Federated Hermes, Inc. Q1 FY2020 Earnings Call

Greetings, welcome to the Federated Hermes, Inc. First Quarter 2020 Analyst Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to your host Raymond J. Hanley. You may begin.

Thank you and good morning, and welcome. Leading today's call will be Chris Donahue, the CEO and President of Federated Hermes, along with Tom Donahue, the Chief Financial Officer. For the Q&A portion, we have Saker Nusseibeh, the CEO of the International Business of Federated Hermes, and Debbie Cunningham, the Chief Investment Officer for the Money Market. During this call, we will be making forward-looking statements, and we would like to highlight that the actual results for Federated Hermes may differ significantly from those implied by these statements. Please refer to our risk disclosures in our SEC filings. There is no guarantee regarding future results, and Federated Hermes does not have an obligation to update any forward-looking statements. Chris?

Thank you, Ray. Good morning all and welcome to the Federated Hermes earnings call. As we recap the first quarter our thoughts and prayers are with those who have been impacted by the coronavirus, in particular those who have lost loved ones and those recovering from this illness or caring for loved ones as they recover. It is important for us to acknowledge those on the frontlines, especially our healthcare workers who work so hard and at risk to their own health to treat and care for the many thousands impacted by this virus. Your efforts are inspiring and we are all truly grateful. Finally, I want to acknowledge the efforts and resiliency of our own employees all around the world. Over 95% of our employees are working from home, creatively adapting to the new environment and leveraging our technology investments. Federated Hermes is fully operational. We have maintained high-quality service levels for our clients and have taken steps to safeguard the health and safety of employees during these trying times. The global pandemic has impacted all facets of life, including markets and investing. We expect that sustainability concerns will continue to grow in prominence as investors navigate ongoing challenging market conditions. With our EOS engagement business, we represent over $1 trillion of actively managed assets for engagement purposes, up from about $877 billion at the end of 2019. We continue to develop and expand this stewardship and engagement business in the U.S. We have hired several new U.S.-based engagers and are working on adding more. At Federated Hermes, we are delivering leading ESG data research and proprietary tools to over 90% of our investment teams, making us a leader in ESG integration and active responsible investing. We believe that these investment research tools coupled with engagement insights and our leading position in active stewardship through EOS are a key differentiator among active managers seeking to deliver long-term sustainable outperformance, placing us among the largest active managers with integrated ESG capability. Now looking at our equities business, assets reached a record high of nearly $91 billion in mid-February, closed the quarter at $68 billion and were about $73 billion as of April 29th. For Q1, lower market valuations and the impact of foreign exchange led to over 90% of the decrease in assets. While overall net sales of combined equity funds and separate accounts were negative, we did see positive net sales in a number of strategies. In fact, we had 12 equity funds with net sales in Q1 led by the Kauffman Small Cap, Hermes Global Emerging Markets, Hermes SDG engagement, Hermes Global Equity ESG, and the large cap Kauffman Fund. Using Morningstar data for the trailing three years at the end of Q1, one-third of our equity funds were in the top quartile and half were above median. The Federated Emerging Market Equity Fund managed by the Cleveland team that came over as part of the PNC acquisition in the fourth quarter became a 5-star fund as ranked by Morningstar during the previous quarter. Looking at the strategic value dividend strategy, recall that its objective is to provide a high and growing income stream from high-quality companies. The domestic fund's 12-month distribution yield was 5%, which ranked it in the second percentile of its Morningstar category at the end of the first quarter. Overall combined equity fund and SMA net redemptions quarter-to-date through April 24th were $339 million. Now turning to fixed income, assets reached a record high of $71 billion in mid-February, closed the quarter at $65 billion and were at $67 billion as of April 29th. For Q1, lower market valuations and the impact of foreign exchange led to nearly 60% of the decrease in assets. Bond market conditions changed dramatically mid-quarter impacting investments and sales results. Through February we had net sales of bond funds of $340 million, while in March we had significant outflows of $2.2 billion. In April, bond fund and SMAs returned to net positive sales of $320 million through April 24th. We saw categories of funds that had produced net sales in the fourth quarter change to net redemptions in the first quarter. These included high yield and other corporates mortgage backed, multi-sector and munis. At quarter-end, using Morningstar data for the trailing three years, we had four funds, 13% in the top quartile, and 15 funds, 44% in the top half. In a turbulent quarter in the bond markets, each of our two biggest fund strategies improved their already solid records compared to peers. The institutional high yield bond fund improved from the top 23% for the trailing three years to the top 18% as of March 31st and remained five stars by Morningstar. In addition, the total return bond fund increased its trailing three-year ranking versus peers from top 34% to top 29% for the same periods while moving from a three- to a four-star ranking by Morningstar. Turning to private markets, we completed two acquisitions in the first quarter that helped to better position this area for long-term growth. In January, Hermes acquired MEPC Ltd from the BT Pension Scheme. MEPC is a leading UK commercial real estate developer and asset manager. This acquisition enhances Hermes' real estate proposition by adding specialist assets and development management expertise to its existing capabilities. In particular, it supports Hermes' core strategy of seeking to create urban regeneration schemes, which not only deliver attractive financial returns but will have a positive impact on the environment and communities in which they are located. As part of the acquisition, Hermes acquired the globally recognized MEPC brand, which dates back to 1946. MEPC has been associated with many UK real estate developments and the brand will remain in use. In March, we completed the acquisition of the remaining interest that was not previously held by Hermes in HGPE, a private equity and infrastructure manager. HGPE has a long record of success. We believe that full ownership of this entity improves our ability to build and execute growth plans. We are beginning to develop business plans with a view towards expanding HGPE's global private equities business and UK-focused infrastructure business, including further expansion into the U.S. market over time. Now moving to money markets, assets increased by about $56 billion or 14% in the first quarter to a record high of $451 billion, reflecting a flight to safety in turbulent markets and a significant yield advantage compared to the average deposit rate. Money market fund yields also compared favorably to applicable direct market rates and even longer duration securities. With the Fed's move to a target range of 0 to 25 basis points, short-term yields, including those of money market funds, decreased over the quarter and are expected to decrease further. Tom will comment on the impact of minimum yield waivers in Q1, which were not material. Our money market mutual fund market share, including sub-advised funds at the end of the quarter was 8.8%, about the same as at the end of 2019. Taking a look at our most recent available asset totals, with Federated as of April 29th and Hermes as of April 24th, managed assets were approximately $642 billion, including $480 billion in money markets, $73 billion in equities, $67 billion in fixed income, $18 billion in alternatives, and $4 billion in multi-asset. Money market mutual fund assets included above obviously were $362 billion. We began the year 2020 with about $850 million in net institutional mandates yet to be funded mostly in fixed income. Tom.

