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Federated Investors Inc. (NYSE:FII)

Q3 2010 Earnings Call

October 29, 2010 9:00 am ET

Executives

Christopher Donahue – President, Chief Executive Officer

Thomas Donahue – Chief Financial Officer

Deborah Cunningham – Chief Investment Officer, Money Markets

Raymond J. Hanley – President, Federated Investors Management Company

Analysts

Michael Carrier – Deutsche Bank

Robert Lee – Keefe, Bruyette & Woods

Michael Kim – Sandler O’Neill

Roger Freeman – Barclays Capital

Ken Worthington – JP Morgan Chase

Cynthia Mayer – Bank of America – Merrill Lynch

Marc Irrizary – Goldman Sachs

William Katz – Citigroup

Brendan Hawkin – Collins Stewart

Operator

Greetings and welcome to the Federated Investors Third Quarter 2010 Earnings call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Raymond J. Hanley, President for Federated Investors Management Company. Thank you, Mr. Hanley. You may begin.

Raymond J. Hanley

Good morning and welcome to our Q3 earnings call. Leading today’s call will be Federated’s CEO, Chris Donahue, and Chief Financial Officer, Tom Donahue; and joining us for the Q&A portion is Debbie Cunningham, Chief Investment Officer for Federated’s money market group.

Let me say that during today’s call we will make a number of 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 our risk disclosures in our SEC filings and we say that no assurance can be given as to future results, and Federated assumes no duty to update any of these forward-looking statements.

And with that, I’ll turn it over to Chris.

Christopher Donahue

Thank you, Ray, and good morning. I will start with a brief review of Federated’s recent business performance before turning the call over to Tom to discuss our financials.

Looking at the cash management portion of our business, money market assets were up slightly from the prior quarter as the 11 billion increase from the first phase of conversions from the SunTrust acquisition was largely offset by late quarter decreases in our money fund assets and by expected seasonal decreases in money market separate account assets. Assets had been fairly stable here in October as our money fund assets have ranged between 229 and 235 billion, and have averaged about 232 billion.

Through mid-September, money market fund assets were up slightly from the prior quarter. With the mid-September corporate tax payment date and other redemptions, money market fund assets, excluding the SunTrust acquisition, decreased by about 8 billion with most of this occurring during the last couple weeks of the quarter.

The SunTrust conversions will continue with an additional 3.5 billion expected in the fourth quarter for a deal total of 14.5 billion. We continue to have active discussions with other money market fund sponsors for these types of arrangements.

The third quarter saw further relief in money fund yield waivers. Tom will comment on this in his remarks. We continue to expect that additional relief will not happen until short-term interest rates begin to move up, and Debbie will discuss this part of our rate outlook later. Our money fund market share at the end of the third quarter was about 8.3%.

On the regulatory front, the President’s working group report on money market reform options was issued last week. We were pleased to see that the report noted the important role of money market funds and the role they play in our financial system. Among the options discussed was the liquidity bank which Federated strongly supports.

The implementation of the extensive changes recently made by the SEC to Rule 2a-7 continues. We look forward to working with the regulators and other money market fund providers in our industry to shape any additional measures that further strengthen the resiliency of money funds.

Turning to other products, our equity investment performance generally improved in the quarter, and we believe that we are well-positioned with an array of quality equity fund products to generate excellent sales results. Our equity mutual fund flows were positive in the third quarter, led by the Strategic Value Dividend Fund and the Prudent Bear Fund. We also saw positive flows into the Kaufmann Large Cap and Clover Small Value funds. Our equity gross sales increased 16% from the prior quarter while redemptions declined 14%.

Looking at results through most of October, equity fund flows have remained positive.

Within equity separate accounts, outflows were largely due to net redemptions in quant products, mainly our MDT, SMA, and institutional accounts.

Looking at bond funds, our sales continue to be solid in the third quarter with gross sales of 3.6 billion and net sales of 826 million. Our total return bond fund showed another quarter of solid inflows, about 374 million. Ultra-short products were also positive and we saw inflows in our high-yield funds as well. Bond fund flows are also positive here in October.

