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spk08: 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.
spk11: 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?
spk13: 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.
spk02: Tom?
spk12: Thanks, Chris. Total revenue for the quarter was down 2% from the prior quarter due mainly to lower average equity assets, higher money market fund waivers, and lower performance fees, partially offset by higher money market assets, higher alternative private market assets, and higher fixed income assets. Q4 carried interest and performance fees were $3.7 million compared to $5.1 million in Q3. Operating expenses increased slightly in Q4 compared to Q3. Compensation unrelated was down due to lower incentive compensation expense. Advertising and promotional increased due to higher advertising and conference expense. We saw some restoration in travel and related expenses during Q4 when pandemic-related restrictions eased. With short-term rates moving up in anticipation of Fed rate hikes beginning in March, we estimate that the negative impact on operating income from minimum yield waivers on money market funds for Q1 will improve to about $22 million. compared to 38 million in Q4. Assuming a Fed rate hike in March, we expect the Q2 negative impact to decrease about 90% from Q1 estimated levels. Estimates are based on our investment team's expectations for portfolio yields and recent asset levels, asset mix, and other factors. 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 changes in these factors can impact the amount of minimum yield waivers, including in a material way. Now, looking at expenses for a minute, for the future, overall, most expense line items will be impacted by inflation for Q1 and for all 2022. Known comp and related items, including things like payroll tax and bonus restricted stock, will increase in Q1 by about $8 million. New hires, wage increases, bonus reset increases, we expect will occur in Q1 but we're not going to predict by how much. Of course, there are less days in Q1 versus Q4, reducing net revenue. Distribution expense is expected to increase as rates rise. System and communication is expected to increase as we continue to invest in the technology supporting our business. Advertising and promotion, the full year of 2022 should look similar to the full year of 2021. Travel should increase as we hope to return to more normal operations. As you heard Chris mention, our ETF and our private markets business plans are being implemented along with the successes that he mentioned. So overall, we're going to continue to invest for growth and we will deal with the reality of inflation. At the end of 2021, cash and investments were $427 million, of which about $397 million was available to us. During Q4, we purchased over 4 million shares of our stock for approximately $145 million. Debt at the end of the year was $223 million, reflecting both the acquisition of the remainder of the BTPS interest in Hermes during Q3 and the Q4 share repurchases. Now net cash and investments were $147 million at the end of the year. We continue to be active in buying our stock. We are monitoring the debt financing market and may pursue long-term financing arrangements to supplement our cash flow from operations to fund share repurchases, potential acquisitions, to pay down part of our existing debt, and for other corporate purposes. Depending on market conditions and other factors, we're considering long-term debt financing of approximately $300 million. That concludes our prepared remarks, and Kate, we would like to open the call up for questions now.
spk08: Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. If you wish to withdraw from the queue, please press star 2. We do ask that if you are listening via speakerphone to please pick up your handset for optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone now. Our first question today is coming from Dan Fannin at Jefferies. Your line is live. You may begin.
spk03: Thanks. Good morning.
spk02: I guess to start on the fee waiver guidance in terms of
spk03: the assumptions as you think about the improvement here to March without any Fed change? Is that assuming asset levels as of 1231 or asset levels as of the numbers you gave today? And then is it based on the current yields, expectations of further improvements, just a little bit more color on the kind of shorter term dynamics before the Fed actually moves?
spk12: Yeah, it's... The asset level is as of, I think, January 21st. And, Rach, do you want to comment on that, Debbie?
spk01: Certainly, yeah. We're looking at what will continue to be, in our minds, the expectations of a steepening yield curve as we get into the months of February and March and closer to that March FOMC meeting.
spk03: Got it. Okay. Thank you. In terms of the expenses, appreciate the color around inflation and the seasonal dynamics for the first quarter and some of the other color, but is the fourth quarter levels a good starting point when we think about that comp reset? Because it came in lower, the 124 in the fourth quarter, just thinking about was there a true up and maybe also whether performance or incentive fees in the fourth quarter as well, just trying to think about we should just be adding aid and some inflation to the 124 if that was artificially low?
spk12: Yeah, so we didn't have a great year in terms of 2021, so you saw the incentive comp went down at the end of the year as we analyzed and looked at how much should be paid out. So we reset those for 2022. And, you know, I already mentioned the $8 million of kind of normalized type things. How much you want to go up from there, we expect it to go up, but we're just not going to speculate on how much. The reason is because any time I do that, I've just been wrong because things change in the marketplace so much that we got tired of forecasting and then being way off.
