Q2 2024 Federated Hermes Inc Earnings Call
Greetings and welcome to the Federated Hermes Incorporated second quarter 2024 analyst call and webcast
Operator: Reporter 2024, Analyst Call on Webcam. At this time, all participants are in a listen-only mode, and 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 that this conference is being recorded. I will now turn the conference over to your host, Mr. Richard Donahue, Vice-President, Financial Planning and Analysis. Sir, you may begin.
At this time, all participants are on a listen-only mode and 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.
I will now turn the conference over to your host, Mr. Richard Donahue, Vice President of Financial Planning and Analysis. Sir, you may begin.
Richard Donahue: Thank you. Good morning.
Speaker Change: Thank you. Good morning. Leading today's call will be Chris Donahue, CEO and President, and Tom Donahue, Chief Financial Officer.
Speaker Change: Joining us for our Q&A are Debbie Cunningham, Chief Investment Officer at Monty Markets and Saker Nusseibeh, CEO of Federated Hermes Ltd. Ray Hanley is attending a family funeral and will not be with us today.
Speaker Change: During today's call, we may make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. We invite you to review the risk disclosures in our SEC filing.
Speaker Change: No insurance can be given as to future results and Federated Hermit assumes no duty to update any of these forward-looking statements.
Richard Donahue: Leading today's call will be Chris Donahue, CEO and President, and Tom Donahue, Chief Financial Officer. Joining us for Q&A are Debbie Cunningham, Chief Investment Officer at MoneyMarkets, and Saker Nusseibeh, CEO of Federated Hermes Limited. Ray Hanley is attending a family funeral and will not be with us today.
Richard Donahue: During today's call, we may make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different from the results implied by such statements. We invite you to review the risk disclosures in our SEC filing. No insurance can be given for future results, and Federated Hermes assumes no duty to update any of these forward-looking statements.
Speaker Change: [inaudible]
Speaker Change: Thank you Richard and good morning all. I will review Federated Hermes business performance and Tom will comment on our financial results.
John Christopher Donahue: Thank you, Richard, and good morning all. I will review Federated Hermes' business performance, and Tom will comment on our financial results. We ended the second quarter with record assets under management of $783 billion, driven by record money market assets of $587 billion. Looking first at equity. Assets decreased by $2.3 billion from Q1 to $77.9 billion due to net redemptions of $3.3 billion partially offset by market gains of $933 million. However, we did see Q2 positive net sales in 11 equity strategies, including MDT Large Cap Growth.
Tom: We ended the second quarter with record assets under management of $783 billion, driven by record money market assets of $587 billion.
Tom: Looking first at equities.
Tom: Assets decreased by $2.3 billion from Q1 to $77.9 billion due to net redemptions of $3.3 billion, partially offset by market gains of $933 million.
Tom: We did see Q2 positive net sales in 11 equity strategies including MDT large-cap growth, MDT mid-cap growth, and International Leaders Fund.
John Christopher Donahue: MDT Mid-Cap Growth, and International Leaders Fund. The MDT fund strategies have shown accelerated sales and net sales in 2024, particularly in the growth space. Year-to-date, through the end of the second quarter, MDT fund strategies have had about $1.8 billion in gross sales and $1.1 billion in net sales.
Tom: The MDT fund strategies have shown accelerated sales and net sales in 2024, particularly in the growth space.
Tom: Year-to-date, through the end of the second quarter, MDT fund strategies have had about $1.8 billion in gross sales and $1.1 billion in net sales.
John Christopher Donahue: Looking at our equity fund performance at the end of Q2 and using Morningstar data for the trailing three years, 54% of our equity funds were beating peers, and 38% were in the top quartile of their category. Now, for the first three weeks of Q3, combined equity funds and equity SMAs had net redemptions of $151 million. As my grandkids say, meaningfully less work.
Tom: Looking at our equity fund performance at the end of Q2 and using Morningstar data for the trailing three years.
Tom: 54% of our equity funds were beating peers, and 38% were in the top quartile of their category.
Tom: Now, for the first three weeks of Q3.
Tom: Combined equity funds and equity SMAs had net redemptions of $151 million.
Speaker Change: As my grandkids say, meaningfully less worse.
John Christopher Donahue: Turning now to Fixed Income, assets decreased by about $1 billion in Q2 to $95.3 billion. Fixed income funds had Q2 net redemptions of $631 million, and fixed income separate accounts had net redemptions of $806 million. More on those numbers in a moment.
Speaker Change: Turning now to fixed income. Assets decreased by about $1 billion in Q2 to $95.3 billion.
Speaker Change: Fixed income funds had Q2 net redemptions of $631 million and fixed income separate accounts had net redemptions of $806 million. More on those numbers in a moment.
John Christopher Donahue: We had 11 fixed income funds with positive net sales in Q2, including Total Return Bond Fund and Institutional Fixed Income. Regarding performance, at the end of Q2 and using Morningstar data for the trailing three years, 45% of our fixed income funds were beating peers, and 21% were in the top quartile of their category. For the first three weeks of Q3, Combined Fixed Income and SMAs had net redemptions of $273 million. In the Alternative Private Markets category, assets decreased by about $400 million in Q2 to just over $20 billion, due mainly to net redemptions in the unconstrained credit fund of about $500 million. We held our final close of Horizon 3, the third vintage of our Horizon series of global private equity funds in Q2, with a $1.08 billion raise.
Speaker Change: We had 11 fixed income funds with positive net sales in Q2, including Total Return Bond Fund and Institutional Fixed Income.
Speaker Change: Regarding performance, at the end of Q2 and using Morningstar data for the trailing three years, 45% of our fixed income funds were beating peers and 21% were in the top quartile of their category.
Speaker Change: For the first three weeks of Q3, Combined Fixed Income and SMAs had net redemptions of $273 million.
Speaker Change: in the Alternative Private Markets category.
Speaker Change: Assets decreased by about $400 million in Q2 to just over $20 billion.
Speaker Change: due mainly to net redemptions in the unconstrained credit fund of about $500 million.
Speaker Change: We held our final close of Horizon 3, the third vintage of our Horizon series of global private equity funds in Q2, with $1.08 billion raised.
John Christopher Donahue: Verizon invests globally with a mid-market focus. It's a hybrid strategy with roughly a 50-50 allocation to co-investments and funds. Continuing on with private markets, we're in the market now with Federated Army's GPE Innovation Fund II, the second vintage of our Pan-European Growth Private Equity Innovation Fund. We're also in the market with our European Direct Lending III, the third vintage of our European Direct Lending Fund, for equity. We have 100 and 66 million wins to fund, offset by $188 million of Snown Redemption. Um, that will come up again later.
Speaker Change: Verizon invests globally with a mid-market focus. It's a hybrid strategy with roughly 50-50 allocation to co-investments and funds.
Speaker Change: Continuing on with private markets. We're in the market now.
Speaker Change: With Federated Hermes GPE Innovation Fund II, the second vintage of our Pan-European Growth Private Equity Innovation Fund.
Speaker Change: We're also in the market with our European Direct Lending III, the third vintage of our European Direct Lending Fund.
Speaker Change: for equities.
Speaker Change: We have a hundred and...
Speaker Change: Sixty-six million wins to fund, offset by a hundred and eighty-eight.
Speaker Change: million of known redemptions
John Christopher Donahue: We are developing, get back on the private label side, we are developing The Global Private Equity Co-Invest Fund, the sixth vintage of the PEC series, targeting a Q4 launch. Now to get back to some of these redemptions. We estimated that about 1.5 billion of Q2 net redemptions are attributable to the Q2 departure of a UK-based senior portfolio manager. These redemptions occurred largely in certain high-yield, unconstrained credit, as I mentioned, and multi-asset credit strategies. And we've been in the process of harmonizing our U.S. and U.K.-based fixed income themes to leverage the considerable strengths of this group on a global basis.
Speaker Change: [inaudible]
Speaker Change: That will come up again later. To get back on the private label side, we are developing the Global Private Equity Co-Invest Fund, the sixth vintage of the PEC series, targeting a Q4 launch.
Speaker Change: Now to get back to some of these redemptions.
Speaker Change: We estimated that about 1.5 billion of Q2 net redemptions are attributable to the Q2 departure of a UK-based senior portfolio manager.
Speaker Change: These redemptions occurred largely in certain high-yield, unconstrained credit, as I mentioned, and multi-asset credit strategies.
Speaker Change: And we've been in the process of harmonizing our U.S. and U.K.-based fixed income themes to leverage the considerable strengths of this group on a global basis.
