Q2 2021 Federated Hermes Inc Earnings Call
[music].
Greetings and welcome to Federated Hermes Q2, 2021 analyst call and webcast conference at the time, all participants are in a listen.
On the 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. As a reminder of this conference is being recorded I would now like to turn this conference over to your host Mr. Ray Hanley President of Federated investors.
Listen management company. Thank you Sir you may begin.
Thank you Laura good morning, and welcome and thank you all for joining US leading today's call will be Chris Donahue, Federated, Hermes, CEO, and President and Tom Donahue, Chief Financial Officer, and joining us for the Q&A are soccer in the same day, who is the CEO of the international.
Total 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 that Federated Hermes actual results may be materially different than the results implied by such statements. Please 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 Federated Hermes business performance, Tom will comment on our financial results.
Q2 ended with a record total assets under management of 646 billion.
Including record of assets in each of equities of 101 billion fixed income 91 billion and private markets 21 billion.
Assets under advice by Eos at Federated.
We also reached a record high of 175 trillion with the tea at the end of the second quarter.
We added 2 new clients in the second quarter. In addition to the 3 we added in the first quarter.
Now while equity fund flows were slightly negative in the second.
Quarter about 300 million we.
We saw positive Q2 net sales in 18 equity fund strategies led by international Global with about $1.1 billion in net flows.
<unk> net sales were strong again in our UK managed sustaining.
Sustainable strategies, including STG engagement.
Asia ex Japan.
Global equity ESG.
And global emerging markets.
Our equity fund performance compared to peers was solid using morningstar data for the trailing of 3.
At the end of the second quarter, 53% at 16 out of 30 of our equity funds were beating their peers, 23%, which is 7 out of 30, we're in the top quartile of their categories.
Among the performance highlights using Morningstar data the soft closed.
3 of Star Kaufmann small cap fund finished in the top 12% for Q2 in line with its long term record at the end of the second quarter. It's trailing 3 year record was topped 16% and it was top decile for the trailing 5 and 10 years.
It was fourth.
Quartile.
For the trailing 1 year.
Equity SMA had Q2 net redemptions of about $162 million down from about $450 million in.
Q1.
And $900 million in Q4.
Equity institutional separate accounts.
<unk> had about $950 million of net redemptions, including $817 million from a U K based client.
First 3 weeks of the third quarter equity funds and SMA had positive net sales of about $115 million.
Turning now to fixed income the second quarter was another very solid quarter of growth and performance.
Assets increased by 4.3 billion.
For the 9.5% from the prior quarter.
With about $3.2 billion or nearly 3 quarters of the growth coming from net sales.
We had 21 fixed income funds with net sales in the second quarter led by multi sector funds was about 1.8.
Dollars or volume.
And high yield and other corporate strategies with about $400 million.
Within high yield net sales were again led by a UK sustainable strategy I E. The <unk>.
D G engagement high yield credit fund with 300 and.
And $50 million.
Fixed income separate account net at net sales of $1.1 billion were led by multi sector mandates.
At the end of the second quarter and using Morningstar data for the trailing 3 years.
We had 10 funds 28%.
8 billion of Cortina and 16 funds, 44% above media.
For the first 3 weeks of the third quarter.
Fixed income funds and SMA had positive net sales of about $835 million.
In the alternative.
The private market category net sales were driven by our differentiated trade finance strategy with net sales of nearly $600 million.
We begin the third quarter with about $1.9 billion in net institutional mandates yet to fund index.
The total funds and separate accounts.
These fundings are expected to occur in private markets with the concentration in unconstrained credit and then fixed income.
Now moving to the money markets.
Assets were up nearly $11 billion in the second quarter with just under half.
From funds.
And the rest from separate accounts.
Our money market mutual fund market share, which includes our sub advised funds.
Was about 7.4% at the end of the second quarter up slightly from the first quarter percentage.
As we said.
On the previous call. We believe that Q2 was the high watermark for money market fund the yield waiver impact as we expected the <unk>.
Fed raised the administered rates in mid June moving repo rates from zero to 5 basis points and interest on excess reserves from.
On 10 to 15 basis points.
While the fed movement was the step in the right direction. The money fund yield curve remains very flat and we are experiencing more waivers for competitive purposes.
Tom will update our yield waiver outlook for the third quarter.
Taking a look now.
Recent asset totals.
Managed assets were approximately 638 billion.
Including $421 billion in money markets 99 billion in equities 93 billion in fixed income $21 billion in alternative and $4 billion in.
At the <unk> asset.
Money market mutual fund assets were at 293 billion.
Tom.
Okay.
Thanks, Chris.
Total revenue for the quarter was down from the prior quarter due mainly to the impact of higher minimum.
<unk> yield and competitive waivers.
Q2 carried interest was $6.2 million lower than Q1, which included the impact of consolidating certain variable interest entities or V. I E.
From the 2020 Hermes GTE acquisition.
