Federated Hermes Inc Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ken Worthington - JPMorgan - Analyst : I wanted to start digging into the money market share. So it looks like the industry money market funds AUM increased about $110 billion in 1Q, suggesting inflows. I think the Federated money market fund AUM was up around $3 billion, suggesting outflows. And we know the money market fund business is very competitive. So maybe can you talk about the competitive environment, the shifts that you're seeing that might be driving this divergence in growth? And it feels like we've seen this since the Fed began to cut, so any comments there.

Question: Ken Worthington - JPMorgan - Analyst : I'm sorry. What I tried to say was you had $3 billion of increased money market fund AUM, which actually suggests outflows for Federated in money fund assets for the quarter. So the industry had inflows. It looks like you had outflows. That's what I was getting at. Deborah Cunningham - Federated Hermes Inc - Chief Investment Officer, Global Liquidity Markets, Senior Portfolio Manager, Executive Vice President, Federated Hermes, Inc. I'm not sure I follow the math on that, Ken. This is Debbie. The inflows were definitely positive. They were not as positive as some others in the industry. Maybe just to break the quarter down a little bit. First of all, I'd start by saying, usually, the first quarter is the worst quarter of the year on a cyclical basis for all the industry from a liquidity business standpoint. And this has to do with a lot of strength that comes from flows from the fourth quarter in a window-dressing manner, to some degree, reversing in the first weeks and early part of January of every year. That didn't happen this year. So that's a positive from an industry standpoint. What I'd also note is that from a percentage standpoint within the first quarter through the middle of March, our assets were up substantially more than what they ended up being positive for the end of the first quarter. That had a lot to do with -- starting with March 15, a substantial outflow due to corporate taxes that I think was probably a little bit worse for us just simply because of our larger institutional nature. And then secondly, towards the end of the quarter, it was a rougher quarter end. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 25, 2025 / 1:00PM, FHI.N - Q1 2025 Federated Hermes Inc Earnings Call And I think a lot of that had to do with what was happening from a broader macro perspective, with the tariff issues that had not yet been fully understood or announced, but concerns about them and the volatility that was happening in many of the other markets. Again, looking at our institutional nature, we had substantial outflows due to margin calls, I think, on other customer -- institutional customers, other assets that came out of their liquidity portions. It even carried that further now into the month of April. Personal taxes and additional margin calls from institutional customers continue to be a negative play despite the fact that it's been a general positive trend to today within the month of April. But definitely, a different first quarter than would be the norm in the money markets. Thomas Donahue - Federated Hermes Inc - Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc., President of FII Holdings, Inc. Ken, this is Tom. Just to give you the assets in the money markets. So December year end, we ended up at about [630] and March 31, '25, we ended up at [637]. And then more importantly, for our revenue is the average assets. So the money market average assets in the end during Q4 were [601;] and for Q1, were [639.8]. So just to --

Question: Patrick Davitt - Autonomous Research - Analyst : So I appreciate the tax payments always make late March, early April seasonally weak. So maybe could you frame what you're seeing in money fund flows since tax date? And then higher level, perhaps for Debbie, an update on where you think we are in that post-Fed rate cut institutional rotation into money funds that you've been talking about for some time? And then beyond that, have you seen any sign that the tariff noise is driving non-US clients out of US money funds? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 25, 2025 / 1:00PM, FHI.N - Q1 2025 Federated Hermes Inc Earnings Call

Question: Patrick Davitt - Autonomous Research - Analyst : As a quick follow-up, there's obviously been a lot of FX noise in your numbers the last few quarters. I guess, what is the steady-state number for that other line item without all of the FX noise now? And do you have an idea of what the impact is looking like so far in 2Q given all the FX volatility? Thomas Donahue - Federated Hermes Inc - Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc., President of FII Holdings, Inc. Okay. So we have over GBP100 million that we are hedging because of our UK office that earns revenue in dollars and has expenses in pounds. So it's a hedging thing. And yes, noise in Q4, the dollar versus the pound, the dollar was up. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 25, 2025 / 1:00PM, FHI.N - Q1 2025 Federated Hermes Inc Earnings Call And then in Q1, the pound was up. And so far, this quarter, the pound is up. We'll see what happens. In terms of what's the normal steady-state number in that other line, it's around $4 million.

