Federated Hermes, Inc.

Greetings. Welcome to a Federated Hermes Third 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, Ray Handley, President of Federated Investor Management Company. Thank you. You may begin.

Good morning and welcome. Leading today's call will be Chris Donahue, Federated Hermes CEO and President, and Tom Donahue, Chief Financial Officer. And joining us for the Q&A are Sacher Nasebi, who is the CEO of the International Business of Federated Hermes, and Debbie Cunningham, the Chief Investment Officer for the Money Market Group. 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. We invite you to review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated HERMES assumes no duty to update any of these forward-looking statements. Chris?

Thank you, Ray. Good morning, all, and thank you for listening. I will review Federated HERMI's business performance, and Tom will comment on our financial results. We continue to grow and expand our EOS at Federated HERMI's engagement activities. During Q3, our staff level of engagers and other specialists reached 65, up from 60 at the end of Q2, and our assets under advice reached $1.2 trillion up from $1.1 trillion in the second quarter. Now looking at our equities business, assets closed the quarter at $80 billion, up from $77 billion at the end of Q2, as market values continued to recover, adding $4.3 billion, offset partially by net redemptions of $1.4 billion. While overall net sales of combined equity funds and separate accounts were negative, we saw positive net sales in a number of strategies. We had 16 equity funds with net sales in the third quarter, led by Kauffman Small Cap and the SDG Engagement Equity USIT Fund. Other funds include Global Equity ESG, Impact Opportunities, International Small Mid Company, and global small-cap equity. Using Morningstar data for the trailing three years, at the end of the third quarter, 24% of our equity funds were in the top quartile and two-thirds were above median. Looking at the strategic value dividend strategy, its objective is to provide a high and growing dividend income stream from high-quality companies. The domestic fund's 12-month distribution yield was 4.4%, which ranked in the second percentile of its Morningstar assigned category at the end of the third quarter. The domestic strategic value dividend strategy had combined mutual fund and SMA outflows of $1.4 billion in the third quarter, down from $1.6 billion in the second quarter. While recent market characteristics have not favored our low volatility, high dividend strategy, we believe that our continued focus on the core goal of providing higher than market dividend yield from high quality business assets will resonate with investors over the long term, especially in a low rate environment. Q4 results through October 23rd show combined fund and SMA net redemptions at about $190 million. Now turning to fixed income. Assets reached another record high of nearly $80 billion at the end of Q3, up over $6 billion or 9% from Q2. The third quarter growth was driven by strong net sales of about $5 billion. our broad array of solid fixed income strategies were well positioned to meet market demand. We had 23 fixed income funds with net sales in the third quarter. The multi-sector total return bond and short intermediate total return bond funds combined for about $1.2 billion of Q3's net fund sales. Ultra-short strategies had about $1.1 billion of net fund sales, and high yield added just over $400 million of net fund sales. Corporates, high yield, multi-sector, government, and municipal bond funds all had net sales, as did our fixed income SMA strategies. Across sectors, short duration strategies were in demand and also drove the fixed income separate account net sales. At quarter end, using Morningstar data for the trailing three years, we had 26% of our fixed income funds in the top quartile and 50% were above median. We began Q4 with about $1.5 billion in net institutional mandates yet to fund, mostly in fixed income. Moving to money markets. The Q3 asset decrease of $25 billion was mostly from money market funds, which decreased from Q2's record high and, to a lesser extent, seasonal declines in separate account assets. Money market fund asset decreases were attributed to corporate clients using cash to pay down debt or spend on their businesses, and the use of cash by government entities among other factors. Our money market mutual fund market share, including subadvised funds at quarter end, was nearly unchanged from the prior quarter at 8.1%. Taking a look now at recent asset totals, managed assets were approximately $614 billion, including $430 billion in money markets, $81 billion in equities, 81 billion in fixed income, 18 billion in alternative, and 4 billion in multi-assets. Money market mutual fund assets were 322 billion. Overall, we continue to function well through the challenges of COVID. Upwards of 95% of our employees are successfully working from home, leveraging progress from years of technology investments and strong culture. We recently communicated that we are delaying a significant return to our office for U.S. employees until mid-February, and our decisions about when to return more employees to our offices will be informed by conditions and not the calendar. We have emphasized that working together in our office is vital to Federated Hermes culture and it facilitates collaboration, allows impromptu conversations, and promotes personal interactions that build camaraderie and creativity. Culture means community, collaboration, and cooperation, and it's best accomplished in the office, in my opinion. We would lean on wanting people to come back to the office when it's proper to do so. Tom?

