Welcome to RBC Capital Markets Financial Institutions Conference. My name is Kenneth Lee, and I am the Senior Equity Analyst covering the U.S. asset manager sector. Welcome to our fireside chat with Federated Hermes. I am very pleased to have with us Chris Donahue, Chairman, CEO, and President, as well as Ray Hanley, President, Federated Investors Management Company, responsible for investor relations. Now, Chris has served as President and CEO of the company since 1998. Just as a reminder, for those who don't know, Federated Hermes is an asset manager with roughly $758 billion of assets under management and is one of the top players in the money market fund industry. As well, the company manages assets across the spectrum, including equity, fixed income, and alternatives. Chris, Ray, thanks again for joining me.
Thanks for having us.
Thank you, Ken.
Now, we're going to keep this discussion relatively interactive. I'll start off with a few questions, and periodically, we will open up to the floor if there's any questions from the audience. I will kick it off. Federated Hermes is known primarily for its money market funds, as I said in my prepared remarks, but investors may not fully appreciate the other aspects of the company. So, Chris, perhaps we could start off with you giving us an overview of Federated Hermes and where you see the company heading.
Thank you. An overview would involve, first of all, if you look at the assets, 75% of the assets are in money funds, 40% of the net revenues. And by the subtraction method, you can figure out that 60% of the revenues come from 25% of the assets, which are long term. What I'd like to do to give an overview is give you the updated end-of-February assets and flows. This is what everybody wants to know anyway. So we're going to start with that. And it's a good way to give an overview because we'll touch all the bases. So our total assets under management are $783 billion. And this is plus about $0.26 billion since year-end. On the money market side, which includes both funds and separate accounts, we're at $584 billion, which is up about $0.25 billion from year-end.
Included in that $584 billion is $420 billion of money market fund assets. Those assets are up $0.15 billion, but they're included in the $584 billion. Fixed income stands at about $96 billion, up a little from year-end, with about $5.10 billion of positive flows through the first two months of this year. Equity assets stand at about $80 billion, up about $1 billion on AUM from year-end, but with about $1.4 billion in negative flows through those first two months. The private markets are steady at about $20 billion. They're up a little bit, $50 million or so. Just to finish it off, multi-asset is about $3 billion. They're about flat with a slight down. So that's just an overview of the numbers and the assets. But the real way to think about us is as an investment manager with high active share, active investment management.
We do vigorous vetting of everything we buy, and that's who we are, and that's who we will be. The money market fund story tells you a lot about us and our culture as follows. We look at the money funds as essential ballast to our ship of state. In our office, we have a painting of the Cutty Sark, which was a British clipper ship, ran tea back and forth across the oceans. And if you want to go see the Cutty Sark, it's over in Greenwich right now. It's dry docked. And this has nothing to do with the booze, nothing to do with the booze. The Cutty Sark is a poem from Robert Burns. We'll get into that if you really want to know. But in any event, it's a beautiful ship put on the west coast of Ireland by this painting by Peter Ellenshaw.
The only way this clipper ship made that trade was to have ballast. Ballast was the money funds because you don't want the ship to be tilted in stormy waters. It's a very simple thing. But there's another message with this painting that we use inside the company and used as part of the acquisition with the Hermes Enterprise in London. And that is, we always said, everyone in your job, you can paint your own picture. And this respects your dignity, your creativity, and also outlines where salespeople can complain about investment or investment about sales. Well, yeah, we can have suggestions. You want to put more red in there? Well, how about no? And this gives you less sort of food fights on it.
In the rest of the business, the private markets are things that we think, with growth, can get up to bigger than the combination of fixed income and equity assets. Another $20 billion today, so they've got to have a ride. On the fixed and equities, where we're going with that, I always say we're going to double them in five years. We've been pretty good about that. But that's about what I would say with those. The money funds, they have a high single-digit number of growth this year. We think the whole industry is going to $7 trillion. We usually have a 7+% market share, so you could do your own math there. We love the idea in an overview of a global distribution, which is what took us to London to buy Hermes. We now have 230 salespeople all over the world.
