Q3 2024 Federated Hermes Inc Earnings Call
Yeah.
Speaker Change: Good day and welcome to the Federated Investors Management Company Q3, 'twenty 'twenty four analyst call and webcast.
Speaker Change: At this time all participants are on a listen only mode. After management's prepared remarks, there will be a question and answer session I would now like to turn the call over to the President of Federated Investors Management Company Ray Hanley the floor is yours.
Ray Hanley: Good morning, and welcome to the Q3 call.
Leading today's call will be Chris Donahue, <unk>, CEO, and president of Federated, Hermes and Tom Donahue, Chief Financial Officer, joining us for the Q&A or soccer and a savings there.
Federated Hermes limited and Debbie Cunningham, the Chief investment officer for money markets. During today's call. We may make forward looking statements and we want to note that Federated Hermes actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings.
Ray Hanley: <unk> can be given as to future results and Federated Hermes assumes no duty to update any of these forward looking statements Chris.
Thank you Ray good morning, all I will review, a Federated Hermes business performance and Tom will comment on our financial results.
Chris: We ended Q3 with record assets under management of $800 billion, driven by money market assets of 593 billion and record fixed income assets of 100 billion.
Ray Hanley: Looking first at equities.
Ray Hanley: Assets increased by $5 7 billion from Q2 to.
Ray Hanley: 283, 6 billion due mainly to market gains of $6 5 billion, partially offset by net redemptions of $1 4 billion.
Ray Hanley: The strategic value dividend strategies had net redemptions of $779 million and the funds in the SMA combined whereas in Q2 that negative number was $1 9 billion.
Ray Hanley: We had Q3 positive net sales in 15 equity strategies, including MDT mid cap growth MDT large cap growth MDT, all cap core and.
Ray Hanley: U S Smid equity UCITS fund.
Ray Hanley: We continue to have success growing our MDT fundamental quant strategies and have recently expanded the MDT product set this year through the end of Q3.
Ray Hanley: M D T fund and SMA strategies have had about $2.2 billion in net sales compared to a little over 400 million in net sales in 'twenty three.
In Q3, we expanded the distribution opportunities for MDT strategies with the launch of four new active Etfs and one new collective investment trusts.
Ray Hanley: We continue to look to these kinds of product enhancements and a variety of strategies to strengthen growth opportunities in domestic and international markets.
Ray Hanley: Looking at our equity fund performance at the end of Q3 end using Morningstar data for the trailing three years.
59% of our equity funds were beating peers and 41% were in the top quartile of their category.
Ray Hanley: For the first three weeks of Q4 combined equity fund and SMA had net redemptions of $51 million.
Ray Hanley: Turning now to fixed income.
Ray Hanley: Assets increased by about $4 9 billion in Q3 to a record high of $100 2 billion.
Ray Hanley: Fixed income funds had Q3 net sales of $305 million and fixed income separate accounts had net sales of 1.1 billion.
Ray Hanley: The total fixed income net sales therefore were one 4 billion compared to $1 4 billion of net redemptions in the second quarter.
Ray Hanley: Fixed income fund net sales were driven by about $515 million of combined net sales in total return bond fund ETF and collective investment front.
Ray Hanley: Fixed income separate account net sales were driven by institutional multi sector strategies and by the core plus SMA strategy.
Ray Hanley: We had 21 fixed income funds with positive sales in Q3, including total return Bond fund net sales previously mentioned and ultrashort.
Ray Hanley: Government Ultrashort fund.
Regarding performance at.
Ray Hanley: At the end of Q3, using Morningstar data for the trailing three years, 37% of our fixed income funds were beating peers and 18% were in the top quartile of their category.
Ray Hanley: For the first three weeks of Q4 combined fixed income funds and SMA had net sales of $365 million.
In the alternative private market category assets increased by $622 million in Q3.
Ray Hanley: 227 billion due mainly to the impact of FX rates, partially offset by net redemptions.
Ray Hanley: We are in the market.
Ray Hanley: We have three programs.
Ray Hanley: The Federated Hermes G. P innovation fund two which is the second vintage of our Pan European growth private equity innovation fund.
The first close in this mandate was in 'twenty three for approximately $110 million or.
Ray Hanley: Our target raise is 300 million the first vehicle raised about $240 million.
Ray Hanley: Next European direct lending III.
Ray Hanley: The third vintage of our European direct lending fund.
We had our first close in Q3 for approximately $235 million or.
Ray Hanley: Our target raise is $750 million.
Ray Hanley: E D. L. One raised about $300 million and E. D. L. Two raised about $640 million.
Ray Hanley: Next European real estate debt fund, a new full European debt fund, we're targeting a Q1 first close and plan to continue marketing in 25, our overall target is $300 million.
Ray Hanley: We are also developing the global private equity co invest fund the sixth vintage of the PEC series P. C targeting a Q1 launch.
Ray Hanley: The target raise is $500 million.
Ray Hanley: Picks one through five raised about $400 million to $600 million in each fund.
Ray Hanley: We began Q4 with about one 5 billion in net institutional mandates yet to fund into both funds and separate accounts.
Ray Hanley: About $1 4 billion of total net wins is expected to come into private market strategies.
With wins in private equity and direct lending.
Ray Hanley: And outflows in absolute return credit.
Ray Hanley: Fixed income expected net additions are about $1 billion.
