Federated Hermes, Inc. (FHI) Q1 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Federated Investors First Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Raymond J. Hanley, President of Federated Investors Management Company. Thank you. Mr. Hanley, you may begin.

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

Thank you, Ray, and good morning. I will start with a brief review of Federated's business performance before turning the call over to Tom to discuss our financials. Looking at cash management. Average money market fund assets were up $2.5 billion from the prior quarter. While the quarter end total's decreased by $11 billion to $245 billion or about the same level as at the end of the third quarter. Money fund asset balances grew over the latter part of Q4 and then decreased in Q1, a pattern that we've experienced before. With the impact of expected tax seasonality this month and the recent closing of our acquisition of Prime Rate Capital Management, money market fund asset levels are running at approximately $245 billion this week and our market share remains over 9%. Higher yields for government securities and repo in the first quarter led to lower yield related fee waivers. Tom will comment further on the impact of these waivers and Debbie will discuss money market conditions and our expectations going forward. During the last few quarters' conference calls, I've made comments and answered questions concerning potential SEC proposals for further regulation of money funds. I discussed Federated's belief that money funds were meaningfully, sufficiently and properly strengthened by the extensive regulatory revisions to Rule 2a-7 in 2010 and that these enhancements were tested and worked successfully through a series of challenges in 2011 that included the U.S. debt ceiling crisis, credit downgrade at the U.S, as well as worries over Greek defaults and European bank solvency. As you well know, our position is in opposing the SEC's draconian proposals for floating the NAV and/or instituting redemption restrictions and capital requirements. We are among a group, a broad group in fact of, businesses, state, local government agencies, trade association, public-interest groups and financial institutions that believe these proposed rules will destroy the functionality, utility, effectiveness and the very essence of money market funds, which are so vital to our economy. I want to take a few minutes on this call to take a look at some of the myths that have been promulgated and that continue to be spread by regulators and many in the media. The first one that we continually hear is that money market funds were either at the center of, or significantly exacerbated the financial crisis of 2007, 2008. This is not true. However, if one accepts this falsehood, then arguments in favor of preserving the utility of money funds for 50 million investors and the multitude of municipalities, corporations and other entities who depend on money funds for efficient funding, can be politely ignored. The facts, however, tell a different story. The meltdown occurred because of certain financial institutions placing enormous leverage bets on the sub-prime housing market, amplified in many cases by derivatives, by the Fed's easy money policy. And when those bets went bad, the complex web of counterparty arrangements between different institutions threatened to cause a general collapse of the system. Importantly, only one money market fund lost its $1 NAV in September of '08. And that was only after an 18-month period that saw the failure of dozens of banks, mortgage lenders and other financial institutions causing the credit markets to freeze up. This is often paired with the falsehood that money funds are susceptible to runs and were bailed out by taxpayers. One run does not make susceptible. The reserve fund failure in September of '08 followed an unprecedented period that saw the collapse of Lehman Brothers and a number of major financial institutions on the brink, and inconsistent responses to these events by the government. As counterparty risk perception increased, institutional investors redeemed 15% of their prime money fund shares, followed by large inflows into money funds backed by government debt. For every dollar that left the prime funds, $0.63 flowed into government money market funds. The conclusion that should be drawn from this is investors were not fleeing money market funds but were rather reallocating their assets to the most conservative investments in a reeling market beset by failures and near failures of many leading financial institutions, unpredictable government policies and widespread concerns about whether prime funds could continue to sell assets into the frozen commercial paper market. The steps then taken by the Fed and the treasury were not a bailout of money funds but rather, especially in the case of the Fed actions, were necessary and proper steps to restore liquidity to the financial system as a whole. It is important to remember that when the dust settled, the reserve primary fund investors lost less than a penny on the dollar and no taxpayer funds were needed. In fact, money market fund companies paid $1.2 billion to the U.S. Treasury for this insurance that was never used, was not requested and was not wanted by many in the industry. This is a remarkable contrast to the cost of the bailouts of 2,800 failed banks, an additional 592 banks that required assistance transactions, as it's known, at a total cost of $188.5 billion from 1971 to -- through 2010. Today, money market funds hold 30% or more of their assets in 7-day available cash and 10% in overnight available cash. Money funds now required by the SEC to have more than double the amount of cash on hand that was needed in September of '08 to pay the redeeming shareholders. Another tall tale that's being bandied about concerns the perceived evils of Europe and the view that a significant source of credit risk in the money market funds over the past year has been the large exposure to global banks which happen to be headquartered in Europe. One official even suggested that money funds could somehow be a conduit for smuggling an unexpected economic problem on the continent back into the U.S. Here again, the facts paint a different picture. The majority of U.S. money markets holdings of European-based institutions are invested in securities of banks that have U.S. affiliates that serve as primary dealers. Primary dealers are financial institutions designated by the Federal Reserve Bank of New York to serve as trading counterparties in the Fed's implementation of monetary policy. These dealers are required to participate every time the U.S. Treasury auctions its securities. They are central players in the U.S. financial system. Among the instruments of these primary dealers that U.S. prime money market funds hold, half are repurchase agreements. Such repos are fully collateralized, usually with U.S. Treasury and government agency securities that these institutions hold precisely because they are primary dealers. More than half of the prime money market funds European holdings are in banks headquartered in the United Kingdom, Sweden and Switzerland, all countries that don't use the euro for currency. Total prime money market fund holdings in the Eurozone amounted to about 15.5% of their portfolios, and virtually all of these holdings are in large banks with global diversified operations, headquartered in Europe's strongest economies and with very short maturities. One of my favorite fairy tales is the misplaced concern that investors believe that money market funds are guaranteed and there is confusion with banks and checking accounts. Nowhere in any money market fund prospectus or market material is there anything that would convey that the money market fund is