Federated Hermes Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2024

There are 12 speakers on the call.

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

Please note this conference is being recorded. Will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

Speaker 1

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 and 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.

Speaker 1

No assurance can be given as to future results and Federated Hermes assumes no duty to update any of these forward looking statements. Chris?

Speaker 2

Thank you, Ray. Good morning all. I will review Federated Hermes business performance. Tom will comment on our financial results. We ended the Q1 with record assets under management of 7 $79,000,000,000 driven by record money market assets of 579,000,000,000 dollars Looking at equities.

Speaker 2

Assets increased by $866,000,000 from year end, reaching $80,200,000,000 due to market gains of $4,900,000,000 partially offset by net redemptions of 3 point $4,000,000,000 and FX impact of about negative 567,000,000 dollars The strategic value dividend domestic strategy had Q1 net redemptions of 1,300,000,000 when you combine it with the fund and the SMA, and the comparable number in the Q4 was 2,200,000,000 dollars We did see Q1 positive net sales in 12 equity fund strategies, including MDT Mid Cap Growth, MDT Large Cap Growth and U. S. SMID Equity The MDT strategies have shown accelerated sales and net sales in the Q1 and here in the 1st part of the second quarter, particularly in the growth space. Looking at our equity performance at the end of the Q1 and using Morningstar data for trailing 3 years, 56% of the equity funds were beating peers and 36% were in the top quartile of their category. Now for the 1st 3 weeks of Q2, combined equity funds and SMAs had net redemptions of $428,000,000 Turning now to fixed income.

Speaker 2

Assets increased by about $1,400,000,000 in the Q1 to $96,300,000,000 with fixed income separate accounts reaching a record high of $51,800,000,000 The growth was driven by net sales of 1,200,000,000 dollars Fixed income funds had 1st quarter net sales of 565,000,000 dollars The 4th quarter was basically negative minus 988,000,000 dollars Fixed income SMA for Q1 net sales had 441,000,000 dollars and fixed income institutional separate accounts had net positive sales of 182,000,000 dollars We had 21 fixed income funds with positive net sales in the Q1, including total return bond fund, ultra short bond, government ultra short bond and total return bond ETF, our new offering. Regarding performance, at the end of the Q1 and using again MorningStar data for trailing 3 years, 40% of our fixed income funds were beating peers, 17% were in the top quartile of their category. For the 1st 3 weeks of Q2, combined fixed income and SMAs had net redemptions of 218,000,000 In the alternative private market category, assets decreased by $86,000,000 in the Q1 from year end to $20,500,000,000 due mainly to negative FX impact of over $200,000,000 partially offset by market value increases of over $100,000,000 and net sales of 21,000,000 dollars We are in the market with Horizon 3, the 3rd vintage of our Horizon series of global private equity Funds.

Speaker 2

Horizon 3 closed on commitments of $1,050,000,000 through the Q1. The Hermes Innovation II Fund, the 2nd vintage of our Pan European Growth Equity Innovation Fund is also in the market. And we're in the market with the 1st vintage of our UK Nature Impact Fund. We began the 2nd quarter with about $1,900,000,000 in net institutional mandates yet to fund into both funds and separate accounts. These wins are diversified across fixed income, equity and private markets.

Speaker 2

Approximately 1,500,000,000 dollars 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 $6,000,000 with wins in ultrashort, short duration, high yield, sustainable investment grade and multi sector. We do have some offsetting losses in high yield.

Speaker 2

For equities, we have 233,000,000 dollars in wins to fund, offset by about $700,000,000 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 $19,000,000,000 during the Q1 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.

Speaker 2

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 0.35% at the end of the Q1, 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 $775,000,000,000 including $579,000,000,000 in money markets, dollars 77,000,000,000 in equities, dollars 96,000,000,000 in fixed income, dollars 20,000,000,000 in alternative private markets and 3,000,000,000 dollars in money in multi asset. Money market mutual fund assets stood at $414,000,000,000 Tom?