In <unk> starting in Q1.
The other revenue increases from Q1 included the impact of higher money market assets, increasing revenue by $5 million and additional day, increasing revenue by about $5 million and higher equity and fixed income assets increasing revenue by.
<unk> $3.4 million.
Q2 performance fees and carried interest were $4.4 million compared to $9.4 million in Q1, which included the catch up in carried interest related to the Vit E consolidations.
Looking at operating expenses the decrease.
The decrease in comp and related from the prior quarter of about $11 million with due largely to the Q1 consolidation of the <unk> previous meant previously mentioned.
And lower incentive compensation expense.
The decrease in distribution expense of $6.3 million.
Compared to the prior quarter was mainly due to the impact of minimum yield waivers, partially offset by higher distribution expense incurred for competitive purposes.
The negative impact on operating income from minimum yield waivers on money market mutual funds is currently.
Currently estimated to be about 38 million for Q3.
Down from the <unk>.
$46.8 million in Q2.
The Q2 waivers were slightly higher than expected due mainly to related higher asset levels.
The Q3 estimate is based on our investment teams.
Workstations.
Portfolio yields and our recent asset levels and mix.
The amount of minimum yield waivers and the impact on operating income will vary based on several factors, including among others interest rates the capacity of distributors to absorb waivers asset.
Asset levels.
And asset mix.
The change in these factors can impact the amount of minimum yield waivers, including in the material way as Ray said in the beginning.
We are not undertaking any duty to update this information throughout the quarter.
In the UK.
Recent legislation will increase the corporate income tax rate from 19% to 25% effective on April 1.2023 as the result, our Q2 income tax provision of $35.2 million included.
Did $14.5 million or 11.
The diluted share to revalue of certain deferred tax assets and liabilities.
Non controlling interest decreased from the prior quarter due mainly to the decrease in income earned by Hermes from U.
The U K tax change parcel.
And offset by an increase in the value of investments held by consolidated funds.
During Q2, we purchased 993000 shares of our stock for approximately $32 million.
As mentioned on our last call and as contemplated in the put call option.
Indeed executed when we purchased our majority interest in Hermes Fund managers in July 2018, which we publicly filed at the time a request for valuation was made in April by the BT pension scheme.
The valuation firm was up.
Subsequently engaged we continue to work with the pension scheme for the.
As soon as to the agreed upon procedures in the option deed.
We are also planning to close on our.
Posed on amendment to our credit line extending the maturity to 2020.
6 and reducing the total line from $375 million to $350 million.
At the end of Q2 cash and investments were $424 million of which about $314 million was available to the west.
Debt at the end.
Of the quarter was $65 million.
That concludes our prepared remarks, and Laura we would like to open the call up for questions now.
Yes.
Okay.
Conducting a question and answer session.
Like to ask the question please.
1 on your towers.
Telephone keypad the confirmation.
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1 moment, while we poll for questions.
The first question.
It's the line of Ken Worthington with J P. Morgan you May proceed with your question.
Hi, good morning, Thanks for taking my questions on maybe.
The first off on.
On the competitive fee waivers for money market funds are being on the rise I would've thought that given the pressure on revenue from lower rates the competitive.
Fee waivers would be maybe diminished not not increasing so can you give us a little more flavor on what's driving like we know this is always a lack of competitive business. So nothing really changes there, but why the increase.
The increase in competitive fee waivers is it maybe 1.1 competitor.
<unk> on particular or is it is it broader based on that.
And then last time, when we think about sort of 60.
678 years ago did you see following the financial crisis, and the zero rate environment did competitive fee waivers increase then during that period.
And part of this time different and I guess, ultimately I'm trying to figure out why.
In with.
With competitive fee waivers as you know Ken.
It is of forever a constant situation.
And.
In this 1 we cannot predict or figure out why certain competitors.
Whereas side to do certain things over a certain period of time, there are a lot of variables in the in the equation.
Some competitors want to increase their footings.
Others have creative uses of how things work inside their funds.
And we just.
Just to do the best we can to stay competitive and so it is not a predictable where assignable thing and as you know it is not possible for us or the competitors to find out from each other why they're doing certain things on the pricing.
So that's that's the way it.
Tried it on I.
I do not recall.
<unk> of waivers being altered that much in the in the <unk>.
Post <unk> timeframe.
Okay great.
Thank you.
And 1 of them.
Yes.
Can I just follow up on the back end.
The.
It is this time the rates are lower than they were back in the <unk> timeframe.
Yeah, I can read 1 out of just the.
1 of the this is Debbie sorry, 1 other factor to add into that is the the the the mix of assets. So much more of an government funds at this point.
Point compared to the 2008 timeframe, where more than half of our assets were in prime funds and the prime funds, obviously maintain a higher yield. So the waivers are less now that you've got you know 80 per cent of the industry and government funds with the curve on the government side.
