Federated Hermes, Inc. (FHI) Q1 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Federated Investors’ First Quarter 2016 Analyst Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ray Hanley, President of Federated Investors Management Company. Thank you, sir. You may begin.

Good morning and welcome. Leading today’s call will be Chris Donahue, Federated’s CEO and President; and Tom Donahue, Chief Financial Officer. And joining us for the Q&A is Debbie Cunningham, our CIO for the Money Markets. During today’s call, we may make forward-looking statements and 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. Chris?

Thank you, Ray, and good morning. I will briefly review Federated’s business performance and then Tom will comment on our financial results. Federated’s Q1 equity business results were solid against the backdrop of challenging market conditions. We again posted sales results that placed us among the industry leaders. In Q1, the all-in, net equity flows exceeded $2 billion, which represents an annualized organic growth rate of about 15%. And we’ve had positive equity net flows in 9 of the last 10 quarters. Over 40% of our actively managed equity strategies that’s 14 to 34 had net positive sales in the first quarter led by strategic value dividend fund. Other funds with positive net flows include Prudent Bear, International Leaders, International Strategic Value Dividend, MDT Stock, Muni Stock Advantage. Federated’s 10% first quarter annualized equity fund organic growth rate ranked in the top 2% of the industry, based on strategic data, strategic insight data. This places us 14th out of 693 competitors. Looking forward, our equity business is well-positioned with a verity of strategies producing solid performance in sales results. Using Morningstar data for ranked funds at the end of the first quarter, five of Federated’s funds or almost 20% were in the top decile for the three trailing years. We had 13 funds or 50% in the top quartile and over two-thirds in the top half for the trailing three years. Performance highlights include seven of the eight MDT strategies outperforming versus benchmark for the trailing three years and since inception. We’ve also had solid results from the Federated’s strategic value dividend strategy. And while we’ve noted over the years that industry relevant ranking don’t always properly measure the investment success of these strategies, it is worth noting that the mutual fund version of this strategy, it had 8% return in the first quarter and that placed it in the top 2% for the quarter, top 1% for the trailing one year and top 3% for the trailing three and five years. Federated’s Muni Stock Advantage Fund offers another solid product with an income mandate. The fund ranked in the top 3% of the trailing one year, top 14% for three years and top 3% for five years at the end of the first quarter. Federated International Leaders Fund won the Lipper Award as the best ranked fund or performance over the 10-year period ended December. The Federated Kaufmann Large Cap Fund, another bottom-up concentrated portfolio is rated four stars and has solid long-term performance records. And while the last year’s been challenging, the fund's more recent performance has improved. Looking now at early Q2 results, equity funds and SMAs combined are net positive, little over $360 million and this is at a comparable rate to the Q1 through the end of last week. The strategic value dividend strategy continues to lead the net sales results. Positive net sales funds also include strategic -- International Strategic Value Dividend, Muni Stock Advantage and Prud Bear. Now turning to fixed income, net outflows occurred in ultrashorts, total return, corporate and mortgage backed funds during the first quarter. High yield fund strategies were slightly negative and have returned to net positive inflows here in the second quarter. During Q1, the federated high yield trust fund won the Lipper Award as the top performing fund for the five-year period ended December of 2015. At quarter-end, we had nine fixed income strategies with top quartile three-year records including strategies for high yield floating rate, short intermediate, total return government and munis. Fixed income fund sales are net negative early in the second quarter at a comparable rate to Q1. Now, looking at money markets; assets increased by nearly $6 billion from year-end and were up about $14 billion from the first quarter of 2015. Average money fund assets increased about $12 billion from year-end and $7 billion from Q1 of 2015. Our money market fund mutual share at quarter -- market share at quarter end was 8.12%, up slightly versus year-end 8.02%. As you are all aware, we're moving into the later innings of the substantial effort to position our money market products in advance of the October 2016 requirement for floating NAVs or institutional prime and muni funds. We recently announced further operational details including the FMAV strike times for institutional, prime and muni funds. We also made the required disclosures to provide additional money market information on our website for our funds. This includes daily reporting of daily weekly liquid asset percentages, net shareholder inflows and outflows and shadow NAVs. We also conducted a road show for our planned new private fund with a targeted mid-year launch and are developing a new collective fund. We will have a robust set of products and choices. Taking a look now at our most recent asset totals, as of April 27, managed assets were approximately $364 billion including $255 billion in money markets, $58 billion in equities and $51 billion in fixed income. Money market mutual fund assets were $218 billion and average assets in money market mutual funds are running about $219 billion. Looking at distribution, our SMA business reached new heights in the first quarter, with record gross and net sales. Gross sales exceeded $2 billion and net sales were over $1 billion. In fact, first quarter net sales were greater than the total for all of 2015. Total SMA assets ended the quarter at just under $19 billion, an increase of $2 billion in the quarter. The SMA assets are up nearly 80% over the past three years. Federated ranked 6th in the rankings of the largest SMA managers at the end of 2015, which is the most recent data available. We also added a $150 million EFA, equity separate account in the first quarter and have $45 million in fixed income separate account additions expected to fund here during the second quarter. RFP activity remains solid and diversified with interest in value dividend, EFA, growth strategies for equities, high yield and short duration for fixed income. On the international side, we saw our first trades in our new Canadian-domiciled strategic value dividends on product in the first quarter, as we seek to continue our growth in Canada. Our assets at the end of 2013 were a little over $1 billion and today they at approximately $1.7 billion. We continue to see success in Europe, Asia, and the Mid East from a subadvised high yield product working with a large private bank. These assets reached $350 million in the first quarter and we were selected to subadvise another high yield fund beginning sometime around the third quarter. We continue to seek alliances and acquisitions to advance our business in Europe, the Asia Pac region as well as of course the U.S. and the rest of Americas. Tom?

