Federated Hermes Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2024

There are 13 speakers on the call.

Operator

Good day, and welcome to the Federated Investors Management Company Q3 2024 Analyst Call and Webcast. At this time, all participants are on a listen only mode. After management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to the President of Federated Investors Management Company, Ray Hanley. The floor is yours.

Speaker 1

Good morning, and welcome to the FHI Q3 call. And 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 and A are Saker Nassebe, the CEO of Federated Hermes Limited and Debbie Cunningham, the Chief Investment Officer for MoneyMarkets. 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.

Speaker 1

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. Good morning, all. I will review Federated Hermes business performance and Tom will comment on our financial results. We ended Q3 with record assets under management of 800,000,000,000 driven by money market assets of $593,000,000,000 and record fixed income assets of $100,000,000,000 Looking first at equities. Assets increased by $5,700,000,000 from Q2 to $83,600,000,000 due mainly to market gains of $6,500,000,000 partially offset by net redemptions of $1,400,000,000 The strategic value dividend strategies had net redemptions of $779,000,000 in the funds in the SMA combined, whereas in Q2 that negative number was $1,900,000,000 We had Q3 positive net sales in 15 equity strategies including MDT Mid Cap Growth, MDT Large Cap Growth, MDT All Cap Core and U.

Speaker 2

S. Mid Equity Usage Fund. We continue to have success growing our MDT fundamental quant strategies and have recently expanded the MDT product set. This year, through the end of Q3, MDT Fund and SMA strategies have had about $2,200,000,000 in net sales compared to a little over $400,000,000 in net sales in 2023. In Q3, we expanded the distribution opportunities for MDT Strategies with the launch of 4 new active ETFs and 1 new collective investment trust.

Speaker 2

We continue to look to these kinds of product enhancements in a variety of strategies to strengthen growth opportunities in domestic and international markets. Looking at our equity fund performance at the end of Q3 and using Morningstar data for the trailing 3 years, 59% of our equity funds were beating peers and 41% were in the top quartile of their category. For the 1st 3 weeks of Q4, combined equity fund and SMAs had net redemptions of $51,000,000 Turning now to fixed income. Assets increased by about 4,900,000,000 dollars in Q3 to a record high of $100,200,000,000 Fixed income funds had Q3 net sales of $305,000,000 and fixed income separate accounts had net sales of $1,100,000,000 The total fixed income net sales therefore were $1,400,000,000 compared to $1,400,000,000 of net redemptions in the 2nd quarter. Fixed income fund net sales were driven by about $515,000,000 of combined net sales in total return bond fund, ETF and collective investment fund.

Speaker 2

Fixed income separate account net sales were driven by institutional multi sector strategies and by the core plus SMA strategy. We had 21 fixed income funds with positive sales in Q3, including total return bond fund net sales previously mentioned and ultra short

Speaker 3

the government ultra short fund. Regarding

Speaker 2

performance, at the end of Q3, using Morningstar data for the trailing 3 years, 37% of our fixed income funds were beating peers and 18% were in the top quartile of their category. For the 1st 3 weeks of Q4, combined fixed income funds and SMAs had net sales of $365,000,000 In the alternative private markets category, assets increased by $622,000,000 in Q3 to $20,700,000,000 due mainly to the impact of FX rates, partially offset by net redemptions. We are in the market with 3 programs, the Federated Hermes GP Innovation Fund II, which is the 2nd vintage of our Pan European Growth Private Equity Innovation Fund. The first close in this mandate was in 2023 for approximately $110,000,000 Our target raise is 300,000,000 The first vehicle raised about $240,000,000 Next, European Direct Lending III, the 3rd vintage of our European Direct Lending Fund. We had our first close in Q3 for approximately $235,000,000 Our target raise is $750,000,000 EDL1 raised about $300,000,000 dollars and EDL2 raised about $640,000,000 Next, European Real Estate Debt Fund, a new pool European debt fund.

Speaker 2

We're targeting a Q1 first close and plan to continue marketing in 2025. Our overall target is $300,000,000 We are also developing the Global Private Equity Co Invest Fund, the 6th vintage of the PEC series, PEC, targeting a Q1 launch. The target raise is $500,000,000 PECs 1 through 5 raised about $400,000,000 to 600,000,000 dollars in each fund. We began Q4 with about $1,500,000,000 in net institutional mandates yet to fund into both funds and separate accounts. About $1,400,000,000 of total net wins is expected to come into private market strategies with wins in private equity and direct lending and outflows in absolute return credit.

