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Athena Jiang

FII AT A GLANCE

P/E ► 13.8 AVG EV/EBITDA ► 9.31 AVG ROA ► 25.2% VERY HIGH ROE ► 45.1% VERY HIGH Debt to Equity ► 0.713 AVG Current Ratio ► 0   Interest Coverage Ratio ► 67.0 HIGH

 

 

 

 

 

 

Federated Investors is one of the largest mutual fund management companies in the United States, with over $300B in 148 mutual funds as of December 31, 2007. 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. Revenues reached 1.1 billion USD in 2007.

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; at the end of 2007, money market funds accounted for over 75% of the company's assets under management. However, the firm has been working in recent years to increase its equty 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 through 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.

Business Financials

The three main markets for Federated’s funds are as follows:

• Private wealth management professionals from bank trust departments invest overwhelmingly in Federated’s money market funds, which contained 131 billion USD of the 144 billion USD under investment for wealth managers.

• Broker/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 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.^[1]

Total assets under management increased by 27% from 2006, and despite volatile markets throughout 2007, revenue also increased by 15% from 2006. ^[2] This was partly due to the expansion of its equity assets management business with the acquisition of MDT Advisors. This acquisition, one of half a dozen acquisitions last year, also reflects Federated’s desire to expand its investments in foreign securities.

^[3]

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Total operating expenses also increased by 100 million USD from 2006 to 2007, mainly because of a 67 million USD increase in marketing and distribution expenses. Larger portfolios under management demand higher distribution and intermediary expenses, and a full year’s worth of marketing expenses related to the acquisition of Alliance Capital Management halfway through 2005 contributed to operating expenses as well. ^[5]

Trends and Forces

• Interest rate fluctions leads to asset flight: Unlike some other mutual fund companies, Federated specializes in low-risk money market funds. 49% and 11% of total revenues in 2007 came from money market and fixed income funds respectively, and the largest investors in these funds are institutions. 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. ^[6] 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.

• 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. Market volatility and falling interest rates in 2007 contributed to a 36% increase in money market mutual funds AUM in 2007.

• Federated is dependent on a few large clients: A majority of Federated's assets under management come from large financial institutions. In 2007, Bank of New York Mellon, accounted for 15% of Federated's income. ^[7] 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. 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 Wells Fargo (WFC)

All figures below in billions USD.

Notes

1. ↑ 2007 FII 10-k, Item 1, pg. 6
2. ↑ 2007 FII Annual Report, pg. 35
3. ↑ 2007 FII Annual Report, pg. 62
4. ↑ 2007 FII Annual Report, pg. 35
5. ↑ 2007 FII Annual Report, pg. 38
6. ↑ 2007 FII Annual Report, pg. 52
7. ↑ 2007 FII Annual Report, pg. 22
8. ↑ 2007 AB 10-k
9. ↑ 2007 FII Annual Report, pg. 35
10. ↑ Fidelity Investments
11. ↑ 2007 BEN 10-k, Item 7, pg. 43
12. ↑ 2007 JNS 10-k, Item 6, pg. 14