Federated Hermes - Earnings Call - Q4 2018
January 25, 2019
Transcript
Speaker 0
Greetings, and welcome to the Federated Investors Fourth Quarter twenty eighteen Analyst Call and Webcast. At this time, 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 the conference over to your host, Mr.
Raymond Hanley, President, Federated Investors Management Company. Thank you. You may begin.
Speaker 1
Good morning and welcome. Leading today's call will be Chris Donahue, Federated's CEO and President and Tom Donahue, Chief Financial Officer. And joining us for the Q and A are Saker Nusabe and Debbie Cunningham. Saker is CEO, Hermes and Debbie is our Chief Investment Officer for the money markets. During today's call, we may make forward looking statements, and we want to note that Federated's actual results may be materially different than the results implied by such statements.
We invite you to review the risk disclosures in our SEC filings. No assurance can be given as to future results and Federated assumes no duty to update any of these forward looking statements. Chris? Thank you, Ray. Good morning.
I will briefly review Federated's business performance and Tom will comment on our financial results. Looking first at equities. We closed the year with $72,500,000,000 of assets, down from $84,000,000,000 at the end of the third quarter with market related losses leading to nearly 80% of the decrease. For the full year, equity assets increased by about $10,000,000,000 with the gain from Hermes partially offset by net redemptions and market related losses. We had 15 equity funds with positive net sales in the fourth quarter.
The MBT Small Cap Growth and Core Funds and the Kauffman Small Cap Fund had inflows as well as the MBT All Cap Core and Large Cap Growth Funds. Several Hermes equity funds achieved positive net sales in the fourth quarter, including the SDG Engagement Fund, the Global Equity ESG Fund, the newly launched Emerging Markets SMID Fund and the Asia ex Japan Fund. Using Morningstar data for the trailing three years at the end of the year, nearly half of our equity funds were in the top quartile and about twothree were in the top half. Five star equity funds include MDT MidCap Growth, Kauffman SmallCap, Hermes Asia ex Japan, Hermes Global Emerging Markets. We also had ten four star equity funds, including multiple MDT funds, Kaufman and Hermes strategies.
Looking at the strategic value dividend strategy, its objective is to provide a high and growing dividend income stream from high quality companies. The fund's twelve month distribution yield, a little over 4%, ranked it in the first percentile of its category in Morningstar at the end of the year. The fund had a return of minus 7.8% in the fourth quarter. It ranked in the top fourth percentile of its Morningstar assigned large cap value category for fourth quarter. And that meant it was forty second percentile for the trailing one year and eighty third percentile for the trailing three years.
The domestic strategic value dividend strategy had a combined mutual fund and SMA outflows of $1,500,000,000 in the fourth quarter, down slightly from the third quarter's numbers. Looking at early Q1 twenty nineteen results, combined fund and SMA net redemptions for this strategy were about $38,000,000 for the first '3 weeks of January. Combined equity fund and SMA, this includes Federated and Hermes, net sales in the first three weeks of January were positive by approximately $216,000,000 Funds with positive net sales in this period include Hermes Global Emerging Markets, MDT SmallCap, Kaufman SmallCap, MDT SmallCap Growth and the Hermes SDG Engagement Fund. Now let's turn to fixed income. Assets decreased by about $2,000,000,000 in the fourth quarter to $63,000,000,000 mainly due to net redemptions and to a lesser extent market related losses.
We saw fund inflows in ultra short and other short duration products offset by outflows in high yield and other categories. For separate accounts, the net outflows were driven by approximately 1,000,000,000 of redemptions from state bond pools. Our fixed income business has a variety of strategies that are performing well. At quarter end, using Morningstar data for the trailing three years, we had eight funds in the top quartile, including total return bond and Hermes multi strategy credit and 14 funds in the top half. Fixed income fund and SMA net sales, again, combining Federated and Hermes, are negative early in the first quarter by $179,000,000 Compared to the $216,000,000 of positive that I mentioned earlier, this means that long term assets in funds and SMA flows are modestly positive so far here in 2019.
We also begin the year with about $2,000,000,000 in net institutional mandates yet to fund, with about $1,500,000,000 in fixed income and $500,000,000 in equities. On the international side, we launched our first product with Hermes in the fourth quarter, the Federated Hermes SDG Engagement Equity Fund, which is a U. S. Complement to the Hermes product that was launched in December and reached nearly $300,000,000 in assets at year end. We are moving forward in registering additional U.
