Federated Hermes Inc (FHI) 2015 Q4 法說會逐字稿

Welcome to the Federated Investors fourth-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, Mr Raymond Hanley, President Federated Investment Management Company. Thank you. You may begin.

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

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 result 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. Federated assumes no duty to update any of these forward-looking statements. Chris?

Thank you, Ray. Good morning. I will briefly review Federated's business performance and then Tom will comment on our financial results. I will begin by reviewing our equity business.

Though equity market conditions improved in Q4, the up and down swings over the last half of 2015 and continuing here into January, presented challenges for investors and of course impacted flows. Federated achieved a solidly positive net equity flows for 2015, just under $3 billion. For Q4, our equity flows were about $130 million, negative. This is after eight consecutive positive quarters.

Still, nearly half of our actively managed equity strategies had net positive sales in the fourth quarter led by International Leaders, Kaufmann Large Cap, MDT Stock and Absolute Return Fund. Federated's 5% equity fund organic growth rate in 2015 was among the best in the industry. Based on Strategic Insight data, Federated's 2015 equity fund net flows ranked in the top 4% of the industry.

Looking forward, our equity business is well-positioned with a variety of strategies producing solid performance and sales results. Using MorningStar data for ranked funds as of year-end, four Federated funds or 15% were in the top decile for the trailing three years. We had 14 funds or 54% in the top quartile and over two-thirds in the top half for the trailing three years.

Performance highlights include two Kaufmann strategies, a small and mid-cap and two MDT strategies, the all-cap and the large value in the top decile for the trailing three years. Our International Leaders Fund, a foreign large-cap blend strategy, was in the top 15% or better for the trailing 3, 5 and 10 years. Our Absolute Return Fund is well-positioned in the market neutral category, with its top quartile three-year record achieved since the change in portfolio manager.

Looking now at early 2016. Equity fund and SMA's combined are just about at breakeven through the end of last week, with our active strategies showing net inflows offset by index fund outflows. The strategic value dividend strategy is showing particular early quarter strength, as our largest equity strategy, at about $23 billion, it has produced slightly positive January month-to-date performance against the significant broad market decline. It's strategy of seeking consistent and growing dividend paying stocks may provide a distinct advantage when fixed income yields are low and the broader market is volatile and customers still want income.

Now turning to fixed income. Our outflow for the quarter of $653 million resulted from net negative fund flows, partially offset by positive flows in separate accounts. More than half of the fund net outflows came from ultrashort bond funds, which are often used as cash management vehicles for tax payments and other purposes. During the fourth quarter, we saw solid net inflows in our high-yield strategies of about $360 million.

Our institutional high-yield bond funds beat its pure average again in 2015 for the 12th consecutive year. The only fund in its category to do so. The fund is in the top quartile for the trailing 3 years and the top decile over the trailing 5 and 10 years.

Our high-yield trust fund ranks in the top 2% for trailing 3 years and 1% for trailing 5 and 10 years. We have a long record of success in the high-yield sector. Our focus on companies with strong operating results and avoidance of commodity driven firms and other problem areas led to solid, relative performance in 2015 in very challenging market conditions.

At quarter end, we had nine fixed income strategies with top quartile three-year records including strategies for high-yield, government and mortgage and munis. Fixed income funds overall are net negative for flows early here in the first quarter.

Looking now at money markets. Assets increased by nearly $10 billion from the prior quarter reflecting year-end seasonality. Average money market assets increased about $3 billion. Our money market fund share at year end was just over 8%. We continue to advance on the substantial effort necessary to position our product offering well in advance of the October 6, 2016 requirement for floating NAVs for institutional prime and muni money market funds.

We announced our institutional fund line up in November and completed a series of fund mergers in December. We continue to work on a privately placed fund for qualified institutional investors who are unable or unwilling to use money funds as modified by the new rule. We completed the transition of about $930 million in money market assets from Huntington in the fourth quarter and continue to look for consolidation opportunities.

Taking a look now at our most recent asset totals. As of January 27, managed assets were approximately $363 billion, including $261 billion in money markets, $51 billion in equities and $51 billion in fixed income. Money market mutual fund assets were $223 billion. The January average money fund assets are running at about $220 billion.

Looking at distribution. SMA's continue to be a very good business for us, with positive net sales in the fourth quarter of $164 million. Total SMA sales ended the year at nearly $17 billion. These assets increased 6% for the year and are up 80% over the past three years. Federated ranked sixth in industry rankings of the largest SMA managers at the end of the third quarter, which is the most recent data available.

