Q3 2023 Federated Hermes Inc Earnings Call
Greetings and welcome to the Federated Hermes, Inc, Q3, 2023 analyst call and webcast at.
Speaker 1: Greetings. Welcome to the Federated Hermes Inc. 23 2023 Analyst, Coal, and Webcast. At this time, all participants are in English and only mode. A question and answer session.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Speaker 1: I will now turn the conference over to your host, Ray Hanley, president of Federated Investors.
I'll now turn the conference over to your host Ray Hanley President of Federated Investors Management Company you may begin.
Speaker 2: Good morning and welcome. Thank you for joining us today. Leading today's call will be Chris Donahue, Federated Herbie's President and CEO , and Tom Donahue Chief Financial Office.
Good morning, and welcome. Thank you for joining US today, leading today's call will be Chris Donahue, Federated, Hermes, President and CEO, and Tom Donahue, Chief Financial Officer.
Speaker 2: and joining us for the Q&A or SACR to Sabi, who is the CEO of Federated Hermes Limited, our international operation, and Debbie Cunningham, the Chief Investment Officer for the Money Mark.
And joining us for the Q&A or soccer soccer to say base, who is the CEO of Federated Hermes limited, our international operation and Debbie Cunningham, the Chief investment officer for the money markets.
Speaker 2: During the 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 filing. No assurance can be given as to future results and federated Hermes assumes no duty to update any of these forward-looking statements. Chris? Thank you.
During the 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.
<unk> can be given as to future results and Federated Hermes assumes no duty to update any of these forward looking statements Chris. Thanks.
Thank you Ray and good morning all.
Speaker 3: I will review Federated Herming's business performance. Tom will comment on other financial results.
I will review Federated Hermes business performance, Tom will comment on our financial results.
Speaker 3: We had solid asset growth in Q3, ending with record assets under management of $715 billion. Driven by record money market assets of $525 billion.
We had solid asset growth in Q3, ending with record assets under management of $715 billion driven by record money market assets of 525 billion.
Speaker 3: Fixed income produced solid growth as well.
Fixed income produced solid growth as well.
Speaker 3: Looking first at equities, assets were down $5.7 billion to $77.3 billion.
Looking first at equities assets were down five $7 billion to $77 $3 billion.
Speaker 3: Due to combined market losses and effects impact totaling 3.3 billion and net reductions of 2.4 billion.
Due to combined market losses, and FX impact totaling $3 3 billion in net redemptions of $2 4 billion.
Speaker 3: We did see Q3 positive net sales in 14 equity strategies.
We did see Q3 positive net sales in 2014 equity strategies, including MDT large cap growth international leaders and U S Smid equity.
Speaker 3: including MDP large-cap growth, international leaders, and U.S. smid equity.
Speaker 3: The strategic value dividend domestic strategy had Q3 net redemptions of 1.5 billion.
The strategic value dividend domestic strategy had.
Q3, net redemptions of one 5 billion.
Speaker 3: This strategy is outcome driven and is benchmark agnostic as we have said each quarter. It seeks a high and rising stream of dividend income from high quality companies.
This strategy is outcome, driven and as bench benchmark agnostic as we have said each quarter. It seeks a high and rising stream of dividend income from high quality companies.
Speaker 3: As of 930, the fund had a weighted average dividend yield of 5.1 percent compared to a 1.6 percent yield in the S&P. And the fund has seen 39 dividend increases and zero cuts in the trailing 12 months.
As of 930, the fund had a weighted average dividend yield of five 1% compared to a one 6% yield in the S&P.
And the fund has seen 39 dividend increases and zero cuts in the trailing 12 months.
Speaker 3: Looking at equity performance compared to peers and using morning star data for the trailing three years end of Q3, 54% of our equity funds were beating peers and 33% were in the top core top of their category.
Looking at equity performance compared to peers end using Morningstar data for trailing three years end of Q3.
54% of our equity funds were beating peers and 33% were in the top quartile of their categories.
Speaker 3: For the first three weeks of Q4, combined equity funds and SMAs on the equity side had net redemptions of $753 million.
For the first three weeks of Q4 combined equity fund and SMA. So on the equity side had net redemptions of $753 million.
Now turning to fixed income.
Speaker 3: Assets increased by 2.3 billion in Q3 to 89.8 billion with fixed income separate accounts reaching a record high of 47.2 billion.
Assets increased by $2 3 billion in Q3 to 89 point <unk>.
<unk> 8 billion with fixed income separate accounts, reaching a record high of $47 2 billion.
Speaker 3: Fix income institutional separate accounts net sales of 3.8 billion were driven by the funding of a two billion dollars in an institutional multi-sector mandate and by approximately 1.3 billion from a large public entity.
Fixed income institutional separate account net sales of $3 8 billion were driven by the funding of a $2 billion in an institutional multi sector mandate and by approximately $1 3 billion from a large public entity.
Speaker 3: Fixed income SMAs had due to record gross and net sales of $572 million and $320 million respected.
Fixed income SMA had Q3 record gross and net sales of $572 million and 320 million respectively.
Speaker 3: Fixed income funds had net redemptions of about $684 million.
Fixed income funds had net redemptions of about $684 million.
Speaker 3: Within funds, our flagship core plus strategy total return bond fund had Q3 net sales of about 466 million. Oh, that includes both the fund and the CIT.
Within funds, our flagship core plus strategy total return bond fund.
Q3, net sales of about $466 million. So that includes both the fund and the city.
Speaker 3: 4 plus funds and other fixed income SMA strategies added 320 million of Q3 sales.
Core plus funds and other fixed income.
Semey strategies added $320 million of Q3 sales.
Speaker 3: The three ultra-short funds posted net redemptions of about $462 million.
The three ultra short funds posted net redemptions of about $462 million.
Speaker 3: We had 15 fixed income funds with positive net sales in the third quarter, including the total return bond fund, the total return bond collective investment fund.
We had 15 fixed income funds with positive net sales in the third quarter, including the total return bond fund the <unk>.
Total return bond collective investment.
Fund.
Speaker 3: the intermediate corporate bond fund and the sterling cash plus.
The intermediate corporate Bond fund and the Sterling cash plus.
Regarding performance.
Speaker 3: At the end of Q3 and using Morningstar data for the trailing three years, 31% of our fixed income funds were beating peers. 17% were in the top quartile of their tateg.
At the end of Q3 and using Morningstar data for the trailing three years, 31% of our fixed income funds were beating peers, 17% were in the top quartile of their categories.
Speaker 3: For the first three weeks of Q4, fixed income funds and SMAs had net redemptions of $77 million.
For the first three weeks of Q4 fixed income funds and SMA had net redemptions of $77 million.
Speaker 3: In the alternative private markets category, assets decreased by about 1.3 billion in the third quarter from the prior quarter, coming to 20.
And the alternative private market category.
Assets decreased by about $1 3 billion in the third quarter from the prior quarter.
Coming to 23 billion.
Speaker 3: The decrease was due to FX impact.
This decrease was due to FX impact.
Speaker 3: of about just under $800 million, market value decreases of about $300 million, and net redemptions and distributions of about $200 million.
Of about just under 800 million market value decreases of about $300 million and net redemptions and distributions of about $200 million.
Speaker 3: We are in the market with Horizon 3, the third vintage of our Horizon series of global private equity funds.
We are in the market with horizon III, the third vintage of our Horizon series of global private equity funds.
Speaker 3: Horizon 3 has closed on commitments of 1.05 billion through the third quarter. We're also in the market with the Hermes Innovation Fund II, the second vintage of our pan-European growth private equity innovation fund. We had our first close in August for approximately 100 million euros. And we're in the market with our first vintage of our UK nature impact fund.
Arrives in three has closed on commitments of 1.15 billion through the third quarter. We're also in the market with the Hermes innovation fund to this.
The second vintage of our Pan European growth private equity innovation fun, we had our first close in August for approximately 100 million euros and we're in the market with our first vintage of our UK nature impact fund.
Speaker 3: We began Q4 with about $4.9 billion in net institutional mandates yet to fund in both funds and separate accounts.
We began Q4 with about $4 9 billion in net institutional mandates yet to fund in both.
Funds and separate accounts.
Speaker 3: These wins are diversified across fixed income, equity, and private markets.
These wins are diversified across fixed income equity and private markets.
Speaker 3: Fixed income expected additions total about $3.1 billion, which include wins in active cash, short credit, high yield, and corporate.
Fixed income expected additions total about $3 1 billion, which include wins and active cash short credit high yield and corporates.
Speaker 3: Approximately $1.5 billion of total net wins is expected to come in private market strategies with wins in private equity, direct lending, and absolute return.
Approximately one 5 billion of total net wins is expected to come in private market strategies with wins in private equity direct lending and absolute return.
Speaker 3: About $227 million of the net total wins is expected to come into equity strategies.
About $227 million of the net total wins is expected to come into equity strategies.
Speaker 3: And wins included mandates in bioequity.
And wins included mandates in bio equity.
Speaker 3: global equity, and JEM.
Global equity.
And Jos.
Speaker 3: Moving to money markets, we reached record highs for the money market assets of $385 billion and total money market assets of $525 billion.