S. Mutual funds to offer some of Hermes' best investment ideas to our customers in 2019. We are advancing plans to grow the successful Hermes EOS business that features leading ESG stewardship and engagement services to institutional asset owners and pension plans and are working with Hermes to develop opportunities to offer them federated strategies to their clients. Hermes managed assets at year end were approximately $42,600,000,000 down from Q3 46,900,000,000.0 with again about 80% of the decrease coming from market losses. Hermes highlights include the successful Q4 launch of the global emerging markets SMID Strategy previously mentioned and continued progress in the development and growth of a world class multi asset credit platform with growth in both Hermes Unconstrained Credit Fund and the Hermes European Direct Lending Fund, both launched in 2018.
In addition, Hermes EOS stewardship and engagement business added several new clients in the fourth quarter with assets under stewardship reaching nearly $500,000,000,000 In the alternatives category, assets at year end were $18,300,000,000 down slightly from Q3. Net sales in HermesEuropean direct lending and unconstrained credit, as I mentioned, in infrastructure strategies and in the proved bear fund were offset by private equity withdrawals. Now let's look at money markets. Total money market assets increased approximately $38,000,000,000 in the fourth quarter, with funds up about 26,000,000,000 separate accounts up about 12,000,000,000 We saw positive money market fund flows from a variety of our institutional and intermediary clients during the quarter. Prime money fund assets increased about $7,000,000,000 or 18% from about $38,200,000,000 in Q3 to $45,100,000,000 in Q4.
Our money market fund market share, including sub advised funds at year end was 7.9%, up from 7.3% at the third end of the third quarter. Now if we look at some of the most recent available asset totals, Federated this is Federated as of January 23 and Hermes on the January 18. Managed assets were approximately $468,000,000,000 including $3.00 $6,000,000,000 in money markets and $76,000,000,000 in equities, dollars 64,000,000,000 in fixed income, 18,000,000,000 in alternative and $4,000,000,000 in multi asset. Money market mutual fund assets were $2.00 $5,000,000,000 And Federated and Hermes RFP and related activity continues to be solid with diversified interest in MDT, Kauffman, Global Emerging Markets, Global Equity Global Equities for Equities, High Income, Trade Finance and CoreBroad for Fixed Income. Now in conclusion, in addition to the efforts with Hermes, we continue our business development in Asia Pac region with a focus on opportunities in Greater China, Korea and Japan.
We're actively working to establish strategic relationships with selected financial institutions to add reasonable distribution to Federated strategies. This effort complements Federated's European, UK and Canadian operations. Managed assets, excluding Hermes in these markets, totaled about $14,500,000,000 at the end of the quarter. Finally, we were recently notified that we won a sovereign wealth fund money fund money market mandate of approximately $2,300,000,000 which is expected to fund in the first quarter. Tom?
Thank you, Chris. Total revenue was down slightly from the prior quarter due mainly to a decrease in revenue from slower average equity assets of 12,700,000.0 partially offset by higher revenue from higher average money market assets of $9,200,000 and higher performance fees. Performance fees were $5,800,000 in Q4 compared to $1,700,000 in Q3. Revenue was up about $29,000,000 compared to Q4 of last year due mainly to the consolidation of Hermes revenue of $51,100,000 including $5,800,000 of performance fees and higher money market revenue of $8,100,000 These revenue increases were partially offset by lower equity related revenue of $11,500,000 a decrease from the impact of the adoption of the new revenue recognition accounting standard, which was $8,300,000 and a decrease from higher waivers from money market funds of 4,800,000.0 The decrease in operating expenses from the prior quarter was mainly due to lower transaction related costs from the Hermes acquisition. The increase from Q4 twenty seventeen was due mainly to the consolidation of Hermes expenses of $44,200,000 partially offset by decrease in expense due to the adoption of the previously mentioned accounting standard, was 9,000,000 Comp and related was lower than our Q3 estimate, primarily due to lower bonus accrual related to the equity market declines in the fourth quarter.
Because of the volatility in the markets and the significant variability in our bonus accrual throughout the year, we're not planning to estimate comp expense going forward. We incurred Hermes transaction related operating expenses of approximately $13,300,000 in 2018 with about $600,000 recorded in Q4. We continue to invest in the growth of Hermes with an emphasis on U. S. Distribution of Hermes strategies.