Speaker 3

Thanks, Chris. Total revenue for Q1 increased $4,900,000 from the prior quarter due mainly to higher average money market assets increasing revenue by $13,700,000 and higher average equity and fixed income assets increasing revenue by $7,200,000 partially offset by fewer days reducing revenue by $5,800,000 dollars and lower carried interest and performance fees, reducing revenue by $9,300,000 Total Q1 carried interest and performance fees were $400,000 compared to $9,700,000 in Q4. Q1 operating expenses increased by $8,900,000 from the prior quarter due mainly to higher compensation expense primarily from incentive compensation and payroll taxes, increasing expenses by 13,700,000 dollars partially offset by lower compensation from carried interest in consolidated vehicles of 4,600,000 dollars 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 campaign. The effective tax rate was 27.9% in Q1, up slightly from 26.6% in Q4.

Speaker 3

We expect the tax rate to be in the 26% to 20 8% 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 $559,000,000 Cash and investments excluding the portion attributed to non controlling interest was 487,000,000 dollars 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 dollars quarterly dividend. This marks our 6th special dividend since 2,008.

Speaker 3

The quarterly dividend increased by 10 0.7% and the dividend is considered an ordinary dividend for tax purposes. The dividend and the repurchase of 1,100,000 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 2 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 Your first question for today is from Bill Katz with TD Cowen.

Speaker 4

Great. Thank you very much. Good morning, everybody. Good morning, Bill. Good morning, Bill.

Speaker 4

Good morning, all. Maybe just a big picture question on capital return. Certainly appreciate your balance sheet is in very good shape and you generated tremendous amount of cash flow. How are you thinking about just buyback in a broader sense, just given where the stock is trading versus the efficacy of the special dividend? Then how does that signal in terms of M and A, and independence?

Speaker 4

Thank you.

Speaker 3

Yes, Bill, it's Tom. So we've looked at all 3

Speaker 2

M and A,

Speaker 3

special dividends and buybacks. And we think that, as we've said for a long time, our first choice is to do M and A where we find it and because we like the returns and we like what our track record on M and A. So that's the first thing that we would like to do. As we looked at our balance sheet and looked at the stock price, we determined to obviously pay a special dividend and don't think that paying that dividend given our capital position and our availability under a revolver does anything to diminish our financial flexibility. And yet, we're earning the money in our business and we don't think that the earnings are reflected in the share price.

Speaker 3

So getting adding value by paying a dividend to the shareholders, we think, is appropriate. And we also believe in continuing to purchase the shares given where the price is and where we think the company is going

Speaker 2

to go grow to. And Bill, if I could add, we're very proud of the circle or the three things that Tom mentioned, acquisitions, dividends and share repurchases. And since you were along with going public back in 'ninety eight, that's been over $6,000,000,000 that's been returned to shareholders. So we have a long term look at that. To get more current, as we mentioned on the call last time, we would love to be able to expand some of those businesses that we have at Hermes like the real estate business in the United States.

Speaker 2

And that would attract our attention in terms of an acquisition if we could find something that was worthy. So we are convinced when we look at the cash flow that we have the continual flexibility to do whatever we want, whenever we want.

Speaker 4

Okay. That's helpful. And then just a couple of housekeeping items. Can you remind me of what the comp payout rate is against both the carry related performance revenues as well as just performance revenues? And then the clarification on your pipeline at the $1,900,000,000 is that gross or net of the known outflows?

Speaker 4

Thank you.

Speaker 1

So Bill, there's not a defined payout ratio, but if you look at what the portion attributed to the carried interest vehicles that is offset directly in comp has been somewhere around 2 thirds of our total carry amount and there's no comparable number on performance fees. And then in terms of the pipeline, your question was?

Speaker 2

It's 1.9 is net. It is a net number, yes.

Speaker 1

We always report net known wins offset by any known redemptions coming up.

Speaker 4

Okay. So to clarify, there's no comp payout against performance fees?

Speaker 1

Not in any formulaic way like there is with certain of the carried interest is passed directly through.

Speaker 4

And that's 65%. So I'll make sure I track that correctly. Okay. Thank you very much.

Speaker 1

It's roughly been 65%. That can vary as well.

Speaker 4

Thank you.

Operator

Your next question for today is from Patrick Davitt with Autonomous Research.

Speaker 5

Hey, good morning, everyone. First question, for the last few quarters, you've talked about the money fund opportunity shifting from retail to institutional as Fed pauses and then cuts. So with $17,000,000,000,000 still sitting in deposits, could you dig in on how those more institutional money fund pipelines and discussions are looking? And in that vein, what is your confidence that we should still expect the usual second half seasonal pop in those flows despite what's already been an unusually strong start to the year? Thank you.

