Federated Hermes, Inc. (FHI) Q3 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Federated Investors Third Quarter 2011 Quarterly Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond J. Hanley, President of Federated Investors Management Company. Thank you, Mr. Hanley. You may begin.

Good morning and welcome. Today, we will have some remarks before opening the call up for questions. Leading today's call will be Federated's CEO, Chris Donahue; and Tom Donahue, Chief Financial Officer; and Debbie Cunningham, Chief Investment Officer for the Money Market area, will update us on Money Market conditions. By way of forward-looking statements, let me say that during today's call we may make forward-looking statements, and we want to note that Federated's actual results may be materially different than the results implied by such statements. We invite you to review our risk disclosures in our SEC filings. No assurance can be given at the future results and Federated assumes no duty to update any of these forward-looking statements. So with that, I'll turn it over to Chris.

Thank you, Ray, and good morning, all. I will start with a brief review of Federated's recent business performance before turning the call over to Tom for a discussion of our financials. Looking first to cash management, total Money Market assets increased by $6 billion in the third quarter compared to the prior quarter. Average money fund assets decreased slightly in the quarter due mainly to tax seasonality in separate accounts. Money Market mutual fund average assets were nearly the same as the prior couple of quarters. Money Market total assets increased $9 billion or 4% in Q3 versus Q2, and our market share increased to over 9%. Growth in government money fund assets was partially offset by a very modest decrease in prime assets, and by lower Muni fund assets. Following my remarks, Tom will address the money fund fee waivers, and Debbie will comment on the current Money Market conditions and our expectations going forward. On the regulatory front, money funds continue to be an active topic of discussion. We are engaged in discussions with the regulators as they study various ideas that have been suggested. We believe that money funds were meaningfully and sufficiently strengthened by last year's extensive revisions to 2a-7. We are seeing those changes work successfully in real time, with money funds and European bank investments, money funds and debt ceiling discussions, money funds and loss of USA AAA rating. Investors are able to see fund positions with unprecedented clarity, and we've seen very low movement of money from our Prime funds. The SEC now has a view into the recent holdings of all money funds. The funds have had ample liquidity in compliance with the revised regulations. Overall, the regulations and structure of money funds are working quite well in the midst of challenging marketing conditions, and they continue to offer excellent cash management services to both shareholders and issuers. We remain favorably disposed to improvements that would enhance the resiliency of money funds by addressing the primary issue faced during the financial crisis, namely market-wide liquidity crunch. We are unable to make predictions on any particular outcome or timeline in this area. Turning to longer-term assets, our broad income-focused product line and reputation for solid, consistent income-producing strategies fits well with investors' increased demand for these products in both equity and bond portfolios. Looking first to our Equity business, we had our best quarter for gross equity fund sales in a decade at $2.4 billion. As investors increasingly look for solid income-producing equity investments, we continue to see strong results from the strategic value dividend strategy. It became our first equity fund to produce over $1 billion in net sales during a quarter, and was among the top-selling funds in the entire industry during the quarter. The related separate accounts strategy had another very solid quarter of inflows as well, adding nearly $500 million in net flows during the quarter. We are also seeing heightened institutional interest in the form of RFPs for this strategy. Our sales force has been very successful expanding distribution opportunities for this product. In addition, we broadened the focus and placements of our advertising we started earlier this year to include international version of this strategy. We are pleased with the early results of this campaign. We have started to see some lift in the flows for the International Strategic Value Fund in Q3 and here early in Q4. Both strategies have achieved strong performance and are well-positioned for continued growth. In addition, the Prudent Bear Fund produced higher gross sales and net sales in Q3 over Q2. The Clover Small Value Fund also increased its gross and net sales from the prior quarter. At the end of Q3, we had 7 equity strategies in a variety of styles that have top quartile 3-year records and are well-positioned for growth. Capital Income, Prudent Bear, Equity Income, International Leaders, International Strategic Value, Kaufmann Large Cap and Strategic Value Dividend. Equity fund flows are running slightly higher for the first 3 weeks of October, so the early results may not necessarily reflect the results for the entire quarter. Overall flows in equity separate accounts were positive. We saw growth in the Strategic Value strategy, partially offset by redemptions that we characterize as largely de-risking asset allocation decisions made by our clients, and to a lesser extent, net redemptions in Quant's strategies. Equity RFP activity is up about 33% year-to-date, Q3 compared to the same period in 2010. We are seeing particular interest in equity income, small-cap value and international equity strategies. Reflecting the challenging market conditions, we are seeing longer decision processes around institutional RFPs. We have about 50% more RFPs in pending status at the end of Q3 compared to a year ago, and a higher percentage of our 2011 RFPs are classified as pending compared to a year ago. Looking now at fixed income, some flows were positive for Q3, led by our stable Value Capital Preservation Fund product and by a return to positive Muni fund flows. Our multisector and corporate funds had positive flows, and we are beginning to see some good sales results from our new Unconstrained Bond Fund. Fixed income fund flows are running solidly positive for the first 3 weeks of October, with all domestic bond categories producing net inflows. Fixed income separate accounts had negative flows with about half of the total due to 3 different government entity accounts that drew down funds. We also saw a derisking activity from certain clients in other accounts who allocated funds out of high-yield emerging market and corporate portfolios, which we attribute to the challenging market conditions during the quarter. RFP activity for fixed income is up approximately 30% year-to-date of '11 compared to the same period in 2010. We won 2 new accounts in the third quarter, and have about $100 million in related funding expected in Q4 or perhaps even early next year. We continue to see interest in a variety of areas, including: active cash, short duration, high yield and other corporates and emerging market debt strategies. Now turning to fund investment performance and looking at quarter-end Lipper rankings for Federated's equity funds, 42% of rated assets are in the first or second quartile over the last year, 35% over 3 years, 45% over 5 years and 76% over 10 years. For Bond Fund assets, the comparable first and second quartile percentages are 68% for 1 year, 38% for 3 years, 69% for 5 years, and 74% for 10 years. Looking at the Morningstar rated funds, 30% of rated equity fund assets are in 4- and 5-star product as of 9/30 and 68% are in 3-, 4- and 5-star products. For Bond Funds, the comparable percentages are 38%, 4- and 5-star; and 80%, 3-, 4- and 5-star. As of October 26, managed assets were approximately $355 billion, including $272 billion in Money Markets, $30 billion in equities, $53 billion in fixed income, which includes our liquidation portfolios. Money Market mutual fund assets stand at about $247 billion. So far in October, Money Market fund assets have ranged between $244 billion and $249 billion, with average of $246 billion. Looking at distribution highlights, year-to-date, gross sales of equity funds increased about 20% compared with the same period in 2010, with sales growth strongest in our wealth management bank trust channel. Year-to-date, gross SMA sales have more than doubled. Fixed income fund sales are up 13% year-to-date, with the best growth coming from the broker/dealer channel. As mentioned last quarter, we are in the process of adding 12 additional sales reps and additional sales support positions in the broker/dealer channel to add to the already substantial sales growth that we've achieved in this area. Our strategy is to leverage the progress we've made over the last couple of years in providing better coverage to the major wirehouse firms, and to increase our coverage of the regional and independent firms. Now we've added about half of these positions so far, and expect to have the rest on board by the end of Q2 in 2012. Regarding acquisitions and offshore businesses, we remain focused on developing an alliance to further advance our business outside the U.S., and we continue to work to grow our current offshore businesses. We launched a new sterling-denominated money fund in Q3 and added the fund to a multiple of global portals that already offered our other Ireland domicile products. We expect to complete the addition of the product to 2 new portals this quarter, and to develop retail distribution through a major clearing platform in the U.K. as well. We recently added a sales person in our Frankfurt office. In our London office, we are currently in the process of adding 2 new positions, including a senior sales rep, and are also looking for some office space in the city. In the U.S., we are actively seeking consolidation opportunities, and in Q3 completed 2 deals with the EquiTrust Funds and the Tributary International Equity Fund, adding about $600 million in new assets in a variety of strategies. Tom?

