Federated Hermes, Inc. (FHI) Q4 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Federated Investors' Fourth Quarter 2015 Analyst Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Raymond Hanley, President, Federated Investors Management Company. Thank you. You may begin.

Good morning and welcome. Leading today’s call will be, Chris Donahue, Federated’s CEO and President; and Tom Donahue, Chief Financial Officer. Joining us for the Q&A will be Debbie Cunningham, our Chief Investment Officer for the Money Markets. During today’s call, we may make forward-looking statements and we 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. Chris?

Thank you, Ray and good morning. I will briefly review Federated’s business performance and then Tom will comment on our financial results. I will begin by reviewing our equity business. Although equity market conditions improved in Q4, the up and down swings over the last half of 2015 and continuing here into January presented challenges for investors and of course impacted flows. Federated achieved solidly positive net equity flows for 2015 just under $3 billion. For Q4, our equity flows were about $130 million negative. This is after eight consecutive positive quarters. Still nearly half of our actively managed equity strategies had net positive sales in the fourth quarter lead by International Leaders, Kaufmann Large Cap, MDT stock, and Absolute Return funds. Federated’s 5% equity fund organic growth rate in 2015 was among the best in the industry. Based on Strategic Insight data Federated’s 2015 equity fund net flows ranked in the top 4% of the industry. Looking forward our equity business is well positioned with a variety of strategies producing solid performance and sales results. Using Morningstar data for ranked funds as of year-end four Federated funds or 15% were in the top decile for the trailing three years. We had 14 funds or 54% in the top quartile and over two thirds in the top half for the trailing three years. Performance highlights include two Kaufmann strategies, the Small and Mid Cap, and two MDT strategies, the All Cap and the Large Value in the top decile for the trailing three years. Our International Leaders Fund, a foreign large cap blend strategy, was in the top 15% or better for the trailing three, five and 10 years. Our absolute return fund is well positioned in the market neutral category, with its top quartile three year record achieved since a change in portfolio manager. Looking now at early 2016, equity fund and SMAs combined are just about at breakeven through the end of last week with our active strategies showing net inflows offset by index fund outflows. The strategic value dividend strategy is showing particular early quarter strength, as our [largest] equity strategy at about $23 billion it has produced slightly positive January month to date performance against the significant broad market decline. Its strategy is seeking consistent and growing dividend paying stocks may provide a distinct advantage when fixed income yields are low and the broader market is volatile and customers still want income. Now turning to fixed income. Our outflow for the quarter of $653 million resulted from net negative fund flows, partially offset by positive flows in separate accounts. More than half of the fund's net outflows came from Ultrashort Bond funds, which are often used as cash management vehicles for tax statements and other purposes. During the fourth quarter we saw solid net inflows in our high yield strategies of about $360 million. Our institutional high yield bond funds beat its peer average again in 2015 for the 12th consecutive year, the only fund in its category to do so. The fund is in the top quartile for the trailing three years and the top decile over the trailing five and 10 years. Our high yield trust fund ranks in the top 2% trailing three years and 1% for trailing five and 10 years. We have a long record of success in the high yield sector. Our focus on companies with strong operating results and avoidance of commodity driven firms and other problem areas led to solid relative performance in 2015 in very challenging market conditions. At quarter-end we had nine fixed income strategies with top quartile three year records, including strategies for high yield government and mortgage and munis. Fixed income funds overall are net negative in inflows early here in the first quarter. Looking now at Money Market. Assets increased by nearly $10 billion from the prior quarter reflecting year-end seasonality. Average Money Market assets increased about $3 billion. Our Money Market fund share at year-end was just over 8%. We continue to advance on the substantial effort necessary to position our product offerings well in advance of the October 6, 2016 requirement for floating NAVs for Institutional Prime and Muni money market funds. We announced our institutional fund line up in November and completed a series of fund mergers in December. We continue to work on a privately placed fund for qualified institutional investors, who are unable or unwilling to use money fund as modified by the new rule. We completed the transition of about $930 million in Money Market assets from Huntington in the fourth quarter, and continue to look for consolidation opportunities. Taking a look now at our most recent asset totals. As of January 27, managed assets were approximately $363 billion, including $261 billion in Money Markets, $51 billion in equities, and $51 billion in fixed income. Money Market mutual fund assets were $223 billion and the January average Money fund assets are running at about $220 billion. Looking at distribution. SMAs continue to be a very good business for us with positive net sales in the fourth quarter of $164 million. Total SMA sales ended the year at nearly $17 billion. These assets increased 6% for the year and are up 80% over the past three years. Federated ranked 6th in industry rankings of the largest SMA managers at the end of the third quarter, which is the most recent data available. We continue to have success for our EFA separate account wins, including $150 million mandate in the fourth quarter that is expected to fund here in this first quarter. Fixed income separate accounts had positive flows in the fourth quarter led by high yield. We had a $200 million win fund into our institutional high yield bond fund in the fourth quarter. We have $45 million in fixed income separate account additions that are expected to fund during the first quarter. RFP activity remained solid and diversified with interest in value, dividend, EFA and growth strategies for equities and high yield and short duration for fixed income. Our equity RFP activity increased 30% in 2015. We are adding another consultant relations manager to leverage our solid investment records into additional institutional opportunities. On the international side, we registered a Canadian domiciled strategic value dividend fund product in December with the sales effort to commence this quarter. We're looking to accelerate the growth we've seen in Canada in our SMA business and with institutions. Canadian assets at year-end were about $1.6 billion, growing over $500 billion from year-end 2013. We continue to see success in Europe and Asia and the Mid-East from a sub-advised high yield product working with a large private bank. These assets reached $320 million at year-end with most of the growth occurring during 2015. As I mentioned before, we had an Asia and Mid-East launch in September and a road show which continued in Hong Kong, Singapore and Dubai. We continue to seek alliances and acquisitions to advance our business in Europe and the Asia-Pac region as well as in the US and the rest of the Americas. Tom?

