Federated Hermes - Earnings Call - Q2 2020
July 31, 2020
Transcript
Speaker 0
Greetings, and welcome to Federated Hermes Q2 twenty twenty Analyst Call and Webcast Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr.
Raymond Hanley, President of Federated Investors Management Company. Thank you. You may begin.
Speaker 1
Good morning, and welcome. 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 are Saker Nasevi, CEO of the International Business of Federated Hermes and Debbie Cunningham, our Chief Investment Officer for Money Markets. During the 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 disclosure in our SEC filings.
No assurance can be given for future results, and Federated Hermes assumes no duty to update any of these forward looking statements.
Speaker 2
Chris?
Speaker 3
Thank you, and good morning all. I will review Federated Hermes' business performance, and Tom will comment on our financial results. We continue to make progress establishing our brand as the leading provider of active, responsible investment management driven by the combination of strong fundamental analytical capabilities and the multi sector insights provided by the EOS at Federated Hermes engagement operation. EOS assets under administration were $1,100,000,000,000 at the end of the second quarter. And we expanded the EOS staff of engagers and specialists to 60 during the second quarter.
Now recently, the international business of Federated Hermes was assessed by Real Impact Tracker, which certifies institutions most committed to impact. And we achieved the highest score in the history of its certification. As a result, the firm has joined Real Impact Tracker's certified community for which only around five to 10% of fund managers are eligible to qualify. Real Impact Tracker identified our firm as the leader in creating impact throughout its operation, investment process, corporate engagement, and policy and advocacy in particular. The firm's philosophy and approach to stewardship was highlighted as the model for other firms looking to improve their active ownership.
In addition and separately, the United Nations PRI just awarded the domestic portion of Federated Hermes with an overall A rating for our annual responsible investing assessment. The international business of Federated Hermes received an A plus rating. Now turning to our equities business. Assets closed the quarter at 77,000,000,000 up from $68,000,000,000 at the end of the first quarter as market values rebounded by just under $11,000,000,000 offsetting net redemptions of 2,700,000,000.0 While the overall net sales of combined equity and separate accounts were negative, the $2,700,000,000 I just mentioned, we saw positive net sales in a number of strategies. We had 12 equity strategies with net sales in the second quarter led by Kaufman SmallCap.
Other equity funds with net sales in the second quarter included Global Equity ESG, Global Small Cap Equity, MDT All Cap Core, and the SDG Engagement Equity Fund. Using Morningstar data for the trailing three years at the end of the second quarter, 30% of our funds, nine out of 30, were in the top quartile. And two thirds, 20 of 30, were above median. Looking at the strategic value dividend strategy, its objective, as you recall, is to provide a high growing dividend income stream from quality companies. The domestic fund's twelve month distribution yield was 4.4%, which ranked it in the second percentile of its Morningstar assigned category at the end of the second quarter.
The SMA's strategy's gross weighted average dividend yield was 5.26 at the end of the second quarter. The domestic strategic strategy had combined mutual fund and SMA outflows of $1,600,000,000 in the second quarter compared to $461,000,000 of outflows in the first quarter. Q3 results through July 24 show combined fund and SMA net redemptions of just over 200,000,000 Dividend stocks were soundly out of favor during q two's cyclical risk on tech led rally. The best performing market sectors were lower dividend paying consumer discretionary and information technology type stocks. Low beta underperformed high beta.
High yielding stocks underperformed low yielding. And high quality underperformed the lowest quality. While the second quarter market characteristics were not conducive to our low volatility, high dividend strategy, we believe that our continued focus on the core goals of providing higher than market dividend yield from high quality business assets will resonate with investors over time, especially given the outlook for lower rates over an extended period of time. And recall that even during these net redemption times, through July 24, the gross sales gross sales of the strategic value, dividend and SMA strategy were just about $3,500,000,000, showing there is active life in the strategy. Now turning to fixed income.
Assets reached a record high of $73,000,000,000 at the end of the second quarter, driven by over $6,000,000,000 in net sales and nearly $2,000,000,000 of market gains in the quarter. Bond market conditions changed dramatically from the lows in March, and our broad array of solid fixed income strategies were well positioned to meet investor demand. We had 23 fixed income funds with net sales in the second quarter. High yield funds led the net sales with over 2,000,000,000. Multisector sector bond strategies also had solid net sales led by 300,000,000 in total return bond fund and also drove strong results in separate accounts.