That is 5 to 6 basis points that that's I think where some of the positioning and changes have occurred.
Okay, great. Thank you I'm going to wrap 2.2 tiny questions together, 1 trade finance you guys mentioned, there seems to be taking off I'm a bit naive on the product, but the yield doesn't seem particularly.
The good and the returns don't look good to other fixed income asset classes. So clearly I'm missing something what has driven this product to take off and then the other tiny 1 is any plan outflows from B T. P. S over the next 6 months. Thanks.
So on the trade finance the beauty of trade finance.
Is that like other large institutional wins it takes a long time to make these sales.
You have different people using the trade finance differently.
Some of it use it inside a portfolio instead of using cash others use it as a short term.
Investment, where you get more yield then you get on cash and.
You have a short portfolio and a diversified look at the assets in in the marketplace and so maybe from your perch on the tree you don't like the yield but I assure you from these clients point on the.
The view for what they are doing and what they are looking at it as a very very strong offering.
So on on.
<unk> Ken.
We're not really too excited about talking about our clients.
They told US as we said some time ago with last time, we were addressing.
Their asset levels.
They had planned on taking out the public market money in.
So.
I think I'll just leave it there.
Great. Thank you very much.
Our next question comes from the line of Dan Fannon with.
You May proceed with your question.
Thanks, Good morning, Mike.
On the kind of the alternatives bucket of private markets.
Do you have decent flows are solid flows I should say on the second quarter.
And just curious about kind of the fund raising environment. You've mentioned you know on overall backlog of unfunded.
With that the stuff around of just under 2 billion. So curious.
How much of that is or what the breakdown of that is in terms of the AUM, but also just the outlook for the alternatives business as there seems to be some momentum there.
Well as we mentioned.
This is the $1.9 billion is concentrated.
The.
Unconstrained credit and fixed income of further break John I think ray might be able to add some color.
Yes, yes, Dan there is.
There's more to come on the trade finance side.
So we would have that along with the unconstrained credit.
<unk>.
In the alternative category and that would be in total of about $1.2 out of the 1 billion 9 so it's.
That's where the more recent momentum is.
Within fixed income, it's it's a it's high yield, but it's also absolute return credit.
And the.
Core bond and some short duration money.
Okay. Thank you and then just a follow up on the.
The the option with Hermes and where that sits on.
I heard your comments, but can you update us on the time period, just generally of what we should expect.
And how this the process of balls from here and so we can think about the you know.
Helpful around that timing side.
Okay Dan.
So as you know we said April is when they.
Most of the evaluation and then we hired a firm and.
We have not received the report from the firm once we get a report theres processed the whether it fits into.
Hey.
Range, where if either party.
Puts our calls it.
It has to happen and there is also an opportunity to if either party is not happy with the valuation than they.
That's another valuation so youll see the first evaluation took from.
April when we don't have it yet.
And how long was the second 1 take I don't know, but thats kind of the dynamics that are involved in terms of timing.
Okay. Thank you.
Our next question comes from the line of William Katz with Citigroup. You May proceed with your question.
Okay. Thanks, very much so just backing away from fee waivers for a moment on looking at the long term business as you think about the incremental growth of what's coming in the door versus of what's been going out the door.
Can you talk about how you sort of see the fee rate and the outlook for the base management fees relative to that growth.
I assume bill here, you're talking about on money funds when youre talking about the waivers, but what I'm, saying I'm trying to of course, if just to qualify it just stripping away the fee waivers I think that's pretty straightforward I'm just looking at the long term side.
Sure that's true.
Trying to get a sense of volume versus fee rate.
Yes, and what what we see happening on the money market fund side is an increase in <unk> or whatever you want to look at.
Rather importantly, and that historically.
Out of the biscuit funds are a percentage of that point to the.
Banks don't want the deposits, obviously that can change and some banks can do balloon squishing the Duane.
Their deposits and say money funds.
But net net debt is a growth inspiration.
<unk> for the money fund.
Overall since so about a I think it's 1990, the retail prime shareholders retail prime shareholders have gotten 200.
$1 billion more in yield than they would have gotten in and of MDA that will always obtain because the banks.
<unk> pay administered rates and the retail prime funds pay a market rate.
The overall.
Those are a couple of influences.
In addition to the core fact that the money funds the beautiful thing.
Giving individuals.
Real pricing.
And real yields at the sphere point of the short term rates and that applies to both issuers and to users I E shareholder.
The holders.
So now you say well what about competitors.
Every year, there's less and less competitors.
And yet the competitors.
It can be just as ferocious when there were a lot more of them.
And as I said in the answer to the first call we can't predict how.
Various organizations are going to evaluate how they should price these things.
So it's really hard to say.
What will happen.
So the term.
On.
On the pricing, but we don't expect.
A dimunition in the economics that we have going right now.
On these things now of course, we have to argue with the fed about.
The other.
Delightful existence of the institutional prime products, which we all know about.