In fixed income separate accounts, we had a solid quarter of net inflows of about 280 million, and we expect another 1.1 billion from recent wins, the Fund in Q4 and into 2011.

Turning to investment performance and looking at the quarter-end Lipper rankings for Federated’s equity funds, 58% of rated assets per in the first or second quartile over the last year, 61% over three years, 71% over five years, and 81% over 10 years. For bond fund assets, the comparable first and second quartile percentages are 34% for one year, 68% three years, 72% five years, and 81% for 10 years.

As of October 27, our managed assets were approximately 343 billion, including 262 billion in money markets, 30 billion in equity, 51 billion in fixed income, including liquidation portfolios. Money market mutual fund assets stand at about 234 billion.

Regarding acquisitions, we continue to conduct an active search for an alliance to further advance our business outside the United States as an important component of our strategy to expand global distribution. We remain active in looking for consolidation deals including the money fund business and other opportunities as the market presents them. As always, we cannot predict the probability or timing of any potential deals.

Tom?

Thomas Donahue

Thank you, Chris. Operating income was up by 9.3 million compared to the prior quarter, excluding the second quarter insurance recovery and impairment charges. Net income on the same basis increased from $0.35 to $0.42 per share, or an increase of 20%.

Revenue growth from the second quarter was driven by money market funds and fixed income products, and was boosted by an additional day in the third quarter. We realized 1.3 million in investment performance fees, and the SunTrust acquired assets added about 700,000 of revenues.

As expected, we saw less impact from money market fund yield waivers in Q3 and this impact-related revenue and expense items as detailed in the press release. The reduction in operating income from these waivers dropped to 11 million compared to 13 million in the second quarter. Based on current market conditions and asset levels, we expect these waivers to reduce operating income by 11 to 12 million in the fourth quarter. We do not expect the impact from waivers to change materially from this level until the Fed begins to increase interest rates, and Debbie will talk about that later.

Looking forward, we estimate that gaining another 10 basis points in gross yields will likely reduce the impact of these waivers by about one-third from the current level, and a 25 basis point increase would reduce the impact by about two-thirds. We caution that a wide range of outcomes of possible factors that impact these waivers include yield levels available in the market, changes in assets within the fund, actions by the Fed, Treasury, and SEC and other governmental entities, changes in the expenses of the fund, and our willingness to continue the waivers.

Turning to operating expenses, compensation and related expense was down slightly, excluding the 1.5 million insurance recovery recognized in Q2 as we recalibrated our investment compensation expectations for the year. Distribution expense increased compared to Q2 due to the growth and mix of money market fund assets as well as lower minimum yield waiver impact. The number of days impacted this line item as well.

The other significant variances in operating expenses were due mainly to the impact of the insurance recovery and impairment charges recorded in the second quarter.

Looking at our balance sheet, cash and marketable securities totaled 316 million at quarter-end. This, combined with expected additional cash flows from operations and availability under present debt facilities, provides us with significant liquidity to be able to take advantage of acquisition opportunities when they arise, as well as the ability to fund contingent payments, share repurchases, dividends, new product fees and other investments, capital expenditures, and debt repayments.

As Chris mentioned earlier, the SunTrust conversions began in the third quarter, earlier than we originally expected. We have paid 4.9 million for the initial conversion of the 11 billion that came over in the third quarter. We expect to complete the conversion in November with 3.5 billion more in assets, brining the total to 14.5 billion. Based on these assets, we will pay approximately 7 million upfront and will pay an additional approximately 27 million in contingent consideration over the next five years. Actual contingent payments will, of course, vary based on the asset levels and related revenues.

So before we open the call for questions, let’s hear Debbie’s forecast on rates.

Deborah Cunningham

Thanks, Tom. Just to review basically where we were at the end of the last quarter versus today, the yield curve today on money markets is 30 basis points flatter than it was at that point; yet in comparison with the flattish yield curve that we’ve had in the course of the last several years, that was in the first quarter of 2010, it’s much deeper than that. So it’s not as good as it was at the end of the second quarter but much better than at the end of the first quarter.

