Federated Investors reported a jump in earnings for the first quarter of 2016, due primarily to higher yields and reduced fee waivers. Their Q1 earnings call Friday also featured some discussion of new products, including a private money fund and a collective fund for retirement accounts. Federated also commented on how assets may shift and settle leading up to and beyond the MMF reform implementation date in October. Debbie Cunningham, CIO, Global Money Markets, said, "They [investors] are enjoying that additional yield spread right now, and the question they're asking is, 'How do I continue to use this product and enjoy this yield spread as these regulations roll in?' It's a different question than maybe a year ago when it was, 'What do I need to do and when do I need to switch?"

Federated's press release explains, "Money market assets were $262.0 billion at March 31, 2016, up $13.8 billion or 6 percent from $248.2 billion at March 31, 2015 and up $5.6 billion or 2 percent from $256.4 billion at Dec. 31, 2015. Money market mutual fund assets were $224.7 billion at March 31, 2016, up $10.4 billion or 5 percent from $214.3 billion at March 31, 2015 and up $3.1 billion or 1 percent from $221.6 billion at Dec. 31, 2015."

In Q1, it says, "Revenue increased by $28.5 million or 12 percent primarily due to a decrease in voluntary yield-related fee waivers. Operating expenses increased by $30.8 million or 18 percent primarily due to an increase in distribution expenses as a result of a decrease in voluntary yield-related fee waivers." Year-over-year, revenue increased by $51.6 million or 23 percent primarily due to a decrease in voluntary fee waivers. Federated reported that the pretax impact of money fund yield related waivers of $9.4 million was down from $16.4 million at the end of the prior quarter.

CFO Tom Donahue said the decreases were due mainly to higher fund gross yields. He comments, "Based on current assets and yields, we expect an impact of these waivers on pretax income in Q2 to be about $6 million. An increase in yields of 25 basis points could lower this waiver impact to about $2 million per quarter and a 50 basis point increase could nearly eliminate these waivers.... As we've previously discussed, the impact of the change in one of our customer relationships may reduce pretax income by about $6 million per quarter when fully implemented late in 2016." (See our March 10 News, "Federated, Edward Jones Restructure Money Fund Deal; New 10-K Filing.")

In his remarks, CEO Chris Donahue said, "As you are all aware, we are moving into the later innings of a substantial effort to position our money market products in advance of the October 2016 requirement for floating NAVs for Institutional Prime and Muni funds. We recently announced further operation details, including the FNAV "strike times" for Institutional Prime and Muni funds. We also made the required disclosures to provide additional money market information on our website for our funds -- this includes daily reporting of daily and weekly liquid asset percentages, net shareholders inflows and outflows, and shadow NAVs."

Donahue continued, "We also conducted a road show for our planned new Private fund, with a targeted mid-year launch, and are developing a new Collective fund. We will have a robust set of products and choices for our Institutional customers as they navigate the new landscape for cash management during 2016 and beyond."

During the Q&A with analysts, the CEO elaborated on the Collective fund. He explained, "We are coming up with a Collective fund ... utilized for retirement assets only, and we think this will be a good addition to the pot. [It] will be a good DOL-proper fund that will have good staying power into the future for cash." On the recent DOL (Department of Labor) ruling, Donahue said he doesn't see the rule having any impact on cash investments.

There was a question about what drove inflows in Q1, a quarter which usually sees outflows. Deborah Cunningham, CIO, Global Money Markets, responded, "I would definitely say the increase in Q1 is the result of lower waivers and higher yields being paid out to participants in the marketplace. Certainly getting off zero or one basis point has had a positive influence on the assets during the first quarter."

One analyst asked about expectations for money moving. Chris Donahue answered that he doesn't expect much investor movement until the summer or closer to the deadline. He said, "Some [clients] are just getting aware of what is going to happen. What is, in part, shaking more action, is the movement by some of the funds to do different things. The most recent thing we did was announce strike times. That doesn't move assets, but it's yet another communication that something else is different, and you're going to have to decide where to go. We just haven't seen the big movements of the underlying clients yet."

Cunningham added, "Basically, Government vs. non-Government [assets] are equal at this point. So, with a $2.8 trillion industry, about $1.4 trillion is in Govie and about $1.4 trillion is in non-Govie, which would be Prime and Muni. That's definitely a shift from the norm, which was $1.8 trillion or so in non-Govies and about $1 trillion in Govie. The majority of that movement has come from products changing their Prime focus to Government. Federated has not done this, but others in the industry have basically converted what were large Prime funds into Government funds.... As far as client flows go, it certainly seems as though the second and into the third quarter will start to produce some [shifts], but you're not seeing them en masse yet at this point."

She does expect to see some money moving in Q2, specifically related to competitors, not Federated, that have booted out Institutional investors from those funds deemed Retail under the new categorizations. Cunningham comments, "That's taking place in the second quarter for a few types of products, and we think we'll see that continue to occur. But again, we're not seeing that from our own standpoint."

She added, "We did have various road shows across the country over the course of the last month and a half.... I'd say our clients are enjoying the additional yield spread of about 20-22 basis points of Prime funds over Government funds, whereas historically that spread has been around 12 or 13 basis points.... Our weekly liquid assets -- assets that are most easily convertible into cash for redemption purposes on any given day -- are drastically different for our Institutional Prime funds than they have historically been. `They are much higher at this point.... The Retail and Institutional Prime funds have been positioned accordingly with shorter WAMs, more weekly liquid assets, and shorter barbells."

Going forward, Cunningham is optimistic. She says, "I definitely feel like there will be a continuation of normal or higher level of assets. Chris [Donahue] has said in various discussions that post-reform in October 2016, going into 2017, we believe we will have assets in the cash space that are higher than they were pre-reform announcements back in 2014. We don't necessarily think this will be a deterrent from an asset perspective. How is that mix of assets ultimately going to position itself?"

She answers, "Certainly there will be Institutional clients who are in Prime and Muni funds today that will go into Govie funds initially in the October 2016 time frame. Depending on what spreads get to, and the performance of those funds from a volatility perspective ... and ultimately looking at them against other funds on a total return basis rather than just on a yield basis, I think clients will [move] back into that space in 2017 and beyond. There will be transitions and movements, lots of clients' money in motion. But ultimately I do believe the assets will be higher post reform."

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