Federated Hermes Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 12 speakers on the call.

Operator

Company. Raymond, over to you.

Speaker 1

Good morning and welcome. Thanks for joining us today. Leading today's call will be Chris Donahue, CEO and President of Federated Hermes and Tom Donahue, Chief Financial Officer. And joining us for the Q and A are Saker Nassebi, who is the CEO of Federated Hermes Limited and Debbie Cunningham, our Chief Investment Officer for the 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 And the results implied by such statements.

Speaker 1

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?

Speaker 2

Thank you, Ray, and good morning all. I will review Federated Hermes Business Performance and Tom will comment on our financial results. Looking first at equities, Assets were down $637,000,000 to $83,000,000,000 due largely to net redemptions of 8 $28,000,000 partially offset by market gains of about $115,000,000 Even so, We saw Q2 positive net sales in 15 equity strategies including Asia ex Japan, MDT Large Cap Growth, MDT Mid Cap Growth and International Leaders. Now the strategic value dividend domestic strategy had Q2 net redemptions of 700,000,000 compared to net sales of $727,000,000 in the Q1. As we have talked about before, this strategy is outcome driven and is benchmark agnostic.

Speaker 2

It seeks a high and rising stream of dividend income from high quality companies. Over the last 10 years ended June 30, It has returned on average 7.4%. To make the point, the strategy returned 8.5% in 2022 compared to a loss of over 18% from the S and P 500 and thereby ranked in the top 1% of its Morningstar assigned category of large cap value for this 2022 performance. Year to date, however, through June of 'twenty three, it has a negative return of 5.3% Compared to the S and P 16.9 percent gain and that ranked it in the 99th percentile of its assigned category. This year, the market, as you know, has been led by a small group of technology companies that are largely outside of this strategy's objectives As they either pay no dividends or have a low dividend yield, the top yielding quintile of stocks in the S and P 500 Are underperforming the bottom yielding quintile by nearly 40% to date.

Speaker 2

Now this strategy would benefit if investors rotate back into cheaper high yielding defensive stocks. Looking at our equity performance overall compared to peers and using Morningstar data for the trailing 3 years. At the end of the second quarter, 50% of our equity funds were beating peers and 29% were in the top quartile of their category. For the 1st 3 weeks of Q3, combined equity funds and SMAs had net redemptions of $310,000,000 Now turning to fixed income. Assets decreased slightly in the 2nd quarter to $87,400,000,000 Fixed Income Funds and SMAs had Q2 net sales of $454,000,000 while fixed income institutional separate account net redemptions $526,000,000 were driven by regular cash flows from a large public entity.

Speaker 2

Within funds, our flagship core plus strategy, total return bond fund had Q2 net sales of about $1,000,000,000 Core Plus and other fixed income SMA strategies added $207,000,000 of Q2 net sales, Well, net redemptions of about $354,000,000 occurred in the 3 ultrashort funds. The Ultra Short net redemptions were down from $1,200,000,000 in the prior quarter. Just as a note, Total AUM and Ultra shorts are about $5,400,000,000 here at mid July. We had 15 fixed income funds with positive net sales in the 2nd quarter, including of course total return bond fund and SDG Engagement High Yield Fund. Regarding performance, at the end of the second quarter and using Morningstar data for Trailing 3 years, 49% of our fixed income funds were beating peers and 16% were in the top quartile of their category.

Speaker 2

For the 1st 3 weeks of Q3, fixed income funds and SMAs had net positive sales of 20,000,000 In the alternative private markets category, assets increased by $428,000,000 in Q2 compared to the prior quarter, reaching $21,600,000,000 The increase was due to FX impact, partially offset by net redemptions and distributions. We have the final close of PEC V, the 5th vintage of our private equity Co Invest Fund in June, reaching $486,000,000 in commitments, which exceeded our $400,000,000 target. Commitments came from existing PEX Series investors as well as new investors from Europe and South Korea. Federated Hermes GPE has a 22 year track record of making co investments, Having committed $4,500,000,000 across 278 global co investments As of March of 2023, we continue to market Horizon 3, the 3rd vintage of our Horizon series of private equity funds. Horizon 3 has commitments of a little over $1,000,000,000 through the Q2.

