Good morning, ladies and gentlemen and welcome to the Federated Hermes Q3 2021 Analyst Call and Webcast. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Ray Hanley, President of Federated Investors Management Company. Sir, the floor is yours.

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

Thank you, Ray, and good morning. I will review Federated Hermes' business performance, and Tom will comment on our financial results, including waivers. Q3 ended with a record long-term assets under management of $220 billion, including record assets in fixed income at $97 billion and in alternative/private markets of $22 billion. Assets under advice by EOS at Federated Hermes were $1.7 trillion at the end of Q3. We added one new client in the third quarter and six new clients year-to-date. While equity fund flows were negative in the third quarter by $867 million, we saw positive net sales in 15 equity fund strategies and added about $400 million in equity assets from the Hancock Horizon transaction. Our equity fund performance compared to peers was solid. Using Morningstar data for trailing three years at the end of the third quarter, 50% of our equity funds were beating peers and almost 20% were in the top quartile of their category. Equity SMAs had third quarter net redemptions of about $15 million, down from $160 million in Q2, down from $450 million in Q1, and down from $900 million in Q4 of 2020. The domestic strategic value dividend strategy had positive Q3 SMA sales of $34 million and slightly positive combined fund and SMA sales. For the first three weeks of Q4, equity funds and SMAs had net redemptions of about $463 million. Interestingly, about three-fourths of this was a tactical shift by one client. Now, turning to fixed income. Q3 was another very solid quarter of net sales and performance. Assets increased by $6.4 billion or 7% from the prior quarter, with nearly all the growth coming from net sales. Fixed income separate account net sales of $4.6 billion were driven by multi-sector strategies. Most of the Q3 separate account net sales came from a large public entity. Fixed income fund net sales of $1.7 billion were driven by short-duration strategies of $1.4 billion, with solid results in core total return strategies as well, that's about $360 million. We had 19 fixed income funds with net sales in the third quarter. Now, we're progressing towards the planned Q4 launch of our first two active transparent ETFs: An investment-grade short-duration corporate bond fund and a high-yield short-duration bond fund. These initial offerings draw on our strengths in these areas and we're focused on the successful launch and growth of these initial products, while we also plan for additional ETF offerings. At the end of the third quarter and using Morningstar data for the trailing three years, we had 28% of our funds in the top quartile and 44% above median. For the first three weeks of Q4, fixed income funds and SMAs had net sales of about $454 million. Now in the alternative/private market category, net sales were diversified across unconstrained credit $568 million, absolute return credit a little over $200 million, real estate $180 million, and direct lending $68 million. We began Q4 with about $1.4 billion in net institutional mandates yet to fund, into both funds and separate accounts. These additions are expected to occur in fixed income and alternative/private markets, including the aforementioned unconstrained credit, direct lending, and trade finance. Now, we are working on two new private markets products. We expect the initial closing for our new direct lending fund during Q4 for about $270 million and expect to raise additional assets in 2022. We are also working on a new private equity fund with an initial closing set for Q4. This will be a mix of existing clients rolling over to the new fund and some new clients. We expect around $300 million in the initial close with an additional capital raise expected to occur next year. Moving to money markets. Assets were down about $16 billion in Q3 with about $10 billion from funds and $6 billion from separate accounts. Our money market mutual fund market share, including sub-advised funds, was about 7.2% at the end of Q3, down slightly from Q2 of 7.4%. While the Fed raised the administered rates in mid-June, the money fund yield curve remained flat and rates didn't change much in the third quarter. We believe that we will see higher short-term rates in 2022. We continue to experience more waivers for competitive purposes. Tom will update this program, as I mentioned. Now taking a look at recent asset totals. Managed assets were approximately $636 billion, including $413 billion in money markets, $99 billion in equities, $98 billion in fixed income, $22 billion in alternative private markets, and $4 billion in multi-asset. Money market mutual fund assets were $290 billion. With that, I'll turn it over to Tom.