Thank you, Chris. Total revenue for the quarter was up about $4 million from the prior quarter due mainly to higher equity and fixed income assets, which combined to add about $20 million of revenue. This was partially offset by net money market minimum yield and other waivers and lower money market assets, which combined to reduce revenue by about $18 million. Recall that in Q2, We saw revenue growth from higher money market assets partially offset by lower revenue from equity assets. Our diversified business mix positioned us to grow revenues in varying market conditions against a backdrop of challenging times. Other factors impacting Q3 revenues compared to the prior quarter included an additional day which added $4.4 million and a decrease of $2.9 million in performance fees and carried interest. Looking at operating expenses, comp and related increased $2.6 million from the prior quarter due mainly to higher headcount and FX rates and higher benefit and other costs. The decrease in distribution expense compared to the prior quarter was due to the impact of minimum yield waivers and lower money market assets. which reduced distribution expense by about $18 million. This was partially offset by an additional day in the quarter and higher equity and fixed income assets. Other expenses include a $1.1 million revaluation from the contingent purchase price liability from the first quarter MEPC acquisition. Also impacting the other expense line item was a decrease of 1.8 million of expenses from derivatives. This is from the Hermes hedging their dollars into pounds. The impact of money fund yield-related waivers on operating income in Q3 was 3.8 million. Based on recent assets and expected yields, the impact of these waivers on operating income in Q4 could be about $9 million, and we think that's about where it will level off. Multiple factors impact waiver levels, including a potential additional stimulus package, which is included in our forecast. Non-operating income decreased from the prior quarter due mainly to the lower increase in the value of seed and other investments in the third quarter. As noted in the press release, the Board approved a $1.27 per share dividend, including a $1 special dividend. We have declared five special dividends for a total of $7.53 per share, or about three-quarters of a billion dollars in the last 12 years. We will pay the dividend from cash on hand, and it will be considered an ordinary dividend for tax purposes. The Q4 dividend payment is expected to reduce Q4 earnings per share by about one and a half cents per share, due largely to the exclusion of the dividends paid on unvested restricted shares from net income under the two-class method of computing earnings per share. During Q3, we purchased 867,000 shares for $20 million. with nearly all of this purchased in the open market. At the end of the third quarter, cash and investments were $437 million, of which about $370 million was available to us. Debt at the end of the quarter was $90 million. We would like to open the call up for questions now.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Ken Worthington with JP Morgan. Please proceed.

Hi. Good morning. Regulators and regulatory panels continue to kick around the idea of altering money market fund regulations, again, in response to the need for Fed programs to support funds post-COVID. What are the fixes that are being most talked about? And could this round of rules either damage the outlook for prime money market funds, or is it more likely that it actually helps the outlook for prime money market funds?

