On Federated Investors' Third Quarter 2014 Earnings Call Friday morning, Chris Donahue, Federated's president and CEO, discussed some of the new products that the company is considering as it prepares for the money market reforms to kick in starting in October 2016. "We, of course, are working on various projects related to the SEC rules that were issued in July," said Donahue. "We expect to have products in place to meet the needs of all of our money fund clients -- these are likely to include prime and municipal money market funds modified to meet the new requirements, government money funds, separate accounts, and offshore money funds. We're also working on developing privately placed funds that will likely mirror existing Federated money market funds to serve the needs of groups of qualified investors unable to use the money funds that have been modified by the new rules."
The modified funds that Federated is looking to develop are 60-day and under maturity funds. They have piqued the interest of some of Federated's clients. "Perhaps the 60 days fund has inched ahead of the private funds as answers for people who don't qualify to stay in the existing funds," stated Donahue. "The separate accounts are not having as big a reception as we thought they might get and the variable net asset fund as per the rule we still don't think has a lot of legs." He added, "We're also looking at the whole structure of the products, especially on the government side. There's going to be a lot more interest in government funds as one of the main receivers of money, so there's going to be more competition there."
Donahue elaborated later in the call on a possible future roster of MMFs. "At this point, the most likely thing is there will be 60 day funds, there will be government funds, there will be private funds ... and then there will be retail funds. As I mentioned on this call before, you can't use any definition of retail that you had in your head before, you have to have a new definition of retail. So there is no doubt that we will be offering retail funds. Then, hanging in the balance is whether we'll have any of these floating NAV institutional prime funds. I'm still doubtful of it."
Later in the call, Donahue reiterated his thoughts on the future of floating NAV money funds. "My guess would be as it was at the beginning, and I haven't changed it -- those kinds of funds aren't going to be viable at all. The more likely thing that we're going to do is use the existing funds that we have and have them either be for retail or have them be 60 day funds. Whether or not any of them will be variable net asset value money funds ... I'm not certain of that now, but I would be inclined to doubt it."
Federated CIO Debbie Cunningham added that client attitudes toward institutional prime floating NAV funds have changed slightly. "Over the course of the last 3 months ... we've been doing a series if about 20 different road shows across the country. One of the first ones was in late July, and when we mentioned the variable NAV product ... there was nobody in the room that raised their hands or had any interest in that type of product. However, we just did one on Monday of this week, where, I would say, that ... one person at every table had raised their hands that they still would have an interest in the product, even with the variable NAV component. So I think there has become a little bit more of a potential acceptance."
When asked about supply, Cunningham said, "Suffice it to say it's a lot more dificult today than it was 3 or 4 years ago to find appropriate coverage from a supply perspective. Having said that, there are new issuers in the markletplace on a somehwat regular basis. We're using a lot more of what I'll call 'semi-sovereigns', which are not the countries themslves, but generally entities within the countries that they are guaranteeing. We recently approved the country of Finland and the largest Finnish bank. So there are areas of growth, but generally speaking, it's you kind of have to look under quite a few rocks to find the gold that lays under there."
On fee waivers, CFO Tom Donahue said the firm had money fund yield waivers of of $30 million in Q3, about the same as the last quarter and Q3 2013. He estimates that gaining 10 basis points in gross yields would likely reduce the impact of waivers by about 45%, and a 25 bps increase would reduce the impact by about 70%. On the M&A front, they are still looking at acquisition opportunities in the money fund world.
The earnings release says, "Money market assets were $245.5 billion at Sept. 30, 2014, down $24.8 billion or 9 percent from $270.3 billion at Sept. 30, 2013, and up $0.3 billion from $245.2 billion at June 30, 2014. Money market mutual fund assets were $215.2 billion at Sept. 30, 2014, down $22.7 billion or 10 percent from $237.9 billion at Sept. 30, 2013, and up $2.8 billion or 1 percent from $212.4 billion at June 30, 2014. Money market market share was 8.3%, same as last quarter."
In conclusion, Donahue said, "Our goal is to have a warm and loving home for all of our clients. I would say that after a lull in the action, we'll be back on the growth path on money market fund assets as we come to the end of the two year period."
