Q4 2024 Federated Hermes Inc Earnings Call
Speaker Change: Greetings. Welcome to the Federated Hermes, Inc. Q4 2024 Analyst Call and Webcast.
At this time, all participants are in a listen-only mode.
Speaker Change: 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.
Speaker Change: Please note this conference is being recorded. I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.
Speaker Change: Thank you all. Good morning and welcome to our call. Leading today's call will be Chris Donahue.
Chris Donahue: Chief Executive Officer and President of Federated Hermes, and Tom Donahue, Chief Financial Officer. Joining us for the Q&A are Sakhar Nasebi,
Speaker Change: who is the CEO of Federated Hermes Limited and Debbie Cunningham, the Chief Investment Officer for Armani Markets.
Speaker Change: During today's call, we will 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.
Speaker Change: Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris.
Chris Donahue: Thank you, Ray. Good morning. I will review Federated Hermes' business performance, and Tom will comment on our financial results.
Speaker Change: We ended 2024 with record assets under management of $830 billion, driven by record money market assets of $630 billion.
Now looking first at equities.
Speaker Change: Assets decreased by $4.2 billion from Q3 due mainly to net redemptions of $2.5 billion and FX impact of $1.3 billion.
Speaker Change: As mentioned last quarter, net redemptions included $1.5 billion from a sub-advised fund that was internalized by the fund's sponsor.
Speaker Change: Q4 saw further improvement in flows from strategic value dividend strategies both domestic and international.
Speaker Change: These strategies had Q4 net redemptions of $222 million in the funds and SMA combined, compared to $779 million in Q3.
Speaker Change: Through January 24th, these strategies have had net sales of $139 million.
Speaker Change: We also saw continued solid performance of flow results from the MDT fundamental quant strategies in Q4, capping off a strong year.
Speaker Change: MDT Strategies topped $13 billion in assets at year-end, up 70% from year-end 23.
Speaker Change: MDT Fund and SMA Strategies had $3.4 billion in net sales in 2024, up from $411 million in 2023.
Speaker Change: These strategies had about $1.2 billion in net sales in Q4, up from $837 million in Q3.
Speaker Change: Through January 24th, these strategies have had net sales of $862 million.
Speaker Change: During the second half of 2024, we expanded the MDT product set by launching four active ETFs and a new collective fund.
Speaker Change: These funds have assets of approximately $424 million as of January 24th.
U.S. SMID Equity Usage Fund
MDT All Cap Corps and the U.S. Strategic Dividend ETF.
Speaker Change: Looking at our equity fund performance at the end of 24 and using Morningstar data for trailing three years
Speaker Change: 56% of our equity funds were beating peers, and 36% were in the top quartile of their category.
Speaker Change: For the first three weeks of Q1, Combined Equity Funds and S.M. Mays, on the equity side, had net sales of $542 million.
Now turning to fixed income.
Speaker Change: Assets decreased by about 2.1 billion in the fourth quarter due mainly to market valuations of about a billion and net redemptions of about 950 million.
Fixed income funds had Q4 sales of $308 million.
Speaker Change: Fixed income separate accounts at Q4 net redemptions of $1.3 billion due mainly to redemptions from a large public entity that has regular sizable inflows and outflows.
Speaker Change: We had 16 fixed income funds with net sales in the fourth quarter, led by Total Return Bond Fund and the Government Ultra Short Fund.
Speaker Change: Regarding performance at the end of 24 and using Morningstar data for trailing three years, 45% of the fixed income funds were beating peers, 18% were in the top quartile of their category.
Speaker Change: For the first three weeks of Q1, combined fixed income funds and SMAs had net redemptions of $28 million.
In the Alternative Private Markets category,
Speaker Change: Assets decreased by $1.8 billion in the fourth quarter, mainly due to the impact of FX rates $1.2 billion and net redemptions which included approximately $547 million.
Speaker Change: related to the previously discussed Senior Portfolio Manager departure in mid-2014.
Speaker Change: Now we are in the market with our European Direct Lending III, the third vintage of our European Direct Lending Fund.