guaranteed. In fact, the risks are clearly and repeatedly noted in bold print, not FDIC insured, may lose value, no bank guarantee. Institutions hold more than 60% of the $2.6 trillion invested in money funds, and these professionals certainly know the difference between a money market fund and a bank account. The oft mentioned loss experienced by reserve fund shareholders clearly demonstrated that the non-insured status of money market funds was a reality. Further, a recent survey by Fidelity Investments shows that the vast majority of retail investors also know that money market funds are not guaranteed. Lastly, in promoting the devastating idea of a floating NAV, some folks have been putting forth the fanciful notion that the $1 NAV, the hallmark of money funds, is somehow made up or illusory, far from it. Money fund shares are priced to the dollar on a daily basis, not simply because they want to pay shares at $1 but because the underlying assets are required to meet very stringent, high credit quality, liquidity, maturity requirements that are regulated under current SEC Rule 2a-7. And those regulations were strengthened in 2010, as I mentioned, by the SEC, based on recommendations and working with money market fund providers. The ability to transact at the $1 NAV provides real benefits to corporations, government entities and other money market fund users by allowing them to use automated cash management processes, facilitating same-day transaction processing, shortening settlement cycles, reducing float balances and counterparty risk. These are measurable benefits that translate directly into lower cost of capital and higher returns on assets. With so much at stake for the tens of millions of individual investors, corporations, government entities and nonprofits who depend on money market funds for cash management and raising funds, it's important to set the record straight and for us to repeat the sounding joy of the beauty of money market funds. Now, to turn to our equity business. We continued to see solid demand for income products. Particularly, our strategic value dividend strategy, which led to positive equity product flows in Q1 for combined funds and separate accounts. The Strategic Value Dividend Fund had its third consecutive quarter of gross sales in excess of $1 billion and had net sales of over $400 million. The SMA strategy had about $700 million of net new flows and we added a couple of institutional accounts as well. The fund and the SMA each have positive flows over the first couple of weeks here in the second quarter. The team continues to execute its long-term strategy, investing in high-quality stocks with a target yield of 5% and a target dividend growth rate of 5% even as the market shifts to favor various styles and various periods. For example, in Q1, growth categories showed the strongest returns and income strategies were lower by comparison. Our international strategic value, dividend value fund and the Clover Small Value Fund also produced positive net sales in Q1, while Pru Bear and Kaufmann flows were negative. At the end of Q1, we had 6 equity strategies in a variety of styles with top quartile 3-year records and 10 strategies with top quartile 1-year performance. The first quarter saw a strong performance from the suite of Kaufmann products. The flagship Kaufmann Fund reached the top 4% of its category in the quarter. The Kauffmann Large Cap was in the top 3% for the quarter and top 14% for the trailing year and top 7% for 3 years. The small cap fund ranked first in its category for the quarter and top 15% trailing 1 year and top third for 3 years. Our international funds had a very solid first quarter performance as well. Equity fund flows were negative for the first 3 weeks of April but at a slightly lower pace than the first quarter. Q1 flows in equity separate accounts nearly reached $1 billion and were 3x greater than the prior quarter. Drivers were the strategic value strategy and a large Clover Small Cap Value mandate. While RFP activity shifted significantly from equity to fixed income in the first quarter, we are continuing to see RFPs for Strategic Value Dividend, both the domestic and international side, and Clover Small Cap Value equity strategy. Now turning to fixed income. Net positive fund flows continued in the first quarter at a healthy pace. While we did see a $500 million redemption in the total return government Bond Fund due to a client's asset allocation change, the rest of our bond fund flows were comparable to the strong level we saw in the fourth quarter. Total return Bond Fund continues to lead flows. The multisector category has been strong for us. We also saw solid inflows into emerging markets, corporates and high yield, where we have a group of outstanding products. Ultrashort Bond Funds and our stable value product continue to produce inflows. We ended Q1 with 7 fixed income strategies with top quartile 3-year records and 10 strategies reaching top quartile on a 1-year basis. Fixed income flows are running solidly positive for the first few weeks of April. Fixed income separate account flows were slightly negative. We have about $600 million from Q4 and Q1 wins, expected to fund in the second quarter, with most of these going into funds rather than to separate accounts. RFP activity for fixed income in the first quarter was up significantly as I mentioned. We continue to see interest in a variety of areas, including active cash, short duration, high yield and other category -- and other corporates and emerging market debt strategies. Turning to fund investment performance and looking at quarter end Lipper rankings for Federated's equity funds. 53% of rated assets are in the first or second quartile over the last year, 21% over 3 years, 17% over 5 years and 76% over 10 years. For Bond Fund assets, the comparable first and second quartile percentages are 60%, 1 year; 35%, 3 years; 66% for 5 years; and 70% for 10 years. As of April 25, managed assets are approximately $364 billion, including $275 billion in all money markets, $33 billion in all equities and $56 billion in all fixed income, which includes our liquidation portfolios. Money market mutual fund assets stand in about $246 billion. So far in April, money fund assets have ranged in the funds between $240 billion and $248 billion and have averaged $245 billion. Looking at the distribution highlights. We believe that our efforts to add sales capacity is paying off. In the institutional channel, where we added 3 consultant relations positions last year, we have seen higher RFP and related activity levels and have enhanced these critical relationships. In the broker/dealer channel, we've added 12 new sales and support positions so far with another 8 planned in 2012. In this channel, fund sales have grown from about $6 billion in '08 to over $14 billion in '11 and reached $3.6 billion in the first quarter. The number of advisers doing business with us is up from 29,000 in '08 to 36,000 in 2011 and got close to 37,000 here in the first quarter. As regards acquisitions and offshore business, we recently closed the previously announced acquisition of London-based Prime Rate Capital Management, adding about GBP 2.7 billion or USD $4.3 billion in managed assets. The Prime Rate Capital Management client reception of our joining forces has been outstanding, and we are excited by this opportunity to continue to grow and develop these relationships. We are looking for additional alliances to advance our businesses outside of the U.S. and continue to work to organically grow our offshore businesses. In the U.S., we are seeking consolidation opportunities like the recently announced Fifth Third acquisition $5 billion, which is planned to be closed during the third quarter. At this point, I'll turn it over to Tom to discuss the financials.

