Greetings. Welcome to the Federated Hermes' First Quarter 2020 Analyst Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Raymond J. Hanley. You may begin.
Thank you and good morning. Welcome. Leading today's call will be Chris Donahue, Federated Hermes CEO and President, and Tom Donahue, Chief Financial Officer. Joining us for the Q&A are Saker Nusseibeh from Hermes, CEO of the International Business of Federated Hermes, and Debbie Cunningham, Chief Investment Officer for the money markets. During today's call, we will make forward-looking statements, and we want to note that Federated Hermes actual results may be materially different than the results implied by such statements. Please review our 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. Good morning, all, and welcome to the Federated Hermes earnings call. As we recap the first quarter, our thoughts and prayers are with those who have been impacted by the coronavirus, in particular, those who have lost loved ones and those recovering from this illness or caring for loved ones as they recover. It is important for us to acknowledge those on the front lines, especially our healthcare workers who have worked so hard and at risk to their own health to treat and care for the many thousands of impacted people by this virus. Your efforts are inspiring, and we are all truly grateful. Finally, I want to acknowledge the efforts and resiliency of our own employees all around the world. Over 95% of our employees are working from home, creatively adapting to the new environment and leveraging our technology investments.
Federated Hermes is fully operational. We have maintained high-quality service levels for our clients and have taken steps to safeguard the health and safety of employees during these trying times. The global pandemic has impacted all facets of life, including markets and investing. We expect that sustainability concerns will continue to grow in prominence as investors navigate ongoing challenging market conditions. With our EOS engagement business, we represent over $1 trillion of actively managed assets for engagement purposes, up from about $877 billion at the end of 2019. We continue to develop and expand this stewardship and engagement business in the U.S. We have hired several new U.S.-based engagers and are working on adding more.
At Federated Hermes, we are delivering leading ESG data research and proprietary tools to over 90% of our investment teams, making us a leader in ESG integration and active, responsible investing. We believe that these investment research tools, coupled with engagement insights and our leading position in active stewardship through EOS, are a key differentiator among active managers seeking to deliver long-term sustainable outperformance. This places us among the largest active managers with integrated ESG capability. Looking at our equities business. Assets reached a record high of nearly $91 billion in mid-February, closed the quarter at $68 billion, and we're about $73 billion as of April 29. For Q1, lower market valuations and the impact of foreign exchange led to over 90% of the decrease in assets.
While overall net sales of combined equity funds and separate accounts were negative, we did see positive net sales in a number of strategies. In fact, we had 12 equity funds with net sales in Q1, led by the Kaufmann Small Cap, Hermes Global Emerging Markets, Hermes SDG Engagement, Hermes Global Equity ESG, and the Large Cap Kaufmann Fund. Using Morningstar data for the trailing three years at the end of Q1, 1/3 of our equity funds were in the top quartile and 1/2 were above median. The Federated Emerging Market Equity Fund, managed by the Cleveland team that came over as part of the PNC acquisition in the fourth quarter, became a five-star fund as ranked by Morningstar during the previous quarter. Looking at the strategic value dividend strategy, recall that its objective is to provide a high and growing income stream from high-quality company.
The domestic fund's 12-month distribution yield was 5%, which ranked it in the second percentile of its Morningstar category at the end of the first quarter. Overall, combined equity fund and SMA net redemptions quarter to date through April 24th were $339 million. Turning to fixed income. Assets reached a record high of $71 billion in mid-February, closed the quarter at $65 billion, and were at $67 billion as of April 29th. For Q1, lower market valuations and the impact of foreign exchange led to nearly 60% of the decrease in assets. Bond market conditions changed dramatically mid-quarter, impacting investment and sales results. Through February, we had net sales of bond funds, $340 million, while in March had significant outflows, $2.2 billion. In April, bond funds and SMAs returned to net positive sales of $320 million through April 24th.
We saw categories of funds that had produced net sales in the fourth quarter, change to net redemptions in the first quarter. These included high yield and other corporates, mortgage-backed, multi-sector, and munis. At quarter end, using Morningstar data for the trailing three years, we had four funds, 13% in the top quartile, and 15 funds, 44% in the top half. In a turbulent quarter in the bond markets, each of our two biggest fund strategies improved their already solid records compared to peers. The institutional high yield bond fund improved from the top 23% for the trailing three years to the top 18% as of March 31st, and remained five stars by Morningstar. In addition, the total return bond fund increased its trailing three-year ranking versus peers from top 34% to top 29% for the same periods, while moving from a three to a four-star ranking by Morningstar.