Thanks, Chris. The MEPC and HGPE acquisitions impacted Q1 reported results. MEPC results have not been previously included and HGPE results were previously reported as non-operating income for the portion owned by Hermes. The $452 million of acquisition-related private market assets reported in the press release is from MEPC. HGPE had managed assets of $8.3 billion at the end of Q1. HGPE assets have been reported in the alternative private markets category and noted as assets managed by a non-consolidated entity since the acquisition of Hermes. Hermes' portion of HGPE financial results have been included in non-operating results since the acquisition of Hermes through February. Reflecting Hermes' equity investment, beginning in March the results of HGPE are now fully consolidated and included within the various operating revenue and expense line items. The two acquisitions added about $5.4 million in revenues, of which $1.2 million is non-recurring and $3.8 million in operating expenses for Q1, including amortization of intangible assets. MEPC results are for the full quarter, while as mentioned, HGPE became a consolidated entity effective March 1st. Total revenue for the quarter was up about $1 million from the prior quarter, due mainly to the acquisitions as mentioned and from higher money market assets, which added about $3.4 million. These increases were partially offset by about $5 million less in revenue from fewer days in the quarter and from $1.5 million of lower performance fees. Looking at operating expenses, compensation and related expenses increased about $4 million from the prior quarter. In addition to base pay increases, the growth was due mainly to about $2.6 million of acquisition impact, $2.5 million from higher restricted stock and sales bonus expense, and about $1.2 million from seasonally higher payroll taxes. These increases were partially offset by lower severance pay of about $2.5 million, as Q4 included $2.7 million from the combining of certain administrative, operational, sales, and investment management teams. Distribution expense increased about $3 million compared to the prior quarter, with about $4 million from higher average money market fund assets, partially offset by a reduction of about $1 million from fewer days in the quarter. The increase in the other operating expense line item for Q1 compared to Q4, about $3.6 million was due largely to the net impact of revaluing U.S. dollar assets and foreign exchange hedges at Hermes at the quarter-end spot rate. In Q1 this resulted in net expenses of $700,000 compared to a net credit of $1.8 million in Q4, a variance of $2.5 million. Amortization expense from the new acquisitions added about $600,000 to Q1 and is expected to be approximately $1.1 million for the full quarter of both acquisitions. The impact of money fund yield-related fee waivers in Q1 was not material. Based on recent assets and expected yields, the impact of these waivers on operating income in Q2 could be about $3 million. Multiple factors impact waiver levels and we expect these factors and their impact to vary. These factors include changes in fund assets, available yields for investments, actions by regulators, changes in the expense level of funds, changes in the mix of customer assets, changes in distribution fee arrangements with third parties, Federated Hermes' willingness to continue the fee waivers, and changes in the extent to which the impact of the waivers is shared by third parties. With so many volatile factors, it's easy to see the $3 million waiver number changing. Non-operating expense increased by $16 million from Q4. Seed and other investments decreased in value by about $15.8 million compared to Q4's gain of $3.3 million. HGPE's carried interest was about $4 million lower than the prior quarter. The decreases were partially offset by a $7.5 million gain in the HGPE acquisition. The $3.9 million change in net income attributable to non-controlling interest in subsidiaries from Q4 was primarily from the reduction in market value of consolidated funds. If you look at the seed losses after non-controlling interest and after tax, they were about $0.09. The HGPE fair value gain after non-controlling interest and after tax was about $0.04, so combined they impacted EPS by about $0.05. Yesterday, the Board added 3.5 million shares to our share repurchase programs. During Q1 we purchased 714,000 shares for $16 million with nearly all of this bought in the open market. We have 3.7 million shares remaining in our authorized share buyback programs. At the end of Q1, cash and investments were $381 million, of which about $335 million was available to us. We used approximately $20 million of cash for the MEPC and HGPE acquisitions. In March we drew $100 million from our revolving credit facility and this week we repaid $25 million of it.

