FEDERATED HERMES, INC. Q2 FY2025 earnings call

• Ended Q2 with record AUM of $846 billion, led by equity gains. Equity assets up $8.1B (10%) from prior quarter; equity net sales $1.8B (organic growth ~9%).
• MDT fundamental quant strategies had net sales $3.8B in Q2 (up from $3.3B in Q1); Q3 through 7/25 net sales $730M. 7 of 8 MDT equity mutual fund strategies in top quartile of Morningstar categories over 3 years ended June 30.
• Fixed income assets down ~$800M in Q2 due to net redemptions, but partially offset by market valuations and FX.
• Alternative private markets assets up $1.3B in Q2; involved in various fund offerings and acquired Rivington Energy Management Limited.
• Money market fund assets reached record high of $468B in Q2; actively involved in tokenized money market funds and digital asset infrastructure.
• Board approved new share repurchase program for 5 million shares in addition to remaining shares from prior program; company purchased ~1.5M shares for ~$64.5M in Q2.

Equity

• Ended Q2 with record assets under management (AUM) of $846 billion. Equity assets increased by $8.1 billion or 10% from prior quarter. Second quarter equity net sales were $1.8 billion, 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, combined equity funds and SMAs had net sales of $480 million. 56% of equity funds were beating peers and 26% were in the top quartile of their Morningstar categories for the trailing 3 years ended June 30.

Fixed Income

• Assets decreased by about $800 million or 1% in Q2 due mainly to net redemptions of $2.4 billion, partially offset by higher market valuations and FX of $1.6 billion. 46% of fixed income funds were beating peers and 21% were in the top quartile of their category for the trailing 3 years ended June 30. For Q3 through July 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, mostly in the MDT Market Neutral Fund. Activities included various funds like European Direct Lending III (target raise $750M, closed $450M), global private equity co-invest fund (first close $114M, target $500M), etc. Also, completed acquisition of majority interest in Rivington Energy Management Limited.

Money Markets

• Reached record high at end of Q2 for money market fund assets, increasing by $3.1 billion to $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. Actively participating in tokenized money market funds and digital asset infrastructure, subadvisor for Superstate Short Duration U.S. Government Securities Fund ($425M assets), and involved in Bank of New York and Goldman Sachs blockchain initiative for money market funds.

• Q2 effective tax rate was 26.1%; expected to be in the 25% to 28% range for 2025.
• Board of Directors approved a new share repurchase program for 5 million shares in addition to the 1.1 million shares remaining from the prior program.

• Market conditions and volatility can impact asset flows and valuations.
• FX risks related to currency fluctuations, as seen in hedging of pound vs dollar.
• Competition in the money market fund industry, with a tight and competitive landscape.
• Regulatory changes affecting stablecoins and money funds could impact business dynamics.

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

A: John Christopher Donahue said baseline it's incremental; new customers and things, not an avalanche of use yet. Debbie Cunningham added it's a different way to distribute product, with traditional money fund still providing daily liquidity at par.

Q: How do you see growth in stablecoins impacting money market fund industry; Treasury Secretary's $2T stablecoin assets target.

A: Deborah Ann Cunningham said current stablecoin market ~$250B, GENIUS Act defines backing for stablecoins; John Christopher Donahue added stablecoins can't pay interest, leading to innovations like using money funds for returns.

Q: Capacity in MDT Mid and Small Cap products given inflows.

A: John Christopher Donahue said at this point, no capacity issues seen, methodologies robust.

Q: Exit pace for expenses, breakdown between comp and noncomp lines.

A: Thomas Robert Donahue said FX hedging lowered notional amount, compensation expected up a couple million next quarter, distribution line item expected higher, other line items not seeing big changes.

Q: Tokenization expanding money market fund industry size and market share.

A: John Christopher Donahue and Deborah Ann Cunningham said it's incremental, hard to predict size, but striving for more market share in tight and competitive industry