Thank you, Chris and good morning. Revenue was up 12% compared to Q4 of last year due mainly to lower money fund yield related fee waivers and higher equity managed assets. Revenue increased 4% from the prior quarter due mainly to lower money fund yield related fee waivers. Equities contributed 43% of Q4 revenues, the highest percentage among the various asset classes. Combined equity and fixed-income revenues were 62% of the total. Operating expenses increased 7% compared to Q4 of last year and 4% from the prior quarter due mainly to higher Money Market fund distribution expenses as a result of the lower waivers. The pretax impact of money fund yield related waivers of $16.4 million was down from the prior quarter and Q4 of last year. The decreases were due mainly to higher growth fund yields. Based on current assets and yields we expect the impact of these waivers on pretax income in Q1 to be about $11 million. An increase in yield of 25 basis points in 2016 could lower this waiver impact to about $4 million per quarter, and a 50 basis points increase could lower the impact to around $1 million per quarter and finally an increase in yields of 75 basis points could nearly eliminate these waivers. However, as we previously discussed, partially offsetting any potential waiver recovery is the impact of a potential change in a customer relationship that may reduce pretax income by about $6 million per quarter beginning late in 2016. This is most of the amount of waivers that we began estimating a year ago that may ultimately not be recovered. Multiple factors affect [related] waiver levels and they don’t either recapture related income going forward. These factors are covered in the press release and in our SEC filings and we expect these factors and their impact to vary. The Q4 effective tax rate was 36.5% and the full year tax rate was 37.4%. We expect a tax rate of about 37% to 38% going forward. For Q1, it is important to remember that the fewer number of days will impact revenue, which is largely earned on a per day basis. Thus for Q1 based on Q4 average asset levels we expect the fewer days to reduce revenues by about $4.3 million and reduce the related distribution expenses by about $1.6 million. Seasonality around payroll taxes and benefit expenses will impact compensation and related expense in Q1 and we expect to have higher incentive comp accrual. An early estimate of Q1 comp and related expenses is about $76 million, up about $7 million from Q4. The combined impact of fewer days and higher estimated comp and related expense is about $10 million in lower operating income compared to Q4 all else being equal. Looking at our balance sheet; cash and investments totaled $347 million at quarter end of which $334 million of cash is available to us. [Donna] that completes our prepared remarks and we would like to open the call up now for questions.

Thank you. [Operator Instructions] Our first question is coming from Michael Kim of Sandler O'Neill. Please proceed with your question.

Hi guys, good morning. First, Chris, maybe just focusing on the fixed income business, just sort of excluding the Ultrashort funds, just curious how you think about the platform in terms of positioning, performance, liquidity and ultimately flows, just assuming rates trend higher?

