternative firms?

On the international side, pricing and demand, pricing is up and demand is up, so that's a tough thing. We are still over, as Chris mentioned, we're still over in Europe looking for things and have been in discussions. Again, pricing seems to be tougher in the ebbs and flows of what's going on. Back over here, in the states, the money fund we are still in discussion on the money fund world in terms of people looking and whether there actually going to stay in business, and that we think will continue. In terms of roll ups, we're still active there. We've done one deal this year, so far, and we're in discussion with a number of others, we'll see what happens.

Okay. Then, just one more for you, Tom, if I may. Any color on the ins and outs in terms of the comp line this quarter as it relates to any shifts in bonus accrual? Then, any outlook going forward as we look out into the fourth quarter and beyond?

The comp line is pretty similar to last quarter but there were changes in the mix there as the sales bump ups. We had some early Q4 sales in fixed income, as we mentioned. If I have to give a forecast on the comp line, I would say it would be somewhere around the same as Q3. If sales jump again, we will have to bump that up. Then, we go through and look at, on the investment management side and into the performance, and that can change when people get paid on 1-, 3- and 5-years and quarters go out and new quarter comes in, it could go either way, so that's why I just stick with around where it was in Q3.

Ken Worthington, JPMorgan.

First, can you talk about the availability of short-term paper in the market giving shrinking repo and CP balances and how does this impact the money fund business going forward?

Debbie?

Sure, Ken. This is Debbie Cunningham. We've seen definitely shrinkage over the course of the last six years, generally speaking from a CP perspective, while the CD side of the equation has grown. As Chris has mentioned, with various components of banking regulation incenting banks now to probably shut down or diminish how much they have out there from a deposit perspective, we would expect that, that would be at least not as strong a growth going forward and probably shrinking to a degree also. Repo market, very similar, as you've mentioned at some point in the way distant past it was probably more than 3.5 times the size that it is today.

Having said that, I think where we've seen some growth has come from basically the ABS side of the equation, better from a corporate perspective. As you well know, money market funds traditionally have been concentrated from an industry perspective in the financial sector. I think where becoming a little bit more diverse because of some of the growth in the non-finance corporate sector of the marketplace. When you look at the banking side of the equation, structured deposits are definitely much less punitive from an LCR perspective. Therefore, those have been growing and the usage of those, I think, will continue to be a positive.

What we look for also is, basically, with a growing economy comes a growing need for working capital and that working capital is generally funded through the CP marketplace, so we think a lot of the shrinkage that has occurred over the course of the last five or six years in the CP marketplace has come because of structures that from an ABCP perspective are no longer palatable or useful or considered appropriate for money market funds. Those aren't ever going to come back.

But, when you look at the general trend of working capital financing, we have seen a growth in those types of areas from a CP issuance perspective. We think that to some degree, perhaps they will continue to grow at an even stronger pace going forward because of some of the banking incentives where the bank holding company generally is funding through the CP market while the bank is funding to the deposit market. There's less punishment, if you well, from the holding company's perspective than there is when the bank itself is issuing the deposits with some of the new regulations that are coming on. We think that shift will be something that we see going forward.

Suffice it to say, it's a lot more difficult today than it was three or four years ago to find appropriate coverage from a supply perspective on a day-to-day basis. Having said that, there are new issuers in the marketplace on a somewhat regular basis. We're using a lot more from what I will call a semi-sovereign basis of foreign entities. Rather than just foreign banks, we're using the semi sovereigns, which are not the countries themselves but generally entities within the countries that they are guaranteeing who also need short-term financing.

We recently approved the country of Finland and the largest Finish bank out there, so that increased a little bit of supply. There are areas of growth, but generally speaking it's one that you have to look under quite a few rocks to find the gold that lays under there.

