By Agency Reporter

Monday, 1 Nov 2010

Federated Investors Incorporation reported a 24 per cent decline in third-quarter earnings as one of the nation‘s top money-market fund managers criticised proposed changes to the industry, Wall Street Journal reported on Saturday.

Federated Investors reported net income of $43.m, or 42 cents a share, for the quarter ended September 30, compared with $57m, or 56 cents a share, for the same period last year. Revenue fell by 18 per cent from a year earlier, to $242.2m, largely due to a decline in money-market managed assets.

A Federated spokeswoman, Ms.Meghan McAndrew, said, the company saw $1.1bn in inflows in its bond funds and separate accounts during the quarter, but stock funds and separate accounts had net outflows of $396m.

Federated‘s money-market assets in both funds and separate accounts were $260.9bn at the end of the quarter, down by 18 per cent from a year earlier. Money-market assets accounted for 51 per cent of revenues during the quarter.

The decline in money-market assets follows the broader industry trend. Money-market mutual funds hold about $2.8tn, down from $3.3tn as at October 2009, according to iMoneyNet.

On a conference call with analysts on Friday morning, Federated Chief Executive Christopher Donahue fielded a string of questions on the future of the money-fund business. A report on money-fund regulatory change released last week by the President‘s Working Group on Financial Markets left on the table a number of options, including requiring the funds to have floating share prices and subjecting them to bank-like regulation.

Donahue weighed in against several options included in the report, including money-fund insurance that would limit credit losses for shareholders and a two-tiered system that would allow for money funds with both stable and variable share prices.

”On the insurance, we just don‘t see how it works,” Donahue said on the call, adding that ”the socialisation of credit risk is unwise.” As for a two-tier system, he said, ”we don‘t really think that‘s the way to go.”

Some overhaul options addressed in the working-group report, such as regulating money funds as special-purpose banks, would require significant capital from the industry, the report said.

The potential for such change has influenced the firm‘s thinking about capital, Donahue said on the call. ”It did occur to us these things were going on when we took down the $425m,” Donahue said on the call, referring to a new term-loan agreement Federated entered into earlier this year.

”It‘s going to take a long time” for all the regulatory overhauls to play out, says Michael Kim, analyst at Sandler O‘Neill & Partners LP, noting that the working-group report was originally set to appear about a year ago.

Further money-fund overhaul is likely to hasten industry consolidation, some analysts say. Federated earlier this year agreed to acquire the money-market assets of SunTrust Banks Incorporation.

Many overhauls already implemented as well as those under consideration ”have this tendency toward oligopolisation of this business, for better or worse,” Donahue said.

Source: Punch