Good morning and welcome to our call. 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 is Debbie Cunningham, Chief Investment Officer for the Money Markets. During today's call, we may make forward-looking statements and we want to note that Federated Hermes actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

Thank you, Ray. Good morning all. I will review Federated Hermes' business performance. Tom will comment on our financial results. We ended the first quarter with record assets under management of $779 billion, driven by record money market assets of $579 billion. Looking at equities, assets increased by $866 million from year-end, reaching $80.2 billion due to market gains of $4.9 billion, partially offset by net redemptions of $3.4 billion and FX impact of about negative $567 million. The strategic value dividend domestic strategy had Q1 net redemptions of $1.3 billion when you combine it with the fund and the SMA, and the comparable number in the fourth quarter was $2.2 billion. We did see Q1 positive net sales in 12 equity fund strategies, including MDT Mid Cap Growth, MDT Large Cap Growth, and the US SMID Equity Fund. The MDT strategies have shown accelerated sales and net sales in the first quarter and here in the first part of the second quarter, particularly in the growth space. Looking at our equity performance at the end of the first quarter and using Morningstar data for trailing three years, 56% of the equity funds were beating peers and 36% were in the top quartile of their category. Now for the first three weeks of Q2, combined equity funds and SMAs had net redemptions of $428 million. Turning now to fixed income, assets increased by about $1.4 billion in the first quarter to $96.3 billion with fixed income separate accounts reaching a record high of $51.8 billion. The growth was driven by net sales of $1.2 billion. Fixed income funds had first quarter net sales of $565 million. The fourth quarter was basically negative minus $988 million. Fixed income SMA for Q1 had net sales of $441 million and fixed income institutional separate accounts had net positive sales of $182 million. We had 21 fixed income funds with positive net sales in the first quarter, including Total Return Bond Fund, Ultrashort Bond, Government Ultrashort Bond, and Total Return Bond ETF, our new offering. Regarding performance at the end of the first quarter and using again Morningstar data for trailing three years, 40% of our fixed income funds were beating peers, 17% were in the top quartile of their category. For the first three weeks of Q2, combined fixed income and SMAs had net redemptions of $218 million. In the alternative private market category, assets decreased by $86 million in the first quarter from year-end to $20.5 billion, due mainly to negative FX impact of over $200 million, partially offset by market value increases of over $100 million and net sales of $21 million. We are in the market with Horizon 3, the third vintage of our Horizon series of Global Private Equity Funds. Horizon 3 closed on commitments of $1.05 billion through the first quarter. The Hermes Innovation II Fund, the second vintage of our pan-European Growth Equity Innovation Fund is also in the market, and we're in the market with the first vintage of our UK Nature Impact Fund. We began the second quarter with about $1.9 billion in net institutional mandates yet to fund into both funds and separate accounts. These wins are diversified across fixed income, equity, and private markets. Approximately $1.5 billion of net total wins is expected to come into private market strategies. The wins include private equity, direct lending, trade finance, and outflows include some areas in absolute return credit. On the fixed income side, we expect net additions of about $866 million with wins in ultrashort, short duration, high yield, sustainable investment grade, and multi-sector. We do have some offsetting losses in high yield. For equities, we have $233 million in wins to fund, offset by about $700 million of known redemptions. Moving to money markets. In Q1, we reached another record high for money market fund assets, money market separate account assets, and total money market assets as mentioned at the beginning of my remarks. Total money market assets increased by $19 billion during the first quarter from year-end. Money market strategies continue to benefit from favorable market conditions for cash as an asset class, elevated liquidity levels in the financial system, and attractive yields compared to cash management alternatives like bank deposits and direct investments in money market instruments like T-bills and commercial paper. In the long-expected upcoming period of declining short-term interest rates, we believe that market conditions for money market strategies will continue to be favorable compared to direct market rates and bank deposit rates. Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.35% at the end of the first quarter, down slightly from about 7.40% at the end of 2023. Looking now at recent asset totals as of a few days ago, managed assets were approximately $775 billion, including $579 billion in money markets, $77 billion in equities, $96 billion in fixed income, $20 billion in alternative private markets and $3 billion in multi-asset. Money market mutual fund assets stood at $414 billion.