Thank you, Ken. This is Chris. I believe that the thing that's being talked about the most is the restriction on that 30% trigger. The comments that were made to the SEC of not only requiring a 30% weekly liquidity level, but then requiring the public notice thereof and then the consideration by the Board of Fees and Gates acted exactly the way that was predicted. Namely, it caused more problems than it solved. And there are a lot of ways around that. If the SEC wants to keep the trigger, fine. You just don't have to do the things that wave a red flag in front of the marketplace. And ameliorating the impact of that 30% is the number one thing that's being discussed. At this point, in our view, the money market funds came through this situation much like they did before with a lot of resilience and that therefore there is no need to further diminish prime funds even though there are some who use them as trading mechanisms in order to preserve their non-SIFI status. The reason for this is if you take an honest look at stakeholders, stakeholders include the issuers which include colleges, municipalities, all of whom need great help during COVID and post-COVID times, and restricting their ability to get financing on the short end doesn't make a lot of sense. And you have the users, which again include that same group, and then you have the other shareholders, and we just don't think that it makes a lot of sense to eliminate the spear point of the short-term markets at this time. So what will happen with regulation, I cannot predict. I can assure you that we will be in there defending the beauty and efficacy of prime money market funds.

Great, thank you. And then you had pretty substantial outflows in money market funds this quarter and pretty strong net sales into fixed income funds this quarter. to what extent is the money that's coming out of cash going into fixed income? And really the heart of the question is, to what extent can you cross-sell or cross-market cash management clients and really the intermediaries to kind of retain those dollars coming out of money market funds and get them sort of pointed to federated fixed income business?

A truly lovely concept that doesn't work and I can't defend. And if I could, I would. We have discovered over the many, many decades of being in the money fund business that the money fund and cash determinations by clients are made on the basis of cash. But what happens is because you're there with the cash account, you can talk to them about the other beautiful options that you have. But to be able to exactly calculate and follow money moving from cash into fixed income, we just have never been able to do. We have separate sales organizations who coordinate very closely, and I think a large part of the sales that we had in this quarter were related to the breadth and quality of the fixed income offerings that our clients were able to see. And so you can be sure that the salespeople on the fixed income and equity side use the money market fund as a door opener. It's just very difficult to trace the money.

Great. Thank you very much.

Our next question is from Dan Fannin with Jefferies. Please proceed.

Thanks. So I wanted to follow up on the fee waiver outlook. You highlighted the potential for stimulus in that assumption for the $9 million. Can you talk about the sensitivities if there isn't stimulus and other kind of assumptions that are embedded in that.

Sure, Dan, thanks. There's a whole lot of assumptions and, you know, rates, assets, mix, clients' actions, and then, you know, you just mentioned the stimulus, which we mentioned, which, you know, if you track our forecast, surprisingly, because of so many factors, we've been pretty accurate. Basically, our team thinks that there's going to be a stimulus package, and the size and the timing matter, and as we run through so many factors, we came up with an estimate that was $9 million. I guess if the stimulus package doesn't happen, we'd run the numbers and get a couple million more in waivers.

Okay. The relationship between the gross and the net with the distribution expense, is there a point at which it becomes more negative to the overall profitability where you cap out on the distribution expense offset?

Hey, Dan, it's Ray. So embedded in that, when you see the numbers roll up in total, is a group of 40-ish funds and multiples of that in share classes. And they all have different ratios of distribution, revenue, and expense. And the answer to your question is yes, in that at the higher fund fee levels, they're higher because they have additional distribution revenue and related distribution expense built into the fund. And so when and as and if rates go lower, then that mix changes. and you have funds that have lower distribution revenue and expense begin to get impacted by waivers. And you can see that if you look at the history of the waivers and the resulting impact on those line items back in the 2009 to 2016 period. But it's really a function of the mix of assets again across a pretty wide base of funds and share classes and that makes it hard to model and predict.

Okay, thank you.

Our next question is from Patrick Davitt with Autonomous Research. Please proceed.

Hey, good morning everyone. Could you update us on the progress of kind of the ESGification of the long-term business. And through that lens, any kind of specific anecdotes you can give us of that transformation actually helping the flow picture for specific strategies as they move, kind of transform from non-ESG to ESG, particularly on the equity side. Thanks.

