Greetings. Welcome to the Federated Hermes, Inc. Q4 2024 Analyst Call and Webcast. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

Thank you, Holly. Good morning, and welcome to our call. Leading today's call will be Chris Donahue, Chief Executive Officer and President of Federated Hermes; and Tom Donahue, Chief Financial Officer. Joining us for the Q&A are Saker Nusseibeh who is the CEO of Federated Hermes Limited; and Debbie Cunningham, the Chief Investment Officer for our money markets. During today's call, we will 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. I will review Federated Hermes' business performance, and Tom will comment on our financial results. We ended 2024 with record assets under management of $830 billion, driven by record money market assets of $630 billion. Looking first at equities, assets decreased by $4.2 billion from Q3, mainly due to net redemptions of $2.5 billion and an FX impact of $1.3 billion. As mentioned last quarter, net redemptions included $1.5 billion from a sub-advised fund that was internalized by the fund sponsor. In Q4, we saw an improvement in flows from strategic value dividend strategies, both domestic and international. These strategies experienced net redemptions of $222 million in the funds and SMA combined, compared to $779 million in Q3. Through January 24th, these strategies have had net sales of $139 million. We also saw continued solid performance from the MDT fundamental quant strategies in Q4, concluding a strong year. MDT strategies reached over $13 billion in assets at year-end, a 70% increase from year-end '23. MDT fund and SMA strategies had $3.4 billion in net sales in 2024, up from $411 million in 2023. These strategies secured about $1.2 billion in net sales in Q4, up from $837 million in Q3. Through January 24th, these strategies have had net sales of $862 million. In the second half of 2024, we expanded the MDT product set with the launch of four active ETFs and a new collective fund, which have approximately $424 million in assets as of January 24th. We had net sales in 14 equity fund strategies during Q4, including MDT mid-cap growth, MDT large-cap growth, U.S. SMID Equity Usage Fund, MDT All Cap Core, and the U.S. Strategic Dividend ETF. By the end of '24, using Morningstar data for the trailing three years, 56% of our equity funds were outperforming peers, and 36% were in the top quartile of their category. For the first three weeks of Q1, combined equity funds and SMAs had net sales of $542 million. Turning to fixed income, assets decreased by about $2.1 billion in Q4, primarily due to market valuations of about $1 billion and net redemptions of approximately $950 million. Fixed income funds had Q4 sales of $308 million. Fixed income separate accounts experienced Q4 net redemptions of $1.3 billion, largely due to redemptions from a large public entity that has regular sizable inflows and outflows. We had 16 fixed income funds with net sales in the fourth quarter, led by the Total Return Bond Fund and the government Ultrashort Fund. Regarding performance at the end of '24, 45% of our fixed income funds outperformed peers, and 18% ranked in the top quartile of their category. For the first three weeks of Q1, combined fixed income funds and SMAs had net redemptions of $28 million. In the alternative private markets category, assets decreased by $1.8 billion in Q4, mainly due to FX rate impacts of $1.2 billion and net redemptions, including approximately $547 million related to the senior portfolio manager departure discussed earlier. We are currently marketing our European Direct Lending III, the third vintage of our European direct lending fund, with approximately $350 million closed to date and a target raise of $750 million. For context, EDL I raised about $300 million and EDL II raised approximately $640 million. We are also in the market with the Federated Hermes GPE Innovation Fund II, the second vintage of our pan-European growth private equity Innovation Fund, which has closed approximately $110 million so far, targeting $300 million; the first vehicle raised $240 million. We are working on a new pooled European real estate debt fund, aiming for a Q1 first close and planning to continue marketing in '25, targeting a total of $300 million. Additionally, we are launching the global private equity co-invest fund, the sixth vintage of the PEC series, with a target raise of $500 million. PECs 1 to 5 raised between $400 million and $600 million each. As we entered 2025, we had about $3.7 billion in net institutional mandates yet to fund across both funds and separate accounts. Expected net additions in equities totaled $1.6 billion, with wins in growth, MDT, and global equity. Approximately $1.5 billion of total net wins are anticipated in private market strategies, including private equity and direct lending. Expected net additions in fixed income were around $616 million, with gains in Ultrashort duration and sustainable investment-grade credit and government bonds. In money markets, we reached another record high for money market fund assets at the end of '24, totaling $462 billion, with overall money market assets of $630 billion. Total money market assets increased by about $37 billion in Q4, as money market funds added $21 billion and separate accounts added $16 billion. Market sentiment around short-term interest rates reflects a view of higher rates for an extended period, favorable for the growth of money market strategies. Higher rates enhance the attractiveness of cash as an asset class, making money market strategies appealing compared to alternatives like bank deposits and direct investments in T-bills and commercial paper. Our estimate of the money market mutual fund market share, including our sub-advised funds, was approximately 7.22% at the end of '24, slightly down from about 7.32% at the end of Q3. As of just a few days ago, managed assets were approximately $839 billion, including $634 billion in money markets, $83 billion in equities, $100 billion in fixed income, $19 billion in alternative private markets, and $3 billion in multi-asset. Money market mutual fund assets were at $455 billion.