Okay. Thank you, Chris. Taking a look at, first, the money fund fee waivers. The impact to pretax income in the first quarter was $22.3 million. The decrease from last quarter was due mainly to higher rates for treasury and mortgage-related securities. Based on the current assets and expected yields, we think these waivers could impact Q2 by around $20 million in pretax earnings. Looking forward, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 40% and a 25% -- 25 basis point increase would reduce the impact by about 70%. I want to emphasize that the variables impacting the waivers can change frequently and they do. Revenues in Q1 increased 6% from the prior quarter, even though we had one fewer day in Q1. Reflecting the strength of our diversified business mix, we saw revenue gains in all 3 asset categories: money market, equity and fixed income, along with increases in average assets in all these categories. Operating expenses increased from Q4 primarily due to higher compensation and related expense and higher distribution expense. The comp increase included the resetting of incentive comp accruals and seasonally high payroll and benefit cost, partially offset by a reversal of $1.6 million of incentive pay that was estimated and accrued in 2011. We expect the comp line to be up about $0.5 million in Q2. Distribution expense increased primarily due to lower money fund yield waivers. Intangible asset-related expense decreased by $1.2 million, primarily due to a mark-to-market adjustment in an acquisition-related contingent purchase price liability. We expect the Q2 intangible expense to be approximately $1 million. Nonoperating expense for Q1 reflected $2 million in investment gains primarily related to consolidated seed investment products. Looking at our balance sheet, cash and marketable securities totaled $311 million at quarter end, and our net debt was about $42 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 repurchase, dividends, new product fees and other investments, capital expenditures and debt repayments. That completes my portion and I'd like to have Debbie Cunningham give her comments on the money market view.