Well, Patrick, this is Chris. Once again, the movement to full integration is in full operation. And the theme of it is to be able to legitimately and in-depth convince investment people who are looking for mandates or RFPs that we are authentic and this is not a cosmetic operation. And so we have these charts that we look at that go through each group on three different levels from the initial analysis to the customization and then the integration with testing in each stage and bar graphs that show you how we're doing in each group. And as we've mentioned before, the liquidity group that Debbie runs is very, very much in the lead on this and has integrated and in fact is now in the process of engaging with some of the GSEs as part of that effort. The strategic value fund is also complete on this process, as is the high yield group. Others are proceeding along quite well. This remains a commitment. The way you phrased the question about when they're ESG or non-ESG, some of these groups that I've just mentioned already got high grades on ESG even though they weren't ESG integrated. And that's because of the fact that they're really looking at risk. And when you look at risk, you look at it a lot of different ways. So this enhances it. Now in terms of the second part of the question where you asked about the sales, that is very hard to discern because when you integrate into the entire money market franchise, I don't think you can say, oh, well, we got these ones or those ones from the ESG. I will allow Debbie to give you incidental type observations on that, but it's very, very difficult to track, and the same in the other areas that I've mentioned. But where you do see it is in some of the funds that are from our UK operation. that I mentioned with the positive flows around the globe. That would be another way of looking at it. Debbie?

Thanks, Chris. I think probably the reason that we are the most fully integrated group within the three different sectors at Federated Hermes has to do with the fact that We, by Rule 2A7, for our money market funds, for our mutual funds, are required to only deal with issuers that represent minimal credit risk, high quality and their minimal credit risk. So, for the most part, we're dealing with the largest companies, the largest financial entities in the world on a global basis, and as such, even though there may be issues from a governance perspective for some of them with regard to the financial services sectors. There may be environmental issues for the BPs and the exons of the world. There may be social issues from some of the pharmaceutical companies that we're using. The fact of the matter is they're the leaders in the industry, and we are engaging with them to move forward so that they can move those issues from an industry basis in a positive direction. So that's kind of our modus operandi, if you will, within the sector. Some of the incidental observations that we've noted from a COVID perspective have a lot to do with firms' adaptability. One of the issues that we have engaged with a very large soft drink manufacturer has been their use of plastics. Yet during COVID times back in March and April, they actually took several of their plastic manufacturing lines, their bottling lines, and turned them into PPE manufacturers. So they were making the face shields that were being used by healthcare workers around the world. So similar stories from say a Walmart and some other retailers who repurposed their individuals and on a social basis did not necessarily lay those individuals off. So incidental observations have been good and from a GSE standpoint, We've begun conversations with our top five GSEs in the country, and they have not been asked to engage on any types of issues from an ESG perspective by any other investor in their database, and they are excited about the opportunity to start working with Federated on this front.

Thank you, Debbie. Before we leave this question, I'd like to ask Sacher Nessebi from the UK to comment on the equities and how this integration works on his perspective.

Thank you, Chris. So as you might recall from previous talks we gave to you when we talked about the business in London, ESG is integrated into everything we do. And because we have this lead, we do see increased flows into ESG. You see this across the market in Europe as a whole. and increasingly in Asia. But it also allows us to do something else. It allows us to launch specialist funds, which have the authenticity to be seen as being true to the marker, which goes one step beyond. And by that, I mean thematic funds. So this is not just standard ESG that's going one step beyond. I would highlight, for example, the Impact Fund, which has raised some very strong asset flows. I'd impact something like the high-yield SDG Fund that's tries to play to the strength of the SDG and others that we have been launching. So we do see a connectivity between integrating ESG, being seen as authentic and a leader in it, and fund flows both into mainstream funds, which integrate ESG, and into specialist funds that actually decide to go one step further and to become thematically ESG in addition. We are thinking of others which will bring to the market and which we think we will see strong flows, too, as we go along through this year and the beginning of next.

Awesome. Thanks. And real quick, as a follow-up to earlier, could you give the quarter-to-date bond flow number again and the pipeline? I missed that.