John Christopher Donahue: So we begin Q3 with about $1.9 billion in net institutional mandates yet to fund into both funds and separate accounts. These are diversified across private markets, fixed income, and equity; about 1.1 billion of net total wins is expected to come in the private market strategy, with wins in private equity and direct lending. Fixed income is expected to add a net addition of about $835 million with wins in ultra short and short duration, sustainable investment grade credit, government bond, and emerging market debt.
Speaker Change: So, we begin Q3 with about $1.9 billion in net institutional mandates yet to fund into both funds and separate accounts.
Speaker Change: These are diversified across private markets, fixed income and equity. About $1.1 billion of net total wins is expected to come in private market strategy with wins in private equity and direct lending.
Speaker Change: Fixed income is expected.
Speaker Change: A net additions of about $835 million with wins in ultra-short and short duration, sustainable investment grade credit, government bond, and emerging market debt.
John Christopher Donahue: I've already mentioned that for equities, we have $166 million in wins to fund, which is offset by $188 million of known redemptions. Both the wins and the losses are in the global equity mandate area. Now, moving to money markets.
Speaker Change: I've already mentioned that for equities, we have $166 million in wins to fund.
Speaker Change: which is offset by 188 million of known redemptions. Both the wins and the losses are in the global equity mandate area.
John Christopher Donahue: In the second quarter, we reached another record high for money market fund assets of $426 billion and total money market assets of $587 billion, as I have already mentioned. Total money market assets increased by $8 billion in the second quarter. Money market strategies continue to benefit from favorable market conditions for cash as an asset class, elevated liquidity levels in the financial system, and attractive yields compared to cash management alternatives like bank deposits and direct investments in money market instruments like T-bills and commercial paper. It is expected, in the upcoming period of declining short-term rates, that we believe the market conditions for money market strategies will continue to be favorable compared to direct market rates and bank deposit rates.
Speaker Change: Now moving to money markets.
Speaker Change: In the second quarter, we reached another record high for money market fund assets of $426 billion and total money market assets of $587 billion, which I already mentioned.
Speaker Change: Total money market assets increased by $8 billion in the second quarter.
Speaker Change: Money market strategies continue to benefit from favorable market conditions for cash as an asset class.
Speaker Change: Elevated liquidity levels in the financial system.
Speaker Change: and attractive yields compared to cash management alternatives like bank deposits and direct investments in money market instruments like T-bills and commercial paper.
Speaker Change: It is expected in the upcoming period of declining short-term rates that we believe the market conditions for money market strategy will continue to be favorable compared to direct market rates and bank deposit rates.
Thomas Robert Donahue: Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.45% at the end of Q2, up from about 7.35% at the end of Q1. Now looking at recent asset totals as of a few days ago, managed assets were approximately $786 billion, including $589 billion in money markets. 78 billion in equity, $96 billion in fixed income, $20 billion in the alternative private market, and $3 billion in multi-assets. Money Market Mutual fund assets were at $429 billion. Thanks, Chris.
Speaker Change: Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.45% at the end of Q2, up from about 7.35% at the end of Q1.
Thomas Robert Donahue: Total revenue for Q2 increased $6.2 million, or 2% from the prior quarter, due mainly to $3.4 million of higher carried interest revenue and $2.1 million of higher revenue from money market assets, partially offset by lower revenue from equity assets and lower performance fees. Total Q2 carried interest and performance fees were $2.8 million compared to $0.4 million in the first quarter. Q2 operating expenses increased by $64.1 million from the prior quarter due mainly to a $66.3 million non-cash intangible asset impairment charge.
Speaker Change: Now looking at recent asset totals as of a few days ago, managed assets were approximately $786 billion, including $589 billion in money markets.
Speaker Change: 78 billion in equities.
Speaker Change: $96 billion in fixed income, $20 billion in alternative private markets, and $3 billion in multi-asset.
Speaker Change: Money Market Mutual fund assets were at $429 billion.
Speaker Change: Don.
John Christopher Donahue: Thanks, Chris.
Speaker Change: Total revenue for Q2 increased $6.2 million, or 2% from the prior quarter, due mainly to $3.4 million of higher carried interest revenue and $2.1 million of higher revenue from money market assets, partially offset by lower revenue from equity assets.
Speaker Change: and Lower Performance Fees.
Speaker Change: Total Q2 carried interest and performance fees were $2.8 million compared to $0.4 million in the first quarter.
Speaker Change: Q2 operating expenses increased by $64.1 million from the prior quarter due mainly to the $66.3 million non-cash intangible asset impairment charge.
Thomas Robert Donahue: All other operating expenses decreased by $2.2 million, or about 1% from the prior quarter. The impairment charge was due to the change in fair value of one of the intangible assets from the 2018 Federated Army's limited acquisition due to changes in projected cash flows compared to the prior quarter. Advertising expense increased in Q2 due to the timing of our ad program. The effective tax rate in Q2 reflects the impact of the valuation allowance on foreign deferred tax assets and the impairment charge.
Speaker Change: All other operating expenses decreased by $2.2 million or about 1% from the prior quarter.
Speaker Change: The impairment charge was from the change in fair value of one of the intangible assets from the 2018 Federated Hermes Limited acquisition due to changes in projected cash flows compared to the prior quarter.
Speaker Change: Advertising expense increased in Q2 due to the timing of our ad programs.
Speaker Change: The effective tax rate in Q2 reflects the impact of the valuation allowance on foreign deferred tax assets and the impairment charge.
Thomas Robert Donahue: We expect the tax rate to be in the 27 to 29 percent range over the rest of 2024. At the end of Q2, cash and investments, excluding the portion attributable to non-controlling interests, were $453 million.
Speaker Change: We expect the tax rate to be in the 27 to 29 percent over the rest of 2024.
Speaker Change: At the end of Q2, cash and investments were $453 million. Cash and investments excluding the portion attributable to non-controlling interests was $424 million.
John Christopher Donahue: Ollie, that concludes our prepared remarks, and we'd like to open up the call for questions.
Speaker Change: Olly, that completes our prepared remarks and we'd like to open up the call for questions.
Operator: Thank you. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is busy. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Olly: Thank you. At this time we will be conducting our question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue.
Speaker Change: And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Operator: One moment, please, while we poll for questions. Thank you. Our first question is coming from Patrick Davitt with Autonomous Research. Your line is live.
Speaker Change: One moment please, while we poll for questions.
Speaker Change: Thank you. Our first question is coming from Patrick Davitt with Autonomous Research. Your line is live.
Patrick Davitt: All right. Good morning, everyone.
John Christopher Donahue: You've been pointing to, excuse me, you've been pointing to a pickup in institutional money fund flows when the Fed starts cutting. You hinted at it again today. And now that bets on that happening soon are picking up, are you, could you speak to maybe the conversations you're having with those kinds of accounts? Are you really seeing the conversations pick up as you would expect that could point to, say, an early pipeline of more of those mandates coming in later this year? Thank you. Patrick.
Patrick Davitt: All right. Good morning, everyone.
Patrick Davitt: You've been pointing to, excuse me, you've been pointing to a pickup in institutional money fund flows.
Patrick Davitt: When the Fed starts cutting, you hinted at it again today.
Patrick Davitt: And now that bets on that happening soon are picking up, can you speak to maybe the conversations you're having with those kind of accounts? Are you seeing the conversations pick up like you would expect that could point to, say, an early pipeline of more of those mandates coming in later this year? Thank you.
John Christopher Donahue: Patrick, it's very hard to detect that movement when it hasn't happened yet. Debbie will comment on what's going on exactly in the marketplace, but we remain... Confident about the long-term progress of this event because of what happened every time. They have begun to ease rates, and we've gone through that a number of times before. You know, in the Q3 of 19, when they began to ease rates and how that worked out for us in terms of a 22 or so percent increase in assets, the industry also went up 14 percent. But I'll let Debbie comment on discussions with institutional clients and how they're going.
Patrick Davitt: Patrick, it's very hard to detect that movement when it hasn't happened yet. Debbie will comment on what's going on exactly in the marketplace. But, excuse me, we remain...
Speaker Change: confident about the long-term progress of this event because of what happened every time.
Speaker Change: They have begun to ease rates, and we've gone through that a number of times before.
Debbie: You know, in the Q3 of 2019, when they began to ease rates...
Debbie: and how that worked out for us.
Speaker Change: In terms of a 22 or so percent increase in assets, industry also went up 14 percent. But I'll let Debbie comment on discussions with institutional clients and how they're looking at this.
Deborah Ann Cunningham: Thanks, Chris. As for the discussions that we're having, they're ongoing. We came into 2024 with the market, in our estimation, overdone, but expecting 6.97 rate cuts, let's say, in 2024. We went down to a low of the market expecting no rate cuts in 2024, so it's been quite volatile. And so our conversations with customers have sort of had that same volatility. Everybody is discussing, all the clients are discussing, extending duration, taking maybe some of their core cash or their strategic cash, moving it up the curve a little bit.
