Q4 2019 Earnings Call
Good day, ladies and gentlemen, welcome to the Federated Hermes Inc. fourth quarter 2019 analyst call and webcast. At this time all participants are in listen only mode. I would now like to turn the conference over to Mr. Ray Hanley you may begin Sir.
Good morning, welcome leading todays call will be Chris Funny, you CEO and President and Taunton are you Chief financial officer, and joining us for the culinary Arts soccer into say be who is CEO international and Debbie Cunningham Chief investment officer for the money markets. During today's call. We may make forward looking stay.
Even so we want to know to Federateds actual results may be materially different than the resolved implied by such statements. We invite you to review the risk disclosures in our S. You see filings no assurance can be given as to future results generated Hermes assumes no duty to update any of these forward looking statements Chris.
Thank you Ray good morning.
As of today, we have officially changed our name to Federated Hermes Inc.
And we are unveiling an updated corporate identity next week.
Focusing on a commitment to responsible investing to achieve financial outperformance.
New name reflects the combining two active management firms Federated investors Inc. and Hermes investment management.
Iterated Hermes offers world class active investment management and engagement services across a wide range of asset classes for investors around the world.
I just by the conviction that responsible investing is the best way to sustainable wealth creation, beginning on Monday, we will Craig under the ticker at age.
Moving onto our business performance and looking first at equities assets reached an all time record high of 89 billion at the end of 2019, an increase of 23% from 2018.
For the fourth quarter. In addition to positive market impact of about little over 5 billion and gains from T. N C funds acquisition, which closed in mid November a little over 2 billion net sales of a combined equity and separate accounts were slightly positive.
Equity mutual fund sales were positive in the fourth quarter, just under 230 million and for the full year of about 625 million with 16 equity funds with net sales in Q4 led by Kaufmann small cap.
Hermes Global equity, Yes, G Hermes global emerging markets and Hermes STG engagement tops.
Our full year basis equity gross sales increased 45% and net redemptions were down 81%.
Using morningstar data for the trailing three years at the end of 2019, one quarter of our equity funds were in the top quartile and more than half were above media.
Looking at the strategic value dividend strategy recall its objective is to provide a high and growing dividend income stream from high quality companies. The domestic funds 12 months distribution Yos was 3.8% which ranks in the second percentile.
Oh, that's Morningstar category at the end of 2019.
The domestic strategic value dividend strategy had combined mutual fund and that's that May outflows of about 350 million in the fourth quarter down from 580 million in Q3.
Looking at early first quarter results combined fund in SDMA net sales for this strategy were about 30 million through January 24.
Overall combined equity fund and SDMA net redemptions year to date through January 24 were negative by 76 million there were some lumpy redemptions in one of our European mandates.
Turning now to fixed income.
Equity our assets increased to another record of 69 billion at year end Oh for your basis gross sales were up about 6% and redemptions decreased 8%.
Full year net sales were slightly negative 119 million compared to 3.2 billion negative in the prior year.
For the fourth quarter net sales of 1.4 billion combined with gains from PNC acquisition of about 450 million and market gains of 1.2 billion do move assets to the record high level.
On the fund side.
We saw net sales of high yield funds, just under 500 million and ultrashort funds just over 300 million among others.
Separate account net sales included.
Multi sector total return and high yield strategies.
At year end using Morningstar data for the trailing three years, we had seven funds, 21% to talk portal and 20 funds or or 59% in the top hat.
Combined fixed income fund and asked that May net sales are 19 million year to date through January .
These net positive sales have been led by total return bond fund high yield activity and ultra shorts.
Moving to money market [noise].
Assets increased about 36 billion or 10% and the fourth quarter, including about 11 billion from the PNC acquisition.
Money market assets increased 94 billion or 31% for the full year to close 2019 at record high.
Assets of 396 billion.
Money market strategies continue to have a significant yield advantage compared to average deposit rates.
Money market yields also compared favorably to applicable direct market rates and longer duration securities.
Our money market mutual fund market share, including sub advise funds at year end was about 8.8% up from about 8.4% at the end of Q3 and 7.9% at the end of 2018.
Taking a look now at our most recent available asset totals with Federated as of January 29, Hermes January 17th.
