Q3 2020 Federated Hermes Inc Earnings Call
[music] greetings welcome to Federated Hermes third quarter 2020 analyst call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
About your over to your host <unk> President battery.
Federated Investors management company. Thank you you may begin.
Good morning, and welcome.
Leading today's call will be Chris Donahue, Federated, Herbie CEO, and President and Tom Donahue, Chief Financial Officer, and joining us for the QNX our soccer in the Sabby, who is the CEO of the international business of Federated armies.
Debbie Cunningham Chief investment officer for the money market group during today's call. We will make forward looking statements and we want to note that Federated Hermes actual results.
They'll be material may be materially different than the results implied by such statements. We invite you to review the risk disclosures in our FCC filings no assurance can be given as to future results and Federated Hermes assumes no duty to update any of these forward looking statements Chris.
Thank you Ray.
Good morning, all and thank you for listening I will review Federated's Hermes business performance and Tom will comment on our financial results.
We continued to grow and expand our iOS app Federated Hermes engagement activities grants.
During Q3, our staff level of Engagers and other specialists to reach 65 up from 60 at the end of Q2 and our assets under advice reached 1.2 trillion up from 1.1 trillion in the second quarter.
Now looking at our equities business assets closed the quarter at 80 billion up from 77 billion at the end of Q2 as market values continued to recover adding 4.3 billion.
Offset partially by net redemptions of 1.4 billion.
While overall net sales of combined equity funds and separate accounts were negative we.
We saw positive net sales.
Excuse me in a number of strategies.
We had 16 equity funds with net sales in the third quarter led by Kaufmann small cap and the F.D.G. engagement equity use it.
Other funds include global equity E.S.G. impact opportunities International small mid company and global small cap equity.
Using morningstar data for the trailing three years at the end of the third quarter, 24% of our equity funds were in the top four trial and to surge were above median.
Looking at the strategic value dividend strategy. Its objective is to provide a high and growing dividend income stream from high quality companies.
The domestic funds 12 months distribution yield was 4.4%.
Which right in the second percentile of its Morningstar assigned category at the end of the third quarter.
The domestic strategic value dividend strategy had combined mutual fund and SMH outflows of 1.4 billion in the third quarter down from 1.6 billion in the second quarter.
[noise], while recent market characteristics have not favored.
Our low volatility high dividend strategy we.
We believe that our continued focus on the core goal of providing higher than market dividend yield from high quality business assets will resonate with investors over the long term, especially in a low rate environment.
Q4 results through October 20, Threerd show combined fund and actually I may net redemptions at about $190 million.
Now turning to fixed income.
Assets reached another record high of nearly 80 billion at the end of Q3 up.
Up over 6 billion or 9% from Q2.
The third quarter growth was driven by strong net sales of about 5 billion.
Our broad array of solid fixed income strategies were well positioned to meet market demand.
We had 23 fixed income funds with net sales in the third quarter.
The multi sector total return bond and short intermediate total return bond funds combined for about 1.2 billion up Q3's net fund sales.
Ultra short strategies had about 1.1 billion of net fund sales and high yield added just over 400 million of net fund sales core.
Corporate high yield multi sector government and municipal ball bond funds all had net sales as did our fixed income SMH strategies.
Across sectors short duration strategies were in demand and also drove the fixed income separate account net sales.
At quarter end using Morningstar data for the trailing three years, we had a 26% of our fixed income funds in the top four child and 50% were above median.
We began Q4 with about 1.5 billion in net institutional mandates yet to fund mostly in fixed income.
Moving to money markets.
The Q3 asset decrease of 25 billion was mostly from money market funds, which decreased from Q twos at record high and to a lesser extent seasonal declines in separate account assets.
Money market fund asset decreases were attributed to corporate clients using cash to pay down debt or spend on their businesses and to use and and the use of cash by government entities among other factors.
Our money market mutual fund market share, including sub advised funds at quarter end was nearly unchanged from the prior quarter.
8.1%.
[noise], taking a look now at recent asset totals managed assets were approximately 614 billion, including 430 billion in money markets 81 billion in equities 81 billion in fixed income.