We continue to have success for our EFA separate account wins, including $150 million mandate in the fourth quarter that is expected to fund here in this first quarter. Fixed income separate accounts had positive flows in the fourth quarter led by high-yield. We had a $200 million win fund into our institutional high-yield bond fund in the fourth quarter. We have $45 million in fixed income separate account additions that are expected to fund during the first quarter.

RFP activity remains solid and diversified with interest in value and dividends, EFA and growth strategies for equities and high-yield and short duration for fixed income. Our equity RFP activity increased 30% in 2015. We are adding another consultant relations manager to leverage our solid investment record into additional institutional opportunities.

On the international side, we've registered a Canadian domiciled strategic value dividend fund product in December, with a sales effort to commence this quarter. We are looking to accelerate the growth we've seen in Canada in our SMA business and with institutions. Canadian assets at year end were about $1.6 billion, growing over $500 billion from year-end 2013.

We continue to see success in Europe and Asia and the Mid East from a sub advised high yield product working with a large, private bank. These assets reached $320 million at year end, with most of the growth occurring during 2015. As I mentioned before, we had an Asian Mid East launch in September and a road show which continued in Hong Kong, Singapore and Dubai.

We continue to sink alliances and acquisitions to advance our business in Europe and the Asia PAC region as well as in the US and the rest of the Americas. Tom?

Thank you, Chris. Good morning. Revenue was up 12% compared to Q4 of last year due mainly to lower money fund yield related fee waivers and higher equity managed assets. Revenue increased 4% from the prior quarter due mainly to lower money fund yield related fee waivers.

Equities contributed 43% of Q4 revenue, the highest percentage among the various asset classes. Combined equity and fixed income revenues were 62% of the total. Operating expenses increased 7% compared to Q4 of last year and 4% from the prior quarter due mainly to higher money market fund distribution expenses as a result of the lower waivers.

The pretax impact of money fund yield related waivers of $16.4 million was down from the prior quarter and Q4 of last year. The decreases were due mainly to higher growth fund yields. Based on current asset and yields, we expect the impact of these waivers on pretax income in Q1 to be about $11 million.

An increase in yields of 25 basis points in 2016 could lower this waiver impact to about $4 million per quarter. A 50 basis point increase could lower the impact to around $1 million per quarter. Finally, an increase in yields of 75 basis points could nearly eliminate these waivers.

However, as we've previously discussed partially offsetting any potential waiver recovery is the impact of a potential change in the customer relationship that may reduce pretax income by about $6 million per quarter beginning late in 2016. This is most of the amount of waivers that we began estimating a year ago that may ultimately not be recovered. Multiple factors affect yield related waivers levels and the ability to recapture related income going forward. These factors are covered in the press release and in our SEC filings. We expect these factors and their impact to vary.

The Q4 effective tax rate was 36.5%. The full-year tax rate was 37.4%. We expect a tax rate of about 37% to 38% going forward.

For Q1, it's important to remember that the fewer number of days will impact revenue which is largely earned on a per day basis. Thus for Q1 based on Q4 average asset levels, we expect the fewer days to reduce revenues by about $4.3 million and reduce the related distribution expenses by about $1.6 million. Seasonality around payroll taxes and benefit expenses will impact compensation and related expense in Q1. We expect to have higher incentive comp accrual.

At early estimate of Q1 comp and related expenses is about $76 million, up about $7 million from Q4. The combined impact of fewer days and higher estimated comp and related expense is about $10 million in lower operating income compared to Q4, all else being equal. Looking at our balance sheet, cash and investments totaled $347 million at quarter end, of which $334 million of cash is available to us.

Donna, that completes our prepared remarks. We would like to open the call up now for questions.

(Operator Instructions)

Michael Kim, Sandler O'Neill.

First, Chris, maybe just focusing on the fixed income business, just sort of excluding the ultrashort funds. Just curious how you think about the platform in terms of positioning, performance, liquidity and ultimately flows just assuming rates trend higher?

Let's talk about liquidity first because that seems to be a very hot subject. We have a great deal of confidence in the liquidity in all of the investment aspects that we are involved in on the fixed income side, especially and even the high-yield. Of course, we are all responding to the SEC liquidity proposed rules. That's a separate subject. But in terms of the platform, the leader in the clubhouse is of course the high-yield, which I highlighted during my remarks. The performance and the growth there has been quite, quite good.

