This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Greetings and welcome to Federated Hermes Q2 2021 Analyst Call and Webcast Conference. 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.
spk12: Thank you, Laura. Good morning and welcome. Thank you all for joining us. 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 Sacher Nasebe, who is the CEO of the International Business of Federated Hermes, and Debbie Cunningham, 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?
spk14: Thank you, Ray. Good morning, all. I will review Federated Hermes business performance. Tom will comment on our financial results. Q2 ended with a record total assets under management of $646 billion, including record assets in each of equities, $101 billion, fixed income, $91 billion, and private markets, $21 billion. Assets under advice by EOS at Federated Hermes also reached a record high of $1.75 trillion, with a T, at the end of the second quarter. We added two new clients in the second quarter in addition to the three we added in the first quarter. Now, while equity fund flows were slightly negative in the second quarter, about $300 million, we saw positive Q2 net sales in 18 equity fund strategies led by international global with about $1.1 billion in net flows. Here, net sales were strong again in our UK-managed sustainable strategies, including SDG engagement, Asia ex-Japan, global equity ESG, and global emerging markets. Our equity fund performance compared to peers was solid, Using Morningstar data for the trailing three years at the end of the second quarter, 53%, that's 16 out of 30, of our equity funds were beating their peers. 23%, which is 7 out of 30, were in the top quartile of their category. Among the performance highlights, using Morningstar data, the soft closed five-star Kauffman small cap fund finished in the top 12% for Q2. in line with its long-term record. At the end of the second quarter, its trailing three-year record was top 16%, and it was top decile for the trailing five and ten years. It was fourth quartile for the trailing one year. Equity SMAs had Q2 net redemptions of about $162 million, down from about $450 million in Q1 and $900 million in Q4. Equity institutional separate accounts had about $950 million of net redemptions, including $817 million from a UK-based client. For the first three weeks of the third quarter, Equity funds and SMAs had positive net sales of about $115 million. Turning now to fixed income. The second quarter was another very solid quarter of growth and performance. Assets increased by $4.3 billion, or 5% from the prior quarter, with about $3.2 billion, or nearly three-quarters of the growth, coming from net sales. We had 21 fixed income funds with net sales in the second quarter, led by multi-sector funds with about $1.8 billion, and high-yield and other corporate strategies with about $400 million. Within high-yield, net sales were again led by a UK sustainable strategy, i.e., the SDG Engagement High-Yield Credit Fund, with $350 million. Fixed income separate account net sales of $1.1 billion were led by multi-sector mandates. At the end of the second quarter, and using Morningstar data for the trailing three years, we had 10 funds, 28% in the top quartile, and 16 funds, 44% above median. For the first three weeks of the third quarter, fixed income funds and SMAs had positive net sales of about $835 million. In the alternative private market category, net sales were driven by our differentiated trade finance strategy with net sales of nearly $600 million. We begin the third quarter with about $1.9 billion in in net institutional mandates yet to fund into both funds and separate accounts. These fundings are expected to occur in private markets with a concentration in unconstrained credit and in fixed income. Now moving to money markets. Assets were up nearly $11 billion in the second quarter with just under half from funds and the rest from separate accounts. Our money market mutual fund market share, which includes our subadvised funds, was about 7.4% at the end of the second quarter, up slightly from the first quarter percentage. As we said on our previous call, we believe that Q2 was the high watermark for money market fund yield waiver impact. As we expected, the Fed raised the administered rates in mid-June moving repo rates from 0 to 5 basis points and interest on excess reserves from 10 to 15 basis points. While the Fed movement was a step in the right direction, the money fund yield curve remains very flat, and we are experiencing more waivers for competitive purposes. Tom will update our yield waiver outlook for the third quarter. Taking a look now at recent asset totals, Managed assets were approximately $638 billion, including $421 billion in money markets, $99 billion in equities, $93 billion in fixed income, $21 billion in alternative, and $4 billion in multi-asset. Money market mutual fund assets were at $293 billion. Tom? Thanks, Chris.