But thats just the regular ebb and flow of the battles we've had for how many decades.
Okay. Thank you for that I I, just want to rephrase I was actually more interested in the equity fixed income multi asset.
And longer the alts bucket as I sort of.
Just trying to get a sense of is it seems like a lot of mandates are shorter duration land of fixed income and or SMA in scope. So I'm just trying to understand as that volume comes in and if we strip away the impact of the money market business, how should we be thinking about the base.
Fee rate of the management fee rate the blended fee rate for the company as we look forward.
Sure Bill at the rate.
That is a little hard to predict because we do have a lot of per.
Products, a lot of strategies and as I think you know.
Typically the separate accounts generally including SMA.
Would be lower fees.
And you can say.
The mutual funds.
If you look at the ex.
The equity blended fee rate.
For the for Q2 it was it was down.
About.
2 basis points compared to the prior quarter.
He then that's clearly a function of mix that's not us.
Changing the pricing fixed income was flat and.
Multi asset was actually up and alternatives.
We're flat.
No.
It would be hard to give you a yes.
I appreciate the difference.
Quality of modeling it.
I'm trying to predict that given the number of of strategies, but.
I think you're if your premises that.
We'll have lower fee rates the more of the more success that we have on the institutional side compared to the retail side debt that.
We would agree with that.
The we're happy to win that business.
I would add bill.
That longer term.
On 1 of the reasons that we engaged with Hermes U K was for the private markets business.
And I think it would just be instructive to let sac or make a comment or 2 about the real.
Real estate part of this.
At this time.
Thank you so.
2 things that I will tell you. The first 1 is about the real estate and then about the equity of fixed income business. This within the on.
International appreciate the Federated Hermes.
The real estate business.
We have.
Of 2 main businesses, 1 is actually the mutual fund or the equivalent of the mutual fund.
We have evolved that it used to be only available for U K investors, 1 institutional and we have now evolves it too.
The open up 2 other non institutional investors from the non UK institutional investors and.
And that is that is.
An important step for us.
It has a very strong track record.
Much of the top of the part of 10 years and as a steady flow of of fees.
The public denominator, so thats the stronger the other part of our business as well.
Where we really make much more.
1 of of income.
And that comes on something we call place, making and place making is.
When we take cornerstone of institutional investors with very large investments typically on the journey to develop.
In the area in the mostly in the cities that we revive again by.
By working very closely with the local authorities and the journey is typically on the 10% of 10 years to 15 years. They have stages, along the way the payoffs the base management fee and the performance fee and this business of ours continues to grow now the issue with this 1 as you cannot predict.
Cash flow, yeah, but yeah, because it's not.
Mutual fund, but you kind of of the long term see an increase in our fees as we expand our business and we continue to have.
<unk>.
Interest in it.
From from clients not just from the UK, but actually from around the world some of our largest clients on non UK based and we look to expand that elsewhere.
In the future, but that'll take time.
Just to go forward to the.
The other business, which is the fixed income and equity business run out of our London offices now.
Youre right institutional businesses will come on the lower fee then.
The institutional businesses, but there are 2 factors to take into accounts into the mix of the London.
The first 1 is.
Our largest client as you heard from Chris as far as you heard from Tom has indicated to us at the time of the acquisition that they will decline over time the public market.
Exposure now by definition, they were the largest clients and you'd expect them to get the fees commensurate with being the largest client we have as these are replaced.
Replace by other clients you would expect us to charge fees, which are normal for other clients and that that implies an increase in the margin mix and the other 1 is as we increase the sales into new products, particularly in the so-called sustainability and STG products. Both on fixed income and equity we can charge reasonably strong fees for those as well.
So over time, we'd see that expanding as well.
Okay. That's much better. Thank you so much and then sort of follow up just.
Just as we think about copper and with the small cap fund and Bts is there a way of just sort of size what the ultimate assets that still may be at risk in terms of a potential of runoff.
Revenue from the pension scheme.
Right and also of the small cap being soft close like whats the whats the aggregate size of that portfolio today.
Sure.
Well that fund.
As of.
A little bit under 10 billion.
And on the.
P S side.
We're just not at Liberty to talk about them in with specificity.
Okay, Thanks, and sorry, if I wasn't clear on my initial question.
Thank you.
Our next question comes from the line of Robert Lee with K B W. You May proceed with your.
The <unk>.
Great. Good morning, Thanks for taking my questions everyone.
<unk>.
Maybe the first 1 real simple and I apologize I may have missed this earlier if you guys have highlighted the very simple on the performance the impact.
It may have been any of the quarter and then.
So maybe the question for you I mean, the fed did what you expected last quarter you know here, we sit today she may be update us on what your thoughts are.
As you look out over the coming quarters for the and the prospects for either of the short end of the yield curve to steepen again or any of the types of the fed action.
I guess could you.
It can help the short end.
Yes.
Rob Hi.