On our total return bond fund, this year's performance was at the 55 percentile mark, which is just below the first half. That tilts all the numbers at Federated because that's a large fund. We're looking forward to returning that to its historic first and second quartile type numbers. The people that we have on staff in the fixed income area are exceptional. They've been together for a long time, a lot of experience. We expect that will continue into the future.

The $51 billion that we have in fixed income assets, that's a great stage for the future here as well. I think there are other aspects that are hidden jewels, we think can grow. For example, our trade finance projects which are basically a low volatility and low duration type instruments. They are pretty sophisticated, have to be sold on an institutional type basis. But we think there's room for growth there as well.

Got it. Okay. Then in terms of the money market fund platform, I know you guys have done a lot of work ahead of the regulatory changes to be implemented. But just wondering at a high level, how you see related slow trends playing out ahead of the changes? Then the opportunity to maybe pick up some share post all of the changes?

I will comments first on some aspects of it. Then Debbie Cunningham is on the line. She can comment from the CIO perspective, as well on this. My perch on the tree comes along your final comment, which is once the dust settles, then we think there is excellent opportunity for growth in this business by us. Part of the reason is because the force of these regulations is to oligopolize more. We are on the side, we believe, of the winners of the larger players in this business. We've talked about that before.

Furthermore, the clients right now are still to a large extent in pause mode. That will begin to change first and second quarter as people decide what they are going to do and we see how much movement goes from institutional prime and/or muni into [GBI]. We will have all the products available. We think we've got some pretty creative things going with our private fund. So we think we're going to be well set up to capture this business for the long term. Don't forget that we made pretty big commitments, when you look at our waivers, the efforts we put in both politically and at the regulatory level in order to keep this business alive and well for the clients. Debbie?

Sure. I think if you look at the fourth quarter's results, certainly people are not yet contemplating movement from one tier class to another, from one asset class to another. Our prime funds were up substantially over the quarter and continue to be faring well in January. Having said that, with conversations continuing with our clients, we are aware that there will be some of them that at this point believe they will be moving into the government marketplace. That's all well and good.

We have, as Chris has put it the past, we have buckets to catch all of the various raindrops. If you want only treasury, we have that. If you want treasury with repo, we have that. If you want government agencies, we have it. So, there's lots of different product that we can offer along those lines. It's one of the reasons why we didn't do any of the conversions, government to prime that many of our competitors in the marketplace did. I think that when you look at the cash management business and the alternatives that clients have, it's not out of the fund industry. It's not into the bank product at this point.

Banks don't want that type of cash. So for the most part, we believe this will stay with the industry. In fact, as banks shed deposits, we think the industry in fact will grow and be substantially larger. The private fund, as Chris mentioned, is a very innovative product that we believe will capture the attention of many customers in the marketplace and will give them basically the experience that they have had in a prime institutional money market fund to date and will instead be giving it to them in the form of a private prime institutional product.

So we think we're ready. We did a lot of fund mergers during the fourth quarter. Those are behind us, so our product is right size. We believe from a performance perspective and from a size perspective, we are positioned well in the marketplace as clients go through and decide -- make their decisions in the -- probably late second, early third quarter of 2016.

Okay. That's helpful. Then, maybe just one for Tom. I know you talked about some of the specific line items looking into the first quarter, but just kind of stepping back. Any commentary on the outlook for expenses and/or margins at a high level just in light of the ongoing market volatility?

Yes, ongoing volatility. As soon as the rate changes start up, the volatility comes in and affects the equity market. So we continue to review things on a quarterly basis and a budget basis. I think that the last six or seven years experience with living with the reduced revenue has trained us to manage things pretty close to the vest. I think we will continue doing that.

Okay. Thanks for taking my questions.

William Katz, Citigroup.

Just staying on that theme for a moment. A number of your competitors have talked about the need to spend almost regardless of the market chop here early in the part of the new year, around things like technology, global distribution, product manufacturing, things of that ilk. So I appreciate your managing through the short-term volatility. But beyond the comp guidance, how are you thinking about where you might be in terms of the competitive standing? What you might need to maybe beef up the growth of the franchise to sort of realign with some of the changes in the demographics of the business?

Well, you are right in terms of continuing to build up and spend money on things like technology and our [IBOR] project and things like that. You are right on the continuing product development angle. There are always some products that are ground under repair. There are always new ones that you are working on. There's always need for seed monies as we have discussed before.