Thanks, Chris. Total revenue for Q1 increased $4.9 million from the prior quarter, due mainly to higher average money market assets, increasing revenue by $13.7 million and higher average equity and fixed income assets, increasing revenue by $7.2 million, partially offset by fewer days, reducing revenue by $5.8 million and lower carried interest and performance fees, reducing revenue by $9.3 million. Total Q1 carried interest and performance fees were $400,000 compared to $9.7 million in Q4. Q1 operating expenses increased by $8.9 million from the prior quarter due mainly to higher compensation expense, primarily from incentive compensation and payroll taxes, increasing expenses by $13.7 million, partially offset by lower compensation from carried interest in consolidated vehicles of $4.6 million. Distribution expense increased due mainly to higher average assets, partially offset by fewer days. Advertising expense decreased in Q1 due to the timing of our advertising campaigns. The effective tax rate was 27.9% in Q1, up slightly from 26.6% in Q4. We expect the tax rate to be in the 26% to 28% range throughout 2024. The tax rate incorporates a valuation allowance on certain foreign deferred tax assets. At the end of Q1, cash and investments were $559 million. Cash and investments, excluding the portion attributed to non-controlling interest was $487 million. As announced in the press release, Federated Hermes Board declared a dividend of $1.31 per share to be paid on May 15, 2024. The dividend includes a $1 per share special dividend and a $0.31 quarterly dividend. This marks our sixth special dividend since 2008. The quarterly dividend increased by 10.7% and the dividend is considered an ordinary dividend for tax purposes. The dividend and the repurchase of 1.1 million shares in Q1 represent important additional measures intended to increase shareholder value. The special dividend is expected to reduce Q2 EPS by about $0.015 per share, due largely to the exclusion of dividends paid on unvested restricted shares from net income under the two-class method of computing earnings per share. Holly, that completes our prepared remarks and would like to open the call up now for questions.

Great. Thank you very much. Good morning, everybody.

Good morning, Bill.

Maybe just a big picture question on capital return. Certainly appreciate your balance sheet is in very good shape and you generate a tremendous amount of cash flow. How are you thinking about just buyback in a broader sense, just given where the stock is trading versus the efficacy of the special dividend? And then how does that signal in terms of M&A and independence? Thank you.

Yeah, Bill, it's Tom. We have considered M&A, special dividends, and buybacks. Our preferred approach continues to be pursuing M&A opportunities because we value the returns and have a solid track record in that area. After reviewing our balance sheet and stock price, we decided to issue a special dividend. We believe that this action, given our capital situation and the availability under our credit facility, will not affect our financial flexibility. We are generating profits in our business that we feel are not reflected in the share price. Therefore, we believe paying a dividend to shareholders is a suitable way to create value. Additionally, we intend to continue buying back shares, especially considering the current price and our growth outlook for the company.

And Bill, if I could add, we are very proud of the circle or the three things that Tom mentioned, acquisitions, dividends, and share repurchases. And since you were along with going public back in '98, that's been over $6 billion that's been returned to shareholders. So we have a long-term look at that. To get more current, as we mentioned on the call last time, we would love to be able to expand some of those businesses that we have at Hermes, like the real estate business in the United States. And that would attract our attention in terms of an acquisition if we could, you know, find something that was worthy. So we are convinced when we look at the cash flow that we have the continual flexibility to do whatever we want, whenever we want.

Okay, that's helpful. And then just a couple of housekeeping items. Can you remind me of what the comp payout rate is against both the carry-related performance revenues as well as just performance revenues? And then the clarification on your pipeline at the $1.9 billion, is that gross or net of the known outflows? Thank you.

So Bill, there's not a defined payout ratio. But if you look at what the portion attributed to the carried interest vehicle that is offset directly in comp has been somewhere around two-thirds of our total carry amount, and there's no comparable number on performance fees. And then in terms of the pipeline, your question was?

$1.9 billion is net.

It is a net number, yes. We always report net-known wins offset by any known redemptions coming up.

Okay. So just to clarify, there's no comp payout against performance fees?

Not in any formulaic way like there is with certain of the carried interest is passed directly through.

And that's 65%. So make sure I track that correctly. Okay. Thank you.

It's roughly been 65%. That can vary as well.

Thank you.

Hey, good morning, everyone.

Hey.

First question. For the last few quarters, you've talked about the money fund opportunities shifting from retail to institutional as Fed pauses and then cuts. So with $17 trillion still sitting in deposits, could you dig in on how those more institutional money fund pipelines and discussions are looking? And in that vein, what is your confidence that we should still expect the usual second half seasonal pop in those flows despite what's already been an unusually strong start to the year? Thank you.

I'm going to let Debbie comment in a minute. But a delay in the reduction of interest rates still keeps the money fund trade alive on the retail basis, very strong. And when you look at the, as I mentioned in my remarks, when you look at the marketplace in terms of what rates are even on commercial paper and T-bills and things like that, it's still a decent trade. It's not the big trade that we talked about, but that was always dependent upon when as and if the Fed actually starts to lower interest rates. And everybody's guess is as good as mine. Everybody can read everything they want. In fact, I rely on Debbie's estimate of that. Debbie?

