10-K 1 fii-annualreport10kfy2014.htm FORM 10-K FII - Annual Report & 10K FY 2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 1-14818
FEDERATED INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)

 
25-1111467
(I.R.S. Employer
Identification No.)
 
 
Federated Investors Tower
Pittsburgh, Pennsylvania
(Address of principal executive offices)
 
15222-3779
(zip code)
412-288-1900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class B Common Stock, no par value
(Title of each class)
 
New York Stock Exchange
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes x   No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o   No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
  
Accelerated filer
 
o
Non-accelerated filer (do not check if a smaller reporting company)
 
o
  
Smaller reporting company
 
o
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

The aggregate market value of the Class B Common Stock held by non-affiliates of the registrant as of June 30, 2014 was approximately $2.9 billion, based on the last reported sales price of $30.92 as reported by the New York Stock Exchange as of such date. For purposes of this calculation, the registrant has deemed all of its executive officers and directors to be affiliates, but has made no determination as to whether any other persons are affiliates within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934. The number of shares of Class A and Class B Common Stock outstanding on February 17, 2015, was 9,000 and 104,795,024, respectively.

Documents incorporated by reference:
Part III of this Form 10-K incorporates by reference certain information from the registrant's 2015 Information Statement.



Table of Contents
 
 
Page
Part I
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
Part II
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
Part III
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
Part IV
 
 
Item 15
 
 
 
 
 
 
 
 

FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause the actual results, levels of activity, performance or achievements of Federated Investors, Inc. and its consolidated subsidiaries (Federated), or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such statements include certain statements relating to: asset flows, levels and mix; business mix; levels of revenues, expenses, gains, losses, income and earnings; obligations to make additional contingent payments pursuant to acquisition agreements or employment arrangements; future cash needs and cash flows; legal proceedings; the timing and impact of increased laws and regulation, including potential, proposed and final rules by U.S. and foreign regulators and government entities; distribution channels and markets; the components and level of, and prospect for increased, distribution-related expenses; levels of investment, potential losses associated with investments and the timing of redemption of certain investments; the ability to raise additional capital; impact of consolidations; useful life of property and equipment, impairments and other charges for losses and expenses; tax liability and the realization or reversal of deferred tax assets; plans for international growth; management’s assessments, beliefs, expectations, assumptions, projections or estimates, including regarding fee rates, market conditions, the level, degree, continuance, recovery and financial impact of fee waivers and reimbursements or assumptions of expenses (fee waivers), the level, timing, degree and impact of changes in interest rates, yields or asset levels or mix, legal proceedings, the timing, impact and other consequences of potential, proposed and final rules and other regulation, borrowing, taxes, tax assets, tax rates, interest rates, earnings, cash flows, credit spreads, recovery rates, dilution, product and strategy demand, investor preferences, market availability and supply of, and interest in, certain

2


investments, performance, product development and restructuring options and initiatives, including the plans for and timing of such options and initiatives, compliance, and related legal, compliance and other professional services expenses, interest payments or expenses, amortization expense, compensation expense, and other expenses, reallocation of resources, repayment and amortization schedules for indebtedness and interest rate swaps, loan balances, the impact and value of the interest rate swap, indebtedness and certain other investments, volatility, and liquidity; dilution and diluted earnings; future principal uses of cash; performance indicators; the impact of accounting policies and new accounting pronouncements; interest rate, credit, price, sovereign debt, currency, technology, cybersecurity, litigation, foreign exchange, concentration, market and other risks; guarantee and indemnification obligations; and certain items set forth under Item 1A - Risk Factors. Among other risks and uncertainties, market conditions may change significantly resulting in changes to Federated’s asset flows, asset levels, asset mix and business mix, which may cause a decline in revenues and net income, result in impairments and increase the amount of fee waivers incurred by Federated. The obligation to make contingent payments is based on net revenue levels and will be affected by the achievement of such levels, and the obligation to make additional payments pursuant to employment arrangements is based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows and future uses of cash will be impacted by a variety of factors, including the number and size of any acquisitions, Federated’s success in developing, structuring and distributing its products and strategies, potential changes in assets under management and/or changes in the terms of distribution and shareholder services contracts with one or more intermediaries who offer Federated’s products to customers, and potential increased legal, compliance and other professional services expenses stemming from additional regulation or the reallocation of such resources to other initiatives. Federated’s risks and uncertainties also include liquidity and credit risks in Federated’s money market funds and revenue risk, which will be affected by yield levels in money market fund products, changes in fair values of assets under management, investor preferences and confidence, and the ability of Federated to collect fees in connection with the management of such products. Many of these factors may be more likely to occur as a result of the increased scrutiny of the investment management industry by domestic or foreign regulators, and any disruption in global financial markets. As a result, no assurance can be given as to future results, levels of activity, performance or achievements, and neither Federated nor any other person assumes responsibility for the accuracy and completeness of such statements in the future. For more information on these items and additional risks that may impact the forward-looking statements, see Item 1A - Risk Factors.


3


Part I

ITEM 1 – BUSINESS
General
Federated Investors, Inc., a Pennsylvania corporation, together with its consolidated subsidiaries (collectively, Federated), is a leading provider of investment management products and related financial services. Federated has been in the investment management business since 1955 and is one of the largest investment managers in the United States (U.S.) with $362.9 billion in assets under management (AUM or managed assets) at December 31, 2014.
Federated operates in one operating segment, the investment management business. Federated sponsors, markets and provides investment-related services to various investment products, including mutual funds and Separate Accounts (which include separately managed accounts, institutional accounts, sub-advised funds and other managed products) in both domestic and international markets. Federated’s principal source of revenue is investment advisory fee income earned by various domestic subsidiaries of Federated pursuant to investment advisory contracts with the investment products. These subsidiaries are registered as investment advisers under the Investment Advisers Act of 1940 (Advisers Act). Investment advisers are compensated for their services in the form of investment advisory fees based primarily upon the AUM of the investment products.
Federated provided investment advisory services to 131 Federated-sponsored funds (the Federated Funds) as of December 31, 2014. Federated markets these funds to banks, broker/dealers and other financial intermediaries who use them to meet the needs of customers and/or clients (collectively, customers), including retail investors, corporations and retirement plans. The Federated Funds are domiciled in the U.S., with the exception of Federated International Funds Plc and Federated Unit Trust, both of which are domiciled in Dublin, Ireland, and the Federated Cash Management Funds, which are domiciled in the United Kingdom. Most of Federated’s U.S.-domiciled funds are registered under the Investment Company Act of 1940 (1940 Act) and under applicable federal laws. Each of the U.S.-domiciled registered funds enters into an advisory agreement that is subject to annual approval by the fund’s board of directors or trustees, a majority of whom are not interested persons of the funds or Federated as defined under the 1940 Act. In general, material amendments to such advisory agreements must be approved by the funds’ shareholders. A significant portion of Federated’s revenue is derived from these advisory agreements, which are generally terminable upon 60 days notice to the investment adviser.
Of the 131 Federated Funds as of December 31, 2014, Federated’s investment advisory subsidiaries managed 44 money market funds totaling $225.5 billion in AUM, 51 fixed-income funds with $40.5 billion in AUM and 36 equity funds with $33.1 billion in AUM.
As of December 31, 2014, Federated provided investment advisory services to $63.8 billion in Separate Account assets. These Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit plans, corporations, trusts, foundations, endowments, mutual funds and other products sponsored by third parties. Fees for Separate Accounts are typically based on AUM pursuant to investment advisory agreements that may be terminated at any time.
In addition, Federated had been retained by a third party to manage a liquidation portfolio of distressed fixed-income securities through an orderly liquidation process that occurred over multiple years. The assets in this liquidation portfolio were fully liquidated in the fourth quarter of 2014.
Certain Federated Funds have adopted distribution plans that, subject to applicable law, provide for payment to Federated for distribution expenses, including sales commissions paid to broker/dealers. These distribution plans are implemented through a distribution agreement between Federated and each respective fund. Although the specific terms of each such agreement vary, the basic terms of the agreements are similar. Pursuant to these agreements, Federated acts as underwriter for the funds and distributes shares of the funds primarily through unaffiliated dealers. Each distribution plan and agreement is initially approved by the directors or trustees of the respective fund and is reviewed for approval by such directors or trustees annually.
Federated also provides a broad range of services to support the operation and administration of the Federated Funds. These services, for which Federated receives fees pursuant to agreements with the Federated Funds, include administrative services and shareholder servicing.

4


Assets Under Management
Total assets under management are composed of Federated Funds, Separate Accounts and, prior to its complete liquidation in the fourth quarter of 2014, a liquidation portfolio and represent the balance of AUM at a point in time. Total managed assets for the past three years were as follows:
  
 
As of December 31,
 
2014
vs. 2013

 
2013
vs. 2012

dollars in millions
 
2014

 
2013

 
2012

 
 
Money market
 
$
258,772

 
$
275,952

 
$
284,704

 
(6
)%
 
(3
 )%
Fixed-income
 
52,707

 
50,126

 
52,711

 
5

 
(5
)
Equity
 
51,426

 
44,148

 
35,010

 
16

 
26

Liquidation portfolio
 
0

 
5,858

 
7,346

 
(100
)
 
(20
)
Total managed assets
 
$
362,905

 
$
376,084

 
$
379,771

 
(4
)%
 
(1
)%

Average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period. Average managed assets for the past three years were as follows:
  
 
Year ended December 31,
 
2014
vs. 2013

 
2013
vs. 2012

dollars in millions
 
2014

 
2013

 
2012

 
 
Money market
 
$
254,260

 
$
273,680

 
$
274,206

 
(7
)%
 
0
 %
Fixed-income
 
51,333

 
51,340

 
48,986

 
0

 
5

Equity
 
48,317

 
39,474

 
33,816

 
22

 
17

Liquidation portfolio
 
4,557

 
6,633

 
8,141

 
(31
)
 
(19
)
Total average managed assets
 
$
358,467

 
$
371,127

 
$
365,149

 
(3
)%
 
2
 %
Changes in Federated’s average asset mix year-over-year across both asset and product/strategy types have a direct impact on Federated’s operating income. Asset mix impacts Federated’s total revenue due to the difference in the fee rates earned on each asset class and product/strategy type per invested dollar. Equity products and strategies generally have a higher management-fee rate than fixed-income and money market products and strategies or a liquidation portfolio. Likewise, mutual fund products typically have a higher management-fee rate than Separate Accounts or a liquidation portfolio. Additionally, certain components of distribution expense can vary depending upon the asset class, distribution channel and/or size of the customer relationship. Federated generally pays out a larger portion of the revenue earned from managed assets in money market funds than the revenue earned from managed assets in equity or fixed-income funds.
Revenue
Federated’s revenues from investment advisory, administrative and other service fees provided under agreements with the Federated Funds and other entities over the last three years were as follows:
  
 
Year ended December 31,
 
2014
vs. 2013

 
2013
vs. 2012

dollars in thousands
 
2014

 
2013

 
2012

 
 
Investment advisory fees, net
 
$
557,318

 
$
570,952

 
$
630,834

 
(2
)%
 
(9
)%
Administrative service fees, net
 
213,136

 
222,487

 
225,529

 
(4
)
 
(1
)
Other service fees, net
 
84,039

 
79,608

 
85,902

 
6

 
(7
)
Other, net
 
4,757

 
5,318

 
3,441

 
(11
)
 
55

Total revenue
 
$
859,250

 
$
878,365

 
$
945,706

 
(2
)%
 
(7
)%

5


Federated’s revenues from domestic and foreign operations over the last three years were as follows:
  
 
Year ended December 31,
 
2014
vs. 2013

 
2013
vs. 2012

dollars in thousands
 
2014

 
2013

 
2012

 
 
Domestic
 
$
841,429

 
$
857,480

 
$
923,208

 
(2
)%
 
(7
)%
Foreign
 
17,821

 
20,885

 
22,498

 
(15
)
 