Question: Bill Katz - TD Cowen - Analyst : So based on your intra-quarter update, I think you bought back about 600,000 shares to early March, and then you did 3 million-plus for the entire quarter, which would suggest a pretty substantial ramp even before the stock took an incremental hit with the whole post-Liberation Day market decline. So I guess the broader question is, what are the allocations for capital from here? And then just in terms of acquisitions, I appreciate you building out the alt platform. But are you looking at anything that might be a little more of size that could be a little bit more of a substantial shift in the profile of the ability to grow in the alts platform? Thomas Donahue - Federated Hermes Inc - Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc., President of FII Holdings, Inc. Yes. Bill, it's Tom. The -- we've bought 3 million shares -- over 3 million shares. And we just looked at what was going on and looked at our cash position. And we do have a number of things that we're looking at. There's nothing to announce or talk about. And some of them are maybe a similar size to the Rivington thing, and some of them are a little bit bigger. But of course, we'll have to see what happens there. In terms of the future for buying shares, we increased the dividend and we will remain active in the share price. I know last quarter, we talked about why didn't we buy more in Q4 when the price was in the 40s. And then the price went down, and we decided to buy more. We still think it's undervalued. And we will see basically each day what we're willing to buy. So that's giving no indication of what we're going to buy, but we will continue. We have about 2.7 million shares left and approved from the Board. So I would expect this year, for sure, that we would be renewing that with a new program.

Question: Dan Fannon - Jefferies - Analyst : Wanted to follow up on the strong equity flows in MDT in particular. Can you talk about the fee rate of that subset versus the active -- the rest of the overall equity franchise? And then maybe the performance of some of the products here of late given the strength in flows, how they have weathered here this most recent bout of volatility?

Question: Dan Fannon - Jefferies - Analyst : Got it. So just to confirm, these products are below the overall fee rate of the firm is what you said?

Question: Dan Fannon - Jefferies - Analyst : Okay, of the equity rate. And then what is the size of MDT as a percentage of the, whatever, $80 billion-plus of equity products?

Question: Dan Fannon - Jefferies - Analyst : And then just in terms of expenses, if I could just follow up, understanding the onetime dynamic with the VAT charge and some of the FX stuff, but is the rest of the line item, are these reasonable jumping-off points for the remainder of the -- as we think about 2Q and beyond? Thomas Donahue - Federated Hermes Inc - Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc., President of FII Holdings, Inc. Sure, Dan. Comp is a little higher because of the seasonal things I mentioned, the stock-based comp and the payroll and benefits in Q1. So we got to take a little bit off of there. Distribution, what are the assets going to be that flows with the assets, we hope that goes up. Systems and communications, we expect that to go up. Professional service fees and occupancy and intangibles, I don't see much changes. Advertising, that flows with when we're doing our campaigns, and we're starting campaigns. So that should go up a little bit. And travel, that ought to go a little bit up as our sales force gets out there more. When I say a little bit up in those categories, I'm talking like only $1 million or something like that for the next quarter.

Question: John Dunn - Evercore ISI - Analyst : Maybe just to extend the fee rate conversation a little bit, particularly the pipeline. You mentioned the MDT rate. But overall, it would seem that mix of the whole pipeline would be accretive. Could you maybe talk about where the blended average of the whole pipeline might be and where it compares to historical levels? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 25, 2025 / 1:00PM, FHI.N - Q1 2025 Federated Hermes Inc Earnings Call

Question: John Dunn - Evercore ISI - Analyst : Got it. And then the MDT ETF came up earlier in your prepared remarks. Could you just remind us like the outlook, how much AUM you have in active ETFs and the plan for maybe building out that roster?

Question: Patrick Davitt - Autonomous Research - Analyst : So I think you said MDT had $15 billion of AUM. So that's a pretty incredible organic growth rate. Are there any capacity issues with them taking in that much money at one time?