We repurchased 95,000 shares in Q4 and we've been able to pay down about $60,000,000 of our revolver balance from the highest borrowing point after the Hermes transaction in Q3. At year end, our outstanding balance was 135,000,000 and our cash and investments were $190,000,000 of which about $145,000,000 was available to us. Melissa, we would now like to open the call up for questions.
Speaker 0
Thank Our first question comes from the line of Ari Ghosh with Credit Suisse. Please proceed with your question.
Speaker 2
Hey, good morning, everyone.
Speaker 1
Good morning.
Speaker 2
Maybe just starting with the money market business, maybe steady. So excluding the broader industry tailwinds that you've talked about, can you talk about anything, specific to internal initiatives that are driving the recent market share gains? Is it more on the pricing changes that you've made or a new distribution strategy, winning new client relationships? Any color here would be really helpful.
Speaker 1
Thank you. What it really represents is repeating the sounding joy of many, many decades in the money market fund business and a long term steady commitment to it. And over the years, we really don't lose clients. We just have clients move money. And so when you're set up this way and you get a confluence of factors in the marketplace, like, for example, increased volatility, like, for example, risk off, like, for example, banks aggressively managing their betas on their deposits, you have a situation where money market fund flows come in.
But if you haven't developed the relationships and the products in advance, it just didn't come to the home team like it did here. Debbie?
Speaker 3
I would just emphasize three specific reasons Chris hit on all of them. Rates are above inflation at this point. So interest rates are something that are earning something for the underlying client. Volatility in the longer term fixed income and equity markets, it's a great place to have a a safety point in the liquidity markets. And the preponderance of bank products that are now paying something that's grossly under what is being earned in money market funds.
Speaker 4
Got it. That's helpful.
Speaker 2
And then just a quick one maybe on overall pricing trends. Do you see any future pressure to your expense ratios? And that includes distribution expenses that you're inferring right now. Just trying to get a sense of current pricing that you see across on a net basis across both money markets as well as your long term segments. Is that a good starting point?
Are you seeing some pressure longer term to that?
Speaker 1
My answer to that would be that it is relentless. And there will always be, quote, unquote, pricing pressure as you describe it, and we see it as the competitive lay of the land, in this business. And so it is it has been a part of this business since the mind demand runneth not to the contrary and will continue to be. And that those are the factors we have to evaluate in in how we play in the marketplace.
Speaker 2
All right. Thank you very much.
Speaker 0
Thank you. Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed with your question.
Speaker 5
Thanks for taking the question. Tom, maybe first one for you. You mentioned you're not to give guidance on the comp. I guess just broader, how should we be thinking about expenses for twenty nineteen, twenty, just given maybe the lower revenues that you're getting from the equity side, some of the initiatives with Hermes, but then the offset of obviously robust flows on the money market funds. So just when you put that all together, how
Speaker 6
are
Speaker 5
you thinking about expenses overall in
Speaker 1
the future? Yes, sure, Mike. So remember, I mentioned that we're continuing to invest in Hermes distribution in The U. S. And Hermes is going to invest some distribution of Federate funds over in their marketplace.
So that's going to bring additional costs. We sent you know, a big team of salespeople over to Hermes in the beginning of the year. And so, you know, that's the sales cost and and we're starting we're gonna start funds. We've already started one. We've, started the process of filing and registering a number of other funds.
And so those are all costs that are going to continue to grow, and we expect them to grow and then to grow revenue right along with it. In terms of not talking about the comp, you know how the first quarter is with less days and the other various things that drive the comp up. But we saw that missing an expect a number that we gave out by 6,000,000 or $7,000,000 is a pretty big number. And so we're not really too comfortable in doing that in the future with the volatility that's going on. And we're the margin took a jump down with incorporating Hermes into it.
And we still will while Hermes is absolutely a growth engine and we're going to continue to invest in growth, we will still pay attention to the margin.
Speaker 5
Okay. And then maybe a follow-up either for Chris or Debbie. Obviously, a huge quarter for the money market business. Deb, you mentioned just some of the attractive aspects given the yields relative to some of the bank products out there. I guess I'm just trying to understand what maybe was more like either seasonal or environmental versus the core blocking and tackling in Federated you're kind of winning in this environment, given the history and given the competitiveness of the products.
Just maybe any color on what you saw during the quarter that was more unusual given the environment versus the outlook.