Speaker 2

Fixed income expected net additions are about $1,000,000,000 with wins in ultra short duration, sustainable investment grade credit, emerging market debt, core ag government bond with a modest known loss in high yield. For equities, we have 644 in wins offset by 1,500,000,000 of known redemptions, nearly all of that is from a sub advisory account that will be internalized by the fund sponsor in Q4. Moving to money markets. In Q3, we reached another record high for money market fund

Speaker 3

assets of $440,000,000,000 and

Speaker 2

total money market assets of the aforementioned $593,000,000 Total money market assets increased by $6,400,000,000 in Q3 as money market fund gains of $14,800,000,000 were partially offset by seasonal money market separate account asset decreases of 8,400,000,000 dollars Our money market fund assets peaked at about $447,000,000,000 on September 23 and decreased by about $7,000,000,000 over the last couple of days of the quarter. We believe a late quarter jump in SOFR rates led to certain investors shifting some assets into the direct market. We also saw certain large clients using money market fund assets to pay down debt going into quarter end. Q3 saw the first of several expected reductions in the Fed funds target rate, driving substantial growth in industry money market fund asset levels, particularly in August September. Looking ahead for the rest of 2024 and into 2025, we believe that market conditions for money market strategies will continue to be favorable and that money market fund yields will continue to be attractive compared to the direct market and bank deposit rates.

Speaker 2

Our estimate of money market mutual fund market share, including sub advised funds, was about 7.32% at the end of Q3, down from about 7.45% at the end of the second quarter. Looking now at recent asset totals as of a few days ago, managed assets were approximately $799,000,000,000 including $594,000,000,000 in money markets, dollars 83,000,000,000 in equities, dollars 99,000,000,000 in fixed income, dollars 20,000,000,000 in alternative private markets, dollars 3,000,000,000 in multi asset. Money market mutual fund assets were $441,000,000,000 Tom?

Speaker 3

Thanks, Chris. Total revenue for Q3 increased $5,900,000 or 1% from the prior quarter due mainly to $5,100,000 of higher revenue from money market assets, dollars 6,400,000 from the impact of an additional day in the quarter and $2,600,000 from higher revenue from equity, fixed income and private market assets combined. These increases were partially offset by $5,900,000 of higher waivers related to fund proxy costs as discussed during last quarter's call. Total Q3 carried interest and performance fees were $3,500,000 compared to $2,800,000 in Q2. Looking forward, the Q4 sub advised account redemption Chris mentioned will impact annualized revenue by approximately $6,000,000 The impact for Q4 is expected to be approximately $0.75 Q3 operating expenses decreased by $65,200,000 from the prior quarter due mainly to the $66,300,000 non cash intangible asset impairment charge in Q2.

Speaker 3

All other operating expenses increased by $1,100,000 from the prior quarter. Compensation and related expense included an increase in severance and related costs of $3,700,000 primarily from our U. K. Office as we take steps to enhance the sustainability of our operations there. FX related gains decreased the other expense line item by $5,200,000 from the prior quarter as the pound strengthened versus the dollar.

Speaker 3

We expect the tax rate to be in the 26% to 28% range for Q4 and for 2025. At the end of Q3, cash and investments were $565,000,000 Cash and investments excluding the portion attributable to non controlling interest was $515,000,000 Kelly, we would like to open the call up for questions now.

Operator

Certainly. The floor is now open for questions. Your first question is coming from Patrick Davitt with Autonomous Research. Please pose your question. Your line is live.

Speaker 3

Hey, good morning, everyone.

Speaker 1

Good morning.

Speaker 4

First one on money fund market share. I guess the $15,000,000,000 money fund inflow you announced last night was a lot better than the publicly available data we could see. So maybe the real time data we're getting is just wrong, but it still certainly looks like you lost some flow share in 3Q and that continues in October. So do you think you're losing flow share? And if so, what is the nature of these big chunky flows we're seeing going to your competitors that has you missing out on those big chunky mandates?

Speaker 4

Thank you.

Speaker 2

Well, first of all, over a longer term period, as you've heard me say 100 times, we end up with higher highs and higher lows over the 50 years we've been doing the money market funds. And so a little noise here in the quarter does not disturb us. I mean, we have one client who took $6,000,000,000 out, because they were paying down debt. And that's the kind of lumpy things that happen that you got to be ready for and that's just part of normal life. I would like Debbie to comment briefly on this dynamic from her perch on the tree.

Speaker 5

Thanks, Chris. And thanks for the question, Patrick. And ultimately, Chris' explanation, the information that was provided with regard to the quarter explanation of SOFR rates, that's a very real one. We have a lot of institutional clients who go between the direct market on an overnight basis and money funds. And really since the Fed rate cut in mid September, most of those flows have come into the fund side of the market.