(7
)
Total revenue
 
$
859,250

 
$
878,365

 
$
945,706

 
(2
)%
 
(7
)%
Historically Low Short-Term Interest Rates
For several years, the Federal Open Market Committee of the Federal Reserve Board (FOMC) has kept the near-zero federal funds rate unchanged and short-term interest rates continued to be at all-time low levels. In certain money market funds, the gross yield earned by the fund is not sufficient to cover all of the fund's operating expenses due to these historically low short-term interest rates. Since the fourth quarter of 2008, Federated has voluntarily waived fees (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields. These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of the waivers.
These voluntary fee waivers are calculated as a percentage of AUM in certain money market funds and thus will vary depending upon the asset levels in such funds. In addition, the level of waivers are dependent on several other factors including, but not limited to, yields on instruments available for purchase by the money market funds, changes in expenses of the money market funds and changes in the mix of money market assets. In any given period, a combination of these factors drives the amount of fee waivers necessary in order for certain funds to maintain positive or zero net yields. As an isolated variable, an increase in yields on instruments held by the money market funds will cause the pre-tax impact of fee waivers to decrease. Conversely, as an isolated variable, an increase in expenses of the money market funds would cause the pre-tax impact of fee waivers to increase.
With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market funds as well as the mix among certain share classes that vary in pricing structure will impact the level of fee waivers. Generally, prime money market funds waive less than government money market funds as a result of higher gross yields on the underlying investments. As such, as an isolated variable, an increase in the relative proportion of average managed assets invested in prime money market funds as compared to total average money market fund assets should typically result in lower waivers to maintain positive or zero net yields. Conversely, the opposite would also be true.
These fee waivers impact various components of Federated’s Consolidated Statements of Income, including revenue and operating income. See Item 1A - Risk Factors under the caption Potential Adverse Effects of Historically Low Short-Term Interest Rates and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption Business Developments - Historically Low Short-Term Interest Rates for additional information.
Investment Products
Federated offers a wide range of products and strategies, including money market, equity and fixed-income investments. Federated’s mix includes products and strategies that Federated expects to be in demand under a variety of economic and market conditions. Federated has structured its investment process to meet the requirements of fiduciaries and others who use Federated’s products and strategies to meet the needs of their customers. Fiduciaries typically have stringent demands regarding portfolio composition, risk and investment performance.
Federated is one of the largest U.S. managers of money market assets, with $258.8 billion in such AUM at December 31, 2014. Federated has developed expertise in managing cash for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and competitive yields. Federated began selling money market fund products to institutions in 1974. Federated also manages retail money market products that are typically distributed through broker/dealers. At December 31, 2014, Federated managed money market assets in the following asset classes: government ($126.0 billion); prime ($105.1 billion); tax-free ($18.4 billion); and non-U.S. domiciled ($9.3 billion).
Federated’s fixed-income assets totaled $52.7 billion at December 31, 2014 and are managed in a wide range of categories including multisector ($23.3 billion); municipal ($7.4 billion); high-yield ($7.2 billion); U.S. corporate ($5.8 billion); U.S. government ($5.1 billion); mortgage-backed ($2.1 billion); and international/global ($1.8 billion). Federated’s fixed-income products and strategies offer fiduciaries and others a broad range of products designed to meet their investment needs.

6


Federated's equity assets totaled $51.4 billion at December 31, 2014 and are managed across a wide range of styles including value ($29.1 billion); growth ($9.1 billion); international/global ($4.2 billion); blend ($3.2 billion); and alternative ($0.5 billion). Federated also manages assets in balanced and asset allocation funds ($5.3 billion). These asset allocation funds may also invest in fixed-income securities.
Investment products are generally managed by a team of portfolio managers supported by fundamental and quantitative research analysts. Federated’s proprietary, independent investment research process is centered on the integration of several fundamentals: fundamental research and credit analysis, quantitative research models, style-consistent and disciplined portfolio construction and management, performance attribution and trading.
Distribution Channels
Federated’s distribution strategy is to provide products and strategies geared toward financial intermediaries, primarily banks, broker/dealers and investment advisers and directly to institutions such as corporations and government entities. Federated provides comprehensive investment management to approximately 7,700 institutions and intermediaries including corporations, government entities, insurance companies, foundations, endowments, banks and broker/dealers. Federated uses its trained sales force of approximately 200 representatives and managers to add new customer relationships and strengthen and expand existing relationships.
Product Markets
Federated’s investment products and strategies are primarily distributed in four markets. These markets and the relative percentage of managed assets at December 31, 2014 attributable to such markets are as follows: wealth management and trust (44%), broker/dealer (34%), institutional (19%) and international (3%).
Wealth Management & Trust. Federated pioneered the concept of providing liquidity management to bank trust departments through money market mutual funds in 1974, and has since expanded its services nationwide to institutional cash management and treasury professionals, as well as financial professionals. Today, wealth management professionals across all of these types of firms use a broad range of Federated’s equity, fixed-income and money market funds, and Separate Accounts, to invest the assets over which they have discretion.
The majority of Federated’s managed assets from the wealth management channel are invested in money market funds. In allocating investments across various asset classes, investors typically maintain a portion of their portfolios in cash or cash equivalents, including money market funds, irrespective of trends in bond or stock prices. In addition, Federated offers an extensive menu of equity and fixed-income mutual funds and Separate Accounts structured for this market. In addition to bank trust departments and registered investment advisory firms, Federated provides products and services to capital markets customers (institutional brokerages generally within banks) and directly to cash management and treasury departments at major corporations and government entities.
Federated employs a dedicated sales force backed by an experienced support staff to offer products and services to the wealth management and trust market. As of December 31, 2014, managed assets in this market included $135.0 billion in money market assets, $15.4 billion in fixed-income assets and $8.2 billion in equity assets.
Broker/Dealer. Federated distributes its products and strategies in this market through a large, diversified group of approximately 1,400 national, regional and independent broker/dealers and bank broker/dealers. Federated maintains sales staff dedicated to calling on broker/dealers, bank broker/dealers and insurance interests. Broker/dealers use Federated’s products to meet the needs of their customers, who are typically retail investors. Federated also offers money market mutual funds as cash management products designed for use by its broker/dealer customers. As of December 31, 2014, managed assets in the broker/dealer market included $67.2 billion in money market assets, $37.1 billion in equity assets and $19.2 billion in fixed-income assets.
Institutional. Federated maintains a dedicated sales staff to focus on the distribution of its products and strategies to a wide variety of domestic institutional customers including corporations, corporate and public pension funds, government entities, foundations, endowments, hospitals, and non-Federated investment companies. As of December 31, 2014, managed assets in the institutional market included $49.7 billion in money market assets, $15.8 billion in fixed-income assets and $4.1 billion in equity assets.
International. Federated manages assets from customers outside the U.S. through subsidiaries focused on gathering assets in Europe, Canada, Latin America and the Middle East. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption Business Developments - Global Expansion for additional information. As of December 31, 2014, managed assets in the international market included $6.9 billion in money market assets, $2.3 billion in fixed-income assets and $2.0 billion in equity assets.

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Competition
The investment management business is highly competitive. Competition is particularly intense among mutual fund providers. According to the Investment Company Institute, at the end of 2014, there were approximately 7,900 open-end mutual funds of varying sizes and investment objectives whose shares are currently being offered to the public both on a sales-load and no-sales-load basis. In addition to competition from other mutual fund managers and investment advisers, Federated and the mutual fund industry compete with investment alternatives offered by insurance companies, commercial banks, broker/dealers, deposit brokers, other financial institutions, hedge funds and exchange traded funds.
Competition for sales of investment products and strategies is influenced by various factors, including investment performance, attainment of stated objectives, yields and total returns, fees and expenses, advertising and sales promotional efforts, investor confidence and type and quality of services.
Regulatory Matters
Federated and its investment management business are subject to extensive regulation in the U.S. and abroad. Federated and its products (such as the Federated Funds) and strategies are subject to federal securities laws, principally the Securities Act of 1933 (1933 Act), the Securities Exchange Act of 1934 (1934 Act), the 1940 Act, the Advisers Act, state laws regarding securities fraud and regulations promulgated by various regulatory authorities, as well as foreign laws and regulations promulgated by foreign regulatory authorities. See Item 1A - Risk Factors under the caption Potential Adverse Effects of Changes in Laws and Regulations on Federated’s Investment Management Business for additional information.
Current Regulatory Environment - Domestic
On July 23, 2014, the Securities and Exchange Commission (SEC) adopted final rules on money market fund reform (2014 Rules), which among other regulations, amends Rule 2a-7 under the 1940 Act (Rule 2a-7). The 2014 Rules impose reforms that will require any institutional prime money market fund and any institutional municipal (or tax-exempt) money market fund that is registered under the 1940 Act to utilize market-based valuations to calculate a floating NAV rather than using the amortized cost method for valuing securities maturing in more than 60 days to seek to maintain a stable NAV. Using so-called market-based valuations and calculating the NAV to four decimal places, as the amendments to Rule 2a-7 require, could cause the NAV of such funds to fluctuate. A government money market fund, which includes any money market fund that invests 99.5% or more of its total assets in cash, government securities and/or repurchase agreements that are collateralized solely by government securities or cash, or a retail money market fund, which includes any money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the money market fund to natural persons, will be allowed to continue using the amortized cost method (and/or the penny rounding method of pricing) in calculating its NAV.
In times in which a money market fund is below certain liquidity thresholds, the 2014 Rules also will permit, or in certain circumstances require, a money market fund (other than a government money market fund), to impose liquidity fees of up to two percent on all redemptions, and permit a money market fund to limit (or gate) redemptions for up to 10 business days in any 90-day period (absent a finding by the fund board that the imposition of a liquidity fee or redemption gate would not be in the best interests of shareholders). While a government or Treasury money market fund could voluntarily adopt liquidity fees and/or limits on redemptions under the 2014 Rules as long as such funds’ ability to do so is disclosed to shareholders, Federated has recommended, and reviewed with the Board of Directors/Trustees of the Federated Funds, that Federated’s government or Treasury money market funds not reserve the right to employ liquidity fees nor the ability to impose redemption limits (or gates); consequently, these funds will not adopt the ability to impose either liquidity fees or redemption limits (or gates).
The 2014 Rules also will impose certain current event disclosure requirements on a new Form N-CR and certain other enhanced disclosure and reporting (such as on Form N-MFP and Form PF), diversification, and stress-testing requirements on a money market fund. The 2014 Rules became effective on October 14, 2014. The mandatory compliance dates for the 2014 Rules are: (1) October 14, 2016 for the floating NAV requirements, liquidity fees and gates requirements and related disclosure requirements; (2) July 14, 2015 for the current event disclosure requirements on new Form N-CR and related website disclosure requirements; and (3) April 14, 2016 for other requirements not related to the floating NAV, fees, gates or disclosure requirements.
Along with the 2014 Rules, the SEC also issued on July 23, 2014, a Notice of Proposed Rule 10b-10 Exemptive Relief, in which the SEC solicited comment on a proposal to exempt broker-dealers from the immediate confirmation delivery requirements under the 1934 Act for transactions effected in shares of floating NAV institutional prime money market funds and institutional municipal (or tax-exempt) money market funds. The SEC also issued separate proposals re-proposing amendments to Rule 2a-7 and Form N-MFP to remove any references to or requirement of reliance on credit ratings and to establish alternative standards of creditworthiness in place of credit ratings and proposing amendments to Rule 2a-7 to eliminate an exclusion from the issuer diversification provisions for securities with certain guarantees.

8


In response to the SEC’s adoption of the 2014 Rules, the U.S. Treasury Department (Treasury Department) and the Internal Revenue Service (IRS) also issued on July 23, 2014 proposed rules, which money market fund shareholders may immediately rely upon, aimed at relieving tax burdens for shareholders that frequently purchase or redeem shares of a money market fund (such as through a broker-dealer or bank “sweep arrangement”) and that may experience a high volume of small capital gains and losses if they invest in an institutional prime money market fund or an institutional municipal (or tax-exempt) money market fund with a floating NAV. The IRS also issued final guidance in the form of Revenue Procedure 2014-45 addressing applicable wash sale rules and describing the circumstances in which the IRS will not treat a redemption of shares in a money market fund as creating a wash sale.
Management believes that the floating NAV will be detrimental to Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Federated is reallocating certain resources from regulatory efforts and continues to dedicate internal and external resources to analyze the potential impact of the 2014 Rules, and related Treasury Department and IRS guidance, on Federated’s business, results of operations, financial condition and/or cash flows. Federated also is reallocating resources to plan and begin implementation of product development and restructuring initiatives in response to the 2014 Rules. Federated's analysis, planning and implementation efforts include consideration of Federated’s legislative, regulatory, product structure and development, information system development, reporting capability, business and other options that may be available to seek to minimize the potential impact of any adverse consequences. While Federated’s plans are not finalized and continue to evolve, and remain subject to fund board, and in certain cases, fund shareholder and other, review and approvals, Federated anticipates taking steps to adjust its product line to address the liquidity management needs of a broad array of customers. Such steps will include, for example, conducting shareholder votes to seek approval of changes to the organizational or governing documents of certain Federated Funds, such as Money Market Obligations Trust, the registrant for the majority of Federated’s money market funds, proposing to modify, add share classes to or reorganize certain existing Federated Funds, and developing new products and strategies.
Federated anticipates that the adjustments to Federated’s product line will offer investors a full menu of product choices for liquidity management. For example, Federated will continue to offer Treasury and government money market funds, and will designate existing prime and municipal money market funds as either institutional or retail funds. Federated’s Treasury and government money market funds will continue to seek a $1.00 NAV per share.
Regarding retail money market funds, Federated plans to offer prime money market funds, national municipal money market funds, state-specific municipal money market funds, and variable annuity money market funds. Federated's retail money market funds will continue to seek to maintain an NAV of $1.00 per share.
Regarding institutional money market funds, Federated plans to offer prime money market funds and national municipal money market funds. Regarding institutional prime and municipal money market funds, Federated anticipates converting certain existing Federated Funds to 60-day maximum maturity funds while other existing funds will remain 397-day maximum maturity funds. Federated anticipates that institutional prime and municipal funds selected to be 60-day maximum funds will begin to gradually limit their investments in late 2015 to securities maturing on or before December 14, 2016, which is 60 days post implementation, so that the funds can be restructured appropriately by the final mandatory compliance date for the 2014 Rules in October 2016. Each time a 60-day maximum fund calculates its NAV per share, it will use amortized cost to value its portfolio securities as long as there are no market quotations available and each such security's amortized cost approximates the security’s fair value. Beginning on or about the final mandatory compliance date for the 2014 Rules in October 2016, the 60-day maximum funds will attempt to maintain an NAV of $1.0000 per share and, under ordinary circumstances, the funds' per share price would be expected to experience little or no fluctuations. However, these funds’ NAV may fluctuate if the amortized cost value of their portfolio securities no longer approximates the market value or if the funds are required to dispose of securities for a price other than amortized cost. Federated believes that the short maturity of the securities held by these funds should help to limit the instances when these events may cause a fund’s $1.0000 NAV per share to change.
Federated also anticipates that on or about the final compliance date for the 2014 Rules in October 2016 Federated will convert at least one Federated Fund to a floating NAV money market fund for customers seeking an institutional prime money market fund with potentially higher yields than the 60-day maximum money market funds. Federated also continues to explore investment strategies as investment options for certain customers and the feasibility of private funds that mirror existing Federated money market funds as investment options for qualified investors.
Federated expects to announce its plans relating to the adjustments to its product line periodically in advance of the mandatory compliance date of October 2016 to give customers the opportunity to plan for their liquidity management needs. Subject to Federated Fund board and, in certain cases, shareholder and other approvals and disclosure, Federated expects to implement the adjustments to its product line prior to the final mandatory compliance date for the 2014 Rules in October 2016. Further