Speaker 3
Sure. I'll start with that. I think to some degree the volatility in the longer term fixed income and the equity markets drove a substantial amount of the sales that occurred in the fourth quarter. And the allocations that customers were making to liquidity products were higher than necessarily they have historically been. Added to the fact that they were now comfortable two plus years post the reforms that took place to the money market funds in 02/2016.
And, you know, I think that that they were happy to have that additional allocation in these products. Having said that, there was substantial amounts of, you know, what I call recurring types of of sales also. But but definitely, the volatility in the marketplace is something that was driving certain clients to increase those allocations.
Speaker 1
Okay, thanks. And then this is
Speaker 5
a small one, but if the Fed decides to either change their balance sheet strategy, any you know, view on how, you know, that would, you know, maybe change, you know, some of the dynamics, you know, in the market?
Speaker 3
Sure. The balance sheet strategy has definitely added to supply in the marketplace in 02/2018. We expect it to continue in 02/2019. However, if they decide to to cut it back from the current $50,000,000,000 per month that is is, you know, being undertaken to something less than that, it's not a a huge issue with the market given the supply that is needed from a treasury perspective to continue to fund the deficit. The expectation of continued issuance once we're kind of past the issue with the debt ceiling in the end of the first quarter, early parts of second quarter is something that we'll continue to see supply increase in the treasury sector and obviously that is impacting then not only the treasury sector, but, you know, commercial paper, other types of of credit credit sectors.
What would potentially change the equation, a little bit more than than the balance sheet would be if treasury decided to change their funding model. The additional funding that they've done in 2018 was substantially in the money market sector treasury bills. They added a new bill. They, you know, increased settlements the two two settlements per per week in the in the treasury bill market. And and ultimately, if they change that strategy and go back to something that's longer term issuance, that may have some impact.
Although, still that could be used as collateral in the repo market, which has also been growing in 2018 and 2019. So the outlook is still pretty good even if the Fed cuts back their balance sheet, not as attractive, but still pretty good.
Speaker 5
Okay. Thanks a lot.
Speaker 0
Thank you. Our next question comes from the line of Ken Worthington with JPMorgan. Please proceed with your question.
Speaker 6
Hi, good morning and thank you for taking my questions. Maybe first on the money market SMA business, it continues to show very big growth. Can you talk a little bit about what municipalities are doing with cash? There have been reports about cash building and you guys seem to be a beneficiary. So what are you seeing?
And and maybe what is the outlook from here for that SMA business?
Speaker 3
Sure. I think Chris mentioned our, two a seven assets are a little over 200,000,000. Our total liquidity liquidity assets are a little over 300,000,000. It's significant portion
Speaker 4
of
Speaker 3
that is is the, I'm sorry, billion. Yes. A substantial portion of that is is in the, local government investment pool sector, the separate accounts. And in the end of the fourth quarter and during the first quarter, generally speaking, those types of accounts are gathering assets. So they are collecting taxes, they are collecting receipts from the the various constituents within their their pools.
And it's not until late in the first quarter into the second quarter and and third quarter that they actually start to pay those out. So it's a very seasonal business. And if you look historically, that seasonality has been there since we, you know, started our first government investment pool, management, which was, you know, back in the early two thousand and two with with with Texas. What has basically changed over the course of last several years has been with interest rates now above zero in that that sector. You've got, more municipalities, more school districts, participating in those pools.
And even though the seasonality is is identical as it's been historically, the overall base and the volume has actually increased because of the higher rate environment.
Speaker 6
K. Great. Thank you very much. And then can you give us an update on the BT pension scheme withdrawals that you were expecting? What what have we seen, if any, thus far?
And what's the outlook for 2019 there?
Speaker 1
Saker, that's your turn.
Speaker 4
Sorry. Can you repeat the question? The BT withdrawals? What is the So the BT withdrawals so so the BT withdrawals that we saw were part of the process that's been agreed when the purchase was made, and this is part of the reducing some of their exposure to particularly our global equity fund and that carried on as normal. I mean, I I hesitate to I mean, we can take this offline because obviously they're a client and I'm not gonna say how much a client withdrew.
But what I can say to you is it's within the balance of what we expected. And including the BT withdrawals, I can also say to you that for the year as a whole, we had net new assets of about $2,000,000,000 which gives you an idea of how much we're growing our third party business.
