Q1 2020 Earnings Call
Greetings and welcome to celebrated its first quarter 2020 hours, calling what kind of [laughter].
All participants are any listen only mode.
Question answer session will follow the formal presentation anyone should require operator systems. During the conference. Please press star zero in the telephone Keybanc. Please note. This conference is being recorded I'll now turn the conference over to your host Raymond J. Handy you may begin.
Thank you and good morning welcome.
Leading todays call will be Chris study here, Federated, Herbie CEO, and President and Tony Good Chief Financial Officer, joining us for the queuing <unk>, our soccer Niseighty from.
Hermes CEO the international business Federated Herman.
Debbie Cunningham Chief investment officer for the money markets.
During today's call, we will make forward looking statements and we wanted a that Federated Hermes actual results may be materially different than the results implied by such statements.
Please review our risk disclosures in our S. You see filings no assurance can be given as to future results Federated Arby's assumes no duty to update any of these forward looking statements Chris.
Thank you Ray and good morning, and welcome to the fed rate at Hermes earnings call.
We recap the first quarter, our thoughts and prayers are with those.
Who have been impacted by the Corona virus in particular, those who have lost loved ones and those recovering from this illness or caring for love Glenn as they recover.
It's important for us to acknowledge those on the front lines, especially our healthcare workers, who worked so hard and at risk to their own help to treat and care, where the many thousands of impacted people buy this virus.
Your efforts are inspiring and we are all truly grateful.
Finally, I want to acknowledge the efforts and resiliency of our own employees all around the world.
Over 95% of our employees are working from Oh, creatively adapting to the new environment and leveraging our technology investment.
[noise] Federated Hermes is fully operational we have maintained high quality service letters levels for our clients and have taken steps to safeguard the health and safety of employees doing these trying times.
The global pandemic has impacted all facets of life, including markets and investing.
We expect that sustainability concerns will continue to grow and prominence as investors navigate ongoing challenging market conditions.
With our iOS engagement business, we represent over one trillion dollars.
Actively managed assets for engagement purposes.
Up from about 877 billion at the end of 2009 club.
We continue to develop and expand this stewardship and engagement business in the U.S.
We have hired several new U.S. based engagers and are working on adding more.
I've Federated Hermes, we are delivering.
Leading yes, G data research and proprietary tool to over 90% of our investment teams, making us a leader in U.S.G. integration and active responsible investing.
We believe that these investment research tools, coupled with engagement insights and our leading position in active stewardship through either Wes.
Our a key differentiator among active managers seeking to deliver long pain term sustainable outperformance.
And this places us among the largest active managers.
Integrated E.S.G. capabilities.
Now looking at our equities business.
Assets reached a record high of nearly 91 billion in mid February.
Closed the quarter at 68 billion.
And we're about 73 billion as of April 29.
For Q1, lower market valuations and the impact of foreign exchange led to over 90% of the decrease in asset.
Well overall net sales of combined equity funds and separate accounts were negative we did see positive net sales in the number of strategies. In fact, we had 12 equity funds with net sales in Q1 led by the Kaufmann small cap.
Hermes global emerging markets.
Hermes SDG engagement.
Hermes global equity E.S.G.
And the large cap Kaufmann fund.
Using morningstar data for the trailing three years at the end of Q1.
And third of our equity funds were in the top quartile and half or above median.
The Federated are emerging market equity fund managed by the Cleveland team that came over as part of the P. and see acquisition in the fourth quarter became a five star fun as ranked by Morningstar during.
The previous quarter.
Looking at the strategic value dividend strategy.
Recall that this objective is to provide a high and growing income stream from high quality companies.
The domestic funds 12 months distribution yield was 5%.
Which ranked in the second percentile of its Morningstar category at the end of the first quarter.
Overall, combined equity fund and SDMA net redemptions quarter to date through April 24.
Were 339 million.
Now turning to fixed income.
Assets reached a record high of 71 billion in mid February closed the quarter at 65 billion and we're at 67 billion as of April 29.
For Q1, lower market valuations and the impact of foreign exchange led to nearly 60% of the decrease in assets.
Bond market conditions changed dramatically mid quarter impacting investments and sales results.
Sure in February we had net sales of bond funds 340 million well in March had significant outflows 2.2 billion in.
In April bond funds, and ESA Amaze returned to a net positive sales of 320 million through April 24.
We saw categories of funds that it produced net sales in the fourth quarter change through net redemptions in the first quarter.
These included high yield and other corporates mortgage back multi sector and me.
At quarter end.
Using morningstar data for the trailing three years, we had four funds, 13% in the top quartile 15 funds, 44% in the top hat.
In a turbulent quarter and the bond market.
Each of our two biggest fund strategies improve their already solid records compared to peers.
The institutional high yield bond fund improved from the top 23% for the trailing three years to the top 18% as of March 30, Onest and remain five stars by Morningstar.
In addition, the total return bond fund increases trailing three year ranking versus peers from top 34% to top 29% for the same period, while moving moving from a three to a forestar ranking by Morningstar.
Turning to private markets.
We completed two acquisitions in the first quarter that helped to better position. This area for long term growth.