spk00: Okay. Thank you.
spk08: Thank you. Our next question today is coming from Patrick David at Autonomous Research. Your line is live.
spk06: Hey, good morning, everyone. Personal waivers, some of the other large money fund complexes have suggested it can take a few months for the waivers to come off as much as you guys are getting to. So what gives you the confidence that you can be kind of 90% off you know, that rapidly, that quickly after the first hike?
spk01: You know, everybody's factors are a little bit different. It's asset levels, asset composition, how much is in government, how much is in prime, how much is in muni, you know, the dynamics of the curves between those sectors, what the actual outlook would be on an expectations, whether it's, you know, additional moves beyond March, or only one or two moves throughout the year. You also have the expense factors that are being charged. Those are not uniform across the market, and as such, the waivers aren't uniform based on those. So there's lots of different factors that go into that determination and calculation.
spk06: Yeah, thanks. And I appreciate the guidance on $8 billion in funds that would be impacted by the swing pricing, but swing pricing appears to have been accepted in Europe. So why are you so draconian on the reaction in the U.S.? Just out of curiosity.
spk13: It deserves draconian response. And in Europe, they don't really do it on real money market funds, except that they're pricing them more or less out of a black box. What it does is you end up with pricing that makes the product unusable. And customers, at moving a 4%, if 4% redemption occurs, then you have to go to a swing price. And the customers aren't going to know that that's going on in a non-volatile timeframe, and they're going to be surprised to the negative to get hit with what amounts to a redemption fee through the mechanism of a swung price. The mechanisms that have to be put in are expensive, time-consuming, and of no value. And so why are customers going to do that? Why do we want to do it? And basically, it looks to me like it's enlivening what the Fed said years ago that they wanted to either kill prime and muni funds or, quote, regulate them out of existence. And our view is, from a look at real stakeholder defense, that issuers have the right to issue in and buyers have the right to buy these products that have proven very resilient and very successful over the years, protestations by the Fed to the contrary notwithstanding.
spk02: Thank you.
spk08: Thank you. Our next question today is coming from Ken Worthington at JP Morgan. Your line is live.
spk10: Hi, good morning. Chris, you noted that short and ultra-short bond fund outflows, I believe, in 4Q, and I think you highlighted again so far in 1Q. Given the market is anticipating higher interest rates, Why are these funds seeing outflows? And I noticed this has happened in the past too, but I would kind of think that investors would be allocating more to short and ultra-short, not less as we approach and as we enter a rising rate environment.
spk13: Some of those products have experienced a decline in the NAV, and some clients were not really happy with having a decline in the NAV. And I think it was about $0.04. And so that caused some of those redemptions. But that's just the nature of the product. So I agree with you. People ought to be coming into those, and this is a great time for them to be doing that. But we're still living on the backside of that. Debbie?
spk01: Yeah, Ken, I think what I would add to that is if you looked at the flows over the course of the last several years in the most recent zero-rate environment, they've been very, very positive in those products. And much of the positive flows have come from liquidity assets going into bucketing, segmenting their cash, and taking portions out into that ultra-short space. where those clients are now looking at something that in a rising rate environment, they'd rather be an even shorter product where we have, you know, a whole host of liquidity products that have been growing in addition to our new, you know, both taxable and muni micro short products. So I think the alter shorts will gather assets from longer term bond players as they get shorter but they will lose assets in a rising rate environment back to the even shorter products in micro short and money markets.
spk10: Great, thank you. And then I don't know if Sacher's on the call, maybe Chris you can answer if he's not. Does BT still have meaningful investments with Federated Hermes funds and is there any schedule of planned redemptions or return of capital to BT? I know this is something when the deal was first done, you federated someone, you or maybe it was Sacker, highlighted that those assets were going to come out over time. I just wanted to see where we were in that process.
spk13: Sacker is on the call.
spk09: Thank you. So, I mean, first off, I don't want to talk in great detail about BTPS because it's a main client, but insofar as it relates to the publicly available information, which is to do with the deal, we did say at the beginning that certain assets of BTPS, primarily in public markets, were due to have a life, a declining life, because as a fund, it's a direct benefit fund and it is a maturing fund. However, We also run substantial assets for BTPS in private markets, and not only do they remain invested with us, we continue to discuss with them new opportunities which they are interested in.