spk13: Total revenue for the quarter was down from the prior quarter due mainly to the impact of higher minimum yield and competitive waivers. Q2 carried interest was $6.2 million lower than Q1, which included the impact of consolidating certain variable interest entities, or VIEs, from the 2020 Hermes GPE acquisition starting in Q1. Other revenue increases from Q1 included the impact of higher money market assets increasing revenue by $5 million, an additional day increasing revenue by about $5 million, and higher equity and fixed income assets increasing revenue by $3.4 million. Q2 performance fees and carried interest were $4.4 million compared to $9.4 million in Q1, which included the catch-up in carried interest related to the VIE consolidation. Looking at operating expenses, the decrease in comp and related from the prior quarter of about $11 million was due largely to that Q1 consolidation of the VIEs previously mentioned and lower incentive compensation expense. The decrease in distribution expense of $6.3 million compared to the prior quarter was mainly due to the impact of minimum yield waivers partially offset by higher distribution expense incurred for competitive purposes. The negative impact on operating income from minimum yield waivers on money market mutual funds is currently estimated to be about $38 million for Q3, down from the $46.8 million in Q2. The Q2 waivers were slightly higher than expected due mainly to related higher asset levels. The Q3 estimate is based on our investment team's expectations for portfolio yields and our recent asset levels and mix. The amount of minimum yield waivers and the impact on operating income will vary based on several factors including, among others, interest rates, the capacity of distributors to absorb waivers, asset levels, and asset mix. Any change in these factors can impact the amount of minimum yield waivers, including in a material way. As Ray said in the beginning, we are not undertaking any duty to update this information throughout the quarter. In the UK, recent legislation will increase corporate income tax rate from 19% to 25% effective on April 1, 2023. As a result, our Q2 income tax provision of $35.2 million included $14.5 million or 11 cents per diluted share to revalue certain deferred tax assets and liabilities. Non-controlling interest decreased from the prior quarter due mainly to the decrease in income earned by Hermes from this UK tax change, partially offset by an increase in the value of investments held by consolidated funds. During Q2, we purchased 993,000 shares of our stock for approximately $32 million. As mentioned on our last call, and as contemplated in the put call option deed executed When we purchased our majority interest in Hermes Fund Managers in July 2018, which we publicly filed at the time, a request for valuation was made in April by the BT Pension Scheme. The valuation firm was subsequently engaged. We continue to work with the pension scheme pursuant to the agreed upon procedures in the option deed. We are also planning to close an amendment to our credit line extending the maturity to 2026 and reducing the total line from $375 million to $350 million. At the end of Q2, cash and investments were $424 million, of which about $314 million was available to us. Debt at the end of the quarter was $65 million. That concludes our prepared remarks, and Laura, we would like to open the call up for questions now.
spk09: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation film will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the start keys. One moment while we poll for questions. Our first question comes from the line of Ken Worthington with JP Morgan. You may proceed with your question.
spk10: Hi, good morning. Thank you for taking my questions. Maybe first on the competitive fee waivers for money market funds being on the rise. I would have thought that given the pressure on revenue from lower rates, that competitive fee waivers would be maybe diminished, not, not increasing. So can you give us a little more flavor on what's driving, like we know this is always a, like a competitive business, so nothing really changes there, but, but why the, um, increase in competitive fee waivers? Is it maybe one, one competitor in particular, or is it, is it broader based than that? And then last time, when we think about sort of six, seven, eight years ago, did you see, following the financial crisis and the zero-rate environment, did competitive fee waivers increase then during that period, or is this time different? And I guess ultimately we're trying to figure out why.
spk14: With competitive fee waivers, as you note, Ken, it is forever a constant situation. In this one, we cannot predict or figure out why certain competitors decide to do certain things over a certain period of time. There are a lot of variables in the equation. Some competitors want to increase their footings. Others have creative uses of how things work inside their funds. We just try to do the best we can to stay competitive. It is not a predictable or assignable thing, and as you know, it's not possible for us or the competitors to find out from each other why they're doing certain things on the pricing. So that's the way it is. I do not recall competitive waivers being altered that much in the post-08 timeframe.
spk10: Okay, great. Thank you.
spk13: Can I just follow up on that? This time, the rates are lower than they were back in the 2008 time frame.
spk01: This is Debbie. One other factor to add into that is the mix of assets. So much more is in government funds at this point compared to the 2008 time frame. where more than half of our assets were in prime funds, and the prime funds obviously maintain a higher yield, so the waivers are less. Now that you've got, you know, 80% of the industry in government funds with a curve on the government side that is five to six basis points, that's, I think, where some of the positioning and changes have occurred.
spk10: Okay. Great. Thank you. I'm going to wrap two tiny questions together. One, trade finance, you guys mentioned this, seems to be taking off. I am a bit naive on the product, but the yield doesn't seem particularly good, and the returns don't look good to other fixed income asset classes, so clearly I'm missing something. What has driven this product to take off? And then the other tiny one is, any planned outflows from BTPS over the next six months? Thanks.
