Greetings, and welcome to Federated Hermes Q2 2021 Analyst Call and Webcast Conference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Ray Hanley, President of Federated Investors Management Company. Thank you, sir. You may begin.

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

Thank you, Ray. Good morning all. I will review Federated Hermes business performance, Tom will comment on our financial results. Q2 ended with a record total assets under management of $646 billion, including record assets in each of equities, $101 billion; fixed income, $91 billion; and private markets, $21 billion. Assets under advice by EOS at Federated Hermes also reached a record high of $1.75 trillion, with a 'T', at the end of the second quarter. We added two new clients in the second quarter, in addition to the three we added in the first quarter. Now, while equity fund flows were slightly negative in the second quarter, about $300 million, we saw positive Q2 net sales in 18 equity fund strategies, led by International Global with about $1.1 billion in net flows. Here, net sales were strong again in our U.K. managed sustainable strategies, including SDG Engagement, Asia ex-Japan, global equity ESG, and global emerging markets. Our equity fund performance compared to peers was solid. Using Morningstar data for the trailing three years at the end of the second quarter, 53%, that's 16 out of 30 of our equity funds were beating their peers; 23%, which is seven out of 30, were in the top quartile of their category. Among the performance highlights, using Morningstar data, the soft closed 5-star Kaufmann Small Cap Fund finished in the top 12% for Q2, in line with its long-term record. At the end of the second quarter, its trailing three-year record was top 16%, and it was top decile for the trailing five and 10 years. It was fourth quartile for the trailing one year. Equity SMAs had Q2 net redemptions of about $162 million, down from about $450 million in Q1 and $900 million in Q4. Equity institutional separate accounts had about $950 million of net redemptions, including $817 million from a U.K.-based client. For the first three weeks of the third quarter, equity funds and SMAs had positive net sales of about $115 million. Turning now to fixed income. The second quarter was another very solid quarter of growth and performance. Assets increased by $4.3 billion or 5% from the prior quarter, with about $3.2 billion or nearly three quarters of the growth coming from net sales. We had 21 fixed income funds with net sales in the second quarter, led by multi-sector funds with about $1.8 billion and high-yield and other corporate strategies with about $400 million. Within high-yield, net sales were again led by a UK sustainable strategy, i.e., the SDG Engagement High Yield Credit Fund with $350 million. Fixed income separate account net sales of $1.1 billion were led by multi-sector mandates. At the end of the second quarter and using Morningstar Data for the trailing three years, we had 10 funds 28% in the top quartile and 16 funds 44% above median. For the first three weeks of the third quarter, fixed income funds and SMAs had positive net sales of about $835 million. In the Alternative/Private Market category, net sales were driven by our differentiated trade finance strategy with net sales of nearly $600 million. We begin the third quarter with about $1.9 billion in net institutional mandates yet to fund into both funds and separate accounts. These findings are expected to occur in private markets with the concentration in unconstrained credit and in fixed income. Now moving to Money Markets. Assets were up nearly $11 billion in the second quarter, with just under half from funds and the rest from separate accounts. Our money market mutual fund market share, which includes our sub-advised funds, was about 7.4% at the end of the second quarter, up slightly from the first quarter percentage. As we said on our previous call, we believe that Q2 was the high watermark for money market fund yield waiver impact. As we expected, the Fed raised the administered rates in mid-June, moving repo rates from zero to 5 basis points and interest on excess reserves from 10 to 15 basis points. While the Fed movement was a step in the right direction, the money fund yield curve remains very flat, and we are experiencing more waivers for competitive purposes. Tom will update our yield waiver outlook for the third quarter. Taking a look now at recent asset totals. Managed assets were approximately $638 billion, including $421 billion in money markets, $99 billion in equities, $93 billion in fixed income, $21 billion in alternative, and $4 billion in multi-asset. Money market mutual fund assets were at $293 billion.