We just hired a recent one in Norway to do private markets. That was our latest hire. And so that is all now covered by one head of global sales, Paul Uhlman, from our home office. So that's kind of an overview without telling the story of everything all at once.
That was a great overview. That was a great overview. Thanks again for that. Let's dive into money market funds. In your remarks, you talked about what sounds like meaningful growth in the money market funds so far. I think you've said also previously you expect to see meaningful growth this year, especially as rates decline. I wonder if you could just talk a little bit further about what gives you confidence in this kind of outlook and what's sort of the key drivers here that's driving the growth expectations?
So I look at it as overlapping beauties. What are the overlapping beauties? The one is the retail trade, which was the engineer of growth last year. What is the retail trade? Banks manage deposits, and they manage them towards something they call deposit beta. You can use your own euphemism to decide what that means for the customer getting 1%. So they have $17 trillion. So over time, more and more retail customers figure out that 4%-5% is better than 1%. And that trade will continue so long as the Fed keeps where they are in the absolute rates. So this has a longer tail on it because I don't think they're going down below 3% anytime soon. So we like that as a continual growth mechanism. The next one is the institutional trade.
Our experience is that when the Fed pauses or starts the other way, then the direct market has a higher yield than the money market. And when you have sort of reversions inside the yield curve, and you can buy some six-month paper like we did last week, well, that gives the money fund another little advantage. So then the institutions start to look more at the money market funds compared to the direct, which is where they are now. That comes in when they start going the other way on rates. It's just the way it is. So you could see it working both ways. And we think that takes care of it for some extended period of time. We don't know when it ends. But we know in history that each time this has happened, we increase assets when they're easing.
We increase when they're going the other way. The reason is you have these two trades overlapping beauties. What it basically means is money market funds are nirvana, and it's the eighth wonder of the world.
Then just to piggyback upon that, you talked a little bit about the competitive dynamics between money market funds and bank deposit products and direct paper. Then just to round out that discussion, any potential for substitute products outside of that for money market funds? Or is that pretty much it, just the direct paper and bank deposit products?
It's really hard because everybody has tried, OK? And you've got ultra-short funds. You've got macro-ultra-short funds. You have ETFs that have all sorts of fancy stuff. But they take more than five minutes to trade. And so none of them are competitive. And remember, at base, the big slug of money market fund assets are cash management service. And the story I would tell there goes all the way back 50 years ago when we were declared public for the first time. The SEC declared the funds effective. This was January 16, 1974. By the way, I was a low-life grunt law clerk. I was in charge of Xeroxing and carrying bags and stuff. And they called us and said, you're ready to go effective with Fidelity, Dreyfus, and Federated all at the same time so no one gets the edge. But your name has to be changed.
The name we had filed was Federated Cash Management, Inc. And you go, what's wrong with that? The SEC said, you can't manage cash. What? We now have funds called Federated Cash Management, I might add. So we said, we're going to change it. So the then president of the fund looked around his office. He saw something called money markets. And we had management in there. He was big on alliteration. So he said, we'll call it Money Market Management. And on the call, the SEC says, fine, you're going to go effective. Send in the papers. That's how they all became money market funds. But it shows you that at the very beginning, we were talking about managing cash as a part of a service.
That's a great story there. Why don't we just pause here and see if there are any questions from the audience before we proceed? OK? We can just move on. Next one. Let's continue on the topic of duration products and perhaps look at longer duration products like fixed income. It sounds as if there were some positive net inflows quarter to date there. I just want to get your latest thoughts on when, and this is something we've been hearing across the industry, when do you think fund investors could start pivoting towards longer duration products? What signposts are you looking for in particular?
