Federated Hermes Inc (FHI) 2015 Q2 法說會逐字稿

Greetings and welcome to the Federated Investors second-quarter 2015 analyst call and webcast.

(Operator instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ray Hanley, President of Federated Investors Management Company. Thank you, sir. You may begin.

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

During today's call, we may make forward-looking statements and we want to note that Federated's actual results may be materially different than the results implied by such statements. We invite you to review 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. Chris?

Thank you, Ray, 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.

Against a challenging market environment was essentially flat, equity market returns and industry net outflows from equity funds, our equity managed assets were up 1% from the prior quarter and up 10% year over year. And we have solidly positive equity net flows. Total net equity sales, which includes both funds in separate accounts, were $831 million, resulting in an annualized organic growth rate for equities of over 6%. Federated's equity fund organic growth rate of 5.3% for Q2 annualized was, again, among the best in the industry. Based on Strategic Insight's data, our second-quarter equity fund's net flows ranked in the top 3% of the industry. Our equities business is very well-positioned with a variety of strategies, producing solid performance and sales results.

Using Morningstar's data for ranked funds, as of quarter end, seven Federated funds, 27%, were in the top decile for three trailing years. We had 12 funds, that's nearly half, in the top-quartile and about three-fourths of our funds in the top half for the trailing three years. Looking at the one-year rankings, 6 funds were in the top decile, 9 funds were in the top-quartile, and 16 funds were above median. Performance highlights include Federated, the Kaufmann Large Cap Fund in the top decile for the trailing one, three, and five years. The Kaufmann Fund is also top decile for one- and three-year mark while the Kaufmann Small Cap Fund is top 13% for the trailing three years and top 3% for trailing one year.

The International Leaders Fund, which is a foreign large-cap blend strategy is top 3% or better for the trailing 3, 5, and 10 years. Four of our MDT Strategies were top decile for the trailing three years, including the MDT Stock Large-Cap Value Fund and the MDT All Core Fund. Our Absolute Return Fund has developed a top decile, one and three year record in the market neutral alternative category and the Global Allocation Fund gives us another solid solutions-oriented strategy within its top-quartile in one, three, and five year record. These performance results highlight the breadth and strength of our equity product line and positions us for growth across multiple equity strategies. In the second quarter 19 of 33 actively managed equity fund strategies had net positive sales, led by Kaufmann Large Cap, International Leaders, Kaufmann Small Cap, Capital Income, the Muni Stock Advantage, Global Allocation, Managed Volatility, and Absolute Return Funds. Equity separate account net sales were driven by the domestic and international Strategic Value Dividend Strategies, MDT Mid-Cap Growth and Kaufmann Large Cap Growth. Equity fund net sales are slightly positive here early in the third quarter.

Now, turning to fixed income. Total net outflows of $276 million resulted from negative fund flows, partially offset by positive close in separate accounts. As discussed last call, net fund outflows were impacted by tax-related seasonality in certain short duration products. We saw that net fund inflows into the International -- Institutional High Yield Bond Fund and the Total Return Bond Fund. The High Yield Trust and Sterling Cash Funds also had solid inflow. At quarter end, we had 10 fixed income strategies with top-quartile three-year records including high yield, munis, ultrashort, government and mortgage, and short-intermediate total return.

Now looking at money markets, assets decreased by about $6 billion from the prior quarter. This decreases includes the impact of tax seasonality. Money market -- money fund market share, at quarter end, remained at about 8%. We announced our plans during the second quarter for funds characterized as retail under the 2014 money fund rules, and continue to make progress on the institutional product lineup. We expect to provide more details on these products in the coming months.

We expect, as we have mentioned before, to have products in place to address the cash management needs of all of our money fund clients. These will likely include prime and muni money market funds that meet the new requirements, government money funds, separate accounts and offshore money funds. We're also working on privately placed funds in an attempt to mirror existing Federated Money Market funds for qualified institutional investors, either unable or unwilling to use the money funds that have been modified under the new rules. We expect to have substantially all of our product changes completed before the end of this year, which is well in advance of the October 2016 requirement for floating NAVs for institutional prime and muni funds.

