Greetings. Welcome to the Federated Hermes Q1 2025 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. Hello, 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 are Saker Nusseibeh, who is the CEO of Federated Hermes Limited; and Debbie Cunningham, our 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, and good morning, all. I will review Federated Hermes business performance. Tom will comment on our financial results. We ended Q1 with record assets under management of $840 billion, driven by record money market assets of $637 billion. Looking first at equities. Assets increased by $1.5 billion from year-end due mainly to net sales of $1.4 billion. Equity sales in the first quarter were led again by our MDT fundamental quant strategies. Looking at the MDT strategies in funds and SMAs on a combined basis, net sales were $2.5 billion in Q1, more than double the prior quarter's $1.2 billion. Q1 continued the sales momentum from last year when net sales for these strategies reached $3.4 billion, up substantially from $411 million in 2023. For the second quarter through April 18, these strategies have had net sales of $345 million. We are also seeing MDT interest from institutional investors as evidenced by net sales of nearly $700 million in Q1 and by MDT wins of $1.7 billion that have yet to fund. Q1 saw further improvement in flows from strategic value dividend strategies, both domestic and international. These strategies had Q1 combined fund and SMA net sales of $188 million from combined funds and separate accounts compared to negative $221 million of net redemptions in the prior quarter. For Q2 through April 18, these strategies had net sales in combined funds and SMAs of $47 million. We had net sales in 18 equity fund strategies during the first quarter, including the aforementioned MDT Mid Cap Growth, MDT Large Cap Growth, importantly, the MDT Mid Cap Collective, also MDT All Cap Core, MDT Large Cap Value, and again MDT Large Cap Growth ETF. Looking at our equity performance at the end of the first quarter and using Morningstar data for trailing three years, 44% of our equity funds were beating peers and 31% were in the top-quartile of their category. For the first three weeks of Q2, combined equity funds and SMAs had net sales of $208 million. Now turning to fixed income. Assets increased by about $1.4 billion in the first quarter from year-end due mainly to higher market valuations, partially offset by net redemptions. We had 19 fixed-income funds with net sales in the first quarter, including government Ultrashort Fund and the municipal Ultrashort Fund. Regarding performance, at the end of the first quarter using Morningstar data for the trailing three years, 44% of our fixed-income funds were beating peers and 18% were in the top-quartile of their category. For the first three weeks of Q2, combined fixed-income fund and SMAs had net redemptions of $88 million. In the alternative private markets category, assets increased by $562 million in Q1, due mainly to the impact of FX rates and net sales of about $61 million, mostly in MDT Market Neutral Fund. We are in the market with European Direct Lending III, the third vintage of our European Direct Lending Fund. To date, we've closed on approximately $350 million. The target raise is about $750 million, and EDL I raised $300 million, and EDL II raised about $640 million. We're also in the market with Global Private Equity Co-Invest fund, which is the sixth vintage of the PEC we call it the PEC Series. First close in April for about $114 million with a target raise of about $500 million. PEC I through V raised about $400 million to $600 million in each fund. The Federated Hermes GPE Innovation Fund II, the second vintage of our pan-European Growth Private Equity Innovation Fund, is in the market as well. And to date, we've closed on approximately $110 million with a target raise of $300 million. Our first vehicle here raised about $240 million. We're also in the market with a European Real Estate Debt Fund, a new pooled European debt fund and it's marketing here in '25 with an overall target of $300 million. Now, we continue to develop our private markets business for growth. This month, we completed the acquisition of a majority interest in a U.K. renewable energy company called Rivington Energy Management Limited. The acquisition enhances our private markets platform by adding project development expertise and specialist energy transition sector experience to our institutional investment and asset management capabilities in the infrastructure asset class. This acquisition offers access to an existing renewables pipeline and a track record of innovation, enabling us to identify emerging sub-sectors with significant commercial opportunities and deal flow for future fundraising. We believe that access to high-quality proprietary deal flow grounded on innovation and thought leadership will be critical to future fundraising. This combination creates the capability to manage end-to-end energy transition projects for investors and adds a highly complementary skill set and offering to our private markets business. Across our long-term investment platform, we began Q2 with about $3.9 billion in net institutional mandates yet to fund into both funds and separate accounts. Equities are expected to have net additions totaling $1.8 billion. The wins are led by MDT with global equity participation. Approximately $1.7 billion of total net wins are expected to come into private market strategies. The wins are in private equity and direct lending. Fixed income is expected to have net additions totaling about $400 million, and the wins are in sustainable investment-grade credit, active cash short-duration, and government bonds. Now moving to Money Markets. We reached another record-high for money market assets at the end of the quarter, $465 billion and total money market assets of $637 billion. Total money market assets increased by about $7 billion in the first quarter as money funds added $3.2 billion and money market separate accounts added $3.6 billion. We were able to increase our money market managed assets in Q1 against seasonal factors that have often resulted in lower assets. Against the recent backdrop of market volatility, market conditions remain favorable for cash as an asset class. And in addition to the appeal of relative safety in periods of volatility, money market strategies present opportunities to earn attractive yields compared to alternatives such as bank deposits and direct investments in T-bills and commercial paper. Our estimate of money market mutual fund market share, including our sub-advised funds, was about 7.10% at the end of Q1. Down slightly from about 7.22% at the end of 2024. Looking at our money market fund market-share changes from Q4 to Q1 over the prior four years, we saw an average decrease in that timeframe of about 34 basis points. Now, as we look at recent asset totals of the last few days, managed assets were approximately $828 billion including $629 billion in Money Markets, $78.5 billion in equities, $98 billion in fixed-income, $20 billion in alternative private markets, and $3 billion in multi-asset. Money market mutual fund assets were $456 billion.