Speaker 2

I'm going to let Debbie comment in a minute. But a delay in the reduction of interest rates still keeps the money fund trade alive on the retail basis very strong. And when you look at the as I mentioned in my remarks, when you look at the marketplace in terms of what rates are even on commercial paper and T bills and things like that, it's still a decent trade. It's not the big trade that we talked about, but that was always dependent upon when as and if the Fed actually starts to lower interest rates and everybody's guess is as good as mine.

Speaker 1

Everybody can read

Speaker 2

everything they want. In fact, I rely on Debbie's estimate,

Speaker 6

Thanks, Chris. And similarly speaking, the longer rates are where they are today at the 5.25% to 5.5% target rate, the better off we are from both a flow standpoint and expectations standpoint and honestly an overall return standpoint compared to other factors in the marketplace. So it's not a bad thing to delay it. What it does delay, however, is the broader participation in the flows from the institutional side. And again, going back to what Chris mentioned, at one point, it started when the curve was fairly inverted.

Speaker 6

And even in the liquidity and the money market side of the curve, you saw, especially on the treasury side, inversions of 100 basis points in expectation that over the next year, the Fed would be cutting that amount. That's no longer the case. And ultimately, that means that institutional customers who have the capability of not only being in direct treasuries, but direct commercial paper, which is a positively sloped curve at this point and has never really been much negative, continue to be in those direct securities. Now that will change unless something unless history doesn't repeat itself and there's always the possibility of that, but the likelihood in our estimation is very small. We think this is just a very big positive in the context of continuing the strength in the retail flow.

Speaker 6

And when you mentioned the $17,000,000,000,000 that are still there from a deposit perspective, I think about 40% of that is in non interest bearing deposits. So that's just fertile ground for additional converters in to what we believe is the better cash management product.

Speaker 5

Helpful. Thanks. A quick follow-up on the capital return question. Should we think about the kind of decline from 4Q to 1Q as partially driven by the special dividend and through that lens maybe a return to the more elevated levels once that passes in terms of the repurchase? Thank you.

Speaker 3

Well, Patrick, we look at it every day, run our models and determine what we're going to buy and of course factor in as we talked before the M and A. And buying 1,000,000 shares looked like a pretty decent purchase in the quarter and we thought it made sense. Where is the price going? And is it too low from our perspective, which kind of tells us and where we think the growth is going kind of tells us to uptick from there or downtick from there. But that's not really giving you exactly what you asked for.

Speaker 3

That's how we look at it.

Speaker 7

Thank you.

Operator

Your next question for today is from Ken Worthington with JPMorgan.

Speaker 8

Hi, good morning. Thanks for taking the questions. Hi, Ken. Maybe first, TradeRev announced the acquisition of ICD, which follows BlackRock's acquisition of Cash Matrix. How prominent are these platforms or portals in money market fund distribution?

Speaker 8

And how fast is the use of these platforms growing? And then as we tied into you, what portion of your money market fund sales come through these portals?

Speaker 4

So the

Speaker 2

portals have been a long term growing use. And I don't know what our percentage of assets coming through portals is, but just about every one of the clients on the institutional side that are corporate are using various portals. And I don't have more information on how we break down. As you know, we break our information down by institutional and retail, which is basically broker dealer. But I don't know the numbers by what comes through what platform.

Speaker 8

Okay.

Speaker 6

Maybe to add to that for just a second. On the platform side from a trading perspective, for instance, with Tradeweb, which I think was maybe the beginning part of your question, we have very little, less than 5% in what we do on those types of platforms. We are much more of a voice to voice type of trading firm. We feel like we get better execution. We feel like we're better received from a content and expectation standpoint.

Speaker 6

And this kind of endears us a little bit more when there are special things that come to the market. We feel like that helps us from a positioning perspective to be able to be part of those more esoteric types of products that come to the market. That is not the market norm. I'd say the market norm is probably over 50%, but it's mostly indicative of smaller players, not the larger players. I think most larger players like to have the relationship and the voice to voice contact that is the way that we operate our trading business from an FHI standpoint.

Speaker 6

As far as the portal distributions for our money market funds, we are on basically all the portals that are out there. So to the extent that the portals continue and maybe they consolidate to some degree from an ownership perspective, we're not looking at that as problematic. It again isn't I agree, I don't know the percentage that Chris was mentioning as well, but it is not a very large portion of the business compared to other channels.

