Federated Investors, the third largest manager of money funds, continued to reap the benefits of the flight to cash in the fourth quarter. The Pittsburgh company's quarterly earnings release showed a huge money fund asset surge of $119 billion in 2008. On its quarterly earnings conference call, the company addresses concerns about ultra-low yields and fee waivers and strongly defended the current structure of the money market mutual fund product. Federated derived 69 percent of its revenue from money market assets in Q42008.
President and CEO J. Christopher Donahue said on this morning's call he "believes the core will remain intact" of money market funds, including "amortized cost, dilligent, independent credit work," and the $1.00 a share NAV. "Investors understand that money funds are investment products and that investments involve risk," he said, dismissing suggestions of capital requirements for funds. "We believe it [the money fund] will transcend the difficult market conditions that we are experiencing now.... I wouldn't assume there's going to be a capital charge."
On fee waivers, Donahue said, "While waivers reduce income, the growth of assets has made it possible for Federated to perform well." Federated's release warned, "Fee waivers to produce positive or zero net yields are expected to increase and these increases could be significant," but said the levels of waivers would be based on yields, assets, types of funds, expenses, and the advisor's willingness to sustain the waivers. The company also addressed and downplayed the overall threat of low yields to money fund economics in its Q&A, saying that waivers have cost the company $560K in waivers the first three weeks of January.
Federated's earnings cited a "$5.6 million increase in voluntary fee waivers for competitive reasons, which included $3.4 million in fee waivers on certain money market funds in order to maintain zero to positive net yields. The increase in fee waivers was offset by a related reduction in marketing and distribution expenses of $1.9 million such that the net impact on operating income was a decrease of $1.5 million." They noted increasing Treasury yields, the shift away from Treasury funds into Govt and Prime, and their growing economies of scale as alleviating factors.
The Federated press release said, "Asset growth for 2008 was driven by a $119.1 billion increase in money market assets. Average managed assets for Q4 2008 were $369.8 billion, up $79.7 billion or 27 percent from $290.1 billion reported for Q4 2007 and up $34.7 billion or 10 percent from $335.1 billion reported for Q3 2008." Donahue said in the release, "As investors sought haven from unprecedented market conditions, demand for our money market funds and fixed-income investments during 2008 enabled Federated to reach record highs in managed assets."
"Money market assets in both funds and separate accounts were $355.7 billion at Dec. 31, 2008, up $119.1 billion or 50 percent from $236.6 billion at Dec. 31, 2007 and up $67.9 billion or 24 percent from $287.8 billion at Sept. 30, 2008. Money market mutual fund assets were $327.3 billion at year end, up $112.3 billion or 52 percent from $215.0 billion at Dec. 31, 2007 and up $68.1 billion or 26 percent from $259.2 billion at Sept. 30, 2008," says the release. Donahue added that Federated has seen increases continue in January with Prime funds seeing the bulk of inflows.