In January Hermes acquired M E PC limited from the BT pension scheme.
MAPC is a leading UK commercial real estate developer and asset manager.
This acquisition enhances Hermes real estate proposition.
Adding specialists asset and development management expertise to its existing capabilities.
In particular.
Supports Hermes core strategy, if seeking to create urban regeneration schemes.
Which not only deliver attractive financial returns.
But we'll have a positive impact on the environment and communities in which they are located.
As part of the acquisition Hermes required globally recognized any PC brand, which dates back to 1946.
And MAPC has been associated with many UK real estate developments and the brand will remain in U.S.
In March we completed the acquisition of the remaining interest it was not previously held by Hermes in eight GP ease the private equity and infrastructure manager.
Hi, GP. He has a long record of success, we believe that full ownership as this entity improves our ability to build and execute growth plans.
We are beginning to develop business plans with a view towards expanding ahgps global private equities business and UK focus infrastructure business, including further expansion into the U.S. market overtime.
Now moving to money markets.
Assets increased by about 56 billion or 14% in the first quarter.
A record high of 451 billion, reflecting a flight to safety and turbulent markets and a significant yield advantage compared to average deposit rates.
Money market fund yield also compared favorably to applicable direct market rates and even longer duration securities.
With the fed move to a target range observed at 25 basis points short term yogurts, including those of money market funds decreased over the quarter and are expected to decrease further.
Tom will comment on the impact of minimum yield waivers in Q1, which were not material.
Our money market mutual fund market share, including sub advise funds at the ended the quarter was 8.8% about the same as at the end of 2019.
Taking a look at our most recent available asset totals.
With Federated as of the 29th of April and Hermes as of the 24th of April.
Manage assets were approximately 642 billion.
Including 480 billion in money markets 73 billion in equities 67 billion in fixed income.
18 billion in alternative.
And 4 billion in multi asset.
Money market mutual fund assets included above obviously were 362 billion.
We began the year 2020 was about 850 million in net institutional mandates.
Yet to be funded mostly in fixed income.
Tom.
Thanks, Chris.
The PC and AHGP acquisitions impacted Q1 reported results.
PC results have not been previously included and AHGP results were previously reported as non operating income for the portion owned by Hermes.
The 452 million of acquisition related private market markets assets reported in the press release is from PC.
AHGP had managed assets of 8.3 billion at the end of Q1 HCP assets have been reported in the alternative private markets category and noted as assets managed by an unconsolidated entity since the acquisition of Hermes.
Hermes portion of HCP financial results have been included in operating results since the acquisition of Hermes through February.
Reflecting hermes equity investment.
Beginning in March.
The results of HCP are now fully consolidated and included within the various operating revenue and expense line items.
The two acquisitions added.
About 5.4 million in revenues of which 1.2 million is nonrecurring.
And 3.8 million in operating expenses for Q1, including amortization of intangible assets.
And maybe see results are for the full quarter well its mentioned AHGP. He became consolidated entity effective March 1st.
Total revenue for the quarter.
Is up about 1 million from the prior quarter due mainly to the acquisitions as mentioned and from higher money market assets, which added about 3.4 million.
These increases were partially offset by about 5 million less in revenue from fewer days.
In the quarter and from 1.5 million lower performance fees.
Looking at operating expenses.
Up and related expense increased about 4 million from the prior quarter.
In addition to base pay increases the growth was due mainly to about 2.6 million of acquisition impact.
2.5 million from higher restricted stock and sales bonus expense.
And about 1.2 million from seasonally higher payroll taxes.
These increases were partially offset by lower severance pay of about 2.5 billion.
[music].
As of Q4 included 2.7 million from combining of certain administrative operational sales and investment management teams.
Distribution expense increased about 3 million compared to the prior quarter with about 4 million from higher average money market fund assets, partially offset by a reduction of about 1 million from fewer days in the quarter.
Yes.
Priests in the other operating expense line item.
For Q1 compared to Q4 about three point Sixmillion.
Was due largely to the net impact of revaluing U.S. dollar assets and foreign exchange hedges at Hermes.
At quarter end spot rate.
In Q1. This result, this resulted in net expenses of 700000 compared to a net credit of 1.8 million in Q4.
A variance of 2.5 million.
Amortization expense from the new acquisition added about new acquisitions added about 600000 to Q1.
That is expected to be approximately 1.1 million for fourth quarter both acquisitions.
The impact of money fund yield.
Related waiver fee waivers in Q1 was not material.
Based on recent assets and expected yields.
The impact of these waivers on operating income in Q2 could be about 3 million.
Multiple factors impact.
Wavered levels and we expect these factors and their impact the very.
These factors include changes in fund assets available yields for investments actions by regulators changes in the expense level of funds changes in the mix.
Customer assets changes in distribution fee arrangements with third parties.
Federate Hermes willingness to continue the fee waivers and changes in the extent to which the impact of the waivers.
Is shared by third parties.
With so many volatile factors, it's easy to see the 3 million dollar waiver number changing.
Non operating expense increased by 16 million from Q4.
Seed and other.