Turning to private markets. We completed two acquisitions in the first quarter that helped to better position this area for long-term growth. In January, Hermes acquired MEPC Limited from the BT Pension Scheme. MEPC is a leading U.K. commercial real estate developer and asset manager. This acquisition enhances Hermes' real estate proposition by adding specialist asset and development management expertise to its existing capabilities. In particular, it supports Hermes' core strategy of seeking to create urban regeneration schemes, which not only deliver attractive financial returns, but will have a positive impact on the environment and communities in which they are located. As part of the acquisition, Hermes acquired globally recognized MEPC brand, which dates back to 1946. MEPC has been associated with many U.K. real estate developments, and the brand will remain in use.
In March, we completed the acquisition of the remaining interest that was not previously held by Hermes in HGPE, the private equity and infrastructure manager. HGPE has a long record of success. We believe that full ownership of this entity improves our ability to build and execute growth plans. We are beginning to develop business plans with a view towards expanding HGPE's global private equities business and U.K.-focused infrastructure business, including further expansion into the U.S. market over time. Now moving to money markets. Assets increased by about $56 billion or 14% in the first quarter to a record high of $451 billion, reflecting a flight to safety in turbulent markets and a significant yield advantage compared to average deposit rate. Money market fund yields also compared favorably to applicable direct market rates and even longer duration security.
With the Fed move to a target range of zero to 25 basis points, short-term yields, including those of money market funds, decreased over the quarter and are expected to decrease further. Tom will comment on the impact of minimum yield waivers in Q1, which were not material. Our money market mutual fund market share, including sub-advised funds at the end of the quarter, was 8.8%, about the same as at the end of 2019. Taking a look at our most recent available asset totals. With Federated as of the 29th of April and Hermes as of the 24th of April, managed assets were approximately $642 billion, including $480 billion in money markets, $73 billion in equities, $67 billion in fixed income, $18 billion in alternative, and $4 billion in multi-asset.
Money market mutual fund assets included above, obviously, were $362 billion. We began the year 2020 with about $850 million in net institutional mandates yet to be funded, mostly in fixed income. Tom?
Thanks, Chris. The MEPC and HGPE acquisitions impacted Q1 reported results. MEPC results have not been previously included, and HGPE results were previously reported as non-operating income for the portion owned by Hermes. The $452 million of acquisition-related private markets assets reported in the press release is from MEPC. HGPE had managed assets of $8.3 billion at the end of Q1. HGPE assets have been reported in the alternative private markets category and noted as assets managed by a non-consolidated entity since the acquisition of Hermes. Hermes' portion of HGPE financial results have been included in non-operating results since the acquisition of Hermes through February, reflecting Hermes' equity investment. Beginning in March, the results of HGPE are now fully consolidated and included within the various operating revenue and expense line items.
The two acquisitions added about $5.4 million in revenues, of which $1.2 million is non-recurring, and $3.8 million in operating expenses for Q1, including amortization of intangible assets. MEPC results are for the full quarter, while, as mentioned, HGPE became a consolidated entity effective March 1st. Total revenue for the quarter was up about $1 million from the prior quarter, due mainly to the acquisitions as mentioned, and from higher money market assets, which added about $3.4 million. These increases were partially offset by about $5 million less in revenue from fewer days in the quarter and from $1.5 million of lower performance fees. Looking at operating expenses, comp and related expense increased about $4 million from the prior quarter.
In addition to base pay increases, the growth was due mainly to $2.6 million of acquisition impact, $2.5 million from higher restricted stock and sales bonus expense, and $1.2 million from seasonally higher payroll taxes. These increases were partially offset by lower severance pay of $2.5 million, as Q4 included $2.7 million from the combining of certain administrative, operational, sales, and investment management teams. Distribution expense increased $3 million compared to the prior quarter, with $4 million from higher average money market fund assets, partially offset by a reduction of $1 million from fewer days in the quarter. The increase in the other operating expense line item for Q1 compared to Q4, $3.6 million, was due largely to the net impact of revaluing U.S. dollar assets and foreign exchange hedges at Hermes at the quarter end spot rate.
In Q1, this resulted in net expenses of $700,000 compared to a net credit of $1.8 million in Q4, a variance of $2.5 million. Amortization expense from the new acquisitions added about $600,000 to Q1 and is expected to be approximately $1.1 million for full quarter of both acquisitions. The impact of money fund yield-related fee waivers in Q1 was not material. Based on recent assets and expected yields, the impact of these waivers on operating income in Q2 could be about $3 million. Multiple factors impact waiver levels, and we expect these factors and their impact to vary.
These factors include changes in fund assets, available yields for investments, actions by regulators, changes in the expense level of funds, changes in the mix of customer assets, changes in distribution fee arrangements with third parties, Federated Hermes' willingness to continue the fee waivers, and changes in the extent to which the impact of the waivers is shared by third parties. With so many volatile factors, it's easy to see the $3 million waiver number changing. Non-operating expense increased by $16 million from Q4. Seed and other investments decreased in value by about $15.8 million compared to Q4's gain of $3.3 million. HGPE's carried interest was about $4 million lower than the prior quarter. These decreases were partially offset by a $7.5 million gain in the HGPE acquisition.
