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Federated Investors (FII) |
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WIKI ANALYSIS
Federated Investors is one of the largest mutual fund management companies in the United States, with over $389 billion in Assets Under Management (AUM) in 145 mutual funds as of December 31, 2009.[1] Federated invests in equities, fixed income assets, and money market assets and makes money by charging advisory fees as a percent of the assets under management in each fund.
Federated has traditionally specialized in money market funds, which are required by law to invest only in low-risk debt that matures in under 13 months. However, the firm has been working in recent years to increase its equity assets under management. Most notably, the company's 2006 acquisition of MDT Advisors increased its overall equity assets by 16%, while giving Federated exposure to the international equities markets.
Federated's concentration on money market funds has shielded it from the subprime mortgage crisis that continued to plagued other financial services firms in early 2008. Moreover, the firm has benefited from market volatility that accompanied the crisis, as investors tend to favor money market funds during times of uncertainty.
Company Overview
Business Financials
In 2010, FII earned a total of $1.18 billion in total revenues. This was a slight decline from its 2009 total revenues of $1.22 billion in 2008. As a result, this had a negative impact on FII's net income. Between 2008 and 2009, FII's net income declined from $224 million in 2008 to $209 million in 2009.
Business Segments
The three main markets for Federated’s funds are as follows:
Private wealth management
Private wealth management professionals from bank trust departments invest overwhelmingly in Federated’s money market funds, which contained $131 billion of the $144 billion under investment for wealth managers.
Broker/dealers
The brokers and dealers act as intermediaries between Federated and retail investors. When selling its products to retail investors, Federated typically employs a broker who will then work with these individuals. 121 billion USD of assets under management are from such broker/dealers.
The global institutions
The global institution market, which includes governments, foundations, endowments, and other such organizations, supplies 25 billion USD under management, and all other markets add up to 12 billion USD.[2]
Trends and Forces
Interest rate fluctions leads to asset flight
Unlike some other mutual fund companies, Federated specializes in low-risk money market funds. Although money market mutual funds are relatively safe, their return on investment is limited. When interest rates are high, institutional investors tend to seek investment vehicles with better yields for the same perceived risk. To reduce the impact of increasing short-term interest rates, Federated is planning to offer more equity asset management services, which are less affected by interest rates. Whether they are ultimately successful in this endeavor remains to be seen.
Market volatility leads investors to favor money market funds
During times of economic uncertainty and high market volatility, investors tend to prefer money market funds, because they are relatively low risk and have lower advisory fees than equity funds.
Federated is dependent on a few large clients
A majority of Federated's assets under management come from large financial institutions. Bank of New York Mellon accounts for 15% of Federated's income. [3] This concentration of assets among clients leaves Federated vulnerable to consolidation among banks. When one bank acquires another, its increased size gives it greater leverage to negotiate lower fees with Federated. If one of Federated's clients is acquired by a non-Federated client, Federated may not be able to retain its client.
Competition
Federated's major competitors include both mutual fund companies such as Fidelity Investments and diversified financial service companies such as Wells Fargo (WFC). Although Federated is one of the largest mutual fund companies in the United States, its funds are dwarfed by some of the funds of its non-mutual fund competitors like BlackRock (BLK). Other competitors include AllianceBernstein Holding L.P. (AB), Franklin Resources (BEN), and Janus Capital Group (JNS).
References
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