Speaker 5

However, with the jump in SOFR rates at the end of the quarter, there were some that went back out into that sector of the market temporarily on a direct basis. We also are comparing ourselves against a very large group of competitors in the marketplace. In particular, it seems as though some of the larger retail players that are in the direct retail market have been gaining market share on a little bit faster basis. I believe that might have something to do with some of the heat that they've been taking with regard to deposit rates and the customers that have been earning the lower deposit rates rather than money funds. So I believe some of that has been more directed into the money fund sector.

Speaker 5

Obviously, that's not something we can control or are necessarily even really part of. And then it also looks like in some of our banking competitors, there are some internal funds that have been going along those ways. So in general, I think there's lots of explanations. We are not seeing anything on a client basis that would lead us to have concern. In fact, I would say exactly the opposite.

Speaker 5

When you look at the complexity and the variation of the client base that we have broker dealer, RIA, trust, wealth management, family offices, they all seem to be very pleased and continuing their increased participation with us.

Speaker 4

Very helpful. Thank you. And then a quick follow-up on the other expense line. You mentioned $5,200,000 decrease from FX. So is the right run rate there looking into 4Q kind of in the 3.5% to 5% range?

Speaker 4

Just trying to make it clear what that number should have been without the FX noise. Thank you.

Speaker 3

Well, if there were no changes in the rate, the pound went up. And so giving a run rate on that, if the pound goes up, we're going

Speaker 6

to get

Speaker 3

more FX help on the expense side because we're hedging our expenses in London. If the FX rate if the pound goes down versus the dollar, it will go the opposite way.

Speaker 4

Yes. I mean more just like what's the kind of regular way number there in the quarter without any FX impact is what I'm trying to say.

Speaker 3

Okay. And I'll take off 3 fourths of the number because we hedge basically a year's expenses. And if the pound doesn't change for the rest of the year, then we will have this quarter or Q3's expenses in there at the higher rates and we'll get the higher expenses in the next three quarters. So if you want to look at it that way and say it's 3 quarters of the number, is going to be higher expenses coming through not in that category, not in the other category, but in all the rest of them.

Speaker 4

Got it. Okay. Thank you.

Operator

Your next question is coming from Ken Worthington with JPMorgan Chase. Please pose your question. Your line is live.

Speaker 7

Hi, good morning. Maybe first on regulation. I believe in October, the final wave of the SEC's Money Market Fund Reform rules took effect. Can you just remind us what went into effect and to what extent you're seeing an impact to interest in your prime funds?

Speaker 2

So we have seen unlike the last round back in the day where basically almost $1,000,000,000,000 left those funds, the customers are basically sticking with it and our prime funds are up. And if you look at the stats for say a year, the industry assets are up to over $1,000,000,000,000 and that's up 17% over the year And our assets on that category are up 25%. So we're ahead of the industry on that category. So our clients, I think, were quite appreciative of the fact that we hung in there with those funds, even though we did consolidate from 3 of those funds down to 2. But we went through all the work to make the extra so many basis points available.

Speaker 2

Ray?

Speaker 1

Ken, if you if we isolate just the prime money market funds for the 1st 3 weeks or so of October, they're up just a fraction. So if there have been any changes, we would have had puts and takes because the prime funds are still very attractive from a retail standpoint. We're still getting considerable interest there even post the rate cut yields are very attractive. And but there's no discernible impact in October from the last of the rule changes going into it.

Speaker 3

I'd like to add a couple

Speaker 2

of other things about the rules. You sort of hinted, hey, what went in? Well, remember that they told us we had to have 25% in daily cash. Well, that has a big impact on how these funds work and how people look at them. The other thing is these funds were already a variable net asset value type funds.

Speaker 2

So people aren't keeping the money they need tomorrow here. They're willing to deal with this modest changes in NAV. So I think those are important dynamics. And I'm sure we skipped something that Debbie is just anxious to say.

Speaker 5

You're always very thorough, Chris, but I think ultimately in the end, we had absolutely no shareholders leave, our institutional prime or our institutional muni sectors because of the rule changes that went into effect on October 2, this year, Ken. And yes, there is a daily process by which we now have to for those funds, which I might note are the smallest sector in the total universe of money funds. But on a daily basis, we, on a continuous monitoring basis have to review where we are from a flow activity, whether we're in a net purchase or a net redemption phase. And if we get beyond a 5% net redemption phase, we also have a simultaneous process that is running that would look at the price, the cost of redeeming what that greater than net 5% redemption phase would be. And if that price is greater than 1 basis point, which ultimately with the 50% now that's a weekly liquid assets always at par, that's a very difficult hurdle to exceed, then we would have to review the potential for adding some sort of AC to those who are redeeming.