spk10: So where do we stand on the public side to update us on?
spk09: On the public side, they are very much on track as per our original agreement with them. So there's no surprises there. The decline is incorporated within our funds. And the key for us now is the private side, which is where the majority of our assets stand.
spk10: Okay. Okay. Thank you.
spk12: And we gave out the levels there when we did the deal. And, you know, we kind of did that so everybody could see where it stood and anticipated not really going into a client detail after that. So that was August, right? In August. Yeah.
spk10: Okay, that's fair. Thank you.
spk08: Thank you. Our next question today is coming from Kenneth Lee at RBC Capital Market. Your line is live.
spk05: Hey, good morning. Thanks for taking my question. I wanted to get a further color on the potential demand for money market fund products, especially as rates start going up. And thanks again for the historical perspective there. Would you also expect a similar dynamic this time, in which case you would see declines followed by growth over time? Thanks.
spk01: Sure, Kenneth. This is Debbie, obviously. Historically, when interest rates have gone up, the initial reaction is for money market funds to lose assets. And generally speaking, over most cycles it lasts longer than it did in the 16 to 18 cycle. We think this will be more like the 16 to 18 cycle because of a couple characteristics. Number one, we're starting from zero again. So that's different than prior increasing rate cycles. And number two, it was caused by a sort of a major event, in this case a pandemic, and ultimately zero has been experienced for a long time because of that particular factor. When you have a Fed, though, like we have now and like we had in 16 to 18, where you've got the preference for communication and a yield curve that effectively reflects expectations of Fed movement. Now, it is dynamic, obviously. If you asked me three months ago or even three weeks ago, my opinion would have been different for what that Fed movement would have been. But the Fed that we have now is very communicative. FedSpeak is out there in unison. And as such, products reflect that from a yield curve standpoint faster than they have in what I'd call more historic markets. Fed tightening cycles. And in this case, again, I'm not even calling it, and the Fed isn't calling it a tightening cycle, as they did not in 16 to 18. It's more normalization. It's getting rates back to where they should be in a more normalized environment with an inflationary environment that also becomes more normalized.
spk13: Ken, let me add also a couple other factors. One is, take a look at the money supply. And all a money market fund is is a function of that in the hands of all the individuals that have money. And so this is a look at what you might call core money market funds, where people just need a cash management service. And this is an inexorable thing that grows. I don't think they're going to start shrinking the money supply. Now it's not a direct factor, and it certainly doesn't turn in quarters like we're looking at, but it is an underlying a feature which enables us to get to higher highs and higher lows. It's one of the ingredients. Another one is that these products over all these decades have shown tremendous resilience and tremendous ability to give the clients what they want. And so that's another big factor in why these products continue to be successful.
spk05: Gotcha. Very helpful there. And one follow-up, if I may, just wondering if you could just update us on capital allocation priorities. I saw they had meaningful share repurchases in the quarter, and you talked a little bit about long-term financing solutions. I wonder if you could just give out a little further color around there. Thanks again.
spk12: Yeah, further color is to look at what we did in the fourth quarter. We weren't very happy with the stock price, and we think the future of the company is great. And so we've been buying more shares. We've got a new share buyback program with $7.5 million. We continue to be active, and we expect to be active. And with the debt levels, we want to look for long-term financing to continue to have availability on the short term.
spk08: and also you know satisfied with the with the rates on the longer term basis gotcha thank you very much thank you our next question today is coming from john dunn at evercore isi your line is live hi guys um you know with waivers kind of on the way out and the outflow i mean the outlook for flows you know
spk14: pretty good. How does that affect conversations with small and money market players? Does it delay kind of the roll-up deals? Basically, how does that dynamic work at this part of the cycle?
spk13: What we have discovered is that the cycle really doesn't drive that truck. It's more of a longer-term internal decision by other potential roll-up candidates as the The CEO and the business people and the CFO of those enterprises decide whether those things make sense for them, given the risk profile and the growth profile. So it just doesn't work as an accelerant. We've been in this a long, long time, and it's hard to connect something that happened in the marketplace with then things releasing. So what's our answer? We simply call on them all the time so that when the opportunities arise, everybody knows that Federated Hermes is a warm and loving home for their money fund.
