Q3 2019 Earnings Call
Ladies and gentlemen, good day and thank you all for joining this federated investors third quarter 2019 analyst call and webcast. All telephone lines are presently in listen only mode and instructions on how to submit a question will be sure to after todays prepared remarks. During today's conference is operated assistance. Please press star in zero on your telephone keypad as a result.
Andrew today, such and is being recorded and now for opening remarks introductions I'm pleased to turn the floor to president of Federated Investors Management Company Mr. right Hadley welcome right.
Hi, Thank you and good morning, leading today's call will be Chris study, you Federated CEO , and President and Tom daughter, who Chief Financial Officer, joining us for the Q and they are soccer and say that the CEO Hermes and Debbie Cunningham, our chief investment officer for money markets. During today's call. We may make forward look.
These statements and we want to note that federateds actual results may be materially different than the result implied by such statements. Please review the risk disclosures in our actually see filings no assurance can be given as to future results in Federated assumes no duty to update any of these forward looking statements Chris.
Thank you Ray and good morning, Oh.
I will briefly review Federated's business performance and Tom will comment on our financial results.
Looking first at equities gross sales increased 8% from the core prior quarter and 38% from Q3 of 2018.
Net redemptions in Q3 were due largely to unexpected institutional account redemptions from two clients.
[noise], one institutional client redeemed about 800 million from a European equity mandate due to a change in their equity allocation model. In addition, the B T pension scheme ribbing redeemed about 720 million from their equity separate account assets.
These reductions were partially offset by the addition of a new global our emerging markets separate account in Q3 that funded with about 766 million.
Although we continue to work closely with BT P.S. on their planned asset allocation changes they are mature corporate defined benefit scheme and their investment goals include de risking the portfolio over a long term.
As we have discussed Hermes has made great strides to grow its third party business, which has accounted for 82% of year to date revenues.
We had 15 equity funds with net sales in Q3 led by the Kaufmann small cap and the global emerging markets fat.
Several other funds achieved net sales in Q3, including Hermes SDG engagement equity fund.
The global equity E.S.G. fun.
And impact opportunities funds, along with the MDT small cap growth and all cap core Fox.
Using morningstar data for trailing three years at the end of Q3.
About one third of our equity funds were in the top Cortile and nearly two thirds, we're in the top half.
Now looking at the strategic value dividend strategy.
Its objective is to provide a high in growing dividend income stream from high quality companies.
The domestic funds 12 month distribution yield was 3.7%, which ranked <unk> in the second percentile in its Morningstar category at the end of the third quarter Interestingly. The fun returned 3.2% in Q3 and 14% year to date through September .
Our thirtyth.
At that point the fun ranked in the 10th percentile of its Morningstar assign category for the quarter, 14th percentile for the trailing year and 96% cow for the trailing three years.
The domestic.
Strategic value dividend strategy had combined mutual fund and SDMA outflows in the third quarter. They were about 584 million compared to outflows of 494 million in the second quarter.
Looking at early Q4 results combined fund an estimate net redemptions for this strategy were about 25 million through the first three weeks of October .
Overall combined equity and S. M. A net redemptions for the first three weeks of October were $274 million.
Turning now to fixed income.
Assets increased to a record high of nearly 66 billion at the end of the third quarter due mainly to market related gains of a billion and a half partially offset by net redemptions of a little over 600 million.
On the fund side, we saw net sales of ultra short bond funds.
The Federated Bond fund and high yield fives as discussed in our previous earnings call Q3 fixed income fund results were impacted by the redemptions in the total return bond fund from an individual client who made a model change these redemptions totaled approximately.
600 million, while the fund as a whole showed net redemptions of 483 millions.
For fixed income separate accounts the net outflows were due largely to net redemptions from funds, where we act as a sub advisor about half.
And to asset allocation changes made by an insurance company a client for the other half.
At the quarter end using Morningstar data for the trailing three years, we had eight funds in the top quartile and 19 funds in the top half.
Combined fixed income and actually I may have net sales of approximately 265 million early in Q4.
Now we turned to money markets.
These assets increased about 26 billion in Q3.
We saw positive money market fund flows from a variety of institutional and intermediary clients during the third quarter.
