Q2 2025 Federated Hermes Inc Earnings Call
Greetings and welcome to the Federated Hermes incorporated second quarter, 2025 analyst call and webcast.
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I'll now turn the conference over to your host Mr. Raymond Hanley Sir.
Floor is yours.
Hello, and welcome to our call leading today's call will be Chris Donahue.
CEO and president of Federated, Hermes, and Tom Donahue, Chief Financial Officer.
Joining us for the Q&A or soccer to Sandy.
Who is the CEO of 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.
No assurance can be given as to future results.
Federated Hermes assumes no duty to update any of these forward looking statements Chris.
Thank you Ray and good morning.
I will review Federated Hermes business performance and Tom will comment on our financial results.
We ended Q2 with record assets under management of 846 billion led by gains from our equity strategies.
Equity assets increased by $8 1 billion or 10% from the prior quarter.
Second quarter equity net sales of $1 8 billion.
Represent an organic growth rate of just under 9%.
Our MDT fundamental quant strategies produced solid sales results again in the second quarter.
MDT equity strategies had net sales of $3 8 billion in the second quarter.
Up from $3 3 billion in the first quarter.
For Q3 through July 25th.
These strategies have had net sales in combined fund and SMA of $730 million.
Seven of the eight MDT equity mutual fund strategies are in the top performance quartile of their Morningstar categories for the trailing three years ended June 30.
Four of these strategies are in the top decile.
The second quarter saw further improvement in flows from strategic value dividend strategies.
These strategies had second quarter net sales of 344 million.
Compared to 131 million in the prior quarter in.
This includes the funds the SMA any institutional separate accounts under the strategies.
We had net sales in 19 equity fund strategies during the second quarter, including a variety of the MDT offerings and including the Asia Ex Japan Fund.
M D G's offerings included by highlight M D C.
Mid cap growth MDT mid cap collective and the all cap core.
Looking at our equity fund performance at the end of the second quarter end using Morningstar data for the trailing three years.
56% of our equity funds were beating peers and 26% were in the top quartile of their categories.
For Q3 through 725, combined equity fund and SMA had net sales of $480 million.
Now turning to fixed income assets decreased by about $800 million or 1% in the second quarter from the prior quarter due mainly to net redemptions of $2 4 billion, partially offset by higher market valuations and FX of one six.
6 billion.
Redemptions included about $1 5 billion from two large public entities that have regular sizable inflows and outflows.
We had 15 fixed income funds with net sales in the second quarter, including the Conservative Micro short fund and the total return Bond Fund ETF.
Regarding performance at the end of the second quarter end using Morningstar data for the trailing three years, 46% of our fixed income funds were beating peers and 21% were in the top quartile of their category.
For Q3 through $7 25, combined fixed income and SMA had net sales of $47 million.
And the alternative private market category assets increased by $1 3 billion or 7% in the second quarter due mainly to the impact of FX rates, which was $1 1 billion and net sales of $231 million, mostly in the MDT market.
Mutual fund.
Now we are in the market as I've said in previous calls with European direct lending tree, the third vintage of our European direct lending fund.
To date, we've closed on $450 million target raising 750 <unk>.
<unk>, one raised 300 E D L to raise 640.
We're also in the market with a global private equity co invest fund.
Which is the sixth vintage of the P. C series.
Our first close in April was for about $114 million, the target raising $500 million.
And Peck P. C. One to five raised approximately 400 to 600 in each fund.
The Federated Hermes G P innovation fund to the second vintage of our Pan European gross private equity innovation fund.
As in the market today.
To date, we've closed on a $110 million with a target raise of 300 and the first vehicle raised $240 million.
We're also in the market with the European real estate debt fund.
New tools European debt fund, our marketing is here in 2025, and our target is $300 million.
Early in the second quarter, we completed the acquisition of a majority interest in Rivington Energy management limited a UK renewable energy company.
The acquisition enhances our private markets platform by adding project development expertise and specialist energy transition sector experience to our institutional investment and asset management capabilities in the infrastructure asset class.
We are actively working on product development plans with the Rivington team.
Across our long term investment platform, we began Q3 with about $1 billion in net institutional mandates yet to fund in both funds and separate accounts.
Fixed income expected net additions totaled about four of $545 million.
With wins in multi sector.
