Federated Hermes, Inc. (FHI) Q4 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Federated Investors, Inc. Fourth Quarter Analyst Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Raymond Hanley, President of Federated Investors Management Company. Thank you, sir. Please begin.

Good morning, and welcome. Leading today's call will be Chris Donahue, Federated's CEO and President; Tom Donahue, Chief Financial Officer; and joining us for the Q&A is Debbie Cunningham, who is the Chief Investment Officer of our money market area. 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 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'll turn it over to Chris.

Thank you, Ray. Good morning, all. I will start with a brief review of Federated's recent business performance before turning the call over to Tom to discuss our financials. Looking first to cash management. Average money market fund assets were up over $5 billion in the fourth quarter, while the quarter end totals increased by nearly $11 billion to $256 billion. Our market share for money market funds increased slightly in the fourth quarter. For separate account money market assets, the $4 billion of growth in period end assets was due to expected seasonality. The year-end expiration of the government's unlimited insurance on non-interest-bearing bank, accounts called TAG program, likely accounted for some part of the money market fund asset growth for us and for the industry. However, it is not unusual for us to see money market inflows during the fourth quarter. The impact of yield related waivers decreased in Q4, but we expect it to increase in Q1. Tom will comment on this further in his remarks. For the regulatory front, I'll start out by noting that with the industry up $90 billion in money market assets in the fourth quarter, it's obvious that money market investors have remained confident about the product as it's presently constructed: Dollar in, dollar out; uninsured; transparent; invested in a diversified portfolio of high-quality securities; and supported by proper accounting and market valuations. Still the regulators continue on their mission to reform money funds in ways that, as presented by FSOC in their letter to the SEC in November, will raise debt costs for municipal issuers, corporations and others are causing investors to move cash to investments that are far less regulated, have far less transparency and which, in the case of the still too-big-to-fail banks, present far more systemic risks to…

Thanks, Chris. Taking a look first at money fund fee waivers, the impact to pretax income in Q4 was $15.5 million, down from $16.3 million in the prior quarter. The improvement was due mainly to higher rates for treasuries and mortgages, and mortgage-related securities, offset partially by lower yields for prime and muni securities and by higher assets. Early in Q1, we have seen rates decrease in all money market categories compared to Q4. Some of this is cyclical, as Chris noted earlier, we tend to see cash assets including money market fund buildup at year end and carryover into the first part of the next year. As those assets compete for short-term instruments, rates tend to tighten. Factors such as the end of Operation Twist, QE3.5 and the end of the TAG program are factors as well. Combined with higher asset levels, the impact of these minimum yield waivers is likely to be higher in Q1. Based on the current assets and expected yield levels, impact of minimum yield waivers to pretax income in Q1 could be approximately $21 million or $5.5 million more than in Q4. Looking out over the rest of the year, we think rates will rise as the economy improves and some of the seasonal pressures ease. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 40%, and the 25 basis point increase would reduce the impact by about 70%. It's important to note that the variables impacting waivers can and do change frequently. Revenues in Q4 increased 3% from the prior quarter due largely to average asset growth across all categories. Operating expenses were up due to the previously discussed recognition of insurance reimbursement…

[Operator Instructions] Our first question comes from Ken Worthington of JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Just from higher level, I wanted to talk about but competitive advantage at Federated in the money fund business. So first, maybe can you talk about the competitive advantage in your prime funds, like why do institutional investors use your funds versus those, say, BlackRock, Legg, JPMorgan, just the other big players in prime?

On an overall basis, you'll see several players playing in all 3 streets. So our $100 billion of prime funds is related to our clients who, in large part, see us as a provider of a cash management service. Most of our clients, not all, are dealing with us on an omnibus basis and we provide all sorts of additional services to them. If you take a trust department, they are used to dealing with Federated because even guys like me used to call on them back in the stone age in the '70s, and we have a long heritage and culture dealing with them. And so we know their problems, we know their challenges, we have legal accounting and service things that help them make a big difference. So we withstood a lot of competition where people would come in and say, "Oh, will charge less," and things like that. And I'd day, "But yes, but do you do A, B, and C which are all the services that are offered by Federated to these clients and have been doing so for many, many years." So the chief competitive advantage we have as against some of the other players you mentioned, is that degree of service and that degree customer contract over the long haul. I'm going to let Debbie talk about the structure of the funds and how they might also be a distinguishing characteristic in both performance and structure.

