Federated Hermes Inc (FHI) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Federated Investors first-quarter 2016 analyst call.

(Operator Instructions)

I would now like to turn the conference over to your host, Mr. Ray Hanley, President of Federated Investors Management Company. Thank you, sir; you may begin.

Good morning, and welcome. Leading today's call will be Chris Donahue, Federated's CEO and President; and Tom Donahue, Chief Financial Officer. And joining us for the Q&A is Debbie Cunningham, our CIO for the money markets.

During today's call we may make forward-looking statements and 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, and good morning. I will briefly review Federated's business performance, and then Tom will comment on our financial results.

Federated's Q1 equity business results were solid against a backdrop of challenging market conditions. We again posted sales results that place us among the industry leaders. In Q1, the all-in, net equity flows exceeded $2 billion, which represents an annualized organic growth rate of about 15%. And we've had positive equity net flows in 9 of the last 10 quarters. Over 40% of our actively managed equity strategies, that's 14 to 34, had net positive sales in the first quarter, led by Strategic Value Dividend Funds. Other funds with positive net flows include Prudent Bear, International Leaders, International Strategic Value Dividend, MDT Stock, Muni Stock Advantage. Federated's 10% first-quarter annualized equity fund organic growth rate ranked in the top 2% of the industry, based on strategic insight data. This places us 14th out of 693 competitors.

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 at the end of the first quarter, five of Federated's funds, or almost 20% were in the top decile for the three trailing years. We had 13 funds, or 50%, in the top quartile, and over 2/3 in the top half for the trailing 3 years.

Performance highlights include seven of the eight MDT strategies outperforming versus benchmarks, for the trailing three years and since inception. We've also had solid results from the Federated Strategic Value Dividend Strategies; and, while we've noted over the years that industry relative rankings don't always properly measure the investment success of these strategies, it is worth noting that the mutual fund version of this strategy -- it had 8% return in the first quarter, and that placed it in the top 2% for the quarter, top 1% for the trailing 1 year, and top 3% for the trailing 3 and 5 years.

Federated's Muni Stock Advantage Fund offers another solid product, with an income mandate. The fund ranked in the top 3% for the trailing 1 year, top 14% for 3 years, and top 3% for 5 years at the end of the first quarter. Federated International Leaders Fund won the Lipper Award as the best-ranked fund for performance over the 10-year period ended December. The Federated Kaufmann Large Cap Fund, another bottom-up, concentrated portfolio, is rated four stars, and has solid long-term performance records. And while the last year's been challenging, the fund's more recent performance has improved.

Looking now at early Q2 results. Equity funds and SMAs, combined are net positive, a little over $360 million. This is at a comparable rate to the Q1, through the end of last week. The Strategic Value Dividend Strategy continues to lead the net sales results. Positive net sales funds also include International Strategic Value Dividend, Muni Stock Advantage, and Pru Bear.

Now turning to fixed income. Net outflows occurred in ultra-shorts, total return, corporate- and mortgage-backed funds during the first quarter. High-yield Fund strategies were slightly negative and have returned to net positive inflows here in the second quarter. During Q1, the Federated High Yield Trust Fund won the Lipper Award as the top-performing fund for the five-year period ended December 2015. At quarter end, we had nine fixed-income strategies with top-quartile, three-year records, including strategies for high-yield floating rates, short intermediate, total-return, government and munis. Fixed income fund sales are net negative early in the second quarter, at a comparable rate to Q1.

Now looking at money markets. Assets increased by nearly $6 billion from year end, and were up about $14 billion from the first quarter of 2015. Average money fund assets increased about $12 billion from year end and $7 billion from Q1 of 2015. Our money market fund mutual share -- market share, at quarter end was 8.12%, up slightly versus a year-end 8.02%. As you are all aware, we are moving into the later innings of the substantial effort to position our money market products in advance of the October 2016 requirement for floating NAVs for institutional, prime, and muni funds.

We recently announced further operational details, including the FMAV strike times for institutional, prime, and muni funds. We also made the required disclosures to provide additional money market information on our website for our funds. This includes daily reporting of daily and weekly liquid-asset percentages, net shareholder inflows and outflows, and shadow NAVs. We also conducted a road show for our planned new private fund, with a targeted midyear launch, and are developing a new collective fund. We will have a robust set of products and choices for all of our institutional customers as they navigate the new landscape for cash management during 2016 and beyond.