Speaker 2

We are also in the market with the Hermes Innovation Fund, which is the second Vintage of our Private Equity Innovation Fund, the first vintage of our Real Estate Debt Fund And the first vintage of our Nature Based Solutions Fund. Now we began the 3rd quarter With about $5,000,000,000 in net institutional mandates yet to fund both into funds and separate accounts. These wins are diversified across fixed income, equity and private markets. Fixed income expected net additions totaled $2,500,000,000 This includes wins in active cash, short credit, Corporates, HighYield and Core Plus. Approximately $1,300,000,000 of total Net wins is expected to come into private market strategies.

Speaker 2

This includes private equity, direct lending and absolute return credit. About $1,200,000,000 of total net wins is expected to come into equity strategies, including Biodiversity, Global Emerging Markets, MDT Mid Cap Growth and Global Equity. Moving to money markets. We reached record highs for money market fund assets of $364,000,000,000 and total money market assets of 509,000,000,000 The Q2 presented a challenging environment for managing money market strategies as the debt ceiling crisis significantly impacted short term debt markets. Despite this challenge, money market strategies Continued to benefit from favorable market conditions for cash as an asset class, higher yields, elevated liquidity levels in the financial system and favorable yields compared to bank deposits.

Speaker 2

As short term interest rates peak, we expect Market conditions for money market strategies will be favorable compared to both direct markets and bank deposit rates. Looking at flows in money funds in the second quarter, we saw good activity from products geared To the retail customers of Financial Intermediaries, institutional product flows were challenged by the aforementioned Debt crisis, direct security yields and the regular June corporate tax period. Now the SEC as you know recently adopted new rules for money market funds. We continue to study these rules to assess their impact. We were pleased to see that swing pricing was not included and that the ability to use a reverse distribution mechanism was included as an option in the remote possibility that negative yields were to occur.

Speaker 2

We were also pleased that the SEC agreed with our recommendation To remove temporary redemption gates and the link between weekly liquidity asset thresholds and liquidity fees, Which we believe created an incentive for investors to redeem sooner in periods of market stress and prevented the manager from using as much liquidity as was available. The inclusion of mandatory redemption fees Subject to certain conditions in institutional prime and muni funds presents a challenge for fund advisors and investors. We have approximately $11,000,000,000 in third party institutional assets in institutional prime and muni funds that we believe could shift to alternative products that we offer including our private prime fund and Government Money Market Funds. It's worth noting that institutional prime and muni funds Already have fluctuating net asset values and that there is an exception or carve out For so called de minimis impact based on the hypothetical selling of a strip of securities that may occur on the rare days when we have a 5% redemption trigger. We will be talking with our institutional clients over the coming months on this topic.

Speaker 2

We believe that these investors will continue to use Institutional Prime and Muni Funds at least into late next year when the new rules take effect. Our estimate of money market mutual fund market share, including sub advised funds, was 7.2% at the end of the second quarter, Down from 7.4% at the end of the first quarter. Now looking at recent asset totals As of a few days ago, managed assets were approximately $707,000,000,000 including $510,000,000,000 In money markets, dollars 84,000,000,000 in equities, dollars 89,000,000,000 in fixed income, dollars 22,000,000,000 in alternative private markets and $3,000,000,000 in multi asset. Money market mutual fund assets were $365,000,000,000 Thank you. On financials.