Investments decreased in value by about 15.8 million compared to Q fours.
Gain of 3.3 million.
HTP East carry interest was about 4 million lower than the prior quarter.
These decreases were partially offset by 7.5 million gain in the AHGP.
Acquisition.
The 3.9 million change in net income attributable to non controlling interest in subsidiaries.
From Q4 was primarily from the reduction in market value of consolidated funds.
If you look at the seed losses after non controlling interest and after tax they were about nine cents.
Dates GP fair value gain after non controlling interest and after tax was about four cents.
So combined they impacted EPS by about five cents.
Yesterday, the board added 3.5 million shares to our share repurchase programs.
During Q1, we purchased 714000 shares for $16 million with nearly all of this bought in the open market.
We have 3.7 million shares remaining in our authorized share rebuy buyback programs.
At the end of Q1 cash and investments were 381 million.
Of which about 335 million was available to us.
We used approximately $20 million of cash for the PC and AHGP acquisitions.
In March we drew 100 million from our revolving credit facility and this week, we repaid $25 million haven't.
Surely we'd like to now open the call up for questions.
Thank you at this time, we will be conducting a question and answer session. If he would like to ask your question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question Q you may start to if you would like to remove your question from.
Great and may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.
Our first question is from Mike carriers from Bank of America.
Please. Please proceed with your question.
Good morning, and thanks for taking the questions.
First just given the big increase in money market assets, Yes, you are getting back to Europe environment.
Ill provide some color on what is different versus what is similar for fee waivers on this time around just given some of the distribution relationship changes and some of the product changes versus the last time, we were and has there been environment.
Hey, Mike It it's Ray just a couple other differences we've talked before about the mix of assets when you slot them into the expense levels of the various funds that they're in and generally we have.
More of the assets are in the institutionally price products in the 15 to 20 basis point expense cap range as compared to the last cycle and Thats because.
SAP then we had.
We had higher broker dealer.
Sweep assets using money market products and over the past several years brokers have.
Converted a significant portions of that to deposit base sweep models.
And so thats one difference the other difference.
Significant difference would be.
The growth of the last.
Couple of years, it's been weighted to the government funds side as you know the prime products, which were impacted significantly the institutional prime products by the 2014 rule changes that took effect in 2016, and we've had good growth on the prime side, but the proportion.
Of assets in government portfolios would be higher than it would have been.
In the prior cycle.
Okay. Thanks, and then.
Tom just on expenses, you realize very volatile backdrop.
But if you can provide you then any expectations, whether it's on comp or the some of the noncomp items.
Either given kind of and improving backdrop and getting back to work or longer kind of recession recessionary backdrop in areas you can flex. Thanks.
Sure sure Mike.
Yes.
TNT and conferences.
Our.
Happening right now travel entertainment so Q.
You too.
Effect that to be lower the the bonus numbers as you know I've stopped stopped talking about the future on that.
We had.
As I said in my comments.
Higher sales bonus we're happy with that because that's because they had higher sales.
What happens.
This quarter, we'll see.
We also picked up as we mentioned the expenses income from.
From HCP, so they'll show up as higher and we only had one month of it so that will show up as a higher number.
And all the rest of the variable things based on.
Performance and how we're doing.
We'll see what happens in terms of flexibility.
Lot of the thing.
Flex with.
With the market and so we don't have to make draconian take draconian actions.
Ill.
No.
It's a pretty it's a pretty good good set up here.
In terms of controlling and managing our expenses.
Mike This is Chris in terms of your comment about getting back to work.
I have to observe that we are already back to work and I've never stopped being back to work and in fact in the first quarter on the sales side all of the numbers in gross sales ultra shirts, a fixed income and equity were all the highest average monthly gross sales ever which means that we're in the game.
Now we've already talk you about the net.
The next thing I would mention is that.
Theres been an increase in community.
Inside the Salesforce is a recognizes the total team sports has spent a lot more sharing of what works.
And the same has been true on with the relationship with the client the communication loops have been stronger.
And the.
This is the information has been put out by.
The investment people at Federated has been very very well received by the investing community.
I just thought it was important to mentioned those factors.
Yes, I know thats helpful. I, Didnt mean back to work everyone's Oregon.
Just that they've got to more normal operations, but thanks a lot.
Yes.
And our next question is from Ken Worthington from Jpmorgan. Please proceed with your question.
Hi, good morning.
In terms of fee waivers the money market funds are currently in the process it seeing investments mature.
And are being reinvested in securities at prevailing interest rates and yields.
Maybe you can help us.
Better estimate.
Feature fee waivers given the asset size today and the mix of business in current reinvestment rates is it possible for you to give us a range of what the fee waivers are going to look like again, if we just sort of.
Use oh, yeah current stats assets that you know reinvestment rates mix et cetera on because I assume three 3 million. This is not that that steady state fee waiver level.
Ken Ken its rail I'll comment on the waiver ended things in the Debbie can comment on reinvestment in yields and what that.
It looks like going forward in terms of waivers.
As Tom indicated there is there's a lot of potentially a lot of volatility even in coming up with a number for this quarter because.
