Q1 2023 Federated Hermes Inc Earnings Call
Speaker 1: Greetings. Welcome to the Federated Hermes Q1 2023 analyst call and webcast.
Speaker 1: At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad.
Speaker 1: Please note this conference is being recorded. I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.
Speaker 2: CEO and President of Federated Hermes, and Tom Dunn, your Chief Financial Officer.
Speaker 2: And joining for the Q&A are Sakhar Nasebe, CEO of Federated Hermes Limited, our international business, and Debbie Cunningham, the Chief Investment Officer for the Money Markets.
Speaker 2: During today's call, we may make forward-looking statements. Veteran at Hermes' actual results may be materially different than the results implied by such statements.
Speaker 2: Please review the risk disclosures in our SEC filings. No assurance can be given as to future results. And Federated Hermes assumes no duty to update these forward-looking statements. Chris,
Speaker 3: Thank you and good morning. I will review Federated Hermes business performance. Tom will comment on our financial results.
Speaker 3: In a quarter that saw considerable market fluctuations and uncertainty, Federated Hermes ended the first quarter with record total assets under management of $701 billion.
Speaker 3: driven by Q1 growth of $29 billion in money market assets to a record high of $506 billion.
Speaker 3: Turning to equities.
Speaker 3: Assets increased by about 2.1 billion to 83.6 billion.
Speaker 3: which includes market gains of $1 billion and net positive sales of $900 million.
Speaker 3: The Strategic Value Dividend Strategy continued to produce solid net sales with $678 million in the first quarter.
Speaker 3: The U.S. Strategic Value Dividend ETF, which was launched in mid-November, now has $51 million in assets.
Speaker 3: We saw Q1 positive net sales in 25 equity strategies.
Speaker 3: including global emerging markets, international leaders.
Speaker 3: Asia x Japan
Speaker 3: MDT, large tap MDT, mid cap and MDT, all cap core.
Speaker 3: Our equity performance compared to peers remains solid.
Speaker 3: Using Morningstar data for the trailing three years at the end of the first quarter.
Speaker 3: 57% of our equity funds were being peers and 34% were in the top quartile of their category.
Speaker 3: For the first three weeks of Q2, combined equity funds and SMAs had net redemptions of $246 million.
Speaker 3: Turning now to fixed income.
Speaker 3: Assets increased by about $700 million in Q1.
Speaker 3: to $87.5 billion as higher market values were partially offset by net redemptions.
Speaker 3: Within funds, our flagship core plus strategy, total return bond fund,
Speaker 3: had first quarter net sales of about $1.1 billion.
Speaker 3: up from 650 million in the prior quarter.
Speaker 3: High yield category net sales were positive at $231 million compared to net redemptions of $470 million in the prior quarter.
Speaker 3: Core Plus and other fixed income SMA strategies added $170 million of Q1 net sales, including about $43 million in RCW Henderson strategies.
Speaker 3: and other fixed income SMA strategies added $170 million of Q1 net sales, including about $43 million in our CW Henderson strategies. Within Fixed Income Funds
Speaker 3: First quarter net redemptions of about $1.2 billion occurred in the three offshore funds.
Speaker 3: That $1.2 billion redemption is down from $1.8 billion in the prior quarter.
Speaker 3: We had 16 fixed income funds with positive net sales in the first quarter, including obviously the Total Return Bond Fund.
Speaker 3: the SDG engagement high yield, and sustainable investment grade credit funds.
Speaker 3: Regarding performance, at the end of the first quarter, again, using Morningstar data for the trailing three years,
Speaker 3: 57% of our fixed income funds were beating peers and 24% were in the top quartile for their category.
Speaker 3: For the first three weeks of Q2, fixed income funds and SMAs had net redemptions of $69 million.
Speaker 3: In the Alternative Private Markets category, assets increased by approximately $400 million in the first quarter compared to the prior quarter, reaching $21.2 billion. This increase was due to net sales, and the overall revenue increase.
Speaker 3: and positive FX impact.
Speaker 3: partially offset by market losses. Net sales were led by absolute return credit
Speaker 3: Direct lending.
Speaker 3: market neutral, and real estate.
Speaker 3: We continue marketing PEC 5, PEC 5, the fifth vintage of our private equity co-invest fund.
Speaker 3: and Horizon 3, the third vintage of our Horizon Series of Private Equity Funds.
Speaker 3: We have also begun marketing the Hermes Innovation Fund II.
Speaker 3: The second vintage of our private equity innovation fund, the first vintage of our real estate debt fund
Speaker 3: and the first vintage of our Nature-Based Solutions Fund.