Thank you, Chris. Revenue was up 23% compared to Q1 of last year and 12% from the prior quarter, due mainly to lower money funds yield related fee waivers. Equities contributed 36% of Q1 revenues and combined equity and fixed income revenues were about 53% of the total. Operating expenses increased 22% compared to Q1 of last year and 18% from the prior quarter, due mainly to higher money market fund distribution expense as a result of lower waivers. Comp and related increased about $8 million from the prior quarter, due mainly to higher incentive compensation expense and payroll tax and benefits seasonality. And early estimate on Q2 comp and related expense is about $76 million. The pre-tax impact of money funds yield related waivers of $9.4 million was down from the prior quarter and Q1 of last year. The decreases were due mainly to higher fund gross yields. Based on current assets and yields, we expect the impact of these waivers on pre-tax income in Q2 to be about $6 million. An increase in yields of 25 basis points could lower this waiver impact to about $2 million per quarter and a 50 basis-point increase could nearly eliminate these waivers. As we’ve previously discussed, the impact of the change in one of our customer relationships may reduce pre-tax income by about $6 million per quarter when fully implemented, late in 2016. Multiple factors effect yield related waiver levels and the ability to capture related income going forward. These factors are covered in the press release and in our SEC filings, and we expect these factors and their impact to vary. Looking at the balance sheet, cash and investments totalled $342 million at quarter-end of which about $314 million is available to us. That concludes our prepared remarks and we would like to open the call up for questions now.

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Michael Kim with Sandler O'Neill. Please proceed with your question.

First, I joined a bit late, so, I apologize, if you already covered this. But typically, I think we see money market fund outflows in the first quarter of the year just given some seasonality. So, just wondering what you might have seen that was a bit different this time around that drove the inflows and then any sort of implications, as we look into the second quarter?

Naturally, we’ve already covered the key point this tax season and people do pay their taxes, and so that is still going on. What we are seeing is some movements in the marketplace as some firms have taken the occasion to alter their own money market fund structure and what their funds are doing. It's very difficult for us to see input or monies coming to us from those moves. But you can’t pick those moves up by others. This is not to say that customers are yet figuring out exactly what they want to do. It’s still the era of the firms and the funds making their moves on that point. Debbie, would you add to that please?