9


analysis and planning, or additional adjustments to Federated’s product line, may be required if additional regulation or guidance is issued by the SEC or other regulators.
The SEC also initiated in 2014, and continues in 2015, a series of sweep examinations of certain investment management industry participants on various topics, such as fixed-income liquidity, liquid alternatives, separately managed or wrap-fee accounts, and intermediary and other payments, and is giving attention to liquidity and redemption risks, leverage, operational risks, and the failure/closing of investment industry participants, which may lead to further regulation of the investment management industry.
Given the recent adoption of the SEC’s 2014 Rules, their extended compliance dates, the recent issuance of Treasury Department and IRS guidance on certain related tax matters and the potential for future additional regulation, Federated is unable at this time to assess the degree of impact the SEC's 2014 Rules or potential future regulation may have on its business, results of operations, financial condition and/or cash flows. Federated also is unable to assess at this time whether, or the degree to which, any potential options being evaluated in connection with the SEC's 2014 Rules ultimately may be pursued or be successful.
On July 31, 2014, the Federal Reserve Oversight Council (FSOC) indicated that it intends to monitor the effectiveness of the 2014 Rules. FSOC may recommend new or heightened regulation for "nonbank financial companies" under Section 120 of the Dodd-Frank Act, which the Board of Governors of the Federal Reserve System (Governors) have indicated can include open-end investment companies, such as money market funds and other mutual funds. Management respectfully disagrees with this position. On December 18, 2014, FSOC published a Notice Seeking Comment on Asset Management Products and Activities seeking public comment on aspects of the asset management industry, including whether asset management products and activities may pose potential risks to the U.S. financial system in the areas of liquidity and redemptions, leverage, operational functions and the failure or closure of an asset manager or investment vehicle. Comments are due by March 25, 2015 and are available at http://www.regulations.gov/#!docketDetail;D=FSOC-2014-0001. Federated, individually and together with mutual fund industry groups, is participating in the public comment process. Management does not believe that asset managers and management products, such as money market funds, create systemic risk requiring regulation by the Governors and/or FSOC. Management also believes that statements by Congress in a Congressional Appropriations Committee conference report that accompanied the Consolidated Appropriations Act, 2014, and in a House of Representatives’ Appropriations Committee conference report accompanying the Financial Services and General Government Appropriations Bill, 2015, reflect Congress’ view that the regulation of money market funds is within the purview of the SEC, not FSOC.
Federated is unable to assess whether, or the degree to which, any of the Federated Funds, including money market funds or any of its other products, could ultimately be designated a systemically important nonbank financial company by FSOC. In management's view, the issuance of final regulations is, and any reforms ultimately put into effect would be, detrimental to Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact that any reforms or other actions by the Governors, FSOC or other governmental entities may have on its business, results of operations, financial condition and/or cash flows at this time.

International
European-based money market funds face regulatory reform pressure in Europe similar to that faced in the U.S. The European Commission released its money market fund reform proposal on September 4, 2013. The proposal would have permitted either floating NAV money market funds or constant NAV money market funds subject to capital requirements. Under the proposal, a constant NAV money market fund generally would have had to either build a capital buffer of 3% or convert to a floating NAV money market fund. The European Council under the Italian Presidency advanced numerous money market fund reform proposals during the second half of 2014 and on January 1, 2015 turned the money fund matter over to the Latvian presidency. The Latvian Presidency is not expected to consider money market fund reform until the second half of their term. The European Parliament’s Committee on Economic and Monetary Affairs has picked up the debate and members of parliament have tabled numerous differing amendments to the proposal, such as maintaining the proposed capital buffer, developing a system based on liquidity fees and redemption gates, carving-out various definitions of retail and government money market funds (including, for example, definitions which limit government money market funds to European sovereign debt as well as a definition inclusive of all eligible sovereign debt) and developing a system of low-volatility NAV funds or money market funds with variable share classes. Negotiations are expected to continue through 2015. Any proposal must be approved by the European Parliament and European Council and any final regulation could vary materially from that of any proposal. Management does not anticipate agreement on a final regulation until late 2015 or early 2016.
A proposal to implement a European Financial Transactions Tax (FTT) continues to develop. Notwithstanding challenges to its legality, discussions have continued regarding the scope, application and allocation of the FTT. On May 6, 2014, a Declaration was signed by 10 of the 11 original participating countries confirming their support for the FTT, clarifying that the FTT would

10


be introduced on a step-by-step basis, and indicating that the initial phase of the FTT should be implemented by no later than January 1, 2016. Discussions regarding the adoption of the FTT between participating European countries continue. While it has been tentatively agreed that transactions in listed company shares would be subject to the FTT once implemented, discussions continue to focus on, among other topics, the other types of products or transactions that will be subject to the FTT, the jurisdiction in which the FTT should be levied (i.e., place of establishment of the participating financial institutions or where an instrument was issued), the volume of transactions covered and the potential revenue generated versus costs to the industry. At the end of October 2014, the European Union presidency announced that intensified work was required to enable agreement on open issues in order for the first phase of the FTT to be implemented by January 1, 2016. As the European Union Presidency recently shifted to Latvia, not one of the 11 original participating countries, further uncertainty exists as to the fate of this FTT. Management does not expect the FTT to be effective until early 2016.
European money market reform and the imposition of the FTT, particularly if enacted with broad application, would each be detrimental to Federated's fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact that European money market reform proposals or the FTT may have on its business, results of operations, financial condition and/or cash flows until such proposals are finalized and approved or the FTT is enacted.
On January 8, 2014, the Financial Stability Board (FSB) published for comment as a consultative document “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions” (Consultation). The Consultation sets forth proposed methodologies for identifying systemically important non-bank, non-insurance company financial institutions, including, among others, "market intermediaries" which the Consultation appears to define as including investment advisers, brokers and certain other intermediaries, and "investment funds," which the Consultation appears to define as including individual money market funds, other open-end or closed-end mutual funds, and hedge funds and other private funds, or families of such funds following similar investment strategies. Management generally agrees with the Consultation’s approach of developing specific, measurable, published criteria for designating systemically important non-bank, non-insurance company financial institutions, but does not believe that money market funds should be so designated under the Consultation. Federated is unable to assess whether, or the degree to which Federated, any of its investment management subsidiaries or any of the Federated Funds, including money market funds, or any of its other products, could ultimately be determined to be a systemically important non-bank, non-insurance company financial institution.
Employees
At December 31, 2014, Federated employed 1,435 persons.
Available Information
Federated makes available, free of charge on its website, www.FederatedInvestors.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, annual information statements and amendments to those reports, including those filed or furnished pursuant to Section 13(a) or 15(d) of the 1934 Act, as soon as reasonably practicable after such information is electronically filed with or furnished to the SEC.
Federated will also provide, free of charge, a copy of the company's most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, annual information statements and amendments to those reports upon written request. Send requests to: Corporate Communications, Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
Other Information
All references to the Notes to the Consolidated Financial Statements in this Form 10-K refer to those in Item 8 - Financial Statements and Supplementary Data (Consolidated Financial Statements). All other information required by this Item is contained in Note (3) to the Consolidated Financial Statements.
All cross-references between Items in this 10-K are considered to be incorporated into the Item containing the cross-reference.


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ITEM 1A – RISK FACTORS

As an investment manager, risk is an inherent part of Federated's business. U.S. and global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. If any of the following risks actually occur, our business, results of operations, financial condition and/or cash flows could be materially adversely affected. The risks described below are not the only risks involved in Federated's business. Additional risks not presently known to Federated or that Federated currently considers to be immaterial may also adversely affect its business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of a Material Concentration in Revenue. For 2014, approximately 32% of Federated’s total revenue was attributable to money market assets as compared to 39% and 47% for 2013 and 2012, respectively. The change in the relative proportion of Federated's revenue attributable to money market assets from 2013 to 2014 was primarily the result of lower average money market assets and increases in fee waivers for certain money market funds to maintain positive or zero net yields. The change in the relative proportion of Federated's revenue attributable to money market assets from 2012 to 2013 was primarily the result of increases in fee waivers for certain money market funds to maintain positive or zero net yields. A significant change in Federated’s investment management business (such as its money market business) or a significant reduction in AUM (such as money market assets) due to regulatory changes, changes in the financial markets, such as significant and rapid increases in interest rates over a short period of time causing certain investors to prefer direct investments in interest-bearing securities, the availability, supply and/or market interest in repurchase agreements and other investments, significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and resulting fee waivers, investor preferences for deposit products or other FDIC-insured products or other circumstances, could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Historically Low Short-Term Interest Rates. For several years, the FOMC has kept the near-zero federal funds rate unchanged and short-term interest rates continued to be at all-time low levels. In certain money market funds, the gross yield earned by the fund is not sufficient to cover all of the fund's operating expenses due to these historically low short-term interest rates. Since the fourth quarter of 2008, Federated has voluntarily waived fees (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields. These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of the waivers.

These voluntary fee waivers are calculated as a percentage of AUM in certain money market funds and thus will vary depending upon the asset levels in such funds. In addition, the level of waivers are dependent on several other factors including, but not limited to, yields on instruments available for purchase by the money market funds, changes in expenses of the money market funds and changes in the mix of money market assets. In any given period, a combination of these factors drives the amount of fee waivers necessary in order for certain funds to maintain positive or zero net yields. As an isolated variable, an increase in yields on instruments held by the money market funds will cause the pre-tax impact of fee waivers to decrease. Conversely, as an isolated variable, an increase in expenses of the money market funds would cause the pre-tax impact of fee waivers to increase.

With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market funds as well as the mix among certain share classes that vary in pricing structure will impact the level of fee waivers. Generally, prime money market funds waive less than government money market funds as a result of higher gross yields on the underlying investments. As such, as an isolated variable, an increase in the relative proportion of average managed assets invested in prime money market funds as compared to total average money market fund assets should typically result in lower waivers to maintain positive or zero net yields. Conversely, the opposite would also be true.