Corporates, international global, government, municipal bond funds all had net sales as did our fixed income SMA strategies. Across sectors, short duration strategies were also in demand. At quarter end, using Morningstar data for the trailing three years, we had eight funds, which is 24% in the top quartile, and 18 funds, which is 53% in the top half. Moving to money markets. Assets increased about 6,000,000,000 in the second quarter to a record high of $458,000,000,000 with growth in money market funds of about $8,700,000,000 partially offset by seasonal declines in separate account assets of $2,400,000,000 Money market assets reached a high of $483,000,000,000 in late May in advance of tax payments, usage of care funds, and other uses of cash.
Our money market share, including the sub advised funds at quarter end, was 8.1%, down fractionally from 8.8% at the end of the first quarter. Now taking a look at recent asset totals and movements. Managed assets were approximately $629,000,000,000 including $452,000,000,000 in money markets, dollars 80,000,000,000 in equities, dollars 75,000,000,000 in fixed income, 18,000,000,000 in alternative, and 4,000,000,000 in multi assets. The money market mutual fund assets were 339,000,000,000. In terms of flows third quarter through July 24, equity funds and SMAs were negative 240,000,000,000.
Fixed income funds and SMAs were positive 756,000,000,000. By the subtraction method, we were $565,000,000 to the positive so far in the third quarter. Now as we begin the third quarter, we begin with about $1,000,000,000 in net institutional mandates yet to fund, and most of those are in fixed income. Now an overall comment as relates to COVID. We have continued to function well throughout these challenges.
We are fully operational. Our technology resources have enabled us to have upwards of ninety five percent of our employees successfully working from home. The portfolio management teams are connecting regularly and managing well through challenging market conditions. Our regional consultants and other sales and customer service personnel are staying connected to their clients. And while we continue to hire and onboard new employees in the second quarter, we do look forward to the time when we can come together in person in our facilities.
Now for the financials, we'll turn to Tom.
Speaker 2
Thank you, Chris. Q2 includes a full quarter of results from the HGPE private market subsidiary, which became a consolidated entity effective March 1. Total revenue for the quarter was up slightly from the prior quarter due mainly to higher money market assets generating $30,500,000 in additional revenue, a full quarter of HGPE results adding $6,100,000 in revenue, and higher performance fees of $5,400,000 partially offset primarily by money fund minimum yield waivers of 19,600,000.0 and lower equity asset related revenue of 13,700,000.0. Looking at expenses, comp and related expense increased 8,200,000.0 from the prior quarter. The growth was due mainly to higher bonus expense of about 6,100,000.0, primarily related to higher sales and $3,900,000 from the impact of a full quarter of HGPE results, partially offset by $1,000,000 of lower stock based compensation expense and seasonally lower payroll tax expense down about $800,000 The decrease in distribution expense compared to the prior quarter was due to the impact of minimum yield waivers, which reduced distribution expense by 17,600,000.0, partially offset by an increase of 10,500,000.0, primarily from higher money market fund assets.
The increase in other expense operating line item from the prior quarter was due largely to higher amortization of intangible expense from the MEPC and HGP acquisition. We expect amortization of intangibles expenses to be $3,100,000 in the third quarter compared to $3,900,000 in the second quarter. The impact of money fund yield related fee waivers on operating income in q two was about 2,000,000. Based on recent assets and expected yields, the impact of these waivers on operating income in Q3 could increase to about 4,000,000. Of course, factors impact waiver levels, and we expect these factors and their impact to vary.
Non operating income increased from Q1 due mainly to the increase in value of seed and other investments of nearly $15,000,000 in Q2 compared to similar decreases in Q1 for a total swing of $29,000,000 This change was partially offset by the impact of the 7,500,000 gain recorded in the first quarter related to the HGPE acquisition. The $4,500,000 change from Q1 in net income attributable to noncontrolling interest in subsidiaries was primarily from the increase in market value of consolidated funds. During q two, we purchased 843,000 shares for $18,100,000 with nearly all of this purchased in the open market. At the end of Q2, cash and investments were 373,000,000, of which about 317,000,000 was available to us. Debt at quarter end was 90,000,000.
