Greetings and welcome to the Federated Hermes, Inc. Second Quarter 2025 Analyst Call and Webcast. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Raymond Hanley. The floor is yours.

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. 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 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. I will review Federated Hermes' business performance, and Tom will comment on our financial results. We ended Q2 with record assets under management of $846 billion, primarily driven by gains from our equity strategies. Equity assets increased by $8.1 billion or 10% compared to the previous quarter. Second quarter equity net sales of $1.8 billion reflect an organic growth rate of just under 9%. Our MDT fundamental quant strategies achieved strong sales results again in the second quarter, with MDT equity strategies reporting net sales of $3.8 billion, up from $3.3 billion in Q1. For Q3 through July 25, these strategies had net sales in combined funds and SMAs of $730 million. Seven of the eight MDT equity mutual fund strategies ranked in the top performance quartile of their Morningstar categories for the three years ending June 30, with four strategies in the top decile. The second quarter also saw improved flows from strategic value dividend strategies, which had net sales of $344 million compared to $131 million in the previous quarter, including funds from the SMA and institutional separate accounts under these strategies. We had net sales in 19 equity fund strategies during the second quarter, showcasing a variety of MDT offerings, including the Asia ex-Japan Fund. Highlights of MDT's offerings included MDT Mid Cap Growth, MDT Mid Cap Collective, and All Cap Core. At the end of Q2, 56% of our equity funds outperformed their peers, with 26% in the top quartile of their category. For Q3 through July 25, combined equity funds and SMAs recorded net sales of $480 million. Now turning to fixed income, assets decreased by about $800 million or 1% in the second quarter, primarily due to net redemptions of $2.4 billion, partially offset by higher market valuations and FX gains of $1.6 billion. Redemptions included around $1.5 billion from two large public entities with regular inflows and outflows. We had net sales in 15 fixed income funds during Q2, including the conservative Microshort Fund and the Total Return Bond Fund ETF. Regarding performance at the end of Q2, 46% of our fixed income funds surpassed their peers, and 21% were in the top quartile. For Q3 through July 25, combined fixed income and SMAs had net sales of $47 million. In the alternative private markets category, assets increased by $1.3 billion or 7% in the second quarter, primarily due to FX impacts of $1.1 billion and net sales of $231 million, mainly in the MDT Market Neutral Fund. We are currently in the market with European Direct Lending III, our third vintage of the European direct lending fund. To date, we’ve closed on $450 million, targeting a raise of $750 million. EDL I raised $300 million, and EDL II raised $640 million. We are also marketing a global private equity co-invest fund, the sixth vintage of the PEC series, with a first close of about $114 million in April and a target raise of $500 million. PEC funds I to V raised approximately $400 million to $600 million each. The Federated Hermes GPE Innovation Fund II, our second vintage of the Pan-European Growth Private Equity Innovation fund, is also in the market, closing on $110 million to date with a target of $300 million. The first vehicle raised $240 million. Additionally, we are launching the European Real Estate Debt Fund, a new pooled European debt fund, targeting $300 million by 2025. Early in the second quarter, we successfully completed the acquisition of a majority interest in Rivington Energy Management Limited, a U.K. renewable energy company, enhancing our Private Markets platform by adding expertise in project development and the energy transition sector. We are actively collaborating with the Rivington team on product development plans. Across our long-term investment platform, we began Q3 with about $1 billion in net institutional mandates awaiting funding in both funds and separate accounts. Expected net additions in fixed income totaled roughly $545 million, with successes in multi-sector, high yield, and active cash strategies. Approximately $439 million of total wins are anticipated to come from Private Markets strategies. We have around $1.6 billion in yet-to-fund wins, primarily in direct lending, private equity, and trade finance, slightly offset by $1.2 billion in redemptions from the restructuring of our U.K. Property Trust, planned for the third quarter. This fund has delivered solid performance to investors over decades, and the transition is conducted in collaboration with our investors to provide them with liquidity options that match their preferences expressed in recent votes. The expected additions in equities totaled around $59 million, primarily driven by MDT, though some outflows occurred. Moving on to money markets, we reached another record high at the end of Q2, with money market fund assets increasing by $3.1 billion to $468 billion. These assets rose in the second quarter despite seasonal factors that generally lead to lower levels. Money market separate accounts declined by $5.9 billion, reflecting typical seasonal patterns. Market conditions remain favorable for cash as an asset class, offering relative safety during volatility. Money market strategies continue to present opportunities for attractive yields compared to alternatives like bank deposits and direct investments in T-bills and commercial paper. We are actively involved in the development of tokenized money market funds and digital asset infrastructure, exploring a range of opportunities from tokenized share classes to fully digitized assets. Over recent years, we have engaged with various innovators and reputable financial institutions to assess opportunities in the digital assets space, gaining valuable knowledge and experience along the way. We serve as the subadvisor for the Superstate Short Duration U.S. Government Securities Fund, a private tokenized fund with approximately $425 million in assets. It was also announced that Federated Hermes will take part in the launch of a collaborative initiative between the Bank of New York and Goldman Sachs, utilizing blockchain technology to track customer ownership of select money market fund shares. This initiative marks a significant advancement towards enhancing the functionality and transferability of existing money market fund shares, reinforcing our commitment to the digital asset arena, where we anticipate continued innovation and growth. Our estimate for money market mutual fund market share, including sub-advised funds, stood at about 7.11% at the end of Q2, a slight increase from 7.10% at the close of Q1. Looking at recent asset totals from the last few days, managed assets were approximately $854 billion, consisting of $642 billion in money markets, $91 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 amounted to $476 billion.

