Federated Hermes - Q3 2023
October 27, 2023
Transcript
Operator (participant)
Welcome to the Federated Hermes Inc. Q3 2023 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
Ray Hanley (President and Senior VP)
Good morning and welcome. Thank you for joining us today. Leading today's call will be Chris Donahue, Federated Hermes President and CEO, and Tom Donahue, Chief Financial Officer. And joining us for the Q&A are Saker Nusseibeh, who is the CEO of Federated Hermes Limited, our international operation, and Debbie Cunningham, the Chief Investment Officer for the 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 disclosures in our SEC filing. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?
J. Christopher Donahue (Chairman, President and CEO)
Thank you, Ray, and good morning, all. I will review Federated Hermes business performance. Tom will comment on all the financial results. We had solid asset growth in Q3, ending with record assets under management of $715 billion, driven by record money market assets of $525 billion. Fixed income produced solid growth as well. Looking first at equities. Assets were down $5.7 billion-$77.3 billion due to combined market losses and FX impact totaling $3.3 billion and net redemptions of $2.4 billion. We did see Q3 positive net sales in 14 equity strategies, including MDT, Large Cap Growth, International Leaders, and US SMID Equity. The Strategic Value Dividend Domestic Strategy had Q3 net redemptions of $1.5 billion.
This strategy is outcome-driven and is benchmark agnostic as we have said each quarter. It seeks a high and rising stream of dividend income from high-quality companies. As of 9:30 A.M., the fund had a weighted average dividend yield of 5.1%, compared to a 1.6% yield in the S&P, and the fund has seen 39 dividend increases and 0 cuts in the trailing twelve months. Looking at equity performance compared to peers and using Morningstar data for the trailing three years end of Q3, 54% of our equity funds were beating peers and 33% were in the top quartile of their category. For the first three weeks of Q4, combined equity funds and SMAs on the equity side had net redemptions of $753 million. Now turning to fixed income.
Assets increased by $2.3 billion in Q3 to $89.8 billion, with fixed income separate accounts reaching a record high of $47.2 billion. Fixed income institutional separate account net sales of $3.8 billion were driven by the funding of a $2 billion dollars in an institutional multi-sector mandate and by approximately $1.3 billion from a large public entity. Fixed income SMAs had Q3 record gross and net sales of $572 million and $320 million, respectively. Fixed income funds had net redemptions of about $684 million. Within funds, our flagship Core Plus Strategy Total Return Bond Fund had Q3 net sales of about $466 million. Oh, that includes both the fund and the CIT.
Core Plus funds and other fixed income SMA strategies added $320 million of Q3 sales. The three Ultrashort funds posted net redemptions of about $462 million. We had 15 fixed income funds with positive net sales in the third quarter, including the Total Return Bond Fund, the Total Return Bond Collective Investment Fund, the Intermediate Corporate Bond Fund, and the Sterling Cash Plus. Regarding performance, at the end of Q3, and using Morningstar data for the trailing three years, 31% of our fixed income funds were beating peers. 17% were in the top quartile of their category. For the first three weeks of Q4, fixed income funds and SMAs had net redemptions of $77 million. In the alternative private markets category, assets decreased by about $1.3 billion in the third quarter from the prior quarter-...
Coming to $20.3 billion. The decrease was due to FX impact of about just under $800 million, market value decreases of about $300 million, and net redemptions and distributions of about $200 million. We are in the market with Horizon III, the third vintage of our Horizon series of global private equity funds. Horizon III has closed on commitments of $1.05 billion through the third quarter. We're also in the market with the Hermes Innovation Fund II, the second vintage of our Pan-European Growth private equity innovation fund. We had our first close in August for approximately EUR 100 million, and we're in the market with our first vintage of our UK Nature Impact Fund. We began Q4 with about $4.9 billion in net institutional mandates, yet to fund in both funds and separate accounts.