Rates move around asset composition moves around.
It's not linear you get too.
A point where you're.
Just below a funds just above a funds expense ratio and so you have.
No waivers and then you dropped a couple of basis points and the waiver.
Switch gets turned on it so.
There are so many variables that it's.
Not appropriate for us to try to forecast it out over longer periods of time of course, you know you can look back and what happened over the years, where we did have waivers recognizing differences.
In the asset mix et cetera that.
That does that I pointed out before but debt do you want to comment on how reinvestment is looking.
Going forward.
Certainly right and thanks for the question Ken.
We look at our government products.
As well as our prime products as well is on any products now have positively sloped yield cars like is that right now, which is which is a positive which is which is a good thing.
On the government side, we probably got steepness of anywhere from 15 to 20 basis points, depending upon whether you're looking at treasuries or government agencies fixed or floating.
These are at extremely low levels.
We do believe that that a couple of things could happen there to improve that.
The next month's Encoders to include a huge amount of supply that is in the market from a treasury perspective funding the cares act and other programs.
By side, the fed and treasury.
And more of that to come with a lot of that being centered directly in our space and liquidity space. We also believe that technical adjustment from the fed.
Could be forthcoming I did not occur this week at the Feds meeting.
But we do believe taking the lower bound where the L.R. RP currently sits at zero.
Up to five basis points, where which is where on that that.
Rate still ahead.
Through the last zero rate environment from the Fad and we do believe that to be.
Likely potential all that is beneficial to where.
We are doing business on an overnight basis, obviously, but also where we're reinvesting as securities mature.
On the smaller portion of our asset mix that being prime and municipal.
Have spreads that are anywhere from 50 to 70 basis points, depending upon what like security here looking at fixed or floating.
Commercial paper or different types of short term securities.
He.
So the reinvest there is actually much simpler process and the ability to keep out of labors and keep above that here at rate environment is is simpler.
However, again going back to what Ray mentioned, our mix of assets from a government to non government standpoint. At this point is is heavily skewed toward the government space.
Okay, and maybe as a follow up curious to see.
Key if you think the federal Reserve will act to the recent crisis in terms of implementing new rules or regulations around money market funds.
Clearly the fed has had to step and again and provide support again to money market funds.
After eight.
Said, you know stepped in with sort of new rules are expressing frustration with having to come in and support the money market fund business. So what are your thoughts this time around.
Do we need either new rules to be implemented do we need existing rules to be a while back down because the new rules actually did seem to contribute to just some of the issues. We had this time. So what do you expect to the reaction to be and you know does this.
Damage the.
Ability for money market funds to be a viable structure.
So [noise] money market funds continue to be the eighth wonder the world in my opinion.
And the question you asked of course recurrences drilling days of yesteryear when even back then.
Arguments were not based on what was needed in the marketplace. There were based on political considerations, namely.
That's the fed decide well is really treasury secretary decided to slap insurance on the funds back then when all that was needed was liquidity the industry us in particular, others were clamoring for liquidity and Thats. The role of the fed is liquidity when you look at what's happened recently.
What what happened was they put out trillions of dollars of activity and infinitesimal percentage of that was utilized by money market funds at the beginning in the prime space and once again it was the quest for liquidity, where the fed as it has done on many.
Occasions in the past and with other program.
Isn't charge of making sure that these markets actually work.
In addition, especially on the Prime side, there was a great thirst do get companies that are employing people finance on the short end and money market funds are a wonderful way of doing this and so they approach this with mixed.
Mixed views at various times so to us.
Nothing is needed more on the money market fund side in fact, it would be better if they went back to allowing the money the prime money funds to I have a one dollar net asset value and then you could use them in suite products and increase the financing for corporations.
And on the munis and on the municipal side, there's a huge to do going on now about financing municipalities and local governments and one of the best ways to do this on the short side is both to allow them to invest in a prime funds and to allow them to issue into money market funds on the municipal side.
So to me the money market funds continued to be a beautiful viable system and they are not need of any other attention.
Great. Thanks very much.
And our next question from Patrick that it from Autonomous Research. Please proceed with your question.
Hey, good morning, how are you.
So it sounds like there was some good growth in the U.S. assets.
In the quarter could you kind of update us on how to think about the economics of that growth.
And you mentioned you know beefing up the U.S. Salesforce could you could you give us some color around what the mix between us and non U.S. clients is okay. I will I will talk a little little bit about the concept and then.
Soccer will fill in on on that breakdown that you're looking for.
The Ito as is basically our way of showing that engagement really works and yes, it's great to be it a trillion and that growth is important. It is also important to note that we were able to.
Review over 1000 companies on this engagement basis. This is in addition to what everybody does on the analysts side in terms of contacting companies and the whole point of all of this is too.
Come back to that point, we made earlier, namely that.
It's it's our belief that.
Sustainable investing is going to be the most helpful thing in terms of long term growth I'll, let sacher comment on the other aspects of iOS.
Thank you very much so it's just too.
To recap.
We do two functions.
One is we have some clients gulp investments in indices.
As long as revenue performance indices, and they want to engage actively on divesting told the bend the cost of them and that creates a similar wells over the long term they will have the need for.
