In the market dive of late 2008, Federated Investors was one of the few asset managers reporting bumper inflows as its money market funds swelled. And it’s not the first time the little-known firm—often confused with the department store empire of the same name—has emerged as a winner against stiff competition. For three years, CEO Chris Donahue has consistently ranked among the top three CEOs on Chief Executive‘s Wealth Creation Index, which rates CEOs based on the shareholder wealth created during their tenure.
Still, analysts are now questioning whether the company can continue its winning streak. One of the nation’s largest money market fund providers, Federated’s $340 billion in assets is centered in money markets and fixed-income (88 percent), while its peers remain focused on stock. But Donahue, whose father was one of the company’s three founders and serves as Federated’s chairman, is undeterred by such speculation. Although working to “get regenerated on the equity side,” he makes no apologies for the company’s current asset mix.
“Having 40 percent of our revenues from money funds is a plus and a minus,” says Donahue. “It’s a plus in terms of balance and stability, client relationship and survival. It’s a minus in terms of how analysts look. But employees like it, clients like it and the survivability factor is very attractive. With that mix you don’t find yourself in a position where anyone even has the idea of stretching for yield.”
Nor do you suffer the consequences of stretching too far. While the downturn sent other asset managers scrambling to downsize workforces and retrench, Federated was able to stand firm and even seek investment opportunities in the shaky financial sector. “While most of the firms in our industry were laying people off, we bought [value manager] Clover [Capital] and Prudent Bear [Fund],” points out Donahue.
A focus on solid performance over short-term yield is just one of the factors Donahue sees as setting Federated apart. In a recent conversation with Chief Executive’s J.P. Donlon, Donahue shared the five ingredients for success that stood the firm well in the downturn—and will continue to bolster its future success.
1. Born, bred and firmly embedded in Pittsburgh.
“People in Pittsburgh work, because there’s nothing else to do,” says Donahue. He’s only half joking. As a community, Pittsburgh has a strong work culture, and sees less job-hopping than cities like New York and Chicago.
2. An innate ability to adapt.
Founded as a private firm in the mid-’50s, Federated went public for the first time in 1960. In 1982 the company was bought by Aetna, which retained ownership until management reacquired control in a leveraged buyout and took it public again in 1998. Schizophrenic? Not at all, says Donahue, who says that the various ownership structures reflect an ability to roll with whatever presents the most opportunity. “We’ll wear any dress,” he says.
3. Compensating for the long term.
Performance-based compensation at Federated is driven by three-year numbers. “One year is important, but three years drives the truck,” says Donahue. “That means they get to eat, shoot and cook that which they hunt and kill successfully in a competitive marketplace.”
4. Doing their homework.
“We find that when there’s a new issue, a lot of people in this industry don’t read the documents that tell you what can happen,” says Donahue, who points to the protective automatic triggers embedded in structured investment vehicles as an example. “So something happens with interest rates that automatically causes the SIV to sell stuff—at first blush, you say, ‘That’s protection.’ But, holy cats, you’ve got to be nuts. A forced sale? That’s brain dead.”
5. Focus, focus, focus.
In pursuit of yield, asset managers can drift away from the principles of diversification. Bad idea, says Donahue. “We run a cash management service that’s about competence, not yield,” he notes. “As long as you never had the discussion with your client about how your fund is the greatestyielding fund, you don’t create any artificial pressure to do something untoward. And when you have a full array of money market funds, fixedincome, and equity funds, if it starts raining money in some way or another, you will have the buckets to capture it.”
“Remember what happened to Solomon,” adds Donahue. “He asked for wisdom. And he got all the riches beside. If he had gone for the riches, he wouldn’t have had the wisdom—and he probably wouldn’t have gotten the riches either.”