Federated Investors, the fourth largest manager of money market funds, reported its latest earnings late last week and hosted its quarterly conference call Friday. The earnings release, entitled, "Federated Investors, Inc. Reports Third Quarter 2016 Earnings," shows that lower fee waivers continue to be a bright spot in the otherwise cloudy and rapidly-changing money fund sector. It says, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.54 for Q3 2016, compared to $0.42 for the same quarter last year on net income of $54.9 million for Q3 2016, compared to $44.1 million for Q3 2015. Federated reported YTD 2016 EPS of $1.48, compared to $1.17 for the same period in 2015 on YTD 2016 net income of $153.1 million compared to $122.2 million for the same period last year."
The Pittsburgh-based company tells us, "Federated's total managed assets were $364.3 billion at Sept. 30, 2016. Total managed assets were up $13.3 billion or 4 percent from $351.0 billion at Sept. 30, 2015 and down $2.9 billion or 1 percent from $367.2 billion at June 30, 2016. Growth in equity and fixed-income assets was offset by lower money market assets at the end of Q3 2016 compared to the end of Q2 2016. Average managed assets for Q3 2016 were $365.4 billion, up $13.5 billion or 4 percent from $351.9 billion reported for Q3 2015 and up $1.2 billion from $364.2 billion reported for Q2 2016."
They explain, "Money market assets were $248.4 billion at Sept. 30, 2016, up $1.5 billion or 1 percent from $246.9 billion at Sept. 30, 2015 and down $6.6 billion or 3 percent from $255.0 billion at June 30, 2016. Money market fund assets were $209.4 billion at Sept. 30, 2016, down $6.9 billion or 3 percent from $216.3 billion at Sept. 30, 2015 and down $8.7 billion or 4 percent from $218.1 billion at June 30, 2016."
The release continues, "Revenue increased by $60.3 million or 26 percent primarily due to a decrease in voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields (voluntary yield-related fee waivers), as well as an increase in revenue from higher average equity assets. This was partially offset by a decrease in revenue due to a change in the mix of average money market assets.... During Q3 2016, Federated derived 55 percent of its revenue from equity and fixed-income assets (39 percent from equity assets and 16 percent from fixed-income assets) and 45 percent from money market assets. Operating expenses increased by $45.9 million or 29 percent primarily due to an increase in distribution expenses as a result of a decrease in voluntary yield-related fee waivers."
Comparing "YTD 2016 vs. YTD 2015," it comments, "Revenue increased by $170.5 million or 25 percent primarily due to a decrease in voluntary yield-related fee waivers. The increase in revenue was partially offset by a decrease in revenue from lower average fixed-income assets. For the first nine months of 2016, Federated derived 54 percent of its revenue from equity and fixed-income assets (38 percent from equity assets and 16 percent from fixed-income assets) and 46 percent from money market assets. Operating expenses increased $122.2 million or 25 percent primarily due to an increase in distribution expenses as a result of a decrease in voluntary yield-related fee waivers."
The press release adds, "Voluntary yield-related fee waivers and their resulting negative impact could vary significantly in the future as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, yields on instruments available for purchase by the money market funds, actions by the Federal Reserve, the U.S. Department of the Treasury, the SEC, the Financial Stability Oversight Council and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets, changes in customer relationships, changes in the money market product structures and offerings, demand for competing products, changes in the distribution fee arrangements with third parties, Federated's willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by third parties."
On the earnings call, Federated President & CEO Christopher Donahue comments, "Now let's look at money market funds. Total assets in funds and separate accounts decreased by $7 billion from the second quarter and were up $1 billion from the 3rd quarter of '15. MMMF assets decreased by $9 billion from the 2nd quarter and $7 billion from Q3'15. Out MMMF share in October has been about 7.7%, down from about 8% at the end of 2015. About half of that decrease was due to about $4 billion shifted from a Federated Prime MMMF to a Federated managed separate account. As money moves into separate accounts and other non-'40 Act money market products, such as our new prime collective and new prime private funds, it will not be captured in the money market fund data for calculations of market share."
He continues, "In 2016, we saw approximately $11 billion move out of Federated Prime money market mutual funds into bank deposits. A significant portion of these redemptions were transitioned into a bank affiliate, in certain cases relating to M&A activity among brokers and banks…. With the 2014 money fund rules fully in place as of Oct. 14, we saw a significant shift from our Prime and muni money funds into our government money funds in Q3 and here into Q4. During Q3 and through Oct. 26, govt funds increased $48 billion, prime funds decreased by $53 billion and muni funds decreased by $10 billion."
Donahue adds, "We have launched our prime collective and prime private funds. These products have about $580 million at the end of Q3, with about $400 million shifting from Federated money market mutual fund products. With these product additions, extensive changes made to our money fund product line, [and] our separate account capabilities, we believe that our cash management business is well poised for growth."
He also tells us, "Taking a look at our most recent asset totals, as of Oct. 26, managed assets were approximately $357 billion, including $242 billion in money markets [including separate accounts], $63 billion in equity, $52 billion in fixed income. Money market mutual fund assets were $203 billion." CFO Tom Donahue adds, "An increase in yields of 25 basis points, could nearly eliminate the [remaining] effect of waivers <b:>)."
Finally, during the Q&A, MM CIO Deborah Cunningham tell us, "I think the fourth quarter will be a period of transition where people watch and make sure that all the plumbing is correct and that everything flows and works the way it is supposed to. I would expect that you will continue to see some movement in the fourth quarter. But 2017, with that calendar flip, will be the time when people start to re-address where they are and what they are using, from a money market standpoint."
Donahue comments on fee reductions by some providers, "I can't remember a time during the time when there isn't at least one player out there who are chopping at [fees] to gain market share." When asked about fee levels of Prime vs. Govt MMFs vs. SMAs, President Ray Hanley answers, "The net fee would be right around 12 bps, [and there's] not much variability between the two. Separate account rates tend to be about one-half of this (6 bps)." (See Seeking Alpha's earnings call transcript and also Federated's latest 10-Q filing.)