Services. The fact that we've done overturned and makes us the largest active stewards in the in the playbook and this is a growing segment of the market in terms of splits between North America and the rest of the world roughly speaking.
60% all glasses based out of North America, and the rest of spreads from around the world and that's not just true, but also from emerging markets and from developed Asia and museum insulin, so wide and growing asset base.
It's in demand in Europe, obviously, because when the longest but there's been increase demand elsewhere, particularly in Asia and squarely coming to North America and of course fundamentally it gives us what's the cost savings.
A stronger and better insight.
Which added to all he has geometrics allows us to add more fundamental data to all still picking up into Jay creates performance of the long term.
Patrick.
This is Tom on the on the economics of it.
We are we're looking at.
Yes, as a as a growth business and if you talk to to our investment people, particularly John Fischer.
When we were discussing the acquisition Hermes that was is number one.
Reason for being interested in.
Purchasing Hermes was because the ability to get the information.
From iOS in to help our portfolio managers make better decisions and get better performance in our funds.
Got it thank you.
My follow up on the money funds side.
Could you breakout the growth quarter to date between prime and Gabi, because I do think prime flows have recovered meaningfully from March.
And then more broadly maybe for Debbie if there is there any sense of how much of the growth. We're seeing broadly and then industry is being driven by kind of bank line draws a corporates versus investors parking cash on the sidelines.
Patrick just to comment on the on on the quarter to date portion.
The Uh huh.
From March.
31st the a the and this is just the money funds. So putting the separate account side are off to the side or the government funds are up about a 22 billion and the prime funds are up about a 3 billion.
The beauties are up a little over a billion. So again thats just within that to a seven money market mutual funds of course, the biggest part of business.
And Patrick as far as the growth in assets Cowen the diversification of the underlying client I don't believe very much is actually good CIT Bank line drives we've been asking that question and our answers that we've been getting have been rezoning knows.
The diversification of the flows is pretty substantial it's it's a corporate it's financials non financials. It is the you know that the institutional as well as a retail side.
If universities its various other municipal entities.
Its different types of trust account through the banking system. So, it's really pretty diversified and I don't believe much at all can be attributed to the drawdown in bank lines that has been occurring I start from first important right.
Thanks.
And our next question is from Dan Salmon from Jefferies. Please proceed with your question.
Hi, Thanks. My question is back on fee waivers and I understand all the moving parts in terms of trying to project.
What they could be but I guess, the threemillion that youre assuming is that based on you at levels that you gave.
The 480 billion or just trying to get a sense of what the 3 million incorporates that we.
I understand how to think about maybe prospectively from that.
Yeah, we're saying its its current assets.
And our teams.
Expectation on rates for the next quarter.
Without asset growth without further asset growth.
And then just a on the asset part where we're looking at the funds or not the separate accounts. So it would be off of the.
One portion the approximately 362 billion.
Most recent total.
Great and just on the forward projections are based on the curve and what those the kind of incremental yields that were cited before or you said from expectations.
You guys might differ from that.
No no we're going with the debbie's teams forecast so that if you want to.
Expand on that go ahead.
Certain certainly we're forecasting a continuation of positive yield curves and all sectors.
We are thinking that on the government side, we can see a backup Bob maybe collyn.
$50 five five to 10 basis points due to supply.
And we're contemplating that I, we could get an extra five basis points and overnights at some point its does that makes that technical adjustment that I mentioned with regard to RP.
So those those are all on expectations that are built into our forecast at this point.
Great. Thank you.
Next question is from Robert.
Thank you Doug. Please proceed with your question.
Great. Good morning. Thanks for taking my question is no everyone that families that are going okay. In this environment.
Maybe back to money funds I'm just curious.
Maybe view Debbie.
I mean, how sticky do you think some of the these assets will be just as yields come down on typically government bonds and spread too.
Thanks deposits.
No.
Has now substantially mean need you.
Since the.
Some amount of it you know.
Could revert back to.
The banking system.
In coming quarters can get a sense of that.
Sure on even as the yields on our products come down a they're still above what is available for the for the most part and on the on the bank deposit side. Those rates have also been coming down on they follow the market down much fashion and.
They follow interest rate that.
And as far as.
You know that the expectation on kicking ass.
When I mentioned before on growth in assets has come in a very diversified way that generally results in more stickiness of those assets staying around it and it's been a mix of existing customers as well as new customers new customers that are diversifying away from either the.
The current providers that they have in the mutual fund business or diversifying away from other competing products and into that that money fund business. Then in either case I think that diversification. It again adds to that not likely sticky nature of those assets. The other thing that I would mention.
One investors are comfortable.
Moving a portion of their liquidity assets into money market fund. The experience is generally one that that is good and substantial they achieve you know daily liquidity at par really on pretty much a moment's notice for both purchases and redemptions, if they want to add to their asset mix. They.
Hey, purchase and subscribed until fun and that's taken if they want to redeem we provide them back what their liquidity immediately and so I think that on that.
