Federated Hermes, Inc. (FHI) Q3 2013 Earnings Report, Transcript and Summary

Greetings and welcome to the Federated Investors Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ray Hanley. Thank you, Mr. Hanley. You may begin.

Good morning and welcome. Leading today's call will be Chris Donahue, Federated CEO and President; and Tom Donahue, Chief Financial Officer. And we also have Debbie Cunningham, Chief Investment Officer for Federated Money Market, participating in our Q&A session. And let me say that during today's call, we may make forward-looking statements and want to note that Federated's actual results may be materially different than the results implied by such statements. We invite you to review the risk disclosures in our SEC filings. No assurance can be given as to future results and Federated assumes no duty to update any of these forward-looking statements. And with that, I'll turn it over to Chris.

Thank you, Ray, and good morning. I'll begin today with a brief review of Federated's business performance and Tom will comment on our financials. Looking first to cash management. Period-end money market fund assets increased by $5 billion from Q2, while average money market fund assets decreased by $3 billion. We saw gains in government funds, partially offset by lower assets in Prime and Muni. Our market share was just under 9%. The impact of yield-related fee waivers increased in the third quarter as repo rates declined substantially from the prior quarter. Tom will comment further on this in his remarks. On the regulatory front, Federated filed a series of comment letters in response to the SEC's money market fund proposal, which was published in June. We were heartened to see that many of our clients and issuers that we invest with went on the record to express their strong concern with the measures proposed by the SEC. The overall response to the SEC has been broad based. Many individuals and groups representing literally millions of businesses, treasury and financial professionals, as well as state and local government finance professionals and investment officers have submitted their views for consideration. These responses overwhelmingly express opposition to Alternative One, the SEC's floating NAV proposal. In fact, over 98% of the more than 1,400 letters expressed opposition to the SEC's floating NAV proposal. Some of the noteworthy groups going on the record against the floating NAV proposal include the U.S. Chamber of Commerce, representing more than 3 million businesses and organizations; the American Bankers Association, the voice of the $14 trillion dollar banking industry; the Association for Financial Professionals, representing more than 16,000 treasury and financial professionals; the American Council of Life Insurers, representing 300 members and 90% of the assets and premiums of the life and annuity industry; and a host of government and municipal finance and investment organizations like the National Association of State Treasurers, The U.S. Conference of Mayors, the National League of Cities and others. Now approximately 90% of the comments supported Alternative Two, which is the voluntary gating and fees concept that was proposed. And many proposed to accept this, but with modifications. Given the significant issues raised by Federated and others, we expect a lengthy review process that is likely to go into 2014. We, and many others, find that the case has not been made for floating the NAV of a money fund as a remedy for the regulator's expressed concern about increased redemptions in periods of market stress. Floating the NAV would impose significant operational burdens, create extensive new tax and recordkeeping requirements and result in enormous new cost for system reprogramming and recordkeeping. Less efficient capital formation would add material cost for corporations and other issuers in a post-institutional prime money fund world. While the costs are large and burdensome, the benefits are illusory at best. We believe that there is no discernible meaningful benefit that would be achieved by floating the NAV. And certainly, there would be no benefit in stopping so-called runs. In contrast with the floating NAV, gating, that is, giving the fund's Board of Directors the option of imposing a temporary gate on redemptions in extremely rare occurrences of dysfunctional market conditions, promotes the equal treatment of investors and improves the financial markets by stopping a run dead in its tracks. It has proven to be effective in practice, recall the Putnam transaction in '08, and most importantly, preserves the critical features and benefits of money funds. Money funds continue to enhance our financial system and to operate effectively. The recent U.S. government debt ceiling crisis is only the latest in a series of tests that money funds have convincingly passed since the extensive regulatory changes were enacted in 2010. We expect that sound policy will win out, thereby preserving the crucial features of money funds that