Thank you, Chris. Total revenue for the quarter decreased compared to the previous quarter, primarily due to the effects of higher minimum yield and competitive waivers. Carried interest in Q2 was $6.2 million lower than in Q1, which included the effects of consolidating certain variable interest entities from the 2020 Hermes GPE acquisition that began in Q1. Other revenue increases from Q1 included a rise in money market assets that boosted revenue by $5 million, an additional day that added about $5 million, and higher equity and fixed income assets that contributed an increase of $3.4 million. Performance fees and carried interest in Q2 totaled $4.4 million, down from $9.4 million in Q1, which had included catch-up carried interest related to the VIE consolidation. Regarding operating expenses, the decrease of about $11 million in compensation and related expenses from the prior quarter was largely due to the Q1 VIE consolidation mentioned earlier, along with lower incentive compensation expenses. The reduction in distribution expenses of $6.3 million, compared to the previous quarter, was mainly due to minimum yield waivers, slightly offset by higher distribution expenses incurred for competitive reasons. The estimated negative impact on operating income from minimum yield waivers on money market mutual funds for Q3 is currently about $38 million, down from $46.8 million in Q2. The Q2 waivers were somewhat higher than anticipated due to increased asset levels. The Q3 estimate relies on our investment team's projections for portfolio yields and current asset levels and mix. The amount of minimum yield waivers and their impact on operating income will depend on several factors, including interest rates, distributors' ability to absorb waivers, asset levels, and asset mix. Any changes in these factors could significantly affect the amount of minimum yield waivers. As Ray mentioned earlier, we do not intend to update this information throughout the quarter. In the UK, new legislation will raise the corporate income tax rate from 19% to 25% starting April 1, 2023. Consequently, our Q2 income tax provision of $35.2 million included $14.5 million, or $0.11 per diluted share, to revalue specific deferred tax assets and liabilities. Non-controlling interest declined from the prior quarter mainly because of reduced income earned by Hermes due to this UK tax change, partly offset by an increase in the value of investments held by consolidated funds. During Q2, we bought back 993,000 shares of our stock for about $32 million. As mentioned on our last call and as outlined in the put call option deed from our acquisition of a majority stake in Hermes Fund Managers in July 2018, which we made public at that time, the BT pension scheme requested a valuation in April. A valuation firm was engaged subsequently, and we are continuing to collaborate with the pension scheme according to the agreed procedures in the option deed. We also plan to finalize both an amendment to our credit line, which will extend the maturity to 2026, and reduce the total line from $375 million to $350 million. At the end of Q2, our cash and investments totaled $424 million, with about $314 million available. Our debt at the end of the quarter stood at $65 million. That wraps up our prepared remarks, and now we would like to open the call for questions.

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Ken Worthington with JPMorgan. You may proceed with your question.

Hi. Good morning. Thank you for taking my questions.

Good morning.

Maybe first on the competitive fee waivers for money market funds being on the rise. I would have thought that given the pressure on revenue from lower rates that competitive fee waivers would be maybe diminished, not increasing. So can you give us a little more flavor on what's driving? Like we know this is always a competitive business. So nothing really changes there. But why the increase in competitive fee waivers? Is it maybe one competitor in particular, or is it broader based than that? And then last time, when we think about sort of six, seven, eight years ago, did you see following the financial crisis in the zero-rate environment, did competitive fee waivers increase then during that period, or is this time different? And, I guess, ultimately, we're trying to figure out why.

With competitive fee waivers, it is an ongoing situation. We cannot predict or understand why certain competitors make specific decisions at different times. Many variables are at play. Some competitors aim to expand their market presence, while others have unique strategies for managing their funds. We strive to remain competitive, but it's not something that can be easily anticipated or attributed. It is also not feasible for us or our competitors to determine the reasons behind each other's pricing decisions. Furthermore, I don't recall competitive waivers changing significantly since the post-2008 period.

Okay. Great. Thank you. And I have...

Ken, I just follow up on back end. At this time, the rates are lower than they were back in the 2008 time frame.