spk14: So on the trade finance, the beauty of trade finance is is that like other large institutional wins, it takes a long time to make these sales. And you have different people using the trade finance differently. Some use it inside a portfolio instead of using cash. Others use it as a short-term investment where you get more yield than you get on cash, and you have a short portfolio and a diversified look at assets in the marketplace. And so maybe from your perch on the tree, you don't like the yield, but I assure you from these clients' point of view, for what they're doing and what they're looking at, it's a very, very strong offering.
spk13: So on BTPS, Ken, we're not really too excited about talking about our clients. They told us, as we've said previously, Some time ago, last time we were addressing their asset levels, they had planned on taking out their public market money, and so I think I'll just leave it there.
spk10: Great. Thank you very much.
spk09: Our next question comes from the line of Dan Fannin with Jefferies. You may proceed with your question.
spk06: Thanks. Good morning. My question's on kind of the alternatives bucket, private markets, and you had decent flows or solid flows, I should say, in the second quarter. And just curious about kind of the fundraising environment. You mentioned, you know, an overall backlog of unfunded, you know, stuff around just under $2 billion. So curious around how much of that is, what the breakdown of that is in terms of the AUM, but also just the outlook for the alternatives business as there seems to be some momentum there.
spk14: Well, as we mentioned, the $1.9 billion is concentrated in unconstrained credit and fixed income. A further break, John, I think Ray might be able to add some color.
spk12: Yeah, Dan, there's more to come on the trade finance side. So we would have that along with the unconstrained credit and in the alternative category. and that would be in total about $1.2 billion out of the $1.9 billion. So that's where the more recent momentum is. Within fixed income, it's high yield, but it's also absolute return credit and core bond and some short-duration money.
spk06: Okay, thank you. And then just to follow up on the question, the option with Hermes and where that sits. I heard your comments, but can you update us just on a time period, just generally of what we should expect and how this, the process evolves from here. And so we can think about, you know, helpful around that timing side.
spk13: Okay, Dan. So as you know, we said April is when they, requested evaluation and then we hire a firm and we have not received the report from the firm. Once we get a report, there's process of whether it fits into a range where if either party puts or calls it, it has to happen. There's also an opportunity to, if either party is not happy with the evaluation, then they can request another evaluation. So you see the first evaluation took from know april and we don't have it yet and uh how long would the second one take you know i don't know but that's kind of the dynamics that are involved in terms of timing okay thank you our next question comes from the line of william katz with citigroup you may proceed with your questions
spk15: Okay, thanks very much. So just backing away from fee waivers for a moment and looking at the long-term business, as you think about the incremental growth of what's coming in the door versus what's been going out the door, can you talk about how you sort of see the fee rate and the outlook for the base management fees relative to that growth?
spk14: I assume, Bill, here you're talking about money funds when you're talking about the waivers. I'm sorry to interrupt you, Chris.
spk15: Just to qualify, just stripping away the few waves, I think that's pretty straightforward. I'm just looking at the long-term side of the business, just trying to get a sense of volume versus fee rate.
spk14: Yeah, and what we see happening on the money market fund side is an increase in M3 or M2 or whatever M you want to look at, rather importantly, and that historically money market funds are a percentage of that, 0.2%. The banks don't want the deposits. Now, obviously, that can change, and some banks can do balloon squishing between their deposits and, say, money funds. But net-net, that is a growth inspiration for the money fund. Overall, since so about, I think it's 1990, the retail prime shareholders, retail prime shareholders have gotten $250 billion dollars more in yield than they would have gotten in an MMDA. That will always obtain because the banks pay administered rates and the retail prime funds pay a market rate. So overall those are a couple of influences in addition to the core fact that the money fund is a beautiful thing giving individuals real pricing and and real yields at the spear point of the short-term rates. And that applies to both issuers and to users, i.e. shareholders. So now you say, well, what about competitors? Every year there's less and less competitors, and yet the competitors can be just as ferocious when there were a lot more of them. And as I said in the answer to the first call, we can't predict how various organizations are going to evaluate how they should price these things. So it's really hard to say what will happen longer term on the pricing. But we don't expect a diminution in the economics that we have going right now on these things. Now, of course, we have to argue with the Fed about the delightful existence of the institutional prime products, which we all know about, but that's just the regular ebb and flow of the battles we've had for how many decades.