Speaker 5

In the end, this is a process that we are running daily. We are monitoring on a continuous basis. We did historical back price testing, back back testing on it prior to the implementation of the roll. And we're very comfortable that the impact of this on the marketplace and the actual implementation of this that would result in a fee would be very, very few if any times.

Speaker 7

Okay, great. Tom, maybe to follow-up for you, you mentioned the proxy costs and I think there's director costs that flow in maybe this current Q4. Can you remind us of the dollar amounts and where those costs hit? I think some are contra revenues rather than outright expenses.

Speaker 3

Yes, Ken. The proxy costs, when we said talked about it last quarter, okay, they would happen in the 3rd Q4, we didn't know exactly the timing. Well, all the expense came in the 3rd quarter and it's a contra revenue $5,900,000 and so that should not happen it will not happen in the 4th quarter.

Operator

Your next question is coming from Bill Katz with TD Cowen. Please proceed with your question. Your line is live.

Speaker 8

Okay. Thank you very much. Good morning, everybody. So just going back to money markets shockingly, just big picture down. If I look at where you ended the quarter and where your intra quarter update is, at what point do you start to think you see the behavior more robustly migrate back to money markets, if you will, because what we continue to hear from many of your peers, whether it be the traditional managers or the alternative managers that money sitting on the sideline is going to find its way into risk assets, whether it be fixed income equity or alternatives.

Speaker 8

And I'm looking at sort of flattish quarter to date update despite the 50 basis point cut in the Fed. So at what point might we see the behavior change? And how do you sort of see that interplay between maybe the retail part of the business and the institutional side? And maybe you can help quantify that mix

Speaker 9

for us.

Speaker 8

Thank you.

Speaker 2

So it's really tough to come up with a point or a catalyst, Bill. But we are seeing from the financial advisors, a lot of interest in the short duration, a lot of interest in lengthening duration. We've covered those themes before and we're seeing moves there as I tried to comment on the changes in our fixed income flows during my opening remarks. But these things do not happen in a catalytic way. And it is 1 FA and 1 customer and 1 firm at a time.

Speaker 2

In terms of the dynamic from what Debbie might see on the money market side, I'll let her comment.

Speaker 5

Thanks, Chris. I think I mentioned on this call before that when you look at the flows in 2023 and really through mid year of 2024, 80% of the flows came from retail and that retail trade was out of deposits and into money market funds and you could almost follow it dollar for dollar. That will continue because banks have already started lowering their deposit rates after having never raised them to the rate of money market fund market rates. So that trade will continue, maybe not with as robust a pace, but it will continue. Of the other 20% inflows, I'd say probably 10% to 15% is what you're referring to Bill as sideline cash, Those that would be naturally in riskier assets with higher return potentials and longer timeframes associated with those.

Speaker 5

And we're starting to see those move. You saw you heard from Chris' introductory remarks, the increases that we're seeing in various of our equity and longer term fixed income products and that's absolutely a portion of that sideline cash moving back into and fueling those markets in a positive way, which we obviously want to see occur. It's a reflection of healthier markets and healthier economies. On the institutional cash side, that was probably only 5% to 10% of the asset flow in the money markets that we saw. We would expect that as the Fed cuts rates, which we are not expecting to be in that 50 basis points clip, which was sort of a surprise and then start to this declining rate cycle.

Speaker 5

But as they continue to go from a 5 plus percent rate, down to what we think is a terminal rate of around 3%, you're going to see that institutional flow pickup. It's not going to be it's not going to reduce the strength or it's not going to match the strength that we saw in the retail flow, but it will still be a positive. So that ultimately in the end, when we look at industry assets as reported by Crane at this point as an industry source at $6,800,000,000,000 I can still see $7,000,000,000,000 by the end of this year growing further into 2025 and ultimately FHI catching a good portion of those flows.

Speaker 1

And Bill, just on your question about the mix. So the terms are not precise between retail and institutional, but an estimate of that for us would be about 60% of the money market fund assets, including what we sub advised, about 60% would be considered institutional and 40% retail, which for us is still coming through an intermediary. And by the way, that sixty-forty split would be about what the industry split is as well using ICI data.

