Federated Hermes, Inc. Q4 FY2020 Earnings Call

Greetings. Welcome to the FHI Fourth 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 this conference is being recorded. I’ll now turn the conference over to your host Ray Hanley, President of Federated Investors Management Company. You may begin.

Thank you, and good morning. 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 Saker Nusseibeh, the CEO of the International Business of Federated Hermes; and Debbie Cunningham, the Chief Investment Officer for Money Market. 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. We invite you to review the risk disclosure in our SEC filings. No assurance can be given of future results and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

Thank you, Ray. Good morning all. I will review Federated Hermes’ business performance and Tom will comment on our financial results. We continue to grow and expand our EOS at Federated Hermes engagement activities. At year end, our staff of engagers and other specialists reached 67, up from 49 at the beginning of last year. Assets under advice reached over $1.3 trillion, up from $877 billion at the beginning of last year and Saker may have some more interesting news on this subject later in the call. Total long-term assets under management closed the year at a record level of nearly $200 billion. Equity managed assets reached a record high of about $92 billion, up from $80 billion at the end of Q3, driven by market value gains and lower net redemptions and net sales, which were positive at nearly $800 million. Equity gross sales increased 34% from Q3, driving a two-thirds reduction in net redemptions. We saw positive net sales in 19 fund strategies in the fourth quarter led by Kauffman Small Cap, Global Emerging Markets and the SDG Engagement Equity Uses Fund. Others with positive flows included Global Equity ESG, Impact Opportunities and the U.S. SMID Fund. Using MorningStar data for the trailing three years at the end of the year, 23% of our funds were in the top quartile and 61% were above median. Turning now to fixed income. Assets reached another record level of $84 billion at the end of the year, up nearly $5 billion or 6% from the third quarter and up $15 billion or 22% for the entire year. The fourth quarter growth was again driven by strong net sales of $3 billion. Our broad array of solid fixed income strategies was well-positioned to meet market demand. We had 22 fixed income funds with net sales in the fourth quarter. Fourth quarter net sales leaders were Ultrashort strategies with about $1.3 billion, high yield with just over $600 million and the multi-sector total return bond and short intermediate total return bond funds, which combined for about $600 million. Corporate, high yield, mortgage-backed, multi-sector and municipal bond funds all had net sales, as did our fixed income SMA strategies, which grew $136 million to reach $1.4 billion in assets under management. Across sectors, short duration strategies were in demand. Fixed income separate account net sales were led by high yield mandates. At year end, using MorningStar data for the trailing three years, we had 29% of our funds in the top quartile and 50% above median. We began 2021 with about $500 million in net institutional mandates yet to fund. Moving to the Money Market. The fourth quarter asset decrease reflected lower fund assets of about $24 billion, partially offset by higher separate account assets of about $12 billion. Year end money fund assets were down about $43 billion from mid 2020 peak and up about $15 billion from the prior year. As we have experienced in past cycles, our Money Market business has reached higher highs and higher lows once again. Our Money Market Mutual Fund share, including sub-advised funds at quarter end, was at about 7.8%, down from the prior quarter share of 8.1%. Taking a look now at recent asset totals. Managed assets were approximately $621 billion, including $416 billion in Money Markets, $95 billion in equities, $87 billion in fixed income, $19 billion in alternative and $4 billion in multi-asset. Money Market Mutual Fund assets were $290 billion. As of now, we are planning for the staged return of more employees to our offices. While we expect to begin this process in the coming months, the decision about whether to return more employees to our offices will be informed by the conditions and not by the calendar. With that, I turn it over to Tom for the financials.