One – this is Debbie, Ken, one other factor to add into that is the mix of assets so much more is in government funds at this point compared to the 2008 time frame where more than half of our assets were in prime funds. And the prime funds obviously maintain a higher yield. So the waivers are less. Now that you've got 80% of the industry in government funds with a curve on the government side that is five to six basis points. That's, I think, where some of the positioning and changes have occurred.

Okay. Great. Thank you. I'm going to wrap two tiny questions together. One, trade finance you guys mentioned this seems to be taking off. I am a bit naive on the product, but the yield doesn't seem particularly good and the returns don't look good to other fixed income asset classes. So clearly I'm missing something? What has driven this product to take off? And then the other tiny one is any planned outflows from BTPS over the next six months? Thanks.

So on the trade finance, the beauty of trade finance is that, like other large institutional wins, it takes a long time to make these sales. And you have different people using the trade finance differently. Some use it inside a portfolio instead of using cash. Others use it as a short-term investment, where you get more yield than you get on cash and you have a short portfolio and a diversified look at assets in the marketplace. And so maybe from your perch on the tree you don't like the yield. But I assure you from these clients point of view for what they're doing and what they're looking at, it's a very, very strong offering.

So on BTPS, Ken, we're not really too excited about talking about our clients. They told us, as we said some time ago, last time we were addressing their asset levels, they had planned on taking out their public market money. And so I'll just leave it there.

Great. Thanks very much.

Our next question comes from the line of Dan Fannon with Jefferies. You may proceed with your question.

Thanks. Good morning. My question is on kind of the alternatives bucket, private markets and you had decent flows or solid flows, I should say, in the second quarter and just curious about kind of the fundraising environment. You mentioned an overall backlog of unfunded stuff around just under $2 billion. So curious around, how much of that is – what the breakdown of that is in terms of the AUM, but also just the outlook for the alternatives business as there seems to be some momentum there?

Well, as we mentioned – this is – the $1.9 billion is concentrated in unconstrained credit and fixed income. A further break, John, I think Ray might be able to add some color.

Yeah. Yeah, Dan, there's – there's more to come on the trade finance side. So we would have that along with the unconstrained credit. And in the alternative category, and that would be in total about $1.2 billion out of the $1.9 billion. So it's – that's where the more recent momentum is. Within fixed income, it's high yield, but it's also absolute return credit and core bond and some short duration money.

Thank you. I would like to follow up on the option with Hermes and where that currently stands. I appreciate your previous comments, but could you provide an update on the expected time frame? It would be helpful to understand how the process develops from this point forward, particularly regarding timing.

Okay, Dan. So as you know we said April is when they requested a valuation. And then we hired a firm. And we have not received the report from the firm. Once we get a report, there’s a process. Whether it fits into a range where, if either party puts or calls it, it has to happen. And there is also an opportunity to if either party is not happy with the valuation then they can request another valuation. So, you see the first valuation took from April, and we don't have it yet. And how long will the second take, I don't know, but that's the dynamics that are involved in terms of timing.

Okay. Thank you.

Our next question comes from the line of William Katz with Citigroup. You may proceed with your question.

Okay. Thanks very much. So, just backing away from fee waivers for a moment and looking at the long-term business. As you think about the incremental growth of what's coming in the door versus what's been going out the door, can you talk about how you sort of see the fee rate and the outlook for the base management fees relative to that growth?

I assume, Bill here you're talking about money funds when you're talking about the waivers …

Well, I'm saying,…

but …

…I'm sorry to cut you Chris. Just to qualify, just stripping away the fee waivers, I think that's pretty straightforward. I'm just looking at the long-term side of the business, just trying to get a sense of volume versus fee rate.