Speaker 8

That's helpful. And then maybe just a question maybe for soccer or never, and this might just be rounding. So you laid out nice pathway for several funds in the market or sort of coming into the market as we look out over the next 6 to 12 months. But you also round maybe just rounding, but the AUM and the all its bucket does seem to be down about $700,000,000 quarter to date, again it might be rounding. Can you talk a little bit about what we should expect in terms of distributions as we look out through the next 6 to 12 months or realizations coming out of the portfolio?

Speaker 8

And can you actually grow the alt bucket given all the growth opportunities against that? Thank you.

Speaker 3

Zachary, your turn.

Speaker 10

Thank you. Well, thank you very much indeed. And you're right that part of the nature of particularly private equity funds, but other assets of private markets is there's constantly a two way flow, which is the funds that you've got the clients expect you to pay out and then you get some more funds coming in. What I can and I can't provide a very detailed structure of what we're going to see, but I can say this. If you look at all the funds that you've heard Chris talk about, the innovation funds, direct lending funds, if you speak about the Global Private Equity Fund, all of these funds are growing by going back to our client base.

Speaker 10

And in many cases, they're reupping at a higher level than they had in before. Now we can't quantify this until the close is finished, but the general trend as far as we can see is that not only our clients reupping, but that there is, in some cases that we see so far, an increase in reupping, but we can't confirm that when all the closes are finished. The second aspect of it is we're not sitting still. We're coming up with new funds within the alternative state of the old space, which gives us extra close. You heard Chris again mention real estate debt fund, and we're doing some stuff in infrastructure as well.

Speaker 10

So it's a new way that we think that the re ups will be from existing clients will increase. We're adding to our client base. That's also important. So there's new clients coming in and we're innovating our funds and increasing them. All of that leads us to feel that we continue to generate higher revenues as we go forward.

Speaker 10

That's it.

Speaker 3

Okay.

Operator

Your next question is coming from Kenneth Lee with RBC Capital Markets. Please pose your question. Your line is live.

Speaker 9

Hey, good morning. Thanks for taking my question. Just one on the money markets. And I think you mentioned previously that you saw some clients, corporate clients shift money on an overnight basis between direct paper and money markets. Just want to get a little bit more detail on that.

Speaker 9

How easy is that? And to the extent that there's some uncertainty around the Fed rate cuts and the trajectory there, Could you see some lumpiness in terms of money market flows just based on how easy it is to shift one way or the other? Thanks.

Speaker 2

Debbie?

Speaker 5

So for the vast majority of our clients, Ken, it is not an easy switch because they don't repo, basically the SOFR rate indicates, what type of return you can get on overnight repo in the marketplace. Overnight repo is not really security, it's a contract. And as such, you have to have repo contracts in place with dealers and banks in order to go into that sector of the market. So for the vast majority of our clients, that is not possible. But for very large clients, large tech firms from the Midwest and West Coast, large oil firm like large energy firms, some of the large banks that are players in our market, they have those contracts available and usable by them on a daily basis and are able to switch pretty easily.

Speaker 5

So even though it's only a small majority of the actual customers that have that capability to do that switch on a daily basis if they choose to do so. It's still a large volume when that dynamic in the market comes into play.

Speaker 9

Got you. Very helpful there. And just one follow-up, if I may. Any updated thoughts around capital management and outlook for any kind of potential inorganic opportunities out there? Thanks.

Speaker 3

Well, you saw we approved a new share the Board approved a new share repurchase program of 5,000,000 shares. We have $1,200,000 left on the existing one. And we bought over 800,000 shares last quarter, and we expect to still be active. We don't think the price is at an appropriate level. Therefore, we expect to be active.

Speaker 3

On the acquisition side, nothing to point to. We're still working away in a lot of different areas, but I don't have anything to get you excited about or get us on an announcement process.

Speaker 9

Got you. Very helpful there. Thanks again.

Operator

Your next question is coming from Dan Fannon with Jefferies. Please proceed your question. Your line is live.

Speaker 11

Thanks. Good morning. I think you mentioned in the prepared remarks $3,700,000 of severance in I think associated with Hermes. Curious if this is a part of a broader restructuring or cost cutting efforts that's more elaborate or more of a one off?

Speaker 2

I'll make an initial comment, then Tom will comment on the numbers. We always have a duty to run the business better. Tom?

Speaker 3

Yes. So 3.7 $1,000,000 is the severance number out of the London, primarily the London office. And we are looking across the board to, as Chris said, run the business properly and in a sustainable effort. You know that we had the impairment last quarter, and this is a look at that and make sure we are handling things in a proper fiscal manner. So yes, we're looking at things beyond just the severance in terms of expense reductions as we can try to manage it as best we can.