Okay, Chris. Thank you. Total revenue for the quarter was about the same as in the prior quarter, as growth in revenue related to long-term assets, including equity, fixed income, private markets, and performance fees and carried interest was offset by higher Money Market fund waivers and the impact of lower Money Market assets, again showing our significant value in our diversified business mix. Q4 revenue included $11.2 million in combined performance fees and carried interest, compared to $5.7 million in the third quarter. Over the last five years, including the period preceding the 2018 Hermes acquisition, annual performance fees ranged from about $7 million to $23 million and averaged about $11 million. Annual carried interest ranged from about $3 million to $14 million and averaged about $7 million. But we still are unable to project these items for future periods. Looking at operating expenses, the increase in compensation and related from the prior quarter was due mainly to higher incentive compensation expense of $5.9 million and expenses associated with unused vacation time of $4 million. The decrease in distribution expense compared to the prior quarter was due mainly to the impact of minimum yield waivers and lower Money Market assets, which reduced distribution expense by about $15 million. This was partially offset by the impact of higher equity assets. Office and occupancy expense for Q4 included a non-recurring lease incentive gain of about $5 million. The impact of money fund minimum yield related fee waivers on operating income in Q4 was $8.7 million. Based on recent assets and expected yields, the impact of these waivers on operating income in Q1 could be about $14 million. The increase reflects primarily lower yields than previously expected. Multiple factors that are difficult to predict will continue to impact the waiver levels. Non-operating income increased from the prior quarter due mainly to the increase in the value of investments and consolidated funds compared to Q3. The $5.2 million increase from the prior quarter in net income attributable to non-controlling interest in subsidiaries was from higher NCI related to Hermes and consolidated funds. The Q4 dividend payment of $1.27 per share, including the $1 special dividend, reduced Q4 EPS by about $0.01 per share due to the exclusion of the dividends paid on unvested restricted shares from net income under the two-class method of computing earnings per share. During Q4 we purchased approximately 516,000 shares for $14 million, with nearly all of this bought in the open market. Shomali, we would like to open the call up for questions now.

Sure. And our first question is from Ken Worthington with JPMorgan. Please proceed with your question.

Hi. Good morning and thank you. I’m not sure if Debbie is on the call. If she is, Debbie, can you talk about the repo market and what’s happening there? We’ve seen yields really come in. There’s been a lot of chatter about the outlook for repo. So, what is your view on repo? How big a part of the Money Market fund investments right now? Are repo and are there alternatives in the near-term, if the repo market continues to be, call it, uneven?

Sure, Ken. This is Debbie. With regard to rates and what is driving the repo market to those lower rates, we’re currently in somewhere of a 3 basis points to 7 basis points range, hit as low as 2 basis points on a Treasury factory hub basis earlier this week and in some late afternoon, thin markets last week was actually trading negative. Now we didn’t participate in any of that, you know, again, very thin and small portion; two-way flow, but nonetheless, it was in negative territory. Driven by a couple things, number one, mainly just huge amounts of cash that need to be put to work in the short end. And thankfully, we do have a fairly good supply of Treasury and mortgage-backed securities; however, it hasn’t grown much. Stimulus, as you know, did not come in the second round until the end of the fourth quarter. And in addition to that, the amount of stimulus that was passed and what’s been funded so far, has come largely from balances that were of cash that were already at Treasury, not new funding. We would expect that to change, as the second or perhaps, third round of stimulus, the first in the Biden administration proceeds forward sometime in the middle part of this first quarter. As far as allocations go with our Money Market and liquidity products to repo, obviously, the largest amounts would be in our Treasury and our government agency funds; we attempt to do term repo and other types of non-overnight securities in order to reduce our exposure to that overnight marketplace, where going out the curve a little bit with different security types, you can get a little bit more in yield, although not a whole lot. I mean, the whole Treasury yield curve at this point is basically 5 basis points to 9 basis points from one month out to one year. But in the request to do that, we still have repo positions for liquidity purposes in those funds, that are anywhere from 40 to 55-ish type percent and when you look at our other types of products, our prime products, in particular, that would also be using repo in the taxable liquidity world. The exposure there is actually very small, less than 10%. They use other types of overnight paper that has generally a two to three type of repo would be from a rate perspective, overnight motion paper, overnight CDs, other types along those lines. So, hopefully, that’s helpful.

That was great. And then maybe, Chris, for you, there’s been a lot of talk of consolidation; maybe can you share with us how you’re thinking about succession and succession planning, and the next generation of leadership at Federated, when you and Tom decide to spend more of your time fishing and golfing and doing other things?

