Federated Hermes, Inc.

Greetings and welcome to the Federated Hermes Inc's first quarter 2021 analyst call and webcast conference call. 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. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Ray Hanley, President of Federated Investors Management Company. Thank you, sir. You may begin.

Thank you. Good morning and welcome. Leading today's call will be Chris Donahue, President and CEO of Federated Hermes, and Tom Donahue, Chief Financial Officer. And joining us for the Q&A are Sacher Nussebi and Debbie Cunningham. Sacher is the CEO of our international firm. business, and Debbie is the chief investment officer for money markets. During today's call, we may 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 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. I will review Federated Hermes business performance and Tom will comment on our financial results. Q1 was another quarter of solid performance for Federated Hermes. With a challenging backdrop of the global pandemic and fluid markets, including rising long-term rates and short-term rates falling to extreme lows, we executed successfully against the variables that we can influence. We produced solid sales results. as we have over much of the last year during corona time in fact we achieved record high gross 5.6 billion and net 1.2 billion equity fund sales and total fund sales of gross of 15.3 billion A recent IGNITE study noted Federated Hermes' long-term mutual fund organic growth rate of 15%, and that ranked seventh in the industry for net flows over the 11-month period ended February 28th of 21. In Q1, our long-term strategies had net sales of $3.2 billion. We crossed over the $200 billion mark for long-term assets in the first quarter, finishing the quarter with a record high just under $206 billion of long-term assets. We also continue to grow our differentiated EOS at Federated Hermes engagement function. We added three new clients in the first quarter, and assets under advice reached $1.5 trillion, up from $1.3 trillion at the end of 2020. Our staff level of engagers and other specialists reached 68, up from 49 in the first quarter of 2020. Equity managed assets reached a record high of 96 billion and had net sales of about 600 million. Equity fund net sales of 1.2 billion were partially offset by net redemptions in a separate account of $600 million. Equity gross sales increased 38% from the fourth quarter and 28% over the first quarter of last year. We saw positive net sales in 19 fund strategies in first quarter. Sustainable strategies managed by our UK teams drove the strong equity fund sales led by global emerging markets over $400 million, global equity ESG over $400 million, SDG engagement equity over $400 million, and Asia X Japan over $300 million. Other funds with net sales in the first quarter included Impact Opportunities and MDT Small Cap Core. Our Global Emerging Markets Fund shareholders have been informed that the strategy will close to new investors effective June 15th. Existing shareholders will continue to be able to invest in the fund. As announced in December, the Kauffman Small Cap Fund had a soft close effective March 1st during the first quarter here. The five-star $10 billion fund had net redemptions of about $30 million in the first quarter, due in part, we believe, to the soft close. Certain model portfolio applications that were unable to continue to use the closed strategy had lumpy redemptions in March and April. And while there's no guarantee as investor preference and other factors can change, resulting in further redemptions, We currently believe that these redemptions will dissipate in the near term. Early indications in April appear to support this view. Using Morningstar data for the trailing three years at the end of the first quarter, 20% of our equity funds were in the top quartile and 53% were above median. For the first three weeks of the second quarter, Equity funds and SMAs had net sales of about $30 million. Turning to fixed income. Assets reached another record high of $86 billion at the end of the first quarter, up more than $2 billion from year end, and up $22 billion, or 34%, since the first quarter of last year. The Q1 growth was again driven by strong net sales of just under $3 billion. Our broad array of solid fixed income strategies was well positioned to meet market demand. We had 21 fixed income funds with net sales in the first quarter. Q1 net fund sales leaders were ultra-short bond fund with about $1.6 billion, the multi-sector total return bond and short intermediate total return bond funds, combined for nearly $600 million and continued strong results in high yield with nearly $400 million. Within high yield, net sales were led by another UK sustainable strategy, the SDG Engagement High Yield Credit Fund with $686 million. While our domestic flagship five-star institutional high yield bond fund Q1 growth sales were up 20% from the fourth quarter, the fund had net redemptions of about $300 million due to a $600 million redemption from one client who made a tactical change in their asset allocation strategy. The fund has returned to solid net sales of nearly $150 million here in April, and has produced net sales in 22 of the last 25 quarters. Corporate, high-yield, international, multi-sector, municipal bond fund categories all had net sales, as did our fixed income SMA strategies. Across sectors, short-duration strategies were in demand. We saw another solid quarter of net sales for the UK-based unconstrained credit strategy with net fund sales of nearly 80 million and a couple of new institutional wins as well. Fixed income separate account net sales were led by multi-sector and corporate mandates. At the end of the first quarter and using Morningstar data for the trailing three years, we had 26 percent of these funds in the top quartile and just about half of the funds above median. For the first three weeks of the second quarter, fixed income funds and SMAs had net sales of about $160 million. We begin the second quarter with about $1.6 billion in net institutional mandates yet to fund into both funds and separate accounts, including about $700 million in unconstrained credit and $500 million from three new trade finance wins. Now moving to money markets. Assets were down about a billion in Q1 from year end. Our money market fund market share, including subadvised funds at quarter end, was about 7.4%, down slightly from the year end market share of 7.8%. While we've seen Longer-term interest rates increased recently. Short-term interest rates remain at historic lows with yields on money market securities dropping to the low single digits over the last couple of months. As a result, minimum yield waivers were greater than anticipated in the first quarter, and certain money market separate accounts have begun to be impacted in a similar way. Minimum yield waivers are expected to increase again in the second quarter before declining over the rest of the year, as we noted in our press release. As usual, we are experiencing waivers for competitive purposes as well. Against the challenging interest rate and yield environment, money market funds continue to show their resilience and value to investors, issuers, and the overall financial system. The most recent ICI statistics show $4.5 trillion in money fund assets, up from $4.3 trillion since year end, and $3.6 trillion at the end of 2019. We believe that the lower interest rate challenge will pass, despite the Fed's current stance. It's hard not to conclude that the pandemic recovery and the massive stimulus being unleashed will not lead to interest rate increases. We also believe that as we enter another round of the 40 plus years of money market fund regulatory discussions, the truth that the March 2020 market disruptions in the midst of the global pandemic were in no way caused by money market funds and the essential role of money market funds play in our capital markets will be recognized by regulators. We expect the regulatory process to follow the data. Any regulatory changes should be based on facts, not false narratives, and should preserve issuers' and investors' ability to utilize money market funds. Now, taking a look at recent asset totals, managed assets were approximately $640 billion, including $430 billion in money markets $99 billion in equities, $88 billion in fixed income, $19 billion in alternative and $4 billion in multi-asset. Money market mutual fund assets were $306 billion. We announced earlier this week an agreement with Hancock Whitney Bank's Horizon Advisors that is expected to transition about $568 million in equity and fixed income assets from the Hancock Horizon funds. This follows a similar transaction with Hancock in 2017 that transitioned $435 million in assets. Subject to regulatory and fund shareholder approvals and other customary conditions, these transitions are expected to happen in September. And recall that these numbers, the 568 million, is not in the AUM today, nor is it in the pipeline figures. In closing my remarks, I'd like to thank our employees and clients for resilience and adaptability as demonstrated over the last year. It's gratifying to see progress in many places in moving past the worst of the pandemic. As we head towards mid-year and with vaccines now available to all U.S. adults, we're planning for the staged return of more employees to our U.S. offices during the summer.