In April we announced a deal with Reich & Tang Asset Management to transition money market assets into Federated money funds. We expect about $4 billion to transition this month. We also recently completed the transition of about $100 million in money market assets from Touchstone Advisors. Interest levels and discussions around money market consolidation remains elevated. Taking a look at our most recent asset totals as of July 22, managed assets were approximately $354 billion, including $245 billion in money markets, $56 billion in equity, and $53 billion in fixed income. Money market mutual fund assets were $212 billion.

Looking at distribution, in addition to the fund sales results I've already covered, we had significant sales successes for separate accounts. The SMA business continues to perform well. Total SMA assets ended the quarter at $16.5 billion, with most of this in equities. Assets here are up about 14% year over year, and have nearly doubled over the last three years. Federated ranked seventh in the Cerulli Associates ranking of the largest SMA managers at the end of the first quarter, which is the most recent data available. Interestingly, this business, SMA and models, which includes UMA, is now over a $1 trillion business. We also added about $250 million in institutional equity separate account assets from three wins that funded in the second quarter. These wins were in the MDT Mid-Cap Growth, Kaufmann Large Cap Growth, and International Leaders, which is an EFA strategy.

We recently won another EFA account for about $150 million, which is yet to fund from a Canadian entity. Fixed-income separate accounts added $477 million in net sales, driven by new mandates and account additions in multi-sector, muni, core, corporate, and government bonds. We have had about $400 million in expected additions for fixed income to separate accounts yet to fund. On the cash side we expect the West Virginia local government investment pool to fund at about $1.2 billion during the third quarter. RFP activity remains solid and diversified, with interest in EFA products, Kaufmann Large Cap, MDT, Clover, and Dividend Income Strategies for equities and high yield and short duration for fixed income. Our RFP activity is up about 74% year over year.

On the international side, we are planning product enhancements for Canada to accelerate the good growth that we've seen in retail and institutional markets. We intend to launch a Canadian Domicile Strategic Value Dividend Fund product this year and as I mentioned, we were recently awarded a sizable EFA mandate in Canada. This is $150 million that is expected in the third quarter. In Germany, during the second quarter, we added a high yield mandate that reached $130 million and is expected to grow further. We recently won a $200 million corporate bond separate account, which is part of the $400 million expected in additions during the third quarter. We continue to seek alliances and acquisitions to advance our business in Europe and that Asia-Pac region as well, of course, in the United States and the rest of the Americas.

At this point, I will turn it over to Tom.

Thank you, Chris. Revenue was up 3% from the prior quarter and 7% compared to Q2 of last year, mainly due to higher equity assets which added $7 million of revenue versus Q1 and $15 million versus Q2, 2014. Money market-related revenues also increased with improvements in waivers, largely offset by lower assets. Equities contributed about 40% of Q2 revenues, again, the highest percentage among the various asset classes. The combined equity and fixed income revenues were 69% of the total. Operating expenses declined from the prior quarter due mainly to lower comp and related expense. Comp decreased due to lower incentive compensation expense, which was impacted by lower fund sales and personnel changes. Other factors included seasonally lower payroll tax expense and lower stock compensation expense. Q3 comp and related estimates is about $72 million.

The pretax impact of money fund yield waivers of $22 million was down from the prior quarter and from Q2 of last year. The decreases were due to both higher fund yields and lower fund assets. Compared to the prior quarter, about 75% of the improvement was due to higher yields and 25% from lower assets. Based on current assets and yields, the impact of these waivers to pretax income in Q3 would be about the same as Q2. Looking forward, we estimate that gaining 10 basis points in gross yields from beginning Q2 levels would likely reduce the impact of yield waivers by about 40%, and 25 basis point increase would reduce the impact by about 65%. We expect to recover about two-thirds of the remaining money fund yield waivers related to pretax income.

Multiple factors impact the waiver levels and we expect these factors and their impacts to vary. These factors include: changes in fund assets; available yields for investments; actions by regulators; changes in the expense levels of the funds; changes in the mix of customer assets; changes in product structure; changes in distribution and fee arrangements with third parties; Federated's willingness to continue to fee-waiver and changes to the extent to which the impact of the waivers is shared by third parties. The effective tax rate was approximately 38% and that continues to be our expectation going forward. Looking at the balance sheet, our cash and investments totaled $300 million at quarter end.