Speaker 6
Okay. Great. Thank you very much.
Speaker 0
Thank you. Our next question comes from the line of Robert Lee with KBW. Please proceed with your question.
Speaker 7
Great, thanks. Good morning. Thanks for taking my questions. Maybe Tom, sorry to do this, but maybe go back to the comp question. Understanding about the reluctance to give specific guidance.
And just given that the Hermes acquisition is still new, still trying to kind of get the level set a bit, is it fair if we try to think of a run rate, so to speak, if we were to simply kind of average the last two quarters? I mean, I know 2016, for example, you had a similar kind of step down versus what expectations have been in Q4. So it means it's not uncommon to have these reversals in Q4 given the environment that you face. Just trying to level set kind of where you think we should be?
Speaker 1
Yes. And I feel your pain, Rob, because we don't like giving a number out that then is pretty far off. Of course, we didn't particularly enjoy the market in Q4 either. So the first quarter, we kind of recalibrate all the incentive pools and look at it and we generally view things in an optimistic fashion and that would generally lead you to say you're going to have higher payout. And reality comes each quarter and then particularly in the fourth quarter when you actually have a pretty good idea of what you're going to pay and change the numbers around.
There are definitely higher numbers because of the payroll and other things that happened in the first quarter. I don't want to go through and guess at a number by saying this number and that number and divide it up because we've seen the changes, millions and millions of dollars.
Speaker 7
Okay. Well, maybe, Chris, a question for you on capital management. So clearly, a lot of focus on leveraging the acquisition here in Europe and spending time and effort on that. So how are you prioritizing capital management at this point, including appetite for additional transactions? Is this kind of at least for the intermediate term, this is it?
And where is the kind of dividends versus share repurchase kind of any kind of changes, subtle or otherwise, maybe how you're where you're leaning?
Speaker 1
Okay. The first position on capital management revolves around leveraging the acquisitions. We always said that the acquisitions were the highest and best use of that capital, not to diminish dividends and share repurchase. And so we are going to be looking at that because we think that the Hermes deals is a transformational deal for both entities and a great growth opportunity for the combined enterprise. In addition, in terms of acquisitions, we will continually be looking at roll what we call roll ups, you guys call bolt ons, etcetera, without any pause in our giddy up.
But you should not suspect, you should not, expect that we would be doing, any larger type deals such the size of Hermes or something like that, but simply not on the agenda because we spent, as I told you all before, five to six years working on this particular deal and have discovered the beauty of a six year, five year cultural due diligence process in addition to all of the factors that you're well aware of. And we wanna do the best we can to make this successful into the marketplace. As you've noted on our dividend policy, we love dividends around here and have since our whole time being public. And so we are very happy with the dividend that we just declared yesterday. And then we are also active on share repurchases.
And they remain within a range, obviously, because of the monies we spent on the Hermes acquisition, but we still remain active there.
Speaker 7
Thanks for taking my questions.
Speaker 0
Thank you. Our next question comes from the line of Kenneth Lee with RBC Capital Markets. Please proceed with your question.
Speaker 8
Hi, thanks for taking my question. Just a follow-up on the sovereign wealth fund money market fund mandate. Wondering, does this represent a new market opportunity and how much current exposure do you have to that kind of client type? Thanks.
Speaker 1
We we have been calling on these types of entities for many years. So this is just one of a number of those that we have as clients. And so it's not exactly a whole brand new thing. And what was the second part of your question?
Speaker 8
Just the relative exposure you have to sovereign wealth fund in general.
Speaker 1
I think it's around $10,000,000,000
Speaker 8
Got And just in terms of the alternative product set within Hermes, maybe could you comment on what you're seeing in terms of recent client demand for these kind of products, especially in this kind of environment? And which product sets represent sort of like the greatest growth opportunities going forward? Thanks.
Speaker 1
Saker?
Speaker 4
Thank you. So the answer is we are seeing opportunities across the board. We continue to see demand for some of our real estate investments and they continue to return very good returns. And this is particularly for larger clients who come on for investment deals or club deals with us. We have seen demand for our direct lending product, which is part of our private market business and also for infrastructure.
So the answer is that it's varied and we see growth in all of them. We will continue to see strong growth from this area as from other areas. And I would say that in general, despite the difficulty of last year, the general flow within Hermes, as I just said, was positive for the whole year, which is very strong and it's well dispersed amongst most products.