So it is starting to inch along. But you won't hear from me some catalytic answer that says we now have a big fall or this was the moment. And I'll give you some of the pointer fingers that we look at. You take our ultra-short funds. They were negative about $365 million in the fourth quarter. They're negative only $90 billion so far this quarter, which means more people are coming in and going out than the previous quarter. So that's a little hint. Even better, we're seeing it in the Institutional High Yield Bond Fund, where that fund was about $300 million negative in the fourth quarter, $300 million negative in the fourth quarter. And now it's about $60 million positive first two months of this year. So you can feel advisors doing this. Another real good example is our Henderson Group, which is munis.
Now, they were politely positive in the fourth quarter, but they were $115 million positive so far this year. So you're seeing some of these movements. The biggest one, though, is in the core fund, Total Return Bond Fund. And in that fund, even though it had $2.5 billion in positive flows all of last year, it was negative in the fourth quarter. So far this year, meaning the first two months of the year, it's over $400 million positive. So that gives you a lot of pointers of where we're seeing that movement that you're asking about. What's going on? If you talk to our sales individuals, we call them regional consultants, they will tell you that there's some creative friction going on between the financial advisors and the clients. The clients are kind of happy with 4%-5%.
The financial advisor kind of wants to get them in the game, fear of missing out. You have to use letters now in order to get a concept across. And so there's that kind of friction. You can feel them moving out. But we come up with ideas on how to move out, how to do all that in order to provide solutions. So it's happening, but it's slow, and it will continue.
Gotcha. And then the next topic, and this is something we've been seeing recently in terms of the Strategic Value Dividend Fund, we've been seeing improvement in the net outflow picture over the last couple of months or quarters. Could you talk about what's been going on there and maybe give us a little bit more color as to what's going around?
OK, let's talk about the numbers first. Strategic Value Dividend is a fund where the portfolio manager and his team want to get a 4%+ yield and 4%+ annual growth of dividend. They get put in a Morningstar category where they're either the top 10% of the category or the bottom 10%, and both are totally irrelevant to what they do. Plus, Daniel Peris has written three books. There's another one out if you really want to learn about this. OK, what are the numbers? In the first quarter of last year, the fund and the SMA, which are the same mandate, were +$700 million for the first quarter. Second quarter of last year, -$700 million. Ooh, that's a big swing. Third quarter, -$1.5 billion, even worse. Fourth quarter, -$2 billion, even worser.
And yet the first two months of this year, it's negative $700, which if you do the math, you could say it's about half of what it was in the fourth quarter of last year. So you're saying it's improving. I don't disagree with that. But I would say it's less worse. And when it gets positive, then I say it's better. So what's going on? Well, you aren't going to find Daniel Peris buying the Magnificent Seven. Where's the dividend story? And so that whole thing means other people are going to be running around. Some people buy that fund when it's in the top 10%, not thinking about exactly what it does. And so those people come in, and then they come rolling out. And we do our best to try and sell them on it in the right way. But sometimes that's what happens.
That's the story. That fund is going to continue doing what it's doing. They aren't going to step out of line. They aren't going to get whipsawed. They aren't going to do anything other than what they do.
Gotcha. And then let's talk about alternatives in private markets. And it sounds like in your earlier remarks, the longer-term expectation is that the alternatives could actually grow as large or even larger than the equity and fixed income AUM there. And I believe a meaningful amount of the institutional pipeline is actually composed of private market strategies. I wonder if you could just give us any updated thoughts longer term, give us more detail around the longer-term growth opportunities around this area?
OK, so in private markets, the lead is the real estate, $8 billion. And it's a company called MEPC that developed King's Cross. Anybody been to London seeing King's Cross? These were the people who developed it. And what it is, it's a regeneration project, placemaking, if you prefer the term, where you take derelict center cities and come up with a plan that takes multi-years, lots of politics, lots of money. But it can all be done in a beautiful way with everything you like: green space, flowers, colleges, businesses, retail, and residential, everything. And the pension funds love to invest in these things if they're done correctly. So we'd like to do an acquisition in the U.S. where we could continue that. And we've said that on the call. And that's one of the things we're looking for.