Our outlook at this point is for the curve to stay in its current configuration until sometime in the second quarter of so of 2011, at which point we expect economic factors will start to kick in, and allowing the expectations for interest rate rises in the future at that point to start to steepen out the yield curve. Unfortunately we don’t think that actual movement, however, on that front end of the yield curve, as anchored by the Fed fund rate, will actual start to occur now until the second half—into the second half of 2011.

Raymond J. Hanley

Thanks, Debbie. We’ll open up for questions now.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star, one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, two if you’d like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, if you would like to ask a question, please press star, one on your telephone keypad at this time.

Our first question is coming from the line of Michael Carrier with Deutsche Bank.

Michael Carrier – Deutsche Bank

Good morning everyone.

Christopher Donahue

Good morning.

Michael Carrier – Deutsche Bank

Chris, maybe one question just because it’s relatively recent on the President’s working group. It seems like they put a lot of options out there. It’s going to take a lot of discussions, working with the industry, other players in the market to figure out if anything else will change. You guys have been very vocal on the liquidity bank and also, on the opposite side, on the floating NAVs and capital requirements, and all those are included in there. I guess two that stick out that are maybe not new but to shed more light on it would be insurance and then, like, a two-tier system. So I just wanted to get your thoughts on either one of those.

Christopher Donahue

On the insurance, we just don’t see how it works. One of the philosophies we have that we share with many others in this industry is that the socialization of credit risk is unwise, and I don’t have to give you a speech on all of the follow-up to that. And then the cost and expense of it and actually having somebody do it is highly problematic. So yes, this is an okay discussion but understand that this discussion has gone on since the 70s as people have looked in and out of this question. And there hasn’t been a solution to date and we’re just not optimistic that that’s what’s going to happen.

On the two-tiered, it’s interesting that our friends in Europe did a similar thing but we don’t think that’s really the way to go. What they did was said in their rules something called a market money fund that had a variable net asset value, and then something called a short-term money market fund that had a $1 net asset value. And we just don’t see how that’s going to exactly work.

I think what you also get from the flavor of the President’s working group is an understanding that if you keep the resiliency of money funds that have been improved under 2a-7 strong, you will be able to attract the money funds into that corral where you can see what’s going on, and the regulators are not really that interested, at least if you read the President’s working group, in having that money switch out into something else that doesn’t have the strength associated with the money funds.

So it’s good that all of these things are discussed back and forth and all of the points are analyzed, but of all of them, we think the lead one coming out of that is, as you mentioned and as we mentioned, the liquidity bank.

Michael Carrier – Deutsche Bank

Okay, that’s helpful. Yeah, it did seem a bit more balanced than maybe people feared. And then maybe just on the core business, on the expenses, comp came down a pretty decent amount in the quarter. Just anything there that was unusual, or just looking at the year where your revenues and earnings are coming in and just gauging what’s needed for the rest of the year.

Thomas Donahue

Yeah Mike, remember last quarter there was a charge in there—or a reversal in there from the insurance. That was part of it. And just the normal recalibrating all the way through what we expect for the year.

Michael Carrier – Deutsche Bank

Okay. And then on the long-term sales, both on the fixed income and the equity side for the fund products, any granularity or any clarity on where the flows are coming from, from, like, a channel perspective? And then just where you’re at in the channels, meaning where you see more potential, if these products are doing well, where sales could pick up. Thanks.

Christopher Donahue

The channel distribution is more or less across the board. On the fixed income side, it’s both across the board in terms of categories of funds and the array of distribution channels. On the equity side, you see more action with the Prudent Bear fund in the broker dealer world; but on the other hand the Strategic Value Dividend fund, which is obviously designed to pay net 4 and have increasing dividends and then get appreciation, that’s our across-the-board attraction to people who are looking to learn how to live during retirement and also who are willing to step into the marketplace that want a dividend to pay for their troubles. So that’s been more or less across the board.

Michael Carrier – Deutsche Bank

Okay, thanks.

Operator

Thank you. Our next question is coming from the line of Robert Lee with Keefe, Bruyette & Woods. Please state your question.

Robert Lee – Keefe, Bruyette & Woods

Thanks. Good morning, guys.