These wins are diversified across fixed income, equity, and private markets. Fixed income expected additions total about $3.1 billion, which include wins in active cash, short credit, high yield, and corporates. Approximately $1.5 billion of total net wins is expected to come in private market strategies, with wins in private equity, direct lending, and absolute return. About $227 million of the net total wins is expected to come into equity strategies, and wins included mandates in bioequity, global equity, and GEMs. Moving to money markets. We reached record highs for the money market assets of $385 billion, and total money market assets of $525 billion.
Money market strategies continued to benefit from favorable market conditions for cash as an asset class, higher yields, elevated liquidity levels in the financial system, and of course, favorable yields compared to bank deposits. As short-term interest rates peak, we expect market conditions for money market strategies will be favorable compared to both direct market rates and bank deposit rates. Looking at flows in money market funds in the third quarter, we saw good activity from products geared toward the retail customers of financial intermediaries. Institutional product flows continued to be challenged by direct security yields. Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.3% at the end of the third quarter, up from about 7.2% at the end of the second quarter.
Looking at recent asset totals as of a few days ago, managed assets were approximately $716 billion, including $527 billion in money markets, $74 billion in equities, $91 billion in fixed income, $20 billion in alternative private markets, and $3 billion in multi-asset. Money market mutual fund assets were at $385 billion. Tom?
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
Thanks, Chris. Total revenue for Q3 decreased $30.6 million from the prior quarter, due mainly to the substantial carried interest and performance fees in Q2 related to the transactions we discussed on our last call. Q3 carried interest and performance fees were $14.9 million, compared to $39.4 million in the second quarter. All other revenue decreased by $6.1 million. Revenue from money market assets decreased by $9 million, offset by an $8.2 million decrease in related distribution expense. Changes in certain product structures drove these decreases, while higher average money market assets added to revenue. Q3 operating expenses decreased $33.6 million from the prior quarter, due mainly to compensation related to carried interest and performance fees in Q2, and to lower money market fund distribution fees as discussed.
Q3 included about $10 million in compensation related to carried interest. The decrease in other operating expenses includes a reduction of about $7 million in expense related to the infrastructure fund restructuring discussed in Q2, partially offset by an increase of $3.7 million in FX-related costs and approximately $2 million of other expenses. At the end of Q3, cash and investments were $554 million, of which about $486 million was available to us. Holly, that completes our prepared remarks, and we would like to open the call up for questions now.
Operator (participant)
Certainly. 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. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Your first question for today is coming from Dan Fannon at Jefferies.
Daniel Fannon (Managing Director and Senior Research Analyst)
Thanks. Good morning.
J. Christopher Donahue (Chairman, President and CEO)
Good morning.
Daniel Fannon (Managing Director and Senior Research Analyst)
Wanted to, wanted to discuss your outlook for, for money market, assets in, in the context of rates. I think we've heard from others that fixed income is, as rates peak, is going to see a, you know, significant demand, pick up. And I think you're talking about money markets, as being also a beneficiary. So, wondering, you know, what's the as we think about duration maybe being extended, how money markets, you think, will fare in terms of demand versus what would be, you know, more traditional fixed income asset classes?
J. Christopher Donahue (Chairman, President and CEO)
I will comment on it first, then Debbie will have some additional comments. As we've said on this call, over the last several calls, once those rates begin to peak, you begin to attract the institutional money, which, as I mentioned, is more attracted by direct securities at this point in time. We would expect to see institutional flows increase. Right now, on the retail side, we're in a very good position with the rates. When you combine that with the reticence of financial advisors to take positions, their lack of certainty, they're waiting on the Fed and getting paid 5% plus, it's hard to say exactly when they will decide to go longer. That would be the basic outlook.
Don't forget that, as we've mentioned before, when we look at the last cycles, you know, from 2016 to 2018, Q4 of 2016 to Q4 of 2018, after the initial decline, the money market fund assets increased by 15%, and then industry did about the same, about 11%. We continued to grow with higher rates, of course. The other thing we like to mention is that, basically, our assets grew about over 20% through Q3 of 2019, when they began to ease, and the industry assets also grew at a smart clip then. That's the basis on which we come to those kinds of observations. Debbie?