I'll just add 2 things to Chris' answer. One would be sort of the team approach and how we end up using that in the context of structural tendencies for our funds. We generally have a bar bell approach, we have dedicated portfolio managers, analysts and traders, all 3 doing different functions within that team approach for the management of our prime funds. And the overall results from that team approach and that bar bell approach that typically is taken into account has been very good. We've generally been in the top quartile from a performance basis across in a large groups of our peers and in the industry in addition to those that you mentioned. Secondly, I would say, our disclosure and our response to customers has been excellent. Certainly, we obviously have to adhere to the requirements on a disclosure basis from Rule 2a-7, but we've done that in a way that, number one, has come out and disclosed items prior to any kind of rule making; and number 2, has been responsive to what our customers' needs are. Some examples of those would be information on our European bank exposure, that certainly has been a topic of discussion over the course of the last 2 years and we regularly publicize on our website the exposure in the various countries to the banks that we are using. More recently, this year, we started providing daily portfolios to customers who want them, not everybody wants them, but for those who want them, we have daily portfolio information that's available on a disclosure basis to our clients. And just starting today, we are actually starting to provide our shadow NAV for several of our prime funds. So I think, responsiveness to the marketplace and our customer base in particular has also been a huge advantage from Federated's perspective. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: If I asked the same question on the treasury side, which obviously different, you don't have the same sort of credit issues, it seems like the answer would be the same. Is there any differences in terms of competitive advantage you have versus peers on the govie or treasury money market fund side that just already mentioned on the prime side?

Well, you're right. It steers around the customer service because people tend to look at, at least our customers do, the whole array or family of funds. And so they got all the services that Debbie and I have spoken of at one place and have many funds including the municipal funds, the treasury, the government and the prime. So it is the array of services and they look at the transparency, the competence and the service as being key elements.

I think, too, just one thing to add would be, that we actually do undertake credit research within our government and treasury funds also in the context of our counterparty risks. So we oftentimes, in our govie and treasury funds are able to use repurchase agreements, so the counterparty risk assessment is important in those particular products. In addition, we have analyst that covers the government agencies and the various of those that we use on their implicit and explicit support from the U.S. government and their actual financial statements as they are reported on a periodic basis. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. And then the last one, won't beat the dead horse here. Is the treasury side more or less, or the same fee sensitive to the more credit sensitive products like the prime funds. Like, again, the govie seems like there's less credit work there even though there are some. Is it more -- are customers more fee sensitive there than elsewhere in the money fund business?

We haven't noticed fee sensitivity being that fund specific at all. What people are clued into is daily liquidity at par. And so that the -- especially in the treasury and government funds where the yields float around 1 basis point, which I know isn't the fee part but it's related. The yield isn't as important, the fee isn't important, what's important is the cash management service in that particular bucket.

The next question comes from Michael Kim of Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: First, Chris, can you talk a little bit about the rationale for starting to publish the money market NAVs on a daily basis, was it sort of more of about not being a competitive disadvantage versus your competitors or maybe it sounds like it was more a function of client demand? And then related to that, has your thinking changed at all as it relates to actually transitioning to floating NAVs?

Well, I'll answer the last one first. No, we're not transitioning to variable NAVs. And any suggestion that A is related to B is, is just not appropriate especially in our case. Now to go to the first part of the question. Once a bunch of our competitors decided to do it, then the customers look at it and say, "Hey, if A and B are doing it, why isn't C doing it?" And that's why we're doing it. In the whole history of our money market fund area, I'm not aware of anyone who ever asked for the current shadow NAVs on our funds. On some due dili [diligence] trips, we've had people who've asked for the historic daily valuations, and so we've responded to that. So it was definitely not client demand. And as regards to clients, so far what we can detect is, publishing is a lot like lifting your hand out of a bucket of water and then seeing what impact you had. But on the other hand, I think that, I would say, that if having been done means that this is an area where the industry, for whatever reasons and however it happened, has taken the single most transparent financial product in the history of man and made it more transparent. And that, those who think that there are problems in the funds with disclosure, ought to hit pause mode on doing things to destroy this industry because now you can look at these factors, they're all published, and see if there are things going on that you don't like. It's certainly, seemed to me, should undercut some of the arguments in favor of doing some of the more drastic things you mentioned like changing the NAV. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay. That's helpful. And then maybe switching gears a bit. Can you talk about how you see both your equity and fixed income fund businesses positioned assuming retail investors increasingly get more comfortable taking on more risks and start maybe reallocating their portfolios in favor of equities?

Well, we're seeing a little inkling of that here in the first couple of weeks to the year. But the main thing is that -- and the reason I went through all of that, those comments in my remarks, listing all the various areas where we have good performing products. The 13 equity funds with 3-year top quartile record means that we have plenty of buckets in plenty of spaces, wherever their clients and their advisors wish to go, risk on or risk off. So I think we are in as good a position as we have been in for a long time on exactly that point. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then just maybe one for Tom. First, just to clarify, did you say when you were talking about the first quarter compensation expense, you expected it to be $65 million to $69 million or was it just $69 million?