Moving to money markets, we reached record highs for the money market assets of 385 billion and total money market assets of 525 billion.
Speaker 3: Money market strategies continue to benefit from favorable market conditions for cash as an asset class, higher yields, elevated liquidity levels in the financial system, and of course favorable yields compared to bank deposits.
Money market strategies continue to benefit from favorable market conditions for cash as an asset class higher yields elevated liquidity levels in the financial system and of course favorable euros compared to bank deposits.
Speaker 3: A short-term interest rates peak. We expect market conditions for money market strategies will be favorable compared to both direct market rates and bank deposit rates.
As short term interest rates peak.
We expect market conditions for money market strategies will be favorable compared to both direct market rates and bank deposit rates.
Speaker 3: Looking at flows in money market funds in the third quarter, we saw good activity from products geared toward the retail customers of financial intermediaries.
Looking at flows in money market funds in the third quarter, we saw good activity from products geared toward the retail customers of financial intermediaries.
Speaker 3: Institutional product flows continue to be challenged by direct security yields.
Institutional product flows continued to be challenged by direct security yields.
Speaker 3: Our estimate of money market mutual fund market share, including sub advised funds, was about 7.3% at the end of the third quarter, up from about 7.2% at the end of the second quarter.
Our estimate of money market mutual fund market share, including sub advised funds was about seven 3% at the end of the third quarter up from about seven 2% at the end of the second quarter.
Speaker 3: Looking at recent asset totals as of a few days ago, managed assets were approximately $716 billion, including $527 billion in money markets.
Looking at recent asset totals as of a few days ago managed assets were approximately 716 billion, including $527 billion in money markets.
Speaker 3: $74 billion in equities, $91 billion in fixed income, $20 billion in alternative private markets, and $3 billion in multi-assets.
74 billion in equities 91 billion in fixed income <unk>.
One 8 billion and alternative private markets and $3 billion in multi asset.
Speaker 3: money market mutual fund assets we're at three hundred and eighty five
Money market mutual fund assets were at 385 billion.
Tom.
Thanks, Chris.
Speaker 4: Total revenue for Q3 decreased $30.6 million from the prior quarter due mainly to the substantial carried interest and performance fees in Q2 related to the transactions we discussed on our last call.
Total revenue for Q3 decreased $36 million from the prior quarter due mainly to the substantial carried interest in performance fees in Q2 related to the transactions we discussed on our last call.
Speaker 4: Q3 carried interest and performance fees were $14.9 million compared to $39.4 million in the second quarter.
Q3 carried interest and performance fees were $14 9 million compared to $39 4 million in the second quarter.
Speaker 4: All other revenue decreased by 6.1 million. Revenue from money market assets decreased by 9 million, offset by an 8.2 million decrease in related distribution expense.
All other revenue decreased by $6 1 million Rev.
Revenue from money market assets decreased by 9 million offset by an $8 2 million decrease in related distribution expense.
Speaker 4: Changes in certain product structures drove these decreases while higher average money market assets added to revenue.
Changes in certain product structures drove these decreases while higher average money market assets added to revenue.
Speaker 4: Q3 operating expenses decreased $33.6 million from the prior quarter due mainly to compensation related to carried interest and performance fees in Q2 and to lower money market fund distribution fees as discussed.
Q3, operating expenses decreased $33 6 million from the prior quarter due mainly to compensation related to carried interest and performance fees in Q2 and to lower money market fund distribution fees as discussed.
Speaker 4: Q3 included about 10 million in compensation related to carried interest.
Q3 included about $10 million in compensation related to carried interest.
Speaker 4: The decrease in other operating expenses includes a reduction of about $7 million in expense related to the infrastructure fund restructuring discussed in Q2, partially offset by an increase of $3.7 million in FX-related costs and approximately $2 million of other expenses.
The decrease in other operating expenses includes a reduction of about $7 million in expense related to the infrastructure fund restructuring discussed in Q2, partially offset by an increase of $3 7 million in FX related costs and approximately.
<unk> to millions of other expenses.
Speaker 4: At the end of Q3, cash and investments were $554 million, of which about $486 million was available to us.
At the end of Q3 cash and investments were $554 million of which about $486 million was available to us.
Speaker 4: Holly, that completes our prepared remarks and we would like to open the call up for questions now.
Holly that completes our prepared remarks, and we would like to open the call up for questions now.
Speaker 1: Certainly. At this time, we will be conducting a question and answer.
Certainly at this time, we will be conducting a question and answer session.
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Speaker 1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
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One moment, please while we poll for questions.
Yes.
Speaker 1: Your first question for today is coming from Dan Fannin at Jeffries.
Your first question for today is coming from Dan Fannon at Jefferies.
Thanks, Good morning.
Good morning wanted to wanted to discuss your outlook for money market.
Assets under the context of rates I think we've heard from others that fixed income as well as rates peak is going to see significant demand.
Pick up and I think you were talking about money markets as being also a beneficiary. So wondering what's the as we think about duration, maybe being extended how money markets. You think will fare in terms of demand versus what would be more traditional fixed income asset classes.
Speaker 5: I will comment on it first, and then Debbie will have some additional comments. But as we've said on this call over the last several calls, that once those rates begin to peak, you begin to attract the institutional money, which as I mentioned, is more attracted by direct securities at this point in time. And so we would expect to see institutional flows increase.
I will comment on that first and then Debbie will have some additional comments, but as we've said on this call over.
Over the last several calls that once those rates begin to peak you begin to.
Attract the institutional money, which as I mentioned is more attracted by direct securities at this point in time and so we would expect.
To see institutional flows increase right.
Speaker 5: Right now, on the retail side, we're in a very good position with the rates.
Right now on the retail side.
That's a.
We're in a very good position with the rates.
Speaker 5: And when you combine that with the reticence of financial advisors to take positions, their lack of certainty, their waiting on the Fed, and getting paid 5 plus percent, it's hard to say exactly when they will decide to go longer.
And when you combine that with the reticence of financial advisors to take positions. There lack of certainty they are waiting on the fed and getting paid five plus percent.
It's hard to say exactly when when they will decide to.
Go longer.
Speaker 3: but that would be the basic outlook and and don't forget that as we mentioned before when we look at the last
But that would be the basic outlook and don't forget that as we've mentioned before when we look at the last cycles.
Speaker 5: cycles, you know, from 16 to 18.
From 16 to 18.
Speaker 3: Q4 of 16, Q4 of 18, after the initial decline, the money market fund assets increased by 15 percent, and then industry did about the same, about 11 percent. And
In Q4, 16 Q4 of <unk>. After the initial decline in the money market fund assets increased by 15% and then industry did about the same by 11%.
And.
Speaker 5: We continue to grow with higher rates, of course, and then the other thing we like to mention is that.
We continued to grow with higher rates of course, and then the other thing we like dimension is that.
Speaker 5: Basically, our assets grew about over 20 percent through Q3 of 19 when they began to ease. And the industry assets also grew at a smart clip then. So that's the basis on which we come to those kinds of observations. Debbie? Sure. I'll just add a couple things.
Basically our assets grew by over 20% through Q3 of <unk> 19, when they began to ease and the industry assets also grew at a smart clip there. So that's the basis on which we come to those kinds of observations Debbie.
<unk> I'll just add a couple of things you mentioned.
Dan the extension trade and we do that even within money market sell started out this cycle with weighted average maturity is duration is down in the single digits.
Speaker 6: do that even within money markets. So, you know, started out this cycle with weighted average maturities durations down in the single digits to teens from a, you know, days perspective. We're now out much longer, 30, 40, 45 types of days. So, have done the extension trade in order to keep the yields higher within the product itself. I think another thing that's helpful is that, you know, during the zero rate environment, so many cash managers got used to buckets.
Gays perspective, we're now out much longer authority 40, 45 types de sell.
<unk> gotten the extension trade in order to keep that.
Yields higher within the product itself I think another thing Thats helpful is that during the zero rate environment. So many cash manager Scott used Kim pocketing cash so.
Speaker 6: So many cash managers got used to bucketing cash, so a certain amount that's kind of operating on a day-to-day stays in the government sector.
Certain amount that's in our kind of operating on a day to day stays in the government sector next.
Speaker 6: you know kind of more strategic goes out into to to to prime and and then ultimately micro short all all for sure
Through our strategic goes out into Ted Ted Subprime and then ultimately micro Schwartz.
Speaker 6: in the longest bucket, but when you're looking at a higher-for-longer scenario with a yield curve that, you know, from overnight at 5.25% to 5.30% out to, you know, 10-year bonds at just under 5%, you're looking at something that is a market that's finally reconciling with that, you know, Fed statement higher-for-longer. So I think the
Ultra shorts, and the longest bucket, but when youre looking at a higher for longer scenario with a yield curve that from overnight at five and a quarter to $5 30.
<unk> 10 year bonds at just under 10% are at just under 5% Youre looking at something that is a market. That's finally reconciling with that fed statement higher for longer so I think the.
Speaker 2: flows, as Chris mentioned, will continue in retail and will do nothing but grow in institutional. And Dan and Trey, I would just add, we're well positioned for people deciding to extend out on the curb with our fixed income product.
Flows as Chris mentioned in a will continue and retail and we will do nothing but grow in institutional.