Christopher Donahue

Morning, Rob.

Robert Lee – Keefe, Bruyette & Woods

And I apologize, Tom, if you mentioned this in your comments, but are you still expecting the SunTrust to be roughly $0.04, $0.06 accretive kind of in the first year? Is that still in line with your expectations?

Thomas Donahue

I didn’t mention that in my comments, so you didn’t miss it. Last time I think we said somewhere around $0.015 a quarter. Of course, the assets have come down from 17 to our expectation now of 14.5, and the accounting changed it a little bit. You know, we’d probably tweak that a little bit up.

Robert Lee – Keefe, Bruyette & Woods

Okay. And maybe one for you, Chris. Notwithstanding your comments as relates to the money fund proposals that are out there, which I guess will take some time to be implemented, and the fact that you are still looking for additional deals, how do some of these proposals, if at all, kind of factor into how you’re thinking about capital? I mean, it’s one thing when you kind of think proposals are out there, they’re going to be debated; and even know you think—you know, it’s your view certainly that the capital intensive ones—or the more capital intensive ones are unlikely to pass. I mean, does it impact how you’re thinking about your use of cash or capital at this point, or pretty much business as usual?

Christopher Donahue

Well, it is pretty much business as usual, but that’s not to say that we don’t think about these things in terms of capital. It did occur to us that these things were going on when we took down the 425 million, and we still have an open revolver available to us. So we think we’ve maintained a lot of financial flexibility, and we also remain convinced that even though they will discuss and talk about ideas of capital as regards to money funds, that it’s very unlikely that they will try to do something, the net effect of which economically kills the business because the capital can’t be sustained by the marketplace on the money funds. And they make that very clear in the President’s working group simply by looking at all the ebbs and flows and positive things that money funds offer into the economy. So we remain enthusiastic and positive that they’re not going to put any kind of crazy capital requirements on, and we think we are in a pretty good spot with cash and capital.

Robert Lee – Keefe, Bruyette & Woods

Okay, and maybe just a question on special dividends. I mean, obviously you’ve paid a couple the past several years. You have cash and, as you said, capital flexibility. I mean, should we be thinking, or is it reasonable to think that particularly if we get into a month from now or so and it does seem like dividend tax rates may be set to increase some amount, that that could influence your thinking on timing about a special dividend?

Christopher Donahue

As you’ve noted, we have been attentive to trying to run things in the benefit of the shareholders with an eye on the funds as well. And so therefore we would not take off the table the idea of special dividends. Heck, we’ve done them a number of times in the past. And we would want to look at what happens on Tuesday and what kind of proposals come out before we would make any final decision on that.

Robert Lee – Keefe, Bruyette & Woods

Great. That was it. Thanks for taking my questions.

Operator

Our next question is coming from the line of Michael Kim with Sandler O’Neill.

Michael Kim – Sandler O’Neill

Hey guys. Good morning.

Christopher Donahue

Morning.

Michael Kim – Sandler O’Neill

First, the institutional fixed income business continues to win some sizeable mandates. Just curious how big of an opportunity do you see here, particularly as it seems like pension plans are increasingly looking to kind of immunize their liability, so maybe that suggests we’re going to see more of a secular shift in favor of fixed income.

Christopher Donahue

Well, we’re quite enthusiastic about that. I can’t put a number on it. Obviously the size of the business is way bigger than a breadbox. But what encourages us is not just the wins and the flows but the variety of different mandates that we’re able to win with, from core ag to government credit – you know, some of the same activities that we have in some of the funds, so there’s different mandates that are able to win. And—so I can’t put a number on it, but we think we’re in pretty good shape on this business.

Thomas Donahue

Mike, I’d just add that when you seek the more sizeable wins that we’ve had over the last year or so, we find ourselves in more finals and in finals for bigger wins so that the previous ones do kind of lay the path to hopefully bigger ones going forward.

Michael Kim – Sandler O’Neill

Okay, that’s helpful. And then kind of, I guess, the fund NAVs are going to start to be published out to four decimal points starting relatively soon. Do you just feel like there could be some volatility around flows as maybe investors move away from some of the funds that are toward the bottom end of the range?