Yes. I said -- I slipped up and said $65 million, and it's $69 million that we expected to be. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Got it. And then just from a capital management perspective, are you maybe a bit more focused on kind of building up liquidity as opposed to share repurchases for the time being just given the recent special dividend?

Well, we have a history of, if we've done a big acquisition or paid a big dividend, that we've built things up afterwards. But then I'll immediately say, hey, it depends on what's going on in the marketplace.

Our next question comes from Matt Kelley of Morgan Stanley.

I was hoping this question was a little bit already asked, but I want ask it in a slightly different way. Just stepping back and looking at your money fund clients, the proposals that we are seeing out there from the ICI comment letter and that sort of thing, who do you think -- which of your client buckets would you say is most wary of these changes or accepting of them? And where do you see some of those pressures falling? Or even discussions you're having pretty consistently with clients already?

Are you asking about the FSOC letter? But I thought you said the ICI comment letter?

Yes. Sorry, I'm referring to the ICI.

Okay. So you're referring to their -- we have to explain to everybody what that is. The ICI's idea, as I understand it, is to have liquidity fee gates, so that when certain times are reached in the life of a money fund, related to the liquidity available, that then there would be charges in order to get out of the funds. And we don't think that this particular item is a necessary item to do. On the other hand, if the threshold for that occurring is something that Debbie and we think we can consistently meet, then it would probably not destroy the products. And so that would -- that comment addresses all of our clients who come in on an institution or omnibus basis. They wouldn't like it in effect, but I don't think that if the threshold is, say, 7.5% of weekly cash or whatever someone comes up with like that, then I don't think that's going to be a big problem. If any of those things though are adopted, we have taken the position that they should be included with the ability of the fund to do a voluntary gating before that happens. And voluntary gating has taken on the nomenclature of the right of the fund and the directors of the fund to be able to, on a temporary basis, say, for 10 days or some amount of days, gate the fund in order to do what? In order to treat all shareholders equally, fairly, equitably, and to prevent other problems and to give time to solve problems. And the origin of this idea comes out of our experience with the Putnam organization back in 2008. They taught us the lesson because their board, when faced with big redemptions and no problem in their portfolio, hit pause mode on redemptions, put the funds with our funds. And a week later, all shareholders who wanted to redeem or redeemed at a dollar and it was no harm, no foul. PS, this voluntary gating also is in the authority of the Irish funds that we have and was used by European fund managers to good effect also. So that is how I would respond to that portion of the ICI's proposal.

Okay. Great. And then just on the non-comp expenses, a little bit of noise with the insurance recognition, so just hoping you can give us your thought on growth? How are you thinking about marketing and professional fees, that sort of thing, going into 2013 as well?

Marketing and distribution is going to relate to big time on what's happening with waivers. So outside of the waiver comment, if we grow equity and fixed assets, we have marketing and distribution payments that get paid, and that will increase. So that's one of those old things that I used to call a success item and that expense line goes up. That's good because we're getting equity in fixed income assets. In terms of any of the other categories outside of comp, I don't think we have any unexpected things going on there except for traditional growth and we've already commented on Asia Pacific, so there will be office space, things, and computers and things related to that, but I'm counting that in the dollars that we talked about last quarter. Ray, do you have any...

The professional service fees, we gave you the offset and that one bounces around depending on particular things that we're doing. But aside from the Asia Pac office, which is not -- that will ramp up a bit more as we go through 2013, but those increments will be in the hundreds of thousands from what was in the Q4 numbers. So some of that's already in the run rate.

And then just one final one for me and then I'll jump back in. We already talked a little bit about January flows and you guys gave some good color there. But for the industry overall dynamic and what you guys are seeing when you're selling equity and fixed income funds, are you seeing any significant shift from fixed income to equities or is it kind of more money coming off the sidelines to both at this point?

I think if I look at our equity funds sales and just look at it on a monthly basis, you can see a bit of a pickup from a gross sale standpoint, recognizing that we're literally talking about a couple weeks of data. We're looking at numbers that go through the end of last week, so they're not even reflective of this week. If you do the same thing on fixed income, you would see a bit of a decrease, say, in gross sales on a run-rate basis, January versus December. So I think the answer is yes, we're seeing some of that, but it isn't like a U turn.

Our next question comes from Bill Katz form Citigroup.

I may have missed it, you said you gained some market share in money market this quarter. Can you tell me where it ended the quarter versus third quarter?

You mean on the 9.6% versus 9.5%?

You did mention it, I'm sorry, I missed that.

I don't know if I did or not. 9.6% versus 9.5%, I think I may have said slightly.