They have several other projects in the UK that they're looking at now. They've developed some. This is a slow growth thing. But it's great business with a great idea. On the private equity side, we have good records, long records, basically created by managing money for the British Telecom pension plan. We have about $1 billion in the pipeline that's promised that's not yet in. That's a $5 billion business. We've recently hired people in the United States as salespeople. We have some good investment people on that side in New York as well. We're moving that ahead. The next one I would mention would be on the fixed side, the fixed income side of private markets. We would combine unconstrained credit, private credit, and trade finance. That's about $5 billion. We've got about $700 million in the pipeline on the private credit.
The primary use of the private credit is our head PM over there has very good relationships with the European banks. He's able to work with you where he can look at their loans and make his selections. We are going to expand that. We've got some other products in line to have that thing grow, put up some other ones. We think that is a go despite whatever people say about, oh, private credit is going to have a problem. In the United States, only 1/3 of the loans are made in banks and 2/3 not banks. Well, that's OK. So we like that. Infrastructure, a little bit of ground under repair, but we're working on it.
There were others in the marketplace who proved that if you fix that, you're really spending your money well because they've priced that at some high price. Now, if we could do an acquisition there that was not at prices like others have paid recently, we might consider that. But I don't see how that really obtains, given what that big trade was. So that's more or less the business of private markets. We don't put a time on saying it can be as big as the rest of the stuff because then I'd get in trouble. You guys would be able to check on me.
But it's a way of communicating that when we bought Hermes, this was one of the little nuggets that we needed to spend money on and time on to get control of and to build a platform where you could sell to other people as opposed to just one client, namely the British Telecom system.
That's good. Let's just take a moment here just to pause briefly and see if there's any questions from the audience before we proceed. OK, right there.
Thanks, Chris. Chris Donahue, appreciate your comments. It's been long enough now with the Hermes transaction. Do you have any observations on that? How are you navigating some of the sustainability politics in North America?
So the question is, we've done the Hermes deal. It's been more than five years. How are we doing with the Hermes deal? And how are we doing with the politics on the sustainability and that matter? How'd we do? OK, so let's answer the first question. We'll come to the second. The first question, it really is doing great. We went into it and didn't call it a synergy deal. Does everybody know what synergy means? That means shoot people. Well, that usually doesn't work out for bonding and making things go. So we didn't want to do it that way. We wanted what they had that did not overlap, global distribution, investment management styles and activity that we didn't have. We integrated the ESG aspects that they had over there. And that's all it is, adding more factors to analyze risk.
Debbie Cunningham, the head of our money markets, said, hey, if you can illuminate risk for me, I'm all in. Anyway, that has worked out very well. I already gave you the whole picture on the private markets, which we really didn't talk about when we did the acquisition. There were all these things sitting there ready to grow into the future. Saker Nusseibeh is the CEO of that operation over there. I think it was an excellent thing. What has happened over time is that all of their equity teams now report to our CIO of equity in New York. All of the fixed income teams report to the CIO of fixed income in Pittsburgh. Now the entire global sales organization reports to Paul Uhlman, the head of global sales. There have been these kinds of integrations. The investment teams remain intact.
The private markets sales team is intact. We have a separate section on private markets. Now let's talk about the politics. The way I like to begin this discussion is that we have about $150 billion of money from states in the United States of America. A lot of it is short term. If you look at the top 10 states, five are red and five are blue. Can you feel, Chris, one foot on the dock, one foot in the boat, and no line? OK, that's what we're trying to do. Why? Because we're doing what the clients want to do. This is the main thing. The performance has to drive the truck. We get shot at from both sides. One side chooses if we're not doing enough of this. The other chooses if we're doing too much.
