Federated Hermes - Earnings Call - Q4 2020

Transcript

Speaker 0

Greetings. Welcome to FHI Fourth Quarter twenty twenty 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. Please note this conference is being recorded.

I will now turn the conference over to your host, Ray Hanley, President of Federated Investment Management Company. You may begin.

Speaker 1

Thank you and good morning. 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 Nasebe, the CEO of the International Business of Federated Hermes and Debbie Cunningham, the Chief Investment Officer for Money Markets. During today's call, we may make forward looking statements and we want to note that Federated Hermes' 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 Hermes assumes no duty to update any of these forward looking statements. Chris?

Speaker 2

Thank you, Ray. Good morning all. I will review Federated Hermes business performance and Tom will comment on our financial results. We continue to grow and expand our EOS at Federated Hermes engagement activities. At year end, our staff of engagers and other specialists reached 67, up from 49 at the beginning of last year.

Assets under advice reached over $1,300,000,000,000 up from $877,000,000,000 at the beginning of last year. And Saker may have some more interesting news on this subject later in the call. Total long term assets under management closed the year at a record level of nearly $200,000,000,000 Equity managed assets reached a record high of about $92,000,000,000 up from $80,000,000,000 at the end of Q3 driven by market value gains and lower net redemptions and net sales which were positive at nearly $800,000,000 Equity gross sales increased 34% from Q3 driving a two thirds reduction in net redemptions. We saw positive net sales in 19 fund strategies in the fourth quarter led by Kaufman Small Cap, Global Emerging Markets and the SDG Engagement Equity Uses Fund. Others with positive flows included Global Equity ESG, Impact Opportunities and the U.

S. SMID Fund. Using Morningstar data for the trailing three years at the end of the year, 23% of our funds were in the top quartile and 61% were above median. Turning now to fixed income. Assets reached another record level of $84,000,000,000 at the end of the year, up nearly $5,000,000,000 or 6% from the third quarter and up $15,000,000,000 or 22% for the entire year.

The fourth quarter growth was again driven by strong net sales of $3,000,000,000 Our broad array of solid fixed income strategies was well positioned to meet market demand. We had 22 fixed income funds with net sales in the fourth quarter. Fourth quarter net sales leaders were UltraShort Strategies was about 1,300,000,000.0 high yield with just over $600,000,000 and the multi sector total return bond and short intermediate total return bond funds, which combined for about $600,000,000 Corporate, high yield, mortgage backed, multi sector and municipal bond funds all had net sales as did our fixed income SMA strategies, which grew $136,000,000 to reach 1,400,000,000 in assets under management. Across sectors, short duration strategies were in demand. Fixed income separate account net sales were led by high yield mandates.

At year end, using Morningstar data for the trailing three years, we had 29% of our funds in the top quartile and 50% were above median. We began 2021 with about $500,000,000 in net institutional mandates yet to fund. Moving to the money markets. The fourth quarter asset decrease reflected lower fund assets of about $24,000,000,000 partially offset by higher separate account assets of about 12,000,000,000 Year end money fund assets were down about $43,000,000,000 from mid-twenty twenty peak and up about $15,000,000,000 from the prior year end. As we have experienced in past cycles, our money market business has reached higher highs and higher lows once again.

Our money market mutual fund share including sub advised funds at quarter end was at about 7.8% down from the prior quarter share of 8.1%. Taking a look now at recent asset totals, managed assets were approximately $621,000,000,000 including $416,000,000,000 in money markets, 95,000,000,000 in equities, 87,000,000,000 in fixed income, 19,000,000,000 in alternative and $4,000,000,000 in multi asset. Money Market Mutual Fund assets were $290,000,000,000 As of now, we are planning for the staged return of more employees to our offices. While we expect to begin this process in the coming months, the decision about when to return more employees to our offices will be informed by the conditions and not by the calendar. With that, I turn it over to Tom for the financials.

Speaker 3

Okay, Chris. Thank you. Total revenue for the quarter was about the same as in the prior quarter as growth in revenue related to long term assets including equity, fixed income, private markets and performance fees and carried interest was offset by higher money market fund waivers and the impact of lower money market assets, again showing our significant value of our diversified business mix. Q4 revenue included 11,200,000.0 interest compared to $5,700,000 in the third quarter. Over the last five years, including the period preceding the 2018 Hermes acquisition, annual performance fees ranged from about $7,000,000 to $23,000,000 and averaged about $11,000,000 Annual carried interest ranged from about $3,000,000 to $14,000,000 and averaged about $7,000,000 but we still are unable to project these items for future periods.