Taking a look now at our most recent asset totals: as of April 27, managed assets were approximately $364 billion, including $255 billion in money markets, $58 billion in equities, and $51 billion in fixed income. Money market mutual fund assets were $218 billion, and average assets in money market mutual funds are running about $219 billion.

Looking at distribution, our SMA business reached new heights in the first quarter, with record gross and net sales. Gross sales exceeded $2 billion and net sales were over $1 billion. In fact, first-quarter net sales were greater than the total for all of 2015. Total SMA assets ended the quarter at just under $19 billion, an increase of $2 billion in the quarter. The SMA assets are up nearly 80% over the past three years. Federated ranked sixth in the rankings of the largest SMA managers at the end of 2015, which is the most recent data available.

We also added a $150 million EFA, equity, separate account in the first quarter, and have $45 million in fixed income separate-account additions, expected to fund here during the second quarter. RFP activity remains solid and diversified, with interest in value, dividend, EFA, growth strategies for equities, and high yield and short duration for fixed income.

On the International side, we saw our first trades in our new Canadian-domiciled, Strategic Value Dividend Fund product in the first quarter, as we seek to continue our growth in Canada. Our assets at the end of 2013 were a little over $1 billion and today they stand at approximately $1.7 billion. We continue to see success in Europe, Asia, and the Mideast, from a subadvised, high-yield product, working with a large private bank. These assets reached $350 million in the first quarter, and we were selected to subadvise another high-yield fund, beginning sometime around the third quarter. We continue to seek alliances and acquisitions to advance our business in Europe, the Asia PAC region, as well as, of course, the US and the rest of Americas.

Tom?

Thank you, Chris.

Revenue was up 23% compared to Q1 of last year and 12% from the prior quarter, due mainly to lower money fund yield-related fee waivers. Equity contributed 36% of Q1 revenues, and combined equity and fixed income revenues were about 53% of the total.

Operating expenses increased 22% compared to Q1 of last year, and 18% from the prior quarter, due mainly to higher money market fund distribution expense, as a result of lower waivers. Comp and related increased about $8 million from the prior quarter, due mainly to higher incentive compensation expense and payroll tax and benefits seasonality. An early estimate on Q2 comp and related expense is about $76 million.

Pretax impact of money fund yield-related waivers of $9.4 million was down from the prior quarter and Q1 of last year; the decreases were due mainly to higher fund gross yields. Based on current assets and yields, we expect the impact of these waivers on pretax income in Q2 to be about $6 million. Increase in yield of 25 basis points could lower this waiver impact to about $2 million per quarter, and a 50 basis-point increase could nearly eliminate these waivers.

As we've previously discussed, the impact of the change in one of our customer relationships may reduce pretax income by about $6 million per quarter when fully implemented late in 2016. Multiple factors affect yield-related waivers levels and the ability to capture related income going forward. These factors are covered in the press release and in our SEC filings, and we expect these factors and their impact to vary.

Looking at the balance sheet, cash and investments totaled $342 million at quarter end, of which about $314 million is available to us.

That concludes our prepared remarks and we would like to open the call up for questions now.

(Operator Instructions)

Michael Kim, Sandler O'Neill.

Hey, guys, good morning.

First, I joined a bit late, so I apologize if you already covered this. But typically, I think we see money market fund outflows in the first quarter of the year, just given some seasonality. So just wondering what you might have seen that was a bit different this time around, that drove the inflows? And then, any sort of implications as we look into the second quarter?

Naturally, we've already covered the key point that this is tax season and people do pay their taxes, and so that is still going on. What we are seeing is some movements in the marketplace, as some firms have taken the occasion to alter their own money market fund structure and what their funds are doing. It's very difficult for us to see input or monies coming to us from those moves, but you can pick those moves up by others. This is not to say that customers are yet figuring out exactly what they want to do. It's still the era of the firms and the funds making their moves on that point.

Debbie, would you add to that, please?