Great, thank you. Separately, also money market funds, you and we have talked about market share losses and you had called out that the market share was about even, though I think it technically fell a little bit. I noticed that you raised yields. Your Prime Obligation Fund, for example, you raised yields from 2 to 3 basis points, but you absorbed that through increases in your fee waivers. I want to understand, why did you do that? It seems like it would be done for a competitive reason, and are you at the point where you want to support the market share and is the strategy to raise yields and wave more fees to do that? Any help there would be great?

First of all, on the market share, our stats aren't showing a dime below 8.3%, so maybe there's some other statistics that you're working on. I just don't -- we have not done what you are saying we've done, at least to the best of my knowledge or anybody here at the table. I don't know exactly what you're picking up in terms of yield and increased waivers, the way you've described it. I would say that, overall, as part of the whole effort of re-looking at the money market offerings that we're doing for what we were talking about before, we're also looking at the whole structure of the products, especially on the government side, to see how things should shake out in the future.

Because in light of that last question that you were going over with Debbie, there is going to be a lot more interest in government funds as one of the main receivers of money, so there's going to be more competition there. That's another thing we are looking at.

I might add, too, that maybe it's the composition of the waivers to some degree. From a prime-fund perspective we been able to eek out maybe another 1 basis point or 2 on a gross-yield basis, which gets the net yield to the client, 1 basis point or 2 higher over the quarter. On the other side of the equation, however, as Chris was mentioning, from a government-fund perspective, particularly one of our largest treasury-only products, is a very, very difficult in the environment that we've been into eek out anything more than 4 or 5 basis points. So, the waivers have increased on that type of a product. It's perhaps maybe the mix that has changed to some degree.

Ken, it's Ray. Another thing in the numbers you are talking about, if I look at the gross yields of that fund, the Prime Obligation Fund over 2014, they've averaged in the first part of the year about just under 22.5 basis points. Now they're just over or right around 23 basis points, so you're going to get some rounding in there that might look like something is happening that isn't.

I will take it off line, I was just curious given the share shift I thought it was interesting. Thank you very much.

Surinder Thind, Jefferies.

A little bit more on the money market reform. On your earlier comments about the floating rate products, how far down the path of reform do you have to be to know even they're viable as a group? You have to put all the plumbing in place, you've got to build the products, and then you just hope someone shows up to the dance?

My guess would be, as it was at the beginning, and I haven't changed it, that those kinds of funds aren't going to be viable at all. The more likely thing that we are going to do is use the existing funds that we have and have them either be for retail or have them be 60-day funds. Whether or not any of them will be variable, that asset value money funds, reasonable people could differ and I'm not certain of that now, but I would be inclined to doubt it. If you don't have a bunch of assets in this so-called floating net asset value money market fund, then you've got to do something in order to get enough of assets in there to make it viable product by itself.

I would add, too, and this is just over the course of maybe the last three months, since the regulatory certainty has come to fruition. We have been doing a series of about 20 different road shows across the country, major cities across the country, attended generally by 40 to 50 clients in each location. I would say that -- one of the first ones was in late July and we mentioned the variable net asset value product from an institutional prime or an institutional Municipal perspective, there was nobody in the room that raised their hands and had any interest in that type of a product.

However, we just did one on Monday of this week where I would say out of a group that had maybe 10 tables, one person at every table had raised their hand that they still would have interest in the product even with the variable net asset value component. I think there's become a little bit more of a potential acceptance to what might come to fruition. Again, I think what has to be brought forth to them is the volatility that they will see.

Certainly, we've been providing, as well as others in the industry, have been providing the daily NAVs as they are calculated out to the fourth decimal point since 2013 now. However, it's been a pretty benign period of time. When you look at it in the context of a 2-digit NAV versus a 4-digit NAV, historically, 2 digits was able to withstand over 300 basis points of change from an interest rate perspective, instantaneously, and not be impacted from a price. On a 4-digit basis, translate that down to 3 to 3.5 basis points, which happens in a rising rate environment or a declining rate environmental almost every single day.

There has to be a lot of education, I think, from a client perspective, but there does seem to be at least a few more hands in the room that are going up when we asked the question, might there be an interest at some point.