Well, first of all, the consolidation thing and the succession thing are two completely different items. And we get plenty of time to do grandchildren’s stuff right now anyway. So there are no current plans for that which you are discussing. However, we had our Board meeting yesterday and I spent the better part of an hour with our independent directors of FHI, going over the succession plans, not only at the level of me, if I get hit by a bus, Tom gets hit by a bus or anybody else, and how that filters through each one of our executive staff and their reports and those discussions. And so we’re not going to give you chapter and verse on all of that, but there are good plans and good options. We have a very strong executive staff and I am most confident that if I get hit by a bus, the machine would continue to roll the way that it has in the past. In terms of consolidation, there’s always consolidation and then new stuff happening at the other end. And the way we’ve looked at it is, we’ve done our big hairy deal the way I put it because of our affiliation with Hermes, you’ve seen the whole thing and we’ve now changed the name to Federated Hermes, Inc., reflecting what you’ve heard me call a reverse transformational merger and now we are busy about making that work. We completed that with the acquisition of the private markets business from Hermes and MEPC and are working this year in order to get that ready for sale into the marketplace. So that’s what we are about. We will continue to do both in areas of excellence. If we see areas where that’s possible, we will continue to do roll-ups not unlike last year’s PNC deal, which worked out very, very well and that’s our role in consolidation.

Awesome. Thank you very much.

And our next question is from William Katz with Citi. Please proceed with your question.

Okay. Thanks very much. First question centers around the Money Market business. Chris, I was wondering if you could or maybe, Debbie, you could talk a little about where your prime exposure might be today and how the dialogue with the regulators particularly with the sort of the reformulated F stock and how that’s going and I think about risks? And then underneath that, you mentioned that your market share was down a little bit sequentially, so I am wondering if you can talk about some of the drivers there?

I will cover some of the regulation. I’ll let Debbie cover the prime exposure question. So on the regulation front, we’ve all seen the President’s Working Group report and that was basically the SEC throwing out everything that they had in their drawer on the subject. Many of which had been totally rejected before, all of which we have seen before. The most important one is I’ve discussed on this call before is the elimination of that 30% trigger, which is both unnecessary and unwise. And we pointed that out before and was really an artificial trigger to what was a government shutdown causing disruptions in the short-term markets. And we don’t know what will happen under the new regime in Washington and they’re just getting started. So it’s hard to predict. But we are ready with our friends in Congress and with all of the arguments we’ve had before. Because the Money Market fund, especially on the tax-free side is especially relevant when there are tremendous efforts to get money to municipalities as part of stimulus apropos of the pandemic. And this is a great financing vehicle and you could return $500 billion of marketplace-oriented short-term cash into that short-term market by the beauty of those Money Market funds to say nothing of what happened on the prime side. So I’ll let Debbie talk about the prime exposure and then I’ll come back on the market share.

Thanks, Chris, and good to hear from you Bill. As far as our total prime assets go right now, they’re about $125 billion and that is more related towards the non-money parts of prime side that’s a $53 billion or so in Money Market fund assets within there and other types of separate accounts, offshore LGIP type of assets. As far as allocation within those products to sectors of the prime market, the largest sectors remain with exposure to the asset-backed commercial paper world, the CD world and then other types of financial commercial paper. We also have some exposure in the non-traditional repo market, which back to Ken’s first question, doesn’t really have the same issues associated with it, as you know, what would be traditional Treasury and agency repo, and then, ABS exposure, but in the shortest tranches and a very tiny exposure. As far as just to add to what Chris was talking about from a regulatory perspective. We’ve seen the ICI come out with what we thought was a very comprehensive piece that covered the Money Market, not just Money Market funds, and talked about some broader base will be focusing on that in particular. I also came out with some ideas and then the President’s working groups. And where I think the President’s working group will end up focusing is number one on back with what the ICI and what Chris was saying, the broader market, but also some of the things that will change in the 2014 amendments that went into effect in 2016, having to do with gates and feeds and triggers on liquidity for those two items, whether they should be at all, whether they should be delinked from triggers of liquidity and whether they should be considered separately entirely from a gates perspective versus a feed perspective. So, with that, I’ll turn it back to you, Chris.

Thank you, Debbie. With respect to market share, Bill, there’s another aspect of market share that historically we have always looked at and it’s a hard calculation and that is market share of revenues. And part of the reason for our whole pricing history going back to the ‘70s on money funds has been as owner-operator looking at the market share of revenues. So at year end, there were some moves in money. Some of it was hot money. Some of it was moving because some of the competitors quoted a higher net yield and some of that is just the ebb and flow of regular business. We’ve looked at the information on a daily basis and we see money going in and out at $3 billion, $4 billion and $5 billion clips, just like always. I would also mention that on the market share, as we calculate it, if you go back to ‘14, when they put in the reforms, our market share has been variously as those year ends 8.2, 8.02, 7.55, 7.38, 7.89, a high one is 8.78 and 8.12. So as long as we over the long-term are getting higher highs and higher lows, like I mentioned, we are not worried about the quarter-to-quarter market share.