I would definitely say, the increase in Q1 is the result of lower waivers and higher yields being paid out to all participants in the marketplace. Certainly, getting off zero or 1 basis-point I think has had a positive influence on the assets during the first quarter.

And we did see here with Chris mentioning the money market assets, the normal tax season, April decline.

And then, I know you commented a bit on the institutional side of the business but can you maybe just push out a bit more what you might be seeing in terms of demand trends, what strategies might be a bit more in the mix, if you will, as well as kind of the pipeline and funding timelines, more broadly?

Well, what we gave you was the EFA account that was one, and the $45 million of fixed income that is to be funding in the second quarter. And we listed some of the mandates. And what I like to do is always look at the mandates as we won in ‘15 and ‘16 and you get a pretty good variety, you get money market, you get international EFA, fixed income on multi-sector, you get municipal mid-cap growth, you get high yield, and large cap growth. So, you’ve got a good verity of different mandates. And as I mentioned in my remarks, the RFP activity remains strong, and it’s up for this timeframe over the same timeframe from last first quarter. So that would be what I would say.

And Michael, just to add, it’s Ray. What we did see in the first quarter was a bit of a shift to fixed income in terms of the RFP composition. And while high-yield has historically been an area of strength for us and where we have a differentiated record and long experienced team, we’ve seen -- continue to see good activity from high-yield as well as short duration on the fixed income side, but, if you look at the activity year-over-year, and again just grabbing one quarter which can -- you want to look at it over a longer period, but there was a shift to fixed income in the RFP pipeline.

And then maybe just one last one for Tom, just any updated thoughts on expenses and margins in light of the more constructive backdrop, and thoughts on how we should be thinking about the trajectory for margins after the money market fund fee waivers have played out?

It’s a fascinating thing. When the most recent return or reducing of waivers actually mixed the margin and the remaining waivers that are on their when they go away, will decrease the margins also.

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

This is Justin Tarantin [ph] filling in for Bill this morning. Just a real quick broad question for you guys, just based on DOL, just trying to get an understanding of what you guys thoughts are around money markets and the economics on that, on those given the DOL, and the vice role that kind of came out recently.

Answering that question specifically only to the money market, basically one of the things I mentioned is that we were coming up with a collective fund, the collective fund is utilized for retirement assets only. And we think this will be a good addition to the pot and will be a good DOL proper fund that will have good staying power into the future for cash. In terms of the DOL’s direct impact on cash at Federated, we just don’t see it as that big of a deal at this point. First of all, most of the assets that are in those accounts, those types accounts or in other types of assets meaning fixed income and equity. On the money market fund side, what you’re going to be left with here is a question of whether or not the intermediary can meet the fiduciary standard of reasonable compensation on receiving payments from the fund. This applies to the money market fund as well as all the other funds, and this is the standard question that’s asked under fiduciary law and has been asked for a long time. Our experience in this goes back into the 80s when the trust departments, we went through their mechanisms inside a trust department and were able to show to show to the trust world that receiving a 25 basis-point shareholder service fee was in fact reasonable, because their costs were in the low-20s. So, if you do the homework, you can meet that particular standard; and that’s part of the routine aspects of trust law that we’ve gone through in the past.

Just kind of just touch back on the institutional pipeline, again. I know you guys kind of talk about the Canadian fund and some stuff over in Europe and Asia. Is there any other opportunities outside of those areas that you see that you're focusing on the future? And I know it's sized the pipeline up a little better now in terms of those institutional opportunities, really appreciate it.

On the institutional side, we think there are opportunities in Canada, which is why we had sales percent up there. We also think there are opportunities in Latin America specifically in -- with our RJ Delta arrangement. We are exploring other things in the Far East as well, but it’s not something I can size. And as I mentioned in the call, we are having good success with our high-yield offerings on institutional separate account sub-advised et cetera in Europe. But it’s really hard to me to give you some size of where, I think that will go and how big. It’s certainly an excellent opportunity for us in all of those areas.

Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed with your question.