Thanks, Tom, and thanks, Chris. I just thought I'd give you a little bit of an update from an interest rate perspective and then pause a [ph] second on our European exposure. From an interest rate standpoint, certainly the first quarter was much, much better than the fourth quarter of 2011. Overnight rates in the first quarter were averaging in the high teens to low 20s. This would be for the most part, our treasury and mortgage-backed repo. And that's compared to many days in the fourth quarter of 2011, where rates were in a very low single-digits to 0 and a few days even in the negative territory. On the treasury side. [indiscernible] direct treasury securities were also much improved from the standpoint of the fourth quarter into the first quarter. Today, 3-month treasury rates are about a 9 basis point level and 6 months are at about a 14, and that was about average for the first quarter, somewhere around those levels, 7 to 8 to 9 for 3 months and then anywhere between 10 and 15 in the 6-month area. From a standpoint of comparing that to the fourth quarter, where treasury securities were generally in the 01 to 03 range with many, many days in the negative territory, was a vast improvement for our funds that are required to buy treasury securities or repo backed by treasury securities. LIBOR was slightly different in that LIBOR actually came off a bit by about 2 basis points across the curve for our prime funds that generally are buying securities based on LIBOR, although our government agencies floating rate securities are also in that camp. The reason for the improvement in LIBOR rates, i.e., lower LIBOR rates marginally, had to do with improvements from a European credit perspective, which takes me to the second category, which is exposure to Europe and our usage of European banks. Chris gave a great overview of that in the context of the myths that are continued to be discussed from a money market fund reform perspective. From earnings perspective, we continue to monitor these banks. We're starting to get earnings in as well as detailed portfolio information on their loan book for the 2011, so new assessments into 2012 time period, and those continue to be an improving picture. Unfortunately, anything bad about that is the extra liquidity and credit that are being afforded to these large banks are not necessarily generating much from a economic standpoint in the Eurozone. Instead, [indiscernible] the liquidity and the credit that they are being afforded for these banks is actually being used to improve their balance sheet, which is a great thing from a credit perspective for those of us in the money market sector who own them. But it is definitely impacting to some degree, the flow or growth rate in the European sector. Having said that, we continue to use all the same banks that we used in the fourth quarter of 2011. They are the largest banks in the world. They include banks in the Eurozone as well as outside of the Eurozone. We continue to have exposure that is probably right around the 35% to 40% level on any given day, and that compares to what were exposures of around 40% to 45%, generally during most of the 2011 time period, that is not because of any kind of direct cut back or intentional retreat from those banks. It's just that their levels of funding have improved much and we have found other alternatives to their purchases that are actually more important than better relative value for our underlying prime portfolios. So the continued usage of them is something that you should expect going forward. And with that, I'll turn it back to Ray.

Thanks, Debbie. And at this point, we'll open up for questions.

[Operator Instructions] Our first question comes from Michael Kim of Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Just a couple of 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? And 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?

Well, we haven't seen a diminution in use of money funds by institutions. Okay, you can look at what we talked about in our remarks as the normal for a decade's activity, where the assets increase 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.

I'll add to that because I do speak to 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're asking questions about potential change and what they might need to do if, in fact, those changes were problematic in the future, but they're certainly not changing their habits in the current market. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay. That's helpful. 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?

We would hope that it improves and there's a lot of efforts here to invest where we need to invest properly. Chris mentioned that the 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 the technology investments that we think, obviously with the Prime Rate deal we've -- investment, there's 10 new employees over there and offices and things like that. But we hope to improve it. If you get upticks as we've been seeing in the equity and the fixed, we should get better margins.

Our next question comes from the line of Matthew Kelley of Morgan Stanley.

I was just hoping to touch base with you on capital deployments. Given the uncertainty around reform, as you mentioned now, is that -- how much are you kind of on hold or keeping some dry powder while that's an unknown and how do you think about from here in terms of your strategic priorities for your capital?

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, would cause us to think more positively about doing more diversification moves. So we continue to look for international partners and domestic roll-ups and acquisitions right at 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.

