Federated Hermes at RBC Conference: Strategic Growth & Expansion

On Tuesday, 04 March 2025, Federated Hermes (NYSE: FHI) presented at the RBC Capital Markets Global Financial Institutions Conference 2025. The company outlined its strategic initiatives, emphasizing strengths in money market funds and ambitions in private markets. While optimistic about future growth, Federated Hermes also addressed challenges in the current rate environment.

Key Takeaways

• Federated Hermes is focusing on expanding its private markets business, including real estate and private credit.
• Money market funds, while making up 75% of AUM, contribute 42% to revenues.
• The company is prioritizing acquisitions as a key capital allocation strategy.
• Positive equity flows of $1 billion, with fixed income seeing a decline.
• Global expansion efforts include a growing presence in Asia.

Financial Results

• Assets Under Management (AUM):

- Total AUM stands at $847 billion.

- Money market assets are $643 billion, with $467 billion in money market funds.

- Fixed income assets total $100 billion.

- Equity assets amount to $82 billion, and private markets assets are $19 billion.

• Flows:

- Long-term flows recorded a net increase of $700 million in the first two months of the year.

- Equity flows were positive at $1 billion, whereas fixed income saw negative flows of $300 million.

• Revenue Contribution:

- Money market funds, representing 75% of AUM, contribute 42% to revenues.

- Longer-term strategies, though 24% of AUM, account for 58% of revenues.

Operational Updates

• Private Markets Expansion:

- $1.5 billion of unfunded institutional mandates are in private markets, split between private equity ($800 million) and private credit ($750 million).

• Fixed Income Diversification:

- 21 funds with positive flows in categories like munis and corporates.

- ETF assets have grown from zero to over $600 million.

• Technology Investments:

- A $300 million commitment over several years for technology upgrades, including a new website and trade order management system.

• Global Distribution:

- A 19-person office in Singapore is part of the company’s strategic global expansion.

Future Outlook

• Money Market Funds:

- Expected steady growth due to attractive yields above 3% and large uninsured bank deposits.

• Acquisition Strategy:

- Active pursuit of acquisitions in real estate and infrastructure, alongside roll-up opportunities.

• Capital Allocation:

- Focus on acquisitions, share repurchases, and seed investments.

• Technology Expenses:

- Anticipated quarterly technology expenses range from $12 million to $3 million.

• Alternatives and Private Markets:

- Goal to increase alternative assets beyond the current $20 billion.

Q&A Highlights

• Alternative Space:

- In the U.S., emphasis on market neutral funds sold through broker-dealers.

- In the UK, focus is predominantly institutional.

• Acquisition Targets:

- Interest in real estate entities and infrastructure platforms.

• Share Repurchases:

- 525,000 shares repurchased in Q4, with 600,000 shares repurchased year-to-date through February.

• Seed Investments:

- $90 million in seed investments, with 10% in alternatives and private markets.

- The company maintains no net debt, providing financial flexibility.

For more detailed insights, readers are encouraged to refer to the full transcript below.

Full transcript - RBC Capital Markets Global Financial Institutions Conference 2025:

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: Welcome to RBC Capital Markets Global Financial Institutions Conference. My name is Kenneth Lee. I’m the Senior Equity Analyst covering The U. S. Asset Managers sector.

And welcome to our fireside chat with Federated Hermes. I’m very pleased to have with us Chris Donahue, Chairman, CEO, and President, as well as to his right, Richard Donahue, Vice President, Financial Planning and Analysis. Chris has served as President and CEO of the company since 1998. And just as a brief reminder, Federico Hermez is a asset manager with roughly $830,000,000,000 of AUM and one of the top players in the money market fund industry. The company manages assets across the spectrum, including equity, fixed income, alternatives, and multi asset categories.

Chris, Richard, thank thank you for joining us.