That's helpful. Maybe switching gears a little bit, over to the fixed-income side. It seems like that there's some good demand out there for your current product set. How do you think demand holds up or the product positioning when rates do begin to rise?

We think we are well situated for that. That's been one of the themes. When we talk about the positioning on the performance and risk charts of being upper-left, that's what were getting at. That's part of the theme that customers are looking at, staying in fixed income but yet staying short enough where if rates do rise, they don't get clobbered. This kind of thought process is inside a lot of the workings of many of those portfolios, so we think we're in pretty good shape on that.

What really drives the future of flows on the fixed-income side are the individual performance products and the staying with the approach so that you end up with a consistent type performance profile. That's how you do it. If you're dedicated to those Alpha Pods that I talked about, then you're in for the long haul. Yes, it's a lot of blocking and tackling, but that seems to be the best way to set yourself up for the future.

Okay and that's helpful. One final, quick take. There seems to be a lot of talk around unconstrained products and generally movement in that direction. What do you think is the staying power of something like that? Is it just more being driven by the fact we are, ultimately, probably going to be entering a rising rate environment?

I think that was certainly part of it, but I think you see a huge movement, you put your finger on it, towards the unconstrained go-anywhere type product. There have been a lot of major flows into that. We have products that are geared towards that. It also hints at the liquid alternatives space, as well, where you are now analyzing the risks of the various enterprises you're looking at not just sticking to a style box, although we offer those products as well. I think there's a lot of staying power to that kind of investing, a go-anywhere type approach. It's going to require a consistency of performance across various cycles and moves, and investors are going to be very attentive to how that performance is going in changing marketplaces.

Craig Siegenthaler, Credit Suisse.

With few waivers netting to $0.18 per quarter today, can you share your view if Federated will be able to recover this full amount when rates eventually normalize, or do you think some of your distribution partners could see greater economics in the relationship? This would be for the distributor where the money markets sit on their platform.

Craig, that is why I read that long paragraph about the factors that affect the waivers. Absolutely, customers will be back to us saying, hey, you have been able to -- not that I want to give them their presentation, but you have been able to manage all of this at such a lower fee realization, how about continuing it even though the rates are up? We're not interested in that. Not earning your management fee for so many years is not fun, it is not fun on our margin. It is not fun on -- it makes growth tougher. It makes investing for growth tougher. Obviously, it makes our earnings much more difficult, but it's a competitive world and we're going to have to deal with it. So, we will see what happens.

Our customers have maintained their relationship with us all through this. If Chris were talking about this, he would talk about the 40 years of people coming in and trying to grab share by reducing their fees. We'll deal with that in the future. We think we will do well in that.

Tom, just one follow up here. If the economics decline, how would the geography of the impact flow through between management fee, distribution revenue and distribution expense?

We've had a thought process of keeping the lights on, so we are getting some version of service basis points while we're not getting the management fee. It's a philosophy that we say, look, we have to be able to turn the lights on and make everything work. We've been waiving the management fee. We would expect to continue that, and if there are challenges, it would probably come in the management fee.

Craig, you would also to that reflected in the distribution expense to your point about what would happen from the cost of distribution through intermediaries. You would see, in that case, as you have seen really a multi-year trend, an increase in the distribution expense relative to the asset base without the waivers.

Ray, the management fee would probably go down and the distribution expense could go up, but distribution revenue would be stable if there were any net economic concessions?

Yes.

Bill Katz, Citigroup.

I just wanted a feel on margins for a second. If I look at your margin and adding back all the fee waiver dynamics over the last seven or eight quarters, it locked around 28% to 29%. So, you had some equity flows coming in, some good fixed income flows against the money market attrition. How do you think about the margin on a prospective basis if you were to assume fee waivers [weren't] to recover to some extent?