have made them so important to tens of millions of investors, to thousands of short-term debt issuers, including state local government entities and corporations. Now turning to equities. Gross equity fund sales were strong, up 28% compared to Q3 of 2012, down only slightly from the recent high level attained in the second quarter of this year. On a year-to-date basis, gross equity fund sales are up 15%. Equity separate accounts showed positive flows, driven again by the Strategic Value Dividend strategy. Net equity fund flows were negative in the third quarter due to approximately $1 billion of redemptions from 2 clients. In addition to the $220 million index fund redemption mentioned on the last call, another client redeemed $770 million from the Kaufmann Funds. Recall that even though through September 30, the Kaufmann Fund was in the fourth quartile for the third and -- for the 3- and 5-year period, for the trailing 1 year, it has climbed into the top third. Now overall, our equity franchise is very well positioned with a variety of products exhibiting strong 3-year records and positive flows. We have 12 funds, or about half of our strategies, with top quartile 3-year records covering a wide span, including international, balanced allocation, income, growth, large and small cap, global allocation, core, value and index strategies. We also had 12 funds with net positive sales in the third quarter, including Kaufmann Large Cap growth, Capital Income balanced allocation fund, Strategic Value Dividend, both domestic and international, Clover Small Value, International Leaders and the Managed Volatility solutions product. Looking at early Q4 equity fund flows, net flows are solidly positive, led by Capital Income, Kaufmann Large Cap and domestic and international Strategic Value Dividend, Managed Volatility and the small -- Clover Small Value Funds. Equity SMA flows are also slightly positive early here in the fourth quarter. Now taking a look at fixed-income. The third quarter produced lower net fund outflows compared to the prior quarter, where Federated and the industry experienced a rapid move by investors out of bond products in June. Fixed-income separate account net flows were positive. We continue to see solidly positive flows into high-yield, short duration and stable value funds and into a collective fund pursuing a multisector strategy for a large institutional customer. We are seeing an uptick in flows in our floating-rate strategy, which takes a differentiated multi-asset class approach to the floating rate space. At quarter end, we had 12 fixed-income strategies with top quartile 3-year records: Federated Bond Fund, high-yield institutional, our Intermediate Gov/Corporate, Emerging Market Debt, Ultrashort Bond, Short-Intermediate Duration, our muni trust, among others. Fixed-income outflows are slightly negative for the first couple of weeks of October. Turning to overall fund performance and looking at Morningstar-rated funds, 44% of rated equity funds are in 4- and 5-star products as of the end of the quarter and 73% are in 3-, 4- and 5-star products. For bond funds, the comparable percentages are 49%, 4- and 5-star; and 86%, 3-, 4- and 5-star. As of October 23, managed assets were approximately $363 billion, including $265 billion in money markets, $42 billion in equities and $56 billion in fixed income, which includes our liquidation portfolios. As part of this, money market mutual fund assets stood at about $233 billion. So far in October, the money fund assets have ranged between $229 billion and $238 billion and have averaged $233 billion. Turning to distribution. Equity fund gross sales are up 15% year-to-date compared to the same period last year. We have seen a 26% growth in the broker/dealer channel, which has been helped by the addition of wholesalers and related resources. We have expanded the number of advisers doing business with us and increased the product set used by these advisers. We are considering further modest growth of sales personnel in this channel. Interestingly, the number of advisers doing business with us is approximately 39,000 FAs, up from 36,000 in '11 and 29,000 in '08. In the institutional channel, at quarter end, we had about $476 million in equity as separate account additions yet to be funded. Regarding our offshore business and acquisitions, we continue to develop our Asia Pac operation in Australia and we are in an active search for a Head of Sales in Australia, followed by similar additions in Hong Kong and Singapore. We recently announced the expansion of our U.K. operations. We are moving a Pittsburgh-based trade-financed Portfolio Manager to London in a supervisory capacity and added 3 highly experienced trade finance investment professionals to our London office. We also added 2 London-based emerging market debt investment professionals who bring decades of experience to our EMD team. We continue to actively seek alliances and acquisitions to advance our business in Asia, Europe, as well as in the U.S. Tom?