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The impact of such fee waivers on various components of Federated's Consolidated Statements of Income was as follows for the years ended December 31:
 
 
 
 
 
 
 
 
2014

 
2013

in millions
 
2014

 
2013

 
2012

 
vs. 2013

 
vs. 2012

Investment advisory fees
 
$
(279.5
)
 
$
(255.9
)
 
$
(177.2
)
 
(9
)%
 
(44
)%
Other service fees
 
(131.1
)
 
(133.1
)
 
(113.8
)
 
2

 
(17
)
   Total Revenue
 
(410.6
)
 
(389.0
)
 
(291.0
)
 
(6
)
 
(34
)
Less: Reduction in Distribution expense
 
280.9

 
277.1

 
218.5

 
1

 
27

   Operating income
 
(129.7
)
 
(111.9
)
 
(72.5
)
 
(16
)
 
(54
)
Less: Reduction in Noncontrolling interest
 
10.7

 
6.8

 
1.3

 
57

 
423

Pre-tax impact
 
$
(119.0
)
 
$
(105.1
)
 
$
(71.2
)
 
(13
)%
 
(48
)%
The negative pre-tax impact of fee waivers to maintain positive or zero net yields on certain money market funds increased in 2014 as compared to 2013 primarily as a result of lower yields on instruments held by the money market funds partially offset by lower average money market assets. During 2013, the negative pre-tax impact of fee waivers to maintain positive or zero net yields on certain money market funds increased compared to 2012 primarily as a result of lower yields on instruments held by the money market funds. See Note (20) to the Consolidated Financial Statements for information regarding the quarterly pre-tax impact of these fee waivers.
Based on recent commentary from the FOMC in a January 28, 2015 press release, (i.e. "the current 0 to 1/4 percent target range for the federal funds rate remains appropriate,") Federated is unable to predict when the FOMC will increase their target for the federal funds rate. As such, fee waivers to maintain positive or zero net yields on certain money market funds and the related reduction in distribution expense and net income attributable to noncontrolling interests could continue for the foreseeable future. Assuming asset levels and mix remain constant and based on recent market conditions, fee waivers for the first quarter of 2015 may result in a negative pre-tax impact on income of approximately $28 million, which is slightly less than the impact to each quarter included in 2014 (see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption Business Developments - Historically Low Short-Term Interest Rates for additional information on management's expectations regarding fee waivers and Note (20) to the Consolidated Financial Statements for additional information on the quarterly impact of these fee waivers). The actual amount of future fee waivers, the resulting negative impact of these waivers and Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax income going forward, not re-capture previously waived amounts) could vary significantly from management's estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, yields on instruments available for purchase by the money market funds, actions by the Governors, the FOMC, the Treasury Department, the SEC, FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets, changes in money market product structures and offerings, changes in the distribution fee arrangements with third parties, Federated's willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by any one or more third parties. The continuation, duration, level and impact of these fee waivers, as well as Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax income going forward, not re-capture previously waived amounts) when money market yields increase to the point of eliminating the waivers, could have a material adverse effect on Federated's business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Rising Interest Rates. Despite the expectation that increases in short-term interest rates above the historically low rates of 0% - 0.25% will reduce the impact of fee waivers to maintain positive or zero net yields, increases in interest rates could also have an adverse effect on Federated’s revenue from money market and other fixed-income products and strategies. In a rising short-term interest rate environment, certain investors using money market products and strategies and other short-term duration fixed-income products and strategies for cash management purposes may shift these investments to direct investments in comparable instruments in order to realize higher yields than those available in money market and other products or strategies holding lower-yielding instruments. In addition, rising interest rates will tend to reduce the fair value of securities held in various investment products and strategies. Among other potential adverse effects, rising interest rates may result in decreased liquidity and increased volatility in financial markets and could negatively impact the performance of Federated's products and strategies and Federated's revenue. Management cannot estimate the impact of rising interest rates (including, for example on Federated's revenue), but such impact could have a material adverse effect on Federated's business, results of operations, financial condition and/or cash flows.

13


Potential Adverse Effects of a Decline or Disruption in the Economy or Financial Markets. Economic or financial market downturns or other conditions (domestic or international) may cause volatility, illiquidity and other potential adverse effects in the financial markets and adversely affect the supply of investments, such as money market securities and the profitability and performance of, demand for and investor confidence in Federated’s investment products and strategies, disruptions in the securities and credit markets, the commencement, continuation or ending of government policies and reforms, stimulus programs and other market-related actions, changes in monetary policy, increased regulation, increases or decreases in interest rates, changes in oil prices, changes in currency exchange rates, inflation or deflation, widening bid/ask spreads, restructuring of government-sponsored entities, imposition of economic sanctions, economic or political instability in certain countries or regions, technology-related or cyber-attacks or incidents, terrorism or other factors or events that affect the financial markets may cause or contribute to these potentially adverse effects. In addition, Federated's products and strategies may be adversely affected by changes in U.S. markets, downgrades of U.S. credit ratings, the U.S. debt ceiling or other developments in the U.S. as well as be adversely affected by potential deterioration in international sovereign or currency market conditions.
At December 31, 2014, Federated's liquid assets of $318.7 million included investments in certain Federated-sponsored money market and fluctuating-value funds that may have direct and/or indirect exposures to international sovereign debt and currency risks. Federated and the money market and fluctuating net asset value (NAV) funds managed or distributed by Federated also interact with various other financial industry participants, such as counterparties, broker-dealers, banks, clearing organizations, other investment products and customers, as a result of operations, trading, distribution and other relationships. As a result, Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows could be adversely affected by the creditworthiness or financial soundness of other financial industry participants, particularly in times of economic or financial stress or disruption. There can be no assurance that potential losses that may be realized as a result of these exposures will not have a material adverse effect on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
The ability of Federated to compete and sustain asset and revenue growth is dependent, in part, on the relative attractiveness of the types of investment products and strategies Federated offers and its investment performance under prevailing market conditions. Adverse market conditions or other events also could impact Federated's customers. In the event of extreme circumstances, such as economic, political, or business crises, Federated’s products and strategies may suffer significant net redemptions in AUM causing severe liquidity issues in its short-term sponsored investment products and strategies and declines in the value of and returns on AUM, all of which could cause material adverse effects on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
Custody and portfolio accounting services for all of Federated's mutual fund products are outsourced to one of three third-party financial institutions that are leading providers of such mutual fund services. Accounting records for Federated's mutual funds are maintained by these service providers. These service providers, or other service providers and/or vendors of Federated, could also be adversely affected by the adverse market conditions described above. It is not possible to predict with certainty the extent to which the services or products Federated receives from such service providers would be interrupted or affected by such situations. Accordingly, there can be no assurance that potential service interruption or Federated’s ability to find a suitable replacement would not have a material adverse effect on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Changes in Laws and Regulations on Federated’s Investment Management Business. Federated and its investment management business are subject to extensive regulation in the U.S. and abroad. Federated and its products (such as the Federated Funds) and strategies are subject to federal securities laws, principally the 1933 Act, 1934 Act, the 1940 Act, the Advisers Act, state laws regarding securities fraud and regulations promulgated by various regulatory authorities, including, but not limited to, the SEC, the Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE). From time to time, the federal securities laws have been augmented substantially. For example, among other measures, Federated and its products and strategies have been impacted by the Sarbanes-Oxley Act of 2002, the Patriot Act of 2001, the Gramm-Leach-Bliley Act of 1999 and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Federated and its domestic products (such as the Federated Funds) and strategies, and any offshore products (such as offshore Federated Funds) and strategies to the extent offered in the U.S., continue to be primarily regulated by the SEC. Federated, and certain Federated Funds, are also subject to regulation by the U.S. Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), including due to certain Federated Funds investing in futures, swaps or certain other commodity interests in more than de minimis amounts. In addition, during the past few years regulators such as the SEC, FINRA, CFTC and NYSE have adopted other regulations and amendments that have increased Federated's operating expenses and affected the conduct of its business, and may continue to do so. Federated and its products and strategies also are affected by certain regulations governing banks and other financial institutions. Federated's and its products' operations outside of the U.S. are subject to foreign laws and regulation by foreign regulatory authorities, such as the

14


U.K. Financial Conduct Authority (FCA) for London-based operations, the Central Bank of Ireland for Dublin-based operations, and the German Federal Financial Supervisory Authority for Frankfurt-based operations. Additional, or changes in, laws, regulations, interpretations or governmental policies, both domestically and abroad, may increase compliance risk and operating expenses, including the costs associated with compliance, and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. As Federated's business expands, the potential impact of such changes in laws, regulations, interpretations or governmental policies, compliance and the risks and costs associated with compliance may increase.
Domestically, in addition to other potential future regulation, in 2014, the SEC adopted additional money market fund reforms in the form of the 2014 Rules, and the Treasury Department and IRS issued new regulations and guidance on certain related tax matters (see Item 1 - Business under the caption Regulatory Matters for additional information on the 2014 Rules and related tax guidance). Management believes that these regulatory developments, including the floating NAV for institutional and municipal money market funds, will be detrimental to Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Among other potential impacts, these new reforms could increase compliance risks and the costs associated with compliance, make certain money market fund products less attractive to institutional and other investors and result in reductions in assets under management and revenues, and increase operational costs. Given the recent adoption of the SEC’s 2014 Rules, their extended compliance dates, the recent issuance of Treasury Department and IRS guidance on certain related tax matters and the potential for future additional regulation, Federated is unable at this time to assess the degree of impact the SEC's 2014 Rules or potential future regulation may have on its business, results of operations, financial condition and/or cash flows.
In addition, the Dodd-Frank Act provides for a new systemic risk regulation regime under which it is possible that Federated, and/or any one or more of its products (such as the Federated Funds), could be subject to designation as a systemically important financial institution by FSOC, thereby resulting in additional regulation by the Governors in addition to primary regulation by the SEC (see Item 1 - Business under the caption Regulatory Matters for additional information regarding the potential for heightened regulation by the Governors and FSOC). Among other potential impacts, any such designation would subject the designated entity to enhanced banking-oriented measures, including, for example, capital and liquidity requirements, leverage limits, enhanced public disclosures and risk management requirements, thereby increasing compliance risk and compliance costs. Federated is unable to assess whether, or the degree to which, any of the Federated Funds, including money market funds or any of its other products, could ultimately be designated a systemically important nonbank financial company by FSOC. In management's view, the issuance of final regulations is, and any reforms ultimately put into effect would be, detrimental to Federated's money market fund business and could materially and adversely affect Federated's business, results of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact that any reforms or other actions by the Governors, FSOC, or other governmental entities may have on its business, results of operations, financial condition and/or cash flows.
Outside of the U.S., international regulators, such as the FCA, also have adopted and proposed regulations that could increase Federated's operating expenses and adversely affect Federated's business, results of operation, financial condition and/or cash flows. In addition to other potential future regulation, European money market reform and the imposition of the FTT, particularly if enacted with broad application, would each be detrimental to Federated's fund business (see Item 1 - Business under the caption Regulatory Matters for additional information regarding European money market reform and the FTT). Among other potential impacts, compliance risks, the cost of compliance and other operational expenses could increase, and certain money market fund products may become less attractive to institutional or other investors, which could result in reductions in assets under management, revenues and operating income. These affects could materially and adversely affect Federated's business, results of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact that European money market reform proposals or the FTT may have on its business, results of operations, financial condition and/or cash flows until such proposals are finalized and approved or the FTT is enacted.
The designation as a systemically important non-bank, non-insurance company by the FSB also could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows (see Item 1 - Business under the caption Regulatory Matters for additional information regarding systemically important non-bank, non-insurance company designation). Among other potential impacts, any such designation would subject the designated entity to enhanced banking-oriented measures, including, for example, capital and liquidity requirements, leverage limits, enhanced public disclosures and risk management requirements, thereby increasing compliance risk and compliance costs. Federated is unable to assess whether, or the degree to which, Federated, any of its investment management subsidiaries or any of the Federated Funds, including money market funds, or any of its other products, could ultimately be determined to be a systemically important non-bank, non-insurance company financial institution.