So the pipeline number is about $1.5 billion, and that's mostly fixed income. And the quarter-to-date number for... assets? Is that what the first part of the question was?

No, net flows. You gave an equity number, right? I think I missed the bond number.

The bond number quarter to date is about north of $800 million positive.

Thank you.

Our next question is from Mike Carrier with Bank of America. Please proceed.

Good morning. Thanks for taking the questions. Tom, I realize a lot of moving parts with the waivers this quarter, but the operating margin jumped from 27% to 21%. Granted, long-term assets were up a healthy amount, but any other key drivers? How are you thinking about the outlook within that broad range? and not just the quarter, just as we're heading into the next couple of years.

Yeah, Mike, the margin goes up when we lose a revenue number and an expense number that are very close to each other. So actually, it looks like we're smart expense managers, but it's just the way it works when when we lose revenue and then we lose expense that's close to it, and we look like we really managed that margin well, and it did go up. So I guess we're supposed to take credit for that. And if it goes back the other way, you know, the margin will go back down, which we'll be happy because we'll be earning a little bit more.

Guy, okay. And then, Chris, just wanted to get your thoughts on M&A. You guys have done strategic and roll-ups over time. but there's been a little bit more activity in the sector. And just, you know, do you feel like, you know, like the firm has enough skill in, say, areas that you need that obviously you don't need, you know, everywhere? I just wanted to get you up to the top.

Mike, we are always looking for roll-ups. And as I like to say, we are a warm and loving home for those so inclined. And we always have a few of them that we're looking at. So... That isn't a question of whether we have enough size or don't have enough size. That's a question of where we can fit it in and do a better job and make a proper deal with the people who want to do the rollout. In terms of bigger ones, as I've said before on these calls, we are inclined to focus on working on our collaboration with our associates in the UK and in growing this franchise and in integrating it and when you saw what we did in the beginning of the year more or less which was complete the acquisition of the real estate the private equity and the infrastructure aspects of the Hermes business and then you look at the announcement we've made on the ETF side and in order to create and grow a business there, I think you get a pretty good idea of where we're heading. Now, obviously, we don't have any size in ETFs because we're not there. But we're looking at building this out. And, you know, that will be at 2021 when we start filing products and making a lot more announcements about it.

That makes sense. Thanks a lot.

Our next question is from William Katz with Citigroup. Please proceed.

Okay, thanks very much for taking the question. Just coming back to the flows for a moment, it looks like the alts bucket sort of bounced back a little bit. Can you sort of step back and talk a little bit about where you see the best opportunity and then how we should think about maybe performance fees or carry rolling through the P&L as we look at over the next 12 to 24 months?

Sacker, I'll let you handle that one. Sacker, I think you're on mute.

Thank you for telling me, Chris. Sorry about that. So let me start by talking about carry fees. We in the London part of federated attorneys have two sets of performance and carry fees. There's a straightforward Carry fee, which comes for our private equity business, and anyone familiar with private equity businesses would be familiar with how that is depending on the roll-up and the sale of the underlying assets, and we've got a strong history that shows that over time we do generate these fees on a regular basis, but there are lumps, as you'd expect, when you come to the end of the cycle of any one fund that was invested some years before. The other bit of fees that we have is performance fees for property, which is the one that you've seen strongly this year. And these fees tend to come towards the end stage of development projects that we've been working on for some time. And again, if you look through time, they've been reasonably consistent and less lumpy. Now, you'd notice I'm not giving numbers out because, I mean, you can't give numbers out. What I would say is that the performance fees were particularly strong this year from property, and we expect this to continue for some time. But over time, we would expect the performance fee to be a continuing part of the way in which our property investments generate returns as we do within the carry fees within private equity. In terms of ratios, obviously the property performance fees are a bigger ratio and will continue to be a bigger ratio for the time being until we grow up private equity business more. Does that kind of answer the question?