Okay. Chris, thank you. Total revenues for the quarter were up from the prior quarter due mainly to the impact of lower minimum yield waivers of $8.6 million and an extra day in Q3, which increased revenue by $4.9 million. The increased revenue of $5.4 million from higher average fixed income and equity average assets was offset by lower average money market asset-related revenue. Q3 carried interest and performance fees were $5.2 million compared to $4.4 million in Q2. Operating expenses decreased slightly in Q3 compared to Q2. Most categories were lower or about flat. We are seeing restoration in travel and entertainment expenses as pandemic-related restrictions ease. The negative impact on operating income from minimum yield waivers on money market mutual funds is currently estimated to be about $39 million for Q4, up slightly from $37 million in Q3. The Q4 estimate is based on our investment team's expectations for portfolio yields, recent asset levels, asset mix, and other factors. The amount of minimum yield waivers and the impact on operating income will vary based on several factors, including interest rates, the capacity of distributors to absorb waivers, asset levels, and asset mix. Any change in these factors can impact the amount of minimum yield waivers in a material way. During the third quarter, we completed the acquisition of BT Pension Scheme's remaining 29.5% non-controlling interest in Hermes Fund Limited Managers for 116.5 million pounds. During Q3, we purchased about 600,000 shares of our stock for approximately $18 million. John, that completes our prepared remarks and we'd like to open the call up for questions now.

And the first question is coming from Dan Fannon from Jefferies. Your line is live.

Well, thanks. Good morning. First question is on the fee waiver outlook and I understand the inputs that you mentioned that can drive the changes but curious about the competitive factors and maybe what is different as you think about this cycle of rates and from competition versus previous ones? And is the relationship potentially between distribution expense sharing, any economics of that different this time as we come potentially back to more normalized rate levels?

So yes, Dan, this is Tom. Our competitive environment persists as it always has. As we anticipate rates increasing over time, we will stay competitive with the rest of the market. That’s essentially how we view it.

Okay. But I guess just trying to clarify the sequential delta with assets being down, rates generally being up but the fee waivers going higher. Can you give us the factors that are specifically driving that?

The competitive discussion around this topic revolves around the minimum yield waivers, which are designed to keep rates at zero or just above zero. If rates exceed this level, it reflects the competitive dynamics of the marketplace, which are unpredictable.

And Dan, it's Ray. Just to provide more detail on the assets, at the close of the third quarter, the assets in the money market fund were above the average for that quarter. We entered the quarter with a higher average asset level. In terms of government assets, they increased by about $3 billion, while government funds rose by approximately $5 billion, which is where most of the waivers occurred. So we are considering those asset levels in our forecasts.

Got it. Okay, thank you.

The next question is coming from Ken Worthington from JPMorgan. Your line is live.

Okay. Coincidence, similar topic here on competitive fee waivers. It looks like the yield on the government obligations fund rose in August and rose in September to match yield levels by some other big government funds at, say, BlackRock and Goldman, although there are some others as well. I assume that this is a matter of competitive fee waivers that we've been talking about. And also to follow up on Dan, I do know you've always said the money market fund business is always very competitive. But now that we're seeing more conviction around rate increases possibly coming next year, is there jockeying taking place to kind of try to win share through yield in a way that maybe you and the industry didn't see 6 to 12 months ago before there was sort of conviction that maybe we might have higher yields happening in 2022 rather than 2023 or beyond? So anyway, just maybe more of the same.

Ken, it's difficult to fully understand our competitors' strategies. Therefore, we focus on the reality of the marketplace and the current yields. I agree with your comments about the situation last summer. This competition will continue. I'll let Debbie discuss some of the specifics regarding those rate changes.