Okay. In the institutional channel, you ticked off a number of RFPs and more of a fixed income orientation toward them, just sort of wondering, similarly comment here, are you seeing on the institutional side any traction from the equity footprint in any way or is this still more fixed income?

The RFP activity is still weighted toward fixed income, Bill. But we have seen interest on equity as well, but I would tell you that it looks like the RFPs the activity is still weighted to fixed.

And then just one last one, coming in on back to your retail comment. Within the equity component, where are you seeing the greatest lift at the margin?

In terms of product flows, we're...

You mentioned gross sales were up a little bit, where are you seeing the delta, other than Pru Bear, I recognize that, but on the other side?

Yes. I would look at the strategic value products and in particular, the International Strategic Value Fund that's come out of the gate with good strong flows. The domestic strategic value flow is solidly positive for the first couple of weeks of January, so on a higher run rate than what we would have seen, and it was positive in Q4, but it's already more positive in the first part of Q1 than it was in all of Q4.

Our next question comes from Robert Lee of KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Sorry to go back to the money funds again. But, Chris, I was just curious, I mean, stepping back a second, it seems certainly possible that some type of change now or likely that some type of change takes place at the money funds than -- while the exact form is unknown, but how do you think about having to evolve your product line into kind of your non-money fund short duration proxy. I know you have a lot of Ultrashort products, and they've been successful. But are there specific new products or strategies you're thinking about or rolling out that you think in advance of potential for a significant change that may better position to capture some assets if they do end up moving with change down the road? I'm just trying to get a feel for how you think you respond to that change.

Well, assuming the dread occurs, which is kind of what you're asking, I'll first stop at the idea that there's less than $100 billion in Ultrashort funds compared to $2.6-plus trillion in money market funds, and the Ultrashort funds have much bigger yield and very modest change in NAV. So any of the new products that have those characteristics, namely, a higher yield and a little bit of a change in NAV, are not going to be favored by the customers. So the answer is not going to be creative variable in asset value product. The creativity is going to be coming up with products that are as close to $1 as you can get them. And whether that is re-going over the enhanced cash products, whether it's looking at collective funds, common funds, whether it's looking at offshore funds, whether it's looking at private accounts, separate accounts, whether it's looking expanding the province of estate pools, you do all of those kinds of things because your goal at that point, which I don't think we'll get to, because I think good policy will win out, your goal is still the dollar-in, dollar-out type net asset value as best as you can do it. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And then may be shifting gears a little bit. If memory serves me, I think you guys have filed for an ETF product, short duration ETF products, if I'm not mistaken. So maybe, if you could just update us on your thoughts on your strategy for expanding into -- or building some ETF products and kind of expanding your -- the ways in which you offer your strategies. I mean, do you -- what's kind of the goal and when do you think you'd be launching maybe this initial product?

Yes. We did file that ETF as kind of a defensive thing to see if there was a potential to have a $1 net asset value type product in ETF. So we filed that, worked on it, and there had been a couple of them that have come out into the marketplace, but none of them have the key feature of daily liquidity at par. And so I don't expect that to go too far right now with us in terms of the products. So that's the story on ETFs. And I don't see us launching a family of ETFs either. And I think that's really what's necessary. The top 3 have, what? 80% or 85% of the assets, and that's a very competitive field punctuated by price competition and lots of funds being excised from the marketplace each year. I think last year, there were 40 of them that were withdrawn. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: I mean, maybe just this thing on the EPS for a moment. I mean, TIMCO obviously had some success with launching an ETF version of their Total Return Fund. You've had very successful, more traditional structures than your total return type products in fixed income. And do you see kind of the ETF structure even if it's not a full family but kind of offering your investment capabilities selectively in ETF as being a way of, at least, attacking a new kind of customer base?

Well, we have looked at that and continue to look at it about every 6 weeks, and have not concluded that that's the best opportunity we have to focus where we're going. It's not to say that it won't happen, but as of this point, all the other things that we're doing like setting up an operation in Australia, like growing the prime rate in London, like doing the distribution through Bury Street in Europe and through the regular blocking and tackling of a now increased sales force domestically are, to us, far better opportunities.

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

Maybe a couple of questions just on the seasonality of the flows. Is it possible to give a sense of how much of the money market flows you would consider seasonal, what the normal pattern is in terms of those going back out? And second, on the Ultrashort flows, it looks like that's -- the main source of inflows to taxable in the quarter, at least, on the fund side, and so I'm wondering if any of those were seasonal, too, or due to expiration of TAG.