spk14: Got it. And then you mentioned the strategic value dividend fund is doing better so far in 2022. Can you remind us how that product sold, and do you think there's potential for a pickup there to take up some of the slack in other areas of equities this year?
spk13: We do, and that's why I mentioned the thought leadership that we were putting out into the marketplace. This began many months ago with the belief that perhaps inflation was not, quote, transitory, close quote. And that's to look at the index betas to CPI of various investment areas. And those charts and works showed that dividend stocks, value stocks, And as I mentioned, even international and small cap and obviously tips are the gang of solutions that you can work with to help clients manage around these higher inflation and higher inflation expectations. And so the strategic value dividend fund is right in the middle of the mix for that. And that just underscores one other point here. And that is we like to call ourselves a franchise for all seasons. And so when you get these giant reversals from growth to value and you have inflation, which are different situations than we've had over the last several years, you have solutions for products that are ready and able to go.
spk14: Thanks very much.
spk08: Thank you. Our next question today is coming from Robert Lee at KBW. Your line is live.
spk04: Great. Thanks. Good morning, everyone. You know, just want to maybe go back to expenses a little bit and, you know, Tom understanding don't want to give forward guidance, but maybe just to level set, you know, 2021, I mean, on comp, I mean, clearly some reversal of prior accruals. So if we're trying to think of kind of a, for lack of a better way, putting a normalized comp level? Should we be just averaging the four quarters, understanding in the first quarter last year there was a bunch of noise that would kind of get us to around the $130-ish million level? Is that the best way to think of it as we head into next year?
spk12: Yeah, so it's tough, Rob. The first quarter, that's why I went through inflation and the expenses in the first quarter. And then if we're right and the earnings of the company, because of the rate increases, are going to change, every time we put an accrual in for an earnings quarter, we are supposed to predict what we think is going to be the bonuses and the comp for the year. So come Q1, we're going to have to put an accrual number in And with our expectations of rates going up and, you know, basically taking most of the waivers out, you know, so we're going to have a nice decision to make in there. And that's why I don't want to predict it. Obviously, we took a lot of comp out in Q4 based on, you know, based on the earnings and the other factors. And so would we restore comp? If the earnings are restored, yes.
spk04: Okay, thanks. And then, you know, maybe on the EOS business. So, I mean, trillion six of assets under advisement. I know it's been a place certainly, I think, in the U.S. you've invested in the understanding that it supports kind of the investment process across the firm, you know, more broadly. But, you know, how did you know, how should we think of the economic contribution of that advisory business? Is it really just, hey, you know, gives you greater insights? It's really, or is there, you know, any kind of, you know, potential or meaningful, you know, earnings or revenue upswing that we should be thinking about from that business?
spk13: Zachary, it's your turn.
spk09: Thank you, Chris. I think, look, first and foremost, you have to think about it as essential to our brand at FHI as being the main differentiator with everybody who wants to play within the ESG space, because it gives us particularly deep understanding of all the factors that come to play. And remember that for us, we believe that putting these factors in leads to sustainable wealth creation, meaning they actually add to our alpha. So In many ways, the value that you see that our clients see are reflected also in the understanding of the company that we engage with, in the environment that these companies operate in, and so on. So there is an inherent value in brand, there's an inherent value in understanding companies, an inherent value of actually improving our own performance as the insight that we get is unique to our teams, whether in Pittsburgh, in Boston, or in London. The second thing you should take into account is that Generally speaking, the clients who we do have are clients we have in other areas, and that means that it's a holistic relationship, and it tends to tie clients in. You hear Chris talking about us being a franchise for all seasons, and the one thing that is an overarch in all the seasons, certainly has been in the markets outside of the U.S., has been the EOS relationship because It doesn't matter what you're in. There's always going to be, for the clients, a degree of index investments, and quite a lot of the time we try to get the EOS services for that index investment. That gives us contact and commitment to the clients. If you're asking me, is EOS going to make us an enormous amount of money, the answer is it is by definition not as high margin as other – as directly high margin as other asset management businesses are concerned, but it's a business that we believe is worth pursuing, both from a financial point of view, but also from an understanding point of view.