Speaker 8
Got you. Thank you.
Speaker 0
Thank you. Our next question comes from the line of Bill Katz with Citigroup. Please proceed with your question.
Speaker 9
Okay. Thank you very much for taking the question this morning. First one is actually a set of ones is in the money market business. Debbie, if defense is on hold here potentially for the rest of this year and potentially move into more of an easing backdrop as the forward curves are suggesting. How do you think that sort of plays through for the money markets in terms of volume?
And then relatedly, Tom, I think you mentioned, I missed it, I apologize, there were some fee waivers in the quarter. Could you compare them to last quarter? And then how do you think about that sort of a net yield impact on the growth?
Speaker 3
From the Fed's perspective, we're actually not in the camp of them being on hold at this point. We think their process is maybe a little bit more scrutinous as to the data that's released, although that's somewhat tenuous given the government shutdown currently. But we are still of the thinking that they are likely to see they're likely to add two more moves to their tightening schedule, bringing them, you know, what to what we think would be clearly in their neutral neutral rate zone, for 02/2019. We don't think it'll happen, you know, in the first quarter. We probably think it's more second second, maybe third or fourth quarter related.
And for that reason, we're not real excited with what the the yield curve is giving us right now. So, know, we're keeping our weighted average maturities a little bit shorter. We have generally our longer end of our barbell situated in the shorter end, not all the way out at the twelve and thirteen months sector, which is as far out as we can go. Quite honestly though, I think if you translate that into volume, it continues the volume in the fourth quarter was exceptional, I think, because of what we're talking about with market volatility and the other sectors of the market. But I don't think that what would be sort of the traditional volume will have any problems with even if rates do stay on hold.
They're still, you know, at inflation or above inflation and a good place to, you know, capture some incremental income while they're waiting for whatever, you know, whatever purpose their liquidity is, you know, is being allocated. So, I don't think it has a huge impact on volume. Generally, the first quarter is, from an industry perspective, one that is a negative volume quarter. I don't know whether we'll see that this year or not. We didn't last year.
But traditionally, it is a negative volume quarter, not necessarily related to rates or what's happening on an expectation basis. I don't know that we see anything different though based on the Fed moving two times in 2019 or being on hold.
Speaker 1
So on the waivers, what I said was compared to last year's fourth quarter, the waivers were $4,800,000 a change. And basically, the assets are going up. And so as the assets go up and we're waiving, the waivers increase. The difference between this Q3 and Q4 is not and I didn't mention anything because it's not a big enough difference to really call out.
Speaker 9
Okay. And then my second follow-up question. Thanks for taking the question this morning. Just going back to Hermes, just in terms of the performance fee in the quarter, maybe provide just a little color on where you generated performance fees? And how should we be thinking about that line item specifically for 2019 either in absolute sense or the timing and pacing of potential performance fees?
Speaker 1
Zakar?
Speaker 4
Thank you. So I'm not going to comment about timing, I can comment about regularity. And that's to say that where we do take performance seasons primarily in two areas, One is in our property business and one is in our global equity business. Where we do take them over the last several years, these have been consistent in coming every single year. And why?
Because we, in some cases, sell our business on very low performance fees, for example, in some equity product a sorry, very low base fees with a performance fee on top. And in terms of the property, it's to do with how we manage them and harvest the fees back and we consider them in this case to be part of our normal management fee. So they are reasonably repeatable as evidenced in the past few years. As for timing during the year, if you don't mind, we can take that offline.
Speaker 9
Okay. I'd be curious about that. And then maybe just one last one. Thanks for taking all these questions. Just Tom, going back to expenses.
If you look at the non comp line, that and you strip out, I think, of the deal costs and adjust for the amortization. It looks like non comp is about flattish quarter on quarter, third to fourth quarter. How do you think about collectively non comp and non distribution, how do you think about that for next year in the construct of trying to build that Hermes?
Speaker 7
Is there
Speaker 9
a natural pace of growth against that or is there enough things you can do to offset that so that's more of a flattish construct?
Speaker 1
Well, Bill, we went through our budget process and we're trying to give them marketplace and you've seen what others have done, which we have not done, but we're trying to manage the variable things as well as we can. And of course, the flexibility with the comp number, I know you asked about non comp, but the flexibility in the comp number shows the company's flexibility in how we manage given what's going on in the marketplace. So the cost is actually somewhat easier to manage than the other more fixed costs. And we're just doing the best we can. And I don't really think I can go further than that.