The $3.9 million change in net income attributable to non-controlling interest in subsidiaries from Q4 was primarily from the reduction in market value of consolidated funds. If you look at the seed losses after non-controlling interest and after tax, they were about $0.09. The HGPE fair value gain after non-controlling interest and after tax was about $0.04. Combined, they impacted EPS by about $0.05. Yesterday, the board added 3.5 million shares to our share repurchase programs. During Q1, we purchased 714,000 shares for $16 million, with nearly all of this bought in the open market. We have 3.7 million shares remaining in our authorized share buyback programs. At the end of Q1, cash and investments were $381 million, of which about $335 million was available to us. We used approximately $20 million of cash for the MEPC and HGPE acquisitions.
In March, we drew $100 million from our revolving credit facility, and this week we repaid $25 million of it. Shauna Lee, we'd like to now open the call up for questions.
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please pressstar one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Mike Carrier from Bank of America. Please proceed with your question.
Hi. Good morning, and thanks for taking the questions. First, just given the big increase in money market assets, getting back to a ZIRP environment, can you provide some color on what is different versus what is similar for fee waivers this time around, just given some of the distribution relationship changes and some of the product changes versus the last time we were in a ZIRP environment?
Hey, Mike, it's Ray. Just a couple of the differences. We've talked before about the mix of assets when you slot them into the expense levels of the various funds that they're in. Generally, we have more of the assets are in the institutionally priced products in the 15-20 basis point expense cap range as compared to the last cycle. That's because back then we had higher broker-dealer sweep assets using money market products. Over the past several years, brokers have converted significant portions of that to deposit-based sweep models. That's one difference. The other significant difference would be the growth of the last couple of years has been weighted to the government fund side. As you know, the prime products were impacted significantly, the institutional prime products, by the 2014 rule changes that took effect in 2016.
We've had good growth on the prime side, but the proportion of assets in government portfolios would be higher than it would have been in the prior cycle.
Okay, thanks. Tom, just on expenses, you realize a very volatile backdrop. If you can provide any expectations, whether it's on comp or some of the non-comp items, either given kind of an improving backdrop and getting back to work or a longer kind of recessionary backdrop in areas that you can flex. Thanks.
Yeah, sure. Sure, Mike. T&E and conferences are not happening right now. Travel and entertainment. Q2, I expect that to be lower. The bonus numbers, as you know, I've stopped talking about the future on that. As I said in my comments, higher sales bonus, we are happy with that because that's because they had higher sales. What happens this quarter, we'll see. We also picked up, as we mentioned, the expenses in comp from HGPE. That'll show up as higher, and we only have one month of it, so that'll show up as a higher number. All the rest of the variable things based on performance and how we're doing, we'll see what happens. In terms of flexibility, a lot of the things flex with the market, and so we don't have to take draconian actions.
It's a pretty good setup here in terms of controlling and managing our expenses.
Mike, this is Chris. In terms of your comment about getting back to work, I have to observe that we are already back to work and have never stopped being back to work. In fact, in the first quarter on the sales side, all of the numbers in gross sales, ultra shorts, fixed income, and equity were all the highest average monthly gross sales ever, which means that we're in the game. We've already talked to you about the net. The next thing I would mention is that there's been an increase in community inside the sales force as they recognize it's a total team sport. There's been a lot more sharing of what works, and the same has been true with the relationship with the clients.
The communication loops have been stronger, and the information that's been put out by the investment people at Federated has been very well received by the investing community. I just thought it was important to mention those factors.
Yeah, no, that's helpful. I didn't mean back to work. Everyone's working. Just meant back to kind of more normal operations, but thanks a lot.
Yeah.
Our next question is from Kenneth Worthington from JPMorgan. Please proceed with your question.
Hi, good morning. In terms of fee waivers, the money market funds are currently in the process of seeing investments mature, and they're being reinvested in securities at prevailing interest rates and yield. Maybe you can help us better estimate future fee waivers. Given the asset size today and the mix of business and current reinvestment rate, is it possible for you to give us a range of what these fee waivers are going to look like? Again, if we just sort of use current stats as of today, reinvestment rate, mix, et cetera, because I assume $3 million is not that steady-state fee waiver level.
Ken, it's Ray. I'll comment on the waiver end of things, and then Debbie can comment on reinvestment and yields and what that looks like going forward. In terms of waivers, as Tom indicated, there's potentially a lot of volatility even in coming up with a number for this quarter because rates move around, asset composition moves around. It's not linear. You get to a point where you're just above a fund's expense ratio, and so you have no waivers, and then you drop a couple of basis points, and the waiver switch gets turned on. There are so many variables that it's not appropriate for us to try to forecast it out over longer periods of time. Of course, you can look back at what happened over the years where we did have waivers, recognizing differences in the asset mix, et cetera, that I pointed out before.