Chris Donahue, Chairman, CEO, and President, Federated Hermes: Thank you for having us, Ken.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: We’re gonna keep this, discussion relatively interactive. I’ll start off with a few questions, and we will open it up to the floor periodically for questions from the audience. So to start off here, Federated Hermes is known primarily for its money market funds, but investors may not fully appreciate the other aspects of the company. Perhaps we could start off with, you, Chris, giving us with an overview of Federated and where you see the company going.

Chris Donahue, Chairman, CEO, and President, Federated Hermes: Okay. Thank you very much. First of all, it’s a great business and we love it. In terms of the assets, I’m going to get right into the assets and then the flows. This is what everybody is interested in.

So today, I’m going to read you the exact assets. We are at $847,000,000,000 Notice that’s a little different than the $830,000,000,000 at year end. Total money market assets, dollars $643,000,000,000, of which $467,000,000,000 were in money market funds. Fixed income assets were $100,000,000,000 equity, $82,000,000,000 private markets, $19,000,000,000 and multi asset, $3,000,000,000 And the usual statement, we don’t say anything about the future that can’t be undone. Now in terms of flows, this is very interesting that the long term flows had net $700,000,000 in the first two months of this year, led by $1,000,000,000 of positive flows in equities and 300,000,000 negative, in fixed income.

And we’ll get into some of the details on that as we go. But Ken talked about the dynamic of having a lot of assets and money funds, and therefore, that’s what people think. Okay. Three fourths of the assets under management are money funds, but that accounts for 42% of the revenues after you take out the distribution. By the famous subtraction method, 58% of the revenues are thereby occasioned from the 24% of the assets that are in longer term strategies.

Now if you look at it overall and say, well, where are these guys going? What do you wanna do? When we bought the Hermes Enterprise in 2018, there were some really neat things in there. There was an entire private markets business that’s made up of about $7,000,000,000 in real estate, just under $5,000,000,000 in private equity and about $2,800,000,000 in infrastructure. And we’re attempting to build that up.

So we’re looking in The U. S. For a real estate enterprise that could do the kind of things that have been done at King’s Cross and Paradise Circus in Birmingham and other places. And we’re growing very smartly the private credit business, which is very popular today. But this is something that we’re really looking at.

And at the last meeting, on the last call, we said there were $3,700,000,000 of institutional mandates that had not yet been funded. Well, of that, about $1,500,000,000 is in the private markets. And so that’s $800,000,000 into private equity and $750,000,000 into private credits. So what I’m trying to show you is we’re trying to build that business in for the long haul. Now when you ask about the business overall, okay, let’s talk about fixed income.

Yes, we did have negative flows so far this year. However, we have 21 funds with positive flows. We have positive flows in munis, corporates, governments. And so, yes, there is an ebb and flow to this, but it’s a diversified, what we like to call, franchise for all seasons. And we’re really proud of the short term things that we actually manage that are gathering assets, especially on the muni side.

And then if you look at the overall, this combines some of the equity and fixed things, but the ETFs that we’ve started, which are some are fixed income, some are up over $600,000,000 All right, that’s not a monster number. But from zero, that’s a real good number. And the CITs, Collective Investment Trusts, are up to over a billion. And these are things that are going to have to grow into the future and become an increasingly strong part of, the FHI enterprise. On the equity side, we’re very happy with where we are, especially with the MDT franchise.

Now here’s a franchise that we bought in o six, and today that that was about 6,000,000,000. Today, they’re over 15,000,000,000. Now I mean, they’re 17,000,000,000, so up 10,000,000,000 over that time frame, and a lot of that came in the last two or three years. They have an across the board franchise with a lot of really terrific records, and we have some ETFs in that space as well. And they were very, very strong, 1,700,000,000 of positive flows so far this year.

Meaning, if you compare those other numbers, there are other guys who are in the subtraction mode. But nonetheless, we’re really, really happy with that. And there are other things too, and I’ll get into that a little bit by talking about global distribution. In January, I was invited to talk at the Asia Financial Forum. So 3,600 people in Hong Kong.

