Q4 2020 Federated Hermes Inc Earnings Call

[music].

Greetings and welcome to the athlete Jai fourth quarter 2020 analyst call and webcast. At this time all participants are in a listen only mode. The 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.

I'll now turn the conference over to your host Ray Hanley President of Federated Investors Management Company you may begin.

Thank you and good morning, leading today's call will be Chris Donahue, CEO, and president of Federated, Hermes and Tom Donahue, Chief Financial Officer, and joining us for the Q&A are soccer and the <unk>. The CEO of the international business of Federated Hermes and Debbie Cunningham, the Chief investment officer for money markets.

During today's call we may make forward looking statements and we want to note. The Federated Hermes actual results may be materially different than the results implied by such statements. We invite you to review the risk disclosures in our SEC filings no assurance can be given as the future results and Federated Hermes assumes no duty to update.

Any of these forward looking statements Chris.

Thank you Ray good morning, all.

I will review of Federated Hermes business performance and Tom will comment on our financial results.

We continue to grow and expand our Eos at Federated Hermes <unk> engagement activities.

At year end, our staff of engages and other specialists.

Reached 67% up from 49 at the beginning of last year.

Assets under advice reached over 1.3 trillion up from 877 billion at the beginning of last year and Schacher may have some more interesting news on this subject later in the call.

Total long term assets under management closed the year at a record level of nearly 200 billion.

Equity managed assets reached a record high of about 92 billion up from $80 billion at the end of Q3 driven by market value gains.

And lower net redemptions.

And net sales, which were positive at nearly $800 million.

Equity gross sales increased 34% from Q3.

Driving a two thirds of reduction in net redemptions.

We saw positive net sales in 19 fund strategies in the fourth quarter led by Kaufmann small cap.

Global emerging markets.

And the STG engagement equity UCITS fund.

Others with positive flows included.

Global equity ESG impact of opportunities.

In the U S smid product.

Using morningstar data for the trailing three years at the end of the year, 23% of our funds were in the top quartile and 61% were above median.

Turning now to fixed income.

Assets three another record level.

Of $84 billion at the end of the year.

Up nearly $5 billion of 6% from the third quarter and up $15 billion or 22% for the entire year.

The fourth quarter growth was again driven by strong net sales of $3 billion.

Our broad array of solid fixed income strategies was well positioned to meet market demand.

We had 22 fixed income funds with net sales in the fourth quarter.

Fourth quarter net sales leaders were ultrashort strategies was about $1 3 billion high yield with just over $600 million.

And the multi sector total return bond and short intermediate total return bond funds, which combined for about $600 million.

Corporate high yield mortgage backed multi sector and municipal bond funds all had net sales as did our fixed income SMA strategies.

Which grew $136 million to reach one 4 billion in assets under management.

Across sectors short duration strategies were in demand fixed income separate account net sales were led by high yield mandates.

At year end using Morningstar data for the trailing three years we.

We had 29% of our funds in the top quartile and 50% were above median.

We began 2021 with about $500 million in net institutional mandates yet to fund.

Moving to the money markets.

The fourth quarter asset decrease reflected lower fund assets of about 24 billion.

Largely offset by higher separate account assets of about $12 billion.

Year end money fund assets were down about.

43 billion from mid 2020 peak.

And up about $15 billion from the prior year end.

As we have experienced in past cycles, our money market business has reached higher highs and higher lows once again.

Our money market mutual fund share, including sub advised funds at quarter end was at about seven 8%.

Down from the prior quarter share of eight 1%.

Taking a look now at recent asset totals.

Managed assets were approximately $621 billion.

Including 416 billion in money markets.

95 billion in equities.

87 billion in fixed income.

$19 billion in alternative.

$4 billion in multi asset.

Money market mutual fund assets were $290 billion.

As of now we are planning for the stage return of more employees to our offices.

While we expect to begin this process in the coming months.

The decision about where the return more employees to our offices will be informed by the conditions and not by the calendar with that I turn it over to Tom for the financials.

Yes.

Okay, Chris Thank you.

Total revenue for the quarter was about the same as in the prior quarter as growth in revenue related to long term assets, including equity fixed income private markets and performance fees and carried interest was offset by higher money market fund waivers and the impact.

Of lower money market assets.

Again, showing our significant value of our diversified business mix.

Q4 revenue included $11 2 million in combined performance fees and carried interest.

<unk> to $5 7 million in the third quarter.

Over the last five years, Inc.

Moving the period preceding the 2018 Hermes acquisition.