Thanks, Chris. Our financial results were solid when viewed against the backdrop of very challenging market conditions. Our margins were about the same as the prior quarter and about the same as Q3 of last year. We continue to be diligent on expenses while making investments for growth in the areas of new products, distribution and acquisitions. Money Market funds continue to be a very important source of revenue for Federated even as the extraordinary market conditions caused us to waive a significant portion of our revenues in this area. Revenues from Money Market assets were $93 million in the third quarter, about 44% of total revenue, down from a 10-year average of about 50% of our total revenues. Money Market revenue net of distribution payments accounted for about 37% of our total revenue, again net of distribution payments, down from a 10-year average of about 41%. For comparison purposes, our equity revenue net of distribution expense made up 39% of our total, about the same as its 10-year average. Waivers impacted Money Markets as expected. Full details are in the press release. As we look ahead, we think these waivers could impact the fourth quarter by around $26 million in pretax earnings compared to the $23.2 million in the third quarter. The expected increase is due mainly to the growth in government Money Market assets, which have the lowest gross yield and highest waivers. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields will likely reduce the impact of these waivers by about 40% from these levels, and the 25 basis point in increase would reduce the impact by about 70%. Looking at total revenue, the decrease from the prior quarter was due to higher money fund waivers and lower average equity assets, partially offset by 1 additional day in the quarter and by higher fixed income-related revenues. Comp and related expense was lower than Q2 due mainly to adjustments to incentive compensation accrual. Advertising expense was up sequentially as we began an extended run of online and print ads to promote the domestic and international strategic value dividend products. Amortization and intangible decreased due to the Q2 roll-off of amortization expenses from certain previously acquired assets and amortization of deferred sales commissions decreased due to the full amortization of certain B Share related assets. Looking at nonoperating expense, Q3 included $2.3 million in net losses from lower asset -- lower net asset values on consolidated products. These losses were nearly all unrealized on trading securities related to seed capital investments. Looking at our balance sheet, cash and marketable securities, totaled $322 million at quarter-end and our net debt was about $70 million. Cash and investments, combined with expected additional cash flow from operations and availability under present debt facilities provides us with significant liquidity to be able to take advantage of acquisition opportunities, as well as the ability to fund related contingent payments, share repurchases, dividends, new product seeds and other investments, capital expenditures and debt repayments. And now I'd like to turn the call over to Debbie to discuss Money Market conditions.

