Federated Investors, Inc. Earnings Call Nuggets: Institutions and Money Funds, Capital Deployments

On Friday, Federated Investors, Inc. (NYSE:FII) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

Institutions and Money Funds

Michael Kim – Sandler O’Neill: Just a couple questions for me. First, do you get the sense that some institutional clients may have started to pull back on their use of money market funds just with all the uncertainty out there on the regulatory front? Then on the flip side, do you think we could see a step up in demand assuming we ultimately get some direction from the SEC in terms of which path they ultimately choose to pursue?

J. Christopher Donahue – Director, President and CEO: Well, we haven’t seen a diminution in use of money funds by institutions, okay. You can look at what we talked about it in our remarks as the normal, for decades, activity where the assets increased in the latter part of the year and then decrease as we head into tax season, but we have not detected a diminution in institutional use of money market funds at all, and I don’t know what would be the effect of the SEC coming out with saying they aren’t going to come up with a proposal or something like that to increase the demand. I think the demand is the demand, and that I just don’t have a way of figuring out how many customers are not in the funds, because they are concerned about something that the SEC is about to do.

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Deborah A. Cunningham – EVP, CIO, Taxable Money Markets, and Senior Portfolio Manager: I’ll add to that. I do speak to the clients on a daily, probably hourly basis, meeting with them regularly and certainly none that I have met with are currently changing their mode of operation for money market funds. They are asking questions about potential change and what they might need to do if in fact those changes were problematic in the future, but they are certainly not changing their habits in the current market.

Michael Kim – Sandler O’Neill: And then maybe a question for Tom. If we exclude the impact of the fee waivers from kind of both the revenues and expenses, it looks like the underlying operating margin has been pretty consistent over the last few years. So what’s the outlook for margins particularly assuming the mix continues to skew toward equity and fixed-income strategies?

Thomas R. Donahue – President, FII Holdings, Inc., CFO and Treasurer, Federated Investors, Inc.: We would hope that it improves, and well, there is a lot of efforts here to invest where we need to invest properly. Chris mentioned that, broker dealer sales additions have been valuable to us and we’re going to continue that this year, so we’re investing there. We’re continuing technology investments that we think obviously with the Prime Rate deal investment, there is 10 new employees over there and offices and things like that. We hope to improve it. If you get the upticks as we’ve been seeing in the equity and the fixed we should get better margins.

Capital Deployments

Matthew Kelley – Morgan Stanley: I was just hoping to touch base with you on capital deployments, given the uncertainty around reform as you mentioned now, did that – how much are you kind of on hold or keeping some dry powder well that’s in unknown and how do you think about from here in terms of your strategic priorities for your capital?

J. Christopher Donahue – Director, President and CEO: The activities on the regulation side as regards money funds don’t impede us in the least. In fact if you really think about it, it would cause us to think more positively about we are doing more diversification moves. So we continue to look for international partners and domestic rollups and acquisitions right a-pace and if you look at our financial statements we have over $300 million in marketable cash and marketable securities and a $200 million revolver and a considerable amount of borrowing power in addition to that. So our attitude is to continue doing the money fund business and looking for acquisitions and growing organically in the fixed income and equity space as we’ve discussed.

Thomas R. Donahue – President, FII Holdings, Inc., CFO and Treasurer, Federated Investors, Inc.: The other two big factors in there are paying a dividend and you see we’re continuing to pay our dividend and share buyback, which was 50,000 shares in the last quarter and not as big as we’ve done in other quarters but that could change.

Matthew Kelley – Morgan Stanley: Just a quick follow-up then on the reform front. If we talk about institutional client demand, maybe with a falling NAV if that were to happen in terms of the demand for the products, which of your clients you think would be most the least sensitive to some the reform proposals out there?

J. Christopher Donahue – Director, President and CEO: Well I think that – if you are talking about the changing of the NAV from talking with our clients it would be a universal departure from the use of money funds, because what they want is daily liquidity at par and if you change the NAV. It disrupts their system, the legal situations they have on cash management and the whole point of what they’ve been doing for three or four decades. So it would be across the board. There was a recent report put together by a group called Treasury Strategies where they surveyed the treasurers and they basically said that 80% of them would meaningfully reduce or eliminate their use of money funds if they change the NAV.

Matthew Kelley – Morgan Stanley: Just one quick, other question from me and then I’ll jump back in, in terms of flow so far in April on the equity side, I apologize if you mentioned this, but on the Prudent Bear fund, just curious to get a sense from you as to how volatile that’s been obviously with that outflows in the first quarter, but I’m wondering if that has kind of reverted back in April and any other fund that you see has the margin really taken up this quarter versus last quarter.

Raymond J. Hanley – IR: The Pru Bear fund in the first couple weeks of the quarter has improved on its pace relative to really. The last couple of quarters recognizing really looking at three weeks worth of data, but it’s not far from being break even not having outflows and so we’ve seen over the three plus years that we’ve had the product that it does change pretty quickly to market conditions.