FEDERATED HERMES, INC. Q4 FY2024 earnings call

• Equities: MDT strategies saw strong growth, with $13 billion in assets at year-end, up 70% from 2023. Equity funds had solid performance with 56% beating peers.
• Fixed Income: Asset decreases due to market valuations and redemptions, but some funds had net sales.
• Alternative Private Markets: Launches of various funds and ongoing fundraising efforts.
• Money Markets: Record assets driven by higher rates, positive sentiment for money market strategies.
• Financials: Q4 revenue increased $16.2 million, operating expenses up $17.5 million, tax rate 25.4% in Q4, expected 26%-28% in 2025. Q1 outlook includes lower revenues and higher compensation expense.

Equities: Assets decreased by $4.2 billion from Q3, mainly due to net redemptions and FX impact. MDT strategies ended 2024 with $13 billion in assets (up 70% from 2023), had $3.4 billion in net sales in 2024. 56% of equity funds beat peers, 36% were in the top quartile. First three weeks of Q1 had net sales of $542 million. Fixed Income: Assets decreased $2.1 billion in Q4. Fixed income funds had $308 million sales, separate accounts had $1.3 billion redemptions. 45% of fixed income funds beat peers, 18% were top quartile. First three weeks of Q1 had net redemptions of $28 million. Alternative Private Markets: Assets decreased $1.8 billion in Q4. Activities include European Direct Lending III, GPE Innovation Fund II, etc. Began 2025 with ~$3.7 billion in net institutional mandates. Money Markets: Record money market assets $462 billion, total $630 billion. Q4 net additions $37 billion. Market share was ~7.22% at end of 2024.

• Q1 revenues expected lower by ~$9.2 million due to fewer days.
• Distribution expenses expected lower by ~$2 million in Q1.
• Compensation and related expense expected higher in Q1 due to seasonally higher stock compensation and payroll taxes.
• Tax rate expected in 26% to 28% range for 2025.

• Market share fluctuations in money markets, but no loss of clients.
• Potential client redemptions in institutional mandates.
• FX impact on operating expenses, though hedged over a year.

Q: Hi. Good morning, everyone. I'm going to start with a higher level question on the money market fund market share, excluding the SMAs. It feels like the SMAs are kind of making up what looks like a little bit of market share loss on the fund side. Could you speak to maybe any trends that are going on that would kind of explain why some of the other large money fund complexes, say, at the banks or even other large asset managers like BlackRock are seeing so much higher fund flows, mutual fund flows than you guys? I appreciate that the SMAs are making up for that, but I'm just curious what dynamics you are seeing there and maybe we can't see from our position?

A: I'll talk a little bit, Patrick, then Debbie will offer some comments. The first thing is I went back and looked over our market share data for the last three years that we've been giving you every quarter. And you average all those numbers, and it turns out to be between 7.33% and 7.32%. So looking at it over one quarter where we were at 10th of a percent less, okay, yes, you can say that's loss of market share. We don't lose any clients in the process. And you see the ebb-and-flow of big amounts of money from clients. So I don't have any worries about losing market share. I'll let Debbie give you a better pulse of the marketplace response.

Q: Hi. Good morning, everyone. I'm going to switch gears for a second. I just want to touch on ESG and your very sustainable -- sustainability front, I mean with seemingly less focused on broader ESG products in recent years and maybe even more so now. Can you just kind of remind us and talk through how some of your ESG and sustainability products like Global Equity or Global ESG and various impact funds might be positioned in the market in the years ahead?

A: I will talk about that from the point of view of the acquisition and a broader element than the questions you're asking. Saker and Debbie will comment on those funds. When we did the Hermes acquisition back in '18, we had already decanted through a lot of good legal work that you can say yes to fiduciaries while using ESG so long, as you are focused on the risk-reward and the returns to the underlying investor. And therefore, we continue doing that because these are good tools, additional information and analysis that assist portfolio managers and teams in making investment decisions. And this is what we still believe. Now I'll let Saker comment on some of the funds that you mentioned.

Q: Hi. This is Trevor [indiscernible] on for Dan. For my first question, can you speak to the priorities of spending into 2025 and where it's differing from last year? And how we should think about the rate of growth for those investments?

A: Sure. I think I've already addressed comp, at least for the first quarter compensation because of the payroll and bonus and recalibrating incentive comp, at least first quarter wise and into the future there. If things are going great, we'll be paying more there. Same thing on the distribution side. We reflected that less days in Q1 will knock that down a little bit, but that's on an asset basis from the fourth quarter. If -- and we expect to raise more assets, the distribution line will go up. On the systems and communication lines, I would say, we expect to have a step up there. Somewhere around -- on a quarterly basis, about $3 million, and that would be into each quarter into the future, and that's market data and technology spending related. And the rest of the areas, I really don't have much change expectation. Of course, the other line, the infamous other line with FX. And remember, we are hedging our expenses in London. And so when we get -- the pound goes down, it doesn't really affect us because then we pay less pounds over for our expenses in London. So over a year basis, it doesn't – we are hedged basically. I can't control the non-operating line with our seat money and whether that goes up or down and the tax. We -- I think we already addressed the tax line. The reason why it was up -- I'm sorry, the reason why the tax rate was down a little bit was because the stock price was up. And so as we had vestings that caused the tax rate to go down, so that was a benefit.

Q: Good morning. This is Robin Holby on for Bill Katz. Thank you for taking the question. Follow-up on the last private markets question. Just given capital markets activity is accelerating, what is your near-term outlook for realizations in the portfolio? And when do you expect the fundraising, with respect to the funds that you mentioned, that start to offset these distributions?

A: Thank you, Chris. So the answer is we are distributing as we speak and raising assets as we speak. The whole point about having PEC VI following PEC I to V, is as PEC V pays out PEC VI comes in and raises new capital. It is the nature of capital markets. If you look at direct lending, we paid off a debt [technical difficulty] and actually, I think I'm making more than that, and we're in exactly where we are in the cycle. And of course, returning assets to the clients is a sign of success because it shows that we have made the success of whether it is in private equity, whether it is infrastructure, whether it's in direct lending. So returning assets to the client is a sign of success and then triggers more flows coming our way. So we are in the midst of the cycle, and we're pleased with what we're seeing. And more importantly, our clients are pleased with what we are seeing and coming up to re-up a lot of the money that we raised are re-ups from old clients across our strategies, which tells you we are in a good place. I hope that answers the question.

Q: Thank you. Great to see strategic value dividend improving and flipping positive so far this year. But can you kind of contextualize how people think about that fund and the demand for it given the backdrop of markets and rates?

A: Yes. The way people -- the way this product is presented is that the dividend fund with an idea towards growing dividends. A lot of times, historically because this fund will be either at the top of the chart or the bottom of the chart because it doesn't belong in the class where the charts put it, people will tend to buy it because it is at the top of the chart. Not for the right reason that it is a dividend fund looking for growth in dividends. One of the interesting things about the dynamic here is that even when the fund last year was in negative flows, the strategic dividend ETF was gaining traction. And so someone buying that particular aspect of strategic dividend shows you that they understand that it is a dividend fund. So today, many of the people coming in are looking at this as a stepping stone into the market. You get a good yield and yet you do participate in the market. And if there is a broadening out, you get paid a dividend along the way. And so this fund is turning up pretty good numbers right now.