Thanks, Tom. I thought I'd just give you an update on rates and then talk a little bit about the hot topic in the market which continues to be the European banking situation, and then touch also on Operation Twist, which is a new issue from the Fed since the last call. From a short-term rate perspective, we actually saw some reprieve in the marketplace, certainly not from a Fed Funds perspective, but rather from overall short-term rates modestly being higher in the third quarter. Repo, which is a very important vehicle for use within our government, as well as prime mini-market funds, is situated in the mid to high single digits. That's up from the low to mid-single digits in the second quarter. So there has been a little bit of reprieve in that marketplace, certainly not as a 25 basis point high for the target range, but again, mid to high single digits in the third quarter. And that's continuing in the last quarter of the year. Overall LIBOR rate, 1 month was up 6 basis points to 25 basis points, 3 months up 18 basis points to 43, 6 month up 10 basis points to 62 and 12 months LIBOR up 17 basis points to 93 basis points. So we actually have a yield curve that almost gives us a one handle on the long end of it. As such, we've been employing our barbelled strategy within all of our products buying longer-dated fixed rate security in addition to shorter-dated floating rate security to help take advantage of some of that improving condition in the yield curve. From a European debt perspective, Federated continues to use European banks, 8 different countries, several banks within each of those countries in a fashion that on a percentage allocation basis is not drastically different from our usage of those banks in the past. All year long, that average has been between 40% and 45% in our Prime fund for exposure to the European bank. That continues to be the case with the average today right around 43%. And don't expect that to change much going forward. Our strategy, however, has shortened over the course of the last several years and continuing in for the last several months. The maturity restrictions on many of those institutions, many of those European banks. As such, we are making decisions on whether to roll over those debt, that debt, every day, and effectively have shortened maturities from somewhere in the 3 to 6 months range, down to somewhere that's more near about 1 month, 2 weeks for some institutions out to 3 months for others. So on average, our decision-making process and our ability to change those decisions, should our monitoring and surveillance of those issuers warrant that change, is very quick and very short from a time perspective at this time. We continue to believe that the overall credit quality of those institutions is as high as it gets from a minimal credit risk perspective and our assessment of those institutions. Certainly yesterday's Greek accord from the EU's perspective and their capabilities are now writing down 50% of that Greek debt exposure is a positive in the marketplace. The overall assessment in the market has been received as such. But the devil is in the details and we'll continue to monitor and surveil as we go forward. This is something that we believe, again, kicks the can down the road in the context of this being not an overnight fix to this process. 18 months ago, when the first round of Greek debt negotiations were undertaken, there was about a 20% write-down that was mandated. We're now up to 50% and most likely we'll go something further as the market conditions warrant, depending upon what happens from an economic perspective in the marketplace. But again reiterating, the institutions in the banking companies that we are using in Europe are all very well-situated to deal with these write-downs and continue to represent minimal credit quality constraints and risks within our Prime portfolios. The last thing I'll mention is Operation Twist, which was the new form of easing, if you will, that was announced at the last FOMC meeting by the Federal Reserve. The first thing I'll say about Operation Twist is that it does not result in any new net supply in the marketplace. One of the constant themes that you've been hearing from me as well as others in the Money Market over the course of the last several years is that this is a supply-constrained market. Operation Twist doesn't help this supply. There are no new treasuries being issued from this operation. What is happening is they're taking the shorter portion of the debt that's currently held in Treasury securities on the New York Fed balance sheet and selling that back out into the marketplace and then taking the proceeds from the sales and redeploying those by purchasing longer dated Treasury securities back on to the balance sheet. So net effect is 0 to the Fed, with an average maturity that's actually lengthening in the process. What is helpful from a Money Market perspective is that we now have additional supply on a direct purchase basis. So there are more eligible securities that will be -- that are in the market and will continue to be put into the marketplace that are directly able for Treasury and government agency Money Market funds to purchase. Offsetting that to some degree is the fact that some of the longer-dated collateral that have been used in the marketplace for repurchase agreement collateralization is now being put back on to the Fed's balance sheet. So although it's not the end positive result that maybe had been contemplated at the very beginning, thoughts of Operation Twist, we do view it as a modest potential positive for Money Market rates and certainly for the government Money Market funds. And most important, when you view the other alternatives that they were contemplating during that time period, Operation Twist is the best outcome that we could have hoped for at that point.