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

At this time, we will be conducting a question-and-answer session.

(Operator instructions)

William Katz with Citigroup.

Maybe just on the fee waivers so because I think I heard you say two-thirds of the remaining fee waivers you expect to re-capture. That's down from your last guide which was, I think, about 75%. Just sort of walk through what has changed. Is it just what you recouped? Is there any kind of shift in pricing dynamics with clients in terms of what they expect to get on the distribution side or is it just greater competition now for yield? I'm just trying to understand the delta here.

Yes, Bill, this is Tom. Not much has changed. We just haven't implemented -- or the one customer we talked about hasn't been implemented and so the waivers reduce the impact of that coming later on will affect the number in a little bit bigger size, or going from 75% to the two-thirds number.

Okay, I understand. But beyond that one customer, have you seen any type of other customers stepping forward and saying we want a greater share of recapture rate?

No.

Okay. Unrelated question -- within fixed income, I don't think I heard what the flows were, of course, I know you can't give that. But wondered if you could qualify that; if you said that, I apologize. But just stepping back, assuming the rates were to move higher, how would you expect the portfolio to hold in there? I'm curious about the short duration bond funds, maybe you could say a size where that stands today?

Bill, it's Ray. Quarter to date, the first couple of weeks, the fixed income flows -- the fund flows are negative as they were in the prior quarter. Again, with a concentration in the short duration products, ultrashort, still good solid, positive flows on high yield. On -- in terms of rate increase, obviously, it's something we think a lot about. We think that a lot of our strategies, for example, high yield, will do fine in a -- with rates increasing with the underlying economy being solid in terms of the default rates. The performance there continues to be outstanding and in terms of the shorter-duration funds, that's a little harder to predict. If you go back to the last tightening cycle, we certainly saw a slowdown in terms of demand for the ultrashort products as the regular money market rates go up closer to what the short duration bond rates are. We thought people would leave the shorter duration bond funds and go back into regular money market funds. Of course, the field is going to look a lot different in this upcycle than it did 10 years ago. But, that's difficult to predict.

Okay. And just last one. You obviously took up a number of wins and the solid pipeline and I've asked this question in the past so sorry to be so redundant but what strikes me is that you have a lot of small account wins. At what point do you think you would start to see any larger mandates that could maybe more noticeably move the extra AUN needle? Or is it just a symptom of what the kind of mandates that are out there right now?

Well, the way I look at that, Bill, is we have increased the size of mandates we've been winning over the last several years. Years ago, if we were winning a $30 million, $40 million, $50 million mandate, that was a big deal. Now we are in the $150 million and $200 million and $400 million-type range and those are the type of mandates that are available and that's what we're seeing. Some of them we've seen come out where they'll say it's a $300 million mandate. They'll like two managers and then they'll split it $150 million/$150 million. We've had that experience. So I think that the more important thing is the breadth of the types of mandates that we are able to win and for us, both on a percentage basis and in terms of the enthusiasm with which we look at the mandates, those types of mandates are big and good.

And, Bill, I would point out the fourth quarter last year, we had two fixed incomes wins that were lowered to $500 million, one of them being high-yield. It was about $700 million. Obviously, we'd like to increase the frequency of that, as Chris said.

Okay. Thanks for taking my question, guys.

Michael Kim with Sandler O'Neill.

Just to maybe follow up on the equities fund side of the business. Clearly, you've been able to gain market share and at a time when demand for actively managed domestic equity funds across the industry remains lackluster, more broadly. So, just curious, assuming risk appetites do start to pick up at some point and demand for maybe more traditional equity funds starts to reaccelerate, would you see that as an incremental positive for your fund business in that environment?