Money market strategies continue to have a significant yield advantage compared to average deposit rates.
With recent fed rate cuts money fund yields also compare favorably to applicant <unk> direct market rates into longer duration securities given the relatively flat yield curve.
Our money market fund market share, including sub advised funds at the ended the third quarter increased just over 8.4%.
From about 8.1% for the prior quarter and 7.3% for the third quarter of 2018.
[noise] net redemptions in the private markets and alternative space, we're really due mainly to a successful private equity fund with underlying asset sales, leaving to CAD.
Sure.
We continue to raise funds in our direct lending business and are targeting another close of our European direct lending fund over the coming months.
Taking a look now at our most recent available asset totals with Federated as of October 20, Threerd Hermes as of October 18.
Managed assets were approximately 536 billion, including 300 in 66 billion in liquidity.
81 billion in equity.
67 billion in fixed income.
18 billion in alternative and 4 billion in multi asset.
Money market mutual fund assets were 267 billion.
RFP and related activity levels continue to be solid and diversified with interest in MDT strategic value dividend.
Global emerging markets for equities and for corporates high yield and I mean for fixed income corporates high yield and short duration.
We began the quarter was about 100 million in net institutional mandates yet to fund.
On the international side, we've had a good response from clients for the initial funds develop for U.S. distribution that are sub advised by Hermes.
Assets in these funds were just over 60 million at the end of the third quarter with about half of that being externally sourced.
We are evaluating further U.S. mutual fund launches using Hermes strategies, and we are actively presenting hermes strategies to our institutional customers and are working with Hermes to develop opportunities for them to offer federated strategies to their clients.
We are progressing on the expansion of the Hermes Ito S stewardship engagement business in the U.S. and are working to higher several new engagers.
Hermes Eos assets under administration reached 781 billion at the end of the third quarter up from 638 billion at the end of the second quarter.
We believe the quality depth and breadth of Hermes Ers capability is a powerful differentiator, adding important insights and information to our investment processes.
Hermes managed assets at quarter end were 44 billion down from 45.7 billion at the end of this second quarter.
The decrease was due to the negative impact of foreign exchange rates of approximately 1.2 billion and net redemptions of about 900 million, partially offset by 377 million of market based gains.
We're looking to grow our business relationships and opportunities both inside and outside the U.S., including through alliances and acquisitions to complement our domestic UK European Asia Pacific and Canadian operations Tom.
Thank you Chris.
Total <unk> total revenue was up about 19 million or 6% from the prior quarter due mainly to 13.6 million of higher money market revenue.
Primarily from higher average money market assets and 3.9 million of higher revenue from an additional day in Q3.
[noise] performance fees of 1.4 million were recorded in Q3, no performance fees were recorded in Q2.
Revenue was up about 32 million or 10% compared to Q3 of last year due mainly to higher money market revenue of 37 million, partially offset by decrease.
In revenue of 1.7 million related to lower average equity assets.
Looking at operating expenses comp and related increased about 5 million from the prior quarter due mainly to higher incentive compensation expense.
Distribution expense increased 6.1 million.
Due mainly to higher average money market fund assets.
Other expense increased due to the onetime reversal of 1.9 million in Q2 of amortization of intangible expense related to the Hermes acquisition.
Due primarily to the finalization of the purchase price allocation.
The increase in total operating expenses from Q3 2018 of 24 point Threemillion was primarily due to higher distribution expense from higher average money market fund assets.
Into higher incentive comp and related expenses.
The non operating income increase in Q3 is primarily due to an increase in private equity carried interest on assets managed by a hermes related non consolidated entity.
The bottom line EPS impact on Federated after reflecting the minority interest and taxes from the carried interest.
Was approximately three cents per share.
We're not able to predict the timing or size of future potential Kerry to be earn.
At the end of Q3 cash and investments were 309 million of which about 259 million was available to us.
We remain on track to close the PNC deal announced in May and we expect to close it around the middle of the fourth quarter.
Jim that concludes our prepared remarks, so we'd like to open the call up for questions.
Gentlemen, thank you into our audience joining today over the phones. If you would like to ask it live question over your telephone line.