Annual performance fees range from about 7 million to $23 million and averaged about $11 million.

Annual carried interest range from about 3 million to $14 million and averaged about $7 million.

But we still are unable to project these items from future periods.

Looking at operating expenses, the increase in compensation and related from the prior quarter was due mainly to higher incentive comp expense of $5 9 million.

And expenses associated with unused vacation time of.

$4 million.

The decrease in distribution expense compared to the prior quarter was due mainly to the impact of minimum yield waivers and lower money market assets, which reduced distribution expense by about $15 million. This was partially offset by the impact of higher equity assets.

Office and occupancy expense for Q4 included a nonrecurring lease incentive gain of about $5 million.

The impact of the money fund minimum yield related fee waivers on operating income in Q4 was $8 7 million.

Based on recent assets and expected yields the impact of these waivers on operating income in Q1 could be about $14 million.

The increase reflects primarily lower yields than previously expected.

Multiple factors that are difficult to predict will continue to impact.

The waiver levels.

Non operating income increased from the prior quarter due mainly to the increase in the value of investments and consolidated funds compared to Q3.

The $5 2 million increase from the prior quarter and net income attributable to non controlling interest in subsidiaries.

Was from higher NCI related to Hermes and consolidated funds.

The Q4 dividend payment of $1 27 per share, including the $1 of special dividend reduced Q4, EPS by about <unk> per share due to the exclusion of the dividends paid on Unvested restricted shares from net income under the two class method.

Of computing earnings per share.

During Q4, we purchased approximately 516000 shares for $14 million.

With nearly all of this bought in the open market.

<unk>, we would like to open the call up for questions now.

Sure at this time, we will be conducting a question and answer.

If you would like to ask the question. Please press star one on your total.

The compensation of <unk>.

Your line is in the questions.

You mean price start to like to remove your question from Keith.

The participants using speaker equipment.

The necessary to pick up your financing.

Sorry.

One moment.

Pull for questions.

And our first question is from Ken Worthington with JP Morgan Police force.

Which of your question.

Hi, good morning, and thank you.

I'm not sure of it debuts on the call if she is.

Debbie can you talk about the repo market and what's happening there we've seen yields really come in there's a.

There's been a lot of chatter about the the outlook for repo. So what is your view on repo how big of a part of the money market Fund investments right now our repo and all of their alternatives in the near term if the repo market continues to be a I'll call. It uneven.

Sure Ken this is Debbie.

With regard to range.

Yes.

We're currently in somewhere.

The seven basis.

Point range hit as low as two a treasury.

Treasury repo basis earlier, this week and in.

Late afternoon, Denmark at various times last week was actually trading negative no. We didnt participate in any of that.

And a small portion of <unk>.

Hey flow, but nonetheless, it was a negative territory.

That's driven by.

A couple of things number one, namely the huge amount of.

Cash that needs to be put to work in the short end.

And thankfully, we do have a fairly good supply of.

Treasury and mortgage backed securities. However, it hasn't grown much stimulus as you know did not come the second round until the end of the pool.

Fourth quarter and in addition to that that that that amount.

Stimulus that was passed in what's been funded so far has come largely from balances of.

The cash that we're already at Treasury.

New funding, we would expect that to change.

The second or third round of stimulus the firsthand the burden of administration christine's flow right.

Sometime in the middle part of this first quarter as far as allocation go with our money market and liquidity products Q Repub.

Obviously, the largest amounts would be in our treasury.

Income from sign.

Tim and Tom.

The repo and other.

Non.

Overnight.

In order to reduce alright.

Do that overnight marketplace, where you know going out the curve a little bit with different security types, you can get a little bit more in yield although not a whole lot I mean, the whole treasury yield curve at this point is basically five to nine basis points from one month out from one year, but.

In the the quest to do that we still have repo position for liquidity purposes in those funds that are anywhere from you know.

40 to 55 ish type percent and when you look at our other types of products of our prime products.

In particular that would also be using repo in the taxable liquidity of world.

The exposure there is actually very small less than less than 10%. They use the other types of overnight paper that the.

General.

Repo with the from a rate.

Perspective.

Lots of paper overnight.

Along those line.

That's helpful.

That was great.

And then maybe Chris for you there's been a lot of talk of consolidation, maybe can you share with us how you're thinking about succession and succession planning and the next generation of leadership et cetera, <unk> you know when you and Tom decided to spend more of your time, you know fishing and golfing in and doing other things.

Well.

First of all of the consolidation thing and the succession thing are two completely different items and we.