Anything that happens positive in the equity side of the business would be very positive for us. If you look at the array of products, in each one of our teams, there are strong products. So, you'd be into the Clover Value Type product, Clover Small Value, and with all three Kaufman funds hitting on a very good performance, you've got a growth offering that's pretty much unparalleled. And we're even seeing life in some of the alternative products where you're getting positive flows in five of those products right now and if it goes all risk on, then people are going to be looking at some of those products as well. So, a positive move in the stock market would be very helpful for this. It may shift some of the people who are into [fewer] income but we have enough of breadth of product to be able to capture assets that are looking for, as I like to put it, a warm and loving home.

And we think that the income foundation is very well suited for really, the demographics going forward. You look at retirement and you look at the search for income, even with equity market conditions that you mentioned and even with rates expected to rise, there -- it seems expectations are that rates won't rise perhaps as much as in the past cycles. There's still going to be a very strong demand for diversified income and we think our product set there is unmatched.

Got it. That's helpful. And then maybe just to follow up on that discussion in terms of the market share gains, just wondering if you could maybe give us an update in terms of where you stand building relationships with some new distribution partners as well as maybe efforts to accelerate cross-selling in the various channels.

Well, what -- when we have told the story about the numbers of sales individuals that have been added on the institutional side because the two that were added you've seen some very good results that I recounted in my remarks on the more retail or broker-dealer intermediary side. It's the same kind of thing. In terms of the numbers of relationships in terms of brokers, I'm going to let Ray comment on that.

Yes, Mike, we've seen a gradual uptick in the numbers in terms of accounts of the advisors doing business with us. The way we look at that, we're at about just under 38,000 now. That number a few years ago would have been 36,000 and several years ago, would have been under 30,000, and over the last couple of quarters, we watched that tick up. We've talked about the expansion over the last couple of years on the broker-dealer side with additional wholesalers and so the distribution is broadening out, not so much from new relationships at the entity level but just from being able to reach more of the intermediaries. We have better tools on the marketing and analytics side to focus our sales resources to where the prospects are best based on the underlying data and we've also invested considerably on the technology, the website, social media tools to broaden our reach in that regard as well.

Okay. And then, maybe just one last one for Tom. Any color on the thinking related to expense growth, more broadly, just looking at particularly assuming that maybe a more volatile market backdrop?

We saw some volatility in our compensation line, incentive compensation Q1 to Q2. So, if sales pick up, that's going to pick up in expense there and that's the biggest line item that would change.

Fair enough. Thanks for taking my questions.

Ken Worthington with JPMorgan.

Hi, good morning. JPMorgan indicated that in the first half of the year, it kicked down its deposit base by about $100 billion in response to new capital rules. It doesn't look like Federated or the money fund industry seems to have benefited from that money coming out of JPM. Given the pressure seems like it might be continued for the banks and more deposits are likely to get squeezed out, what are your thoughts here on the benefit for money market funds? I guess first, if the money didn't going to money market funds in the industry, where did it go? And if money continues to come out of the banks, would you expect it to go to money market funds and if yes, why haven't we seen it yet?

Yes, Ken, we noticed the same thing, especially in light of the JPMorgan call and perhaps you would have better insight on the answer to that than I. Nonetheless, I will respond. It appears to us that, yes, the money did not flow into the money fund. It appears that our estimate is that a lot of that money went direct when staying on the sidelines, so to speak, not deciding on money funds at this time.

Over the longer haul, however, meaning post-2016, when the dust settles on what these money funds are going to be looking like, whether we're going to have private funds, whether we're going to have 60-day funds, what they'll look like, what the spread will be between the seven-day fund, the government fund, the closing that asset value prime funds, when all that settles out, then there's no reason, in my mind, to expect that if the bank is not bidding for that money, that then it will be a large portion of it will be available to the money funds. What the comment I've made before is that if you just take corporations, we, at a peak, coming into the 2008 sequence had almost half of corporate cash in the high 40s as a percent in the fund. Now that number is about half of that but we haven't lost any clients. So, it will be a determination made by corporate treasures and the like as to where they think their best investment lies. And I'm just waiting for the dust to settle but still remain convinced that our future has greater money market assets in that post-2016 environment.

Great. Thank you. And a little technical one on the money market fund fee waivers, it looks like the negative impact on management fees recovered a lot more than the negative impact on service fees. Why is that?