During March, we borrowed 100,000,000 on our credit facility. We repaid that 100,000,000 and an additional 10,000,000 in q two. The q two tax rate was 23.8, down from last quarter due primarily to market value gains in the consolidated funds, which have no associated tax expense as the funds are not taxable entities to us. For 2020, we expect our combined federal, state, and foreign tax rate to be about 24 to 26%. Laura, that concludes our prepared remarks.
We'd like to open up the call for questions now.
Speaker 0
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Our first question comes from the line of Mike Carrier with Bank of America. You may proceed with your question.
Speaker 4
Good morning and thanks for taking the questions. First, just a question on money markets and the way we're out looking. Debbie, maybe first, just wanted to get an update on the outlook for yields as assets are getting reinvested, including, I know, during the quarter, just how much some of the Fed moves helped. And then just trying to figure out, you know, how that could play out in terms of, like, max waivers because it seems like a decent amount of the assets, you know, by the time, you know, we're at sort of the end of the the third quarter, you know, would have been, you know, sort of reinvested at at some lower rates. But just trying to get a sense on, you know, how that's playing out, you know, in across the different products.
Speaker 3
Debbie, why don't you address the, reinvestment rate, and, Tom and I will talk about the impact on waivers.
Speaker 5
Absolutely. Good to talk to you this morning, Mike. And as for the Fed moves, they absolutely were extremely helpful during the quarter by changing their repo rates and procedures from a timing perspective that really influenced where overnight rates are. And for, you know, our government products that can have upwards of, greater than 50% in that type of market, it was extremely helpful. So what basically we saw was an increase in the average repo rates that we were using on an overnight basis in those funds by, let's say, seven, eight basis points, somewhere in that neighborhood.
And they have generally kind of leveled off right around high single digits to low double digits as opposed to being down in the one to two to three basis point camp where they spent a good part of the beginning of the quarter and the end of the first quarter. So, you know, if you have 10% in overnight and the extra nine basis points in repo.
Speaker 3
Uh-oh. It sounds like Debbie fell off. Tom, would you address the waiver impact? We'll reconstruct Debbie's connection.
Speaker 2
Yeah. The the, you know, we mentioned the 4,000,000, which would be up from our estimate of of 2,000,000 in the third quarter. And, you know, we stay very close with Debbie and her team on on their forecast. And as I've said before, that's what we use when we project out one quarter. You know, if you if you were to ask Debbie what's she gonna say for the rest of the year, and she would say, well, the the rates will be, similar to to the, third quarter, but probably, a little bit lower.
And, you know, that would make our waivers be, you know, a little bit higher. But we only like to talk about one quarter.
Speaker 4
Okay. Got it. You re
Speaker 5
Hi. This is Debbie,
Speaker 6
have you returned?
Speaker 5
Hear my did you guys hear my answer? Sorry. My phone dropped.
Speaker 1
I I think we got, the the the the rate picture. So, yes, we can move on.
Speaker 5
Okay. Sorry. Thank you.
Speaker 0
Our next question comes from the line of Patrick David with Autonomous Research. You may proceed with your question.
Speaker 2
Hey, guys. Good morning. You quantify the performance fee this quarter and kind
Speaker 7
of break out the nature of those performance fees and how they break, into the various asset class revenue buckets, please?
Speaker 1
Well, the the the total, was about, 6,700,000.0, and and that was that was generated through Hermes strategies. So Saker may have a comment on on that. The comparison number in the prior quarter was about 1,300,000. So as we've said before, those numbers are gonna move around and are, you know, difficult to project. But, Saker, do you wanna comment on the nature of the q two performance fees?
Speaker 8
Sure. So, let's start by saying you can never predict performance fees any more than you can predict performance. And but you can get a pretty good idea if you go through our reported numbers, which are lodged in The UK for previous history. We make performance fees and carry fees primarily from two main sources. One is from our property portfolios and that then breaks down into further sources.