Ray Hanley: With wins in ultra short duration sustainable investment grade credit emerging market debt.
Ray Hanley: Core AG government bonds government bond.
Ray Hanley: With a modest known loss and high high yield.
Ray Hanley: For equities, we have 644 in wins offset by one 5 billion of known redemptions nearly all of that is from a sub advisory account that will be internalized by the fund sponsor in Q4.
Ray Hanley: Moving to money markets.
Ray Hanley: In Q3, we reached another record high for money market fund assets of 440 billion and total money market assets of the aforementioned $593 million.
Ray Hanley: Total money market assets increased by $6 4 billion in Q3 as money market fund gains of $14 8 billion were partially offset by seasonal money market separate account asset decreases of $8 4 billion.
Ray Hanley: Our money market fund assets peaked at about 447 billion unsurpassed ember, 23rd and decreased by about $7 billion over the last couple of days of the quarter.
Ray Hanley: We believe a late quarter jump in sulfur rates led to certain investors shifting some assets into the direct market.
Ray Hanley: We also saw a certain large clients using money market fund assets to pay down debt going into quarter end.
Speaker Change: Q3 saw the first of several expected reductions in the fed funds target rate driving substantial growth in industry money market fund asset levels, particularly in August and September.
Speaker Change: Looking ahead for the rest of 2004 and into 2005, we believe that market conditions for our money market strategies will continue to be favorable and that money market fund yields will continue to be attractive compared to the direct market and bank deposit rates.
Speaker Change: Our estimate of money market mutual fund market share, including sub advised funds was about 7.32% at the end of Q3.
Speaker Change: Down from about 7.45 at the end of the second quarter.
Speaker Change: Looking now at recent asset totals as of a few days ago managed assets were approximately 799 billion, including $594 billion in money markets.
Speaker Change: 83 billion in equities 99 billion in fixed income $20 billion in alternative private markets $3 billion in multi asset money.
Speaker Change: Money market mutual fund assets were 441 billion tonne.
Speaker Change: Thanks, Chris.
Speaker Change: Total revenue for Q3 increased five $9 million or 1% from the prior quarter due mainly to $5 1 million of higher revenue from money market assets $6 4 million from the impact of an additional day in the quarter and $2 6 million from higher revenue from <unk>.
Speaker Change: <unk> fixed income and private market assets combined.
Speaker Change: These increases were partially offset by $5 9 million of higher waivers related to fund proxy costs.
Speaker Change: As discussed during last quarter's call.
Speaker Change: Total Q3 carried interest and performance fees were $3 5 million compared to $2 8 million.
Speaker Change: In Q2.
Speaker Change: Looking forward the Q4 sub advised account redemption, Chris mentioned will impact annualized revenue by approximately $6 million the.
Speaker Change: The impact for Q4 is expected to be approximately three quarters of $1 million.
Speaker Change: Q3 operating expenses decreased by $65 2 million from the prior quarter due mainly to the $66 3 million noncash intangible asset impairment charge in Q2.
Speaker Change: All other operating expenses increased by $1 1 million from the prior quarter.
Speaker Change: Compensation and related expense and included an increase in severance and related costs of $3 7 million, primarily from our UK office as we take steps to enhance the sustainability of our operations there.
Speaker Change: FX related gains decreased the other expense line item by $5 2 million from the prior quarter as the pound strengthened versus the dollar.
Speaker Change: We expect the tax rate to be in the 26% to 28% range for Q4 and for 2025.
Speaker Change: At the end of Q3 cash and investments were $565 million.
Speaker Change: Cash and investments excluding the portion attributable to Noncontrolling interest was $515 million.
Speaker Change: Kelly, we would like to open the call up for questions now.
Secondly, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
Speaker Change: While posing a question you. Please pickup your handset listening on a speaker phone to provide optimum sound quality. Please note just a moment, while we poll for questions.
Speaker Change: Your first question is coming from Patrick Davitt with Autonomous research. Please pose your question your line is live.
Patrick Davitt: Hey, good morning, everyone.
First of all first one on.
Patrick Davitt: Money fund market share I guess, the $15 billion money Fund inflow, you announced last night was a lot better than the publicly available data we could see so maybe the real time data. We're getting is what's wrong, but its still certainly looks like you lost some flow share in <unk> and that continues in October. So do you think youre, losing flow share and if so.
What is the nature of these big Chunky flows we're seeing going to your competitors that that has you're missing out on those on those big chunky mandates. Thank you.
Speaker Change: Well first of all over.
Speaker Change: A longer term period as you've heard me say, a 100 times, we end up with higher highs and higher lows over the 50 years, we've been doing the money market funds and so a little noise here in the quarter does not disturb us I mean, we have one client who took 6 billion out because you are paying down debt and thats. It.
Speaker Change: Kind of lumpy things that happen that you you got to be ready for it and Thats just part of normal life.
Speaker Change: I would like to add Debbie.
Speaker Change: Comment briefly.
Speaker Change: On on this dynamic from her perch on the tree.
Thanks, Chris.
Debbie: And thanks for the question Patrick.
Debbie: Ultimately Chris as explanation.
Debbie: The information that.
Debbie: Was provided with regard to the quarter explanation of sulfur rates. That's a very real one we have a lot of institutional clients to go between the direct market on an overnight basis in money funds and really since the fed rate cut in mid September most of them.