15


Changes in laws, regulations, interpretations or governmental policies, domestically and abroad, also impact the financial intermediaries, service providers, customers and other third-parties with whom Federated, and its products (such as the Federated Funds), conduct business. For example, provisions of the Dodd-Frank Act may affect intermediaries in their sale or use of Federated's products or strategies. Among other potential impacts, this could affect Federated's arrangements with these intermediaries, increase respective operating expenses and distribution costs, result in fewer assets under management and otherwise affect the conduct of their respective businesses. This also could result in Federated or one or more of these third parties seeking to restructure or alter the payment or other terms of the business arrangements between Federated or its products (including the Federated Funds) and one or more of these third parties. The above factors could have a material adverse impact on Federated’s business, results of operations, financial condition and/or cash flows.
Over the past few years, various service industries, including, for example, mutual fund service providers, have been the subject of changes in tax policy that impact their state and local tax liability. Changes that have been adopted or proposed include (1) an expansion of the nature of a service company's activities that subject it to tax in a jurisdiction, (2) a change in the methodology by which multi-state companies apportion their income between jurisdictions, and (3) a requirement that affiliated companies calculate their state tax as one combined entity. As adopted changes become effective and additional jurisdictions effect similar changes, among other potential impacts, there could be a material adverse effect on Federated's tax liability and effective tax rate and, as a result, net income. Various investment products, such as municipal and tax-free Federated Funds, also may be impacted by tax changes, which could have an adverse effect on the products and Federated’s business, results of operations, financial condition and/or cash flows.
Potential Adverse Effect of Providing Financial Support to Investment Products. Federated may, at its sole discretion, from time to time elect to provide financial support to its sponsored investment products (such as the Federated Funds). Providing such support utilizes capital that would otherwise be available for other corporate purposes. Losses on such support, or failure to have or devote sufficient capital to support products, could have a material adverse effect on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
Risk of Federated’s Money Market Products’ Ability to Maintain a Stable $1.00 Net Asset Value. Approximately 32% of Federated’s total revenue for 2014 was attributable to money market assets. An investment in money market funds is neither insured nor guaranteed by the FDIC. Until any changes resulting from the SEC’s 2014 Final Rules (discussed above) are implemented, Federated’s money market funds will seek to maintain a stable NAV. Although stable-value money market funds seek to preserve an NAV of $1.00 per share, it is possible for an investor to lose money by investing in these funds. Federated devotes substantial resources, such as significant credit analysis to the management of its products and strategies. Federated money market funds have always maintained a $1.00 NAV; however, there is no guarantee that such results will be achieved in the future. Market conditions could lead to a limited supply of money market fund securities and severe liquidity issues and/or further persistent declines in or additional prolonged periods of historically low yields in money market products or strategies which could impact their NAVs and performance. If the NAV of a Federated stable-value money market fund were to decline to less than $1.00 per share, such Federated money market fund would likely experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated’s business, results of operations, financial condition and/or cash flows.
No Assurance of Access to Sufficient Liquidity. From time to time, Federated’s operations may require more cash than is available from operations. In these circumstances, it may be necessary to borrow from lending facilities or to raise capital by securing new debt or by selling shares of Federated equity or debt securities. Federated’s ability to raise additional capital in the future will be affected by several factors including, for example, Federated’s creditworthiness and the fair value of Federated’s common stock, as well as general market conditions. There can be no assurance that Federated will be able to obtain these funds and financing on acceptable terms, if at all, and, if Federated cannot obtain such funds, it could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
Retaining and Recruiting Key Personnel. Federated’s ability to attract and retain quality personnel has contributed significantly to its growth and success and is important to attracting and retaining customers. The market for qualified executives, investment managers, analysts, traders, sales representatives and other key personnel is extremely competitive. There can be no assurance that Federated will be successful in its efforts to recruit and retain the required personnel. Federated has encouraged the continued retention of its executives and other key personnel through measures such as providing competitive compensation arrangements and, in certain cases, employment agreements. The loss of any such personnel could have an adverse effect on Federated. In certain circumstances, the departure of key employees could cause higher redemption rates for certain AUM or the loss of customer accounts. Moreover, since certain of Federated’s products and strategies contribute significantly to its revenues and earnings, the loss of even a small number of key personnel associated with these products or strategies could have a disproportionate impact on Federated’s business.

16


Various executives, investment, sales and other key personnel own restricted stock subject to vesting periods of up to ten years from the date awarded and to provisions that require resale or forfeiture to Federated in certain circumstances upon termination of employment. In addition, certain of these employees are employed under contracts which require periodic review of compensation and contain restrictive covenants with regard to divulging confidential information and engaging in competitive activities.
Potential Adverse Effects of Increased Competition in the Investment Management Business. The investment management business is highly competitive. Federated competes in the management and distribution of investment products and strategies (such as mutual funds and Separate Accounts) with other fund management companies and investment advisers, national and regional broker/dealers, commercial banks, insurance companies and other institutions. Many of these competitors have substantially greater resources and brand recognition than Federated. Competition is based on various factors, including, among others, business reputation, investment performance, quality of service, the strength and continuity of management and selling relationships, distribution services offered, the type (passive versus actively managed) and range of products and strategies offered and fees charged. As with any highly competitive market, competitive pricing structures are important. If competitors charge lower fees for similar products or strategies, Federated may decide to reduce the fees on its own products or strategies (either directly on a gross basis or on a net basis through fee waivers) in order to retain or attract customers. Such fee reductions could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
Many of Federated’s products and strategies are designed for use by institutions such as banks, insurance companies and other corporations. A large portion of Federated’s managed assets, particularly money market and fixed-income assets, are held by institutional investors. If the structure of institutional investment products, such as money market funds, changes or becomes disfavored by institutions, whether due to regulatory or market changes or otherwise, Federated may be unable to retain or grow its share of this market and this could adversely affect Federated’s future profitability and have a material adverse affect on Federated’s business, results of operations, financial condition and/or cash flows.

A significant portion of Federated’s revenue is derived from providing products (such as mutual funds) and strategies to the wealth management and trust market, comprising approximately 2,300 banks and other financial institutions. Future profitability of Federated will be adversely affected if it is unable to retain or grow its share of this market, and could also be adversely affected by consolidations in the banking industry, as well as regulatory changes impacting its customers.
Potential Adverse Effects of Changes in Federated’s Distribution Channels. Federated acts as a wholesaler of investment products and strategies to financial intermediaries including, for example, banks, broker/dealers, registered investment advisers and other financial planners. Federated also sells investment products and strategies directly to corporations and institutions. There can be no assurance that Federated will continue to have access to any financial intermediary or financial intermediaries that currently distribute Federated products and strategies or that Federated’s relationship with any one or more financial intermediaries will continue over time or on existing economic terms. The impact of minimum yield waivers and related reductions in distribution expense can vary depending upon, among other variables, changes in the distribution fee arrangements with one or more financial intermediaries and changes in the extent to which the impact of the waivers is shared by one or more financial intermediaries. In addition, exclusive of the impacts of minimum yield waivers and related reductions in distribution expense to maintain positive or zero net yields, Federated has experienced increases in the cost of distribution as a percentage of total revenue from 31% in 2007 to over 38% in 2014. Federated expects such costs to continue to increase in total due to asset growth and per dollar of revenue due to the competitive pressures of the investment management business. Higher distribution costs reduce Federated’s operating and net income.
Potential Adverse Effects of Declines in the Amount of or Changes in the Mix of Assets Under Management. A significant portion of Federated’s revenue is derived from investment advisory fees, which are based on the value of managed assets and vary with the type of asset being managed, with higher fees generally earned on equity products and strategies than on fixed-income and money market products and strategies. Likewise, mutual fund and other fund products generally have a higher management-fee rate than Separate Accounts or a liquidation portfolio. Additionally, certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship. Consequently, significant fluctuations in the value of securities held by, or the level of redemptions from, the products (such as the Federated Funds) or strategies advised by Federated may materially affect the amount of managed assets and thus Federated’s revenue, profitability and growth. Similarly, changes in Federated’s average asset mix across both asset and product or strategy types have a direct impact on Federated’s revenue and profitability. Federated generally pays out a larger portion of the revenue earned from managed assets in money market funds than the revenue earned from managed assets in equity or fixed-income funds. Substantially all of Federated’s managed assets are in investment products or strategies that permit investors to redeem or withdraw their investment at any time. Additionally, changing market conditions may cause a shift in

17


Federated’s asset mix towards money market and fixed-income products or strategies which may cause a decline in Federated’s revenue and net income.
Potential Adverse Effects of Poor Investment Performance. Success in the investment management business is largely dependent on investment performance relative to market conditions and the performance of competing products and strategies. Good performance generally assists retention and growth of managed assets, resulting in additional revenues. Conversely, poor performance tends to result in decreased sales and increased redemptions with corresponding decreases in revenues to Federated. Poor performance could, therefore, have a material adverse effect on Federated’s business (including, but not limited to, business prospects), results of operations, financial condition and/or cash flows. The effects of poor performance on Federated could be magnified where assets or customers are concentrated in certain strategies, products, asset classes or sectors. In terms of revenue concentration by product, approximately 11% of Federated’s total revenue for 2014 was derived from services provided to a sponsored fund, the Federated Kaufmann Fund. A significant and prolonged decline in the AUM in this fund could have a material adverse effect on Federated’s future revenues and, to a lesser extent, net income, due to a related reduction to distribution expenses associated with this fund.
Operational Risks. Federated's and its products/business operations are supported internally and through management of relationships with various third party service providers, both domestically and internationally. In turn, service providers' operations rely on additional relationships with other third parties. Operational risks include, but are not limited to, improper, inefficient, or unauthorized execution, processing, pricing and/or monitoring of transactions, deficiencies in operating systems, business disruptions, inadequacies or breaches in Federated’s, its products' or a service provider's internal control processes, unauthorized disclosure of confidential information and noncompliance with regulatory requirements. As Federated's and it's relevant service provider's businesses expand, operational risk increases both domestically and internationally. Management relies on its employees and systems, and those of relevant service providers, to comply with established procedures, controls and regulatory requirements. Breakdown or improper use of systems, human error or improper action by employees or service providers, or noncompliance with regulatory rules, could cause material adverse effects on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
No Assurance of Successful Acquisitions. Federated’s business strategy contemplates the acquisition of other investment management companies, as well as investment assets, both domestically and internationally. There can be no assurance that Federated will find suitable acquisition candidates at acceptable prices, have sufficient capital resources to realize its acquisition strategy, be successful in entering into definitive agreements for or consummating desired acquisitions, or successfully integrate acquired companies into Federated, or that any such acquisitions, if consummated, will prove to be advantageous to Federated.
Impairment Risk. At December 31, 2014, Federated had intangible assets including goodwill totaling $733.8 million on its Consolidated Balance Sheets, the vast majority of which represents assets capitalized in connection with Federated’s acquisitions and business combinations. Federated may not realize the value of these assets. Management performs an annual review of the carrying values of goodwill and indefinite-lived intangible assets and periodic reviews of the carrying values of all other assets to determine whether events and circumstances indicate that an impairment in value may have occurred. A variety of factors could cause the carrying value of an asset to become impaired. Should a review indicate impairment, a write-down of the carrying value of the asset would occur, resulting in a noncash charge which would adversely affect Federated’s financial position and results of operations for the period.
Systems, Technology and Cybersecurity Risks. Federated utilizes software and related technologies throughout its business (both domestically and internationally) including, for example, both proprietary systems and those provided by outside service providers. Service providers to, and customers of, Federated and its products, and third parties on which such service providers and customers rely, also utilize software and related technologies in their businesses. Unanticipated issues could occur and it is not possible to predict with certainty all of the adverse effects that could result from a failure of Federated or a third party to address computer system problems. Data or model imprecision, software or other technology malfunctions, programming inaccuracies and similar or other circumstances or events may impair the performance of systems and technology. Accordingly, there can be no assurance that potential system interruptions, other technology-related issues or the cost necessary to rectify the problems would not have a material adverse effect on Federated’s business (including, but not limited to, business prospects), results of operations, financial condition and/or cash flows.
In addition, the use of the Internet and other electronic media and technology exposes Federated, its business, its products and services, customers, and relevant service providers, and their respective operations, to potential risks from cybersecurity attacks, events or incidents (cyber incidents). For example, Federated and relevant service providers collect, maintain and transmit confidential, proprietary and personal customer information (such as in connection with online account access and performing investment, reconciliation, transfer agent, custodian and other recordkeeping and related functions) that can be