Speaker Change: To date, we've closed on approximately $350 million. Target raise, $750 million.
Speaker Change: For information, EDL-1 raised about $300 million, EDL-2 raised about $640 million.
We're also in the market with the Federated Hermes.
GPE Innovation Fund II.
Speaker Change: the second vintage of our pan-European growth private equity innovation fund. To date, we've closed on approximately $110 million.
Speaker Change: The target raise is $300 million, and the first vehicle raised $240 million.
Speaker Change: We're also working on the European Real Estate Debt Fund, a new pooled European debt fund, targeting Q1 first close, and planning to continue to market in 2025. Overall target, $300 million.
Speaker Change: We're also launching the private equity, global private equity co-invest fund, the sixth vintage of the PEC series.
Target Raise $500,000,000
Speaker Change: and PECS 1 to 5 raised approximately $400 to $600 million in each fund.
Speaker Change: Now, we began 2025 with about $3.7 billion in net institutional mandates yet to fund into both funds and separate accounts.
Equity's expected net additions totaled $1.6 billion.
with wins in growth, MDT, and global equity.
Speaker Change: Approximately $1.5 billion of net total wins is expected to come into private market strategies.
including wins in private equity and direct lending.
Speaker Change: Fixed income expected net additions total about $616 million with wins in ultra-short duration and sustainable investment-grade credit.
and government bonds.
Now moving to money markets.
Speaker Change: Total money market assets increased by about $37 billion in Q4, as money market funds added $21 billion, and money market separate accounts added $16 billion.
Speaker Change: Market sentiment around short-term interest rates indicates a higher-for-longer view, which is conducive for growth in money market strategies.
Speaker Change: Higher rates support a positive view of cash as an asset class.
Speaker Change: Money market strategies in this environment have attractive yields compared to alternatives like bank deposits and direct investments in T-bills and commercial paper.
Speaker Change: Our estimate of money market mutual fund market share, which includes our sub-advised funds, was about 7.22% at the end of 24, down slightly from about 7.32% at the end of Q3.
Speaker Change: Now, looking at recent asset totals of a few days ago.
managed assets were approximately $839 billion.
including $634 billion in money markets.
Speaker Change: $83 billion in equities, $100 billion in fixed income, $19 billion in alternative private markets, and $3 billion in multi-asset.
Speaker Change: Money Market Mutual fund assets were at $455 billion. Tom. Thanks, Chris.
Speaker Change: Total revenue for Q4 increased 16.2 million, or 4% from the prior quarter, due mainly to $5.3 million of higher revenue from equity assets and $5.1 million of higher revenue from money market assets.
Speaker Change: Q4 revenues were reduced by $1.7 million in waivers related to additional fund proxy costs, compared to $5.9 million in fund proxy costs recorded in Q3.
Speaker Change: Total Q4 carried interest and performance fees were $4.8 million compared to $3.5 million in Q3.
Speaker Change: Approximately $3.2 million of the Q4 fees were offset by nearly the same amount of compensation expense.
Chris Donahue: The Q4 sub-advised account redemption that Chris mentioned occurred mid-quarter and impacted Q4 revenues by about $627,000.
Speaker Change: The impact in Q1 and future quarters will be about 1.5 million per quarter.
Speaker Change: Q4 operating expenses increased by $17.5 million from Q3, due mainly to $13.8 million of FX-related expense increases in the other expense line item as the pound weakened versus the dollar.
Speaker Change: Compensation and related expense was up slightly from Q3 as higher incentive compensation was largely offset by lower severance expense.
Speaker Change: Advertising and promotion expense increased due mainly to the timing of our advertising campaign spends.
Speaker Change: The Q4 tax rate of 25.4 was lower than the expected range. We expect the tax rate to be in the 26 to 28 percent range for 2025.
Speaker Change: Cash and investments excluding the portion attributable to non-controlling interests was $588 million.
Now looking ahead to Q1
Certain seasonal factors will impact results.
Speaker Change: Based on Q4 average asset levels, the impact of fewer days is expected to result in about $9.2 million in lower revenues and about $2 million of lower distribution expenses.