So we don't have any what we think are glaring deficiencies in the product offering; however, we are always looking and are talking to various people at various times where we think we could enhance those. Those types of deals where we would do acquisitions, as you know, Bill, we think would be self-supporting. Obviously, you pay for them, but they are self-supporting in that we would make good purchases of those assets. So, we continue to look forward to growth in both the organic business and in opportunities for acquisitions.

Bill, just one other thing on that with the global distribution. If you look at how we've done that, especially over the last year, we've added some resource for Canada and Latin America. That's followed as we've garnered business. It's leading to additional opportunities. But it's probably on a smaller scale but it's been effective. The other thing that's been effective is winning the sub advised mandate that we talked about in high yield, which is leveraging another firm's distribution and getting our product out to many different parts of the world where it hadn't been before.

Okay. Just one more follow-up from me. I appreciate the extra granularity in terms of the sensitivity for fee waiver relative to incremental rate hikes. I guess the bigger question is, if you think about that, you need another 75 basis points to get back to -- maybe more than that I guess to get 100% of the residual fee waivers back. In an era where BlackRock and Schwab have taken down their passive ETF's to 3 basis points, is there any risk on pricing for the money market business? It just sort of strikes me as a rather high gross yield in a deflationary world. So I wonder if there's any pressure on the economics of the business?

Bill, this is Chris. I don't see them as connected in any way, shape or form. The pressures that exist as regards to the money funds, the sharing with the distribution are basically unchanged and are always there. That's what we see. So the fact that those guys are competing with each other in terms of what they charge on their ETF's is not really a factor on the money market fund side.

Yes, there are always a fee pressure and more importantly, there is sharing pressure which we've talked about many times. So on a big picture basis, we're sticking with our view that if we get the kinds of increases that are possible, although you could have a debate about where the Fed is going to go, that those will be the relevant numbers, as Tom outlined in his presentation.

Okay. All right. Thanks for the color.

Surinder Thind, Jefferies.

I just wanted to revisit the conversation around compensation expense and guidance. Can you provide a little bit more color in terms of the dynamic of how you see comp evolving over the year? Your guidance implies that comp would be flat year-over-year on a quarterly basis. But there was a stepdown in 2015 that kind of was persistent throughout the rest of 2015. Is that the same dynamic that we should think of? Or is there some other dynamic that's at play?

Yes. Sure, Surinder. Yes, you are right. Q1 of 2015 was the same basically that we are guiding to for Q1 of 2016. The basic things which are normal things are 401-k contributions, the payroll tax and then our normal merit and the number of employee increases and bonus reset. So we have to look every quarter and say what we think we are going to pay out for the year. We have to do it accurately. We have to sign a document to say this is what is our best estimate of what we believe it is.

At the end of the fourth quarter, you see the number went down because we recalibrated everything basically on the reduced sales numbers and on the performance in investment management were the two main drivers for the reduction. So what happened after our expected $76 million number in the first quarter? We will see based on how all the inputs come in.

Thank you, that's helpful. Then maybe a question for Chris. On gross sales activity, it was actually down quarter-over-quarter, when I would have expected it to at least rebound somewhat from what is usually a seasonally slow third quarter. Any additional color there? Or maybe how that compares to maybe some of the industry averages and stuff?

Overall for the year, the totals were down slightly, $32 billion of total sales compared to $33 billion the year before. Either of those numbers are very, very good. But still, on a relative basis, I don't have the exact stats, but we would be gaining share on those -- on total sales in any event. So, you'd have to then get into each product at what was going on into each marketplace at that time to catch what was going on.

Great.

The other thing, Surinder, when you look at the flows in sequential quarters, what -- you had a step-down in funds. I think that's consistent with the industry. Then we also had a step-down on the separate account side. For us, that is more of an up and down each quarter. It's not so much a smooth trend. We had a couple of particularly significant wins that had funded in Q3, which we talked about at length. For example, in EFA. Now we have another good sized one coming at -- expected this quarter. So part of that is just the timing of some lumpy flows on the separate account side.

I see. Okay, that's it. I appreciate the color. Thank you, guys.

Michael Carrier, Bank of America.

Just maybe on the fixed income side, just a question on the mix, meaning when we think about the high yield products versus say the ultrashort and some of the other products, I just want to understand where you have maybe the most traction in the different distribution channels? What you are seeing when you obviously get this amount of volatility out there?

The records that we've put together in muni, muni tax advantage and some of our muni products are pretty doggone good. The multi-sector still remains strong. The short duration remains strong. Obviously, the money funds, although that's a different subject. That's true on both the fund side and on the separate account wins. During 2015, we won accounts on municipal, multi-sector, high yield and short duration. So that's where I come with that broad-based approach.