Okay. Thanks. Just quick follow up; normally you give some flow detail facility and where we are today. We didn’t hear that from you, maybe I missed it, if I did I apologize. And then relatedly on the institution pipeline, any dynamics there in terms of where you’ve seen and best of luck. Thank you.

Hey, Bill. It’s Ray. So, through the early part of the quarter, obviously, with about three weeks of data, the equity funds and SMA combined are positive a couple $100 million. The fixed income continues to be positive, a bit stronger and actually the results are slightly positive. So, long-term flows continue to be running positive for the first three weeks of the quarter. In total, it’s about $1.6 billion. So again, it’s fixed income really ahead, but equity is solidly positive.

Thank you.

Thanks.

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

Good morning, everyone. Thank you for my opportunity to ask questions. Tom, I have a question for you. As we look ahead to next year, considering there was a one-time expense of around $4 million that will not recur, and you've mentioned the incentive compensation along with the increase in EOS employees, should we think of excluding the $4 million one-time expense as a solid starting point for next year? Or is part of the incentive compensation a catch-up for the year, considering your good fund performance? I'm just trying to clarify expectations for next year.

Sure. Our dedicated employees at Federated chose to work instead of taking their vacation in 2020. As a result, expenses that typically would have been incurred in the first three quarters were all accounted for in the fourth quarter because we anticipated they would take their vacation in 2021. This means we recorded an entire year's worth of expenses in one quarter, with the normal run rate being around $1 million. So, while we reported $4 million, the usual run rate is $1 million, which is how I would assess the vacation days.

So, regarding the last part of your question, Rob, I would like Saker to provide insights on EOS, as you mentioned the increase in personnel at EOS, but I believe it’s important to understand what’s happening there. Saker?

Thank you, Chris. There are two important points about EOS. First, the roadmap was indeed a key aspect of our long-term strategy to strengthen our presence, especially in North America, which was part of the acquisition by Federated back in 2018. Second, we continue to expand our client base, having onboarded two significant institutional clients for EOS services from Holland this year, with a total value of approximately €130 billion. We are steadily growing this business, and as we expand, we recognize the need to allocate more resources, as growth naturally leads to increased demand. Back to you, Chris.

Thank you, Saker. And what’s going on here, Rob, is an investment in the light about of the future of engagement and it’s very, very important and will basically impact all of investment management here at Federated and around the world.

Great. To follow up, if I exclude the $4 million, perhaps about $1 million remains. Should I consider the $134 million as the starting point for your company's revenue forecast for next year?

Yeah. Yeah. Rob, in the end, I’m not going to be that helpful, because I just stopped predicting that. As if you remember how wrong we were off by $9 million one quarter off by $5 million another quarter and it depends on all the things, the sales and how those bonuses happen. The investment management and how that comes about and then everything that’s going on in Hermes, which factors and you see this quarter, the performance fees and the carried interest and how Saker is managing through, what he delivers to the enterprise and so, like I said in the beginning, a long or short talk not to really give you all that much guidance on it.

Great. Yeah. Hard to try, but on the other, I know backed the ESG and EOS. Just keep us updated on where those initiatives are in the U.S. and I know pension stampings is related to building that out here. Also on the product side, right now, most of the thematic products are C caps or obviously the Hermes U.K. part of the business. Where are you kind of getting that up and running and products launched here in the U.S.?

Well, I will talk about some of the products. But we’ve got our six products being managed by our friends in the U.K. And all of it is informed by what comes out of EOS. There’s no direct product thing coming out of EOS. What EOS at Federated Hermes does is talk to 1,200 companies on separate issues for their clients, create data on the engagement that then is put into the decision-making process across the Board at Federated Hermes. And I’ll allow Saker to make some more particular comments.