Speaker 3: We began Q2 with about $3.8 billion in net institutional mandates yet to fund in both funds and separate accounts.
Speaker 3: Pay attention to the diversity of the types of mandates we're winning.
Speaker 3: About $1.9 billion of this net total is expected to come in equity strategies, which includes Asia x Japan, global emerging markets, and global markets.
Speaker 3: biodiversity, and global equity.
Speaker 3: Approximately 1.3 billion of the net total wins.
Speaker 3: is expected to come in these private market strategies.
Speaker 3: private equity, direct lending, and unconstrained credit.
Speaker 3: Fixed income is expected to have about 640 million, which includes wins in investment grade credit, high yield and core plus.
Speaker 3: Moving to money markets.
Speaker 3: We reached record asset highs for money market funds, $357 billion, money market separate accounts, and total money markets, which I've already mentioned. The first quarter increase reflected movement into money market strategies from bank deposits in March.
Speaker 3: as investors became increasingly concerned following the failure of certain banks.
Speaker 3: Money market strategies also continued to benefit from favorable market conditions for cash as an asset class, higher yields, elevated liquidity levels in the financial system, and favorable yields compared to bank deposits.
Speaker 3: As short-term interest rates peak, we expect market conditions for money market strategies will remain favorable compared to both direct markets and bank deposit rates.
Speaker 3: Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.4% at the end of the first quarter, down from 7.7% at the end of 2022.
Speaker 3: Looking now at recent asset totals as of a few days ago, managed assets were approximately $707 billion.
Speaker 3: including $511 billion in money markets, $83 billion in equities, $89 billion in fixed income, $21 billion in alternative private, and $3 billion in multi-asset.
Speaker 3: Money market mutual fund assets were $362 billion.
Speaker 3: market mutual fund assets were $362 billion. I'm Sean.
Speaker 3: Thank you, Chris. Total revenue for Q1 increased 8 million or 2 percent from the prior quarter, new mainly to higher average money market assets, increasing revenue by 12.6 million. Thank you.
Speaker 3: and higher average equity assets increasing revenue by $6.9 million, partially offset by two fewer days, and lower performance fees and carried interest.
Speaker 3: Q1 performance fees and carried interest were $1.4 million.
Speaker 3: Q1 operating expenses decreased 13.1 million or 4 percent compared to Q4, which included a 31.5 million non-cash intangible asset impairment charge. The 12.9 million increase in compensation and related
Speaker 3: due to seasonality.
Speaker 3: The compensation and related
Speaker 3: Increase also included $5.9 million of higher incentive compensation expense as we reset our quills for 2023.
Speaker 3: Office and occupancy increased from Q1 from the prior quarter, primarily due to the acceleration of $1.4 million in depreciation expense related to a lease termination as we consolidated space in London. The decrease in advertising and promotional
Speaker 3: from the prior quarter is mainly due to the timing of expected ad spend.
Speaker 3: The increase in the other operating expense line item from the prior quarter includes an increase of $3.4 million in FX impact from the currency forwards used to hedge certain pound exposure, and also includes a significant increase of $3.4 million in FX impact from
Speaker 3: a non-recurring retention expense of $2.5 million related to a claim. In non-operating income, investment gains after subtracting the impact attributable to the non-controlling interest is estimated to be $2.5 million. In the non-operating income,
Speaker 3: Added earnings per share for Q1 of about 3 cents due to the positive market impact on our investments.
Speaker 3: Q4's EPS positive impact was about $0.04. The effective tax rate was $22.7 for Q1.
Speaker 3: The Q1 rate reflects tax deductions for certain stock compensation that shares bested at a higher price compared to the original grant price.
Speaker 3: and the impact of non-taxable, non-controlling interests. Assuming no impact from the non-controlling interests, we expect our effective tax rate to be in the range of $24 to $26.
Speaker 3: percent for the full year 2023. At the end of Q1, cash in investments were $448 million, of which about $453 million was available to us.
Speaker 3: As noted in the press release, the Board declared a dividend of 28 cents, an increase of about 4% from the previous dividend.
Speaker 3: And during the quarter, our share repurchases totaled approximately 133,000 shares for about $4.7 million.
Speaker 3: And Chris, I said that our 1.2 billion net redemptions were in offshore funds and those were in ultra-short funds. I think most of you probably knew that, but nonetheless we should correct the record. Thank you. And now we turn it over for your questions.
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Speaker 1: One moment while we poll for questions.
Speaker 1: One moment while we poll for questions.