We get plenty of time to do grandchildren stuff right now anyway. So there are no current plans for that which you are discussing however.

We had our board meeting yesterday, and I spent the better part of an hour with our independent directors of F. A shy going over the succession plans not only at the level of me if I get hit by a bus Tom gets hit by a bus or anybody else.

And how that filters through each one of our executive staff and their reports and those discussions.

And so we're not going to give you chapter and verse on all of that but there are good plans and good options. We are of very strong executive staff and I am most confident of that if I get hit by a bus of the machine with continued roll of the way that it has in the past.

In terms of consolidation.

Theres always consolidation and then new stuff happening at the other end.

And the way we've looked at it is we've done our big hairy deal the way I put it because of our affiliation with Hermes you've seen the whole thing and we've now changed the name of the Federated Hermes, Inc, reflecting what you've heard me call of reverse transformational merger and now we are busy about making that work we completed that.

The acquisition of the private markets business.

From Hermes and M. P C.

And are working this year in order to get that ready for sale.

And into our into the marketplace. So that's what we are about we will continue to do a bolt on areas of excellence, if we see areas, where that's possible. We will continue to do roll ups not unlike last year's PNC deal, which worked out very very well.

And so that's our that's our role in the consolidation.

Awesome. Thank you very much.

And our next question is from William Katz with Citi. Please proceed with your question.

Okay. Thanks, very much first question of incentives around the money market business. Chris I was wondering if you could maybe you could talk a little about where your prime exposure might be today and how the dialogue with the regulators, particularly with the sort of the we formulated that saga of how that's going and how to think about risks and then underneath that you mentioned that your market share was down a little bit sequential.

I sort of wonder if could talk about some of the drivers there.

I will cover some of the regulation I'll, let Debbie cover the prime exposure question. So on the regulation front, we've all seen the President's working group report and that was basically the SEC throwing out everything that they had in their drawer on the subject many of which had been totally rejected before all of which we have seen beef.

For the most important one as I've discussed on this call before is the elimination of that 30% trigger which is both unnecessary and on wise and we pointed that out before and was really in the artificial trigger to what was a government shutdown, causing disruptions in the short term market.

It's <unk>.

And we don't know what will happen under the new regime in Washington.

And they're just getting started so it's hard to it's hard to predict.

But we are ready with our friends in Congress and with all of the arguments we've had before because the money market fund, especially on the tax free side is especially relevant when their tremendous efforts to get money to municipalities.

As part of a.

Stimulus.

Apropos of the pandemic and this is of great financing vehicle and you could return $500 billion of marketplace oriented short term cash into that short term market.

By the beauty of those of those money market funds to say nothing of of what happened on the prime side. So I'll, let I'll, let Debbie talk about the.

The prime exposure and then I'll come back on the market share.

Thanks, Chris.

Good to hear from you Bill as far as our total price.

Yeah, right now they're about mm 125 billion and that is more of that.

The non money items.

Got.

Hmm.

So the.

The market fund assets with the right now.

Or in other types of the separate accounts offshore L. D I b type of assets.

As far as.

Allocation within those product two sectors of the pie.

The largest sectors remain.

The closure to the Athabasca most of the paper World The C D.

The World and then other types of financial commercial paper. We also have some exposure in the non traditional repo market, which back to Ken's question. First question doesn't really have the same issues associated with it you know what would be traditional of Treasury and agency repo.

And then you know.

I think the closure, but it isn't the shortest tranches and the bearing tiny exposure.

Just to add to what Chris was talking about from the regulatory perspective.

We've seen the ICI come out with what we thought was a very comprehensive Pete that covered the money market.

Money market fund and talked about some broader base.

The.

On that in particular I ASO also came out with some ideas and then the President's working group and.

I think the president of working group will end up the thing is number one on back with what the ICI.

This was saying.

The market, but also some of the things that were changed in the 2014 amendments that went into the.

In 2016, having to do with gates and fees and triggers on liquidity for those two items, whether they should be at all whether they should be D link from the triggers of liquidity and whether they should be considered separately entirely from the gate perspective versus the fee perspective.

So with that I'll turn it back to you Chris.

Thank you Debbie with respect of market share built there's another aspect of the market share that historically, we have always looked at and it's a hard calculation and that is market share of revenues.

And part of the reason for our whole pricing history going back to the Seventy's on money funds has been as the owner operator looking at.

The market share of revenues. So at year end there were some moves in the money.

Some of it was hot money some of it was moving from <unk>.

Cause some of the competitors quoted of higher net yield and some of it is just the ebb and flow of regular business.