Speaker 3

Okay. Understood.

Speaker 4

And then go ahead. I think

Speaker 3

you ought to have Saker give a follow-up because we don't want to do expense things that hurt the business. We want to drive the business toward growth. And maybe Saker could give a comment on our expectations and excitement about the London office.

Speaker 10

Well, thank you very much, Tom. So just a couple of comments. As Chris said, we have a duty to manage the business, and that means managing the cost of the business. As we integrate the business together, as we get closer to working in the market, there are many opportunities to do 2 things. 1 is to become more efficient in the way that you run the business and the other one is to increase your opportunity.

Speaker 10

So the more efficient you kind of got the severance costs and you've heard Tom talk about other efficiencies that can be done through scale, through combined purchasing and so on. But that should not in any way, shape or form take away from the positive things that are happening. And they briefly, I can point to the following. One is, we have seen on the back of strong performance, interest come back to risky assets that we run here. I mentioned specifically sustainable global equity, global equity ESG, the U.

Speaker 10

S. Small and Mid Cap Fund and the Asia ex Japan Fund. And as I say, that came on the back of 2 things, better performance and also on the back of people coming back more to risk assets. We talked about private markets and the excitement of launching new vintages and new ideas and becoming known as a specialist player in the market. But we're also doing other stuff that's exciting.

Speaker 10

I mean, when we talk about money market funds, generally speaking, Federated Hermes has tended to concentrate mostly on the U. S. For the money markets. What we're now doing is bringing those to our sales force here out of Europe, and we've seen lots of positive responses. The presentations, the Sterling Prime Money Market Fund has hit an all time high with £8,400,000,000 So that gives you the potential of growth of money markets here in Malaysia, by the way, where we've seen flows coming in from 23 new family offices, totaling approximately $300,000,000 in money market flows.

Speaker 10

Not a huge amount yet, but it tells you about the potential that you can see coming through. MDT, which has had such a fantastic run for us in our home market, the U. S, you come to this market, we've been taking it out to our client base here. And again, we've had some very positive views within that. And you won't expect me to finish on a positive note without mentioning our stewardship business EOS.

Speaker 10

And I would say we've gone over $2,000,000,000,000 or we're at $2,000,000,000,000 of assets that we represent, and that includes the winning of a major U. S. State pension fund. So we can see the green shoots of recovery here, and we can see the effects of the right kind of investment paying dividends for both assets or funds managed out of London and managed out of the United States, but at the same time, you would expect us to manage our costs in a responsible and dynamic manner. Thank you.

Speaker 11

Great. That's helpful. And then just as a follow-up, you talked about a sub advised mandate loss in the quarter or I think prospectively. Can you just talk in aggregate what the sub advised total AUM is for you and maybe the context of the opportunity set for that? Is that a shrinking pool of assets or is it a bit of source of growth?

Speaker 11

Just curious how some more context around that part of the business.

Speaker 1

Well, in total, the sub advised accounts would be about $37,000,000,000 of our AUM. That's as of the end of the quarter. And that would be weighted toward cash to money market, but it does include equity and fixed as well.

Speaker 11

And has that been a growing source of AUM or shrinking?

Speaker 1

It's the money market part of it has been growing. It has a retail orientation. And on the institutional side, it's sort of pluses and minuses. It's been relatively stable.

Speaker 11

Understood. Thank you.

Operator

Your next question is coming from Brennan Hawken with UBS. Please post your question. Your line is live.

Speaker 6

Good morning. Thanks for taking my question. You guys saw a constructive outcome with the flows on the bond side. And I'm kind of curious whether or not given some of the struggles at a large bond manager, whether or not there was any change in either flows or RFPs that you noticed since late August or any interesting trends that you might note in retail versus institutional engagement regarding your bond offering?

Speaker 2

The clients were attentive to the incident you're talking about. And to some extent, we're there to help our clients when they run into challenges. So it's impossible for us to detect what asset flows came from, what challenges in the marketplace versus the regular blocking and tackling that we do all the time. So overall, you've seen money come out of that outfit and it went somewhere and we got some of it. But boy, that's hard to follow the bouncing ball.

Speaker 6

Sure, sure. That's why I was asking about whether or not there's a change in engagement post late August?

Speaker 2

It depends on what you mean by engagement. What goes on is when you are in the marketplace with your clients constantly repeating the sounding joy of the Federated Hermes product array, then when opportunities arrive, you're there to hit the bid. Or as my father used to say, if it's raining money, get your buckets out. And so, I think we are engaged with the clients all the time. It's not like, oh, let's go do something new.