18 billion in alternative and 4 billion in multi asset.
Money market mutual fund assets were 322 billion.
Overall, we continue to function well through the challenges of trove it.
Upwards of 95% of our employees are successfully working from home leveraging progress from years of technology investments and strong culture.
We recently communicated that we are delaying a significant return to our office for U.S. employees until mid February.
And our decisions about when to return more employees to our offices will be informed by conditions and not the calendar.
We have emphasized that working together in our office is vital to Federated Hermes culture and it facilitates collaboration allows impromptu conversations and promotes personal interactions that build camaraderie and creativity.
Culture means community collaboration and cooperation.
At its best accomplished in the office in my opinion we.
We would lean on wanting people to come back to the office when its property to do so Tom.
Thank you Chris.
Total revenue for the quarter was up about 4 million from the prior quarter due mainly to higher equity and fixed income assets, which combined to add about 20 million of revenue.
This was partially offset by net money market minimum yield and other waivers and lower money market assets, which combined to reduce revenue by about 18 million.
Recall that in Q2, we saw revenue growth from higher money market assets, partially offset by lower revenue from equity assets, our diversified business mix positioned us.
To grow revenues in varying market conditions against the backdrop of challenging times.
Other factors impacting Q3 revenues compared to the prior quarter included an additional day, which added 4.4 billion and a decrease of $2.9 million in performance fees and carried interest.
Looking at operating expenses comp and related increased 2.6 million from the prior quarter due mainly to higher head count and FX rates and higher benefit and other costs.
The decrease in distribution expense compared to the prior quarter was due to the impact of minimum yield waivers and lower money market assets, which reduced distribution expense by about 18 million.
This was partially offset by an additional day in the quarter and higher equity and fixed income assets.
Other expense income.
Include a $1.1 million revaluation from the contingent purchase price liability from the first quarter Emmy PC acquisition.
Also impacting the other expense line item was a decrease of 1.8 million of expenses from derivatives.
This is from the Hermes hedging their dollars into pounds [noise].
The impact of money fund yield related waivers on operating income in Q3 was 3.8 million.
Based on recent assets and expected yield the impact of these waivers on operating income in Q4 could be about $9 million.
And we think that's about where it will level off mall.
Multiple factors impact waiver levels, including a potential additional stimulus package, which is included in our forecast.
Non operating income decreased from the prior quarter due mainly to.
The lower increase in the value of seed and other investments in the third quarter.
As noted in the press release.
The board approved a $1.27 per share dividend, including a $1 special dividend. We have declared five special dividends for a total of $7.53 per share or about three quarters of a billion dollars in the last 12 years.
We will pay the dividend from cash on hand, and it will be considered an ordinary dividend for tax purposes.
The Q4 dividend payment is expected to reduce Q4 earnings per share by about one and a half cents per share due largely to the exclusion of the dividends paid on unvested restricted shares from net income under the two class method.
Computing earnings per share.
During Q3, we purchased 600 and 867000 shares for $20 million with nearly all of this purchased in the open market.
At the end of the third quarter cash and investments were 437 million.
Of which about 370 million was available to us.
At the end at the end of the quarter was $90 million.
We would like to open the call up for questions now.
Thank you I would like to ask a question. Please press star one on your telephone keypad a confirmation until indicate your line is in the question Gil.
You May proceed star two if he would like to remove your question from the Q.
For participants using speaker equipment, and baby necessary to pick up the handset before pressing the sorry. He is our first question is from Ken Worthington with Jpmorgan. Please proceed.
Hi, good morning.
Regulators and regulatory panels continued to kick around the idea of altering money market fund regulations.
Again in response to the need for fed up programs to support funds post code that.
What are the fixes that are being most talked about and could this round of rules.
Either damage the outlet for prime money market funds or is it more likely that it actually helps the outlooks for prime money market funds.
Thank you Ken.
This is Chris I.
I believe that the thing that's being talked about the most.
Is the restriction on that 30% trigger.
The comments that were made at the FCC of not only require a 30% weekly.
Liquidity level, but then requiring the public notice thereof, and then the consideration by the board and fees engaged.
Acted exactly the way that was predicted namely it cause more problems than it solved.