Speaker 1

And just to add to that, the open architecture is a key part of those portals, I guess, obviously, but, we don't expect any change in our business, for example, as a result of the ICT transaction.

Speaker 8

Great. Thank you. Then maybe on strategic value dividend, that product sort of has been in outflow, maybe even elevated outflows for a couple of quarters. I think the pitch in that fund is sort of income paid monthly and maybe some defensiveness. Has the value proposition for strategic value changed in the higher rate environment?

Speaker 8

And maybe if not, what's sort of driving sort of the elevated redemptions that we've seen there?

Speaker 2

Well, unfortunately, one of the things driving elevated redemptions is its, artificial inclusion in the wrong Morningstar in any category in Morningstar. That fund simply does what it does. And it's going to return 4 plus percent return and have 4% plus increase in dividends by the companies that it buys. So when we go through that fund when you look at that fund on the names basis, you've got to evaluate whether that word value should really be in there under those rules. So that's going to be looked at.

Speaker 2

So that is a very, very, very unique fund. One of the challenges with that fund is when it is at the very, very top of the Morningstar category, which doesn't really tell you what it does, then it gets assets in. And people think that's the kind of fund it is, but it's not exactly like that. It is the way I described it, a dividend and dividend growth fund. Now in higher rates like you're saying, that is a factor, but don't forget that this fund specifically allows some FAs to step out the yield curve a little bit or step into the market a little bit and not leave not go all in.

Speaker 2

And so we still see gross sales in that fund. But as I mentioned, the nets are still negative, although they are, as the kids like to say, less worse, this quarter than the prior quarter.

Speaker 8

Great. Thank you very much.

Operator

Your next question for today is from Brian Bedell with Deutsche Bank.

Speaker 9

Thanks. Good morning for thanks for taking my questions. Maybe just going back to the money fund in the environment and thanks for your comments, both Chris and Debbie on that. If you had to choose an environment that you think would be best for just the money market business from an inflow perspective, say, over the next 1 to 2 years? Do you think a gradual easing cycle, even if it's delayed, would be better or a more stagflationary environment, not to say that that's the environment we're going to be in, but a stagflation environment, say closer to the 1970s, 1980s, where the Fed cannot cut, the growth is limited, equity multiples might be lower.

Speaker 9

Just in that type of environment, how would you compare that with the gradual easing cycle for the money? So

Speaker 2

Brian, thank you. I'll answer that first, then I'll let you give Debbie let Debbie give a more technical and marketplace answer. My answer is that since money market funds are the 8th wonder of the world, they're always a wonderful product. And you've gone we've gone through 50 some years of these cycles and people always need their cash taken care of. And we always gain more clients and don't lose clients.

Speaker 2

Specifically though, the main thing to me in terms of environment for the money fund is the word measured. So if it's measured up, that means slow and deliberate. If it's measured down, that means slow and deliberate. Measured is always better as an environment for The Money Fund. Right now, because we have an open retail trade and can look forward to a stronger institutional trade, it's almost nirvana for money funds.

Speaker 2

Debbie?

Speaker 6

I like that word, Chris. Nirvana is one that I use quite often. And, I agree wholeheartedly. From a future expectations environment standpoint, measured is good, which is effectively your first scenario, Brian, where interest rates go down in a measured and orderly fashion expected the curve is predictive of such declines. The key I think to that scenario is it's again a perfect type of scenario for gathering cash and keeping the cash very diversified amongst different players, different investor bases.

Speaker 6

But the key is that it goes to what I'm going to call maybe the 3% level. So, 100 basis points above where the target inflation rate is, not to the 0% level, which is where it stood for a very long period of time and just caused more angst. Now the angst in the market then did not, as Chris mentioned, result in money funds losing everything. It's the it is the 8th wonder of the world. However, that's the worst environment you can come up with.

Speaker 6

In the stagflationary environment, your second sort of scenario, that's not it's a slow growth environment with inflation creeping up to some degree. That's not something that's really too problematic for us either. Maybe not Nirvana, but either one of those scenarios works with the first one being, the preferred and what we think at this point is the expected. Now with that start date being moved out, when Chris started asking me that question, we were in the first half of the year. Now we're in the second half

Speaker 2

of the year. And I hate to get specific or

Speaker 6

more specific, but I'm forced to. My most recent has taken us from June to July to September for a start date. And could there be a scenario where it doesn't start where the declining rate environment doesn't start at all in 2024? I think the answer is potentially yes.