I would definitely say the increase in Q1 is a result of lower waivers and higher yields being paid out to all participants in the marketplace. Certainly getting off zero or one basis point, I think has had a positive influence on the assets during the first quarter.

And we did see here, with Chris mentioning the money market assets, the normal tax season, April, decline.

Got it. That's helpful.

And, then, I know you commented a bit on the institutional side of the business, but can you maybe just flesh out a bit more what you might be seeing in terms of demand trends? What strategies might be a bit more in the mix, if you will, as well as kind of the pipeline and funding timelines, more broadly?

Well, what we gave you was the EFA account -- that was one; and the $45 million of fixed income that is to be funding in the second quarter. And we listed some of the mandates. And, what I like to do is always look at the mandates that we won and 2015 and 2016, and you get a pretty good variety. You get money market, you get International, EFA, fixed income on multi-sector; you get municipal mid-cap growth; you get high-yield. So, in large-cap growth, so you've got a good variety of different mandates. And as I mentioned in my remarks, the RFP activity remains strong and it's up for this timeframe, over the same timeframe from last first quarter. So that would be what I would say.

Michael, just to add -- it's Ray -- what we did see in the first quarter was a bit of a shift to fixed income, in terms of the RFP composition. And, while high-yield has historically been an area of strength for us and where we have a differentiated record and long-experienced team, we've continued to see good activity from high-yield, as well as short-duration on the fixed income side. But if you look at the activity year-over-year -- and, again, just grabbing one quarter, which can -- you'd want to look at it over longer periods, but there was a shift to fixed-income in the RFP pipeline.

Got it. And then maybe just one last one for Tom, just on the updated thoughts on expenses in margins in light of the more constructive backdrop? And thoughts on how we should be thinking about the trajectory for margins after the money market fund-fee waivers have played out?

It's a fascinating thing. When the most recent return, or reducing of waivers, actually, nixed the margin, and the remaining waivers that are on there, when they go away, will decrease the margins also.

Okay; thanks for taking my questions.

Bill Katz, Citigroup.

Good morning. This is Justin Tarrington filling in for Bill this morning.

Just a real quick, broad question for you guys, just based on DOL. Just trying to get an understanding of what you guys thoughts are around money markets and the economics on that, on those given the DOL, and the [vice] rule that kind of came out recently.

Answering the question, specifically only to the money markets -- basically, one of the things I mentioned is that we were coming up with a collective fund; a collective fund is utilized for retirement assets only. And we think this will be a good addition to the pot and will be a good DOL proper fund, that will have good staying power into the future for cash.

In terms of the DOL's direct impact on cash, at Federated we just don't see it as that big of a deal at this point. First of all, most of the assets that are in those accounts, those types accounts, are in other types of assets -- meaning fixed income and equity. On the money market fund side, what you're going to be left with here is a question of whether or not the intermediary can meet the fiduciary standard of reasonable compensation on receiving payments from the fund. This applies to the money market fund as well as all the other funds, and this is the standard question that's asked under fiduciary law, and has been asked for a long time.

Our experience in this goes back into the 1980s, when, with trust departments, we went through their mechanisms inside a trust department, and were able to show to the trust world that receiving a 25 basis-point shareholder-service fee was, in fact, reasonable, because their costs were in the low 20%. So, if you do the work, do the homework, you can meet that particular standard, and that's part of the routine aspects of trust law that we've gone through in the past.

Okay, that's great; thank you for that.

Touch back on the institutional pipeline, again. I know you guys talk about the Canadian fund and some stuff over in Europe and Asia. Is there any other opportunities outside of those areas that you see, that you're focusing on in the future? And I know it's sized the pipeline up a little better now, in terms of those institutional opportunities. Really appreciate it

On the institutional side, we think there are opportunities in Canada, which is why we have a salesperson up there. We also think there are opportunities in Latin America, specifically in with our RJ Delta arrangement. We are exploring other things in the Far East, as well, but is not something I can size. And as I mentioned in the call, we are having good success with our high-yield offerings on institutional separate accounts, subadvised, et cetera, in Europe. But it's really hard for me to give you some size of where I think that will go and how big. It's certainly an excellent opportunity for us in all of those areas.

Great. Thank you for taking my questions.