Speaker 3

Thank you, Chris. As described in the press release, Q2 results included Two transactions that impacted results for a combined loss net of tax of 800,000 The transactions include a sale by a shareholder in one of our private equity funds of a portion of their investment to a third party and a restructuring of 1 of our infrastructure funds. We continue to manage both funds. Total revenue for Q2 increased $51,000,000 from the prior quarter due mainly to an increase of $38,000,000 And carried interest and performance fees, of which $25,900,000 is from carried interest revenue from consolidated carried interest vehicles that was offset mainly by compensation expense. Retained carried interest and performance fees increased by $12,100,000 from the prior quarter.

Speaker 3

Total Q2 performance fees and carried interest were 39,400,000 All other revenue increased by $13,100,000 or 3 percent, Due mainly to higher average money market assets bringing in $11,600,000 of revenue And an additional day in the quarter bringing in $4,600,000 of revenue, partially offset by lower average equity assets, Reducing revenue by $2,500,000 Q2 operating expenses increased $37,800,000 from the prior quarter due mainly to $25,700,000 of compensation expense From the consolidated carried interest vehicles and from $9,800,000 due to the restructuring of the infrastructure fund Recorded in other expense. All other expenses increased by $2,000,000 or 1%. The $23,000,000 increase in compensation and related expense from Q1 included the 20 $5,700,000 in consolidated carry interest vehicle compensation and $1,400,000 in severance, Partially offset by $4,100,000 of lower incentive compensation expense. The increase in professional service fees from Q1 was due mainly to higher legal and consulting fees, The increase in advertising and promotional from the prior quarter is mainly due to the timing of certain conference and advertising spending. The effective tax rate was 27.4% for the quarter.

Speaker 3

The Q2 rate was impacted by the restructuring of the infrastructure fund, which included the purchase rights to receive future carried interest. This purchase and related expenses were not deductible for tax purposes. As a result, our effective tax rate was higher this quarter Compared to our expected rate of 24% to 26% for 2023. At the end of Q2, cash and investments were $521,000,000 of which about $459,000,000 is available to us. Jenny, we would like to now open up the call for questions, please.

Operator

Your first question is coming from Daniel Fannon of Jefferies. Daniel, your line is live.

Speaker 4

Thanks. Good morning. So wanted to start with just money market flows And understand your comments that as rates stabilize or peak you expect to see those flows pick up. But Also just want to contrast that to what we're hearing just broadly about fixed income flows also picking up when that occurs. So how do you think investors and the balance between what Bond funds and money market funds are going to look like as we or allocations are going to trend as we get towards More of that peak rate or lower rates potentially dynamic.

Speaker 2

Daniel, I'll comment on the bond fund portion and I'll let Debbie add on the money market So our franchise, the core plus franchise total return bond Has over $18,000,000,000 in it and it is a great bucket to have a very good story over the long term. And so as we're looking at the fixed income market, that is a big allocation almost no matter what is going on in the marketplace. And therefore, we are winning mandates where that is a core position. And how people are feeling is a little different They are somewhat reticent to go into the market full bore, even though you've seen some changes Along those lines with market performance. And so they are quite sanguine about a core position in a core plus fund that has this kind of record.

Speaker 2

And I'll let Debbie comment on the money market portion and then I'll draw them back

Speaker 5

Thanks, Chris. So from the money market side of the equation, Much of the growth that we have seen so far has come from the retail side of the market. And that's Simply because, compared to bank deposit rates where they were for a lot of the zero rate environment, Money market funds are now paying much more attractive market rate of return. For institutional buyers, however, They have the ability generally to be able to be in direct market specifically, so buying direct commercial paper, buying direct And as the market has increased, they have been purchasing direct market securities such as those In order to pick up the yield, the higher yield more quickly, money market funds operate with a lag, maybe 25 to 30 days depending upon what Our weighted average maturities are. Once markets peak or plateau in this case, And even then, even more so when they start to go down the other side, the opposite occurs for the institutional investor Where they come into those funds that actually lag the market and therefore stay at that higher rate for a longer period of time.