Thanks, Chris. Total revenue for Q4 increased $16.2 million, or 4% from the prior quarter, due mainly to $5.3 million of higher revenue from equity assets and $5.1 million of higher revenue from money market assets. Q4 revenues were reduced by $1.7 million in waivers related to additional fund proxy costs, compared to $5.9 million in fund proxy costs recorded in Q3. Total Q4 carried interest and performance fees were $4.8 million, compared to $3.5 million in Q3, approximately $3.2 million of the Q4 fees were offset by nearly the same amount of compensation expense. The Q4 sub-advised account redemption that Chris mentioned occurred mid-quarter and impacted Q4 revenues by about $627,000. The impact in Q1 and future quarters will be about $1.5 million per quarter. Q4 operating expenses increased by $17.5 million from Q3 due mainly to $13.8 million of FX-related expense increases in the other expense line item as the pound weakened versus the dollar. Compensation and related expense was up slightly from Q3, as higher incentive compensation was largely offset by lower severance expense. Advertising and promotion expense increased due mainly to the timing of our advertising campaign spend. The Q4 tax rate of 25.4% was lower than the expected range. We expect the tax rate to be in the 26% to 28% range for 2025. At the end of the year, cash and investments were $641 million. Cash and investments, excluding the portion attributable to non-controlling interest was $588 million. Now looking ahead to Q1, certain seasonal factors will impact results. Based on Q4 average asset levels, the impact of fewer days is expected to result in about $9.2 million in lower revenues and about $2 million of lower distribution expenses. In addition, based on our early assessment, compensation and related expense is expected to be higher than Q4, due primarily to about $7 million of seasonally higher expense for stock compensation and payroll taxes. Of course, these items and others, including incentive compensation, will vary based on multiple factors. Holly, we would like to open the call up for questions now.

Certainly. At this time we will be conducting a question-and-answer session. Your first question for today is from Patrick Davitt with Autonomous Research.

Hi. Good morning, everyone. I'm going to start with a higher level question on the money market fund market share, excluding the SMAs. It feels like the SMAs are kind of making up what looks like a little bit of market share loss on the fund side. Could you speak to maybe any trends that are going on that would kind of explain why some of the other large money fund complexes, say, at the banks or even other large asset managers like BlackRock are seeing so much higher fund flows, mutual fund flows than you guys? I appreciate that the SMAs are making up for that, but I'm just curious what dynamics you are seeing there and maybe we can't see from our position? Thank you.

I'll talk a little bit, Patrick, then Debbie will offer some comments. The first thing is I went back and looked over our market share data for the last three years that we've been giving you every quarter. And you average all those numbers, and it turns out to be between 7.33% and 7.32%. So looking at it over one quarter where we were at 10th of a percent less, okay, yes, you can say that's loss of market share. We don't lose any clients in the process. And you see the ebb-and-flow of big amounts of money from clients. So I don't have any worries about losing market share. I'll let Debbie give you a better pulse of the marketplace response.