Our first question is from Mike Carrier from Bank of America. Please go ahead with your question.

Hi, good morning and thanks for taking the question. First, just given the big increase in money market assets, getting back to the reserve environment can you provide some color on what is different versus what is similar for fee waivers on this time around just given some of the distribution relationship changes and some of the product changes versus the last time we were in a reserve environment?

Hey Mike, it is Ray. Just a couple of the differences; we've talked before about the mix of assets when you slot them into the expense levels of the various funds that they're in. Generally we have more of the assets in the institutionally priced products in the 15 to 20 basis point expense cap range as compared to the last cycle, and that's because back then we had higher broker-dealer suite assets using money market products, and over the past several years brokers have converted significant portions of that to deposit-based suite models. So that's one difference; the other significant difference would be the growth over the last couple of years has been weighted to the government fund side. As you know the prime products were impacted significantly, the institutional prime product by the 2014 rule changes that took effect in 2016. And we've had good growth on the prime side but the proportion of assets in government portfolios would be higher than it would have been in the prior cycle.

Okay, thanks. And then Tom just on expenses, you realized very volatile backdrop but if you can provide any expectations whether it's on comp or some of the non-comp items either given kind of an improving backdrop and getting back to work or a longer kind of recessionary backdrop in areas that you can flex, thanks?

Sure, Mike. Travel and entertainment expenses and conferences are currently not taking place. In fact, T&E spending for Q2 will need to be reduced. Regarding bonuses, as I mentioned earlier, I've stopped making predictions about the future; however, we did see higher sales bonuses due to increased sales, which is encouraging. We will see what happens this quarter. Additionally, we have incurred expenses from HGPE that will reflect in a higher number, although we’ve only accounted for one month so far. Other variable expenses will depend on performance, and we will assess those as the situation develops. In terms of flexibility, many expenses can adjust with market conditions, so we don't need to implement drastic measures. Overall, our setup for managing and controlling expenses is quite solid.

Mike, this is Chris. In terms of your comment about getting back to work, I have to observe that we are already back to work and I've never stopped being back to work. And in fact, in the first quarter on the sales side all of the numbers in gross sales Ultrashort, fixed income, and equity were all the highest average monthly gross sales ever, which means that we're in the game. Now we've already talked to you about that net. The next thing I would mention is that there's been an increase in community inside the sales force as they recognize that the total team sports have been a lot more sharing of what works, and the same has been true with the relationship with the client. The communication loops have been stronger, and the information that's been put out by the investment people at Federated has been very, very well received by the investing community. I just thought it was important to mention those factors.

Yeah, I know that's helpful. I didn't mean back to work, everyone is working; just meant back to kind of more normal operations but thanks a lot.

And our next question is from Ken Worthington from J.P. Morgan. Please proceed with your question.