And there are a lot of ways around that if the FCC wants to keep the trigger fine.
You just don't have to do.
The things that wave a red flag in front of the marketplace and ameliorating. The impact is that 30% is the number one thing.
Thats being discussed.
At this point in our view the money market funds came through this situation much like they did before with a lot of resilience and that therefore, there is no need to two to.
Further diminish.
Prime funds, even though there are some who use them as trading mechanisms in.
In order to preserve their non SIFI status.
And the reason for this is if you take an honest look at stake holders stakeholders include the issuers which include.
Colleges municipalities, all of who need great help.
During cobot and post Cove at times and restricting their ability to get.
Financing on the short end doesn't make a lot of sense.
And you had the users which again includes that same group.
And then you have the other shareholders and we just don't think that it makes a lot of sense to eliminate the spear point of the short term markets.
At this time, so what will happen with regulation I cannot predict I can assure you that we will be in there defending the beauty in efficacy of prime money market funds.
Great. Thank you.
And then you had pretty substantial outflows in money market funds this quarter and pretty strong net sales into fixed income funds. This quarter to what extent is the money that's coming out of cash going into fixed income and really the heart of the question is to what extent can you cross sell or cross market past management.
Clients and really the intermediaries to kind of retain those those dollars coming out of money market funds and get them sort of pointed to federateds fixed income business.
A truly lovely concept that doesn't work and I can't defend and if I could I would we have discovered over the many many decades of being in the money fund business that the money fund and cash determinations by clients are made on the basis of cash, but what happens is because.
You are there with the cash account you can talk to them about the other beautiful.
Options that you have but to be able to to exactly calculate and follow money moving.
From cash into fixed income, we just have never been able to do.
We have separate sales organizations, who coordinate very closely and I think a large part of the.
Sales that we had in this quarter.
Were related to the breadth and quality of the fixed income offerings.
That our clients were able to see and so that you can be sure that the salespeople on the fixed income and equity side.
Use the money market fund as a door opener, it's just very difficult to trace the money.
Great. Thank you very much.
Our next question is from Dan Fannon with Jefferies. Please proceed.
Hi, Thanks, So I wanted to follow up on the fee waiver outlook you highlighted the potential for stimulus in that assumption for the 9 million can you talk about sensitivities, if there isn't stimulus and other kind of assumptions that are embedded in that.
Sure Dan Thanks.
There's a whole lot of assumptions and a you know raise assets mix clients actions.
And then you know you just mentioned the stimulus, which we mentioned, which you know if you track our.
Our forecast surprisingly because of so many factors we've been we've been pretty accurate a base.
Basically.
Our team thinks that there's going to be a stimulus package and the size and the timing matter and as we run through so many factors. We came up with an estimate that was 9 million I guess, if the if the stimulus package doesn't happen, we would run the numbers and get a couple of.
Million more in waivers.
Okay, and then the relationship between the gross and the net with the distribution expense is.
Is there a point at which it becomes more negative to the overall profitability and where are you cap out on the distribution expense offset.
Hey, Dan its ray.
So and embedded in that when you see the numbers roll up in total is a group of.
40 ish funds and multiples of that and share classes and they all have different ratios of distribution revenue and expense and.
To answer your questions, yes in that you know it.
Higher fund fee levels are higher because they have additional distribution revenue and related distribution expense built into the fund and so as you know when it adds and if rates go lower than that.
That mix changes and you have funds that have lower distribution revenue and expense begin to get.
Impacted by waivers and you can you can see that if you look at the.
History of the waivers and as the resulting impact on those line items back in the 092 to 2016 period, but.
It's really a function of the mix of assets again across a pretty.
Wide base of of funds and share classes and that that makes it hard to model and predict.
Okay. Thank you.
Our next question is from Patrick.
Together with autonomous research. Please proceed.
Hi, good morning, everyone.
Could you update us on the progress of kind of the SG application of the the long on the long term business and through that lens any kind of specific anecdotes you can give us some of that transformation actually.
Helping the flow picture for specific strategies as they move kind of transform from non SGT SG, particularly on the equity side. Thanks.