Managed assets were approximately 583 billion, including 401 billion in money markets 90 billion in equities 70 billion in fixed income.
18 billion in alternative.
4 billion in multi asset.
On the money market mutual fund assets side, the assets worth 283 billion.
RFP and related activity levels continue to be solid and diversified in the fourth quarter with interest in MDT Kaufman and global emerging markets for equities high yield liquid credit and short duration for fixed income.
We began 2020 with about 450 million in net institutional mandates yet to fund all on the fixed income side.
On the international side, we have had a good response from clients for.
The initial new funds develop for U.S. distribution that are sub advised by Hermes.
Assets in these funds were just over 75 million at the ended the year with about 44 million externally sourced by this attraction method that will tell you what the seed assets.
We are evaluating further us mutual fund launches using Hermes strategies.
We are actively presenting hermie strategies with our institutional customers and are working with Hermes to develop opportunities for them to offer the federated strategies to their clients.
We are progressing on the expansion of the Ers stewardship and engagement business in the U.S. and are working to higher several new engages.
Ers assets under administration reached 877 billion ended the year up from 781 billion at Q3 and about 500 billion at the end of 2018.
Hermes managed assets at year end, we're at 49 billion.
From 44 billion as the ended the third quarter and 42.6 billion at the end of 2018.
Hermes fourth quarter net sales were 1.3 billion all third party.
Favorable exchange rates in market gains contributed to the increase in assets as well.
We are looking to grow our business relationships and opportunities both inside and outside the us.
Including alliances and acquisitions to complement our domestic in UK European Asia Pac and Canadian operations Tom.
Thank you Chris.
Total revenue was up about 18 million were 5% from the prior quarter due mainly to higher money market revenue of about 12 million, primarily from higher average money market assets.
Equity and fixed income revenue also increased from Q3, primarily from higher average assets.
Performance fees of 2.8 million were recorded in Q4 compared to 1.5 million in Q3.
2018 total performance fees of seven point Fourmillion, mostly from Hermes strategies.
Hermes performance fees in 2017 were approximately 7.4 million.
And 8.5 million in 2018.
Revenue was up about 191 million or 17% for the full year due mainly to higher money market.
Revenue of 115 million.
In the inclusion of a full year of Hermes results in 2019.
Compared to half of 2018, which accounted for 96 million.
These increases were partially offset by lower domestic equity multi asset and fixed income revenue of about 19 million.
Looking at operating expenses.
Comp and related decreased about 800000 from the prior quarter due mainly to lower incentive compensation expense.
4 million.
Partially offset by severance pay of about 2.7 million reais, resulting from the combining of certain administrative operational sales and investment teams.
Distribution expense increased about 5 million in Q4 compared to the prior quarter and 53 million for the full year due due mainly to higher average money market fund assets.
As a reminder.
For Q1, our revenue is negatively impacted by fewer days in the quarter, partially offset by lower related distribution expense.
In addition.
Payroll taxes in employee benefit costs are seasonally high in Q1 compared to Q4.
[noise] expenses related to the PNC deal totaled about 1.3 million. During Q4. These costs, which were primarily recorded previously as professional service fees.
Previously in previous quarters as professional service fees were capitalized as part of the asset purchase intangible asset.
Subject to Finalization of the PMC deal asset valuations, we do not expect an increase in amortization of intangible assets asset expense due to the nature of the recorded assets.
The decrease in other operating expense line item for Q4 compared to Q3.
Was due largely to the currency exchange rate impacting both evaluation of us.
Dollar assets at Hermes.
And the foreign exchange hedges used by Hermes to swap U.S. dollar based revenue in the pounds in order to line up.
With their largely pound base operating expenses.
In Q4 this resulted.
And then expense credit of 1.8 million compared to the 1.2 million.
In Q3 of expense.
Her words, a 3 million variance.
This Q4 expense credit was partially offset by the overall negative impact of exchange rates on Hermes reported Q4 operating results estimated at about 1.3 million across all operating line items.
The increase in total operating expenses were 2019 versus 2018 was primarily due to the aforementioned inclusion of Hermes full year results.