Hi, good morning. In terms of fee waivers, the money market funds are currently in the process of seeing investments mature and they're being reinvested in securities that are prevailing interest rates and yields. Maybe you can help us better estimate future fee waivers, given the asset size today and the mix of business and current reinvestment rate, is it possible for you to give us a range of what these fee waivers are going to look like, again if we just sort of use current stock assets today, reinvestment rate, mix etc., because I assume $3 million is not that steady fee waiver level?

Ken, it is Ray. I will comment on the waiver end of things and then Debbie can comment on reinvestment and yields and what that looks like going forward. In terms of waivers, as Tom indicated, there's a lot of potential volatility even coming up with a number for this quarter because rates move around, asset composition moves around. It's not linear; you get to a point where you're just below the funds, just above the funds expense ratio, and so you have no waivers, and then you drop a couple of basis points and the waiver switch gets turned on. So, there are so many variables that it's not appropriate for us to try to forecast it out over longer periods of time. Of course, you can look back at what happened over the years where we did have waivers recognizing differences in the asset mix etc. that I pointed out before. But, Deb, do you want to comment on how reinvestment is looking going forward?

When we look at our government products, prime products, and new products, all show a positive trend. Specifically, on the government side, we see steepness of about 15 to 20 basis points depending on whether it's treasuries or government agencies, fixed or floating, although these levels are quite low. We believe a few factors could enhance this in the coming months and quarters, including significant supply from the Treasury, funding the Cares Act and other Fed and Treasury programs, much of which is focused in our liquidity space. Additionally, we anticipate that the Fed may make a technical adjustment; it didn’t happen this week, but we expect an increase in the lower bound of the RRP from 0 to 5 basis points, as it was during the previous zero rate period. This change would be beneficial for our overnight business and for reinvestment as securities mature. The smaller portion of our asset mix, consisting of prime and municipal, has spreads ranging from 50 to 70 basis points depending on the type of security—be it fixed or floating, commercial paper, or CDs. This makes reinvestment relatively straightforward, allowing us to avoid waivers and stay above the zero rate environment. However, our asset mix at this time is significantly weighted towards the government sector.

Okay, and maybe as a follow-up, curious to see if you think the Federal Reserve will act to the recent crisis in terms of implementing new rules or regulations around money market funds. Clearly, the Fed has had to step in again and provide support to money market funds after 2008, the Fed stepped in with sort of new rules expressing frustration with having to come in and support the money market fund business. What are your thoughts this time around? Do we need either new rules to be implemented, do we need existing rules to be wound back down because the new rules actually did seem to contribute to some of the issues we had this time, so what do you expect the reaction to be and did this damage the ability for money market funds to be a viable structure?

Money market funds are, in my view, a remarkable financial instrument. The question you raised reminds me of past discussions, which often stemmed not from market needs but from political motivations. Specifically, the Treasury Secretary decided to implement insurance on these funds when what was truly required was liquidity. Our industry, and we in particular, were calling for liquidity, which is the Fed's primary role. Recently, the Fed has released trillions of dollars into the economy, yet only a tiny fraction has been accessed by money market funds initially in the prime segment. Once again, the focus has been on the need for liquidity, with the Fed playing its usual role in keeping these markets functional. Furthermore, there is a strong demand for financing companies that employ people through short-term options, and money market funds are an excellent means to achieve this. At times, perspectives on this matter may vary, but in our view, the money market fund sector needs no additional changes. In fact, it would be beneficial to return to allowing Prime Money Funds to maintain a $1 net asset value, which would facilitate their use in sweep accounts to enhance corporate financing. On the municipal finance side, there is significant activity focused on supporting municipalities and local governments. One of the most effective approaches to short-term financing is to enable them to invest in prime funds and to permit the issuance of money market funds from the municipal sector. Therefore, I believe money market funds remain a robust and effective system that does not require further intervention.

Great, thank you very much.

And our next question is from Patrick Davitt from Autonomous Research. Please proceed with your question.

Hey good morning, how are you? So, it sounds like there was some good growth in the EOS assets in the quarter. Could you kind of update us on how to think about the economics of that growth and you mentioned beefing up the U.S. sales force, could you give us some color around what the mix between U.S. and non-U.S. clients is?

Okay, I will talk a little bit about the concept and then Saker will fill in on that breakdown that you're looking for. The EOS is basically our way of showing that engagement really works and yes, it's great to be at a trillion and that growth is important. It is also important to note that we were able to review over 1000 companies on this engagement basis. This is in addition to what everybody does on the analyst side in terms of contacting companies. The whole point of all of this is to come back to that point we made earlier, namely that it's our belief that sustainable investing is going to be the most helpful thing in terms of long-term growth. I'll let Saker comment on the other aspects of EOS.