Michael Carrier, Bank of America.

All right. Thanks a lot.

Tom, maybe first one -- I know you always had the seasonal pressure in 1Q on the margin in year over year. The margin did increase. I just wanted to get a sense, when you think about the seasonal lift that you typically see, meaning on the comp side -- it doesn't seem like that's changing too much quarter over quarter. And then, you have the revenues and the expenses normalize, with the fee waivers, yet the long-term business continues to do well. Just where the margins can go, or where the expense-base outlook is likely to trend?

I know it's not all about margin -- meaning, you can still generate the earnings growth, with a stable margin. But just wanted to get your sense on, is there stuff with the waivers that just continues to limit that in the near term? Or when will we likely to see some improvement?

As I mentioned to the other Mike, if you look at the press release and the margin of the waivers that we are doing, it's lower than our existing margins. So, as those go up, that's a headwind to increasing margin. But the seasonality and the benefits and payroll things go away, and you see that in first quarter of 2014, first quarter of 2015, first quarter of 2016, and we would expect the margin to improve over the year. And then, absolutely, I'm willing to say that, as the waivers go away, once that is out of the mix, and we continue to grow like we are doing on the equity side, we should expect margin improvement at the Company.

Okay that's helpful.

Chris, on the long-term business of both equity and fixed income, and right now on the equity side it seems like it's been year after year where the industry has faced challenges and you guys continue to put up long-term flows. And it seems like with the performance, you are still fairly well positioned. Just wanted to get your sense, when you look at some of the new regulatory changes or proposals, whether it's the DOL or the SEC proposals on liquidity -- is there anything out there relative to your positioning in the distribution channels, particularly in retirement, that makes it more or less of a headwind going forward? Or do you continue to see your franchise fairly well positioned and the growth outlook likely to continue?

We are about as well positioned, I think, as anybody. I'll cover it with respect to the DOL, first. Then, I'll comment on the liquidity you mentioned, and maybe we'll even throw in derivatives to boot.

On the DOL -- don't forget, I began my sales career as a lawyer, calling on trust departments in the 70s. And we have had fiduciary relationships with trust departments since then, doing a lot of good work for them, understanding the two-pronged nature of fiduciary activity, namely the duty of loyalty, and the duty of care. So we have those things and they are part of our ethos. We also have, at Federated, one of the nation's experts in fiduciary law, that has been an employee here pretty much forever. So, with respect to the DOL, we think we are in a excellent position to help them implement what is necessary and what needs to exist.

Because if you look at some of the various businesses, I will show you how they meet, in our view, both the loyalty and the prudence aspects of it. You take our SMA business -- we think we are very well-positioned here. And when you think about the SMA business, it is transparent, it is a level fee, the disclosures are generally very clear about who is getting what, and this addresses successfully the duty of loyalty. Then, if you look at the duty of prudence, which was well articulated in the rule, but it wasn't the principal focus of the original issue of the rule, you have research-approved product that go in; you have actual monitoring of both the products that are used and the underlying account; and you have honest, thorough client profiles, so that you actually know the customer and what's going on. There are people there to call, so it isn't a 10,000-to-1 ratio, if people are interested in difficult times, like what was going on in January. And the SMA is also politically correct in the view of the Fed, because you have individuals owning individual securities, which they like.

Now, there's one other thing that has to happen, which we are very good at helping people with, and that is to document all the fiduciary processes. And this is critical. This is one of the new things that has to happen.

Another thing that I think we will do well in is the R-6 classes. We have six or seven of them now and R-6 classes are priced without the other service fees in 12B-1 fees, but we'll probably have 18 of them by the end of the summer. And we think these are going to be very important.

You already mentioned some of the things we think about, and that is that you've got to have good performance. And that's going to remain important. And we think we do here very well, too. And this addresses, again, the area of prudence. And I already talked and answered the other question about how we think we have cash opportunities here as well. So I think we are very well-positioned on the DOL side.