Speaker 4: Your first question for today is coming from Ken Worthington at JP Morgan. Hi, good morning. Thanks for taking the question. Maybe first, can you talk about the outlook for the state pool and SMA money fund businesses?
Speaker 4: So how do you think higher rates impact the growth of this business over time in terms of municipality participation? And then to what extent are the banks really the competitor to these products? And does the mid-cap banking crisis position these pools for better growth?
Speaker 4: And then lastly, you manage a couple of these polls already like Texas and Florida. Are there other states that pull together the municipalities? And is there more winnable business here like say California where the regional bank seemed to be located that have struggled so much lately?
Speaker 3: Ken, this is Chris. There are many other opportunities on the state pool front.
Speaker 5: Let's divide that up in certain ways. In many of these states, even where we have the main pool, there are sub-pools in the state as well. Those pools are always viewed as a polite competition for the big state pool.
Speaker 5: and the extent to which those pools don't buy the right securities or don't have the right yields or don't have sufficient size to make things happen, that tends to enable the big pool to get bigger and therefore our...
Speaker 5: claim on assets to manage to grow. That's one part of it. Another part of it, I can't say what will happen in California to what they do in their state pool. I don't have information on that. We can get you that.
Speaker 6: But.
Speaker 5: Overall, it does not appear that the
Speaker 5: the things happening to the regional banks.
Speaker 5: are impacting the state pools. That business is done
Speaker 5: based on long-term contracts with long lead times, with bid processes, RFPs that are very complicated.
Speaker 5: And so it's really hard for those state pools to turn on a dime.
Speaker 5: And obviously that's a tough thing for getting new business, but it's a pretty good thing for keeping old business. The next point I'd make is that we have a separate sales group that calls on those groups all the time so that whenever there's an opportunity on whatever state,
Speaker 5: And we are working on right now a small handful of states, I'm not going to mention them, where we think we can become the manager of the pool. Debbie?
Speaker 7: Thanks, Chris. Ken, Chris just mentioned the long lead time for the pools themselves, taking over the state pools themselves, local government investment pools, but the participants don't have such long lead time and the participants do have choices. They don't have to be in the state pools. They could be in a bank, as you mentioned.
Speaker 7: to this business. Much like our outlook for money market funds, however, our outlook for the state pools from a participant gathering assets basis going forward is excellent. Generally speaking, in an increasing rate environment, which assets are not going to be going forward,
Speaker 7: we see the same trajectory for our state pools. I will mention, however, though, there are a lot of...
Speaker 7: cash flow idiosyncrasies with regards to the state pools. Generally the state and the local municipalities receive cash at a certain time, same with the school districts within those state pools. And then they have a period of time when they are no longer receiving the cash receipts.
Speaker 5: or the disbursements from the state themselves, but are rather spending it. So there are definite annual cyclical cycles that we deal with in those pools as well. The final point I mentioned is we are at an all-time high of $148 billion in state pools.
Speaker 4: Yep, great. Thank you. And then Chris, you've been doing this for a long time. You've built a really big business at some point. You'll retire. What does succession planning look like for Federated? And do you think that leadership stays in the family?
Speaker 4: or are you thinking about an outsider as we think longer term about leadership?
Speaker 5: No human is indispensable and I appreciate your comment of being here a long time. But my standard for that is where is our board in terms of my participation, health, enthusiasm, and contribution to the good of the enterprise? And as long as that keeps going, you're going to keep hearing from me.
Speaker 5: In terms of succession, under the New York Stock Exchange rules, we're required to every year go over the succession plans with the board. And now that doesn't mean that you have exact candidates in every case, but it means you have a gang of candidates or a process that gets you that answer.
Speaker 5: And this is exactly what we've gone over with the board. And so our executive committee has plenty of good candidates to succeed me the way we put it if I get hit by a bus.
Speaker 5: and the enterprise would continue on beautifully.
Speaker 5: The other thing I would mention is that, don't forget, with the A.B. stock, the family does control the voting, such like we did yesterday.
Speaker 5: But what the voting will do is do what's in the best interest of the entire enterprise and that's how we'll approach it. So we can't say for certain what will happen down the road, but you see the structure, the pattern, and the process that we will go through.
Speaker 4: Great, thank you very much.
Speaker 1: Your next question is coming from Patrick Davitt at Odonamis Research.
Speaker 8: Good morning, everyone.
Speaker 9: Before this quarter, you've been guiding to the big uptake in deposit to money fund rotation really starting once the Fed pauses. But the SIBB situation has obviously driven a big spike and it looks to be continuing in April better than we would normally see in April .