Looking at operating expenses, the increase in compensation and related from the prior quarter was due mainly to higher incentive comp expense of $5,900,000 and expense associated with unused vacation time of 4,000,000 The decrease in distribution expense compared to the prior quarter was due mainly to the impact of minimum yield waivers and lower money market assets, which reduced distribution expense by about $15,000,000 This was partially offset by the impact of higher equity assets. Office and occupancy expense for Q4 included a nonrecurring lease incentive gain of about 5,000,000 The impact of money fund minimum yield related fee waivers on operating income in Q4 was $8,700,000 Based on recent assets and expected yields, the impact of these waivers on operating income in Q1 could be about $14,000,000 The increase reflects primarily lower yields than previously expected. Multiple factors that are difficult to predict will continue to impact the waiver levels. Non operating income increased from the prior quarter due mainly to the increase in the value of investments and consolidated funds compared to Q3. The $5,200,000 increase from the prior quarter in net income attributable to non controlling interest in subsidiaries was from higher NCI related to Hermes and consolidated funds.

The Q4 dividend payment of $1.27 per share, including the $1 special dividend reduced Q4 EPS by about $01 per share due to the exclusion of the dividends paid on unvested restricted shares from net income under the two class method of computing earnings per share. During Q4, we purchased approximately 516,000 shares for $14,000,000 with nearly all of this bought in the open market. Shyamali, we would like to open the call up for questions now.

Speaker 0

Sure. At this time, we will be conducting a question and answer session. And our first question is from Ken Worthington with JPMorgan. Please proceed with your question.

Speaker 4

Hi, good morning and thank you. I'm not sure if Debbie is on the call. If she is, Debbie, can you talk about the repo market and what's happening there? We've seen yields really come in. There's been a lot of chatter about the outlook for repo.

So what is your view on repo? How big a part of the money market fund investments right now are repo? And are there alternatives in the near term if the repo market continues to be, I'll call it, uneven?

Speaker 5

Sure, Ken. This is Debbie. Just with regard to rates and what's driving the repo market to those lower rates, we're currently in somewhere of a three to seven basis point range, hit as low as two on a, treasury backed repo basis earlier this week. And in some late afternoon thin markets, various times last week was actually trading negative. Now, didn't participate in any of that.

Again, very thin and small portion of two way flow, but nonetheless, it was in negative territory. It's driven by a couple things. Number one, mainly, just huge amounts of cash that needs to be put to work in the short end. And, thankfully, we do have a fairly good supply of, treasury and mortgage backed securities. However, it hasn't grown much.

Stimulus, as you know, did not come the second round until the end of the fourth quarter. And in addition to that, that that that amount of stimulus that was passed and what's been funded so far has come largely from balances that were of of cash that were already at treasury, so not new funding. We would expect that to change, you know, as this second or, I guess, third round of stimulus, the first in the Biden administration proceeds forward, sometime in the, you know, middle part of this first quarter. As far as allocations go with our money market and liquidity products to repo, obviously, the largest amounts would be in our treasury and our government agency funds. We attempt to do term repo and, you know, other types of non overnight securities in order to reduce our exposure to that overnight market place where, you know, going out the curve a little bit with different security types, you can get a little bit more in yield, although not a whole lot.

I mean, the whole treasury yield curve at this point is basically five to nine basis points from one month out to one year. But, you know, in the the quest to do that, we still have repo positions for liquidity purposes in those funds that are anywhere from, you know, 40 to 55 ish type percent. And when you look at our other types of products, our prime products, in particular, that would also be using repo in the taxable liquidity world, the exposure there is actually very small, less less than less than 10%. They use other types of overnight paper that is generally two to three times what repo would be from a rate perspective, overnight commercial paper, overnight CDs, other types along those lines. So hopefully that's helpful.

Speaker 4

That was great. And then maybe, Chris, for you, there's been, a lot of talk of consolidation. Maybe can you share with us how you're thinking about succession and succession planning and the next generation of leadership at Federated when you and Tom decide to spend more of your time fishing and golfing and doing other things?

Speaker 2

Well, first of all, the consolidation thing and the succession thing are two completely different items. And we get plenty of time to do grandchildren stuff right now anyway. So there are no current plans for that which you are discussing. However, we had our board meeting yesterday and I spent the better part of an hour with our independent directors of FHI going over the succession plans not only at the, level of me if I get hit by a bus, Tom gets hit by a bus, or anybody else, and how that filters through each one of our, executive staff and their reports and those discussions. And so we're not going to give you chapter and verse on all of that, but there are good plans and good options.