Christopher Donahue

I don’t really expect something like that. Now, if you say bottom of the range, I don’t know what that’s going to be since I haven’t seen everybody’s report. But here are a couple of factors to remember. When you look at those numbers, at least in our case, what you’re going to see are three 9’s or three zeroes after the decimal spot, which means that you may see some numbers change in the fourth decimal spot behind—I mean, the fourth spot behind the decimal. And so these funds are at a dollar – they’re priced at a dollar and they are a dollar. And therefore I wouldn’t expect to see much flow movement because of this. On the other hand, we think it’s a good thing that this information is coming out because it reminds people that these are investment products and it is a way of showing what’s going on in addition to the portfolio inside the fund.

Michael Kim – Sandler O’Neill

Okay. And then just finally to maybe follow up on compensation, I guess you kind of adjusted the accruals a bit this quarter, so does that suggest this is a pretty good run rate looking out to the fourth quarter, just barring any sort of seismic shifts in the environment?

Thomas Donahue

Yeah, I mean, things change and our expectations change and performances change in the quarter and the sales change in the quarter. And we like to be conservative going into the final quarter because we don’t want to get caught under-accrued.

Michael Kim – Sandler O’Neill

Okay. Thanks for taking my questions.

Operator

Thank you. Our next question is coming from the line of Roger Freeman of Barclays Capital.

Roger Freeman – Barclays Capital

Good morning. I guess first just on the fee waiver guidance, I guess you’re guiding sort of flattish sequentially. It sounds a little bit better than some others that have reported and kind of talked about the outlook, like (inaudible) or Ameritrade, for example. You know, there was like a spike in LIBOR (inaudible) advanced hedge funds earlier in this third quarter and that’s come off, so I’m just wondering if there’s any different dynamic we need to be thinking about in terms of sort of your (inaudible).

Thomas Donahue

Roger, we kept the range the same, as Debbie pointed out. I mean, the rates have come in a bit but we were at the low end of that range before, and so we’re comfortable keeping that same range in place.

Roger Freeman – Barclays Capital

Is there anything worth pointing out, like I guess in sort of flows between types of money market accounts, maybe in commercial (inaudible) out of treasuries, et cetera, to try to pick up yield. Maybe there’s less to give back on those, or nothing worth noting.

Thomas Donahue

We’ve seen—we’ve continued to see a shift toward the prime products. Interestingly, treasury went up a little bit in the quarter. Money more or less came out of the agency funds and into prime.

Roger Freeman – Barclays Capital

Okay. And with respect to sort of the total money market, I guess, demand pool, I was wondering your thoughts around—there was a CFTC proposal proposing that FCMs would no longer be able to pay anything more than, I guess, 10% of sort of customer guarantee funds in the money markets. I don’t know what that average is today. Curious if you think that’s an issue. Are we going to see other sorts of guarantee funds pulling back from how much they’re allowed to put into money markets?

Christopher Donahue

Well let’s start—overall, it’s a proposal and we have very excellent working relationships with the staff at the CFTC and we’ll be commenting, working with them on these proposals, but we don’t yet know what will come out. That’s an important thing to remember. Next thing is that this is a two-prong proposal. One is an overall limit to 10, and the other is a by-family limit of two. And as it stands right now on our book of business, if that were adopted, we’d probably be a net winner. We’re not aware of any of our clients having more than 2% in our funds right now anyway, so if they go to a big diversification move, we’d probably be net winners; and if at the current level, we don’t see how it affects the clients right now. But we are going to be working with them on their proposal and making our comments.

Roger Freeman – Barclays Capital

Great, that’s helpful. And then just lastly, back on the Strategic Value Dividend fund, are you also seeing flows, I guess, from maybe not just sort of retirees but would otherwise—or do you think otherwise these fixed income investors. I mean, it just feels like a product that’s probably as close to fixed income as you get in the equities world.