Thanks, Chris. Total revenue for Q2 saw a slight increase from the previous quarter, primarily due to elevated revenue from additional days in the quarter and the Rivington acquisition, although this was partially offset by declines in performance fees and carried interest. In Q2, carried interest and performance fees amounted to $1.4 million, down from $5.9 million last quarter, with about $829,000 of these fees countered by a similar amount in compensation expenses. Operating expenses in Q2 rose from the previous quarter, mainly due to a $12.9 million VAT refund received in Q1. In the other expense category, foreign exchange and related expenses reflected a credit of $5.8 million in Q2 compared to $5.6 million in Q1, as the pound appreciated against the dollar. We have reduced the notional value of our foreign currency forwards to GBP 31.5 million, down from GBP 86.7 million at the end of Q2. Compensation and related expenses increased by $1.6 million from the prior quarter, primarily due to higher incentive compensation and merit increases totaling $6.9 million, partially offset by lower seasonal expenses for stock-based compensation of $4.7 million and payroll taxes of about $600,000. Advertising and promotional expenses grew mainly due to the timing of our advertising campaign expenditures. The effective tax rate for Q2 was 26.1%, and we anticipate it to be between 25% and 28% for 2025. At the close of Q2, cash and investments totaled $607 million, with $474 million excluding the share attributable to noncontrolling interests. During Q2, the company bought about 1.5 million shares of its stock for approximately $64.5 million. The Board of Directors approved a new share repurchase program yesterday for 5 million shares, in addition to the 1.1 million shares still available from the prior program. Ali, that wraps up our prepared remarks. We would now like to open the call for questions.

Our first question is from Patrick Davitt with Autonomous Research.

On the back of your stablecoin tokenization comments, I think it would be helpful maybe if you could update us on your broader thoughts around the extent to which you think these products could disintermediate the traditional money fund business? Or do you see it more as incremental to that traditional money fund cash exposure?

We view it as incremental, with new customers and new opportunities. There isn't a massive uptake of these products just yet. It's important to remember that people with cash prefer daily liquidity at par. They might opt for a stablecoin that doesn't yield returns, but they would also appreciate a reasonable daily yield. We believe that the model where Goldman creates the platform, the Bank of New York serves as the custody and transfer agent, and the money fund remains as it usually does while someone else manages the tokenization is effective. From the customer's perspective, it's effectively a tokenized money fund, while for the money fund operator, it's still functioning as a standard money fund to ensure daily liquidity at par. This is a solid approach, though not the only one that will emerge in the future. Many are excited about the potential since this allows for trading at any time, though there are still mechanics to figure out regarding dividend distribution. Under our current program with BNY and Goldman, the individual holding the token at the end of the day will receive the dividend. This isn't as fully tokenized as some other money funds. Overall, we believe it's essential to engage in this space. We're in discussions with various parties, including European players, about innovative ideas. I can't cover all of them right now, but the partnership with the Bank of New York and Goldman has been publicly announced, as has Superstate.

