Federated Investors, which last week announced reform strategies and changes to its money fund lineup (see our Feb. 20 News), also detailed risks and plans in its latest "10-K" Report with the SEC Friday. The filing revealed a 6% drop in money market fund assets to $258.8 billion at year's end. Overall, as of December 31, 2014, Federated managed $362.9 billion in assets, down 4% for the year. Money market funds were by far the largest segment of their asset base, or 71.3% of total assets. Of the total money market fund assets, $225.5 billion were in MMFs (down 6% for the year), and $33.3 billion were in separate accounts (down 7%). Federated managed money market assets in the following asset classes: government ($126.0 billion); prime ($105.1 billion); tax-free ($18.4 billion); and non-U.S. domiciled ($9.3 billion). Federated's investment products and strategies are primarily distributed in four markets: wealth management and trust (44%), broker/dealer (34%), institutional (19%) and international (3%). In the report, Federated also discussed the impact of fee waivers on revenues, and how it plans to adapt to MMF reforms with new 60-day MMFs.
The report discusses further the impact of the SEC's MMF reforms. "Management believes that the floating NAV will be detrimental to Federated's money market fund business and could materially and adversely affect Federated's business, results of operations, financial condition and/or cash flows.... Federated also is reallocating resources to plan and begin implementation of product development and restructuring initiatives in response to the 2014 Rules. While Federated's plans are not finalized and continue to evolve, and remain subject to fund board, and in certain cases, fund shareholder and other, review and approvals, Federated anticipates taking steps to adjust its product line to address the liquidity management needs of a broad array of customers."
The 10-K explains, "Such steps will include, for example, conducting shareholder votes to seek approval of changes to the organizational or governing documents of certain Federated Funds, such as Money Market Obligations Trust, the registrant for the majority of Federated's money market funds, proposing to modify, add share classes to or reorganize certain existing Federated Funds, and developing new products and strategies. Federated anticipates that the adjustments to Federated's product line will offer investors a full menu of product choices for liquidity management. For example, Federated will continue to offer Treasury and government money market funds, and will designate existing prime and municipal money market funds as either institutional or retail funds. Federated's Treasury and government money market funds will continue to seek a $1.00 NAV per share."
It continues, "Regarding retail money market funds, Federated plans to offer prime money market funds, national municipal money market funds, state-specific municipal money market funds, and variable annuity money market funds. Federated's retail money market funds will continue to seek to maintain an NAV of $1.00 per share. Regarding institutional money market funds, Federated plans to offer prime money market funds and national municipal money market funds. Regarding institutional prime and municipal money market funds, Federated anticipates converting certain existing Federated Funds to 60-day maximum maturity funds while other existing funds will remain 397-day maximum maturity funds."
On the 60-day maximum maturity funds, it says, "Federated anticipates that institutional prime and municipal funds selected to be 60-day maximum funds will begin to gradually limit their investments in late 2015 to securities maturing on or before December 14, 2016, which is 60 days post implementation, so that the funds can be restructured appropriately by the final mandatory compliance date for the 2014 Rules in October 2016. Each time a 60-day maximum fund calculates its NAV per share, it will use amortized cost to value its portfolio securities as long as there are no market quotations available and each such security's amortized cost approximates the security's fair value."
Federated's 10-K continues, "Beginning on or about the final mandatory compliance date for the 2014 Rules in October 2016, the 60-day maximum funds will attempt to maintain an NAV of $1.0000 per share and, under ordinary circumstances, the funds' per share price would be expected to experience little or no fluctuations.... Federated believes that the short maturity of the securities held by these funds should help to limit the instances when these events may cause a fund's $1.0000 NAV per share to change."
It adds, "Federated also anticipates that on or about the final compliance date for the 2014 Rules in October 2016 Federated will convert at least one Federated Fund to a floating NAV money market fund for customers seeking an institutional prime money market fund with potentially higher yields than the 60-day maximum money market funds. Federated also continues to explore investment strategies as investment options for certain customers and the feasibility of private funds that mirror existing Federated money market funds as investment options for qualified investors."
The report also comments on possible Financial Stability Oversight Council regulations. "FSOC may recommend new or heightened regulation for "nonbank financial companies" under Section 120 of the Dodd-Frank Act, which the Board of Governors of the Federal Reserve System (Governors) have indicated can include open-end investment companies, such as money market funds and other mutual funds. Management respectfully disagrees with this position. On December 18, 2014, FSOC published a Notice Seeking Comment on Asset Management Products and Activities seeking public comment on aspects of the asset management industry, including whether asset management products and activities may pose potential risks to the U.S. financial system in the areas of liquidity and redemptions, leverage, operational functions and the failure or closure of an asset manager or investment vehicle. (Comments are due by March 25, 2015.) Federated, individually and together with mutual fund industry groups, is participating in the public comment process. Management does not believe that asset managers and management products, such as money market funds, create systemic risk requiring regulation by the Governors and/or FSOC."
Concerning fee waivers, they explain, "Since the fourth quarter of 2008, Federated has voluntarily waived fees (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields. These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to non-controlling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of the waivers.... With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market funds as well as the mix among certain share classes that vary in pricing structure will impact the level of fee waivers. Generally, prime money market funds waive less than government money market funds as a result of higher gross yields on the underlying investments. Assuming asset levels and mix remain constant and based on recent market conditions, fee waivers for the first quarter of 2015 may result in a negative pre-tax impact on income of approximately $28 million, which is slightly less than the impact to each quarter included in 2014."
Finally, the report says, "Federated continues to explore opportunities to further expand its global footprint. In 2014, among other initiatives, Federated focused on growing distribution opportunities for its products and services in Canada and Latin America. In 2014, Federated also continued to seek acquisition candidates, both internationally and domestically."