Sure. This is Debbie. Examining the various curves and what's available, the government funds, which Ray mentioned are typically the ones contributing to the highest amount in waivers, faced constraints in the third quarter due to the debt ceiling limit. Unfortunately, this issue has been postponed and will significantly impact us in the fourth quarter as well. However, if you look at other curves not affected by the debt ceiling constraints, you'll see that money market curves have generally increased by 4 to 10 basis points. We expect that once we begin tapering and receive more supply after the debt ceiling is resolved, the government curve will align accordingly. Competitors anticipate that with the expected rise in yields, concerns about enhancements to various shareholders in the market will diminish. This is the general sentiment as we approach 2022, putting the debt ceiling behind us, starting the tapering process, and allowing the government curve to resemble the prime curve, whether that involves LIBOR or other indices, indicating rising rates.

Perfect. Thank you so much.

The next question is coming from Bill Katz from Citigroup. Your line is live.

Okay, thanks very much for taking the question this morning. You went through some of the product launches pretty quickly this morning. Just wondering if you could repeat what you had mentioned in terms of the direct lending and private equity? And how do those funds compare to predecessor funds? And then a broader question, Chris, there seems to be a fairly big focus on tapping into the retail democratization for alternatives. I was just sort of wondering what's your sort of go-to-market strategy to try and pick up on that opportunity?

Yes, Bill, regarding those various items, there are two main points. One is direct lending, which will help us reach new totals that we'll discuss shortly. What's happening here is an expansion into private markets that wasn't initially part of the excitement around the Hermes deal. We believe the entire private markets business could grow to a size comparable to what the whole Federated enterprise was when we made the acquisition. We are pleased to see progress in private lending, which aligns with broader trends in the marketplace. In private equity, we have a strong group of investors. As mentioned, we anticipate around $300 million in the initial close, leading to some impressive figures. Ray will share those numbers, and then I'll have Saker provide his perspective on the entire effort.

Yes, Bill, just on the activity we expect in Q4. On the direct lending, we will have funding in the $300 million range which would bring our total direct lending assets to about EUR 700 million. Then we're looking at additional asset raises for that product next year. On the private equity side, this would be another iteration of what we've done to date. We expect, as we said, about $300 million in the initial closing from a mix of rolling over existing clients staying in and some new investors as well. That vehicle will also look to raise additional funds next year. Saker?

Thank you very much. So in terms of the whole private markets business, we have a very strong footprint across the firm in private markets going from property through to infrastructure, through to private equity, through to direct lending, and through to unconstrained credit. We view this as a singular platform. We're increasingly working on being able to present it to our clients as one so that they can choose on various facets within it, specifically talking about what went through and what Chris talked about. The direct lending fund typically works in vintages that close. The fact is that we've raised the first part of the vintage faster than we'd anticipated. The flows look, as you just said, to be strong and we expect to continue raising assets for that into next year and into next quarter. It is a well-regarded team, one of the best in the business according to many analysts out there, and the performance has been strong in the past which is why we continue to see this flow through. The private equity team is a very well-established team, and this is again a new vintage that they've raised and we're hoping to raise assets that you've heard about and is very strong. In real estate, I've talked to you in the past, there are two kinds of real estate we do. It's particularly U.K.-focused. One is a fund, a unit trust, an equivalent of what the Americans would call a mutual fund. That continues to have the best track record over 10 years and continues to attract capital. But in addition, we have these development projects which we call place-making that have had outstanding returns and which continue to attract assets, and we're pretty confident that we will continue to see clients coming into this, but there tends to be big chunks, one-offs. So they don't tend to be sort of random. As far as your question of how do we democratize the access to private markets. It is something we're working on. We're not yet ready to come to the market and talk about how we're doing it. But it's certainly something that we do think about and we're thinking about how to make our capability available in different ways. It is combined a very strong business with the projection for growth, as Chris has said which is quite substantial. I return it to Chris.

One other thing, Bill. When we purchased Hermes and had all these exciting businesses, Saker and his team developed those with the relationship with the pension scheme and what we've talked about now is how do we institutionalize this and make it available to a broad group, and that's going to we're coming down the path to being faced with adding some distribution and other operating expenses that will come along in this business next year. But we continue to be pretty excited about it.

Thank you.

The next question is from Kenneth Lee from RBC Capital Markets. Your line is now live.