Debbie, do you want to comment on how reinvestment is looking going forward?
Certainly, Ray, and thanks for the question, Ken. When we look at our government products, as well as our prime products, as well as our muni products, they all have positively sloped yield curves right now, which is a positive, which is a good thing. On the government side, we probably got steepness of anywhere from 15- 20 basis points, depending upon whether you're looking at treasuries or government agencies, fixed or floating, albeit these are at extremely low levels. We do believe that a couple of things could happen there to improve that over the next months and quarters to include a huge amount of supply that is in the market from a treasury perspective, funding the CARES Act and other programs by the Fed and Treasury, and more of that to come, with a lot of that being centered directly in our space, the liquidity space.
We also believe that a technical adjustment from the Fed could be forthcoming. It did not occur this week at the Fed's meeting. We do believe taking the lower bound, where the RRP currently sits at zero up to 5 basis points, which is where that rate stood through the last zero rate environment from the Fed, and we do believe that to be a likely potential. All of that is beneficial to where we're doing business on an overnight basis, obviously, but also where we're reinvesting as securities mature. The smaller portion of our asset mix, that being prime and municipal, have spreads that are anywhere from 50- 70 basis points, depending upon what securities you're looking at, fixed or floating, commercial paper, different types of short-term securities, CDs.
The reinvest there is actually a much simpler process, and the ability to keep out of waivers and keep above that zero rate environment is simpler. However, again, going back to what Ray mentioned, our mix of assets from a government to non-government standpoint, at this point is heavily skewed toward the government space.
Okay, maybe as a follow-up, curious to see if you think the Federal Reserve will react to the recent crisis in terms of implementing new rules or regulations around money market funds. Clearly, the Fed has had to step in again and provide support again to money market funds. After 2008, the Fed stepped in with sort of new rules. Expressing frustration with having to come in and support the money market fund business. What are your thoughts this time around? Do we need either new rules to be implemented? Do we need existing rules to be wound back down because the new rules actually did seem to contribute to some of the issues we had this time? What do you expect the reaction to be? Does this damage the ability for money market funds to be a viable structure?
Money market funds continue to be the eighth wonder of the world, in my opinion. The question you asked, of course, returns to the thrilling days of yesteryear, when even back then, the arguments were not based on what was needed in the marketplace. They were based on political considerations, namely, that the Treasury Secretary decided to slap insurance on the funds back then, when all that was needed was liquidity. The industry, us in particular, others, were clamoring for liquidity. That's the role of the Fed, is liquidity. When you look at what's happened recently, what happened was they put out trillions of dollars of activity, and an infinitesimal percentage of that was utilized by money market funds at the beginning in the prime space.
Once again, it was the quest for liquidity, where the Fed, as it has done on many occasions in the past and with other programs, is in charge of making sure that these markets actually work. In addition, especially on the prime side, there is a great thirst to get companies that are employing people financed on the short end, and money market funds are a wonderful way of doing this. They approach this with mixed views at various times. To us, nothing is needed more on the money market fund side. In fact, it would be better if they went back to allowing the prime money funds to have a $1 net asset value, and then you could use them in sweep products and increase the financing for corporations and on the municipal side.
There's a huge to-do going on now about financing municipalities and local government. One of the best ways to do this on the short side is both to allow them to invest in a prime fund and to allow them to issue into money market funds on the municipal side. To me, the money market funds continue to be a beautiful, viable system, and they are not in need of any other attention.
Great. Thank you very much.
Our next question is from Patrick Davitt from Autonomous Research. Please proceed with your question.
Hey, good morning. How are you?
Great.
It sounds like there was some good growth in the EOS assets in the quarter. Could you kind of update us on how to think about the economics of that growth? You mentioned beefing up the U.S. sales force. Could you give us some color around what the mix between U.S. and non-U.S. clients is?
Okay. I will talk a little bit about the concept, and then Saker will fill in on that breakdown that you're looking for. The EOS is basically our way of showing that engagement really works. Yes, it's great to be at $1 trillion, and that growth is important. It is also important to note that we were able to review over 1,000 companies on this engagement basis. This is in addition to what everybody does on the analyst side in terms of contacting companies. The whole point of all of this is to come back to that point we made earlier, namely, that it's our belief that sustainable investing is going to be the most helpful thing in terms of long-term growth. I'll let Saker comment on the other aspects of EOS.