Okay. You guys have the percent of new exposure or where your assets are in terms of -- I think a long time ago, you used to have it by channel and just more, whether it's on the institutional side or the different retail channels that you guys service?

That something we could do with you off-line, Mike.

Okay, yes.

We don't -- I don't have -- it would be a lot of detail to go through on this call. But it's fairly well distributed across our channels. Something like high yield has worked well. Institutionally, we've talked about some institutional wins there. It does very well through broker-dealers. The high yield trust version of that, that also invests in the equity, has an equity bucket for the same companies that we're doing the work on the high yield side and has put together an exceptional record. That has worked very well in the retail side. So generally, you're going to see those products span the distribution channel.

Okay, got it. Then just on the equity side, the trends there, particularly relative to the industry, continue to be strong. When you look at the product lineup and where the demand is over the past couple years and where you see it heading, anything from a product strategy standpoint that you'd be looking to add? Or do you feel like you have a lot based on where the current demand is from the client base?

When you put it as the current demand, the current demand is in the strategic value dividend fund, where people are looking at this world and if they are tilting a little bit away from risk and still want income, this is a very strong product. It was positive return last year. As I mentioned, it's positive return so far in the first month. It's hitting on all cylinders in terms of both the SMA and regular fund sales.

But if you talk about things down the road, I'll mention again the alternatives. The Absolute Return Fund has done very well. The Prudent Bear fund is doing what it's supposed to do. We look forward to some of those other funds being able to function when the alternatives are back and hot on the list. So we think we are well-positioned into the future. When you have -- it's 2015 or 2016 mandates that are still in very, very good shape on the equity side spanning all of our groups, it gives you a lot of confidence in the diversification that wherever the market tends to go, we will have products.

Just looking at Kaufmann for one, that enterprise is three excellent funds. That's an area where growth takes over. On the global equity side, you look at International Leaders, an outstanding record. Then you look at the Global Allocation Fund. Yes, it hit a little pause mode in second half of last year, but it's three-year record is outstanding and has good flow numbers as well. So we think we're pretty well-positioned around the horn.

Okay --

It's extending some of the products, like for example, the strategic value developing a Canadian version of that, where we had success on the SMA. We've had success obviously in the US with strategic value. So we come out with a Canadian fund version of it. We will launch that in the next couple weeks. I mentioned the equity part of the high yield, which has been an embedded part of that particular fund. We're working on developing that as a separate equity strategy. So it's more product extension than filling holes.

Okay, thanks. Then Tom, just real quick, when you think about over the past years, you guys have been managing with the waivers in place. Is there anything that has been put on hold or slowed down from an investment standpoint? I know on the distribution, you guys have been active and like on the product side. But anything more operational that you would look to do if the rate environment continues to improve? Just trying to get a sense over the next couple years if there's anything that's been more just put on hold?

Yes. Mike, at our Board meeting yesterday, I reviewed for the Board, the last number of years living under this waiver scenario. What I focused on was all the things that we have invested in and continue to invest in, in order to help grow the Company, which Chris and Ray went over a bunch of them. So we don't really think that we have pent-up demand for something that we're not doing. We've tried to manage it with a balancing act to continue to invest to grow. So, no, I don't see pent-up things that we haven't done.

Okay. That's helpful. Thanks.

Craig Siegenthaler, Credit Suisse.

I just wanted to come back to money market fund price competition. Not all your competitors are really trying to maximize profits here. I just heard that one or maybe more of your larger competitors may keep their prices at these depressed levels as fee waivers go up. So I'm just wondering, have you seen that yet? What is your plan if there is an element of price competition introduced here?

Okay. I am going to give you two elements to this. One is there has been one competitor who has, for a considerable amount of time meaning more than a year, maintained a price of paying higher than what the yields would indicate in the marketplace. That has been something we've had to deal with. We've talked about it on this call before. The other one with the individual client, this individual client is simply redoing the structure of their arrangement. Yes, there are broader pricing things involved with it. But it is an individual customer who for a lot of different reasons is making these kinds of moves. We have not seen this duplicated in other clients nor do we have any other clients similarly situated.

So, yes, there will be constant competition from others, but don't forget that it is the logical result of big, hairy regulations to oligopolize the business. I've mentioned that before. I mentioned it before and during today's call. It is a very important point. There are just less and less people going to be in this business --before 2007 there were over 200 people offering funds. Now, there's about 60 and the bottom gang of those don't have much money and don't have much opportunity to distribute to third-parties.