Debbie: Those flows have come into the fund side of the market. However, with the jump in so for rates at the end of the quarter. There were some that went back out into that sector of the market temporarily on a direct basis.
Debbie: We also.
Speaker Change: You are comparing ourselves against that.
I'm very large group of.
Speaker Change: Competitors in the marketplace.
Speaker Change: In particular, it seems as though some of the larger retail players that are in the direct retail market.
Speaker Change: Been gaining.
Market share.
Speaker Change: A little bit faster basis, and I believe that might have something to do with some of the heat that they had been taking with regard Q.
Speaker Change: Deposit rates and the customers that have been earning net to lower deposit rates rather than <unk>. So I believe some of that has been more directed into the money funds sector. Obviously, that's not something we can control or are necessarily even really part of it.
Speaker Change: And then it also looks like in some of our banking.
Speaker Change: Competitors there are some internal funds that have been going along those lifestyle.
Speaker Change: General I think theres lots of explanations, we are not seeing anything on a client basis that would lead us to have concern in fact, I would say exactly the opposite when you look at the complexity and the variation of.
Speaker Change: The client base that we have broker dealer Ria's Trust wealth management family offices, they all seem to be very pleased and continuing to.
Speaker Change: Increased participation with us.
Speaker Change: Very helpful. Thank you.
Speaker Change: Then a quick follow up on the other expense line you mentioned 5.2 million decrease from FX. So is the right run rate there.
Speaker Change: Looking into <unk> do you kind of in the three.
Speaker Change: To five range.
Speaker Change: Just trying to make it clear what that numbers that have been without the FX noise. Thank you.
There are no changes.
Speaker Change: And their rates.
Speaker Change: <unk> went up.
Speaker Change: And so.
Speaker Change: Giving a run rate on that if the pound goes up we're going to get more.
Speaker Change: FX help on the expense side, because we are hedging our expenses and London.
Speaker Change: FX Greg.
Speaker Change: Power goes down versus the dollar.
Speaker Change: It will go the opposite way.
Speaker Change: Yes, yes, I mean more just like what's the kind of regular way number there in the quarter without any FX impact is what I'm trying to think.
Speaker Change: Thanks Ross.
Speaker Change: Three fourths of the number because we hedge basically a year's expenses.
Speaker Change: The pound doesn't change for the rest of the year.
Speaker Change: Then we will head.
Speaker Change: This quarter or Q3 as expenses in there at higher rates.
Speaker Change: We will get the.
Speaker Change: The higher expenses in the next three quarters.
So if you want to know if you want to look at it that way and say, it's three quarters of the number.
Speaker Change: He is going to be higher expenses coming coming through.
Speaker Change: Not in that category not in the other category, but in all of the rest of them.
Got it.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question is coming from Ken Worthington with Jpmorgan Chase. Please pose your question. Your line is Lyons Hi.
Ken Worthington: Hi, Good morning, maybe first on regulation I believe in October the final wave of the Sec's money market Fund reform rules.
Ken Worthington: Our rules took effect can you just remind us.
What went into effect and to what extent, you're seeing an impact.
Ken Worthington: I had two interest in your prime funds.
Ken Worthington: So we have seen unlike the last round back in the day, where basically almost a trail.
Ken Worthington: Julien.
Ken Worthington: Left those funds the customers are basically sticking with it and our prime funds are up and if you look at the.
Ken Worthington: Stats for say a year.
You know the industry assets are up to over a trillion dollars and thats up 17% over the year and our assets in that category are up 25%.
Ken Worthington: So we're ahead of the industry on that category. So our clients I think we are quite appreciative of the fact.
Ken Worthington: That we hung in there with the with those funds, even though we did consolidate from three of those funds down to two.
Ken Worthington: But we went through all the work to make the extra so many basis points available Ray Ken If you if we isolate just the prime money market funds for the first three weeks or so of October they were up just theyre just a fraction so.
Ken Worthington: If there've been any changes we would have had puts and takes because the prime funds are still very attractive from a retail standpoint, we're still getting considerable interest there even post the risk rate cut yields are very attractive and.
Ken Worthington: But there is no discernible impact in October from the last of the rule changes going into it.
Speaker Change: I'd like to add a couple of other things about the rules you sort of hinted at Hey, what went in well remember they told US we had to have 25% and daily cash will that has a big impact on how these funds work and how people look at them.
Speaker Change: Other thing is these funds were already a variable net asset value.
Speaker Change: Type funds so.
Speaker Change: People are and keeping the money they need tomorrow here there they are willing to deal with this modest changes in <unk>. So I think those are important dynamics and I'm sure. We skipped something that Debbie just anxious to say.
Speaker Change: You are always very thorough Chris, but I think ultimately in the end.
Speaker Change: We had absolutely no shareholders leave.
Speaker Change: Institutional prime or our institutional Muni factor is because of the rule changes that went into effect.
Speaker Change: On October 2nd of this year, Ken and yes, there is a daily process by which we now have Q4, those funds, which I might note are the smallest sector in the total in the total universe of money funds.
Speaker Change: But on a daily basis.
Speaker Change: On a.
Speaker Change: Continuous monitoring basis have to review, where we are from a flow activity.
Speaker Change: Whether we're in a net purchase or a net redemption phase and if we get beyond a 5% net redemption fade.