Thank you, Chris. Taking a look first at money fund fee waivers. The impact to pretax income in Q3 was $30.3 million, up from $23.7 million in the prior quarter. The increase was due mainly to lower rates for treasury and mortgage-related securities. In July, our estimate of $28 million for the Q3 waiver impact used a repo range of 3 to 8 basis points. The actual repo range was lower at about 2.5 to 4.5. In addition, approximately 500,000 of the higher waiver impact was from proxy costs related to changes in the Federated Fund Board of Directors. Based on current assets and assuming overnight repos for treasuries and mortgage-backed securities run at between 3 and 6 basis points over the quarter, the impact to minimum -- of minimum yield waivers to pretax income in Q4 would be about the same as in Q3. Revenues in Q3 decreased 5% from the prior quarter due largely to minimum yield waivers and, to a lesser extent, to lower average fixed-income and money market assets and to the impact of higher waivers due to the director proxy costs. These items were partially offset by the impact of an extra day in the quarter, higher average assets for equities and performance fees. Operating expenses decreased from Q2, largely to lower distribution expense, resulting from higher minimum yield waivers and to lower comp and related expenses. Distribution expense included approximately $1 million of director proxy costs. The impact of director proxy costs also reduced noncontrolling interest by about $0.5 million. In total, the impact of the director proxy to pretax income was a reduction of approximately $2.2 million. Nonoperating income included $4.4 million of realized gains from investments and an impairment charge of $3.1 million related to a change in the fair value of a minority interest investment, which now has a remaining book value of $600,000. The Q3 effective tax rate was 35.7%. The rate was reduced by about 2.2% due to the reversal of a capital loss carryforward valuation allowance related to the capital gains realized. We estimate the effective going-forward rate to be around 38%. Looking at our balance sheet. Cash and investments totaled $351 million at quarter end, of which about $259 million is available to us. Looking forward, cash and investments, combined with expected additional cash flow from operation and availability under present debt facilities, provide us with significant liquidity to be able to take advantage of acquisition opportunities and related contingent payments, share repurchases, dividends, new product seeds and other investments, capital expenditures and debt repayment. We would now like to open the call up for questions.

[Operator Instructions] Our first question is from Ken Worthington of JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Two questions, maybe first on the non-U.S. equity presence. Maybe can you update us on how sales are progressing in Europe? You've got some distribution relationships there. How you're thinking about Asia? And then lastly, given RDR in the U.K., how do you kind of fit into the new world, given new rules that have and will continue to go into effect in the U.K.?

Let's work backwards. With RDR, obviously, that has already been implemented and has already had some effect in the U.K. And we think one of the things this will do is expand distribution opportunities -- I mean, acquisition opportunities for us in the U.K. because it throws all the balls up in the air. When you eliminate commissions, it does change things. So I think there will be some attrition of selling FAs in the U.K. as people look at their businesses and realize that the models have to change. But I think it will also give opportunities for people like us who are looking to move in there, some opportunities. So that would be the first part. In terms of what's going on in Australia and Asia, we are not currently selling any of our mandates. As I mentioned, we are looking to bring on the salespeople in order to do that. So it's a little early to be talking about the actual equity flows in the Asia Pac area. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: And then in Europe, how are the sales progressing? And I should expand it. I know fixed income, the high-yield product is bigger there. But how are sales progressing on the European side?

Ken, we would describe that as early stage. We're, as we've talked about, working with Bury Street there. We've had some sales in the high-yield space and we're also looking at our dividend strategy. But that's still kind of in a more or less of a startup phase. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. Maybe next turning to the profitability of the money market fund business, the treasury business appeared to waive maybe record fees last quarter. And some of the products that we audited seem to have higher fee waivers than management fees at this point. And I think profitability was limited previously, but my understanding was that profitability was still positive. So as we stand today in the third quarter, is the money market fund business still profitable for you today? And is the treasury fund business still profitable for you today?

Yes and yes.