Speaker 9: Do you think that the start has been pulled forward or do you think we'll see a lull now until we get more of an all-clear from the Fed?
Speaker 7: You know, I think taxes come due in April . It's generally, you know, sort of beginning of a new quarter where first quarter has outflows. That obviously didn't come to fruition. There were inflows this year. So I expect that we'll continue to see.
Speaker 7: upticks in rates, the comparison versus deposit products, especially with what happened to some of the regional banks in March of this year, has kickstarted that process to some degree and will continue to impact in a positive way.
Speaker 7: the flows into money funds even before the Fed approaches and reaches that terminal rate in the next several months or so. And Patrick, it might be helpful on that point to take a look at the difference between institutional and retail even though...
Speaker 5: Nobody has accurate numbers on what's institutional and what's retail.
Speaker 5: On the retail, we basically figure we've been gaining market share and these kinds of assets tend to be more sticky.
Speaker 5: because it is kind of related to the rates and the biggest risk of the retail is going back into the market, which would all be good because we have buckets for that too.
Speaker 5: In terms of the institutional, if you talk to some of our salespeople, they will tell you that the institutional trade, if you will, started a little early, like you're hinting, and it was probably accelerated by a lot of those bank moves, the bank problems. How much of it is already in the pipeline? It's really hard to say.
Speaker 5: I could beat our guys up into giving me an answer, but even if they gave me one, I wouldn't give it to you over the phone. And so, there's more to come, but I can't tell you how much that trade has already been done.
Speaker 5: beat our guys up into giving me an answer, but even if they gave me one, I wouldn't give it to you over the phone. And so there's more to come, but I can't tell you how much that trade has already been done.
Speaker 9: And then on expenses, you mentioned a lot of kind of little seasonal and one-time type items. It wasn't entirely clear to me which of those you really consider one-time or what part is kind of a run rate step up. So could you maybe frame how much of all those items in one queue you expect to roll off into queue not repeat.
Speaker 9: And then more broadly, how should we expect the cadence of operating expenses to track this year, including what I imagine will be a continued step up in distribution with a much higher MMS asset. Thank you very much.
Speaker 9: More broadly, how should we expect the cadence of operating expenses to track this year, including what I imagine will be a continued step up in distribution with a much higher M&F asset?
Speaker 3: So the London office, you know, saving some space of 1.4 million. So we don't expect that to reoccur, but we're going to get some savings from not having space into the future.
Speaker 3: The London office saving some space of 1.4 million, so we don't expect that to reoccur, but we're gonna get some savings from not having space into the future. But that's a 1.4 million.
Speaker 3: The insurance claim I mentioned, you know, that's a non-recurring thing. So those two things add up to about three cents.
Speaker 3: in terms of non-recurring.
Speaker 3: in terms of non-recurring. For the future,
Speaker 3: the comments on comp, which I mentioned the seasonality on the payroll tax and on our incentive stock compensation.
Speaker 3: you know, that would be for Q2, I'd say those numbers will be down by 3 million.
Speaker 3: But of course you have all the other things that can change in comp so that's just a change Not commenting on what else is what else is going to happen? in Q2 for call
Speaker 3: talent distribution, we would expect the obviously we see the assets are up and still growing and so the distribution line item, I absolutely would say I would expect that to go up.
Speaker 3: Systems and Communications and Professional Service, these are both getting the opportunity to spend more money with technology. So the tech spending, both of those line items, I would expect to go up.
Speaker 3: I already talked about office and occupancy and advertising and promotional. Q1 is low just on the timing for the year. We've always said look at that over the whole year. We've always said look at that over the whole year.
Speaker 3: So I'd expect that to go up in Q2 and the rest of the year. And enough about intangibles last quarter. Travel and related Q1 is low, so I'd expect that to go up. And I think I went through the FX on the other and the claim is in other. So those, who knows what happened. FX changes every quarter.
Speaker 1: Okay. That was helpful. Yes, that was helpful. Thank you. Your next question for today is coming from Daniel Fanon at Jefferies.
Speaker 10: Thanks. Good morning. The 3.8 billion of institutional backlog, you highlighted the diversity of it. Can you talk about the fee rates across that book of business that's coming in and how that compares to the overall kind of long term fee rate that you have today?
Speaker 2: Ray? Sure, Dan. So on the private market side, we've talked about the current book being in the neighborhood of 40 basis points, but that's weighted to...
Speaker 2: As you know, a lot of that money came into those strategies through Hermes' relationship with BTPS as owner and so as we increasingly diversify the investor base there, you know, we look for new mandates and new money.