Thank you very much. EOS, to recap, we do two functions. One is we represent clients who've got investments in indices. As long as they have investments in indices and they want to engage actively on their assets to ensure that they look after them and they create sustainable wealth over the long term, they will have a need for our services. The fact that we've gone over $1 trillion makes us the largest active stewards in the playbook, and this is a growing segment of the market. In terms of split between North America and the rest of the world, roughly speaking, 60% of our assets are based out of North America, and the rest are spread from around the world. That's not just Europe, but also from emerging markets and from developed Asia and New Zealand and so on. It's a wide and growing asset base.
It's in demand in Europe, obviously, because it's been the longest. There's been increased demand elsewhere, particularly in Asia. It's slowly coming to North America. Of course, fundamentally, it gives us, right across Federated Hermes, a stronger and better insight, which added to our ESG metrics, allows us to add more fundamental data to our stock picking ability and create performance over the long term.
Patrick, this is Tom. On the economics of it, we are looking at EOS as a growth business. If you talk to our investment people, particularly John Fisher, when we were discussing the acquisition of Hermes, that was his number one reason for being interested in purchasing Hermes, was because the ability to get the information from EOS in to help our portfolio managers make better decisions and get better performance in our funds.
Got it. Thank you. My follow-up's on the money fund side. Could you break out the growth quarter to date between prime and govie? Because I do think prime flows have recovered meaningfully from March. Then more broadly, maybe for Debbie, is there any sense of how much of the growth we're seeing broadly in the industry is being driven by kind of bank line draws at corporates versus investors parking cash on the sideline?
Patrick, just to comment on the quarter to date portion. From March 31st, and this is just the money fund, so putting the separate account side off to the side. The government funds are up about $22 billion, and the prime funds are up about $3 billion. The munis are up a little over $1 billion. Again, that's just within the Rule 2a-7 money market mutual funds, of course, the biggest part of the business.
Patrick, as far as the growth in assets go and the diversification of the underlying clients, I don't believe very much is actually due to bank line draws. We've been asking that question, and our answers that we've been getting have been resounding nos. The diversification of the flows is pretty substantial. It's corporates, it's financials, non-financials. It is the institutional as well as the retail side. It's universities. It's various other municipal entities. It's different types of trust accounts through the banking system. It's really pretty diversified, and I don't believe much at all can be attributed to the drawdown in bank lines that has been occurring for some corporates.
Thanks.
Our next question is from Daniel Fannon from Jefferies. Please proceed with your question.
Thanks. My question is back on fee waivers. I understand all the moving parts in terms of trying to project what they could be. I guess the $3 million that you are assuming, is that based on AUM levels that you gave, the $480 billion, or just trying to get a sense of what the $3 million incorporates so we understand how to think about maybe prospectively from that.
Yeah. We're saying it's current asset, and our team's expectation on rates for the next quarter without further asset growth.
Dan, just on the asset part, we're looking at the funds, not the separate accounts. It would be off of the fund portion, the approximately $362 billion most recent total.
Great. Just on the forward projections, is it based on the curve and what those kind of incremental yields that were cited before? You said firm expectations. You guys might differ from that?
No. We're going with Debbie's team's forecast. Debbie, if you want to expand on that, go ahead.
Certainly. We're forecasting a continuation of positive yield curves in all sectors. We are thinking that on the government side, we could see a backup of maybe, call it 5-10 basis points due to supply. We're contemplating that we could get an extra 5 basis points in overnights at some point if the Fed makes that technical adjustment that I mentioned with regard to RRP. Those are all expectations that are built into our forecast at this point.
Great. Thank you.
Our next question is from Robert Lee from KBW. Please proceed with your question.
Great, good morning. Thanks for taking my questions, and I hope everyone and their families are doing okay in this environment. Maybe back to money funds. I'm just curious, maybe for you, Debbie. How sticky do you think some of these assets will be just as yields come down on strictly government funds and spread to bank deposits has narrowed substantially? Do you sense that some amount of it could revert back to the banking system over the coming quarters? Just trying to get a sense of that.
Sure. Even as the yields on our products come down, they're still above what is available for the most part. On the bank deposit side, those rates have also been coming down. They follow the market down much faster than they follow interest rates up. As far as the expectation of stickiness, when I mentioned before our growth in assets has come in a very diversified way, that generally results in more stickiness of those assets staying around. It's been a mix of existing customers as well as new customers. New customers that are diversifying away from either the current providers that they have in the mutual fund business or diversifying away from other competing products and into the money fund business. In either case, I think that diversification, again, adds to the likely sticky nature of those assets.
The other thing that I would mention, once investors are comfortable moving a portion of their liquidity assets into money market funds, the experience is generally one that is good and substantial. They achieve daily liquidity at par, really on pretty much a moment's notice for both purchases and redemptions. If they want to add to their asset mix, they purchase and subscribe into a fund. That's taken. If they want to redeem, we provide them back with their liquidity immediately. I think that liquidity on a constant basis is really something that is noted by investors. It was noted in the first quarter. It continues to be noted in the second quarter. Basically receiving that at par with the market return is what they're continuing to look for.
