Federated Investors' hosted its latest quarterly earnings conference call on Friday. CEO Chris Donahue says, "Looking first to Cash Management, total money market funds assets increased $6 billion in the third quarter compared to the prior quarter. Average money fund assets decreased slightly in the quarter due mainly to tax seasonality in separate accounts. Money market mutual fund average assets were nearly the same as the prior couple of quarters. Money market total assets increased $9 billion, or 4%, in Q3 versus Q2 and our market share increased to over 9%. Growth in government money fund assets was partially offset by a very modest decrease in prime assets and by lower muni funds assets. Following my remarks, Tom will address the money fund fee waivers and Debbie will comment on the current money market conditions and our expectations going forward."
He adds, "On the regulatory front, money funds continue to be an active topic of discussion. We are engaged in discussions with the regulators as they study various ideas that have been suggested. We believe that money funds were meaningfully and sufficiently strengthened by last year's extensive revisions to 2a-7. We are seeing those changes work successfully in real time with money funds and European bank investments, money funds and debt ceiling discussions, money funds and loss of USA AAA rating. Investors are able to see fund positions with unprecedented clarity and we have seen very low movement of money from our prime funds."
Donahue explains, "The SEC now has a view into the recent holdings of all money funds. The funds have had ample of liquidity in compliance with the revised regulations. Overall the regulations and the structure of money funds are working quite well in the midst of challenging market conditions. They continue to offer excellent cash management services to both shareholders and issuers. We remain favorably disposed to improvements that would enhance the resiliency of money funds by addressing the primary issue faced during the financial crisis namely a market wide liquidity crunch. We are unable to make predictions on any particular outcome or timeline in this area."
He tells us, "As of October 26, managed assets were approximately $355 billion, including $272 billion in money markets, $30 billion in equities, and $53 billion in fixed income, which includes our liquidation portfolios. Money market mutual funds assets stand at about $247 billion. So far in October, money market fund assets have ranged between $244 billion and $249 billion, with [an] average of $246 billion."
Donahue says, "Regarding acquisitions and offshore businesses, we remain focused on developing an alliance to further advance our business outside the U.S. We continue to work, and to grow our current offshore businesses. We launched a new sterling-dominated money fund in Q3 and added the fund to a multiple of global portals that already offered our other Ireland-domiciled products. We expect to complete the addition of the product to two new portals this quarter and to develop retail distribution to a major clearing platform in the U.K. as well."
CFO Tom Donahue comments, "Money market funds continue to be a very important source of revenue for Federated. Even as the extraordinary market conditions cause us to waive a significant portion of our revenues in this area. Revenues from money market assets were $93 million in the third quarter, about 44% of total revenue, down from a 10-year average of about 50% of our total revenue. Money market revenue net of distribution payments accounted for about 37% of our total revenue … down from a 10-year average of about 41%."
He explains, "Waivers impacted money market as expected. Full details are on the press release. As we look ahead, we think these waivers could impact fourth quarter by around $26 million in pretax earnings, compared to the $23.2 million in the third quarter. The expected increase is due mainly to the growth in government money market assets, which have the lowest gross yield and highest waivers. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields will likely reduce the impact on these waivers by about 40% from these levels and a 25 basis point increase will reduce the impact by about 70%."
Money Market CIO Debbie Cunningham comments, "From a European debt perspective, Federated continues to use European banks, 8 different countries, several banks within each of those different countries, in a fashion that on a percentage allocation basis is not drastically different from our usage of those banks in the past. All year long that average has been between 40 and 45% in our prime funds for exposure to the European banks. That continues to be the case, with the average today right around 43%. Don't expect that to change much going forward."
She explains, "Our strategy, however, has shortened over the course of the last several years and continuing over the last several months. [We have] maturity restrictions on many of those institutions, many of those European banks, as such we are making decisions on whether to roll over that debt every day, and effectively have shortened maturities from somewhere in the three to six month range down to somewhere that is [closer to] about one month, two weeks for some institutions and up to three months for others. On average, our decision making process and our ability to change those decisions should our monitoring and surveillance of those issuers warrant that change is very quick and very short from a time perspective at this time."
Cunningham adds, "We continue to believe that the overall credit quality of those institutions is as high as it gets from a minimum credit risk perspective and our assessment of those institutions.... Again, reiterating, the institutions and the banking companies that we are using in Europe are all very well situated to deal with these write downs and continue to represent minimum credit quality, constrain and risks within our prime portfolio."
Finally, on the Q&A portion of the call, Federated was asked, "Are you guys making money on the management treasury money market funds? President Ray Hanley answers, "We don't calculate fund ability at asset class level, but from a revenue stand point the answer is clearly 'yes'. We have revenue from the management of treasury and agency product with the yield environment.... [T]hese funds have essentially not had [net] yields for about three years now, so [they're] managed with a bias toward liquidity which means there is a lot of repo there.... That allow us to continue to operate the fund to have net revenue from the funds and not subsidize them the way most people define subsidy, meaning actually supporting the cost of the product. We are not doing that."
