Federated Hermes, Inc.

Good day, ladies and gentlemen, and welcome to the Federated Hermes Q4 2021 Analyst Call and Webcast. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Raymond J. Hanley, President, Federated Investors Management Company. Sir, the floor is yours.

Good morning and welcome. Thank you for joining us today. Leading today's call will be Chris Donahue, CEO and President of Federated Hermes, and Tom Donahue, Chief Financial Officer. And joining us for the Q&A are Saka Nsebi, who is the CEO of the International Business of Federated Hermes, and Debbie Cunningham, our Chief Investment Officer for the Money Markets. During today's call, we may make forward-looking statements, and we want to note that our 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, and good morning, all. I will review Federated Hermes' business performance, and Tom will comment on our financial results. 2021 ended with record long-term assets under management of $221 billion, including record assets in fixed income, $98 billion, and record in alternative private markets, $23 billion. Gross sales of long-term strategies reached another record high in 2021, hitting nearly $70 billion, a 14% increase from 2020. Net sales in these strategies nearly doubled to just under $9 billion. Assets under advice by EOS at Federated Hermes were $1.6 trillion at the end of 2021. We added one new client in the fourth quarter and 10 during the year. Looking first at equities, fund flows were negative in the fourth quarter by about $1.7 billion. with outflows in growth and international strategies. Equity SMAs had fourth quarter net redemptions of about 56 million, and equity institutional separate accounts had 987 million of net redemptions, including 549 million from a UK-based client. We saw positive net sales, however, in 18 equity strategies, including Global Emerging Markets SMID, US SMID, and Global Equity ESG. Looking at areas of focus for equity business in 2022, we are providing clients with research and thought leadership on asset classes and strategies that have responded well in past inflationary periods. Within equities, these include dividend income, international, emerging markets, and value strategies. Our largest equity strategy, the Strategic Value Dividend Strategy, is off to a solid start in 2022 with positive returns and early net sales for both the fund and the SMA. We have a robust suite of international equity strategies managed both in London and in the U.S. Several of our London-managed equity strategies produced solid net sales in 2021, including Global Equity ESG, $849 million, SDG Engagement, $565 million, Asia X Japan, $437 million, and Global EM-SMID, $166 million. All three of the international strategies managed from our Cleveland office are rated five stars by Morningstar. We will continue to emphasize these and other strategies that offer solutions to clients as they manage against higher inflation. Our equity fund performance at the end of 2021 compared to peers was solid. Using Morningstar data for the trailing three years at the end of 2021, 59%, 20 of 34, of our equity funds were beating peers, and 26%, 9 out of 34, were in the top quartile of their category. For the first three weeks of 2022, equity funds and SMAs each had net positive sales, showing a combined total of about 46 million. And we had 18 equity funds with positive net sales in these first three weeks of January. Turning now to fixed income. Q4 net sales were just under $500 million, as institutional account net sales of $752 million and SMA net sales of about $60 million were partially offset by fund net redemptions of $330 million. Fixed income separate account net sales were driven by high yield, $407 million, and multi-sector, 327 strategies. Within fixed income funds, high yield strategies showed net sales of $424 million, led by the SDG engagement high yield credit uses fund. Net redemptions occurred in ultra-short bond fund and certain other short duration strategies. We had 19 fixed income funds with positive net sales in the fourth quarter, including strategic income, muni and govi ultra-shorts, inflation protected securities, floating rate strategic income, and total return bond fund, and of course others. In the fourth quarter, We successfully launched our first two active transparent ETFs, an investment-grade short-duration corporate bond fund and a high-yield short-duration bond fund. We are focused on the growth of these initial products while we also plan for additional ETF offerings in 2022. Regarding performance, at the end of 2021 and using Morningstar data for the trailing three years, We had eight fixed income funds, 22%, in the top quartile, and 17 funds, 47%, above median. For the first three weeks of Q1, fixed income funds and SMAs had net redemptions of about $34 million. During the same period, we had 17 fixed income funds with positive net sales, including solid results in total return bond fund and high yield. Ultra-short funds were negative. In the alternative private market category, net sales of over $200 million included unconstrained credit of $193 million, absolute return credit of $91 million, and private equity of $39 million. This was partially offset by net redemptions in direct lending and infrastructure. We successfully launched in Q4 a new vintage of our Private Equity Series, PEC 5, and a new vintage of our European Direct Lending Series, European Direct Lending 2. PEC 5 had initial funding of 342 million in the fourth quarter, and European Direct Lending 2 had 272 million in commitments for later funding. We are continuing marketing efforts to raise additional assets in each of these strategies this year. We began 2022 with about $800 million in net institutional mandates yet to fund into both funds and separate accounts. These additions are expected to occur in alternatives, private markets, including unconstrained credit, direct lending, trade finance, and fixed income. Fixed income wins include core, flexible credit, and investment-grade credit strategies. Now moving to money markets. Assets were up about $34 billion in the fourth quarter, with about $20 billion from funds and $14 billion from separate accounts. In addition to seasonal trends, we benefited from ongoing stimulus-driven liquidity growth as well as wins in certain institutional market segments. Our money market mutual fund market share, including subadvised funds, was about 7.4% at the end of the year, up from 7.2% at the end of the third quarter. With the market pricing in a series of hikes in short-term rates in 2022, including the first increase in March, we've begun to see increases in the rates in the three-month and longer portions of the money market curve. Tom will update how this impacts our yield waiver outlook. We believe that higher short-term rates will benefit money market funds beyond waiver relief. As in the 2009 to 2016 period of near zero rates, money market funds have retained most of their assets, even as alternatives offered higher yields. Over the span of the last Fed tightening cycle that began in the fourth quarter of 16 through the last rate hike in the fourth quarter of 18. After an initial decline, our money market fund managed assets increased by about 15%. The industry followed a similar pattern when, after initial decline, it was followed by growth of 11% over that time frame. The higher rates helped us continue to grow these assets by an additional 22% through the third quarter of 19 when the Fed began to ease rates. Similarly, industry money market fund assets also grew in this period, showing a 14 percent increase. Now, we closely monitor and comment on the SEC's proposed money market fund regulatory changes. The comments submitted to the SEC by us and others clearly note that swing pricing is not a workable alternative for institutional prime and muni money market funds. We believe that most institutions would not use these products if swing pricing were to be imposed. In addition to uncertainty around redemption proceeds, large scale system changes would be required by both money fund managers and investors to enable swing pricing to work. In our view, few, if any, will undertake these efforts. As a result, We expect that most of the assets currently in institutional prime and muni funds would shift to government money market funds, as many did the last round of changes in 2016, or to products like our private prime fund that are not subject to 2A7 money market mutual fund regulations. We have approximately $8 billion in client assets in institutional prime and muni funds that would be impacted if swing pricing were to be imposed as described. Taking a look now at recent asset totals, managed assets were approximately $651 billion, including $436 billion in money markets, $90 billion in equities, $98 billion in fixed income, $23 billion in alternative private markets, and $4 billion in multi-asset. Money market mutual fund assets were $294 billion.