That's something, Ken, we probably have to address off-line and look at more closely. I will say one of the dynamics we've talked about before -- we reached -- when the waivers reached their trough, we had reached the point where there were -- we had in certain funds with T-bills only, in particular, we did have the ability to share waivers further with the intermediaries. And so all of those waivers effectively hit advisory fees and there was nothing left on the distribution side. As some of those buckets filled back up, and you look at the last quarter, repo rates ticked up, bill rates were actually rather flat but we saw some recovery in those portfolios so that the advisory bucket began to fill up. It's kind of like the last out, first in concept.

Great. Thank you very much.

Craig Siegenthaler with Credit Suisse.

Good morning. So if the non-operational deposits are on the sidelines investing directly and not paying 10 to 15 basis point management fees, why in the future would these corporate treasurers move their money to an asset management and pay the fees, especially if they are a larger corporation with a big Treasury Department?

It's just a question of what their net annuities may be in the expense of rolling the securities and buying them direct. And it's a decision they have been doing for decades and it's a question of what their best position would be. So, some of it, I'm confident would come back into the industry, because I think if you restore, what shall we say, normal rates, then the prime money funds, as then constituted, would have yield advantages and practical operational advantages to going direct, just like always.

Craig, what we've seen from the Trust Departments, from the corporations, they never do all just one thing. They have -- they go direct and use bank deposit products. They use money market products and the proportions change based on their underlying balances, how active they want to be, with it be in and out of direct, how they effectively tier or tranche their cash. So, it's been a multi-decade trend for us of seeing fluctuations across the cash alternatives and we think money funds will continue to get their share when you get -- especially when you get past the noise of the product reconstitutions.

I'll give you one more story. Excuse me, Craig. That is that, back when I started selling money funds to banks in the 1970s, it was presented it to them, and I know you're talking about corporations and I'm talking about banks, but the idea is the same. And that is that the money fund was presented as an alternative to the bank balance sheet, which basically meant you could do balloon squishing and the bank would be in charge. And we were happy with the second position of being a go-to player when the bank didn't want to bid the money in. And by the same token, the corporations over the last several years -- that's why I used those statistics, look at it as a very viable alternative. They don't close their accounts. And so we think we can outlast them. We're certainly willing to be here decade over decade and be ready for when the opportunity is right for the money funds.

Very helpful. And then just as my follow-up, since you've done a bunch of product tweakings and launchings over the last quarter, do you see any changes in institutional retail behavior, just given the consolidations and new offerings?

We have not yet seen meaningful change in investor behavior. One consistency is that they wish they didn't have to deal with it. The other consistency is they know that they do. You've seen some modest moves into government funds. But a lot of questions and pause mode as to what the future is going to hold on the institutional side.

Surinder Thind with Jefferies.

I was hoping to touch base on some of your gross sales trends, starting with the institutional segment. It seems that you guys continue to see healthy demand that's growing yet when we look over on the retail side, in terms of the equity side of the business, it seems like demand is little bit softer this quarter. Is there something that the institutional investor or the mindset you're seeing there that maybe the retail investor. It seems like was that just simply a case of volatility in the quarter and maybe a little bit of risk off?

I would be if I had a circle B than circle A.

Recognize, of course, with the institutional, it will be more of a wave chart by definition when we win mandates and that was a particularly solid quarter for us. I think when you look at the retail side of the mutual funds side, sales being down in the second quarter was consistent across the industry.

And you have to look at the timing of how much time goes into deciding a retail sale through an intermediary advisor versus an institutional sale, of course, that could take a year or so. And it really isn't related by the time, the mandate matures as to exactly what happened in the marketplace. So, those juxtapositions really don't concern us.

Fair enough. Then, I guess just maybe a little bit more color on I think you said, mentioned that there was over your RFP activity was up over 70%. Is that kind of -- what is the kind of level of growth that you've seen the last few quarters or that we could expect while what is a normalized rate there? For that segment, at this point, you guys are seeing.

It's hard to give you a normalized trend there. We look year-over-year we see, as we mentioned, pretty dramatic step up on the equity side. But, I'd be reluctant to try to give you how that looks on a normalized basis. If we go -- if we do look at several years, we've had about a 10% increase per annum in the overall level of RFPs. But the jump, in this case, year over year for equity, I think is reflective of all the performance things you've heard, reflective of adding to our institutional distribution capability. I certainly wouldn't want to project a 75% increase out over years but we think there's a lot more ground to cover here for us.