This place is huge, and you can put this hotel in there several times. And I was one of the few Americans, if not the only American there. And so when they went to introduce me on a panel like this, the moderator says, oh, here. We’re glad to have Chris Donahue here. He’s the longest serving mutual fund, CEO in the world.

And I go on a live mic. You just introduced me as an old geezer. And he said, well, since you’re the only American here, what about Trump? It was just like that. Boom.

And what we say what I said was, okay. If you are not cautiously optimistic, reread your copy of The Art of the Deal. Do you really think Canada’s gonna be the fifty first state? Are we gonna get Greenland, you know, the Panama Canal? And then what about the Gulf Of America?

I said, well, that adds a lot of chaos. And in this beautiful sandwich between uncertainty and volatility, we’re going to insert chaos. And what are we? We are investment managers, active investment managers who have to look through all this and come up with good projects for our clients. So, yes, we welcome all the craziness, that’s going on.

Now in terms of meeting with clients in Hong Kong and Singapore, they’re interested in liquidity, trade finance, a fund we have called Asia x Japan, which is done quite, and MDT, which is, you know, managed out of Boston. So we are pretty excited about what we can do. We have a 19 person office in Singapore, and, you know, that’s what I was out looking at. No discussion on anybody’s business would be complete without technology. And we’ve said this before that we’ve made commitments of about $300,000,000 over the next several years to do what?

Build a website, do our trade order management system, get our other get the whole Salesforce program together, do a new system for HR and for the internal accounting. And I’m sure there are other things as well. And so, you know, we’re pretty active on doing that and committed to doing it. So, overall, we think there’s a lot of beauty in a franchise for all seasons and a diversified look, and it’s worked out well so far. And that was, it gives us twenty minutes for the rest of the thing where you can dive in.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: That was a great overview. Let’s talk about money market funds. I think on your last earnings call, you recently mentioned a higher for longer rate environment could be conducive for growth in money market fund assets. If rates plateau at these levels, do you still see meaningful money market fund growth? And what are the key drivers here?

Is it mainly on the institutional side or the retail side?

Chris Donahue, Chairman, CEO, and President, Federated Hermes: Okay. So let’s look at it this way. If you have a 5% handle on a money fund, it’s nirvana. If you have 4%, this is great. Three is pretty good.

And people started making decisions at two. Our customers are happy at cash at anything with a three and above. And so if you have, in effect, the rates staying longer where they are, this is all good as an asset manager. If you’re looking for a catalyst because you were good five or six rate declines and then have an avalanche institutional money, which we sort of thought would happen. But when you didn’t have those rate cuts, then the slope’s a lot slower.

Well, the asset manager thinks this is great. Now they aren’t printing as much money, so you don’t have that going. So you’re unlikely to add a trillion dollars to the, to the numbers where we are today. But it’s still gonna grow because people still need cash and still need to, take care of their liquidity. So now you ask about institutional and retail.

On the institutional side, in a flat market, you do have situations where the money market fund yields higher than the spot market, and so that attracts some of them. But it’s not an avalanche or a catalyst. On the retail side, you still have $17,000,000,000,000 in banks, seven of which is not insured, 10 of which is. And what are the rates on those? You can go look them up.

They’re not nearly as good as they are in the money fund. So the retail trade is still alive and well and supplies an engine of growth into the money markets. And therefore, we would expect to see some steady growth in that as well. That’s great. And then somewhat relatedly, let’s stick on the concept of duration here and

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: more specifically longer duration products like fixed income. Just given the current rate environment, do you see any potential for pickup in fixed income organic growth? I know you talked about the year to date, that flows there, but just wanted to see a little bit more in terms of what you’re seeing in terms of fixed income, net flows so far.

