Federated Investors reported its Fourth Quarter Earnings late last Thursday and hosted its Q4 2016 Earnings Conference Call on Friday. (See the Seeking Alpha transcript here.) Federated's release says, "Federated's money market assets were $252.2 billion at Dec. 31, 2016, down $4.2 billion or 2 percent from $256.4 billion at Dec. 31, 2015 and up $3.8 billion or 2 percent from $248.4 billion at Sept. 30, 2016. Money market mutual fund assets were $206.4 billion at Dec. 31, 2016, down $15.2 billion or 7 percent from $221.6 billion at Dec. 31, 2015 and down $3.0 billion or 1 percent from $209.4 billion at Sept. 30, 2016."
Comparing Q4 2016 vs. Q4 2015, the release says, "Revenue increased by $46.3 million or 19 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) and, to a lesser extent, an increase in revenue from higher average equity assets. The increase in revenue was partially offset by a decrease in revenue from lower average money market assets.... During Q4 2016, Federated derived ... 44 percent from money market assets. Operating expenses increased by $38.3 million or 23 percent primarily due to an increase in distribution expenses as a result of a decrease in voluntary yield-related fee waivers, partially offset by lower average money market assets."
President & CEO Christopher Donahue commented on the earnings call, "Now looking at money markets, total assets in funds and separate accounts increased by $4 billion from Q3 and were down $4 billion from the end of 2015. Money market mutual fund assets decreased by $3 billion from Q3 and $15 billion from Q4 of 2015, while separate accounts added $7 billion from the prior quarter and $11 billion for the full year. The post-October 14th reform driven shift from Prime and Muni money funds into Government money funds didn't change much through the year. We expect that as spreads widen investors who exited Prime Funds will we consider their options over time, including our newly launched Private Prime and Collective Prime Funds. We also expect a rising rate environment will be positive for money funds generally and in particular as compared to banks deposit alternatives."
On recent assets, he continued, "As of January 25, managed assets were approximately $363 billion, including $249 billion in money markets.... The money market mutual fund assets were $199 billion and the January average money market fund assets are running about $200 billion. Looking at distribution, Q4 was another solid sales quarter for our SMA business with over $2 billion in gross sales and $600 million in net sales. Total SMA assets ended the quarter at $23.6 billion, an increase of nearly 7 or 40% for the year 2016. SMA assets nearly doubled over the past three years.... We also continue to seek alliances, acquisitions and other activities to advance our business in Europe and Asia PAC region as well as in the U.S. and the rest of the Americas."
CFO Thomas Donahue said, "Revenue was up 19% compared to Q4 of last year due to lower money fund yield waivers. Revenue decreased 2% from the prior quarter due to lower money market asset and related revenue. Q4 revenues include the impact of approximately $3 million related to a non-recurring fee credit from a fund service provider, which resulted in reduced regular fund fee waivers. Revenue increased 23% for 2016 compared to 2015 driven by improvements in money fund waivers and equity related revenue."
He continued, "The increase from 2015 was due mainly to higher money market fund distribution expense as a result of the lower waivers. The sequential decrease was due mainly to lower costs and related expenses reflecting changes to incentive compensation accruals. Distribution expense includes a $2 million expense to correct certain under payments of past distribution costs. The previously discussed change in one of our customer relationship is expected to be completed today. For Q1, the reduction to our pre-tax income is expected to about $1 million compared to Q4's run rate and $2 million on a full quarter basis for future quarters."
Donahue added, "The pre-tax impact of money fund yield waivers of $3.4 million was down from the prior quarter's number of $4.2 million and Q4 of last year's number of $16.4 million. The decreases were due mainly to higher fund gross yields. Based on our current assets and yields, and with the expected customer change, we expect the impact of these waivers on our pre-tax income in Q1 to be about $1 million, dropping down to about $350,000 in Q2 and if there are further Fed rate increases, these numbers should go immaterial level."
When asked about separate accounts, flows and their new private fund, Tom Donahue responded, "The vast majority of the separate account money market inflows would have been from our existing separate accounts to state pool business.... We talk about seasonality in that business runs along the tax collection and the state spending cycle. So typically Q4 and Q1 into the first part of Q2, we see inflows and outflows over the subsequent two quarter as money is being utilized by the state."
He also commented, "We did have positive flows in the private prime fund; they would have been fairly nominal at this point, but there is a considerable amount of the interest. There is a long runway ... to having our clients adopt the agreements necessary to use that kind of fund. It is structurally much different than a mutual fund. But we did add customer relationships in the fourth quarter to the private fund and we have a good pipeline of interest and agreements in process now."
Chris Donahue told the call, "What the clients were doing, as we have mentioned before and I think that's been true across the industry, is ... really looking and seeing what the lay of the land was going to be. [They wondered] how things were going to work, [and were] play[ing] it safe in governments. [They wanted to] check out and see how the new products work, how much spread is there going to be and bide their time as they come into 2017. And I think that's what is going to happen. It isn't going be any kind of sudden movement, it will be something that occurs over time."
When asked about rates, Donahue answered, "I think that basically when you have rates going up, when you look at the onslaught that money funds have suffered over these many, many years, there is a great desire to have the final end product, i.e. daily liquidity of par. And so as rates go up, I think you will see increasing amounts of money coming into the business.... Then as you point out, because they have put a few dents in the prime product, maybe more than dents, those receptacles aren't there. So the spreads are going to be a key factor. Once they get to 50 basis points or so, I think you will see more movement occurring. They're around 40 or so right now and I think people will be digesting that and seeing what to do."
He added, "I also think there are some, at least we are working on it, [that are] trying to change these products and get them back to the way they were in 2010. And there are lot of different angles on that as well.... Finally, I would add that it also depends on when these rates come through. Our house view is that we think two more are likely and more than likely get coming in March and September rather than June and December and then that would leave open yet another possibility in December."