On the seasonality for the fourth quarter, if we've talked to our sales reps who are in touch with the clients, it could -- they contend that about $6 billion of the $11 billion can sort of be pushed at the TAG accounts, and the rest of it would be either new accounts or seasonality. And so half of it one way, half of it the other. It's -- we see these kinds of numbers, we experienced it last year. Money came in Q4, then went out during Q1 right up till tax season, and so we expect TAG to happen again. But when you have as many omnibus clients as we have, it's really tough to track exactly where that money comes from. It doesn't come with a TAG label on it, so you have to do a little bit of investigation on it. So it's like I said in the remarks that I'm sure some of it came from there, the incidental notion is $6 billion, and I'd be inclined to go with that. And Ray will comment on the Ultrashort.

Yes. Cynthia, I'd point out on the Ultrashort, no, we wouldn't necessarily put a TAG sensitivity to that money. The Ultrashorts have grown pretty steadily for us as they tend to do in -- when the money fund yields are lower. We've seen that in prior cycles, and we would expect that to reverse when and as interest rates increase, which will happen at some point, but no, we wouldn't point that to TAG. And then, talking about the Q4 fixed income flows, the strongest area for us was -- it would have been in the high-yield space, so obviously a much different profile than Ultrashort.

Okay. And then on the total return, you mentioned you're still getting RFPs, but it looked to me like the fund turned to outflows in November and December. So why would the 2 have different flow profiles with the same performance?

Yes. The total return was positive for the quarter, and it's solidly positive here in the first part of January. That strategy has an excellent long-term record through various cycles on a -- taking into account the risk that, that product -- risk profile that product relative to peers. It resonates very well with institutional audiences, with the consultants. And so we find that, that's a continued and an ongoing source of interest from clients especially looking at it through the institutional lens.

Got it. And maybe just one last follow-up on the expenses, not to take it line item by line item. But systems and communication was a little bit lower. Is that a sustainable number? Do you see that sort of flat for 2013?

I would expect -- we're continuing to invest in technology, and a lot of the technology ends up in there, and you're probably just seeing timing of when we expense things, and I would not expect that to trend down, no.

Okay. And I guess, just one more follow-up. You mentioned a $3 million expense, I guess it was related to an intangible cost of some kind. Can you just elaborate on what that was?

No, that's a minority interest investment that we had. By the accounting rules, we have to look at the company that we are invested in and put a value on it. And once assets decline and then asset decline again, and then finally, it gets to a point where, under accounting rules it's -- other than temporarily impaired, then we have to go in and put our own valuation on it. So that was a $3 million expense for the quarter.

Okay. And what company was that?

It's one of the small investments that we've had, and we weren't talking about the name of the company. And the valuation, what's left is about $3.6 million to $3.8 million. So it's not going to be a big item going forward.

Our next question comes from Eric Berg of RBC Capital Markets.

I'm still trying to understand the significance of this so called shadow NAV concept and what -- to pose my question, what I did first is I placed myself in the shoes of a customer, and I was thinking to myself, suppose I read in the newspaper -- and I'm just going to make up some numbers here to illustrate my point and frame the question. Suppose I read in the newspaper that the shadow NAV is $0.9985 one day and $0.9983 the next day, so we're talking about sort of the fourth decimal point changing. What are consumers supposed to do with this information, and why is this interesting information and helpful information? I just don't understand why, this is anything but very boring in most cases.

You have captured it very accurately, that's why I said it's like lifting your hand out of a bucket of water and looking at it. It's why I also said that, as far as I know, we've never had clients asked for it except on subsequent due dili [diligence] where some people just wanted to see it. And I don't know what customers will make of it. That's why I said that from what we've heard so far, since these things, I think, we're either publishing ours today or tomorrow, today, they aren't that interested in them. We'll see what happens. And so it's not a big deal. But there have been people at the commission who have -- some of whom have wanted it disclosed like this for some considerable amount of time, which is fine. There have been other arguments that putting that out there instead of on a 60-day delay basis, which is what we have now, can cause more problems than it solves. But we never felt one way or the other about it. It helps the transparency. And now that it exists, I'm taking the position that, hey, let's see how this looks for people and see what kind of actions you get. If this is something that is going to cause an issue or cause people to arb the funds and things like that, well, boy, we'll sure find that. P.S., at $1 NAV, I am unaware of how any one successfully arbitrages the money fund.