The other 2 big factors in there are paying a dividend and you see we're continuing to pay our dividend and share buybacks, which was 50,000 shares in the last quarter and not as big as we've done in other quarters, but that could change.

Understood. Okay. Just a quick follow-up then on the reform front. If we talk about institutional client demand, maybe with a floating NAV, if that were to happen in terms of the demand for the product, which of your clients do you think would be most to least sensitive to some of the reform proposals out there?

Well, I think that -- if you're 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 systems, the legal situations they have on cash management and the whole point of what they've been doing for 3 or 4 decades. So it'd 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.

Understood. Okay. Just one quick other question for me and then I'll jump back in. In terms of flows 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, we’ve had outflows in the first quarter but I'm wondering if that is kind of reverted back in April, and any other funds that you see at the margin really taking out this quarter versus last quarter?

Yes, Matt, it's Ray. The Pru Bear Fund in the first couple weeks of quarter has improved on its pace relative to really the last couple of quarters, recognizing we’re only looking at 3 weeks’ worth of data. But it's not far from being breakeven, not having outflows. And so we've seen over the 3-plus years that we've had the product that it does change pretty quickly to market conditions.

Our next question comes from the line of Bill Katz with Citigroup.

Chris, just to sort of go back to your first 15, 20 minutes of comments on the money markets. So two-part question, one is, just given what seems to be a little bit stepped up discussion and debate on your end, is there something that you're sort of sensing coming out that might have an adverse outcome? And then the second part is, I've been reading that the -- part of the delay with the SEC may be the fact that with the G-20 incrementally focused on the regulatory form [ph], including the shift to floating rate NAV, I'm just sort of wondering if you could maybe comment on what you sort of see on that front as well. And I have a follow-on question.

Okay, on the sensing of anything that's going on, we don't have a sense of that. We don't know whether they are on the brink of a proposal, coming up with a proposal. We did note that Mary Schapiro in her testimony earlier this week, commented that she was getting recommendations from her staff. And that's a little bit different than saying, as she said back in November, that they were going to have her proposal in the first quarter. So I just can't give you a better sense than that. The reason that we don't think a proposal is a good idea and are therefore optimistic of our position, is because the proposal is such fundamentally poor policy. And we think that, therefore, good policy ideas will win out. Now what is influencing the SEC, whether it is the G-20, the Fed, the threat of having jurisdiction taken away by FSOC, or other political things or whatever, you really have to ask the SEC in terms of what are their motivations. Our position is that good policy will win out.

Okay. So and just my follow-on question's, just coming back to flows for a moment, I was writing as quick as I could. You mentioned that the mutual funds are in a little less negative sequentially. So if you are getting good growth in the Strategic Value Fund and the Prudent Bear's moving toward breakeven, where are you seeing the weakness and maybe you could talk about the dynamics of that weakness maybe on a sequential quarter as well?

But Bill, the comment was that the flows are a bit less negative. So it really -- the underlying trends are about the same as you identified. Continued improvement on the income products in addition to strategic value. We've seen a couple of the other income products like our capital income fund has actually gone into positive flows, which have been in a negative position for several periods before this quarter. And that's a fund with an excellent long-term record and one that our salespeople are increasingly focused on. So I would say the improvement generally continues to come from the income strategies. Pru Bear is, as you pointed out, less of an offset from a redemption standpoint. The Kaufmann products remain in net redemptions, although as Chris pointed out, the Q1 performance was outstanding and we hope to see that continue.

Our next question comes from Michael Carrier of Deutsche Bank.

Chris, maybe just one more on the money markets. So I think a lot of your comments makes sense. And I think, where just in this environment where, even though there's a lot of things that makes sense sometimes, from a regulatory standpoint other things happen. So, and I think when you guys look at the possibilities that are out there and then when talking to your clients, if we were to get something like a floating NAV, where do you think that might money does go, like meaning, is it banks, is it Ultrashort duration Bond Funds, is it offshore? And then, are there ways for you to capture some of that business if it is that scenario?

Well, the answer to the question where the money goes is I think where the regulators want it to go, which is overwhelmingly, back into banks. So you have a situation develop where the regulators are trying to push money into the big banks as against the 50 million investors. So that would be the overwhelming thing. Now, of course, there are other options, I've mentioned them on here on the phone on these calls before you mentioned a bunch of them. It can go into unregulated products, it can go into LGIPs, it can go into common funds, collective funds, it can go offshore and into things that haven't even perhaps been developed yet. And yes, we have looked at and continue to look at many of these alternatives, but understand that none of them are as good, as strong, and valuable to the economic system as the money market fund, because putting all the different clients into the same kind of fund is a huge advantage in the diversification of the client base, especially when you're required to know your client. A lot of the things that I just catalogued are specific to individual type investors. Only certain investors can be in an LGIP, which is a state plan. Only certain investors can go in a collective fund. Only certain investors can go in a common fund. Only certain investors can qualify to go offshore, et cetera. So yes, there are some things that can be done but nothing is as good as the money fund.