Speaker 2

This is what we've been doing. And it's a lot like the football analogy. Those that are running hard and running to the ball, they're going to get an interception. Look at what Pitt did last night. Okay, let's get on with the meeting.

Speaker 2

All

Speaker 4

right. I don't know

Speaker 6

to run with the buckets or with the interception, but good enough. Thanks for taking my question.

Operator

Your next question is coming from John Dunn with Evercore ISI. Please post your question. Your line is live.

Speaker 12

Thank you. Could you maybe talk a little bit about the time to funding or the pipeline and directionally where you might expect it to go over the next year or so? And then also could you describe the kind of the temperature of institutional investors and consultants looking into next quarter and then 2025?

Speaker 1

I can talk about the timeline and then we'll get to the rest of it. So of course, in Q4, because of the sub advisory mandate that we talked about, we would expect negative from an equity standpoint and positive both fixed income and alternative. But those and fixed income is weighted, so that it is a pipeline amounts come in more over Q4 and Q1. Alternative has portions that come in more ratably. Some of that, a good chunk of it is money that's already been committed, but it is not yet earning fees.

Speaker 1

So you'll see that really on kind of almost ratable growth over the next several quarters out through the end of next year. So fixed income more front loaded, equity the negative more front loaded and then alternative more spread out.

Speaker 2

And in terms of RFP activity, it is very, very strong. And that's why on the fixed income side, I go to the trouble of listing the various mandates where we're actually scoring wins. You can go back to the beginning of the call and see the list. And it's a half a dozen real strong ones. And we see continued RFP interest there.

Speaker 2

So that's where that pipeline builds. And I just said in the answer to the last question, we're in the market all the time waiting, looking and bringing solutions to clients as needs change.

Speaker 12

Got it. And then I think we're all going to be talking more about active ETFs than we were in the past. Have you made any had to make any additions or behavioral changes to market the active ETF suite? And how significant do you think that segment can be for you guys?

Speaker 3

Well, we think it could

Speaker 2

be very big, very strong. Right now, the ETFs make up about 7%. I mean, the active ETFs make up about 7% of the overall ETF market. And they're continuing to have an increasing percentage of the flows, maybe up to 30% or something depending on what numbers you look at. And then if you look at our numbers that from the gang that we have, we're seeing good results in the total return bond fund and in the strategic value dividend fund.

Speaker 2

And the whole suite of products is now over $500,000,000 and I think Ray can give you the accurate numbers.

Speaker 1

No, that's about right. Over $500,000,000 weighted toward the two strategies that Chris mentioned. But we've had a lot of good response out of the gate on the MDT strategies that we recently added, both 4 of them that we launched active ETFs, one we launched also in a collective format. And we'll continue to look at the product line. You should expect us to continue to add to the active ETF menu over time.

Speaker 1

But we've certainly covered some of the bigger strategies both in terms of equity and fixed income with total return bond and strategic value.

Speaker 12

Thanks. Thank you very much.

Operator

Your next question is coming from Brian Bedell with Deutsche Bank Securities. Please proceed with your question. Your line is live.

Speaker 6

Great. Thanks for taking my questions. Just one back on the institutional cash management, and I know we've talked about that a lot during this call. Obviously, it's difficult to predict what types of cash flow needs those clients will have, both coming in and going out. But do you have a sense of, for those clients that are using your money market funds, what level of assets roughly at least are parked in overnight rate agreements?

Speaker 6

So almost like an addressable market, if you will, if they were to, let's say, switch all to money funds in a rate cutting cycle?

Speaker 2

Well, if someone knows how long our clients want to keep their money in and what percentage of them are thinking overnight, they'd be smarter than I. And that's why I mentioned the longer term trends 50 years, 1 years, numbers on Prime. And Debbie has gone through the catalog of the variety of clients that we have, which is an underlying strength to the business because they move at counter times, counterbalancing one from the other. And, I don't think we can go past this question without letting, Debbie have a comment.

Speaker 5

Thanks, Chris. Sorry, I was having difficulty getting it off of mute. Brian, we definitely have a very rigorous, know KYC, know your customer process. And so yes, we have various spreadsheets that provide information on expectations for various clients, their needs, their cyclicality to some degree and what their other options are. We have both from a sales perspective, close relationships with especially the largest clients and also from a portfolio management standpoint.