Maybe I can just add 2 additional points. Number one, I think, to some degree, this will help mitigate some of the perhaps sensationalization of NAV mark-to-market or shadow pricing versus the amortized cost fictional pricing as they generally refer to it as. The fact that, for the most part, what you'll see is movement in the fourth decimal point, as you indicated in your question, it makes it very boring and makes it very apparent, I think, that what has been mentioned as incorrect or a fictional pricing from an amortized cost basis was shown to be exactly wrong. And that in fact, when you look at the shadow pricing, you compare it to the trading NAV as conducted by the amortized cost pricing is identical. Secondly, I think, to some degree, it deserves a little bit of educational purposes -- or educational ideas from a standpoint of disclosure, so that customers realize that even though we're giving them a price that shows on a shadow NAV calculated basis, 1.0001, they're still trading in $1, they're not trading to the fractions of $0.01. And we also have available on our website as of yesterday is an educational piece that helps clients understand that a little bit better. So maybe some of the very boring will still continue, but at least it will be occurring in an education -- in a more educated form.

I mean, isn't it the case -- I have a question of an entirely unrelated nature related to equity investing. But isn't it the case that the incidents of -- the number of instances in the history of the money fund business in which to quote, real NAV or the shadow NAV, market value NAV has departed from that base on amortized cost. But the number of instances has been very low. I mean, I'm not trying to...

It's been exactly 2, 1 in 1994 in Colorado, and 1, the reserve fund in 2008. So there have been exactly 2, and that's with almost 40 years of activity and $325 trillion of money moving through money funds successfully at $1.

Okay. I have one quick question about -- that sort of builds on the earlier question about no one mentioned a rotation into equities from fixed income, but that was sort of the spirit of the question. And my question is how does really anybody know whether that's happening in the sense that you can see, say, positive flows into your equities, but do you -- my specific question is, when you see customers buying your equity funds and when you enjoy a positive net flows, do you know for sure where the money is coming from?

No, we do not. And generally, the reason is that unlike people who have direct retail customers on their books, we overwhelmingly have omnibus accounts. And that's why Ray's answer was, well, you can see some movement in that direction and things like that. It's very tough for us to say that any individual investor rotated from fixed income to equity or equity to fixed income. We don't see the individual data associated with the individual investor.

And by omnibus account, you mean?

By omnibus accounts, I mean that we will have a relationship with a trust department or, for that matter, a brokerage firm, and that underneath of that, they will be maneuvering their clients here and there, and they will come to us as one net trade, so that we don't see behind the curtain as to what's going on in the individual trust account or the individual broker-dealer account. It will be one net trade for us.

Our next question comes from Marc Irizarry of Goldman Sachs.

Chris, I don't know if I missed this, but can you just go through, now with the comment period extended, what do you think the timeline of events are for money market fund reform? And then, I know it's tough to handicap, but what do you project could be the outcome here from the reform perspective?

Okay. On the timeline, I think, it's next -- it's mid-February, the FSOC extended the deadline. And so comments come in, comments have to be evaluated, however long that takes, FSOC hasn't told us. Then, FSOC has the ability to either come up with a proposal to the SEC or to not come up with a proposal to the SEC. And if the SEC receives that proposal, they then have to put it into a rule form, then they have to publish the rule and give a 60- or 90-day comment period, then receive the comments back, and then construct the rule. So it's very hard under that sequence to get any of that completed before even Labor Day. Another sequence that is possible at any time is the usual SEC process, which I just added on to the end of the FSOC process. So if the SEC decides to come up with a rule proposal, they have to internally come up with a term sheet, gives the commissioners 30 days to look at it and say this, that, be in favor or not, then vote on it or not. Then, if they vote on it, then they publish it, then they have 60 or 90 days and sometimes even longer comment period, then accept comments, and then decide to come up with a rule, and then have whatever implementation time they deem appropriate in the rule. So that's kind of the timeline. Now for the second part of the question, making book on know this comes up. Having been at this business for 40 years and dealing with the regulators, at various times, the SEC, the Fed and others, now FSOC, it's very, very hard to make book on how these things will come up. My belief is that good regulation and good regulatory policy will win out. And that there has been no evidence put out that shows sins committed by money funds or a need to be draconian about the industry. And therefore, I don't think those kinds of things will happen. But I'm not in charge of it, and it's really hard to exactly predict it, but I would say that if any of those things, like I was asked about earlier on an earlier call, come to fruition, I am certain that the regulators understand what they're dealing with, and there will be long times of the implementation because of how important and how sensitive these issues are.

Okay. And then just somewhat related, can you talk about the -- your institutional business building that out, building your presence in the institutional channel? And to what extent, if any, do you think that this is -- that the money market reform is -- to what extent is that an overhang for consultants potentially and RFP activity going forward?

Well, it's interesting in the question of overhang that back in the days when the money funds were growing like crazy and everything and we'd get the question, "Well, geez, is that helping you on the institutional side or anywhere?" The answer was no." "And does it impact you on the other side of it when money funds are being attacked or criticized?" And the answer is no. The whole game on the money fund side is really independent of all of the efforts. And that's why it's good to have a small handful of us spending time on dealing with the money market fund things, and then have 1,450 other people with real jobs, doing real work advancing the ball for the company, right?