Fair enough. Then, just very quickly, I believe you indicated that there was roughly about $150 million in institutional wins that have yet to fund. And I didn't catch it if there was a fixed income number as well or can you just verify those?

Sure. There's $400 million on the fixed income side and $150 million on the equity side. There's $1.2 billion on the cash side.

On the cash side; fair enough. Then, my final question, I think you guys commented on this a little bit earlier which was kind of the concept around the demand for yield oriented strategies in a, more or less, a rising rate environment. Is the thought that it's more about -- is that a function of more about that maybe that the guidance to pass it the rate rise or should we be thinking about it more in terms of some of the absolute levels of rates get to -- the target rates gets to like 1% or something like that, where we should see demand to diminish or do you guys have any data or thoughts on that?

Well, in part, it begins with the composition of the buying public and our client base, and what's going on, on retirement, What's going on with baby boomers and those things come in first. Then comes the movement in rate. And I don't have any hot statistics for you that will say where that's going to go.

All I can say is that we think that the power of income is really a permanent sport. And that the products that we have are designed for that. And, of course, as I said before, if the tilt becomes more risk on, we have the products for that as well. But again, our client base and the demographics are not going to get all that far away from the beauty of getting a check and that kind of an approach.

And we look at our income strategy -- we have a pretty good head start on the equity side, if you take a product like Strategic Value Dividend that has a 4% or 5% underlying dividend yield from its portfolio and then strives for 5% growth in that dividend stream. To your point about the magnitude of a rate increase is it, by anyone's estimation, it will take a while, if ever to get bond market yields up to that level by all counts, it will be slow and steady. And so when you combine the demographics, as Chris said, with the absolute levels of yield that we have in strategies like Strategic Value Dividend, we think those strategies will hold out very well in a rising rate environment.

Fair enough. Thank you very much.

Greg Warren with Morningstar.

When we think about the path of interest rates, the Feds pretty much signal that they're going to raise rates at the end of this year. But when we look at next year, it's an election year and typically, they've been a bit low to raise rates or do anything with rates in an election year period. How are you guys thinking about this path of interest rates and do you think that may be the recovery of fee waiver that's going to be a little more prolonged?

Well, we would divide this into two parts. We'll let Debbie comment on what our beliefs are and the trajectory of interest rates and then Tom will comment on how this will impact or could impact the waivers.

Good morning, everyone. As far as our outlook goes from a pace perspective, Janet Yellen, I think, tried to set the market straight last week in her testimony to the Senate and the House, basically saying that 2015 from a list of perspective was not a question at this point and that was really even before the resolutions came about from a Greek and European perspective. So, I think the comments that she made that were backed up by several of her other credit governors were what will the pace be and that will be very data dependent. Obviously, she's not going to mention anything from an election year perspective but our outlook at this point is that the process will start in September and then it might the in every other or every third meeting type of increase. Our expectation will be they get to 1% and they wait and see then. 1% is still highly accommodative. There's lots of room for growth, from an economic perspective, with 1% interest rate, yet it brings the US back to a little bit of a normal situation in comparison to the other parts of the world. So, 1% and wait is the expectation that we're looking for in the 2016 timeframe starting in September of this year.

Great. So, in terms of the waivers, if it's 25 basis points in September, remember, we mentioned that we'd recover 65%; if it gets all the way to 1%, that would virtually eliminate the waiver situation on a yield basis.

Great, great. That's good insight. That helps a lot. The other question I have is more bigger picture. For a long time, let's go back, say, pre- and post-financial crisis period, you guys have really talked about building up the equity and fixed income business to where it was $100 billion in assets. You've been there for about a year-and-a-half now. I've always felt that you used the cash flow from the money management business, with the money market business to actually invest in and build out the other businesses whether it's through acquisitions or through internal growth. I'm just wondering at what point do you guys feel more comfortable starting to do more of that, expanding out those businesses because obviously, as we can see here, the debt diversification really helps you in periods when you're dealing with low interest rates.