Speaker 2: that's to come in at better fee rates. But, you know, that's all working itself out in the marketplace. It's not going to move the number in the next quarter or two. And then as far as the...
Speaker 2: equity, which is really the biggest part. The fee rates there, as are typical, the separate account, those are also negotiated on sort of an individual basis. But when you blend everything together, there are different types of
Speaker 2: roughly, you know half or so of what the fund Advisory rates are and so, you know, you should look for numbers in the low to mid 30s there again with a lot of variance across individual strategies and individual clients.
Speaker 2: Unlike, for example, the funds. On the fixed income side, kind of a similar dynamic, but our blended fee rate there is more like in the 10 basis point range for fixed income separate accounts. Again, varies by client, varies by mandate. You'll have a lot of range around that number.
Speaker 2: But that's where the fee rates are now, and that at least gives you a good starting point for the pipeline figures.
Speaker 5: To add color to the fee rates, I'd ask Sacker to comment on that, some of those businesses.
Speaker 11: Thank you very much. I think Ray covered them. We have had a very good influence in the equity side, our gems funds and institutional rates are advertised. As Ray said, it is a negotiation as to the size of the funds that are being used.
Speaker 11: of the institutional mandate and also it's a negotiation as to whether we have other relationships with the same institution and the rule of thumb if you win a huge mandate then the customer quite rightly expects you to give back some of that. On the other hand in private markets
Speaker 11: If you look at some of the wins we've had in our direct lending
Speaker 11: lot of that although it's sold institutionally is actually sold in the format of a fund so there might be some discounts as the practice in Europe but we're getting quite close to what we'd answer so I think a generalist point of view is as we to reiterate what Ray says as we move away from our old mandates that we had with our client BTS when they were an owner in private market
Speaker 11: we are increasing our fee rates and you can see this in things like our direct lending fund. You can see this in new clients that come into for example the nature fund which we are innovators in and I believe the first people to launch an actual fund in Europe in conjunction with the government in the UK in conjunction with the government there and you can see this in our equity funds where we're seeing a double inflow one is in gems in general as people see.
Speaker 10: helpful, thank you. And then just to follow up on the balance sheet, cash balances continue to grow, buybacks have been pretty quiet. So maybe talk about the M&A environment, your appetite for that versus buybacks, or should we think about cash building as the year progresses.
Speaker 3: Hey Dan, we're active. We don't have anything to talk about. We're still working on growing our CW Henderson business, which is going nicely there.
Speaker 3: We continue to, as you say, buy modestly shares and we analyze that. You notice we did also a modest increase in the dividend, but all things continue to be on the table. I think I mentioned last quarter that our seed is not a good thing.
Speaker 3: usage may increase as we develop new products around the globe. So that's another use of the cash. We invest our money in a money market fund managed by a company that has a
Speaker 3: highly competent team and we're getting some pretty nice yields on that now, so it's not burning holes As we make our you know high four percent numbers on it
Speaker 1: Understood. Thank you. Your next question is coming from Kenneth Lee at RBC Capital Markets.
Speaker 12: Hi, good morning and thanks for taking my question. Just on the alternative side, you mentioned a couple of funds starting to being marketed at nature based solutions.
Speaker 12: How should we think about the potential contribution to AUM over time from some of these funds that you're starting to market? Thanks.
Speaker 5: I will give you a broad answer and then I will let Sacher fill in the current situation.
Speaker 5: and then I will let Sacher fill in the current situation. Overall,
Speaker 5: The whole private markets effort over time without a date on it could be as big as the rest of the entire enterprise. There are a lot of good things going on in private market, real estate, direct lending, unconstrained credit, and some work being done on infrastructure as well. That's a broad answer. Now you talk about individual funds there, the debt fund, the real estate debt fund, and the nature-based solutions fund. I will let Sakhar fill in the blank on those. Thank you, Chris.
Speaker 11: So broadly in line with what Chris says, the private markets takes a long time because some of the products and some of our funds are a long-term negotiation. For example, a really big real estate project takes several years to negotiate and several years to get clients lined up, but generally that pays back over 10 years. And we're talking about very large sums.
Speaker 11: of assets on the management. On the other hand, on the extreme other side if you like, something like our direct lending, that is a business that is rapidly growing above the billion that we were at last year. And we see that as continuing to grow because we have a differentiated product. The real estate direct lending we've just launched, we have high hopes for it.
Speaker 11: and we'll come back and report on the closes as we come to that. So these are two ends of the spectrum. You've mentioned the Nature Fund and I'll mention that because it's worth mentioning it. There is in Europe and in Canada demand for innovative products such as the Nature product. I didn't mention when we talked about our equity funds, the large inflow we've had in our biodiversity fund.