Star in one on your telephone keypad.
Please your line into with you and also a friendly reminder, that if you're joining us today on the speakerphone. Please return to your handset before pressing star one to ensure that your signal does reach our equipment. Once again, ladies and gentlemen that is star and one for questions. We'll go first of Patrick debit with autonomy research. Please go ahead.
Hi, Good morning, guys how are you.
It looks like maybe the money market funds coming in from PNC.
Still have about 3 billion more assets and then then the 9 billion you had originally guided after they rolled out the money, they're keeping for their cash sweep do you think that's amount that that's going to move over and and if so are there any updated thoughts on the a pencil potential accretion from those assets.
Any potential as a part.
Any updated thoughts on the potential accretion from those assets.
Oh, Okay. So we're not going to give a forecast on accretion and.
The assets are public and that's what they are we don't know what will come over when we close.
We're going to merge those assets into our funds.
That's where the assets are when it merges that's what we'll get but things change.
Yes, Okay. Thank you and then.
You mentioned the move in other expenses I think last quarter. You also mentioned a hermes FX hedge or was there any impact from that this quarter and.
Because of the move in the pound would that now reverse in the fourth quarter.
Patrick It's Ray Yeah, there would have been a expense in other via other expense line item that was about a million too for the third quarter and look for like a million 6 million seven for the second quarter, so and as for the.
Fourth quarter, you know, we're pretty early on so though no no prediction there.
Okay. Thank you.
Well take our next question from the line of Ken Worthington JP Morgan. Please go ahead. Your line is open Sir.
Hi, Thank you very much for taking my questions. Good morning, and yes, just launching investment management fee free SMH.
You are a leading estimate provider. So what do you think or you would see if others sort of follow you be yes.
SMB fees are already pretty low.
Do you think this sort of drives further pressure on SMC estimate fees to accelerate.
Ken mentioning you be yes of course is a great relationship with us and with Hermes and.
Our relationship with them has been accelerated and enhanced by the.
New funds that we've recently put out and so it's not our province to comment on their pricing of their estimate I would note that we continue to charge on our SMH.
Where we have been before and we'll have to see how this unfolds in the marketplace.
Okay fair enough.
And then maybe second you know buybacks had been more muted a more recently they've been in the past why is this in you know how should we expect a buyback just to kind of evolve in the future any reason not to think that they returned to sort of a prior levels.
Well, we have about 900.
Thousand shares available on our existing program, we have a history of completing our programs.
And we remain active in the share and purchasing shares and we look at it every day with what what is going on what cash we are going to use.
In the in the past when we've done transactions like the Hermes deal back in the days with Kaufman and others, we didnt usually by as much when we spent our cash on acquisitions of course, we have the PNC deal coming up.
And.
We will continue to be active.
Okay, great. Thank you very much.
Next we'll hear from Dan Fannon at Jefferies.
Thanks, Good morning.
The discount brokers went to zero commissions.
On this on stock in the ETF trades in one of the largest yet providers talked about.
Yes, now becoming more of an equivalent for cash like instruments. So just curious how you're thinking about the competitive.
Backdrop for money markets and if yes, you know can be more specific kind of direct competitor and as you think about.
No that going forward based on those changes.
It it strikes us that big large customers such as we have on the cash side.
Our not influenced one way or the other by afford all or a 95 cents charge, whether it's there or not.
The next point would be that our customers overwhelmingly.
Our looking for daily liquidity at par.
And we are simply not aware from our customer base of that kind of a dynamic occurring where the cash that they have with us would be susceptible to moving into a variable asset value.
Ats and also note that those vcs are priced either 100 bucks or 50 Bucks, which is really setting the stage for allowing a change from the navy based on bid ask spreads.
And don't forget their trading differences in how those dts work, where they create more like stocks and T plus two and our customers are more interested in a current use.
And capability of getting their money.
So.
Basically I would say that not all pontifications apply to all clients and we haven't seen that dynamic.
Understood and.
Looking at the alternatives business and kind of the outlook based on I think you mentioned a few funds where there is demand and.
We've seen also the redemptions I'd be a little bit higher here since basically you've on these assets. So just curious as we think about kind of 2020 and potential fund raising or demand and versus the kind of redemptions cycle like how you think about the net growth of the broader alternatives business.