Chris, just hitting on that last point in terms of industry consolidation. If you look down the road to 5, 10 years from now, do you think there will be many, if any money market managers with less than $50 billion left? Also do see in opportunities like what we saw with BlackRock and Bank of America to do transactions with money market businesses that actually are large, maybe north of $25 billion?

I will answer the second question first, then come back to the first one. The second question is what about the big deals like the BofA, BlackRock. Yes, we don't know how all bank regulation is going to go. We don't know how things are going to be analyzed by banks or some large players. So yes, there are opportunities for that as well. That's a good example. Now they aren't going to be an avalanche style, but we think that is definitely a possibility into the future. Now, the first part of your question was what?

The first part was, if you look down the road, 5 to 10 years -- I heard your oligopoly comment, but do you think there's really any managers with less than $50 billion (multiple speakers) at that point?

Okay. Yes, I think there will be several and the reason is that either, if you control the right to redeem of your assets, then you could run a money fund with very modest assets. You don't have to worry about getting third-parties in or out. If you've decided you can accommodate the regulations by either running all government funds or something like that, then you can run a relatively small group.

A second group will be those who have large, enormous fund groups. Therefore, can handle all the regulations and want to be offering all of the products that are necessary to their fund group. They may not get to $50 billion in money markets but they will have those as an accommodation to their clients. So, yes, those kinds of groups will continue to exist while the total number of purveyors of these products will continue to dwindle.

Got it. Very helpful. Thank you.

Robert Lee, KBW.

A question for Tom, I really just wanted to clarify some of the comments around the fee waivers. I know you've been talking about for a while now, maybe a year or more, the pending agreement with the distributor, which may reduce the amount of those fee waivers so you can kind of recapture. You mentioned this quarter it's about $6 million per quarter. Two questions: number one, is this really more of a when, not, if? Like it's going to happen, it's just still not determined exactly when?

Yes, Rob, so we expect in Q1 $11 million in waivers. When and if the relationship changes, we would only recover $5 million of the $11 million. What we said on the call was, it could happen at the end of 2016 -- late 2016.

Okay. Then maybe just to continue on that path. So conceivably, let's say, rates to the end of this year are 25 basis points higher, your fee waivers are down to 4. This new agreement comes into play. So are we actually going to be looking that, a little bit of -- actually, are you going to have to give up $2 million?

Yes.

Okay. I just wanted to make sure I understood it correctly.

You have it understood correctly.

Okay. Thank you. So, I guess a question for Chris, maybe you answered it with some -- before. I'm just curious more specifically, if I look around at the competitive universe, I kind of put your competitors into three camps as it relates to thinking about how to deal with the challenge from the ETF business. Some maybe trying to build it themselves with the smart beta product through acquisitions or hiring staff. Others may be looking to license, whether it's Eaton Vance's products or someone else as a way to maybe -- if it makes sense down the road to go kind of the less transparent active ETF route, if you will.

Then others have decided that is just not their thing. How do you -- where do you -- how do you think about that? Do you feel like you're more in the, we're comfortable where we are, it's too much out of our wheelhouse to think about going down one of those paths? Just trying to get your thoughts on where you stand right now.

Where we stand today is, we are an active manager and proud of it. What makes the difference to us is the generation of alpha by doing honest research. Whether it is credit analysis on the fixed income side or kicking tires on the equity side, this is where we think we make our mark. Now, this is not to say that we wouldn't consider looking at. We filed some ETF product and have come up with a variety of ideas and we have looked at various acquisitions, so it's not a total philosophical opposition. But it's not where we are headed and where we are focused at this time.

Furthermore, I think at some point, the intellectual community is going to be doing some studies on, at what point where everybody or a lot of people are not doing price discovery work, what percentage of the marketplace, not doing that, gives the alpha characters a better advantage from an academic standpoint. You can have debates about that, but there hasn't been enough research done on that yet. But it is at some point. We remain committed to the honest work of price discovery and credit analysis in order to make a difference for our client.

Great. That was helpful. I appreciate you taking my questions. Thanks.

Eric Berg, RBC Capital Markets.

Chris, I'm hoping you can build on your response to the earlier question -- or the immediately preceding question in the following sense. It seems to me that in addition to extending and I think Ray referenced this, existing products, that the big trend in the marketplace today in terms of the competitive landscape is for what some have called next generation products. That means different things to different people, but it seems like we are getting growth in all these products that sort of combine different needs of different individuals.