Deborah Cunningham (EVP, CIO of Global Liquidity Markets)
George, I'll just add a couple things. You mentioned, Dan, the extension trade, and we do that even within money markets. So you know, started out this cycle with weighted average maturities, durations down in the single digits to teens from a, you know, days perspective. We're now out much longer, 30, 40, 45 types days, so and have done the extension trade in order to keep the yields higher within the product itself. I think another thing that's helpful is that, you know, during the zero-rate environment, so many cash managers got used to bucketing cash. So, you know, a certain amount that's, you know, kind of operating on a day-to-day basis, stays in the government sector.
Next, you know, kind of more strategic goes out into prime and then ultimately micro shorts, ultra shorts in the longest bucket. But when you're looking at a higher for longer scenario with a yield curve that, you know, from overnight at 5.25%-5.30%, out to, you know, 10-year bonds at just under 5%, you're looking at something that is a market that's finally reconciling with that, you know, Fed statement higher for longer. So I think the flows, as Chris mentioned, you know, will continue in retail and will do nothing but grow in institutional.
Ray Hanley (President and Senior VP)
And, Dan, it's Ray. I would just add, we're well positioned for people deciding to extend out on the curve with our fixed income product array. And in particular, you know, people are interested, as evidenced by the flows in our Total Return Bond Core Plus strategy with a six-year weighted average effective duration. It's really well positioned. We've been talking to clients all year. The cash yields are very attractive, so it's there is a certain amount of waiting for the right time. But when that trade happens, we have a lot of good strategies that can catch the money going out further.
J. Christopher Donahue (Chairman, President and CEO)
One more comment I had to raise, bringing that up, and that is that the ultra-short funds are starting to turn. They haven't gone positive yet, right here in this, the first couple of days of this month or quarter, but it's getting a lot closer. And the Government Ultrashort Fund has just done a pretty good job on flow. So you're seeing people go out there. And remember, that's currently a $5 billion franchise that we have here, and ultra-short funds on all three streets.
Daniel Fannon (Managing Director and Senior Research Analyst)
Great. So that, that's very helpful. I wanted my follow-up on distribution expense, some of the dynamics in the quarter, I think you walked through, but if you could provide a little bit more specifics around what happened and more importantly, going forward, how we should think about the relationship of frankly, money market, AUM, and the distribution expense.
Ray Hanley (President and Senior VP)
Okay, Dan, it's Tom.
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
... You know, probably going forward, we would anticipate as assets go up, that that distribution number would go up. And we had some changes in the quarter, as I mentioned on product structures that reduced some of the revenue, but then reduced a pretty commensurate amount of expenses. That should be, you know, cleared up, and I would expect if assets grow, that the distribution line item will go up as an expense.
Ray Hanley (President and Senior VP)
Yeah, then the Q3 run rate is a good one to use going forward. It's down, as Tom noted, but also, as you noted, commensurate with the change in revenue. But that's a good run rate to use going forward.
Michael Brown (Managing Director and Equity Research Analyst)
Great. Thank you.
Operator (participant)
Your next question is coming from Patrick Davitt with Autonomous Research.
Patrick Davitt (Partner, Senior Research Analyst, and Research Analyst)
Hey, good morning, guys.
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
Good morning, Patrick.
Patrick Davitt (Partner, Senior Research Analyst, and Research Analyst)
You, you mentioned last quarter you thought the stock was cheap and you had, I think, more than $400 million of available cash, so why not do more repurchase? And now that the stock is even cheaper, should we be expecting more of that in 4Q?
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
That's a great idea.
Ray Hanley (President and Senior VP)
Yeah, we had our board meeting yesterday, and we approved another $5 million share buyback program. That's our 16th, and we have a history of completing our share buybacks, buyback programs. We have about 1.4 million left in the existing one, and we wanted to get approval for more shares with only 1.4 million left.