Tom, maybe first one; I know you always had the seasonal pressure in 1Q on the margin and year-over-year the margin did increase. I just wanted to get a sense like when you think about the seasonal lift that you typically see, meaning on the comp side, it doesn't seem like that's changing too much quarter-over-quarter. And then as the revenues and the expenses normalize with the fee waivers, yet the long-term business continues to do well. Just where the margins can go or where the expense base outlook is likely to trend? I know it's not all about margin, I mean you can still generate the earnings growth with a stable margin, but just wanted to get your sense on is there stuff with the waivers that just continues to limit that in the near term or when will we likely to see some improvement?

So, as I mentioned to the other Mike, if you look at the press release and the margins of the waivers that we're doing, it's lower than our existing margins. So, as those go off, that's a headwind to increasing margin. But the seasonality and the benefits and favorable things go away and you see that in first quarter of ‘14, first quarter of ‘15, first quarter of ‘16 and we would expect the margin to improve over the year. And then absolutely, I'm willing to say that as the waivers go away, once that is out of the mix, and we continue to grow like we are doing on the equity side, we should expect margins improvement as a company.

Chris, on the long-term business of both equity and fixed income, I guess right now on the equity, seems like it's been year-after-year where the industry has faced challenges and you guys continue to put up long-term flows. And it seems like with the performance, you are still fairly well positioned. Just wanted to get your sense when you look at some of the new regulatory changes or proposals, whether it's the DOL or the SEC proposals on liquidity, is there anything out there relative to your positioning in the distribution channels, particularly in retirement that makes it more or less of a headwind going forward or do you continue to see your franchise fairly well positioned and the growth outlook likely to continue?

We are about as well positioned I think as anybody. I'll cover with respect to the DOL first then I’ll comment on the liquidity you mentioned and maybe we'll even throw in derivatives to boot. On the DOL, don't forget I began my sales career as a lawyer calling on trust departments in the 70s and we have had fiduciary relationships with trust departments since then, doing a lot of good work for them, understanding the two-pronged nature of fiduciary activity, namely the duty of loyalty and the duty of care. So, we have those things and they're a part of our ethos. We also have, at Federated, one of the nation's experts in fiduciary law that's been an employee here pretty much forever. So with respect to the DOL, we think we are in an excellent position to help them implement what is necessary and what needs to exist. Because if you look at some of the various businesses, I will show you they meet in our view, both the loyalty and the prudence aspect of it. If you take our SMA business, we think we are very well-positioned here. And when you think about the SMA business, it is transparent;’ it is a level sea; the disclosures are generally very clear about who’s getting what; and this addresses successfully the duty of loyalty. Then, if you look at the duty of prudence which was well articulated in the rule but wasn't the principal focus of the original issue of the rule. You have research approved products that go in, you have actual monitoring of both the products that are used and the underlying account and you have honest, thorough client profiles, so that you actually know the customer and what's going on. There are people there to call so that it isn’t a 10,000 to 1 ratio, if people are interested in difficult times, like what was going on in January. And the SMA is also a politically correct in the view of the Fed because you have individuals owning individual securities which they like. Now, there's one other thing that has to happen which we're very good at helping people with and that is to document all the fiduciary processes. And this is critical and this is one of the new things that have to happen. Another thing that I think we will do well in is the R6 classes; we have six or seven of them now and R6 classes are priced without the other service fees in 12b-1 fees, we’ll probably have 18 of them by the end of the summer. And we think these are going to be very-very important. We already mentioned some of the things we think about, and that is that you’ve got to have good performance. And that’s going to remain important. And we think we do here very well too and this addresses again the area of prudence. And I’ve already talked in answer to the other question about how we think we have cash opportunities here as well. So, I think we are very, very well positioned on the DOL side. Now, on the liquidity side -- and I would say most people will give you this kind of an answer that the essence of managing a mutual fund and the sacramental thing in a mutual fund is the right to redeem. And therefore, everybody is very sensitive to the redemption and through the potential thereof. So, it's fine. People want to study it and focus on it more. And I think there will be some very good improvements from what the SEC came up with. I don’t think they’ll end up with six buckets; they’ve gotten a lot of push back on that. And so, I think we’re going to see some improvements. We’ve had meetings with them down there, as have others, and see it openness and willingness to do what’s necessary to meet what the Fed or the [indiscernible] and to do things that don’t destroy the underlying efficacy of the mutual fund, and I’d make the same kind of overall comment on the derivative side. We wouldn’t be that much affected if they stuck with their hard numbers, but it would alter the flexibility inside all sorts of other funds and perhaps some of ours. So, I think they’re far better off going to a principal state arrangement with the derivatives. And I think they will consider or at least give you some choices depending on what kind of fund you happen to be in. So overall, I think we are in a good position to respond to these various regulatory activities.