Soccer.
Thank you very much.
As far as the redemptions are concerned both of those what plans as part of all private equity business, which is and when I when investments a successful there is a planned realization from the fund in fact.
Setting the underlying investments and returning the cash to plans and that's something we do on a regular basis and that's how we get paid so that is a positive thing not a negative thing in fact, now I can't predict when although such hospitals would happen it depends on when the equities investment materials.
And and so.
Part of it is one particular unit trust, which is a kind of fund structure that we have in the UK, which is a property units.
And the redemption that largely came from a UK defined benefit pension scheme.
Looking to de risk that portfolio.
As they move towards and insurance by out of their liabilities and again that is specific to that.
In terms of assets raises a again, it's difficult for us to predict until we can see them and we'll have you have to come back and tell you. When we've seen the reality what I can say is direct lending business.
Targeting another close another that's another one of our European direct lending fund the late Q4 2019, or the Q1 2020.
So that is on on calls.
Thank you.
Thanks.
Again, ladies and gentlemen that it started one if you would like to ask alive question, we'll hear from Michael carrier at Bank of America.
Hi, good morning, and thanks for taking the questions.
Yes, let me first it's another question on the alternative side are you guys mentioned, even if some revenue on the performance fee side and then also.
The Kerry.
You know in the non op area.
I I know these things are you know tough to predict so I'm not going to ask you to do that but when it maybe this is for soccer like when you look at the products.
I have whether its performance fees or carry like maybe whats the magnitude or what are the assets that can throw off those fees over time.
And then just separately on the direct lending side do you have the size of the the last fund you know that you raise on the European side. Obviously this fund could be different but just so we had some context around it.
Thank you very much less dealt with the gathering fees.
The kind of fees are connected to the loss on so I gave which is that when obviously is an investment to successful and you does it down to return cash declines.
Quite often but the way we get paid is partially category, which is what you saw that I know I'm, sorry, I cannot predict either the size all the Clinton what I will say to you is that if you look at all that's all previous.
Records, which is which is probably the cracker the all oh.
Our financials, you will find that Ah onez pretty regular basis private equity business seems to generate for us. It carries the office that's a magnitude what we call. It the timing is when it will happen, but it's.
So that's on the Gadaffi performance this performance.
Again, if you look back over time.
You can see the magnitude has has been that I called again predict what happened again or when it will happen, but that you can see for that and that brings me to the find one which is what did we close back on well because the first fund on and the answer is I'll come back to was that.
I'll fly when I get that information, we have it but I'm just connecting enough.
Okay. That's helpful.
And then Debbie maybe just on the money market Fund business. You know obviously the flows continue to be robust yeah. This quarter just given some of the volatility that we saw in the repo markets. Just more curious you know what you saw on in terms like client demand or preference among products you anything that was.
You know more surprising is that calmed down once the fed has stepped in.
We continue to see demand across all three categories of our product. This includes governments prime and Muni.
On an actual dollar basis, the government probably garnered the most just given their their their larger side.
But on a percentage basis primes amini is actually outperformed out through that the government sector, having said that we.
We know that day and shareholders and all of these products benefited from the volatility in the repo rate during the mid September time period and to some degree continuing as we go into the fourth quarter, although at a much much more muted basis and you know, it's certainly let's not reflective.
Oh, the any type of credit event in the marketplace. So they were pretty easy conversations to be having with our shareholders who were questioning what what in fact was happening in the marketplace.
Basically came down to was just a supply and demand mismatched with some regulatory overlay and maybe some operational glitches from.
The fed themselves.
Initially when they went into began open market operational over again, so there's a pretty easy stories to have our information to give to underline shareholders and the Comfortability I think entries to their participation in the marketplace at that point that.
Okay. Thanks, a lot.
Just before we go I just.
Check now and the first.
Direct lending fund flows at 18 million.
Thanks.
Our next question will come from Bill Katz with Citi.
Okay. Thanks, very much I want to come back to discussion that's amaze us for a moment or can you tell me of your estimate maybe 100%, but how much of that is actually geared to the wire houses how much do you have relative to you B S. And then maybe the more humane question to me is where do your expense ratios lineup versus peers in that category.