Debbie, thanks.
Let me add that if you remember our charts, which we've been using since 1998. What seems to happen is when you get these run-ups in assets, yes, the top of the hump may come off, but you end up with higher highs, and thereby lower lows, over many decades of this type of activity. That happened in 2008, 2009. It happened earlier in the 2000s, and it happened back when we were all children. We expect that kind of a chart to happen, even though things are obviously different.
I appreciate that. Maybe the quick follow-up, understanding that Hermes and the U.S. business in particular are kind of investing for growth and contributing to other things. Can you help us understand how Hermes itself maybe contributes overall to the bottom line? I know it's obviously going to be part. It was a lower margin business, and you own 60% of it, not 100%. Just trying to get a sense of that part of the business, proceeds and pace, how that kind of flows through to the bottom line runs.
The first thing I would mention is that the whole concept of the combination that's wrapped up in this name change is the real message in branding. Yes, there will be many points under that. The main thing is that you have two really strong investment management firms that are combining to step out into the future with success. You take the U.S.'s view of this, where we had a great response from clients with our new funds, and this was based on Hermes' successful strategies. These funds were over $70 million at the end of the first quarter, and about $44 million of that was externally sourced. By the subtraction method, the rest was seed assets. We're valuing other launches, and we're working on our first SMA product using our Hermes strategy.
As I've talked about many times, we have begun to run the traps on the institutional side with many of Hermes' mandates. This is one whole package of activities. The other thing I would hasten to mention is that the enthusiasm of the sales force for now having a complete array of international type products. When you combine the Hermes activities with the Cleveland activities, with the other international funds that we had managed out of our New York office, we have a real excellent complement or family of nine funds.
Yeah, Chris, I was going to add in. The recent MEPC brings a lot of exciting things to Saker and the real estate team. What Chris mentioned, the HGPE, getting total control of that and to be able to commit to growth there is really exciting. In terms of economics from the transaction, remember Hermes got hit on the emerging market front not too long after the deal, and so that just decreased their revenues. Saker manages the business holistically and has adjusted things quite professionally.
Through the whole acquisition. Again, like what Chris just said, we changed the name of the company to Federated Hermes. We couldn't be more excited about it.
Since this is partly about the Federated Hermes International, just maybe answer by giving a flavor. The first thing I'll say is, don't let's mix up the EOS business with the rest of the Hermes business. The EOS business does have a margin, but in the growth phase, you're in fact investing in professionals who are engagers, so that margin gets eroded somewhat, but in fact, you bring it back over time. The key impact of that business, as was said by Chris and others, is the insight it gives the fund managers, which allows you to create performance, which allows you to attract more clients into standard funds that actually bring you higher revenue. In terms of the rest of the business, we ended the quarter in Federated Hermes International with about GBP 33 billion of assets under management.
Today, on the exchange rate, it's just over $41 billion. You look at the composition of this, without giving anything away, most of it is very high active share. In fact, all of it is very high active share, specialist, performance-related funds. You would expect us to be harvesting on those the sort of margins that you would associate with such high-margin business. Our private market business is the same, but payment is different. You have seen through the account several times mention of carry, and of course, carry comes when the performance is there. The margins, if you add the carry plus the fees plus the performance fees, is what you'd expect from long-term creation of alpha. Notwithstanding the size, Federated Hermes International is in the space, which is in fact the one that you'd expect to have the margins associated with high alpha funds.
On the downside, if you like, it is also in the space, which is very geared into movements into markets because it is equity and fixed income, I'm leaving aside private markets now. Of course, there's gyrations, as Tom alluded to, that we saw with emerging markets soon after the acquisition. Again, we manage the business as a whole. We manage it dynamically to protect our margin, and we manage it to continue to grow our business. The point that I think we're trying, all of us, to emphasize here, that this acquisition was never just about acquiring the assets or the sales. This acquisition was about acquiring two things, the know-how, which is being transferred now to our colleagues in Pittsburgh, that allows us combined to enhance our returns.
More importantly, it allows us to become the lead in what is clearly going to be the most exciting growth part of the market for the next several years, as can be seen by the fact that all the other major asset managers are trying to enter into this sphere. Which in fact, I would claim we, if not created, were amongst the very early pioneers within this sphere. It is an exciting and very high growth and margin business in time. In time, as it reaches its size.
Well, thank you for taking my questions. Appreciate the full answer. Everyone stay safe and healthy.
Our next question is from Bill Katz from Citigroup. Please proceed with your next question.
Okay, thanks very much. Just come back to money markets. Sorry to stay on this. I'm just a little trying to keep up with the math. Can you walk through what the average fee rate might be for the government versus the prime, and what the incremental reinvestment rate is? I'm just not following all the math. I apologize.