One is a unit trust, in fact two unit trusts but one large unit trust. Unit trusts are like mutual funds but they're essentially for institutional investors which has an automatic performance fee and that is triggered when we outperform our benchmark and we continue to be one of the best performing funds in the market over the long term and the short term. The other way that we do it in property is in certain development projects. If at the end of the project, our shareholders benefit more than the accepted benchmark that triggers a performance fee which is then PATOS And the performance fees of properties have been consistent, at least for the last ten years, not in terms of quantum but in terms of being paid. The other way in which we have performance fees is the carry on the private equity funds, which like all private equity funds tends to move around, and gets paid whenever, the private equity realizes again that it's been distributed to shareholders and takes a part of that performance fee.
Does that answer your question?
Speaker 7
Yes. Thanks. So so it sounds like it was all in the alternative revenue bucket.
Speaker 8
So it's all in the alternative revenue bucket, and a lot of it is generated in property. Yes. We do have some also in some private sorry, in public markets, but primarily, it is the alternative bucket.
Speaker 2
Hey, Patrick. This is Tom. Yeah. Just to give you to give you some of the numbers that Saker, mentioned. So year to date, for performance fees, we have, about 8,000,000.
In in 02/2019, we had 7.4. In 02/2018, we had 8.5. In 02/2017, we had 7.4. For the carry, year to date, we have 2.5. And 02/2019, we had 11.3.
And 2018 was 2.7. 2017 was 13.5. So you see why we don't wanna predict the numbers.
Speaker 9
Yep. Thank you.
Speaker 0
Our next question comes from our next question comes from the line of Robert Lee with KBW. You may proceed
Speaker 6
Great. Thanks. Thanks for taking my questions. Hope everyone is doing well. I guess maybe a little bit, Tom, a little bit of a modeling question.
So can you give us a sense now on compensation? Obviously, you've had the consolidation of the rest of the kind of buying in the acquisition. You talked about some comp accruals, bonus accruals. But, you know, how should we be thinking about kind of on a go forward basis with some of those moving pieces that, you know, just kind of a good run rate to be basing off of? Is there anything kinda, you know, whether it's, you know, catch up accruals or anything that we should be thinking about?
So how should we think of comp kind of on a go forward basis?
Speaker 2
Yeah. Sure. Sure, Rob. And we're doing well here. Thank you.
The the in my remarks, I mentioned that, the biggest driver of increase in pump was sales sales related. And of course, if you look at the numbers that Chris mentioned, we're pretty happy with that. In the old days, we called that a success item because if we have increased sales, we're gonna earn more money eventually. So that increased. But also investment performance and incentive aligned with investment performance has increased here in The States, And so that line has increased.
And then, you know, our operating teams and administration have just done an outstanding job in this environment. So, you know, I expect that will continue to, improve. Of course, that depends on earnings also. And then, over in our international area, in Sackers area, with the performance across the board, and they take a more holistic approach, as things improve, you know, those numbers will expect to go up too.
Speaker 6
Excuse me. Okay. Thank you. I'm just curious on kind of main points of the money fund business. So I mean, after kind of the industry surge back in March in Q1 and beginning of Q2, I guess, the pace of all the industry slowed down, there's tax payments, whatnot that happened.
But, you know, how do you kind of think of, you know, money from demand for a year, particularly as kind of the yields kind of come down so much gap between the government funds, bank deposits is certainly narrowed substantially. How does that if at all, do you think kind of any type of kind of the institutional demand we should think about, going forward?
Speaker 3
Well, I'll make a couple of comments, Rob, to start, and then, allow Debbie to comment on the difference in yield between govi funds and deposit rates and commercial paper funds. But overall, we always like to repeat the sounding joy of the fact that the clients are in there for daily liquidity at par, and the yield is a secondary consideration. And this is a cash management service as much as it is an investment. And therefore, overall, in a long term big picture, we are looking at higher highs and higher lows on our charts as the ebb and flow of money market, activities change as you dutifully point out. And this has been true since we got into this business, in the mid seventies.
Debbie?
Speaker 5
Thanks, Chris. If you look at most bank deposit rates, they're at a basis point. So, they're they're they're low on the totem pole from a an earnings perspective. If you look at the gross yields on our money market fund for the government sector, it's about 25 basis points. The gross yields on our prime funds are currently about 37 basis points, so about 12 basis points over the w.