Speaker Change: In addition, based on an early assessment, compensation and related expenses are expected to be higher than Q4, due primarily to about $7 million of seasonally higher expense for stock compensation and payroll taxes.
Speaker Change: Of course, these items and others, including incentive compensation, will vary based on multiple factors.
Speaker Change: Holly, we would like to open the call up for questions now.
Speaker Change: Certainly. At this time we will be conducting a question and answer session. If you would like to ask a question please press star 1 on your telephone keypad. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: Your first question for today is from Patrick Davitt with Autonomous Research.
Hey, good morning, everyone.
Speaker Change: I'm going to start with a higher-level question on the money market fund market share, excluding the SMAs. It feels like the SMAs are kind of making up.
Speaker Change: What looks like a little bit of market share loss on the fund side
Speaker Change: Could you speak to maybe any trends that are going on that would, that would kind of...
Speaker Change: explain why some of the other large money fund complexes, say at the banks or even other large asset managers like BlackRock, are seeing so much higher
Speaker Change: fund flows, mutual fund flows than you guys. I appreciate that the SMAs are making up for that, but just curious what dynamics you're seeing there that maybe we can't see from our position. Thank you.
Speaker Change: I'll talk a little bit, Patrick, then Debbie will offer some comments. The first thing is I went back and looked over our market share data for the last three years that we've been giving you every quarter.
Speaker Change: You average all those numbers and it turns out to be between 7.33 and 7.32 percent.
So looking at it over one quarter
where we were a tenth of a percent.
Speaker Change: Less, okay. Yeah, you could say that's loss of market share. We don't lose any clients
Speaker Change: in the process, and you see the ebb and flow of big amounts of money from clients. So, I don't have any worries about losing market share. I'll let Debbie give you a better pulse of the marketplace response.
Debbie: Thanks Chris and I apologize if there's any background noise but ultimately you know I agree a hundred percent with everything that Chris just said the market share lost is not a loss in the context of clients
Debbie: It may just be some large flows at year-end, which is one of our
most volatile times of
Debbie: of the year, what I would say, in kind of defense of that position, is that generally speaking, the first quarter of every year on a cyclical basis tends to be the worst.
Debbie: from a mutual funds flow basis, and we're not seeing that this year. Now, maybe that'll change. We're only one month into this first quarter, but ultimately we think that's a very positive trend.
Debbie: The first time I've seen this video, I've been watching this video for a long time.
Debbie: Helpful, thanks. And then as a quick follow-up, you know, obviously rebuilding a fairly large cash balance.
Speaker Change: Stock price has been range bound, but you've ratcheted down the repurchase quite a bit. So maybe update us on how you're thinking about Repurchases through the lens of the range bound price and now much higher cash balance again. Thank you
Speaker Change: Well, Patrick, looking backwards, ratchet down, okay, we were buying the stock as it was going up, and then right as soon as we weren't allowed to buy any more, the stock went down. And these are all, you know...
fit into our models of which tell us that
because of our belief in the growth of the firm.
Speaker Change: The price is still significantly undervalued. So we have to do two things. Look at it on a high level and say, Should we be buying stock? The answer to that is yes. And then we get every day to get to decide, Okay, is today better to buy or tomorrow better to buy? And I think that's really how we would...
Speaker Change: characterized the quarter which I don't really view ratcheted down and we expect to buy in 2025.
Thank you.
Your next question is from Ken Worthington with J.P. Morgan.
Speaker Change: Hi, good morning. Thanks for taking my question. This is Michael Cho. I'm in for Ken today. I just wanted to follow up on the money market discussion.
Speaker Change: You called out the change in rate backdrop in your opening remarks, higher for longer rates. And I guess, do you envision flows strengthening from here for your money fund business? And I think that you called out the start of the year seems to be strong on the mutual fund side.
Speaker Change: And so I guess I'm just trying to understand or better appreciate how you envision the Money Fund business here and the Hire for Longer backdrop, as well as maybe some of your ultra short products as well, which seem to make up a considerable portion of the business. Thank you.