And I think what you're seeing is that, as we share with our intermediaries in the waivers and as it has gone down, the rates are so low that there's -- we end up bearing, depending on which fund it is, more of the sharing. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Yes, but it's still -- but you're still net-net, even with allocated costs -- everything is still profitable?

We don't allocate the costs, but we believe that everything is profitable, which is why I so quickly said yes and yes.

Our next question is from the line of Michael Kim with Sandler O'Neill.

This is actually James Howley filling in for Michael this morning. Just wanted to come to fixed income and see if, maybe, you guys have started seeing some investors who pulled away from fixed income more broadly earlier in the year, maybe starting to come back into some of those less correlated strategies, maybe some international and high-yield stuff? That would be great.

James, yes, we are certainly seeing interest, in particular on the high-yield side, though I would describe that as sort of -- that's been a running trend for us. The product set that we have there is outstanding. We have funds literally in the top percentile, top decile. In the institutional product, I think to your point, the flows into that product shows that we're obviously in a yield-starved market. And our high-yield team thinks there's still a good ways to run on the high-yield side, and it's resonating with our clients.

Great. And maybe one for Tom. Just any adjustments in the bonus accrual in the third quarter? And maybe any color on how you're kind of thinking about the comp line, as you look out into the fourth quarter?

Sure, James. We did have an adjustment and it was approximately $2 million. And so when you factor that in for the year, if you're looking at the fourth quarter, you'd probably add $1.5 million to the number that's on there.

Our next question comes from the line of Bill Katz of Citigroup.

Chris, you may -- I think I caught the tail end of your commentary, but could you just, and I apologize in advance to everyone, can you just repeat what you were saying in terms of the timing of reform, when you expect some of these comments to be filtered by the SEC, and for their rebuttal to come out and then the reaction from that?

What I said there was that because of the depth and the high quality of the comments, it would take them a good bit of time to get through all that and we would be well into 2014. If you press me on it, I don't think they can get it done in the first quarter of 2014. And after that, that's up to the worker bees at the SEC. And don't forget, they did have a couple of weeks off. So it's impossible to exactly say when this will come about. But that would be about as close as I could guesstimate. And remember, I don't control it and I don't have any inside information.

I'll just add one comment, and that is that for the 2009 proposals that ultimately resulted in the 2010 amendment, they were slightly less than 200 pages in length and much, much less in the context of the actual potential changes that could be occurring. That was a 5.5-month process for the SEC to review those comments. This document is nearly 700 pages long. So I don't know whether you can interpolate from that or not, but just a comment.

Yes, it helps. And then just staying on the money market discussion, again, you might have covered that, so I apologize again, I think the Federated share of this quarter was particularly high. Is it just a mix issue? Was it an absolute level of interest rates? And is that part of your guidance for the fourth quarter in terms of that share staying about the same?

Bill, I would attribute it to mix. We mentioned being up on the government side in terms of the asset flow, but it's overwhelmingly a function of where rates ran in the quarter, especially for the repo rates being in the 2.5 to 4.5 range. You may recall back in 2011, we had a period, a quarter where the share of waivers that we bore went up in a similar way. So it's driven mainly by rates and by the mix. And yes, we factor that in among the multi-variables when we do a calculation of where we think the number's heading for the upcoming quarter.

Okay, great. And just one last one, just in terms of your guidance on assets, Chris, the money markets look like they're trending up just a little bit, how much of that is maybe seasonal versus maybe the backdrop of short-term interest rates and/or what's going on in capital markets, and equities in particular? I know it's sort of omnibus in relationship in many cases, but any general trends you're seeing in terms of appetite for cash right now?