Sure. Just to follow up on that, when you look for where you can grow incrementally, are there any flagship capital raises or buckets of opportunity you see over the next year or so?

So that's a really good question. And that, again, tells you about the beauty of our property business. So the way that the property business has grown is by finding key stakeholders or key clients who we form very long relationships with because the investment tends to be, A, very large in size, you're talking about tickets somewhere between $300 and $700 million, and B, they tend to be very long in nature. So you're talking about the commitment of typically 15 years in which you generate both the fees and the revenues. And we are in constant discussions with clients, and we have some that want to invest with us, and it's a matter of finding the right projects that we want them to invest with us on so that we can generate the return that you expect with them. So this is without trying to predict anything about the future, but looking at the client base that we have, I would imagine for these to continue to emerge, that is to say these large clients, as we find the projects for them to do in terms of property. Now, property is different from private equity. Private equity, we would look to launch more funds in the next couple of years, and these funds will raise equity, and already we have indications that these would be attractive offerings to our client base.

Bill, it's Ray. You had asked about flows as well in this area and the pickup in the third quarter. From a fund standpoint, there were two of the London strategies that had a step up in terms of net sales, and that was the unconstrained credit fund and the absolute return credit fund. I don't know, Sacker, if you make any comment on those particular fund strategies.

So absolutely. So that is part, so that is, I mean, yes, okay, there are alternatives, but they're not in private markets, which is what I concentrated the performance fee on. What we've seen is an increase of pickup for our funds, which are linked to our fixed income team, which has been very successful. And these two are an example of that. The multi-asset credit is seen wide demand in the UK market, and we've raised assets for it very strongly, and that unconstrained return as well. So this is part and parcel of our marketing, our fixed income team. We've built a very strong team over the last six years, effectively, with a very strong track record, and we've just started taking them to the market in a major way over the last eight months. So this is something that you see more of as we go forward.

Okay, and then just to follow up for Tom, thanks for taking the questions. Tommy mentioned, and I guess Christian mentioned, you're going to sort of stick it out, work from home through February. Can you talk a little bit about maybe the non-comp trajectory of expenses? It doesn't look like it was particularly depressed this quarter, adjusting for your one-offs. How should we be thinking about maybe the outlook for that as we look out into some, quote-unquote, level of normalization next year, perhaps?

Well, the most interesting one is that T&E, which, you know, you see on the press release, you know, still running at a low level. And, you know, we're talking to the sales force and our budgeting process and when do they think things are going to pick back up. And basically they're kind of saying, hey, the second half of the year will be, you know, full throttle. That's their expectation now. And the first half will be, will be slow, maybe half as much as it normally would be. But that is just totally dependent on the circumstances with the virus and people's willingness to travel and people's willingness to let us in. The rest of the expenses, I don't see any We're investing in a lot of technology things, and that will continue, but I don't see that showing up as outsized things in our financial office and occupancy. That shouldn't change much. Distribution, you know how that's going to flow, and I think we've covered that. That'll flow with waivers and our growth or money markets going up. Advertising and promotion. You know, we had intentions of doing a lot of things related to the Federated Hermes name change, and we got going on that, but, you know, curtailed that in terms of COVID and what was going on. So I think we'll creep back in there. And then Chris mentioned a few things that we are doing new, and Zachary mentioned a few things that we're doing new in terms of ETFs, which will come along in 2021, and a number of products that SACRE wants to do. And then Chris also mentioned early on the EOS and the hiring here and in the states of people to go out and engage to make sure that we are doing the EOS the way that Hermes does EOS. So that's my rundown.

Thank you.

Our next question is from Kenneth Lee with RBC Capital Markets. Please proceed.

Hi, thanks for taking my question. Wondering if you could just share with us your expectations for near-term fund flows on the money market fund side, especially when you combine what you're seeing in terms of activity around the corporate and government clients, as well as seasonality impact. I think the fourth quarter is typically a strong quarter. Thanks.