Before we did the deal, we had six years of cultural due diligence with Hermes. We started talking to them in 2012, closed the deal in 2018. If we couldn't figure out what we were going to do with them by the time of six years, you know, go do something else. We spent three of those years working rigorously on the legals so that we could come to the U.S. and say sustainability and responsibility, you can say yes to the fiduciaries in the United States as long as your goal is the performance of the funds. And we had the whoop-de-woop law professors from Northwestern or Harvard write great articles. You can get them in the Stanford Law Journal. They are the definitive answer. They've been quoted by the circuit courts in the United States as the answer.
And when you see all the politics going back and forth, even the people who were high on these things before are now giving the same speeches that we had been giving from the very beginning. This is not a thing where someone is holier than thou. This is not a thing of politics. It remains an investment management deal. This isn't humans trying to get big stages and do big speeches. This is real-time investment management. And we just keep repeating this to all of these clients. And we think we have the right track. But when you get out in the middle of the road, you can get hit by cars on either side.
That's good. Any other questions from the audience before we proceed? OK, and maybe I could just follow up on some of the comments you said earlier in terms of acquisitions. This, I think, in the past, you've consistently been saying that acquisitions often remain the highest and best use of excess capital. I think you touched upon looking at opportunities in the U.S., possibly infrastructure or possibly the EU region. But just wanted to get a little bit more color around some of these opportunities and what you're seeing out there.
On the easiest ones, which are roll-ups. The easiest ones of those are banks and other entities that have more bond money fund or mutual fund families. They need us. OK, it's that simple. One of the things I did in the 1980s was run around with another sidekick from the office and sell banks on putting their money into those funds. Over the years, we've had probably 20 or 25 of them come back. The way we look at that is, oh, that's supposed to be our investment management fee anyway. Now, three decades later, we're getting it back. OK, so we waited. We got one of those that we're working on right now. They don't come up that frequently. They're not a catalyst where you're going to go, oh, boom, boom, boom.
Periodically, there are mutual funds that can be merged in. We don't see a lot of that right now. Then I did mention infrastructure. I already commented on that. The real estate one would be a pretty big one. I would reiterate what you said at the top of your question, that that is the highest and best use of our money. The reason for that is because we're valued in the marketplace at multiple revenues, however you want to look at it. The marketplace is telling us, if you can buy stuff that's better than that, go do it. If it's consistent with the culture, that's what we'll do. Consistent with the culture means we want it to grow. That means we're not just going to be merging ice cubes, you know, and then have a synergies debate with you or discussion.
Then, OK, yeah, that'll work for five minutes. But we got to run this thing over the long haul. That's the way we'd like to do it.
That's good. And then in terms of perhaps more broadly, in terms of capital allocation, how do you think about capital allocation more broadly? And more specifically, how do you think about share repurchases in this context?
So the money belongs to the shareholders, see. This is kind of like a thought. And so now we get to manage what happens to it. We like the acquisitions for the reasons I just mentioned. Dividends are terrific. As I said in the very first meeting when we went public in 1998, and someone said, well, how do you know we're going to get a fair shake here? And I said, how many sisters do you have? They said, well, I have one. I said, well, that's not enough. I have nine. They all own the stock. We're going to give you a fair shake. I want to go to Thanksgiving dinner. Well, this is a way of telling a story. But it's a way of telling you how we think about it, that we like the dividend.
You can go look at it. It's either page 17 or 20 in our deck. You'll see we've been increasing the dividend nicely. We pay special dividends every once in a while. So we like that. Share repurchase. Ray Hanley here is the ex-checker of the cash models on when to buy. The reason he's the ex-checker is because I'd always be buying. So he gets to decide that. We are still active. When you run the free cash flow models into the future and run your pricing lines, you guys know how to do it. But we do our own. OK, so we're still active in buying. We have 4.3, 4, some number like that million shares left in our program. We continue to love to score on all three streets: acquisitions, dividends, and share buybacks.
That's great. Well, we are out of time right now. I'd like to wrap up here. Why don't everyone join me in a round of applause thanking Chris and Ray for joining us today?
Oh, boy, thank you.