Thank you, Chris. So you’ve got to understand sort of EOS in two ways. First off, in representing our clients and the engagements with the companies that we do, we work with these companies on behalf of our clients to ensure and enhance long-term returns and best business practices for the long-term. That’s a benefit to all. But also because of the way that we engage and the depth of engagement that we have, because of the history of engagement, typically we engage with the same company over a very long period, stretching more than 10 years. Because of the depth of expertise we have, we are the oldest engagement team anywhere in the world. We are the largest engagement team anywhere in the world. And we would claim we have the best experienced engagement team anywhere in the world. That gives us particular insights about specific companies, but also about sectors and markets. All of that then is available as part of the integrated information that are used across all assets that are actively managed within Federated Hermes, either the assets managed out of our Pittsburgh Office, our Boston office, our London office or any other offices we may have. That is the beauty, if you like, of having the stewardship businesses, part and parcel of what we do. Now additionally, with the changes in the market and the moves towards a requirement of more stewardship activity for passive investors, particularly out of the European markets, we see an increased demand for our stewardship services and that inevitably over time will lead us to invest more into it. So we get two things out of it. If you like it’s a business in its own right. It helps enhance returns to our clients. And it helps us in making better-informed decisions as part of information that feeds into our decision-making trees for our active management. I hope that answers the question on EOS and back to you, Chris.

Okay.

Yeah. Thanks, guys.

And our next question is from Mike Carrier with Bank of America. Please proceed with your question.

Hi. Good morning and thanks for taking the question. This is probably for Saker. But just in terms of performance fees and carried interest, the historical levels are always helpful. But given what seems like a challenging year for real estate generally, it seemed like the overall level of performance, even carried interest, is strong. Just curious that the asset base has increased significantly, that could dip those levels or from like a portfolio standpoint are we just in a more seasoned portfolio, I mean, in an average year, and that’s what’s throwing off some of the higher level of performance fees and carrying interest?

So I’ll try to answer that the best that I can. Now, the first thing to say is, you cannot extrapolate poor performance fees from back looking performance fees. Generally speaking, when we say performances, we are referring to our real estate, but not exclusively our real estate. But that’s where most of our performance fees are gathered. Now, if you remember, I have said on previous calls that there are two things that generate performance fees. One is, there is a performance fee generated for the equivalent of what you would call in the United States and each firm was called unit trust. And to some degree, you can see the trend of that over time, because it’s calculated for three years and you can see the trend of performance and although you can’t predict it, you can see the directionality. The way we generate performance fees in that and indeed in separately managed portfolios is that we tend to enhance the value of the buildings that we buy for our clients and the investments we make for our clients through better management, through integrating ESG, funding enough into real estate, we’re the pioneers in doing that as well. And I remind you all that if you go back in time, in the United Kingdom, there’s a massive development in Kings Cross, which is a living example of how integrating ESG factors into development actually increases return over the long-term. So we do that for the buildings that we manage. We manage them well. And we tend to over time go into sectors that we think are growing. Now, that is the average performance fees. But in addition to that, we get every now and then additional performance fees when projects are finished or finalized or when we reach a landmark in investment for a major client. These tend to happen not as regularly as the other bit of performance fees and that’s why you occasionally see spikes. Now, if you look back historically, you can average the performance fees for our real estate. Going forward, you cannot predict performance fees, but I have no reason to think that our methodology, which has been also creating is in danger of not being is also creating as it’s always been, but the level of performance fees cannot be predicted and therefore we do not. I will say I cannot expect more than that.

Hey, Mike.

Got it.

When I mentioned that the performance fees and carried interest of $11.2 million and last quarter was $5.7 million in my remarks. So our team did a little work because just to help people think through, because there’s the NCI and tax and where does it occur, which tax rate. And we view performance fees and carried interest as core to us, but somebody says, what’s core earnings. If you look at Q4 versus Q3 and bring it down to a $0.01 per share difference with those numbers that I just went through, it’s basically about a $0.03 difference quarter-to-quarter.

Okay, guys. That’s helpful. And then just a follow-up on Money Market, Debbie, thanks for the earlier comment and realize the team only gives waiver guidance for the current quarter. We’re just curious how you and the team are thinking about like rates over the year? You mentioned stimulus, that could be a potential benefit, any other catalysts that you’re watching throughout the year that could either do pressure or lift some of the yields?