We have a very strong executive staff, and I am most confident that if I get hit by a bus, the machine would continue to roll the way that it has into the past. In terms of consolidation, there's always consolidation and then new stuff happening at the other end. And the way we've looked at it is we've done our big hairy deal the way I put it because of our affiliation with Hermes. You've seen the whole thing. And we've now changed the name to Federated Hermes Inc, reflecting what you've heard me call transformational merger.

And now we are busy about making that work. We completed that with the acquisition of the private markets business from Hermes and MEPC and are working this year in order to get that ready for sale into the marketplace. So that's what we are about. We will continue to do bolt on areas of excellence if we see areas where that's possible. We will continue to do roll ups, not unlike last year's PNC deal, which worked out very, very well.

And so that's our role in consolidation.

Speaker 4

Awesome. Thank you very much.

Speaker 0

And our next question is from William Katz with Citi. Please proceed with your question.

Speaker 6

Okay. Thanks very much. First question centers around the money market business. Chris, I was wondering if you could or maybe Debbie, you could talk a little bit about where your prime exposure might be today and how the dialogue with regulators, particularly with the sort of the reformulated F stock and how that's going and how to think about risks? And then underneath that, you mentioned that your market share was down a little bit sequentially.

So I wonder if could talk about some of the drivers there.

Speaker 3

I will cover, some of

Speaker 2

the regulation. I'll let Debbie cover the prime exposure question. So on the regulation front, we've all seen the President's working group report and that was basically, the SEC throwing out everything that they had in their drawer on the subject, many of which had been totally rejected before, all of which we have seen before. The most important one, as I've discussed on this call before, is the elimination of that 30% trigger, which is both unnecessary and unwise. And we pointed that out before and was really an artificial trigger to what was a government shutdown causing disruptions in the short term markets.

And we don't know what will happen under the new regime in Washington And they're just getting started, so it's to predict. But we are ready with, our friends in Congress and, with all of the arguments we've had before because the money market fund, especially on the tax free side, is especially relevant when there are tremendous efforts to get money to municipalities as part of stimulus apropos of the pandemic. And this is a great financing vehicle and you could return $500,000,000,000 of marketplace oriented short term cash into that short term market by the beauty of those money market funds, to say nothing of what will happen on the prime side. So I'll let Debbie talk about the prime exposure, and then I'll come back on the market share.

Speaker 5

Thanks, Chris, and good to hear from you, Bill. As far as our total prime assets go right now, they're about, 125,000,000,000, and, that is more heavily weighted towards the non money market fund side. So, $53,000,000,000 or so in money market fund assets with the remainder in other types of separate accounts, offshore, LGIP type of assets. As far as allocation within those products to sectors of the prime market, the largest sectors remain with exposure to the asset backed commercial paper world, the CD world, and then other types of financial commercial paper. We also have some exposure, in the nontraditional repo market, which, back to Ken's question first question, doesn't really have the same issues associated with it as does, you know, what would be traditional treasury and agency repo.

And then, you know, ABS exposure, but in the, you know, shortest tranches and a very tiny exposure. As far as just to add to what Chris was talking about from a regulatory perspective, we've seen the ICI come out with what we thought was a very comprehensive piece that covered the money market, not just money market funds, and talked about some broader base and we'll be, you know, focusing on that in particular. I also came out with some ideas and then the President's working group and where I think the President's working group will end up focusing is number one on back with what the ICI and what Chris was saying, the broader market, but also some of the things that were changed in the 2014 amendments that went into into effect in 2016 having to do with gates and fees and triggers on liquidity for those two items, whether they should be at all, whether they should be delinked from triggers of liquidity, and whether they should be considered, separately entirely from a Gates perspective versus a fees perspective. So with that, I'll turn it back to you, Chris.

Speaker 2

Thank you, Debbie. With respect to market share, Bill, there's another aspect of market share that historically we have always looked at and it's a hard calculation and that is market share of revenues. And part of the reason for our whole pricing history going back to the 70s on money funds has been as owner operator looking at, the market share of revenues. So at year end, there were some moves in money. Some of it was hot money.