Chris Donahue, Chairman, CEO, and President, Federated Hermes: Well, we already said that we are down 300 so far this year. And with a whole bunch of funds in various categories, like I mentioned, with positive flows, you’re seeing people pick and choose. So you are seeing some people go out the yield curve a little bit. Some of those are going in a strategic value dividend. We’ll talk about that later.

I’ll stay on with what you want about the fixed income. But as I mentioned, we have all sorts of categories of fixed income that are up so far. Corporate, munis, GOVIs, but we’ve been hit on the high yield side and on the total return bond fund side. On the total return bond fund, even though they were negative for those two months, substantially less negative or as the kids like to say, less worse on February as compared to January. So we like that trend.

In addition, we’ve seen good growth on the ETF side of total return bond. And that gives us another sense of well, the structure does matter, but it’s the same investments. So when the marketplace is doing what it’s doing, then some of the clients are more than happy to keep up their fixed income and even increase it. Great. And I’m

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: glad you mentioned the strategic value dividend fund. And that gets to my next question there. It certainly seems that there has been improvement in the net outflow picture there more recently. Could you just talk a little bit more about what’s going on there and whether you think this pace of improvement is sustainable?

Chris Donahue, Chairman, CEO, and President, Federated Hermes: Okay. Strategic value dividend is a growth of dividend and dividend fund, And it’s in the wrong category because they put it in that Morningstar category. So it’s either gonna be at the top of the category or the bottom of the category. But now both the fund, the strategic value dividend fund, and the ETF, the strategic dividend ETF, are in the top one percentile of their group. I wouldn’t mention that if they were 99.

But, you know, every once in a while, it really works out. And the reason is, last year, the return was 7.9%. And you had to own one or two stocks in order to have that kind of return. So it’s worked out very well for them. Now in terms of what has happened to the flows, if you just go one year ago today now this is a $15,000,000,000 enterprise or fund for FHI.

So in the first quarter of last year, it was negative 400. The second quarter of last year was negative four fifty. The third quarter was negative one thirty. The fourth quarter, I mean, it was negative two twenty, then 130. Now it’s positive.

So in one year, it’s gone from being 400 to the negative to where it’s positive. And you’ve seen both less redemptions and more sales. So the dynamic is working together. And this is what I meant by some clients see that as a way to step into the market and say, I’ve got seven plus percent last year. Yeah.

The money funds. And the story is good because the team, Dan Paris and his team, just keep repeating the sounding joy of their mandate. They don’t go running off over here and over there when, the marketplace puts them in, the lower part of the MorningStar category, which doesn’t matter, but, of course, they’re at the top.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: Let’s stick on the the topic of of the equity business and and perhaps just look a little bit more broadly out. And if you could talk about, once again, the the year to date net flows, but just digging into a little bit more, you know, which what’s the complexion of of net flows? You know, which strategies or areas are you seeing a little bit more positive organic growth there?

Chris Donahue, Chairman, CEO, and President, Federated Hermes: The best one is the MDT. And this is okay, I think we’re going to be able to compete with the passive indexers on this. And the reason is that with the MDT enterprise, you get a diversified, a truly diversified portfolio. It’s not high 30s or 40%, seven guys named Moe. And what does this look like to a fiduciary?

What does this look like for the long term? What does this look like to someone who’s monitoring it? Then you look at the records in just about all the style boxes of the n MDT enterprise, they’re doing great. You take the mid cap ETF is growing gangbusters, and we’re seeing that as a real good engine. So as I mentioned, this is something we bought twenty years ago that has now found its stride, in the last, several years.

And I think the dynamic there of not only good performance, but looking at it as a diversified fundamental manager who’s doing all of their work in advance on the computer owning a lot of stocks, and they don’t make sector bets or big bets on companies, which is what the S and P is. And therefore, you get a diversified look. They try to keep the beta the same as the market and then end up with some pretty good performance. So that’s one thing. Then I mentioned the collectives and the ETFs as things that we’re trying to get going.