Speaker 11: which is also something that we are leaders in. Now what differentiates us is we work with innovators in the field. So for example, in the biodiversity fund we have very strong relations with the scientist community that works within the London Natural History Museum. That's partly why we've had such a successful...
Speaker 11: ability to launch, manage and grow the fund. Now in the case of the Nature Fund, we have this, we've launched it in conjunction with a part of the UK government which wants to encourage biodiversity and that then attracts clients and by being the first to the field and I've got to emphasise.
Speaker 11: we believe we are the first in the field in the UK in this format. There might be others called other formats, but in this pure format and at least the ones acknowledged by the government, the key with that is we learned how to do this. And the potential is huge if I listen to clients, but that's going to be a slow build because we've got to think about how we can innovate the actual investment process. So you can see some information.
Speaker 11: I think in some of the more traditional products you're likely to see a quick, reasonably small incremental increases over time as you would with any other public market fund. In the very large projects I think the potential is very large but it takes time. I hope that answers your question.
Speaker 12: Gotcha. Very, very helpful there. One follow-up, if I may, just back on the Money Market Fund side. I wonder if you could just share your thoughts about any potential impact from the ongoing debate around the U.S. government debt ceiling and money market funds. Thanks. I'm going to call it Groundhog Day. We've been here before. We've been here before.
Speaker 7: She'll continue to use extraordinary measures until they're almost exhausted and then there will be some resolution. So our expectation is similar to past experiences with this is that it will be passed, it will get resolved. Maybe, you know, in some instances it's been temporary suspensions and, you know, short-term kick the can down the road for a few months, that's a potential.
Speaker 7: of even a technical default from a U.S. Treasury perspective. Now having said that, the market has prepared over the course of the last decade, let's call it now, for such an event from both an operational perspective, from a systems standpoint, the ICI, the SIFMA, DTCC are prepared.
Speaker 7: a very, thankfully, a very remote event, but one that could be dealt with in the context of the market if it were ever to come to fruition.
Speaker 12: Gotcha. Super helpful there. Thanks again.
Speaker 12: Gotcha. Super helpful there. Thanks again. Sure.
Speaker 1: Your next question is coming from John Dunn at Evercore ISI.
Speaker 13: Thank you. Maybe you could level set for us higher rates and the impact on the shifts in demand for your fixed income menu. And then are you seeing institutions de-risk into fixed income now that fixed income actually has income? First of all, So
Speaker 5: Looking at the trends from the way we look at on the retail side, average
Speaker 5: Mutual fund and SMA gross sales. Okay I know you guys are all into net but gross sales is the way I have to approach your question.
Speaker 5: And over the last several years, all during COVID 2000, 2001, 2002.
Speaker 5: And over the last several years, all during COVID 2000, 2001, 2002, our
Speaker 5: Gross monthly sales of mutual funds and SMA's on the fixed income side, which you're asking about have averaged about $1.5 billion. So in the first quarter we were $1.434 billion.
Speaker 5: And what this tells you is that there is a excellent demand for these products. When I mentioned that there's 16 fixed income funds here that are positive flows in the quarter, it's because people actually enjoy getting yield. Now obviously the biggest one is the total return bond fund.
Speaker 5: But it has other accomplices as well. And remember that among the retail clients, trust departments, etc., there will always be a component of fixed income in the portfolio. Even if the stock market were to take off, you have a robust demand.
Speaker 5: for a core amount of fixed income. Last year you had some of the biggest players have some performance glitches which helped us enormously in showing the steady, eddy return of how we manage money in the core space and we were able to gain some in that world as well.
Speaker 7: So, I don't know if you have more specific things you're interested, John , but that's an overall approach. I'll add one thing, too. Our expectation, even when the Fed reaches a terminal rate, is not for rates to go back to zero. It's not normal despite the fact that...
Speaker 7: You know, people that have been in the market for maybe the last 15 years think that's the landing gauge, but in fact it is not. So when you get rates that are 3, 4, 5 percent and you are at a point when the Fed is at the top of its cycle, you know, you're at a point where you're at a point where you're
Speaker 7: you see flows into products like the ultra short funds, the micro short funds, the cash plus funds that will maintain those higher rates for a longer period of time because the Fed is not taking a trajectory that takes it back to zero.