We've looked at are the.

The the information on a daily basis, and we see money going in and out of three four and $5 billion clips just like always.

Also mentioned that on the our market share as we calculate it if you go back to 2014 when they put in the.

Put those reforms in our.

Of our market share has been variously those year end of eight to 8.0 too.

7.557387.

789 of high wanted 878.

And the 812.

So as long as we over the long term are getting higher highs and higher lows like I mentioned.

We are not worried about the quarter to quarter market share.

Hi, Thanks, just a quick follow up normally you give us some flow of detail. So you know where we are today.

Can you hear that from you maybe I missed if I did I apologize and then relatedly on the institutional pipeline any dynamic there in terms of where you're seeing the best of luck. Thank you.

Hey, Bill it's Ray.

So through the early part of the quarter, obviously, we're about three weeks of a.

Data the of the equity.

<unk> and SMA combined are positive a couple of hundred million the.

Fixed income continues to a to the.

Uh huh.

The positive a bit stronger and actually the the alts.

Our slightly positive so long term flows continue to be running positive.

For the first three weeks of the quarter in total it's about $1 six so again its fixed income really.

Our head but.

But equity is solidly positive.

Thank you.

Thanks.

The next question is from Robert Lee with Covid.

Please proceed with your question.

Great. Good morning, everyone. Thanks for taking my questions.

And then maybe a question for you so.

Just wanted to think through Hum.

That's your understanding.

The $4 million is kind of one time. It goes the way you mentioned the incentive comp, but you've also had the names.

One of the U S employees.

Should we if we exclude the.

The 4 million one time is that kind of gives you a good jumping off point for the next year.

As part of the.

Hum.

I don't know I guess I'm sort of catch up for the year.

Yeah.

Performance.

I think that drove some of the just trying to kind of level set.

The next year sure.

So our dedicated employees of Federated.

Besides the work instead of take care of vacation basically in 2020, and so what normally would expenses it would occur.

Q1 2223.

We have to take all of the expense in Q4, because we.

We expect them to take vacation in 2020, 'twenty 'twenty, one I mean.

So it's not it's a full.

Full year bumping up in one quarter and probably the the normal.

Run rate number is around a million there. So we said it was $4 million so of normal run rate is $1 million.

And.

That's about how I would look at the vacation days. So in the last part of your question Rob.

Rob I'd like Sacredh of comment on iOS cause you you phrased it the run up in people the Eos, but I think you need to hear what's going on there soccer.

Thank you Chris.

So there's two things to know about deals one is the the run up was in fact part of our long term plan to bolster our positioning, particularly in North America and that was part of the act.

Bye bye the rates of getting back the 18th of that was part of the plan. The second of all of it is if we continue to increase our clients and since the beginning of this year, we've had two major institutional clients.

Line up to the email services out of Poland, where the combined value of about 130 billion euros.

So it's it's we continue to grow that business.

The move of the good obviously, the most of the really puts us all of sudden it because one of these to the other.

Back to you Chris.

Thank you Sandra and watch what's going on here, Rob is an investment in the lifeblood of the future of engagement and it's very very important and we'll basically.

Basically impact all of the investment management here at Federated and around the world.

Great.

Just the I'm sorry, just the keep on the pumps. So if I exclude the 4 million of maybe 1 million stages that J I.

You think of $134 million as being the right jumping off point from kind of.

The next year.

Sure Rob.

<unk>.

And the end of I'm not going to be that helpful. Because of just stopped.

Predicting that.

If you remember how long we were off by 9 million one quarter of $5 million another quarter and you know it depends on all of the things the sales in all of those those bonuses happen.

The investment management and how that comes about.

And then of everything that's going on in the Hermes, which <unk>.

Factors and you see this this quarter the performance fees in the carried interest in the house Aker is managing through.

You know what he delivers to the to the enterprise.

And so like I said in the beginning of a long long long or a short talk not to really give you all that much guidance on it.

Well Ken.

The handheld to tried but.

The mother of maybe back to the ESG and <unk> can you just update us on where those initiatives are in the U S.

The pension staffing is related to moving that up.

Here.

So on the product side right.

Right now most of the B b minus sort of see cash.

Or obviously.

The.

From a UK.

The U K part of the business, but where are you with the kind of getting that up and running.

<unk> launched.

In the U S.

Well I will talk about some of the products.

But.

We put our sixth product of.

The that's being managed by our friends in the U K and all of it is informed by what comes out of our E. O. So there's no direct product thing coming out of each of us what Eos at Federated Hermes does.