If you look at the growth rate of assets on a year to date basis for bank deposits versus money market funds because both have grown substantially given the environment and the, you know, risk mitigation that investors are seeking and the buildup in cash, frankly. But bank deposits have grown by a little over 12% on a year to date basis, whereas premarket funds in total have grown about 17%. So, again, although the numbers, you know, on a base base average or base base level are different, the growth rate has been higher in money market products. And I do believe that that will sink to given the very, very, you know, very low rates that are available on bank deposits. You can find, you know, the the the occasional teaser rate, but it's not sustainable.
And generally, there are restrictions with withdraw withdrawals. And obviously, that's not the case when you're talking about a money market fund, government or prime.
Speaker 6
Great. Thank you. If I could have just one quick financial follow-up on the performance fees, the 6.5%, does that include carry or was that just, you know, performance fees?
Speaker 1
The the 6.7 for q two was just the performance fees. There was an additional 1.8 of carry, so 8.5 total for those two items. Great.
Speaker 6
Thanks so much for taking my questions.
Speaker 0
Our next question comes from the line of William Katz with Citigroup Investment Research. You may proceed with your question.
Speaker 9
Okay. Thank you very much. Hope everyone is doing okay. You didn't spend much time talking about the multi asset or the alternatives business, which had a bit of a lackluster quarter when you look at the net flows. They weren't really part of your flow update.
Can you talk a little bit about why you're seeing weakness there and how to think about the growth rate, particularly for alternatives, particularly given just the tremendous growth we're seeing elsewhere in the industry for that bucket?
Speaker 3
On the alternatives, which we consider the private markets, as you know, we just spent the first quarter getting that organized in terms of corporate structures, ownership, and getting ready for, the future. And, we did make it clear, when we were doing those transactions transactions on on the the last last call call that that we we weren't weren't going to be looking for growth numbers, in this calendar year from those activities, although they are, extraordinary opportunities, into the future. And, I would let Saker comment on, some of the things that are going on there that are setting up, the future growth plans there.
Speaker 8
Sure. Thank you, Chris. So, again, you've got to think of alternatives in different buckets, if you like. If you look at start with the real estate portfolio, which is where we've had a lot of performance fees in the past, Generally, these are sold in big lumps to institutional partners. It takes several years to get one of those deals set up.
They're typically quite large deals and they're typically invested for the next ten to fifteen years. Now for that, we are beginning to think about expanding our product capability into The United States and that will take some time to set up, sometime meaning more than one year. In the meantime, within our home territory in The United Kingdom, we continue to attract interested parties. It's also dependent on finding the right projects to invest in. The unit trust, which is a mutual fund in property is pretty much at capacity.
We have a long line of waiting investors wanting to come in when they can. If you move to private equity, we have a plan that was agreed with the team when the acquisition was completed of expansion plan of increasing the client base. And we will see that come to fruition in next two to three years, primarily by expanding within again North American market. We have other funds within what you'd call alternative, which we put within private markets, which are seeing some growth, but they're not as substantial as these two particular ones. So I'd say that the private markets is being prepared for expansion particularly in terms of the private equity and that the real estate actually is on track.
It's just you will not see it quarter on quarter. These are elephants that would pick off, takes time to get one in, and then they're in for the long term.
Speaker 9
Okay. Thank you for that. That's helpful. And then just a follow-up, don't know for Tom and Debbie. Just as you think about the money market fee waivers, and thanks for the update, any thoughts of how the relationship on the sharing side might be different this cycle versus the prior zero rate backdrop with the distributors?
So in other words, the question is, you know, how much sharing should we anticipate? Is there any risk that, Federate might need to absorb a higher percentage of those fee waivers as we look ahead?
Speaker 2
Well, Debbie, I'll answer first if you have a follow-up. We were, very, put in a lot of effort the last time in the low cycle to meet with everybody and work through the sharing arrangement and pro rata thought process, and were very successful in the last time around. And, you know, we're still getting asked by our, partners for increased, participation that they get versus us. But on terms of the waiver sharing, we have not seen, any any issue with our structure and and sharing arrangements.
Speaker 5
I have nothing to add to that. Thanks Tom.
Speaker 6
Okay, thank you all.
Speaker 0
Our next question comes from the line of Kenneth Lee with RBC Capital Markets. You may proceed with your question.
Speaker 7
Hi, good morning. Thanks for taking my question. Outside of the compensation expense, wondering if you could just share with us any of your latest thoughts on how operating expenses could trend, especially in this current environment? Thanks.