Some of it was moving because some of the competitors quoted a higher net yield. And some of it is just the ebb and flow of regular business. We've looked at the information on a daily basis, and we see money going in and out at $3,000,000,000 4,000,000,000 and $5,000,000,000 clips just like always. I would also mention that on the market share as we calculate it, if you go back to 'fourteen when they put in the put those reforms in, our market share has been variously at those year ends 8.2, 8.02, 7.55, 7.38, 7.89, a high one at 8.788.12%. So as long as we over the long term are getting higher highs and higher lows like I mentioned, we are not worried about the quarter to quarter market share.

Speaker 6

All right. Thanks. Just a quick follow-up. Normally, you give some flow detail for sort of where we are today. We didn't hear that from you.

Maybe I missed it. If I did, I apologize. And then relatedly on pipeline, any dynamic there in terms of where you're seeing the best of it? Thank you.

Speaker 1

Hey, Joe, it's Ray. So, through the early part of the quarter, obviously, about three weeks of data, The equity funds and SMA combined are positive a couple 100,000,000. The fixed income continues to be positive, a bit stronger. And actually the alts are slightly positive. So, long term flows continue to be running positive for the first three weeks of the quarter.

In total, it's about $1,000,000,000 So, again, it's fixed income really ahead, but equity is solidly positive.

Speaker 6

Thank you.

Speaker 2

Thanks.

Speaker 0

And our next question is from Robert Lee with KBW. Please proceed with your question.

Speaker 7

Great. Good morning, everyone. Thanks for taking my questions. Now maybe, Tom, question for you. So just want to think through comp as we look to next year, understanding there's the $4,000,000 ish kind of one time that goes away.

You mentioned the incentive comp, but you've also had run up in EOS employees.

Speaker 8

Should we if we exclude the

Speaker 7

$4,000,000 one time, is that kind of giving us a good jumping off point for next year? Or was part of the incentive some I know I guess I thought a little bit of a catch up for the year. You had good fund performance and whatnot, so maybe that drove some of it. Just trying to kind of level set for

Speaker 0

next year.

Speaker 3

Sure, Rob. So our dedicated employees at Federated decided to work instead of take their vacation basically in 2020. And so what normally would expense that would occur in Q1, Q2, Q3, we had to take all the expense in Q4 because we expect them to take vacation in twenty twenty twenty one, I mean. So it's not it's a full year bundled up in one quarter and probably the normal run rate number is around $1,000,000 there. So we said it was $4,000,000 So a normal run rate is 1,000,000

Speaker 2

And that's

Speaker 3

about how I would look at the vacation days.

Speaker 2

So on the last part of your question, Rob, I'd like Saker to comment on EOS because you phrased it the run up in people at EOS, but I think you need to hear what's going on there. Saker?

Speaker 9

Thank you, Chris. So there's two things to know about EOS. One is that the run up was, in fact, part of our long term plan to bolster our positioning, particularly in North America and that was part of the acquisition by Federated going back to 'eighteen, so that was part of the plan. The second one is that we continue to increase our clients. And since the beginning of this year, we've had two major institutional clients sign up to the EOS services out of Holland with a combined value of about €130,000,000,000 So we continue to grow that business and the more we grow it, obviously, the more that we need to put resource in it because one leads to the other.

Back to you, Chris.

Speaker 2

Thank you, Zechler. And what's going on here, Rob, is an investment in the lifeblood of the future of engagement. And it's very, very important and will basically impact all of investment management here at Federated and around the world.

Speaker 7

Great. And maybe the the top I

Speaker 10

mean, just I'm sorry. Just to keep on the comp thing.

Speaker 7

So if I exclude the $4,000,000 obviously, maybe $1,000,000 stays, is that should I think of $134,000,000 as being the right jumping off point for kind of your revenue, your comp base Yes, heading into next

Speaker 3

Rob. In the end, I'm not going to be that helpful because I just stopped predicting that. If you remember how wrong we were off by $9,000,000 one quarter, off by $5,000,000 another quarter. And it depends on all the things, the sales and how those bonuses happen, the investment management and how that comes about. Then everything that's going on at Hermes, which factors and you see this quarter the performance fees and the carried interest and how Saker is managing through what he delivers to enterprise.

And so like I said in the beginning a or short talk not to really give you all that much guidance on it.

Speaker 7

Well, can't hurt to try. But another maybe back to ESG and EOS, can you just update us on where those initiatives are in The U. S? I know a bunch of the staffing is related to building that out here. Also on the product side, right now most

Speaker 10

of the thematic products are CCaaS

Speaker 7

or obviously the Hermes UK part of the business. But where are you kind of getting that up and running in products launched here in The U. S?

Speaker 2

Well, I will talk about some of the products. But we've put our sixth product that's being managed by our friends in The U. K. And all of it is informed by what comes out of EOS. There's no direct product thing coming out of EOS.