Performance fees for Q2.
Net carried interest were $4.4 million compared to $9.4 million in Q1, which had the catch up from the V I E.
And Debbie.
Sure Rob.
Yes.
Much like in it from 1 of if maybe we were a little bit early but the fed did what we wanted the Purdue.
In March the increase the amount per RP participants 30 to 80 billion in June.
As Chris mentioned, the increase to the technical factors by 5 basis points.
Steve.
Yeah.
Is perhaps with the debt ceiling behind US next month Treasury.
Being down.
Bills in order to.
To get the governments to cash balance within the limits required for the debt ceiling by my Tomorrow by July 31, so effectively today.
And they will start using than at the beginning of next week other measures in order to fund the government and in doing so we expect a treasury.
In the ones too.
To pick back up again, so we think that within the next day now over the next month on a half or so you'll continue to see.
Until the debt ceiling of 3 Youll see.
Not major but not minor either medium term increases in treasury bill issuance that will maybe get a.
They wish basis point or 2 on steepness in the curve now you know does that translate into extra yields on the fund eventually it well, but only a basis point or so we then take the next move by the fed or or discussions continue discussions by the fed will be with tapering we saw that at the at.
The meeting.
As mentioned again by chair Powell, we think that'll be discussed to some degree.
Jackson hole and our expectation would be at the September meeting you see on it.
<unk> net of when and how tapering will start what security selection what amounts what timeframe.
The zinc that will begin that process will begin before the end of the year, which likely adds another basis point or 2 and steepness to the treasury yield curve and and the prime Carnival back up commensurate with that and then ultimately as that tapering discussion gets into more of our take tapering process get them.
And we do more of a full force sort of mechanism in that first half of 2022, we will see an extra basis point or 2 come from that but ultimately you still don't probably get to the yield curve. That's much steeper than maybe 15.10 to 15 basis points and where are you. Finally, then yet.
Broader release.
2 items with ultimate a fed funds target rate action, which we think could come by the end of the second half of 2022, and we were very.
Paul with the release of the information from the June meeting on the updated expectations by the F O Z on.
The first themselves.
They were sort of in aggregate.
More of the 2022 range and.
On the range that had been previously.
Previously with their their march release of that economic data and expectations.
Great. Thanks for that comprehensive the answering.
During the maybe Chris if I could squeeze in 1 more question on the ETF.
Etfs in ESG, so you've touched on this in some prior calls.
Hired some some.
Some people to run that business for you and obviously has been very strong demand for ETF Susan sustain.
Staying nimble or ESG framework, you could update us on where that initiative sits and maybe what we should be looking for over the.
On the coming year.
Yes.
I assume you were asking about E O S.
Sure.
I was thinking about the 2 were okay.
Okay.
Okay, well right.
We're still very positive about doing it obviously, we have a couple of short term funds.
They're going to be the first ones out of the box, we still expect them.
To have birth dates with this year's handle on it.
The active part of the business is.
The only about 4% of the total ETF business right now so as we like to say, it's still early innings.
And there are other structures.
The people are catching up with where you could actually do of mutual fund and ETF and the same structure now whether that works or not.
The cc likes it whether their patents and things like that involved all have to be.
Evaluated.
But basically it's the packaging thing, where you've got at least half of the business, meaning the non retirement half.
The who find the ETF to be.
1 of the inner mousetrap, primarily because of taxes and trading.
It doesn't work in the in the retail and the.
Our retirement half of the business so.
It's 1 of the packaging that we think is necessary for the future.
So we're working diligently with the providers.
Ben.
That's about as much update as I have eventually we will be adding products, we sort of half of line on who will be next in line, but that'll be of 22 event and those are subject to change so I'm not going to give you. The list of who's who of next on the list.
And Rob on Huawei.
We're not.
And specifically the list we are certainly.
Value, adding in and looking at sustainable strategies related to Etfs.
Okay, great. Thanks, guys. Thanks for taking my questions.
Our next question comes from the line of John Dunn with Evercore ISI.
You May proceed with your question.
Hi, good morning.
The money market mix has changed the tons since the last peak.
Could you maybe talk about some of the mix shifts you you've been seeing recently or you might expect to see as we go forward you know things like web products.
How it shifts between products the claim types expense ratios.
The kind of stuff.
Debbie why don't you take it from the point of view of where Youre seeing the monies in the types of funds and then Ray will comment on.
The economics of thereof.
Certainly well we have seen more from the Chile, 7 money market fund standpoint more of the inflows have come into the government funds and that has a whole lot to do with where the.
The net yields are right now most of that yields are in the 1 to 3 basis point level and.
It's true on.
Many investors who are comfortable and have been in prime funds. It doesn't really make a whole lot of sense, because they're not getting any extra incremental income from a net yield perspective by being in those and those types of funds. So we've seen our prime money fund to a 7 money fund assets decline, where we've seen increased.
