Good day, ladies and gentlemen, and welcome to the Federated Hermes Q4 2021 Analyst Call and Webcast. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Raymond J. Hanley, President, Federated Investors Management Company. Sir, the floor is yours.
Good morning and welcome. Thank you for joining us today. Leading today's call will be Chris Donahue, CEO and President of Federated Hermes, and Tom Donahue, Chief Financial Officer. Joining us for the Q&A are Saker Nusseibeh, who is the CEO of the international business of Federated Hermes, and Debbie Cunningham, our Chief Investment Officer for the money markets. During today's call, we may make forward-looking statements, and we want to note that our actual results may be materially different than the results implied by such statements. Please 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.
Thank you, Ray, and good morning, all. I will review Federated Hermes business performance, and Tom will comment on our financial results. 2021 ended with record long-term assets under management of $221 billion, including record assets in fixed income, $98 billion, and record in alternative private markets, $23 billion. Gross sales of long-term strategies reached another record high in 2021, hitting nearly $70 billion, a 14% increase from 2020. Net sales in these strategies nearly doubled to just under $9 billion. Assets under advice by EOS at Federated Hermes were $1.6 trillion at the end of 2021. We added one new client in the fourth quarter and 10 during the year. Looking first at equities.
Fund flows were negative in the fourth quarter by about $1.7 billion, with outflows in growth and international strategies. Equity SMAs had fourth quarter net redemptions of about $56 million, and equity institutional separate accounts had $987 million of net redemptions, including $549 million from a U.K.-based client. We saw positive net sales, however, in 18 equity strategies, including Global Emerging Markets SMid, U.S. SMid, and Global Equity ESG. Looking at areas of focus for equity business in 2022, we are providing clients with research and thought leadership on asset classes and strategies that have responded well in past inflationary periods. Within equities, these include dividend income, international, emerging markets, and value strategies.
Our largest equity strategy, the Strategic Value Dividend strategy, is off to a solid start in 2022, with positive returns and early net sales for both the fund and the SMA. We have a robust suite of international equity strategies managed both in London and in the U.S. Several of our London-managed equity strategies produced solid net sales in 2021, including Global Equity ESG, $849 million, SDG Engagement, $565 million, Asia ex Japan, $437 million, and Global EM SMid, $166 million. All three of the international strategies managed from our Cleveland office are rated five stars by Morningstar. We will continue to emphasize these and other strategies that offer solutions to clients as they manage against higher inflation. Our equity fund performance at the end of 2021 compared to peers was solid.
Using Morningstar data for the trailing three years at the end of 2021, 59%, 20 of 34, of our equity funds were beating peers, and 26%, nine of 34, were in the top quartile of their category. For the first three weeks of 2022, equity funds and SMAs each had net positive sales, showing a combined total of about $46 million. We had 18 equity funds with positive net sales in these first three weeks of January. Turning now to fixed income. Q4 net sales were just under $500 million as institutional account net sales of $752 million and SMA net sales of about $60 million were partially offset by fund net redemptions of $330 million.
Fixed income separate account net sales were driven by high yield, $407 million, and multi-sector, $327 million strategies. Within fixed income funds, high-yield strategies showed net sales of $424 million, led by the SDG Engagement High Yield Credit UCITS Fund. Net redemptions occurred in Ultrashort Bond Fund and certain other short duration strategies. We had 19 fixed income funds with positive net sales in the fourth quarter, including Strategic Income, Muni and Government Ultrashorts, Inflation Protected Securities, Floating Rate Strategic Income, and Total Return Bond Fund, and of course, others. In the fourth quarter, we successfully launched our first two active transparent ETFs, an investment-grade short duration corporate bond fund, and a high-yield short duration bond fund. We are focused on the growth of these initial products while we also plan for additional ETF offerings in 2022.
Regarding performance, at the end of 2021, and using Morningstar data for the trailing three years, we had eight fixed income funds, 22% in the top quartile, and 17 funds, 47% above median. For the first three weeks of Q1, fixed income funds and SMAs had net redemptions of about $34 million. During the same period, we had 17 fixed income funds with positive net sales, including solid results in Total Return Bond Fund and High Yield. Ultrashort funds were negative. In the alternative private market category, net sales of over $200 million included unconstrained credit of $193 million, absolute return credit of $91 million, and private equity of $39 million. This was partially offset by net redemptions in direct lending and infrastructure.