What EOS at Federated Hermes does is talk to 1,200 companies on separate issues for their clients, create data on the engagement that then is put into the decision making process across the board at Federated Hermes. And I'll allow Dessacker to make some more particular comments.

Speaker 9

Thank you, Chris. So you've got to understand sort of EOS in two ways. First off, in representing our clients and the engagements with the companies that we do, we work with these companies on behalf of our clients to ensure and enhance long term returns and best business practices for the long term. That's a benefit to all. But also because of the way that we engage and the depth of engagement that we have, because of the history of engagement, typically we engage with the same company over a very long period, stretching more than ten years because of the depth of expertise we have, we're the oldest engagement team anywhere in the world, we're the largest engagement team anywhere in the world and we would claim we have the best experienced engagement team anywhere in the world.

That gives us particular insights about specific companies, but also about sectors and markets. All of that then is available as part of the integrated information that are used across all assets that are actively managed within Federated Hermes. Either the assets managed out of our Pittsburgh office, our Boston office, our London office or any other office that we may have. That is the beauty if you like of having the stewardship businesses part and parcel of what we do. Now additionally, with the changes in the market and the moves towards a requirement of more stewardship activity for passive investors, particularly out of the European markets, we see an increased demand for our stewardship services and that inevitably over time will lead us to invest more into it.

So we get two things out of it. If you like, it's a business in its own right. It helps enhance returns to our clients and it helps us in making better informed decisions as part of information that feeds into our matrix of decision making trees for our active management. I hope that answers the question on EOS and back to you, Chris.

Speaker 2

Okay.

Speaker 7

Thanks guys.

Speaker 0

And our next question is from Mike Carrier with Bank of America. Please proceed with your question.

Speaker 11

Hi, good morning and thanks for taking the question. This is probably for Saker. But just in terms of the performance fees and carried interest, the historical levels are always helpful. But given what seems like a challenging year for real estate generally, it seemed like the overall level of performance fees and carried interest was strong. So just curious that the asset base has increased significantly, that could shift those levels Or from like a portfolio standpoint, are we just in a more like seasoned portfolio, I mean, than an average year, and that's what's throwing off some of the higher level of performance fees and carry interest?

Speaker 9

So I'll try to answer that the best that I can. Now, the first thing to say is you cannot extrapolate forward performance fees from back looking performance fees. Generally speaking, when we say performance fees, we're referring to our real estate but not exclusively our real estate but that's where most of our performance fees are gathered. Now, you remember, I have said on previous calls that there are two things that generate performance fees. One is there is performance fees generated for the equivalent of what you would call in The United States a mutual fund, what's called here a unit trust and to some degree, you can see the trend of that over time because it's calculated for three years and you can see the trend of performance and although you can't predict it, you can see the directionality.

The way we generate performance fees in that and indeed in separately managed portfolios is that we tend to enhance the value of the buildings that we buy for our clients and the investments we make for our clients through better management, through integrating ESG, funnily enough into real estate, we were the pioneers in doing that as well. And I remind you all that if you go back in time in The United Kingdom, there's the massive development in Kings Cross, which is a living example of how integrating ESG factors into development actually increases return of the long term. So we do that for the buildings that we manage, we manage them well and we tend to over time go into sectors that we think are growing. Now that is the average performance fees, but in addition to that, we get every now and then additional performance fees when projects are finished or finalized or when we reached a landmark in an investment for a major client. These tend to happen not as regularly as the other bit of performance fees and that's why you occasionally see spikes.

Now, if you look back historically, you can average the performance fees for our real estate. Going forward, you cannot predict performance fees, but I have no reason to think that our methodology which has been alpha creating is in danger of not being as alpha creating as it's always been, but the level of performance fees cannot be predicted and therefore we do not. I'm sorry, I Mike, can't get your

Speaker 3

this is Tom. I mentioned that the performance fees and carried interest was €11,200,000 and last quarter was $5,700,000 in my remarks. So our team did a little work because just to help people think through because there's the NCI and tax and where does it occur, which tax rate. And we view performance fees and carried interest as core to us, but somebody says what's core earnings. If you look at Q4 versus Q3 and bring it down to $01 per share difference with those numbers that I just went through, it's basically about a $03 difference quarter to quarter.

Speaker 11

Okay, got it. That's helpful. And then just a follow-up on money market. Debbie, thanks for the earlier comments and realize the team only gives waiver guidance for the current quarter. But just curious how you and the team are thinking about like rates over the year.