Well Patrick this is Chris once again.
The movement to full integration is in full operation and the theme of it is to be able to legitimately an in depth convince.
Investment people are looking for for mandates or RFP.
That we are authentic and this is not a cosmetic operation.
And so.
We have these charts that we look at that go through each group on three different levels.
From the the initial analysis.
The customization and then the integration with testing in each stage and a bar graphs that show you how we're doing in each group and as we've mentioned before the liquidity group.
That Debbie runs is very very much in the lead on this and has integrated and in fact is.
Now in the process of engaging with some of the G.S. ease.
As part of that effort.
The strategic value fund is also complete on this process.
As there are the high yield as a high yield group and others are proceeding along quite well.
So this remains a commitment now the the way you phrased the question about well when their E.S.G. or 90 SG.
Some of these groups that I've, just mentioned already got high grades on E.S.G., even though they weren't SG integrated and Thats because of the fact that they're really looking at risk and when you look at risk you look at it a lot of different ways. So this enhances it now.
Now in terms of the second part of the question, where you asked about the sales that is.
Very hard to discern because when you integrate into the entire money market franchise.
I don't think you can say Oh, well, we got these wins are those ones from.
The S.G. I will allow Debbie to give you.
Incidental type observations on that but it's very very difficult to track and the same in the in the other areas.
That I've mentioned, but where you do see it is in some of the funds.
That are from our UK operation.
That I mentioned with the positive flows around the globe and.
So that would be another way of looking at it Debbie.
Thanks, Chris from an I. I think probably the reason that we are the most fully integrated group within you know that's the three different sectors that Federated Hermes has to do with the fact that we buy rule to lay seven <unk>, yeah for our money market funds for our mutual funds are required to.
Only deal with issuers that represent minimal credit RASK high quality and they are minimal credit risk. So the nice part we're dealing with the largest companies the largest financial entities in the world on a global basis and as such even though there may be it.
She is from a governance perspective for some of them with regard to the financial services sector is there may be environmental issues for the bps on the exxon's or the world there may be social issues from some of the pharmaceutical companies that were using the fact of the matter is they're the leaders in the industry and we are engaging with them.
To move forward, so that they can move those issues from an industry basis in in a positive direction. So that's kind of our our our modus operandi, if he well within the sector. Some of the incidental observations that we've noted from a co that person that can have a lot to do with firms adopt.
Stability.
One of the issues that we have engaged with whereas with a very large soft drink manufacturer has been their use plastic yet during kobin times back in March and April they actually took several there met their plastic manufacturing lines their modeling line and turn them into.
PCB manufacturer. So they were they were making the phase shields that were being used by health care workers around the world. So similar stories from say, a Walmart and some other retailers to re purpose. There are individuals and honest social basis did not necessarily lay those individuals are.
So you know incidental observations have been good and from a C.G.I.C. standpoint, we've begun conversations with our top five G.S. ease in the country and.
They have not been asked to engage on any types of issues from an E. S. T perspective by any other investor in there in their their their database a and they are excited about the opportunity to start working with battery it on that front.
Thank you, Debbie, but very healthy business.
Before we leave this question I'd like to ask Saccharin Giuseppe from the UK to comment on the equities and how this integration works on his perspective.
Thank you Chris So as as you might recall from previous talks we gave to you in that when we talk about the business in London.
Yes, she has integrated into everything we do and because we have this leads we do see increased flows into years do you see this across the markets in Europe in Europe.
<unk> as a whole.
And increasingly in Asia, but it also allows us to do something else. It allows us through and especially this funds, which have the authenticity to be seen as being true to the market, which goes one step beyond that by that I mean domestic funds. So this is not just on the D. as gene just going once the bill I would highlight for example, the impact.
Which has faced some very strong that's the flows I'd impact something like the high yield as the GE fund that tries to play to the strengths of this division.
And how does it feel that we have been launching so we do see connectivity between integrating its gene being seen as a fantastic and the need to the nuts and fund flows both into mainstream funds, which integrates these fee and then to specialists bombs that actually designs go once it for them to.
Becomes domestically he has fees in addition.