Also higher distribution expense, primarily from higher average money market fund assets and higher incentive compensation and related expense.
Nonoperating income expense of 1.4 million from Q3, primarily due to an increase in the market value of securities held by consolidated funds.
3.4 million.
Offset by lower private equity carried interest on assets managed by a non consolidated entity.
The carry was 5.4 million in Q4 compared to 6.8 million in Q3.
Non operating income increased 51.4 million in 2019 compared to 2018, primarily due to the 2018 FX loss in connection with the Hermes acquisition of 29 million.
Primarily higher.
Equity carried interest on assets managed by the non consolidated entity.
9 million.
And an increase in the market value of securities held by consolidated funds of 7 million.
As we've said previously we're not able to forecast future private equity carried interests in 2019 carried interest recorded was 11.3 million.
In four of the previous five years.
Carry interest was approximately $3 million.
In the fifth year, the carry was about 13.5 million.
The 2.4 million increase in net income attributable to non controlling interest in subsidiaries from Q3 was primarily from consolidated funds and from Hermes.
At the end of 2019 cash and investments were 341 million.
Which about 276 million.
Was available to us.
Yes, we would like to open the call up for questions now.
Certainly ladies and gentlemen at this time, we will conduct a question answer session. If he would like to ask a question. Please press star one on your phone now and you will be placed in the queue. In the order received if your question has been answered all your question maybe yourself from the Keogh. Please press pounds. We're now ready to begin our first question comes from.
Ryan Bodell with Deutsche Bank.
Great. Thanks, Good morning, Thanks, and congrats on the name.
Maybe just to start off with that GGB, Chris If you just want to elaborate a little bit you Werent right now instead of doing this when when the deal closed.
And if you can just talk a little bit about the new marketing program.
What you tend to do specifically in.
And what the expense impact you expect between 20 and would that new market.
Yes [noise].
In terms of the timing of the name change.
The excitement and all of the work that was done you get the deal together.
Was also one of the reasons it didn't happen right away. There was a lot that goes into changing the name of two organizations, who is lifetime has been under a different nomenclature.
We.
We were able to combine though the fiduciary heritage of Federated.
And the SGN responsible investing.
Activities of Hermes.
And felt that once we got all organized funds on the block, where we are selling them with a responsible investment office opened at Federated with the integration of PSG into.
Money markets at Federated, and then well on the way in several other of our investment management.
Teams.
And with the except in Sydney clients have had.
We felt this was a very good timing behind the curtain in terms of internal.
We announced all this.
Internally last year at our sales conference, which is next week. We're in we have the 230, a high powered engines machines coming into Pittsburgh and we felt this was a perfect time launch that into the marketplace. So it was both the next hurdle and an internal decision making.
Yes on the on the expense side.
You know, it's a forecast so it's a forecast, but somewhere around $5 million that advertising.
Got it.
You know business cards names of product.
There's a lot because a lot that's involved and doing that and we look forward to.
[noise] bring forward Federated Hermes.
That's helpful. And then maybe just the third party sales it looks like that did and the net sales basis will that did tick up in the fourth quarter. Maybe if you have any kind of expectation given especially given the branding in the additional marketing and of course the you the more recent.
Excitement about U.S.G. too so to speak.
What are your expectations for third party sales for Hermes products.
HM in 2020.
Soccer that your return.
So.
Well that I can say is.
[noise] RFP activity is very high.
And we have seen net sales to continue.
In the beginning of this quarter.
I would give you the numbers I'm going to give the numbers in pounds, because that's numbers that I see.
In terms of inflows last year.
That's gross inflows, we saw about 8 billion of gross and just sort of 8.3 billion 8.3 billion pounds. This gross inflows coming out last year and I'd expect.
Something slightly ahead of that without the sales in the United States through this year.
It's not an exact onsite, but I'm not gonna give more guidance than saying, it's going to be we believe better than the yeah just ended.
<unk>.
Yeah, just peak when we're in on the admin sort of its the increase in Fourq you 19 versus Threeq you what was the driver of Baton Rouge B.
Up to 70 million from 64, which should we be seeking for run rate and HM.
So Brian Thats, driven by mutual fund average assets generally and.