And I already gave you the numbers on those, $1,100,000,000 on the collectives and $600,000,000 on the ETFs, which includes some fixed income.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: Okay. Great. Let’s just pause here a moment and see if there are any questions out there in the audience. If there is, just please raise your hand and a mic should come around.

Chris Donahue, Chairman, CEO, and President, Federated Hermes: You don’t play Jeopardy music.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: No. That’ll be the suggestion box for for next year. Let’s just go on to the next one. And, obviously, if if the audience has a question, we we can always pull the audience once again. Within alternatives and private market strategies, you know, Federated is out marketing several funds.

And I believe, once again, you you talked about it earlier, a meaningful amount of the institutional pipeline is composed of private market strategies. Wondering if you could just give us more updated thoughts around longer term growth opportunities that that you see within this area.

Chris Donahue, Chairman, CEO, and President, Federated Hermes: Well, I’ll continue on first with MDT. They have a thing called market neutral, which is now $1,100,000,000 very good positive sales. And it is what it says it is, market neutral. And this is a rather new entry, even though they’ve been managing money like this for a long time, a relatively new entry. And this is considered in our alternatives space.

But back on the things that we picked up in the Hermes deal in 2018, the leader in the pack in terms of money is what we call EDL, European Direct Lending. And we’re on the third vintage of this, and we’ve closed on about $350,000,000 and we’re trying to get to $750,000,000 and, the previous ones have been in the 600 So this is a nice little story of growth and we think we’re going to be able to do it. Then we have our GPE Innovation Fund II, guess what, second vintage and we’ve raised about over $100,000,000 right now. Target is $300,000,000 and the last one was about $240,000,000 Again, that’s the pattern. Then there’s a real estate debt fund that we’re working on pretty strongly.

And the first close is planned, hasn’t happened yet, but we’re planning that to raise about $300,000,000 in this year. Then we have a co invest series of private equity. And again, the target rate is about $500,000,000 and that’s consistent with what we’ve raised before. So this whole package requires a lot of work, a lot of focus. And the big goal is not only to replace the money that’s going out because that’s what this business does, but to get those assets to grow.

And that’s been the big challenge because we’ve been at this $20,000,000,000 for a while. I will admit that. And I suffer from questions on one on ones from that

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: all the

Chris Donahue, Chairman, CEO, and President, Federated Hermes: time. Guilty, yes. But we’re going to make a change.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: And then just staying on the topic of alternatives in private markets. There were some redemptions related to to the departure of a UK Portfolio Manager in the middle of last year. Just wanted to get any more details around that. You know, what are your expectations for any potential continued noise around that flows in over the next year?

Chris Donahue, Chairman, CEO, and President, Federated Hermes: The only good thing about a redemption is it can only occur once. And we had $1,400,000,000 At one point, we thought it was going to be less and then there were two bytes, but it’s been about $1,400,000,000 went out because of that, and we think it’s over.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: Good. And it’s pivoting got a question from the audience there. I guess, you could just ask and I’ll repeat it to the mic. On the balance of space, how important is the retail wholesale channel versus the distribution? So just to repeat the question again, in the alternative space, how important is the retail distribution versus the wholesale?

Chris Donahue, Chairman, CEO, and President, Federated Hermes: Well, depending on how you talk about it, the retail business in The United States for us on that basically doesn’t exist except for the market neutral, which is being sold through broker dealers and intermediaries. So in The United States, that market neutral is focused on what we would call retail, even though you’re going through intermediaries. In The UK, it’s almost all on the institutional side that we’re doing the business. The co invests are obviously bigger clients and the EDL is basically institutional clients across Europe. And so we would love to see more of the democratization of the alternatives in private markets.

And the structures in The U. S. Have to be improved in order to get there. Closed end funds and interval funds. But closed end funds have a little problem because the strike suit lawyers come at you every time you’re five minutes or 5¢ with a spread on it.