His talk to 1200 companies on separate issues for their clients create data on the engagement. The then is put into the decision making process across the board at Federated Hermes.

The allow the sector to make some more particular comments.

Thank you, Chris So you've got to understand sort of into two ways.

First of all of it representing all clients.

Of the engagements with the companies that we do we work with these companies on behalf of our clients to ensure and enhance long term returns.

And the best business practices for the long term that's the benefit.

But also because of the the way that we engage in the depth of engagement that we have the can.

Most of the history of engagement typically we engage with the same company over a very long period such of more than 10 years because of the depth of expertise we have with the oldest engagement team anywhere in the world, where the low disengagement from anywhere in the world and we would say we have the best experience engagement from anywhere in the world that gives us particular insights about specific companies.

But also about sectors of markets. All of that then is available as part of the integrated the information that I've used the cros all assets that the actively managed within Federated Hermes neither of the assets manage all of the Pittsburgh office of Boston Office.

London office of Anyhow. The office, if we may have that is the beauty if you like of.

Having the stewardship businesses pulse and pulse of of what we do now Additionally, with the changes in the market and the move schools. The requirement of most stewardship activities for passive investors, particularly out of the European markets, we see an increase of demand for for students.

Our services and that didn't happen to be the overtime will lead us to invest more into it. So we got two things out of it if you like it's a business in its own right. It helps enhance returns to our clients.

And it helps us in making informed decisions as part of the information that feeds into a matrix of of Oh.

The decision, making tree for active management.

I hope that answers the question on <unk>.

And back to you Chris.

Okay.

Thanks, guys.

And our next question is from Mike Kelly with Bank of America. Please proceed with your line.

Good morning, and thanks for taking the question.

This is probably for soccer, but just in terms of the performance fees and carried interest.

The historical levels or you know are always helpful.

You know given what seems to be a challenging year for real estate generally all of it seemed like you know the the overall level of performance fees and carried interest is strong.

So just curious of the the acid base has increased significantly.

Inefficiently.

The shift of those levels.

Or from like a portfolio of standpoint are we just didnt of more like season portfolio.

In an average year and that's what's throwing off some of the you know the higher level of.

Net performance fees of carried interest.

Hum.

All of them I'll try to answer that the best that I can know the first thing to say is you cannot extrapolate the fourth performance fees from backflip from performance fees.

Generally speaking when we say potencies.

Referring to our real estate, but not exclusively but that's what most of our performance fees Oh, yeah, but now if you remember I have said on the previous schools.

That's there was two things the generate performance fees of one is there was a performance fees generated for the crew.

The list of what you what's called in the United States, the mutual and the school to the unit Trust.

And to some degree you can see the trend of that over time, because it's calculated the three years and you can see the trend of performance in the older you kind of predicted you can see the directionality the way.

We generate performance fees in that indeed.

The separately managed portfolios is the.

We tend to enhance the value of the buildings that we buy for our clients of the investments we make for our clients are.

Through better management to integrate the ESG from there nothing to real estate two of the pioneers in doing that as well and I remind you all of that if you go back in time in the United Kingdom, the massive development the Cros.

Which is of living example of integrating ESG factors into the development actually increases the return of the long term. So we do that for the buildings that we manage we manage them well and we tend to over time go into sectors. If we think Oh, great now that is the average performance.

But in addition to that we get every one of them then additional performance fees when projects are finished or finalized.

When we reached a landmark and investment for the major planned these tend to happen north of US regularly as the all the bit of performance fees and that's why you occasionally see spikes.

Look back historically, you can average of the performance fees.

For Oh really in the state.

Going forwards.

For the performance fees, but I have no reason to think that's all methodology, which has been health of creating a is in danger of not being as also creating as it's always been but the net.

The performance fees cannot be predicted and therefore, we do not.

I'm sorry.

Mike This.

This is Tom.

Mentioned that the performance fees and carried interest of $11 2 million.

Last quarter was $5 7 million in my remarks, so our team doing the work because just to help.

People think true because there's the NCI and tax and where where does it occur which tax rate.

And we.

We view of performance fees and carried interest as core to us, but somebody says what's core earnings. If you look at Q4 versus Q3 and bring it down to a per share difference those numbers that I just went through it's basically about a <unk> difference quarter to quarter.

Okay got it that's helpful.

And then just a follow up on money market Debbie Thanks for the earlier comments and realize the team only.

We have a guidance for the current quarter.

But just curious how you and the team are thinking about like rates over the year you mentioned the stimulus.