We are observing an increase in the money market fund sector, particularly in M3 or M2 metrics. Historically, money market funds account for about 0.2% of that, and currently, banks are reluctant to accept deposits. This situation may evolve, and some banks might adjust deposits alongside money funds, but overall, this presents a growth opportunity for money funds. Since around 1990, retail prime shareholders have gained an additional $200 billion in yield over what they would have earned in a Money Market Deposit Account. This trend will continue because banks offer administered rates, while retail prime funds offer market rates. Overall, these factors influence the market. Additionally, money funds provide individuals with competitive pricing and yields aligned with short-term rates, benefiting both issuers and shareholders. Regarding competition, there are fewer competitors each year, although those that remain can be quite aggressive. Predicting how these organizations will approach pricing is challenging, making it difficult to ascertain long-term pricing trends. However, we do not foresee a decline in the current economic advantages we have. Of course, discussions with the Fed regarding the institutional prime products remain a constant aspect of our long-term interaction, reflecting our ongoing challenges over the decades.

Thank you for that. I want to clarify that I'm particularly interested in the equity, fixed income, multi-asset, and alternative investments. I'm trying to get a grasp on the trends, especially since many mandates appear to be leaning towards shorter durations and fixed income or separately managed accounts. I want to understand how we should consider the base fee rate, management fee rate, and blended fee rate for the company going forward, excluding the impact of the money market business.

Sure, Bill, it's Ray. It's a bit challenging to predict because we have numerous products and strategies. Typically, separate accounts, including SMAs, tend to have lower fees than mutual funds. In Q2, the equity blended fee rate decreased by about two basis points from the previous quarter, primarily due to mix rather than pricing changes. Fixed income remained unchanged, while multi-asset fees increased and alternatives stayed flat. Therefore, it's difficult to provide a clear projection, and I understand the challenges in modeling this given our range of strategies. However, if you assume that we'll have lower fee rates as we experience more success on the institutional side relative to the retail side, we would agree with that, and we are pleased to secure that business.

I would add, Bill, that longer term, one of the reasons that we engaged with Hermes U.K. was for the private markets business. And I think it would just be instructive to let Saker make a comment or two about the real estate part of this at this time.

Thank you. I want to discuss two key areas: our real estate segment and the equity and fixed income business within Federated Hermes' international operations. In our real estate business, we have two primary components. The first is akin to a mutual fund, which was originally available only to institutional investors in the U.K., but we have since opened it up to non-institutional and non-U.K. investors. This is a significant advancement for us, as it has a strong track record and has consistently generated a healthy stream of public-denominated fees. The second component, which contributes more substantially to our income, is what we refer to as placemaking. This involves collaborating with cornerstone institutional investors who make significant investments aimed at developing urban areas, primarily in cities that we help revitalize in close partnership with local authorities. This process typically spans 10 to 15 years and involves various stages. Clients pay us both a base management fee and a performance fee. Our placemaking business continues to grow, although direct cash flow can’t be predicted year-by-year like a mutual fund sale. However, we anticipate a long-term increase in our fees as we expand this business, which is attracting strong interest from clients globally, including many of our largest clients who are based outside the U.K. We aim to broaden our reach, but this will take time.

Okay. That's much better. Thanks so much. And then just a follow-up. Just as we think about comp with the small cap fund and BTPS, is there a way to sort of size what the ultimate assets that still may be at risk in terms of potential runoff?

BT pension scheme?

Right. And also with small cap being soft closed, like what's the aggregate size of that portfolio today?

Well, that fund is a little bit under $10 billion. And on the BTPS side, we're just not at liberty to talk about them in specificity.

Okay. Thanks and I'm sorry if I wasn't clear on my initial question.

Thank you.

Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.

Hi. Great. Good morning. Thanks for taking my questions, everyone. Maybe the first one real simple, and I apologize, I may have missed this earlier if you guys highlighted, but the very simple, just what the performance fee impact may have been, if any, in the quarter? And then I guess maybe, Debbie, a question for you. I mean the Fed did what you expected in the last quarter. Here we sit today, can you maybe update us on what your thoughts are as you look at over the coming quarters for the prospects for either the short end of the yield curve to steepen again or any of the type of action that you think can help the short end of the curve.

Rob, Hi. The performance fees for Q2 and carried interests were $4.4 million compared to $9.4 million in Q1, which had the catch-up from the VIE. And Debbie?