Now, on the liquidity side -- and I would say most people will give you this kind of an answer -- that the essence of managing a mutual fund and the sacramental thing in a mutual fund is the right to redeem. And, therefore, everybody is very sensitive to the redemptions and to the potential thereof. So, it's fine. People want to study it and focus on it more and I think there will be some very good improvements from what the SEC came up with. I don't think they'll end up with six buckets; they've gotten a lot of pushback on that. And so I think were going to see some improvements. We've had meetings with them down there, as have others, and see an openness and willingness to do what is necessary to meet what the Fed or the (technical difficulty) and to do things that don't destroy the underlying efficacy of the mutual fund. And I think the same kind of overall (technical difficulty) on the derivative side.

We wouldn't be that much affected if they stuck with their hard numbers, but it [will be the followers] of flexibility inside all sorts of other funds and, perhaps, some of ours, so I think they are far better off going to a principles-based arrangement with the derivatives. And I think they will consider it, or at least give you some choices, depending on what kind of fund you happen to be in. So overall, I think we are in a good position to respond to these various regulatory activities.

Okay, thanks a lot.

Ken Worthington, JPMorgan.

Good morning.

Chris, I know you touched on this but it want to ask a little more specifically. We're getting closer to the implementation of a new money market fund rules and, maybe, to what extent have institutional investors already repositioned for these new rules? And how much of an acceleration you expect for repositioning in 2Q? And, then, maybe based on customer behavior, do we see a lot of customers just waiting for the last minute to reallocate? Thanks.

I will take the second part, because Debbie's done some pretty good work on the movement of various funds inside categories. And so I will let her cover that.

But as I mentioned, the clients -- you could say they're waiting for the NDS; that is true. Some are just getting aware of the fact of what is going to happen, and what is important in [shaking] more action is the movement by some of the funds to do different things. The most recent thing we did was announce strike times. And that does move assets, but (technical difficulty) as yet, another communication that something else is different, and you're going to have to decide where to go. So, as I mentioned, we just haven't seen the big movements of the underlying clients yet. We will have a $3.5 billion redemption out of a tax refund, because of the one client, but that isn't going to occur until the summer, and I think that's when you'll see the biggest movements occurring.

Debbie?

We've seen, from an industry shift, basically, time, government versus non-government assets, be equal at this point. So, a $2.8 trillion industry, about $1.4 trillion (technical difficulty) continuity -- that's a (technical difficulty) definite shift from the normal (technical difficulty), $1.8 trillion or so in (technical difficulty) in about $1 trillion in (technical difficulty).

The vast majority of that -- three quarters of that movement -- has come from, as Chris mentioned, products changing their prime focus, if you will, to government. So, Federated has not done this, but others in the industry have basically converted what were large trust funds into government funds in that shift. That has caused the industry itself to be about equal from a government and a non-government standpoint. As far as client flows themselves go, it certainly seems as though the second, and into the third quarter, will start to produce some of those (technical difficulty) We're really not seeing this en masse, yet, at this point.

What we do think we'll see in the second quarter -- again, from an industry perspective, not so much from Federated's standpoint, but over monitoring on an industry basis -- is, as changes have occurred from (technical difficulty) industries, competitors that have basically taken some of (technical difficulty) building out the institutional customers right now. And that's taking place in the second quarter, for a few types of products. And we think we'll see that continue to occur. Again, we're not seen that from our own flow standpoint.

As Chris mentioned, we did have various road shows across the country over the course of the last month and a half, and, ultimately I'd say our clients are enjoying the additional yield spread of about 20 to 22 basis points, prime funds over government funds; whereas historically, that spread has been around 12 or 13. So, they're enjoying that additional yield spread right now, and I'd say the questions that they're asking mostly are, how do I get to continue to use this product and enjoy this yield spread, as these regulations roll in? Help me with that. It's a different question than what was, maybe a year ago, what do I need to do, and when do I need to switch?

All right; thank you.

And, maybe, just as a follow-up to that, if we see a lot of last-minute repositioning, how easy is it going to be for the industry to handle that? Have we seen enough pre-work done by the companies, themselves, by Federated themselves, and your peers, to be able to handle the repositioning? Or is this actually going to cause some angst in the CP markets or even the short-term government markets?