Speaker 5

So generally, that's when we would see institutional markets, and the institutional flows pick up, While retail will be maintained at that point. So it comes from 2 different sources, the retail side as money is coming off of 0 And very attractive versus bank deposits. And then once rates plateau and start to go down, even marginally, It comes from the institutional side. So that's and these are generally cash manager cash management flows. It doesn't include What Chris was talking about those flows that ultimately may make their way back to The longer side of the fixed income markets or even the equity markets for that matter.

Speaker 5

Chris, back to you.

Speaker 2

Okay. Thanks. And so What's really going on here is it's almost independent decisions. In addition to filling out a core position, Those FAs are willing to lengthen duration like the product. The product Does a very good job of capturing alpha on the downside and on the upside.

Speaker 2

And if you look at its 3 year rolling returns over 72 periods, about 90 some percent of the time, this fund beats The competitors and the bench. And so it's a very solid product. And Others are consolidating managers and doing other things like that, and that's why you're seeing these strong flows into the total return bond fund category.

Speaker 4

Okay. Thank you. That's helpful. And then I was hoping to clarify some of the dynamics within the carried interest in the quarter. I think you mentioned a restructuring of the infrastructure fund.

Speaker 4

So and I believe something else I might have missed it. But if you could just talk about specifically what happened and then Understanding what the impact was that carried interest in comp, but I believe there was is that partly why the elevated legal cost as well? Just want to make sure we're Looking at the kind of normalized expense levels exiting kind of the second quarter would be helpful.

Speaker 3

Yes. Okay, Dan. That's why we put that kind of specific things in the press release Under financial summary, but just to talk about it. So we have the Horizon product, which has a long term, large private equity investor was looking to Exit some of their position and we worked on this for a long time and they were able to complete the transaction, Sell their position to somebody else. And importantly, we still are managing it.

Speaker 3

So it's just we're managing it for somebody else. That triggered the carry from the gains that they got by selling it, which triggered the carry of which we get some of it, we being The Inc. And which the managers get some of it, which is why it is compensation. That standalone by itself that would have been a positive contribution to earnings. So the second transaction was in our infrastructure business where we kind of Looked at it and realized that we needed to update it to more satisfy the existing investors And to transfer it into a better structure to grow it in the future.

Speaker 3

And that What that did was triggered carried interest from the past that we were able to recognize. The reason why we were able to recognize it, the reason why we didn't recognize it before was because there was a clawback. Once we restructured it, the clawback ends and therefore we recognized it. And what we also had to do was went out and got Fair market value of the carry for the people who get the carried interest and we had to take that as an expense. By the way, that was not a comp expense even though it's paid to the employees and it shows up in the other line.

Speaker 3

Now both those things and we continue to manage that portfolio too. And I think it's important for Saker, If he wants to make any follow-up comments on those businesses.

Speaker 6

Sure. Thank you. So Two things about this. 1, if you think about the first transaction, it is actually a success because when you have a private Market investor, they're technically in there for the long term. You want to ensure that they're for the long term.

Speaker 6

And you also want to make sure that if they need liquidity at some They can find or we can help them find somebody else and that's what we did. And that then triggers a realization of some of our carry, both for us and for the managers. The second one is different in the sense that the clients themselves wanted us to restructure the fund so that we can adapt it to what they want to do. And again, we kept Management Office. So the first key point is that we have control over management of both.

Speaker 6

The second one is something like this gives This is neither a forecast nor it's just simply the numbers are the numbers, but it gives you an indication of how private markets work, Which is there's a lot of revenue that is generated within private markets that comes through these lumpy, carry payments It's happened over time, which we do not predict, but you can look at our past records and the notes attached to the press release and you can see the averages over time. And that's an integral part of how we do it. Now we have established an incredibly strong reputation in all parts of private markets In private equities, the track record is outstanding, and that's partly why we managed to close our fund above our expectations. In property, it's the same, in direct lending and so on. So it's a combination of us keeping clients, Actually expanding our client bases in many ways and then realizing the carry, some of which goes to the managers, which is typical within private markets And some of it comes to Inc, which is the house.