Once again, we'll double-team that answer. I'll go first.
going down and having a better
Speaker Change: relationship to the deposit rates, we believe the retail trade continues to be a very, very good trade.
Speaker Change: The institutional trade is available for institutions that are doing things not exactly for getting the extra basis point. So, to us, that means...
Speaker Change: We still have a positive attitude about the money fund business to an owner-operator even though
The rates didn't
a lot of credence to cash as an asset class.
Speaker Change: And I've said this before, if you have a five handle it's total nirvana, if you have a four handle it's delightful on a money fund.
Speaker Change: At a three-handle, the clients are still quite sanguine about being there, but the war is still between the advisor who's worried about missing out and trying to convince the customer to maybe move up.
Speaker Change: Then you have in the marketplace a lot of people recognizing
Speaker Change: that cash deserves more than a 10 or 20 or 100 basis point type return and that comes from a lot of factors, competitive, legal, regulatory, etc. So that sets a good stage for our business. Debbie?
Debbie: I wholeheartedly agree. I think maybe a couple things to add with regard to that when you look at the expected terminal rate.
Debbie: in the current environment versus where it was six months ago in the, you know, second...
Debbie: and the latter half of 2024, it's 50 basis points higher. It's substantially higher. And the expectations with.
Debbie: new administration's policies, I think, again, allow us to be very comfortable that the nirvana maybe doesn't start to happen again. I am not a believer of a tightening later in the year, although there are some in the market that are.
Debbie: but the delightful aspect of it I think is still there and ultimately when you have additional users that have come into the market over the course of the last
Debbie: you know, two-plus years, they're not leaving and more than likely they're going to increase their balances because their own cash is increasing from a standpoint of, you know, their balance sheet and what they're receiving with a good economic backdrop, you know, to have invested in this asset class. So our outlook continues to be maybe not percentage growth,
Debbie: that exceeds what we saw in 2023 and 2024, but certainly continued substantial growth in the sector.
Speaker Change: Great. Thanks for all that color. If I could just switch gears for a second, I just want to touch on ESG and your various sustainability funds. I mean, with seemingly less focus on broader ESG products in recent years, and maybe even more so now,
Speaker Change: Can you just kind of remind us and talk through how some of your ESG and sustainability products like global equity or global ESG and various impact funds might be positioned in the market in the years ahead?
Speaker Change: I will talk about that from the point of view of the acquisition and a broader element than the questions you're asking. Saqr Nasebi will comment on those funds.
Speaker Change: When we did the Hermes acquisition back in 18, we had already decanted through a lot of good legal work that you can say yes to fiduciaries while using ESG so long as you are focused on
the risk reward and the returns to the underlying investor.
Speaker Change: And therefore, we continue doing that because these are good tools, additional information and analysis that assist portfolio managers and teams in making investment decisions.
Sacher: And this is what we still believe. Now I'll let Sacher comment on some of the funds that you mentioned.
Sacher: We have always used ESG as a factor as part of our sustainability study to help us achieve better financial return in the long term.
Sacher: Now, we also live in a different part of the world with different market expectations and different requirements.
Sacher: and there are some people in Europe who also want specific funds which are not just aiming for outright returns but aiming for specific outcomes. We do not consider these to be mainstream ESG funds.
Sacher: We consider these to be thematic funds. Then going back to answering your question...
Sacher: As far as the main front, global ESG for example, that continues to do well and it continues to see interest from clients because ultimately clients either are buying it because performance is good or because they want the double materiality which for them is important.
Sacher: If you look at the same thing in our fixed income funds, the SDG fixed income fund continues to see interest.
If you look at the thematic funds...
Sacher: These have ebbs and flows depending on what the advisors in Europe are advising the clients to go into the funds And of course are affected with the risk on risk off element the the lack of The strength of flows we've seen this come back But in the last year or so had more to do with the risk off sentiment
in Europe than it did with the funds specifically.
Sacher: So, as far as we're concerned, the funds are doing exactly what the clients want.
Sacher: They're giving back the returns exactly as the clients want, and they abide by what the regulators want, both here and in the U.S.