We try not to predict and guess what margin is going to be. We put in a program in the Company, not a program but an effort to make sure we're properly managing expenses while continuing to invest in various areas for growth. What that means is that we have a lot of things try to keep expenses down. The switch over to, over the last year, to bigger positive net flows in the equity side will help along the way. But trying to protect what's going to happen, is just not something we're going to do, Bill.

Let me ask one more question, then, sorry to belabor the point. If rates were at some point to go forward, it looks like it's more of a 2015 or 2016 event than anything in the real near term, would you unlock some spending such that it's not a straight add back of the fee waivers to think about normalized earnings power?

Would we unlock --? We're investing where we think we need to be investing. It's not like were holding back anywhere. The places that get held back are -- effect employees, compensation. Although we can't deal with that in the sales and the investment management because we have programs going on there. I don't know if we're holding back on doing anything. Trying to predict what's going to happen, again, that's why I list all the factors in there to say, we don't know what's going to happen. We're trying to maintain a margin that allows us to continue to invest.

Okay, thank you. Just one follow-up question. Chris you mentioned you've had some good success on the institutional pipeline in terms of fixed income. You highlighted about $1 billion in and you mentioned a small-cap fund going out for about $700 million, $800 million. Can you talk maybe a couple more sends or details about what is driving the respect and growth? What are the characteristics specifically that the consultants are looking at? You mentioned team platform, et cetera. Maybe that is it. We're hearing quite a bit of that these days.

Then on the small-cap side, is this a one-off, maybe what was the reason for the pulling? Are there any other assets at risk that might follow behind that?

That is a definite one-off, to answer the last question first. The performance of that mandate is very strong, in any event. That was a change in style type thing by one particular client, so that is a one-off. On overall, on the institutional side, the plus-billion that will be coming in, it's a wide variety of mandates after a very good RFP type activity, with, as I said, many different mandates. Of course, the total return space has been accelerated because of changes in the marketplace. Of course, we're in a good position to be able to respond to some of these requests and have done so already. Over the last couple of weeks, this has been a very good source of growth for that mandate for Total Return Bond Fund.

Eric Berg, RBC.

One broad question about your strategy in money funds. Chris, you've mentioned that in your informal polling of investors, they seem to be more responsive to the 60-day funds and less responsive to the separate account. At another point you talked about, I think Chris talked about modifying the 60-day funds and emphasizing retail. I'm just trying to organize all this in my mind and answer the question, assuming we get to two years from now, a floating NAV on the institutional prime and the institutional Municipal money market funds, what is your best sense, at this point, as to the most likely products that you'll be offering in the money fund area both for institutions that face this floating NAV as well as for retail investors?

My answer to that at this point is that I think the most likely thing is there will be 60-day funds, there will be government funds, there will be private funds. Although, there some things that have to be worked out there. Then, there will be retail. As I've mentioned on this call before, you can't use any definition of retail that you had in your head before. You have to have a new definition of retail. It's now a word of art or a word of legal or a word that gets put in quotes, because there are many trust-type accounts that can be retail. There is no doubt that we will be offering retail funds. Then, hanging in the balance is whether we'll have any of these floating NAV institutional prime funds. I'm still doubtful of it, despite hand raising. We have healthy disputations about this, as we should, as were in the water-boarding stage of our activities. That would be my best guess as to what we will see.

I think with each of those product lines we would be offering the AAA-rated version, as well as the non- or single-A rated versions for those customers that need the ratings aspects of it, too.

Are you saying in other words -- and this will complete my questions. Are you saying in other words that, for the most part, realizing that this is still a very fluid situation and that definitions are changing, as Chris just emphasized, are you saying that it's a general statement then that you anticipate that the 60-day government and private funds will replace what is currently the institutional prime and Municipal money funds?

Our goal is to have a warm-and-loving home for all of our clients and even more money that's being shaken loose out of the system through the LCR effort. So that if you pressed me, I would say that after a lull in the action, that we'll be back on the growth path on money market fund assets as we come to the end of the two-year period.

Tom Whitehead, Morgan Stanley.