Bill, the fee rates across all of the money markets in the last quarter were a little bit under 8 basis points for advisory fees. There are not meaningful differences between the categories. We don't really price the funds in that manner. That's the average across all types of money funds. In terms of fund yields, Debbie, you could comment on that.
Sure. Maybe just to add a little bit of a different bent to it. Most of our products are run in a barbell fashion, where we have a substantial amount in either floating rate or very short-term, overnight to one-week type of paper. We offset that from a weighted average maturity target perspective, out in the six to nine to 12-month sector for fixed rate purchases. Generally speaking, overnight rates at this point are anywhere from 2- 10 basis points, depending upon what sector you're looking at. One-month rates are probably in the neighborhood of 7- 30-ish type of rates. When you go out to the 12-month sector of the curve, which would be the part where we're adding incremental basis points and yield to the products. In the Treasury space right now, you're at 15 or so basis points.
We think that's been as high as 25 in the last several weeks, and we think it can get back there again with the additional supply from the marketplace in Treasury securities. For prime type securities, you're looking at somewhere in the neighborhood of
70 basis points or so, 70-80 basis points. We don't expect that to back up. In fact, if anything, that might contract a little bit. It's the mixture of those short-term, overnight to one-month type of securities in the front end of the barbell. Where we think we might get an additional 5 basis points if RRP adjusts at some point. It's not a given, but we think it's potentially likely. The current curve and expectations for that curve on the long end of the barbell, six, nine, and 12 months, that are getting us to the approximate yields that we think we will get to from our underlying portfolio standpoint, and then what the resulting amount of waivers that might produce.
Okay. That's helpful. Thank you very much for that. Then just second question, a little bit of a multi-part, apologize. Chris, you've given some flows for equities into the new quarter. Under what conditions do you think that the equity business could actually bounce back to positive? I certainly appreciate the acute negative in the first quarter, but market's been pretty robust into the new quarter. How much of a lead lag do you think you need? Then what's the existing strategic value, AUM, and maybe how are those flows involved the first quarter and in April? Thank you.
Okay. Overall, I'll do all the overall equity situation. Ray'll give you the stats on the strategic value recent. The equity business is now really a function of how people respond to getting back to work, and open up the economy, and all of those things. It's the giant macros out there. However, what I would note from our sales force is that the clients and the salespeople have balanced very well working from home. They very much appreciate the thought leadership that we're getting. What we're seeing, now don't go writing this up as a big hairy trend, is the beauty of high active share, active management selecting winners and losers in portfolios. Some of the clients are actually starting to look at their passive positions and looking towards active management.
We see that when you see people looking at the Kaufmann entries, which are high active share, pick good companies. Then, you see other things as well. You see people coming into high yield. You see people looking at the high dividend on strategic value. So you see people starting to tiptoe in as they have done in the past. So both high yield and strategic value in some way can be viewed as tipping into the market. We aren't really able to predict when that will happen. We rely rather on the franchise for all seasons and offering solutions to where our 10,000 clients are and how they can help their clients. In specific answer to the strategic value flows.
The asset level for the domestic strategy, which is where the bulk of the assets are, the recent total as of a few days ago, would've been about $25 billion, and that's about 2/3 in the SMA and 1/3 in the fund. The net redemptions through April 24th were a little over $200 million for the whole strategy. That compares to a little under $400 million for the month of March. Recognizing April's not closed, and we tend to have some of the models that report late in the month. $200 million versus $400 million for March. I would point out that for the month of February, we were very close to break even. The outflows were a little over $30 million. You can see the dramatic impact on this strategy and really across many parts of the industry for March, less so in April.
Thank you very much.
Our next question is from John Dunn from Evercore ISI. Please proceed with your question.
Good morning. Just a quick follow-up on Hermes. Maybe could you just give a little more color on where we are in the development of the institutional sales cycle for Hermes in the U.S.?
Okay. This sales cycle is an 18-month sales cycle, corona time is not helpful to it. We still get RFPs, there's still that activity going on. That put a little pause in it. We are seeing a lot of good interest in it and expect big things out of it once all this marketplace sets down. I'd ask Saker to put other color on it.
Sure. If you're looking at the cycle outside of the U.S., which is the one that Federated Hermes International has some control of, effectively we've been roughly running at just about a neutral position so far. We have, judging by the number of RFPs that we're filling out at present, which are over 100. I would say that the likelihood is we'll see some more money coming in. This goes back to what Chris said right at the beginning. This period of working from home has been very productive. Yes, we have not been able to travel. Remember, we have a wide remit of area to cover, not just in Europe but also in Asia. We have offices there too, if you remember, and in Australia. We are in fact raising assets from them.