Let us talk about liquidity first because that seems to be a very hot subject. We have a great deal of confidence in the liquidity in all of the investment aspects that we are involved in on the fixed income side, especially and even the high yield, and of course, we are all responding to the SEC liquidity proposed rules and that is a separate subject, but in terms of the platform the leader in the clubhouse is of course the high yield, which I highlighted during my remarks, and the performance and the growth there has been quite good. On our total return bond fund this year’s performance was at the 55% mark, which is just below the first half and that tilts all the numbers at Federated because that is a large fund. And we are looking forward to returning that to its historic first and second quartile type numbers. The people that we have on staff in the fixed income area are exceptional. They have been together for a long time with a lot of experience and we expect that that will continue into the future. The $51 billion that we have in fixed income assets, that is a great stage for the future here as well. I think there are other aspects that are hidden jewels, we think can grow. For example, our trade finance projects, which are basically low volatility and low duration type instruments. They are pretty sophisticated. They have to be sold on an institutional type basis. But we think there is room for growth there as well.

Got it. Okay, and then in terms of the money market fund platform, I know you guys have done a lot of work sort of ahead of the regulatory changes to be implemented, but just wondering sort of at a higher level, how you see kind of related floor trends playing out ahead of the changes and then sort of the opportunity to maybe pick up some share post all the changes?

Well, I will comment first on some aspects of it and then Debbie Cunningham is on the line and she can comment from the CIO perspective as well on this. My perch on the tree comes along your final comment, which is once the debt dust settles then we think there is excellent opportunity for growth in this business by us. And part of the reason is because the force of these regulations is to [Indiscernible] more and we are on the side we believe of the winners or the larger players in this business, and we have talked about that before. Furthermore, the clients right now are still to a large extent in pause mode. That will begin to change first and second quarter as people decide what they are going to do, and we see how much movement goes from institutional prime and to our muni into [Indiscernible]. We will have all the products available. We think we have got some pretty creative things going with our private fund. So we think we are going to be well set up to capture this business for the long term and don't forget that we made pretty big commitments when you look at our waivers, the efforts we put in both politically and at the regulatory levelin order to keep this business alive for the client. Debbie?

Sure, I think if you look at the fourth quarter results certainly we are not yet contemplating movements someone [indiscernible] to another. From one asset class to another. Our Bond funds were up substantially over the quarter and continued to be very well in January. Having said that with conversation continuing with our clients, we are aware that there will be some of them that at this point believe they will be moving into the government market place. And that's all well and good. We have a [indiscernible] in the past, we have a bucket to catch all the various rain drops. You want only treasury, we have that. You want treasure with [indiscernible] we have that. You want government agencies, we have it. So, there is lots of different products that we can offer along this lines and tell the reasons why we didn’t do any of the conversion, governments appoint many of our competitors in the marketplace, did. I think that when you look at the [indiscernible] and business and the alternatives that's going past, it's not out of the fund industry, it's not into the bank product at this point. Banks don’t want that type of cash. So, for the most part we leave it, we'll stay with the industry, in fact, as a share deposit, we think the industry impact will grow and be substantially larger. That the private fund that Chris mentioned is very innovative product that we believe will capture the attention of many customers in the market place and will give them basically the experience that they have had in a prime institutional Money Market fund to-date and will have said giving it to them in the form of a private prime institutional product. So, we think we're ready. We did a lot of fund mergers during the fourth quarter, those are behind us. So, our product is right size. And we believe from a performance perspective and from a side perspective, we're positioned well in the market place as clients goes [indiscernible] to side. Make the decision in the probably late second, early third quarter 2016.

Okay, that's helpful. And then maybe just one for Tom. I know you talked about some of the specific line items looking into the first quarter. But just kind of stepping back, any commentary on the outlook for expenses and our margins at a high-level just in mind of the ongoing market volatility?

Yes. Ongoing volatility, and as soon as the rate changes start up, as the volatility comes in and affects the equity market. So, we continue to reviewing quarters' basis and a budget basis and I think that the last six to seven years' experience with living with the reduced revenue has trained us to manage things pretty close to the best. I think we'll continue doing that.

Okay, great. Thanks for taking my questions.

Thank you. Our next question is coming from William Katz of Citigroup. Please proceed with your question.

Okay. Thanks, so much, Christine, in taking the question. Just was staying on that theme for a moment. A number of your competitors have sort of talked about the need to spend almost regardless of the market chop here earlier in a few prior to New Year, around things like technology, global distribution, product manufacturing and things of that yoke. So, I appreciate your sort of managing through the short-term volatility. But beyond the comp guidance, how do you think that about where you might be in terms of the competitive standing, what you might need to maybe beef up the growth of franchise as sort of realign with some of the changes in the demographics of the business?