Given the volumes money market mutual funds.
More specifically so that.
That will correlate to the change in average assets going forward.
Great. Thanks, very much food from <unk>.
Only next to Patrick David and I Thomas Research.
Hi, Good morning, guys and so you talked about the 5 million in marketing how should we see more broadly about you know the expense trajectory.
You know, bringing in a full quarter of the PMC assets in one Q.
And then beyond now there.
So the expenses.
PNC you know, we got the as Chris went through the lift the money markets and the equity in the fixed and we're not we said today, we don't expect to have amortization related to that so the expenses with the money markets will primarily be related to distribution payments.
[music].
And you know all the other funds merged into.
Our existing funds, so where theres distribute fusion payments. There. We also picked up a great team in Cleveland.
With three funds. So we're picking up the expensive that team in Cleveland office and that connections into into Federated and the new efforts to to sell and distribute that those three funds.
In a wider fashion, so we're pretty excited about the whole.
Oh outlook on the.
On the merger and the growth of in the new phone [noise].
You just any more broadly, though like do you have a view on.
Including that 5 million of extra marketing, where expenses will be kind of in 2020 versus 29 team.
[noise] flattish up a bit.
Well you know we've talked about 5 million in.
2019 related to Hermes and that includes the breadth of.
Abroad list of things new products people as Chris mentioned in.
The responsibility office and at what kind of across the board. So we would expect to see and then when you start new funds and you hire new people you have a continuing expense. So we think that some of this.
Expense related to advertising and has the other changes.
No my all that might not re occur, but then we might switch to to do more.
More advertising into the future. So we'll just see so but we can talk about as basically 5 million dollar number for 2020.
And that is that on top of the 5 million in Hermes, you've got to 2019 or just kind of move into now that.
Yeah, I think it's you know I said when we hire people. Then this is in addition to that yeah Doug.
Didn't go through and say, we expand exactly 5 million that was an estimate from work that we've done in advancing the owned do we hire all the people who are we going to hire the rest of them in 2020, it's not exact science, we're trying to give you some indication of what what we were looking to do.
And a more trying to implement it.
Okay fair enough.
Excellent.
Well Im acts to Dan Fannon at Jefferies.
Hi, Thanks, I'm, just a follow up again on expenses I guess first on comp.
For Q here, you had revenue sequentially rise, but calm down just curious if there was anything specific in that number and then you the normal seasonal step up as you mentioned for payroll just remind us for you guys. How much that is and anything else. It I guess as we can you kind of bridge between Fourq you in one Q that might be more.
Notable.
So Dan on the second part of that the the bump up in payroll tax and four okay.
Seasonality will probably be in the $3 million range for.
Q1, compared to Q4 and as Tom mentioned.
In a lot of our revenue most of our revenue is based on as calculated on on a daily basis.
And.
We didnt work through the numbers, we coming into 2019, we estimated about $5 million for Q1 of.
18 of lower sequential net revenue. So it is a it is a significant change and in Q1 because of the fewer days.
And the last thing we first part your question was you know why the the.
The recalibration of other down in the incentive compensation and basically what is we're looking every quarter to get that number right and come into the end of year and recalibrate everything and.
We had to adjust down.
Okay, and then can you elaborate a bit I think you on the equity here today trends or the negative I think it was 76 million and you talked about some international products, maybe that's awesome outflows I guess little more color on that and I think I guess, you said the backlog and I think the activity levels are there.
Our positive so just so if there's anything else to to unpack there. Please.
The.
There was a lumpy redemption. They came out of one of our of one of our Hermes funds and I don't have any more to say on it than that it was over $100 million and.
That was greater than what was the negative and that's why I mentioned is as lumpy, but when you have big customers you get big moves we've discussed that before there is nothing going on in the performance that move was not a performance move.
So it doesn't Oh, you know worry us in terms of future flows and on the forward numbers. The 450 that we talk about fixed income there. There are some institutional type of wins, but we expect those to go into funds and that sometimes happen.
As a as well and that's probably a couple hundred million dollars, but we did not include that in the 450, that's all fixed income.
Okay. Thank you.
Well go next to Michael carrier with Bank of America.