18


targeted by cyber incidents. Cyber incidents may include, for example, unauthorized access to systems, networks or devices (for example, through hacking activity), infection from computer viruses or other malicious software code, corruption of data, and attacks (including, but not limited to, denial-of-service attacks on websites) which shut down, disable, slow or otherwise disrupt operations, business processes or website access or functionality. In addition to intentional cyber incidents, unintentional cyber incidents can occur, (for example, the inadvertent release of confidential or non-public personal information). A cyber incident may cause Federated, its business, products or services, its customers, or relevant service providers, to lose proprietary, sensitive, confidential or non-public business or customer information, suffer data corruption or business interruption, lose operational capacity (for example, the loss of the ability to process transactions, calculate NAV, or allow the transaction of business), and/or fail to comply with applicable privacy and other laws. Among other potentially harmful effects, cyber incidents also may result in theft, unauthorized monitoring and failures in the physical infrastructure or operating systems. Any cyber incident could cause adverse impacts, the occurrence of financial losses, expenses and exposure related to regulatory penalties, litigation, reputational damage, and additional compliance costs associated with protection, detection, remediation and corrective measures. Cyber incidents affecting issuers in which Federated’s or its customers’ assets are invested also could cause such investments to lose value. Any of these cyber incidents may become incrementally worse if they were to remain undetected for an extended period of time.
The operating systems of Federated, its products, its customers and relevant service providers are dependent on the effectiveness of information security policies and procedures which seek to ensure that such systems are protected from cyber incidents. Federated has, and believes its products and its service providers have, established risk management systems that are reasonably designed to seek to reduce the risks associated with cyber incidents, however, there is no guarantee that such efforts will be successful, either entirely or partially. Among other reasons, the nature of malicious cyber incidents is becoming increasingly sophisticated and Federated, and its relevant affiliates and products, cannot control the systems and cybersecurity systems of issuers, relevant service providers or other third parties. While Federated cannot predict the financial or reputational impact to its business resulting from any cyber incident, the occurrence of a cyber incident, or a similar situation or incident, could have a material adverse effect on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Reputational Harm. Any material losses in customer (including shareholder) confidence in Federated, its products or strategies or in the mutual fund industry as a result of potential litigation, economic or financial market downturns or disruptions, material errors in public news reports, misconduct, rumors on the Internet or other matters could increase redemptions from and/or reduce sales of Federated's products (such as the Federated Funds) and strategies and other investment management products and services. If such losses were to occur, it could have a material adverse effect on Federated's business (including, but not limited to, business prospects), results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Termination or Failure to Renew Fund Agreements. A substantial majority of Federated’s revenues are derived from investment management agreements with sponsored funds (and to a lesser extent, sub-advised funds) that, as required by law, are terminable upon 60 days notice. In addition, each such investment management agreement must be approved and renewed annually by each fund’s board of directors or trustees, including independent members of the board, or its shareholders, as required by law. Failure to renew, changes resulting in lower fees, or termination of certain, or a significant number of these agreements could have a material adverse impact on Federated. As required by the 1940 Act, each investment advisory agreement with a mutual fund automatically terminates upon its assignment, although new investment advisory agreements may be approved by the mutual fund’s directors or trustees and shareholders. A sale or other transfer of a sufficient number of shares of Federated’s voting securities to transfer control of Federated could be deemed an assignment in certain circumstances. An assignment, actual or constructive, will trigger these termination provisions and may adversely affect Federated’s ability to realize the value of these agreements. Federated investment advisory contracts for Separate Accounts that are not investment companies subject to the 1940 Act generally are terminable by Federated’s customers upon notice to Federated (or, in certain cases, after a 30 day, 60 day or similar notice period). As required by the Advisers Act, investment advisory agreements for Separate Accounts that are not investment companies subject to the 1940 Act also provide that consent is required from Federated's customers before the agreements may be assigned and an assignment, actual or constructive, also will trigger these consent requirements and may adversely affect Federated's ability to realize the value of these agreements.
Under the terms of a settlement agreement with the SEC and New York State Attorney General, a Federated investment advisory subsidiary may not serve as investment adviser to any registered investment company unless: (1) at least 75% of the fund’s directors are independent of Federated; (2) the chairman of each such fund is independent of Federated; (3) no action may be taken by the fund’s board of directors or trustees or any committee thereof unless approved by a majority of the independent board members of the fund or committee, respectively; and (4) the fund appoints a senior officer who reports to the

19


independent directors or trustees and is responsible for monitoring compliance by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are approved.
Potential Adverse Effects of Unpredictable Events. Unpredictable events, such as natural disaster, pandemic, war and terrorist attack, could adversely impact Federated’s, its customer's and their respective service providers' ability to conduct business. Such events could cause disruptions in economic conditions and financial markets, system interruption, loss of life, unavailability of personnel or additional costs. As such, there can be no assurance that unpredictable events, or the costs to address such events, would not have a material adverse effect on Federated’s business (including, but not limited to, business prospects), results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Litigation, Investigations, Proceedings and Other Claims. Federated can be subject to routine, sweep and other examinations, inquiries, investigations, proceedings (administrative, regulatory, civil or otherwise) and other claims by its regulators (regulatory claims). Federated also can be subject to customer, and other third-party complaints, proceedings (such as civil litigation) and other claims (business-related claims). Among other factors, as Federated’s business, products and strategies expand, and financial products and other investments, markets and technology increase in complexity, the attention and resources that Federated devotes to compliance increases and the possibility and occurrences of non-compliance may increase. Federated has business-related claims asserted and threatened against it, and is subject to certain regulatory claims (such as routine and sweep examinations and other inquiries), in the ordinary course of business. In addition, Federated may be subject to business-related claims, and administrative, regulatory or civil investigations and proceedings or other regulatory claims, outside of the ordinary course of business. Federated cannot assess or predict whether, when or what types of business-related claims or regulatory claims (collectively, claims) may be threatened or asserted, the types or amounts of damages or other remedies that may be sought (which may be material when threatened or asserted), whether claims that have been threatened will become formal asserted pending investigations, proceedings or litigation, or whether claims ultimately may be successful (whether through settlement or adjudication), entirely or in part, whether or not any such claims are threatened or asserted in or outside the ordinary course of business. Federated may be initially unable to accurately assess a claim's impact. Given that the outcome of any claim is inherently unpredictable and uncertain, a result may arise from time to time that adversely impacts, potentially in a material way, Federated’s business, results of operations, financial condition and/or cash flows. In certain circumstances, insurance coverage may not be available or deductible amounts may not be exceeded, and Federated may have to bear the costs related to claims or any losses or other liabilities resulting from any such matters, or from the operation of Federated’s business, products and services generally.
Federated’s Status as a "Controlled Company." Federated has two classes of common stock: Class A Common Stock, which has voting power, and Class B Common Stock, which is non-voting except in certain limited circumstances. All of the outstanding shares of Federated's Class A Common Stock are held by the Voting Shares Irrevocable Trust for the benefit of certain members of the family of John F. Donahue. The three trustees of this trust are Mr. John F. Donahue, the Chairman of Federated's board of directors, his wife, and his son, Mr. J. Christopher Donahue, who is Federated's President and Chief Executive Officer, as well as a director. Accordingly, Federated qualifies as a “controlled company” under Section 303A of the NYSE Listed Company Manual. As a controlled company, Federated qualifies for and relies upon exemptions from several NYSE corporate governance requirements, including requirements that: (1) a majority of the board of directors consists of independent directors; and (2) the entity maintains a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities. As a result, Federated's board does not have a majority of independent directors nor does it maintain a nominating/corporate governance committee. Federated is also exempt as a "controlled company" from certain additional independence requirements and responsibilities regarding compensation advisers applicable to Compensation Committee members, including those that became effective in 2013.

ITEM 1B – UNRESOLVED STAFF COMMENTS
None.

ITEM 2 – PROPERTIES
Federated leases space sufficient to meet its operating needs. Federated’s operations are headquartered in Pittsburgh, Pennsylvania where it occupies approximately 259,000 square feet in the Federated Investors Tower. Federated leases approximately 94,000 square feet at the Keystone Summit Corporate Park location in Warrendale, Pennsylvania and an aggregate of approximately 25,000 square feet at other locations in the Pittsburgh area. Federated also leases office space in New York, New York, for the operations of Federated Global Investment Management Corp.; in Boston, Massachusetts, for the operations of Federated MDTA LLC; in Rochester, New York, for the operations of Federated Clover Investment Advisors, a

20


division of Federated Global Investment Management Corp.; in Frankfurt, Germany, for the operations of Federated Asset Management GmbH; and in London, England for the operations of Federated Investors (UK) LLP.

ITEM 3 – LEGAL PROCEEDINGS
The information required by this item is included in Note (18) to the Consolidated Financial Statements.

ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.

Part II

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Federated's Class B common stock is traded on the NYSE under the symbol FII. The following table summarizes quarterly high and low trading stock prices and quarterly dividends per common share for 2014 and 2013.
 
 
March 31,

 
June 30,

 
September 30,

 
December 31,

2014
 
 
 
 
 
 
 
 
Stock price per share
 
 
 
 
 
 
 
 
High
 
$
31.20

 
$
31.48

 
$
31.50

 
$
33.96

Low
 
25.63

 
26.82

 
27.80

 
26.99

Cash dividends per share
 
0.25

 
0.25

 
0.25

 
0.25

2013
 
 
 
 
 
 
 
 
Stock price per share
 
 
 
 
 
 
 
 
High
 
$
25.32

 
$
29.08

 
$
30.87

 
$
28.98

Low
 
20.68

 
21.92

 
26.71

 
25.50

Cash dividends per share
 
0.24

 
0.24

 
0.25

 
0.25

The approximate number of beneficial shareholders of Federated’s Class A and Class B common stock as of February 10, 2015, was 1 and 26,522, respectively.
 

The following table summarizes stock repurchases under Federated’s share repurchase program during the fourth quarter of 2014.
 
 
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
1
 
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Program
1
October
 
60,000

 
$
28.86

 
60,000

 
554,734

November
 
40,000

 
30.65

 
40,000

 
514,734

December
 
100,000

 
32.59

 
100,000

 
414,734

Total
 
200,000

 
$
31.08

 
200,000

 
414,734

1
Federated’s share repurchase program was authorized in August 2008 by the board of directors and permits the purchase of up to 5.0 million shares of Federated Class B common stock with no stated expiration date. No other plans existed as of December 31, 2014. See Note (19) to the Consolidated Financial Statements for information on a new program approved in 2015.

21


Stock Performance Graph

The following performance graph compares the total shareholder return of an investment in Federated’s Class B Common Stock to that of the Standard and Poor’s MidCap 400® Index (S&P MidCap 400 Index) and to the S&P 1500 Asset Management & Custody Banks Index for the five-year period ended on December 31, 2014.
The graph assumes that the value of the investment in Federated’s Class B Common Stock and each index was $100 on December 31, 2009. Total return includes reinvestment of all dividends. As a member of the S&P MidCap 400 Index as of December 31, 2014, Federated is required to include this comparison. The historical information set forth below is not necessarily indicative of future performance. Federated does not make or endorse any predictions as to future stock performance.

 
 
12/31/2010

 
12/31/2011

 
12/31/2012

 
12/31/2013

 
12/31/2014

Federated
 
$
104.18

 
$
63.18

 
$
95.05

 
$
140.44

 
$
166.12

S&P MidCap 400 Index
 
$
126.64

 
$
124.45

 
$
146.69

 
$
195.84

 
$
214.97

S&P 1500 Asset Management & Custody Banks Index
 
$
114.09

 
$
92.73

 
$
118.73

 
$
177.22

 
$
194.20


22


ITEM 6 – SELECTED FINANCIAL DATA

The selected consolidated financial data in this item should be read in conjunction with Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Financial Statements and Supplementary Data. The selected consolidated financial data (except managed assets) of Federated for the five years ended December 31, 2014 have been derived from Federated's audited Consolidated Financial Statements.
in thousands, except per share data and managed assets
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2014

 
2013

 
2012

 
2011

 
2010

Statement of Income Data1
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
859,250

 
$
878,365

 
$
945,706

 
$
895,114

 
$
951,943

Operating income
 
237,949

 
251,743

 
312,593

 
257,455

 
309,791

Net income including noncontrolling
   interests in subsidiaries
 
149,822

 
166,355

 
197,628

 
155,083

 
189,163

Net income attributable to Federated Investors, Inc.
 
149,236

 
162,177

 
188,088

 
150,906

 
179,114

Share Data Attributable to Federated Investors, Inc.
 
 
 
 
 
 
 
 
 
 
Earnings per share – Basic and Diluted1
 
$
1.42

 
$
1.55

 
$
1.79

 
$
1.45

 
$
1.73

Cash dividends per share2
 
$
1.00

 
$
0.98

 
$
2.47

 
$
0.96

 
$
2.22

Weighted-average shares outstanding – Basic
 
100,721

 
100,668

 
100,313

 
100,609

 
99,925

Weighted-average shares outstanding – Diluted
 
100,723

 
100,669

 
100,313

 
100,632

 
99,993

Balance Sheet Data at Period End
 
 
 
 
 
 
 
 
 
 
Intangible assets, net and Goodwill
 
$
733,847

 
$
735,345

 
$
727,857

 
$
720,926

 
$
720,825

Total assets
 
1,140,519

 
1,135,797

 
1,090,061

 
1,150,856

 
1,153,504

Long-term debt3
 
216,750

 
198,333

 
276,250

 
318,750

 
361,250

Federated Investors shareholders’ equity2
 
609,494

 
566,119

 
495,432

 
541,959

 
491,799

Impact of Minimum Yield Waivers4
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
(410,553
)
 
$
(389,031
)
 
$
(290,966
)
 
$
(320,671
)
 
$
(241,576
)
Less: Reduction in Distribution expense
 
280,851

 
277,168

 
218,479

 
232,336

 
186,573

Operating income
 
(129,702
)
 
(111,863
)
 
(72,487
)
 
(88,335
)
 
(55,003
)
Less: Reduction in Noncontrolling interest
 
10,699

 
6,800

 
1,243

 
6,473

 
1,023

Pre-tax impact
 
(119,003
)
 
(105,063
)
 
(71,244
)
 
(81,862
)
 
(53,980
)
Managed Assets (in millions)
 
 
 
 
 
 
 
 
 
 
As of period end
 
$
362,905

 
$
376,084

 
$
379,771

 
$
369,697

 
$
358,241

Average for the period
 
358,467

 
371,127

 
365,149

 
354,387

 
347,074

1
In 2012 and 2010, results included pretax insurance recoveries totaling $20.2 million and $25.0 million, respectively, for claims related to various legal proceedings.
2
Federated paid a special dividend to shareholders of $1.51 per share or $156.9 million in 2012 and $1.26 per share or $129.8 million in 2010.
3
In 2011, Federated amended and restated the 2010 agreement to extend the term of the loan. In 2014, Federated amended and restated the 2011 agreement to extend the term of the loan. See Note (10) to the Consolidated Financial Statements for additional information.
4
See Note (3) to the Consolidated Financial Statements for additional information regarding the impact of minimum yield waivers.