spk15: Okay, thank you for that. I just want to rephrase. I was actually more interested in the equity fixed income multi-asset and the alts bucket as I sort of just trying to get a sense of as it seems like a lot of mandates are shorter duration and or fixed income and or SMA in scope. So I'm just trying to understand as that volume comes in and if we strip away the impact of the money market business, how should we be thinking about the base fee rate, the management fee rate, the blended fee rate for the company as we look forward?
spk12: Sure, Bill. It's Ray. That is a little hard to predict because we do have a lot of products, a lot of strategies, and as I think you know, Typically, the separate accounts generally, including SMAs, would be lower fee than, say, mutual funds. If you look at the equity blended fee rate for Q2, it was down about two basis points compared to the prior quarter, and that's clearly a function of mix. That's not us... you know, changing the pricing. Fixed income was flat, and, you know, multi-asset was actually up, and alternatives were flat. So it would be hard to give you a... And I appreciate the difficulty of modeling it, of trying to predict it, you know, given the number of strategies. But I think if your premise is that... we'll have lower fee rates, the more success that we have on the institutional side compared to the retail side. We would agree with that, though we're happy to win that business.
spk14: I would add, Bill, that longer term, one of the reasons that we engaged with Hermes UK was for the private markets business. And I think it would just be instructive to let Sacher make a comment or two about the real estate part of this at this time.
spk00: Thank you. So two things that I'll say. The first one is about the real estate and then about the equity and fixed income business that's within the international operations of Federated Amis. The real estate business, we have two main businesses. is actually a mutual fund or the equivalent of a mutual fund. And we have evolved that. It used to be only available for UK investors who are institutional. And we have now evolved it to be open up to other non-institutional investors or non-UK institutional investors. And that is an important step for us. It has a very strong track record and very much the top of the pile over 10 years and has a steady flow of fees that are public denominated. So that's strong. The other part of our business is where we really make much more of our income. And that comes in something we call placemaking. And placemaking is when we take cornerstone institutional investors with very large investments, typically on a journey to develop an area in a town, mostly in the cities that we revive again. by working very closely with the local authorities. And the journeys typically are 10 years to 15 years. They have stages along the way. They pay us a base management fee and a performance fee. And this business of ours continues to grow. Now, the issue with this one is you cannot predict a direct cash flow year by year because it's not like selling a mutual fund. But you can over the long term see an increase in our fees as we expand our business and we continue to have strong interest in it. from clients, not just from the UK, but actually from around the world. Some of our largest clients are non-UK based and we look to expand that elsewhere in the future, but that'll take time. Just to go forward to the other business, which is the fixed income and equity business run out of our London offices. Now, you're right, institutional businesses will demand a lower fee than institutional businesses, but there are two factors to take into account into the mix of the London business. The first one is our largest client, as you heard from Chris, sorry, as you heard from Tom, has indicated to us at the time of the acquisition that they will decline over time, the public market exposure. Now, by definition, they were the largest clients and you'd expect them to get the fees commensurate with being the largest client we have. As these are replaced by other clients, you would expect us to charge fees which are normal for other clients. And that implies an increase in the margin mix. And the other one is, as we increase the sales into new products, particularly in the so-called sustainability and SDG products, both on fixed income and equity, we can charge reasonably strong fees for those as well. So over time, we would see that expanding as well.
spk15: Okay, that's much better. Thank you so much. And then sort of follow up, just as we think about Kauffman with a small cap fund and BTPS, is there a way to sort of size what the ultimate assets that still may be at risk in terms of potential runoff?
spk04: Maybe from the pension scheme?
spk15: Right, and also with the small cap being soft closed, what's the aggregate size of that portfolio today?
spk12: Well, that fund is a little bit under $10 billion. And on the BTPS side, we're just not at liberty to talk about them with specificity.
spk15: Okay, thanks. I'm sorry if I wasn't clear on my initial question.
spk09: Thank you. Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.
spk05: Great. Good morning. Thanks for taking my questions, everyone. So, you know, maybe the first one, real simple, and I apologize. I may have missed this earlier if you guys highlighted, but the very simple, just what the performance fee impact may have been, if any, in the quarter, and then I guess maybe, Debbie, a question for you. I mean, the Fed did what you expected last quarter. Here we sit today. Can you maybe update us on what your thoughts are as we look at over the coming quarters for the prospects for either the short end of the yield curve to steepen again or any other type of Fed action that you think could help the short end of the curve?
spk13: Yeah. Rob, hi. The performance fees for Q2 and carried interest were $4.4 million compared to $9.4 million in Q1, which had the catch-up from the VIE. And Debbie?