Speaker 2
Yeah. One of one of the things we didn't talk about, because I think everybody knows why we don't have T and E. Salespeople aren't aren't traveling and neither really is anybody else. We're hoping that that picks up sometime. And so as soon as that does, you know, the the the low expense item in t and e would would go up.
We're continuing to invest in in our technology and, you know, have a number of different projects across the company to, improve, upgrade, do do things better. But, I don't I view those are in the regular context of what we spend and what we work on. So I don't see, you know, outsized surprise things coming there either. You know, the distribution line item, we've pretty much covered that and we know that flows as asset flows. And I just went over the waiver thing so that we continue to deal with that.
You know, the nonconsolidated items, we've covered.
Speaker 3
And
Speaker 2
I don't have anything further.
Speaker 7
Okay. Great. Helpful. And just one quick follow-up, if I may. You repurchased some shares in the quarter.
Wondering if you could just give us your latest thoughts on capital allocation priorities and perhaps any thought on potential M and A opportunity? Thanks.
Speaker 3
Sure. On the breakdown, we are very active at, buying shares back. You see the numbers for the first and second quarter. And the priorities haven't really changed. As you hint in the form of your question, M and A remains the highest and best use.
But we are very active on the share buyback. And we, of course, like the dividend as well. On the M and A side, I see Tom, thirsting to come to the podium.
Speaker 2
Well, you know, it's pretty difficult to go out and meet people face to face, more than difficult. And so doing, you know, centers of x centers of excellence, I think, will be a challenge here. But roll ups, we're we remain active and and, hope to to still close some deals here.
Speaker 7
Great. That's very helpful. Thanks again.
Speaker 0
Our next question comes from the line of John Dunn with Evercore ISI. You may proceed with your question.
Speaker 6
Thanks and good morning. Could you maybe talk about how your relationships with the different distributors are evolving, during this period of time?
Speaker 3
The relationships with the distributors are very, very strong. And the evolution is now going deeper into the relationships with the distributors and the individual FAs. As people have, less ability to go and visit, They're doing more on the phone, more by the, Zooming and and all of that. And the FAs, as I mentioned I think on the last call, are doing, increased quality evaluation of their portfolios. And this is where our portfolio construction team, comes into the mix.
Because now, we're able to present our FAs with the idea of looking at the portfolios they've constructed where they may have 10 great funds, but they don't know how the bets are really being made inside those funds. And so we can help them with portfolio construction and find opportunities for various federated products along the way. And so the way I would characterize it is that there is some degree of oligopolization in the business when you can't go around and get new clients the way you would like to. So those who have them are bucks up to those who don't. And I don't know how good that is over the long haul, but right now it tends to oligopolize and strengthen the relationships that are already there.
We have been able to continue discussions on adding products. We added the sixth, Hermes product. And those new products continue to work well. And as you note on our sales numbers, we have the highest monthly average sales in our history. Our previous high had been about $3,000,000,000 a month in gross sales.
And now we're well over an average for the first six months of 4,000,000,000 per month. And so this is telling you that even though the regional consultants can't spend T and E money, they're still able to tell the story and present the solution. To summarize, I think the relationships have strengthened, and I think they have gotten deeper and stronger.
Speaker 6
Gotcha. And then, maybe as a follow-up, you guys are fortunate to be able to, keep investing. Can you can you just maybe remind us of the top areas of investment spend, for you guys at at this point?
Speaker 3
Well, we will we will give everybody a shot at that. One of the areas which we announced recently was a new hire in the active ETF space, and, we are beginning to get ready for that. So, that's one which we think is important. I'm sure Saker has a few on his agenda, and I'll let him, have a say there.
Speaker 8
Thank you. I mean, besides the one that we continue to invest in the EOS, we which just mentioned, which is a substantial investment in senior seasoned professionals to join our stewardship team, we've also hired a couple of additional people to our impact team in The UK, which is strong. We've added expertise into our responsibility office where we do some research. That particular individual is in fact was a doctor and has a particular specialization in pandemics as well. So these are the areas that come to mind in this last quarter.
But we've continued to hire we've also, hired or finalized the hire of an MD for the private markets business that we've established, as we've said, and that went quite well.