Christopher Donahue

The answer is yes, and it’s some of what you see although we can’t really put our finger on the pulse as well as those who have the actual retail customer because we’re through intermediaries. But you do see some people who are willing to move into an equity product because it has a worthy dividend, and they’re stepping out from the fixed income, thinking about what that might mean for the long haul. So you do see some of that. I’m not in a position to give you a lionized trend and go from that to some big macro point.

Roger Freeman – Barclays Capital

Right, okay. Thanks a lot.

Operator

Our next question is coming from the line of Ken Worthington with JP Morgan. Please state your question.

Ken Worthington – JP Morgan Chase

Hi, good morning. Couple questions on RidgeWorth. I think, Tom, you mentioned EPS in the deal went from 17 to 14.5 billion but the accretion is actually going up. How does that happen? And then also on RidgeWorth, what are the management fees versus the distribution costs, and did the SunTrust products—would they have waived any fees if you had owned them for all of the third quarter? And if so, what would those fee waivers be for those funds?

Thomas Donahue

Well they definitely would have waived fees, but the first question on how would the EPS go up. The accounting—you know, we thought we were going to be amortizing when we talked about that, amortizing some of the expenses and that’s not what’s going to happen. So that’s why it would go up even though the assets went down. They kind of balance each other out to just a slightly uptick on our estimations.

Ken Worthington – JP Morgan Chase

Okay. And the management fees versus the distribution fees for the SunTrust products, are they meaningfully different than what you have on your book, your existing book, today?

Thomas Donahue

No, and we won’t—we can’t get into specifics on that, Ken, but we talked before about the basis points on the products being in the—the revenue basis points would be in the low 20s if you blend everything together, and the distribution fees would not be dramatically different than the profile you’d see in other similar customers.

Ken Worthington – JP Morgan Chase

Okay. And what were the fee waivers in those products?

Thomas Donahue

I don’t have the specific fee waivers in their products. They would have transitioned into our products and we wouldn’t be able to break out once the thing has been transitioned, and they’re the same as anybody else in that fund.

Ken Worthington – JP Morgan Chase

Okay, but your fee waiver guidance for the quarter includes the fee waivers on the incremental SunTrust assets?

Thomas Donahue

Yes.

Ken Worthington – JP Morgan Chase

Okay. And then last question – Federated successfully lobbied over time the expanded use for money market funds. Just kind of fishing here, but any new opportunities that you guys are kind of working on behind the scenes?

Christopher Donahue

Okay, I’m allowed to mention now that this is probably maybe the 11th quarter or something like that, that we still are working on 15c3-3. 15c3-3 is the Exchange Act provision under which broker dealers have cash, and we still work with the SEC on getting this accomplished. So that’s one that’s being worked on. There’s another one that’s being worked on which is when the CME is due to be given a lot of derivatives to handle, there may be collateral associated with that and naturally this looks like a worthy home for money funds as well. So that’s just two.

Thomas Donahue

You know, Ken, we’re still talking to a lot of people on the acquisition side, which isn’t what you asked, but we expect more transactions there.

Ken Worthington – JP Morgan Chase

Excellent. I’m glad I asked the question. Thank you very much.

Operator

Our next question is coming from Cynthia Mayer with Bank of America - Merrill Lynch.

Cynthia Mayer – Bank of America - Merrill Lynch

Hi, good morning.

Christopher Donahue

Good morning, Cynthia.

Cynthia Mayer – Bank of America – Merrill Lynch

On expenses, it looked like actually a number of categories, from professional services, systems and communications, travel were all a bit lower versus 2Q, and I’m wondering if those are good run rates?

Thomas Donahue

Well, remember that insurance recovery factors in on a number of those line items and from the previous quarter, so I guess the current quarter is probably a decent run rate.

Cynthia Mayer – Bank of America – Merrill Lynch

Okay. And on MDT, can you give us a sense of what the assets are there at this point and what the trends have been in terms of flows, including maybe in October, and what your outlook is? You know, what would it take to turn those around?