spk01: Sure, Rob. So, yes, much like an economist, maybe we were a little bit early, but the Fed did what we wanted them to do. In March, they increased the amount per RRP participants from $30 to $80 billion. In June, as Chris mentioned, they increased the technical factors by five basis points. We're is perhaps with the debt ceiling behind us next month, Treasury has been paying down bills in order to get the government's cash balance within the limits required for the debt ceiling by tomorrow, by July 31st, so effectively today. And they will start using then at the beginning of next week other measures in order to fund the government. And in doing so, we expect Treasury bill issuance to pick back up again. So we think that within the next, you know, over the next month and a half or so, you'll continue to see until a debt ceiling is reached. You'll see not major, but not minor either, medium term increases in treasury bill issuance that will maybe get a basis point or two on steepness in the curve. Now, does that translate into extra yields on the fund? Eventually it will, but only a basis point or so. We then think the next move by the Fed or discussions, continued discussions by the Fed will be with tapering. We saw that at the June meeting. It was mentioned again by Chair Powell. We think it will be discussed to some degree in Jackson Hole. And our expectation would be at the September meeting, you see an announcement of when and how tapering will start, what security selections, what amounts, what time frame. And we think that will begin, that process will begin before the end of the year, which likely adds another basis point or two in steepness to the Treasury yield curve. And the prime curve will back up commensurate with that. And then ultimately, as that tapering discussion gets into more or tapering process gets into more of a full force sort of mechanism in the first half of 2022, we'll see an extra basis point or two come from that. But ultimately, you still don't probably get to a yield curve that's much steeper than maybe 15, 10 to 15 basis points and where you finally then get, you know, a broader release comes with ultimate, uh, you know, fed funds, target rate action, which we think could come by the end of the second half of 2022. And we were very thankful with the, um, release of the information from the June meeting on the updated expectations by the members themselves. that they were sort of in the 2022 range and had been previously with their March release of that economic data and expectations.
spk05: Great. Thanks for that comprehensive answer. And maybe, Chris, I could squeeze in one more question on ETFs and ESG. So, you know, you've touched on this in some prior calls. You know, you've hired some people to run that business for you, and obviously there's been very strong demand for ETFs within sustainable or ESG frameworks. You could update us on where that initiative sits and maybe what we should be looking for over the coming year.
spk14: I assume you were asking about EOS.
spk05: Well, I was thinking about if you were... Okay, fine.
spk14: Okay, well, right. We're still very positive about doing it. Obviously, we have a couple of short-term funds that are going to be the first ones out of the box. We still expect them to have birth dates with this year's handle on it. The active part of the business is only about 4% of the total ETF business right now. So, as we like to say, it's still early innings. And There are other structures that people are catching up with where you could actually do a mutual fund and an ETF in the same structure. Now, whether that works or not, whether the SEC likes it, whether there are patents and things like that involved, all have to be evaluated. But basically, it's a packaging thing where you've got at least half of the business, meaning the non-retirement half, who find the ETF to be a better mousetrap, primarily because of taxes and trading. It doesn't work in the retirement half of the business, so it's one of the packagings that we think is necessary for the future. So we're working diligently with the providers, and that's about as much update as I have. Eventually, we will be adding products. We sort of have a line on who will be next in line, but that will be a 22 event, and those are subject to change, so I'm not going to give you the list of who's who next on the list.
spk12: And, Rob, while we're not going to go through a specific list, we are certainly evaluating and looking at sustainable strategies related to ETS.
spk07: Great. Thanks, guys. I was just taking my questions.
spk09: Our next question comes from the line of John Dunn with Evercore ISI. You may proceed with your question.
spk07: Hi, good morning. Your money market mix has changed a ton since the last peak. Could you maybe talk about some of the mix shifts you've been seeing recently or you might expect to see as we go forward, things like where products, how it shifts between products, client types, expense ratios, that kind of stuff?
spk14: Debbie, why don't you take it from the point of view of where you're seeing the monies in the types of funds, and then Ray will comment on the economics thereof.
spk01: Certainly. Well, we have seen more from a 2A7 money market fund standpoint. More of the inflows have come into the government funds, and that has a whole lot to do with where net yields are right now. Most net yields are at a one to three basis point level. And for many investors who are comfortable and have been in prime funds, it doesn't really make a whole lot of sense because they're not getting any extra incremental income from a net yield perspective by being in those types of funds. So we've seen our prime money fund, 2A7 money fund assets decline. Where we've seen increases The prime side, however, has come in the non-2A7 business. So offshore, separate accounts, local government investment pools, they seem to be trending more toward the prime space. And the mix of assets on an overall liquidity business basis has remained fairly steady, but with a larger proportion of governments in the 2A7 space, and a larger proportion of primes in the non-2A7 space.