High yield and active cash.
Approximately $439 million of total wins are expected to come into private market strategies.
We have approximately one $6 billion in wins, yet to fund mostly indirect lending.
Private equity.
And trade finance for our.
Actually offset by $1 $2 billion in redemptions from the restructuring of our UK property for us, which will occur in the third quarter.
Yeah.
We have managed this particular fund for decades, and it has delivered solid performance to our investors.
The restructuring and transition of the fund to a third party as a result of changing market demand for such products. It is being done in collaboration with our investors and with the goal of providing them liquidity options to suit their preferences as expressed in there.
Recent voting.
The wins.
In this area are obviously in direct lending and.
And private equity and trade finance.
Equities expected additions total about $59 million.
Driven by MDT, and some offset by some outflows.
Moving on to money markets.
We reached another record high at the end of Q2 for money market fund assets, which increased by $3 1 billion.
To reach 468 billion.
These assets moved higher in the second quarter. Despite seasonal factors that often result in lower assets money market separate accounts decreased by $5 9 billion, reflecting usual seasonal patterns.
Market conditions remain favorable for cash as an asset class. In addition to the appeal of relative safety in periods of volatility.
Money market strategies present opportunities to earn attractive yields compared to alternatives, such as bank deposits and direct investments in T bills and commercial paper.
We are actively participating in the development of token is money market funds and digital asset infrastructure and continue to rigorously explore opportunities.
<unk> from token is share classes to offering fully digitized assets.
Over the past several years, we have engaged with a broad array of innovators and well regarded financial institutions to identify and evaluate opportunities in the digital assets Arena.
Accompanying.
Going along with a significant amount of knowledge gained and experience along the way.
We are sub advisor for the superstate short duration U S government Securities Fund.
A private token nice fun that has assets of about $425 million.
It was also recently announced that Federated Hermes, we will participate in the launch of a collaborative initiative between bank in New York and Goldman Sachs.
That we use blockchain technology to maintain our record of their customers' ownership of select money market funds.
This is a significant step towards enhancing the utility and transferability of the existing money market fund shares.
Our our participation highlights our commitment to the digital asset space, where we expect ongoing innovation and growth.
Our estimate of money market mutual fund market share, including sub advised funds was about 711% at the end of the second quarter.
Up slightly from about 710 at the end of the first quarter.
Now looking at recent asset totals as of the last few days.
Managed assets were approximately 854 billion.
Including $642 billion in money markets.
91 billion in equities.
98 billion in fixed income.
$20 billion in alternative private markets $3 billion in multi asset.
Money market Mutual fund assets were 476 billion Tom.
Thanks, Chris.
Total revenue for Q2 increased slightly from the prior quarter due mainly to higher revenues from.
From more days in the quarter and revenue related to the Rivington acquisition, which were partially offset by lower revenue from performance fees and carried interest.
Total Q2 carried interest and performance fees were $1 4 million compared to $5 9 million last quarter approximately 829000.
The Q2 fees were offset by nearly the same amount of compensation expense.
Q2 operating expenses increased from the prior quarter due mainly to the 12.9 million VAT refund in Q1.
In the other expense line item FX and related expense was a credit of $5 8 million.
For Q2 compared to a credit of $5 6 million in Q1 as the pound strengthened against the dollar again.
We have lowered the notional amount of our foreign currency forwards to 31 5 million pounds.
<unk> from $86 7 million pounds at the end of Q2.
Compensation and related expense increased by $1 6 million from the prior quarter due mainly to higher incentive comp and base pay merit increases of $6 9 million.
Partially offset by seasonally lower expense for stock based compensation of $4 7 million.
And payroll taxes of about 600000.
Advertising and promotion promotional expense increased due mainly to the timing of our advertising campaign spend.
The Q2 effective tax rate was 26, 1%, we expect the rate to be in the 25% to 28% range for 2025.
At the end of Q2 cash and investments were 607 million cash and investments excluding the portion of attributable to noncontrolling interests were $474 million.
During Q the company purchased approximately one 5 million shares of its stock for about $64 5 million.
The board of directors approved a new share repurchase program yesterday for 5 million shares. In addition to the $1 1 million shares.
Remaining from the prior program.
That concludes our prepared comments, we'd like to open up the call for questions.
Thank you.