We all thinking of all those which we went to the market and we think we will see strong close to as we go along through this year and the beginning of next.
Awesome. Thanks real quick as a follow up to earlier could you give the quarter to date bond flow number again in the pipeline I missed that.
So the pipeline numbers about a billion and a half.
And that's mostly a fixed.
Fixed income and the quarter to date number four.
Assets is that what the what the first part of the question was.
No not flow like you gave the <unk> Yeah, you gave an equity number right.
I think I missed the bond number.
The bond number quarter to date.
Is about Ah north of 800 million positive.
Okay. Thank you.
Our next question is from Mike carrier with Bank of America. Please proceed.
Hi, good morning, Thanks for taking the questions.
I realize a lot of moving parts June with waivers ordered the operating margin jumped from 27% to 21% granted long term assets were up a healthy amount, but any other key drivers how are you thinking about your the outlook with net profit.
And not just the quarter just as we're heading into the next couple of years.
Yes, Mike the the margin goes up when.
When we lose.
Oh, a revenue number and an expense number that are very close to each other so actually you know it looks like we're smart expense managers.
But it's just the.
The way it works when when we lose revenue and then we lose expense that's close to it and we look like we are really manage that margin well and it did go up so I guess, we're supposed to take credit for that.
And if it goes back the other way yeah. The margin will go back down, which we'll be happy because we'd be earning a little bit more.
Got it okay.
And then Chris just wanted to get your thoughts on M&A you guys have done you can roll ups over time.
But it's been a little bit more activity in the sector.
And just you feel like you know like the firm has enough scale. The areas that you need you don't you are slightly up.
[noise], Mike we are always looking for roll ups and as I like to say, we are a warm and loving home for those so inclined and.
We always have a few of them that are that were looking at so that isn't a question of whether we have enough size or don't have enough size. That's a question of where we can fit it in and do a better job and make a proper deal.
With with the people who want to do the rollout.
In terms of a bigger ones as I've said before on these calls.
We are inclined to focus on.
Working on our collaboration with our associates in the UK and in growing this franchise and in integrating it and when you saw what we did in the beginning of the year.
More or less which was complete the acquisition of the real estate the private.
Equity and the infrastructure aspects of the Hermes business and then you look at the announcement, we made on the E. T F side in order to create and grow a business there.
I think you get a pretty good idea of where we're headed now obviously, we don't have any size and eat the escos were not there but.
But we're looking at a building.
Building this out and [noise].
You know that will be a 2021, when we start filing products and are making a lot more announcements about it.
It makes sense, thanks a lot.
Our next question is from William Katz with Citigroup. Please proceed.
Okay. Thanks, very much for taking the question.
Just coming back to the flows for a moment it looks like the ultrabook at a sort of bounce back a little bit can you sort of step back and talk a little bit about where you see the best opportunity and then how we should think about maybe performance fees will carry rolling through the PD L. as we look out over the next 12 to 24 months.
Sacher I'll, let you handle that one.
[noise] sector I think you're on mute.
Thank you for telling me, Chris sorry about that.
So let me start by talking about carriage fees.
We in the London, Oh, the fifth rig Tommys have two sets of performance in categories. There's a straightforward karaoke, which comes from a private equity business and anyone familiar with private equity businesses would be familiar with how that is depending on the roll up and the sale of underlying assets and we've got a strong history.
Chose that overtime, we do generate these fees and regular basis, but the the lumps as you'd expect when you come to the end of the cycle of any one fund.
That was invested some years before.
The other bit of fees that we have is performance fees for property, which is the one that youve seen stronger this year.
DTC spend to come towards the end stage of development.
Development projects that we've been working on for some time.
Again, if you look through time, they've been reasonably consistent than less lumpy.
Now you would notice I'm, not giving numbers out because I mean, you can't give numbers out what I would say is that the performance fees were particularly strong this year.
From property and we expect this to continue for some time.
But overtime, we would expect the full might seem to be continuing parts off the way in which our proxy investments generates returns as we do within the kinda fees within private equity in terms of ratios obviously, the the property performance fees on it.
<unk> ratio and would continue to be a bigger issue for the time being onto would grow up private equity business model.