Our next question comes from the line of Ken Worthington with JP Morgan. Please proceed with your question.

Chris, I know you touched on this but I wanted to ask a little more specifically. We're getting closer to the implementation of the new money market fund rules and, maybe, to what extent have institutional investors already repositioned for these new rules? And how much of an acceleration might you expect for repositioning in 2Q? And, then, maybe based on customer behavior, do we see a lot of customers just waiting for the last minute to reallocate? Thanks.

Ken, I’ll take the second part and Debbie has done some pretty good work on the movement of various funds inside the categories. And so, I’ll let her cover that. As I mentioned, the clients -- you can say they’re waiting for the end, yes; that is true, some are just getting aware of the fact of what is going to happen, and what is in part shaking more action is the movement by some of the funds to do different things. The most recent thing we did was announced strike times and that doesn’t move assets but is yet another communication that something else is different and you’re going to have to decide where to go. So, as I mentioned, we just haven’t seen the big movement of the underlying clients yet. We will have $3.5 billion redemption out of a tax refund because of the one client that that is going to occur until the summer, and I think that’s when you will see the biggest movements occur. Debbie?

We’ve seen from an industry shift basically government versus non-government assets be equal at this point. So, $2.8 trillion industry, about $1.4 trillion is in govies, about $1.4 trillion is in non-govies which would be prime and munis. That’s definitely a shift from the norm, which was 1.8 trillion or so in non-govies and about 1 trillion in govies. The vast majority of that three quarters of that movement has come from as Chris mentioned product changing their prime focus, if you will, to government. So, Federated has not done this but others in the industry have basically converted what were large prime funds into government funds and that shift has caused the industry itself to be about equal from a government and non-government standpoint. As far as client flows themselves go, it certainly seems as though the second and into the third quarter, we’ll start to produce some of those but we’ve really not seen them in that yet at this point. What we do think we’ll see in the second quarter again from an industry perspective, not so much from Federated standpoint but what we’re monitoring on an industry basis is as changes have occurred from others in the industry, some of the competitors that have basically taken some of the retail funds and said okay we’re booting out the institutional customers right now. And that’s taking place in the second quarter for a few types of products. And I think we’ll see that continue to occur. Again, we’re not seeing that from our own flow standpoint. Just as Chris mentioned, we did have various road shows across the country over the course of the last month and half. And ultimately, I’d say our clients are enjoying the additional yield spread of about 20-22 basis points prime funds over government funds, whereas historically that spread has been around 12 or 13. So, they’re enjoying that additional yield spread right now. And I’d say the questions that they’re asking mostly are, how do I get continue to use this product and enjoy this yield spread as these regulations roll in, help me with that. It’s a different question than what was maybe a year ago of what do I need to do and when do I need to switch.

And then maybe just as a follow-up to that, if we see a lot of last minute repositioning, how easy is it going to be for the industry to handle that? Have we seen enough like maybe pre-work done by the companies themselves by Federated themselves and your peers to be able to handle the repositioning or is this actually going to cause some angst in the CP markets or even the short-term government markets?

