Good morning, everyone, and welcome to Fireside Chat. We have here with us Fireside Chat with Federated Hermes. We have Chris Donahue and Ray Hanley. Chris Donahue, Chairman, CEO, and President. Ray Hanley, President of Federated Investment Management Company, responsible for investor relations. Mr. Donahue has served as president and CEO of the company since 1998. Just as a reminder, Federated Hermes is asset manager, over $900 billion of assets under management, one of the top players in the money market fund industry. The company manages assets across equity, fixed income, alternatives, multi-asset categories. Once again, Chris, Ray, thanks again for joining us. We're gonna keep this relatively interactive, so periodically we will poll the floor for any questions.
Why don't we just start off with a couple of questions ourselves. Chris, Federated is known primarily for its money market funds, but perhaps investors may not fully appreciate the other aspects of the company. Maybe just start off with a quick overview of the company itself, and where do you see the company heading over time?
Okay. An overview of Federated is what we like to call a franchise for all seasons, meaning that the diversity of assets, clients, and products enables us to sail through tough seas because we got a lot of ballast. Let's talk about it. Current assets as of recent time, either Friday or Monday, are $924 billion. Of that $924 billion, $698 billion is in the money markets. Then that, by the way, is up $16 billion for the quarter. Then you have $103 billion in equities, which is up about $6 billion for the quarter. About $102 billion or $101 billion in fixed income, and then $22 billion in alternatives and multi sector. Then that adds up to the whole thing. Now, that's the assets.
Now in terms of the flows, the flows so far year to date are about $2.1 billion positive, and that's made up of $1.6 billion in equities and about $333 million in fixed income and a couple hundred million in alternatives. In other words, the flow machine is working. The way we look at that, both on gross sales and on flows, i.e. net sales, is this is the vote of the marketplace. Are you alive? Are you selling a lot of things? Because redemptions are an inevitable part of life. Another interesting overall one, we don't quote it a lot, but when it's good, we quote it. Barron's did their survey on the best mutual fund companies. We turned out 11th out of the 50 they rate, which they select out of 700 or 800 total.
As long as you're there, you're in good shape. For the five-year, we were even number six on the hit parade. Across the board, we're expanding the different kinds of wrappers we use for our products. We have SMAs, and they are over $40 billion, and that's just a way to offer the same mandate. The ETFs, which are the newest players on the field, are up to $2 billion. The CITs, which are basically for retirement programs, are now up to $4 billion. You can feel us adding the same investment mandate through all these different packages and expanding awareness, and all sorts of good things for the company. We're expanding overseas. Take this one.
We file a UCITS, which is an Irish fund for sale in Europe, and it's basically MDT's All Cap Core. Now that fund is doing quite well. I think it has about $600 million, some number like that. That's a brand-new fund. Then there's one where it's managed in Boston, registered in Dublin, and sold throughout Europe. This is the kind of thing we started talking about in 2018 when we did the Hermes deal initially. It's part of the whole offering. Another overview of Federated, and I mentioned this last year too, is that we're expanding internationally. We announced this year we're gonna open a Hong Kong office. That adds to our 23-person Singapore office. We have an office in Australia, one in Japan, and all over Europe.
We're building, in effect, distribution in all of those places to tell the story of all of these products, MDT included, Asia ex-Japan included, trade finance included, and of course, the lovely story of money funds, which are the eighth wonder of the world. There, no discussion with Federated or anybody that has anything to do with the money fund is complete unless you talk about tokenization. I don't want to hog the whole thing and not let you answer your questions, but there's some important things here. First of all, the clients aren't yet there, so go with that. We, however, are working like crazy on it because of FOMO like everybody else has. The customers will get there, we do believe. Look at the ways we're doing it.
We do a sub-advisory deal with Superstate. Well, that's pretty straightforward. You sub-advise the money. I mean, what could be right out of central casting for us? The BNY, Goldman deal is where we have our regular fund. BNY makes a token. The token invests, in effect, money in the fund, so the money fund's the same as it was five minutes ago, and it participates in Goldman's platform. That's another whole deal. Archax is one we're doing in Europe. It's about the same as the BNY Goldman setup. We have the structures inside to actually tokenize a money fund.