Well Bill we win or you're not talking about a client balance I would and I don't have the wire house percentage you know we're in a variety of of platforms. There. So we're not gonna have a lot of a success that might be something we can look at and come back to offline the expense ratios.
Our roughly middle of the pack without having done and expert exact study you on the subject.
Okay, and then maybe bigger picture question I'm, putting the cyclicality to my remarks business decided for a moment on the long only business you know between what you're winning what did saw the redemptions into new quarter, just sort of step back. It seems like there's a lot of small things never happened and even a direct lending sounds like it's relatively small opportunity.
At what point do you get to scale the business to drive maybe more more consistent positive growth or more a more visible organic growth on long only side is it investments is it time is it border distribution as a product what do you think Ah so the missing piece here.
Well. The list you made is almost comprehensive and it requires a lot of blocking and tackling there's no. One of those that you can say Oh. That's the answer you must have the investment performance you must have the.
Distribution side, you've got to have the products right at the right time.
And the way this business has worked.
On all of those they don't all work in sync all the time you don't win every game.
And I don't think there's anything missing there's just the constant effort of doing the blocking and tackling necessary.
To to win and that's why for example, during this quarter, even though we had negative flows we have 25 different mandates 15 on the equity side 10 on the fixed income side that had positive flows.
And if you look at the gross sales, it's a nice thing to look at even though I know you guys are legitimately focused on net flows on the growth side. When you are continually.
Selling more each time it is a voice of the marketplace, saying that you are doing the right thing redemptions, yes, and obviously that drives.
The revenues and that the net income, but that's another good one to look at to see if we're getting it right and that gives us a lot of confidence in the business model. One other thing I would say that makes us unique is the power of the money funds don't forget when we went public in 98 you were there bill.
Our our phraseology was a franchise for all seasons.
And so these money funds really count in terms of producing revenues and net income at times when other things aren't firing on all cylinders and therefore, you can keep the other aspects of the business is going very strongly and this is worked out very well for the long haul.
Okay. Thank you.
Our next question comes from Brian Bodell at Deutsche Bank.
Great. Thanks, Good morning folks, maybe just switching over to Hermes on these third party distribution effort I'm, just going to try to fight 18 and looking at the.
The net third party inflows, maybe if you could talk a little bit about.
The you know the potential to get the third party net inflows back up to sort of where they were over the past three years and that's 4 billion plus how long do you think that might take if if we have sort of an unusual ish view on its investors are sort of neutral on I'm, putting money back into work.
In global E M products, I mean, maybe talk about that the the product development pipeline to get you there.
Thank you. So there's there's an automobile says it's kind of just generally it is.
On the specifics I see the funny thing I'd say that at this particular quarter. We had two very specific large outflows, which do happen every now and then and there were more than made up in terms of revenue by one infer that came down the way in terms all all how do we predict the future. We look at our RFP pipeline and RFP pipeline is pretty much.
At the higher end of what we've seen in the Paul which gives US a lot of confidence that we'll continue to see this coming through if you asked me what do we gauge it gets into and I would say to you that we've seen growth.
Across the board we've seen for example, if you look at this quarter, we saw wins in absolute credit in global equities as well as in gems and we sold three new clients habits are still chip business with a combined assets under advisement is up about 10 billion and if you look at the bombs that we'd be launching successfully.
Ranging from the high yield Global fund.
The SDG funds. These continue to go on the new assets as they grow and to meet demand and it's worth highlighting that's in many of these cases were launching them with clients.
Who in fact put them on their platforms and see them, which sounds as if there's a lot of demand out there for them. Some reasonably happy that the funds that we have are attracting.
Increasing flows from football declines and I'm pretty happy that funds that we are creating and brings the markets in India SDG space and then the E.S.G. space continues to find a lot of traction.
Finally, I'd say that as as Chris mentioned at the end of the day.
You buy anybody's funds because of performance because that's what the clients really want than our performance remains very strong with we calculate performance because we have a combination of institutional equities institutional money and implement it slightly differently and we say that today handled the quota 65.