A lot of mine have been answered, but I wanted to come back to fixed income, quickly. You mentioned you saw a little bit of a pickup in Total Return related to the dislocation that's out there and the assets in motion from the news at PIMCO. Couple questions are, have you seen any other products, seen greater demand, or are you stepping up your efforts in, really, across the space? More broadly, can you talk to the level of success you've had given what's going on?

We are stepping up efforts in terms of underscoring the kinds of products that we been offering for a long time, so we are enhancing a little bit of ad budget here and there. Ray has a comment a little further.

Tom, just in terms of particular areas, you mentioned Total Return Bond. We've talked by adding a high-yield mandate. High yield's been a multi-year, really multi-decade strong performer for us, so we continue to see institutional interest there and the fund flows as of the early part of fourth quarter have returned to positive territory. We talked earlier about our floating rate product, there is considerable interest in that as well.

Great. I know you touched on M&A earlier, but maybe if you could give us a broader update on your capital priorities, divies versus buybacks versus M&A, and what the potential could be for a special this year?

Specials are never off the table, but they're not currently on the table. As you look at our chart, our pie chart, you will see that, and overtime, the approach we've had has been, shall we say, opportunistic and we try to evaluate it as being a shareholder-friendly operation. We're very interested in returning monies to shareholders and doing the best thing with the money for shareholders we can think of.

As we've mentioned on this call many times, the highest and best use, in our view, are acquisitions that meet our criteria. We like the dividend and we are active on share purchase. I know that doesn't give you a whole lot of direction as to which one of those we are going to jump on the most, but that is about as good as we can give you at this point.

Michael Carrier, Bank of America at Merrill Lynch.

On the long-term funds side, you've always had good progress in traction on the equity side of the business. On the fixed-income side, it sounds like, when we go through the funds and some of the funds that you noted, you have some that have good performance. The flows haven't been as strong, just curious is there anything at all that you guys are working on and that can be done on the distribution side? Or is it certain key products just aren't where they need to be in order to be in the top 5 or 10 funds that are selling in the industry?

It's a lot of Repeat the Sounding Joy, Repeat the Sounding Joy, keep telling the story, and that's what's going on. There were times when we would run into various situations where clients would say, I can't get fired if I higher God or X. Then, that would just be the determinant. Now, that particular answer doesn't obtain, so that opens up the field a little more. But if you haven't been doing the basic activities for a long time, it just doesn't all of a sudden open up for you. Yes, there are some funds that are ground under repair, but there's certainly plenty that could drive successful and positive flows here into the future.

Mike, we talked earlier about unconstrained strategies. We have one. That's one, clearly, where you've seen flows in the industry where we'd like to see a stronger effort and stronger results. That would be one that we are actively working on.

Okay, thanks. Debbie, if you are still on, just curious, given that volatility that we saw in the fixed-income markets last week and given that the repo market is strong, quite a bit over the years, just more curious if you saw anything that was unusual or that made things a little bit more challenging or was it manageable?

No, it was very manageable. Nothing -- we are at such low rates already from a standpoint of the shortest-term offerings in the fixed-income space for money market funds that it didn't really translate into a lot of volatility. Certainly, we saw treasuries go a little bit lower. There was a flight to quality at different points. What might have been 1.5 basis point that we were getting for our 3-months treasury became 0.5 basic point. Nothing when into negative territory.

Maybe complicating things to some degree where the changes to the Feds reverse repo program that occurred at the end of the third quarter whereby we had to place our orders at 8 AM rather than at 1 PM and we were constrained on the total volume basis to no more than $300 billion, which obviously caused, instead of a 5 basis point return on that investment it was at zero for the day. That hasn't played through further within the quarter, and we're not sure what to expect from that from a fourth-quarter perspective. I would venture to say that if anything is going to have more of an impact on the short, short, short-term spaces it's that particular program.

At this time I'd like to turn the floor back to Management for closing comments.

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

Thank you. You may now disconnect your lines as this ends the call. Have a wonderful day.