We successfully launched in Q4 a new vintage of our private equity series, PEC 5, and a new vintage of our European direct lending series, European Direct Lending II. PEC 5 had initial funding of $342 million in the fourth quarter, and European Direct Lending II had $272 million in commitments for later funding. We are continuing marketing efforts to raise additional assets in each of these strategies this year. We began 2022 with about $800 million in net institutional mandates yet to fund into both funds and separate accounts. These additions are expected to occur in alternatives, private markets, including unconstrained credit, direct lending, trade finance, and fixed income. Fixed income wins include core, flexible credit, and investment-grade credit strategies. Now moving to money markets.
Assets were up about $34 billion in the fourth quarter, with about $20 billion from funds and $14 billion from separate accounts. In addition to seasonal trends, we benefited from ongoing stimulus-driven liquidity growth as well as wins in certain institutional market segments. Our money market mutual fund market share, including sub-advised funds, was about 7.4% at the end of the year, up from 7.2% at the end of the third quarter. With the market pricing in a series of hikes in short-term rates in 2022, including the first increase in March, we've begun to see increases in the rates in the three-month and longer portions of the money market curve. Tom will update how this impacts our yield waiver outlook. We believe that higher short-term rates will benefit money market funds beyond waiver relief.
As in the 2009-2016 period of near zero rates, money market funds have retained most of their assets even as alternatives offered higher yields. Over the span of the last Fed tightening cycle that began in the fourth quarter of 2016 through the last rate hike in the fourth quarter of 2018, after an initial decline, our money market fund managed assets increased by about 15%. The industry followed a similar pattern where an a fter an initial decline, it was followed by growth of 11% over that time frame. The higher rates helped us continue to grow these assets by an additional 22% through the third quarter of 2019 when the Fed began to ease rates. Similarly, industry money market fund assets also grew in this period, showing a 14% increase.
Now we closely monitor and comment on the SEC's proposed money market fund regulatory changes. The comments submitted to the SEC by us and others clearly note that swing pricing is not a workable alternative for Institutional Prime and Muni Money Market funds. We believe that most institutions would not use these products if swing pricing were to be imposed. In addition to uncertainty around redemption proceeds, large-scale system changes would be required by both money fund managers and investors to enable swing pricing to work. In our view, few, if any, will undertake these efforts.
As a result, we expect that most of the assets currently in institutional prime and muni funds would shift to government money market funds, as many did the last round of changes in 2016. Or to products like our private prime fund that are not subject to 2a-7 money market mutual fund regulations. We have approximately $8 billion in client assets in institutional prime and muni funds that would be impacted if swing pricing were to be imposed as described. Taking a look now at recent asset totals. Managed assets were approximately $651 billion, including $436 billion in money markets, $90 billion in equities, $98 billion in fixed income, $23 billion in alternative private markets, and $4 billion in multi-asset. Money market mutual fund assets were $294 billion. Tom?
Thanks, Chris. Total revenue for the quarter was down 2% from the prior quarter, due mainly to lower average equity assets, higher money market fund waivers, and lower performance fees, partially offset by higher money market assets, higher alternative private market assets, and higher fixed income assets. Q4 carried interest and performance fees were $3.7 million compared to $5.1 million in Q3. Operating expenses increased slightly in Q4 compared to Q3. Compensation and related was down due to lower incentive compensation expense. Advertising and promotional increased due to higher advertising and conference expense. We saw some restoration in travel and related expenses during Q4 when post-pandemic related restrictions eased.
With short-term rates moving up in anticipation of Fed rate hikes beginning in March, we estimate that the negative impact on operating income from minimum yield waivers on money market funds for Q1 will improve to about $22 million compared to $38 million in Q4. Assuming a Fed rate hike in March, we expect the Q2 negative impact to decrease about 90% from Q1 estimated levels. Estimates are based on our investment team's expectations for portfolio yields at recent asset levels, asset mix, and other factors. The amount of minimum yield waivers and the impact on operating income will vary based on several factors, including, among others, interest rates, the capacity of distributors to absorb waivers, asset levels, and asset mix. Any changes in these factors can impact the amount of minimum yield waivers, including in a material way.