One story I like to tell is that The Wall Street Journal a few months ago wrote a title that said, "Federated Tokenized a Money Fund." Our independent director said, "Well, wait, you didn't tell us you were tokenizing a money fund." Well, the truth is we didn't tokenize the money fund. It's the same money fund, it's just that BNY put the token on it. From the customer standpoint, it looks, tastes, and feels like a tokenized money fund and can be used that way. You get this kinda education and confusion going. But we're working on it. The governments are working on it. The regulators are working on it. Everybody can see that it could work. But the use cases are not yet profound and not yet really lighting fires under people.
Now, there's probably stuff I missed, but I'll give you a chance to ask some questions.
There's a lot there. Let's just unpack some of them. First off, MDT fund complex, you touched upon that. You know, we've been seeing a lot of good organic growth within there, and I believe more recently the comments have been that, you know, the pipeline's looking pretty good overall there. Just wanna talk a little bit more about, you know, what's driving client demand and how do you see MDT products really standing out from other competitors?
On MDT, the way it stands out is by performance. That's really important. We bought them in 2006 because they were a quant shop. Does anybody remember the time when if you said quant, that was bad? Well, now it's good. Not only is it good, but it's very good because the performance is good. If you don't have good performance, you're not gonna light it up. More important than that, how they do it. It is very unique. They can tell you. They have brochures that tell you. It's decision trees, yes, no, yes, no, and then they bundle up the trees and make forests and make bundles of forests, and they update their model every six months. They do this because they're adding behavioral factors, other factors, answering yes, no.
They are forever doing all of this work in advance. It's not AI, but let me assure you, it is data-driven. Once the customers understand what this is and how it works, they can move on to other aspects of MDT, not just the All Cap Core, but other parts of it. It is, in effect, its own family of funds. It's getting a lot of traction now on the institutional side. The true driver here for asset growth has been on the SMA side, which means you have a rigorous individual wealth manager working on it. This gives you a long time and a lot of analysis, a speed bump, if you will, on the way in, but it also gives you a speed bump on the way up. Why did you buy it? Here's the most important thing.
It's not just the performance, not just the uniqueness of how they do things. How is it a solution to the client? That's what really sinks. That's what the relationship that we have with our intermediaries gets to. How are these working in solutions? This gets embedded in whatever the project is that that investment advisor is working with the client, and that's where you really hit a good lick, when it becomes a solution.
Got it. That's real helpful there. Let's just switch over to fixed income now, just given the current rate environment, the current outlook there. How do you think about potential pickup in terms of fixed income organic growth over the near term there?
Well, take for example the total return bond fund, the core fund, way out of central casting, positive flows for the year, good long-term record, excellent people there for the long haul, and we think that's a very good opportunity into the future. Next. Okay, you have $8 trillion in money funds. Everybody says, "Oh, that money's gonna move out." Well, if you look at that, we get higher highs and higher lows on the money funds, but I'm using it to say some people take some of that money and move it out the yield curve. Now when you do that, you run into our ultra shorts, our short intermediate, whether it's an ETF format or a fund format, and so we see good growth there. You see the ultra shorts up.
Right out the yield curve, we have very good offerings. Frankly to us on the money market funds side or on the question you're asking, it matters not what the Fed does. It's important, but we set up the products that it isn't gonna be a problem one way or the other.
Got it. No, that's great. Since you touched upon money market funds, let's just talk about that. I think in your recent call you talked about potentially single digit AUM growth this year. Just wanted to dive into a little bit more what are the key factors driving that potential growth this year, and perhaps just talk a little bit more the dynamics between institutional and retail flows into that product.
Okay. If we begin with the difference between the institutional trade and the retail trade, it'll be helpful. As long as the Fed is lowering rates, whether it's gradual over time, big amounts or whatever, then it's immediately obvious that the money market funds of the 45-day average maturity is gonna have a higher yield than the spot rate on T-bills or even repo. The institutional people really like this, and they like a higher yield. That's not that complicated. That institutional money is still available to come into the funds. On the retail side, it's not so much what the spot market's doing, it's what's the bank doing and what are the deposit rates. Right now, as more or less forever, the bank deposit rates are gonna be lower than the mutual fund rates.
They vary all over the lot from 10 or 15 basis points to a few hundred basis points, but nonetheless, less than the money fund. If you add to that if people's balance sheet is going up, market moves to the contrary recently notwithstanding, their percentage of cash also goes up, so that in an up market, money fund assets go up. In a down market, what happens? People go risk off, they get more defensive, and guess what? Money market assets go up. How could this be a bad business? When it goes up, you go up, and when it goes down, you go down. It's really nice. Corporations are always gonna be having cash. Now some of those corporate treasurers will sell their mother for a basis point. You gotta...