Well, let's talk specifically about the first couple of weeks, and then I'll have Debbie talk about the flows more generally and the seasonality thereof. But if you look at just this month of October, what we saw happen was on October 1, we had about $123 billion in our government funds, which are agencies and direct treasuries. And that got to a low of about 1 16 on October 16, and on the 23rd, stands at a little over 1 18. And it's interesting that at the same time and on the same time frame, our Prime was just about 94 on the 1st of October and then about 400 over that by October 16. And then is also up from there another $1 billion by the 23rd. And the Muni funds were more or less about flat. So there was some movement of about, oh, $7 billion out of institutional government and treasury related to all of the shenanigans with debt ceiling and default threat, et cetera. And interestingly enough, during that time, the Prime funds were up, while the government funds were down. This is more or less a distortion to the regular pattern. And as I mentioned to the numbers, they're starting to right themselves and get back into the more normal regular flows. So with that comment on October, I'll let Debbie talk about the seasonality of the rest of the activity.

Thanks, Chris, and certainly, what generally happens in the fourth quarter is that the week preceding the end of the year, you will see a run up, and sometimes it's even 2 weeks. You'll see a run up in positive assets coming into -- flows coming into the government money market funds, including both treasury and government agency products with a smaller outflow, but definitely a negative flow to the Prime fund assets. I'm sure that's reflective of year-end window dressing in many instances. That's also -- we see that every quarter end. But in a more minor fashion. Year-end is generally a larger version of that same thing. As far as the month of November and into early December and the rest of this month, October, no expected seasonal movements and, from contacts with our own clients over the course of the first several weeks of October due to what was going on in Washington, no outlook for change from our customers' preferences at this point in time.

Just throw in to your comment about whether we see money going to equity, we don't really see or able to track that, but I would point out that about a 1/3 of our money fund assets are retail in nature through the broker/dealer channel, and those assets are actually up, money market assets are up year-over-year. So there's still a lot of money in cash.

Our next question comes from the line of Cynthia Mayer of Bank of America.

Just a question on money market share in the industry. It looks like, looking at strategic insight data, like you've been losing share this year, both overall and in terms of institutional money market funds. And particularly in terms of Prime, it looks like you guys were the only ones that actually had Prime outflows in 3Q. So is there something particular to Prime funds where you might not be in the same channel as others? Or is there something else going on in terms of institutional channel? What explains the share?

Well, it would be tough for us to pinpoint the movement of the Prime assets over that relatively brief period of time. I -- we mentioned that on the government side, we had assets were up in the quarter. On the money share, we've comment -- that market share, we've commented on that before. We've seen that sort of ebb and flow over decades. Part of it has to do with differences in yield, which tend to correct themselves over periods of time. I would tell you that it's not -- there isn't a particular thing that we would point to. We would prefer to look at it over longer periods of time. And generally, our share has gone up.

I guess, a question on the yield being a differentiator. Is -- in such a low yield environment, is this -- does the yield continue to be a differentiator?

The principal differentiator is daily liquidity at par, and this is the main show. Yes, there is some ancillary or sporadic competition from those who are either able to put an extra basis point on or want to put an extra basis point on. And this really isn't a lot different than we've seen over 40 years of being in this business. So to us, the core is to maintain the whole position of the money market fund as a cash management service. And if people choose to waive more, which some people periodically do, then they can, at the margin, capture more assets. But we don't ever end up losing clients. And the differences in market share are measured in fractions of a 1/10 of a point. And as Ray said, it's really hard to get excited about that. I mean, we note these things. But boy, they go in ebbs and flows that it's really hard to get excited about.

Okay, I guess just one follow-up on that. So if you did feel as though others were waiving shares, waiving fees more and gaining some share, would that make you inclined to waive a little more or to maybe pursue acquisitions more? I guess, how important is it to you to fight for that share? Or are you happy to see it go, as long as you can maintain the fees a couple of basis points higher?

The marginal battle for share is not the goal of the operation. And our decisions on what to waive are really made independent of that. And would it inspire us to do more or whatever on the acquisition side? We are fully inspired to acquire money fund assets whenever they're available and analyze all the deals, and would be still inclined to do that regardless of the lay of the land on these moves in market share or other people's enthusiasm for higher waivers.

Okay. And then just moving over to equity side. It seems like Clover small cap's doing pretty well. Is there any capacity issues at Clover we should know about?

Not currently.