Thomas Donahue

The assets are actually right around where they were a quarter ago, just around $3 billion, with the bulk of that being on the separately managed account side and then the rest in mutual and institutional accounts. In terms of a turnaround, the performance has improved a bit in the most recent quarter but we’ve had a couple years of underperformance and so it’s going to take more than a quarter of better performance to reasonably expect those flows to turn around. We have seen, though, that customers that stayed with the product understand why the model underperformed in the kind of macro environment that we were in, and they appreciate the fundamental orientation of the model and continue to use it because they believe that ultimately over the long term, that’s where—that that will bring success. And if you look at the strategies, there are seven of them on the managed account side, and six of the seven continue to outperform versus their benchmarks from inception. So the long-term record still argues for the model.

Cynthia Mayer – Bank of America – Merrill Lynch

Okay. And then maybe just circling back to the possibility of buying more money market assets, can you maybe describe if there is any shift in the attitude of the potential sellers? Does the prospect of a really extended period of low rates influence them? Is there any difference versus last quarter, or not particularly?

Christopher Donahue

It’s very, very difficult, Cynthia, to come up with a macro from that because each one of these deals is so particular and so unique and so tied into the internal workings and thought processes of the people that have the money funds. In many examples, they’re our clients already. And so—you know, yes. Those factors that you mentioned – lower rates, more cost of compliance, higher level of need, less core business for them – all these things factor in; but what really drives the trucks is the internal decision-making of those organizations and I wish there could be a macro catalyst that would cause all the money to just flow right home, but it doesn’t work like that unfortunately.

Cynthia Mayer – Bank of America – Merrill Lynch

Great. Thank you.

Operator

Our next question is coming from Marc Irrizary with Goldman Sachs.

Marc Irrizary – Goldman Sachs

Great, thanks. Just a couple questions. First on the fee waivers, under what scenario—rate scenario do you see potential fee waivers extending to your ultra-short fund?

Christopher Donahue

I don’t know of any.

Marc Irrizary – Goldman Sachs

Okay. And then on the regulatory front, it looks like some of the tougher decisions were turned over to the FSOC in terms of regulating or determining systemic importance of money market funds. What’s your guys understanding of sort of where the—you know, your understanding or maybe the industry’s understanding of where the committee might come out on some of these issues, considering that’s a new regulatory body?

Christopher Donahue

It’s really hard to predict. We support the ICI in their efforts to comment on this whole process in terms of the efficacy of actually naming individual funds or gangs of funds as quote strategically important. And I think that the issues will turn on all of those factors which were listed in Dodd-Frank that have to be considered, like for example, are these entities on leverage or are they not? Obviously the mutual funds in general and money funds in particular are not on leverage. Whether there are off balance sheet exposures – well, mutual funds don’t have those. Whether where sources of credit for low or low income or minority or underserved communities, so that’s not exactly a factor. Whether we manage the assets or own the assets – that’s a big factor, and obviously in the funds we manage them. And the degree to which the company is already regulated, it’s already regulated very well by the SEC and this is perhaps, in our mind, one of the most important points because the source of the regulation comes from an entity who is primarily geared toward protecting the shareholders of the funds. And the Fed’s attitude is to protect a different constituency or a different philosophy, and we think it’s very important that that be maintained. And there are other factors as well, and so I think that’s where the debate is. And it’s pretty tough to say where these guys will come out. I think they have a lot bigger fish to fry, but nonetheless I can’t make a solid prediction.

Marc Irrizary – Goldman Sachs

Okay, and then you may have commented on this already, but I guess some of your competitors who are bringing back their money funds and have to be reported on the shadow NAV basis to the SEC that they’re making—they’re bringing them back to dollar NAV. Is that something from your perspective that you’re interested in doing, or are your funds all at a dollar?

Christopher Donahue

Well, our funds are all at a dollar so we won’t be doing that. And as to what the other guys were doing, you know, that’s fine. Whatever they’re doing, they’re doing. But we don’t have any material realized losses in our funds that would cause us to even get to that question.

Marc Irrizary – Goldman Sachs

Great, thanks.

Operator

Thank you. Our next question is coming from William Katz with Citigroup. Please state your question.

William Katz – Citigroup

Yes, thank you. Good morning everyone. I looked at the rev share between the C-waiver and then the give-back on the distributors. I think it was about 80% this past quarter. That seems a bit on the high side. I’m just sort of curious – is that just sort of the idiosyncratic nature of where the fee waivers are coming by channel, or is there a little bit more of a structural shift here that the distributors are willing to bear a little bit more of the economics given the persistency of the low rates?