Speaker Change: Also have a simultaneous process that is running that would look at the price the cost of redeeming what that greater than that 5% redemption phase with D and if that price is greater than one basis point, which ultimately with the 50% now thats a weekly liquid assets always at par.
Speaker Change: That's a very difficult.
Speaker Change: Hurdle to exceed.
Speaker Change: Then we would have to review the potential for adding some sort of AC to those two are redeeming.
Speaker Change: In the end. This is a process that we are running daily we are monitoring on a continuous basis, we did historical back price testing backpack testing on it prior to the implementation of the rule and we're very comfortable that the impact of this on the marketplace.
Speaker Change: Actual implementation of this debt.
Speaker Change: Would result in a fee would be very very few if any times.
Speaker Change: Okay, Great Tom.
Speaker Change: Tom maybe to follow up for you you mentioned the proxy costs and I think theres director costs that flow in maybe this current fourth quarter can you remind us of the dollar amounts and where those costs hit I think summer contra revenues rather than outright expenses.
Speaker Change: Yes.
Speaker Change: Cost.
Speaker Change: When we talked about it.
Last quarter.
Speaker Change: Yes that would happen in the third and fourth quarter, we Didnt know exactly the timing while all the expense came in the third quarter and it's a contra revenue $5 9 million and so that should not happen.
Speaker Change: That will not happen in the in the fourth quarter.
Speaker Change: Your next question is coming from Bill Katz with TD Cowen. Please pose your question. Your line is lines. Okay. Thank you very much good morning, everybody.
Bill Katz: Coming back to money markets shockingly.
Just big picture down if I look at where you ended the quarter and what are your intra quarter update is.
Bill Katz: At what point do you start to think you see the behavior more robustly migrate back to money markets. If you will because while we continue to hear from many of your peers would it be the traditional managers or the alternative managers that money sitting on the sideline is going to find its way into risk assets.
Bill Katz: Whether it be fixed income equity alternatives and I'm looking at sort of flattish quarter to date update despite the 50 basis point cut in the fed so at what point might we see the behavior change and how do you sort of see that interplay between maybe the retail part of the business in the institutional side and maybe quantify that mix for us.
Speaker Change: Thank you.
Speaker Change: So it's really tough to come up with a point or a catalyst bill, but we are seeing from the financial advisors.
Speaker Change: A lot of interest in the short duration a lot of interest in lengthening duration, we've covered those themes before and we're seeing moves there as I tried to comment on the changes in our fixed income flows during my opening remarks.
Speaker Change: But these things do not happen in a catalytic way.
And.
Speaker Change: It is one <unk> and one customer in one firm at a time in terms of the dynamic from a.
What Debbie might see on the money market side I'll, let her comment.
Speaker Change: Thanks, Chris.
Speaker Change: I've mentioned on this call before that when you look at the flows in 2023 and really through.
Debbie: Mid year of 2020 for 80% of the flows came from retail and that retail tray was out of deposits and into money market funds and you can almost follow it dollar for dollar.
Debbie: That will continue because banks have already started lowering their deposit rates after having never raised onto the rate of money market fund.
Debbie: Market rates.
Debbie: That that trade will continue maybe not with as robust a pace, but it will continue of the other 20% in flows I'd say, probably 10% to 15% is what is what youre, referring to pellet sideline cash those that would be naturally in riskier assets with higher return potential and longer.
Debbie: Timeframe associated with us and we're starting to see those move you saw you heard from Chris <unk> introductory remarks, the increases that we're seeing in various of our equity in longer term fixed income product and that's absolutely a portion of that side on cash moving back into heavy fueling those markets.
Debbie: In a positive way, which we obviously want to see you have currency.
Debbie: Reflection of healthier markets and healthier economy.
The institutional cash side that was probably only five 5% to 10% of the asset flow.
Debbie: In the money markets that we saw we would expect that as the fed cuts rates, which we are not expecting to be in that 50 basis points.
Debbie: Cliff.
Cliff: Which was sort of a surprise.
Start to this declining rate cycle, but as they continue to go from a 5% rate.
Speaker Change: Yes. Thank you what we think is a terminal rate of around 3% youre going to see that institutional flow pick up it's not going to be it's not going to reduce the strength or talking to match. The strength that we saw in the retail flow, but it will still be a positive so that ultimately in the end when we look at industry assets as reported by <unk>.
Speaker Change: Train at this point as an industry stores at $6 eight trillion I can still see seven trillion by the end of this year grow further into 2025, and ultimately FHA catching a good portion of that as well.
Speaker Change: And Bill just on your question about the mix.
Speaker Change: So the terms are not precise between retail and institutional but.
An estimate of that for us would be about 60% of the money market fund assets, including what we sub advise.
Speaker Change: About 60% would be.
Speaker Change: Considered institutional and 40% retail, which for US is still coming through an intermediary and by the way that 60 40 split would be about what the industry split is as well using ICI data.
Speaker Change: That's helpful. And then maybe just a question maybe for soccer.
Speaker Change: Or never and this might just be rounding. So you laid out a nice pathway for several funds in the market or sort of coming into the mortgage as we look out over the next six to 12 months.
Speaker Change: But you also around maybe just rounding, but the AUM and the oldest bucket does seem to be down about $700 million core today to get it might be rounding.
Speaker Change: Can you talk a little bit about what we should expect in terms of distributions as we look out through the next six to 12 months.