Now looking at expenses for a minute, for the future. Overall, most expense line items will be impacted by inflation for Q1 and for all of 2022. Known comp and related items, including things like payroll tax and bonus restricted stock will increase in Q1 by about $8 million. New hires, wage increases, bonus reset increases we expect will occur in Q1, but we're not going to predict by how much. Of course, there are less days in Q1 versus Q4, reducing net revenue. Distribution expense is expected to increase as rates rise. System and communication is expected to increase as we continue to invest in the technology supporting our business. Advertising and promotion, the full year of 2022 should look similar to the full year of 2021. Travel should increase as we hope to return to more normal operations.
As you heard Chris mention, our ETF and our private markets business plans are being implemented along with the successes that he mentioned. Overall, we're gonna continue to invest for growth, and we will deal with the reality of inflation. At the end of 2021, cash and investments were $427 million, of which about $397 million was available to us. During Q4, we repurchased or purchased over 4 million shares of our stock for approximately $145 million. Debt at the end of the year was $223 million, reflecting both the acquisition of the remainder of the BTPS interest in Hermes during Q3 and the Q4 share repurchases. Now net cash and investments were $147 million at the end of the year. We continue to be active in buying our stock.
We are monitoring the debt financing market and may pursue long-term financing arrangements to supplement our cash flow from operations to fund share repurchases, potential acquisitions, to pay down part of our existing debt, and for other corporate purposes. Depending on market conditions and other factors, we're considering long-term debt financing of approximately $300 million. That concludes our prepared remarks. Katie, we would like to open the call up for questions now.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. If you wish to withdraw from the queue, please press star two. We do ask that if you are listening via speakerphone to please pick up your handset for optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone now. Our first question today is coming from Dan Fannon at Jefferies. Your line is live. You may begin.
Thanks. Good morning. Just to start on the fee waiver guidance in terms of the assumptions, as you think about the improvement here to March without any Fed change, is that assuming asset levels as of 12/31 or asset levels as of the numbers you gave today? Is it based on the current yields, expectations of further improvements? Just a little bit more color on the kind of shorter-term dynamics before the Fed actually moves.
Yeah, it's the asset level as of, I think, January 21st. Rates, do you want to comment on that, Debbie?
Certainly, yeah. We're looking at what will continue to be in our minds, the expectations of a steepening yield curve as we get into the months of February and March and closer to that March FOMC meeting.
Got it. Okay. Thank you. Then in terms of the expenses, appreciate the color around inflation and the seasonal dynamics for the first quarter, and some of the other color. Is the fourth quarter levels a good starting point when we think about that comp reset? 'Cause it came in lower, the 124 in the fourth quarter. Just thinking about, was there a true up and maybe also were there performance or incentive fees in the fourth quarter as well. Just trying to think about what we should just be adding [AIB] and some inflation to the 124 if that was artificially low.
Yeah. We didn't have a great year in terms of 2021. You saw the incentive comp went down at the end of the year as we you know analyzed and looked how where how much should be paid out. We reset those for 2022. You know I already mentioned the $8 million of kind of you know normalized type things. How much you wanna go up from there? We expect it to go up, but we're just not gonna speculate on how much. The reason is because anytime I do that, I've just been wrong because things change in the marketplace so much that we got tired of forecasting and then being way off.
Okay. Thank you.
Thank you. Our next question today is coming from Patrick Davitt at Autonomous Research. Your line is live.
Hey, good morning, everyone. First on the waivers. You know, some of the other large money fund complexes have suggested it could take a few months for the waivers to come off, as much as you guys are guiding to. What gives you the confidence that you can be kind of 90% off, you know, that rapidly, that quickly after the first hike?