Rental boss is why does the benchmark, which was 74% of them. How does the median and information ratio on a weighted basis comes with 0.59, which means that we have made real money for clients across all our thumbs up to fees, so I'm reasonably optimistic.
Given we live in a volatile market.
I know that that that's good color. It's a good segue off the two of my second question for Chris but back to the yes, and maybe I mean, just in your experience over very long time period, sometimes we've seen pricing news from from competitors and are readily this merger an active products but.
I guess, Chris in your judgment or where do you think went out here in terms of what clients do.
Between performance and looking at just simply simple discount on fees.
Well over the long haul, perhaps our experience in money market funds is somewhat indicative.
Backing the seventies, they were differently price than they are today and there were always efforts to.
Lower the prices over that was many decades and our job is to continue to produce the performance the underlying product held the story.
And maintain the efficacy of the business and in the end the clients are willing to pay for performance and client can then that sentence mean, the underlying client and or the intermediary clients, who absolutely wants to.
To be able to select the best of the best.
For these type of efforts I'll highlight one thing that is perhaps unique about.
Some of the things that we do and with intermediaries and that is.
A portfolio construction, where you're adding value by looking at the underlying risks that the intermediaries are taking with owning different products and and and ER activity. So.
Exactly and SDMA comment, but it is a comment on adding value in the investment process in helping people figure out the nature of the risk that they have.
But I'm not really going to go further than I went in the answer to the question. The first time about where this might I I, how this might roll out into the marketplace.
Because I'm not interested in commenting on you B S is activities and it it isn't long enough in the to the see where this is going to come out.
Do you see people are going is a b or where even the manufacturers at other platforms will be in a wait and see mood see how this plays out before they do anything else on pricing or would you.
I I, just don't know and you can always assume in this business that there is always pricing pressure.
It is just part of life.
Okay alright, thank you.
Next we'll take your question from Kenneth Lee at RBC Capital. Please go ahead.
Hi, Thanks for taking my question you touched upon seeing some outflow related to the BT pension scheme I'm in the quarter. Just wondering if you had any updated thoughts on a expectations for the outflow guide a glide path for for this year and maybe next year.
Soccer.
Thank you.
The Oh relationship with Bcps remains a very close relationship that are major clients of ours and we continue.
Work very closely with them if we look at their assets. The majority of the assets that we know run for the might in fact in private market assets now why do I say that because that are maturing defined benefit scheme. That's according to the fashion in the UK Oldham methodology. It flies in the UK is on a de risking Paul.
And that for the withdrawals within what we understood to be happening on that de risking Bob.
It's difficult because they have their own fiduciary duty that they've got us yet due to how they stick to that Dom guide, but I would say, it's it's pretty much as one would expect it to be at this thing.
Gotcha, and then one more in terms of the and this Tom this one on the the money market Fund area I'm wondering if you could just probably a little bit more color on the competitive dynamics between money market funds and particular bank products and specifically, whether you expect the money market fund yield.
Do you continue to lag behind bank deposit rates on the on the way down if short term rates were to continue to fall.
I'm sure I'm from a bank products perspective, certainly whether you're looking at institutional side of the market or the retail side of the market makes a difference but in either case the money funds managed products the whole product continues to.
To provide a pretty substantial spread versus the those direct products in the marketplace. You know something in the order 100 250 basis points on the retail side and probably still something to the order of 15 to 20, maybe even larger on the institutional side depending up.
On the size of the institution.
As for the lag in the marketplace and a decline in re environment essentially what we have seen initially was slightly inverted money market yield curve that turned into a fairly flat yield curve that is now back to a positive money market yield curve what kids.
Is reflective of both expectations from the fed movement in the future.
As well as you know some of that supply and demand dynamics, especially in the treasury markets and with that yeah, more steepening of the yield curve and the ability for we added liquidity managers can't be purchasing the higher and higher you know the higher.
Our yielding.
Security out in a that's six to 12 month areas I would expect that will continue to be able to maintain some of the yield in that portfolio is not necessarily entirely reflecting each lives that that the fed might make and that's basically what we what we what weve seen with.
That you know sort of a inversion to flattening test like Steepening now that's already occurred is that that 25 basis points fully don't happen haven't played out and potentially well if that type of the yield curve configuration is maintained.