That could be potential benefit of any other catalysts that you're watching throughout the year that could be either pressure or the some of the kind of yields.

Yeah.

Sure.

Well, obviously short term rates of anchored to fed policy and at this point.

Sure Paul earlier this week.

Right.

Yeah.

And the others have not anything in the near term.

So we tend to believe in them.

What we also know is that.

You know.

When virus distributions or vaccine distribution for the virus.

Some of more widespread theres, a whole lot of pent up demand that's out there.

You know necessarily what the consumer but it's also in the business sector as well and depending upon the sector of business. It can be you know high are extremely high our arms on Mars.

But in any case of pent up demand that we think will need to be satisfied and what that will drive is at least pockets of inflation from our expectation.

And pockets of inflation or not really what the fed gets concerned about with their dual mandate of.

Yes inflation unemployment.

However, we think that you know as I travel begin to pick up again the business you know from.

From a.

More traditional mode begin to pick up again, the other things well.

The drive that the inflation rate up and I think you know what that means is.

The fed is not in play in 2021, there's just no way that's going to happen, but we also think that.

The guidance <unk> given.

That's true in 2023 time frame might be a little bit too long of given some of those scenarios and that what we're probably.

Thinking about for a steeper yield curve with that policy.

Likely to be in the second half of 2022.

Rates that we're currently progressing so where does that put us in the context of this year. This day.

These fun it's essentially.

Kind of of technical market at this point, that's going to be driven a lot by supply and demand a lot of front end.

There are a lot of some of them.

Without putting cash starts to get more cash.

On the wall.

Onside backstop.

The equity market, maybe pulls off a little bit and they reenter the market some of the cash will lead the liquidity.

And last the man.

Okay.

On the other side of the equation.

Syed.

That's not the treasury supply and the supply is probably pretty stagnant for the year commercial paper should take up though as the industry picks up you know that's the supply side, you've got more supply of lots of demand in that situation, perhaps you'd get a little bit of a steeper money market yield kind of that doesn't mean, you get 15 or 20 basis points, probably means you get to the five.

So that's sort of the neighborhood that we're looking at from the steepness standpoint in 2021.

Okay, great color. Thanks, a lot.

And our next question is from Kenneth Lee with RBC capital markets.

We'll see what you reported.

Hi, Thanks for taking my question, we see strong very strong net sales from fixed income.

Over the past few quarters, just wondering if you're able to highlight what you think could be oh, some of the key factors from that.

Yes.

Some of the some of the key factors are that the clientele is still anxious to see yield and we see this across the board of.

In the inside.

Our distribution.

And.

There is renewed interest in muni space.

We're getting more questions on that because of the obvious implications of potential tax increases.

And there remains just a strong appetite for short duration at most most firms.

And.

For anyone who is allocating our money not making a brand new decision Oh are we going to win all bonds all stocks of our that our products prove very very strong last year. That's why we had I think it was <unk> 19 of them with positive flows.

Board enhancement of quality that occurred last year.

And it was focused on positive flows in the fixed income which are continuing as ray mentioned.

But what's really going on behind the curtain is it even though the salespeople are not traveling.

They are enhancing the relationship they already have because of you already have the email of the phone number and you know the golf courses in the places where your clients are going.

You can still build up our relationships and yes. It does put a little crimp on new stuff going in or getting into new clients, but you get to enhance the quality of old ones as I've mentioned here before of which means of.

Broader look at the Federated array of products and an in depth look at the portfolios through portfolio construction. So the portfolio of construction when you tear into the these portfolios ends up with a lot of our short intermediate total return bond fund type products as the answer to the.

Types of bets that are being made by our clients. So this move.

Move to quality.

In the marketplace and the the still current demand by many people for yield.

Keeps the fixed income as a of positive flow situation.

It kind of just the highlight as Chris said the short duration has been strong high yield has certainly been strong and then within high yield of our institutional.

The domestic product, but we've also seen last quarter and into the first part of this quarter.

You know the Hermes a product a menu of the S. D. G engagement high yield credit fund has gotten off to a very.

Solid start and had a very solid.

Our fourth quarter so.

We're up to 23 funds in the first part of Q1 on the fixed income side that have a positive net sales and they really are spread through sectors with a concentration in short duration across sectors are high yield and as I mentioned the S. D J.

Coming on.

Great. That's very helpful color and just one quick follow up if I may.

I know, it's a it's been of Watson should we talked about this but wondering if there are any updated thoughts on potential.

The potential of BT pension scheme outflows, what's the expectations for this year and should we expect to see any kind of meaningful impacts on net sales of close thanks.