Okay. That's helpful. And then maybe on the equity funds, just based on the performance that you gave, the 3, 5-year looks a little bit on the weak side, and this quarter the outflow has picked up. So, when I look at that versus the separate accounts, I just want to know the nuances, like is the separate accounts really being driven by the Strategic Value Dividend and then in the funds, besides Prudent Bear and Kaufmann, a few of the things that you pointed out, is there any other funds that are weighing on that? Just because when we look at the performance, it looks like there might be other, some issues there.

Well, in terms of the overall mandates on the separate account side, what we're seeing is -- and I mentioned some of this in the remarks, is that the bunch of wins that are going to be funded that we talked about are across the board. They're fixed income core, short term govy, intermediate govy, small-cap growth, large cap value, strategic value. So it's a good range of products.

Mike, and then just specifically on the first quarter, the composition of the separate account flows. It certainly was weighted toward strategic value in the SMA version. But also we're seeing some institutional account wins and that was a product that historically would not have been an institutionally focused product. But in today's yield environment, is something that we're seeing traction on. We're getting increased RFPs related to that. So we still think that has a long way to go. Importantly, the other big component of the inflows in the separate accounts in the first quarter was a very nice $200 million plus win on the Clover side in the small value mandate, where they have a very competitive record and it's another area where we're seeing interest. So we pointed to the 6 strategies, that cross-style box is, there's income in there, there's international, there's the Kaufmann Large Cap. And so we certainly feel like, from a saleability standpoint, we have enough of products for our salespeople to be out there with good products for the clients.

Our next question comes from the line of Ken Worthington of JPMorgan. Rahul Nevatia - JP Morgan Chase & Co, Research Division: This is Rahul Nevatia for Ken Worthington this morning. We've got a couple of questions. First one is probably in line with what people been asking about. Can you talk nature of mutual fund redemptions this quarter? Was it more from the retailer institutional side? And maybe you can tell us in which customer segment, was it bank trust, broker or corporate cash, et cetera? So I'm just trying to dig in further into the reason for redemptions. Is it rate sensitivity or something else?

Are you talking about the money market funds or the fixed income and equity funds? Rahul Nevatia - JP Morgan Chase & Co, Research Division: Mutual funds, fixed income and equity.

Fixed income and equity. I don't know that we would've seen any meaningful variance across the channels. It's really more reflective of the product mix. So I would not overlay a channel view to the redemptions. Rahul Nevatia - JP Morgan Chase & Co, Research Division: And do you think it was more due to rate sensitivity or anything else that you saw redemptions across mutual funds and money market?

I could not hear that question. Rahul Nevatia - JP Morgan Chase & Co, Research Division: I said that would you associate any of the redemptions to rate sensitivity or anything else in both mutual funds and money funds?

I think what you really have to do is look at each individual product. The reasons for redemptions from say, something like a Pru Bear Fund would be very different from the reasons for redemption from a strategic value dividend. If you look at that product, which is very successful, still getting traction, we're expanding distribution, I mentioned the institutional interest. We actually had some clients who had to pull back a bit on their allocations because of how much that product had appreciated in the prior year, it became too big a part of their model. And so on an absolute basis, the redemption number went up but the underlying reason was actually not a bad one. So it really would need to be a product-by-product analysis. I would not overlay a macro like interest rates to the -- given the breadth of our products. Rahul Nevatia - JP Morgan Chase & Co, Research Division: Okay. And one more question, if I can sneak that in. What are the assets for the Clover small cap value? We can see it from retail side but I'm trying to get an idea of what the total assets are and how much capacity there is in that fund.

The total assets in the mutual fund is about $200 billion and -- a little bit under $300 billion. And at some point, yes, we would look at capacity but we're a ways away from that and we're actually benefiting there from some of the other folks who are capacity-constraint.

It would be multi-billions and it will be determined by when the portfolio manager determines that, that's where the number should be.

Our next question comes from the line of Cynthia Mayer of Bank of America Merrill Lynch.