We now like to open the call up for questions.

[Operator Instructions] Our first question comes from Bill Katz with Citigroup.

Just a couple of questions. Chris, perhaps I'll start with you. You mentioned a lot of good things going on in terms of flows and expansion a little bit. Could you sort of frame that out against maybe the outlook for expenses into 2000 -- and maybe into the fourth quarter and into 2012? You issued a comp that it looked like maybe you had a little bit of a catch up on the variable accrual and so forth, but how should we think about expenses relative to the growth prospects?

Yes, Bill, this is Tom. On the comp, we have -- every quarter we to look at what we think is the comp is going to be for the year and we readjusted it to the third quarter. And when you go to do that in the third quarter, you have to readjust and include the first and second quarter. So you might see a little uptick to probably below 60. But again, we have to readjust it at the end of the year. So it could be higher or lower. But on a -- right today, that's what we would say -- would be the answer.

In terms of the rest of expenses, we don't see anything extraordinary coming in.

Okay, that's helpful. And second question is -- and maybe I'm not looking at the data correctly so I apologize if I'm not, but if you look at sort of the net economic sharing arrangement that you have with your distributors, it seems like that ratio is working against you a little bit. I think it's like 26% or so in the third quarter. Given where rates are now, is there -- are you starting to see any kind of pushback, in terms of the sharing arrangements with the distributors, or was it just mix? I'm sort of curious what the dynamics might be leading to result in that ratio moving up over the last couple of quarters?

Bill, it's Ray, I'll just comment on the mechanics on the numbers that you're seeing. You get the greatest proportion of sharing as you've had the higher fee fund. So you've -- as the yields came in, even a bit further, you get into the asset pool where there is less of a distribution expense to the distributor. So that accounts for the pretty modest change that you saw in the offset in the distribution expense.

And as to the pushback in sharing, there is very little "pushback" in sharing when there's so little to share. This is not to say that the constant pattern of the marketplace to want more has changed. So you will always have that factor, which we have dealt with for decades.

Okay. So just to clarify then, can you say that governments are make up a greater percentage of the assets these days, that would suggest that, that ratio would hold at this level?

Yes, government as a higher percentage would have a lower level of distribution expense than, say, Prime, where you see more utilization in some of the -- for example, the broker/dealer channel. So at the margin, it would be -- it would lead to lower distribution of expense, and therefore, less of an offset as you noted.

Okay, understood. And my last one. When you think about what's going on at both the equity and fixed income side, a lot of good things going on, but how do you -- what's the outlook in terms of the fee -- rate impact, just give me some of the ins and outs between all the various funds if you will?

Well, Bill, if you look at within equity, the biggest growth there clearly is strategic value dividend. And that fee would -- the revenues related to that would be lower than our average fee, but kind of right in line with what you would see in many other funds. On the flip side of that, we've had growth in Prudent Bear, which is because of the nature of what they do, a bit of a higher fee than say the average. And so that's been additive and we've had outflows on the Kaufmann side, though at a diminished rate in the most recent quarter. And that would be at a higher rate as well. So you can almost think of those 2 as pushing and pulling each other purely from a revenue standpoint.

