Federated Hermes, Inc.

Good day, ladies and gentlemen, and welcome to the Federated Hermes Q1 2022 Analyst Call and Webcast. At this time, all participants have been placed on listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Ray Hanley, President of Federated Management Company. Sir, the floor is yours.

Good morning and welcome. Leading today's call will be Chris Donahue, Federated Hermes CEO and President, and Tom Donahue, Chief Financial Officer. And joining us for the Q&A are Sacher Nasebi, the CEO of the International Business of Federated Hermes, Federated Hermes Limited, and Debbie Cunningham, our Chief Investment Officer for Money Markets. During today's call, we may make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

Thank you, Ray, and good morning. I will review Federated Hermes' business performance over the quarter, and Tom will comment on our financial results. Looking first at equities for Q1, total net redemptions were $78 million. down from the prior quarter's $2.7 billion. Equity separate account net sales were a positive $80 million, while equity funds had net redemptions of about $158 million, each showing improvement from the prior quarter. Notably, the domestic strategic value dividend strategy had Q1 net sales of about $933 million, with both the fund at $442 million and the SMA at $490 million producing solid net sales. We saw positive net sales in 18 equity fund strategies, including several international equity strategies, such as Asia X Japan, SDG Engagement, International Equity, international strategic value dividend, global equity ESG, impact opportunities. Back on the domestic side, the MDT small cap core fund also produced $127 million in net sales. Not surprisingly, net redemptions were concentrated in growth strategies reflecting difficult market conditions for these activities. With inflation concerns prevalent, the area of focus of our equity business include asset classes and strategies that have responded well in the past inflationary periods. These include dividend income, international, emerging markets, and value strategies. The Q1 sales improvements were concentrated in these categories. Our equity performance at the end of the first quarter compared to peers was solid. Using Morningstar data for the trailing three years at the end of Q1, 61% of our equity funds were beating peers, and 39% were in the top quartile of their category. Now, for the first three weeks of Q2, combined equity funds and SMAs had net redemptions of $109 million. We had 21 equity funds with positive net sales in the first three weeks of April, including the Strategic Value Dividend, the International Strategic Value Dividend Fund, Global Equity ESG Impact Opportunities, and International Equity. Now turning to fixed income. Q1 net redemptions were about $2 billion. Net sales of just under a billion in fixed income separate accounts were offset by $3 billion in fixed income fund net redemptions. Our fixed income separate account net sales of just under a billion were driven by multi-sector strategies. Within fixed income funds, the three ultra-short funds had net redemptions of about 1.4 billion. The institutional high-yield bond fund had about 750 million of net redemptions. All categories of bond funds had debt redemptions reflecting market conditions. However, we had 17 fixed income funds with positive net sales in the first quarter. Our floating rate strategic income fund, the SDG engagement high-yield credit, climate change high-yield credit, strategic income, inflation-protected securities, short-term government, total return bond fund, and conservative municipal micro-short. Regarding performance, at the end of the first quarter, and again using Morningstar data for the trailing three years, 61% of our fixed income funds were beating peers, and 19% were in the top quartile of their category. For the first three weeks of Q2, fixed income funds and SMAs had net redemptions of about $1.1 billion. In the alternative private market category, net sales of $139 million included real estate of $215 million, direct lending of about $57 million, Prue Baer about the same number, Trade finance, $30 million. And these were partially offset by net redemptions in private equity and in infrastructure. So we begin Q2 with about $1.1 billion in net institutional mandates yet to fund into both funds and separate accounts. Additions are expected to occur in alternatives, private markets, including private equity, unconstrained credit, and direct lending. Fixed income wins include core, flexible credit, and government debt strategies. Moving to money markets. Assets declined about $27 billion in Q1 compared to UN totals. As money market fund assets decreased by $33 billion and our separate account money market assets increased by about six billion. Our total money market assets at the end of Q1 were just above the total that we had at the end of the first quarter of 21. Seasonal trends impacted both money market funds and separate accounts. Rising interest rates and competitive pressure also impacted money market fund asset levels. Our money market fund market share, including some advised funds, was about 6.9% at the end of Q1, down from about 7.4% at the end of 2021. With the first Fed hike last month and a series of additional increases expected, money market fund minimum yield related fee waivers decreased in Q1, Tom will update us on our yield waiver outlook. Market expectations are that the Fed will increase the pace of interest rate hikes. While we welcome higher money market yields, we believe that measured increases would be better for money market funds compared to direct investments. However, though more rapid rate increases may initially favor direct investments, we believe that higher short-term rates will benefit money market funds over time, particularly compared to deposit rates. And we've noted this in history. We said during the last quarter that during the last Fed increase cycle that began in Q4 of 16 through the last rate hike in Q4 of 18, after an initial decline, our money markets market fund managed assets increased by 15%. The industry followed a similar pattern with an initial decline, followed by a growth of 11% over that same timeframe. 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. Industry money market fund assets also grew in this period, showing a 14 percent increase. Now, on the regulatory front, we recently filed two comment letters with the SEC on their proposed money market fund rule changes, including a primary comment letter of 115 pages and a separate 45-page letter on the deviance of swing pricing. Our comments and those from others 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 from a client's point of view, large-scale systems changes would be required by money fund managers, intermediaries, and investors to even enable swing pricing to function. 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 municipal money market funds would shift to government money funds, as many did with the last round of changes in 2016, or move to products like our private prime liquidity fund, that are not subject to money market mutual fund regulation under 2A7. We have approximately $8 billion in client assets in this category of institutional prime and municipal funds that we believe would be impacted if swing pricing were to be imposed as the SEC is proposing. We also commented that the SEC proposed requirement that stable NAV money market funds convert to a floating NAV of future market conditions resulted in negative money market fund yields would lead to material outflows from U.S. government money funds to bank deposits or, again, other non-regulated investment products. Now, taking a look at recent asset totals, managed assets were approximately $617 billion, including $413 billion in money markets, $87 billion in equities, $91 billion in fixed income, $22 billion in alternative private markets, and $4 billion in multi-asset. Money market mutual fund assets were $269 billion. Tom? Thanks, Chris.