In terms of the fee waiver guidance, I'm just wondering is that assuming steady rates versus current levels? And is there any seasonality to repo rates because my understanding was repo rates sometimes fall in 2Q?

Debbie could comment on the rate outlook and has a bit already, Cynthia. I would just say in looking at the numbers going forward, it's mostly a snapshot of about where we are now with a little bit of subjectivity in there for, thinking that we would expect the repo rates not to be as high in the second quarter as they were in the first quarter. Remember too, that the waivers are a rate volume analysis and so the asset decrease that we saw in the first quarter was pretty highly weighted toward the government agency products and the treasury products and so another way for waivers to go down is for assets to go down. And we don't expect those kind of decreases, step downs like we saw in the first quarter, as Chris pointed out, a lot of that is due to seasonality. But the waiver outlook is both rate and volume of assets.

And as far as the overnight rates are concerned, certainly the reason the seasonality is associated with that rate in the second quarter has a lot to do with tax season. So we have seen rates fall off on an overnight basis from the high teens to low 20s that we saw in the first quarter. That's a reflection of the treasury not needing as much funding given the tax receipts that have started, that have come in during the month of April and in that capacity, rates certainly don't look like they would ever go back or at least not in the near future, go back to the level, the abysmal levels that they were in the fourth quarter of 2011, but the expectation is that they will remain similar to where they are today which on an overnight basis is right in the double-digit, low to mid double-digit so 10, 13, 15 basis points, somewhere around there, maybe 5 to 8 basis points off where they were in the first quarter.

And Debbie had earlier mentioned the improvement in the T-bills. And you may recall from last quarter we had a discussion about particular funds that done by repo that has to buy only treasuries and so the improvement in the bill rates also has entered into that forecast, Cynthia.

Great. That helps a lot. And then on the money market separate accounts. It looks like the balance is basically flat. And I thought the tax pool [ph] balances usually rose in first quarter. Is there anything new going on there?

Tax pool [ph] actually starts to generally come in, in the fourth quarter, receipts generally starts to [indiscernible] in the fourth quarter of each year, continuing into the first quarter and then at the end of that first quarter, start to flow out again as people are using their allocation. I think, generally speaking, though, the lower level of rates has probably kept that a bit more muted this year.

Okay. And then, let's see. Just a question on the buyback. It seems smaller than usual, smaller than certainly a year ago. Any particular reason?

No. We look at it every day and determine whether we think we should buy or not.

Okay. And maybe one last question, which is -- you touched on this a little bit, but just to clarify, the large inflows to equity separate accounts in the first quarter, what was the mix of institutional versus SMA and do you expect basically the same mix going forward? Is the SMA due to any particular new win on a platform or was it just sort of filling assets coming into that, in to the strategic value in Clover?

It would have been about 2/3 SMA and 1/3 institutional. And the SMA would have overwhelmingly been strategic value dividend, it would have been increases primarily in platforms where the product’s already situated. But as I mentioned we do continue to develop new distribution opportunities for that product really across channels. But the bulk of that would've been because of increasing use and allocation models and the outstanding performance of the product. If you take the other 1/3 of the separate account flows, that would've been the Clover Small Value and we actually also had some money come in on the growth side, money managed by Kaufman.

And the 600 you're expecting, is that sort of the same 2/3 SMA, 1/3 institutional, or are those institutional wins?

The 600 would be wins from institutions but for different reasons, they’re choosing to fund it into funds. And so those will be mutual fund primarily fixed income and short duration type of product.

Our next question comes from the line of Edwin Groshans of Height Asset Management.

One of your peers about 1.5 weeks ago, stated that money market reform should be a priority and that the industry really needs to coordinate with the SEC because of the concern that the Financial Stability Oversight Council would then step in and direct the SEC and the industry what to do. I just want to get your thoughts on that type of comment.

I would agree that the concept of money fund regulation is very important. The reason that the industry got together in starting to comment on potential SEC proposals was that it was back in the first week in November when the head of the SEC said that they were going to come up with a proposal. And the way I characterized it when I heard about it from the Wall Street Journal when they asked me about it was, that it was a choice of which way to die, by bullet or by hanging. And so when that's the choice on the regulation side, that's not really much of a choice at all. And that's when the discussions between the industry groups and the SEC took a different turn because the regulators were determined to have either one of the above of a changing NAV redemption holdback or capital. And all of a sudden, the goals of the regulators were different than just enhance the resiliency of money funds because each one of those in various ways, devastates the money funds. So different people have different views and I guess maybe if I had a couple hundred billion dollars of money from the government that wanted a different angle on it, maybe you'd hear a different song.