Our next question comes from Michael Carrier with Deutsche Bank.

Maybe a question on the long-term side. So you obviously are gaining traction in some of the products. When you think about what you have established on the distribution side, you mentioned some of the hires in the sales force and that's going to continue, but when you see where these flows are coming from, I guess when you look out in terms of the channels that you're already in, how much penetration have you had versus where you see the opportunity? And then maybe the channels where these products just aren't as prevalent but you're working on getting them into those channels, how much of an opportunity do you see there as well?

Well, especially on broker/dealer, Michael, we see a lot of good opportunity, which is why we put on the -- or agreed to put on the 12 new salespeople. I mean, we took the number of advisers that we're calling on from in the mid-20,000s to over 30,000. And depending on how you count advisers, there is 120,000 of them. So we felt we've done a very, very good job at the big wirehouses, and we're able to carve up territories to allow others to get into smaller broker/dealers, which should expand on exactly that kind of basis, those numbers. The next level is that even where we are doing business, we're able to expand from 1 or 2 type tickets or type mandates with an individual to get that up to 3 or 4. And once you do that, then there's a higher love quotient going on, which helps both the numbers and the longevity of the business. So the way that we're looking at it is that we can expand very smartly in this business, and that's why we're committed to adding the people. I guess that's a good piece of evidence there. On the wealth and trust management, we see the same kind of thing. It isn't so much that we can get into new areas. We've been in the same banks for a long time, but we basically have an infinitesimal market share of these kinds of assets. And we think with the triumph of advice and the increase of imposed fiduciary duties, whether it's from the marketplace or from regulation, that the kinds of things that we're doing and have been well known for in that marketplace set us up for good growth.

Okay, that's helpful. And then maybe, just on the expense side and maybe not necessarily on the fourth quarter, but as we head into 2012, particularly the success on the long-term products -- like that continues. Should we be thinking about -- obviously the fees are going to be higher, but when you think about the expense side, either whether it's comp, anything on the advertising side, relative to either where we are now or from the full year of -- or year-to-date of 2011, should we be thinking anything differently if this really starts to catch on into 2012?

Well, Michael, if the performance and a number of those funds continues to be excellent, we're still going to be paying incentive comp there, but then you have to look at the whole complex to determine the bottom line number. And some are doing better and getting higher compensation and some are not hitting all the scorecards properly. In terms of other costs associated with growing in those products, we don't see any outsized need for additional expenses as those products grow. We have some pretty good leverage opportunity there.

Our next question comes from Michael Kim with Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Just a couple of questions. First, just given the success of the Strategic Value Fund, do you think you can sort of leverage that momentum and maybe broaden out the sales to some of your other products through some of your channels? And then how much of a headwind do you think the 3-year Lipper rankings are, if at all?

Well, on that product, we have already expanded and just as I've mentioned by the international dividend fund. And it does -- it is helpful in terms of pointing attention to the other members of the dividend strategies like capital income fund and equity income fund. So yes, it does help but we think we are able to do some leveraging there. And we think that the product in and of itself continues on quite smartly. One of the interesting things about this particular fund and relative performance is as follows: because this fund has been successfully sold as a 5 and 5 product, meaning 5% dividend more or less, 5% growth of dividends more or less, when the performance relative to other funds in the category has even been in the bottom decile, the funds sales continue apace. And so naturally, we're happy when it has a good relative record, but because of what it is, it continues to sell even though it may have historically -- even though historically, it has gone in and out of the top group. So whatever the Lipper ranking is on that product, really won't matter too much because we continue to stick to the knitting.

And Mike, it's Ray, I assume you're talking about overall percentage of Lipper in the 3-year numbers because clearly with the strategic value, it's top decile for 3 years and when we went through the top quartile equity strategy on a 3-year basis, and we went through 7 of them, 4 of them are income-oriented equity products: the capital income, the equity income and then both versions of strategic value dividend. And so we feel that we're developing an even stronger reputation in the marketplace for income products broadly where we had somewhat of a reputation with bonds and with money funds and now we're building that on the equity side. And we see outstanding growth prospects for those 4 equity income products against what's becoming a pretty dominant market theme. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay, that's helpful. And then just maybe a question for Tom. Now that net debt continues to come down, has your thinking on capital management shifted a bit, particularly as it relates to maybe a special dividend since you've done those in the past?