Sure, Rob. Yes, much like an autonomous process, we may have been a bit early, but the Fed did what we anticipated. In March, they raised the amount available to RRP participants from $30 billion to $80 billion in June. As Chris mentioned, they also increased the technical factors by five basis points. With the debt ceiling concerns behind us next month, the Treasury will be paying down bills to ensure the government's cash balance is within required limits by July 31st, starting to utilize them at the beginning of next week along with other measures to fund the government. We expect Treasury bill issuance to increase again. Over the next month and a half, until the debt ceiling is reached, we anticipate medium-term increases in Treasury bill issuance, which may slightly steepen the yield curve. This will eventually translate into marginally higher yields on the fund, possibly by one basis point. We think the next discussions by the Fed will focus on tapering, as mentioned during the June meeting and likely to be addressed in Jackson Hole. We expect an announcement regarding tapering details in September, which should start before the end of the year, adding another basis point or two to the yield curve steepness. As tapering progresses in the first half of 2022, we anticipate an additional basis point or two. However, we expect that the yield curve won't steepen much beyond 10 to 15 basis points. The broader release will likely coincide with changes to the Fed funds target rate, which we anticipate might occur in the second half of 2022. We are grateful for the updates from the June meeting regarding the FOMC members' expectations for 2022 and 2023, which align with the previous economic projections.

Great, thanks for that comprehensive answer. Maybe Chris, I could squeeze in one more question on the ETF and ESG. So, you've touched on this in some prior calls. You've hired some people to run that business for you, and obviously there has been very strong demand for ETFs within sustainable or ESG framework. You could update us on where that initiative sits and maybe what we should be looking for over the coming year?

Yes, I assume you were asking about EOS?

Well, I was thinking about if you were asking about EOS?

Okay, fine. Okay. Well, we are still very positive about doing it. And obviously, we have a couple of short-term funds that are going to be the first ones out of the box. We still expect them to have birth dates with this year's handle on it. The active part of the business is only about 4% of the total ETF business right now. So, as we like to say, it's still early innings. And there are other structures that people are catching up with where you could actually do a mutual fund and an ETF in the same structure. Whether that works or not, whether the SEC likes it, whether there are patents and things like that involved? All have to be evaluated. But basically, it's a packaging thing, where you've got at least half of the business, meaning the non-retirement half, who find the ETF to be a better mousetrap, primarily because of taxes and trading. It doesn't work in the retail and in the retirement half of the business. So, it's one of the packagings that we think is necessary for the future. So, we're working diligently with the providers, and that's about as much update as I have. Eventually, we will be adding products. We sort of have a line on who will be next in line, but that will be a '22 event. And those are subject to change, so I'm not going to give you the list of who's who next on the list.

And Rob, while we're not going to go through a specific list, we are certainly evaluating and looking at sustainable strategies related to ETFs.

Our next question comes from the line of John Dunn with Evercore ISI. You may proceed with your question.

Hi, good morning. Your money market mix has changed significantly since the last peak. Could you discuss some of the shifts you've been noticing lately or anticipate moving forward? Specifically, I'm interested in which products are involved, how the shifts occur within products, client types, expense ratios, and similar aspects.

Debbie, why don't you take it from the point of view of where you're seeing the moneys in the types of funds? And then, Ray will comment on the economics thereof?

Certainly. Well, we have seen more from a 2a-7 money market fund standpoint, more of the inflows have come into the government funds, and that has a whole lot to do with where net yields are right now. Most net yields are to one to three basis point level and to many investors who are comfortable and have been in prime funds, it doesn't really make a whole lot of sense because they're not getting any extra incremental income from a net yield perspective by being in those types of funds. So, we've seen our prime money fund, 2a-7 money fund assets decline. Where we've seen increases in the prime side, however, has come in the non-2a-7 business. So, offshore separate account, local government investment pools, they seem to be trending more toward the prime space. And the mix of assets on an overall liquidity business basis has remained fairly steady, but with a larger proportion of governments in the 2a-7 space and a larger proportion of prime in the non-2a-7 space.