Patrick Davitt (Partner, Senior Research Analyst, and Research Analyst)
Got it. Thanks. Another one on capital. Could you speak to any inorganic opportunities you're seeing right now? What kind of discussions are out there, and what your appetite is to do more M&A at this point?
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
Yeah, we have a lot of appetite. You know, we've gone through for years. You know, we pay our dividend and share buybacks. The first thing that we'd like to do, you know, after the dividend, is to buy somebody and more than somebodies, because the way we do it and we look at our returns, and we think that that's a, you know, an excellent return for the company. It's been challenging getting people to let loose to sell. And, you know, I don't have a. You know, we just continue to meet with people, and I don't have a, you know, any announcements to make.
But, you know, on the money fund side and on the, what we call roll-up sides, where people decide it's time for them to you know turn it over to us, we are active in talking to people. And on bigger deals, you know, those things take time to do, and I say I don't have a list of things to announce.
Patrick Davitt (Partner, Senior Research Analyst, and Research Analyst)
Thanks.
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
That's it.
Operator (participant)
Your next question for today is coming from Ken Worthington with JP Morgan.
Ken Worthington (Senior Equity Research Analyst and Managing Director)
Hi, good morning. Thanks for taking the question. I wanted to expand on Dan's earlier question. So a number of CEOs have expressed the opinion that various investors are over-allocated to cash. So I guess first, do you see retail and/or institutions over-indexed to cash versus other asset classes? And within cash, are they over-indexed to money market funds? So you talked about sort of the direct market, but how do you think money market funds stand today versus other cash channels? And are investors really over-indexed or not?
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
I don't have statistics good enough to make a judgment as to whether the retail clients are over-indexed to cash or not. The incidental information we get based on our sales force, which is robust, is that they are just very, very, very, very unsure about what to do. So that would mean they would have more money than the average bear would think in the money funds. But I don't have enough of stats to tell you whether they are over-indexed to that. And we don't participate as vigorously as others do in this so-called cash sorting, because the products we offer are the ones that give marketplace yield across the board. And I think that's about my response, unless you have something, Debbie.
Ray Hanley (President and Senior VP)
The only thing I'd add is that if you look at our money market fund assets as a % of our total liquidity assets, they are basically growing equally. It's about three quarters money funds, one quarter other types of, you know, whether it's in, local government investment pools, separate accounts, collectives, privates, offshore. The rate of growth seems to be commensurate for both types of liquidity products. It doesn't seem like people are overweighting the money fund side of it.
Ken Worthington (Senior Equity Research Analyst and Managing Director)
Okay. Okay, fair enough. And then, you know, Federated stock has underperformed quite a bit since it was announced that it would be excluded from the Russell Indices. I guess, how challenging would it be to adjust the structure to meet the minimum requirements for inclusion back in Russell? And given the magnitude of the stock underperformance, why not consider this?
J. Christopher Donahue (Chairman, President and CEO)
... Well, we're not going to do that, but, I, I just can't connect coming out of the Russell to the performance of the stock. That's one of those post hoc ergo propter hoc mistakes, and, I, I just can't buy into that. And in terms of the structure, we have a lot of confidence in the structure. We've been using it for a long time. And, of course, considering sin is not the same as committing it, so talking about it is fine, but I don't think it's going to happen.
Ken Worthington (Senior Equity Research Analyst and Managing Director)
Okay, fair enough. Thank you very much.
Operator (participant)
Your next question for today is coming from Brian Bedell with Deutsche Bank Securities.
Brian Bedell (Managing Director, Senior Equity Research Analyst, and Research Analyst)
All right, great. Good morning, folks. Thanks so much for taking my questions. Maybe first one, just back on the money market franchise. If I can squeeze in a two-parter on this one. One, from the retail behavior allocation side, so, for the platforms that you're on, in which you would be getting money market inflows from, say, risk off allocations away from, say, at, say, equities, is there any way to size, you know, what, what potential, across your money fund base, your money market mutual fund base would be sensitive to those platforms? Maybe I'll start with that one.