No, Cynthia. That fund is a little over $500 million. We've seen a steady ramp-up in the sales each of the last 3 quarters. That continues to get positive flows, but we would be a fair ways away from a capacity issue there.

Okay. And on Strategic Value, it's still at bottom decile year-to-date, but you're getting inflows. Is that still a function, you think, of basically people viewing it in a different category as really a yield kind of fund?

Well, more particularly, it does exactly what it says it's going to do. So yes, they look at it as a 5-and-5-type fund. And the signal that we continue to get flows when it ends up being in the bottom quartile or bottom decile or wherever is really a tribute to the fact that the customers understand exactly what the fund is doing. And so it really doesn't matter where they show up on that -- on those comparisons because that's not really what that fund is doing.

Our next question is from the line of Robert Lee with Keefe, Bruyette, & Woods. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Real quick question just on capital usage. I'm just trying to remember, did you have any legacy contingent payments coming up in the fourth quarter than maybe what you have ahead next year, whether it's related to the SunTrust deal, Clover or some other transaction?

One second. [indiscernible] I don't think in the fourth quarter. But in the first quarter, we have our final Clover payment. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: And is that it for most of next year? I'm just trying to get a sense of demands on capital, that's it.

Yes, Rob, for next year -- I mean, for this year, when it's all said and done, including SunTrust and Clover, we'll have about $8 million of payments for next year. Based on where things stand today, it would be around $12 million. So a little bit of a step up, but not material. One more, Rob, the SunTrust thing is in December, not next quarter. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: All right, great. I just was curious -- I know you had put out the press release and, Chris, you mentioned in your comments about moving some trade finance people to London, but quite frankly, I guess, I'm just curious to know, can you describe what that business is? And what -- I guess, when I think of trade finance, I don't typically think of it in an asset manager context.

The -- what trade finance is, is basically good old-time factoring where you finance material products whether it's coal from Mongolia or grain from Brazil, and it's over a short time frame. And the banks don't generally want to do the financing. So you end up with pieces of paper that are financed a maximum of 18 months, a duration of probably 6 months or 9 months, a wide variety of different kinds of products moving around, short duration. And the idea is to beat the T bills by 400 basis points on an annualized basis, and this product has been doing that. So that's pretty much what it is. Now the challenge in it is to develop the paper and to develop the actual positions. And so this requires a very comprehensive and creative network of people to be able to do these financings and do them efficiently in order to package them up into our various products and for our various customers. And we think there are outstanding opportunities for us in this field, both to enhance the performance of our own funds to take positions and to offer to institutional clients as part of large pension funds' desires to have yield, to have relatively lower risk and a diversified type investment. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: But to make sure I understand, so you have some standalone products that specifically raise, whether it's an institutional fund or whatnot, this is the mandate. And then some amount of this paper gets placed in other kind of credit products that you may have. Is that the way to think of it?

Yes, we have a core fund that is our trade-finance fund. And some of the other funds can take positions in the core fund. And then institutional clients, we may develop a portfolio for them as well. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: But just out of --is it possible to kind of size what this business is? Or do you see this as -- clearly, [indiscernible]

Well, it's grown to $400 million now. But I think that it is a multibillion-dollar enterprise. That's one of those forward-looking statements.

Right. We mentioned, Rob, the floating rate product, that ours are differentiated compared to funds that use all bank loans. We have a heavy mix of bank loans, but this would be an example of utilizing the trade finance asset class with -- that will react pretty quickly to upticks in rates and we think that's additive to our floating rate funds.

Our next question is from the line of Eric Berg of RBC Capital Markets.

I'm going to presume from your comments that you are part of the obviously, opposed to option 1 in the money market reform discussion, and that Federated supports option 2. But Chris, why? I mean, not why do you -- why are you opposed to option 1. You've made that very clear on multiple occasions. But looking at the option 2 of gating or redemption fees in particular, I mean, isn't it the case that if you, in a time of upheaval, if you gate a fund, you're just sort of putting off the inevitable, that when the gates come down, you'll have the same sort of rush to the door, to the fire exits that would've been the case absent the gates, or maybe not. I'd like to get your thinking on why this is not just a better approach than option 1, but a sensible one.