Speaker 2
Yeah. In the the the Kaufman team, you know, they've they've done so well, and their performance just speaks for itself. And, you know, we are looking for a number of new hires in there. And and they point out that the the recent hires that they've made have turned out turned out very well. So, you know, more investing in the Kaufman team.
Speaker 6
Thank you very much.
Speaker 0
Our next question comes from the line of Brian Bedell with Deutsche Bank. You may proceed with your question.
Speaker 10
Hi, this is Melinda Roy filling in for Brian. Maybe just one more follow-up on the fee waivers. Could you parse out the expected changes in management fees versus distribution expenses in 3Q versus 2Q in the context of your expected negative, 4,000,000 impacts received by waivers next quarter?
Speaker 1
Melinda, we we don't, really do that at the line item, basis, so that would be tough to to do. We we could, if you wanna talk about that, following up after the call, I'd be happy to to to to to try to help you there.
Speaker 0
Okay. No problem. And then
Speaker 10
maybe just one cleanup question. In the other service fees declined pretty significantly, in q q versus one q. You can maybe talk about the driver there, and is this $32,000,000, level of good revenue going forward.
Speaker 1
Yeah. That that would have been, where the bulk of the revenue impact from the minimum yield waivers, occurred. So, that would explain, you know, just about, you know, the the biggest portion of that change. There were some other things that, happened in there in q in q one. We had, a million two of non we pointed out a million 2 of non recurring revenue in, one of the private market, companies that we acquired.
So so that was booked in in q one and obviously not in q two. But the minimum yield waivers would explain the bulk of the step down there.
Speaker 10
Okay. Great. Thank you so much.
Speaker 0
Our next question comes from the line of Ken Worthington with JPMorgan. You may proceed with your question.
Speaker 11
Hi, good morning. I jumped on a touch late, so, hopefully you haven't covered this. But you've launched a series of, Hermes ESG focused funds in The U. S. Can you talk more about progress in bringing those products and services to The U.
S? And I think you said you've launched six funds thus far. How is dialogue going with distribution? And are those products getting on platforms? Or maybe it's just too early.
And then, you mentioned in prior calls, I think really last year, about the incremental cost and investments to bring these, products to The US. How much have you spent thus far And what's the outlook for incremental investment, to further launch these products, over the next year or so?
Speaker 3
Ken, the reception has been excellent. And the assets in those funds were about $88,000,000 at the end of the second quarter. And nearly all of that was externally sourced. So the seed assets in there are about 5, million. And so we're evaluating other strategies to look at.
And we've just launched our first SMA product based on a Hermes strategy, which, you know, will be coming out. So it is a little early to see how big these things will get. But the receptions have been good, and we've been able to onboard them and get on some platforms. Obviously, we want to get on more. In terms of the expense associated with that Yeah.
Speaker 2
We so we talked when we did the deal and had forecast and and, you know, put out millions of dollars of expected expense. But we now view ourselves as one company and, you know, aren't aren't saying, oh, here's some extra expenses. It's normal fund cost and and normal, you know, people cost, but it's not some extra thing to do to have the Hermes team manage the money over there. We have it figured out. And, you know, we don't break that out and and don't look at it that way.
We have our research committees get together and figure out what's the best product to bring out and what can we sell, and it's in it's in our normal process now.
Speaker 11
Okay. I think it's fair enough. Thank you. And then, maybe some more color on performance fees. I know they're hard to predict, but maybe just some guidelines.
Is there anything you can give us on the timing of when funds are eligible to pay? So clearly, this, you know, was a bigger quarter. Is 2Q a big quarter, maybe 4Q? Timing there. And then any way to size unrealized performance fees or unrealized carry?
How big is the pool that we might have to look forward to based on where things are at this point in time?
Speaker 2
Yes. Zachary, you can follow-up with my non answer. You can. You know, they just they just you know, it it involves selling a building and when is that gonna happen? Or or the private equity, you know, realizing and monetizing something that they own.
And the timing is just total variable. We've had things where where they've we've asked them for projections and, you know, this is kinda inter works at at Federated Hermes to try to ask them for projections to and it's just oh, why did it take longer? Well, this thing didn't sell. Why did it happen? Well, the legal's this.