23


ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1A - Risk Factors, Item 6 - Selected Financial Data and Item 8 - Financial Statements and Supplementary Data, including Federated's audited Consolidated Financial Statements.
General
Federated is one of the largest investment managers in the U.S. with $362.9 billion in managed assets as of December 31, 2014. The majority of Federated’s revenue is derived from advising the Federated Funds and Separate Accounts in both domestic and international markets. Federated also derives revenue from providing administrative and other mutual fund-related services, including distribution and shareholder servicing.
Federated’s investment products and strategies are distributed in four markets. These markets and the relative percentage of managed assets at December 31, 2014 attributable to such markets are as follows: wealth management and trust (44%), broker/dealer (34%), institutional (19%) and international (3%).
Investment advisory fees, administrative service fees and certain fees for other services, such as distribution and shareholder service fees, are contract-based fees that are generally calculated as a percentage of the net assets of managed investment portfolios. Federated’s revenue is primarily dependent upon factors that affect the value of managed assets including market conditions and the ability to attract and retain assets. Nearly all managed assets in Federated’s investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement. Fee rates for Federated's services generally vary by asset and service type and may vary based on changes in asset levels. Generally, management-fee rates charged for advisory services provided to equity products and strategies are higher than management-fee rates charged on money market and fixed-income products and strategies. Likewise, mutual funds typically have a higher management-fee rate than Separate Accounts or a liquidation portfolio. Accordingly, revenue is also dependent upon the relative composition of average AUM across both asset and product types. Federated may waive certain fees for competitive reasons such as to maintain certain mutual fund expense ratios, to maintain positive or zero net yields on money market funds, to meet regulatory requirements or to meet contractual requirements. Since Federated’s products are largely distributed and serviced through financial intermediaries, Federated pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products. These payments are generally calculated as a percentage of net assets attributable to the applicable financial intermediary and represent the vast majority of Distribution expense on the Consolidated Statements of Income. Certain components of Distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Federated generally pays out a larger portion of revenue earned from managed assets in money market funds than revenue earned from managed assets in equity or fixed-income funds.
Federated’s most significant operating expenses are Compensation and related expense and Distribution expense as described above. Compensation and related expense includes base salary and wages, incentive compensation and other employee expenses including payroll taxes and benefits. Incentive compensation, which includes stock-based compensation, can vary depending on various factors including, but not limited to, overall results of operations of Federated, investment management performance and sales performance.
The discussion and analysis of Federated’s financial condition and results of operations are based on Federated’s Consolidated Financial Statements. Federated operates in a single operating segment, the investment management business. Management evaluates Federated’s performance at the consolidated level. Management analyzes all expected revenue and expenses and considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new business. Federated’s growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability of those assets, which is impacted, in part, by management’s decisions regarding fee waivers in order for certain money market funds to maintain positive or zero net yields. Fees for fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds. Management believes the most meaningful indicators of Federated’s performance are AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.

24


Business Developments
Money Market Fund Matters
For the year ended December 31, 2014, approximately 32% of Federated’s total revenue was attributable to money market assets as compared to 39% and 47% for 2013 and 2012, respectively. The change in the relative proportion of Federated's revenue attributable to money market assets from 2013 to 2014 was primarily the result of lower average money market assets and increases in fee waivers for certain money market funds to maintain positive or zero net yields. The change in the relative proportion of Federated's revenue attributable to money market assets from 2012 to 2013 was primarily the result of increases in fee waivers for certain money market funds to maintain positive or zero net yields. A significant change in Federated’s investment management business (such as its money market business) or a significant reduction in AUM (such as money market assets) due to regulatory changes, changes in the financial markets, such as significant and rapid increases in interest rates over a short period of time causing certain investors to prefer direct investments in interest-bearing securities, the availability, supply and/or market interest in repurchase agreements and other investments, significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and resulting fee waivers, investor preferences for deposit products or other FDIC-insured products or other circumstances, could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
(a) Current Regulatory Environment
Federated and its investment management business are subject to extensive regulation in the U.S. and abroad. Federated and its products (such as the Federated Funds) and strategies are subject to federal securities laws, principally the 1933 Act, 1934 Act, the 1940 Act, the Advisers Act, state laws regarding securities fraud and regulations promulgated by various regulatory authorities, as well as foreign laws and regulations promulgated by foreign regulatory authorities. In 2014, among other developments, the SEC promulgated new money market reform in the form of the 2014 Rules. Federated is analyzing the potential impact of these reforms. Internationally, among other developments, European money market fund reforms, similar in some respects to the U.S. reforms, continued to be considered in 2014, but have not yet been finalized. Federated is reallocating certain resources from regulatory efforts and continues to dedicate internal and external resources to analyze the potential impact of the 2014 Rules, and certain related regulations, on Federated’s business, results of operations, financial condition and/or cash flows. Federated also is reallocating resources to plan and begin the implementation of product development and restructuring initiatives in response to the 2014 Rules. See Item 1 - Business under the caption Regulatory Matters and Item 1A - Risk Factors under the caption Potential Adverse Effects of Changes in Laws and Regulations on Federated’s Investment Management Business for additional information.
(b) Historically Low Short-Term Interest Rates
For several years, the FOMC has kept the near-zero federal funds rate unchanged and short-term interest rates continued to be at all-time low levels. In certain money market funds, the gross yield earned by the fund is not sufficient to cover all of the fund's operating expenses due to these historically low short-term interest rates. Since the fourth quarter of 2008, Federated has voluntarily waived fees (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields. These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of the waivers. See Item 1 - Business under the caption Historically Low Short-Term Interest Rates and Item 1A - Risk Factors under the caption Potential Adverse Effects of Historically Low Short-Term Interest Rates for additional information.
Assuming asset levels and mix remain constant and based on recent market conditions, fee waivers for the first quarter of 2015 may result in a negative pre-tax impact on income of approximately $28 million, which is slightly less than the impact to each quarter included in 2014 (see Note (20) to the Consolidated Financial Statements for additional information on the quarterly impact of these fee waivers).While the level of fee waivers are impacted by various factors, increases in short-term interest rates that result in higher yields on securities purchased in money market fund portfolios would likely reduce the negative pre-tax impact of these waivers. Management estimates that an increase of 10 basis points in gross yields on securities purchased in money market fund portfolios will likely reduce the negative pre-tax impact of these waivers by approximately 40% from the current levels and an increase of 25 basis points would reduce the impact by approximately 65% from the current levels. Based on management’s assessment of competitive market conditions, including, for example, an expectation of higher distribution expenses as a percentage of money market fund revenues when interest rates and yields increase, management estimates that Federated will recover approximately 75% of the pre-tax impact of minimum yield waivers (that is, capture approximately 75% of the pre-tax income going forward, not re-capture previously waived amounts) when money market fund yields increase to the point of eliminating the waivers. The actual amount of future fee waivers, the resulting negative impact of these waivers and Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax income going

25


forward, not re-capture previously waived amounts) could vary significantly from management's estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, yields on instruments available for purchase by the money market funds, actions by the Governors, the FOMC, Treasury Department, the SEC, FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets, changes in money market product structures and offerings, changes in the distribution fee arrangements with third parties, Federated's willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by any one or more third parties.
Second Amended and Restated Credit Agreement
During the second quarter of 2014, Federated entered into an unsecured Second Amended and Restated Credit Agreement (Credit Agreement). The Credit Agreement amended and restated Federated's prior unsecured Amended and Restated Credit Agreement, which was dated June 10, 2011, and scheduled to mature on June 10, 2016 (Prior Credit Agreement). The borrowings under the Credit Agreement's term loan facility of $255 million (Term Loan) equaled the remaining principal balance from the Prior Credit Agreement's term loan facility. See Note (10) to the Consolidated Financial Statements for additional information.
Global Expansion
Federated continues to explore opportunities to further expand its global footprint. In 2014, among other initiatives, Federated focused on growing distribution opportunities for its products and services in Canada and Latin America. In 2013, Federated enhanced its capabilities in trade finance investments by adding three experienced professionals and obtaining the right to use certain intellectual property from GML Capital LLP and in emerging-market debt investments by adding two emerging-market specialists. In 2014, Federated also continued to seek acquisition candidates, both internationally and domestically.


26


Asset Highlights
Managed Assets at Period End
in millions as of December 31,
 
2014

 
2013

 
Percent
Change

By Asset Class
 
 
 
 
 
 
Money market
 
$
258,772

 
$
275,952

 
(6
)%
Fixed-income
 
52,707

 
50,126

 
5

Equity
 
51,426

 
44,148

 
16

Liquidation portfolio1
 
0

 
5,858

 
(100
)
Total managed assets
 
$
362,905

 
$
376,084

 
(4
)%
By Product Type
 
 
 
 
 
 
Mutual Funds:
 
 
 
 
 
 
Money market
 
$
225,471

 
$
240,048

 
(6
)%
Fixed-income
 
40,456

 
39,606

 
2

Equity
 
33,141

 
28,097

 
18

Total mutual fund assets
 
299,068

 
307,751

 
(3
)
Separate Accounts:
 
 
 
 
 
 
Money market
 
$
33,301

 
$
35,904

 
(7
)%
Fixed-income
 
12,251

 
10,520

 
16

Equity
 
18,285

 
16,051

 
14

Total separate account assets
 
63,837

 
62,475

 
2

Liquidation Portfolio1
 
$
0

 
$
5,858

 
(100
)%
Total managed assets
 
$
362,905

 
$
376,084

 
(4
)%

Average Managed Assets
in millions for the years ended December 31,
 
2014

 
2013

 
2012

 
2014
vs. 2013

 
2013
vs. 2012

By Asset Class
 
 
 
 
 
 
 
 
 
 
Money market
 
$
254,260

 
$
273,680

 
$
274,206

 
(7
)%
 
0
 %
Fixed-income
 
51,333

 
51,340

 
48,986

 
0

 
5

Equity
 
48,317

 
39,474

 
33,816

 
22

 
17

Liquidation portfolio1
 
4,557

 
6,633

 
8,141

 
(31
)
 
(19
)
Total average managed assets
 
$
358,467

 
$
371,127

 
$
365,149

 
(3
)%
 
2
 %
By Product Type
 
 
 
 
 
 
 
 
 
 
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
Money market
 
$
220,742

 
$
239,440

 
$
246,731

 
(8
)%
 
(3
)%
Fixed-income
 
40,366

 
41,177

 
39,941

 
(2
)
 
3

Equity
 
30,859

 
25,512

 
23,015

 
21

 
11

Total average mutual fund assets
 
291,967

 
306,129

 
309,687

 
(5
)
 
(1
)
Separate Accounts:
 
 
 
 
 
 
 
 
 
 
Money market
 
$
33,518

 
$
34,240

 
$
27,475

 
(2
)%
 
25
 %
Fixed-income
 
10,967

 
10,163

 
9,045

 
8

 
12

Equity
 
17,458

 
13,962

 
10,801

 
25

 
29

Total average separate account assets
 
61,943

 
58,365

 
47,321

 
6

 
23

Liquidation Portfolio1
 
$
4,557

 
$
6,633

 
$
8,141

 
(31
)%
 
(19
)%
Total average managed assets
 
$
358,467

 
$
371,127

 
$
365,149

 
(3
)%
 
2
 %
1
Liquidation portfolio represents a portfolio of distressed bonds at cost. Federated had been retained by a third party to manage these assets through an orderly liquidation process that was completed during the fourth quarter of 2014. Management-fee rates earned from this portfolio were lower than those of traditional Separate Account mandates.