Dan It's Ray I would just add we are well positioned for people deciding to extend out on the curve with our fixed income product.
Speaker 2: And in particular, you know, people are interested as evidenced by the flows in our total return bond for a plus strategy with a six-year weighted average effective duration. It's really well-positioned. We've been talking to clients all year. The cash yields are very attractive.
Array and in particular people are interested as evidenced by the flows in our total return bond core plus strategy with it.
Our six year weighted average effective duration is really well positioned we've been talking to clients all year.
Cash yields are very attractive.
Speaker 5: There is a certain amount of waiting for the right time, but when that trade happens, we have a lot of good strategies that can catch the money going out further.
There is a certain amount of.
Waiting for the right time, but when that trade happens we have a lot of good strategies that can catch the the money going out further and one more comment I'll add to ray's, bringing that up and that is the ultrashort funds are starting to turn they haven't gone positive yet right here in this.
Speaker 5: the first couple of days of this month or quarter, but it's getting a lot closer and the government ultra short fund has just done a pretty good job on flow. So you're seeing people go out there and remember that's a currently a five billion dollar franchise that we have here and ultra short funds on all three streets.
The first couple of days of this month or quarter.
But it is getting a lot closer and the government Ultrashort fund has just done.
A pretty good job on flows so youre seeing people.
Go out there and remember that's currently a $5 billion franchise that we have here.
And.
Ultrashort funds on all three streets.
Speaker 7: Right, so that's very helpful. I want to, for my follow up on distribution expense, some of the dynamics in the quarter, I think you walk through, but if you could provide a little bit more specifics around what happened and more importantly going forward, how we should think about the relationship of frankly money market at UM and the distribution expense.
Great. That's very helpful. I wanted to my for my follow up on distribution expense.
Some of the dynamics in the quarter, you walk through but if you could provide a little bit more specifics around what happened in <unk> and more importantly going forward how.
How we should think about the relationship of.
Ray Hanley: Greetings. Welcome to the Federated Hermes Inc. Q3 2023 Analyst, Coal, and Webcast. At this time, all participants are in English and only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press R0 on your telephone keypad. 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. Good morning and welcome. Thanks for joining us today.
Frankly money market AUM.
And the distribution expense.
Speaker 4: Okay, Dan, as Tom, you know, probably going forward, we would anticipate as assets go up that that distribution number would go up.
Okay, Dan as Tom.
Probably going forward, we would anticipate as assets go up with that distribution number would go up.
Speaker 4: And we had some changes in the quarter, as I mentioned, on product structures that reduced some of the revenue, but then reduced a pretty commensurate amount of expenses. That should be cleared up. And I would expect, if assets grow, that the distribution line item.
And we had some.
Changes in the quarter as I mentioned.
On product structures.
<unk> reduced some of the revenue, but then reduced.
Pretty commensurate amount of expenses that should be cleared up and I would expect as assets grow that the distribution line item will go up as an expense than the Q3 run rate is a good one to use going forward it's down as.
Ray Hanley: Leading today's call will be Chris Donahue, Federated Hermes, President and CEO, and Tom Donahue, Chief Financial Officer.
Speaker 2: We'll go up as an expense. Yeah, then the Q3 run rate is a good one to use going forward. It's down, as Tom noted, but also, as you noted, commensurate with the change in revenue, but that's a good run rate to use going forward.
Ray Hanley: And joining us for the Q&A or Saker Nusseibeh, who is the CEO of Federated Hermes Limited, our International Operation, and Debbie Cunningham, the Chief Investment Officer for the Money Markets. Join the 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 filing. No assurance can be given as to future results. And Federated Hermes assumes no duty to update any of these forward-looking statements.
As Tom noted, but.
Also as he noted commensurate with the change in revenue, but thats a good run rate to use going forward.
Great. Thank you.
Speaker 1: Your next question is coming from Patrick Davitt with Autonomous Research.
Your next question is coming from Patrick Davitt with Autonomous research.
Hey, good morning, guys.
Speaker 8: You mentioned last quarter you thought the stock was cheap and you had I think more than $400 million of available cash So why not do more repurchase and now that the stock is even cheaper should should we be expecting more of that in 4Q? That's a great idea
Sorry, Patrick.
Hugh you mentioned last quarter, you thought the stock was cheap and you had I think more than $400 million of available cash so why not do more repurchase and now that the stock is even cheaper or should we be expecting more of that in <unk>.
Chris Donahue: Chris?
Chris Donahue: Thank you, Ray, and good morning all. I will review Federated Hermes' business performance, Tom will comment on other financial results. We had solid asset growth in Q3, ending with record assets under management of $715 billion, driven by record money market assets of $525 billion. Fixed income produced solid growth as well.
That's a great idea.
<unk>.
Yes.
Speaker 4: We had our board meeting yesterday and we proved another 5 million share buyback program. That's our 16th and we have a history of completing our share buybacks, buyback programs. We have about a million four left in the existing one and we wanted to get approval for more shares with only a million four left.
Yes.
So we had our board meeting yesterday and we approved.
Another 5 million share buyback program.
Our <unk> and <unk>.
We have a history of completing our share buybacks buyback programs, we have about $1 million for less.
Chris Donahue: Looking first at equities, assets were down $5.7 billion to $77.3 billion due to combined market losses and effects impact totaling $3.3 billion and net redemptions of $2.4 billion. We did see Q3 positive net sales in 14 equity strategies, including MDP large tap growth, international leaders, and US smid equity. The strategic dividend domestic strategy had Q3 net redemptions of $1.5 billion. This strategy is outcome driven and is benchmark agnostic as we have said each quarter.
And the existing one.
And we wanted to get.
Get approval for more shares with only $1 four left.
Speaker 8: Got it, thanks. And another one on Capital, could you speak to any inorganic opportunities you're seeing right now, what kind of discussions are out there, and what your appetite is to do more.
Got it thanks.
And another one on capital could you speak to any inorganic opportunities you're seeing right now what kind of discussions are out there and what your appetite is to do more M&A at this point.
Speaker 4: Yeah, we have a lot of appetite. You know, we've gone through for years, you know, we pay our dividend and share buybacks and the first thing that we'd like to do.
Yes.
A lot of appetite.
Gone through three years, we pay our dividend and share buybacks in the first thing that we'd like to do.
Speaker 4: after the dividend is to pay, is to buy somebody and more than somebody because the way we do it and we look at our returns and we think that that's an excellent return for the company. It's been challenging.
After the dividend is to pay us to buy.
Somebody and more than somebody's.
Because the way we do it and we look at our returns and we think that Thats.
Chris Donahue: It seeks a high and rising stream of dividend income from high quality companies. As of 930, the fund had a weighted average dividend yield of 5.1%, compared to a 1.6% yield in the S&P, and the fund has seen 39 dividend increases and zero cuts in the trailing 12 months. Looking at equity performance compared to peers and using Morningstar data for the trailing three years end of Q3, 54% of our equity funds were beating peers and 33% were in the top quarter of their category.
An excellent return for the company it's been a.
Challenging.
Speaker 4: uh... getting people to let loose to uh... so and you know i don't have a you know we should continue to meet with people but i don't have a you know any amount announcements to make but
Getting people to let loose to sell and.
We continue to meet with people and I don't have.
Any announcements to make but.
Speaker 4: you know on the money front side and on uh... what we call roll-up sides where people decide it's time for them to
On the money fund side and on the what we call roll Upsides, where people decided it's time for them to.
Speaker 3: to turn it over to us. We are active in talking to people, and on bigger deals, those things take time to do, and I say I don't have a list of things to announce. That's yours.
Two.
I'll turn it over to US we are active in talking to people and on bigger deals.
Those things are.
Take time to do and I say I don't have a list of things to announce.
Chris Donahue: For the first three weeks of Q4, combined equity funds and SMAs on the equity side had net redemptions of $753 million.
Thank you that's it.
Your next question for today is coming from Ken Worthington with Jpmorgan.
Speaker 9: Hi, good morning, thanks for taking the question. I wanted to expand on Dan's earlier question. So a number of CEOs have expressed the opinion that various investors are before allocated to cash. So I guess first, do you see retail and or institution over index to cash versus other asset class?
Hi, good morning, Thanks for taking the question I wanted to expand on Dan's earlier question. So a number of Ceos have expressed the opinion.
Chris Donahue: Now turning to fixed income. Assets increased by $2.3 billion in Q3 to $89.8 billion with fixed income separate accounts reaching a record high of $47.2 billion. Fixed income institutional separate account net sales of $3.8 billion were driven by the funding of a $2 billion in an institutional multi-sector mandate and by approximately 1.3 billion from a large public entity. Fixed income SMAs had Q3 record gross and net sales of $572 million and $320 million respectively.
That various investors were allocated to cash so I guess first do you see retail inner institutions over index to cash versus other asset classes and within cash are they over index to money market funds.
Speaker 9: and within cash are they over indexed to money marks.
Speaker 9: Speaking about sort of the direct market, but how do you think money market funds stand today versus other cash channels? And our investors really over indexed or not.
It's about sort of the direct market, but how do you think money market funds stand today versus other cash cash channels.
And our investors really over indexed or not.