Speaker 6

So it gives you an insight, if you like, of how private markets works

Speaker 3

So Dan, the last comment that I have is Yes, we put in the net net net on all these things, which I understand are complicated to figure out. And that's why we put in That an after tax impact was only $800,000 when you take all these transactions and all these 1,000,000 of dollars. We kind of wanted to give you an indication that it wouldn't have impacted earnings too much, well, dollars 800,000 exactly.

Speaker 4

Okay. Thank you.

Operator

Thank you. Your next question is coming from Patrick Davitt of Autonomous Research. Patrick, your line is live.

Speaker 7

Hey, good morning, everyone. So

Speaker 1

the press

Speaker 7

reported on some money fund fee cuts earlier in the month, but I think misrepresented the impact. So could you frame any immediate impact to the earnings model from those reported changes? And then more broadly, What exactly are the changes you made? And any color on the reasoning for the new framework? Thank you.

Speaker 1

Yes, Patrick, it's Ray. We did in the beginning of May, the Fund Board approved A reduction in investment advisory fees on a group of our money funds. But as you indicated, there's no impact to our revenue because We already had long standing advisory fee waivers. So this was not revenue that we were collecting. It may have been reported as such or indicated that.

Speaker 1

In addition, in the beginning of July, we launched 10 new share classes on 3 of our treasury funds. And we did that to give clients Additional product options and also to add some consistency, when looking at our treasury products compared to the government And prime funds when you look at things like expenses and minimum investments and some other features. As a consequence of these Creating these new share classes, certain number priced at 15 basis points, net of waivers. And so that does represent on a new share class, a lower net effective fee rate than what was Previously available and that's kind of in line with moving in line with where some of the competition funds are And again, giving us consistency. We already had that pricing option on the government side, which is The bigger category.

Speaker 1

So, those are the changes at a high level. Debbie, I don't know if you want to Add anything to that?

Speaker 5

No. I think just that we really don't expect it to be impactful in The assets in those products and any kind of shifts that might take place between share classes within a product, we expect to be modest at this point.

Speaker 1

And the intention of course is to regardless of shifting and if any of that occurs or when Our when we undertake changes like this, our expectation is that they will be revenue enhancing.

Speaker 3

Got it. Thanks. And as

Speaker 7

my follow-up, you're building a fairly nice cash balance and did a lot more repurchase in the second quarter than I think Maybe your tone on the last call would have suggested. So should we be leaning more into repurchases as we think about our models for the second half now and now that your price is

Speaker 3

much lower It was last quarter. Yes, Patrick, it's Tom. So we had the Russell. We got kicked out of the index in the Russell. So we weren't sure what was going to happen there and wanted to be prepared.

Speaker 3

And then we also Knew that the money market regulation was coming and weren't exactly sure what was going to happen there. And so looking into the future, the Russell is behind us and we did buy shares during that period. We thought that there was lower price than was appropriate, so a buying opportunity. And now that the money market thing is not as bad as it could have been, we think that our stock is underpriced. And so we will review as we buy shares based on that thought process.

Speaker 3

Thank you.

Operator

Thank you very much. Your next Question is coming from Mike Brown of KBW. Mike, your line is live.

Speaker 8

Great. Good morning, everyone. You just touched on the dynamic with the Russell removal there. We did receive a number of inbounds about that dynamic and the resulting technical pressure on the stock. Can you just touch on this dynamic a little bit more?

Speaker 8

And I guess given your Governance is really kind of part of your investment strategy. Why not meet the requirements to stay in the index?