Don't you get concerned, especially with Mr. Volcker out there. He seems to have the ear of people in DC. And he consistently pushes the money market funds as shadow banking or regulatory arbitrage and things along those lines. And it seems to me that if the SEC, and to your comment, if the SEC loses authority or gives up some authority or jurisdiction over money market funds, then it goes to the Financial Stability Oversight Council, which would seem to me that Treasury, the OCC and the Fed are not really receptive to the money market fund industry.

They, you are exactly right -- they are not receptive and it's very, very fundamental as to why. As I've said on these calls before, the Investment Company act of 1940 and the securities acts in general, are designed to protect the interest of investors as their sacred code and they do this through disclosure, not through the elimination of risk, which even the President's Working Group said, if that were your goal, you were going to have Draconian results. Whereas the Fed's goal is safety and soundness, broad views based on what the Fed does or thinks at a given time. And these are not together type attitudes. These are in conflict. And that's why you get completely different regulatory regimes. So we believe that the money market funds have been properly regulated on the 2a-7 and the pricing rules by the SEC and that going further is the same as saying, if you put them into FSOC, that they should be banks. And the former chairman of the Fed that you're referring to has tried to kill money market funds since back in the '70s and ‘80s and has never given up, and I don't expect that he or they will. In fact, it was in July of 2010, after the new 2a-7 regulations had been put into effect, and before Dodd-Frank was passed, that the Fed published a report that basically said, as you're recounting, that money market funds are shadow banks an intentionally pejorative term. And then I will read it for you, "It is imperative for policy members to assess whether shadow banks should have access to Fed backed stocks permanently (it means that they are regulated as banks), or be regulated out of existence." So we know where they are coming from on this and it hasn't changed. And that's why we continue to repeat the importance of money funds in the marketplace and the use that these money market funds have made in improving things for many types of customers over the decades.

But again, I think, don't you get kind of concerned that it’s those policy makers who will basically drive the Financial Stability Oversight Council's direction? It seems to me like the industry needs to sit down with the SEC and hammer something out. And it would seem to me like the pressure's building that it has to be sooner rather than later because the risk is rising that Financial Stability Oversight's going to step in and their regulatory regime is going to focus somewhere around risk-based capital levels.

The FSOC is a vote of, I think it's 10 or 11. And for them to do anything, the Secretary of the Treasury has to get engaged because if the Secretary of the Treasury doesn't vote in favor of that designation, then it doesn't happen. And our view of that is that you've got to through a process that has begun to be articulated by the FSOC organization and that there are opportunities to comment along the way about the efficacy of the designation of a fund, an industry, a collection of funds, an adviser, some of the above, any of the above. So it's not just a simple thing. And yes, we have concerns about that. But at this point, it functions more like a form of regulatory extortion of one group of regulators that have an agenda to get control of the money funds versus the other who have done a very good job of managing them for the purpose for which they were intended, and that is the protection of investors.

We'd be happy to, if you have other questions, to -- you can call in, we'd be happy to talk to you.

Our next question comes from the line of from Marc Irizarry of Goldman Sachs.

Just real quick. If we look at the mix of equity AUM, it's at the highest level as it's been in quite a while, but it looks like maybe more of that mix is in separate accounts. Can you just talk a little bit about the fee rate, which overall for your firm has ticked up? How much of that's really just being driven by equity mix versus maybe the fee waivers rolling off? And then also the shift from maybe equity funds to separate accounts, how should we think about what the fee rate implications are there as well?

Yes, Mark, clearly, we had improvement in the overall fee rate and it was a function of the lower waivers on money funds primarily. The equity blended fee rate really didn't change very much. It actually ticked down very slightly, sequential quarters. The prior quarter it had dropped a couple of basis points but there was hardly any change in the most recent quarter. And as you point out, it really is a function of the mix. Separate accounts generally would have lower fees than a mutual fund. But really it's the product mix and it's also the contribution from a market standpoint. So the asset growth the last couple of quarters, we've had pretty good levels of NAV appreciation, and when you look at the individual products that, that hits and the underlying fees, that's really what led to the stabilization in Q1.

There are no further questions at this time I'd like to hand the floor back over to management for closing comments.

Okay. Thank you, Luis. That will actually conclude our call for today. Thank you for joining us.

Thank you. Bye-bye.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.