Well, certainly we've seen repositioning. And I can tell you from our own standpoint, if you look at the various products that we manage and the cash base here at Federated, our weekly liquid assets -- which would be the assets that are most easily convertible into cash for redemption purposes on any given day -- those are drastically different for our institutional prime funds, that may have historically been -- they're much higher at this point. They're also different for our institutional retail, although less high, at this point, and, when you look at what our traditional products that are not being affected by the regulatory changes -- the pools that we manage, the separate accounts, the offshore products -- those are those categories that are higher.

So, retail and institutional prime have been positioned accordingly, with shorter-wait average maturities, more weekly liquid assets, and shorter barbells. So, typically we buy barbells that go out to 12 or 13 months; the longest we can buy in the money-market yield curve. Those products are looking with a cap at more like six months.

All right; thank you.

Then, last, for Tom or for Ray -- once your comp was unchanged year over year, should we expect comp for 2Q, 3Q, and Q4 to generally mirror what we saw in 2015? At least that's what it setting up to look like.

Well, Ken, first of all, on the first-quarter costs, there was a reversal, a bit of prior-year accruals, that you would've seen a higher number in Q1. And so, when Tom said $76 million for the second quarter, you would've seen more of that traditional drop-down. But it would be hard to speculate going forward on the same pace as last year or any year, because the main drivers, of course, are the incentive comp and the variability there, and that's going to be tied into what you would expect the sales levels and investment performance levels, as well as earnings. So, no, I wouldn't necessarily guide you to the prior year. It would be more driven by the factors I mentioned.

Okay, great, thank you very much

Robert Lee, KBW.

Thanks, good morning, everyone.

DOL-related question, from a little bit different perspective. Obviously, while the questions relate to how it impacts you, but I'm just curious -- how do you think this changes the expense or the cost relationship with distributors? They have preferred-provider lists, platform fees, all kinds of stuff that you guys have to spend money on. How do you see the, if at all, the DOL rules shifting that? Is that kind of something you feel like, getting a sense of, they're not going to be able to charge for? How do you have a preferred-provider list and be a fiduciary type of thing? Do you see any upheaval along those lines that can work towards your benefits? Or maybe it's a negative in that it opens up the playing field even more to competition and different distributors? How do you think of that?

Well, I think that, overall, that has not yet been fully decanted. And most of these firms are aggressively reviewing these rules in order to determine what their duties are, under the duty of loyalty. What about the duty of prudence? What about the documentation? And what about reasonable fees? Don't forget that they did grandfather all the existing products. And so that means you're not under an immediate panic. They also said that you could keep variable comp. And what that means is that, if you can defend it as being reasonable, which is why I went through that routine about old trust departments before, you can keep it.

So, obviously, the firms are going to try to retain as much of the revenues as they can from their business. And we'll have to see whether they are up to the task of allocating costs, studying them, in order to meet the standard of reasonable. The DOL was very careful to say that more or less any pricing mechanisms are going to be fine. You also haven't yet determined exactly what it means to have a level fee. We all know sort of what they want, which is -- okay, you charge the customer 1.5% and then there's nothing else around. But how is that going to compare with how all the products are done? Which is why I highlighted that pricing routine in the SMA as being very consistent with what the DOL has.

So, I don't have answer to that. I will tell you that it is going to change how they function and how they think. And we'll be Johnny-on-the-spot with them. We feel we understand it and can be helpful in executing and implementing, but we just don't have a definitive answer to that.

Okay, fair enough.

Maybe a follow-up question on capital management. Now that a lot of the fee waivers have dissipated -- and understanding you have that one distributor that could have some impact on the second later this year -- but are you at all -- how should we be thinking about capital management now that earnings have come back up from their lows and the fee waivers have dissipated? You haven't talked about acquisitions in a while; that used to be something you talked about a lot, is -- should we be thinking that, maybe, whether it's a focus on dividends and dividend increases, or step up in buyback -- any change in how you're thinking about capital management priorities as earnings have strengthened?

So, our first choice has always been acquisitions. Of course, right with it has been our current dividend and the yield related to that and our payout ratio. But on the margin, we have looked at our track record in acquisitions and are happy to spend the money there, because we think we can get an excellent return; and, based on our past history, it's what we're doing that on. And, like you said, getting those is hard and so, we continue to try to do that.