Does that kind of answer the question.
I'm sure. When you were just to follow up on that when you look for where you can grow incrementally are there any flagship capital raises or buckets of opportunity you see over the next year or so so so that's a really good question and that's again tells you about the beauty of our property business. So the way to the property business has grown is by finding.
Key stakeholder all key clients, who we formed very long relationships with because the investment tends to be a very large in size.
We are talking about ticket somewhere between 300 and $700 million.
B they tend to be very long in nature. So you're talking about the commitment of typically 15 years in which you guys put both the fees and the revenues and we are in constant discussions with clients and we have some that's once investment listen it's a matter of.
Finding the right project, that's we wanted them to invest with us on so that we can generate the returns that you expect with them. So I. This is without trying to predict anything about the future, but looking at the client base that we have I would imagine for these to continue to manage that is to say these large declines as we fund the projects for them to do it.
So property no profit is different from private equity private equity, we would look to launch more funds in the next couple of years and these funds will raise equity and already we have indications that these would be a attractive offerings to our client base.
Hey, Bill its Ray you had asked about flows as well in this area and that the pickup in the third quarter and from a from a fun standpoint, there were two of the London strategies that had a you know step up in terms of ER net sales and that was the unconstrained credit facility absolute return credit fund.
I don't have a soccer if you have any.
Make any comment on those particular fund strategies.
So yes, absolutely. So that is public so that is a I mean, yes. Okay. There are alternatives, but didn't know and private markets, which is what I concentrated the performance fee on what we've seen is an increase of pickup for funds, which all links all fixed income team.
It's been very successful and these two are an example of that the multi asset credits is seen wide demand in the UK market and we think that's a sports they strongly and that converts into town as well. So this is part and parcel of our marketing on fixed income team. We built a very strong team over the last.
Six years effectively.
With that I mean, with a very strong track records.
Just started taking to the market in a major way over the last eight months. So this is something that you see more of as we go forward.
Okay, and then just a follow up for Tom Thanks, taking the questions I'm, Tom you mentioned and I guess, because you mentioned going to sort of stick it out to work from home to February he talk a little about maybe the non comp trajectory of expenses. It doesn't look like it was particularly depressed this quarter adjusting for your one offs, how should we thinking about maybe the outlook for that as we look out into <unk>.
Quote quote levels normalization next year, perhaps.
[noise] well the most interesting one is the.
TNT, which you see on the.
On the press release, so you know still running at a low level.
And you know, we're talking to the sales force and our budgeting process and when do they think things are going to pick back up and basically they are kind of saying hey, the second half of the year will be a full throttle that their expectation now.
And the first half will be will be a slow maybe a half as much as it normally would be.
But that is just totally dependent on.
On the circumstances with the virus and People's willingness to travel and People's willingness to.
Let us in.
Other you know the rest of the.
The expenses.
No I don't I don't see any.
We're investing in a lot of technology thing and that you know that will continue but I don't see that showing up as outsized outsize things in our in our financial.
Oh office and occupancy that shouldn't it shouldn't change much distribution.
You know, how that's going to flow and I think we've covered that so.
That'll flow with.
Waivers and and our growth or more money markets going out.
Advertising and promotion you know, we we had intentions of doing a lot of things with related to the federate Hermes name change and we got going on that but you know curtailed that.
In terms of.
Cove, it and what was going on but so I think we'll will creep.
Creep back in there and then.
And Chris mentioned, a few few things that we are doing new and soccer mentioned, a few things that were doing new in terms of Ats, which will come along and in 2021 and a number of products in soccer wants to do and then Chris also mentioned early on the iOS and the hiring here and.
In the states of people to go out and engage to make sure that we are doing the iOS the way that Hermes does iOS.
Well, that's a quite run down so.
Thank you.
Okay.
Our next question is from Kenneth Lee with RBC capital markets. Please proceed.
Hi, Thanks for taking my question I'm wondering if you could just share with us your expectations for near term fund flows on the money market fund side, especially when you combine what you're seeing in terms of activity around the corporate and government clients as well as the seasonality impact I think the fourth quarter is typically a strong.
Okay. Thanks.