And John, I would just add to that, we think of liquidity as a kind of a spectrum and we recently put a couple of new short duration, micro-short funds out to sit between the money fund choice and the ultra-short bonds that we already are very, very strong in. And so, I would not tell you that we've had any significant shift in the client mix. We're active with our bank clients, we're active directly with corporations, including some of the largest, on a direct basis. And those clients have a very sophisticated and tiered approach to how they manage cash and hence, our product line has evolved to give them options that fit with the segmentation that they're doing on their cash.

One more thing I'll add, John, and that is that, when Debbie talks about the non-2a-7 products increasing in prime, one of the things behind the curtain there is that because of the SEC rule, that the 30% weekly liquidity threshold, if it's threatened or crossed, then you threaten the client with a fee or a gate. This caused more redemptions in the prime funds that were subject to 2a-7. And when you look at the charts, we didn't have any of those issues in the other funds that are non-2a-7. So, this inspires part of our commentary to the SEC that you've got to eliminate this link. It was a mistake when they put it in. And so, they just ought to remove it because it did hurt the resiliency of those funds because the 30% which was supposed to be a liquidity buffer actually ended up being a floor and you couldn't hardly use it. So, that's one point I'd like to make. The second point is, as things have changed over 4 plus decades in money funds, we don't lose clients. They may move from over this type of product to another type of product, or another solution, whether it's a private solution, whatever, even when the massive amounts of prime were shut down because of the 14 amendments implemented in '16, the clients moved over to our govie funds. So, part of the reason for that is our heritage and devotion to the business, our defense of the stakeholders here, but also because as Ray mentioned, these clients are diversified, that's what he means by tiered approach. They do not put all their money with one purveyor. They move it around and keep it diversified and that, of course, is helpful to us.

John, just one other thing. When you talk about the clients, while the nature of the clients haven't changed how they think about their cash, does. For example the banks, certain of the larger banks that we're working with are managing their balance sheet and looking at their deposit level and are looking for alternatives for placing cash. And we work actively with them as to help solve that dilemma.

Great, thanks. And then on the long-term side, just as we hopefully continue to move to a more normal environment, what's the outlook and maybe your plans for Hermes Strategies for U.S. institutional clients?

We are actively promoting Hermes Strategies through our institutional sales efforts, and we have seen some success over the last quarter. Some of our achievements have been related to Hermes Strategies. This remains a strong focus for us. Additionally, we are working on expanding our private market business in the US. This will take longer to develop, but we aim to replicate the success Hermes has experienced in the UK and EU in the US market.

Our next question comes from the line of Kenneth Lee with RBC. You may proceed with your question.

Hi. Good morning, and thanks for taking my question. I know that Federated has historically been open to bolt-on acquisitions. So, just wondering if you could give us any update or outlook for the potential for M&A?

Sure, Ken. Federated Hermes has had an interest in acquisitions for a while. We discussed the put-call, which is still a current topic, and our team continues to focus on money fund transactions. We are actively engaged in discussions regarding this area. Regarding bolt-on acquisitions, we refer to those as centers of excellence deals, and we remain interested in pursuing them and meeting with potential partners. However, there isn't anything specific or imminent to report at this time.

Got you. Very helpful. And then one follow-up, if I may, just on the money market side. Wondering if you could just further qualify the level of competitive activity you're seeing? Are you seeing competitors doing relatively uneconomic or irrational actions and therefore you would think these kind of actions are relatively unsustainable longer term? I just wanted to get a better sense of that.

Well, I would prefer not to use any adjectives in order to describe how I think about what the competitors are doing. And I have no way of knowing what their relative economics are or with some of the bigger ones what other things they have going that enable them to do things here that we might not see as the wisest thing to do. So, it's just really tough for me to jump on all the adjectives, even though I might be enthusiastic to do so.

Understood. Thanks again.

Our next question comes from the line of Patrick Davitt with Autonomous Research. You may proceed with your question.