Thanks, Chris. And I apologize if there's any background noise. But ultimately, I agree 100% with everything that Chris just said. The market share loss is not a loss in the context of clients. It may just be some large flows at year-end, which is one of our most volatile times of the year. What I would say and kind of defend that position is that, generally speaking, the first quarter of every year on a cyclical basis tends to be the worst from a mutual fund flow basis. And we are not seeing that this year. Now maybe that will change. We are only one month into the first quarter. But ultimately, we think that's a very positive trend.

Helpful. And then as a quick follow-up, obviously rebuilding a fairly large cash balance. Stock price has been range-bound, but you ratcheted down the repurchase quite a bit. So maybe update us on how you're thinking about repurchases through the lens of the range-bound price and now much higher cash balance again? Thank you.

Well, Patrick, looking backwards, ratchet down, okay, we were buying the stock as it was going up. And then right as soon as we weren't allowed to buy anymore, the stock went down. And these are all fit into our models of which tell us that because of our belief in the growth of the firm, the price is still significantly undervalued. So we have to do two things. Look at it on a high level and say, should we be buying stock? The answer to that is yes. And then we get every day to get to decide, okay, is today better to buy or tomorrow better to buy. And I think that's really how we would characterize the quarter, which I don't really view as ratcheted down, and we expect to buy in 2025.

Your next question is from Ken Worthington with JPMorgan.

Hi, good morning. Thanks for taking my question. This is Michael Cahill, I'm in for Ken today. I just wanted to follow up on the money market discussion. You called out the change in rate backdrop in your opening remarks, higher for longer rates. And I guess, do you envision flows strengthening from here for your money fund business, and I think that you called out the start of the year seems to be strong on the mutual fund side. And so I guess I'm just trying to understand, or better appreciate how you envision the money fund business here and the higher for longer backdrop, as well as maybe some of your Ultrashort products as well, which seem to make up a considerable portion of the business. Thanks.

Well, once again, we'll double team that answer. I'll go first. When you have rates as they are and going down and having a better relationship to the deposit rates, we believe the retail trade continues to be a very, very good trade. The institutional trade is available for institutions that are doing things not exactly for getting the extra basis points. So to us, that means we still have a positive attitude about the money fund business. To an owner operator, even though the rates didn't drop so fast that you created a big push for institutional business, even though that didn't happen to an owner operator, this is still a great time for money funds because they are a great advantage in the marketplace. And that's why I said it gives a lot of credence to cash as an asset class. And remember, and I've said this before, if you have a five handle, it's total nirvana. If you have a four handle, it's delightful on a money fund. At a three handle the clients are still quite sanguine about being there. But the war is still between the adviser who's worried about missing out and trying to convince the customer to maybe move up. Then you have in the marketplace, a lot of people recognizing that cash deserves more than a 10 or 20 or 100 basis point type return. And that comes from a lot of factors: competitive, legal, regulatory, et cetera. So that sets a good stage for our business.

I completely agree and would like to add a couple of points. When comparing the expected terminal rate in the current environment to where it was six months ago, it's 50 basis points higher in the latter half of 2024, which is significantly elevated. The expectations regarding inflation and its persistence, along with the growth implications of the new administration's policies, give us confidence that we may not experience a return to ideal conditions just yet. I don't believe there will be a tightening later this year, although some market participants do. However, the positive aspects remain. Additionally, the increase in users in the market over the past two years is encouraging, as they are likely to stay and potentially increase their balances due to their cash flow improvements, supported by a favorable economic backdrop for investing in this asset class. Therefore, while our growth in percentage terms may not surpass what we experienced in 2023 and 2024, we anticipate continued substantial growth in the sector.