spk12: John, I would just add to that. We think of liquidity as kind of a spectrum, and we recently put a couple of new short-duration, micro-short funds out to sit between the money fund choice and the ultra-short bonds that we already are very, very strong in. I would not tell you that we've had any significant shift in the client mix. We're active with our bank clients. We're active directly with corporations, including some of the largest, on a direct basis. And those clients have a very sophisticated and tiered approach to how they manage cash, and hence our product line has evolved to... to give them options that fit with the segmentation that they're doing on their cash.
spk14: One more thing I'll add, John, and that is that when Debbie talks about the non-2A7 products increasing in prime, one of the things behind the curtain there is that because of the SEC rule that the 30% weekly liquidity threshold, if it's threatened or crossed, then you threaten the client with a fee or a gate. This caused more redemptions in the prime funds that were subject to 2A7. When you look at the charts, we didn't have any of those issues in the other funds that are non-2A7. This inspires part of our commentary to the SEC that you've got to eliminate this link. It was a mistake when they put it in, and so they just ought to remove it because it did hurt the resiliency of those funds because the 30%, which was supposed to be a liquidity buffer, actually ended up being a floor, and you couldn't hardly use it. So that's one point I'd like to make. The second point is as things have changed over time, four-plus decades in money funds, we don't lose clients. They may move from over this type of product to another type of product or another solution, whether it's a private solution, whatever. Even when the massive amounts of prime were shut down because of the 14 amendments implemented in 16, the clients moved over to our Gavi funds. So, Part of the reason for that is our heritage and devotion to the business, our defense of the stakeholders here, but also because, as Ray mentioned, these clients diversify. That's what he means by tiered approach. They do not put all their money with one purveyor. They move it around and keep it diversified, and that, of course, is helpful to us.
spk12: John, just one other thing. When you talk about the clients, while the nature of the clients haven't changed, how they think about their cash does. For example, the banks, certain of the larger banks that we're working with are managing their balance sheet and looking at their deposit level and are looking for alternatives for placing cash. And we work actively with them to help solve that dilemma.
spk07: Great, thanks. And then on the long-term side, just as we hopefully continue to move to a more normal environment, what's the outlook and maybe your plans for Hermes strategies for US institutional clients?
spk12: We're active in presenting Hermes strategies through our institutional sales effort, and we've had some success there over the last quarter. Some of our wins have been in the Hermes strategies. So that's very much an active effort. The add-on to that would be we're working on the private market business and expansion of that in the U.S. That's going to have a longer time horizon to it, but we're looking to port the success that Hermes has had in the U.K. and EU over to the U.S. market.
spk15: Thanks very much.
spk09: Our next question comes from the line of Kenneth Lee with RBC. You may proceed with your question.
spk08: Hi, good morning, and thanks for taking my question. I know that Federated has historically been open to bolt-on acquisitions, so just wondering if you could give us any updated outlook for the potential for M&A. Thanks.
spk13: Yeah, Ken. Federate Hermes has been interested in acquisitions for a long time. We talked about the foot call, so that's obviously out there. We continue to have our team out there, particularly looking at money fund transactions. We continue to be in discussions and looking there. You mentioned both on acquisitions. We'd call those centers of excellence type of deals. We continue to be interested in those and meeting with people. There's nothing that I'm pointing to now in terms of some eminent thing going on, though.
spk08: Gotcha. Very helpful. And then one follow-up, if I may, just on the money market side. Wondering if you could just further qualify the level of competitive activity you're seeing. Are you seeing competitors doing relatively uneconomic or potentially irrational actions, and therefore you would think these kind of actions are relatively unsustainable longer term? I just wanted to get a better sense of that. Thanks.
spk14: I would prefer not to use any adjectives in order to describe how I think about what the competitors are doing. I have no way of knowing what their relative economics are, or with some of the bigger ones, what other things they have going that enable them to do things here that we might not see as the wisest thing to do. So it's just really tough for me to jump on all the adjectives, even though I might be enthusiastic to do so.
spk08: Understood. Thanks again. Thank you.
spk09: Our next question comes from the line of Patrick Davitt with Autonomous Research. You may proceed with your question.