Good morning, Thanks for taking the questions I'm. So maybe the first one just on the the the Hermes Federated like the rebranding and then maybe just going a little bit more.
In detail in particularly on the U.S. side.
When you look at maybe 2020 versus 2019, just like what initiatives, you're maybe already in place you know whether it's by you know the different distribution channels, whether it's through the trust. The banks are the you know the retail your some of the products that were launched.
What are the Salesforce, which which products are they going be focused on any more granularity. You did you try to see that traction starts to pick up you know within you know the USA.
Well, we're very very excited about what now amounts to a broad based family of international products to bring to our U.S. distribution. This includes the products that Tom mentioned from Cleveland, New York products, Pittsburgh products, and London products that now represent a complete.
Ray and part of the effort as I mentioned in our sales meeting next week will be to focus on these products.
Into the future. So that's one.
That's one you know a pretty big push.
Another area that we're going to be making a bet on is our Asia Pac through.
Harriet steel.
Operation inside Hermes and we think that is something that is going to be.
Get some focus it well and as you know on the institutional side. These things are not a these sales are not made and in in a short timeframe. It takes a minimum of a year sometimes.
Ended the second year before you begin to actually when mandates having cloud the ground. It's just the a the timing that's involved.
So those are some of the things internally.
And this wouldn't be for 2020 that we're talking about but internally, we're looking at getting organized the private market area.
We already announced the the completion of the purchase of Emmy PC, which is a real estate development accompany that the pension scheme and Hermes at work on for many years.
We're looking at the the private equity side of it as well.
We've added that people to the infrastructure side.
And we're trying to get that all organized for building into the future.
But as I said, that's not a 2020, that's a adopt more down the road. So those are some of the main thing.
I'd now like to Taiwan.
It's Debbie.
I also mentioned the basically the full integration.
Yes, he analysis into our credit review process, where all of our liquidity product that was something we had been driving toward since the 2018 acquisition and accomplish that in 2019 now its evolutionary not revolutionary it will continue to develop but we have absolutely included.
On the analysts any engagers the information that's coming out of the the Hermes.
The Hermes proprietary model and use that within the qualitative aspects of our credit analysis process for our money market fund.
Okay, and then just quick follow up just on the fixing them side. So in the quarter you saw pretty good strange and then it sounds like you had continuing into 2020 on anything particular, particularly in the quarter just given that the the number was over 1 billion just anything that was more lumpy that you'd call out.
Well on the institutional side, Mike a there there was some good wins on the Multisector side, and so institutional accounts or are by definition.
Lumpy or what they called we also saw a return to strengthen in high yield. So in you know, what's the yield challenges and in in the marketplace.
Hi yield came back into.
A more significant flows.
And we mentioned you know that's continued early into the first part a of Ah of 2020. The total return bond fund so the spread product set of.
That have been responsible for for the inflows ultra shorts for a a meaningful part in the Q4 positive just to correct, they're actually a little bit negative in the first part of a of 2020 and that's really just more more technical analogous to what happens in the money.
Market fund side, where money tends to come in especially late in the year and then go Oh, you can kind of thinking.
As much more like long cash then than the spread products.
That really have driven the inflows on fixed income.
Okay. Thanks, a lot.
Well move next to Bill Katz with Citi.
Okay. Thank you very much taking the question this morning.
Just to spend a little time talking through some of the choppiness on the multi asset any alternative buckets in certain seeing better growth elsewhere sort of wondering what might be going on underneath that are just as we've again.
Well said.
Those sales are.
Slow and take a long time and as you've noticed they the numbers are roughly flat and that's one of the reasons I mentioned that we were looking to.
Get better organized on.
The ownership and ER of those entities, even though we control some of them.
We have to get those things organized first before we.
The side to make big investments into them into the future and that's why I characterized it as getting organized this year with.
Ideas of having input costs on the board next year.
And that's pretty much the theme in in all of those private market I think the.
The multi asset credit product whoever has had good strong positive flows good reflection on the new product and I'd ask sacher to comment on that particular one.
So.
If I may Chris I'll comment just briefly on southern markets and then onto this one on the private market. One I would just remind people that it's a longer sales cycle, because generally speaking to assets remain with us. So many many years to come it's also affect sign come because quite often times the two kinds of additional revenue besides.