Debbie your turn.
Sure I'm generally speaking our liquidity products do see inflows at the end of the year that may be mitigated to some degree by lower interest rates and by what was already a huge inflow in the second and part of that and you know the beginning part of that.
Third a third quarter so.
Already a lot of that cash was in our products and may be different types of others. On cash was included you know stimulus cash that's now being utilized for its original purpose sorta flight to quality cash I do think depending upon what happens from an election perspective.
Short term markets don't like change for that matter, you'll see a flight to quality. If there's any kind of contested are questionable. It I issues associated with the election, you'll probably see treasuries go a little bit lower in that interim time here Ed repo go a little bit lower on a rate basis because of that wed flows.
Coming in so demand exceeding.
Supply at that point until we do get some stimulus in the marketplace on the other side of that market with the credit markets from the prime and Muni standpoint, its more than likely that you will see Ah.
You know little bit of spread widening in some outflows if that when in fact be the case, but generally speaking the fourth quarter is usually a strong one for positive flows.
Great I appreciate the color. Thank you very much.
Our next question is from John Dunn with Evercore ISI. Please proceed.
[noise] Pacsun hi.
More in the pipeline you talked about mostly fixed income is the fixed income that's in there similar to what's been flowing now and then maybe has the time to funding change at all and.
Also the equity piece that I'd be interested to hear what.
With that comprised of.
Sure.
So on the fixed income side.
It is similar to what is happening now strong in terms of high yield in particular.
That makes up a good bit of that pipeline and then at the other end of the spectrum.
Spectrum would be short duration.
And and so so we're seeing a yes.
A similar mix to to what's in place now are on the equity.
Side of the equation, that's actually a couple of of the Herbie.
Institutional.
Mandates that they've won that are expected to come in.
And then we have some offsets there we always given that number so the equity number is Ah you know a couple hundred million. It at a couple of hundred million that we expect to to add to that that we know about that's got to go out and I just want to stress on our funding it's always hard to predict a these are.
No wins and a lot of times, we get a range of funding will tend to pick the low end of that range. The timing can vary. It. These are not necessarily a Q4 in flow some of them. We know a will fund on into into into next year.
Got you and then just a little more in any PC, maybe how do you know the turn environment. We're in how it impacts like the push and pull between putting money to work, but also you know.
Usually benefiting from disruption.
Did you say M P C.
<unk>.
Yep that's right.
Yep, well soccer you want to.
Talking about the timing there.
HM might be on mute again.
Sorry about that so the timing is all new clients is hard to predict what I can tell you is the projects that they need to see is engaged with a continued to be developed and handed then and continue to generate income and the reason for that is that if you look at the United Kingdom.
Mpcs involved.
Along with some of our businesses in other towns.
And particularly Oh specialization of regenerating the in the city.
You know the smaller cities in the United Kingdom, and there's been a move towards those partly because there's been a national policy to move out of London. The government was trying to push I'm personally because technology makes it easier and you go away from the very expensive southeast of the United Kingdom, and particularly London as.
As of course, so doesn't that made a bid for projects that we're continuing to if you look at them APC projects. These are multiyear projects that continue to work the pace and in its the question is how does that open the door to attracting clients.
It does but it takes us many years to land one of these large clients. So that all talks with the ongoing we cannot predict when they happen, but when they do like I said at the beginning they tend to be commitments for 15 years on average.
Thanks very much.
And our final question is from Robert Lee with KBW. Please proceed.
Good morning, everyone. Thanks.
Taking questions.
I guess I have a couple of no maybe oh.
I wanted to talk a little bit better strategy. I mean, you talked a couple of times buttons on 2021, and that's maybe jumping the gun but.
You know clearly you see no no Blackwell.
Maybe some others there as you.
You know kind of impacted from demand for E.S.G. strategy. So no given.
Given your registered expertise would be reasonable to assume that's how they're going to be the focus of so your initiatives to try.
Differentiate yourself that way.
Well that will certainly be included.
The overall picture, though is that the active ETF market is maybe in the second inning going into the third.
And.
There are a lot of filings going on on active but the assets are only less than 3% of the total in the entire GTF business and so are our activity is geared around coming up with a handful of strategies next year and probably.
