Federated Hermes, Inc. (FHI) Earnings

Management highlights

Equity strategies performed well with MDT strategies seeing sales growth, strategic value dividend strategies net sales increase, and multiple equity fund strategies showing strong performance. Fixed income was impacted by net redemptions but some funds had net sales and certain strategies outperformed peers. Alternative private markets saw asset growth, with various products being worked on and an acquisition enhancing the platform. Q3 had institutional mandates yet to fund with different expected additions and redemptions. Money markets reached record assets, market share slightly increased, and were involved in digital asset innovations like tokenized money market funds. Second quarter total revenue slightly increased due to more days in quarter and Rivington acquisition, but performance fees and carried interest decreased. Operating expenses increased with factors like VAT refund, compensation expense, and advertising expense. Stock repurchased and new share repurchase program approved

Guidance

Expect the effective tax rate to be in the 25% to 28% range for 2025. Actively talking about acquisitions in the private markets space

Segment performance

Equity: Ended Q2 with record AUM of $846 billion, led by gains from equity strategies. Equity assets increased by $8.1 billion (10%) from prior quarter. Second quarter equity net sales of $1.8 billion represent an organic growth rate of just under 9%. MDT fundamental quant strategies had net sales of $3.8 billion in Q2, up from $3.3 billion in Q1. For Q3 through July 25, these strategies had net sales in combined funds and SMAs of $730 million. Seven of the eight MDT equity mutual fund strategies are in the top performance quartile of their Morningstar categories for the trailing three years ended June 30. Four of these strategies are in the top decile. Second quarter saw further improvement in flows from strategic value dividend strategies with net sales of $344 million compared to $131 million in prior quarter. Had net sales in 19 equity fund strategies during Q2. 56% of equity funds were beating peers and 26% were in the top quartile of their category for the trailing three years ended June 30. For Q3 through 7-25, combined equity funds and SMAs had net sales of $480 million. Fixed income: Assets decreased by about $800 million or 1% in Q2 from prior quarter due mainly to net redemptions of $2.4 billion, partially offset by higher market valuations and FX of $1.6 billion. Had 15 fixed income funds with net sales in Q2. 46% of fixed income funds were beating peers and 21% were in the top quartile of their category for the trailing three years ended June 30. For Q3 through 7-25, combined fixed income and SMAs had net sales of $47 million. Alternative private markets: Assets increased by $1.3 billion, or 7% in Q2 due mainly to the impact of FX rates ($1.1 billion) and net sales of $231 million. Working on European Direct Lending III, Global Private Equity Co-Invest Fund, Federated Hermes GPE Innovation Fund II, European real estate debt fund. Completed acquisition of majority interest in Rivington Energy Management Limited. Began Q3 with about $1 billion in net institutional mandates yet to fund. Fixed income expected net additions total about $545 million, private market strategies expected about $439 million, equities expected additions about $59 million. Money markets: Reached record high at end of Q2 for money market fund assets, increased by $3.1 billion to reach $468 billion. Money market separate accounts decreased by $5.9 billion. Estimate of money market mutual fund market share was about 7.11% at end of Q2, up slightly from about 7.10 at end of Q1. Recent managed assets were approximately $854 billion, including $642 billion in money markets, $91 billion in equities, $98 billion in fixed income, $20 billion in alternative private markets, $3 billion in multi-asset. Money market mutual fund assets were $476 billion

Risks & headwinds

Actual results may be materially different than forward-looking statements. FX fluctuations may impact financial performance. Uncertainty in stablecoin development and industry competition. Intense competition in money market industry. Net redemptions in fixed income may affect asset size. Uncertainty in alternative private markets product launches and acquisitions

Analyst Q&A

• Q: On the back of your stablecoin tokenization comments, update on broader thoughts around extent to which these products could disintermediate the traditional money fund business or if it's incremental.

  A: Baseline, seen as incremental. New customers, new things. Goldman Bank of New York methodology is a sound strategy.

• Q: As we get closer to likely Fed cuts, see any more institutions come in to talk about rotation into money funds.

  A: Been alive and well but not started in earnest yet due to Fed rate cuts not materializing.

• Q: How do you see growth in stablecoins impacting the money market fund industry?

  A: Stablecoin market is $250 billion, Genius Act defines backing, bill supply improvement expected.

• Q: On MDT capacity in some of the MDT mid and small cap products.

  A: At this point, no capacity issues expected.

• Q: Given how hedging pound versus dollar, talk about exit pace for expenses.

  A: Lowered notional amount of foreign currency forwards. Compensation line expected to go up, other line has various items.

• Q: To what extent do you see the tokenization of money market funds expanding the overall size of the money market fund industry?

  A: Incremental to the business, hard to say exact size yet.

• Q: Do you see yourself getting higher market share on incremental growth?

  A: Always striving to get more market share in the tight and competitive business