Thanks Chris. Total revenue for Q1 decreased slightly from the prior quarter as higher revenue from money market assets of $9.8 million were offset mainly by lower revenue of $9.2 million from fewer days and lower revenue of $3.2 million from equity assets. Total Q1 carried interest and performance fees were $5.9 million compared to $4.8 million last quarter. Approximately $1.3 million of the Q1 fees were offset by nearly the same amount of compensation expense. Q1 operating expenses decreased by $22.5 million from the prior quarter due mainly to $13.7 million of lower FX-related expense. So the pound strengthened versus the dollar and a credit up to $12.9 million from a VAT refund. Compensation and related expense increased by $6.1 million from the prior quarter due mainly to seasonally higher expenses for stock-based compensation and payroll taxes. Advertising and promotional expense decreased due mainly to the timing of our advertising campaign spend. The Q1 tax-rate of 23.6% was lower than the expected range. We expect the tax to be in the 25% to 28% range for 2025. The Q1 rate was impacted by the U.K. entity recording pre-tax income as a result of the $12.9 million VAT tax refund with no additional tax as a result of valuation allowances from prior year tax losses offsetting this income and the net income attributable to non-recurring non-controlling interests which are not taxed. At the end of Q1, cash in investments was $542 million, cash in investments excluding the portion attributed to non-controlling interest was $476 million. In addition to investments for growth, we seek to use acquisitions, dividends, and share repurchases as levers to add value for shareholders. So far in 2025, we've used all three. In addition, to the Rivington acquisition, Chris already mentioned, the Board of Directors yesterday declared a $0.34 per share dividend, an increase of nearly 10% from the prior quarter dividend. During Q1, the company purchased just over 3 million shares or almost 4% of its stock for about $120 million. Holly, we would like to open the call up for questions now.

Your first question for today is from Ken Worthington with JPMorgan.

Hi, good morning. Thanks for taking the questions. I wanted to start sort of digging into the money market, market-share. So, it looks like the industry money market fund AUM increased about $110 billion in 1Q, suggesting inflows. I think the Federated money market fund AUM was up around $3 billion, suggesting outflows. And we know the money market fund business is very competitive. So maybe can you talk about the competitive environment, the shifts that you're seeing that might be driving this divergence in sort of growth? And it feels like we've seen this since the Fed began to cut so, any comments there?