Well, we -- our insight to that is we're -- a broader answer is we're looking to maintain our activity in buying shares back. And we of course have continued to pay the regular dividend. And then the third leg is the acquisitions of which we continue to look for. And including the international side of things. And so, the fourth one you're adding there is the special dividend which is yes, we paid 2 before and looking at the environment and what's coming and are we able to get a deal. If you look at our history, when we've done those deals, the acquisitions, our purchase of shares has gone down, and when we paid the dividends, it hasn't been necessarily exactly closely to when we made the acquisitions. So that's a lot of talk to say. Let's see whether we get an acquisition and what we would do with our cash into the future, not committing to anything.

Our next question comes from Ken Worthington with JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: First, are you guys making money on the management of Treasury Money Market funds? And the reason I ask, is if you look at expense ratio excluding management fees in your bigger funds, it's about 33 bps in the Treasury obligation fund. The yield is on treasuries -- 3-month treasuries is 2 bps, duration of the fund is 32 days. So it seems like you're not only waiving management fees but having to cover the expenses of the government -- of the treasury funds as well. So maybe this is a obvious question and with an obvious answer, but just to put it out there, are you making money or are these products losing you money right now?

Ken, it's Ray. We don't calculate profitably at the fund level or asset class level. But from a revenue standpoint, the answer is clearly yes. We have net revenue from the management of Treasury and agency products, even with the -- in the yield environment. You mentioned the T-Bills and they're obviously low. As Debbie mentioned, these funds have essentially not had yield for about 3 years now. So they're managed with a bias towards liquidity which means there's a lot of repo there and going back to Debbie's comments, we've been in the mid to upper single digits on repo levels that really dominate those portfolios. So that allows us to continue to operate the funds to have net revenue from the funds and to not be subsidizing them the way most people define a subsidy, meaning actually supporting the cost of the products. We are not doing that. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay, perfect. That actually answers the question. Secondly, in terms of risk management, to what extent does the executive office oversee investment decisions being made in the Money Market fund business? So, for example, the investment side has made -- Federated made a differentiated bet on French banks. It's a big bet -- it's probably the right bet, but it's a big bet nonetheless and if it goes wrong, it has implications not just for the funds but for Federated as a whole. So how does the risk management structure work on the investment side? How does the reporting structure work? And what is the role of the C-Suite in investment decisions here, if any?

I'll make a couple of comments then I'll let Debbie comment on this as well. The overall risk management system has to begin with the independent directors of the fund and the fund's prospectus. Then you have the executives here -- and you say that the C level and I think you're looking both at Chief Executive Officers and Chief Investment Officers and even the President of the Investment Advisers. So these things are constantly reviewed in those groups as well. We have meetings roughly every 3 weeks where the C level people look at all of these factors. This is not to say that there isn't an analysis that goes on in between as well. In addition, there is a separate risk management effort headed by a fellow by the name of Mike Granido, interestingly with a background at JPMorgan. In any event, he heads up the risk management here and does a lot of work independent of what the credit work has done on these subjects as well. So those are the broad outlines of overall risk management. And I'll let Debbie tell you about it from the portfolio manager perspective.