Speaker 9
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.
Speaker 8
Great. Thanks. Good morning, folks. Chris, I think
Speaker 10
you and Taker also, you talked earlier about developing Hermes products in The U. S, some duplicate products. Can you talk a little bit more about what structures you're doing those in, whether there's mutual funds, SMAs or both? And in terms of just the ramping of that product, and I know it's always hard to predict what the sales are going to be. But if we look at the potential of what you think you can launch, if I look at Hermes, say, party AUM ex North America, to make them right on this, it's about $25,000,000,000 Do you think you can sort of launch duplicate product for maybe how much of that asset base, I guess?
Speaker 1
Well, let's deal with the first part in terms of the products that are being offered or being filed right now that we mentioned. There were four of them, and they involve two equities and two fixed income, including the unconstrained credit. So those four funds are marching through the registration process, which causes me to be less effusive in discussing them specifically than otherwise I might be inclined to do. And we expect to offer those products to the investing public here in The United States in in our clientele through our distribution here in The US. And so that would not be a function of whatever other numbers Hermes has on the international side.
In addition, we are in discussions with people about the possibility of creating some SMA vehicles with those types of mandates and perhaps others. Funds, though, will be will be ahead of that. And, of course, on the institutional side, we have already done the road shows with our major clients where we had individuals from Federated and Hermes going on big picture discussions with our major clients, and we would expect to be starting to offer the exact products sometime at the beginning of the second quarter or so on various mandates, which I'm not gonna articulate exactly which ones at this point. So it would be an all points effort on expanding those things here in The US. Now as to your second question, which I'm gonna let Saker comment on related to the 25,000,000,000 that you ascribed to them on the international side.
I'll let Saker comment on that.
Speaker 4
So I'm trying to calculate it. Do you mean that 25,000,000,000 is from international clients, meaning outside of The United Kingdom?
Speaker 10
Yeah. What I'm just doing is taking the third party assets of 29,000,000,000 and subtracting out the North America distributed products, which which I think are 4,000,000,000 of the 4 of your total 42. $44,000,000,000 is also getting to 25. Based on that, is that
Speaker 4
So so our third party clients would include some in North America, some in Europe, and some in Asia, and some in The UK. And obviously, BT as a client is a UK based client and so it's hard to untangle the two in terms of what we distribute. We already distribute some clients in The United States which is why it's not an easy untangling. And as I say, I we give less information about this because then one can work out some more information about one client, which is not correct. Okay.
Yeah. I'm I'm taking
Speaker 10
the well, I'm taking the 11 per on on slide 16, I'm taking the 11% of North America and multiplying that by the 42,000,000,000, you know, to get 4,000,000,000 or so and then subtracting that from the twenty nine billion third party to get that 25.
Speaker 4
So like I'm saying to you, it's it's we have we have a mixed bag of of of third party clients and distributed equally around the world as is actually some of our BTS. So Okay. I'm not I'm sorry. I can't talk more than that. Yeah.
Yeah. That's that's that's so
Speaker 10
maybe just to tie it back, Chris, in terms of the product launch, to get a feel of of, you know, the products that you mentioned that are in registration and maybe what you're thinking about for the pipeline for this year.
Speaker 9
What is the sort of
Speaker 10
the duplicate assets that are currently managed by Hermes that we're talking about? And I'm just trying to get a sense of the size of the potential of ramp up of that.
Speaker 1
What you're talking about is we're starting funds and the funds are similar. Hermes is starting funds that they're going to run-in The U. S. That are similar to other funds that they run.
Speaker 7
Yep. Yep. Yep. And how
Speaker 10
do get those the assets similar to I'm trying to get the asset level of that similarity at at Hermes right now.
Speaker 1
Yeah. Brian, I don't think we have that number at hand, so that's something we could follow-up.
Speaker 10
Okay. Yes, great. And then maybe just a follow-up, going back to the comp, maybe just the structure as you do ramp this up and you're investing, I think, Tom, you mentioned earlier about the sort of the need to ramp up on the growth initiatives, including in comp. Is the comp structure based on gross sales for these new product launches? Or is there a deferral that is somewhat based on asset retention?
Speaker 1
Yes. So our cost structure is that the investment management is based primarily based on performance. And then this is Federated, I'm talking, and then I'll go through Hermes in a second. And the sales is primarily based on sales. And then the the operation, executive and everything else is based on how the company does.