Thank you, Chris. With the longer rates currently at a target of 5.25% to 5.5%, we are in a favorable position from both a flow and expectation perspective, and in terms of overall returns compared to other market factors. Delaying actions is not necessarily a negative as it does postpone broader participation in institutional flows. Initially, this situation arose when the yield curve was significantly inverted. On the liquidity and money market side, particularly with treasuries, we observed inversions of around 100 basis points in anticipation of the Fed cutting rates in the coming year, which is no longer the expectation. Consequently, institutional clients capable of engaging in direct treasuries and commercial paper—where the curve is currently positively sloped and generally not negative—continue to focus on those direct securities. This dynamic could change, barring historical patterns. While there is always a chance of deviation from past trends, we consider that possibility to be quite minimal. We view this as a significant positive for sustaining robust retail flows. Regarding the $17 trillion in deposits, approximately 40% of that resides in noninterest-bearing accounts, which creates a ripe opportunity for conversions into what we consider superior cash management products.

Helpful. Thanks. A quick follow-up on the capital return question. Should we think about the kind of decline from 4Q to 1Q as partially driven by the special dividend and through that lens, maybe a return to the more elevated levels once that passes in terms of the repurchase? Thank you.

We assess the situation daily, running our models to decide on purchases. We consider factors such as mergers and acquisitions, and buying one million shares seemed like a solid decision this quarter. We evaluate whether the price is low from our perspective, which influences our expectations for growth and whether we should adjust our approach. However, that's not precisely what you were asking. That's our method of analysis.

Thank you.

Hi. Good morning. Thanks for taking the questions.

Hi, Ken.

Maybe first, Tradeweb announced the acquisition of ICD, which follows BlackRock's acquisition of Cachematrix how prominent are these platforms or portals in money market fund distribution? And how fast is the use of these platforms growing? And then as we tie it into you, what portion of your money market fund sales come through these portals?

So the portals have been a long-term growing use. And I don't know what our percentage of assets coming through portals is. But just about every one of the clients on the institutional side that are corporate are using various portals. And I don't have more information on how we break down. As you know, we break our information down by institutional and quote, retail, which is basically a broker-dealer. But I don't know the numbers by what comes through what platform.

Okay. Maybe to add to that for just a second. On the platform side, from a trading perspective, for instance, with Tradeweb, which I think was maybe the beginning part of your question. We have very little, less than 5% in what we do on those types of platforms. We are much more of a voice-to-voice type of trading firm. We feel like we get better execution. We feel like we're better received from a content and expectation standpoint, and this kind of endures us a little bit more when there are special things that come to the market. We feel like that helps us from a positioning perspective to be able to be part of those more esoteric types of products that come to the market. That is not the market norm. I'd say the market norm is probably over 50%, but it's mostly indicative of smaller players, not the larger players. I think most larger players like to have the relationship and the voice-to-voice contact that is the way that we operate our trading business from an FHI standpoint. As far as the portal distribution for our money market funds, we are on basically all the portals that are out there. So to the extent that the portals continue and maybe they consolidate to some degree from an ownership perspective, we're not looking at that as problematic. And again, I agree, I don't know the percentage that Chris was mentioning as well, but it is not a very large portion of the business compared to other channels.

And just to add to that, the open architecture is a key part of those portals, I guess, obviously, but we don't expect any change in our business, for example, as a result of the ICD transaction.

Great. Thank you. Great. Then maybe on strategic value dividend, that product sort of has been in outflow, maybe even elevated outflows for a couple of quarters. I think the pitch on that fund is sort of income paid monthly and maybe some defensiveness. Has the value proposition for strategic value changed in the higher rate environment? And maybe if not, what's sort of driving sort of the elevated redemptions that we've seen there?

Unfortunately, one of the main factors behind the increased redemptions is its artificial inclusion in the wrong Morningstar category. That fund operates as intended and is expected to deliver a return of over 4 percent, along with a similar increase in dividends from the companies it invests in. When assessing that fund, you need to determine whether its value fits within the existing guidelines. It truly is a very unique fund. A challenge arises when it ranks extremely high in the Morningstar category, which may not provide an accurate representation of its nature, leading to an influx of assets. This can mislead investors into thinking it functions differently than it does; it’s fundamentally a dividend and dividend growth fund. In this higher interest rate environment, that is a consideration. However, it’s important to note that this fund allows some financial advisors to strategically adjust their positions without fully committing to the market. We continue to observe gross sales in that fund, but as I previously mentioned, net redemptions are still negative, although they are somewhat improved this quarter compared to the previous one.