There was an example, Eric, and that's why I mentioned the Putnam in my remarks. And what happened there was that they had a $12 billion fund, had $5-plus billion of redemption requests. And the independent directors of that -- the directors of that fund decided to gate the fund. And over the weekend, a solution was found. It was a combination of various things: The Fed coming up with a liquidity program and their fund deciding to come into one of our funds. And so then in 1 week, there was no disaster. There was no forced selling of securities. There was the honoring of all of the redemptions. And it was no harm, no foul, no one ever heard of it. The SEC in their 700-page proposal also articulated other examples of where gating in Europe and other places had been done successfully. Next point is that when the 2010 amendments were put in, the SEC put in the idea that you could gate the fund. But if you gated the fund, then you had to go into liquidation. So the concept of the gating was already in the 2010 amendments, except that the only solution was to liquidate. And what's being proposed in option 2 today is to give the board of the fund the right to do the same thing that the Putnam board did. And that we have articulated that is a very logical thing for a board to do because it looks at it and says, "We want to treat all shareholders the same and fairly. We don't want to have to artificially sell securities into the market. And we want to take a time out to see if we're capable of figuring out a solution." And if you can't figure out a solution, then you just gate the fund and you liquidate. And don't forget that a money market fund, among all investment products, has baked in the cake a so-called living will. You just hold the maturity and pay everybody out. That's what would happen in the worst kind of circumstance. One other point I would mention is that a part of the Investment Company Act since 1940 has been the right of the board to delay redemptions. And notice, I didn't say forbid redemptions, it's just they delay the payment of the redemptions for 7 days. And this has been baked in the Investment Company Act since 1940, so it's not unfamiliar territory.

Our next question is from the line of Marc Irizarry of Goldman Sachs.

Chris, I was wondering if you could talk a little bit about the floating rate funds and it seems to be a lot of retail flow going that way. And maybe talk about the underlying liquidity of some of those markets. Is there a sort of -- how do you sort of mitigate or sort of think about the flows that are coming in there for retail investors versus maybe the underlying liquidity of some of those asset classes?

Are you talking about the bank loan fund or the money market funds?

The bank loan funds. So it's just outside of money funds. I have a question on money funds, of course, too. But just on bank loan funds, I'm curious, in particular, how you think about all the retail flows that are heading that way versus underlying liquidity of the market managing that.

I don't think there's going to be a liquidity problem in that area. And I'm certain we haven't heard of anything like that. We think that the category is very, very attractive because of yield-seeking investors who don't want to take a big risk. And it's not unrelated to the overall Fed policies of keeping yields lower and people then searching everywhere they can.

And Mark, I mentioned before that we have taken more of a multi-sector approach in that area. It's not due to liquidity necessarily. But because we think, especially for institutional applications, the idea of having bank loans, but also having corporate exposure, trade finance, which I mentioned, even a bit of mortgage exposure, is an improvement over a full bank loan product.

Okay. And then on Chris, just in terms of reform and discussions around it, I'm just curious if you have a view, overall, on the OFR paper, and just maybe how sort of money market reform plays into the overall idea of just asset managers being systemically important, maybe some thoughts on that?