Debbie: Thanks, Chris.
Debbie: As for the discussions that we're having, they're ongoing. We came in to 2024.
Debbie: with the market, in our estimation, overdone, but expecting 6.97 rate cuts, let's say, in 2024. We went down to a low of the market expecting no rate cuts in 2024. So it's been quite volatile. And so our conversations with customers have sort of had that same volatility. Everybody is discussing, all the clients are discussing extending duration, taking maybe some of their core cash or their strategic cash, moving it up the curve a little bit. They're questioning whether we're extending duration within our money market funds themselves for their operating cash, which we have been.
Deborah Ann Cunningham: They're questioning whether we're extending duration within our money market funds themselves for their operating cash, which we have been. But in fact, what generally happens, and it's not any different so far this cycle, is that until the first rate cut happens, you don't see much of that movement in anticipation. Everybody likes to prepare, everybody likes to discuss, but the actual movement doesn't generally start to occur until the first cut happens. So we are having those conversations.
Debbie: But in fact, what generally happens, and it's not any different so far this cycle, is that until the first rate cut happens, you don't see much of that movement in anticipation. Everybody likes to prepare. Everybody likes to discuss.
Debbie: but the actual movement doesn't generally start to occur until the first cut happens. So, we are having those conversations. There is nothing different about them. They are healthy. They are what we would expect.
Deborah Ann Cunningham: There is nothing different about them. They are healthy, they are what we would expect, but we're not really seeing that type of movement yet. If the Fed cuts in September or November or December, that's when that should occur. But it's not at all likely.
Debbie: But we're not really seeing that type of movement yet. If the Fed cuts in September or November or December , that's when that should occur, in all likelihood.
Patrick Davitt: Got it. Thanks.
Speaker Change: Got it, thanks. And just as a quick follow-up,
Patrick Davitt: Just as a quick follow-up, how are you thinking about second-half repurchases? You still have a lot of cash. The share price is still around $35. Can we take that to mean that you could pick that up a fair amount at this point? I would say that we certainly would...
Speaker Change: How are you thinking about second half repurchases? You still have a lot of cash. The share price is still around $35. Can we take that to mean that you could pick that up a fair amount at this point?
John Christopher Donahue: I would say that we would certainly expect to be active. You saw what we did this past quarter, and the price was a little lower than $35,000, but we still believe that the stock is undervalued.
Operator: Thank you. Our next question is coming from Adam Beatty with UBS. Your line is live.
Speaker Change: I would say that we would certainly expect to be active. You saw what we did this past quarter, and the price was a little lower than $35, but we still believe that the stock is undervalued.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is coming from Adam Beatty with UBS. Your line is live.
Adam Quincy Beatty: Thank you and good morning. I just noticed among the top-selling equity funds, there was a bit of a tilt this time toward smaller cap or SMID cap, and that seems to coincide with a bit of a rotation out of maybe the MAG 7 or whatever you call it, large-cap growth, into more of that broader emphasis. Just wondering, it's fairly recent, so just wondering how you're seeing that and whether your clients are pointing their conversations in that direction. Thank you.
Adam Quincy Beatty: Thank you and good morning. I just noticed among the top selling equity funds, there was a bit of a tilt this time toward smaller cap or SMID cap. And that seems to coincide with a bit of a rotation out of, you know, maybe the mag seven or what have you, large cap growth into more of that broader emphasis. Just wondering, you know, it's fairly recent, so just wondering, you know, how you're seeing that and whether your clients are pointing their conversations in that direction. Thank you.
John Christopher Donahue: A hint of that, Adam, is that three weeks' worth of flow data. And it's only a hint because three weeks, you go with three weeks, that's not the best thing to do.
Adam Quincy Beatty: A hint of that, Adam, is that three weeks' worth of flow data. And it's only a hint because three weeks, you go with three weeks, that's not the best thing to do. However...
John Christopher Donahue: However, what's happened in the performance gives you maybe a reason for that. You take strategic value dividend, which was facing that headwind of the MAG 7, and that's been reversed, as we all know. So quarter to date... Strategic Value Dividend is up 5.5%, and the S&P is down 0.5%. So, you know, if you look at July's numbers... in Morningstar, which we don't like.
Speaker Change: What's happened in the performance gives you maybe a reason for that. You take strategic value dividend.
Speaker Change: which was facing that headwind of the MAG 7, and that's been reversed as we all know. So quarter to date...
Speaker Change: Strategic Value Dividend is up 5.5% and the S&P is down 0.5%.
John Christopher Donahue: The fund's in the top one percentile of its peers, so, you know, and the ETF is doing well on those numbers, too. But, as we always say, that's an odd peer group for this dividend fund, and you're touching on the fact that many of the dividend-oriented products in our category are leading the way right now. And, you know, if you look into the portfolios, you will see that finance and bank holdings have helped out that particular fund.
Speaker Change: So, you know, if you look at July's numbers...
Speaker Change: in the Morningstar, which we don't like.
Speaker Change: The fund is the number one percentile in its peers.
Speaker Change: So, you know, and the ETF is doing well on those numbers too, but as we always say, that's an odd peer group for this dividend fund.
Speaker Change: And you're touching on the fact that many of the dividend-oriented products in our category are leading the way right now.
Speaker Change: You know, if you tear into the portfolios, you will see that finance and bank holdings have helped out that particular fund.
John Christopher Donahue: And if you talk about other funds, you take the Kauffman Fund. This is another one that's been one of the leaders in the clubhouse with Net Redemption. The fund is in the top quartile for the trailing one year and top 12% for the trailing three months. However, three months is short. So you know, that's a move. Just to expand on that a little bit, since I'm approaching this from the point of view of who are the leaders of our redemptions and what's going on.
Speaker Change: And if you talk about other funds, you take the Kauffman Fund, this is another one that's been one of the leaders in the clubhouse with Net Redemption.
Speaker Change: The fund is in the top quartile for the trailing one year and top 12% for the trailing three months. Again, three months is short. So, you know, that's a move.
Speaker Change: Just to expand on that a little bit, since I'm approaching this from the point of view of who are the leaders of our redemptions and what's going on, it's kind of a green shoots report. The GEMS product across the pond...
John Christopher Donahue: It's kind of a green shoots report. The GEMS product across the pond is in the 32nd percentile year to date and just about in the top quartile in the preceding three months. And Asia X Japan is, as of the 24th of July, in the top 2% for the trailing three years, and other good numbers. So, yes, we're seeing the rotation, and it's helping many of the small cap funds, especially on the MDT side.
Speaker Change: is in the 32nd percentile year to date and just about the top quartile in the preceding three months. And Asia X, Japan.
Speaker Change: is, as of the 24th of July , it's in the top 2% for the trailing three years and other good numbers.
Speaker Change: So, yes, we're seeing the rotation, and it's helping many of the small cap funds, especially on the MDT side.
John Christopher Donahue: Debbie mentioned that clients, both institutional and intermediary, are all talking about both extending duration and then stepping out the risk curve and when they are going to join the rotation for these smaller stocks. So, over the last three weeks, there has been a bit of a change in the marketplace.
Debbie: Debbie mentioned that clients, both the institutional and the intermediaries...
Debbie: are all talking about...
Debbie: both extending duration
Speaker Change: and then stepping out the risk curve and when are they going to join the rotation for these smaller stocks. So, over the last three weeks, it has been a bit of a change in the marketplace.
Adam Quincy Beatty: I appreciate the detail and the green shoots report there. Just turning to money market funds, one of the big topics of conversation in the Wealth Management Channel has been the need to pay higher yields on client cash. And obviously, there are several different options that those firms have to do that. But I was just wondering if you see potential opportunity with that move. Thank you.
Speaker Change: Thank you, appreciate the detail and the green shoots report there. Just turning to money market funds, one of the big topics of conversation in the wealth management channel has been the need to pay higher yields on client cash and you know obviously there are several different options that those firms have to do that but I was just wondering if you see you know potential opportunity with that move. Thank you.
John Christopher Donahue: Yes, we do. And here's one of the interesting ones. Back in the Stone Age of the 1970s, when money market funds were just getting going, and the banks saw that the funds had way higher yields, the banks, for the first time, started advertising their yields. But guess what?
Speaker Change: Yes, we do. And here's one of the interesting ones. Back in the Stone Age...
Speaker Change: of the 70s when money market funds were just getting going and the banks saw that the funds had way higher yields.