Great very helpful. Thank you.
Thank you and our next question will come from Mac Sykes Gabelli.
Good morning, everyone.
I actually want to park a two part question. So I'll just answer together.
<unk>.
My questions around.
Your sense about the potential for disruption by short duration in cash, yes versus traditional money market funds and then given your leadership in understanding of regulatory matters managing cash assets do you see any issues with any of the innovation on the chip side. Thanks.
So I I already commented on the potential of E T S.
[noise] disrupting money market funds, which we simply don't see because customers that we deal with one daily liquidity at par so I'm not going to go through that catalog.
I would ask a debbie if she has comments on that part and then we'll get to the second part.
Well I mean.
We certainly have reviewed you know that that competitors in the marketplace that have E. T S a product.
And.
Like many other types of short term products, our alters our friends to be included a they have gathered assets in the most recent.
Rate environment declining rate filings playing rate environment that we've been in however, not to the same degree that we have from a money market fund industry and certainly from Saturday. This experience with our money market Fund perspective, So I think to some degree as we go south of 2% on short term rate.
The low rate environment <unk>.
Well above zero that still lower rate causes people to maybe want to look at their cash balances as to what buckets. They need to be in those that are yeah, absolutely necessary for daily activity versus those that maybe might be drawn on six to 12 months from now on potentially there.
He gets.
Stratification as to how your cash is invested but at this point, we're not even really seeing on any kind of impediments from <unk> perspective in that in that regard no I think the second part of your question related to the future of cash and.
I have a lot confidence that the fed will protect its province on crypto currencies and wanting to run the show as they have indicated that they will do this does not mean that we are not exploring working on all sorts of ideas about the future.
Your cash, which I'm not going to get into a much detail on.
But you can I can assure you that things like seven by 24 around the globe and things like that are being investigated by many in this field.
And we will be in the forefront of that as it evolves.
Sorry for the.
Duplicative question I was jumping calls thank you.
Thanks.
Our next question will come from Robert Lee at KBW.
Great. Thanks, Good morning, guys.
Right.
Hi, I'm I apologize that made Mitchell's earlier I also would get on the call a little late but.
Actually my first question is on the BT pension scheme.
No.
The loans about 29 call it 30%.
Hermes and just remind us.
But the expectation is there for them.
Selling down their stake overtime. If there was kind of priests said formula or schedule, where they can start putting it in is that something you would expect.
Federated to participate in it would that be more hermes employees taking over the.
The.
They're holding or by buying in their home.
Yeah, Rob Okay.
The arrangement that we made with them when we purchased the 60% and you remember the employees own and still own 10.5% and the pension scheme, and 29 and a half and they have and we have put and call arrangement that begins in.
And your three.
And.
They can put it or we can call it and there's a pricing mechanism that we would go through if either of those happens.
And.
It's quite simply how it works it would be Federated.
Purchasing it that would not be the employees.
Purchasing it.
And then would that be like the whole chunk at once or can it actually be kind of in like tranches over time.
And I guess, maybe as a corollary to that I mean, you look at some other firms where they have kind of.
Maybe some type of outstanding contingent purchase possibility you often see these mark up more downs.
The p. now related to how their valuing that over time it.
Maybe that is in your numbers I don't remember, saying, if you kind of yeah refresh us on how you kind of it accounted for that.
But maybe a couple of things.
Sacra has mentioned you know there are are good client and we would work with them. While we have a document that has a written put and call arrangement, we would work with them and be flexible and and weve discussed with them.
Our ability to work with them be flexible as to what they would want to do and what we would want to do and what made sense for both of us.
The evaluation.
We have to do on what we own is a it was a quarterly thing and we have to go through and and run to run evaluation of what how we value that through the accounting process.
And.
That's a ongoing thing it's based on forecast we have an outside advisor.
Gives us looks it.
Looks at our forecast and what we think is happening and.
You've got the values then.
Reviewed by our internal or external auditors and.
Shows up every quarter.
Rob if I could add yes, we have a very specific put and call arrangement with our partner client.
But in the end of the day any transaction that occurs in that 29.5% is gonna be a negotiation.
