Federated Investors, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing identifies the registrant as Federated Investors, Inc.; the supplied filing text does not identify it as Federated Hermes, Inc.
Business context
Federated provides investment management and related services. Its principal revenue source is asset-based investment advisory fees, supplemented by administrative and other service fees. At year-end, it managed $358.2 billion across sponsored funds, separate accounts and liquidation portfolios, down 8% from 2009. Money market assets were the largest category, at $276.0 billion.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $951.9 million | $1,176.0 million | Down 19% |
| Investment advisory fees, net | $639.4 million | $749.8 million | Down 15% |
| Administrative service fees, net | $215.7 million | $262.8 million | Down 18% |
| Other service fees, net | $94.0 million | $159.0 million | Down 41% |
| Average managed assets | $347.1 billion | $405.6 billion | Down 14% |
Average money market assets fell 22% to $268.7 billion, while fixed-income average assets rose 31% to $37.7 billion and equity average assets rose 9% to $29.1 billion. Average liquidation-portfolio assets increased 66% to $11.6 billion. These shifts affected revenue because fee rates differ by asset and product type.
Approximately 50% of 2010 revenue was attributable to money market assets. The filing text provided here does not give clear values for net income, operating margins, cash flow, cash balances, total debt or liquidity. It refers readers to the incorporated annual report for the financial statements and related discussion.
Material changes and unusual items
- Money market fee waivers to maintain positive or zero fund yields totaled $241.6 million in 2010, partially offset by $186.6 million of lower distribution expenses; the net operating-income impact was $55.0 million. In 2009, the net impact was $34.2 million.
- Total managed assets declined 8% year over year. Money market year-end assets fell 12%, while fixed-income assets grew 20% and equity assets grew 4%.
- Federated repurchased 200,000 shares under its publicly announced program during the fourth quarter at an average price of $22.32; an additional 22,226 restricted shares were repurchased in connection with employee separations. The program had 3,601,600 shares remaining at year-end.
Outlook, commentary and risks
- Management expected money market fee waivers and related distribution-expense reductions to continue into 2011 and likely remain material. It did not expect the first-quarter 2011 quarterly operating-income impact to change materially from the $12.3 million recorded in the fourth quarter of 2010.
- Management estimated that a 10-basis-point increase in gross yields on money market portfolio securities could reduce the operating-income impact of waivers by about one-third, and a 25-basis-point increase by about two-thirds. Actual results depend on yields, asset levels and mix, expenses, policy actions and other factors.
- Concentration risks include one sponsored fund, Federated Kaufmann Fund, and one intermediary customer, Bank of New York Mellon Corporation including Pershing; each accounted for approximately 12% of 2010 revenue.
- Key risks include continued low short-term interest rates and fee waivers, changes in money market regulation under the Dodd-Frank Act and potential money market fund reforms, market-driven asset flows and performance, competition, and possible changes in tax rules. The filing states that the effects of proposed reforms were uncertain.
Important facts for investors to verify
- Review the incorporated 2010 annual report for net income, earnings per share, cash-flow details, balance-sheet liquidity, debt, margins and full management discussion; those values are not clearly provided in the supplied filing text.
- Verify the subsequent size and duration of money market fee waivers and their net effect after distribution-expense offsets.
- Track managed-asset flows and fee mix, especially money market balances, given their large contribution to revenue.
- Assess developments affecting the two revenue concentrations and the implementation of money market and other regulatory reforms.