J. Christopher Donahue (Chairman, President and CEO)
Hmm. We don't know.
Brian Bedell (Managing Director, Senior Equity Research Analyst, and Research Analyst)
Okay.
J. Christopher Donahue (Chairman, President and CEO)
We look at the charts we keep on the terms of the assets that are in that field, but that isn't going to answer your question. If I take you to the chart that shows you how much is in broker-dealer and retail, that's not going to answer your question. I don't have enough to answer that one.
Deborah Cunningham (EVP, CIO of Global Liquidity Markets)
Yeah, I can say that for our largest distributors of retail products, retail money market funds, they're number one, very diverse, and number two, all experiencing large amounts of growth in the 2022-2023 timeframe. So it's not heavily weighted to one institution's you know, preference or sales or allocation tactic. You know, it's across distributions.
Brian Bedell (Managing Director, Senior Equity Research Analyst, and Research Analyst)
Okay. Okay, fair enough. And is there time for me to ask one more money fund question and also one ESG question?
J. Christopher Donahue (Chairman, President and CEO)
Yes. Keep rolling.
Brian Bedell (Managing Director, Senior Equity Research Analyst, and Research Analyst)
Okay, okay. Just on a quick one on the money fund side, how you have been extending duration, what should we think of maybe as sort of a maximum extension, if you think at some point you know the market's going to start to price in rate cuts, and naturally, the longer you are extended, the better, I guess, subject to liquidity constraints?
Deborah Cunningham (EVP, CIO of Global Liquidity Markets)
Right. Yeah, we—I mean, generally speaking, we target 10-day ranges. So right now in our prime funds, we're at 40-50 days, our Govi funds, 35-40 days, muni, 40-50 as well. I mean, the longest we're ever gonna get is 50-60 days. But even that, with the new daily and weekly liquid asset requirements that will come into being from an SEC rule requirement standpoint in April of 2024, it will be difficult to get up into the mid- to high 50s. And given that, you know, there's always a concern about, you know, whether there's large clients that want to exit, sort of know your client kind of discussions.
I would guess maybe there's another 10-15 days extension, but not too much more than that.
Brian Bedell (Managing Director, Senior Equity Research Analyst, and Research Analyst)
Got it. Got it. Okay, great. And then on the ESG side, just, I guess, just, as this year has unfolded and all the political challenges we've seen for ESG, are you seeing any changes in demand for the ESG funds that you have rolled out? And if you can contrast the U.S. versus maybe what you're seeing in Europe. And then how might that influence your you know, your future ESG product rollout strategy, both again, in Europe versus U.S.?
J. Christopher Donahue (Chairman, President and CEO)
Brian, I'll take that first, then I'll let Saker comment on the European side. We did six years of cultural due diligence with Hermes when we were looking at them from 2012 to 2018, and ESG was one of the main things. During that time, we also spent a lot of time figuring out how to be able to successfully say yes to the fiduciary with ESG. We have repeated the sounding joy of this work to the SEC, to the Department of Labor, to the marketplace, where you have a Stanford Law Review article that set forth all the research that had been done, that basically says, if you're a fiduciary, you have to be for the exclusive pecuniary interest of the underlying investor. If you want an impact fund, that's great, too.
You can use the ESG features to analyze risk in order to improve returns. We think this continues. Now, you asked the question in light of, okay, political stuff and, where, where are we and how does that affect us? Well, what we try to do is stay out of the politics and stay down the street of the performance of the funds. I would mention that there is a recent study that came out of, well, it was a bunch of professors from University College at UCD in Dublin, Oxford, and University of Texas at Austin, that basically concluded that engagement can reduce the risk in a portfolio or in an individual security. Okay, so that's an interesting one and a fair fight in the marketplace. Reasonable people can disagree.