Thanks.

Because they are.

The big Big Beautiful client, we don't like to get into the specifics of their redemption of our investment profile as you know they have a substantial assets with us on the long term nature and as we discussed way back at the beginning.

They had announced and we repeat that they were going to be taking down the.

Mutual fund or a set of.

Products that they're that they're in over time related to their own circumstances.

We have no reason to think that that won't continue.

But we're just not at Liberty to speak.

To give what their redemption profile.

May or may not be and sometimes we don't even know.

Understood.

Very much.

And our next question is from John Dunn with Evercore ISI. Please proceed with your question.

Hi, guys.

I was wondering are there any products.

That can be sold kind of as a substitute for kaufmann small cap and and you know how much of it flows typically comes from the new versus existing clients basically just the the notion of being able to ship clients between strategies.

So we have a broad array of as you know of Kaufman product.

Obviously, the mid cap and obviously the large cap and for those that are focused on the kaufmann methodology. There very good alternatives on the MDT side, we have a couple of small cap funds that have very strong performance and have picked up a good assets and good flow.

Those over the timeframe.

And also you have the all cap core which includes I'm talking about MDT, which includes.

The the small cap as well.

In addition on the international side.

We have the international Smid product and frankly, our friends in Cleveland are basically all.

All over the cap scale and in their investments as well. So we have some specific kaufman some specific small cap.

And some other general funds that include small caps.

That enable us to continue to talk to clients.

Very very successfully.

About where they could invest for the future.

Great.

And then you guys just talk about how the money market deals.

Money market the idiosyncratic.

How should we think about different rate scenarios and people's willingness to throwing the towel like eventually when we get higher rates.

Would the people, maybe sellers think needed to get a bit of price in Tibet spur more activity.

In in the whole history of money funds going back into the seventies.

To me the way to look at it as people will always need to have their cash managed and there are various things that occur in the marketplace. It incent them more yes higher rates would be more helpful.

But on the other hand, if you go back and do a standard issue wealth management sequence.

About 20% of that money is always in cash in any event, whether they're long the market whether their bets on bets off it's just the ebb and flow of life.

And you couple that with the increase in money supply the overall increase in markets and and and portfolio as being a percentage of those increases in value.

There is always constant demand for the cash.

If youre also referring to kind of M&A and money markets.

You know the way we look at that is to work out long term arrangements with the with the people that we do deals with.

Or are they continue to earn a.

What is available to earn so in the low interest environment of course, there isn't as much to earn and but if people throw the towel in and say they want to.

With us we are still available ready and willing to do that.

And it's pretty easy to look at what what's being earned.

And we share the risk with anybody who we do transactions with and it's worked out well and we are still ready willing and able to do them.

Thanks very much.

Okay.

And our next question is from Dan Fannon of Jefferies. Please go see the two questions.

The things just to follow up on the fee waivers.

The guidance for Q1, I assume that size of the balances a day.

But just we've seen outflows the start the year in recent months. So just can you talk about some of the inputs that could make that number.

The variables that could make that number either higher or lower as we think about the current backdrop.

Yeah, when we when we did the the forecast.

Assets are about where they are today.

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So.

Basically not much change of course, you know we always we used to tell the whole paragraph on all the variables and we stopped giving that but all the variables are there.

Assets go up changes assets go down it changes and then all of all debbie's rates discussions.

But.

At the current forecast updated with the assets.

Currently.

Okay, and then just with regards to the sharing with the distribution partners. So it seemed like this quarter the.

The relationship between what was I think other revenue and the distribution expense was the little bit more disproportionate have you the economic share of with your partners changed as you've as those fee waivers of increased or how.

How should we think about that going forward.

Okay.

Dan It's really the it's not of anything like an act of change on our part it's really just you know each one of the funds and each really each class of shares has a different level of distribution revenue and expense and and what comes out at the end is really a blue.

Lend across all of those funds.

Funds and and and classes of shares so it now of course is.

Gross yields come down, which they did buy a couple of basis points overall during Q4.

You know you have funds that weren't waiving the day before the begin to weigh when they cross the threshold and this is why we've always said that this is very difficult the model it's not linear.

You know you have funds move in and out and they can have very different fee characteristics and its just one of the variables that makes.

Predicting this difficult.

Okay. Thank you.

And our next question from.

Ryan.

What's the bank.

Of course.

Great. Thanks, good morning from.

One follow up on on.

The money market question and then a few of few.

Few questions.

On the distribution side.

The theory.