Well, you're right in terms of continuing to build up and spend money on things like technology and our [eye more] [ph] project and things like that. You're right on the continuing our product development angle. There are always some products that are ground under repair and there are always new ones that you are working on. And there is always need for seed money, as we have discussed before. So, we don’t have any what we think our glaring deficiencies in the product offering, however, we are always looking and are talking to various people of various times where we think we could enhance those. And those types of fields where we would do acquisitions, as you know, Will, we think would be self-supporting. Obviously, you pay for them but they are self-supporting and that we would make good purchases of those assets. So, we continue to look forward to growth in both the organic business and in opportunities for acquisitions.

Will, just one other thing on that with the global distribution. If you look at how we've done that especially with the last year we've added some resource for Canada and Latin America, and that's followed as we got business and it's leading to additional opportunities. But it's probably on a smaller scale but it's been effective. The other thing it's been effective is winning the sub-advisory mandate that we talked about in higher which is leveraging another firms distribution and getting our product out to many different parts of the world where hadn’t been before.

Okay. Just one more follow-up from me. I appreciate the, as your granularity in terms of the sensitivity for few way is relative to [indiscernible]. I think the bigger question is if you think about that, you need another 75 basis points to sort of get back to and maybe more than that, I guess, to get a 100% of the [indiscernible] BlackRock and [Swan] [ph] have taken down their passive ETF to 3 basis points. Is there any risk on pricing for the Money Market business? It sort of strikes me as a rather high gross yield in a deflationary world, -- pressure on the economics of business?

Well, Will, this is Chris. I don’t see them as connected in any way they've informed. The pressures that exist as regard to the money funds, the sharing with the distribution, are basically unchanged and are always there. And that's what we see. So, the fact that those guys are competing with each other in terms of what they charge on their ETF, is not really a factor on the Money Market fund side. And yes, there are always a fee pressure and more importantly there is sharing pressure which we've talked about many times. So, on the big picture basis, we're sticking with our view that if we get the kinds of increases that are possible, although you could have a debate about where the fed is going to go, that those will be the relevant numbers as Tom outlined in his presentation.

Okay, all right. Thanks for the color.

Thank you. Our next question is coming from Surinder Thind of Jefferies. Please proceed with your question.

Hi, good morning, guys. I expect to kind of revisit the conversation around compensation expense and gains. Can you provide a little bit more color in terms of the dynamic of how you see comp evolving over the year, your guidance implies that comp would be flat year-over-year on a quarterly basis. But there was a step down in 2015 that kind of was persistent throughout the rest of '15. Is that '15 dynamic that we should think of or is there some other dynamic that's at play?

Yes, sure, Surinder. Yes, you're right. Q1 of '15 was the same basically regarding to for Q1 of '16. And the basic things which are the normal things are 401(k) contributions, the payroll tax, and then our normal merit, and the number of employee increases, and bonus reset. So, we have to look every quarter and say what we think we're going to pay out for the year, and we have to do it accurately as designed. Its [indiscernible] to say that this is our best estimate of what we believe it is. And at the end of the -- in the fourth quarter, you see the number went down because we re-calibrated everything basically on the reduced sales number and the performance and investment management were the two main drivers for the reduction. So what happened after our expected 76 number in the first quarter, we will see based on how all the inputs come in.

Thank you, that's helpful. And then, maybe a question for Chris on gross sales activity, it was actually down quarter-over-quarter when I would have expected it to at least rebound somewhat from what is usually seasonally slow third quarter, any additional color there and maybe how that compares to maybe some of the industry averages and stuff?

Well, overall for the year the totals were down slightly, $32 billion of total sales compared to $33 billion the year before and either of those numbers are very, very good. But, still on a relative basis, I don't have the exact stats, but we would be gaining share on those, on total sales in any event. And so, it has to then get into each product and what was going on in the each marketplace at that time to catch what was going on.

Yes, the other thing Surinder, when you look at the flows, sequential quarters what you – you had a step-down in fund, I think that's consistent with the industry. And then, we also had a step-down on the separate account side and for us that is more of an up and down each quarter, it's not so much smooth trend. We had a couple of particularly significant wins that had funded in Q3, which we talked about at length and for example, [indiscernible] now we have another good size one coming it’s expected this quarter. So part of that is just a timing of some lumpy flows on the separate account side.

I see, okay that's it I appreciate the color. Thank you, guys.

Thank you. Our next question comes from Michael Carrier of Bank of America. Please proceed with your question.