Speaker Change: Or realizations coming out of the portfolio and can you actually grow the old bucket given all the growth opportunities against that thank you.
Speaker Change: Zachary your turn.
Speaker Change: Thank you well, thank you very much indeed, and Youre right, the Basel III nature of particularly private equity funds.
Speaker Change: Okay.
Is this constantly.
Speaker Change: Two way flow.
Speaker Change: It sounds like you've got the plans, we expect to stay out and then you get some more funds coming in.
Speaker Change: What I can.
Speaker Change: I can't provide you the detail.
Speaker Change: Structure of what we're going to see but I can say.
Speaker Change: If you look at all the problems that you've heard Chris talk about that.
Speaker Change: Innovation from direct lending funds.
Speaker Change: About the global private equity fund all of these funds.
Speaker Change: Oh, all growing by going back to our client base and in many cases, the re upping at a higher level than they had been before.
Speaker Change: We can't quantify this until the close is finished with the general trend as far as we can see there's no room to our clients re upping.
Speaker Change: There is in some cases of disease as well an increase in reality, but to kind of confirm that it's been overcome.
Speaker Change: <unk> finished the second aspect of it is we're not sitting still coming up with new funds.
Speaker Change: And the alternative states.
Speaker Change: Space, which gives us extra close you had.
Speaker Change: Again mentioned real estate debt fund.
Speaker Change: And we're doing some stuff.
Speaker Change: And.
Speaker Change: Our infrastructure as well so.
Speaker Change: The way that we think that the re ups will be from existing clients will increase we're adding to our client base vessels importance of this new clients coming in.
Innovating our funds.
Speaker Change: We see them all of that leads us to feel.
Speaker Change: Continue to generate high revenues as we go forward.
Speaker Change: That's it.
Speaker Change: Okay.
Speaker Change: Your next question is coming from Kenneth Lee with RBC capital markets. Please pose your question your line is live.
Hey, good morning, Thanks for taking my question.
Just one on the money markets.
Kenneth Lee: And I think you've mentioned previously that that's something you saw some some clients corporate clients shift money or on an overnight basis between direct paper and in money markets just wanted to.
Speaker Change: Get a little bit more detail on that how easy is that.
You know to the extent that there is some uncertainty around the fed rate cuts and the trajectory. There could you see some lumpiness in terms of money market flows just based on how easy it is to shift one way or the other thanks.
Speaker Change: Debbie.
Debbie: So for the vast majority of our clients Ken.
Ken Worthington: It is not an easy switch because they don't repo basically the sofa rate indicates.
Speaker Change: What type of return you can get on overnight repo in the marketplace overnight repo is not really security at the contract and as such you have to have repo contracts in place with dealers.
Speaker Change: Banks in order to go into that that sector of the market. So for the vast majority of our clients that is not possible, but for very large clients large tech firms from that from the Midwest and west coast large oil for light.
Speaker Change: A large energy firms.
The large banks that are players in our market they have those contracts available and usable by them on a daily basis.
Speaker Change: And are able to switch pretty easily so even though it's only.
Speaker Change: A small majority are small minority of the actual customers that have that capability to do that switch on a daily basis, if they choose to do so.
Speaker Change: It's still a large volume win.
When that when that dynamic in that in the market comes into play.
Gotcha very helpful. There.
Speaker Change: And just one follow up if I may.
Any updated thoughts around capital management.
Speaker Change: And outlook for any kind of potential a lot inorganic opportunities out there. Thanks.
Speaker Change: Well you saw we approved a new share the board approved a new share repurchase program of 5 million shares.
Speaker Change: Have two left on the on the existing one and we.
Speaker Change: Bought over 800000 shares.
Speaker Change: Last quarter, and we expect to still be active we don't think the price.
Speaker Change: <unk> is at an appropriate level, therefore, we expect to be active.
Speaker Change: On the acquisition side.
Speaker Change: Nothing to point to.
Speaker Change: We're still working away and a lot of different areas, but I don't have anything to.
Speaker Change: Get you excited about or get us.
Speaker Change: On announcements process.
Speaker Change: Got you very helpful. There. Thanks again.
Speaker Change: Your next question is coming from Dan Fannon with Jefferies. Please pose your question your line is live.
Dan Fannon: Hi, Thanks. Good morning, I think you mentioned in the prepared remarks, $3 7 million of severance associated with Hermes curious if this is a part of a broader restructuring or cost cutting effort, that's more elaborate or more of a one off.
Speaker Change: Ill make an initial comment and then Tom will comment on the numbers.
Speaker Change: We always have a duty to run the business better Tom Yes.
Tom: So $3 7 million as the severance number out of out of the London.
Tom: Primarily the London office, and we are looking across the board to as Chris said run the business.
Tom: Properly and in a sustainable effort you know that.
Tom: We had the impairment.
Tom: Last quarter and this is a.
Tom: Look at that and make sure we.
Handling things in a proper physical manner.
Tom: Yes, we're looking at things beyond just the severance in terms of.
<unk> reductions as we.
Tom: And trying to manage it as best we can.
Speaker Change: Okay. Thanks.
Tom: And then.
Speaker Change: Yes.
Speaker Change: Give a follow up because.
Speaker Change: We don't want to do.
Speaker Change: <unk> things that.
