EUR 850.00 For Business Accounts Only

Morningstar | Market Gains Offset Outflows in Federated's 1Q, Setting Company Up for Better Near-Term Results

While there was little in no-moat-rated Federated Investors' first-quarter results that would alter our long-term view of the firm, we are likely to increase our fair value estimate slightly to reflect a somewhat stronger first quarter than we projected. Federated closed out the March quarter with $484.9 billion in managed assets, up 5.4% sequentially and 23.6% year over year. Excluding the impact of the Hermes acquisition, which added $46.0 billion in assets under management during the third quarter of 2018, the company's AUM was up 11.9% year over year, with most of the lift coming from its money market fund operations. Net long-term outflows of $2.4 billion were a marked improvement over the fourth quarter of 2018, with flows improving in each of the firm's equity, balanced, and fixed-income platforms.

While average long-term AUM was up 19.5% year over year during the March quarter, Federated reported only a 16.4% revenue increase from the prior-year period due to shifting product mix, which lowered its overall effective fee rate to 0.258% from 0.265% during the first quarter of 2018. This was still better than our call for mid-single-digit revenue growth for 2019 (which we are now likely to increase to high single digits given the strength of Federated's top-line results coming out of the March quarter).

While first-quarter adjusted operating margins of 26.3% were 390 basis points lower than 2018 levels, they were in line with how we expected the year to unfold, with our expectation for 25%-27%. We continue to expect increased expenditures aimed at improving investment performance and enhancing distribution, as well as the lower-profit-margin profile at Hermes, to weigh on profitability; as such, we expect Federated to generate adjusted EBIT margins of 27% and lower over the remainder of our five-year projection period.