Time will be conducting our question and answer session. Thank.
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One moment, please while we poll for questions.
Yes.
Yes.
Thank you.
Our first question is coming from Patrick Tavis with Autonomous Research your line is life.
Hi, good morning, everyone.
On the back of your.
Stable coin to organizations comments.
I think it would be helpful. Maybe if you could update us on your.
Your broader thoughts around the extent to which you think these products could disintermediation the traditional money fund base business or do you see it more as incremental to that traditional money fund cash exposure. Thank you.
Baseline.
Okay.
We would see it as incremental.
New customers new things there is not an avalanche of use of these things right now and don't forget the basic thing on people with cash as they want daily liquidity at par.
They are willing to go with a stable coin that doesn't pay a yield but then they also like a respectable daily yield and we think that the.
The Goldman and bank of New York methodology.
We're goldman creates a platform.
Bank of New York as the custody and transfer agent and the money funds is there just like it always sat there as a money fund and yet someone else is taking care of the token is Asia. So that from the customer standpoint. It is in fact, a token is money fund, but from the money fund operators standpoint is off.
Operating a regular <unk> seven money fund in order to provide daily liquidity at par. So this is a.
Very sound strategy I'm, not saying, it's the only one that will go into the future.
But overall, we think that's a very good one.
One of the reasons that.
People are getting excited about this is because you can get seven by 24.
Activity trade anytime.
But you still have to work out some of the mechanics of who gets the dividend the way our program will work with.
Boney in Goldman right now is whoever owns the token at the end of the day is going to get the dividend and.
This is not as much a token is money fund as as others have.
Full token is money funds.
So our overall view is that you have to play in this space and we are talking to people I got a list of them and there are many of them on their including European players.
Where we're dealing with all.
All of the ideas of the innovation I can't go through all of them with you the one with.
Bank of New York and Goldman obviously has been made public as.
As.
Super Super Super Spike.
Yeah. So.
Debbie what would you add to that.
You covered it very very.
Gary.
The only thing I'd add is right now we think this is the tip of the iceberg Patrick This is for our current products.
That are on this platform a different way to distribute so we distribute through various types of intermediaries.
For insurers through broker dealers through banks, we distribute directly this is another way of distributing our products and in the process turning it into a.
Our ledger.
That has better transfer ability than a typical money market I'm sure. Doug. So we think it's a very clever and new way to be able to distribute product and as Chris mentioned Theres lots of innovation that we think can happen.
Yes.
Provide additional bells and whistles to why this is a product that will take over to some degree the future.
Definitely well what is in existence today, what is in existence today as the traditional money on being distributed to a different group of clients, particularly from a collateralization standpoint, so money funds stable coin you mentioned they need to be backed by something they need to be back on treasury bills or money funds containing less tragic.
Yes.
As such a genius act is all about money funds will provide that collateral.
We will provide an odd chain so that the ease of use is basically seamless.
Lots of innovation to come as it exists today distribution changes that are beneficial.
Great. Thanks, and just as a quick follow up Debbie I feel like we've been talking about this for a couple of years now, but as we get closer to likely fed cuts are you starting to see any more institutions come in to talk to you about this long awaited rotation into money funds that we've been talking about for a while now thanks.
Okay.
This has been alive and well Patrick through all of.
2000.
From the second half of 2024, and all of 2025 year to date set for the last year, but it's not really started in earnest because what we saw in fed rate cuts at the end of 2024 again materialize into anything yet in 2025. So it's one of those wait till you see the lights of neurons sort of thing I think is.
As far as volume goes.
But we were basically flat on a money fund asset basis for the second quarter, which had really two different aspects to it. The first month April was very much personal tax outflows now huge personal taxes.
And from an institutional side.
Outflows due to margin calls have you recall April six was.
Liberation day announcements tariff announcements many margin calls that came from institutional accounts.
What we lost in assets in April basically where that needed to be made up in may and June which the wire as we ended up the quarter flat.
However, it was definitely a tale of two quarters. When you looked at April compared to May and June may and June are more confirmation of what we've been saying on the institutional side from a rotation in and out of direct securities, whereas April was more based on what the situation in late what's happening from an economic and a physical store.
Good point.
Thank you.
Our next question is coming from Ken Worthington with Jpmorgan. Your line is live.