But we are going to continue with our integration efforts. We are going to continue with looking at these points, the way we said we were, to enhance performance as active managers that we are. But there is a big difference between basically, even though there's food fights in the U.S. on this, there's a big difference between the basic U.S. structure and that in Europe. And I'll let Saker talk about his role in overseas.
Saker Nusseibeh (CEO)
Thank you very much, Chris. So, just before we talk about overseas, I want to reemphasize something that Chris said about the way we look at ESG. To our mind, integrating ESG is a way of enhancing financial returns in the long term. And because in the Hermes business, and we see ourselves as a long-term institutional business, it has been our conviction, and indeed, our internal data shows, that on average, it actually adds value over the long term. So to us, this is part of enhancing returns. Furthermore, we combine it with engagement through our stewardship business, EOS. And as Chris has said, the new studies come out that actually supports previous studies that have come out, that show that our type of engagement does enhance financial returns.
Now, it's important to emphasize, we do not integrate ESG for any other non-financial, long-term reasons for trying to enhance value and create sustainable wealth. That's not what we do. Unless the client asks us to, specifically, we do not, for example, divest from particular types of stocks. So that's just a general background of what we do in the old Hermes, which became Federated Hermes Limited. And as Chris says, we think that is totally in line with fiduciary duty as understood by U.S. law. In Europe, there is a demand for one additional factor, which is not just to do ESG for enhancing returns, but to try to create social impact. This is allowed in some certain jurisdictions and certain structures in Europe, and the demand for that continues to increase in Europe.
We have continued to see demand for, and the opportunity for, continuing to grow our business over there. I will finish up by making one point. The old Hermes, I would claim, was one of the first people to look at this space back in 1983. We've had a long experience of thinking about why we do it, and the point is that we do it for the sake of the enhancement of the underlying investor. Our position, in our mind, is what gives us the strength to continue to roll out our products outside of the United States, where demand is continuing to increase, in fact, and to enhance, to ensure the fact that within what we do, we are doing it within the bounds of fiduciary duty. Specifically, the demand is not dying out in the rest of Europe.
Asia possibly is a little bit less than in Europe, but we see an increasing demand within the big European market for the time being.
Brian Bedell (Managing Director, Senior Equity Research Analyst, and Research Analyst)
That's a great overview. Thank you so much.
Operator (participant)
Your next question for today is coming from John Dunn with Evercore ISI.
John Dunn (Managing Director and Senior Equity Research Analyst)
Thank you. Can you kinda characterize the sort of timing of the unfunded pipeline? You know, how much is later stage versus newer wins and maybe the average time to funding?
J. Christopher Donahue (Chairman, President and CEO)
Sure, John. I don't have statistics to give you on the quarter. Specifically, you'll see the equity and fixed income fund in a couple of quarters, and private markets can take as long as, you know, into next year. Because when we get those commitments, when we have closings, the money often is not shown as assets under management until it's actually drawn down in investing. So we'd have to do some more work to give you kind of a weighted average timing on the pipeline. Generally, look for the equity and fixed over the next couple of quarters and the private market to extend out several quarters.
John Dunn (Managing Director and Senior Equity Research Analyst)
Gotcha. And then maybe just thinking about Strategic Value Dividend, can you give, give us kind of a flavor of the profile of the investor there? You know, how they look at the current backdrop, and how the conversations of, you know, your wholesalers are going, you know, holding on to assets versus, like, maybe increasing sales at some point?
J. Christopher Donahue (Chairman, President and CEO)
Well, in terms of discussions, these are challenging discussions with the sales, the salespeople and, the intermediaries that are in there. And so we gotta be straightforward about that. But it simply repeats what we said all along, and the fund continues to do what it does. So even though it's like a pogo stick in terms of, Morningstar category, that it doesn't really fit, going from the top to the bottom, bottom to the top, that's what stimulates the discussions. And so, we've been through this before.
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
...And that keeps a lot of the core shareholders quite sanguine because they're looking at a 5%+ yield on a, on a bunch of stocks that are pretty solid. Now they're not the Magnificent Seven, so you're not gonna get that ride. So it is an active debate and an active discussion.