Creases on.
In the the the prime side, However has come in the non to a 7 business. So offshore our separate accounts local government investment pools, they seem to be trending more towards the prime space and the mix of assets on an overall liquidity business basis.
This has remained fairly steady, but with a larger proportion of governments in the 2.7 space at a larger proportion of primes and the non to a 7 space.
And John I would just add to that.
We think of the liquidity as of kind of of spectrum.
We.
A couple of a new.
Short duration.
Micro short funds out to sit between the money fund Choi.
Joyce and the ultrashort bonds that we already are very very strong in and so I would not tell you that we've had.
Any significant shift in the client mix, where we're active with with with our bank clients were active directly with the corporations, including some of the largest.
On a direct basis and those clients have a very.
Sophisticated and tiered.
The approach to how they manage cash and enhance our product line has evolved to.
The 2.
To give them options that that fit with the segmentation that theyre doing on on their cash.
1 more thing I'll add John and that is the.
When Debbie talks about the non to a 7 products increasing in price.
1 of the things behind the curtain there is it because of the SEC rule.
The 30% weekly liquidity threshold, if it's threatened or.
<unk>.
Then you threaten the client with the fee or a gain.
This caused more redemptions in the prime funds that were subject to a 7 and when you look at the charts, we didn't have any of those issues.
The other funds.
On the non 287. So this is.
Inspire is part of our commentary to the SEC.
Net.
You've got to eliminate this link it was a mistake when they put it in and so they just order of remove it because it did hurt the resiliency of those funds.
The 30%, which was supposed to be of liquidity buffer.
Cross actually ended up being of floor and you couldnt hardly use it so thats 1 point I would like to make the second point.
Is as things have changed over 4 plus decades in money funds, we don't lose clients.
They may move from over of this type of product.
Buffer of another type of product or another solution.
Other it's a private solution.
Whatever.
Even when the the massive amounts of prime were shut down because of the 14 amendments implemented in 16, the clients moved over to our <unk> funds.
Funds so.
Part of the reason for that is our heritage and devotion to the business our defense of the.
Stakeholders here, but also because of as Ray mentioned these clients.
The diversified that's what he means by tiered approach they do not put all of their money.
Money with 1 purveyor, they move it around and keep it diversified and the.
That of course is helpful to us.
John just 1 other thing when you talk about the clients.
While the nature of the clients haven't changed how they think about their cash does for example of the banks.
Certain of.
The larger banks that we're working with are managing their balance sheet and looking at their deposit level and are looking for.
Alternatives for 4 of placing cash and.
We work actively with them is to help solve that dilemma.
Great.
Thanks, and then on the long term side, just as we hopefully continue to move to a more normal environment whats the outlook and maybe your plans for Hermes strategies U S institutional clients.
We're active in presenting Hermes strategies through our institutional.
Sales effort and we've had.
Some success there over the last.
Quarter, some of our wins have been.
In the Hermes strategies.
So that's very much an active effort the the the add on to that would be.
We're working on the private.
Market business and expansion of that in the U S. That's a little that's going to have a longer time horizon to it but.
We're looking.
Looking to port.
The success of Hermes has had in the U K and EU.
Over to a 2.2 of the U S market.
Thanks very much.
Our next question comes from the line of Ken.
Kenneth Lee with RBC you May proceed with your question.
Hi, good morning, and thanks for taking my question I know that Federated has historically been open to bolt on acquisitions. So just wondering if.
If you could give us any update the outlook for the potential for M&A. Thanks.
Yeah Ken.
Federated Hermes has been interested in acquisitions for a long time, you know we talked about the.
The put call. So that's obviously out there and we continue to have our team.
<unk> out there, particularly looking at.
Money fund transactions and you know we're continue to be of discussions and looking there.
You mentioned a bolt on acquisition so.
We'd call those centers of excellence type of type of deals.
We continue to be interested in those and in.
Meeting with people.
No there is nothing that I'm pointing to know the terms of.
Some eminent thing going on though.
Gotcha very helpful and then 1 follow up.
We if I may just on the money market side I'm wondering if you could just for the qualify the level of competitive activity, you're seeing or are you seeing competitors doing relatively on economic or irrational on actions and therefore E U.
You would think these kind of actions on a relatively unsustainable longer term, but just wanted to get a better sense of that thanks.
Well.
I would prefer not to use any adjectives in order to describe how I think about what the competitors are doing and I have no way of knowing what their relative economics are.
Or was some of the the bigger ones.
The other things they have going.
That enable them to do things here that we might not see as the wisest thing to do.
So it's just really tough for me to jump on all of the edge is even though it might be.
She asked it to do so.
Understood. Thanks again.
Thank you.
Our next question comes from the line of Patrick Davitt with Autonomous Research you May proceed with your question.
Hey, good morning, everyone.
A follow up on the the.
And Susan it's and the.
Broader kind of alternatives traction, which is obviously good to see.