You know, those are those kind of clients. You have state pools, which are tremendous. This is just. Think about a state. These taxes come in, the money goes out, the ebb and flow. Even in the first quarter, we had less worse than usual. We usually have a drawdown, and it basically did not happen. That's another non-correlated cash movement inside the Federated fort. That helps tremendously because if you have a variety of clients all doing different things at different times, makes the whole effort a lot stronger.
Okay. Great. Just one around digital assets and tokenization, and I realize you briefly mentioned you touched upon that earlier. Any other use cases longer term or long-term as you look further out, you know, what could potentially drive demand there? What kind of catalyst should we expect to see around that?
If you're a Coinbase guy and that's your wallet, that's your world, you're gonna want your money fund right there.
Right.
That's not our clients. Okay, that's lovely people, but that's not our clients, and that's not the world yet. You could see moves where collateral, where that becomes important. That's expensive to move, and how do you do it? That could be another use case. Everybody talks about the fact that some companies and international transactions want 7 by 24 all around the globe. Yes, that's true, but we don't have clients that are, you know, clawing at the door to make that happen. At the end of the day, if you foresee, as we do, that blockchain is gonna be a better way to do it's gotta come at a time when the client sees it as a solution. The clients have to really wanna make this happen. I don't know when the tipping point will be.
At some point, that will happen, and then that's why I said everybody wants to get ready for tomorrow.
Right. Well, why don't we take a pause here and see if there are any questions from the floor before we move on? Okay. Well, why don't we go on to the next one then. In terms of alternatives in private markets, obviously very topical. I know that Federated Hermes is out marketing several funds, and more recently, the pending acquisition of FCP, the U.S. real estate investment manager. Maybe just talk about how FCP fits in. You know, what's the overall strategy for alternatives for Federated? And, you know, could we see Federated continue to expand more of the capabilities over time in this area?
Let's talk about FCP. What is it? It's a real estate company in the United States. What is the biggest problem with real estate in the United States, okay? Not enough units, not enough housing for all the Gen Z, everybody else that wants to have a place. This team of people has put $15 billion in the ground, 75,000 units in 19 jurisdictions, not including New York and Pittsburgh. They're in Sun Belt, Southern, and Southwest. They have 75 people that are doing this. Right now, they're managing about $3.8 billion. Their next raise up will be in 2027. We're looking at it saying, our connection with our wealth clients and our relationship, we wanna strengthen it by adding our assistance to their efforts to sell, basically round seven of their deals.
This is what's behind the curtain. You can almost feel the sales pitch being made. What's the big macro? Need more units. How are these guys done? That's exactly what they're doing. Here are the returns, and here's how it works. You know, we think this will do well. The fact that we haven't sold it yet means we've got stuff to learn and stuff to work on. I'm telling you behind the curtain the concerns, which is why we're not gonna do another one right away on that 'cause we wanna get this one squared up. Now, you mentioned at the beginning of your question about the funds that we're selling on the private market side.
One that's peculiarly of interest is the private credit one. Now, here's a fund that closed two or three weeks ago with $780 million in it. That meant it was marketed all during the time when all the shenanigans is going on in the marketplace, all the articles and other things, oh my Jesus, what's going on here? Well, what's going on here is, the portfolio manager has very good relationships with European banks, looks through their loan book, decides which ones he thinks are good, does his own credit work with our team, and then presents the offering. It's at about 3 percentage points over EURIBOR, so it's not double-digit, high roller sport fishing, it's regular. Then he goes to the regular clients.
The interesting thing about the clients in this product, they're very interested in who the other clients are. They don't want to be in with a bunch of yield queens or runners or hot money. Boy, would that be interesting way to do a business where the clients actually knew and asked about, "Hey, who else am I in with?" Over time, good relationships. You can see why we could close. By the way, we have no defaults in this thing either, and we're gonna expand it. We're gonna do some more of this right in the face of all this, private credit, type noise. Those are two stories of what we're doing, on the private market side.