Whether it's a low volatility fund that is combined with income or an Absolute Return Fund that is currency hedged. It seems there is a major push in this area of, again, what some have called next generation as opposed to building on existing products. Two-part question, do you agree with this assessment? If so, where does Federated stand in this category?

In terms of next generation, Eric, the way I would look at it would be that there's two gangs of products here. One is the normal gang of buckets that allow intermediaries to make their choices, to make their cash calls, to make asset allocation decisions and they want to pure buckets in order to accomplish that. We have many, many intermediary clients who want that type of product.

Then you have the other type of products that are solutions oriented. They are the absolute return type fund. They are the global allocation type fund. These are what are generally called next generation type products. So we think you've got to keep the buckets moving ahead. You going to have to improve them in order to compete. You have to keep coming up with more in different solutions for clients as they move ahead.

However, we have no fear of the same old things. Money market funds as money market funds boring as they are, are delicious, lovely and a thing of beauty, as is the strategic value dividend fund. So you keep -- we keep looking at them as some could look at them and say it's the same old things, but people really don't change all that much and have the same old fears coming back and need these types of products in their investment portfolios.

One final question regarding the money fund, maybe to Debbie, but whoever feels best to answer will answer, of course. Suppose we do get a wholesale move or a meaningful move by your customers out of the prime institutional funds in muni and into the governments in an effort to retain the $1 NAV. If we do have this meaningful wholesale shift of assets, how will the economics of Federated be affected?

Well, since we have products in all areas, we think we will do pretty well. The returns on the government funds can be slightly less than the returns on the prime funds. That's one of the reasons why we come up with a private fund to attempt to duplicate that experience in all aspects both for the client and for Federated. Our main job will be to retain the client allegiance. Because what happens immediately, meaning in the end of the second quarter, third quarter, this year is not necessarily mean that's the end of the game.

We do not yet know how much of that will move. You've seen estimates from as low as several hundred billion, which is already moved, up to all of it which would be $1.5 trillion and estimates all in between. We don't know what effect that will have on the spreads that exist between GBI's and the then now constituted institutional prime funds. So without knowing those, it's really hard to gauge exactly what that will mean on the finances of Federated. We don't run any models on it to try and figure it out either. But those are some of the dynamics that are involved.

All right, then. Thank you.

Ken Worthington, JPMorgan Chase.

This is Will Cuddy standing in for Ken. Ken apologizes for not being on the call this morning. First, thank you for all the detail in the fee waivers. This is another follow-up on the fee waivers. We were looking at the Federated government obligations and treasury obligations, they've both seen increases in yields from 1 to 17 and 13, just respectively. It looks like those fee waivers are being recovered on a lag incremental basis. How do you think about tactically removing fee waivers? So you had given the high level of how you were thinking about it, I'm curious how you think on a fund by fund level, how you evaluate the fee waiver removal?

Will, it's essentially just a function of the gross yield. We talked about this when waivers first came into play that for each portfolio it's different obviously based on the expense structure of the portfolio. We were waiving fees in proportion between the revenue that the advisory fee revenue that Federated was receiving in distribution fee revenue and then the revenue that the distributors were receiving.

You see that in the press release when we show how the waivers impacted both us and then our distribution expense, which of course goes to the third-parties. So the inverse happens on the way up as the assets -- as the yields increase, we're refilling those buckets proportionally as well as providing the yield to the shareholder. So it all happens in the same kind of proportions as it did on the way down. It will vary at literally for each portfolio each fund.

Okay. This is tying into that and to a question earlier. How important are competitor prices for the fee waiver removal? How do you think about taking off the fee waivers?

To us, we are always dealing with whatever other people are doing, since the minded man runneth not to the contrary. The way we are looking at is exactly the way that Tom and Ray have described it, that if we get the increase in interest rates, then the waivers will come off and that's what we're expecting. So we're not going to have -- we aren't currently planning to have a different type of waiver recapture because of what competitors are doing or may do.

Okay, great. Thank you. Our other questions have been asked and answered. I appreciate the color and info today. Thank you.

Jonathan Casteleyn, Hedgeye Risk Management.

I was curious about the $6 million per quarter in operating income out the door to other distributors. I was curious, why do you think that's an isolated event? Meaning, can other distributors sort of claw back their expenses? As I said, what gives you confidence it's more of an isolated incident? What percentage of assets under management in the money fund business does that account for?