Speaker Change: The banks, for the first time, started advertising their yields. But guess what? Their yields were way lower than the money fund. And when you start talking to people about yields...
John Christopher Donahue: Their yields were way lower than the money fund. And when you start talking to people about yields, and you say, oh, I raised it from 0.1% to 1% or 2%, and they look around, and they're being taught about yields, and all of a sudden, they go, whoa, whoa, whoa, it's 5% of the money fund. That helps the retail trade, in my opinion, and so that's what's going on. What we like about the whole move is that people and the marketplace do a lot better if they're getting marketplace returns for their cash, and so that's what we talk about, and I think if they're going to sell based on higher yields, and they're going to find out the money fund's higher, that's going to work out well for us.
Speaker Change: And you say, oh, I raised it from 0.1% to 1% or 2%, and they look around, and they're taught about yields, and all of a sudden they say, whoa, whoa, whoa, it's 5% of money fund.
Speaker Change: That helps the retail trade, in my opinion.
Speaker Change: And so that's what's going on. What we like about the whole move is...
Speaker Change: that people and the marketplace do a lot better if they're getting marketplace returns.
Speaker Change: for their cash and so that's what the what we talk about and I think if they're going to sell based on higher yields and they're going to find out the money fund's higher, that's going to work out well for us.
Adam Quincy Beatty: Sounds good! Thank you for taking my question.
Speaker Change: Sounds good. Thank you for taking my questions.
Operator: Our next question is coming from Dan Fannon with Jeffreys. Your line is live.
Speaker Change: Thank you. Our next question is coming from Dan Fannon with Jeffreys. Your line is live.
Daniel Thomas Fannon: Thanks, good morning. I have a question on the fee rate. In the quarter itself, it came in a little bit better. So I'm curious, within money market funds or certain products, if maybe there are some underlying trends that maybe are getting a little bit better. Then also, prospectively, as you think about that on a longer term basis, how are you thinking about, you know, kind of the fee rate in the context of both where demand sits and also in terms of your products competitively in the market? Well, uh...
Daniel Thomas Fannon: Thanks, good morning.
Daniel Thomas Fannon: It's a question on the fee rate. In the quarter itself, it came in a little bit better. So I'm curious if within money market funds, there are certain products that maybe
Speaker Change: There are some underlying trends that maybe are getting a little bit better. Then also, prospectively, as you think about that on a longer-term basis, how are you thinking about the fee rates in the context of both where demand sits, but also in terms of your products competitively in the market?
Thomas Robert Donahue: Well, you know the fee rate comes from the mix of all the assets, as you know, and we don't track that closely and think about that on a total basis, but we do look at each product and we have a monthly expense meeting at a fairly high level looking at each product, not every product every month, but we certainly cover all the products, analyzing where they fit in, what our prospects are, where our performance is, where sales think we can So we are very attentive to that very regularly, and I think we have our products priced pretty well for success.
Speaker Change: Well you know the fee rate comes from the mix of all the assets as you know and you know we don't track that.
Daniel Thomas Fannon: closely and think about that
Daniel Thomas Fannon: on a total basis, but we do look at each product.
Daniel Thomas Fannon: And we have a monthly expense meeting, you know, at a fairly high level, looking at each product, not every product, every month.
Daniel Thomas Fannon: but we certainly cover all the products, analyzing where they fit in, what our prospects are, where's our performance, where do sales think we can generate more and more activity, and
Daniel Thomas Fannon: So we are attentive to that very regularly and think we have our products priced pretty well for success.
Daniel Thomas Fannon: Okay. And then just, you know, on expenses, just as you think about the back half of the year, you've seen some growth in, you know, various of the sub buckets, but curious if there's anything to call out as you think about the budget or the outlook in the second half versus kind of what's been the run rating here in the first half.
Speaker Change: Okay and then just you know on expenses just as you think about the back half of the year you've seen some growth in you know various of the sub buckets but curious if there's anything to call out as you think about the budget or the outlook in the second half versus kind of what's been run rating here in the first half.
Thomas Robert Donahue: Okay, Well, you see, the comp number was down, kind of like what we expected. And, you know, Chris is talking about green shoots and performance, and I would anticipate that our comp numbers would probably go up on the incentive comp side based on performance expectations. Now, of course, that's not answering whether we're going to get carried interest or performance. And I'm not, I'm not giving a forecast on that.
Daniel Thomas Fannon: Okay.
Daniel Thomas Fannon: Well, you see the COPS number was down, you know, kind of like what we expected, and, you know, Chris was talking about green shoots and performance, and I would anticipate...
Speaker Change: that our comp numbers would probably go up on the incentive comp side based on
Speaker Change: performance expectations now of course that's not answering whether we're going to get carried interest or performance and I'm not I'm not giving a forecast on that
Thomas Robert Donahue: But without that, I would expect the comp numbers to go up. And we expect to get higher money market assets through the second half of the year, and that will drive distribution, line up Advertising and Promotions. You know, the second half is usually a little heavier than the first half systems and communications, where we just continue to eek more investments in there, so that would be, you know, kind of slightly higher. Professional Services. I don't have much to comment on.
Speaker Change: But without that, I would expect the comp numbers to go up and, you know, we expect to get higher money market assets through the second half of the year, and that will drive the distribution.
Speaker Change: Line up.
Speaker Change: Advertising and promotion, you know, the second half is usually a little heavier than the first half. Systems and communications, we just continue to eek more investments in there. So that would be, you know, kind of slightly up.
Thomas Robert Donahue: Office and Occupancy, I don't see any big changes there. Travel and Related, we do a little more of that called Cog Prospecting in the second half of the year versus the first half of the year. And one other point, which is not on the expense side, but it really is expensive. We are going to have a proxy to elect our fund directors, which we have to do every 10 or 15 years, and that's going to come in the second half of the year.
Speaker Change: professional services I don't have much to comment on
Speaker Change: Office and Occupancy, I don't see much changes there. Travel and Related, we do a little more of that, I'll call it prospecting, in the second half of the year versus the first half of the year.
Speaker Change: And one other point, which is not on the expense side, but it really is expenses.
Speaker Change: We are going to have a proxy to elect our fund directors, which we have to do every 10 or 15 years. And that's going to come in the second half of the year. It comes as a reduction in revenue.
Thomas Robert Donahue: It comes as a reduction in revenue, and we expect that to be about a $6 million line item. The reason why it's a reduction in revenue is because of waivers, and so it doesn't show up on the expense lines, but we'll get lower revenue over the second half of the year, and we estimate that it's a $6 million cost to get all the directors elected properly.
Speaker Change: And we expect that to be about a $6 million line item, and the reason why it's a reduction of revenue is because of waivers, and so it doesn't show up on the expense lines, but we'll get lower revenue over the second half of the year, and we estimate, you know, that's a $6 million cost.
Speaker Change: Get all the directors elected properly.
Operator: Thank you. Our next question is coming from Ken Worthington with JP Morgan. Your line is live.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is coming from Ken Worthington with J.P. Morgan. Your line is live. Hi, good morning. Thanks for taking the questions.
Kenneth Brooks Worthington: Hi, good morning.
Kenneth Brooks Worthington: Thanks for taking the questions. So, I'd love to get more color on the impairment charge for Hermes. Since the deal was announced, the markets have been up quite a bit. Since you acquired at least the first tranche in, I think it was 2018, I know there were aspirations to launch Hermes and ESG products in the U.S. and leverage that brand to grow. So, what happened here? What didn't work out? Why the impairment?
Kenneth Brooks Worthington: So, I'd love to get more color on the impairment charge for Hermes.
Speaker Change: Since the deal was announced, the markets are up quite a bit.
Speaker Change: Since you acquired at least the first tranche in, I think it was 18, I know there was aspirations to launch, you know, Hermes and ESG products in the U.S. and leverage that brand to grow. So what happened here? What didn't work out? Why the impairment?
Thomas Robert Donahue: Okay, Ken, we have to, when we did the acquisition, we had to value the assets, and the assets that we impaired this time and the assets that we impaired last time were the pooled assets, i.e., the funds.
Speaker Change: Okay, Ken, we have to, when we did the acquisition, we had to value the assets, and the assets that we impaired this time and the assets that we impaired last time was the pooled assets, i.e. the funds.
Thomas Robert Donahue: And so what happened really versus last quarter from where we were valuing things? We had the GEMS product, we had the AsiaX Japan product, the GEMS performance thing Christian said was turned around, but there were significant redemptions in there. We had the AsiaX Japan product, which has always had good performance but has a significant Chinese ownership, and we had significant redemptions in there. And then Chris mentioned in his comment that the billion five billion of redemptions were on the thick side because of the PM departure.