Thank you very much. So, EOS just to recap, we do two functions. One is we represent clients who've got investments in industries. As long as they have investments in industries and they want to engage actively on the assets to ensure that we look after them and they create sustainable wealth over the long term, they will have a need for our services. The fact that they have gone over a trillion makes us the largest active stewards in the playbook, and this is a growing segment of the market. In terms of the split between North America and the rest of the world, roughly speaking, 60% of assets are based out of North America and the rest are spread from around the world and that's not just Europe but also from emerging markets and from developed Asia and New Zealand and so on. The wide and growing asset base is in demand in Europe obviously, and there has been increased demand elsewhere particularly in Asia and slowly coming to North America. Fundamentally, it gives us right across Federated Hermes a stronger and better insight which, added to our ESG metrics, allows us to have more fundamental data to our stock picking ability and create performance over the long term.

Patrick, this is Tom. On the economics of it, we're looking at EOS as a growth business and if you talk to our investment people, particularly John Fisher, when we were discussing the acquisition of Hermes, that was his number one reason for being interested in purchasing Hermes was because of the ability to get information from EOS in to help our portfolio managers make better decisions and get better performance in our funds.

Got it, thank you. And my follow-up is on the money fund side. Could you break out the growth quarter-to-date between prime and government? Because I do think prime flows have recovered meaningfully from March? And then more broadly maybe for Debbie, if there's any sense of how much of the growth we're seeing broadly in the industry is being driven by kind of bank line drive corporate versus investors parking cash on the sidelines?

Patrick, just to comment on the quarter-to-date portion, I think from March 31st, and this is just the money fund supporting the separate accounts side off to the side, the government funds are up about $22 billion and the prime funds are up about $3 billion. The munis are up a little over $1 billion, so again that's just within that 2a7 money market mutual funds, of course is the biggest part of business.

And Patrick, as far as the growth in assets go and the diversification of the underlying clients, I don't believe very much is actually due to bank line draws. We've been asking that question and our answers that we've been getting have been resounding those. The diversification of the flows is pretty substantial. It's corporate, its financials, non-financials, it is the institutional as well as the retail side. It's universities, it's various other municipal entities. It's different types of trust accounts through the banking system, so it's really pretty diversified and I don't believe much at all can be attributed to the drawdown in bank lines that has been occurring for some corporates.

And our next question is from Dan Fannon from Jefferies. Please proceed with your question.

Thanks. My question is back on fee waivers, and I understand all the moving parts in terms of trying to project what they could be, but I guess the $3 million that you are assuming, is that based on AUM levels that you gave the $480 billion or just trying to get a sense of what the $3 million in corporates that we understand how to think about maybe prospectively from that?

Yeah, we are saying it's current assets and our team's expectation on rates for the next quarter without asset growth, without further asset growth.

And Dan, just on the asset part, we're looking at the funds, not the separate account, so it would be off of the fund portion approximately $362 billion most recent total.

Great and just on the forward projections based on the curve and what those kind of incremental yields that were cited before or is it firm expectations that you guys might differ from that?

No, we're going with Debbie's team's forecast. So Deb, if you want to expand on that, go ahead.

Certainly, we're forecasting a continuation of positive yield curves in all sectors. We are thinking that on the government side we could see a backup of maybe call it 5 to 10 basis points due to supply and we're contemplating that we could get an extra 5 basis points in overnight at some point if the Fed makes that technical adjustment that I mentioned with regard to RRP. So, those are all expectations that are built into our forecast at this point.

And our next question is from Robert Lee from KBW. Please proceed with your question.

Great, good morning. Thanks for taking my questions. Hope everyone in the family are doing okay in this environment. Maybe back to money funds, I am just curious maybe for you Debbie, how do you think some of these assets will be just as yields come down on particularly government funds and spread to bank deposits? It helps as a matter substantially; I mean do you expect some amount of it to revert back to the banking for some over the coming quarters? Just trying to get a sense of that?

