Federated Hermes, Inc. (FHI) Earnings

Management highlights

### Overall AUM Milestone - Ended Q2 with a record total AUM of $912 billion, with growth led by equity and private market assets. As of mid-July, total managed assets stood at approximately $899 billion. ### Investment Product Performance - 6 of 9 MDT fundamental quant equity fund strategies ranked in the top performance quartile of their Morningstar categories for the trailing 3-year period, with 54% of all equity funds outperforming peers and 30% in the top quartile. 39% of fixed income funds outperformed peers and 19% ranked in the top quartile for the trailing 3-year period. - MDT strategies led equity gross sales with a record $6 billion in gross sales and over $3.5 billion in net sales for Q2. ### Strategic Acquisitions & New Product Launches - Completed the acquisition of an 80% interest in FCP Fund Manager LP in early Q2, which added $3.2 billion in U.S. multifamily real estate assets and contributed $14 million in incremental Q2 revenue. - Launched the digital treasury money market fund, with a non-tokenized initial share class compliant with regulatory requirements for institutional investors and stablecoin issuers; an on-chain share class with blockchain-based record-keeping is in development. - Actively developing the 6th vintage of the global private equity co-invest fund (PEC VI), which has already closed on $300 million in commitments; also launched a new pooled European real estate debt fund. ### Early-Stage Digital Initiatives - Participating in multiple industry digital asset initiatives including BNY Goldman's mirrored tokenization project and Archex's UK UCITS tokenized money market fund project. Management notes these are early-stage efforts, with client demand currently focused on information rather than transaction capabilities, with growth expected as regulatory clarity improves.

Guidance

- As of the start of Q3, the firm had approximately $3.4 billion in net institutional wins that are yet to fund, split across: ~$1.7 billion for equity strategies (with $1.6 billion from MDT additions), ~$1.3 billion for private market strategies (including $700 million for direct lending, $538 million for private equity, and $100 million for trade finance), and ~$300 million for fixed income strategies. - Management expects historical Q2/Q3 seasonality of lower money market assets (driven by tax-driven peak assets at year-end and mid-April, followed by seasonal declines) to hold as it has in past years. - The firm's 2026 effective tax rate is expected to fall in the 25% to 28% range. - For Q3, management expects: $5 million lower compensation expense due to the absence of one-time FCP acquisition-related costs (with FCP's ongoing compensation expense remaining), ~$2 million increase in systems and communications expenses, and ~$6 million decrease in professional service fees relative to Q2.

Segment performance

Total revenue for Q2 increased $23.8 million (5%) quarter-over-quarter. Segment performance breakdown by asset class: 1. Equity: Record closing assets of $110 billion, up $8.8 billion (9%) from Q1. Gross sales hit $9.1 billion (flat with Q1's record level), with net redemptions of $1.1 billion (driven by a planned $3 billion global equity sub-advisory redemption). Equity contributes ~12% of total assets under management (AUM) as of Q2 end. 2. Fixed Income: Closing assets of just over $100 billion, up $689 million from Q1. Market appreciation added $1 billion, offset partially by net redemptions. Fixed income contributes ~11% of total AUM as of Q2 end. 3. Alternative & Private Markets: Closing assets increased $2.6 billion to $21.6 billion. The acquisition of 80% of FCP Fund Manager LP added $3.2 billion in U.S. multifamily real estate assets. This segment contributes ~2.4% of total AUM as of Q2 end. 4. Money Markets: Total money market assets decreased $7.9 billion (1%) quarter-over-quarter to $500 billion for money market funds, and are up ~7% year-over-year. Money market separate accounts decreased $5 billion (3%) quarter-over-quarter, and are up 6.4% year-over-year. Estimated money market fund market share was 6.7% at Q2 end, down from 6.9% at Q1 end. Money markets contribute ~55% of total AUM as of Q2 end. 5. Multi-Asset: Closing assets of $3 billion, contributing ~0.3% of total AUM as of Q2 end.

Risks & headwinds

- Forward-looking statements are inherently uncertain, and actual results may differ materially from implied expectations, with risks detailed in the firm's SEC filings. Management assumes no obligation to update forward-looking statements. - Money market assets and market share are subject to quarterly volatility driven by seasonal cash flows, large market issuances (like IPOs and corporate debt raises), competitor promotional programs, and client shifts between cash and ultra-short fixed income strategies. - Digital asset and product development efforts are early-stage, and growth depends on future regulatory clarification that is currently uncertain. - Fixed income net flows are still recovering from negative redemptions, with sustained positive net flows dependent on future market conditions that cannot be predicted with certainty.

Analyst Q&A

• Q: Fixed income gross sales have improved and net flows have stabilized recently. Has investor interest shifted amid expectations of prolonged higher rates, and can the segment return to sustained positive net flows? /

  A: Management notes end clients have become less reactive to ongoing negative geopolitical news, and demand has grown for conservative ultra-short and MicroShort fixed income products, which partially overlaps with money market fund demand. A range of fixed income products across the yield curve, led by the payer ETF which offers higher yield that is well-received by clients and advisors, leaves management optimistic that the segment will return to positive net flows in the foreseeable future.

• Q: Given the current rate outlook, what is the updated outlook for full-year money market asset growth? /

  A: Management notes that money market assets have historically followed predictable seasonal patterns, which it expects to hold. With the Fed expected to keep rates higher for longer, money market funds offering yields between 3.5% and 4.5% remain very attractive to investors. The firm has reduced its money market funds' weighted average maturity to retain flexibility if rates rise further, and floating rate securities are widely available to support performance in a rising rate environment, positioning the category to continue gathering assets in line with broader industry trends.

• Q: What drives the observed quarterly shifts in money market market share, and are there any key takeaways from recent shifts? /

  A: Management explains that market share shifts stem from a confluence of volatile factors, including seasonal cash flow swings, large IPO/debt issuance activity that temporarily increases cash holdings, competitor promotional programs, and client shifts between money markets and ultra-short fixed income. The firm has more than doubled money market assets from $208 billion to $500 billion over the past 7.5 years despite periodic small market share declines, and management prioritizes overall asset and revenue growth over steady market share, noting that small share declines are acceptable given the strong long-term growth trajectory.

• Q: What is the update on active ETF expansion plans, including launch pace, product priorities, and distribution strategy over the next 12-18 months? /

  A: Management plans to continue launching ~2 new ETFs per year to maintain market visibility and align with distribution partner priorities. The firm is prioritizing launching ETF versions of its already successful existing traditional mutual fund strategies, and is also exploring active ETF opportunities outside the U.S., building on existing success with MDT strategies in offshore UCITS structures. The firm is also pursuing confidential deeper distribution partnerships with major intermediaries to scale its ETF business, and aligns new product development with areas of strong industry-wide ETF sales growth.