Speaker Change: And so what happened really versus last quarter from where we were valuing things...
Speaker Change: We had the GEMS product. We had the Asia X Japan product.
Speaker Change: The GEMPAD performance thing, which Chris just said, is turned around, but there were significant redemptions in there. We had the AsiaX Japan product, which has always had good performance, but has a significant China ownership, and we had significant redemptions in there.
Speaker Change: And then Chris mentioned in his comments...
John Christopher Donahue: the billion five of redemptions on the thick side
Thomas Robert Donahue: And so when you add all the negative flows in there and look at the forecast, it runs right into how we have to value the thing, and we had to take the impairment. In terms of excitement for what's going on, which we still have, first of all, we're still and will remain a global entity, and it's because of the acquisition that we were able to do that. And I think Saker is here, and he ought to give a few comments on the rest of the business and why we still are highly, highly excited.
Speaker Change: Because of the PM departure and so when you add all the negative flows up in there and look at the forecast
Speaker Change: It runs right into how we have to value the thing.
Speaker Change: and we had to take the impairment. In terms of excitement for what's going on, which we still have, first of all we're still and will remain a global entity and it's because of the acquisition that we were able to do that.
Sacher: And I think Saker ought to give, he's here and he ought to give a few comments on the rest of the business and why we still are highly, highly excited about it. Thank you very much, Tom. So if you look at our business that's in the London office.
Saker Anwar Nusseibeh: Thank you very much, Tom. So, if you look at our business that's in the London office, you can look at it in three ways. The first one is that we have a large income stream that comes traditionally from our equity funds. Our equity funds are primarily, not totally, but primarily, if you want to think about it, quality growth. And investors have held off investing in quality growth until the rotation that the previous speaker mentioned earlier, and we've begun to see green shoots of that with inflows, for example, into our U.S. small-cap funds run out of London, of all places.
Sacher: You can look at it in three ways. The first one is we have a large income stream that comes traditionally from our equity funds. Our equity funds are primarily, not totally, but primarily if you want to think about it, quality growth.
Speaker Change: And investors have held off investing in quality growth until the rotation that the previous speaker mentioned earlier. And we've begun to see green shoots of that with inflows, for example, into our U.S. small-cap funds run out of London, out of all places.
Saker Anwar Nusseibeh: If you look at specifically our GEMS product, which was a large revenue generator for us, and our AJX Japan, we've seen the flow slow down substantially, and given the valuation levels and the performance levels of the funds, you have to think the clients are, at some stage, going to look positively at those as we go forward. So that's the first thing.
Speaker Change: If you look at specifically our GEMS product, which was a large revenue generator for us, and our AJX Japan, we've seen the flow slow down substantially, and given the valuation levels and the performance levels of the funds,
Speaker Change: You have to think that clients at some stage are going to look positively at those as we go forward, so that's the first thing.
Saker Anwar Nusseibeh: The second element you've got to think about is the fixed income. As Tom mentioned, we lost one senior PM. I will note that it's the only loss of any senior investment active PM that we've had since the acquisition in 18. And not surprisingly, with something like that, you will see outflows that follow with that as the consulting community puts you on either hold or redemption. So that's what held us back there.
Speaker Change: The second element you've got to think about is the fixed income. As Tom mentioned, we lost...
Speaker Change: One senior PM I will note.
Speaker Change: That's the only loss of any senior investment.
Thomas Robert Donahue: active BM that we've had since the acquisition in 18.
Speaker Change: and not surprisingly with something like that you will see outflows that follow with that as the consulting community puts you on either hold or redemption. So that's what held us back there. Now we've been bringing together the two teams across the pond between London and between Pittsburgh and we see good things coming through that. The third element that held us back slightly is again interest rates.
Saker Anwar Nusseibeh: Now we've been bringing together the two teams across the pond between London and Pittsburgh, and we see good things coming through there. The third element that's held us back slightly is, again, interest rates. You know that we have a large presence in private markets, a large real estate business, particularly a development business. Now to be able to harvest your performance fees, and we can never predict performance fees, to be able to harvest them theoretically, what you've got to be able to do is rent the offices that you've built.
Speaker Change: You know that we have a large, in private markets, a large real estate business, particularly development business. Now, to be able to harvest your performance fees, and we can never predict performance fees, to be able to harvest them theoretically, what you've got to be able to do is rent the offices that you've built.
Saker Anwar Nusseibeh: And we have been successfully doing that despite the cycles, particularly in the developments in the north of the country, that is, the country being the United Kingdom, and indeed, we have won a new award in Leeds. But the second thing you need to have is lower interest rates. And interest rates in the UK are beginning to come down. That has stopped us from collecting as much performance fees as we had before.
Speaker Change: And we have been successfully doing that despite the cycles, particularly the developments in the north of the country, that's the country being the United Kingdom, and indeed have won a new award in Leeds.
Speaker Change: But the second thing you need to have is lower interest rates.
Speaker Change: and Interest Rates in the UK are beginning to come down. But that has stopped us from harvesting as much performance fees as we had before. Now looking to the future...
Saker Anwar Nusseibeh: Now looking to the future, I would say that as the rotation goes away from the Magnificent Seven, you would expect investors to begin to put more money back into actively managed funds. That's what we specialize in. You would expect, with lower interest rates, the property business to do slightly better.
Speaker Change: I would say that as the rotation goes away from the Magnificent Seven, you would expect investors to begin to put more money back into actively managed funds. That's what we specialize in. You would expect...
Saker Anwar Nusseibeh: And more importantly, you mentioned ESG and I talked about sustainability. The wind behind that trend is very strong. I note the public announcement of the Irish Sovereign Wealth Fund, which has said that it will only invest in managers who integrate sustainability, and that's going to be a very large fund that's going to grow over the next few years. So that gives you an indication of where the market is going in Europe.
Speaker Change: with lower interest rates.
Speaker Change: for the property business to do slightly better, and more importantly, you mentioned ESG, and I'd like to talk about sustainability.
Speaker Change: The wind behind that trend is very strong.
Speaker Change: I note the public announcement of the Irish Sovereign Wealth Fund, which has said that it will only invest with managers who integrate sustainability, and that's going to be a very large fund that's going to grow over the next...
Saker Anwar Nusseibeh: So, for perfectly understandable reasons, it's been a tough quarter, but I think we've seen a turnaround in performance, and the key is performance. That's what we manufacture in investment management, and it's looking good from here on. If I could add, and let me just add a couple other things, I would do it again, with enthusiasm, the whole deal, okay?
Speaker Change: So that gives you an indication of where the market is going in Europe .
Speaker Change: So I think for perfectly understandable reasons, it's been a tough quarter, but I think we've seen a turnaround in performance, and the key is performance.
Speaker Change: That's what we manufacture in investment management, and it's looking good from here on.
Speaker Change: If I could add, let me just add a couple of other things, I would do it again, with enthusiasm, the whole deal. Okay? So we started, we are now a global company for real, which we weren't before.
John Christopher Donahue: So we started; we are now a global company for real, which we weren't before. We have an engagement, activity with statistics, with data that enables us to have what we think is an edge in looking at companies and understanding where they're going and where they've been. And this sets us up especially well in terms of gaining mandates in Europe. We were able to get a hold of a whole variety of private market enterprises, which the cost of creating or buying would be just enormous. And what's really happened in the U.S. is that some people who were leaders in the investment industry decided to make all this ESG jazz political. And that never works out. We're not political. We're not moral.
Speaker Change: We have a engagement...
Speaker Change: activity with statistics, with data, that enables us to have what we think is an edge in looking at companies and understanding where they're going, where they've been, and this sets us up especially well in terms of gaining mandates in Europe .
Speaker Change: We were able to get a hold of a whole variety of private markets enterprises Which the cost of creating or buying would be just enormous
Speaker Change: and what's really happened in the U.S.
Speaker Change: some people who were leaders in the investment industry decided to make
Speaker Change: or the ESG Jazz Political.
John Christopher Donahue: We are trying to evaluate risk and come up with excellent performance, as Saker mentioned, and we would happily do the whole Hermes thing again. Go ahead. Yeah.
Speaker Change: And that never works out.
Speaker Change: We are not political, we are not moral.
Speaker Change: We are trying to evaluate risk and come up with excellent performance, as Saker mentioned, and we would happily do the whole Hermes thing again. Go ahead.
Kenneth Brooks Worthington: Thank you, and I'll just keep digging here. If you look at the multi-asset and the alternative business, assets aren't growing. We're in the heyday of private market investing. I think those alternative assets have been sort of stagnant for three or so years, and on the multi-asset side, assets are down, I think 40%, since the acquisition was first announced. So you mentioned real estate is one of the factors. Are there other factors on the alternative side that are sort of weighing on the growth there? And I know the multi-asset business is really tiny, but the fact that the assets are down so much sort of warrants the question what's going on there as well.