You know, everybody's factors are a little bit different. It's asset levels, asset composition. How much is in government? How much is in prime? How much is in muni? You know, the dynamics of the curves between those sectors. What the actual outlook would be on expectations, whether it's, you know, additional moves beyond March, or, you know, only one or two moves throughout the year. You also have the expense factors that are being charged. Those are not uniform across the market, and as such, the waivers aren't uniform based on those. Lots of different factors that go into that determination and calculation.
Got it. Thanks. Appreciate the guidance on, I guess, $8 billion in funds that would be impacted by the swing pricing. Swing pricing appears to have been accepted in Europe, so why are you so draconian on the reaction in the U.S.? Just out of curiosity.
It deserves draconian response. In Europe, they don't really do it on real money market funds, except that they're pricing them more or less out of a black box. What it does is you end up with pricing that makes the product unusable. If 4% redemption occurs, then you have to go to a swing price. The customers aren't gonna know that that's going on in a non-volatile timeframe, and they're gonna be surprised to the negative to get hit with what amounts to a redemption fee through the mechanism of a swing price. The mechanisms that have to be put in are expensive, time-consuming, and of no value. Why are customers gonna do that? Why do we wanna do it?
Basically it looks to me like it's enlivening what the Fed said years ago that they wanted to either kill prime and muni funds or, quote, "regulate them out of existence." Our view is from a look at, you know, real stakeholder defense, that issuers have the right to issue and buyers have the right to buy these products that have proven very resilient and very successful over the years. Protestations by the Fed to the contrary, notwithstanding.
Thank you.
Thank you. Our next question today is coming from Ken Worthington at JP Morgan. Your line is live.
Hi, good morning. Chris, you noted that short and ultra-short bond fund outflows, I believe in Q4, and I think you highlighted again so far in Q1. Given the market is anticipating higher interest rates, why are these funds seeing outflows? I noticed this has happened in the past too, but I would kind of think that investors would be allocating more to short and ultra-short, not less in a, you know, as we approach and as we enter a rising rate environment.
Some of those products have experienced a decline in the NAV, and some clients were not really happy with having a decline in the NAV. I think it was about $0.04.
Yes.
That caused some of those redemptions. That's just the nature of the product. I would agree with you, people ought to be coming into those, and this is a great time for them to be doing that, but we're still living on the backside of that. Debbie?
Yeah, Ken, I think what I would add to that is if you looked at the flows over the course of the last several years in the most recent zero rate environment, they've been very, very positive in those products. That much of the positive flows have come from liquidity assets going into, you know, bucketing, segmenting their cash, and taking portions out into that ultra-short space where those clients are now looking at something that in a rising rate environment, they'd rather be in even shorter products where we have, you know, a whole host of liquidity products that have been growing in addition to our new both taxable and muni micro short products.
I think the ultra shorts will gather assets from longer term bond players as they get shorter, but they will lose assets in a rising rate environment back to the even shorter products in micro short and money markets.
Great. Thank you. Then I don't know if Saker's on the call. Maybe, Chris, you can answer if he's not. Does BT still have meaningful investments with Federated Hermes funds? And is there any schedule of planned redemptions or return of capital to BT? I know this is something when the deal was first done. Someone, you or maybe it was Saker, highlighted that, you know, those assets were gonna come out over time. I just wanted to see where we were in that process.
Saker is on the call.
Thank you. I mean, first off, I don't wanna talk in great detail about BTPS because it's a main client. Insofar as it relates to the publicly available information, which is to do with the deal, we did say at the beginning that certain assets of BTPS, primarily in public markets, were due to have a life, a declining life, because as a fund, it's a direct benefit fund and it is a maturing fund. However, we also run substantial assets for BTPS in private markets. And not only do they remain invested with us, we continue to discuss with them new opportunities which they are interested in.
Where do we stand on the public side to update us on?
On the public side, they are very much on track as per our original agreement with them. There's no surprises there. The decline is incorporated within our funds. The key for us now is the private side, which is where the majority of our assets stands.
Thank you.
Okay. Okay. Thank you.
Thank you.
Ken, we gave out the levels there when we did the deal, and, you know, we kind of did that so everybody could see where it stood and anticipated not really going into a client detail after that.
That was August, right?
In August.
Yeah.
Okay. That's fair. Thank you.
