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Morningstar | Equity and Fixed-Income Outflows Mar Federated's 4Q Results; No Change to $25 FVE

There was little in no-moat-rated Federated Investors' fourth-quarter results that would alter our long-term view of the firm. We are leaving our $25 per share fair value estimate in place. The company closed out the December quarter with $459.9 billion in assets under management, up 15.7% sequentially and 5.2% on a year-over-year basis. Excluding the impact of the Hermes acquisition, which added $46.0 billion in assets under management, or AUM, during the third quarter, the company's AUM was up 4.1% sequentially and 5.8% year over year, with most of the lift coming from its fixed-income and money market fund operations.

Net outflows of $4.9 billion in long-term assets were driven primarily by net redemptions of $2.5 billion and $2.1 billion from its equity and fixed-income operations. Federated did, however, report $37.6 billion of inflows from its money market operations, which ended the fourth quarter with $301.8 billion in AUM. We expect that much of the liquidity inflows were due to investors parking cash during the fourth-quarter sell-off, and that much as in past periods Federated will have a difficult time holding on to this capital longer term as it gets invested back into riskier assets.

While average AUM was up 16.1% year over year, fourth-quarter revenue increased just 10.4% as the realization rates for each of Federated's main asset class segments declined. Full-year top-line growth of 3.0% was better than our forecast calling for flat to slightly negative revenue growth during 2018. As for profitability, Federated's full-year operating margins, which included some integration costs associated with the Hermes acquisition, of 29.1% were 190 basis points lower than 2017 levels. Backing out these costs, year-to-date operating margins were 31.0%, basically flat with year ago levels.