Are we going to let cash build up to some huge numbers at the Company? We don't have a history of doing that. And take an eclectic view of, is it better to pay out, increase the dividend, pay out special dividends, as we've done many times in the past, and do share buybacks? So, basically, if we don't get the acquisitions at some point, then we will go to the other two, and determine at the time what we think is best for shareholders and best for the Company.

Great -- thanks for taking my question.

Eric Berg, RBC Capital Markets.

Thanks very much.

First question -- Chris, it sounds like, with respect to what seems to be -- I don't know if I'd call it a conventional view, but certainly a view out there -- that 12 B-1 fees are in trouble as a result of the DOL rule, along with revenue sharing and other marketing support. What I'm taking away from your comments is that maybe that's not the case; that these still may be permissible and we'll just have to see. Am reaching the right conclusion on your thinking?

Yes, you are. And what occasions this is, that the first draft of the DOL proposal had in it that it was going to be a low-fee harbor and there was not nearly as much articulation about fundamental trust law. And when you get into basic fundamental trust law, you have to look at the duty of loyalty. And that means not that you go simply to the lowest fee -- and they articulate this very clearly in the opening section of the rule.

And so you have to be able to defend the compensation as reasonable. And whether 12 B-1 funds fees can be defended as reasonable will depend on the facts and circumstances as these things evolve out over time with [point of spar] et cetera, and how much work distributors do on justifying and saying that these things are reasonable. And that will be the standard.

And so we don't look at it as though they implemented what everybody was worried they would implement, because they did not. Now this is not to say that, that's not what they really want in their heart of hearts, because of this level fee, because of the (fit) contract -- all these other influences are still there. So, there's a lot of balls up in the air in terms of how this shakes out. But you have interpreted what I had in mind very well.

Great. And, then, just thank you for that, and then just one quickly for Debbie.

Debbie, should I infer from your comments that, even though there continues to be uncertainty as to what your customers will do once the new regulations in the money fund area are implemented later this year, that it's your strong sense now that there will be a transfer of assets to new products, rather than a loss of assets? Is that the right conclusion?

I definitely feel like there will be a continuation of normal or higher level of assets. I think Chris has said in various discussions that, post the reform in October 2016, going into 2017, we believe we will have assets in the cash space that are higher than they were pre the reform announcements back in 2014. So we don't necessarily think this is a deterrent from an asset perspective. How that mix of assets is ultimately going to position itself, I think we'll even still be in flux in 2017. Certainly, there will be institutional clients who are in prime and municipal funds today, that will go into govi funds, initially, in the October 2016 timeframe.

Depending upon what spreads get to, and also depending upon the performance of those funds from a volatility perspective, and ultimately, looking at them against other funds on a total-return basis, rather than just on a yield basis, I think will bring clients back into that space in 2017 and beyond. So I think it will be transitions of movement, lots of clients' money in motion. But ultimately, I do believe that the assets will be higher post reform.

Thank you; very clear. I' m all set.

Surinder Thind, Jefferies & Company

Good morning, guys. Just one quick question here.

I' d like to revisit the Strategic Value Dividend team and the retirement of Walter there. That product has continued really well in terms of the flows; it's one of your leaders at this point. How has the institutional response been, since it's been six months since the announcement of his retirement, and at the end of the year he did officially retire?

That was a well-planned-for retirement, with good solid backup and succession in place, and Walter has earned his retirement and we are very thankful for all of his contributions here to the Company. I remember one of the questions that would come in as we were talking to the clients, and they would say -- now, wait a second -- which guy was it? The guy that wrote the book, or the other guy who retired? Well, the guy who wrote the book is still there. In fact, he's written two books. We are adding resources, as we move ahead on this, and we are looking to also expand the product line and are examining various ways to do that, as well. So the retirement has not, in any way, shape, or form, injured or altered the performance or the sales flows, the enthusiasm, the morale, or the activity of the fund.

So just to make sure I understand this -- that basically, the institutional RFP activity or response has generally been, or is basically continued, as if there's been no change -- is that the right way to think about it, at this point?

Yes.

Okay, thank you.

There are no further questions at this time. I would like to turn the call back over to Mr. Hanley for any closing remarks.

Well, thank you for joining us today. That concludes our comments.

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