The fee revenue, we get a which is the management fee revenue one is performance fees and property funds generally speaking and then a carry fee in private equity funds.
And that means that it's sometimes difficult to look on them on a quarter by quarter or yet, but yeah basis.
For these two reasons if you look at a multi assets.
This is a a capability that we've been movie holding over several years. It's exhibits the same standards of alpha that others have and again just to remind everybody.
The Hermes product offering you effectively is all high monkey, Ohio.
Hi, active share, which means very different from benchmark integrate CSG and has very strong.
Performance fees and that is beginning to come up to assets and that's why we're seeing them flows coming through as we are in other parts of the business.
I'd make one other comment sacra doesn't make any comment like this because of the reason I'm going to say, but we did have 1.6 billion in sales in in private equity, but those are basically a numbers that we already had before where they're just rolling over but it is a positive indicator about the underlying strength of the organization.
[noise], Okay off offline I'm, just trying to track into that outflows you're talking now in your disclosure just one last question just in terms of how you think about your line of different flows a different segments different geography is how do you think about the interplay between net new assets on the low.
Along side of the based long only side of business versus the rates from here.
Well the the fee rate.
Are we haven't had.
Immediate or current or grand dispute patients on those in our plans, especially for this year.
On the institutional side. They are generally individually negotiated as per the disclosures. We've made on the fund side there are the normal.
Uh huh.
Discussions with distributors about sharing and the regular marketplace that is unchanged.
So.
No. We don't we aren't currently dealing with a meaningful reductions in fee rates.
Okay. Thank you.
[noise] [noise] well move next to John down at Evercore.
Good morning. Thank you I Wonder if you could give us a little more for the flavor of the Hermes sale, the discussions with institutional clients and maybe how big an opportunity that could be and if we could start to see where been impact in the second if it 2020.
Well since Sacher was on that road show with the institutions I will let him comment and then I will add.
Thank you. So we have continued to see a strong interest in our products for institutional clients that again to remind everybody before the majority stake was acquired by Federated's, how we already had some monkey clients in the United States. So.
Well, we win big itself is if we were not known but these sales as you well know typically take some time to come through but we've seen a lot of positive reception.
From a fixed income I might surprise some of you, but some to a U.S. small cap and certainly two a month, a STG fund as well.
So we're hopeful that this will begin to come through in in this yeah I'm translates into into assets.
And and I would add a couple of things we are adding to our institutional sales force here up you know, it's like Onesies Twosies.
But it is because we have a lot of confidence in these mandates and at a macro level. One of the reasons is exactly the reason for the combining of the name you bring federated's fiduciary heritage, which is a drive for performance and Alpha Hunter an active manager we.
With Hermes, who shares exactly those views along with a lifetime commitment to responsible investing this is the overall message, we're bringing to the institutions and we think we're able to bring it in a unique way because of the focus on the fiduciary and.
Because of the beauty of the engagements the way Hermes has done it.
And the way Hermes is done if it makes it unique is it is a third party effort. So there is a group that does e. alessi that sends the 40 person team into various companies to get data that looks forward into what is going to happen. In addition.
Taking all the data this backward looking as to how people did do.
And these kinds of things are good messages in the institutional world and if you have the numbers to go along with it we think it makes for an excellent project.
Gotcha, and then not just one on a strategic strategic value dividend seems to be turning in a better direction, but what do you think we are in the sales cycle for that and maybe just some of the environments in the past where youve.
Good for that strategy.
Well in terms of the sales cycles as I've mentioned, we've seen.
The sales continuing to increase in redemptions continuing to decrease and.
So far in January it's a positive flow story part of the reason for that is then continuing.
Low rate environment. This 3.8% distribution your with a growing dividend stream is a very very well.
Viable product and.
Our people a it at least some of the.
Fox from.
You know the marketplace.
Ours. It they are continued interest in this product.
And they are continually interested in the yield.
Some are not willing to jump balls go into the market.
But they like getting the yield to keep them interested so overall the tone, we're finding from the the broker dealer SDMA world is that they're cautiously optimistic and.