Thanks guys. Just on the fixed income side, just a question on the mix meaning when we think about, like the high yield products versus some of the other products, I just want to understand where you have maybe the most attraction in the different distribution channels and what you are seeing when you obviously get this amount of volatility out there?

The records that we have put together in muni tax advantage and some of our muni products are pretty dug on good, the multi-sector still remains strong. The short duration remains strong and obviously the money fund, so that's a different subject. And that's true on the fund side and on the separate account with, I mean, during 2015 we won accounts on municipal, multi-sector, high yield and short duration so that's where I come with that broad based approach.

Okay. And I mean, do you guys have just, I think the percentage of your exposure or where your assets are in terms of, I think long time ago you used to have it like five channel in just more, whether it's on the institutional side or the different retail channels that you guys are?

That's something we could deal with you offline Mike, we don't have – lot of detail to go through on the call. But it's fairly well distributed across our channels. Something like high yield has worked well institutionally, we talked about some institutional wins there, it does very well through brokerage dealers, the high yield trust version of that that also invest in the equity, has an equity bucket for the same companies that we are doing the work on the high yield side and has put together an exceptional record that has worked very well in the retail side. So generally, you are going to see those products and the distribution channel.

Okay, got it. And then, just on the equity side to the trends there particularly relative to the industry, you need to be strong. When you look at the product line up and where the demand is over the past couple of years and where you kind of see it heading. Anything from like a product strategy standpoint that you would be looking to add or you feel like you have a lot based on where the current demand is from the client base?

Well, when you put it as a current demand, the current demand is in the strategic value dividend fund where people are looking at this world and if they are tilting a little bit away from risk and still want income, this is very strong product. And it was positive return last year and as I mentioned its positive return so far in the first month and it's hitting on all cylinders in terms of both the SMA and regular fund sales. But, if you talk about things down the road, I will mention again the alternatives and the absolute return fund has done very well, they’re proving their fund is doing what it's supposed to do and we look forward to some of those other funds being able to function when the alternatives are back and hot on the list. So, we think we are well positioned into the future when you have its 2015 or 2016 mandate that are still in very, very good shape on the equity side spanning all of our groups. It gives you a lot of confidence in the diversification that wherever the market tends to go we will have product. So, just looking at pause mode for one that enterprise is excellent fund and that's the area where growth takes over. On the global equity side, you look at international leaders and outstanding records and then you look at the global allocation fund. Yes, it hit a little pause mode in the second half of last year, but it's three year record is outstanding and has good flow numbers as well. So, we think we are pretty well positioned around the horn.

Okay.

It's extending some of the products like for example, the strategic values developing Canadian version of that where we had success on the SMA, we had success obviously in the U.S. with strategic value, so we come out of the Canadian fund version of it. We will launch that in the next couple of weeks. I mentioned the equity part of the high yield which has been an embedded part of that particular fund, we are working on developing that as a separate equity strategy. So it's more product extension than filling holes.

Okay. Thanks and then Tom just real quick, when you think about the past years you guys have been managing with the waivers in place. Is there anything that has been put on hold or slowdown from like an investment standpoint, I know on the distribution you guys have been active and like on the product side. But anything more like operational that you would look to do if the right environment continues to improve. Just trying to get a sense over the next couple of years if there is anything that has been more you can just put on hold?

Hey Mike, at our board meeting yesterday, a review for the board that the last number of years living under this wavier scenario and we are focused on was all the things that we have invested in and continue to invest in, in order to help grow the company which Chris and Ray went over a bunch of them. So, we don't really think that we have heads up demand that we are not doing, we have tried to manage it, the balancing act we continue to invest to grow and so I don't see pent up things that we haven't done.

Okay that's helpful, thanks.

Thank you. Our next question is coming from Craig Siegenthaler of Credit Suisse. Please proceed with your question.

Thanks and good morning. I just wanted to come back to money market fund price competition and so not only your competitors are really trying to maximize profits here and I just heard that one or maybe more of your larger competitors may keep their prices at depressed level as fee waivers go up. So, I am just wondering have you seen that yet and what is your plan, if there is an element of price competition to this year?

Okay, I am going to give you two elements to this, one is there has been one competitor who has for a considerable amount of time meaning more than a year, maintained a price of paying higher than what the yields would indicate in the marketplace. And that has been something we had to deal with and we talked about it on this call before. The other one was the individual client. This individual client is simply redoing the structure of their arrangements and yes, they’re pricing things involved in it, but as in individual customer who for a lot of different reasons is making these kinds of move and we have not seen this duplicated in other clients nor do we have any other clients similarly situated. So yes, there will be a constant competition from others, but don't forget it is the logical result of big hairy regulation to oligopolies the business. And I mentioned that before, I mentioned it before during today's call and it is a very important point, there is just less and less people going to be in this business before 207 there were over 200 people operating funds now it's about 60 in the bottom gang of those, they don't have much money and don't have much opportunity to distribute to the third parties.