Great, thanks for all that color. If I could just switch gears for a second. I just want to touch on ESG and your very sustainable sustainability front, I mean with seemingly less focused on broader ESG products in recent years and maybe even more so now. Can you just kind of remind us and talk through how some of your ESG and sustainability products like Global Equity or Global ESG and various impact funds might be positioned in the market in the years ahead? Thanks.

I will talk about that from the point of view of the acquisition and a broader element than the questions you're asking. Saker and Debbie will comment on those funds. When we did the Hermes acquisition back in '18, we had already decanted through a lot of good legal work that you can say yes to fiduciaries while using ESG so long as you are focused on the risk-reward and the returns to the underlying investors. And therefore, we continue doing that because these are good tools, additional information and analysis that assist portfolio managers and teams in making investment decisions. And this is what we still believe. Now I'll let Saker comment on some of the funds that you mentioned.

Thank you, Chris. I want to emphasize a key point about our terminology. At Federated Hermes Limited, we have always incorporated ESG as a factor in our sustainability analysis to secure better long-term financial returns. We now operate in a different global context with varied market expectations and requirements. In Europe, there are individuals looking for specific funds that aim not just for strong returns but for particular outcomes. We do not classify these as mainstream ESG funds; instead, we view them as thematic funds. To answer your question, the main global ESG strategies are performing well and attracting client interest because clients are drawn to them either due to good performance or their focus on double materiality, which is important to them. Our SDG Fixed Income Fund is likewise receiving interest. The thematic funds experience fluctuations depending on the advice from European advisors, as well as being influenced by risk sentiment. The strength of flows has seen a rebound, though in the past year, this has been more about the risk-off sentiment in Europe rather than the funds themselves. Overall, our funds are meeting client expectations, delivering returns in line with their desires, and complying with regulatory requirements in both Europe and the U.S. They are fulfilling the fiduciary responsibility to achieve optimal financial outcomes, except for specific thematic funds in Europe designed for targeted results.

Great. Thank you so much.

Your next question for today is from Dan Fannon with Jefferies.

Hi. This is Trevor on for Dan. For my first question, can you speak to the priorities of spending into 2025 and where it's differing from last year? And how we should think about the rate of growth for those investments?

Sure. I believe I've already discussed compensation for the first quarter, considering payroll, bonuses, and adjusting incentive compensation for the first quarter and beyond. If things improve, we anticipate increasing those payments. The same applies to the distribution side. A shorter period in Q1 will slightly reduce that, but it's related to our asset performance from the fourth quarter. If we continue to acquire more assets, the distribution figure will rise. Regarding systems and communication, we expect an increase of about $3 million quarterly in the future, driven by market data and technology expenditures. For other areas, I don't foresee significant changes. Additionally, regarding foreign exchange, we are managing our expenses in London. Therefore, when the pound weakens, it does not impact us negatively since we pay fewer pounds for our expenses there. Over the course of the year, we remain hedged. I can't influence the non-operating line related to our seating money, whether it rises or falls, or the tax situation. I believe we've addressed the tax line; the tax rate decreased slightly because our stock price increased. As a result of vesting, this led to a lower tax rate, which was beneficial.

Great. I appreciate the color there. And then for my follow-up, on alternative products, the overall market interest has been pretty strong. Are there certain areas of the firm you guys view as subscale? And what specific areas would you guys like to invest in, or areas or regions?

Okay. Yes, there are a couple of areas that are interesting to us that are subscale. One would be infrastructure where we are interested in improving that situation. And then another one is in real estate, where we don't do any of it in the U.S. And we've talked about that on these calls for a number of times where we would be willing to expand to be able to do the kinds of things that Chris Taylor and his team have done on the U.K. side, especially with King's Cross, Paradise Circus, and Birmingham and other places, to do those kinds of regeneration projects in the U.S. So those would be to where I would say we'd love to get past or get greater size and activity. The ones where, even though we may be small like in direct lending, it is a couple of billion, but we still have great opportunities, as I've mentioned. And on the PE side, we are looking at very good opportunities with the numbers that I mentioned. I don't have to go over them again. So we are pretty strong there. Another one, depending on how you count it, is trade finance, which is the short end of private credit. And there is a lot of interest in that across the globe. I was out with clients in Hong Kong and Singapore two weeks ago, and this is a very, very interesting opportunity on the trade finance side. And so that's another one where, again, it's about $2 billion, but we've got good records, good projects, and good opportunities with clients.

