Federated Investors' CEO Chris Donahue spoke yesterday morning at Barclays Capital's 2010 Global Financial Services Conference and discussed fee waivers, the liquidity exchange bank, and industry consolidation among other things money market. Donahue says Federated, which recently celebrated 55 years in the fund business, started with a simple concent. "[P]eople want to invest their money in pools with professional management and diversification," he comments.
Donahue says, "No story on Federated would be complete without some focus on our money market funds.... Our compound annual growth rate [in assets since 1999] has been about 9%.... We look at this business as a high single digit growth business.... We've seen a leveling off to slight increase in our asset flows. This is important in terms of evaluating waivers." The accompanying slides show Federated's assets at $231 billion as of 6/30/10, with $99 billion in bank trust, $43 billion in capital markets, $68 billion in broker dealer, and $21 billion in the corp/other channel.
He continues, "In the first quarter, our waivers of ordinary income were about $17.8 million dollars. In the second quarter they dropped to $13, and we said on our [earnings] call and are sticking with it, that for Q3 we are comfortable with the idea of $11 to 12 million dollars. That's reflective of a combination of a lot of different factors with a lot of changing variables. The one variable that doesn't appear to want to change too quickly is the Fed's attitude about what rates should be. Our people along with most of the rest of the pundits believe that changes in that are not in the offing for the rest of this year, more or less, for sure."
Donahue comments, "We're pretty happy with our position in the money fund business. So happy in fact ... that we're willing to add to this franchise and if do nothing else stimulate the consolidation that's going on here.... [A]s regards regulation, remember the watchwords of all of this various moves have been to quote 'enhance the resiliency of money funds,' whether it was the President's Working Group, whether it was Congress, whether it was the regulators, [or] whether it was Mary Schapiro.... Since 1980, $325 trillion dollars have successfully moved through money funds ... and they have paid $450 billion more in income than had that money been in a comparable MMDA account. Money funds are an integral part of the financial system as well, helping to assist, in a short term, financing Treasuries, Agencies, Munis, Commercial Paper, Repos and the like."
He adds, "In terms of other issues, for example, capital, this is always an issue that has been brought up in studied by various pundits. Our belief is that they are not going to assign capital to money market funds. We have always believed that the money market fund business is an investment product business and [you] should be judged on your competence and your experience in this business and that has proven to be the case.... What's really necessary to further enhance the resilience of money funds is the adoption of the liquidity bank."
Donahue explains, "This is an idea that grew out of a request form the Presidents Working Group.... [S]o the ICI Working Group came up with the liquidity bank idea. The idea is very simple. You create a state trust company or a bank that is then funded by two different things -- contributions by investment advisors who own commercial paper money funds and by the commercial paper money funds themselves. This capital builds up and is used for the purpose of taking care of liquidity problems. Notice I didn't say credit. This is a liquidity bank solution. At the end of the day the liquidity bank has access to Fed, and this was what really solved the problems in the money fund industry in the late September '08 time frame. So we think it is an excellent idea whose time has come."
Note also that BlackRock's Larry Fink will speak Tuesday morning at 9:45am EDT at the same conference. See the release entitled, "BlackRock CEO to Speak at Barclays Capital 2010 Global Financial Services Conference on September 14th," for details.