Okay. Thank you very much.

Thanks. Good morning. Thanks for taking my questions. Maybe just going back to the money fund and the environment, and thanks for your comments, both Chris and Debbie on that. If you had to choose an environment that you think would be best for just the money market business from an inflow perspective, say, over the next one to two years, do you think a gradual easing cycle, even if it's delayed, would be better or a more stagflationary environment, not to say that that's the environment we're going to be in. But a stagflationary environment, say, closer to the 1970s and 1980s, where the Fed cannot cut, the growth is limited, equity multiples might be lower. Just in that type of environment, how would you compare that with the gradual easing cycle for the money market?

Thank you, Brian. I'll respond to that first before allowing Debbie to provide a more detailed and technical answer. In my view, money market funds are incredibly valuable and have proven themselves over the past 50 years. People consistently need to manage their cash, and as a result, we tend to attract more clients rather than losing them. The key aspect of the current environment for money funds is that it is measured. This approach, whether it's a slow increase or decrease, is always preferable. Currently, with an open retail trade and expectations for a stronger institutional trade, the conditions for money funds are nearly ideal. Now, Debbie?

I appreciate that term, Chris. The concept of nirvana is one I frequently reference, and I completely agree that a future environment characterized by measurement is positive. This aligns with your first scenario, Brian, where we see a gradual decrease in interest rates as anticipated, with the curve predicting such declines. The important aspect of this scenario is that it is ideal for accumulating cash and ensuring it remains diversified among various players and investor bases. The objective is for rates to reach around 3%, which is 100 basis points above the target inflation rate, rather than returning to the prolonged 0% level that created significant anxiety. That said, while the market's angst did not lead to money funds suffering severe losses, it represents the least favorable scenario. In the second scenario, characterized by stagflation, we would be looking at slow growth with inflation rising modestly. While this isn't our ideal scenario, we can manage it as well. Either of these scenarios is feasible, with the first being preferable and currently the expected outcome. However, with the start date now pushed back, I’ll have to be more specific: my latest assessment has shifted our timeline from June to July and now to September for the start date. It's also possible that the anticipated decline in rates may not begin at all in 2024.

That's great perspective. Thank you. Can I move to expenses for Tom, just the expenses have simply been very good. Maybe if you can just give some commentary around how you see that playing out for the year, particularly seasonally, obviously, compensation typically seasonally high in Q1. And then we did have a shift down in office and occupancy all year last year. So just wanted to understand if the current run rate is rebased and stays there? And then just maybe a commentary on advertising as seen throughout the year.

Okay, Brian. You're right about Q1 and for Q2. I'm not discussing the whole year, but at least for compensation, payroll taxes and bonus-restricted stocks were higher in Q1, so we would expect those to decrease in Q2. However, benefits and base pay will increase. For Q2, assuming everything else is equal, such as not receiving carried interest or the associated compensation, I expect compensation to be slightly lower. You mentioned the office and occupancy costs, which decreased because we vacated an office space in London, so we’re now at the prevailing rate there. I don't anticipate significant changes in that area. The distribution line will naturally increase if assets under management go up, and we are pleased with that correlation. On the systems and communications front, we expect that to rise as our technology spending continues to increase. Regarding advertising, it's about timing; as we've indicated before, we look at the entire year's advertising programs. We're starting one in the second quarter now, so I also expect advertising expenditures to increase in Q2. Additionally, looking ahead, I anticipate that our spending in 2024 will exceed that of 2023 based on our timing and increased commitments. Travel and entertainment expenses were a bit low in Q1, and we expect those to rise in Q2, but there’s not much else to highlight in the other line items.

That's a good point. Regarding the seasonal decline in the second quarter, would you say that looking ahead to a more typical year like 2022, when there was a drop of around $6 million, serves as a reasonable benchmark for comparison?

I would consider that, all else being equal, we would reduce expenses by approximately $3 million for Q2. However, this comes with the usual caveats regarding changes in bonuses and carried interest, but that's the estimate I would provide.

Okay, great, great. Thank you very much.

Hey, good morning. Thanks for taking my question. Wondering if there's anything else to call out in terms of what was driving the equity net outflows in the quarter. And then perhaps, I wonder if you could just further expand with more details. You said that you were seeing accelerated sales in the MDT fund complex. Just want to see some sentiment or demand around specific products within that area. Thanks.