Liquidity on a constant basis is really something that is noted by investors. It was noted in the first quarter. It continues to be noted in the second quarter and basically receiving that at par with a market return is what they're continuing to look for.
Let me, let me add that if you remember our charge was we've been using.
Since 98.
Well.
It seems to happens when you get these run ups and assets, yes. The top of the hump may come off that you end up with higher highs.
And thereby lower lows over many decades of this type of activity and a that's you know that happened in Orlando nine has happened earlier in the and the in in the two thousands and it happened back when we were all children. So we expect that kind of a chart.
To happen, even though things are obviously different.
I appreciate that and maybe the.
Quick follow up.
Understanding that Hermes and the US business in particular are kind of investing for growth contributing to other things but.
Help us understand how hung itself, maybe contributes to the bottom overall to the bottom line I know, it's obviously when you acquired it was.
Lower margin business.
I mean, you owns 60% of about 100%. So just trying to get a sense of that part of business.
Proceeds and pays how that kind of flows through to.
To to you at the bottom line.
Well.
The first thing I would mention is this is the whole concept of the combination. This wrapped up in this name change is the real message and branding and yes, there will be many many many points under that but the main thing is that you have to really strong investment management firms that are combining.
To two cepheid into the future with success, so you take out.
The U.S. his view of this.
Well, we had a great response from clients as our new funds.
And this was based on Hermes successful strategies. So these funds were over 70 million at the end of the first quarter and about 44 million of that was externally sourced by the subtraction method the rest receipt asset.
And.
We're evaluating other launches.
And were working on our first SDMA product using our Hermes strategy and as I've talked about many times.
We have begun to run the traps on the institutional side with many of Hermes.
Mandates. So this is one whole package of activities.
And.
The other thing I would I would.
Hasten to mention is that.
The enthusiasm of the Salesforce for.
Now, having a complete array of international type products. When you combine the Hermes activities with the Cleveland activities with the other international funds that we had managed out of our New York Office, we have a real excellent compliment our family of of nine funds.
Yes, Chris Thats going to add in the you know the recent Emmy PC brings a lot of exciting things to soccer and the real estate team.
The which Chris mentioned the AHGP.
Getting.
So total control of that and to be able to commit to growth. There is really exciting in terms of economics from the transaction you know remember.
Hermes got hit on the emerging market.
Front.
Not too long after the deal and so.
That is decreased their revenues, but sacher manages the business.
Holistically and as adjusted things right.
Especially through the whole acquisition and we you know again like what Chris said, we changed the name of the company to Federate Hermes we couldn't be.
More excited about it.
Hi.
Since this is both about the public kind of international just no doubts about giving a flavor.
So the first thing I'd say is done let's makes up the Pos business with the rest of the women's business.
The Iot business does have a margin, but in the growth phase in fact investing in professionals worried gauges. So that margins gets erode the somewhat but in fact, you bring it back over time, but the key impact of that business as Bill said by Chris and all those is then side gives the fund managers, which allows it to create performance which allows.
More clubs instead, the phones that actually.
The new high revenue come to the rest of the business.
We ended the quarter three times internationally with about 33 billion.
Mr pounds of assets under management say on the exchange rates is just over 41 billion Boes you look at the composition of this and without giving anything away. Most of it is very high active share like all of it is very high active share specialists performance related.
And you would expect us to be halt taking on those sort of margins that you would associate with such high margin business, a part of market business.
Is the same.
Payment is different to what seems to the concept sometimes mention of carriers and of course.
Got it comes when the performance is that the margins. If you add the carry plus the fees plus performance fees is what you'd expect from long term creation of alpha.
So notwithstanding the size, but the weighted average international.
In the space, which is in fact, the one that you'd expect to have the margins associated with higher for <unk>.
On the downside if you like it is also in the space, which is very good into movements into markets because it is equity and fixed income I'm, leaving aside from the markets. So of course as gyrations has probably the two that we sold with emerging markets.
Soon after the acquisition, but again, we manage the business as a whole we're Medicaid dynamic need to protect our margins and were manager to continue to grow our business.
The point that I think we'll try and both of us to emphasize here.
This acquisition was never just about acquiring the assets will the cells. This acquisition was a path acquiring two things the know how which has been transformed now to our colleagues in Pittsburgh that's allowed us combined to enhance our returns a more importantly, it allows us to become the lead in water.
Can you may begin to do the most exciting growth.
Part of the market for the next level, yes, that's what we see and by the fact that all the other major asset managers are trying to enter into this fair, which in fact I would claim we still not created amongst the very handy pioneers within the skin.
So.
It is Uh huh.
Exciting and total heiko.
Certain business income into has it which is a site.
Thanks for taking my questions. Appreciate the full answer on day, one space safety health.
Our next question is from Bill Katz from Citigroup. Please proceed with your question.
Okay. Thanks, very much so just come back to many markets are starting to stay on this I'm just little a trying to keep over the math.
You walk through what the average fee rate might be a for the government's versus the prime what the incremental reinvestment rate is I'm, sorry, I'm, just not falling or the math I apologize.
So bill the.
Ah fee rates across the us all of the money markets are a a little under.