Speaker 2

So I'll steal the first part

Speaker 3

and Chris can answer the last question. The dynamics are hard to understand and know exactly, but we looked at our volume And saw that before the index date, our volume picked up and the price came down Leading up to it, if you look at a month or so beforehand, the price went kept going down, down, down and the volume went up. Whether that was people addressing and preparing their portfolios in advance of the Russell change Or whether it was people betting or selling based on what they thought was going to happen in the money market business, you can pick. I think it was probably both. After you had a big volume day, I forget 12,000,000 shares or something on the day that Russell changed.

Speaker 3

And actually the few days before the stock, we kind of outperformed relative to the market. And then roughly the 5 days after, we kind of underperformed. So maybe that was the people who were tied to the Relative index, but not actually index funds, were adjusting their portfolios. We thought that was a buying opportunity And participated. And I think it's in the rearview mirror now because Our share trading seems to have settled down to more historical levels.

Speaker 2

So Changing in order to get with an index, didn't strike us as the way to do the strategy for Federated Hermes Inc. The index people decide not to be an index doesn't mean that we have to decide to join their non index index. We have had this structure going all the way back into the 60s when we went public. It was an intervening time in the 80s when we were owned by Aetna. But when we bought ourselves back in 'eighty nine, we went back to the same structure.

Speaker 2

And in conjunction with looking at The funds, the money that we manage on the institutional side, it's been our conclusion and it's worked well for us That it's very clear as to who is in charge and who is managing the money. And we're not worried about who's having lunch with whom. And we are able to therefore focus on investment management performance and growth of the enterprise. I would also add that because we do generate cash flow, we can take these incongruities in the marketplace

Speaker 8

Okay. Thank you for the thoughts there. And then just as a follow-up, If I just take approach the capital allocation question a little bit differently, just are you seeing any opportunities on the M and A front and how are you thinking about some of the Strategic opportunities that would best fit Federated that you think could kind of take you on your next evolution of growth here?

Speaker 3

Okay. This is Tom. We have we've talked about before looking in the real estate Development area, that's going to be a long, long process. It's going to probably be an acquisition in the U. S.

Speaker 3

And we've got to get the skills and expertise that we have in London and trying to bring that over here We'll require boots on the ground in the U. S. And so that's a long term thing. It has to fit with us. It has to Culturally and all the things, it took us a long time to find the acquisition in Hermes.

Speaker 3

I would expect That's going to take us a long time to find something that makes sense for us there too. That kind of be the biggest thing. We don't have Needs in growth or want or value. Those would probably I would expect to be more roll up type of things that happen. And then of course in the Money Fund business, We're all in, in the MoneyFam business.

Speaker 3

And if someone wants to be out, we are a highly interested player.

Speaker 8

Okay, great. Appreciate the thoughts.

Operator

Thank you very much. Your next question is coming from Brian Bedell from Deutsche Bank. Brian, your line is live.

Speaker 9

Great. Thanks. Good morning, folks. Thanks for taking my questions. First on the money market side, sort of a combo question on the proposals from the SEC, particularly The liquidity rules, I think going from 10% to 30% in, I think overnight and weekly to 25% 50% that proposal, Which subset of funds would that impact on the money side for you?

Speaker 9

And then I guess, sort of connected with that, I I know you tend to manage relatively conservatively across the money fund asset class. How do you See the competitive yield dynamic on the retail side of the business. Sometimes you get obviously flows chasing Hot sort of hot money chasing higher yielding and you don't typically engage in that, but maybe just some perspective On where you see your competitive yields in the marketplace and then how that might change in the near to intermediate term?

Speaker 3

Debbie? Sure.

Speaker 5

I can take that. So going from 10% in overnight and 30% in weekly liquid assets that are required In the current role, the 25% in dailies and 50%, which will be required in the new roles. The only funds that, that will impact would be the prime funds. First of all, the municipal funds are exempt From any kind of daily liquid asset requirement. So it's only weekly liquid assets that impact them.