And Chris, just sitting on that last point in terms of industry consolidation. If you look down the road five to ten years from now, do you think there will be many if any money market managers with less than 50 billion left? And also, do you see opportunities like we saw black in Bank of America to do transactions with money market businesses that actually are large, maybe north of 25 billion?

I will answer the second question first then come back to the first. The second question is what about the big deals like the BFA Black run. Yes, and we don't know how all bank regulation is going to go, we don't know how things are going to be analyzed by banks or some large players. So yes, there are opportunities for that as well and that's a good example. There aren't going to be avalanche style, but we think that is definitely a possibility into the future. Now the first part of your question was what?

The first part was, so like if you look down the road, five to ten years, and I heard your oligopoly comments, but do you think there is really any managers with less than 50 billion left?

Yes, I think there will be several and the reason is that either if you control the right to redeem of your assets, then you could run a money fund with very modest assets and you don't have to worry about getting third parties in or out. And if you decided you can accommodate the regulations by either running all government funds or something like that then you can run a relatively small group. A second group will be those who have large enormous fund groups and therefore can handle all the regulations and want to be offering all of the products that are necessary to their fund group. And they may not get to 50 billion in money market, but they will have those as an accommodation to their client. And so, yes, those kinds of groups will continue to exist while the total number of purveyors of these products will continue to dwindle.

Got it, very helpful, thank you.

Thank you. Our next question is coming from Robert Lee of KBW. Please proceed with your question.

Thanks, good morning guys. Question for Tom, I really just wanted to clarify some of the comments around the C-way and I know you have been talking about for a while or maybe a year or more. The pending agreement with the distributor which may reduce the amount of those fee waivers that you can kind of recapture, you mentioned this quarter it's about $6 million per quarter I wondered, two questions number one, is this really more of a when not if like it's going to happen, is this kind of still not determined exactly when?

Yes Rob, so we expect in Q1 $11 million of waivers and when and if the relationship changes we will only recover $5 million of the $11 million. And what we said on the call was we – it could happen at the end of 2016, late 2016.

Okay and then maybe just continue on that path, so conceivably let's say rates at the end of this year are 25 basis points higher, your fee waivers are down to 4 this new agreement comes into play, so are we actually going to be looking that kind of a little bit of, actually you are going to have to give up 2 million instead of –?

Yes.

Okay. Just wanted to make sure I understood it correctly.

You have understood correctly.

Okay, thank you. So, I guess a question for Chris and maybe you kind of answered it with some before, but I am just kind of curious more specifically, if I look around the competitive universe, I kind of put your competitors into three camps as it relates to thinking about how to deal with the challenge from ETF business. So maybe trying to build it themselves with the smart data product through acquisitions or hiring staff others maybe looking for license whether seeing advances in products or someone else as a way to maybe, if it makes sense down the road to the kind of the less transparent active ETF route if you will. And then, others have decided that this not their thing how do you, where do you kind of, how do you think about that I mean do you feel like you’re more in comfortable yards it's too much [indiscernible] going down one of those tabs, just trying to get your thoughts on where you stand right now?

Where we stand today is we are an active manager and proud of it and what makes the difference to us is the generation of alpha by doing honest research whether it is credit analysis on the fixed income side or kicking tires on the equity side, this is where we think we make our mark. Now this is not to say that we wouldn't consider looking at and we filed some ETF products and come up with ideas and we have looked at various acquisitions. So it's not a total philosophical opposition, but it's not where we are headed and where we are focused at this time. Furthermore, I think at some point the intellectual community is going to be doing some studies on at what point where everybody, where a lot of people are not doing price discovery work, what percentage of the marketplace not doing that gives the alpha characters a better advantage from an academic standpoint. And you can have debates about that but there hasn't been enough research done on that yet, but it is at some point. And we remain committed to be honest work of price discovery and credit analysis in order to make a difference for our clients.

Great that's helpful, I appreciate taking my questions. Thanks.

Thank you. Our next question is coming from Eric Berg of RBC Capital Markets. Please proceed with your question.

