Federated Investors report 9 percent drop in second-quarter profits

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Federated Investors today reported a 9 percent drop in second-quarter profits on a 5 percent decline in revenue.

The Downtown investment manager said net income totaled $36.9 million, or 35 cents per share, on revenue of $213 million versus earnings of $40.4 million, or 39 cents per share, on revenue of $223.8 million in the year-ago quarter.

The results, released after Wall Street closed, were in line with analysts’ estimates.

They reflect fees Federated waived on money market funds in order to allow investors to break even or make a small profit on their investments. The waivers reduced pretax income by $29.6 million during the quarter versus a $23.7 million hit in the same quarter a year ago

Federated said assets under management totaled $351.6 billion at the end of the quarter, down 3 percent from year-ago levels. Equity assets reached a record $49.9 billion, up 29 percent from year-ago levels. Federated has been making a concerted effort to grow its equity and fixed income businesses because of new regulations facing its money market funds, which have been the company’s franchise business.

Money market assets provided about a third of Federated’s revenue during the quarter, while stocks and fixed income assets generated about two-thirds of it, the company said.

The earnings came a day after the Securities and Exchange Commission announced regulations that will affect corporate and institutional investors who use money funds to park excess cash. Fund operators say the regulations severely curb features of the investments that make them popular. One of the conveniences is that the value of a money fund share remains constant at $1, even though the value of the investments in the funds may fluctuate above or below that.

The SEC will let the value of shares in prime money funds, whose investments include short-term debt issued by banks and other corporations, to float above and below $1. The measure is intended to prevent runs on money funds like the 2008 one involving a fund that had invested in short-term paper issued by bankrupt Lehman Bros. Prime fund operators also will be able to limit redemptions and impose fees on them during market crises.

Funds that invest only in U.S. Treasury and other government securities or that serve retail investors will not be affected.

Federated maintains the floating rate will not stop runs during times of market distress. In a statement, it said there is no rush for prime fund investors to jump ship since the regulations will not take effect for two years. Federated said it expects to offer the investors other options for managing their cash soon.

Federated shares closed today at $29.89, up 7 cents. They are up 4 percent this year.

Len Boselovic: 412-263-1941 or lboselovic@post-gazette.com First Published July 23, 2014 8:00 PM

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