And that's just the way I think about it yes, we have an agreement I'm not trying to step away from the agreement, but that's the way that thing works in reality in my opinion.
Take rate maybe the.
A follow up and again I apologize if you covered this in the early prepared remarks, but if I live in the fixed income business I mean.
Me your performance a less so much I see no.
It seems to be pretty competitive.
And fixed income broadly for the industry has been a relative bright spot, but certainly this quarter and maybe little bit last quarter feels like the.
More of a struggle for you to kind of just maybe as much as some of your peers as.
Do you maybe shed some light on that is it just kind of the ebbs and flows maybe yeah, but little bit higher high yields.
Orientation than maybe some some of your peers do proportionately.
That are the short duration kinda, having some impact on the on the opposite.
Well as a as I mentioned, you know the 600 million of a net redemptions for fixed income this quarter about half of that was from.
Funds, where we act is sub advisor, which means someone else is doing.
You know the primary work and they are the primary distribution.
And and then the other half of that as I mentioned was from a one insurance company client, who just change their asset allocation.
Ah so behind the curtain, we don't know exactly whether that was.
Related to high yield or whatever it was related to buy them and we also mentioned that you know we're about 265 million to the good in Q4.
Which is only a few a few weeks I I grant you that.
And then we tour in a little bit into total return Bond fund.
And and shows it really it was in a one big client move.
You know that that is oh and eight another model change that.
You know redeemed more than the total or of the net redemptions, which meant that without that client. It was positive. So these are the ebbs and flows of life, where people have to like you get their money they time for any reason and.
Theres, a little bit of Red Queen and all of these businesses and we think we have a model to a run twice as fast as at and where to advance the ball.
Okay, great. Thank you appreciate added color.
Thank you and thank you to our audience proposing their questions and thank you to our leadership team for taking the time to answer the questions. Today. Our final question in the queue comes as a follow up from Patrick Dabir. Please go ahead. Your line is once again open.
Hey, guys. Thanks for taking the follow up.
Could you.
We update us if at all on kind of the a pack strategy. After the comment you made last quarter, if you're still exploring partnerships and acquisitions there.
In conjunction with the Hermes expansion.
And maybe even the opportunity to get an Asian distributor to pick a stake in Federated.
Okay. This is Chris.
The Asia Pac strategy, we turned over the efforts that we had over to the Hermes sales effort.
So Harry it is a running that on behalf of up with Sacra nuts and.
They are currently working on an expanded idea of what to do but for the whole Asiapac region.
In terms of the second part.
We would always be open too, but that is a long slow slog.
Bob getting a partner who would do both a stake in Federated and a distribution effort.
These things take forever they are.
Not catalytic in the sense that they so I can say what will happen or win.
But it is something that we continue to remain.
Open too.
But overall in terms of Asia Pac we remain very optimistic about it for the long term future and I'd ask a soccer to comment.
As he sees it.
Thanks, Chris so prior to Federated acquiring some sends them as we had already established a operation done in Asia, which is primarily a sales operation. Although we also have manufacturing done.
Both in Singapore and.
In and in Australia, and what we've done recently is we've combined our operations with with wells, but the rate. It was doing so what do we see the region I mean it you know this is one as I do a the region has an incredibly high rates of savings growth. That's the first thing.
The second thing is we know that across the board that's to say that the rates it products as well as having these products. These have residents within that region. So that is another take for US we have raised assets very successfully Apple Hermes from markets such as Australia for example, both in.
Global equities, and then has to chip business. We've raised successfully in private equity and then public equity from markets, such as Korea, and we think that there's more opportunity that for the combined company. That's on a fuel cells are adamant now if something comes up that we can find somebody that become popular with.
Obviously, we will look at that but as you know our partnerships in that part of the well take a long time and have to be culturally the rights wants to be able to go forward.
Thank you.
And gentlemen at this time there are no further questions from the audience I will turn it back to you for any additional or closing remarks.
Oh, well that will conclude the call and we thank you for joining us and for your time today.
Ladies and gentlemen, this does conclude today's announcement and we thank you all for your participation you may now disconnect and we hope that you enjoy your weekend.
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