Thanks very much. Chris, I am hoping you can build on your response to the earlier question, immediately preceding question in the following sense. It seems to me that in addition to extending and I think Ray referenced this existing product that the big trend in the market place today in terms of the competitive landscape is for what someone called next generation products. And that means different things to different people, but it seems like we are getting growth in all these products so that sort of combine different needs of different individual whether it's a low volatility fund that it's combined with income or a absolute return fund that is currency hedge. It seems there is a major push in this area again where some have called next generation as opposed to building on existing products. Two part question, do you agree with this assessment and if so where does Federated stand in this category?

In terms of next generation Eric, the way I would look at it would be that there is two gangs of products here. One is the normal gang of buckets that allow intermediaries to make their choices to make their cash calls, to make their assets allocation decisions and they want pure buckets in order to accomplish that. We have many, many intermediary clients who want that type of product. Then you have the other type of products that are solutions oriented. They are the absolute return type funds. They are the global allocation type funds and these are what is generally called next generation type product. So, we think you got to keep the buckets moving ahead, you are going to have to improve them in order to compete and you have to keep coming up with more and different solutions for clients as they move ahead. However, we have no fear of the same old things. Money market funds as money market funds boring as they are; are delicious lovely and a thing of beauty as is the strategic value dividend of funds. So, we keep looking at them as some could look at them and say, it's the same old thing, but people really don't change all that much and have the same old fears coming back and need these types of products in their investment portfolio.

One final question regarding the money funds maybe you could Debbie, but whoever feels best to answer will answer of course. How do we get a wholesale move or meaningful move by your customers out of the funds, institutional funds in muni and into the governments in an effort to retain the $1 NAV. If we do have this meaningful wholesale shift of assets how will the economics of Federated be affected?

Well, since we have products in all areas, we think we will do pretty well. The returns on the government fund can be slightly less than the returns on the prime funds and that's one of the reasons why we come up with a private fund to attempt to duplicate that experience in all aspects, both for the client and for Federated. Our main job will be to retain the client allegiant because what happens immediately meaning, in the end of the second quarter, third quarter this year is not necessarily mean that's the end of the game. We do not yet know how much of that will move using estimates from as low as several hundred billion which has already moved up to all of it. We could be a trillion and a half and estimates all in between and we don't know what effect that will have on the spreads that exists between [govie] and then now constituted institutional prime funds. So without knowing those it's really hard to gauge exactly what that will mean on the finances of Federated and we don't run any models on it and trying to figure it out either but those are some of the dynamics that are involved.

Alright and thank you.

Thank you. Our next question is coming from Ken Worthington of JPMorgan Chase. Please proceed with your question.

Good morning. This is Wong Cudy standing in for Ken. Ken apologized for not being on the call this morning. So, first thank you for all the detail on the fee waivers, this is another follow up on the fee waivers. We are looking at the Federated government obligations and treasury obligations they both seen increases in the yield from 1 to 17 or 13 respectively. Previously waivers are being recovered lag incremental basis, how do you think about tactically removing fee waivers? You are getting the high level of how are you thinking about it I am kind of curious how you think, you’re going -- how you evaluate the fee waiver removal?

Well, it's essentially just the function of the gross yield that we have talked. We have talked about this when waivers first came into play that for each portfolio its different obviously based on the expense structure of the portfolio. And we were waving fees in proportion between the revenue that the advisory fee revenue that Federated was receiving in distribution fee revenue and then, the revenue that the distributors were receiving. And so, you see that in the press release when we show how the waivers impacted both us and then our distribution expense which of course goes to the third party. So the invert happens on a way up as the assets, as the yields increase where refilling those buckets proportionally as well as providing the yield to the shareholders. So, it all happens in the same kind of proportion as they did on the way down and it will vary literally for each portfolio, each fund.

Okay. And then, this is kind of tying to the question earlier, how important are competitor prices for the fee waiver removal, how do you think about taking off the fee waivers?

Well, to us we are always dealing with whatever other people are doing since [indiscernible] to the contrary and the way we are looking at is exactly the way that Tom and Ray have described it that if we get the increase in interest rates then the waivers will come off and that's what we are expecting. So, we are not going to have, we aren't currently planning to have a different type of waiver recapture because of what competitors are doing or may do.

Okay, great, thank you. All other questions have been asked and answered. Appreciate the color and info today. Thank you.

Thank you.

Thank you. Our next question is coming from Jonathan Casteleyn with Hedgeye Risk Management. Please proceed with your question.