As you know, for the quarter, the way we calculate the revenues, the equity component of the business across 50% of our revenues, that's taking out distribution expenses. So, we have marched along that path.

In terms of future acquisitions to build up that business, yes, we would be ready, willing, and able to do it but it has to fit, the cultures have to match, the pricing has to be right, et cetera, et cetera, and we consider that a worthy way to go. It's either looked at lucky sales or even growth by cheating, which we're willing to do in that context. However, we're looking at the basic funds that we have and maybe you heard me say before that we have six or seven funds that are on the $1 billion category that are on the threshold of being on the $5 billion category. And you put a few of those together and continue the good performance and it's not all that difficult to calculate getting the $56 billion up to $100 billion over the five-year period. So, we feel we have an organizational -- an organic platform that is organized to accomplish those goals but we would be willing to do some of the others as well. And it really isn't tied to, well, they were using revenues from one group of funds for the other. I agree with the diversification aspect of your comment, but we have the financial flexibility to do that in any event. We don't have much, if any, debt. We certainly don't have net debt and so any deals that we do is usually able to be financed on its own in any event so those aren't artificial restraints in being able to build out those business should we see the opportunities that meet those other criteria.

Okay, would you still consider Europe to be sort of an area of focus that you're interested in?

Yes.

Okay, perfect. Thank you very much for your answers.

William Katz of Citigroup.

Just coming back to pressure in money markets -- just thinking about the conversation and interest rates and the Feds posing it at 1% for a bit, just given the growth of ETF and the nominal level of interest rates are, is there any downward pricing pressure from the money market business at the end of the day? It takes a full 100 basis points to recoup all your fee waivers, I'm just wondering about the competitive pressures that may work that, ultimately [bring] that pricing down over time (inaudible).

Well, we haven't seen that as of yet, okay? And as we have commented before, Bill, there is an insatiable demand on the part of intermediaries to ask for and request and negotiate for higher payment, so that is a permanent part of the deal. I don't think there's really anything in the rate rise that would stimulate any more of that than we have right now. And, in fact, when you have a situation that's developing, which of the oligopolization of the business, you eliminate a lot of competitors and that tends to eliminate competitors who choose to compete by price. At least -- it doesn't eliminate them all but it eliminates some of them. So that you have that going. And it does take a lot in order to respond to all of what the SEC has been requiring in the new rules. You heard me say before that we were told we would be waterboarded and that's what's going on behind the curtain. So it's very polite of me to say that we're coming up with our new products we'll will serve all the clients but believe me, there's a lot of work going on behind that we're doing, willing to do and committed to do that others are not willing to do. This will influence, I believe, people in our industries pricing response as well. In the end, it will be a question of how efficacious this product is, how good the money market funds are, and what kind of yield and service they can offer to the client.

Thank you. Just one last one, money market and thanks for taking all my questions this morning. When, Tom, if you -- as you think about the guidance for the recoup of a few waivers, how much does the potential changes of rotation toward private accounts or separate accounts or offshore accounts, does that change the calculus in any way? Is there any risk one way or the other to that few waiver, to the extent that you see some migration of accounts and where they are today?

Sure, sure. When I read my multiple factors about -- read about that as I can, to go through all those things, absolutely. It will have impact. If they're going into money funds, it doesn't -- that's not going to affect our waiver situation except that if they've left our money fund into a separate account type of thing, we would have lower assets so that would affect it.

Bill, in terms of building the private products, we would build the pricing to be identical to the pricing on the money funds and so we're not expecting that kind of change. If, on the other hand, someone decides to negotiate a separate account, okay, that could be different. But, a lot of those customers don't necessarily want a separate account because what is a separate account?

A separate account is almost like redemption in kind in advance. And the beauty of a money fund is the diversification of the client base to allow for increased liquidity. So, we think that people like the funds and like them together and that's why the structure of our pricing on the private funds will be identical to the money fund and so we don't expect the kind of thing you're talking about there.

Got you. Thanks very much everyone.

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

Okay, well, thank you. That concludes our call and we appreciate you joining us today.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.