Sure. Thank you.

Your next question is from Robin Holby with TD Cowen.

Good morning. This is Robin Holby on for Bill Katz. Thank you for taking the question. Follow-up on the last private markets question. Just given capital markets activity is accelerating, what is your near-term outlook for realizations in the portfolio? And when do you expect the fundraising, with respect to the funds that you mentioned, that start to offset these distributions? Thank you.

I'm going to let Saker take a swing at that pitch.

Thank you, Chris. So the answer is we are distributing as we speak and raising assets as we speak. The whole point about having PEC VI following PEC I to V is as PEC V pays out, PEC VI comes in and raises new capital. It is the nature of capital markets. If you look at direct lending, we paid off a debt and actually, I think I'm making more than that, and we're in exactly where we are in the cycle. And of course, returning assets to the clients is a sign of success because it shows that we have made the success of whether it is in private equity, whether it is infrastructure, or whether it's in direct lending. So returning assets to the clients is a sign of success and then triggers more flows coming our way. So we are in the midst of the cycle, and we're pleased with what we're seeing. And more importantly, our clients are pleased with what we are seeing and coming up to re-up a lot of the money that we raised are re-ups from old clients across our strategies, which tells you we are in a good place. I hope that answers the question.

Excellent. That’s helpful. Thank you very much.

Your next question for today is from John Dunn with Evercore ISI.

Thank you. Great to see strategic value dividend improving and flipping positive so far this year. But can you kind of contextualize how people think about that fund and the demand for it given the backdrop of markets and rates?

Yes. The way this product is presented is as a dividend fund aimed at growing dividends. Historically, this fund often appears either at the top or bottom of charts due to its classification, leading people to buy it when it's at the top for the wrong reasons, rather than recognizing it as a dividend fund focused on dividend growth. Interestingly, even when the fund experienced negative flows last year, the strategic dividend ETF was gaining popularity, indicating that those investing in it understand its purpose. Currently, many new investors see this as a stepping stone into the market, attracted by the good yield while still participating in market growth. If the market broadens, they will benefit from dividends along the way. Right now, this fund is showing strong performance.

Got it. Are there any significant institutional mandates that might be at risk? More generally, which areas of institutional investment are you concerned could be at risk?

Well, the first thing is on the institutional side, we are on a short leash everywhere. And so it is everybody. Basically, even though the institutions say they are there for however long, they have the right to pull the money any time for any reason or for no reason. So I can't say that we are not at risk anywhere. And but it's not like the kind of risk you are talking about, where we're worried about losing something, but I'm going to let Ray talk about that for a second.

Sure, John. In terms of our pipeline numbers, known redemptions were very low this quarter. We don't have much visibility into any significant redemptions on the institutional side at this moment. However, as Chris mentioned, that could always change. We do have clients, like the large public entity we discussed, who may not inform us about upcoming redemptions, but they receive cash inflows and utilize that cash. This can lead to fluctuations. Currently, in terms of visibility, there is nothing substantial from an outflow perspective. On the other hand, the inflow pipeline continues to grow, especially for the NDT strategies, which have accelerated significantly regarding gross sales, net sales, asset growth, and strong institutional interest. They contributed greatly to our increased equity pipeline wins on the institutional side, driven by MDT, and we have several other opportunities that haven't been accounted for yet, but we are very optimistic about their potential size.

Thanks very much.

We have reached the end of the question-and-answer session, and I will now turn the call over to Ray for closing remarks.

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

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.