Hurt the business, we want to drive the business towards growth and maybe <unk> could give a comment on our expectations and excitement about the London office.
Speaker Change: Well. Thank you very much so just a couple of a couple of comments.
Speaker Change: As Chris said, we have a duty to manage the business and that means managing because of the business as we integrate the business together as we speak.
Speaker Change: As it relates to working in the market. There are many opportunities to do two things one is to become more efficient in the way that you run the business and the other one is to increase your opportunity. So the more efficient you kind of got the severance costs in there and you've heard.
Speaker Change: Tom talk about other efficiencies that can be done through scale through combined purchasing and so on but that should not in any way shape or form to take away from the positive things that are happening and they briefly.
Components of the following one is we have seen on the back of strong performance.
Speaker Change: Interest come back to risk assets that were on yeah, I I mentioned, specifically sustainable global equity global equity ESG. The U S small and mid cap funds in Asia ex Japan Fund.
Speaker Change: And as I say that came on the back of.
Speaker Change: Two things better performance and also on the backhaul.
Speaker Change: People coming back more to risk assets.
Speaker Change: We talked about.
Speaker Change: With markets and the excitement of launching a new vintages, and new ideas and becoming known as in specialists.
Speaker Change: Players in the market.
Speaker Change: But the.
Speaker Change: Also doing other stuff that's exciting I mean, when we talk about money market funds.
Speaker Change: Generally speaking our Federated Hermes has tended to concentrate mostly on the U S for the money markets. What we're not doing is bringing those two.
Sales sports gear out of Europe, and we've seen.
Speaker Change: Lots of calls.
Speaker Change: Positive responses to the presentations.
Speaker Change: The Sterling brought in money market funds is at an all time high with $8 4 billion pounds. So that gives you cause it potential of growth of money markets here and in Asia by the way, where we've seen flows coming in from 'twenty three new family offices.
Speaker Change: Assuming approximately $300 million in money market flows not a huge amount yet, but it tells you about the potential.
But you can see coming through.
Speaker Change: N D C, which has had such a fantastic run for us in our home market. The U S. You come to this market, we've been thinking about our client base to give them again.
Speaker Change: We've had some very positive.
Speaker Change: Views within that.
Speaker Change: You won't expect to just finish on a positive notes without mentioning our stewardship business E O S.
Speaker Change: And I would say we've gone live with true turned into will add two trillion dollars of assets that we represent and.
Speaker Change: That includes a winning all the major U S. A.
Speaker Change: Statements pension pumps, so we can see the green shoots of recovery yet.
Speaker Change: And we can see the effects of the right kind of investments are paying dividends for both of US it's old funds manage out of London and managed out of the United States that at the same time, you would expect us to manage our costs in a responsible and dynamic mono.
Speaker Change: Thank you.
Speaker Change: Great. That's helpful. And then just as a follow up you talked about a sub advised mandate loss in the quarter or or I think prospectively could you just talk.
Speaker Change: Aggregate, what the sub advised total U M is for you and maybe the context of the opportunity set for that but is that a shrinking pool of assets or is it a bit of a source of growth just curious about some more context around that part of the business.
Well in total the sub advised accounts would be about $37 billion of of our of our <unk>.
Speaker Change: As of the end of the quarter and that.
Speaker Change: That would be weighted toward toward cash due to money market, but it does include <unk>.
Speaker Change: Equity and fixed as well.
Speaker Change: And if that had been a growing source of AUM or shrinking.
Speaker Change:
Speaker Change: <unk>.
Speaker Change: The money market part of it has been growing it has a retail orientation and on the on the institutional side, its sort of pluses and minuses.
Speaker Change: It's been relatively stable.
Speaker Change: Understood. Thank you.
Speaker Change: Your next question is coming from Brennan Hawken with UBS. Please pose your question your line is fine.
Speaker Change: Good morning, Thanks for taking my question you guys saw them.
Speaker Change: A constructive outcome with the flows on the bond side.
Speaker Change: I'm kind of curious whether or not given some of the struggles at.
Speaker Change: A large.
Speaker Change: Pond manager, whether or not there was any change in either flows or rfps that you noticed since late August or you know any interesting trends that you might note in retail versus institutional engagement regarding your bond offering.
Speaker Change: The clients were attentive to the incident, you were talking about and.
Speaker Change: To some extent, we're there to help our clients when they run into challenges so.
Speaker Change: It's impossible for us to detect what asset flows came from what.
Speaker Change: Challenges in the marketplace versus the regular blocking and tackling that we do all the time so.
Speaker Change: Overall, you've seen money come out of that outfit and it went somewhere and we got some of it.
Speaker Change: But boy that's hard to follow the bouncing ball.
Speaker Change: Sure sure that's why I was asking about whether or not there's a change in engagement.
Speaker Change: Subsequent post late August.
Speaker Change: Well it depends on what you mean by engagement what what what goes on is when you are in the marketplace with your clients constantly repeating the sounding of the sounding joy of the Federated Hermes product array than when opportunities arise you are there.
Speaker Change: Hit the bid, whereas my father used to say, if it's raining money get your buckets out and so I.
Speaker Change: I think we are engaged with our clients all the time, it's not like Oh, Let's go do something new this is what we've been doing and it's it's a lot like the football analogy those that are running hard and running through the ball you know theyre going to get an interception.
