Federated Hermes, Inc. (NYSE:FHI) Q1 2024 Earnings Call Transcript April 27, 2024
Federated Hermes, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Federated Hermes, Inc. Q1 2024 Analyst Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.
Raymond Hanley: Good morning and welcome to our call. Leading today’s call will be Chris Donahue, CEO and President of Federated Hermes; and Tom Donahue, Chief Financial Officer. And joining us for the Q&A is Debbie Cunningham, Chief Investment Officer for the Money Markets. During today’s call, we may make forward-looking statements and we want to note that Federated Hermes actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?
Christopher Donahue: Thank you, Ray. Good morning all. I will review Federated Hermes’ business performance. Tom will comment on our financial results. We ended the first quarter with record assets under management of $779 billion, driven by record money market assets of $579 billion. Looking at equities, assets increased by $866 million from year-end, reaching $80.2 billion due to market gains of $4.9 billion, partially offset by net redemptions of $3.4 billion and FX impact of about negative $567 million. The strategic value dividend domestic strategy had Q1 net redemptions of $1.3 billion when you combine it with the fund and the SMA, and the comparable number in the fourth quarter was $2.2 billion. We did see Q1 positive net sales in 12 equity fund strategies, including MDT Mid Cap Growth, MDT Large Cap Growth and US SMID Equity Fund.
The MDT strategies have shown accelerated sales and net sales in the first quarter and here the first part of the second quarter, particularly in the growth space. Looking at our equity performance at the end of the first quarter and using Morningstar data for trailing three years, 56% of the equity funds were beating peers and 36% were in the top quartile of their category. Now for the first three weeks of Q2, combined equity funds and SMAs had net redemptions of $428 million. Turning now to fixed income, assets increased by about $1.4 billion in the first quarter to $96.3 billion with fixed income separate accounts reaching a record high of $51.8 billion. The growth was driven by net sales of $1.2 billion. Fixed income funds had first quarter net sales of $565 million.
The fourth quarter was basically negative minus $988 million. Fixed income SMA for Q1 net sales had $441 million and fixed income institutional separate accounts had net positive sales of $182 million. We had 21 fixed income funds with positive net sales in the first quarter, including Total Return Bond Fund, Ultrashort Bond, Government Ultrashort Bond and Total Return Bond ETF, our new offering. Regarding performance at the end of the first quarter and using again Morningstar data for trailing three years, 40% of our fixed income funds were beating peers, 17% were in the top quartile of their category. For the first three weeks of Q2, combined fixed income and SMAs had net redemptions of $218 million. In the alternative private market category, assets decreased by $86 million in the first quarter from year end to $20.5 billion, due mainly through negative FX impact of over $200 million, partially offset by market value increases of over $100 million and net sales of $21 million.
We are in the market with Horizon 3, the third vintage of our Horizon series of Global Private Equity Funds. Horizon 3 closed on commitments of $1.05 billion through the first quarter. The Hermes Innovation II Fund, the second vintage of our pan-European Growth Equity Innovation Fund is also in the market, and we’re in the market with the first vintage of our UK Nature Impact Fund. We began the second quarter with about $1.9 billion in net institutional mandates yet to fund into both funds and separate accounts. These wins are diversified across fixed income, equity and private markets. Approximately $1.5 billion of net total wins is expected to come into private market strategies. The wins include private equity, direct lending, trade finance, outflows include some areas in absolute return credit.
On the fixed income side, we expect net additions of about $866 million with wins in ultrashort, short duration, high yield, sustainable investment grade and multi-sector. We do have some offsetting losses in high yield. For equities, we have $233 million in wins to fund, offset by about $700 million of known redemptions. Moving to money markets. In Q1, we reached another record high for money market fund assets, money market separate account assets and total money market assets as mentioned at the beginning of my remarks. Total money market assets increased by $19 billion during the first quarter from year-end. Money market strategies continue to benefit from favorable market conditions for cash as an asset class, elevated liquidity levels in the financial system and attractive yields compared to cash management alternatives like bank deposits and direct investments in money market instruments like T-bills and commercial paper.
In the long-expected upcoming period of declining short-term interest rates, we believe that market conditions for money market strategies will continue to be favorable compared to direct market rates and bank deposit rates. Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.35% at the end of the first quarter, down slightly from about 7.40% at the end of 2023. Looking now at recent asset totals as of a few days ago, managed assets were approximately $775 billion, including $579 billion in money markets, $77 billion in equities, $96 billion in fixed income, $20 billion in alternative private markets and $3 billion in money — in multi-asset, money market mutual fund assets stood at $414 billion. Tom?
Thomas Donahue: Thanks, Chris. Total revenue for Q1 increased $4.9 million from the prior quarter, due mainly to higher average money market assets, increasing revenue by $13.7 million and higher average equity and fixed income assets, increasing revenue by $7.2 million, partially offset by fewer days, reducing revenue by $5.8 million and lower carried interest and performance fees, reducing revenue by $9.3 million. Total Q1 carried interest and performance fees were $400,000 compared to $9.7 million in Q4. Q1 operating expenses increased by $8.9 million from the prior quarter due mainly to higher compensation expense, primarily from incentive compensation and payroll taxes, increasing expenses by $13.7 million, partially offset by lower compensation from carried interest in consolidated vehicles of $4.6 million.
Distribution expense increased due mainly to higher average assets, partially offset by fewer days. Advertising expense decreased in Q1 due to the timing of our advertising campaigns. The effective tax rate was 27.9% in Q1, up slightly from 26.6% in Q4. We expect the tax rate to be in the 26% to 28% range throughout 2024. The tax rate incorporates a valuation allowance on certain foreign deferred tax assets. At the end of Q1, cash and investments were $559 million. Cash and investments, excluding the portion attributed to non-controlling interest was $487 million. As announced in the press release, Federated Hermes Board declared a dividend of $1.31 per share to be paid on May 15, 2024. The dividend includes a $1 per share special dividend and a $0.31 quarterly dividend.
This marks our sixth special dividend since 2008. The quarterly dividend increased by 10.7% and the dividend is considered an ordinary dividend for tax purposes. The dividend and the repurchase of 1.1 million shares in Q1 represent important additional measures intended to increase shareholder value. The special dividend is expected to reduce Q2 EPS by about $0.015 per share, due largely to the exclusion of dividends paid on unvested restricted shares from net income under the two-class method of computing earnings per share. Holly, that completes our prepared remarks and would like to open the call up now for questions.
Operator: Certainly. At this time we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from Bill Katz with TD Cowen.
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