You mentioned stimulus, that could be a potential benefit. Any other catalysts that you're watching throughout the year that could either pressure or lift some of the yields?

Speaker 5

Sure. The you know, we're we're obviously, short term rates are anchored to Fed policy. And at this point, you know, chair Powell earlier this week, you know, told us we're still in a low rate environment. We're gonna be also stimulative, and it's not gonna change in the near term. So we we tend to believe him.

What we also know is that, you know, when virus distribution or vaccine distribution for the virus, becomes more widespread, there's a whole lot of pent up demand out there. It's it's, you know, necessarily with the consumer, but it's also in the business sector as well. And depending upon the sector of business, it can be, you know, high or, you know, extremely high or or moderately low. But in any case, there's pent up demand that we think will need to be satisfied. And what that will drive is at least pockets of inflation from our expectations standpoint.

And pockets of inflation are not really what the Fed gets concerned about with their dual mandate of, you know, inflation and employment. However, we think that, you know, as travel begins to pick up again, business, you know, from a more traditional mode begins to pick up again, those things will begin to drive the the inflation rate up. And I think, you know, what that means is the Fed is not in play in 02/2021. There's just no way that's going to happen. But we also think that the guidance that they've given that leads us to a 2023 time frame might be a little bit too long given some of those scenarios, and that what we're probably thinking about for a steeper yield curve with Fed policy is likely to be in the 2022 at least at the rate that we're currently progressing.

So where does that put us in the context of this year, this day, these funds, it's essentially kind of a technical market at this point that's going to be driven a lot by supply and demand. A lot of front end or a lot of front end cash is existing. If that front end cash starts to get more comfortable as the yield curve on the bond side backs up or as the equity market maybe pulls off a little bit and they reenter those markets, some of the cash will leave the liquidity market and that in and of itself less demand will cause the yield curve to steepen. On the other side of the equation, on the supply side, if we get additional treasury supply, GSE supply is probably pretty stagnant for the year. Commercial paper should pick up though as industry picks up.

That's the supply side. You've got more supply, less demand in that situation. Perhaps you get a little bit of a steeper money market yield curve. That doesn't mean you get 15 or 20 basis points. It probably means you get two to five.

So that's sort of the neighborhood that we're looking at from a steepness standpoint in 02/2021.

Speaker 11

Okay. Great color. Thanks a lot.

Speaker 0

And our next question is from Kenneth Lee with RBC Capital Markets. Please proceed with your question.

Speaker 12

Hi, thanks for taking my question. We've seen strong very strong net sales for fixed income over the past few quarters. Just wondering if you're able to highlight what you think could be some of the key factors for that? Some

Speaker 2

of the key factors are that the clientele is still anxious to see yield. And we see this across the board inside our distribution. And there is renewed interest in muni space. We're getting more questions on that because of the obvious implications of potential tax increases. And there remains just a strong appetite for short duration at most firms.

And for anyone who is allocating money, not making a brand new decision, oh, are we going to win all bonds, all stocks, none of that, our products proved very, very strong last year. That's why we had I think it was 19 of them with positive flows. So it was an across the board enhancement of quality that occurred last year. And it was focused on positive flows in the fixed income, which are continuing as Ray mentioned. But what's really going on behind the curtain is that even though the salespeople are not traveling, they are enhancing the relationships they already have.

Because if you already have the email, the phone number and the golf courses and the places where your clients are going, you can still build up relationships. And yes, it does put a little crimp on new stuff going in or getting into new clients, but you get to enhance the quality of old ones as I mentioned here before, which means a broader look at the federated array of products and an in-depth look at the portfolios through portfolio construction. So the portfolio construction when you tear into these portfolios ends up with a lot of our short intermediate or total return bond fund type products as the answer to the types of bets that are being made by our clients. So, this move to quality in the marketplace and the still current demand by many people for yield keeps the fixed income as a positive flow situation.

Speaker 1

Ken, I'd just highlight, as Chris said, short duration has been strong. High yield has certainly been strong. And then within high yield, our institutional domestic product. But we've also seen last quarter and into the first part of this quarter, on the Hermes product menu, the SDG engagement high yield credit fund has gotten off to a very solid start and had a very solid fourth quarter. So, we're up to 23 funds in the first part of Q1 on the fixed income side that have positive net sales and they really are spread through sectors with a concentration in short duration across sectors, high yield and as I mentioned SDG coming on.