Ken, what did you mean by $3 billion of outflows when you were saying there were $3 billion of inflows?

I am sorry. What I tried to say was you had $3 billion of increased money market fund AUM, which actually suggests outflows for Federated in money fund assets for the quarter. So the industry had inflows, it looks like you had outflows. That's what I was getting at.

I am not sure I understand the math on that, Ken. This is Debbie. The inflows were definitely positive, although not as strong as some others in the industry. To break down the quarter, typically the first quarter is the weakest for the industry from a liquidity standpoint. This is often due to the strength seen in flows from the fourth quarter, which reverses in the early weeks of January. However, that trend did not occur this year, which is a positive sign for the industry. Additionally, while our assets were up significantly through mid-March, they ended up being less positive by the end of the first quarter. This drop can be attributed to substantial outflows starting March 15 due to corporate taxes, which affected us more because of our larger institutional focus. Towards the end of the quarter, we also experienced a rougher quarter-end, likely due to broader macro issues, particularly regarding tariffs that had not yet been fully addressed, leading to volatility in other markets. As a result, we faced significant outflows due to margin calls from institutional customers. Moving into April, personal taxes and further margin calls from institutional clients continued to have a negative impact, despite a generally positive trend throughout the month. Overall, this first quarter was quite different from what is typically expected in the Money Markets.

Hi, Ken, this is Tom. Just to give you the assets in the Money Markets. So, December year-end, we ended up at about $630, and of March 31, '25, we ended up at $637. And then more importantly for our revenue is the average assets. So, the money market average assets in the end during Q4 were $601, and for Q1, we're $639.8.

Yep. Got it. Appreciate that. And then just on the April data you gave in fixed-income suggested some elevated fixed-income outflows. What's sort of driving that? It seems to be sort of a change from what we saw in recent quarters?

The numbers were primarily composed of the Total Return Bond Fund and High Yield, with around 75% of the $888 in Total Return and the remainder in High Yield. We are pleased to see the Total Return Fund's performance improving. While the three-year figures haven't changed yet, the more recent numbers have shown positive movement, raising our optimism. As we discussed in the previous call, our strategy has been somewhat defensive and wasn't the best choice compared to others last year, but it is beginning to look more favorable as we progress through this part of the year. This reflects the usual fluctuations we're experiencing.

Great. Thank you very much.

Your next question for today is from Patrick Davitt with Autonomous Research.

Hi, good morning, everyone. So I appreciate the tax payments always make late March, early April seasonally weak. So maybe could you frame what you're seeing in money fund flows since tax date? And then higher level, perhaps for Debbie, an update on where you think we are in kind of that post-Fed rate cut institutional rotation into money funds that you've been talking about for some time? And then beyond that, have you seen any sign that the tariff noise is driving non-U.S. clients out of U.S. money funds? Thank you.

Don, I'll address the last question, and Debbie can handle the first two if we can keep them all in mind. Regarding the last question, we have not observed any impact from tariff issues influencing international clients' actions. Now, what are Debbie's long-term thoughts on these matters?

Sure. To provide a brief update since the personal tax deadline of April 15, we've seen significant inflows over the past week from both retail and institutional investors, though this week has been somewhat quieter. Looking ahead to 2025, we expect two to three rate cuts, with three being more likely and two as a fallback. Currently, expectations suggest rates will remain higher for an extended period. When the cutting cycle began in September 2024, we anticipated rates would be close to 2% by now after initiating a 50-basis point cut back then, but we're still far from that target. Retail and institutional investors continue to benefit from the four-plus percent returns on their money market investments, which would still be profitable even if rates drop into the mid-three percent range, especially compared to the long period when rates were at zero. Inflation remains unpredictable. We are observing hard data on inflation and employment that suggests the Fed will maintain higher rates for longer rather than decreasing them as quickly as some in the industry expect. However, softer indicators like consumer confidence surveys indicate a potential for a quicker rate-cutting approach from the Fed, which remains uncertain. For now, we are leaning toward the hard data and anticipating fewer rate cuts than what was initially expected at the beginning of the year. Nonetheless, these developments continue to attract positive inflows from both retail and institutional investors into our products, and we expect to maintain or even increase this momentum.