Hi, thanks for taking my question. One, just around the competitive landscape for money market funds. Wondering if part of the competitive reasoning is seeing any clients going to either money market fund substitutes of any sort?

It appears that deposits remain a significant aspect of the landscape, especially as a competitive product in money markets. Even in the current low interest rate environment, a considerable amount of deposits remains uninsured and noninterest-bearing, yet many clients still choose this option. Regarding other financial products, such as ETFs, cash-equivalents, and cryptocurrencies, we are not currently observing a shift toward those alternatives. However, we are monitoring these developments closely to ensure we remain aware of any emerging competition, although we are not seeing immediate changes at this time.

And Ken, just to add to that, we are seeing, of course, clients, corporations putting cash to work, investing as we enter an upcycle and come out of the pandemic. So we will expect to continue to see uses of cash, whether that's stimulus money that's flowed through and flowed into money funds and eventually goes on to do its intended stimulus work as well as, as I mentioned, corporations beginning to invest and seeing opportunities where they were more hunkered down over the last 18 months.

And one last thing, Ken, in the context of our Microshort Ultrashort products, there have been clients who, over the last two years with ultra-low rates, continue to allocate cash and extend their investments into those products. Additionally, those who are concerned about a steeper yield curve and higher long-term rates have also been drawn to these products. With a complete range of funds that span from overnight to 30 years, we are pleased with those flows.

Great, very helpful. And just one on the private markets direct lending fund. I wonder if you could just talk a little bit more about how the underlying economics work for Federated Hermes? And then perhaps it sounds as if it's a very experienced team there. Just wondering, in general, how the fund can compete against perhaps some other players that do direct lending through permanent capital vehicles?

I can comment just broadly on the fee levels for alternative private market, and Saker can address the competitive landscape for direct lending. Essentially, our private market/alternative business blends in at around just under 40 basis points and that does not include performance fees and carried interest which come along episodically. That's a range of strategies. We wouldn't comment on particular fund levels for particular slices of that at this point. Saker, do you want to talk to the competitive landscape?

Sure. You are correct that there are many different direct lending funds and initiatives available. What sets us apart are three key factors. First, our team led by Patrick Marshall is highly experienced, especially in the lending sector, with a background that dates back to the financial crisis, which adds significant credibility. Second, our approach to assessing loans is distinct; incorporating ESG factors, as we've mentioned before, enhances our returns. We believe considering future factors also contributes to better performance and provides valuable insights, ultimately giving us a competitive edge, especially in Europe. Lastly, our loan sourcing method differs from the typical marketplace, and although we can discuss this further later, we have a unique model that has proven particularly effective. We are confident in our value proposition when engaging clients, especially in Europe, as evidenced by the rapid filling of our new tranches. This leads us to believe we possess a strong competitive advantage.

And I would add on the PE side, the way you phrased the question, you had it that private equity and direct lending fund, they're not together. They're completely separate. Each individual fund. And on the PE side, it's a unique way of offering that has gone on quite successfully for a long time, originating obviously with the Pension Scheme but growing into third-party investors with a club-like approach of investors and a very thematic approach from the investment advisory side of it, coupled with the ESG integration. So in each of the direct lending and the PE, you see what we think is a unique flavor that allows us to be enthusiastic for these offerings.

Great, that's very helpful. Thanks again.

The next question is coming from Patrick Davitt from Autonomous Research. Your line is live.

Hey, good morning. I want to clarify something. Am I understanding that the private equity strategy does not operate with vintages like what we typically see in alternative asset management? From that perspective, is it more of an evergreen strategy that can continuously raise funds? Is that the correct way to look at it?

So it does have vintages but it rolls vintages. The methodology, as Chris said, is what really matters in the private equity business. Again, I'd like to emphasize it's a lead investor and a team that has a stunning track record going back many years, and that's public domain, so you can check it out. They've developed this very differentiated way of accessing deals in private equity markets. The second element is this, again, very differentiated, thematic overview that they put on. Now, what we typically do with all of these strategies in private equity is we launched different vintages of funds and that's what we're looking to do as we go forward. Quite often, this is past performance is no guarantee of future, but quite often, clients who were in the previous vintage will roll over into the next vintage. But private equity has to live in vintages because think about it, what happens is once you invest in private, there comes a time when you sell it on, and that's how you realize the profit and hopefully get that carried too. I hope that answers your question.

