FEDERATED HERMES, INC. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Assets Under Management: Ended Q3 with record $800 billion AUM, driven by $593 billion money market assets and $100 billion fixed income assets.
• Equities Activity: Market gains and net sales in 15 equity strategies; MDT fundamental quant strategies saw $2.2 billion net sales YTD (vs ~$400 million in 2023).
• Fixed Income Performance: Record assets and positive net sales, with total fixed income net sales at $1.4 billion in Q3.
• Alternative Markets: Launch of new funds like European Direct Lending III and expectation of inflows from net institutional mandates.
• Money Markets: Impact of SOFR rates and client flows, with 60% institutional and 40% retail mix in money market fund assets.

Segment Performance

• Equities: Assets increased to $83.6 billion from Q2, driven by $6.5 billion market gains but offset by $1.4 billion net redemptions. 59% of equity funds beat peers over 3 years; 15 equity strategies had positive net sales in Q3. MDT fundamental quant strategies had ~$2.2 billion net sales YTD (vs ~$400 million in 2023).
• Fixed Income: Assets reached $100.2 billion in Q3, up $4.9 billion. Net sales of $1.4 billion in Q3 (vs $1.4 billion net redemptions in Q2), driven by total return bond fund and institutional multi-sector strategies.
• Alternative Private Markets: Assets increased to $20.7 billion in Q3. Focus on funds like Federated Hermes GPE Innovation Fund II and European Direct Lending III. Began Q4 with ~$1.5 billion in net institutional mandates.
• Money Markets: Reached record $440 billion in money market fund assets. Increased by $6.4 billion in Q3, impacted by SOFR rates and client actions. Estimated 60% institutional and 40% retail in money market fund assets.

Guidance

• Assets: Anticipate continued growth in fixed income and alternative markets, with expected net sales in equity and fixed income strategies.
• Fund Flows: Expect further growth in MDT strategies and new ETFs; money markets expected to benefit from favorable market conditions despite short-term fluctuations.
• Institutional Mandates: Expect ~$1.5 billion in net institutional mandates to fund into funds and separate accounts in Q4.

Risks

• Market Fluctuations: Impact on asset values and client flows.
• Regulatory Changes: Potential impact on money market funds, though minimal observed in Q3.
• Client Flows: Lumpy inflows/outflows, especially in money markets; severance in London office for sustainable operations may affect expenses.

Question and Answer

• **Q: On money fund market share and flow loss.

A: Chris Donahue and Deborah Cunningham discuss lumpy client flows, SOFR rate impact, and competition in money markets.

• **Q: On regulation impact on prime funds.

A: Chris Donahue and Deborah Cunningham note minimal impact on prime funds, with continued interest and prime funds up.

• **Q: On alt bucket distributions and growth.

A: Saker Nusseibeh discusses re-upping of clients and potential growth in alternative private markets funds.

• **Q: On capital management and inorganic opportunities.

A: Tom Donahue mentions share repurchase program and no immediate acquisition plans.

• **Q: On severance and cost-cutting.

A: Chris Donahue, Tom Donahue, and Saker Nusseibeh discuss restructuring in London office for sustainable operations.

• **Q: On institutional cash management and strategic value.

A: Chris Donahue and Brian Bedell discuss institutional cash trends and outlook for strategic value dividend fund performance**