And there are some workings through Congress right now that could improve that, improve that structure. And I think that would accelerate the democratization of those enterprises in The United States. And we were running around a little bit in Congress last week talking about these things. And I think there’s an openness to it. But Congress, as soon as you say that, nobody knows what’s going to happen.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: Okay. Any other questions from the audience? Okay. I’ll go right back to it then. Let’s pivot over to acquisitions.

And I think in the past, you said that acquisitions remains the highest and best use of excess capital. And and certainly, you’ve talked about roll up opportunities. And and more recently, you you’ve had a couple specific opportunities there. Wondering if you could just talk a little bit more comprehensively, you know, what are you

Chris Donahue, Chairman, CEO, and President, Federated Hermes: looking at in terms of opportunities? So on the opportunity and the acquisition side, Ken is exactly right. We think it’s our highest and best use of money, although we continue to buy shares and pay dividends. We are looking for a real estate thing, which is what I told you about earlier, to try and duplicate the kind of place making that has been very successful in The UK. Big investors, big projects, regenerating inner cities, things like that.

So we’re looking, but we aren’t yet there. We would look at infra. We have just under $3,000,000,000 of infra, and we think we need more in order to make it go. But it’s a lot better to go off an existing platform and add to it. And so we’d be looking to do things there as well.

In addition, we’re always looking for roll ups. And a roll up in our lexicon is it’s a moribund investment operation, whether it’s SMAs or whether it’s mutual funds, where they need a warm and loving home, and that’s us. And anytime anybody’s moving a money fund, they talk to us. And so if any of those things start moving around, we’re right on top of that. So overall, we remain open and looking for opportunities.

Okay, great. And you briefly mentioned this, but perhaps we

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: could just step back a little bit and more broadly talk about capital allocation priorities. How do you think about share repurchases within this context? And then along the same lines, seed capital investments as

Chris Donahue, Chairman, CEO, and President, Federated Hermes: a potential use of share? So on share buybacks, Richard’s boss, Ray Hanley, and my brother, Tom Dunn, who’s the CFO, control the buying of shares because I buy them all the time, they cut me off. But nonetheless, in the fourth quarter, we bought 525,000 shares in the fourth quarter. We told everybody that. So far this year through the February, we’re up to 600,000 shares repurchased.

That doesn’t mean I took over. That just means they were buying more. And I think that’s a good thing in that space. Now seed investments, you mentioned seed investments. So, we have about $90,000,000 in seed investments, and that’s here in The U.

S, in London. And of that, maybe 10% of it, maybe a little more than that, is in seed investments, in alternatives in private markets to get them going. And don’t forget that we don’t have any net debt. So therefore, we have a lot of flexibility and we are not constrict Okay. Uh-huh.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: It increased this year. Wondering if you could just provide a little bit more color around any other expense for this year?

Chris Donahue, Chairman, CEO, and President, Federated Hermes: Well, the expenses for the technologies, we’ve said we’re gonna be $12,000,000 to $3,000,000 a quarter. Okay? Now beyond that, I’m gonna let Richard tell you something.

Richard Donahue, Vice President, Financial Planning and Analysis, Federated Hermes: Yeah. So we take a look at those those big five that we’re we’re talking about. They’re they’re gonna come across in a couple different line items, comp, systems communications, professional service fees, depreciation. But we would really stick back to that $3,000,000 a quarter on the systems and comms line. The other stuff will definitely move in and out, but with depreciation feeds and stuff like that, stuff’s gonna come in and gonna come off.

So if you’re if you’re looking at a adjustment number or change, we’d stick to what we said back in the quarter.

Kenneth Lee, Senior Equity Analyst, RBC Capital Markets: Great. With that, let’s just wrap it up here. Thank you very much.

Chris Donahue, Chairman, CEO, and President, Federated Hermes: Well, thank you. Thank you all for coming.

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