Last quarter were a little bit under eight basis points on for advisory fees and there are not or you know meaningful differences between the categories, we don't really price of funds.
In that manner.
So that's the average across.
Ah Ah all types of of money funds out.
In terms of.
Fund yields Debbie you could comment on that.
Sure, maybe just to add a little bit of a different bent to at most of our product are running a barbelled fashion, where we have a substantial amount in either floating rate are very short term overnight to one week type of paper and then we offset that from a weighted average maturity.
Target perspective, you know out in that the six to nine to 12 month sector for fixed rate purchases. So generally speaking overnight rates at this point are anywhere from you know to that 10 basis points, depending how much sector you're looking at.
And Ah you know one month rates are probably in the neighborhood of.
Seven to 30 ish type <unk> type of rate when you go out to that 12 months sector on the curve, which would be that apart, where we're adding incremental incremental basis points and yield to the products.
In the Treasury space right now you're at 15 or so basis points. We think that's been in high is 25 in the last several weeks and we think it can get back there again with the additional supply.
From the market place.
In Treasury Securities and then you know for Prime type Securities you're looking at somewhere in the neighborhood of 70 basis points are so 70 to 80 basis points.
We don't expect that tend to backup in fact, if anything that my contract a little bit but it's the mixture of those short term you know overnight to one month type of UBS securities in the front end at the bar mouth.
And you know, where we think we might get an additional five basis points in RP I joined us at some point, it's not again, but we think it's it's potentially likely and then the current I, you know curve and expectations for that curve on the long end of the bar amount.
Six 912 months that are getting us to the approximate yields that we think we will get to from our under lying portfolio standpoint, and then what the resulting amount of labor that night I forget it.
Okay. That's helpful. Thank you very much for that and then just second question a little bit of multiple I apologize.
Because she would give us some flows for equities into the new quarter.
So under what conditions do you think that the equity business could actually bounce back to positive I certainly appreciate the acute negative in the first quarter, but mark Smith pretty robust into the new quarter, you know how much of a lead lag do you think you need and then what's the existing strategic value a win and maybe what how would those flows in both the first quarter in April.
Thank you.
Okay over overall I'll do all the overall equity a situation rail give you the stats on the strategic value recent [noise].
The equity business is now really a function of how people respond.
To getting back to work and open up the economy and all of those things. So is the giant macros are out there. However, what I would note from our Salesforce is that the clients and the salespeople have balance very well.
Working from home.
And.
They very much appreciate the thought leadership that we're getting and what we're seeing that don't go right. In this up is a big Harry trend is the beauty of high active share active management selecting winners and losers in portfolios and so some of the clients are actually.
Starting to look at their passive positions and looking towards active management and we see that when you see people are looking at the Kauffman entries, which are high active share picked good companies.
And then.
You know you see or other things as well you see people coming into high yield.
And you see people looking at a high dividend on strategic value.
And so you see people starting to tip toe in as they have done in the past and so both high yield and strategic value in some way can be viewed as a tipping into.
The market, but we are really able to.
Predict when that will happen, we rely rather on the franchise for all seasons and offering solutions to where our.
10000 clients are and how they can help their clients non specific answer to the strategic value flows.
So the asset level for the domestic strategy, which is where the bulk of the assets are a recent total as of so you know few days ago.
Would've been about 25 billion.
Thats a about two thirds and they are in the SDMA and one third and the and the fund and the.
The redemptions net redemptions in the through April 24, or a little over 200 million.
<unk> for the whole strategy.
And that compares to a little under 400 million for the month of March.
Recognizing april's closed and we will have.
We tend to have some of the models that report late in the month, but.
200 versus 400 for March and I would point out the for the month of February a we're very close to breakeven the outflows were a little over 30 million.
So you can see the.
Dramatic impact.
On this strategy and really across many parts of the industry for March or less so in April.
Thank you very much.
Yeah.
Our next question is from John Dunn from Evercore ISI. Please proceed with your question.
Good morning, just a quick follow up on Hermes, maybe could you just give anymore color on that where we are in.
Development or the institutional sales cycle for Hermes.
In the U.S.
[noise], Okay. The [noise].
This sales cycle is an 18 month sales cycle and.
Corona time is not helpful to it.
There are still.
We still get RF fees, and there's still that active activity going on that put a little paused in it.
But.
We are seeing a lot of good interest in it and expect a big things out of it one solve this marketplace Oh sat down and.
I'd ask soccer or to put other color on it.
Sure. So if you're looking at the cycle outside of the states, which is the one that citizens international has some comfortable effectively we've been roughly running.
Just a just about and you take positions so fall.
And we have judging by the number of other fees that were putting up a person's which all over 100 I would say that the likelihood is we'll see some more money coming in and this goes back to what Chris said trucks at the beginning.
This period of working from home has been very productive, yes, we have not been able to travel remember we have a wide units and it's probably not just in Europe, but also in Asia. We have offices that too if you remember animal stay there, but we are in fact proving assets from the we've done that buys as you know just by contacting our client base and potential clients by phones are making.
Presentations on phone.
To give you. An example, we on boarded the major time this morning.