Speaker Change: Look at what pit did last night, Okay, let's get on with the meeting.
Speaker Change: Alright.
Speaker Change: No to run with the buckets or with the interception, but could index. Thanks for taking my question.
Speaker Change: Yes.
Speaker Change: Your next question is coming from John Dunn with Evercore ISI. Please pose your question your line is live.
Thank you.
John Dunn: Can you maybe talk a little bit.
John Dunn: The time to funding of the pipeline and Directionally, where you might expect it to go over the next year.
John Dunn: So and then also could you describe the kind of the temperature.
John Dunn: Institutional investors and consultants looking into next quarter and then 25%.
Speaker Change: I can talk about the timeline and then we'll get to the rest of it.
Speaker Change: So of course in Q4.
Speaker Change: Because of the sub advisory mandates that we talked about we would expect a negative from an equity standpoint.
Speaker Change: And positive both fixed income and alternative.
Speaker Change: For those.
Speaker Change: Fixed income's weighted so that it is a pipeline amounts come and Moreover, our Q4 and Q1.
Speaker Change: Alternative has.
Speaker Change: Portions that come in more ratably.
Speaker Change: That a good chunk of it is money that's already.
Speaker Change: Been committed but not yet earning fees, so youll see that.
Speaker Change: Really on kind of all.
Speaker Change: All of those ratable growth over the next several quarters out through the end of next year. So fixed income more frontloaded equity the negative more frontloaded and then alternative more spread out.
Speaker Change: And in terms of RFP activity is very very strong and that's why on the fixed income side.
Speaker Change: Go to the trouble of listing the various mandates where we're actually scoring wins you can go back to the beginning of the call and see the list and it's a half a dozen real strong ones and we see continued RFP interest there. So that's where that pipeline builds and I just said in answer to the last.
Speaker Change: Question.
Speaker Change: We're in the market all the time.
Speaker Change: Waiting looking and bringing solutions to clients as needs change.
Speaker Change: Got it and then I think we're all going to be talking more about active etfs than we were in the past have you made any had to make any additions or behavioral changes to market.
Speaker Change: The active ETF suite and how significant do you think you know that.
Speaker Change: Segment can be for you guys.
Speaker Change: Well, we think it can be very big very strong.
Speaker Change: Right now the Etfs make up about 7% I mean, the active Etfs make up about 7% of the overall ETF market.
Speaker Change: And they're continuing to have an increasing.
Speaker Change: Percentage of the flows may be up to 30% or something depending on what numbers you look at and then if you look at our numbers.
Speaker Change: Debt from the gang that we have.
Speaker Change: We're seeing good results and the total return bond fund and in the strategic value dividend fund and the whole suite of products is now over $500 million and I think ray can give you the accurate numbers no that's.
Speaker Change: That's about right.
Speaker Change: Over 500 million weighted toward the two strategies.
Speaker Change: Chris mentioned, but.
We've had a lot of good response out of the gate on the MDT.
Speaker Change: <unk> strategies that we recently added both.
Speaker Change: Four of them that we launched active Etfs one we launched also in a collective.
Speaker Change: Format, and we'll continue to look at the product line you should expect us to continue to to to add to the active ETF menu over time, but we've certainly covered some of the.
Speaker Change: Bigger.
Speaker Change: Strategies, both in terms of equity and fixed income with the with total return bond and strategic value.
Speaker Change: Thank you very much.
Speaker Change: Your next question is coming from Brian Bedell with Deutsche Bank Securities. Please pose your question your line is live.
Speaker Change: Great. Thanks, Thanks for taking my questions.
Brian Bedell: Just one back on the <unk>.
Brian Bedell: Institutional cash management.
Brian Bedell: And I know, we've talked about that a lot during this call.
Speaker Change: Obviously, it's difficult to predict.
Speaker Change: What types of cash flow needs those clients will have things coming in and going out, but do you have a sense for.
Speaker Change: For those clients that are using your money market funds.
What level of assets roughly at least are plugged in overnight.
Speaker Change: You know right agreement too so it's almost like an addressable market. If you will with if they were to let's say switch all all to money funds in a rate cutting cycle.
Well, if someone knows how long our clients want to keep their money in and what percentage of them are thinking overnight.
Speaker Change: It'd be smarter than I, and that's why I mentioned the longer term trends 50 years.
Speaker Change: One years.
Speaker Change: Number is on prime.
Speaker Change: And.
Speaker Change: Debbie has gone through the catalog of the variety of clients that we have which is an underlying strength to the business because they move at counter times.
Speaker Change: Counter balancing.
Speaker Change: One from the other and.
Speaker Change: I don't think we can go past this question without letting Debbie have a comment.
Okay.
Debbie: Thanks, Chris Sorry, I was having difficulty get it up and getting it off of mute.
Speaker Change: Drew.
Speaker Change: Brian we definitely have a very.
Speaker Change: A rigorous.
Speaker Change: No <unk> know your customer.
Speaker Change: Our process and so yes, we have.
Speaker Change: Darius.
Spreadsheets that provide information.
Speaker Change: On expectations for various clients their needs there.
Speaker Change: Cyclicality to some degree and what their other options are we have.
Speaker Change: Both from a sales perspective, our close relationships with especially the largest clients and also from a portfolio management standpoint, and we review and look at that on a regular basis and although when you look at it on an individual basis, Chris noted the $6 billion that went out right.