Short-term rates are clearly influenced by Fed policy, and Chair Powell indicated earlier this week that we're still in a favorable environment. We anticipate that this supportive stance will remain unchanged in the near future. Additionally, as vaccine distribution becomes more widespread, we expect a significant pent-up demand from consumers and businesses alike. The extent of this demand can vary greatly across different sectors. We believe this demand will generate at least some inflation, although the Fed's focus is primarily on broader inflation and employment metrics. As travel and traditional business activities begin to revive, we foresee upward pressure on inflation rates. Therefore, we do not expect the Fed to take action in 2021, and the timeline they've suggested extending into 2023 might be longer than necessary based on current trends. We are likely looking at a steeper yield curve driven by Fed policy in the latter half of 2022 if progress continues at the current pace. This year, the market dynamics will largely be shaped by supply and demand. There is a substantial amount of liquidity available, and as this liquidity becomes more confident—potentially driven by a steadier yield curve in bonds or a slight pullback in the equity market—some cash may exit liquidity markets, which could steepen the yield curve due to reduced demand. On the supply side, if we see additional Treasury issuance and relatively stable GSE supply, along with a rise in commercial paper as businesses recover, that could further influence the supply. More supply and less demand could lead to a slightly steeper Money Market yield curve, though the increase may be modest, around 3 to 5 basis points, rather than significantly higher. That’s the kind of steepness we anticipate for 2021.

Okay. Great color. Thanks a lot.

And next question is from Kenneth Lee with RBC Capital Markets. Please proceed with your question.

Hi. Thanks for taking my question. We have observed very strong net sales for fixed income over the last few quarters. Could you share what you believe might be the key factors contributing to this?

Some of the key factors are that the clientele is still anxious to see yield and we see this across the Board inside our distribution. And there is renewed interest in the muni space. We’re getting more questions on that because of the obvious implications of potential tax increases. And there remains just a strong appetite for short duration at most firms. And for anyone who is allocating money, not making a brand new decision, oh, we are going to go in all bonds, all stocks now. Our products proved very, very strong last year, that’s why we had, I think, it was 19 of them with positive flows. So it was across the Board enhancement of quality that occurred last year. And it was focused on positive flows in the fixed income, which are continuing, as Ray mentioned. But what’s really going on behind the curtain is that even though the salespeople are not traveling, they are enhancing the relationships they already have. Because if you already have the email, the phone number and the golf courses and the places where your clients are going, you can still build up relationships. And yes, it does put a little crimp on new stuff going in. We’re getting into new clients. But you get to enhance the quality openings, as I’ve mentioned here before, which means a broader look at the Federated array of products and an in-depth look at the portfolios through portfolio construction. So the portfolio construction, when you tear into these portfolios, ends up with a lot of our short intermediate or total return bond fund type products as the answer to the types of bets that are being made by our clients. So this move to quality in the marketplace and there is still a current demand by many people for yield keeps the fixed income as a positive flow situation.

Yeah. Ken, I just highlight, as Chris said, short duration has been strong high yield has certainly been strong, and then within high yield our institutional domestic product. But we had also seen last quarter and into the first part of this quarter on the Hermes product menu, the SDG engagement high yield credit fund has gotten off to a very solid start and had a very solid fourth quarter. So we’re up to 23 funds in the first part of Q1 on the fixed income side that have positive net sales, and they really are spread through sectors with a concentration in short duration across sectors, high yield, and as I mentioned, SDG coming on.

Great. That’s a very helpful color. And just one quick follow up, if I may. I know it’s been a while since we talked about this, but wondering if there are any updated thoughts on potential BT Pension Scheme outflows. What’s the expectations for this year and should we expect to see any kind of meaningful impact on that sales from those flows? Thanks.

Because they are a big beautiful client, we don’t like to get into the specifics of their redemption or investment profile. As you know, they have substantial assets with us on the long-term nature and as we discussed way back at the beginning, they had announced and we repeat that they were going to be taking down the mutual fund or products that they’re in over time related to their own circumstances. And we have no reason to think that that won’t continue. But we’re just not at liberty to give what their redemption profile may or may not be.

Understood. Thank you very much.

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

Hi, guys. I was wondering, are there any products that can be sold kind of as a substitute for Kaufmann Small Cap and how much of flows typically come from new versus existing clients, so that basically just the notion of being able to ship clients between strategies.

We offer a wide range of Kaufmann products, including both mid-cap and large-cap options. For those who adhere to the Kaufmann methodology, these are excellent alternatives. On the MDT side, we have several small-cap funds that have performed very well and have experienced positive asset growth and influx over time. Additionally, the All Cap Core, which encompasses small-cap opportunities, is part of the MDT offerings. Moreover, on the international front, we provide an international SMID product. Our colleagues in Cleveland have diverse investments across the entire market capitalization spectrum. Thus, we have specific Kaufmann options, as well as small-cap and various other funds that incorporate small caps, allowing us to engage successfully with clients about potential investment opportunities for the future.