Speaker Change: Thank you, and I just keep digging here. If you look at the multi-asset and the alternative business, the assets aren't growing.
Speaker Change: We're in the heyday of private market investing. I think those alternative assets have been sort of stagnant for three or so years. And on the multi-asset side...
Speaker Change: Assets are down, I think, 40%.
Speaker Change: since the acquisition was first announced. So, you mentioned real estate is one of the factors.
Speaker Change: Are there other factors on the alternative side that are sort of weighing on the growth there? And I know the multi-asset business is, you know, really tiny, but the fact that the assets are down so much sort of warrants the question what's going on there as well.
Saker Anwar Nusseibeh: So if you look at, this is Saker again, if you look at the private markets business, we're seeing really good traction in part of the private markets, but not as much good traction in other parts. Now, the really strong part of the traction we're seeing in our direct lending. Chris mentioned earlier that we're in the process of closing our Direct Lending III fund, which we launched, and we expect that to close at a higher level than 1 or 2.
Saker: So if you look at, this is Saker again, if you look at the private markets business, we're seeing really good tractions in part of the private markets, but not as much good traction in other parts. Now, in the really strong part of the traction we're seeing in our direct lending business.
Speaker Change: Chris mentioned earlier on that we're in the process of closing Direct Lending 3.
Saker Anwar Nusseibeh: And that's been a strong growth story, pushed by very good performance and a very unique way of approaching the market. So it's been doing well. We've talked about our private equity business, and that's done well. But other parts have been more difficult. If you look at the infrastructure business, that is more difficult because of the regulators, particularly in the United Kingdom and the way that they've interacted with that. So I think that the rotation into private market assets does happen, and people can raise money, but it's a matter of investing them. And our approach tends to be more cautious and more client-oriented, which would explain our positioning in general in the private markets. I'm not commenting specifically on the multi-strategy specific.
John Christopher Donahue: fund which we've launched and we expect that to close at a higher level than 1 or 2.
Operator: [inaudible]
Speaker Change: And that's been a strong growth story pushed by very good performance and a very unique way of approaching the market.
Speaker Change: So that's been doing well. We've talked about our private equity business and that's done well. Other parts have been more difficult. If you look at the infrastructure business, that is more difficult because of the regulators, particularly we're talking about the United Kingdom and the way that they've interacted with that.
Speaker Change: So I think that the rotation into private market assets does happen and people can raise money, but it's a matter of investing them.
Speaker Change: and our approach tends to be more cautious and more client-oriented. And that would explain our positioning in general in the private markets. I'm not commenting about the multi-strategy specifically.
Thomas Robert Donahue: Again, this is Tom, from an acquisition and company point of view, when we got the private markets business, and we've talked about this many times before, it was a business for one, which was the parent. We have taken a significant amount of time, effort, money, and investment in making that an institutional saleable product, and we are still in the process of that, and it just has taken a long time to get other clients to get it filled up and to work successfully, along with having a great investment team and continuing to look like we are growing. We are getting new assets as we sell something and distribute them out to the product. It's still a great business, and we do hope to get off the treadmill and go faster than the Redemptions and return to the clients that we're delivering.
Speaker Change: This is Tom from acquisition and look at the company point of view.
Kenneth Brooks Worthington: Great, thanks for the caller.
Speaker Change: When we got the private markets business...
Speaker Change: And we've talked about this many times before, it was a business for one, which was the parent. And we have taken a significant amount of time, effort, and money and investment making that an institutional investment.
Speaker Change: This is a saleable product and we are still in the process of that and it just has taken a long time to get other clients to get it built up and to work successfully along with having a great investment team and continuing to
Speaker Change: Good performance.
Speaker Change: The other thing on a treadmill that we're on, there's a really good part of that treadmill where as we raise assets and the funds that we're investing in generate return and send money back to the investors.
Speaker Change: You know, the investor, particularly BTPS, has been happy with the treadmill. Although it doesn't look like we grow, we are getting new assets as we sell something and distribute out to the product.
Speaker Change: It's still a great business and we do hope to get off the treadmill and go faster than the redemptions and returns to the clients that we're delivering.
Operator: Thank you. Our next question is coming from Bill Katz with TD Cowen. Your line is live.
Speaker Change: Okay, great. Thanks for the caller.
Speaker Change: Thank you. Our next question is coming from Bill Katz with TD Cowen. Your line is live.
William Raymond Katz: Okay, thank you very much for taking the question. Good morning, everybody.
William Raymond Katz: I'm just sort of scratching my head trying to figure out the path forward here in terms of organic growth. The redemptions that you mentioned in fixed income sort of quarterize out to just over a billion dollars again. And you sort of step back for a moment. If rates start to go lower, the expectation for most of your peers is that money that's sitting in money markets is going to migrate out and go into longer duration.
William Raymond Katz: Okay, thank you very much for taking the question. Good morning, everybody. I'm just sort of scratching my head trying to figure out the path forward here in terms of organic growth.
William Raymond Katz: The redemptions that you mentioned in fixed income sort of core rise out to just over a billion dollars again and you sort of step back for a moment. If rates start to go lower, the expectation for most of your peers is that money that's sitting in money markets is going to migrate out and go into longer duration.
William Raymond Katz: So given what I see as relatively weak performance based on what you just disclosed, how do I think about the organic growth rate for the fixed income business versus the money market and then the implication for revenue growth?
Speaker Change: So, given what I look at, relatively weak performance based on what you just disclosed, how do I think about the organic growth rate for the fixed income business versus money market and then the implication for revenue growth? Thank you.
John Christopher Donahue: Thank you.
John Christopher Donahue: So, let's attack this a little differently. What we see on the money market fund side is that the money market asset continues to grow. If you asked Debbie or me or somebody else, you'd say the whole thing is going to be seven trillion and we're going to maintain, if not expand, our market share. And even though people will move out the yield curve, it's very difficult for us to, A, see the money move from one pot to the other, money funds to fixed income.
Speaker Change: So, let's attack, hi Bill, let's attack this a little differently.
Speaker Change: What we see in the money market fund side is that that money market asset continues to grow.
Speaker Change: If you asked Debbie or me or somebody else, you'd say the whole thing is going to $7 trillion, and we're going to maintain, if not expand, our market share.
Speaker Change: And even though people will move out the yield curve, it's very difficult for us to, A, see the money move from one pot to the other, money funds to fixed income.
John Christopher Donahue: But there's so much more money coming into the system that you just continue this March growth. And you have a cash management service. So I would not look for the money market part of our business to decline because rates rise. I look at it the opposite way. Now, if you go into the performance of fixed income, the reason that total return bond funds' performance isn't where it has been is that they are a little reticent on the high-yield side and have been so for so.
Speaker Change: But there's so much more money coming into the system that you just continue this March growth up.
Speaker Change: And you have a cash management service. So I would not look for the money market part of our business declining because rates rise. I look at it on the opposite.
Speaker Change: Now, if you go into the performance of the fixed income,
Speaker Change: The reason that total return bond funds performance isn't where it has been is they are a little reticent.
John Christopher Donahue: And that's their call, and we've seen them make that call before. And when that snaps back, it snaps back. And it's a very strong franchise with strong people in it. And then at the yield curve, there is excellent performance straight through. So, the path forward for organic growth is continued money market funds and continued activity on the fixed income side across the yield curve.
Speaker Change: on the high yield side and have been so.
Speaker Change: And that's their call, and we've seen them make that call before.
Speaker Change: And when that snaps back, it snaps back.
Speaker Change: It's a very strong franchise with strong people in it. And then at the yield curve, there is excellent performance straight through. That's why I mentioned all those wins in the institutional side on short duration government bonds and things like that.
Speaker Change: So, the path forward for organic growth is continued money market funds.
Speaker Change: and continued activity on the fixed income side across the yield curve.
Deborah Ann Cunningham: The only thing I'd add, this is Debbie, to embellish that is the flows that we have had since the cycle began into liquidity products have been 80% driven by retail flows, and they're versus deposit products, which will still continue to be, you know, in the favor of the money market fund. The institutional flows have been minor in comparison. Our expectation would be that when rates start to go lower, you'll see that the makeup of flows be about 50-50, 50% retail, 50% institutional. So the retail will continue, it's just the institutional will pick up. So that's just a little embellishment to what Chris has already confirmed.