Basically, I'll say it's a continuous story of flows, flows from an informational perspective that go from the investment management group to the risk management's group compliance, legal, as the main groups have oversight on a day-to-day basis. Generally speaking, our systems allow the investment management folks to have real time access to all data so if I want to know intra-day what my positions to French banks are, it's a very simple process for me and the investment group to get that. Our oversight from a flow perspective on that information to the risk management compliance and legal groups happens on a batch basis at night. And that has proven to be pretty effective in the context of keeping everybody up to date on current market conditions and potential bets as you might note, I would say that, that Money Market funds at this point really are -- and certainly Federated's Prime and Muni funds where we would maintain direct exposure to French banks and even on a counter-party basis within our government funds, are not making a bet that's different from the marketplace at this point. We're just doing our job in a way that calculates what we consider to be the best relative value of institutions out there, and doing it with day-to-day continuous monitoring. The other side of this flow situation is the fund flow. So the asset flow, shareholder flows that are going into and out of the -- those products that use those French banks or European institutions on a day-to-day basis, and that helps us to validate basically that we're doing the appropriate decision-making process within our own assessment of the risks involved in those institutions, the information flow that goes to those oversight groups within Federated. And then again, validated by the client flow. If you look, Chris had mentioned on his regulatory side, discussions about various options that continue to be reviewed for money fund reform and our conclusion in many ways that the 2a-7 reforms that occurred in 2010 are 99.99% of the way to final reform for this industry. And what we saw in the July and August time period in the marketplace, where you had huge amounts of volatility in the Prime and Muni funds that was for the most part, industry-related to the second round of Greek debt negotiations just beginning. And then you had piled on top of that volatility within the government sector. If you recall at our last discussion, our last earnings call, we were questioning whether or not the U.S. was going to default. We weren't questioning that, but the market was questioning whether or not the U.S. was going to default on their debt, and certainly the resulting long-term downgrade by S&P is one that has been challenging for even our government Money Market funds, which from an industry perspective, have always been the safe haven. So despite these sorts of conditions in the July and August time period, Federated funds came through with flying colors. And our overall flow validation of our process and our model held up very well against the industry and the industry in total held up very well in the context of the new regulations and what's proven to be a pretty sound source of liquidity, credit and diversification changes that came about from those 2010 regulation changes. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay, great. And actually just to press the 2a-7, it seems like there were meaningful redemptions at the Prime funds and have been in these periods of credit quality concerns and times of stress most recently. So 3Q Prime funds at about $97 billion of redemptions around Greek debt to and French bank concerns, et cetera. And I think you saw this out of your Prime cash obligation funds, which had the biggest exposure to French banks. That saw disproportional redemptions for you guys. So it seems like little concerns, little runs in Prime funds. If there was a big credit problem, there could be a big run. And I thought that was what the regulators were trying to prevent. And if we're still seeing these mini-runs here -- run is probably a terrible word, but like outsized redemptions, is it really -- are the new rules really working well or do they -- seems like -- well, I guess your opinion is they're working well, but I don't know if this data kind of confirms that? Any response to that?

The only response I would have is that from our perspective, I think you're reading way too much into the Prime cash obligation side of the equation. At any given point in time, we may have a larger shareholder in that fund or any of our other products that may cause it to look like it's doing something different. In fact, our strategy across all the Prime funds is identical. So -- and generally speaking, the only difference is that you might note on a quarter end or reporting date are the results of client flows that just happened to be a little different. And that we've agreed to from a know-your-client basis ahead of time. The other side of it, though, when you look at sort of the market conditions and Prime fund redemptions that did take place during that July and August time period, I think the industry on average was down about 10% in Prime fund assets and specifically, there were funds that were down over 50%. These are not Federated funds, but I'm sure you follow the market on a specific basis. You know who they are. This in the 2008 time period would have caused extreme market illiquidity. And going back again to what Chris mentioned, that's what we perceived to have been the main problem outside of those institutions that owned Lehman Brothers on a credit default basis back in September of 2008. But the extreme illiquidity that was the result of that back in 2008 certainly did not play out at all in the context of the summer of 2011 timeframe.

Our next question comes from Robert Lee with Keefe, Bruyette. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: I want to go -- maybe go back to an expense question and I'm just curious, I mean you guys have been I guess, pretty tight on the expense front for a while, given some of the revenue pressures. But do you see any built-up pressures to the extent that if or when more of the money fund fee waivers start rolling off that some of that may actually -- lack of a better way of putting it, have to be absorbed into different new business initiatives or comp or what have you that you've been kind of holding back on for a while as they've been in place?

Well, we hope it comes back into comp because as earnings decrease and we go through our accrual calculations for what we think we were going to be able to pay when earnings are down, it's not as less. So if earnings go up, we would hope that would creep back into higher comp, absolutely. In terms of continuing to invest, I had a little comment in there and Chris talked about we have new products, we've invested in new sales force -- our addition to sales force. We're continuing our technology investments at about the similar pace that we have in the last few years and that was not something that we ever went in and tried to get savings there. We continue to do that. So I don't expect a explosion except for if we're doing some new business or if we have some acquisition where you get some obvious expense that would come with revenues. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And I have a question on the redemption front. I mean, historically, you guys tended to have higher redemption rates than, I'd say, the industry average if I look at your fixed income and equity business. I understand that it's somewhat a function of the nature of your distribution and maybe in fixed income, short duration products certainly have an effect. But is there anything you see or you think you can do or maybe given where your sales are right now by channel, a distributor that we could see an improvement in that or anything that you think you can do to kind of moderate that to some degree?

Rob, it's Ray, before I enter the substance of your question, just on the rates, I would agree with you that with a fixed income rates, they have historically been higher and I think you've attributed it properly to our mix of assets with a short duration, the Ultrashort funds in particular. We probably have some more inflows and outflows from people using those more like cash. I think our rates on the equity side have been pretty much in line.