That's a good situation for our strategic value dividend.
Great. Thank you very much.
Well move next to Kenneth Lee at RBC capital.
Hi, Thanks for taking my question just one on the Hermes U.S. you touched upon mentioned that you're in the process of hiring new Engagers right now I'm wondering what other further milestones.
Would you expect in the near term and could we potentially see.
Implementation in the U.S. sometime this year. Thanks.
Well the implementation is in the U.S. This year, we've already hired some and there are more on the docket and overall.
My expectation is we'll cross.
We'll go from 877 over a trillion in in ER assets under administration.
In some time frame here in the future I need to put exact date on it.
It's a sackers Leon can be who runs it I'll, let him tell you about it.
So we we already prior to this of course engage with companies in the United States, our commitment to increase lucky engagement capability.
In the U.S. is partly was partly also to service the fund managers within the Pittsburgh in New York on Boston offices, the Federated because our view has always been did they use a fee as GE, which we pioneered from 30 years ago and the use of stewardship, which we pioneered again from 30 years ago, and formalized 15 years ago with them.
Launch of the U.S. theme is in fact, the way in which helps us fine, but Daytona companies and helps us adelson. So this has always been a commitment that at the increase in people in the states engages allows us a deep engagement with a American companies and a better way of servicing our Inc.
Freezing number of U.S. based clients and again to remind people we run you as a and that's different way from others. We run it does that kind of a club where all of our clients decide collectively on the topics that they want to pursue with the companies and the.
Companies, they want to talk to including by the way. The teams that we have you know who act as a as a client so the federated how many seems like to decline to the U.S. and this is different from perhaps others.
Who are trying to enter the stewardship.
Arena by pursuing what they see has the right seems to pursue and all that allows us to focus on companies a in a way of improving the long term performance and that's way actually release.
That's a value creation and wealth creation as a long time. So we all of that we've added more people a there is a a segment of the floor a in Pittsburgh, which is already E. L. S and that's who continue to grow over time, it's something we've been building for 15 years, where the market leaders, we will continue to build.
Right. Thanks, and they just one follow up if I may just on the the money market funds you touched upon that money market fund rates are still favorable compared to some competing products wonder if you could just give us a little further details in terms of the current a competitive landscape. Thanks.
Debbie.
Well I'll take that one deposit rates are still I think last spring bank.
Great deposit rate in that came in at 14 basis point, so I'm not much above where we find work.
It environment I'm wondering if you're a rate environment I'm most of our funds are somewhere on a net yield basis swing one.
No 180 that interest rates went down a win with the Corona virus over the course of the last several weeks and concerns about what that might do from an economic activity perspective, and how the fed may need to react on the bad However, on Wednesday confirmed rates and actually Ray I we are.
Andy RP, which is overnight lending by five basis points said that a beneficial to our product and has made that does but you'll kind of look a little bit more attractive on a fun basis. So I don't back those yields to dropped very much so when you're talking about deposit rate you're talking at lease.
750 basis point advantage over for the most customers in those types of account that receiving at that point.
Great. Thanks.
Well move next to Ken Worthington with JP Morgan.
Good morning.
Just a little cuddy filling in for Ken.
So first the comments right compensation ratio has bounced around a little could you remind us of how you think about the growth of compensation relative to revenue over the long term and more specifically with revenue growth how should we be thinking about at trending over time.
Yeah, well, Tom we don't look at it based on revenue.
We are more.
Granular and the U.S. in terms of how the sales force is.
How compensation is down there and that's based on how sales go and of course, then you go to investment management and and a huge portion of their pay is on 10 incentive is on how performance is done.
Then the operation and that the rest of the non sales and on investment management are more tied to it to an operating income view, so that would have a little bit of revenue look at it but it's certainly more of a bottom line.
Approach.
And.
We don't we don't look at the ratio comp to revenue, we've never calculated that weve never use that in our and our budget process.
We're really doing a a.
Build from ground zero and up.
Okay got it. Thank you and did I hear correctly earlier was 1.6 billion.
Sales in private equity and if so what products are seeing no sales.
We're referring to Hermes.
A press release actually and in November talking about Hermes GP, raising a billion six.