Thomas Donahue

No, there’s no structural shift, Bill. It’s purely where the assets lie, so whenever we talk about more going into prime, I mean, that would be disproportionately in more of, say for example, a broker dealer sweep channels would use those kind if products more and other intermediary applications. So it’s purely a shift, not any type of structural thing.

William Katz – Citigroup

Okay, that’s helpful. And then Chris, you’re now the fourth major money market player among the publicly traded names. (Inaudible) the exact same song that liquidity bank is the way to go. I’m just sort of curious – when you sort of read some of the documents that are out there, the liquidity bank itself has some pros and cons associated with it as well. What is it specifically about the liquidity bank that is so attractive to the major players; and then secondarily, is it really just a matter of that’s the lesser of all evils from a compromise perspective relative to capital or floating rate NAV?

Christopher Donahue

Well, on the second part, if it functions like that, everything isn’t exactly a trade. And it isn’t exactly oh well, this is one that we can do and therefore do it. I don’t think so. I think that the liquidity bank does add a feature of strengthening the resiliency of money funds and therefore it should not surprise you that the leading purveyors of money funds, who have been working together on coming up with this, would also speak in favor of it. It’s because they came together in response to an initial request from the President’s working group to come up with a private feature that would link into the liquidity system. And so it has a certain beauty, namely that it would be capitalized by the advisors of prime funds, that it would issue securities that would be available to third parties and others, and that it would build up capital; and then at the end of the day after the 30% of cash and funds were used, it could buy high quality securities at amortized cost from funds that were having liquidity challenges, and then have access to the discount window which, of course, would have attendant costs and charges that would make that something you’d just as soon not do, but certainly if you had to do it, you would surely do it. So I think that’s how we’re looking at it, and we think it would be a good addition to the system. And Debbie has a comment as well.

Deborah Cunningham

If you think back based on Chris’ comments to what the AMLF did from the Federal Reserve Bank of Boston, which was put into place on September 19, the Friday after the default of Lehman Brothers, it served exactly the purpose that Chris mentioned and had all the various points associated with it. But it was pulled together rather quickly and it was designed by the Fed. This is a way to capture that same degree of liquidity provision, doing it ahead of time, number one, and doing it from an industry perspective, number two. So we think both of those are positive features that could replicate something that was quite a good success story already.

William Katz – Citigroup

So if I could just follow up to that question, then – one of the things that the President working group had mentioned that it could result in sort of the concentration of market share, would this—it seems like it would be both capital and cost-prohibitive to some of the smaller players. Do you think that this would give you a little bit of an inflection for acceleration of market share gain?

Christopher Donahue

All of the things that have been done have this tendency towards oligopolization of this business, for better or for worse. And so whether it is doing increased stress tests or requiring great detail on the credit analysis or, in this particular aspect of capitalizing the liquidity bank for prime funds, I think they all have that tendency. It’s not its primary purpose and I don’t think it’s its primary effect; but it is certainly an effect out of—it’s very logical to come out of the existence of the liquidity bank.

William Katz – Citigroup

Okay. Thanks for taking my questions.

Operator

Our last question is coming from the line of Brendan Hawkin with Collins Stewart. Please state your question.

Brendan Hawkin – Collins Stewart

Hi guys. Most of my questions have been asked and answered. Just one quick one, and I jumped on the call late so I’m sorry if you went through this. Could you give the revenue breakdown by asset class, please, for the quarter?

Thomas Donahue

I’ll give you the percentages, Brendan. I don’t have the dollars in—

Brendan Hawkin – Collins Stewart

Yeah, percentages are fine. That’s great.

Thomas Donahue

It was 51% money market, 30% equity, and 18% fixed income. The 1% would have been other things.

Brendan Hawkin – Collins Stewart

Thank you.

Operator

Gentlemen, we have no further questions at this time. I’ll turn the floor back over to management for any closing remarks.

Raymond J. Hanley

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

Operator

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

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