spk03: Hey, good morning, everyone. I'll follow up on the trade finance and the broader kind of alternatives traction, which is obviously good to see, and to Bill's question on the mix of fees. As we're kind of new to, you know, we're still kind of getting our heads around what your alternative business is doing. Could you kind of walk through how the management fee structures of all these products are structured? Are they mark-to-market type structures, committed capital type structures, kind of thinking about the tenor of the management fees that will be coming in from this $1.9 billion of mandates you're talking about?
spk12: Well, Patrick, the way they're priced differently than the funds, we have a fee schedule, but each one of them gets priced individually because typically they're larger than the top end of the fee structure, so I don't have a rate that I could give you on the upcoming wins. We can talk about the overall blended rate of those businesses. Away from the funds, the private market accounts are around a 40 basis point blended advisory fee rate. Again, you have individual accounts all around that blended number.
spk03: Okay, fair enough. And last one, I remember a few years ago you had talked about searching for an Asian partner. Is that something we should still consider an aspiration, or have you kind of pivoted to building that distribution out yourself?
spk13: Searching Asian market. Yeah, Chris will follow up. So remember, we put... The Federated Hermes London team together with the Pittsburgh team and the London team is working on expansion plans. Maybe, Sacher, you want to talk a little bit about that? Their expansion plans are organic growth right now. Sacher?
spk00: Sure. Since we combined both teams, we have consolidated in our Asian headquarters, which is based in Singapore. From Singapore, we have strong relations with South Korea, which we have dedicated team members that visit on a regular basis. We are also looking at Japan. where we're looking in the future to have a permanent position, and we've also started a permanent office in Australia. So we're putting down, if you like, a flag in each of the main markets, and we continue to grow our business organically. Our contention is that the combination of the products managed out of Pittsburgh and managed out of London are particularly attractive to clients in the Asia region, they tend to be institutional longterm and that's something that we have experienced in doing. So it takes time to bring them in, but they, but they tend to be very good longterm clients. And that's the plan that we continue working on for the present.
spk14: And Patrick in specific answer to the question about what we were talking about a few years ago, uh, there's nothing hot on the agenda on that right now, but we haven't abandoned the concept of finding a big distribution partner, who appreciates exactly what Sacher just said, and therefore we can have a confluence of arrangements. The covetization of this process was not helpful because basically you've got to be able to travel the deal and spend the time, the long time that's necessary in order to create one of these bigger type partnerships. So that's the specific answer, Patrick.
spk08: Great. Thanks, guys.
spk09: Our next question comes from the line of Brian Bedell with Deutsche Bank. You may proceed with your question.
spk02: Great. Thanks very much. Good morning, folks. I apologize. I joined the call late, so I'm not sure if you covered this. But if not, can you update us on NetFlux into what you consider dedicated sustainable products? I think they were very strong in the first quarter, so I just wanted to get an update. on that if you have it. And then if you can just frame the total AUM in dedicated ESG funds across the franchise, both between, of course, Hermes liquid and alternative products and the federated branded products in the U.S. that have started on that as well. And then I have a second follow-up related to that.
spk12: So, Brian, we talked about the international global where we had about $1.1 billion on the fund side of net flows. Virtually all of that, let's say $1 billion of it, would have been coming from UK-based sustainable strategies. On the fixed income fund side, we mentioned the SDG Engagement High Yield Credit Fund, which had about $300 $50 billion. There were some others in there as well. So that would be another, say, $400 million. And then the other thing to add to that would be the fund side that you asked about. We also had institutional accounts, unconstrained credit, and others. And I don't have that total handy. That's something we could follow up with you on.
spk02: Okay. Yeah, that'd be great. And then just in terms of the product development, I'm not sure if you covered this as well, but any thoughts on launching cash management strategies that are dedicated to ESG? I know BlackRock converted quite a few of their cash strategies over to dedicated sustainable investment processes. I don't know if there was any interest in doing that for federated.
spk14: Well, I'm going to let Debbie run a victory lap on this one, but let me introduce it by saying that when we did the reverse transformational deal with Hermes, we wanted to integrate all of our investment management with ESG so that you get ESG baked in the cake. And guess who was first at the starting line and the finish line to get that accomplished was the money market funds. And I will let Debbie tell you how that worked and how that plays in the funds.
