Federated Hermes, Inc.

Good morning, ladies and gentlemen, and welcome to the FHI Q3 2022 Analyst Call and Webcast. At this time, all participants have been placed on a 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, Mr. Ray Hanley, President of Federated Investors Management Company. Ray, the floor is yours.

Thank you. Good morning, all. 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 Sacher Nassavi, who is the CEO of Federated Hermes Limited, 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 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, all. I will review Federated Hermes' business performance. Tom will comment on our financial results. While Q3 presented challenging market conditions across asset classes, Our business mix enabled Federated Hermes to achieve positive net sales in equities, fixed income, private markets, and long-term assets overall. We also produced increases in revenue operating in net income compared to the prior quarter as growth in money market revenue offset lower revenues from market-based decreases in long-term assets. Looking first at equities. Assets declined due to the negative market and FX impact. However, Q3 net sales were $182 million compared to net redemptions in the prior quarter of $969 million and for Q3 of 21 of $1.4 billion. Equity net sales were driven by the strategic value dividend strategy. The domestic strategy had third-quarter net sales of nearly $1.6 billion, with both the fund at almost $600 million and the SMA at about $1 billion, producing solid net results in sales. We also saw third-quarter positive net sales in 15 equity fund strategies, including several international equity strategies like Asia X Japan, International Strategic Value, China equity, international equity, international growth, and emerging markets equity. The domestic MDT small cap core and MDT large cap growth also had solid net sales results. Net redemptions were concentrated in gross strategies of about $555 million in Q3 and down from $955 million in Q2, still reflecting difficult market environment for these strategies. We continue to emphasize asset classes and strategies that have responded well in past inflationary periods, including dividend income, international, emerging markets, and value strategies. Now, our equity performance at the end of the third quarter compared to peers was solid. Using Morningstar data for the trailing three years, at the end of the third quarter, almost 60% of our equity funds were beating peers and 40% were in the top quartile of their category. For the first three weeks of the fourth quarter, Combined equity funds and SMAs have had net redemptions of 192 million. We have 13 equity funds with positive net sales in the first three weeks of October, including strategic value dividend, Asia X Japan, international strategic value dividend, and international equity. Now let's turn to fixed income. The third quarter saw overall net sales of about 1.1 billion. Fixed income separate account net sales of 3.2 billion were partially offset by 2.1 billion of fund net redemptions. Fixed income separate account net sales were driven by multi-sector strategies. Most of the Q3 separate account net sales came from a large public entity. Within funds, Our flagship core plus strategy, total return bond fund, total return bond, saw net sales of about 750 million, benefiting from a long-term performance record that has led to expanded distribution opportunities. Core plus and other multi-sector fixed income SMA strategies added another 209 million of net sales. Within fixed income funds, net redemptions of about $1.4 billion occurred in the three ultra-short funds. In addition, high-yield funds had about $462 million of net redemptions, down from about $860 million in the second quarter. Even so, we had 12 fixed income funds with positive net sales in the third quarter, including Conservative Municipal Microshort, Muni High Yield Advantage, Total Return Government Bond, and others. Regarding performance, at the end of Q3 and using Morningstar data for the trailing three years, just over 60% of our fixed income funds were beating peers, and 22% were in the top quartile of their category. For the first three weeks of Q4, fixed income funds and SMAs had net redemptions of about $693 million. And this is mainly from ultra-short funds, about $400 million, and high-yield, almost $200 million. During the same period, we had 14 fixed income funds with positive net sales led by conservative municipal micro-short total return bond fund, short-term income, and ultra-short government bond fund. In the alternative private markets category, net sales of $17 million included real estate, Prue Baer, MDT market neutral, and this was partially offset by net redemptions in infrastructure, private equity, trade finance, absolute return credit, and unconstrained credit. We continue marketing the fifth vintage of PEC, P-E-C, our co-invest private equity structure, and the third vintage of the Horizon Private Equity Fund. We begin Q4 with about $2.9 billion in net institutional mandates yet to fund into both funds and separate accounts. About $2.6 billion of this net total is expected to come into private market strategies, including private equity, a little over a billion, direct lending, about a billion, and unconstrained credit, 400 million. Moving to money markets. Assets increased in the third quarter compared to the second quarter. Money market fund assets increased about 12 billion, benefiting from higher yields and continued elevated liquidity levels in the financial system. Money funds also benefited from higher yields relative to deposit alternatives. We continue to believe that higher short-term rates will benefit money market funds over time, particularly as compared to deposit rates. Money market separate accounts were down by 10 billion, mainly from seasonal factors related to timing of tax payments. our money market mutual fund market share, including subadvised funds, was about 7.4% at the end of the third quarter, up from about 7.3% at the end of the second quarter. Now, looking at recent asset totals as of a few days ago, managed assets were approximately $626 billion, including $437 billion in money markets, $77 billion in equities, $89 billion in fixed income, $20 billion in alternatives private markets, and $3 billion in multi-asset. Money market mutual fund assets were $304 billion. These figures include approximately $3.5 billion in fixed income assets from the C.W. Henderson transaction which closed on October the 1st. Tom?