Federated Investors hosted its First Quarter 2013 Earnings Call on Friday morning, and President & CEO J. Christopher Donahue discussed asset flows, fee waivers and regulatory issues. He comments, "Our market share for money market funds decreased slightly in the first quarter. Money market separate account assets were up $8 billion in the first quarter, with most of the increase coming from the addition of [a] previously discussed State of Massachusetts' mandate. As expected, the impact of yield-related fee waivers increased in Q1.... On the regulatory front, public comments from an SEC commissioner indicate that a proposal may be forthcoming in the next couple of months.... Unless and until a proposal is put out for comment, there's not much in the way of additional commentary that I can make."
Donahue says, "We continue to advocate for sound policy that enhances the resiliency of money funds for our clients, who fully understand that money funds, like other investments, have elements of risk. They are not interested in radical and unnecessary changes like floating NAVs, holdbacks or capital requirements. Money fund investors have remained confident in the product as presently constructed, a dollar in and a dollar out, uninsured, transparent, invested in a diversified portfolio of high-quality securities and supported by proper accounting and market valuations. Our position is straightforward. We will continue to champion those things that enhance the resiliency of money funds while retaining the core features of a sound product with an unparalleled long safety record and success, all based on daily liquidity at par with the market rate of interest."
On Federated's Quarterly Money Market Update Thursday, CIO for Taxable Money Market Funds Deborah A. Cunningham comments that a new regulatory proposal might come "[in the] next couple of months, probably in Q2". But it "might get pushed" [back further] she adds. Cunningham doesn't think the FSOC is reviewing the 128 comment letters, and believes that FSOC is waiting for the SEC to act. She tells us, "I don't think it [the proposal] will be as draconian and problematic [as some believe]." While Cunningham told listeners, "We do think there will be a floating NAV" in the proposal, she doesn't expect it to make it to the final rule. Since the IRS reportedly declined to accommodate "de minimis" gains associated with transactions, this "adds another nail in [the] floating NAV coffin," she says. "Capital is off the table [with the] realization ... that [a] 3% [buffer] is far-fetched." Cunningham believes, "Some sort of gating will be part of the proposal ... [as well as] minor changes that might dial-in risk."
Federated CFO Thomas R. Donahue says of the rise in fee waivers on the earnings call, "The increase was due mainly to lower rates for treasury and mortgage-related securities. Based on current assets and expected yield levels, the impact of minimum yield waivers to pretax income in Q2 could be similar to the level it was in the first quarter. 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 a 25 basis point increase would reduce the impact by about 70%.... Revenues in Q1 decreased 7% from the prior quarter due largely to minimum yield waivers and fewer days, partially offset by higher average assets for equities, fixed income and money markets. Operating expenses decreased from Q4 due largely to lower distribution expenses due to minimum yield waivers and fewer days."
During the call's Q&A, Chris Donahue responds, when asked about "contingency plans" and money fund "alternatives," "Well, as regards what these guys might come up with, whether it's a variable NAV or not, it's a separate subject, which we can get into. But get to your question is the alternatives.... We have a very large separate account business, which works very well for very large clients.... Moving funds to offshore can be considered. Moving funds to other types of products, enhanced cash, etc., can be considered. Moving products to depository institutions and largely larger banks would also be considered."
He continues, "So all of these things, and there are other new products that I think could get created that haven't even shown up yet. Some have filed, including us, various forms of ETFs. But the thing about all of these alternatives is that none of them are as good for the customer, the economy or the issuer as the money market fund. But that would be an array of potential options. Obviously, the simplest one is if they throw prime funds under the bus, then everybody runs over the government funds."
When asked about new products taking market share from large players, Donahue responds, "I don't see that. I see more the impact of the regulatory environment that we live in as the continuing the oligopolization of the business. Perhaps that's not its intent, but that's certainly its effect. It's very difficult to start brand-new products, especially on the cash management side, when what the customer wants is daily liquidity at par. You need a bigger bunch of assets in order to make that viable. So I just don't see that."
Finally, he adds, "More likely, depending on what the proposal is, it will follow the line of a bunch of money moving into Govies if they trash prime and moving into large bank deposits for the rest of the money. That will be the main show. Then all these other products that could come up will take their place in line, but it'll be well behind. And I just don't see the underlying business efficacy of all new businesses for new type cash management products, which don't do what people want and require a lot more of assets than are available."