And even though we have tried all sorts of things from redemptions hours to other things that redemptions are just a part of life and if we could do something about them, I assure you we would. We continually brainstorm it. But the most important strength of the investment company is the right to redeem. And I know we don't have all investment companies, but you just can't dent the right to redeem. And you have it exactly right, the nature of our clients is a little different than the nature of a pure retail clients. So we have to, therefore, like our friend the Red Queen, run twice as fast in order to get somewhere.

Our next question comes from Cynthia Mayer with Bank of America.

Question on the fee waivers, it sounds like your guidance is based really more on mix shift than on interest rates. And I'm just wondering, I mean you talked a little about the mix shift that took place during the quarter, but do you see that shift as a permanent shift or sort of what is your outlook for the mix shift?

Well, any mix shift we see -- the idea of permanent is just not a concept. I don't know how to even say the word "permanent." As the market changes, though, people have shown a lot of resilience of moving back in and out of Prime funds, not unlike you've seen risk-on, risk-off in other types of activities. It seems to become the inspirational motivation of many clients, risk-on, risk-off all across the spectrum of investing.

It's also, Cynthia, a combination of where -- certainly where the assets are in the government funds and what are the overnight repos and which number do we want to plug in there and what are you going to get and where are the assets.

I also think it's instructive. If you look at the full cycle, we had tremendous run-up in the government funds in the first part of the whole credit crunch cycle. I mean, our Treasury funds got up into the $90 billion plus range. And coming into the beginning of this year, they were a little bit under $40 billion and now they're back up to where they're pushing $50 billion. So we've seen pretty good ebb and flow in and out of that particular subset of products, pretty well correlated to the level of stress and angst in the world. And so, no, "permanent" is certainly not the right word to attach to it. Our hope would be that we will see clients get comfortable and begin to migrate gradually as they did in the beginning part of the cycle out of the Treasury fund, into the agency and into the Prime as their comfort level increases.

Okay. So I guess if the rest of the market is back to risk on you would expect to see in an analogous thing with the Money Markets?

It doesn't work in lockstep with the equity/bond players risk-on, risk-off. The cash management decision is a different kind of a decision. But overall, yes, I would agree with that. If they're basically risks back on, then at the margin, you're going to see people coming back in to the Prime funds. But remember, we're talking about numbers that are like the top hat of the charts, not the base of the chart. The numbers Ray gave you, these things move in tens of billions, not of fifties of billions.

Right. And I guess just on the Money Market balance, is there any seasonality we should take into account in terms of corporations building up cash at the end of the year and then spending it early in the year or seasonality in the separate accounts that we should look out for?

There is on the separate accounts because they're weighted toward government pools of cash. And so they tend to collect taxes in Q4 and Q1. Those will be our peak, and draw the money down in Q2 and Q3. And we've seen that kind of a wave cycle over the 10 years that we've been managing this money. On the fund side, there's much less seasonality around year end per se. There is regular seasonality around tax payments. So we saw mid-September was when we had the dip in assets, we related a lot of that to regular -- the regular cycle of quarterly tax payments by corporations and other entities.

Generally there's a monthly pattern too by which assets build up to either the 15th or the 25th of the month and then have some amount of payout that occurs on each of those 2 dates. But again, it's repeatable, and we've been sort of following it and know the origins of it over years.

Okay. And then just to clarify on the separate accounts business. You mentioned the $500 million that went into the equities, I guess, related to the strategic value. Is that separately managed accounts, the traditional SMA or is it a more institutional?

No, that's the traditional SMA.

Okay. Overall, your SMA business, is it growing, shrinking, stable at this point? Because my impression for the industry was that it was kind of -- that the business as a whole was in that redemptions, but it sounds like at least one side of it for you has grown?

Yes, certainly, the equity side has grown and driven by this particular strategy. We've commented in past calls that the Quant strategy was under some pressure and that's diminished though it continues to be in net redemptions. But equity SMA has, over the past several quarters, been improving to the point now where it's net positive. The gradual gain driven by strategic value have overcome the redemptions we've had on the Quant side.

Okay. And last question, I guess, just on roll-ups of Money Markets. Any shift in terms of the willingness for people to sell their Money Market businesses with the continuing waivers?

Yes, I don't know if it's a shift. I mean, we're continuing to have a number of conversations and expect more to come.

There are no further questions in queue at this time. I would like to turn the floor back over to Mr. Hanley for closing comments.

Well, that will conclude our remarks for today and we thank you for joining us.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.