Speaker 5

And from both a municipal and a government standpoint, They operate well in excess of those either 25% or 50% requirements for dailies and weeklies. So, it's really the prime funds that will be impacted. And for the most part, since 10 30 and especially the 30 had a negative consequence of the potential for dates and fees. We tended to never manage our funds with 1030, But rather something that was probably closer to 2040. So 2040 going to 2550 is impactful.

Speaker 5

It will have a basis point impact in those particular products, Prime Retail and Prime Institutional, but they should still be able to maintain their competitive spread over the government sector, which is where they're mostly compared. From a competitive yields perspective in the market, Our products at this point are for retail, especially are kind of the top of the heap from a standpoint of what their alternatives Generally speaking, for cash management products, mostly, our highest competitor outside the industry Would be the bank deposit market, the retail bank deposit market and that continues to lag from a standpoint of What those banks are paying in an administered rate versus what the funds are earning and passing through as a market rate. On the institutional side, again, as we as yields peak plateau and start to go down the other side, the comparisons to the direct market for the institutional Customers will also become very attractive at that point.

Speaker 9

That's great color. And my follow-up will be on the strategic value fund. This Chris, as you described this, it's typical classic performance versus the peer group and now we're in this Mega CapTek, Raleigh. Do you maybe just some color on your sales force Management. And the advisors that you're selling this product to, is it resonating that this is probably a good buying opportunity from at least a mean reversion Perspective or do you really do advisors typically chase performance on this And buy it more when it's actually outperforming?

Speaker 2

Well, you need to look at that in terms of when the money came in, how long it's been there And how the advisors presented the product. Last year when it was number 1, this is the exact experience we had before. The money that comes in because it's The number one fund is the money that goes out, when that performance changes. However, the money that went in because it was a growth dividend story, stays in. And so what the FAs, prefer over the long haul is us sticking with our knitting And staying with the concept.

Speaker 2

And the PM and the team have written books on these subjects. We're coming up with a new one as we speak. In terms of the efficacy of this type of investing, Recent performance to the contrary notwithstanding. So the core group of those fund holders remain Very, very steady. And that's why I mentioned the 7.4% return, over all over the last 10 years Because that's what it takes.

Speaker 2

But at the margin, when the money comes in, when it's number 1 and because of number 1, It goes out when that backs up.

Speaker 1

And Brian, I would just add, we've had continue to have the strategy added And added 2 platforms and exposed to growth opportunities within platforms, Precisely because it is an alternative to the growth oriented small group of stocks driving returns. And I'd also mention the ETF that we launched late last year, it's around $60,000,000 in assets, but we're having the same kind of experience. It's being Added as an option. And so from an advisor standpoint, it's a strategy that they want to continue to have access to.

Speaker 2

One other comment would be, don't forget, they're pretty near $500,000,000 worth of gross sales in that fund in that quarter when we had the net redemptions. So the product is alive and well. And our commitment to the whole thing is demonstrated by what Ray just mentioned, Namely the new ETF, maybe that wasn't the best time to come out with it. But on the other hand, it's a long term look At a viable product for the long term.

Speaker 9

Yes. That's great perspective. Thank you.

Operator

Thank you very much. Your next question is coming from John Dunn from Evercore ISI. John, your line is live.

Speaker 10

Good morning. Thank you. Maybe continuing on the theme of money market roll ups. Can you frame for us with the higher rates with closer to the plateau and maybe some more certainty around regulation. How do smaller players look at that environment, maybe the guys in the 10 to 25 range?

Speaker 10

Does it give us more confidence of joining up with someone bigger or it doesn't work that way and it's just more episodic?

Speaker 2

It depends on how the money got in there and who controls the money at the moment of redemption. So there are 50, maybe 60 listed money market fund players. The top 25 Have all the assets, the top 20 are the only ones who really compete for the big assets. And it all depends on How that fits into your regular business? So we have a sales force That goes around and calls on all the players in the Money Market Fund business to, as Tom pointed out, be a warm and loving home, Should they decide to change their mind on doing this.