spk04: Great. Maybe one last question, and this is maybe looking at the SMA business. Clearly, the industry has a lot of movement towards, talk about model portfolios, everyone's It seems like they're trying to, you know, creating model portfolios, trying to get them on platforms. And that's, I mean, not, I guess, a part of the industry that I think you guys have spoken to too often in the past. So can you maybe, within your SMA business, how you kind of are thinking about, or maybe it's a part of it, you know, kind of developing models, capability to try to get that placement as opposed to kind of the more, I'll call it traditional SMA approach, kind of strategy by strategy?
spk13: We would be on both streets, Rob. Reason, I think we talked about this in prior calls. We had one client especially who wanted models along the ESG line, which we set up and are implementing here, I think, in the first quarter. And that was a whole new deal for us. But the model thing and the SMA thing are related. So naturally, we're going to keep repeating what we've been doing on the SMA side. And in addition, working on these models in response to client demand.
spk04: Okay, great. Thanks, Chris. Appreciate you taking my questions.
spk08: Thank you. Our next question today is coming from Brian Bedell at Deutsche Bank. Your line is live. You may begin.
spk07: Great. Thanks very much. Chris, I like the warm and loving home comment on money market funds. You should make that a marketing brochure, especially for frigid temperatures here in the Northeast this time of year. But maybe if I can ask Debbie about one more on the money market fund flow trajectory, and specifically on brokerage sweep. If we think about how brokerages tend to lag deposit pricing, they have very low deposit betas in the first couple of hikes up the cycles. Therefore, clients that do want to get a yield would naturally migrate to money market funds in those sweep systems. um maybe if you can comment on your thoughts of whether you think that would be a positive contributor as the cycle um certainly if the fed hikes you know once per quarter or or at a sustained momentum um and and uh if you can refresh us on the aum that is in um that is in uh the brokerage sweeps within the money fund complex
spk01: Sure. Well, first of all, most brokerage sweeps at this point are within our government sector. That's because of the FNAV nature of the prime institutional and municipal institutional that went into effect in 2016. I don't know that we actually break that out from an FHI standpoint. I think from an industry standpoint, from a public standpoint anyways, but from an industry standpoint, I think about 20% to 25% of the government assets in the market are in that type of a sweep arrangement. And Ray, do you have additional insight from an FH?
spk11: We combine everything that are financial intermediaries, so we don't break out brokers per se. But when you One of the reasons why we looked at the historical growth in two steps coming out of the 2016 cycle was that as the rates rose, we did see exactly what you're talking about. The cash yields in and of themselves become a more attractive asset class. And while that has institutional implications, it certainly, for us, helped us with brokers and other intermediaries who were able to It's some effort on their part to move out of the default option. It's kind of the easiest thing to do with their cash, but they're able to access meaningfully higher yields with us, and that was something we were very active in doing right up until the time where the Fed pretty aggressively moved the rates back down.
spk01: We would expect a similar type of pattern to occur here, so I think it's a repeated pattern that we have some history associated with it, as Ray mentioned.
spk07: Okay, that's helpful. And then maybe just back on expenses, I know it's tough to predict, but in the compensation area, I appreciate, obviously, there's inflation dynamic to that. But if we think about the money market fee waivers, recouping those from that $38 million level, just on the sort of variable component of that, the $38 million improvement to pre-tax, I guess, what type of offset would there be in comp just simply on that better performance, just so we can think of sort of how much may fall to the bottom line?
spk12: Yeah, so, Brian, we're just not going to do it. There's so many variables, just the equity declines in the first quarter and what they do. Whether we make that up in the marketplace by recovery or we make it up in sales or in fixed income or in the private markets. And we're also looking at the new hires that we're trying to get and whether we're going to succeed and how much the cost is with the tight labor market. It's just fascinating. I'm not going to give you any more help on it. Sorry.
spk07: Yeah, that's okay. I appreciate that. It's good color. And just one last clarification. I think, Chris, did you say $8 billion of institutional prime was at risk for that swing pricing?
spk13: I said $8 billion of institutional and muni prime, so that if swing pricing goes in, we've looked at it and said that's about what would be the subject matter. And then, as I said, like the last time, they'll chase that money into the guvies. The last time, we didn't lose any clients. The money just all played musical chairs, and there was less financing in the real market.
spk07: Right. Okay. Yep. That makes sense. Thank you for taking my question.
spk08: Thank you. We have no further questions in the queue at this time. I would now like to turn the call back over to Ray Hanley for any closing remarks.
spk11: Thank you, Kate. That concludes our call for today, and we thank you for taking the time to join us.
spk08: Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.
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