Speaker 9

That's great perspective. Thank you. Can I move to expenses for Tom? Just the expenses have been very good. Maybe if you can just give some commentary around how you see that playing out for the year, particularly seasonally.

Speaker 9

Obviously, compensation typically seasonally high in 1Q. And then we did have a shift down in office and occupancy all year last year. So just wanted to understand if the current run rate is rebased and stay there and then just maybe on commentary on advertising, assuming throughout the year.

Speaker 3

Okay, Brian. You're right. Q1, the well, for Q2, and I'm not really talking about the whole year, but at least for comp, the payroll taxes were higher and the bonus restricted stock were higher in Q1. So we would expect that to go down in Q2. But of course, benefits and base go up.

Speaker 3

But I would expect for Q2, with all else being equal, I. E, not getting carried interest or the related comp that comes with that, that the comp line would be down a little bit. The you mentioned the office and occupancy and that was that came down because we got out of an office space in London. And so now we're kind of at the going rate there. So I wouldn't expect much change there.

Speaker 3

The distribution line, of course, if AUM goes up, that's going to go up. And we're happy with that going up when AUM goes up. On the Systems and Communications side, we would expect that to tick up as our tech spending continues to tick up. On the ads, that's a timing. What we said for a long time is look at the whole year and when are we going to do our advertising programs.

Speaker 3

Well, we're starting one right here in the Q2 now. So that would, I expect, tick up in the Q2 also. And a year comment on that would be that I would expect us to spend more in 2024 than we did in 2023 based on the timing and us committing more there. T and E was a little low in Q1, and we expect that to go up in Q2. And I don't see much else on the other line items worth pointing

Speaker 9

out. That's great color. Just on the comp line for the seasonal drop in 2Q, I think maybe to look more into the more normal year on that would be in 2022 or is that down about $6,000,000 Is that in rough terms a decent benchmark for that?

Speaker 3

So the way I look at it is right now with all else being equal, we'd add about or we'd take out about $3,000,000 of expenses for Q2. That's about as far and I'm going to put all the qualifiers on it with bonuses change and carried interest changes, but all else being equal, that's what I'd knock it down by.

Speaker 9

Okay, great. Great. Thank you very much.

Operator

Your next question is from Kenneth Lee with RBC Capital Markets.

Speaker 7

Hey, good morning. Thanks for taking my question. I

Speaker 3

was

Speaker 7

wondering if there's anything else to call out in terms of what was driving the equity net outflows in the quarter. And then perhaps wonder if you could just further expand with more details. You said that you were seeing accelerated sales in the MDT fund complex. I just want to see some sentiment or demand around specific products within that area. Thanks.

Speaker 2

Okay. On the MDT, we had gross sales of over $1,000,000,000 net sales of over 500,000,000 dollars bringing that franchise, the MDT franchise, SMA and funds and institutional altogether, to write about $10,000,000,000 So that's a big franchise. Their performance has been outstanding. You can check it all out. 1, 3 5 year excellent performance.

Speaker 2

And so that's what's behind that story. And that was an acquisition that we did back in 2006. And so this has been a long term investment on the Federated Hermes part. In terms of what's driving other redemptions, we've already talked about the strategic value dividend fund on this call. The other one, of course, is Kauffman.

Speaker 2

And what's happened there has been some changes inside the portfolios, especially the big fund, to reduce the cash positions, change the percentage on biotech stocks. And if you look at the rankings of the 3 funds in that area over the last year, they're all right middle of the pack, 53%, 44%, 48%, percentile on Morningstar over the last year. So that's an improvement over where they have been. And if you go one step further and take a look at the 3 months numbers or Q1 for the big Kauffman fund, they're now right at 50%. And if you look at the small cap fund, they're at 38% for the 3 months.

Speaker 2

And that combines with small caps top 10% over 10 years. The reason I mentioned those is that this is what builds the case for diminishing redemptions and in fact increasing sales. Interestingly enough, you still have meaningful growth sales in all of those products that have even have net redemptions. Another story to call out would have been would be the SMID product run out of London with $150,000,000 worth of positive flows in the Q1 as well. And as I mentioned, there are a dozen funds with positives, but it's very hard to work against those large negatives of Kauffman and strategic value dividend.