Good morning, everyone. I’d like to follow up on trade finance and the overall progress in the Alternatives sector, which is encouraging. In response to Bill's inquiry about the mix of these products, as we are still trying to understand your alternative business, could you explain how the management fee structures are set up? Are they based on market-to-market or committed capital? I'm considering the duration of the management fees expected from the $1.9 billion in mandates you mentioned.

Well, Patrick, the pricing is different for each fund. We have a fee schedule, but each fund is priced individually, as they are generally larger than the upper limit of the fee structure. I can't provide a specific rate for the upcoming wins; however, we can discuss the overall blended rate for those businesses. Excluding the funds, the private market accounts have an approximate blended advisory fee rate of 40 basis points. Nevertheless, individual accounts vary around that blended figure.

Okay. Fair enough. And last one, remember a few years ago, you had talked about searching for an Asian partner. Is that something we should still consider an aspiration, or have you kind of pivoted to building that distribution out yourself?

Yes. Chris, I'll follow-up. So remember, we put the Federated Hermes London team together with the Pittsburgh team and the London team is working on expansion plans and maybe Saker, you want to talk a little bit about that, which is their expansion plans or organic growth right now. Saker?

Since we merged both teams, we have consolidated at our Asian headquarters located in Singapore. From Singapore, we have established strong relationships with South Korea, where we have dedicated team members visiting regularly. We are also exploring opportunities in Japan for a future permanent position, and we have initiated a permanent office in Australia. We are essentially establishing a presence in each of the key markets while continuing to grow our business organically. We believe that the combination of products managed from Pittsburgh and London is particularly appealing to clients in the Asia region. These clients are typically institutional and long-term, an area where we have significant experience. While it may take time to engage them, they tend to become excellent long-term clients, and that remains our ongoing strategy.

And Patrick, in specific answer to the question about what we were talking about a few years ago, there's nothing hot on the agenda on that right now, but we haven't abandoned the concept of finding a big distribution partner who appreciates exactly what Saker just said. And therefore, we can have a confluence of arrangements. The covidization of this process was not helpful because basically, you got to be able to travel to deal and spend the time, the long time that's necessary in order to create one of these bigger-type partnerships. So that's the specific answer, Patrick.

Great. Thanks, guys.

Our next question comes from the line of Brian Bedell with Deutsche Bank. You may proceed with your question.

Good morning, everyone. I apologize for joining the call late. I wanted to ask if you could provide an update on net flows into dedicated sustainable products, which appeared to be very strong in the first quarter. Additionally, could you outline the total assets under management in dedicated ESG funds across your franchise, including Hermes, liquid and alternative products, as well as Federated branded products in the US that have recently been introduced? I have another follow-up question related to this.

So Patrick, I'm sorry, we discussed the international global aspect, where we had approximately $1.1 billion in net flows on the fund side. Nearly all of that, around $1 billion, came from UK-based sustainable strategies. Regarding the fixed income fund side, we highlighted the SDG engagement high-yield credit fund, which amounted to about $350 billion. There were additional funds as well, contributing roughly another $400 million. Furthermore, that covers the fund side you inquired about. We also have institutional accounts, unconstrained credit, and others, though I don't have the total figures available right now. We can follow up with you on that.

Okay, yes, that would be great. And then regarding product development, I'm not sure if you covered this, but do you have any thoughts on launching cash management strategies that focus on ESG? I know BlackRock transitioned several of their cash strategies to dedicated sustainable investment processes. Is there any interest in doing that for Federated?

Well, I'm going to let Debbie run a victory lap on this one, but let me introduce it by saying that when we did the reverse transformational deal with Hermes, we wanted to integrate all of our investment management with ESG, so that you get ESG baked in the cake. And guess who was first at the starting line and the finish line to get that accomplished was the money market funds. And I will let Debbie tell you how that worked and how that plays in the funds.