Speaker 2

And it's episodic. There was no avalanche after the last Go round of SEC regulation. I don't expect an avalanche out of this one. But periodically, CFOs, CEOs and managers decide That the time has come, Lalor said, to get out of it. And that's what we're looking for.

Speaker 2

So it I don't believe it will be A catalyst to an

Speaker 10

avalanche. Got you. And then you talked about strategic value dividend. But outside of that, can you talk a little more about your other equity strategies that you think can see pickup in demand to kind of soak up some of those

Speaker 2

Well, the 2 MDT offerings have been very excellent, the large cap and the mid cap growth, Picking up both regular fund business and large institutional business, and their growth is excellent. You look at the International Leaders Fund, that's another one, that has excellent performance across the timeframes And is a very good offering inside the retail distribution. If you go across the pond and you look at Asia ex Japan, this fund is outstanding in terms of its flows and performance. The GEMS product, the emerging markets fund, is also continues to win Management. I'm probably skipping some of my children whom I love dearly, but those are the ones that pop up immediately.

Speaker 10

Great. Thank you.

Operator

Thank you very much. Your next question is coming from Ken Worthington of JPMorgan. Ken, your line is live.

Speaker 11

Hi, good morning and thanks for taking the questions. Chris, SEC filings suggest you sold a substantial portion of the stock that you owned during 2Q. Some digging suggests that some of this was done by a trust and others were just transfers to other vehicles controlled by your family. But the end result seems like your direct interest in Federated is substantially lower than it has been in the past. So maybe first, can you explain What appears to be selling during the quarter, how much stock do you directly own at this point?

Speaker 11

And is that enough to adequately align your interest with shareholders?

Speaker 2

Well, as I just said, I love my children too. And So there was no selling of the stock. There was transfers in trusts that are controlled inside our family, meaning Me, 8 kids, 6 spouses and 40 grandchildren. And as to my commitment to the enterprise, It goes way beyond the stock interest in terms of our family and my commitment in terms of what's going on. I don't know exactly how many shares I have right now.

Speaker 2

I could find that out and get back to you on that one. But the big bunch of shares are still owned and are by the family and are still very, very much A role in adding incentive, but what I'm telling you is there's plenty of incentive In this whole family, to keep the ball rolling. Remember, not almost 20% of that stock It's owned inside the Fort and Counting the Family Enterprise. And so It's a very good deal. Now one thing that did occur Was that my mom, who passed away December 12th last year, Did sell her shares of which I am the trustee.

Speaker 2

And so that in effect counts against me. But that's all related to distributions due to estate planning to various entities, various charities And various children and grandchildren and great children. P. S, The 179th great grandchild of my mother was born 2 days ago.

Speaker 11

Congratulations for that. And thank you for answering. Just as a follow-up, money market Management. The fund share you highlighted fell from 7.4% to 7.2% in 2Q and the dynamics for retail and institutional highlighted by Debbie 2Q were true for your peers as well as for you during the quarter. So what drove the loss share in 2Q?

Speaker 11

And would you expect that loss share to rebound in the second half of the year? Debbie?

Speaker 5

Sure. I think what drives it is that If you look at other money fund providers that have a larger retail Disadvantages us to some degree during an environment when retail is growing more than institutional. We do expect that to even itself out as rates increase only in a minor way going forward, plateau And then ultimately start going down in a slow fashion, back down again. We do expect that to influence then the institutional side of flows in a much larger way, where we play a larger role in that market.

Speaker 11

Okay, great. Thank you very much.

Operator

Thank you. And that appears to be all the questions that we have in the queue today. I'm going to hand back over to the management for any closing remarks.

Speaker 1

Thank you very much and that concludes our call. Thank you for joining us today.

Operator

Thank you, everybody. That does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day and a wonderful weekend. Thank you for your participation.

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Earnings Conference Call
Federated Hermes Q2 2023
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