Hi good morning. I was curious about the 6 million per quarter in operating income helped the door to other distributors, I was curious why do you think that's an isolated event meaning, can other distributors sort of call back their expenses and as you say, what is your confidence, it's more about an isolated incident and what percentage of that is on the management in the money fund business do that account for?

Well, let me assure you that it is one client and it is uniqueness of one client where this is occurring. And I am not at liberty to talk about who the client is and so therefore you got to go with me on this or not, but it's not a wide spread thing. And therefore, there are no other clients that are similarly situated to enable them to do that which we are talking about doing here. And if I gave you the asset totals then you would be able to name the client and so we are not in the business of naming the client, so I am not doing that either.

Okay. That's okay thanks. And then just to Debbie, you normally have a very good view as to what price stand from a short term rate environment, I am curious what you think fed actions look like from the desk at this point?

We are really looking at probably on average two to three moves in the year of 2016. Dependency is the key here and I think that [indiscernible] in January but yes from our December numbers certainly employment and housing remain very strong, that's pulling the engine along but we get some of the broader consumer statistics as well as inflation as well as certainly the industrial side of the economy and some of the regional indicators. They continue to weaken slightly in December and then the beginning part of January so those are the numbers that we’re going to be watching to see whether we think there is a merge increase, a huge increase you know 25 basis points incremental of what we are going to see and we think that in the end year around 1% from a fed times perspective does that mean one to one in the quarter or 75 to 1, I think both of those are on the table and again we will be real dependent upon how the economics of the situation continue to play out.

Any expectations of change, the large multi-sale with market volatility or how do you sort of measure those expectations?

Well, I think it adds to the equation. I don't think it's the top item that's being reviewed, I do think it certainly taken into consideration. So, if we continue to be able return the economic price certain market volatility is going to keep another move and that’s move off the table. If we start to strengthen again from an economic perspective I think the global situation and the volatility in the marketplace tends to take a bit of a backseat at that point.

Understood. The last question you put investors with the upcoming rule set of limitations in the money market funds really in the two camps really unable to invest in money funds or unwilling. Can you just describe how a corporate treasure maybe unable to invest in the money fund around the new regulations and then the second part of it is, why would people be unwilling to actually engage in the product with the new role?

Yes, let me address that that was in my remarks. There are some people who are unable and some unwilling what does that mean? Well obviously, a treasure can do what they want in some cases people are unwilling to take on the obligation of being in front with their fees and gait and they don't like that. Some are unable through their documents to take on a changing net asset value. So there are state laws, there are indentures, there are requirements given by boards or committees, investment committees they have been put into effect for over 40 years that constrain some clients. And then, some who aren't constraint that way are constrained because they don't like the potential of fees and gait for example, in a different circumstance some retailer of our clients on the sweep side will not do a fee and a gait fund because they don't want to go through all of the computer work and technology changes that have to be done in order to make that fund accommodated to fees and gait so they will just go to [govie] direct that's just a different example of someone unwilling. So if they want to keep doing what they have done before which is have a dollar in, dollar out product then hopefully they will see the wisdom of coming into our private fund that we are starting to offer in the second quarter of this year.

Understood, thank you.

Thank you. We are showing time for one additional question for today. Our last question will be coming from Patrick Davitt from Autonomous Research. Please proceed with your question.

Thanks for squeezing me in. As a follow-up to Craig’s question about [indiscernible] deal how many of flags like that within the 60 you gave, do you think there are that could in motion of science?

Well, I can't put a number on it, I would say there are a few but I am not going to put a number on it. Obviously, the biggest ones are ready willing and able to proceed on their own and since I don't have any names and no one has actually done it other than one, it's really hard for me to gauge that. But, in this type of business there is so much change and in some of those institutions the money market fund business does not drive the truck, it can easily be decided to be maneuvered and we always put at our side that we are warm and loving home for any of those opportunities.

Okay that's helpful. And then finally, we heard a lot of discussions about the interplay between prime and govie, are you starting to see any impact on the flows between the deposits and money markets post fed hike as the banks are lagging deposits rate or is it still kind of too early to gauge how that will play or work out?

I don't have a good gauge on that, Debbie do you have a comment on that?

We believe that some of those have begun to happen and certainly we have seen the lag from the deposit perspective in addition to the desire by banks to shed those which obviously exacerbates the lag. But it’s hard to identify them specifically at this point since we have a lot of very and banking types of relationships and customers, so I won’t say its hind at this point.

Okay, thanks a lot.

Thank you. At this time I would like to turn the floor back over to management for additional or closing comments.