Hi, good morning, Thanks for taking the question.
Debbie how do you see growth in stable coins impacting the money market fund industry. Our Treasury Secretary has suggested two trillion a staple coin assets in coming years.
Target is reached what does this mean for money markets.
Given the supply of T bills that are outstanding today.
Does does all the math work.
For money market funds.
Yes.
<unk> sure the current size of the stable corn market is about 250 billion.
Very concentrated in in <unk> basically.
And then the assets that are backing those two coins Katherine circle.
Our basically in Treasury securities there some commercial paper in there, but it's mostly treasury securities. So that's all being topped up very easily right now what happens with the genius that is there is now more definition as to what needs to be backing of stable coin and its very short treasuries are treasury backed repo.
Which ultimately Australia and two trillion.
Please put your finger in the air I'm, not sure where that number guidance, but its somewhere above <unk>.
Drastically above where it is in the $250 billion market today.
What we thankfully have done in addition to the Genius Act is passed.
The debt ceiling.
Renewal that gives us an extra $5 billion in treasury.
And ultimately we've seen a pretty good.
Coffers had extraordinary measures depleted some coffers, which are being replenished at this point, but we also have had.
Improvement in Bill supply, which we do believe will continue and despite the fact that one.
The treasury.
<unk> Treasury went from Janet Yellen to Beth.
<unk> pushed back on how much short term debt had been available in the market.
During the yellow errors with the expectation that that would start to term that debt out to some degree that has not been the case and what they have.
<unk> provided.
A pretty nice increase in the bill supply. So we do think there will be extra supply in that one to three months sector basically 93 day bill market and under it will probably make it a little bit more expense, but that's being offset to some degree by the additional supply that we have and our expectation would be for <unk>.
The foreseeable future is enough to meet the demands of what we're expecting at least at this point from a stable coin market.
If I could.
Ken.
One of the other features of the Genius Act was to not allow stable coins to pay interest or return and so the people who ought to be concerned about the two trillion going into stable coins are the ones, who have deposit accounts with little or no interest and how does that dynamic exactly work.
And so then you see the next level of things where people offer deals where OAS you own as stable coin and they'll take a bunch of your money and put it into a money fund charge you a fee and keep 80% of your money and have money funds that you get at least some return and youre seeing those kinds of innovations going on right now, but it's important.
To note that the stable coin can't pay a yield.
Okay fair enough.
And then just on MDT, having wild success here with that franchise.
How do we think about capacity and some of the MDT mid and small cap products I don't know what sort of separate account assets are sort of there as well, but how do we think about the capacity for those given the inflows you're seeing.
So at this point.
On an all of the funds each of the funds, we don't expect any capacity issues.
The methodologies and the ability to buy shares is robust and so.
Believe me, we're looking at that too to see if something is going to poke a hole in our balloon, but at this point, we're not seeing it.
Okay, great. Thank you.
Thank you.
Our next question is coming from Bill Katz with TD Cowen Your line is nice.
Thank you good morning, everybody I appreciate you taking the questions.
Maybe one final question good morning, Tom.
Maybe to start with you just given how have you been hedging maybe some of the pound versus the dollar can you talk a little bit about where you think the exit pace is for expenses, maybe break that down between comp and maybe the non op non non comp line, particularly the other line has been so negative last few quarters. Thank you.
Okay Bill on the FX, that's why I mentioned in there that we've lowered our notional amount.
On the hedging and basically we're looking at it on a quarterly basis. We had previously looked at it on a yearly basis and we got the benefit in the first two quarters by looking at it on a yearly basis and so now we only our exposure is much less on the pound.
Worked out quite well for us.
In terms of the comp.
Compensation line.
Sure.
I would say next quarter, we expect that to be up.
A couple of million dollars or something like that of course every time I predict that something happens and we ended up.
Paying out more or less.
On the distribution line item.
With the.
Chris mentioning our assets.
To date in July being up.
Pretty significantly on the money fund side, we would expect a higher distribution.
<unk>.
And then.
In the beginning of the year I've talked on.
Systems, Inc. Communication line about Kevin.
No.
A decent amount of more dollars per quarter, and it's taken us a little bit longer time to get moving on those and.
I still see that line going up $5 million next quarter.
And the rest of the line items.
<unk>.