Hi, Patrick, this is Tom. Just the specific since the tax money stop leaving, we're up about $5 billion, and as Debbie said, both on the money fund side and on the institutional side.

Great. Thank you. As a quick follow-up, there's obviously been a lot of FX noise in your numbers the last few quarters. I guess, what is the steady-state number for that other line item without all of the FX noise now? And do you have an idea of what the impact is looking like so far in 2Q given all the FX volatility? Thank you.

Okay. So we have over GBP100 million in that we are hedging because of our U.K. office that earns revenue in dollars and has expenses in pounds. So it's a hedging thing. And yes, the noise in Q4, the dollar versus the pound, the dollar was up. And then in Q1, the pound was up. And so far, this quarter, the pound is up. We'll see what happens. In terms of what's the normal steady-state number in that other line, it's around $4 million.

Thanks.

Your next question for today is from Bill Katz with TD Cowen.

Okay. Thank you very much, and good morning, everybody. So based on your intra-quarter update, I think you bought back about 600,000 shares through early March, and then you did 3 million-plus for the entire quarter, which would suggest a pretty substantial ramp even before the stock took an incremental hit with the whole sort of post-Liberation Day market decline. So I guess the broader question is, what are the allocations for capital from here? And then just in terms of acquisitions, I appreciate you building out the alts platform. But are you looking at anything that might be a little more of size that could be a little bit more of a substantial shift in the profile of the ability to grow in the alts platform? Thank you.

Yes, Bill, it's Tom. We have purchased over 3 million shares. We assessed our cash position and are considering a few opportunities, although there's nothing specific to announce at this moment. Some of these opportunities may be comparable in size to the Rivington acquisition, while others might be larger, but we'll see how those developments unfold. Regarding our future share purchases, we've increased the dividend and plan to stay active in the market. Last quarter, we discussed why we didn't purchase more shares in the fourth quarter when prices were in the 40s, and then we decided to buy more once prices decreased. We still believe the stock is undervalued and will evaluate our buying decisions daily. This doesn’t indicate any specific plans, but we will keep going. We have approximately 2.7 million shares remaining that have been approved by the Board, and I anticipate that we will renew this with a new program this year.

Okay. Thank you for that. And then just as a follow-up, as you're going around your conversations, and maybe it's a little too soon just given the intensity of the volatility coming off the quarter into the new quarter, but what are you hearing on the institutional side in terms of allocations? Where might the incremental interest be? Where are decision-making at this point in time? Any delay? Or what are the conversations like? And where are you seeing the greatest opportunity for Federated? Thank you.

On the institutional side, we are pleased with the $3.9 billion in mandates that are yet to be funded. One of the most encouraging aspects is the interest in MDT, largely due to their risk controls and the diversification that this strategy provides, not to mention its performance over one, three, five, and ten years. We are experiencing a significant amount of interest from the RFP perspective as well. Additionally, the private equity and direct lending figures, which I have previously discussed, account for another $1.7 billion that we are very satisfied with. Furthermore, active cash and short duration continue to be a consistently active area of enthusiasm.

We have two accounts that we'll be funding, actually, especially at the end of June. It will now happen in the beginning of July, after the 4th of July holiday. That is a substantial win from another state perspective. We are at a point in time, however, when most of the state accounts that we have are in basically the period where their assets start to decline on a cyclical basis. But if you look at the growth that they've experienced on a year-over-year basis, it's still pretty substantial. So even though we would expect those assets to go down still on a year-over-year basis, they're substantially higher than before.