Thanks, Chris. And certainly, Brian, given the high-quality short-term security types that we use in the money funds, what we basically did was add an additional layer of input into our credit process. So our team management approach for money market funds consists of team members that are investment analysts, portfolio managers, and traders. So through our investment analyst positions, we added the EOS and ESG informational content that was provided, both by external as well as more importantly, internal sources and are using that actively in our assessment for the credit securities that we're using within our portfolio. Our prime funds were the first ones to be integrated just simply because their large use of international global banks and industrial types of firms and the coverage of those types of issuers by the ESG assessors and analysts. But most recently, we've made a lot of progress integrating our government funds as well with the beginning of engagement strategies with all of the various GSEs that we use within our portfolios for the government funds, loan bank, Fannie Mae, Freddie Mac, TBA, the farm credit system; we are beginning discussions or have begun discussions with all of them fully integrating then our government funds as well. In addition, because many of our municipal funds also rely on the banking system for their letters of credit and guarantors, those have also been fully integrated. So, our level is very high and our amount of input, given the high-quality short-term issuers that we use in these portfolios has been very impactful and substantive.

And so, Brian, the answer you should detect from that without mentioning any particular competitor is that when you're dealing with a Federated Hermes Money Market fund, the word Hermes basically embeds ESG in the process. And when you look at our money market funds, it's designed to go for minimal credit risk. Anytime you see risk somewhere, you want to evaluate it for your purposes. And that's what we're doing here. So, we view our products as fully integrated on ESG and able to stand up against anybody on that score.

Yes, that's great. That's great color. Thank you.

Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.

Thank you for taking my follow-up, and I appreciate everyone's patience with the questions today. Chris, regarding the money fund business, especially over the past year since March 2020, I was curious if you could discuss the reforms that have been implemented. These changes, while not surprising to you or many observers, seem to involve revisiting past proposals that were previously set aside. Is there anything you're currently hearing or seeing about these older proposals, or perhaps something new that raises concerns for you, especially with regulators' attention on certain issues that we should be aware of?

Rob, the list of things is, as you say, a rehash. I consider a whole lot of zombies coming back from the dead because most of them are just different forms of killing money funds or killing prime money funds or killing muni money funds. And if that's what they want to do, then they got to be straightforward about doing it. So, I'm not aware of anything other than removing the mistake that was made by linking the 30% weekly liquidity with the threat of fees and gates, which did compromise the resiliency of funds. But part of the issue really here is that the Fed from the mid-70s has wanted to eliminate these money funds and uses any opportunity to do so. And we make the argument that the money fund is simply a transparent collection device, a de facto operating entity of bank paper and commercial paper, and don't forget the Fed in 1913 was started in order to help and assist the commercial paper market. And so, when the Fed takes an action by simply looking at the transparent and available money market funds, they can put a nice softening touch to the entire market by just dealing with the $53 billion that they dealt with the last time, lose no money, take no risk, and do their liquidity deals. So, we look at the whole thing as the only structural vulnerability that was created, was really the link of the 30%. We also think that the Fed could do a lot more and certainly ought to, before they go about shooting money funds. For example, doing an all-type market where people can really trade these short-term securities. And there are things they can do related to leaving the discount window open, reevaluating SLR in a crisis, and things like that to make the liquidity work smoother and still do everything totally consistent with Dodd-Frank, where all you do is help liquidity and don't help individual people in advance. P.S. that's not what they did when they helped ETFs.

Let me add one thing to that, Rob. This is Debbie. In addition to what Chris was saying about the Fed, we do think one of the things that they did at their meeting this week where they announced the standing repo facility takes away some of the emergency actions they need to do. So, this replaces their temporary market open market operations that they beefed up in the February, March and April time frames and then allow the opposite. This standing repo facility, it's the opposite of the standing reverse repo facility that they have. It's therefore borrowing not investing. So, people putting transaction back to them, putting collateral back to them, rather than them taking the cap and giving the collateral. But in fact, we think maybe that is a sign of their willingness to look at facilities that are more permanent in nature and able to help in a crisis, rather than just coming up with emergency lending facilities, when they are on the brink of problems.

Great. That was helpful. Thanks for taking my questions and your patience this morning.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Ray Hanley for closing remarks.

Well, we thank you all for joining us today and that will conclude today's call. Thank you.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.