Sure, even as the yields on our products come down, they're still above what is available for the most part. On the bank deposit side, those rates have also been coming down. They follow the market down much faster than they follow interest rates up. As far as the expectation of stickiness, what I mentioned before, growth in assets has come in a very diversified way, that generally results in more stickiness of those assets staying around. It's been a mix of existing customers as well as new customers. New customers that are diversifying away from either the current providers that they have in the mutual fund business or diversifying away from other competing products into the money fund business. But in either case, I think that diversification again adds to the likely sticky nature of those assets. The other thing that I would mention, once investors are comfortable moving a portion of their liquidity assets into money market funds, the experience is generally one that is good and substantial. They achieve daily liquidity at par really on pretty much a moment's notice for both purchases and redemptions. If they want to add to their asset mix they purchase and subscribe into a fund and that's taken. If they want to redeem, we provide them back with their liquidity immediately. So I think that liquidity on a constant basis is really something that is noted by investors. It was noted in the first quarter, and it continues to be noted in the second quarter and basically receiving that at par with the market return is what they're continuing to look for.

And Bob, let me add that if you remember our charts that we have been using since 1998, what seems to happen is when you get these run-ups in assets yes, the top of the hump may come off but you end up with higher highs. And thereby lower lows over many decades of this type of activity. And that happened in 2008-2009; it happened earlier in the 2000s and it happened back when we were all children. So we expect that kind of a chart to happen even though things are obviously different.

I appreciate that. And maybe a quick follow-up. Understanding that Hermes and the U.S. business in particular are contributing to growth, can you help us understand how Hermes itself contributes to the overall bottom line? It was part of the lower margin business and earned 60% of it, not 100%. So I'm trying to get a sense of how that part of the business flows through to the bottom line.

The main point I want to highlight is that the essence of this name change is focused on branding. Essentially, two strong investment management firms are merging to move forward successfully. In the U.S., we've seen a positive response from clients regarding our new funds, which are based on Hermes' effective strategies. By the end of the first quarter, these funds had exceeded $70 million, with about $44 million coming from external sources, while the remainder consisted of seed assets. We're also exploring additional launches and are developing our first SMA product utilizing Hermes' strategy. Furthermore, we've started engaging with various institutional mandates tied to Hermes, making this a comprehensive range of initiatives. I would like to highlight the strong enthusiasm of our sales team for our comprehensive range of international products. By integrating the activities of Hermes with those in Cleveland and our other international funds managed from New York, we have created an impressive complementary family of nine funds. The recent MEPC addition brings many exciting opportunities for Saker and the real estate team. Additionally, Chris mentioned that gaining full control of HGPE and the potential for growth there is truly thrilling. It's important to remember that Hermes faced challenges in the emerging markets shortly after the deal, which affected their revenues. However, Saker has managed the business as a whole effectively throughout the acquisition. As Chris stated earlier, we have rebranded the company to Federated Hermes, and we couldn't be more thrilled about it.

Can I provide some perspective on Federated Hermes? First, it's important to distinguish the EOS business from the rest of the Hermes operations. While the EOS business does generate a margin, being in a growth phase means that some of those margins are temporarily diluted, but they tend to recover over time. A significant benefit of this business, as noted by Chris and others, is the insights we gain from fund managers, which enhance our performance and help us attract more clients into standard funds that yield higher revenue. At the end of the quarter, Federated Hermes International managed about $33 billion in British Pounds, which is over $41 billion at the current exchange rate. Most of this consists of highly active, specialist performance-oriented funds, which typically show margins reflective of their high-performance nature. Our private market business operates similarly but has different payment structures. You've seen discussions about carry, which comes from performance, and if you consider carry alongside fees and performance fees, this aligns with the long-term creation of alpha. Despite the scale of Federated Hermes, it operates in environments where one would expect margins associated with top-tier performance. Additionally, it exists in a sector that reacts positively to market movements, specifically in equity and fixed income markets, excluding private markets for now. While there have been fluctuations, particularly in emerging markets following the acquisition, we manage the entire business dynamically to safeguard margins and foster growth. The key takeaway is that this acquisition was more than just asset accumulation. It involved acquiring significant expertise, which we're now integrating with our team in Pittsburgh, enabling us to enhance our returns. More importantly, this positions us as a leader in what is likely to be a high-growth segment of the market in the coming years, especially as major asset managers increasingly venture into this area where we were among the early pioneers. Overall, it represents an exciting opportunity in a high-margin business for the future.

Thank you for taking my question. Appreciate the full answer. And stay safe now.

And our next question is from Bill Katz from Citigroup. Please proceed with your question.

Thanks very much. I just want to go back to money markets to make sure I understand. Could you explain the average fee rate for government compared to prime and also the incremental reinvestment rate? I'm having a hard time following the math, and I apologize.

