Please ensure Javascript is enabled for purposes of website accessibility

Federated Investors Earnings Rise 9%: Thank the Fed

By Jordan Wathen – May 2, 2017 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Higher interest rates on the short end of the yield curve have buoyed fees earned on money market funds over the last year, but now the company has to convince investors that it can pick winning stocks and bonds, too.

Federated Investors (FHI -1.63%) reported that first-quarter net income grew to $49.6 million, a 9% increase from the year-ago period. Higher interest rates buoyed management fees it earned on money market assets it manages on behalf of its clients.

With the easy money for the Pittsburgh, P.A.-based asset manager in the past, the company will have to move beyond its legacy money market business to generate meaningful earnings growth. 

Federated Investors' first quarter by the numbers


Q1 2017

Q1 2016

Year-Over-Year Change

Assets under management (AUM)

$361.7 billion

$369.7 billion


Net income

$49.6 million

$45.3 million


Earnings per share




Data source: Federated Investors investor relations.

What happened this quarter

  • Federated Investors' legacy money market business contains the bulk of its managed assets, but it continues to slowly bleed fee-earning AUM. It managed $245 billion of client capital in money market strategies at the end of the first quarter, down approximately 3% from the sequential quarter, and 6% from the year-ago period.
  • AUM in stock and bond strategies grew 2.5% during the quarter, but investors are pulling money faster than new investments are flowing in. AUM growth here is driven by rising stock and bond prices rather than new investments. While AUM is the lifeblood of any asset manager (more is always better), Federated shareholders would prefer to see the company grow by bringing in new investors rather than grow by riding a rising tide in the markets.
  • A shift in the mix of its managed assets is weighing on its average fee rate. AUM in its funds, which carry higher fees, declined by roughly 10%, or $29.5 billion during the quarter. Its separately managed account (SMA) assets grew by about 30%, or $25.3 billion. All else equal, fund assets generate more fees, and profit, than SMA assets. 
  • For years following the financial crisis, Federated waived fees to keep its clients' money market returns in positive territory. Those waivers have since been reversed. Fee waivers negatively impacted pre-tax operating income by $0.8 million in the first quarter vs. $9.4 million in the year-ago period. To put that in perspective, fee waivers were a mere rounding error, negatively affecting its operating income by about 1% this quarter. 
Photo of change jar

Image source: Getty Images.

What management had to say, plus a look ahead

Management called out its Strategic Value Dividend stock strategies as a high-quality driver of asset and fee growth. In prepared remarks on the company's post-earnings conference call, Federated Investors CEO J. Christopher Donahue noted that

Total assets in the domestic and international strategic value dividend strategies increased 4% in the first quarter to reach a record high of $38.9 billion. The strategic value dividend funds investment performance was solid in the first quarter returning 5.3%. This ranks it in the top 9% of funds in the Morningstar category which it has been assigned, namely large cap value.

It's no surprise that company management is excited about record stock assets. As the table below shows, stock and bond assets generate more revenue per dollar of AUM than its legacy money market business.

Asset Type

Percentage of Average AUM

Percentage of Total Revenue

Money market









Data source: Federated Investors 10-Q.

In the future, growing revenue and profit won't be as easy as simply riding the tailwinds of rising interest rates. As this growth driver falls off, Federated will have to grow AUM while stemming a negative shift in its mix toward lower fee structures. 

Case in point: More than $25 billion of money market assets moved from higher-fee funds to lower-fee SMAs in the past year. On the conference call, management indicated that these SMAs generally carry fees of 0.04% of assets vs. the average net fee of 0.10% it collects from money market funds. 

To move the needle on profits, Federated Investors will have to convince its clients that it's more than just a money market manager, and that it can effectively manage more profitable assets, too. 

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Federated Investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Federated Hermes, Inc. Stock Quote
Federated Hermes, Inc.
$32.66 (-1.63%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.