Speaker 5

And we review and look at that on a regular basis. And although when you look at it on an individual basis, Chris noted the $6,000,000,000 that went out right at the end of the quarter due to debt repayment, when you think of it in the context of the $600,000,000,000 that we manage in this type of liquidity, it's not a large number. Nonetheless, if you had $10,000,000,000 of those $6,000,000,000 altogether for all the same reason on all the same day, that would be a different type of environment. Thankfully, I think the complexity and the diversification of our clients works in our favor. And oftentimes, when you see a $6,000,000,000 outflow, you may see somebody else $6,100,000,000 inflows that offset that.

Speaker 5

In this particular case, it just happened to be highlighted because it was at a quarter end.

Speaker 6

Okay. But do you have a sense of what potentially could move over to institutional that's being allocated overnight right now then in aggregate?

Speaker 5

Yes. I think it's probably something that's less than 10% of the total assets at this point, which is not insignificant, but it's not out of the realm of consideration into the problematic phase, anything like that.

Speaker 1

Debbie, you're talking about from going out from money market to direct To direct securities. And I think your question is how much could go the other way?

Speaker 6

Yes. How much could go the other way? That's exactly right.

Speaker 5

How much could go the other way in going into riskier types of assets longer term

Speaker 10

use of equity?

Speaker 6

No, no. Going from direct overnight cash into money market funds when the

Speaker 5

Fed cuts Okay, okay, okay. So on the inflow side of things, well, I think going back to Ray's split of about 60% institutional, 40% retail, At different points in time, that number has been higher towards the institutional side. So I think it's somewhat substantial, probably at least another 10% to 20% of asset flows, as a potential if in fact money funds are able to maintain a yield that is better than the direct securities market, especially in a declining rate environment. That would have been very difficult to do after the Fed's initial 50 basis point rate cut back in September. The curve was anticipating faster cuts by the Fed and that we were not in agreement with that.

Speaker 5

So having difficulty buying longer dated securities to keep our yield for a longer period of time. Having said that, with some of the stronger economic numbers that have come to fruition over the course of the last 3 weeks, that has changed. And so we have been able the market has been able and given us the opportunity to maintain and lengthen our weighted average maturity so that we will maintain that healthy advantage over the direct securities market. And I think probably with that attracts some portion of increasing institutional flows over the next quarter.

Speaker 2

Brian, my answer to you is one word, 1,000,000,000,000, period. Then you go, okay, we could go through catalogs of where all that money is, but it's so much that we're certainly optimistic about our ability to play in that game.

Speaker 6

Yes. Okay. No, that is fantastic color. Thank you so much. I'll just finish up with strategic value.

Speaker 6

Performance has improved rather dramatically. It looks like I know you don't like to compare the front in the Morningstar categories, but your top quartile over the past 2 quarters, by our measure, you're top third in that over a 1 year 3 year timeframe. The product is still in outflows. Do you expect this performance to convert to inflows anytime soon?

Speaker 2

Anytime soon. I hate putting deadlines on it like that, but that's why I gave you the changes over quarter to quarter so that you could see what was going on. And we're seeing it in the marketplace. And we get comments now from the field like, boy, I'm sure glad I hung on to my strategic value dividend versus what the heck is happening with the performance on Morningstar with strategic value dividend. And months months ago that was the comment you were getting from the field.

Speaker 2

Now it's, boy, I'm glad I'm still there. And, it is still a way that, the underlying clients can keep some income, get in the market and buy the kinds of stocks that are owned in strategic value dividend. So yes, I would expect those trends to continue. Exactly when it will cross over to positive is really hard for me to predict.

Speaker 6

Yes. Fair enough. Thank you so much

Speaker 4

for all the color.

Operator

You have a follow-up question coming from Patrick Davitt with Autonomous Research. Please proceed with your question. Your line is live.

Speaker 4

Hi, thanks for the follow-up. Just a quick another quick housekeeping. On the $6,000,000 the $5,900,000 contra revenue, was that all in management fees or split across the 3 buckets? And then if there is some in management fees, how should we adjust the individual asset buckets? Trying to get our fee rates

Speaker 1

that way.

Speaker 3

Yes. So that was all in management fees.

Speaker 4

Okay. And how was it split across the equity buckets? I mean the asset buckets? Do you know?

Speaker 3

Well, it's every fund shares. Okay. And

Speaker 1

the best proportionally would be for modeling purposes.

Speaker 3

By the way, we got the vote. Good. It was successful.

Speaker 4

All right. Great. Thank you.

Operator

There are no further questions in queue at this time. I would now like to turn the floor back over to Ray Hanley for any closing remarks.

Speaker 1

Well, thank you very much. That concludes our call. Thank you for joining us today.

Operator

Thank you, everyone. This does conclude today's conference call. Please disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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Earnings Conference Call
Federated Hermes Q3 2024
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