Speaker 13: And then maybe just any comment on how the deposit slide is impacting rollups of money market funds. Do you think it makes it more or less likely that you could get some more done? Well, uh,
Speaker 5: It is an inevitable thing, and we've seen over the years, as I've reported on this call many times, there used to be over 200 people presenting money market funds to the money market world, and now it's 50. And this was born very publicly on October 21st, when name update was among the same
Speaker 5: are all small and don't really compete for real money. And so each of those eventually come to the conclusion that this is not worth it, it costs too much money to manage it, we don't have enough size to make it work, there's risk here, the CFO gets excited about it, people want to improve their cost structure.
Speaker 5: And as I said before, we have a sales force of M&A specialists that call on every one of these people. And we are well known as the go-to player. If you are going to sell some money funds, you are going to call us even if we happen to miss you this week. And as I always say, we are a very warm and loving home.
Speaker 5: for all money market fund assets. Does this particular thing accelerate it? I can't give a good speech on why that will be some kind of catalytic event, but it does add to the mixture. Another thing that adds to the mixture, and it always does.
Speaker 5: Every time there is an increase in regulation,
Speaker 5: That's the same thing as strengthening the oligopolization of an industry.
Speaker 5: And so even though we fight vigorously against new regulations that we don't think make sense, it does have that effect.
Speaker 14: Okay, great. Good morning. I just wanted to ask a little bit of a nuanced question about the money fund inflows in the quarter. Given that they came in later in the quarter post the bank stress, how did that impact the revenue contribution? I'm guessing clearly it's not a very big piece of the revenue this quarter.
Speaker 5: at FHI are average daily assets. And so when it comes in later for the quarter, it has the obvious effect.
Speaker 5: In terms of how that impacts the distribution, it's a pro-rata deal, and I'd let Tom or Ray comment further on that. There's not much more comment. It comes right in at the exact same time as we get revenue. Our distribution payments go up.
Speaker 3: And we're happy in the old days, I used to call that an expense success item, because we got the revenue that came with the additional assets.
Speaker 2: And remember that a lot of that of course are 12B1 distribution fees billed into the fund that, as Tom said, we collect and pass through in many instances. Okay, great. And then maybe just a follow up on the money market business. I mean, I tend to view it more so as a cash management tool.
Speaker 14: short-term fixed income ETFs. Is that a risk here or is it because of the dynamics of how institutional municipalities look at their cash? You're talking about apples and oranges here. And then maybe just one follow-up on that is...
Speaker 14: You talked about how the competitive landscape has really narrowed over time, but there are still some very large players here that I'm sure would love to keep some of these assets close. Have you noticed a tougher competitive landscape, and has that played through in terms of fee rate pressure in the space? Let's answer the last one first, and we'll crawl back to the first question. The detailed Paradise buzz
Speaker 5: Recently, we haven't noticed any new competitive pressures on pricing. And you go, oh, well, that could have why isn't that happening? I don't know. The the players haven't been doing any more than the normal amount that we've been dealing with for how many decades. One of the other things to remember about this, even though the big players, the biggest players obviously want to keep money and get.
Speaker 5: for their cash because they like diversification.
Speaker 5: If anything, you may see more of that coming given what happened in the banking world.
Speaker 5: And so that's the answer to the second part of the question. On the first part, as to I appreciate fully and support your observation that we offer a cash management service. Do you use the word tool? I don't quibble. But we call it a cash management service or a cash management solution..
Speaker 5: And that gives it a lot of resiliency no matter what's going on in the marketplace, which is why we talk about getting higher highs and higher lows over the various sequences.
Speaker 5: And when you mention other short-term investments like ETFs or ultra-short funds or even our own micro-short funds, they have variable net asset values. And the ETF is never really going to be competitive with a money market fund. They don't pay the dividends every day. You don't know if you're going to get a buck back or not.
Speaker 5: It's going to be a price just like a security. So if someone wants to do a longer cash thing, then fine. We have the products for that. But those products are not going to compete specifically with money market funds. The only thing I'd add to that is generally ETFs are settling on a T plus two basis.
Speaker 7: That is certainly not what's expected and for the most part needed and utilized in the liquidity world for money market funds. They're expecting T plus zero settlement for putting their cash with us and for redeeming their cash for its various uses. So that's it.
Speaker 1: for today's coming from Brian Bedell at Deutsche Bank.
Speaker 13: Great, thanks. Good morning, folks. Another one on money funds. Two-part question number one, are you able to guess at what the outflow impact during the month of April was from tax payments? We saw a few days with elevated outflows.