Which is an interesting sort of taken all business I think that's all sales cycle.
Has so far be no right the key questionnaires.
We need to travel to be able to continue to.
Probably a prospect for new clubs and though comes down to when does the looked on reduce enough to allow business travel.
That would have to wait and see but the growth potential both here and in North America is huge why because these are products that are better than type old way from high yield to equities and to private markets the old alpha generating Gulf to fees and costs and that's what makes sense for investors.
Hum and as Chris has.
It's not just one type of.
Strategy, but a franchise full seasons and investment then best as we'll come back to market. The question is how quickly can we go out and prospects a more to add to the ones, we're talking to buy phones and by remote what.
I hope that answers the question.
Yeah, I got it and then just thinking about smaller money market players and maybe opportunity for you guys.
Environment like that this is it just tougher with your and waivers or is it that everyone's getting assets and people realize maybe it's a good yeah. Good business to have even if your small or <unk> crude crude your benefit.
Well over overtime, what we have seen is it there's never been an immediate catalyst.
That causes people, who don't have a whole lot of assets to throw in the top as I said on these calls before if you have control over the redemption you can run a small money fund and that's a that's a that's a fine thing because you're not going to get crushed on the redemption side.
If you look at these statistics.
The top 25 money market fund purveyors have over 90% of the assets.
And I think there are maybe 55 or so people listed who have money funds.
And the ebb and flow of that is a constant.
Look back on our part for those who wish to two to find or what I call, a warm and loving home on the money market fund side.
And periodically there are things that cause.
The company's to do it the CFO gets a look at as the CEO takes a different strategy things change.
And so to us the bottom half of that charges always available for acquisition purposes, and then periodically some of the bigger ones decides they want to move into different direction.
This is debbie just to add color to that in the context.
Value add on and in money market land that may only be a basis point or two but it's incrementally valuable to be able to garner AMPU extra basis points in the products that you're choosing for your liquidity and your cash and when you're a larger player you're able to find different.
On structures and different Counterparties.
Maybe from a repo perspective that give you an extra one or two basis points or that give you extra supply you're able to.
Review that structures on the asset backed commercial paper that again, you know smaller players may not have the credit analyst the staffing to be able to undertake that is and the extra one or two basis points that you're getting in others on structures along with the high quality that comes along with them is valuable to the underlying clients.
So side definitely has some advantages in that no not at this aspect of the market.
Very helpful. Thank you.
And next question is from Kinda gleaned from RBC capital markets. Please proceed with your question.
Hi, Good morning, Thanks for taking my question just a one on the minimum yield waivers.
Wondering if there's been any initial discussions on potential cost sharing of the impact with distribution partners.
And whether you would expect a similar kind of percentage of cost sharing as a historical thanks.
The candidates rate so.
We are proceeding in the same matter that we did a with a minimum of a yield fee waivers a in the prior cycle and that is at the fund level and are looking at the proportion of the revenue that goes to the intermediary compared to two are advised.
Every phase and that ratio essentially determines the a the sharing of Ah of any waivers that are necessary to keep a keep the yields at a at least a zero.
Great. That's helpful and just one follow up if I might just given the be announcements of the transactions. The M. P C and D. H D P.
I wonder if there's any other update around the outlook or time frames for potentially reorganizing other controlling structures of 'em somebody other youre infrastructure funds with Hermes. Thanks.
[noise] I Didnt follow that last last part of your question Ken restructuring what.
Oh, just reorganizing somebody comes tolling structure is around some of the other private equity or infrastructure, a GP so within Hermes.
Okay. So the ownership the key thing that happened here was the ownership that we did not have we now have.
And so all of those things underneath.
The other private markets.
Have that ownership structure now if you're talking about the individual funds.
As we've mentioned before the AHGP, we raised a bunch of money from existing clients over $1 billion. That's proceeding we're looking at the various parts of the infrastructure.
In terms of how the structure that for growth for the future and.
If if sacher chooses to Oh pine on what else might be going over there. He is welcome to.
Thank you. So we had a very successful closing first soft because you know part direct.
Lending product.
In the middle of the current device, which was I think a great achievement for our sales team led by higher it seems that was very good we are in negotiations.
So with a large institutional clients.
For a large mandate to do with.
He property.
Lending and equity generating income both for no that's.
The negotiations, but it does have the potential whether that particular won't come through and <unk>, but it shows you that there's the potential there but in terms of restructuring.
I think would be tidy up a bit ownership both of the small parcel. The HCP that was not owned by the group that had been sides of the top off of a whole that allows them to invest more in sales and concentrate on distributing that's that's to say the private equity business, particularly in North America entitled to bring our property developer.
Expertise and business to fulfill back as well.
That's sort of gives you an idea I'm also as part of the thank you.
Very helpful. Thank you very much and hope everyone stay safe.
Thank you.
And we have reached the end of the question answer session and I'll now turn the call back over to Raymond James Handy for any closing remarks.
Well, thank you very much for joining us today and.
We wish you a safe and stay safe and stay healthy. Thank you.
This concludes today's conference you may disconnect your lines [noise].
Thank you for your participation.
[noise].