Let me assure you that it is one client and it is uniqueness of one client where this is occurring. I'm not at liberty to talk about who the client is. So therefore, you've either got to go with me on this or not. But it's not a widespread thing. Therefore, there are no other clients that are similarly situated to enable them to do that which we are talking about doing here. If I gave you the asset totals, then you'd be able to name the client. So we're not in the business of naming the client, so I'm not doing that either.

Okay. That's okay, thanks. Then, just to Debbie, you normally have a very good view as to what's priced in from a short-term rate environment. I'm curious what you think Fed actions look like from the desk at this point?

We're really looking at probably on average two to three moves in the year of 2016. Data dependency is the key here. I think that we saw some weaker statistics in January but from our December numbers, certainly employment and housing remain very strong. They are the 100 pound gorilla that's pulling the engine along. But we get into some of the broader consumer statistics as well as inflation as well as certainly the industrial side of the economy and some of the regional indicators.

They continued to weaken slightly in December and then the beginning part of January. So those are the numbers that we're going to be watching to see whether we think there's a March increase, a June increase, 25 basis point moves is incrementally what we're going to see. We think that we end the year around 1% from a spend-times perspective. Does that mean 1 to 1 in a quarter or 75 to 1? I think both of those are on the table. Again, we'll be real dependent upon how the economics of the situation continue to play out.

Do you think those expectations have changed the last month or so with market volatility? Or how do you measure those expectations?

I think it adds to the equation. I don't think it's the top item that's being reviewed, but I do think it's certainly taken into consideration. So if we continue to be a little bit weaker on the economic front, certainly market volatility is going to keep another move -- the next move off the table. If we start to strengthen again from an economic perspective, I think the global situation and the volatility in the marketplace tends to take a bit of a backseat at that point.

Understood. Then last question. You put investors with the upcoming rule set implementation in the money market funds really into two camps really unable to invest in money funds or unwilling. Can you just describe how a corporate treasurer may be unable to invest in a money fund around the new regulations? Then the second part of it is, why are people -- why would people be unwilling to actually engage in the product with the new rule sets? Thank you.

Yes, let me address that. That was in my remarks. There are some people who are unable and some unwilling. What does that mean? Well, obviously a treasurer can do what they want. In some cases, people are unwilling to take on the obligation of being in a fund where there are fees and gates and they don't like that. Some are unable through their documents to take on a changing net asset value. So there are state laws, there are indentures, there are requirements given by Boards or committees, investment committees that have been put into effect for over 40 years that constrain some clients.

Then some who aren't constrained that way are constrained because they don't like the potential of fees and gates. For example, in a different circumstance, some retail of our clients on the sweep side will not do a fee and a gate fund because they don't want to go through all of the computer work and technology changes that have to be done in order to make that fund accommodative to fees and gates. So they'll just go to GBI's direct. That's just a different example of someone unwilling. So if they want to keep doing what they've done before which is have a $1 in $1 out products, then hopefully they will see the wisdom of coming into our private fund that we are starting to offer in the second quarter of this year.

Understood. Thank you.

Patrick Davitt, Autonomous Research.

As a follow-up to Craig's question about the BlackRock BofA deal. How many slugs like that within the 60 you gave do you think there are that could be in motion of size?

Well, I can't put a number on it. I would say there are a few but I'm not going to put a number on it. Obviously, the biggest ones are ready, willing and able to proceed on their own. Since I don't have any names and no one's actually done it, other than one, it's really hard for me to gauge that. But in this type of business there is so much change and in some of those institutions, the money market fund business does not drive the truck. It can easily be decided to be maneuvered. We always put out our sign that we are a warm and loving home for any of those opportunities.

Okay, that's helpful. Then finally, we've had a lot of discussion about the interplay between prime and GBI. Are you starting to see any impact on the flows between deposits and money markets post-Fed hike as the banks are lagging deposit rates? Or is it still too early to gauge how that interplay will work out?

I don't have a good gauge on that. Debbie, do you have a comment on that?

We believe tangentially that some of those flows have begun to happen. Certainly, we've seen the lag from a deposit perspective, in addition to the desire by banks to shed those, which obviously exacerbates the lag. But it's hard to identify them specifically at this point, since we have a lot of varied and banking types of relationships and customers. So I won't say it's a trend at this point.

Okay, thanks a lot.

Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments.

That will conclude our remarks for today. We thank you for joining us.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time. Have a wonderful day.