spk01: Thanks, Chris. And certainly, Brian, given the high-quality short-term security types that we use in the money funds, what we basically did was add an additional layer of input into our credit process. So our team management approach for money market funds consists of team members that are investment analysts, portfolio managers, and traders. So through our investment analyst positions, we added the EOS and ESG informational content that was provided both by external as well as, more importantly, internal sources and are using that actively in our assessment for the credit securities that we're using within our portfolios. Our prime funds were the first ones to be integrated just simply because of their large use of international global banks and industrial types of firms and the coverage of those types of issuers by the ESG assessors and analysts. But most recently, we've made a lot of progress integrating our government funds as well. with the beginning of engagement strategies with all of the various GSEs that we use within our portfolios for the government funds, the home loan banks, Fannie Mae, Freddie Mac, TVA, the farm credit system. We are beginning discussions or have begun discussions with all of them, fully integrating then our government funds as well. In addition, because many of our municipal funds also rely on the banking system for their letters of credit and guarantors, those have also been fully integrated. So our level is very high and our amount of input, given the high-quality short-term issuers that we use in these portfolios, has been very impactful and substantive.
spk14: And so, Brian, the answer you should detect from that, without mentioning any particular competitor, is that when you're dealing with a federated Hermes money market fund, the word Hermes basically embeds ESG in the process. And when you look at a money market fund that's designed to go for minimal credit risk, anytime you see risk somewhere, you want to evaluate it for your purposes. And that's what we're doing here. So we view our products as fully integrated on ESG and able to stand up against anybody on that score.
spk02: Yep, that's great. That's great, Tyler. Thank you.
spk09: Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.
spk05: Great. Thanks for taking my follow-up. I appreciate the patience today with all the questions. But, you know, Chris, going back to sticking with the money fund business, I guess, you know, certainly in the last year or so, post-March of 20, you know, there's been a lot more regular talk about, you know, The reforms, quote, didn't work, you know, in air quotes, that were instituted, which I don't think really surprised you or most observers. But obviously going back to drawing board, trying to, you know, regulators rethink or think about what they can do. And it seems like most of what they're talking about is a rehash of old proposals that were discarded. But is there anything that you're hearing or seeing in terms of, you know, the old proposals or something new that, you know, is, I'd say, more concerning to you or you're more focused on, that regulators seem to be focused on, that we should be aware of?
spk14: Rob, the list of things is, as you say, a rehash. I consider a whole lot of zombies coming back from the dead. because most of them are just different forms of killing money funds or killing prime money funds or killing muni money funds. If that's what they want to do, then they've got to be straightforward about doing it. I'm not aware of anything other than removing the mistake that was made by linking the 30% weekly liquidity with the threat of fees and gates, which did compromise the resiliency of funds. But part of the issue really here is that the Fed from the mid-'70s has wanted to eliminate these money funds and uses any opportunity to do so. And we make the argument that the money fund is simply a transparent collection device, a de facto operating entity of bank paper and commercial paper. And don't forget, the Fed in 1913 was started in order to help and assist the commercial paper market. And so when the Fed takes an action, by simply looking at the transparent and available money market funds, they can put a nice softening touch to the entire market by just dealing with the $53 billion that they dealt with the last time, lose no money, take no risk, and do their liquidity deals. So... We look at the whole thing as the only structural vulnerability that was created was really the link of the 30%. We also think that the Fed could do a lot more, and certainly ought to, before they go about shooting money funds. For example, doing an all-to-all type market where people can really trade these short-term securities. And there are things they can do related to leaving the discount window open, reevaluating SLR in a crisis, and things like that to make the liquidity work smoother and still do everything totally consistent with Dodd-Frank, where all you do is help liquidity and don't help individual people in advance. P.S., that's not what they did when they helped ETFs.
spk01: Let me add one thing. In addition to what Chris is saying about the Fed, we do think one of the things that they did at their meeting this week where they announced the standing repo facility takes away some of the emergency actions they need to do. So this replaces their temporary open market operations. that they beefed up, you know, in the February, March, and April timeframes and allow for this standing repo facility. You know, it's the opposite of the standing reverse repo facility that they have. It's there for, you know, borrowing, not investing, so people putting transactions back to them, putting collateral back to them rather than them, you know, taking the cash. and giving the collateral. But in fact, we think maybe that is a sign of their willingness to look at facilities that are more permanent in nature and able to help in a crisis rather than just coming up with emergency lending facilities, you know, when they're on the brink of, you know, problems.
spk04: Great. That was helpful. Thanks for taking my questions and your patience.
spk09: Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Ray Hanley for closing remarks.
spk12: Well, we thank you all for joining us today, and that will conclude today's call. Thank you.
spk09: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.
Disclaimer