Federated Investors, the money market giant that sailed through the global financial crisis on a wave of safe-haven inflows, is facing choppier waters this year because of rock-bottom interest rates and potential changes to regulations governing money funds.
The U.S. Federal Reserve Board's Aug. 9 vote to keep short-term rates between zero and 0.25% through mid-2013 was the latest rain on Federated's parade. Extremely low interest rates have left Federated waiving millions of dollars of fees on its money market funds — which accounted for 76% of the firm's assets under management as of June 30 and almost half of its revenue — to ensure a positive return for investors.
In a recent interview, Christopher Donahue, president and CEO of Pittsburgh-based Federated, conceded the Federal Reserve's recent pledge to keep rates low for another few years was “not exactly a positive.” But he said the tough environment will pressure a growing number of smaller money market competitors to “throw in the towel,” opening up continued “roll-up and acquisition opportunities” for Federated.
On the question of potential changes in money fund oversight, Mr. Donahue described the ongoing post-crisis review in Washington as part of a decades-long wrestling match with regulators who have never been entirely comfortable with money market funds.
While insisting he isn't losing sleep over that process, Mr. Donahue said the ideas being discussed in the latest round of deliberations - including introducing variable net asset values and capital requirements - would be “stepping stones” to eliminating money market funds entirely. Federated's leadership is “working very hard to try to have sanity rule,” he added.
The critical mass of economic and regulatory uncertainties haunting Federated now has left a number of investment banks — including Credit Suisse Group AG, J.P. Morgan Chase & Co. and Sandler O'Neill & Partners — maintaining “underweight” recommendations for the company's stock, even after a more than 37% drop since early 2011.
A day after the Federal Reserve's Aug. 9 vote to keep the federal funds rate between zero and 0.25% through mid-2013, William Katz, who covers publicly listed money managers for Citi Investment Research & Analysis, changed his Federated rating to “sell” from “hold,” and cut his 12-month price target for the company's stock to $16 from $21.
In his Aug. 10 report, Mr. Katz said his downgrade was prompted by the prospect that Federated will now have to continue its earnings-depressing fee waivers “well into 2012,” even as it faces the “tail risk” of material regulatory change.