The fee rates across all money markets are slightly below what we saw last quarter, which was a bit under 8 basis points for advisory fees. There aren't significant differences among the categories, and we don't price the funds that way. This is the average across all types of money funds. Now, in terms of fund yields, Debbie, you can provide some insight on that.

Sure, maybe just to add a little bit of a different bend to it. Most of our products are run in a bar belled fashion where we have a substantial amount in either floating rate or very short-term overnight to one week type of paper. And then we offset that from a weighted average maturity target perspective out in the 6 to 9 to 12 month sector for fixed rate purchases. So generally speaking, overnight rates at this point are anywhere from 2 to 10 basis points, depending on what sector you're looking at. And one-month rates are probably in the neighborhood of 7 to 30ish type of rate. When you go out to the 12-month sector of the curve, which would be the part where we're adding incremental basis points and yield to the products in the Treasury space, right now you're at 15 or so basis points. We think that's been as high as 25 in the last several weeks, and we think it can get back there again with the additional supply from the marketplace in Treasury securities. And then, for prime-type securities, you're looking at somewhere in the neighborhood of 70 basis points or so, 70 to 80 basis points. We don't expect that to back up. In fact, if anything that might contract a little bit. But it's the mixture of those short-term overnight to one month type of securities in the front end of the barbell and where we think we might get an additional five basis points if RRP adjusts at some point. It's not a given, but we think it is potentially likely. And then the current curve and expectations for that curve on the long end of the barbell 6, 9, and 12 months that are getting us to the approximate yields that we think we will get to from our underlying portfolios standpoint. And then what the resulting amount of waivers that might produce.

Okay, that's helpful. Thank you very much for that. And then just the second question, a little bit of a multipart, I apologize. Appreciate if you could give us some flows for equities into the new quarter, so under what conditions do you think that the equity business could actually bounce back to positive? I certainly appreciate the acute negative in the first quarter; it must have been pretty robust into the new quarter. How much of a lead leg do you think you need? And then what's the existing strategic value AUM and maybe how are those flows in both the first quarter and in April? Thank you.

Okay, overall I will do all the overall equity situation, Ray will give you the stats on the strategic value recent. The equity business is now really a function of how people respond to getting back to work and open up the economy and all of those things. So it is the giant macros out there. However, what I would note from our sales force is that the clients and the salespeople have balanced very well working from home, and they very much appreciate the thought leadership that we're getting and what we're seeing. Now, don't go writing this off as a big, hairy trend, it is the beauty of high active share, active management, selecting winners and losers in portfolios. And so some of the clients are actually starting to look at their passive positions and looking towards active management. And we see that when you see people looking at the Kauffman entries, which are high active share, pick good companies. And then, you see other things as well. You see people coming into high yield and you see people looking at a high dividend on a strategic value and so you see people starting to tiptoe in, as they have done in the past. Both high yield and strategic value in some way can be viewed as tipping into the market. But we aren't really able to predict when that will happen. We rely rather on the franchise for all seasons and offering solutions to where our 10,000 clients are and how they can help their clients. In response to the strategic value flows, the domestic strategy's asset level, which comprises the majority of the assets, was approximately $25 billion as of a few days ago, with around two-thirds in separate managed accounts and one-third in the fund. The net redemptions through April 24th were just over $200 million for the entire strategy, compared to nearly $400 million in March. It’s important to note that April is not yet closed, and we typically receive reports from some models later in the month. However, the figures show $200 million in April versus $400 million in March. In February, we were close to breakeven with outflows just over $30 million. This illustrates the significant impact on this strategy and across various sectors of the industry from March, with a lesser effect seen in April.

Thank you very much.

And our next question is from John Dunn from Evercore ISI. Please proceed with your question.

Good morning. Just a quick follow-up on Hermes, maybe could you just give us more color on where we are in the development of the institutional sales cycle for Hermes in the U.S.?

This sales cycle lasts 18 months, and the current situation with Corona is not helping it. We are still receiving RFPs, and that activity continues, although there has been a slight pause. However, we are witnessing strong interest and have high expectations for it once the market stabilizes. I would like to hand it over to Saker for additional insights.