Thank you. Our next question today is coming from Kenneth Lee at RBC Capital Markets. Your line is live.
Hey, good morning. Thanks for taking my question. Wanted to get further color around potential demand for money market fund products, especially as rates start going up. Thanks again for the historical perspective there. Would you also expect a similar dynamic this time, in which case you would see declines followed by growth over time? Thanks.
Sure, Kenneth. This is Debbie obviously. You know, historically, when interest rates have gone up, the initial reaction is for money market funds to lose assets. Generally speaking, over most cycles, it lasts longer than it did in the 2016-2018 cycle. We think this will be more like the 2016-2018 cycle because of a couple characteristics. Number one, we're starting from zero again. That's different than prior increasing rate cycles. Number two, it was caused by a you know, sort of a major event, in this case, a pandemic. Ultimately, you know, zero has been experienced for a long time because of that particular factor.
When you have a Fed though, like we have now and like we had in 2016 to 2018, where you've got the preference for communication and a yield curve that effectively reflects expectations of Fed movement. Now it is dynamic, obviously. If you asked me three months ago or even three weeks ago, my opinion would have been different for what that Fed movement would have been. But the Fed that we have now is very communicative. Their Fed speak is out there in unison, and as such, products reflect that from a yield curve standpoint faster than they have in what I'd call more historic Fed tightening cycles. In this case, again, I'm not even calling it, and the Fed isn't calling it a tightening cycle, as they did not in 2016 to 2018. It's more normalization.
It's getting rates back to where they should be in a more normalized environment with an inflationary environment that also becomes more normalized.
Ken, let me add also a couple other factors. One is to take a look at the money supply. All of money market fund is a function of that in the hands of all the individuals that have money. This is a look at what you might call core money market funds, where people just need a cash management service. This is an inexorable thing that grows. I don't think they're gonna start shrinking the money supply. Now, it's not a direct factor, and it certainly doesn't turn in quarters like we're looking at. It is an underlying feature which enables us to get to higher highs and higher lows. It's one of the ingredients. Another one is that these products over all these decades have shown tremendous resilience and tremendous ability to give the clients what they want.
That's another big factor in why these products continue to be successful.
Gotcha. Very helpful there. And one follow-up, if I may. Just wondering if you could just update us on capital allocation priorities. Saw that you had meaningful share repurchases in the quarter, and you talked about a little bit about long-term financing solutions. Wonder if you just give out a little, you know, further color around there. Thanks again.
Yeah. Further color is to look at what we did in the fourth quarter. We weren't very happy with the stock price, and we think the future as a company is great. We've been buying more shares. We've got a new share buyback program with 7.5 million. You know, we continue to be active, and we expect to be active. With the debt levels, we wanna look for long-term financing to continue to have availability on the short term and also, you know, satisfied with the rates on the longer-term basis.
Gotcha. Thank you very much.
Thank you. Our next question today is coming from John Dunn at Evercore ISI. Your line is live.
Hi, guys. You know, with waivers kind of on the way out and the outflow, I mean, the outlook for flows, you know, pretty good. How does that affect conversations with smaller money market players? Does it delay kind of the roll-up deals? Basically, how does that dynamic work at this part in the cycle?
What we have discovered is that the cycle really doesn't drive that truck. It's more of a longer-term internal decision by other potential roll-up candidates as the CEO and the business people and the CFO of those enterprises decide whether those things make sense for them, given the risk profile and the growth profile. It just, it doesn't work as an accelerant. We've been in this a long, long time, and it's hard to connect something that happened in the marketplace within things releasing. What's our answer? We simply call on them all the time so that when the opportunities arise, everybody knows that Federated Hermes is a warm and loving home for their money fund.
Got it. Then you mentioned the Strategic Value Dividend fund is doing better so far in 2022. Can you remind us how that product sold? You think there's potential for a pickup there to take up some of the slack in other areas of equities this year?