27



Changes in Equity and Fixed-Income Fund and Separate Account Assets
in millions for the years ended December 31,
 
2014
 
 
2013
 
 
Percent Change
 
Equity Funds
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
28,097

 
 
$
23,152

 
 
21
 %
      Sales
 
 
10,140

 
 
7,439

 
 
36

      Redemptions
 
 
(6,530
)
 
 
(8,328
)
 
 
(22
)
          Net sales (redemptions)
 
 
3,610

 
 
(889
)
 
 
506

      Net exchanges
 
 
42

 
 
214

 
 
(80
)
      Market gains and losses/reinvestments1
 
 
1,392

 
 
5,620

 
 
(75
)
  Ending assets
 
 
$
33,141

 
 
$
28,097

 
 
18
 %
Equity Separate Accounts
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
16,051

 
 
$
11,858

 
 
35
 %
      Sales2
 
 
4,536

 
 
4,445

 
 
2

      Redemptions2
 
 
(3,883
)
 
 
(3,004
)
 
 
29

          Net sales2
 
 
653

 
 
1,441

 
 
(55
)
      Market gains and losses3
 
 
1,581

 
 
2,752

 
 
(43
)
  Ending assets
 
 
$
18,285

 
 
$
16,051

 
 
14
 %
Total Equity Assets
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
44,148

 
 
$
35,010

 
 
26
 %
      Sales2
 
 
14,676

 
 
11,884

 
 
23

      Redemptions2
 
 
(10,413
)
 
 
(11,332
)
 
 
(8
)
          Net sales2
 
 
4,263

 
 
552

 
 
672

      Net exchanges
 
 
42

 
 
214

 
 
(80
)
      Market gains and losses/reinvestments1
 
 
2,973

 
 
8,372

 
 
(64
)
  Ending assets
 
 
$
51,426

 
 
$
44,148

 
 
16
 %
Fixed-income Funds
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
39,606

 
 
$
42,478

 
 
(7
)%
      Sales
 
 
16,186

 
 
18,706

 
 
(13
)
      Redemptions
 
 
(16,120
)
 
 
(21,075
)
 
 
(24
)
          Net sales (redemptions)
 
 
66

 
 
(2,369
)
 
 
103

      Net exchanges
 
 
(354
)
 
 
(351
)
 
 
1

      Acquisition-related
 
 
301

 
 
0

 
 
  N/A
      Market gains and losses/reinvestments1
 
 
837

 
 
(152
)
 
 
651

  Ending assets
 
 
$
40,456

 
 
$
39,606

 
 
2
 %
Fixed-income Separate Accounts
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
10,520

 
 
$
10,233

 
 
3
 %
      Sales2
 
 
2,393

 
 
2,342

 
 
2

      Redemptions2
 
 
(1,343
)
 
 
(2,150
)
 
 
(38
)
          Net sales2
 
 
1,050

 
 
192

 
 
447

      Net exchanges
 
 
230

 
 
4

 
 
5,650

      Market gains and losses3
 
 
451

 
 
91

 
 
396

  Ending assets
 
 
$
12,251

 
 
$
10,520

 
 
16
 %
Total Fixed-income Assets
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
50,126

 
 
$
52,711

 
 
(5
)%
      Sales2
 
 
18,579

 
 
21,048

 
 
(12
)
      Redemptions2
 
 
(17,463
)
 
 
(23,225
)
 
 
(25
)
          Net sales (redemptions)2
 
 
1,116

 
 
(2,177
)
 
 
151

      Net exchanges
 
 
(124
)
 
 
(347
)
 
 
(64
)
      Acquisition-related
 
 
301

 
 
0

 
 
  N/A
      Market gains and losses/reinvestments1
 
 
1,288

 
 
(61
)
 
 
2,211

  Ending assets
 
 
$
52,707

 
 
$
50,126

 
 
5
 %
1
Reflects approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.
2
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of Market gains and losses.
3
Reflects the approximate changes in the fair value of the securities held by the portfolios.


28


Total Changes in Equity and Fixed-Income Assets
in millions for the years ended December 31,
 
 
2014
 
2013
 
Percent Change
Funds
 
 
 
 
 
 
 
Beginning assets
 
 
$
67,703

 
$
65,630

 
3
 %
Sales
 
 
26,326

 
26,145

 
1

Redemptions
 
 
(22,650
)
 
(29,403
)
 
(23
)
Net sales (redemptions)
 
 
3,676

 
(3,258
)
 
213

Net exchanges
 
 
(312
)
 
(137
)
 
128

Acquisition-related
 
 
301

 
0

 
N/A  

Market gains and losses/reinvestments1
 
 
2,229

 
5,468

 
(59
)
Ending assets
 
 
$
73,597

 
$
67,703

 
9
 %
 
 
 
 
 
 
 
 
Separate Accounts
 
 
 
 
 
 
 
Beginning assets
 
 
$
26,571

 
$
22,091

 
20
 %
Sales2
 
 
6,929

 
6,787

 
2

Redemptions2
 
 
(5,226
)
 
(5,154
)
 
1

Net sales2
 
 
1,703

 
1,633

 
4

Net exchanges
 
 
230

 
4

 
5,650

Market gains and losses3
 
 
2,032

 
2,843

 
(29
)
Ending assets
 
 
$
30,536

 
$
26,571

 
15
 %
 
 
 
 
 
 
 
 
Total Assets
 
 
 
 
 
 
 
Beginning assets
 
 
$
94,274

 
$
87,721

 
7
 %
Sales2
 
 
33,255

 
32,932

 
1

Redemptions2
 
 
(27,876
)
 
(34,557
)
 
(19
)
Net sales (redemptions)2
 
 
5,379

 
(1,625
)
 
431

Net exchanges
 
 
(82
)
 
(133
)
 
(38
)
Acquisition-related
 
 
301

 
0

 
  N/A

Market gains and losses/reinvestments1
 
 
4,261

 
8,311

 
(49
)
Ending assets
 
 
$
104,133

 
$
94,274

 
10
 %
1
Reflects approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.
2
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of Market gains and losses.
3
Reflects the approximate changes in the fair value of the securities held by the portfolios.






29


Changes in Federated’s average asset mix year-over-year across both asset class and product types have a direct impact on Federated’s operating income. Asset mix impacts Federated’s total revenue due to the difference in the fee rates earned on each asset class and product type per invested dollar and certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship. The following table presents the relative composition of average managed assets and the percent of total revenue derived from each asset class and product type over the last three years:
 
 
Percent of Total Average Managed Assets
 
Percent of Total Revenue
 
 
2014

 
2013

 
2012

 
2014

 
2013

 
2012

By Asset Class
 
 
 
 
 
 
 
 
 
 
 
 
Money market assets
 
71
%
 
74
%
 
75
%
 
32
%
 
39
%
 
47
%
Fixed-income assets
 
14
%
 
14
%
 
14
%
 
22
%
 
23
%
 
21
%
Equity assets
 
14
%
 
10
%
 
9
%
 
45
%
 
37
%
 
31
%
Liquidation portfolio
 
1
%
 
2
%
 
2
%
 
0
%
 
0
%
 
0
%
Other activities
 
--

 
--

 
--

 
1
%
 
1
%
 
1
%
By Product Type
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
 
Money market assets
 
62
%
 
65
%
 
68
%
 
30
%
 
37
%
 
46
%
Fixed-income assets
 
11
%
 
11
%
 
11
%
 
20
%
 
21
%
 
19
%
Equity assets
 
9
%
 
7
%
 
6
%
 
37
%
 
31
%
 
26
%
Separate Accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Money market assets
 
9
%
 
9
%
 
7
%
 
2
%
 
2
%
 
1
%
Fixed-income assets
 
3
%
 
3
%
 
3
%
 
2
%
 
2
%
 
2
%
Equity assets
 
5
%
 
3
%
 
3
%
 
8
%
 
6
%
 
5
%
Liquidation Portfolio
 
1
%
 
2
%
 
2
%
 
0
%
 
0
%
 
0
%
Other Activities
 
--

 
--

 
--

 
1
%
 
1
%
 
1
%
Total managed assets represent the balance of AUM at a point in time. By contrast, average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.
As of December 31, 2014, total managed assets decreased 4% from December 31, 2013 primarily as a result of decreases in money market assets and assets in the liquidation portfolio, partially offset by increases in equity and fixed-income assets. Average managed assets decreased 3% for the year ended December 31, 2014 compared to the year ended December 31, 2013. Period-end money market assets decreased 6% at December 31, 2014 as compared to December 31, 2013. Average money market assets decreased 7% for 2014 compared to 2013, following the industry trend resulting from the accommodative monetary policy environment. Short-term interest rates remained low throughout 2014 as the FOMC kept the near-zero federal funds rate unchanged in the continuous pursuit of a sustained economic recovery. In the bond market, Treasury yields moved measuredly, with the yield curve flattening as intermediate rates increased slightly while long-term rates dipped, resulting from the U.S. economy continuing to improve and spread-sector yields responding appropriately. Period-end fixed-income assets increased 5% at December 31, 2014 as compared to December 31, 2013 primarily as a result of market appreciation, and to a lesser extent, net sales, while average fixed-income assets remained flat for 2014 as compared to 2013. Period-end equity assets increased 16% at December 31, 2014 as compared to December 31, 2013 primarily due to net sales, and to a lesser extent, market appreciation. Average equity assets increased 22% for 2014 as compared to 2013. Despite greater equity-market volatility late in the third quarter and into the fourth quarter of 2014, both the S&P 500 and Dow Jones Industrial Average, key indicators of broad equity-market performance, reached record highs in late December. Assets in the liquidation portfolio were fully liquidated in the fourth quarter of 2014.
As of December 31, 2013, total managed assets decreased 1% from December 31, 2012 primarily as a result of decreases in money market and fixed-income assets, partially offset by an increase in equity assets. Average managed assets increased 2% for the year ended December 31, 2013 compared to the year ended December 31, 2012. Period-end money market assets decreased 3% at December 31, 2013 as compared to December 31, 2012. Average money market assets remained flat for 2013 compared to 2012, following the industry trend in the accommodative monetary policy environment. Short-term interest rates remained low throughout 2013 as the FOMC kept the near-zero federal funds rate unchanged in pursuit of a sustained economic recovery. In the bond market, anticipation of the beginning of the Governors' tapering, impacting long-term bond rates, contributed to fund outflows industrywide in the second half of 2013. In this difficult year for the bond market overall, period-end fixed-income assets decreased 5% at December 31, 2013 as compared to December 31, 2012 primarily as a result of net

30


redemptions, while average fixed-income assets increased 5% for 2013 as compared to 2012. In equities, the S&P 500 Index rose nearly 30%, as the market benefited from economic growth, rising corporate profits and the continuation of the Governors' economic stimulus. Period-end equity assets increased 26% at December 31, 2013 as compared to December 31, 2012 primarily due to market appreciation, and to a lesser extent, net sales. Average equity assets increased 17% for 2013 compared to 2012 during a strong year for the equity market. Average assets in the liquidation portfolio decreased 19% for 2013 compared to 2012 due to the continued gradual liquidation of the portfolio during 2013.

Results of Operations
Revenue. The following table sets forth components of total revenue for the three years ended December 31:
in millions
 
2014

 
2013

 
2012

 
2014
vs. 2013

 
2013
vs. 2012

Revenue from managed assets
 
$
852.1

 
$
868.7

 
$
937.9

 
(2
)%
 
(7
)%
Revenue from sources other than managed assets
 
7.2

 
9.7

 
7.8

 
(26
)
 
24

Total revenue
 
$
859.3

 
$
878.4

 
$
945.7

 
(2
)%
 
(7
)%
Revenue from managed assets decreased $16.6 million in 2014 as compared to 2013 primarily due to (1) a decrease of $46.2 million from lower average money market assets, (2) a decrease of $21.6 million resulting from an increase in voluntary fee waivers related to certain money market funds in order for these funds to maintain positive or zero net yields and (3) a decrease of $7.5 million resulting from a change in the mix of average fixed-income assets. These decreases in revenue were partially offset by an increase of $64.1 million from higher average equity assets.
See Note (3) to the Consolidated Financial Statements for additional information on voluntary fee waivers related to certain money market funds in order for these funds to maintain positive or zero net yields, including the offsetting decreases in expense and net income attributable to noncontrolling interests and the net pre-tax impact on income.
Federated’s ratio of revenue from managed assets to average managed assets for 2014 was 0.24% as compared to 0.23% for 2013. The increase in the rate was primarily due to the increase in average managed assets invested in higher fee-paying equity products for 2014 as compared to 2013, partially offset by the increase in voluntary fee waivers to maintain positive or zero net yields on certain money market funds for the same period of comparison.
Revenue from managed assets decreased $69.2 million in 2013 as compared to 2012 primarily due to an increase of $98.0 million in voluntary fee waivers related to certain money market funds in order for these funds to maintain positive or zero net yields and a decrease of $3.4 million due to lower average money market assets. This decrease in revenue was partially offset by an increase of $34.1 million resulting from higher average equity assets.
Federated’s ratio of revenue from managed assets to average managed assets for 2013 was 0.23% as compared to 0.26% for 2012. The decrease in the rate was primarily due to the increase in voluntary fee waivers to maintain positive or zero net yields on certain money market funds for 2013 as compared to 2012, partially offset by the increase in average managed assets invested in higher fee-paying equity products for the same period of comparison.
 
Operating Expenses. The following table sets forth significant fluctuations in operating expenses for the three years ended December 31: 
in millions
 
2014

 
2013

 
2012

 
2014
vs. 2013

 
2013
vs. 2012

Compensation and related
 
$
285.3

 
$
269.1

 
$
257.6

 
6
 %
 
4
 %
Distribution
 
197.9

 
212.9

 
253.4

 
(7
)
 
(16
)
Professional service fees
 
30.2

 
37.1

 
18.9

 
(19
)
 
96

All other
 
107.9

 
107.5

 
103.2

 
0

 
4