Great. You have mentioned that Money Market deals are associated with ABC credit. How should we interpret various rate scenarios and the readiness of sellers to accept lower prices? When rates increase, might sellers expect to receive better prices, which could lead to increased activity?

In the whole history of money funds going back into the ‘70s. To me, the way to look at it is people will always need to have their cash managed. And there are various things that occur in the marketplace that incensed them more. Yes, higher rates would be more helpful. But on the other hand, if you go back into a standard issue, wealth management sequence, about 20% of that money is always in cash in any event, whether they’re long the market, whether their bets on, bets off, it’s just the ebb and flow of life. And you couple that with the increase in money supply, the overall increase in markets and portfolios being a percentage of those increases in value, there is always constant demand for the cash.

John, if you’re also referring to M&A and Money Markets. The way we look at that is to work out long-term arrangements with the people that we do deals with, where they continue to earn what is available to earn. So in the low interest environment, of course, there isn’t as much to earn. And but if people throw the towel in, and say, they want to hook up with us, we are still available, ready and willing to do that. And it’s pretty easy to look at what’s being earned and we share the risk with anybody who we do transactions with, and it’s worked out well and we’re still ready, willing and able to do them.

Thanks very much.

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

Thanks. Just a follow-up on the fee waivers, the guidance for Q1, I assume that say as of the balances today. But just we’ve seen outflows to start the year in recent months. So just can you talk about some of the inputs that could make that number or variables that could make that number either higher or lower as we think about the current backdrop?

When we made our forecast, the asset levels were approximately the same as they are now, so there hasn't been much change. We used to detail all the variables affecting this, but we've moved away from that approach. Nonetheless, the variables still exist; assets may increase or decrease, and there are discussions regarding rates. This is our updated forecast based on the current asset levels.

Okay. With respect to sharing with distribution partners, this quarter it seems the relationship between what was previously classified as other revenue and the distribution expense has become somewhat disproportionate. Have you noticed any changes in the economic share with your partners as the fee waivers have increased, and how should we approach this moving forward?

Dan, it's really not a significant change on our part. Each fund and each class of shares has a different level of distribution, revenue, and expense. The final outcome is essentially a mix of those funds and share classes. As gross yields decreased by a few basis points overall in Q4, some funds that were fine before might start to waive fees once they hit a certain threshold. This is why we've always mentioned that modeling this is quite complex. It's not a straightforward process. Funds can move in and out, have varying fee structures, and these factors contribute to the difficulty in making accurate predictions.

Okay. Thank you.

And our next question is from Brian Bedell with Deutsche Bank. Please proceed with your question?

Great. Thanks. Good morning, folks.

Hi.

Just one follow up on Dan’s Money Market question and then a few ESG questions. On the distribution side, is there a, I guess, a natural floor that we should be thinking about in terms of the distribution fees that, the distribution waivers that you’re sharing with your distribution partners? I guess, the question would be, how should we thinking about the magnitude of what that could come to and then would there be more pressure on your actual asset management fee waivers, if you read the depth words reachable?

So it would be a similar answer, Brian. Within each individual fund, there would be distribution fees, typically from distribution fee revenue. However, when you combine them all, there wouldn’t be a specific floor level that we could provide to indicate where changes related to waivers would occur; that would happen at the fund level.

Okay. Fair enough. I have a couple of questions as well, particularly regarding the attraction of your ESP 100 funds in the U.S. The main question is how you’re observing demand improving in the U.S., especially on the EOS side. For Saker, we’ve seen the amount grow from $877 million to $1.3 million this year. How much of that increase has come from U.S. clients? More importantly, what are your thoughts on the demand if the U.S. is starting to align with the trends in Europe?

So, Brian, the group of products we launched over the past year and a half is relatively new. However, the asset basis has increased to around $130 million, up from just over $100 million at the end of the third quarter. While this shows progress, mutual funds typically need to grow larger to access additional distribution opportunities and require more time to establish track records. Nonetheless, due to the rising interest in ESG, these products have been performing well, despite their recent inception dates.

Yeah. No. That all makes sense. Thanks so much for all the detail on that. I really appreciate it.

And we have reached the end of the question-and-answer session. And now I’ll turn the call over to management for closing remarks.

Well, thank you. That concludes our call for today and we thank you for joining us.

And this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.