Certainly we’ve seen repositioning and I can tell you from our own standpoint, if you look at the various products that we manage in the cash space here at Federated are weekly liquid assets, which would be the assets that are most evenly convertible into cash for redemption purposes on any given day. Those are drastically different for our institutional, prime funds than they have historically been, they’re much higher at this point. They are also different for our institutional retail, although less high at this point, and when you look what our traditional products that are not being affected by the regulatory changes, the pools that we manage, the separate accounts, the offshore products, those are those categories that are higher. So, retail and institutional prime have been positioned accordingly with shorter weighted average maturities, more weekly liquid assets and shorter barbells. So, typically we buy barbells that go out to 12 to 13 months, the longest we can buy in the money market yield curve. Those products are looking with a cap at more like six months.

Then last maybe for Tom or for Ray, once your comp was unchanged year over year, should we expect comp for 2Q, 3Q and Q4 to generally mirror what we saw in 2015, at least that’s what it setting up to look like?

Ken, first of all, on the first quarter comp; there was reversal a bit of prior year accruals, that you would have a higher number in Q1. And so when Tom said 76 million for the second quarter, you would have seen more of that traditional drop down. But it would be hard to think of it going forward on the same paces as last year, any year, because it’s going -- the main drivers of course, of the incentive comps and the variability there and that’s going to be tied into what you would expect the sales levels and investment performance level as well as earnings. So, no, I wouldn’t necessarily guide you to the prior year to be more driven by the factors I mentioned.

And our next question comes from the line of Robert Lee with KBW. Please proceed with your question.

I had a DOL related question and I guess maybe from a little bit different perspective. Obviously a lot of the questions relate to how it impacts you but I'm just curious, how do you think this changes the expense or the cost relationship with distributors? They have preferred provider lists, platform fees, all kinds of stuff that you guys have to spend money on. How do you see the -- if at all, the DOL rules shifting that; is that kind of something you feel like getting a sense of they’re not going to be able to charge for? How do you have a preferred provider list and be a fiduciary type of thing? Do you see any upheaval along those lines that can work towards your benefits or maybe it’s negative and that it opens up the playing field even more to competition and different distributors? I mean how do you think of that?

Bob, I think that overall that has not yet been fully decanted. And most of these firms are aggressively reviewing these rules in order to determine what their duties are under the duty of loyalty; what about the duty of prudence; what about the documentation and what about reasonable fees? Don’t forget that they did grandfather all the existing products. And so that means you’re not under an immediate panic. They also said that you could keep variable camp. And what that means is that if you can defend it as being reasonable, which is why I went through that routine about old trust departments before, you can keep it. So, obviously, the firms are going to try to retain as much of the revenues as they can from their business. And you’ll see -- we will have to see whether they are up to the task of allocating costs, studying them in order to meet the standard of reasonable. The DOL was very careful to say that more or less any pricing mechanisms are going to be fine. You also haven’t yet determined exactly what it means to have a level fee. We all know sort of what they want, which is okay, you charge the customer 1.5 and then there's nothing else around. But how is that going to compare with how all the products are done, which is I highlighted that pricing routine and the SMA as being very, very consistent with what the DOL has. So, I don't have to answer that. I will tell you that it is going to change how they function and how they think. And we’ll be joining on the spot with them. We feel we understand it can be helpful in executing and implementing but we just don't have a definitive answer to that.

And then, maybe a follow-up question on -- a lot of question on capital management. Now that a lot of the fee waivers have dissipated, and understanding you have that one distributor that could have some impact in the second -- later this year, but are you at all -- how should we be thinking about capital management now that earnings have come back up from their lows and the fee waivers have dissipated? You haven't talked about acquisitions in a while that used to be something you talked about a lot. Should we be thinking that maybe whether it's a focus on dividends and dividend increases or step up in buyback; I mean any change in how you’re thinking about capital management priorities as earnings have strengthened?

So, our first choice has always been acquisition, of course right with it has been our current dividend and the yield related to that and our payout ratio. But, on the margin, we have looked at our track record in acquisitions and are happy to spend the money there because we think we get an excellent return based on our past history. That’s what we're doing that on. And like you said, getting those is hard, and so we continue to try to do that. Are we going to let cash build up to some huge numbers, as a Company? We don't have a history of doing that and take a collective view of is it better to payout increase the dividend, payout special dividends as we've done many times in the past and do share buybacks. So, basically if we don’t get the acquisitions, at some point we will go to the other two and at the time what we think is best for shareholders and best for the Company.