Speaker 5: I don't have statistics good enough to make a judgment as to whether the retail clients are over indexed to cash or not. The incidental information we get based on our Salesforce which is robust.
I don't have statistics, good enough to make a judgment as to whether the retail clients are over index to cash or not.
Chris Donahue: Fixed income funds had net redemptions of about $684 million. Within funds, our flagship core plus strategy total return bond fund had Q3 net sales of about $466 million. Oh, that includes both the fund and the CIT. Core plus funds and other fixed income SMA strategies added $320 million of Q3 sales. The three ultra short funds posted net redemptions of about $462 million. We had 15 fixed income funds with positive net sales in the third quarter, including the total return bond fund, the total return bond collective investment fund, the intermediate corporate bond fund, and the sterling cash plus regarding performance. At the end of Q3 and using Morningstar data for the trailing three years, 31% of our fixed income funds were beating peers, 17% were in the talk quartile of their category.
The incidental information, we get based on our sales force, which is robust.
Is that they are just very very very very unsure about what to do so that would mean they would have more money than the average bear with zinc in the money funds, but I don't have enough of SaaS to tell you whether they are over indexed to that.
And we don't participate as vigorously as others do in this so called cash sourcing because of the products. We offer are are the ones that give marketplace yield across the board.
And I think that Thats.
Speaker 6: That's about my response unless you have something to do. The only thing I'd add is that if you look at our money market fund assets as a percent of our total liquidity assets.
That's about my response, unless you have something that is the only thing I'd add is that if you look at our money market fund assets as a percent of our total liquidity assets.
Speaker 6: They are basically growing equally. It's about three quarters, money funds, one quarter, other types of, whether it's in local government investment pools, separate accounts, collectives, privates, offshore, the rate of growth.
They are basically growing equally it's about three quarters money funds one quarter other types of <unk>.
It's local.
Investment Paul separate accounts collectives privates offshore.
The rate of growth.
Speaker 6: Seems to be commensurate for both types of liquidity products It doesn't seem like people are over waiting the money fun side of it
Seems to be commensurate for both types of liquidity products. It doesn't seem like people are overweight the money fund side of it.
Chris Donahue: For the first three weeks of Q4 fixed income funds and SMAs had net redemptions of $77 million.
Speaker 9: Okay, fair. And then, you know, federated stock is underperform.
Okay, Okay fair.
And then.
Federated stock has underperformed quite a bit since it was announced that it would be excluded from the Russell indices, I guess, how challenging would it be to adjust the structure to meet the minimum requirement for inclusion back and Russell and given the magnitude of the stock under performance.
Chris Donahue: In the alternative private markets category assets decreased by about 1.3 billion in the third quarter, from the prior quarter, coming to 20.3 billion. The decrease was due to FX impact of about just under 800 million market value decreases of about 300 million and net redemptions and distributions of about 200 million.
Why not consider this.
Speaker 3: Well, we're not going to do that, but I just can't connect coming out of the Russell to the performance of the stock. That's one of those post-hoek air-go-prokered hook mistakes. And I just can't buy into that. And in terms of the structure, we have a lot of confidence in the structure. We've been using it for a long time. And of course, considering sin is not the same as committing it. So talking about it is fine. But I don't think it's going to happen.
Well, we're not going to do that but.
I just can't connect coming out of the Russell to the performance of the stock. That's one of those posts Hoak Ergo probe bear hug mistakes and.
Chris Donahue: We are in the market with Horizon 3, the third private equity funds. Horizon 3 has closed on commitments of 1.05 billion through the third quarter.
I just can't buy into that and in terms of the structure. We have a lot of confidence in the structure, we have been using it for a long time and of course, considering <unk> is not the same as committing it so talking about is fine.
But I don't think it's going to happen.
Chris Donahue: We're also in the market with the Hermes Innovation Fund 2, the second vintage of our PAN European Growth Private Equity Innovation Fund. We had our first close in August for approximately 100 million euros.
Okay fair enough. Thank you very much.
Speaker 1: Your next question for today is coming from Brian Badell with Deutsche Bank.
Your next question for today is coming from Brian Bedell with Deutsche Bank Securities.
Speaker 10: Great. Good morning folks. Thanks so much for taking my questions. Can you first one just back on the money market franchise?
Great. Good morning folks. Thanks, so much for taking my questions.
Chris Donahue: And we're in the market with our first vintage of our UK Nature Impact Fund. We began Q4 with about $4.9 billion in net institutional mandates yet to fund in both funds and separate accounts. These wins are diversified across fixed income, equity, and private markets. Fix income expected additions total about $3.1 billion, which include wins in active cash, short credit, high yield, and corporates. Approximately $1.5 billion of total net wins is expected to come in private market strategies with wins in private equity, direct lending, and absolute return.
First one just back on the money market franchise.
Speaker 10: If I can squeeze in a two-parter on this one. One.
If I can squeeze in a two parter on this one.
One.
Speaker 10: from the retail behavior allocation side. So for the platforms that you're on in which you would be getting money market inflows from say risk off allocations away from say equities.
From the retail behavior allocation side two to.
For the platforms that you're on in which you would be getting money market in fluids from say risk off allocations away from say I'd say equities.
Speaker 10: Is there any way to size, you know, what potential across your money fund based, your money market mutual fund based would be sensitive to those platforms? Maybe.
Is there any way to size them, you know what what potential.
Cross your money fund base.
Money market mutual fund base would be sensitive to those platforms, maybe start with that one.
Chris Donahue: About $227 million of the net total wins is expected to come into equity strategies, and wins included mandates in bio equity, global equity, and gems. Moving to money markets, we reached record highs for the money market assets of $385 billion, and total money market assets of $525 billion. Money market strategies continue to benefit from favorable market conditions per cash as an asset class, higher yields, elevated liquidity levels in the financial system, and of course favorable yields compared to bank deposits.
Speaker 5: We don't know. We look at the charts we keep on the terms of the assets that are in that field, but that isn't going to answer your question if I take you to the chart that shows you how much is in broker deal or in retail, that's not going to answer your question. And I don't have enough to answer that one. Yeah, I can say that.
Hmm.
We don't know.
We look at the insurance Rajiv on the terms of the assets that are in that field.
But that isn't going to answer your question. If I take you to the chart that shows you how much is in broker dealer and retail that's not going to answer your question and <unk>.
I don't have enough to answer that I can say that.
Speaker 6: for our largest distributors of retail products, retail money market funds.
For our largest distributors of retail products retail money market funds.
Speaker 6: They're number one very diverse. And number two, all experiencing large amounts of growth in the 2022, 2022 timeframe. So it's not heavily weighted to one institution, preference or sales or allocation tactic. It's a cross distribution.
Okay.
They are number one very diverse and number two all experiencing large amounts of growth in the 2022 2023 timeframe. So it is not.
Heavily weighted to widen institutions.
Chris Donahue: A short-term interest rates peak. We expect market conditions for money market strategies will be favorable compared to both direct market rates and bank deposit rates. Looking at flows in money market funds in the third quarter, we saw good activity from products geared toward the retail customers of financial intermediaries. Institutional product flows continue to be challenged by direct security yields. Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.3% at the end of the third quarter, up from about 7.2% at the end of the second quarter.
Our preference our sales are or allocation tactic.
It's across distributions.
Speaker 10: Is there time for me to ask one more money-fund question and also one ESD question?
Okay. Okay. That's fair enough is there a time for me to ask one more money fun question and also one ESG question.
Speaker 10: Keep rolling. OK, OK. Just a quick one on the money fund. So how you have been extending duration? What should we think of maybe a sort of a maximum extension if you think at some point, the market's going to start to price in rate cuts. And naturally, the longer you are extended the better. I guess I've got to liquidity.
Yes, keep rolling Okay, Okay, I just thought.
A quick one on the money fund side, how you have been extending duration.
What should we think of maybe it's sort of a maximum of extension if you think at some point.
You know the market is going to start to price and rate cuts and naturally the longer you were extended to better I guess subject to liquidity constraints.
Speaker 6: right yeah we we i mean generally speaking we target ten day ranges uh... so right now in our prime funds were forty to fifty days are gully funds thirty five to forty days uh... unit
Right yes.
Generally speaking, we target 10 day ranges.
So right now in our private funds were at 40% to 50 days or <unk> 35 to 40 days.
Chris Donahue: Looking at recent asset totals as of a few days ago, managed assets were approximately $716 billion, including $527 billion in money markets, $74 billion in equities, $91 billion in fixed income, $20 billion in alternative private markets, and $3 billion in multi-asset. Money market mutual fund assets were at $385 billion. Thanks, Chris.
Speaker 6: 40 to 50 as well. I mean, the longest we're ever going to get is 50 to 60 days. But even that with the new daily and weekly liquid asset requirements that will come into being from an SEC role requirements standpoint in April of 2024.
Any 40% to 50 as well I mean, the longest wherever going to get is 50 to 60 days, but even that with the <unk>.
New daily and weekly liquid asset requirements that will come into.
Being from an SEC rule requirement standpoint in April of 2024, it will be difficult to get up into the mid to high <unk>.
Speaker 6: It will be difficult to get up into the mid to high 50s.