And it's just across the board too difficult for us to to figure it out. Now on the you know, on a higher level, I think Zaker can talk about, you know, that's why I took you through the the numbers to give you the past. Not that that's gonna be the future, but, you know, so Zachary, real estate, I don't know if you wanna follow-up with that.
Speaker 8
So, yeah, I mean, I I I think it's very difficult to try to project, the future. But from the numbers that that Tom has given you, you can see historically what, say, property performance fees look like. This is just the historic. This is just the past. It doesn't mean the future is going to be the same, but it gives you an idea.
And private equity is more variable. I think in becoming one firm as we become part of Federated Hermes, one of the things about the differentiation of our business is it tends to be very institutional, very long term based. And so quite often, the projects that we work on which then pay us handsome dividends are not necessarily traceable on a quarter to quarter basis but a much more long term basis. Now in average, every year we make performance fees and we make carriers and you can as I say see that in our history because one comes after the other. But projecting how much is gonna be in a particular quarter, sometimes even in a particular year, is very hard.
All that we can say is we've been really successful with what we've done historically. You can see historically how much we've generated, but past past performance is no indication of future performance as you always say when you're talking to investors. I'm sorry, can't be any more, specific than that.
Speaker 11
Right. Well, it was worth a shot. Thank you very much.
Speaker 0
Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.
Speaker 6
Great. Thanks for taking my follow-up. Just curious on your on your ETF business, you know, the and you did mention the the higher, you know, press release. Could you maybe talk a little bit about what your plans there? You're talking about active ETFs that have you licensed one of the compete you know, one of the approved technologies out there?
You know, your thoughts around that versus, you know I'm not sure if you have a follow-up yourself, but, you know, your your own technology, so to speak.
Speaker 3
All angles are up in the air being analyzed. And, Brandon Clark just joined the firm. I met with him on Wednesday. And, so we are just getting started on that. And we are gonna figure out what the best way to go is.
And don't forget that overall business on the active side is really in the first inning. It may even still be in spring training. And, you know, there's only $120,000,000,000 of over a $4,000,000,000,000 ETF business. And this is why we looked at it this way. Federated is interested in strong alpha high active share type projects.
And which ones we now put together and how we structure it is what we're going to be about. So I don't have the map because, we brought in someone with a good deal of experience at a number of the big players. And, this is the brainstorming that's gonna go on here to see how the Federated Hermes, active ETFs should look.
Speaker 6
Great. That was it. Thanks for taking my question.
Speaker 0
Our next question comes from the line of Mike Carrier with Bank of America. You may proceed with your question.
Speaker 4
Hi, thanks. Just a follow-up figure. A quarterly you put
Speaker 6
in like $6,000,000,000 of
Speaker 4
inflows in fixed income. I wanted to get a little bit of color. But Chris, you gave some details on like the product on the high yield and short duration. I guess just on the distribution side, if you can provide any color on institutional, if it was sort of money market, you know, some money shifting you into, you know, some of the short duration strategies to see a little bit more, you know, like, retail we can see. And then anything on the international side, given that, you know, some of the relationships that build over time.
So just trying to get a sense of how, like, kind of broad based, you know, that was in the quarter. Thanks.
Speaker 3
It's very, very difficult, and we don't usually make the speech about how money moved from money markets into other products. As you know from history, we deal with most of these clients on an omnibus basis, and so we can't exactly track the cash flow. We can say, as I said on the other on the call last quarter, that there is increasing interest in active management projects, because people are beginning to see that maybe they don't wanna own the whole index. So that's another factor. In terms of the high yield, though, with those net sales over $2,000,000,000 if you were to look at the performance of high yield versus any of the passives or the ETFs, the high yield projects that we have are considerably better performers.
And I think that's very helpful. On the total return bond fund, what customers are looking for is people making judgments for the long term and not just buying the index. And so you're seeing some of those footprints come through there. And you're even seeing it in the SMA strategies as well on the fixed income side where the performance has been really excellent. Let's see.
On on the international, you've seen, some growth there as well, not as much, but it's it's it's alive and well.
Speaker 4
Alright. Thanks a lot.
Speaker 0
Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn this call back to mister Raymond Hanley for closing remarks.
Speaker 1
Well, that will conclude our call for today, we thank you very much for joining us.
Speaker 0
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Speaker 8
Thanks.