And Hermes has more of a thought process from their where they come from in their history of a percentage of revenue of how they've how they've used that as a guideline in the past. And so it's all all the things are variable and we have to, you know, I have to put down and Chris and I have to sign a SEC document that says here's what we think is our best estimate each quarter and and that's what we do.
Speaker 10
Okay. And maybe if I could just squeeze one more clarification. The institutional mandates, Chris, you mentioned the $2,300,000,000 that's going to get funded this quarter. The $2,000,000,000 of the long term mandates in equity and fixed income, do think those are going to get funded this quarter as well?
Speaker 1
Brian, it's Ray. That's kind of hard to say because that involves working out contracts and getting to the finish line and actual funding. So I would not put all of that into Q1. It's likely to extend into the year.
Speaker 10
Got it. Okay. Thanks very much.
Speaker 0
Thank you. Our next question comes from the line of Mac Sykes with G. Research. Please proceed with your question.
Speaker 1
Good morning, everyone, and congratulations. I think you may be the only asset manager to have increased AUM last quarter. Thank you. Given that we're kind of in a new environment for higher rates, can you just talk about how you're adjusting your advertising or marketing, both individually as a firm and maybe working with clients to raise more awareness about kind of this higher rate environment? And are you using different sources of technology or engagement to do that?
So we have a couple of things there. We have a PR effort where our friend Debbie here spends a pretty significant amount of time on the airways. And then we have a lot of other portfolio managers and client portfolio managers out and about talking about rates and talking about the market and talking about whatever else is going on. So that's from a PR standpoint. From the advertising, it's that's which products are we advertising and what's going on there.
And I don't know Chris Feufour and Hermes, Zach or Meg, want to follow-up with that too. Well, over time, there's been a dramatic shift from what would be regular advertising to digital social media advertising. It's it's been a a dramatic shift inside of how we're allocating those dollars. The next thing I would say is that we are going to be coming up with some ideas on how to do a joint slash branding marketing effort with our friends at Hermes, and that's being worked on as we speak. So I can't get into more detail on that.
And then the last thing, Maggie, is not exactly on your question of advertising, but we have maintained and expanded a sales force dedicated to the growth of that business. And so a lot of that promotion and contact and growth happens due to the good efforts of the sales force. Great. Thank you very much.
Speaker 0
Thank you. Our next question comes from the line of Robert Lee with KBW. Please proceed with your question.
Speaker 7
Great. Thanks for taking my follow-up. Just real quickly, I mean, just want to see if there were any expense line, I know there were maybe some still lingering deal costs or things. But were there anything in the other expense lines worth kind of calling out that may have that would suggest that maybe this quarter was kind of a good starting point for next year?
Speaker 1
No. I mean, we said about $600,000 of transaction costs in Q4, And we're viewing the rest of the investments with growing Hermes as regular business going forward.
Speaker 7
Great. And then maybe just one other quick follow-up. The pipeline is pretty healthy. I assume you probably would have called it out. I just want to double check that there's no kind of known large redemptions that you're kind of expecting over the next that you've been notified of over the next quarter or two?
Speaker 1
Rob, those were the numbers that Chris gave were net numbers. So there are some redemptions factored into that. But we've both of the numbers, fixed income and equity on a net basis.
Speaker 0
Thank you. Our next question is a follow-up from the line of Bill Katz with Citigroup. Please proceed with your question.
Speaker 9
Hard to believe I have one, but I do. Just you had given out some flows for the first part of the year, both equity and fixed income. And just trying to triangulate some of other disclosure around alts and the multi asset. Do you have a sense of what the volume has been quarterly data in those two buckets of assets or is that embedded in the mutual funds and fixed income? If it is, I apologize for asking.
Speaker 1
So the fund portion is embedded. We have both fund and separate account in both. On multi assets, the bulk of the assets are in funds and so that would have been included in the numbers that in our overall flow numbers. On the alternatives, they're a mixture of fund and separate account and so less of that would have been included. And we wouldn't consider three weeks of activity on the alternative side
Speaker 7
to
Speaker 1
be a significant time period.
Speaker 9
Got you. Okay, thanks.
Speaker 0
Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Henley for
Speaker 1
Well, that would conclude our call then, and we thank you very much for your time today.
Speaker 0
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.