Debbie: The only thing I'd add, this is Debbie, to embellish that is the flows that we have had since the cycle began into liquidity products have been 80% driven by retail flows and their versus deposit products, which will still continue to be, you know, in the favor of the money market fund.
Speaker Change: The institutional flows have been minor in comparison.
Speaker Change: start to go lower, you'll see that makeup of flows be about 50-50, 50% retail, 50% institutional. So the retail will continue, it's just the institutional will pick up. So that's just a little embellishment to what Chris has already confirmed.
William Raymond Katz: Okay, thank you. And just to follow up, in terms of just sort of strategic positioning here, there's a lot of either bigger players scaling into the retail democratization opportunity on the pure play side. There's the beginning of some alliances that you're seeing between like the KKR Capital Group and others that are trying to figure out co-branded ways to invest publicly and privately. Can you talk about A, your ability to do this on a de novo basis, and B, how open are you to either selling the franchise to a larger player or doing an alliance to potentially catalyze organic growth? So I'll take the last part and let Tom comment on the first.
Speaker Change: Okay, thank you. And just just to follow up, in terms of just sort of strategic positioning here, there's a lot of
Speaker Change: Are there bigger players scaling into the retail democratization opportunity?
Speaker Change: On the pure play side, there's the beginning of some alliances that you're seeing between the KKR Capital Group and others that are trying to figure out co-branded ways to invest publicly and privately. Can you talk about, A, your ability to do this on a de novo basis?
Speaker Change: And B, how open are you to either selling the franchise to a larger player or doing an alliance to potentially catalyze organic growth? Thank you.
John Christopher Donahue: So I'll take the last part and let Tom comment on the first part. As we've said, and you remember this from way back in the old days, Bill, if there is a big hairy deal that is available, then we would consider a full transaction. And the way we talked about that, we have talked about that on these calls for many years, is that the succeeding enterprise would be a public company called Federated Hermes or some other name that comes up because of a big hairy player, but it will be run as a public company run by us as investment managers, even though it might have more assets, and that we would divide up the equity as appropriate with said partner.
Thomas Robert Donahue: So I'll take the last part and let Tom comment on the first part. As we've said, and you remember this from way back in the old days, Bill, if there is a big hairy deal that is available, then we would consider a full transaction.
Thomas Robert Donahue: And the way we talked about that, the way I've talked about that on these calls for many years...
Thomas Robert Donahue: is that the succeeding enterprise...
Thomas Robert Donahue: would be a public company called Federated Hermes or some other name that comes up because of a big hairy player But we run as a public company
Thomas Robert Donahue: run by us as investment managers, even though it might have more assets, and that we would divide up the equity as appropriate with said partner.
John Christopher Donahue: In terms of doing a deal such as others have talked about, we would be open to doing those kinds of things, in terms of the democratization of private equity and things like that. I'll just give you one little hint that the tough guys at Kauffman always felt they were the first to democratize, in effect, hedge funds. And that's how they felt they were running their fund. And if you look at their record over 38 years, it's quite impressive, maybe recent to the contrary notwithstanding. Tom?
Thomas Robert Donahue: In terms of doing a deal such as others have talked about, we would be open to do those kinds of things.
Thomas Robert Donahue: in terms of democratization of private equity and things like that. I'll just give you one little hint.
Speaker Change: that the tough guys at Kauffman always felt...
Speaker Change: They were the first at democratizing...
Speaker Change: and Effect Hedge Funds.
John Christopher Donahue: And that's how they felt they were running their fund, and if you look at their record over 38 years, it's quite impressive, maybe recent to the contrary notwithstanding. Tom. Yeah, I don't think there's much to have to follow up with you on that, Chris.
Thomas Robert Donahue: Yeah, I don't think there's much I have to follow up with you on that, Chris. The only comment I'd make is that we have almost $8 billion in private equity and infrastructure and we have, you know, great teams and we're looking at the things that you're talking about, how can we do that to enhance our business. And, you know, the private equity people look at the distribution in the U.S. and say, wow, could we figure out how to get attached to that to get funds out there that would be, you know, The bigger funds, because they have smaller asset sizes, so it's an absolutely interesting thing to consider.
Speaker Change: The only comment I'd make is that we have almost $8 billion in private equity and infrastructure
Speaker Change: You know, great teams, and we're looking at...
Speaker Change: The things that you're talking about, how can we do that to enhance our business?
Speaker Change: and the private equity people.
Speaker Change: Look at...
Speaker Change: The distribution in the U.S. and say, wow, you know, can we figure out how to get attached to that to get funds out there?
Speaker Change: that would be, you know, readily available to a, you know, an investor class that can can get in them that can't get in the
Speaker Change: The bigger funds because they have smaller asset sizes, so it is an absolutely interesting thing to consider.
Operator: Thank you. Our next question is coming from Brian Bedell with Deutsche Bank. Your line is live.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is coming from Brian Bedell with Deutsche Bank. Your line is live.
Brian Bertram Bedell: Great. Thanks very much for taking my question. Good morning, everyone. Most of my questions have been asked, but maybe just to come back to the money market funds, going back to an earlier question on the potential benefit from some of these concerns around sweep deposits, can you talk about your asset exposure or your asset size in those particular channels where if someone were to make that move into a money fund from a sweep deposit, how would you size that potential benefit from that actual action and your presence in that channel?
Brian Bertram Bedell: Most of my questions have been asked, but maybe just to come back to the money market funds, going back to an earlier question on the
Brian Bertram Bedell: the potential benefit from some of these concerns around sweep deposits. Can you talk about your, I guess your asset exposure or your asset size in those particular channels where
Brian Bertram Bedell: where if someone were to make that move into a money fund from a sweep deposit, in terms of what kind of, how would you size that potential benefit from that actual action and your presence in that channel?
John Christopher Donahue: That would be hard for me to do. Maybe Debbie has a magic wand to figure that one out. But what I was saying before is if they start advertising yield, that's going to help us. You obviously heard that. I think it would be very difficult for us to go chapter and verse on clients and say, well, if Wirehouse A increases their yield from X to Y, what does that do for us?
Brian Bertram Bedell: That would be hard for me to do. Maybe Debbie has a magic wand to figure that one out.
Debbie: What I was saying before is if they start advertising yield, that's going to help us.
Speaker Change: You obviously heard that. I think it would be very difficult for us to go chapter and verse on clients and say, well, if Wirehouse A increases their yield from X to Y, what does that do to us? I'm looking at it like it helps us.
John Christopher Donahue: I'm looking at it like it helps us, and I don't know. We could go through and see. We know how much money is with each client, but those moves, I don't look at them as negatively impacting or potentially negatively impacting us at all.
Speaker Change: I don't know. We could go through and see. We know how much money is with each client. But those moves, I don't look at it as negatively impacting or potentially negatively impacting us.
John Christopher Donahue: Debbie, do you have any wisdom on that?
Deborah Ann Cunningham: The only thing I'd say, Chris, is that we do have a lot of sweep account products through intermediaries, and when they advertise something like an increase in their deposit sweeps to maybe 2%, as you mentioned, Chris, they then look at where their sweep is with a money fund and see it coming in at over 5%, and so it's more of an advertising campaign as to the realization of where true yields are in the market today, and I As far as sweep products into our money funds is concerned, we have many, many relationships along those lines. Prior to the reforms that took place in 2016 when institutional prime funds became floating NAV, the sweep products went into prime institutional products. In our regard,
Speaker Change: at all. Debbie, do you have any wisdom on that?
Debbie: The only thing I'd say, Chris, is that we do have a lot of sweep account products through intermediaries, and when they advertise something like an increase in their deposit sweeps, you know, to maybe 2%, as you mentioned, Chris, they then look at where their sweep is with a money fund and see it coming in at over 5%, and so there's, it's more of an advertisement as to the realization of where true yields are in the market today, and I think beneficial to us. As far as sweep products into our money funds, we have many, many relationships along those lines.
Speaker Change: prior to the reforms that took place in 2016 when institutional prime funds became floating NAV.
Speaker Change: The sweet products went into prime institutional products. For the most part, now the sweet products go into our government.
Speaker Change: products and those continue to be stable net asset value and very viable and with a yield even you know with the increased deposit rates just more than double those rates so I think the benefit of just knowledge that they're
Speaker Change: are higher rates out there is good from our business standpoint and would agree just any kind of you know sort of socialization of the yield is a positive in our regard.
Brian Bertram Bedell: And I meant it as a potentially positive switch potentially if advisors decided to move to money funds instead of taking on even higher sweep rates in those channels. I think you mentioned earlier about extending duration in money market funds. Can you talk a little bit more about that? How much has that extended across the franchise in the last, I don't know, month or two, and what are your thoughts about if the Fed is going to start cutting, how much more you might extend in the money market?
