Federated Hermes Inc Q2 2024 Earnings Call Transcript

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

Question: Patrick Davitt - Autonomous Research LLP - Analyst : All right. Good morning, everyone. You've been pointing to a pickup in institutional money fund flows when the Fed starts cutting. You hinted at it again today. And now that bets on that happening soon are picking up. Could you speak to maybe the conversations you're having with those kind of accounts? Are you seeing the conversations pick up like you would expect that could point to, say, an early pipeline of more of those mandates coming in later this year? Thank you.

Question: Patrick Davitt - Autonomous Research LLP - Analyst : Got it. Thanks. Just as a quick follow up, how are you thinking about second half repurchases? You still have a lot of cash. The share price is still around $35. Can we take that to mean that you could pick that up a fair amount at this point?

Question: Patrick Davitt - Autonomous Research LLP - Analyst : Thank you.

Question: Adam Beatty - UBS Investment Bank - Analyst : Hi, thank you. Good morning. I just noticed among the top selling equity funds, there was a bit of a tilt this time toward smaller cap versus mid cap. And that seems to coincide with a bit of a rotation out of maybe the MAG-7 or what have you, large cap growth, into more of that broader emphasis. Just wondering -- it's fairly recent, so I'm just wondering how you're seeing that and whether your clients are pointing their conversations in that direction. Thank you.

Question: Adam Beatty - UBS Investment Bank - Analyst : Thank you. Appreciate the detail and the green shoots report there. Just turning to Money Market funds, one of the big topics of conversation in the wealth management channel has been the need to pay higher yields on client cash. And obviously, there are several different options that those firms have to do that, but I was just wondering if you see potential opportunity with that move. Thank you.

Question: Adam Beatty - UBS Investment Bank - Analyst : Sounds good. Thank you for taking my questions.

Question: Dan Fannon - Jefferies & Company Inc. - Analyst : Thanks, good morning. Just question on the fee rate. In the quarter itself, it came in a little bit better. So curious on the -- within money market funds or certain products that may be there are some underlying trends that maybe you're getting a little bit better. Then also, prospectively, as you think about that on a longer-term basis, how are you thinking about kind of the fee rate in the context of both where demand sits but also in terms of your products competitively in the market? Thomas Donahue - Federated Hermes Inc - Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc., President of FII Holdings, Inc. Well, the fee rate comes from the mix of all the assets, as you know, and we don't track that closely and think about that on a total basis. But we do look at each product and we have a monthly expense meeting at a fairly high level, looking at each product, not every product, every month, but we certainly cover all the products, analyzing where they fit in, what our prospects are, where is our performance, where does sales think we can generate more and more activity. So we are attentive to that very regularly and I think we have our products priced pretty well for success.

Question: Dan Fannon - Jefferies & Company Inc. - Analyst : Okay, thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 26, 2024 / 1:00PM, FHI.N - Q2 2024 Federated Hermes Inc Earnings Call

Question: Ken Worthington - JPMorgan Chase & Co. - Analyst : Hi, good morning. Thanks for taking the questions. So I'd love to get more color on the impairment charge for Hermes. Since the deal was announced, the markets are up quite a bit since you acquired at least the first tranche in -- I think it was '18, I know there was aspirations to launch Hermes and ESG products in the US and leverage that brand to grow. So what happened here? What didn't work out? Why the impairment? Thomas Donahue - Federated Hermes Inc - Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc., President of FII Holdings, Inc. Okay, Ken. We have to -- when we did the acquisition, we had to value the assets and the assets that we impaired this time and the assets that we impaired last time was the pooled assets, i.e., the funds. And so what happened really versus last quarter from where we were valuing things, we had the GEMs product, we had the Asia ex-Japan product. The GEM pad performance thing, which Chris just said, has turned around, but there were significant redemptions in there. It has Asia ex-Japan product, which has always had good performance, but has a significant China ownership, and we had significant redemptions in there. And then Chris mentioned in his comments, the $1.5 billion of redemptions on the fixed side because of the PM departure. And so when you add all of those negative flows up in there and look at the forecast, it runs right into how we have to value the things. And we had to take the impairment. In terms of excitement for what's going on, which we still have. First of all, we're still and will remain a global entity, and it's because of the acquisition that we were able to do that. And I think Saker ought to give -- he's here and he ought to give a few comments on the rest of the business and why we still are highly, highly excited about it.