To Bill's question on the mix of bees, as we're kind of new to we're still kind of getting our heads around what youre alternative businesses doing could you kind of walk through how the management fee structures of all of these products are structured on a mark to market type of structure is committed.
Trade site structures kind of thinking about the tenor of the the the management piece of it will be coming in from this $1.9 billion of mandates you're talking about.
Okay.
Well.
Patrick the way the price.
Differently than the funds that we have the fee schedule, but each.
1 of them guest price individually, because typically there they're larger than what.
You know than the top end of the of the fee structure. So.
I don't have.
All of a rate that I could give you on on the upcoming.
The wins I mean I could.
Capital talk about the overall blended rate of those businesses.
So away from the funds.
The the private market.
Accounts are around a 40 basis point.
Blended advisory fee rate.
We continue have you have you know.
Oh accounts all around the blended number.
Okay fair enough.
The last 1 or a few years ago.
You had talked about.
Searching for an Asian partner or is that something we should still consider an aspiration or of your kind of pivoted too.
But again at a distribution.
Distribution on yourself.
Sure Jamie.
Alright, great.
Yes, Chris we'll follow up so remember we put.
On the Federated Hermes, London team together with the Pittsburgh team and the the.
The.
Building the love of the team is working on expansion plans and maybe <unk> you want to talk a little bit about debt, which which is their expansion plans.
Our organic growth right now.
But <unk>.
Sure. So since we took a combined.
Teams.
We have consolidated.
Asian headquarters, which his presence is based in.
Singapore from Singapore, we have strong relations with South Korea, which we have dedicated team members of the visits on a regular basis and.
We are also looking at Japan.
Well, we're looking in the future to have permanent position and we've also started a permanent office in Australia, So we're putting down.
The flag in each of the markets and we continue to grow.
<unk> organically.
The contention is that the combination of the products managed out of Pittsburgh.
On both patent manage out of London hub.
Particularly attractive.
The 2 clients.
The Asia region.
Tend to be institutional on long term and that's something that we have experienced in doing so it takes time too.
But the but they tend to be very good long term clients and Thats. The plan with the continued work on for the present.
And Patrick in specific answer to the question about what we were talking about a few years ago.
Theres nothing of hot on the agenda on that right now, but we haven't abandoned the concept of finding a big distribution partner, who appreciates exactly what <unk>, just said and therefore, we can of a confluence of.
The arrangements the carbonization of this process was not helpful. Because.
Basically you got to be able to travel to the deal.
And spend the time the long time that's necessary.
In order to create 1 of these.
The bigger type partnerships so.
That's the specific cancers Patrick.
Great. Thanks, guys.
Our next question comes from the line of.
Ryan the Dal with Deutsche Bank You May proceed with your question.
Great. Thanks, Thanks, very much the morning folks I'm sorry, Paul.
Did I joined the call late.
Not sure if you covered.
But it's.
If not can you update us on net fluids into what you consider dedicated E. Sustainable products I think they were very strong in the first quarter. So just wanted to get an update on that if you have it and then if you could just frame the total a U M. A in dedicated ESG.
This cross the franchise, but you know of course, Hermes liquid and alternative products and the the the Federated product Federated branded products in the U S that have started on that as well and then I have the second follow up related to debt.
So Patrick.
Brian I'm, sorry, we talked about the.
On the international Global where we had about 1 billion 1 on the fund side of net flows and and.
Virtually all of that let's say $1 billion of it would've been.
Coming from sustainable U K based the sustainable strategies on on the on the fixes.
Fixed income fund side.
On the.
We mentioned the STG engagement high yield credit fund.
Which had about 300.
$50 billion there was some others.
In there as well so that would be.
Other.
400 million.
And then the other thing to add to that would be.
That would be the fun side that you asked about we also had the institutional accounts.
The unconstrained credit.
And in others and I don't have that a total handy that's.
The follow up.
With you on.
Okay, Yeah, that'd be great and then just on.
On the day in terms of the product development I'm not sure. If you covered this as well, but any thoughts on.
Launching cash management strategies that are dedicated to ESG I know Blackrock converted.
Something we are quite quite a bit of quite a few of of their cash strategies over too.
Dedicated sustainable investment processes, and I don't know if they're within the interest in doing that for Federated.
I'm going to let Debbie run the victory lap on this 1 but let me introduce it by saying the win.
We did the reverse transformational deal with Hermes.
We wanted to integrate all of our investment management with ESG. So that you get ESG baked in the cake and guess who was first at the starting line and the finish line to get that accomplished was the money market funds.
And I will let Debbie tell you how that works and how that plays in the funds.
Thanks, Chris and and certainly Brian.
Given the high quality short term security types that we used in the money fund what we basically did was add an additional.
All of layer of input into our credit process. So our our team of management approach for money market funds consist of team members that are investment analysts portfolio managers on traders so through our investment analyst position, we added the E OS and the ESG information on.