Speaker Change: We ended the quarter.
Speaker Change: Due to debt repayment when you think of it in the context of the $600 billion that we manage in this type of liquidity is not a large number.
Speaker Change: Nonetheless, if you had 10 of those six millions altogether for all the same reason on all of a sudden day.
Speaker Change: Yes.
Speaker Change: That would be a different type of environment Thankfully I think the complexity and the diversification of our clients' works in our favor and oftentimes when you see a 6 billion outflow you may see somebody else six $1 billion inflows that offset that in this particular case it just happened.
Speaker Change: <unk> be highlighted because it was at quarter end.
Speaker Change: Okay.
Speaker Change: Do you have a sense of what potentially could move over to institutional being allocated overnight right. Now then in aggregate yeah, I think it's probably something that that's less than 10% of the total assets at this point.
Speaker Change: Which is not insignificant, but it's not it's not out of the realm of consideration.
Speaker Change: And into the problematic space or anything like that.
Speaker Change: Youre talking about.
Speaker Change: From going out from money market too.
Speaker Change: So the direct securities and I think it is how much could go the other way yeah, how much goes the other way that's exactly right.
Speaker Change: So how much.
Speaker Change: The way in going into riskier types of assets longer term.
Speaker Change: Yeah, Yeah, no going from direct overnight cash into money market funds.
Speaker Change: Okay. Okay. Okay.
Speaker Change: So on the inflow side of things.
Speaker Change: Well I think.
Speaker Change: Going back to raise a split of about 60% institutional 40% retail at different points in time that number has been higher towards the institutional side. So I think it's somewhat substantial probably at least another 10% to 20% of asset flows.
Speaker Change: As a potential if in fact money funds.
Speaker Change: We're able to maintain a yield that is better than the direct securities market, especially in a declining rate environment that would have been very difficult to do after the fed's initial 50 basis point rate cut back in September the curve.
Speaker Change: Was anticipating.
Speaker Change: Faster cut by the fed and that we were not in agreement with that so having difficulty buying longer dated securities to keep our yield for a longer period of time having.
Speaker Change: Having said that with some of the stronger economic numbers that have come to fruition over the course of the last three weeks that has changed and so we have been able the market has been able and given us the opportunity to maintain them and lengthen our weighted average maturity. So that we will maintain that healthy advantage over the direct security.
Market and I think probably.
Speaker Change: That attracts some portion of increasing institutional flows out over the next quarter.
Speaker Change: Ryan.
Ryan: The answer to use one word trillions.
Speaker Change: Period.
Speaker Change: Okay, we could go through catalogs of where all that money is but.
It's so much the worse certainly.
Speaker Change: We're optimistic about our ability to play in that game.
Speaker Change: Yeah, Okay. No that's fantastic color. Thank you so much I'll just finish up with strategic value performance has improved.
Speaker Change: Either dramatically it looks like I know you don't like to compare this fund in the Morningstar categories, but your top quartile over the past two quarters.
Speaker Change: By our measure your top third and over one year and three year timeframe.
Speaker Change: The product still went out.
Speaker Change: Do you expect.
Speaker Change: This performance too.
Speaker Change: Convert to inflows.
Speaker Change: No anytime soon.
Speaker Change: Anytime soon I hate putting deadlines on it like that but that's why I gave you.
The changes over quarter to quarter. So that you could see what was going on and we're seeing it in the marketplace and we get comments now from the field like Boy I'm sure glad I hung onto my strategic value dividend.
<unk>, what the heck is happening with the performance on Morningstar with strategic value dividend and months and months ago that was the comment you were getting from the field now it's boy I am glad I am still there.
Speaker Change: And.
Speaker Change: It is still a way that the underlying clients can keep some income.
Speaker Change: Get in the market and buy the kinds of stocks that are owned and strategic value dividend.
Speaker Change: So, yes, I would expect those trends to continue exactly when it will crossover to positive.
Speaker Change: It is really hard.
Hard for me to predict.
Speaker Change: Fair enough.
Speaker Change: So much for all the color.
Speaker Change: You have a follow up question coming from Patrick Davitt with Autonomous research. Please pose your question your line is live.
Patrick Davitt: Alright, thanks for the follow up just a quick another quick housekeeping on the six $5 9 million Contra revenue.
Patrick Davitt: Was that all in management fees are split across the three buckets and then if there is southern management fees, how should we adjust the individual.
Patrick Davitt: Asset buckets, I'm, just trying to get our fee rates.
Patrick Davitt: Yes.
Speaker Change: Yeah, So that was all in management fees.
Speaker Change: Okay.
Speaker Change: And how was it split across the equity buckets.
Speaker Change: The asset buckets.
Speaker Change: Well, it's Ed.
Speaker Change: Every fund shares.
Speaker Change: Got it got it proportionately would be.
Speaker Change: For modeling purpose.
Speaker Change: By the way, we got the vote.
Speaker Change: Good.
Speaker Change: Got it.
Speaker Change: Alright, great.
Speaker Change #100: Thank you.
Speaker Change #101: There are no further questions in queue at this time I would now like to turn the floor back over to Ray Hanley for any closing remarks, well. Thank you very much that concludes our call. Thank you for joining us today.
Speaker Change #100: Yes.
Speaker Change #102: Thank you everyone. This does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Speaker Change #100: Yes.