Speaker 12

Great. That's very helpful color. And just one quick follow-up if I may. I know it's been a while since we talked about this, but wondering if there are any updated thoughts on potential BT pension scheme outflows. What's the expectations for this year?

And should we expect to see any kind of meaningful impact on net sales from those flows? Thanks.

Speaker 2

Because they are a big beautiful client, we don't like to get into the specifics of their, redemption or investment profile. As you know, they have substantial assets with us on the long term nature. And as we discussed way back at the beginning, they had announced, and we repeat, that they were going to be taking down the mutual fund or products that they're in over time related to their own circumstances. And we have no reason to think that that won't continue, But we're just not at liberty to give what their redemption profile may or may not be, and sometimes we don't even know.

Speaker 12

Understood. Thank you very much.

Speaker 0

And our next question is from John Dunn with Evercore ISI. Please proceed with your question.

Speaker 13

Hi guys. I was wondering, there any products that can be sold kind of as a substitute for Kaufman Small Cap and how much of flows typically come from new versus existing clients? Basically, just the notion of being able to shift clients between strategies.

Speaker 2

So we have a broad array, as you know, of Kaufman product. Obviously, the mid cap and obviously, the large cap. And for those that are focused on the Kaufman methodology, they are very good alternatives. On the MDT side, we have a couple of small cap funds that have very strong performance and, have picked up good assets and good flows over the time frame. And also, you have the all cap core, which includes I'm talking about MDT, which includes the small cap as well.

In addition, on the international side, we have the international SMID product. And frankly, our friends in Cleveland are basically all over the cap scale in their investments as well. So we have some specific Kaufman, some specific small cap and some other general funds that include small caps, that enable us to continue to talk to clients very, very successfully, about where they could invest for the future.

Speaker 13

Great. And then you guys have talked about how money market deals, money market deals are being idiosyncratic. But, how should we think about different rate scenarios and people's willingness to throw in the towel? Like, eventually, when we get higher rates, would would people maybe if sellers think maybe they get a better price and and could that spur more activity?

Speaker 2

In the whole history of money funds going back into the 70s, to me the way to look at it is people will always need to have their cash managed. And there are various things that occur in the marketplace that incent them more. Yes, higher rates would be more helpful. But on the other hand, if you go back into a standard issue wealth management sequence, about 20% of that money is always in cash in any event, whether they're long the market, whether they're bets on, bets off, it's just the ebb and flow of life. And you couple that with the increase in money supply, the overall increase in markets and portfolios being a percentage of those increases in value, there is always constant demand for the cash.

Speaker 3

John, if you're also referring to M and A and money markets, the way we look at that is to work out long term arrangements with the people that we do deals with where they continue to earn what is available to earn. So in the low interest environment, of course, there isn't as much to earn. And but if people throw the towel in and say they want to hook up with us, we are still available, ready and willing to do that. And it's pretty easy to look at what's being earned. And we share the risk with anybody who we do transactions with and it's worked out well and we're still ready, willing and able to do them.

Speaker 13

Thanks very much.

Speaker 0

And our next question is from Dan Fannon with Jefferies. Please proceed with your question.

Speaker 10

Thanks. Just a follow-up on the fee waivers, the guidance for Q1, I assume that's as of the balances today, but just we've seen outflows to start the year in recent months. So just can you talk about some of the inputs that could make that number or variables that could make that number either higher or lower as we think about the current backdrop?

Speaker 3

Yes. When we did the forecast, the assets were about where they are today. So basically, not much change. Of course, we always we used to have a whole paragraph on all the variables and we stopped giving that, but all the variables are there. Assets go up, it changes, assets go down, changes and then all Debbie's rates discussions.

But that's our current forecast updated with assets currently.

Speaker 10

Okay. And then just with regards to the sharing with the distribution partners, so it seems like this quarter, the relationship between what was I think other revenue and the distribution expense was a little bit more disproportionate. Have you as the economic share of with your partners changed as those fee waivers have increased or how should we think about that going forward?

Speaker 1

Dan, it's really it's not anything like an active change on our part. It's really just each one of the funds and each really each class of shares has a different level of distribution revenue and expense. And what comes out at the end is really a blend across all of those funds and classes of shares. So, now of course, as gross yields come down, which they did by a couple of basis points overall during Q4, You have funds that weren't waiving the day before that begin to waive when they cross a threshold. And this is why we've always said that this is very difficult to model.

It's not linear. You have funds move in and out and they can have very different fee characteristics and it's just one of the variables that makes predicting this difficult.

Speaker 8

Okay. Thank you.