A couple of fixed income and a couple of equity, but behind the curtain and we've got to develop the support the technology.
The strategy and the distribution, which is what we're doing right now.
In order to get to that level and then next following that we'd have a another whole gang of of of of offerings.
More or less in a in a second tranche.
By the time all this happens.
I would suspect that most if not all of those mandates will have been fully integrated any S. G and much the same as a soccer has said on these calls before that in the old days. When you said Hermes you said he SG integration part of the reason for the name change was the reverse.
Transformational merger of Federated such that when you say Federated Hermes are you just say he SG integrated so they would all be part of the whole machinery.
And we think that this puts us in a very good competitive situation for people. So interested because yes, you can engage with some of the companies, but if your passive you're just buying the index because you're buying the index and you're not evaluating the risk reward profile of those underlying companies based on that day.
Data and information you have.
I'm honest and authentic engagement.
Great and maybe the follow up.
Presides Youve talked about getting best in your view as he is key capabilities.
Yes, one thing I asked about kind of your institutional business me your fixed income flows and certainly things.
Pipeline performance generally in fixed income I think its been good for.
A long while and if you look at kind of your fixed income separate accounts to know Thirtyish. Yeah. Just on the 30 billion 30 billion, a nice number compared to some.
Seasonal players out there as much certainly you know much smaller do you feel like there's.
No opportunity or need to kind of revisit some of your maybe institutional marketing or no.
And ER market share that way or is that a lower priority. That's some of the other things that are going on.
Well I I assure you that there are several individuals at Federated Hermes four Mitch that is their top priority and [noise]. So.
So that's.
We're seeing that in RFP activity, and we think that the.
[music].
The numbers that Ray was talking to you about where we have things like high yield integrated and working very rigorously on the I sure cash on that integration is helping us, especially with large mandates from a governmental clients and large pension.
Huh.
That are focused.
On the E.S.G. part of it but.
But another thing to look at.
And this applies across the board for Federated during these times and that is the relationships that have been built habits.
Have enabled us to.
Let the clients understand the quality into its first suffocation of the offerings that are available and that's why.
No we've had $45 billion.
Of sales so far this year now that's a gross number of course, but.
But it's an all time high and that gives us a lot of confidence even during these cope at times that we are able to present those kinds of things to claims now it's a little more difficult trying to get new ones when you're not traveling.
But the ability to do old ones and respond with Ah.
With mechanics, and computers for RFP that still works, but I appreciate your point that are.
Our fixed income.
Institutional money should be bigger than 30 billion and I will pass that message onto our head of sales in the next town.
[laughter].
Fair enough and just one last question I appreciate your patience and I know you don't present business display, but I was just curious Vince.
I get a sense of if you look at flows this quarter or maybe year to date no. We were thinking that some of them that are made no UK business versus you know interruptible Federated. They know it's one team one dream, but just trying to.
Get some sense you know the relative contribution from.
On the Hermes business.
Hello.
Yes.
Yes, Rob it's rate for this particular quarter. The the the flows would have been weighted to the legacy Federated side of the equation, although hermes at causative or.
Net sales on a long term basis, as well, but but for this particular quarter meeting Q3. It came more from the legacy.
Federated side, and we've seen that work both ways.
And a couple of years of of history that we have.
And Rob I would add to that when you use the term Hermes contribution meeting our UK operation.
You cannot underestimate the importance of the E O S data and the methodologies associated which we've covered at length on this call as part of Hermes contribution.
The ecoson planting of.
Federated.
And I would just ask for the noise, it's been picked up here.
The eight grandchildren and I understand the challenge.
[laughter] I used to tell.
And imagine what your Thanksgiving is similar.
Do you like this year with almost no sorry about that.
Thanks for taking my question.
Thanks, Rob.
We have reached I had another question and answer session I would like to turn the conference back over to management for closing remarks.
Thank you Sir that concludes our remarks for today, we thank you all including our youngest participants for joining us today.
Thank you. This concludes today's conference you may disconnect. Your lines at this time and have a great day.
Thank you.
Thanks.
[noise].