And based on trips that three of us have taken out to Asia over the last three months, yes, MDT, yes cash, yes trade finance, yes, Asia ex Japan mandate, and yes, Guyer's Equity Fund. So those are the ones that are gathering the most attention.

Thank you very much.

Your next question is from Dan Fannon with Jefferies.

Hi, good morning. I wanted to inquire about the robust equity flows in MDT specifically. Could you discuss the fee rate of that segment compared to the overall active equity franchise? Additionally, given the recent strength in flows, how have some of the products performed amid this latest period of volatility?

Well, the performance is weathered very well. And I'll let Ray tell you about the fees.

Yes. The fee rates we discuss on a blended basis indicate that the MDT equity strategies are slightly below our average fee rate, but not significantly. Regarding performance, as Chris noted, looking at their strategies for the first couple of weeks of April, the three-year records remain strong, typically in the top decile, with the large-cap growth and large-cap value strategies both ranking in the top 2%. They successfully navigated the April volatility while maintaining their long-term records and demonstrated good performance during that period of uncertainty.

Got it. So, just to confirm, these products are below the overall fee rate of the firm, is what you said?

No, of the equity fee rate.

Okay, of the equity rate. And then what is the size of MDT as a percentage of the, whatever, $80-plus billion of equity products?

It's about $15 billion.

Thank you. I would like to follow up on expenses, particularly regarding the one-time VAT charge and some foreign exchange matters. Are the remaining line items reasonable starting points as we consider the second quarter and beyond?

Sure, Dan. Comp is a little higher because of the seasonal things I mentioned, the stock-based comp, and the payroll and benefits in Q1. So we got to take a little bit off of there. Distribution, what are the assets going to be that flows with the assets, we hope that goes up. Systems and communications, we expect that to go up. Professional service fees and occupancy and intangibles, I don't see much changes. Advertising, that flows with when we're doing our campaigns, and we're starting campaigns. So that should go up a little bit. And travel, that ought to go a little bit up as our sales force gets out there more. When I say a little bit up in those categories, I'm talking like only $1 million or something like that for the next quarter.

Great. That's helpful. Thank you.

Your next question is from John Dunn with Evercore ISI.

Hi. Maybe just to extend the fee rate conversation a little bit, particularly the pipeline. You mentioned the MDT rate. But overall, it would seem that mix of the whole pipeline would be accretive. Could you maybe talk about where the blended average of the whole pipeline might be and where it compares to historical levels?

Well, yes, it would be accretive given the skew toward private markets and to equity broadly and MDT in particular. Typically, if you look at our pipeline in the past, it would have been weighted more toward some of the institutional fixed income strategies that have lower fee rates, including things like active cash and short duration. So yes, the pipeline will be accretive to the overall blended fee rate of the company.

Got it. And then the MDT ETF came up earlier in your prepared remarks. Could you just remind us kind of like the outlook, how much AUM you have in active ETFs and the plan for maybe building out that roster?

So, we plan to add a handful of ETFs each year. And there's always a rigorous enthusiastic discussion about which candidates will be first and how that will turn out. The ETFs are over $800 million right now as a group and we also should add in that discussion a little bit on collectives, which is a completely different business, and I know not the gravamen of your question, but it's another way of our being indifferent as to the buckets or the packaging but getting the investment management through in different markets. So that's our strategy on active ETFs. And we still feel we're in the early innings on the active ETFs and are ready to proceed. And you asked a specific question about how much is in the MDT ETF. Is that 25?

Yes, there are four active MDT ETFs, and they collectively have about $250 million. They were launched in July of 2024 and are relatively new.

Got it. Thank you.

Your next question is a follow-up question from Patrick Davitt. Your line is live.

Hi, thanks for the follow-up. So I think you said MDT had $15 billion of AUM. So that's a pretty incredible organic growth rate. Are there any capacity issues with them taking in that much money at one time?

No. And we're not looking like on any of those mandates that we're thinking about capacity issues. So we're quite enthusiastic about keeping the growth going.

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

Thank you for joining us today for our call, and that concludes the call. Thank you.

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