Content.
That was provided by external as well as more importantly internal sources.
And are you using that actively in our assessment for the debt.
The credit securities that we're using within our portfolio of.
Ryan on for the first 1 to be integrated just simply because there are not.
Use of International Global Bank.
Banks and industrial types of firms in the coverage of those types of of issuers by by debt the ESG assessors and analysts, but most recently we've made a lot of progress integral.
Integrating our government funds as well with the beginning.
Engagement strategies with all of the various G. S E that we use within the hour portfolios for the government funds the home loan banks, Fannie Mae Freddie Mac a T V a.
The the farm credit system are we we are beginning discussions or have begun discussions with all of them fully integrating then our government funds as well. In addition, because many of our municipal fund also rely on the the banking system for their letters of credit and guarantor.
Tours those have also been a fully integrated so our level is very high and our amount of input given the high quality short term of issuers that we use in these portfolios has been very impactful and and and substantive.
And so.
The answer you should do.
The catch up of met without mentioning any particular competitor.
Is that when you're dealing with a.
Federated Hermes money market fund the word of Hermes basically embeds ESG in the process.
And when you look at the money market funds, it's designed.
To go for minimal credit risk.
Anytime you see risks somewhere.
1 of the evaluated for your purposes, and and that's what we're doing here. So we view our products as fully integrated on the ESG and able to stand up.
The against anybody on that score.
Yeah, that's great that's great color. Thank you.
Our next question comes on the line of Robert Lee with K B W. You May proceed with your question.
Great. Thanks for taking my follow up I appreciate the patience.
She's.
No Chris.
Going back to the sticking with the money fund business I guess.
Certainly in the last year or so of course.
Uh Huh March of 'twenty, you know, there's been a lot more.
On a more regular talk about you know.
The the reforms who didn't.
You know in the air quotes.
For instance, in the native which I don't think really surprise, you or most observers, but obviously going back the drawing board of trying to re regulators rethink or thinking about what they can do and it seems like most of what they're talking about is a rehash of.
Of all proposals that would the disc.
Worthy, but is there anything that you're hearing or seeing in terms of.
The old proposals or something new that you know.
You know I'd say more concerning to you or you're more focused on.
The regulators seem to be focused on the we should be aware of.
Rob the the list of things is as you say of rehash.
I consider a whole lot of zombies coming back from.
The debt.
Because.
Most of them are just different forms of killing money funds are killing prime money funds.
Sparkling muni money funds.
And if that's what they wanted to do then they got to be straightforward about doing it. So I'm not aware of anything other than removing the mistake that was made by linking the 30% weekly liquidity with the threat of fees and gait.
Which did compromise the resilience.
Ends of 2 funds.
But the.
Part of the the issue really here is as the fed from the mid Seventy's is wanted to eliminate these money funds and uses any opportunity to do so.
And we make the argument that the money fund is simply a transparent.
So the election device of de facto operating entity of bank paper and commercial paper and don't forget the fed and 1913 was started in order to help and assist the commercial paper market.
So when the fed takes an action.
By simply looking.
Current co transparent and available money market funds. They can put a nice softening touch to the entire market.
Just dealing with the 53 billion that they dealt with the last time lose no money.
Take no risk.
And do their liquidity deals so.
We look at the whole thing.
As the only structural vulnerability that was created was really the link of the 30%.
We also think that the fed could do a lot more and certainly ought to.
Before they go about shooting money funds.
For example, doing at all of.
At the.
Market.
Where people can really trade the short term securities.
And there are things they can do.
Related to the leaving the discount window open.
Reevaluating SLR in the crisis.
And things like that.
To make the liquidity.
Smoother and still do everything totally consistent with Dodd, Frank where all you do is help liquidity and don't help individual people in advance.
That's not what they did when they help the Etfs.
Let me add 1 thing.
This is Jeff.
In addition to what Chris is saying about the the bad we do think 1 of the things that they did at their meeting next week, where they announced the standing repo facility takes away some of the.
The emergency.
The actions they need to do so they this replaces their temporary market open on open market operations that they beefed up you know in the the February March and April time frame and then allows the off for the standing repo facility. You know, it's the opposite of the standing reverse repo facility that they.
They have it's there for bar of borrowing not investing so people putting transactions back to them, putting collateral back to them rather than than them, you know, taking the cash and giving the collateral but in fact, we think maybe that is a sign of a their willingness to look.
Look at facilities that are more of them.
Permanent in nature, and able to help in of crises, rather than just coming up with the emergency lending facilities, you know what when they're on the brink of problems.
Yeah.
Those sorts of nice.
Taking my question.
Patients this morning.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Ray Hanley for closing remarks.
Well, we thank you all for joining us today and that will conclude today's call. Thank you.
This concludes today's conference.
You may disconnect your lines at this time. Thank you for your participation of enjoy the rest of your day.
Okay.
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