Speaker 6: And given that, you know, there's always a concern about, you know, whether there's large clients that want to exit sort of know your client kind of.
And given that there's.
There is always.
Tom Donahue: Total revenue for Q3 decreased $30.6 million from the prior quarter due mainly to the substantial carried interest and performance fees in Q2 related to the transactions we discussed on our last call. Q3 carried interest and performance fees were 14.9 million compared to 39.4 million in the second quarter. All other revenue decreased by $6.1 million, revenue from money market assets decreased by $9 million offset by an $8.2 million decrease in related distribution expense. Changes in certain product structures drove these decreases while higher average money market assets added to revenue.
Our concern about whether there is a large clients that want to exit sort of know your client kind of.
Speaker 6: discussions. I would guess maybe there's another 10 to 15 days extension but not too much more than that.
Discussions I would guess maybe there's another 10 to 15 days extension, but not too much more than that.
Speaker 10: Okay, great. And then on the ESG's side, just, I guess, as this year has been folded in all of the political challenges we've seen for ESG, are you seeing any changes in demand for the ESG funds that you have rolled out? And if you can contrast the US versus maybe what you're seeing in Europe , and then how might that influence?
Got it got it okay, great and then on the ESG side, just I guess just.
As this year has unfolded and all of the political challenges we've seen for ESG or are you seeing any changes in demand.
For the ESG funds that you have rolled out and if you can contrast, the U S versus maybe what youre seeing in Europe, and then how might that influence.
Speaker 10: your future ESG product rollout strategy, both again in EuroPersusUS.
Your your your future ESG product rollout strategy, but both again in Europe versus U S.
Speaker 4: So, Brian , I'll take that first, then I'll let Sacker comment on the European side.
So Brian I'll take that first and then I'll, let saker comment on the European side.
Speaker 4: We did six years of cultural due diligence with Hermes when we were looking at them from 2012 to 2018. And ESG was one of the main things. During that time, we also spent a lot of time figuring out how to be able to successfully say yes to the fiduciary with ESG.
We did six years of cultural due diligence with Hermes when we were looking at them from 2012 to 2018 and ESG was one of the main things during that time. We also spent a lot of time figuring out how to be able to successfully say, yes to the fiduciary.
Tom Donahue: Q3 operating expenses decreased $33.6 million from the prior quarter due mainly to compensation related to carried interest and performance fees in Q2 and to lower money market fund distribution fees as discussed. Q3 included about $10 million in compensation related to carried interest. The decrease in other operating expenses includes a reduction of about $7 million in expense related to the infrastructure fund restructuring discussed in Q2, partially offset by an increase of $3.7 million in effects related costs and approximately $2 million of other expenses.
With ESG and then we have repeated the sounding joy of this work to the FCC to the department of Labor to the marketplace, where you have a Stanford law review article.
Speaker 4: And then we have repeated the sounding joy of this work to the SEC, to the Department of Labor, to the Marketplace, where you have a Stanford Law Review article that set forth all the research that had been done, that basically says, if you're a fiduciary, you have to be for the exclusive pecuniary interest of the underlying investor. And if you want an impact fund, that's great too. And you can use the ESG
That set forth all the research that had been done that basically says if youre a fiduciary you have to be for the exclusive pecuniary interest of the underlying investor and if you want an impacts on thats, great too and you can use the ESG.
Tom Donahue: At the end of Q3, cash and investments were $554 million of which about $486 million was available to us.
Speaker 4: features to analyze risk in order to improve return
Features to analyze risk in order to improve returns.
Speaker 4: and we think this continues now you ask the question and light of okay political stuff and all what where we and how does that affect us well uh... what we try to do is stay out of the politics and stay down the uh... down the street of the performance of the fun i would mention that uh... there's a recent
And we think this continues now you asked the question in light of Okay political stuff in.
Operator: Paulie, that completes our prepared remarks and we would like to open the call-up for questions now. Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participant using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.
Where are we and how does that affect us well.
What we tried to do is stay out of the politics.
And stay down.
Don The street of the performance of the funds.
<unk> mentioned that there is a recent.
Speaker 4: study that came out of, well, it was a bunch of professors from University College at UCD in Dublin, Oxford and Texas at Austin, that basically concluded that engagement.
A study that came out of <unk>.
It was a bunch of professors from.
University College of UCB in Dublin.
Oxford in Texas at Austin that basically concluded that engagement.
Speaker 4: can reduce the risk in a portfolio or in an individual security. Okay, so that's an interesting one and a fair fight in the marketplace. Reasonable people can disagree.
Can reduce the risk in our portfolio oriented individuals security. Okay. So that's a that's an interesting one and a fair fight in the marketplace reasonable people can disagree.
Daniel Fannon: Your first question for today is coming from Dan Fanon at Jeffries. Thanks. Good morning. I wanted to discuss your outlook for money market assets and the context of rates. I think we've heard from others that fixed income as rates peak is going to see a significant demand pick up and I think you're talking about money markets as being also a beneficiary. So wondering what's the, as we think about duration, maybe being extended, how money markets you think will fare in terms of demand versus what would be more traditional fixed income asset classes?
Speaker 4: But we are going to continue with our integration efforts. We are going to continue with looking at these points, the way we said we were to enhance performance as active managers that we are.
But we're going to continue with our integration efforts, we are going to continue with looking at these points.
We said we were to enhance performance as active managers that we are but there is a big difference between basically even though there is food fights in the U S. On this is big difference between the basic use structure and that in Europe, and I'll, let <unk> talk about.
Speaker 4: but there is a big difference between basically even though there's food fights in the u.s. on this big difference between the basic u.s. structure and that in Europe and i'll let a sacri talk about his role in in it overseas
His role and in oversea.
Overseas.
Speaker 11: Thank you very much Chris. So just before we talk about overseas, I want to reemphasize something that Chris...
Thank you very much Chris So just before we talk about overseas I want to reemphasize something that Chris.
Daniel Fannon: I will comment on it first and then W will have some additional comments, but as we said on this call over the last several calls, that once those rates begin to peak, you begin to attract the institutional money, which as I mentioned, is more attracted by direct securities at this point in time. And so we would expect to see institutional flows increase.
Speaker 11: said about the way we look at ESG. To our mind, integrating ESG is a way of enhancing financial returns in the long term. And because in the Hermes business, in some of you see ourselves as a long term institutional business, it has been our conviction, and indeed our internal data shows that on average, it actually adds value over the long term. So to us, this is part of enhancing returns.
Says about the way, we look at ESG to our mind integrating ESG is a way of enhancing financial returns in the long term.
And because in the Hermes business and we see ourselves as a long term institutional business. It has been our conviction and indeed, the internal data shows that on average it's actually adds value over the long term so to US. This is volatile enhancing returns further.
Chris Donahue: Right now on the retail side, we're in a very good position with the rates and when you combine that with the reticence of financial advisors to take positions, they're lack of certainty, they're waiting on the Fed and getting paid 5 plus percent, it's hard to say exactly when they will decide to go longer, but that would be the basic outlook, and don't forget that as we've mentioned before, when we look at the last cycles, you know, from 16 to 18, Q4 of 16, Q4 of 18, after the initial decline, the money market fund assets increased by 15 percent, and then industry did about the same by 11 percent, and we continued to grow with higher rates of course, and then the other thing we like to mention is that basically our assets grew about over 20 percent through Q3 of 19 and they began to ease, and the industry assets also grew at a smart cliff then, so that's the basis on which we come to those kinds of observations, Debbie? Sure, of a data couple things, you mentioned Dan, the extension trade, and we do that even within money markets, so you know, started out this cycle with weighted average maturity, durations down in the single digits to teens from a, you know, days perspective, we're now out much longer, 30, 40, 45 types days, so it have done the extension trade in order to keep the yield higher within the product itself.
Speaker 11: Furthermore, we combine it with engagement through our stoochup business, EOS, and as Chris has said, a new study has come out that actually supports previous studies that have come out that show that our type of engagement.
The more we combine it with <unk>.
Engagement through our stewardship business Pos and as Chris has said the new studies come out that actually supports previous studies that have come out that show that type of engagement.
Speaker 11: does enhance financial returns. Now, it's important to emphasize, we do not integrate ESG for any other non-financial long-term reasons for trying to enhance value and create sustainable wealth. That's not what we do. And let's decline the authors to specifically we do not, for example, divest from particular types of stocks.
Does enhance financial returns now it is important to emphasize we do not integrate ESG for any other non.
Non financial long term reasons for trying to enhance value and create sustainable well that's not what we do.
Unless declines also the specifics we did not for example, divest from particular types of stocks. So that's just the general background of what we do in the old Hermes, which we gave for the rest of us and.
Speaker 11: So that's just a general background of what we do in the old Hermes, which became federated Hermes, limited. And as Chris says, we think that is totally in line with fiduciary duties understood by US law. In Europe , there is a demand for one additional factor, which is not just to do ESG for enhancing returns, but to try to create social interests.
Limited and as Chris says, we think that is totally in line with fiduciary duty as understood by U S law in Europe. There is a demand for one additional factor, which is not just to do a ESG.
<unk> four enhancing returns, but to try to create social impact.
Speaker 11: This is allowed in certain jurisdictions and certain structures in Europe . And the demand for that continues to increase.