Okay, great. I think you might have touched upon this briefly, but talking about acquisitions, and I think, Stovie, you've always been saying that the highest and best use of excess capital is to go through our acquisitions. Obviously in the past, you've also talked about roll-up opportunities. Just wondering at this point, you know, what sorts of potential opportunities are you seeing right now as you look out?
As we look out, we are seeing roll-up opportunities. They show up periodically, almost ongoing. What is a roll-up opportunity? Somebody has a fund or a bunch of funds. They're sort of languid. They're not doing anything. They can't be sold. What are you gonna do with them? Then they find a warm and loving home at Federated Hermes. We don't take the people, we just merge the fund in, and this is lumpy growth. We're talking about some of those right now. On bigger ones, we are not. Let's talk about the real biggest ones, the ones that are all in the news. We're not inclined to do those type of deals.
Part of the reason is that if you do, like, take mergers of equals, or if you were growing, as I said, our flows were, and you have 245 salespeople, and your growth is X, all of a sudden it has to be 2X if you combined with somebody that doubled you. Getting there and solving the problem with synergies and firing people isn't as much fun as getting there organically. Those big ones have to have a fundamental growth aspect to them that we really believe that can keep the numbers on growth, not just on synergies. Even more important than that is the cultural deal. Not all cultures work together, and it is really important. We're owner-operators. We're gonna be here tomorrow and the next year.
No, we gotta live with this. It's gotta be a big cultural thing. Now, on intermediate-sized ones, where we're buying areas of excellence, which we did MDT in 2006, we did Kaufmann before that, C.W. Henderson, Hermes, you know, we're always on the lookout for those, and there's always a list of them that we're thinking about. None of them are hot to trot right now, and if they were, I couldn't tell you anyway. They have to perform a real niche in terms of excellence of investment management, and then come in the front. Now notice, this is buying people directly, that we don't do the lift outs. Okay, so.
Okay, great. Just stepping back more broadly on capital allocation, maybe just talk about how you think about share repurchases right now, especially since Federated, I believe, has been more active more recently.
Ray Hanley is the architect of share buyback.
Well, Ken, we are of course regular in our share repurchase activity. We have a very disciplined approach, but it's also opportunistic. We look at a variety of factors, run our own internal models. We look at our expected uses of cash, so something like the FCP acquisition caused us to have an interruption until that became known in the marketplace. We were active last quarter. We bought about 1.5 million shares, and this quarter we continue to be active. We're up over 700,000 shares year to date. It continues to be a regular way that we look to return value to shareholders.
Of course, we love the dividend, and we've had success over time at both increasing the dividend and periodically having special dividends. More recently, the capital return has been skewed to share repurchase.
Great. Just one final question here. In terms of the operating expense outlook, little bits of guidance here and there. Just wonder if you could just give any kind of updated outlook there, and perhaps just remind us whether Federated has any ongoing reinvestment efforts, you know, something like that.
You're picking on Ray again. Well, we went through some things specific to Q1 from a seasonal basis, where we would be up in comp, up in distribution fees. Those numbers are out there. We also, with the FCP deal, expected to close in the second quarter, we have about $9 million of transaction costs that will hit in Q2. Those are unusual items. Beyond that, of course, the real variability in our expense structure comes through the comp and related, and a lot of that's driven by incentive comp, which we enjoy when that goes up because that means good things are happening in terms of our investment performance, the growth sales of our products, and then all the rest of the metrics, earnings, margins, et cetera.
We also like to see our distribution expense go up, and that happened last year. That we hope continues to happen because that's tied to our AUM level on the mutual fund assets. Look for that to go up as well. We've talked about tech expenditures going up gradually. They were up about 6% last year. We have a number of large projects in various states of completion. There does not seem to be an end to the list. New ones will replace the other ones, so you should look for that to continue to go up as well. Importantly, we're investing for growth. Chris mentioned the plans being formulated now to open a Hong Kong office.
We're investing in the digital asset effort, adding some talent resource there. The product expansion that we talked about, rolling out new ETFs, new CITs, a ll of that puts pressure on the margin, clearly. We're focused on continuing to do those growth investments. We describe ourselves as being margin aware, but we're not managing to a specific target. I don't have a, you know, a guideline to give you, a guidance to give you on the margin for 2026. Those are the factors that are gonna impact it.
Okay. Really helpful there. Well, why don't we wrap it up here and just give a hand of thanks again for Chris and Ray for joining us today.
Thank you.