Speaker 0

And our next question is from Brian Bedell with Deutsche Bank. Please proceed with your question.

Speaker 8

Great. Thanks. Good morning, folks. Just one follow-up on Dan's money market question and then a few ESG questions. On that distribution side, is there a, I guess, a natural floor that we should be thinking about in terms of the distribution fees that your distribution waivers that you're sharing with your distribution partners?

I guess, the question would be, how should we think about the magnitude of what that could come to and then would there be more pressure on your actual asset management fee waivers if that floor is reachable?

Speaker 1

So, it would be a similar answer, Brian. Within each individual fund, it would have a level of distribution fees, typically distribution fee revenue. But then when you blend them all in, it wouldn't there wouldn't be a floor level that we could give you that would say beyond this point for the complex waivers changes. Really that would occur at the fund level.

Speaker 8

Okay. Fair enough. And then, couple of ESG questions too. One, just, on the traction of your, ESG and refunds in The U. S.

I guess the broader question really here is, how you're seeing demand improve in The U. S. And especially on The U. S. Side, sort of a question for Saker.

We're getting from that $877,000,000 to $1,300,000 this year. How much of that has come from U. S. Clients? And then probably more importantly, what do you see as the demand as The U.

S. Is really sort of catching up due to or beginning to catch up to the trends in Europe?

Speaker 3

Saker?

Speaker 9

Sorry, yes, of course. So the answer is that you've got to think about it in three separate buckets. So the demand in Europe for EOS is driven partly by not just market move as a whole, but also regulatory moves. We can see increasing demand for it in The United States, but that will take time to catch up as you'd expect. So as a separate product, in time we will see increasing demand for EOS and we're already getting some indications of that, that would catch up with the demand in Europe, but also in Asia where it's growing and the best indication of that is the big index providers are talking very actively about stewardship as being something that they do.

That's because they're reflecting demand. That's one way you should think about it. The other way you should think about ESG in general is how much do we integrate ESG as a firm without necessarily calling our products ESG because this is another factor that's taken into to enhance the returns and create sustainable wealth over the long time. And the answer is that we're well past the 90% mark right across the board in what we do that we consider active, the managed accounts integrate the data that we get from ESG. Why do we need that?

Because actually it helps make better decisions to create better wealth over the long term. That's the second part of it. The third one is specific products that clients want to buy that are labeled an ESG and in my own mind, I think of those more as thematic products. Now there, there is going to be discrepancy between The US and Europe because it's the same discrepancy that you get in any kind of market. So a high yield SDG might appeal across the board, for example, but on the other hand, something that the Europeans call sustainable might be very specific to Europe and we'll see that.

But in general, if the question is, do we see the trend strengthening? The answer is yes, there is acknowledgement it does enhance returns. There is an acknowledgement that there would be more specific products coming out of it, but obviously The United States is a different market with a different fiduciary law structure. It takes time.

Speaker 2

Brian, if I may, I interpret two other questions inside your comment and the first one is, where are we on integration of our teams, both U. S. Obviously and Hermes, they're already there. And the other is, what is the interest in the, ESG offerings inside our client base? And on the first, we are well, well along the way with most, if not all, well along our three stage integration process of analysis, customization and full integration.

And we are very proud of our IO office, which is responsibility investing office for accomplishing this and making the federated Hermes enterprise with ESG baked in the cake. On the question of interest, we've done some surveys with our clients and overwhelmingly, two things are happening. First, they are getting more meaning our FAs are getting more questions from their clients regarding ESG. This will increase with the activities of the new administration. And we are discovering, that more and more of the advisers are incorporating it into their methodologies.

Now this is not universal, okay? This is not universal, but it is a very, very strong force.

Speaker 8

Yes. No, I saw the survey. That's very compelling. And are you seeing, I guess, just on the funds that you've launched, I know it takes a lot of time to build them through distribution, what

Speaker 3

are

Speaker 8

the asset levels of the ESP funds that are U. S. Domiciled as of the end of this year?

Speaker 1

So, Brian, the group of products that we started over the last year and a half, they're relatively new, but the asset base is up around $130,000,000 and that would have been up from just over $100,000,000 at the end of the third quarter. So, progress, but as you know with mutual funds, they need to be bigger to open up additional distribution opportunities and they need typically need additional seasoning in terms of track records. That said, because of the topical interest in ESG, these have proceeded along nicely, again, with relatively recent inception dates.

Speaker 8

Yes. That all makes sense. Thanks so much for all the detail on that. Really appreciate it.