Question: Ken Worthington - JPMorgan Chase & Co. - Analyst : Yeah. Thank you. And I'll just keep digging here. If you look at the multi-asset and the alternative business, the assets aren't growing. We're in the head of private market investing. I think those alternative assets have been sort of stagnant for three or so years. And on the multi-asset side, assets are down, I think, 40% since the acquisition was first announced. So you mentioned real estate is one of the factors. Are there other factors on the alternative side that are sort of weighing on the growth there? And I know the multi-asset business is really tiny, but the fact that the assets are down so much sort of warrants the question what's going on there as well.

Question: Ken Worthington - JPMorgan Chase & Co. - Analyst : Okay, great. Thanks for the color.

Question: Bill Katz - TD Cowen - Analyst : Okay, thank you very much for taking the question. Good morning, everybody. Just sort of scratching my head trying to figure out the path forward here in terms of organic growth. The redemptions that you mentioned in fixed income sort of quarterized out to just over $1 billion again. And you sort of step back for a moment, if rates start to go lower, the expectation for most of your peers is that money that's sitting in money market is going to migrate out and go into longer duration. When I look at relatively weak performance based on what you just disclosed, how do I think about the organic growth rate for the fixed income business versus money market and then the implication for revenue growth? Thank you.

Question: Bill Katz - TD Cowen - Analyst : Okay. Thank you. And just a follow-up. In terms of just sort of strategic positioning here, there's a lot of either bigger players scaling instead of retail democratization opportunity on the sort of the pure-play side. There's the beginning of some alliances that you're seeing between the KKR Capital Group and others that are trying to figure out co-branded ways to invest publicly and privately. Can you talk about, a, your ability to do this on a de novo basis? And b, how open are you to either selling the franchise to a larger player or doing an alliance to potentially catalyze organic growth? Thank you.

Question: Bill Katz - TD Cowen - Analyst : Thank you.

Question: Brian Bedell - Deutsche Bank AG - Analyst : Great, thanks very much for taking my question. Good morning, everyone. Most of my questions have been asked and -- have asked, but maybe just to come back to the money market funds. Going back to an earlier question on the potential benefit from some of these concerns around sweep deposits. Can you talk about your -- I guess, your asset exposure or your asset size in those particular channels where if someone were to make that move into a money fund from a sweep deposit in terms of what kind of -- how would you size that potential benefit from that actual action and your presence in that channel?

Question: Brian Bedell - Deutsche Bank AG - Analyst : And I meant it as a positive switch potentially if advisers were decided to move to money funds instead of taking on even higher sweep rates in those channels. And then just maybe just a follow-up. I think you mentioned Debbie earlier about extending duration in the money market funds. Can you talk a little bit more about that how much has that extended across the franchise in the last, I don't know, a month or two? And what are your thoughts about if the Fed is going to start cutting, how you might -- how much more you might extend in the money funds? Deborah Cunningham - Federated Hermes Inc - Chief Investment Officer of Global Liquidity Markets, Senior Portfolio Manager, Executive Vice President Sure. Product by product is a little bit different, but we are probably extended somewhere in the neighborhood of five to eight days over the course of the last month or so. And that is a reflection of number one, getting some what we think was good relative value in the curve early on in that time period. Not so much today, it would be more difficult extending today. So today, we're happy to be able to just maintain where we are. And most of our products are in what I call the 40 -- low 40 to low 50-day rated average maturity target range. The cap for our product is at 60 days. So those that are in the low 40s have room to extend those that in the low 50s probably won't extend very much. But honestly, with where the yield curve is right now, we think it's overdone with the expectation of rate cuts coming as soon as July, which we don't agree with at all. And even those that are contemplating, there's been discussion around 50 basis points in September, that just makes no sense to us at this point. So our current expectation would be for two rate cuts, it really hasn't changed too much. Some in the group expecting a September start with then a December follow-on. My own expectation would be more like November. I don't think there's any reason to do anything ahead of the election. Certainly, with the GDP print that we just had the first quarter -- the second quarter continues to be, I think, the type of growth environment that's acceptable to the Fed. And why contemplate or bring about the contemplation of pre-election sort of discussions about the Fed if you don't have to. So that's my reasoning behind why a November start. But again, with the two rate cuts in 2024, which would take the target rate down into that 4.75% level rather than the 5.25% where it is today.