For private equity and and Sacher you might want to comment on that more but essentially the point that Christmas making his business is largely rolling over from other successful vehicles that it's a good indicator of the out of the quality of the results that have been delivered through that Ah correctly that at it.
So the way the top private equity business works is that we raise traunches that go into essentially funds, although they're not funds in the sense that you think about them in the United States, but there in fact private equity funds.
And each traunch Uh huh.
Raises money over say the months' time and then it's close and then the performance is calculated over the next depending on the fund between three and five years, a and then the carries paid out accordingly, and <unk>. This increase was getting run to primarily all of our existing clients were very pleased with.
Performance of our previous funds, which remember when when a private equity if I'm performs you actually give the money back because they're sending underlying assets and that for reinvesting back into our.
Our new funds, which then allows us to gotten invest again and so the cycle starts again and that's typical for private equity cycles and declines Oh widely dispersed, including some major clients, we've got in North America as well.
And we'll its ray just from a reporting standpoint, you won't see the billion six we were not put that in there as a as a new sales. So it's not in the into Q4 number those are commitments going forward and as a soccer indicated they will you know the largely rollover from existing mandates. So so you will see that in the none.
But it's obviously a very positive development.
Just a.
That's a quick clarification I saw the 1.6 like is that mostly re up so it's not new clients come in answered them really rolling back into the new yes.
Yes, yes. Thank you.
I'm, sorry, I don't remember, we make our money in two ways and private equities. One is we're making money obviously on the management fee, but also we make money on the carry on the upside that we create an alpha we create flock lines over the long time.
But different than property west performance fee and slightly over a shorter time horizon, but they both have that basic muddled within it.
Well move next to Robert Lee with KBW.
Great. Thanks, Good morning, guys.
Most my questions were asked but I guess I will ask the inevitable capital management question I mean for snowing, you like to hit on acquisitions dividends and buybacks this with the.
Apparently increased earnings power the of the company kind of coming through a they last quarter. This quarter, you know any subtle changes, particularly maybe in how you're thinking of the the dividend or repurchase part of that because I guess haven't raised the dividend in Wyoming.
Payout ratios I guess trending towards a little bit lower than peer average so how do you think of that.
Well, we certainly don't want this price to give andrew improve that ratio but.
Acquisitions remain on the table and doing all of these other things, which we talked about on capital assets. I mean, we are looking at as all the things I mentioned on the marketing side Im not going to go through them again.
We have some internal things, we're doing on our data management and warehousing and we've accelerated those I, we're putting a a a new CRM in <unk>, we're going with Salesforce for the Federated part of it which Hermes already has that so that'll be put together.
And that that will take a few bucks so.
Internal is is added to that list of the dividends share buyback in acquisitions now in dividends. We always look at that in April and we are well aware of all of the statistics that you're commenting on and we will have a hard you look at that in April on share buybacks, we were.
Up a little bit from our polite activity in the past and we continued to be active on that.
And that's about.
As much as I can give you on on that that a activity.
Okay that was all I had thanks, taking my question.
Well returned to Patrick David and Autonomous research.
Hey, guys. Thanks, a follow up.
I remember sort of shatter last year, you had kind of mentioned that there were some discussions to maybe roll some of the be TPS money that had come out back into other strategies are those discussions ongoing any update on on the potential for somebody to come back in.
Soccer.
Well I jotted I had my views on I had I had a mutual I'm sorry, I'm as I said, we are we had some wrote over of money from advanced but net net we have not decline I said the plan that we agreed with them.
When the majority stake was purchase but we continue to show them all the stuff that we have particularly and money market in fixed income and again there in institutional client indeed expect them to take some time I would repeat what I said I think previously on the schools, which is the following.
As you would expect the net fee basis, then I can that we can charge P to P. S is commensurate with the size, which means as they free capacity in a high alpha in demand funds and we sell the same capacity to new clients our margins actually go up.
Right Okay.
Thank you.
Well no other questions holding I'll turn the conference back to management for any additional or closing comments.
[noise] well that concludes our CLO and we thank you for joining us today.
[noise]. Thank you again, ladies and gentlemen for your participation you may disconnect at this time and have a great Dane.
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