I guess the natural floor that we should be thinking about in terms of the.

You can see that you're the distribution waivers that you're sharing.

With your distribution partners.

Yeah, I guess the question would be.

How should we think about the magnitude of.

Yeah.

What that could come due and then would there be more pressure on on your actually the weapons the waiver.

The depth of war is reachable.

So it would be of similar answer Brian the the within each of each individual fund it would have a level of distribution fees.

Typically the distribution fee revenue, but.

When you blend the mall it wouldn't there wouldn't be of floor level that we could give you that wouldn't say beyond this point.

For the complex waivers change, it's really that would occur at the fund level.

Okay, Okay fair enough.

And then some of you can see the question too one just.

On the back of your E N E.

In the U S.

I guess the broader question really here is.

The demand.

Food in the U S and especially on the E. U S side of questions of soccer from getting from that 877 million from one.

Yeah.

And this year.

Hum.

From the U S clients and then with the probably more importantly, what do you see as the demand is in the U S is really sort of catching up.

You are beginning to catch up.

The trends in Europe.

Soccer.

Sorry, Yeah of course so.

Yeah.

The answer is that you've got to think about it in three separate buckets. So the.

Demand in Europe.

Is driven partly by.

Not just the market move as the whole, but also the regulatory moves.

You can see increasing demand for it in the United States, but that will take time to catch up.

You'd expect so as a separate product any time, we will see increasing demand from the U S and we're really getting some indications of that.

The catch up with the demand in Europe, but also in Asia, where it's growing and the best indication of that as the VIX index providers are talking very actively about stewardship as being something do they do that's because of the reflecting demand. That's one way you should think about it the other.

The way you should think about ESG in general it is how much do we integrate ESG is of thumb without necessarily cooling products. The ESP because this is another.

The fact of its taken into to the homes the return.

And create sustainable wealth over the long time and the answer we will post the 90% of bulk right across the board and while we do that we could pay the act of men Oh active the amount of accounts.

Accounts.

Integrate the data we get from ESB, why do we need that because actually it helps make better decisions to create the worlds over the long term. This is the second part of it because of the third one is.

Specific products the clients want to buy.

But the the label.

E S P.

In my own mind, I think of those motors domestic from them now that there is going to be the discrepancy between the U S and Europe, because it's the same discrepancy the to get in any kind of a market.

So our high yield debt.

You might appeal across the board for example, but on the other hand something to the European school sustainable it might be very specific to Europe.

And we will see the but in general if the question is do we see the trend of strengthening the answer is yes. There is the acknowledgment of it doesn't the hospitals. There was an acknowledgment that there would be more specific products coming out of it but obviously the United States of the different markets of the different fiduciary little stripped it takes time.

Yeah.

Brian if I may I interpret to other questions inside your comment in the first one is where are we on the integration of our teams of both U S. Obviously at Hermes, they're already there and the other is what is the interest in the ESG offerings inside of our client base and on the <unk>.

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We are well well along the way.

With most if not all are well along our three.

The stage, our integration process of analysis of customization.

And full integration.

And we are very proud of our.

Our I O office, which is responsibility of investing office.

For accomplishing this and making the Federated Hermes enterprise.

With ESG baked in the cake.

On the question of interest we've done some surveys with our clients and overwhelmingly two things are happening.

First they are getting more meaning our RF as youre getting more questions from their clients regarding ESG. This will increase with the activities of the new administration and we are discovering.

That more and more of the advisors are incorporating it into their methodologies. Now this is not universal. Okay. This is not universal but it is a very very strong force.

Yeah, no that's not the.

The survey at the.

Very compelling and are you seeing I guess just on the funds that you've launched the new it takes a lot of time to build them from distribution, but the.

What are the asset levels of the coupons that are U S domiciled as of the end of the season.

So Brian the group of products that we.

Started over the last a year and a half of them, they're there they're relatively new.

But the asset basis is up around $130 million and that would have been up from just over a 100 million that the AR at the end of the third quarter.

So.

The progress, but as you know with with mutual funds.

They they need to be bigger to to open up additional distribution opportunities and they need typically need of additional seasoning in terms of track records that said because of the topical interest in ESG. These of have proceeded along nicely again with relatively.

A relatively recent inception dates.

That all makes sense. Thanks, so much for all of the detail on down the road.

And we have reached the end of the question and answer session I'll now turn the call over to the magnet.

The growth.

Well. Thank you that concludes our call for today and we thank you for joining us.

And this concludes today's conference and you may disconnect your lines at this time.

For the participation.

Yeah.