We do. That's why I mentioned the thought leadership that we were putting out into the marketplace. This began many months ago with the belief that perhaps inflation was not, quote, transitory, close quote. That's to look at the index betas to CPI of various investment areas. Those charts and works showed that dividend stocks, value stocks, and as I mentioned, even international and small cap, and obviously TIPS are the range of solutions that you can work with to help clients manage around these higher inflation and higher inflation expectations. The Strategic Value Dividend Fund is right in the middle of the mix for that. That just underscores one other point here, and that is we like to call ourselves a franchise for all seasons.
When you get these giant reversals from growth to value and you have inflation, which are different situations than we've had over the last several years, you have solutions for products that are ready and able to go.
Thanks very much.
Thank you. Our next question today is coming from Robert Lee at KBW. Your line is live.
Great. Thanks. Good morning, everyone. You know, just wanna maybe go back to expenses a little bit and, you know, Tom, I understand you don't wanna give forward guidance, but maybe just to level set, you know, 2021, I mean, on comp. I mean, clearly some reversal of prior accrual. So if we're trying to think of kind of a, I don't know, select a better way of putting a normalized comp level, you know, should we be just averaging the four quarters, understanding in the first quarter last year there was a bunch of noise, you know, that would kinda get us to around the $130-ish million level? Is that the best way to think of it as kind of, you know, as we head into next year?
Yeah. It's tough, Rob. You know, the first quarter, that's why I went through, you know, inflation and the expenses in the first quarter. If we're right and the, you know, earnings of the company that because of the rate increases are gonna change. Every time we put an accrual in for an earnings quarter, we're supposed to predict what we think is going to be the bonuses and the comps for the year. Come Q1, we're gonna have to put an accrual number in. With our expectations of rates going up and, you know, basically taking most of the waivers out, you know, we're gonna have a nice decision to make in there, and that's why I don't wanna predict it.
Obviously, we took a lot of comp out in Q4 based on, you know, based on the earnings and the other factors. Would we restore comp if the earnings are restored? Yes.
Okay, thanks. Then, you know, maybe on the EOS business. I mean, trillion of assets under advisement. I know it's been in place certainly in the—I think in the U.S. you've invested with the understanding that it supports kind of the investment process across the firm, you know, more broadly. You know, how should we think of the economic contribution of that advisory business? Is it really just, hey, you know, gives you greater insights, it's really? Is there, you know, any kind of, you know, potential or meaningful, you know, earnings or revenue upswing that we should be thinking about from that business?
Saker, it's your turn.
Thank you, Chris. Look, first and foremost, you have to think about it as essential to our brand at FHI as being the main differentiator with everybody who wants to play within the ESG space, because it gives us particularly deep understanding of all the factors that come to play. Remember that for us, we believe that putting these factors in leads to sustainable wealth creation, meaning they actually add to our alpha. In many ways, the value that you see, that our clients see are reflected also in the understanding of what the company that we engage with in the environment that these companies operate in and so on.
There is an inherent value in brand, there's an inherent value in understanding companies, an inherent value of actually improving our own performance, as the insight that we get is unique to our teams, whether in Pittsburgh or in Boston or in London. The second thing you should take into account is that, generally speaking, the clients who we do have are clients we have in other areas. And that means that it's a holistic relationship, and it tends to tie clients in.
You hear Chris talking about us being a franchise for all seasons, and the one thing that is an overarching in all the seasons, certainly has been in the markets outside of the U.S., has been the EOS relationship, because it doesn't matter what you're in, there's always going to be, for the clients, a degree of index investments. Quite a lot of the time, we try to get the EOS services for that index investment. That gives us contact and commitment to the clients. If you're asking me, is EOS going to make us an enormous amount of money, the answer is it is by definition, not as high margin as other, as directly high margin as other asset management businesses are concerned.
It's a business that we believe is worth pursuing, both from a financial point of view, but also from an understanding point of view.
Great. Maybe one last question, and this is maybe looking at the SMA business. I mean, clearly the you know, the industry, you know, all this, you know, lot of movement towards, you know, talk about, you know, model portfolios. Everyone seems like they're trying to, you know, create model portfolios, trying to get them on platforms. That's you mean, not a, I guess, a part of the industry that I think you guys have spoken to too often in the past.