Sacher: because they are fulfilling the fiduciary duty of trying to achieve the best financial outcome with the exception of very specific thematic funds sold in Europe for specific outcomes.
Great. Thank you so much.
Thank you.
Speaker Change: Your next question for today is from Dan Fannin with Jeffreys.
Speaker Change: Hi, this is Trevor Dawson for Dan. For my first question, can you speak to the priorities of spending in 2025 and where it's differing from last year and how we should think about the rate of growth for those investments?
Uh, sure.
Speaker Change: I think I've already addressed COMP, at least for the first quarter, the compensation because of the payroll and bonus and recalibrating.
Incentive comp.
at least first quarter wise and into the future there.
Speaker Change: If things are going great, we'll be paying more there. Same thing on the distribution side, you know, we reflected that, you know, less days in Q1.
Speaker Change: We'll knock that down a little bit, but that's on an asset basis from the fourth quarter. If we expect to raise more assets, the distribution line will go up. On the systems and communication line,
Speaker Change: I would say we expect to have a step up there, somewhere around, on a quarterly basis, about $3 million, and that would be into each quarter into the future, and that's, you know, market data and technology spending related.
Speaker Change: And the rest of the areas, you know, I really don't have much change expectation.
Speaker Change: Of course, the other line, you know, the infamous other line with FX. And remember, we are hedging our expenses in London. And so, when we get, you know, the pound goes down.
Speaker Change: It doesn't really affect us because then we pay less pounds over for our expenses in London. So over a year basis, we're hedged, basically.
I can't control the, the, uh,
Speaker Change: The non-operating line with our seat money and whether that goes up or down. And the tax, I think we already addressed the tax.
Speaker Change: line the reason why it was up I'm sorry the reason why the tax rate was down a little bit was because the stock price was up and so as we we had best things that caused the tax rate to go down so that was a benefit
Speaker Change: Great, I appreciate the color there. And then for my follow-up, on alternative products, the overall market interest has been pretty strong. Are there certain areas of the firm you guys view as sub-scale and what specific areas would you guys like to invest in or areas or regions?
Would you please repeat that? It got garbled.
Speaker Change: Yeah, yeah. So on alternative products, the overall market interest has been pretty strong. What areas within the firm are viewed as subscale and are there specific areas or regions that you guys are looking to expand?
Speaker Change: Yes, there are a couple of areas that are interesting to us that are subscale. One would be infrastructure, where we're interested in improving that situation. And then another one is in real estate, where we don't do any of it in the U.S. And we've talked about that on these calls for a number of times.
Speaker Change: where we would be willing to expand to be able to do the kinds of things
Speaker Change: that Chris Taylor and his team have done on the UK side, especially with King's Cross, Paradise Circus, and Birmingham and other places, to do those kinds of regeneration projects in the US.
So those would be two where I would say
Speaker Change: We'd love to get past or get greater size and activity.
Speaker Change: where even though we may be small like in direct lending
Speaker Change: It's, you know, a couple of billion, but we still have great opportunities, as I've mentioned.
and on the P.E. side,
Speaker Change: We're looking at very good opportunities with the numbers that I mentioned. I don't have to go over them again.
Speaker Change: So we're pretty strong there. Another one, depending on how you count it, is trade finance, which is the short end of private credit. And there's a lot of interest in that across the globe.
Speaker Change: I was out with clients in Hong Kong and Singapore two weeks ago, and this is a very, very interesting opportunity on the trade finance side.
Speaker Change: And so that's another one where, again, it's about $2 billion, but we've got good records, good projects, and good opportunities with clients.
Great, thank you.
Your next question is from Robin Holby with TD Cowan.
Speaker Change: Good morning, this is Robin Holby, I'm for Bill Kass, and thank you for taking the question. Follow up on the last private markets question, just given capital markets activities accelerating, what is your near-term outlook for realizations in the portfolio, and when do you expect that fundraising with respect to the funds that you mentioned could start to offset these distributions? Thank you.
Speaker Change: I'm going to let Sacher take a swing at that pitch.