Marc, I'll just add to that. One trend we've seen since '08, it was rare to see in RFP, in the cash area, there were some enhanced cash and things like that. But -- and then through '09 and '10, we saw big increases in the RFP levels for cash because people started to understand that there were differences in process, and approach and resources. And so that's come down a bit off of the peak, it's still active. And so that in and of itself gives us a good opportunity to tell our story and differentiate it. And a critical thing here is that there will be, no matter what happens, if anything, in the realm of money market mutual funds, we know that there will be a demand for an intermediary between people who have money that they want to invest on a short-term basis and issuers who want to issue on that basis. And so we do well whenever that reaches an institutional process, a consulting process. And we've won quite a few mandates in the cash area and in the bond area. Even as the noise level on money funds has reached a higher level over the last year, we've had about 20%-plus increase in our RFP level on the fixed income side, and that's across a pretty wide array of strategy. So we certainly haven't seen any of that effect to this point.

Our next question comes from Roger Freeman of Barclays Capital.

So I just want to come back real quickly on the NAV thing. If the balances are really -- and looking at your data, where you disclose every day this year, at literally 1.00. What is the issue, is it just actually moving to that? And it seems like it will be a fairly easy thing to concede from -- to the extent there's any negotiation between the industry and regulators, and there's been no stir since this data has been put out there.

Well, when you say move to it, if you mean moving to the fourth decimal place or doing what FSOC's suggested, which is pricing at $100, then that basically kills the money market fund product because it forces the money market fund net asset value to change. Now if you're -- what you're saying is you continue to price it at $1 and round to $0.01, well, then fine, that's no harm, no foul. But that's not what FSOC has suggested. And I think that the industry would agree that, hey, if you can price it at $1 and round to $0.01, then, let's get on with it. But I assure you that's not their suggestion.

And do you think the users of money market funds, even though they see this data, know that it's not exactly 1 versus if it were actually priced that way that the difference between knowing and seeing is -- that, that actually generates a -- would generate withdrawals?

I don't believe so because I think that most of the clients who have been in this for a long time realize that the variable net asset value or, I mean, the shadow price has been a little off, and then corrects itself. And they realize, more importantly, that we own high-quality securities that march to maturity, and that amortized cost is a much simpler way of taking care of these rather minute changes that have occurred over time. And even during the worst of times in '08, you didn't have NAVs historically on these funds move from the 9,998 to 1,002. So it is -- they realized that you can't precisely measure these things. The other point about it that should be underscored is that under the Investment Company Act, the boards and the advisors are called upon to value these funds at fair value. And even under the amortized cost method, the board still has the duty to make sure that that's fair value. So that duty continues every single day at every single price to make sure that it is fair value. And all of us under the 2010 amendments are required to be able to move to a variable NAV when as and if it is determined that the amortized cost price no longer represents fair value. And so we have those mechanisms baked in the cake right now. But the primary duty of the board on pricing is fair value, and amortized cost has been about, well, the first 2a-7 came out in '82. So call it a 30-year blessed and regulated event by the SEC.

Chris, just a follow-up on that, and I'm not sure, Roger, if you were asking why our customers would not want to be in the money fund that wasn't a dollar, is that part of what you were looking for?

Yes, not $1 that really is $1 because we're talking 3 and 4 decimal points.

Right. Let me, Chris, go on over the studies that we've done and the others have done, we know that our customers want it to be $1.

Okay, all right. That's helpful. Just lastly, do you have any thoughts or early read on what Mary Jo White's position on any of this might be or whether this will be a priority? Anything about her?

No, I don't.

Our next question comes from Bill Katz of Citigroup.

Just on the relationship between what the distributors are sharing versus what Federated has to bear in terms of fee-waivers, that ratio has ticked up the last couple of quarter. I'm just a little curious, given your guidance of sort of a little bit of a step-up, and I know there's a lot of moving parts to where the money markets are coming from, what distribution channels or products or what have you. How should we think about that relationship as any kind of offset, if at all?

Yes. Bill, that one is tough to predict because it does depend on the underlying mix of the assets across the roughly 40 products. So it would be very tough to give you much guidance on that. I think the best we can do would be to look back at the range that it's been in which we've gone through, and if you took an average of those ranges, because there really is not any basis I could give you to predict it.

The final questions comes from Edwin Groshans of Height Analytics.

Chris, my first question is sort of in reference to your response to the question on the ICI comment letter, and you noted that in some of your funds in Ireland that you did hit the pause button there. So I guess...

Timeout. No, I said that we have the authority to hit the pause button there. We did not hit the pause button there.