I don't see big changes there.
Okay I'll circle back on the other expense line is still.
So maybe Chris one for you just been a lot of M&A in the industry. It seems like the opportunity with.
Your <unk> business is percolating, a little bit, but still somewhat small in the grand scheme of things.
You bought back a lot of stock in the second quarter, you ramped up the authorization as well how do we think about maybe capital return priorities from here and there is a way to be a bit more strident on the M&A side to maybe accelerate the opportunity at all it's where I think a lot of the incremental growth seems to sit for the industry. Thank you.
Bill.
We have said this before that the highest and best use of our cash is with.
Doing acquisitions, and we are actively talking about doing various acquisitions, especially in the private markets type space.
And until we have something to announce we don't announce.
But remember.
The whole history, we had before we bought Hermes.
From 2012 to 2018 I agree that was six years. So that's long, but we were saying all along.
We were going to do an international one then.
We took a lot of calls and consternation on that not happening for a while but when we say we're going to do stuff. We do stuff. It just might not be lickety split. So we continue to look in the space exactly as you are saying.
For acquisitions, but this is not to say that we stopped doing look at the roll ups and other things that are attractive for example, anyone who is a more bond money fund knows that we are their warm and loving home.
So Phil back on the other.
I don't expect to have a VAT and.
Don't forecast, what's going to happen FX.
So if you take those things both out of there are other line has lots of items in it.
And if you look back June <unk>.
<unk> 2024.
Line was up $5 million and I would say it would be a little higher than that would be our forecast six and a half but.
So many things changing there its why I don't really.
Like doing what I just did.
Okay. Thank you I can put my slide rule. Thanks.
Thanks, so much.
Yes.
Sure.
Thank you. Our next question is coming from Brian Bedell with Deutsche Bank. Your line is live.
Thanks, Good morning are advancing to the next century here.
I joined late so pardon me if you've answered part of this on the <unk> side, but maybe differ.
A different angle.
Yeah.
To what extent do you see the token zeeshan of money market funds expanding.
The overall size of the money market fund industry.
How dramatic could that be if it's much easier.
To hold this in a digital format.
It is very very difficult to say what that kind of number we haven't done any numbers on that.
Debbie and I believe it's incremental to the business, but as with any of these things, especially when Youre doing blockchain you got a lot of people on their first in order to have it grow it is a little bit of a chicken and egg thing.
And so everybody.
There is a lot of excitement and a lot of articles and all of that.
But the assets are not yet not yet there we're ready for when it goes.
But it's just hard for us to say and.
Maybe Debbie has done some research that I'm not aware of on how big that could be for that.
No Chris exactly I mean, we think it is an additional.
Provision of distribution and an additional collateral management tool, but the actual estimation of the size of the growth is Israeli.
Early to tell at this point.
Yes, yes.
And maybe just a follow on to that as you think about this industry evolving and also including.
The reserve management requirements for stable coin.
Expanding the money market fund industry as well.
Do you see yourself.
For that incremental growth in those assets potentially.
Getting in higher market share than your current base I think that's in the 7% to 8% range.
Sue going forward would you see yourself as a share gainer on this dynamic given given your low cost and obviously long standing reputation in the industry.
Well this business due in large part to two things.
Regulation regulation Alibaba license business and so you only have 10 or 12 players who can actually give clients. The idea that they have daily liquidity at par if they have a $100 million.
So new entrants have a very big challenge, even with the Genius Act, where youre going to have to create new funds because they shrunk.
Average or the maximum maturity of a fund.
You've got to have enough of a big enough pool of money in order to make that.
Next the customer believes they're going to get daily liquidity at par.
So.
That I would we're always striving to get more market share.
But I'm not going to say Oh, yes. This is definite thing thats going to happen.
It's a very tight business is a very competitive business.
And we certainly expect to grow in it and get our fair share and try hard to get that number back on.
Back up to a higher number than 711 I mentioned.
Okay great.
Great that's great color. Thank you.
Thank you.
As we have no further questions on the lines at this time I would like to hand, the call back over to Mr. Hanley for any closing remarks.
Okay, well, thank you for joining us today that concludes our call.
Thank you ladies and gentlemen, this does conclude today's call and you may disconnect. Your lines at this time, we thank you for your participation.
Thanks.