Speaker Change: And I meant it as a positive switch, potentially, if advisors were, you know, decided to move to money funds instead of taking on even higher sweep rates in those channels.
Speaker Change: And then maybe just to follow up, I think you mentioned Debbie earlier about extending duration in the money market funds. Can you talk a little bit more about that? How much has that extended across the franchise in the last...
Speaker Change #100: I don't know, a month or two, and what are your thoughts about if the Fed is going to start cutting, how you might, how much more you might extend in the money funds.
Deborah Ann Cunningham: Sure. You know, product by product is a little bit different, but we've probably extended somewhere in the neighborhood of five to eight days over the course of the last month or so. And that is a reflection of, number one, getting some, you know, what we think was good relative value in the curve early on in that time period. Not so much today.
Speaker Change #101: Sure, you know, product by product is a little bit different, but we are probably extended somewhere in the neighborhood of five to eight days over the course of the last month or so. And that is a reflection of, number one, getting some, you know, what we think was good relative value in the curve early on in that time period. Not so much today. It would be more difficult extending today. So today we're happy to be able to just maintain where we are. And most of our products are in what I'd call the low 40 to low 50 day weighted average maturity target range. The cap for our products is at 60 days. So those that are in the low 40s have, you know, room to extend. Those that are in the low 50s probably won't extend very much.
Deborah Ann Cunningham: It would be more difficult to extend today. So today we're happy to be able to just maintain where we are. And most of our products are in what I'd call the low 40 to low 50 day weighted average maturity target range. The cap for our products is at 60 days.
Deborah Ann Cunningham: So those that are in the low 40s have room to extend. Those that are in the low 50s probably won't extend very much. But honestly, with where the yield curve is right now, we think it's overdone with the expectation of rate cuts coming as soon as July, which we don't agree with at all. And even, you know, those that are contemplating, there's been discussion around 50 basis points in September. That just makes no sense to us at this point. So our current expectation would be for two rate cuts. This really hasn't changed too much.
Speaker Change #101: But honestly with where the yield curve is right now, we think it's overdone with the expectation of rate cuts coming as soon as July , which we don't agree with at all. And even those that are...
Speaker Change #101: contemplating. There's been discussion around 50 basis points in September . That just makes no sense to us at this point.
Speaker Change #102: So, our current expectation would be for two rate cuts. This really hasn't changed too much.
Deborah Ann Cunningham: Some in the group were expecting a September start with a December follow-on. My own expectation would be more like November. I don't think there's any reason to do anything ahead of the election, certainly with the GDP print that we just had in the first quarter. The second quarter continues to be, I think, that type of growth environment that's acceptable to the Fed, and, you know, why contemplate or bring about the contemplation of pre-election sort of types of discussions about the Fed if you don't have to?
Speaker Change #103: Some in the group expecting a September start with then a December follow-on. My own expectation would be more like November . I don't think there's any reason to do anything ahead of the election. Certainly with the GDP print that we just had, the first quarter, or the second quarter continues to be, I think, a type of growth environment that's acceptable to the Fed.
Deborah Ann Cunningham: So that's my reasoning behind why a November start. But again, with two rate cuts in 2024, which would take the target range down into that four and three-quarters level, rather than the five and a quarter where it is today. Yeah.
Speaker Change #103: contemplate or bring about the contemplation of pre-election sort of types of discussions about the Fed if you don't have to. So that's my reasoning behind why a November start but again with still two rate cuts.
Speaker Change #103: in 2024, which would take the target range down into that four and three quarters level rather than the five and a quarter where it is today.
Brian Bertram Bedell: That's great, Collar. Thank you. Thank you. Our final question today is coming from John Dunn with Evercore.
Speaker Change #103: Yeah.
Speaker Change #103: That's great, Howard. Thank you.
Operator: Thank you. Our final question today is coming from John Dunn with Evercore ISI. Thank you. Could you maybe talk a little bit about the time to funding for the institutional pipeline in the second half?
Speaker Change #104: Thank you.
Speaker Change #104: Our final question today is coming from John Dunn with Evercore ISI. Your line is live.
John Joseph Dunn: Thank you. Could you maybe talk a little bit about the time to funding for the institutional pipeline in the second half and maybe based on the conversations you're having the prospects of it kind of leveling up?
Richard Donahue: Sure. This is Richard Anthony here.
John Joseph Dunn: This is Richard answering you here. A lot of the funding in the private markets will be over the next year, two years as we build into those. Some of the other stuff is going to be shorter and quicker, obviously, if it's in an equity or a fixed income stuff.
Richard Donahue: A lot of the funding in the private markets will be over the next year, two years, as we build into those. Some of the other stuff is going to be shorter and quicker, obviously, if it's in equity or fixed income. But the way to think about that is, if you break it out by product, it takes a couple years or at least a couple quarters for some of these direct lending and some of these private equity stuff to actually fund the wins that we have going into there. So kind of a mishmash of longer on the private market stuff and then shorter Next quarter, next quarter, next two quarters on the other stuff. Got it. And then?
John Joseph Dunn: The way to think about that is if you break it out by product, it takes a couple of years or at least a couple of quarters for some of these direct lending and some of these private equity stuff to actually...
John Joseph Dunn: fun the wins that we have going into there so kind of a mishmash of longer on the private market stuff and then shorter order next quarter next two quarters on the on the other stuff
Speaker Change #106: Got it. And then you guys talked about a rotation going on in the market, but can you focus a little bit and talk on the outlook for demand for non-U.S. and emerging market strategies?
Saker Anwar Nusseibeh: So, it's clear to us that the valuation, it's interesting, to go back to one, we run two strategies that are exposed to emerging markets. One is Ajax Japan, which you'd call a value strategy, and one is the GEM strategy, which is effectively a quality growth-tilted strategy. What's interesting is both of these strategies not only have good, strong performance, but both of them are seeing very high values in stocks that they buy. Remember, we're active managers, we buy stocks, and at some stage, I'm a fund manager by background, at some stage, the reality of the valuation will attract people in; it just takes time.
Speaker Change #107: So, it's clear to us that the valuation, it's interesting to go back one. We run two strategies that are exposed to emerging markets. One is Ajax Japan.
Speaker Change #108: which you'd call a value strategy, and one is the GEM strategy, which effectively is a quality growth-tilted strategy.
Speaker Change #109: What's interesting is both of these strategies
Speaker Change #109: not only have good strong performance, but both of them are seeing very high values.
Speaker Change #109: in stocks that they buy. Remember, we're active managers, we buy stocks.
Speaker Change #110: And at some stage, I'm a fund manager by background, at some stage the reality of the valuation will attract people in. It just takes time. Over the last year and a half...
Saker Anwar Nusseibeh: Over the last year and a half, most clients in Europe have been sitting on their hands because of the narrowness of the market and the uncertainty of interest rate rises. Without commenting about our particular funds, because I don't want to make specific predictions, but in general, I'd say if you have a declining interest rate environment, you have huge value in parts of the world, that means that it becomes attractive to institutional and retail clients, so start looking at the GEM.
Speaker Change #110: Most clients in Europe were just sitting on their hands.
Speaker Change #110: because of the narrowness of the market, because of the uncertainty of interest rate rises. Without commenting about our particular funds, because I don't want to make specific predictions.
Speaker Change #110: But in general, I'd say if you have a declining interest rate environment, you have huge value in parts of the world, that means that that becomes attractive to institutional and retail clients.
Saker Anwar Nusseibeh: And as I said, there are indications of that rotation beginning to happen because the flows we've seen in equity in the London business have come into the small-cap US fund. And that's been really interesting, because people can begin to see that the returns are quite attractive and allocate assets.
Speaker Change #110: So start looking at it again. And as I said, there are indications of that rotation is beginning to happen because the flows we've seen in equity in the London business have come into the small-cap US fund. And that's been really interesting because people can begin to see that the returns are quite attractive and allocate assets to it.
Speaker Change #111: Thank you.
Operator: Thank you. As we have no further questions at this time, I will hand it back over to Mr. Donahue and management for any closing remarks. Thank you. That concludes our questions.
Speaker Change #111: Thank you. As we have no further questions at this time, I will hand it back over to Mr. Donahue and management for any closing remarks.
John Christopher Donahue: Thank you. That concludes our call.
John Christopher Donahue: Thank you. That concludes our call.
Operator: Thank you very much, ladies and gentlemen. This does conclude today's call, and you may disconnect your lines at this time, and we thank you for your participation.
John Christopher Donahue: Thank you very much ladies and gentlemen. This does conclude today's call and you may disconnect your lines at this time and we thank you for your participation.