Okay. All right, sorry. Okay. Because that was -- the point of the question is, I think, Sheila Bair and -- just submitted their comment letter on and pushing for floating NAV and saying their capital is really not the way to go. And her and others continue to say that the reason that they're not supportive of gates is that they would expect that there would be a rush ahead of the gates going up to get out of the system. And I guess, my question would have been, have you seen that or has the industry seen that in these instances, where the gates were employed? Was there -- was it a rush on 1 or 2 days, or was there something that happened weeks in advance leading up to the preponderance of withdrawals?

What happened with Putnam was that they had a $12 billion fund, all good securities. And in the aftermath of all of the shenanigans going on that weekend with Merrill, then with Lehman, then with reserve, and then the AIG thing, which really shocked the market, they had many of their investors were coming through platform, so they really didn't know their customer base. So then they showed up, I think, it was on that Thursday with $6 billion worth of redemptions against the $12 billion fund. And so they called us up and said, "Hey, what do you think?" We said, "Well, if it's worth a dollar, we'll put them into our funds. We have no problem with that as long as we have liquidity in the system." And so the Fed put its program in, where basically went up to State Street, and they lent money to State Street, and we sold securities to State Street at amortized cost, and these were securities that Fed had preselected as being proper quality and inside 90 days, and liquidated the $6 billion a week later and kept the customers and moved on. And so the point of that is, within the face of those kinds of redemptions when you have a good portfolio within 1 week, by putting that gate down, they were able to find a solution to the problem and then not have to liquidate the fund and not have to make a big splash in the press and not give first mover advantage, totally prevent the run and treat all shareholders fairly and equitably, and I'm the only one who ever talks about this example as if it never happened.

Great. That's excellent color because I do -- that is the continuous pushback on the gates is that everybody will jump out early and they run into the same problem. All right. The other question I have has to deal with, I guess, recent comments by SEC Commissioner Gallagher. And it seems that he's been out there talking about being in support of or could be in support of floating NAVs. And I guess, from my perspective, it seems like that's a little bit of a change in his position from where he was in the summer, and I just wanted to hear what you thought of either the positioning that he's doing. Is he just explaining different possibilities? Do you think there's a push to go in that direction at the SEC?

I think that the first comment I'd make is that the jurisdictional aspects of this situation are important. And I don't think the SEC is interested in losing jurisdiction to FSOC nor do I think it's appropriate that they do so because the SEC has actually done a very sound job on money funds for 40 years, and it is inappropriate for FSOC to even threaten to take the jurisdiction. So that's number one. Number two, as I've read Commissioner Gallagher's statements, he has always talked about, when he's talked about being enamored of a variable NAV, 2 things: done properly and all of the other operational problems having been solved. I don't know exactly what done properly would mean, but I have some sense of what it means to solve all the other operational problems. It means having the IRS solve all the problems of capital gains and losses that are being accounted for. It means solving the wash sale rules. It means declaring that these funds are still cash and cash equivalents for the purposes of accounting. It means revising the investment company requirements as to sending out confirmations. And it requires timing and understanding, so that, as they say, you can get to the point where you eliminate all of those minute changes and the systems have to be changed for that. And I frankly don't think they're in line to get all that accomplished. The next thing that is included in my mind in all operational problems are state laws. And the answer you get when you ask about state laws is, "Well, gee, that's not our jurisdiction." But yet, as a substantial amount of our clients and clients in the industry that are required under state law to invest at a dollar in and a dollar out, they are governed under indentures, they're governed under escrow accounts, et cetera. And so these things are not even on the agenda of being solved. So SEC commissioners take their positions, and they are playing at an open field and trying to do the best they can, and other SEC commissioners have said other things, and we just deal with them as best we can.

I agree. I think to get all those small issues resolved, I mean, I think you get the IRS involved, you get FASB involved. It just seems that the coordination on there is going to be difficult to achieve. What about if they decide -- or have you heard anything about splitting off and setting maybe just prime funds to floating NAV and leaving government funds as stable value?

From both our customers, on behalf of our customers and on behalf of the issuers that we use, I and we are unwilling even to offer to throw under the bus the commercial paper market or the yields that are available and the importance of that short-term financing. And so yes, people have come up with those ideas, some of them talk in their book, which is fine, that's what we do in a competitive industry, but I don't think that's necessary nor appropriate.

Right. Well, I think it's just -- I think, it's unusual that there's this discussion of just having prime funds go to floating NAV, and then a number of players in the industry, including Federated, all of a sudden publishing these shadow NAVs on a daily basis. So that to me seems too coincidental not to be tied together in some way, shape or form.

I can't get into the motives of how people do things, when they do them other than what we do.

There are no further questions at this time. I would now like to turn the floor back to management for closing comments.

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

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