This is allowed in certain jurisdictions in certain structures.
Europe and the demand for that continues to increase in Europe.
And we have continued to see demand for and the opportunity for continuing to grow our business over that.
I will finish up by making one point.
The old Hermes.
I would claim was one of the first people to look at this space back in 1983, we've had a long experience with thinking about why we do it and the point is that we do it for the sake of the enhancement of the underlying investor opposition in our mind is what gives us the strength to continue to rollout.
Our products outside of the United States, where demand is continuing to increase in fact.
Chris Donahue: I think another thing that's helpful is that, you know, during the zero rate environment, so many cash managers got used to bucketing cash, so, you know, a certain amount that's, you know, kind of operating on a day-to-day, stays in the government sector, next, you know, kind of more strategic goes out into prime, and then ultimately, micro shorts, ultra shorts, in the longest bucket, but when you're looking at a higher-for-longer scenario with a yield curve that, you know, from overnight, at 5.25 to 5.30, out to, you know, 10-year bonds at just under 5%, you're looking at something that is a market that's finally reconciling with that, you know, fed statement higher for longer, so I think the flows, as Chris mentioned, you know, will continue in retail, and will do nothing but grow and institutional. And Dennis, Ray, I would just add, we're well positioned for people deciding to extend out on the curve with our fixed income product, Ray, and in particular, you know, people are interested as evidenced by the flows in our total return bond for plus strategy with a six-year-weighted average effective duration.
Speaker 11: And to ensure the fact that within what we do, we are doing it within the bounds of fiduciary duty. Specifically, the demand is not dying out the rest of Europe . Asia possibly is a little bit less than in Europe , but we see an increasing demand within the big European market for the time.
And then to ensure the fact that within what we do we are doing it within the bounds of fiduciary duty.
Specifically the demand is not dying out rest of Europe Asia, possibly is a little bit less than then.
Then.
Europe, we see an increasing demand within the big European market for the time being.
Speaker 12: That's great overview. Thank you so much.
That's great overview. Thank you so much.
Your next.
Next question for today is coming from John Dunn with Evercore ISI.
Speaker 13: Thank you. Can you kind of characterize the sort of timing of the unfunded pipeline? How much is later stage versus newer wins and maybe the average time to funding?
Thank you can.
Can you kind of characterized the sort of timing of the unfunded pipeline. How much is later stage versus newer wins and maybe the average.
Time to funding.
Speaker 2: uh, short John . Um, I don't have, um,
Sure John.
I don't have.
Speaker 2: statistics to give you all the orders. Specifically, you'll see the equity and fixed income fund in a couple of quarters and private markets can take as long as, you know, in the next year. Because when we get those commitments, when we have closings, the money often is not shown as assets under management until it's actually drawn down and investing. So we'd have...
Statistics to give you on orders, but typically you will see the equity and fixed income fund and a couple of quarters in private markets can take as long as.
In the next year.
Because when.
When we get those commitments when we have closings.
<unk>.
The money often.
Not shown as assets under management until its actually drawn down and investing so we'd have to.
Chris Donahue: It's really well positioned. We've been talking to clients all year. The cash yields are very attractive, so there is a certain amount of waiting for the right time, but when that trade happens, we have a lot of good strategies that can catch the money going out further. And one more comment I had to raise bringing that up, and that is the ultra-short funds are starting to turn. They haven't gone positive yet right here in this, the first couple of days of this month or quarter, but it's getting a lot closer, and the government ultra-short fund has just done a pretty good job on flow. So you're seeing people go out there, and remember that's a currently a $5 billion franchise that we have here, and ultra-short funds on all three streets.
Daniel Fannon: Great, that's very helpful.
Speaker 2: do some more work to give you kind of a weighted average timing on the pipeline, but generally look for the equity and fix over the next couple of quarters and the private market to extend out several quarters.
There is some more work to give you a kind of a weighted average timing on the pipeline, but generally look for the equity and fixed over the next couple of quarters and the private market to extend out several quarters.
Speaker 13: Gotcha. And then maybe just thinking about strategic value dividend, can you just give us kind of a flavor of the profile of the investor there, how they look at the current backdrop and how the conversations of your wholesalers are going, you know, holding on to assets versus like maybe increasing sales at some point. and other way.
Got you and then maybe just thinking about the strategic value dividend.
Can you just give us kind of a flavor of the profile of the investor There how do they look at the current backdrop and how the conversations are.
Your wholesalers are going.
Holding on to assets versus like maybe increasing sales at some point.
Well in terms of the <unk>.
Speaker 4: discussions that these are challenging discussions with the sales, the sales people and the intermediaries that are in there. And so we got to be straightforward.
Discussions these are challenging discussions with the sales the salespeople and.
The intermediaries that are in there.
And so you got to be straightforward about that.
Speaker 4: but it simply repeats what we said all along and the fund continues to do what it does. So even though it's like a pogo stick in terms of morning star category that it doesn't really fit going from the top to the bottom, bottom to the top, that's what stimulates the discussions. And so we've been through this before and that keeps...
It is simply repeat what we said all along and the fund continues to do what it does so even though it's like a pogo stick in terms of.
Tom Donahue: I want to, for my follow-up on distribution expense, some of the dynamics in the quarter, I think you walk through, but if you can provide a little bit more specifics around what happened and more importantly going forward how we should think about the relationship of frankly money market at UM and the distribution expense. Okay Dan, as Tom, you know probably going forward we would anticipate as assets go up that that distribution number would go up and we had some changes in the quarter as I mentioned on product structures that reduced some of the commensurate amount of expenses.
Morningstar categories that it doesn't really fit going from the top to the bottom bottom to the top.
Thats, what stimulates the discussions and so.
We've been through this before.
And that keeps a lot of the core shareholders quite sanguine, because theyre looking at a five 5% yield on a on a bunch of stocks that are pretty solid now theyre not the magnificent seven so youre not going to get that right.
Speaker 4: quite sanguine because they're looking at a five plus percent yield on a bunch of stocks that are pretty solid uh... now they're not the magnificent seven so you're not going to get that ride
Speaker 3: So it is an active debate and an active discussion.
So it is an active debate and an active discussion.
Tom Donahue: That should be cleared up and I would expect if assets grow that the distribution line item will go up as an expense. Yeah Dan, the Q3 run rate is a good one to use going forward. It's down, as Tom noted, but also as you noted commensurate with the change in revenue, but that's a good run rate to use going forward.
Thank you.
Yes.
Your next question is coming from Michael Brown with K B W.
Daniel Fannon: Great, thank you.
Speaker 14: Great, thank you. How much wanted to...
Great. Thank you.
I just wanted to.
Speaker 14: I dive into the expenses a little bit. I appreciate the commentary about the quarter. But given some of the puts and takes you mentioned, just was looking to maybe clarify some, some, you know, forward thoughts on the non-comp side.
Dive into the expenses a little bit I appreciate the commentary about the quarter, but given some of the puts and takes you mentioned just was looking to maybe clarify some some not.
Forward thoughts on the non comp side.
Speaker 14: particularly on the GNA side is what you saw in the third quarter a reasonable run rate for the fourth quarter should expect that to kind of step down and then when I look at it to 2024,
Patrick Davitt: Your next question is coming from Patrick Davitt with Autonomous Research.
Particularly on the on the G&A side is what you saw in the third quarter.
A reasonable run rate for the fourth quarter should we expect that to kind of steps down and then when I look out to 2024 based on your <unk>.
Chris Donahue: Hey good morning guys. You mentioned the last quarter you thought the stock was cheap and you had I think more than $400 million of available cash. So why not do more repurchase and now that the stock is even cheaper should we be expecting more of that in 4Q? That's a great idea. Yeah, we had our board meeting yesterday and we approved another 5 million share buyback program. That's our 16th and we have a history of completing our share buybacks buyback programs. We have about a million four left in the existing one and we wanted to get get approval for more shares with only a million four left.
Patrick Davitt: Got it, thanks.
Speaker 14: growth and investment expectations, any view on what the expense growth rate could be for that G&A line in particular given that might be a bit better or easier to predict and could that come back to like a mid single digit growth range?
Growth in investment expectations any view on what the expense growth rate could be for that G&A line in particular, just given that it might be a bit better or easier to predict and could that come back to like a mid single digit growth range. Thank you.
Speaker 4: Okay, Mike. So we mentioned that the comp line had the comp related to the carried interest of about 10 million. So unless we get more carried interest in Q4 and into the future, you know, that number all else being equal would go down and remember I stopped predicting the compensation line because I can't predict the compensation line.
Okay.
So we mentioned that the comp line had had.
The comp related to the carried interest of about $10 million. So unless we get more carried interest in in Q4 and into the future.
That number all else being equal.
We'd go down and remember I stopped predicting the compensation line, because I can't predict the compensation line.
Speaker 4: on the distribution, I think we talked about a little bit that the, you know, the run rate is good and if, you know, assets go up, we would expect that to go up.
Patrick Davitt: And another one on capital.
On the distribution I think we've talked about a little bit that the run rate is good in this.