Debbie, your turn.

Sure. Generally speaking, our liquidity products do see inflows at the end of the year. That may be mitigated to some degree by lower interest rates and by what was already a huge inflow in the second and the beginning part of the third quarter. Already a lot of that cash was in our products and maybe different types of cash was included, you know, stimulus cash that's now being utilized for its original purpose, sort of flight to quality cash. I do think, depending upon what happens from an election perspective, short-term markets don't like change for that matter. You'll see a flight to quality if there's any kind of contested or questionable issues associated with the election. You'll probably see treasuries go a little bit lower in that interim time period, repo go a little bit lower on a rate basis because of it with flows coming in. So demand exceeding supply at that point until we do get some stimulus in the marketplace. On the other side of the market with the credit markets from a prime and a muni standpoint, it's more than likely that you'll see a little bit of spread widening and some outflows if that would in fact be the case. But generally speaking, the fourth quarter is usually a strong one for positive flows.

Great. Appreciate the color. Thank you very much.

Our next question is from John Dunn with Evercore ISI. Please proceed.

Thanks. Hi. A little more on the pipeline. You talked about mostly fixed income. Is the fixed income that's in there similar to what's inflowing now? And then maybe has the time to funding changed at all? And also the equity piece, I'd be interested to hear what that comprised of.

Sure. So on the fixed income side, it is similar to what's happening now. Strong in terms of high yield in particular, that makes up a good bit of that pipeline. And then at the other end of the spectrum would be short duration. And so we're seeing a similar mix to what's in place now. On the equity, side of the equation that's actually a couple of the Hermes institutional mandates that they've won that are expected to come in and then we have some offsets there we always give a net number so the equity number is you know a couple hundred million in and a couple hundred million that we expect to that we know about that's going to go And I just want to stress on funding. It's always hard to predict. These are known wins, and a lot of times we get a range of funding. We'll tend to pick the low end of that range. The timing can vary. These are not necessarily Q4 inflows. Some of them we know we'll fund on into next year.

Got you. And then just a little more on MEPC, maybe how, you know, the current environment we're in, how it impacts, like, the push and pull between putting money to work but also, you know, potentially benefiting from disruption.

Did you say MEPC? Yeah, that's right.

Yeah, well, Zachary, you want to talk about the timing there? You might be on mute again.

Sorry about that. So timing of new clients is hard to predict. What I can tell you is the projects that MEPC is engaged with continue to be developed and handed in and continue to generate income. And the reason for that is that if you look at the United Kingdom, MEPC is involved along with some of our businesses in other towns. and particularly our specialization of regenerating the inner city of the smaller cities in the United Kingdom. And there's been a move towards those, partly because there's been a national policy to move out of London that the government was trying to push, and partly because technology makes it easier and you go away from the very expensive southeast of the United Kingdom and particularly London as a course. So in terms of the availability of projects, We're continuing to, if you look at the MEPC projects, these are multi-year projects that continue to work apace. If the question is how does that open the door to attracting clients, it does, but it takes us many years to land one of these large clients. So there are talks that are ongoing. We cannot predict when they happen, but when they do, like I said at the beginning, they tend to be commitments for 15 years on average.

Thanks very much.

And our final question is from Robert Lee with KBW. Please proceed.

Good morning, everyone. Thanks for your patience and taking questions. I guess I have a couple, you know, maybe I want to talk a little bit about ETF strategy. I mean, you talked a couple of times about things to come in 2021. And so maybe this is jumping the gun, but Clearly, you've seen BlackRock and maybe some others, their ETF businesses benefit from demand for ESG strategies. Given your expertise, would it be reasonable to assume that's going to be the focus of your initiative to try to differentiate yourself in that way?