Chris Donahue: Thank you, Chris. So the answer is we are distributing as we speak and raising assets as we speak. The whole point about having PEC 6 following PEC 1 to 5.
Chris Donahue: is, as PEC 5 pays out, PEC 6 comes in and raises new capital. It's the nature of capital markets. If you look at direct lending, we paid off a debt.
Chris Donahue: Actually, that's money going back to the investors. We raise more money to make, to take its place. So the same can be said within that. In direct lending, we're now in EDL3. Now, of course,
Chris Donahue: Again, as these mature, we will be paying back. So I would say we're in a balance where we are replenishing the assets that we pay back. And actually, I think...
I'm making more than that.
Chris Donahue: and we're in exactly where we are in the cycle and of course returning assets to the clients is a sign of success.
Chris Donahue: So, we're in the midst of the cycle and we're pleased with what we're seeing and more importantly our clients are pleased with what we're seeing and coming out to re-up. A lot of the money that we raise are re-ups from old clients across our strategies, which tells you we're in a good place. I hope that answers the question.
That does. That's helpful. Thank you very much.
John Dunn: Your next question for today is from John Dunn with Evercore ISI.
John Dunn: Thank you. You know, great to see a strategic value dividend improving and flipping positive so far this year, but can you kind of contextualize how people think about that fund and the demand for it, you know, given the backdrop of markets and rates?
Yes.
John Dunn: The way this product is presented is as a dividend fund with an idea towards growing dividends.
John Dunn: A lot of times, historically, because this fund will be either at the top of the chart or the bottom of the chart because it doesn't belong in the class where the charts put it.
John Dunn: People will tend to buy it because it's at the top of the chart.
not for the right reason that it's a dividend fund.
looking for growth in dividends.
John Dunn: One of the interesting things about the dynamic here is that even when the fund last year
John Dunn: was in negative flows, the Strategic Dividend ETF was gaining traction. And so someone buying that particular aspect of Strategic Dividend shows you that they understand that it is a dividend fund.
So today.
John Dunn: Many of the people coming in are looking at this as a stepping stone into the market. You get a good yield, and yet you do participate in the market. And if there's a broadening out...
John Dunn: You get paid a dividend along the way, and so this fund is turning up pretty good numbers right now.
got it and then
Speaker Change: Is there any kind of chunky institutional mandates you could point to that might be at risk, and then just more broadly, what areas of institutional are you, you know, worried could be at risk?
Speaker Change: Well, the first thing is, on the institutional side, we're on a short leash everywhere, and so is everybody. Basically, even though the institutions say they're there for however long,
Speaker Change: They have the right to pull the money at any time for any reason or for no reason.
So.
I can't say that we're not at risk.
Anywhere and
Speaker Change: But it's not like the kind of risk you're talking about where we're worried about losing something, but I'm going to let Ray talk about that for a second.
Ray Hanley: Sure, John. When we give our pipeline numbers to the 3.8, that's net of any known redemptions coming through the institutional side, which could be in a separate account or in a fund. Sometimes they're using funds.
Ray Hanley: And the known redemptions were very, very low this quarter. We have very, we don't have really visibility to any material.
Chris Donahue: Redemptions on the institutional side. Now as Chris says, I mean that could always...
Chris: change, and then you have clients like we talked about, the large public entity that on our...
Chris Donahue: on a regular basis. They may not tell us there's a redemption.
Chris: coming, but they have cash come in and they use cash and so you have those kind of swings.
Chris: At this point in terms of visibility, there's not anything material out there from an outflow standpoint. On the other hand, the inflow pipeline continues to build, in particular for the NDT strategies, which
have, as noted in the remarks, have...
Chris: really accelerated in terms of gross sales, net sales, asset growth getting strong.
institutional interest
Chris: They make up the big increase we had in our equity pipeline wins for the institutional side that was driven by MDT And we have a bunch of other ones that are bubbling around that aren't in that number yet that we're very optimistic about Some of those being of good size
Thanks very much.
Ray Hanley: We have reached the end of the question and answer session and I will now turn the call over to Ray for closing remarks.
Chris: Thank you, Holly. That concludes our call. Thank you for joining us today.