Chris Donahue: Could you speak to any inorganic opportunities you're seeing right now? What kind of discussions are out there and what your appetite is to do more M&A at this point? Yeah, we have a lot of appetite. We've gone through for years, we pay our dividend and share buybacks. The first thing that we'd like to do after the dividend is to buy somebody and more than somebody because the way we do it and we look at our returns and we think that that's an excellent return for the company.
Assets go up we would expect that to go up.
Speaker 3: advertising and promotion, you know, it's in a band and maybe that goes up a little bit in the fourth quarter as we do a little more advertising and promotion.
Advertising and promotion.
It's in a band and maybe that goes up a little bit in the fourth quarter as we do a little more.
Advertising and promotion.
Speaker 3: All the other line items, I think, look like they're in good order for run rate. You know, the other line has FX in it. So, you know, what's going to happen to the pound? Remember, we had...
All the other.
The line items I think look like Theyre in in good order for run rate. The other line has FX in it so.
So what's going to happen to the pound remember, we hedge because we earn earn our fees in dollars and it has to pay the people in London in pounds. So if the power goes down then we have Fas expense, but of course then.
Speaker 3: because we earn our fees and dollars and have to pay the people in London and pounds. So if the pound goes down, then we have FF expense, but of course then we are covered when we go to pay the cost there. We went through the infrastructure restructuring and so those costs should come down a little bit. So that's,
Chris Donahue: It's been challenging, getting people to let loose to sell and I don't have which continue to meet with people and I don't have any announcements to make but on the money fund side and on what we call roll-up signs where people decide it's time for them to.., to, you know, turn it over to us.
We are covered when we go to pay pay the.
Okay the cost there.
We went through the infrastructure restructuring and so those costs should come down a little bit.
Chris Donahue: We are active in talking to people and on bigger deals, you know, those things take time to do and I say I don't have a list of things to announce.
So thats basically Q4.
Speaker 3: In terms of 24, I don't really have a whole lot to add to that. You know, we're getting into our budget season and I'm not too excited about making predictions on 24.
In terms of 24.
I don't really have a whole whole lot too to add to that we're getting into our budget season and.
Not too excited about making predictions on 24.
Speaker 14: Okay, thank you Tom. And maybe just one follow up on the MAA comment earlier. It sounds like you're having some active dialogue looking at.
Okay. Thank you Tom and maybe just one follow up on the M&A comment earlier.
Brian Bedell: Hi, good morning, thanks for taking the question. I wanted to expand on Dan's earlier option. So, a number of CEOs have expressed the opinion that various investors are for allocated to cash. So, I guess first you see retail and or institution over index to cash versus other asset classes and within cash are they over index to money market funds. I think it's about sort of the direct market, but how do you think money market funds stand today versus other cash channels in our investors really over index or not.
It sounds like the.
It sounds like you're having some active dialogue looking at interesting opportunities out there could you just give us a flavor of.
Speaker 14: opportunities out there. Could you just give us a flavor of what would be some interesting additions to the federated Hermes platform, what types of assets could be a good fit for your company? And then in terms of maybe size, do you think that a deal would be closer to a CW Anderson, maybe more of a bulldog, or do you think that there's potential for something more transform?
What would be kind of some interesting additions to two the Federated Hermes platform what types of assets could be oh good good.
Good fit for for your company and then in terms of maybe size. What do you think of a deal would be kind of closer to a CW Henderson.
So maybe more of a bolt on or do you think that there is potential for something more transformative. Thank.
Speaker 4: So we're really excited about the Henderson. We're coming up on a, we're passed our one year anniversary there and we are expecting actually some exciting things there into the future because that part of the budget process has started so we're looking forward to some growth there.
Thank you.
So.
Brian Bedell: I don't have statistics good enough to make a judgment as to whether the retail clients are over index to cash or not. The incidental information we get based on our sales force which is robust is that they are just very, very, very, very unsure about what to do. So, that would mean they would have more money than the average bear would think in the money funds, but I don't have enough stats to tell you whether they are over indexed to that. And we don't participate as vigorously as others do in this so called cash sorting because the products we offer are the ones that give marketplace yield across the board.
We're real excited about the Henderson comment upon but we passed our one year anniversary there and we are expecting.
Actually some exciting things there into the future.
Because that part of the budget process has started so we're looking forward to some growth growth there.
Speaker 3: And so doing that size transaction works pretty well with us. We can integrate it, make it part of federated, take the expertise that the teams bring, and utilize it, and have our distribution have the opportunity to sell it. So we will look for more things like that.
And so doing that size transaction.
Works works pretty well with us we can we.
We can integrate it make it part of Federated take the expertise that that the teams bring and utilize it and have our distribution.
Have the opportunity to sell it so.
We'll look for more things like that.
Speaker 3: If you remember what we talked about last quarter.
If you remember what we talked about last quarter.
Chris Donahue: And I think that that's about my response unless you have something to do. The only thing I'd add is that if you look at our money market fund assets as a percent of our total liquidity assets, they are basically growing equally. It's about three quarters, money funds, one quarter, other types of, you know, whether it's in local government investment pools, separate accounts, collectives, privates, offshore, the rate of growth seems to be commensurate for both types of liquidity products. It doesn't seem like people are over waiting the money funds side of it. Okay, fair.
Speaker 15: And it feels like it's just talked, but...
And it feels like it's just talk but.
Speaker 15: the alternative markets and what we try to do there to take our expertise over in London and expand it here in the US.
The alternative markets and what we tried to do there to take our expertise over in London.
And expanded here in the U S is continue to look at things and try to do it I would not expect that those would be what.
Speaker 15: is continual to look at things and try to do it. I would not expect that those would be...
Speaker 15: what you would describe size wise as transformational, more something of how we can take our skills and combine them with a team here.
You would describe size wise as transformational.
More something about how we can take our skills and combine them with with.
A team here that then we could do.
Speaker 15: that then we could do it on the real estate side, on the private equity side, on the infrastructure side, on the private debt side, which we have excellent growth prospects over in London, how we could make that grow here, which is...
<unk> on the real estate side on the private equity side on the infrastructure side on the private debt side.
Brian Bedell: And then, you know, federated stock has underperformed quite a bit since it was announced that it would be excluded from the Russell indices.
We have <unk>.
Excellent growth prospects over in London to how we could.
Make that grow here, which is.
Speaker 15: you know what an exciting opportunity to.
And exciting.
Chris Donahue: I guess how challenging would it be to adjust the structure to meet the minimum requirements for inclusion back in Russell and given the magnitude of the stock under performance? Why not consider this? Well, we're not going to do that, but I just can't connect coming out of the Russell to the performance of the stock. That's one of those post-hoke air-go-prope air-hoke mistakes. And I just can't buy into that. And in terms of the structure, we have a lot of confidence in the structure. We've been using it for a long time. And, of course, considering it's not the same as committing it, so talking about it is fine. But I don't think it's going to happen.
Opportunity too.
Speaker 3: I wouldn't expect any of those to be big transformational deals Unless something comes along that we're interested in doing which you know as Chris says we're always willing to try on Any kind of things like that
I wouldn't expect any of those to be big transformational deals.
Unless something comes along that we are interested in doing which you know as Chris says, we're always willing to try on.
Brian Bedell: Okay, very much.
Any kind of things like that.
Great. Thank you I appreciate all the color.
Speaker 1: have reached the end of the question and answer session and I will now turn a call over to Ray for a close
We have reached the end of the question and answer session and I will now turn the call over to Ray for closing remarks.
Thank you Holly that concludes our call and we thank you for joining us today.
Speaker 1: Thank you. This does conclude today's conference and you may disconnect your lines at this time. Thank you for your participation.
Thank you. This does conclude today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Michael Brown: Your next question for today is coming from Brian Bedell with Deutsche Bank Securities. All right, great.
Michael Brown: Good morning, folks. Thanks so much for taking my questions. Your first one is back on the money market franchise. If I can squeeze in a two-parter on this one, from the retail behavior allocation side, so for the platforms that you're on in which you would be getting money market inflows from, say, risk off allocations away from say, say, equities, is there any way to size, you know, what potential across your money fund-based, your money market mutual fund-based would be sensitive to those platforms.
Michael Brown: May I start with that one? We don't know. We look at the charts we keep on the terms of the assets that are in that field, but that isn't going to answer your question. If I take you to the charts that shows you how much is in broker-deal or in retail, that's not going to answer your question. And I don't have enough to answer that one. Yeah, I can say that for our largest distributors of retail products, retail money market funds, their number one very diverse, and number two, all experiencing large amounts of growth in the 2022-2023 timeframe. So it's not heavily weighted to one institution's preference or sales or allocation tactic. You know, it's across distributions. Okay, okay.
Michael Brown: Is there time for me to ask one more money fund question and also one ESG question? Yes, keep rolling. Okay, okay.
Debbie Cunningham: Just a quick one on the money fund. So how you have been extending duration? What should we think of maybe a sort of a maximum extension if you think at some point, you know, the market is going to start to price in rate cuts, and naturally the longer you are extended, the better. I guess I've got to liquidity constraints. Right. Yeah, we, I mean, generally speaking, we target 10-day ranges. So right now in our prime funds, we're at 40 to 50 days, our Gavi funds, 35 to 40 days, meaning 40 to 50 as well.