Sure, the OFR report, the first comment I'd make on that is we are very, very encouraged by the fact that the SEC has grabbed the ball here and put this out for comment. Because it demonstrates to us a willingness on the part of an independent agency to actually defend its jurisdiction when it has the expertise and the directive from Congress to protect investors. So this, I think, is the first and very important part of this. When you get into it, into the OFR report, I think it has a lot of weaknesses. Even though the report acknowledges that investment management is an agency activity and not a principal activity and that there's not leverage at the investment adviser level much like a bank, they go on to just paint everybody the same and come up with ideas that don't really implement the acknowledgment of the agency aspect of this business. And this will tend to send them in the wrong direction, which is where I think they want to go anyway. Interestingly enough, as you mention systemic risk, I'm attracted by Professor Hansen's definition. He's the -- one of the 3 Nobel Laureates, and he is quoted as having said that there is no academic basis to systemic risk and no definition and, therefore, it is a "grab bag for the regulators to go where they want to go." So I think we need more definition on what is a systemic risk. And I think when you look at the report, what they're talking about in there are possibilities of things happening. And then, therefore, oh, my gosh, we have to do something. And so they're taking the possibility, not looking at the likelihood, and then they make the perfect become the thorough enemy of the good. And this is a dangerous way to try and jump into the capital markets. But most importantly, I think that some of the ideas that they've got in there will negatively impact investors. And this is why it's so important to us that the jurisdiction be claimed by the SEC because their practice, their mandate and their experience is the protection of investors. Now we can quibble about the process and how they've gone on here, but we will have commented by the time November 1 rolls around, because we don't really think that firms like Federated and others meet some non-definition of systemic risk, and we're very, very concerned about what it will do to investors.

Okay, helpful. And then just a question on the long-term business, float trends there and outflows, I guess, have somewhat persisted. I'm just curious, when you take a step back, is it, maybe, it looks like Strategic Value is underperforming a little bit. Is it performance, product, or what do you think it's going to take to really get the flow trends in the -- is it distribution? What's it going to take to get the long-term flow business on a more steady, reliable trajectory?

Just as a footnote, I can't accept the -- a performance hit on Strategic Value. We went through that a few minutes ago. They're doing exactly what they were said they were going to do, exactly for the clients. So the flows continue to be good there. And if you look at September, there were positive equity flows for us; October, as I mentioned in the call, positive for us; and we had those 2 big hits over the summer. And so that's why I went -- spent so much time on the 12 mandates that are top quartile for 3 years and the 12 that have positive flows. That's what it's about, basic blocking and tackling. So it is a combination of those. We're seeing some good numbers here. But they obviously weren't enough to offset the lumpy ones, but that's what you've got to do, is continue to pump out the performance. And I think the 200 person -- 210-plus distribution is working well. That's why I highlighted the up performance in the broker/dealer where we just expanded that sales force. And it's the forces of redemptions that are tough to overcome. But I think we're well on our way to doing that, and we're looking for good growth in all of those equity areas.

And Marc, the other thing I'd add is on the institutional side where we have about $0.5 billion to fund, which is a big number, a big number particularly for us. And with the performance that Chris mentioned, we're seeing a lot of interest, we continue to see it on Strategic Value Dividend, we've seen a lot on Clover, a lot for our international products. We mentioned on the last call, interest on the MDT side. So there are a number of bright spots there that we have, that we fully expect to blossom into higher flows, both for mutual funds and for separate accounts.

Our next question is a follow-up from the line of Cynthia Mayer of Bank of America.

Just a couple of questions, one is on the 2 big equity outflows over the summer. Were those removals from platforms? So there might be some follow-through in terms of slower sales? Or were those just one-offs?

There will not be follow-ups on that. They were one-offs, if you want to call them one-offs. They're pretty big one-offs.

But I guess, were those removals from platforms where, had they stayed, some sales might have continued?

Yes.

Okay. And then just a narrow modeling question on expenses. Appreciate the comments on comp, but beyond comps, the professional fees, advertising have been a little bit elevated recently, and I assume that's a function of all the regulatory work you guys have been doing. But -- so as that continues, should those remain elevated? Or is the bulk of that done for you guys so that it would tail off in 4Q in next year?

Yes, Cynthia, we talked to the -- actually started our budget process and started talking to the people spending that. And they said, "Well, it could either be similar to last year or lower." So we'll have to see where things go, where the SEC comes out and we'll see where it comes out. I guess, when we go to do our budget, we probably will have a decrease, but that doesn't mean that's what will be the answer.

Right, you'll budget for less, but then play it as it happens, okay.

There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Well, thank you very much. That concludes our call. We appreciate your joining us today.

Thank you. You may now disconnect your lines at this time. Thank you for your participation.