We've done that by raising assets, by contacting our client base and potential clients by phones and making presentations on phone. To give you an example, we onboarded a major client this morning, which is an interesting sort of take on our business. I think that our sales cycle has so far been all right. The key question is, we need to travel to be able to continue to prospect for new clients. That all comes down to when does the lockdown reduce enough to allow business travel, and that we'll have to wait and see. The growth potential both here and in North America is huge. Why? Because these are products that are varied in type, all the way from high yield to equities and to private markets. They're all alpha generating after fees and costs, and therefore they make sense for investors.
As Chris says, it's not just one type of strategy, but a franchise for all seasons. The investors will come back to the market. The question is, how quickly can we go out and prospect some more to add to the ones we're talking to by phones and by remote working. I hope that answers the question.
Yep. Got it. Just thinking about smaller money market players and maybe opportunity for you guys. In an environment like that, is it just tougher with yields and waivers, or is it that everyone's getting assets and people realize maybe it's a good business to have, even if you're small, or does it accrue to your benefit?
Well, over time, what we have seen is that there's never been an immediate catalyst that causes people who don't have a whole lot of assets to throw in the towel. As I said on these calls before, if you have control over the redemption, you can run a small money fund, and that's a fine thing because you're not going to get crushed on the redemption side. If you look at the statistics, the top 25 money market fund purveyors have over 90% of the assets. I think there are maybe 55 or so people listed who have money funds. The ebb and flow of that is a constant look on our part for those who wish to find what I call a warm and loving home on the money market fund side. Periodically, there are things that cause the companies to do it.
The CFO gets a look at it. The CEO takes a different strategy. Things change. To us, the bottom half of that chart is always available for acquisition purposes. Periodically some of the bigger ones decide they want to move in a different direction.
This is Debbie, too. Just to add color to that. In the context of value add, and in money market land, that may only be a basis point or two, but it's incrementally valuable to be able to garner a few extra basis points in the products that you're choosing for your liquidity and your cash. When you're a larger player, you're able to find different structures and different counterparties, maybe from a repo perspective, that give you an extra 1 or 2 basis points or that give you extra supply. You're able to review the structures of asset-backed commercial paper that, again, smaller players may not have the credit analysts, the staffing to be able to undertake those. The extra 1 or 2 basis points that you're getting in those structures, along with the high quality that comes along with them, is valuable to the underlying clients.
Size definitely has some advantages in this aspect of the market.
Very helpful. Thank you.
Our next question is from Kenneth Lee from RBC Capital Markets. Please go ahead with your question.
Hi. Good morning. Thanks for taking my question. Just one on the minimum yield fee waivers. I'm wondering if there's been any initial discussions on potential cost sharing of the impact with distribution partners and whether you would expect a similar kind of percentage of cost sharing as historical. Thanks.
Hey, Kenneth. Ray. We are proceeding in the same manner that we did with the minimum yield fee waivers in the prior cycle, that is at the fund level and looking at the proportion of the revenue that goes to the intermediary compared to our advisory fees. That ratio essentially determines the sharing of any waivers that are necessary to keep the yields at least at zero.
Great. That's helpful. Just one follow-up, if I might. Just given the announcements of the transactions, the MEPC and the HGPE. Wonder if there's any other update around the outlook or timeframes for potentially reorganizing other controlling structures of some of the other PE or infrastructure funds within Hermes. Thanks.
I didn't follow that last part of your question. Restructuring what?
Just reorganizing some of the controlling structures around some of the other private equity or infrastructure GPs within Hermes.
Okay. The key thing that happened here was the ownership that we did not have, we now have. All of those things underneath the private markets have that ownership structure. Now, if you're talking about the individual funds, as we've mentioned before, the HGPE, we raised a bunch of money from existing clients, over $1 billion. That's proceeding. We are looking at the various pods of the infrastructure in terms of how to structure that for growth for the future. If Saker chooses to opine on what else might be going over there, he's welcome to.
Thank you. We had a very successful first soft closing of our direct lending product in the middle of the coronavirus, which was, I think, a great achievement for our sales team, led by Harris Fields. That was very good. We are in negotiations with a large institutional client for a large mandate to do with a property lending and equity-generating income portfolio. That's in the middle of negotiations, it tells you the potential. Whether that particular one comes through or not, it shows you that there's potential there. In terms of restructuring, I think with the tidying up of the ownership of the small part of the HGPE that was not owned by the group, that has been tidied, and is now part of the whole.
That allows us to invest more in sales and concentrate on distributing that, say, the private equity business, particularly in North America. In time, we'll be bringing our property development expertise and business to North America as well. I hope that sort of gives you an idea and answers part of the question. Thank you.
Very helpful. Thank you very much. Hope everyone stays safe.
Thank you.
We have reached the end of the question and answer session, and I will now turn the call back over to Raymond J. Hanley for any closing remarks.
Well, thank you very much for joining us today. We wish you stay safe and stay healthy. Thank you.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.