Can you maybe, within your SMA business, how you kind of are thinking about, or maybe it's a part of it, you know, kind of developing a models capability to try to get that placement as opposed to kind of a more, I'll call it traditional, you know, SMA approach, you know, kind of strategy by strategy?
We would be on both streets, Rob. I think we talked about this in prior calls. We had one client, especially who wanted models along the ESG line, which we set up and are implementing here, I think, in the first quarter. That was a whole new deal for us. The model thing and the SMA thing are related. Naturally, we're gonna keep repeating what we've been doing on the SMA side. In addition, working on these models in response to client demand.
Okay, great. Thanks, Chris. Appreciate you taking my questions.
Thank you. Our next question today is coming from Brian Bedell at Deutsche Bank. Your line is live. You may begin.
Great. Thanks very much. Chris, I like the warm and loving home comment on money market funds. You should make that a marketing brochure, especially here in the frigid temperatures here in the Northeast this time of year. Maybe if I can ask Debbie about one more on the money market fund flow trajectory and specifically on brokerage sweep. If we think about how brokerages tend to lag deposit pricing, they have very low deposit betas in the first couple hikes of the cycles. Therefore, clients that do want to get a yield would naturally migrate to money market funds in those sweep systems.
Maybe if you can comment on your thoughts of whether you think that would be a positive contributor as the cycle, certainly if the Fed hikes, you know, once per quarter or at a sustained momentum. If you can refresh us on the AUM that is in the brokerage sweeps within the money fund complex.
Sure. Well, first of all, most brokerage sweeps at this point are within our government sector. That's because of the FNAV nature of the prime institutional and municipal institutional that went into effect in 2016. I don't know that we actually break that out from an FHI standpoint. I think from an industry standpoint, from a public standpoint anyways, but from an industry standpoint, I think about 20%-25% of the government assets in the market are in that type of a sweep arrangement. Ray, do you have additional insight from an FHI-
We combine everything that are financial intermediaries. We don't break out brokers per se. One of the reasons why we looked at the historical growth in two steps coming out of the 2016 cycle was that as the rates rose, we did see exactly what you're talking about. The cash yields in and of themselves become it becomes a more attractive asset class. While that has institutional implications, it certainly for us helped us with brokers and other intermediaries who were able to it's some effort on their part to move out of the default option.
It's kind of the easiest thing to do with their cash, but they're able to access meaningfully higher yields with us, and that was something we were very active in doing right up until the time where the Fed pretty aggressively moved the rates back down.
We would expect a similar type of pattern to occur here. You know, I think it's a repeated pattern that we have some history associated with, as Ray mentioned.
That's helpful. Maybe just back on expenses. I know it's tough to predict in the compensation area. You know, I appreciate obviously there's inflationary dynamic to that. If we think about the money market fee waivers, you know, recouping those from that $38 million level. Just on the sort of variable component of that. The $38 million improvement to pre-tax. I guess what type of offset would there be in comp just simply on that better, you know, that better performance, just so we can think of sort of how much might be, how much may fall to the bottom line?
Yeah. Brian, we're just not gonna do it. There's so many variables. Just the equity declines in the first quarter and what they do, whether we make that up in the marketplace by recovery or we make it up in sales or in fixed income or in the private markets. We're also looking at the you know the new hires that we're trying to get and whether we're gonna succeed and how much the cost is with the you know tight labor market. It's just not gonna give you any more help on it. Sorry.
Yeah. No, that's okay. I appreciate that. It's good color. Just one last clarification. I think, Chris, did you say $8 billion of institutional prime was at risk for that swing pricing? Just want to make sure I-
I said $8 billion of institutional and muni prime, so that if swing pricing goes in, we've looked at it and said that's about what would be the subject matter. Then as I said, like the last time, they'll chase that money into the govies. The last time we didn't lose any clients. The money just all played musical chairs. There was less financing in the real market.
Right. Okay. Yep. That makes sense. That's it. Thank you for taking my questions.
Thank you. We have no further questions in the queue at this time. I would now like to turn the call back over to Raymond Hanley for any closing remarks.
Thank you, Katie. That concludes our call for today, and we thank you for taking the time to join us.
Thank you, ladies and gentlemen, this does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.