Speaker 13: that would otherwise imply much better than 4 billion of inflows in April . And then secondly, the cash sorting dynamic. So obviously we're seeing sort of a different dynamic at brokerages versus retail banks. I'll just use Schwab as an example where much of the cash sorting is done there in a very later innings there. However, on the retail bank side, we're seeing a lot of more of a more of a more of a more of a more of a more of a more of a more of a
Speaker 13: assets that are not advised are sorting later in the cycle. So I don't know if Chris or Debbie, you can give some perspective of what any of you think we are on the retail bank side and then just relative within your complex with federated money funds on the shelf at banks versus brokerages. That yeah.
Speaker 13: to what extent do you have a bigger presence in the retail bank channel than at the sweep vehicle at brokerages? So on cash sorting, what a lovely expression. That describes it as if the customer is in charge of it as opposed to
Speaker 5: deposit beta where the bank is in charge of it. And basically it's the same thing of squishing that balloon. And we're very much in favor of the expression you're using of cash sorting because that generally means that the customer is figuring out that maybe 0 or 10 or 25 basis points is not the market.
Speaker 5: for a cash return.
Speaker 5: And it's obvious what you're seeing that some of the banks are having to pay up in order to keep, maintain, or gain deposits.
Speaker 5: And all it is, is the marketplace having its effect. The deposit beta rate is basically an administered or concocted rate with the design of giving beta to the bank for its net interest income.
Speaker 5: And there's a little shift because of what happened in the banking industry for how people are actually looking at that. Now, where are we in the cycle? That's really hard to say because can the banks increase enough to keep the customer?
Speaker 5: We've also seen situations where tie-in sale prohibitions to the contrary notwithstanding, there are total relationships that are developed between banks and customers that keep the deposits nice and handy. And we don't see those real time.
Speaker 7: The deposit beta side, first of all, if you look at deposits in the marketplace, total deposits, they are down several trillion and it did not start just in March. It was kick-started in March, I would call it, of 2023. But it began in earnest back in March of 2022 when the Fed began raising interest rates.
Speaker 7: And most recently during the first quarter, deposits are down about, I think it was $513 billion, so a little less than half a trillion. And amazingly, money market funds were also up a little less than a half a trillion. So yet it's very difficult to follow the dollar to see it leave a specific institution or a specific security type like a deposit or and.
Speaker 7: go into another type of entity like a money market fund. Having said that, when you look at the deposit beta historically for banks in a rising interest rate environment, it's about generally 40%. In today's environment, we're still at less than 20% from a deposit beta perspective. So, you know, the last I saw, the average deposit rate paid by banks is still less than 1%. And we're in an interest rate environment that's at this point.
Speaker 7: showing overnights at a 480 and a curve that goes out to, you know, 580 depending upon what type of security you're looking at. So we're less than 1% from a deposit data perspective and, you know, will the banks get to that 40% historical average?
Speaker 7: Like Chris said, it's hard to say what others will do, but given that they're nowhere close to that number yet and we are close to reaching what seems like a peak or a terminal rate in short-term rates, there's still a lot to go in this ballgame. I'm not sure what exact inning it would be.
Speaker 3: to around 511 before a few days before the tax.
Speaker 3: So money came in and then money went back out and and after the tax season We know 18th was the payment date We ended up at around 511 and I think we we said we're around 511 so you actually ended up having a little bit positive in that, you know, five or six or seven day Which was a little bit unusual
Speaker 13: Just one part of that money fund question, your exposure or your – I guess exposure is the right word – in terms of the retail banking channel versus brokerage, do you have more funds on retail banking platforms or as you say a wider or larger franchise?
Speaker 5: But we are on platforms wherever we can be on platforms. Thanks very much.
Speaker 2: Your next question is a follow-up question coming from Patrick Devitt at Autonomous Research. Thanks for the follow-up. Special dividends have always been a part of your toolkit, and since it sounds like you're not planning big repurchases.
Speaker 9: Could you remind us how you think about that part of the capital return equation and how often you evaluate that? Thank you.
Speaker 3: Yeah we so you know we paid the number of those in the past and when we looked at those we you know were highly disappointed with the number of them where the stock price was we were earning the income and we were not our shareholders were not getting rewarded by the price that reflected our.
Speaker 3: of a bunch of things.
Speaker 3: you know, seed money and acquisitions. But we basically would go through the same thought process and that's why I added in that we're getting a much higher yield on it than we used to. And so, you know, like I said, it's not.
Speaker 15: Thanks.
Speaker 1: We have reached the end of the question and answer session and I will now turn the call over to Ray Hanley for closing remarks. Thank you, Holly. That concludes our call and we thank you for joining us today.
Speaker 1: We have reached the end of the question and answer session and I will now turn the call over to Ray Hanley for closing remarks. Thank you, Holly. That concludes our call and we thank you for joining us today.