Well, that will certainly be included. The overall picture, though, is that the active ETF market is maybe in the second inning going into the third. And there are a lot of filings going on on active, but the assets are only less than 3% of the total in the entire ETF business. And so our activity is geared around coming up with a handful of strategies next year, probably... you know, a couple of fixed income and a couple of equity. But behind the curtain, we've got to develop the support, the technology, the strategy, and the distribution, which is what we're doing right now, in order to get to that level. And then next, following that, we'd have another whole gang of offerings, more or less in a second tranche. By the time all this happens, I would suspect that most, if not all, of those mandates will have been fully integrated in ESG. And much the same as Sacker has said on these calls before, that in the old days when you said Hermes, you said ESG integration. Part of the reason for the name change was the reverse transformational merger of federated such that when you say federated Hermes, you don't say ESG integrated. so they would all be part of the whole machinery. And we think that this puts us in a very good competitive situation for people so interested because, yes, you can engage with some of the companies, but if you're passive, you're just buying the index because you're buying the index, and you're not evaluating the risk-reward profile of those underlying companies based on the data and information you have from honest and authentic engagement.

Great. And maybe the follow-up, you know, Chris, obviously you've talked about investing in your EOS, ESG capabilities, you know, ETS. I wanted to ask about kind of your institutional business. I mean, your fixed income flows have certainly been good, good pipeline, you know, performance. generally in fixed income, I think it's been good for a long while. But if you look at kind of your fixed income separate accounts, 30-ish, just under $30 billion, $30 billion is a nice number, but compared to some institutional players out there, it's certainly much smaller. Do you feel like there's an opportunity or need to kind of revisit some of your maybe institutional marketing or get better market share or is that a lower priority compared to some of the other things that are going on?

Well, I assure you that there are several individuals at Federated Hermes for which that is their top priority. And so we're seeing that in RFP activity, and we think that the numbers that Ray was talking to you about where we have Things like high yield integrated and working very rigorously on the short cash on that integration is helping us, especially with large mandates from governmental clients and large pension funds that are focused on the ESG part of it. But another thing to look at, and this applies across the board who are federated during these times, That is the relationships that have been built have enabled us to let the clients understand the quality and diversification of the offerings that are available. That's why we've had $45 billion of sales so far this year. That's a gross number, of course, but it's an all-time high. That gives us a lot of confidence, even during these COVID times, that we are able to present those kinds of things to clients. Now, it's a little more difficult trying to get new ones when you're not traveling. But the ability to do old ones and respond with mechanics and computers for RFPs, that still works. But I appreciate your point that our fixed income institutional money should be bigger than $30 billion, and I will pass that message on to our head of sales in the next hour.

Fair enough. And just one last question. I appreciate your patience. And I know you don't present the business this way, but I was just curious if it's – I'm getting a sense of, you know, if we look at flows this quarter or maybe year to date – you know, if we were thinking about kind of the Hermes, you know, UK business versus, you know, federated. And I know it's one team, one dream, but just trying to, you know, get some sense of, you know, the relative contribution from, you know, from the Hermes business and, you know.

Yeah, Rob, it's Ray. You know, for this particular quarter, the flows would have been, weighted to the legacy federated side of the equation, although Hermes had positive net sales on a long-term basis as well. But for this particular quarter, meaning Q3, it came more from the legacy federated side, and we've seen that work both ways in the couple of years of history that we have.

And Rob, I would add to that that when you use the term a HERMES contribution, meaning our UK operation, you cannot underestimate the importance of the EOS data and the methodologies associated, which we've covered at length on this call, as part of the HERMES contribution to the ethos and branding of federated data. And I would just ask for the noise that's been picked up here. I have 38 grandchildren, and I understand the challenge.

I can't imagine what your Thanksgiving is going to be like this year without most of them. Sorry about that. Thanks for taking my questions.

Thanks, Rob.

We have reached the end of the question and answer session. I would like to turn the conference back over to management for closing remarks.

Thank you, Sherri. That concludes our remarks for today. We thank you all, including our youngest participants, for joining us today.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a great night.

Thank you.