On the MDT, we achieved gross sales exceeding $1 billion and net sales over $500 million, consolidating the MDT franchise, SMA, and institutional assets to approximately $10 billion. This franchise has delivered exceptional performance, as seen in the one, three, and five-year results. This represents a long-term investment made by Federated Hermes since the acquisition in 2006. As for the reasons behind other redemptions, we've previously discussed the strategic value dividend fund. Additionally, there have been changes in the Kaufmann portfolios, particularly in reducing cash positions and adjusting the biotech stock percentages. Over the past year, the rankings for the three funds in that sector have improved, landing at the 53rd, 44th, and 48th percentiles according to Morningstar. If we look at the first quarter, the large Kaufmann fund ranks at 50%, while the Small Cap Fund stands at 38% for three months, which aligns with the Small Cap's top 10% performance over the past decade. This data supports the notion of reduced redemptions and the potential for increased sales. Notably, there are still significant gross sales in all products despite experiencing net redemptions. Additionally, the SMID product from London has seen $150 million in positive flows during the first quarter, and there are several funds with positive trends, even though the large negative impacts from Kaufmann and Strategic Value Dividend are challenging to counter.

When you examine the growth over the last couple of quarters, we have experienced significant but decreasing net redemptions. We observed these in the first quarter, but in the early part of the second quarter, fueled by the strength of MDT, we actually saw positive net flows in growth as a category.

Got you. Very, very helpful color there. That's all I had. Thanks, again.

Thanks. Good morning.

Good morning.

You mentioned several alternative products that you have in the market. I was just curious what the previous fund sizes were for the ones that are kind of in second or third generation? And how you would think about the potential targets for these funds versus what you did previously?

We recently closed PEC V, which showed an increase from before and was in the $600 million range. We are now organizing for PEC VI. The Horizon Fund is larger, exceeding $1 billion, although I don't have the previous amount at hand. This marks the third iteration, and in general, the fund sizes have increased.

And it's been a tough year, even 18 months of raising money in private markets, private equity, in particular. So that's just an additional comment. I don't have the numbers either.

Understood. And just a follow-up on the modeling question. So the tax rate, I think you're guiding to 26% to 28%. You haven't been there in several years. I guess, what's driving that higher as we think about the rest of this year?

Yes. We don't get to deduct or we have a valuation allowance in foreign subsidiary. So that's where we used to be able to deduct losses and we can't do that anymore before we get a higher tax rate.

Understood. Okay, thank you.

Thank you. You mentioned the strategic value dividend and quant. Can you provide some context on the equity flow outlook?

So equity always goes in ups and downs. And we are looking for, as I mentioned, a lot bigger, better things coming out of the MDT franchise. And as I tried to plant the seeds a rebound in the Kaufmann enterprise. And if you look historically at Kaufmann, when it has had some tough going, its spring back is really a beautiful thing to behold. And Strat Val is going to continue to do what it does in terms of its investment activities. So those are the principal ones. Now that's why we mentioned about having a dozen others that keep that are positive that give us other opportunities for growth on the equity side as well. In terms of the FAs, when you ask about context, the FAs by and large, and this is obviously the business where we're calling on RIAs, broker-dealers, et cetera. There's a little debate between the FA generally and the client. The client is perfectly happy at 5%. The FA wants to get into the market. And we're seeing more movement into the market. And I don't be thinking this as an avalanche or a catalyst or all that. But when we have $265 million of positive flows in Ultrashorts coming off bigger negatives. And when we see more interest in Microshorts and when we hear the FAs talking about moving duration into one, three months or one, three year duration products, we're beginning to see more movement. This is not a total risk on trade. But it sets the stage for getting closer. And when you look at the performance and the sales response on MDT, we're getting more newer clients into those mandates. And we think that is a good thing in terms of seed corn for the future as well.

Right. And then maybe like the puts and takes on the fixed income side. Total Return Bond is doing great but.

Well, as we mentioned, the flows have been very solid, and that's why I mentioned about the Ultrashorts coming in, they're sort of an in-between product. And what we present to clients is a solution both out the yield curve and out the risk parameters and our people present solutions to clients, and they're very well able to compete with people who want to go all passive or things like that. And that's why we continue to have what amounts to robust sales in fixed income for exactly that reason. And remember that there's a huge fraction of our business, maybe half, maybe a little less than half, that's basically retirement-oriented. And the intermediaries are coming up with solutions for those clients over the long term that involve fixed income. And so we've seen the assets move up and we would certainly see that continuing. And one that's sort of a hidden jewel at this point in the cycle is the high yield, excellent long-term record is a big franchise here at Federated Hermes, a great marketplace reception. And that one goes in ebbs and flows as well based on the nature of the clients going risk on. So we have a lot of buckets ready for when it starts raining money in other areas as well.

Thanks very much.

Thank you, Holly. That concludes our call. Thank you for joining us today.

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