Debbie Cunningham: I mean, the longest we're ever going to get is 50 to 60 days. But even that with the new daily and weekly liquid asset requirements that will come into being from an SEC roll requirements standpoint in April of 2024, it will be difficult to get up into the mid to high 50s. And given that, you know, there's there's always a concern about, you know, whether there's large clients that want to exit sort of know your client kind of discussions, I would guess maybe there's another 10 to 15 days extension, but not too much more than that. Got it, got it. Okay, great.
Chris Donahue: And then on the ESG side, I guess just as this year has been full of it and all of the political challenges we've seen for ESG, are you seeing any changes in demand for the ESG funds that you have rolled out, and if you can contrast the US versus maybe what you're seeing in Europe, and then how might that influence your future ESG product roll out strategy both again in Europe versus US? So Brian, I'll take that first, then I'll let Saker comment on the European side.
Chris Donahue: We did six years of cultural due diligence with Hermes when we were looking at them from 2012 to 2018, and ESG was one of the main things. During that time we also spent a lot of time figuring out how to be able to successfully say yes to the fiduciary with ESG. And then we have repeated the sounding joy of this work, to the SEC, to the Department of Labor, to the marketplace where you have a Stanford Law Review article that set forth all the research that had been done that basically says if you're a fiduciary you have to be for the exclusive pecuniary interest of the underlying investor, and if you want an impact fund that's great too.
Chris Donahue: And you can use the ESG features to analyze risk in order to improve returns. And we think this continues. Now you asked the question in light of okay political stuff and where are we and how does that affect us? Well what we try to do is stay out of the politics and stay down the down the street of the performance of the funds. I would mention that there's a recent study that came out of, well it was a bunch of professors from University College at UCD in Dublin, Oxford and Texas at Austin that basically concluded that engagement can reduce the risk in a portfolio or in an individual security.
Chris Donahue: Okay so that's an interesting one and a fair fight in the marketplace, reasonable people can disagree. But we are going to continue with our integration efforts, we are going to continue with looking at these points the way we said we were to enhance performance as active managers that we are.
Saker Nusseibeh: But there is a big difference between basically even though there's food fights in the US on this, there's a big difference between the basic US structure and that in Europe.
Saker Nusseibeh: And I'll let Sackard talk about his role in overseas. Thank you very much Chris.
Saker Nusseibeh: So just before we talk about overseas I want to reemphasize something that Chris said about the way we look at ESG. To our mind, integrating ESG is a way of enhancing financial returns in the long term. And because in the Hermes business, we see ourselves as a long term institutional business it has been our conviction and indeed our internal data shows that on average it actually adds value over the long term.
Saker Nusseibeh: So to us this is part of enhancing return. Furthermore, we combine it with engagement through our stewardship business EOS, and as Chris has said, a new study has come out that actually supports previous studies that have come out that show that our type of engagement does enhance financial returns.
Saker Nusseibeh: Now, it's important to emphasize, we do not integrate ESG for any other non-financial long-term reasons for trying to enhance value and create sustainable wealth. That's not what we do, unless the client asks us to specifically, we do not, for example, divest from particular types of stocks. So, that's just a general background of what we do in the old Hermes, which became Federated Hermes, limited, and as Chris says, we think that is totally in line with fiduciary duties here, as understood by you as law.
Saker Nusseibeh: In Europe, there is a demand for one additional factor, which is not just to do ESG for enhancing returns, but to try to create social impact. This is allowed in some certain jurisdictions and certain structures in Europe, and the demand for that continues to increase in Europe, and we have continued to see demand for more and the opportunity for continuing to grow our business over there.
Saker Nusseibeh: I will finish up by making one point. The old Hermes, I would claim, was one of the first people to look at this space back in 1983. We've had a long experience of thinking about why we do it, and the point is that we do it for the sake of the enhancement of the underlying investor. Our position, in our mind, is what gives us the strength to continue to roll out our products outside of the United States, where demand is continuing to increase, in fact, and to ensure the fact that within what we do, we are doing it within the bounds of fiduciary duty. Specifically, the demand is not dying out the rest of Europe. Asia possibly is a little bit less than Europe, but we see an increasing demand within the big European market for the time being.
Brian Bedell: That's great overview. Thank you so much.
John Dunn: Your next question for today is coming from John Dunn, with Evercore ISI. Thank you. Can you kind of characterize the timing of the unfunded pipeline? How much is later stage versus newer wins, and maybe the average time to funding? Sure, John. I don't have statistics to give you all the orders, but typically, you'll see the equity and fixed income fund in a couple of quarters, and private markets can take as long as, you know, in the next year, because when we get those commitments, when we have closings, the money often is not shown as assets under management until it's actually drawn down and investing.
John Dunn: So we'd have to do some more work to give you kind of a weighted average timing on the pipeline, but generally look for the equity and fixed over the next couple of quarters and the private market to extend out several quarters. Gotcha. And then maybe just thinking about strategic value dividend, can you just give us kind of a flavor of the profile of the investor there, you know how they look at the current backdrop and and how the conversations of, you know, your wholesalers are going, you know, holding on to assets versus like maybe increasing sales at some point.
John Dunn: Well, in terms of discussions, these are challenging discussions with the sales, the salespeople and the intermediaries that are in there. And so we got to be straightforward about that. But it simply repeats what we said all along and the fund continues to do what it does. So even though it's like a pogo stick in terms of morning star category that it doesn't really fit going from the top to the bottom bottom to the top, that's what stimulates the discussions.
John Dunn: And so we've been through this before. And that keeps a lot of the core shareholders quite sanguine because they're looking at a five plus percent yield on a bunch of stocks that are pretty solid. Now they're not the magnificent seven, so you're not going to get that right. So it is an active debate and an active discussion.
John Dunn: Thank you.
Michael Brown: Your next question is coming from Michael Brown with KBW. Great. Thank you.
Tom Donahue: Tom, I just wanted to dive into the expenses a little bit. I appreciate the commentary about the quarter. But given some of the puts and takes you mentioned, I just was looking to maybe clarify some some, you know, forward thoughts on the non comp side, particularly on the DNA side is what you saw in the third quarter. A reasonable run rate for the fourth quarter should expect that to kind of step down.
Tom Donahue: And then when I look out to 2024 based on your growth and investment expectations, any view on what the expense growth rate could be for that DNA line in particular given that might be a bit better or easier to predict. And could that come back to like a mid single digit growth range. Thank you.
Tom Donahue: Okay, Mike. So we mentioned that the comp line had had the comp related to the carried interest of about 10 million. So unless we get more carried interest in Q4 and into the future, you know, that number all else being equal. So, you know, we go down and remember, I stopped predicting the compensation line because I can't predict the compensation line. On the distribution, I think we talked about a little bit that the, you know, the run rate is good.
Tom Donahue: And if, you know, assets go up, we would expect that to go up. Advertising and promotion, you know, it's in a band and maybe that goes up a little bit in the fourth quarter as we do a little more advertising and promotion. All the other line items, I think, look like they're in good order for run rate. The other line has FX in it, so what's going to happen to the pound?
Tom Donahue: Remember, we hedge because we earn our fees and dollars and have to pay the people in London and pounds, so if the pound goes down, then we have FX expense, but of course then we are covered when we go to pay the cost there. We went through the infrastructure restructuring, and so those costs should come down a little bit, so that's basically Q4. In terms of 24, I don't really have a whole lot to add to that.
Tom Donahue: We're getting into our budget season, and I'm not too excited about making predictions on 24.
Michael Brown: Okay, thanks Tom, and maybe just one follow-up on the M&A comment earlier.
Tom Donahue: It sounds like you're having some active dialogue, looking at interesting opportunities out there, can you just give us a flavor of what would be some interesting additions to the Federated Hermes platform, what types of assets could be good fit for your company, and then in terms of maybe size, do you think a deal would be closer to a CW Henderson, maybe more of a bolt-on, or do you think that there's potential for something more transformative? Thank you.
Tom Donahue: So we're really excited about the Henderson. We're coming up on a way past our one-year anniversary there, and we are expecting actually some exciting things there into the future, because that part of the budget process has started, so we're looking forward to some growth there. And so doing that size transaction works pretty well with us. We can integrate it, make it part of Federated, take the expertise that the teams bring, and utilize it, and have our distribution have the opportunity to sell it.
Tom Donahue: So we will look for more things like that. If you remember what we talked about last quarter, and it feels like it's just talked, but the alternative markets, and what will we try to do there to take our expertise over in London, and expanded here in the US, is continual to look at things and try to do it. I would not expect that those would be what you would describe size-wise as transformational, more something of how we can take our skills and combine them with a team here that then we could do it on the real estate side, on the private equity side, on the infrastructure side, on the private debt side, which we have excellent growth prospects over in London, how we could make that grow here, You know an exciting opportunity too.
Tom Donahue: I wouldn't expect any of those to be big transformational deals unless something comes along that we're interested in doing which you know as Chris says we're always willing to try on any kind of things like that.
Tom Donahue: Great thank you appreciate all the comments.
Operator: We have reached the end of the question. Thank you for joining us today. Thank you.
Operator: This does conclude today's conference and you may disconnect your lines at this time.
Operator: Thank you for your participation.