Federated reported a solid quarter with earnings relatively flat compared to last year with some asset growth.

Chief executive Chris Donahue and his crew were able to pull this off despite ongoing money market fund doldrums as well as continued uncertainty over the government's regulatory plans. They did this in part by drumming up appetite in their equity and bond products as well as developing new areas of strength around the globe.

First the basics. If you peruse the SeekingAlpha transcript of the latest analyst call and the company's own earnings information, you'd note that Federated reported first quarter net income of $43 million, or 41 cents per share, compared to $42.3 million, or 41 cents per share, the same period a year ago.

Federated's total AUM was $377.3 billion at the end of the quarter, up $13.7 billion or 4 percent from $363.6 billion a year ago.

This included healthy increases in both bond and equity assets. For example, Federated's equity assets were $37.9 billion at March 31, 2013, up $3.8 billion or 11 percent from $34.1 billion a year ago. Its fixed-income assets were a record $52.8 billion at March 31, 2013, up $6.6 billion or 14 percent from $46.2 billion at March 31, 2012.

Meanwhile, money market mutual fund assets were $242.7 billion at March 31, 2013, down $2.5 billion or 1 percent from $245.2 billion at March 31, 2012.

There were at least three strong themes to glean from the conference call and earnings results.

They are:

POINT 1: Regulatory Uncertainty Is a Still a Big Problem
POINT 2: Federated Is Concentrating on Organic Growth
POINT 3: Europe and Asia Are Ripe Markets


Now to drill down on these points.

POINT 1: Regulatory Uncertainty Is a Still a Big Problem
It's important to note that none of the Federated executives expressed anything approaching alarm over the possibility of toughened new money market reforms. Nonetheless, the uncertainty represents a headache for money fund players like Federated, and for good reason. Depending on what rules are finally selected, firms like Federated could face higher costs and possibly even outflows to other products. But since there are no clear indicators as to where the government might go, Donahue and company refused to to indulge in any speculation.

Here is what Donahue had to say on the subject:

On the regulatory front. Public comments from an SEC commissioner indicate that a proposal may be forthcoming in the next couple of months, "near-term." Unless and until a proposal is put out for comment, there's not much in the way of additional commentary that I can make. We continue to advocate for sound policy that enhances the resiliency of money funds for our clients, who fully understand that money funds, like other investments, have elements of risk. They are not interested in radical and unnecessary changes like floating NAVs, holdbacks or capital requirements. Money fund investors have remained confident in the product as presently constructed, a dollar in and a dollar out, uninsured, transparent, invested in a diversified portfolio of high-quality securities and supported by proper accounting and market valuations.

Our position is straightforward. We will continue to champion those things that enhance the resiliency of money funds while retaining the core features of a sound product with an unparalleled long safety record and success, all based on daily liquidity at par with the market rate of interest.

One reason why the regulatory headwinds can lead to seasickness is the fact that the money fund industry can't turn on a dime. Donahue had this to say on the difficult to launch entirely new products and strategies in the face of government uncertainty.

Well, as regards what these guys might come up with, whether it's a variable NAV or not, it's a separate subject, which we can get into. But get to your question is the alternatives, we've discussed this on the calls before. We have a very large separate account business, which works very well for large clients, very large clients, and so that is one thing that can be considered. Moving funds to offshore can be considered. Moving funds to other types of products, enhanced cash, et cetera, can be considered. Moving products to depository institutions and largely larger banks would also be considered. So all of these things, and there are other new products that I think could get created that haven't even shown up yet. Some have filed, including us, various forms of ETFs. But the thing about all of these alternatives is that none of them are as good for the customer, the economy or the issuer as the money market fund. But that would be an array of potential options. Obviously, the simplest one is if they throw prime funds under the buses, then everybody runs over the government funds.

Indeed, chief financial offer Thomas Donahue said that regulatory troubles would lead to a shakeout in the industry.

He described the situation in this way:

I see more the impact of the regulatory environment that we live in as the continuing the oligopolization of the business. Perhaps that's not its intent, but that's certainly its effect. It's very difficult to start off brand-new products, especially on the cash management side, when what the customer wants is daily liquidity at par and you need a bigger bunch of assets in order to make that viable. And so I just don't see that. More likely, depending on what the proposal is, it will follow the line of a bunch of money moving into govies if they trash prime and moving into large bank deposits for the rest of the money. That will be the main show. Then all these other products that could come up will take their place in line, but it'll be well behind. And I just don't see the underlying business efficacy of all new businesses for new type cash management products, which don't do what people want and require a lot more of assets than are available.

POINT 2: Federated Is Concentrating on Organic Growth
When asked about whether Federated was thinking of any potential M&As in the near future, CEO Chris Donahue had this to say on the subject:

Well, there are product sets that we think we're working on, but we've decided to do it more or less internally. When you add a managed vol and a managed tail-risk product and you put them into insurance-type products, when you create an unconstrained bond fund and go anywhere, a balanced-type asset, allocation-type funds, and combine them with the Pru Bear and the Pru Dollar Bear Funds, you have a pretty good gang of what the world would call alternatives. And we have looked at whether to do that by acquisition many times, and we just can't get convinced of the value proposition for the underlying clients and, sometimes, not even the repeatability of the performance. So we've taken those ideas, put them into various mutual fund components managed by various of the teams that we have going here, but we package them and refer to them as 2 pods, of one is alternative and one is our asset allocation, that address this need. So that's how we've approached what we saw as a need in the product array.

They've certainly set the stage for more organic growth. Here is what Donahue had to say on their distribution initiatives:

Looking at distribution. Equity fund gross sales grew by 24% in the first quarter compared to the fourth quarter. We saw the strongest growth in the wealth management trust channel at plus 32%, followed by broker/dealer at plus 23% and institutional at plus 12%. Fixed income sales grew by 20% in broker/dealer channel versus Q4, and we're up 9% in wealth management trust channel. In the broker/dealer channel, we continue to leverage our investment in additional distribution capacity. We are expanding the number of advisors doing business with us and grow the product set used by these advisors. The number of advisors doing business with us is nearing 39,000, up from 29,000 in 2008.

POINT 3: Europe and Asia Are Ripe Markets
Donahue had this to say about overseas:

Acquisitions and offshore business. We continue to develop our Asia Pac operation in Australia. We're evaluating strategies to offer and expect to begin adding sales personnel later in 2013.

In Europe, we had our first trades booked in April from our expanded distribution efforts with Bury Street Capital and look forward to growing this during 2013. We continue to look for alliances and acquisitions to advance our business in Europe and Asia as well as the United States.

To learn more, read the SeekingAlpha transcript of the latest analyst call and the company's own earnings information.  

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