Our next question comes from the line of Eric Berg with RBC Capital Markets. Please proceed with your question.

Thanks very much. First question, Chris, it sounds like that with respect to what seems to be, I don't know if I'd call it a conventional view but certainly a view out there that 12b-1 fees are in trouble as a result of the DOL rule, along with revenue sharing and other marketing support. What I'm taking away from your comments is that maybe that's not the case that these still may be permissible and we'll just have to see. Am reaching the right conclusion on your thinking?

Yes, you are. And what occasions this is, this is the draft of the DOL proposal had in it that there was going to be a low fee harbor and there was not nearly as much articulation about fundamental trust law. And when you get into basic fundamental trust law, you have to look at the duty of loyalty and that means not that you go simply to the lowest fee and they articulate this very clearly in the opening section of the rule. So, you have to be able to defend the compensation as reasonable and whether 12b-1 funds fees can be defended as reasonable, will depend on the facts and circumstances as these things evolve out over time with [indiscernible] et cetera and how much work distributors do on justifying and saying that these things are reasonable and that will be the standard. And so we don’t look at as though they implemented what everybody was worried they would implement because they did not. Now, this is not to say that that's not what they really want in their heart of hearts because of this level fee, because of the big contract, all these other influences are still there. So, there's a lot of balls up in the air in terms of how this shakes out, if you have interpreted what I had in mind very well.

And then, just thank you for that. And then just one quickly for Debbie. Debbie, should I infer from your comments that even though there continues to be uncertainty as to what your customers will do, once the new regulations in the money fund area are implemented later this year that it's your strong sense now that there will be a transfer of assets to new products, rather than a loss of assets? Is that the right conclusion?

I definitely feel like there will be a continuation of normal or higher level of assets. I think Chris has said in various discussions that post the reform in October of 2016 going into 2017; we believe we will have assets in the cash states that are higher than they were pre the reform announcements back in 2014. So, we don’t necessarily think that this is a deterrent from an asset perspective. How that mix of assets is ultimately going to position itself, I think will even still be influx in 2017. Certainly there will be institutional clients who are in prime and municipal funds today that will go into govie funds initially in the October of 2016 timeframe. Depending upon what spreads get to and also depending upon the performance of those funds from a volatility perspective and ultimately looking at them against other funds on a total return basis rather than just on a yield basis I think will bring clients back into that space in 2017 and beyond. So, I think there will be transitions and movements, lots of clients’ money and motion but ultimately I do believe that the assets will be higher, post reform.

Our next question comes from the line of Surinder Thind with Jefferies. Please proceed with your question.

Just one quick question here; I’d like to revisit the Strategic Value Dividend team and the retirement of Walter there. That product has continued really well in terms of the flows; I mean it's one of your leaders at this point. How has the institutional response been, since it's been six months since the announcement of his retirement and at the end of the year he did officially retire?

That was a well plan for retirement with good solid backup and succession in place. And Walter has earned this retirement and we’re very thankful for all of his contributions here to the Company. I remember one of the questions that would come in as we were talking to the clients and then would say wait a second, which guy was it, the guy who wrote the book or the other guy who retired. Well, the guy who wrote the book is still there; in fact, he’s written two books. We are adding resources as we move ahead on this and we are looking to also expand the product line and are examining various ways to do that as well. So, the retirement has not in any way, shape or form injured or altered the performance or the sales flows, the enthusiasm, the morale or the activity of the fund.

So, just to make sure I understand this, that basically the institutional RFP activity or response has generally been or is basically continued as if there's been no change; is that the right way to think about it at this point?

Yes.

There are no further questions at this time. I would like to turn the call back over to Mr. Hanley for any closing remarks.

Thank you for joining us today. That concludes our comments.