If we consider the cycle outside of the U.S., which is where Federated Hermes International has some control, we've been maintaining a mostly neutral position so far. Given the number of fees currently over 100, it seems likely that we'll see additional funds coming in. This aligns with what Chris mentioned earlier; this work-from-home period has been quite productive. Although we haven't been able to travel, we have a broad reach that includes Europe, Asia, and Australia, where we have offices. In fact, we are raising assets from these regions by engaging with potential clients over the phone and making presentations. For example, we onboarded a significant client this morning, which reflects confidence in our business. Overall, our sales cycle has been acceptable so far. The main challenge is that we need to resume travel to effectively prospect for new clients, and that depends on when the lockdown measures are relaxed enough to allow business travel. We will have to wait and see. However, the growth potential in both regions is significant, as we offer a variety of products ranging from high-yield options to equities and private markets. All of these generate alpha from fees and costs, which is appealing to investors.

Yeah, got it. And then just thinking that smaller money market players and maybe opportunity for you guys, in an environment like that, is it just tougher with yields and waivers or is it that everyone is getting accurate and people realize maybe it's a good business to have even if you're small or does it accrue to your benefit?

Well, over time what we have seen is that there's never been an immediate catalyst that causes people who don't have a whole lot of assets to throw in the towel. As I said on these calls before, if you have control over the redemption, you can run a small money fund and that's a fine thing because you're not going to get crushed on the redemption side. If you look at these statistics, the top 25 money market fund purveyors have over 90% of the assets. And I think there are maybe 55 or so people listed who have money funds. The ebb and flow of that is a constant look on our part for those who wish to find what I call a warm and loving home on the money market funds side. Periodically there are things that cause the companies to do it. The CFO gets to look at it, the CEO takes a different strategy, things change. And so to us, the bottom half of that chart is always available for acquisition purposes. Periodically, some of the bigger ones decide they want to move in a different direction.

This is Debbie too. Just to add color to that, in the context of value-add and in money market land, that may only be a basis point or two, but it's incrementally valuable to be able to garner a few extra basis points in the products that you're choosing for your liquidity and your cash. When you're a larger player, you're able to find different structures and different counterparties. Maybe from a repo perspective that give you an extra one or two basis points or that give you extra supply. You're able to review if the structures of asset-backed commercial paper that again smaller players may not have the credit analysts, the staffing to be able to undertake those. The extra one or two basis points that you're getting in those structures, along with the high quality that comes along with them, is valuable to the underlying clients. So size definitely has some advantages in this aspect of the market.

Very helpful, thank you.

Next question is from technically Kenneth Lee from RBC Capital Markets. Please proceed with your question.

Hi, good morning and thanks for taking my question. Just one on the minimum yield fee waivers. I'm wondering if there's been any initial discussions on potential cost sharing of the impact with distribution partners and whether you would expect a similar kind of percentage of cost sharing as historical?

Hey Ken, it is Ray. So we are proceeding in the same manner that we did with the minimum yield fee waivers in the prior cycle. And that is at the fund level and looking at the proportion of the revenue that goes to the intermediary compared to our advisory fees and that ratio essentially determines the sharing of any waivers that are necessary to keep the yields at least at zero.

Great, that's helpful. And just one follow-up, if I may, just given the announcement of the transactions, the MEPC and the HGPE wondering if there is any other update around the outlook or timeframes for potentially reorganizing other controlling structures of some of the other PE or infrastructure ones in Hermes?

I didn't follow that last part of your question, Ken. Restructuring what?

Okay, so the ownership, the key thing that happened here was our ownership that we did not have, we now have. So all of those things underneath the private market have that ownership structure. Now, if you're talking about the individual fund we've mentioned before, the HGPE, we raised a bunch of money from existing clients, over a billion dollars. That's proceeding. We're looking at the various pause to the infrastructure in terms of how to structure that for growth for the future. And if Saker chooses to opine on what else might be going over there, he's welcome to.

Thank you. So we had a very successful closing, first soft closing of our direct lending product in the middle of the coronavirus, which was I think a great achievement for our total feed but I was very good. We are in negotiations for the large institutional clients for a large mandate to do with a property lending and equity generating income portfolio. That's in the middle of negotiations, but it tells you the potential, whether that particular one comes true or not. But it shows you that there's potential there. But in terms of restructuring, I think with the tightening up of the ownership of the small part of the HGPE that was not owned by the group that has been cited is now part of the whole that allows us then to invest more in sales and concentrate on distributing that to the specific private equity business, particularly in North America, entitled to bringing our property development expertise and business to North America as well. I hope that sort of gives you an idea and answers part of the question, thank you.

Very helpful, thank you very much, and hope everyone stay safe.

Thank you.

And we have reached the end of the question-and-answer session, I will now turn the call back over to Raymond J. Hanley for any closing remarks.

Well, thank you very much for joining us today, and we wish you safe and stay safe and stay healthy. Thank you.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.