Federated released its Q3 earnings late last week and hosted an earnings call on Friday. Their press release, entitled, "Federated Investors, Inc. Reports Third Quarter 2017 Earnings," states that, "Federated ... reported earnings per diluted share (EPS) of $0.56 for Q3 2017, compared to $0.54 for the same quarter last year on net income of $56.4 million for Q3 2017, compared to $54.9 million for Q3 2016. Federated reported YTD 2017 EPS of $1.57, compared to $1.48 for the same period in 2016 on YTD 2017 net income of $159.5 million compared to $153.1 million for the same period last year. Federated's total managed assets were $363.7 billion at Sept. 30, 2017, down $0.6 billion from $364.3 billion at Sept. 30, 2016 and up $3.3 billion or 1 percent from $360.4 billion at June 30, 2017. Lower money market assets were partially offset by higher equity and fixed-income assets at the end of Q3 2017 compared to the end of Q3 2016." The company also posted a new "10-Q" filing. (See Seeking Alpha's earnings call transcript here.)
Federated says, "Money market assets were $243.8 billion at Sept. 30, 2017, down $4.6 billion or 2 percent from $248.4 billion at Sept. 30, 2016 and up $1.7 billion or 1 percent from $242.1 billion at June 30, 2017. Money market fund assets were $177.9 billion at Sept. 30, 2017, down $31.5 billion or 15 percent from $209.4 billion at Sept. 30, 2016 and up $4.6 billion or 3 percent from $173.3 billion at June 30, 2017. Since Sept. 30, 2016, approximately $21 billion in money market assets have transitioned from Federated funds to Federated separate accounts. Federated's money market separate account assets were $66.0 billion at Sept. 30, 2017, up $27.0 billion or 69 percent from $39.0 billion at Sept. 30, 2016 and down $2.8 billion or 4 percent from $68.8 billion at June 30, 2017."
They state, "Revenue decreased by $16.3 million or 6 percent primarily due to lower average money market assets and a decrease in revenue resulting from a change in a customer relationship. The decrease in revenue was partially offset by 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 an increase in revenue from higher average equity and fixed-income assets."
Federated's release continues, "During Q3 2017, Federated derived 60 percent of its revenue from equity and fixed-income assets (43 percent from equity assets and 17 percent from fixed-income assets) and 40 percent from money market assets. Operating expenses decreased by $16.4 million or 8 percent primarily due to a decrease in distribution expenses related to lower average money market fund assets and a change in a customer relationship, partially offset by an increase in distribution expenses related to a decrease in voluntary yield-related fee waivers. The decrease in operating expenses is also attributable to a decrease in compensation and related expenses resulting from lower incentive compensation."
During the earnings call, President & CEO Christopher Donahue comments, "Money market mutual fund assets increased by about $5 billion from Q2. Separate account money market assets were down $3 billion, reflecting tax and other seasonal factors. Our money market mutual fund market share at the end of Q3 was 7.3%, down slightly from the prior quarter, 7.4%."
He continues, "Prime money fund assets increased about 5% in Q3. We believe more investors will consider prime based cash management options over time, including our private and collective funds which preserve the use of amortized cost accounting and do not have the burden of a redemption fee and gate provisions. Assets in these newer products were just under $750 million at quarter end, up from $636 million in the prior quarter."
During the Q&A, Donahue responded to a question about fee pressures, saying, "There are obvious pricing [impacts] when $1 trillion moves from prime to govies, so you get some of that. However, a bigger factor for the future will be the spread between the govie funds and the prime funds, which is right now running at about 30 basis points. [This] is more than double the historic spread that caused prime funds to have all that money in the first place. It is our belief that over time you will start to see people move to that direction, which we are starting to see because it's worth it to them."
Cunningham adds, "On a year-to-date basis, Prime assets have gained about $70 billion from an industry standpoint. We have products that are up over 50% in that prime space. Absolutely, the products are competitive from a pricing standpoint. But historically that has always been the case. I don't think it is really any different at this point than it has been in prior cycles." Donahue also says, "The two new [private] funds we created, that I referenced in my [earlier] remarks ... are now over $850 million. We're having meetings and customer interest in those funds."
Donahue answered another question about money moving out of Government funds, responding, "One of our top funds for the quarter was our ultra-short fund, and that was about $250 million of positive flows. So, you do see some of that. But the other factor that is ... that since [2008], you've seen a dramatic increase in deposits, deposits in banks at no interest or very, very low interest. At some point, that is going to unwind and return itself to the thrilling days of yesteryear where money funds in general and prime funds in particular have a substantial interest advantage over those. I think you are going to see a return to that.... The banks have their own issues."
Another question asked about brokerage sweep assets shifting to banks. Federated President Ray Hanley responds, "Over the last year or two we have seen [some more of] that; we still see some modest activity there. But the majority of the brokers that we are working with would be not as big as the type you mentioned. But we have seen over several quarters where brokers have shifted money onto their affiliated bank's balance sheets."
Federated's new 10-Q states, "Revenue Concentration by Customer. Approximately 16% of Federated's total revenue for both the three- and nine-month periods ended September 30, 2017, and 15% for both the three- and nine-month periods ended September 30, 2016, was derived from services provided to one intermediary customer, The Bank of New York Mellon Corporation, including its Pershing subsidiary. Significant negative changes in Federated's relationship with this customer could have a material adverse effect on Federated's future revenues and, to a lesser extent, net income due to a related reduction in distribution expenses associated with this intermediary."