But it doesn't seem like there is a Hermes Fund 5, nor have they been following up on Hermes Fund 4. Is that correct?

It sounds like there is Hermes Fund 5. Is that what you just said?

Yes, let me answer that. Yes, you do name them like that. But it's far better for us not to talk about the names just yet because of legal constraints, but that is exactly what happens.

Can you tell us the size of the previous funds?

So, I will come back offline and get you with that. Yes, I will do that.

All right. Last question. Any color on how to think about the incremental earnings impact from having a full quarter of the new Hermes ownership in Q4?

I think we discussed this last time, and there was a minor positive aspect to mention. Ray has the figures from the previous equity funds.

Yes. And Patrick, as you know, I mean, there's committed capital and invested capital. The last read around midyear, we had about $850 million in that fund. If there was more than that, about twice that committed. I don't have any more recent figures. There may have been additional investments made over the last quarter. But that gives you a rough dimension.

Thanks.

The next question is coming from Robert Lee from KBW. Your line is live.

Great, thanks, good morning everyone. My first question is regarding expenses as we approach next year. I understand, Tom, you’re not providing guidance, but I’m curious about how travel and entertainment expenses and investments in the private markets business will trend. Are you experiencing the same pressure on compensation costs as the rest of the U.S. industry? As we look ahead to next year, aside from any impacts from fee waivers on distribution expenses, how should we consider compensation growth? Is it aligning with the inflation rate plus a reasonable margin? How are you approaching this as you near your budgeting process?

If we revisit your question, that's the answer. I'm joking a bit, but yes, you covered most of the topics. Let's look at this quarter and what to expect in Q3. Inflation is real and it will impact us regarding incentive compensation compared to run rate benefits. We're continuing to invest in our technology and operations, and market data, especially related to ESG, and professional service fees will be influenced by inflation as well, along with office and occupancy costs. These will rise as we anticipate a return to office for more advertising and promotions. This also includes expenses related to conferences, sales meetings, and we certainly hope to see an increase there. Travel and entertainment, particularly for our sales and investment teams visiting clients and companies, have already seen an uptick in Q3 and we expect it to rise further in Q4. All of these factors will likely impact next year too, including our expansion in the private markets business.

Okay. Returning to the topic of private markets from a different perspective, there was a significant event yesterday, and many managers like yourselves are enhancing their private market capabilities in various ways. From a capital standpoint, private market strategies generally require larger capital commitments, whether for general partner commitments to funds or to initiate new strategies. BP has fulfilled some of that role previously. Do you foresee this becoming a larger capital investment to boost the growth of that business? Additionally, as you consider mergers and acquisitions, is there a heightened emphasis on finding complementary or scalable private market businesses?

Yes. Each of our teams has expressed how exciting it will be for Federated Hermes, Inc. to invest as part of the process and demonstrate good faith to support the capital raise. We anticipate making a significant profit from this investment. Therefore, I expect us to pursue more of these opportunities. Regarding mergers and acquisitions, acquiring those businesses is challenging, but we are fortunate to have purchased Hermes and positioned each of its lines of business for further development. As I mentioned earlier, we need to institutionalize it, establish distribution teams, and continue to expand beyond just the original investors. Saker's team has made significant progress in this area, but we are aiming for even more growth. Since we've already made the acquisition, it becomes much easier to pursue these initiatives. Our team is actively exploring how to introduce the various areas Saker mentioned into the U.S. market and whether M&A will be necessary for some of those efforts. We have considered multiple opportunities in this regard, although they are challenging to execute.

Great, thanks for taking my questions this morning.

I'd now like to turn the floor back to management for any closing remarks.

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

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.