Saker Nusseibeh (CEO)
Thank you.
Operator (participant)
Your next question is coming from Michael Brown with KBW.
Michael Brown (Managing Director and Equity Research Analyst)
Great, thank you. Tom, I just wanted to dive into the expenses a little bit. I appreciate the commentary about the quarter, but given some of the puts and takes you mentioned, I just was looking to maybe clarify some, you know, forward thoughts on the non-comp side. Particularly on the GNA side, is what you saw in the third quarter a reasonable run rate for the fourth quarter? Should we expect that to kinda step down? And then when I look out to 2024, based on your, you know, growth and investment expectations, any view on what the expense growth rate could be for that GNA line in particular, just given that might be a bit better or easier to predict? And could that come back to, like, a mid-single-digit growth range?
Thank you.
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
Okay, Mike. So we mentioned that the comp line had the comp related to the carried interest of about $10 million. So unless we get more carried interest in Q4 and into the future, you know, that number, all else being equal, you know, would go down. And remember, I stopped predicting the compensation line because you can't predict the compensation line. On the distribution, I think we talked about a little bit that the, you know, the run rate is good, and if, you know, assets go up, we would expect that to go up. Advertising and promotion, you know, it's in a band, and maybe that goes up a little bit in the fourth quarter as we do a little more advertising and promotion.
All the other line items I think look like they're in good order for run rate. You know, the other line has FX in it, so you know what's gonna happen to the pound? Remember, we hedge because we earn our fees in dollars and have to pay the people in London in pounds. So if the pound goes down, then we have FX expense. But of course, then we are covered when we go to pay the costs there. We went through the infrastructure restructuring, and so those costs should come down a little bit. So that's basically Q4. In terms of 2024, I don't really have a whole lot to add to that.
You know, we're getting into our budget season, and I'm not too excited about making predictions on 2024.
Michael Brown (Managing Director and Equity Research Analyst)
Okay. Thank you, Tom. Maybe just one follow-up on the M&A comment earlier. You know, it sounds like there-- it sounds like, you know, you're having some active dialogue, looking at interesting opportunities out there. Could you just give us a flavor of, you know, what would be kind of some interesting, you know, additions to the Federated Hermes platform? You know, what types of assets could be, you know, a good, good fit for your company? In terms of maybe size, would you think a deal would be kinda closer to a C.W. Henderson, so maybe more of a bolt-on, or do you think that there's potential for something more transformative? Thank you.
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
We're really excited about the Henderson. We're coming up on our one-year anniversary there, and we are actually expecting some exciting things there into the future, 'cause that part of the budget process has started, so we're looking forward to some growth there. Doing that size transaction works pretty well with us. We can, you know, integrate it, make it part of Federated, take the expertise that the teams bring and utilize it, and have our distribution have the opportunity to sell it. We will look for more things like that.
If you remember what we talked about last quarter, and it, you know, it feels like it's just talk, but the alternative markets and what will we try to do there to take our expertise over in London and expand it here in the U.S., is continual to look at things and try to do it. I would not expect that those would be what you would describe size-wise as transformational, more something of how we can take our skills and combine them with, you know, a team here. That then we could do it on the real estate side, on the private equity side, on the infrastructure side, on the private debt side, which we have, you know, excellent growth prospects over in London.
How we could, you know, make that grow here, which is a, you know, an exciting, opportunity, too. I wouldn't expect any of those to be big transformational deals, unless something comes along that we're interested in doing, which, you know, as, Chris says, we're always willing to try on, any kind of things like that.
Michael Brown (Managing Director and Equity Research Analyst)
Great. Thank you. Appreciate all the color.
Operator (participant)
We have reached the end of the question and answer session, and I will now turn the call over to Ray for closing remarks.
Thomas R. Donahue (VP, CFO, Treasurer, and Director)
Thank you, Holly. That concludes our call, and we thank you for joining us today.
Operator (participant)
Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.