Speaker 1

Well, I would add that, when you look at the last couple of quarters in growth, we've had as a category, we've had meaningful but diminishing net redemptions. We still had them in Q1, but in the early part of Q2, driven by the strength of MDT, we actually have positive net flows in growth as a category.

Speaker 7

Got you. Very, very helpful color there. That's all I had. Thanks again.

Operator

Your next question for today is from Dan Fannon with Jefferies.

Speaker 10

Thanks. Good morning. You mentioned several alternative products that you have in the market. I was just curious what the previous fund sizes were for the ones that are kind of in 2nd or 3rd generation and how you would think about the potential targets for these funds versus what you did previously?

Speaker 1

Well, we just to comment on, the one we already closed was the PEC-five and that was an increase from prior. It was in the $600,000,000 range and now we're starting to get organized on PEC 6. The Horizon Fund is larger at $1,000,000,000 plus, though I don't have the number in front of me for the prior one. This was the 3rd iteration of that. So in general, they've gone up.

Speaker 2

And it's been a tough year, even 18 months of raising money in private markets, private equity, in particular. So that's just an additional comment. I don't have the numbers either.

Speaker 10

Understood. And just a follow-up on a modeling question. So the tax rate, I think you're guiding to 26% to 28%. I mean, you haven't been there in several years. I guess, what's driving that higher as we think about the rest of this

Speaker 3

year? Yes. We don't get to deduct or we have a valuation allowance in a foreign subsidiary. So that's where we used to be able to deduct losses and we can't do that anymore.

Operator

Your next question is from John Dunn with Evercore.

Speaker 11

Thank you. You guys you touched on strategic value dividend and quant, but maybe could you contextualize like the equity flow outlook?

Speaker 2

So equity always goes in ups and downs. And we are looking for, as I mentioned, a lot bigger, better things coming out of the MDT franchise. And as I tried to plant the seeds, a rebound in the Kauffman enterprise. And if you look historically at Kauffman, when it has had some tough going, its spring back is really a beautiful thing to behold. And StratVal is going to continue to do what it does in terms of its investment activities.

Speaker 2

So those are the principal ones. Now that's why we mentioned about having a dozen others that keep that are positive, that give us other opportunities for growth on the equity side as well. In terms of the FAs, when you ask about context, the FAs by and large and this is obviously the business where we're calling on RIAs, broker dealers, etcetera. There's a little debate in between the FA generally and the client. The client is perfectly happy at 5%.

Speaker 2

The FA wants to get into the market. And we're seeing more movement into the market. And don't be thinking this is an avalanche or a catalyst or all that. But when we have $265,000,000 of positive flows in ultra shorts coming off bigger negatives. And when we see more interest in micro shorts and when we hear the FAs talking about moving duration into 1, 3 months or 1, 3 year duration products, we're beginning to see more movement.

Speaker 2

This is not a total risk on trade, but it sets the stage for getting closer. And when you look at the performance and the sales response on MDT, we're getting more newer clients into those mandates. And we think that is a good thing in terms of seed corn for the future as well.

Speaker 11

Right. And then maybe like the puts and takes on the fixed income side. Total return bond is doing great, but

Speaker 2

Well, as we mentioned, the flows have been very solid and that's why I mentioned about the ultra shorts coming in. They're sort of an in between product. And what we present to clients is a solution both out the yield curve and out the risk parameters. And our people present solutions to clients. And they're very well able to compete with people who want to go all passive or things like that.

Speaker 2

And that's why we continue to have, what amounts to robust sales in fixed income for exactly that reason. And remember that there's a huge fraction of our business, maybe half, maybe a little less than half that's basically retirement oriented. And the intermediaries are coming up with solutions for those clients over the long term that involve fixed income. And so we've seen the assets move up and we would certainly see that continuing. And one that's sort of a hidden jewel at this point in the cycle is the high yield.

Speaker 2

Excellent long term records, a big franchise here at Federated Hermes, a great marketplace reception and that one goes in ebbs and flows as well based on the nature of the clients going risk on. So we have a lot of buckets ready for when it starts raining money in other areas as well.

Speaker 11

Thanks very much.

Operator

We have reached the end of the question and answer session. And I will now turn the call over to Ray Hanley for closing remarks.

Speaker 1

Thank you, Holly. That concludes our call. Thank you for joining us today.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Federated Hermes Q1 2024
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