You covered it very succinctly. The only thing I'd add is, right now, we think this is the tip of the iceberg, Patrick. This is, for our current products that are on this platform, a different way to distribute. So we distribute through various types of intermediaries through states, through insurers, through broker-dealers, through banks. We distribute directly this is another way of distributing our product, and in the process, turning it into a ledger product that has better transferability than a typical money market fund share does. So we think it's a very clever and new way to be able to distribute product. And as Chris mentioned, there's lots of innovation that we think can happen that provide additional bells and whistles to why this is a product that will take over, to some degree, the future. But that's not what is in existence today. What is in existence today is a traditional money fund being distributed to a different group of clients, particularly from a collateralization standpoint. So money funds. Stablecoins you mentioned, they need to be backed by something. They need to be backed by treasury bills or money funds containing those treasury bills. That's what the GENIUS Act is all about. Money funds will provide that collateral, and we will provide it on-chain so that the ease of use is basically seamless. But lots of innovation to come as it exists today, distribution changes that are beneficial.

Great. And just as a quick follow-up, Debbie. I feel like we've been talking about this for a couple of years now, but as we get closer to likely Fed cuts, are you starting to see any more institutions come in to talk to you about this long-awaited rotation into money funds that we've been talking about for a while now?

It's been active throughout the second half of 2024 and into 2025 so far. However, it hasn't fully kicked off yet because the anticipated Federal Reserve rate cuts at the end of 2024 have not yet impacted 2025. It’s a situation where we need to wait for clearer indicators regarding volume. For the second quarter, we saw our money fund assets remain mostly unchanged, but the quarter had two distinct phases. April experienced significant personal tax outflows and institutional outflows due to margin calls, particularly following the announcements made on April 6. The assets we lost in April were effectively recovered in May and June, allowing us to finish the quarter flat. The contrast between April and the subsequent two months is striking, with May and June reflecting our prediction about institutions shifting towards money funds instead of direct securities, while April was influenced more by economic and fiscal factors.

Our next question is coming from Ken Worthington with JPMorgan.

Debbie, how do you see growth in stablecoins impacting the money market fund industry? Our Treasury Secretary suggested $2 trillion of stablecoin assets in coming years. If this target is reached, what does this mean for money markets given the supply of T-Bills that are outstanding today? Does all the math work for money market funds?

The current size of the stablecoin market is about $250 billion, primarily concentrated in two coins. The assets backing these coins, Tether and Circle, are mainly in treasury securities, with some commercial paper involved. The GENIUS Act now provides more clarity on what should back a stablecoin, focusing on very short treasuries or treasury-backed repos, potentially increasing the market significantly beyond the current $250 billion. Additionally, with the recent debt ceiling renewal, we have gained an extra $5 billion in treasury. There have been extraordinary measures taken to address depleted resources, which are currently being replenished. We have also seen an improvement in bill supply, which we believe will continue. Despite some initial resistance when the Treasury transitioned from Janet Yellen to Bessent regarding short-term debt availability, the outcome has been an increase in bill supply. We anticipate extra supply in the 1- to 3-month sector, particularly in the 93-day bill market or shorter. While this may slightly increase costs, the additional supply should help meet the demand we expect from the stablecoin market for the foreseeable future.

If I could add, Ken, one of the other features of the GENIUS Act was to not allow stablecoins to pay interest or return. And so the people who ought to be concerned about the $2 trillion going into stablecoins are the ones who have deposit accounts with little or no interest and how does that dynamic exactly work. And so then you see the next level of things where people offer deals where, oh, yes, you own a stablecoin and they'll take a bunch of your money and put it into a money fund, charge you a fee and keep 80% of your money in a money fund, so you get at least some return. And you're seeing those kinds of innovations going on right now. But it's important to note that the stablecoin can't pay a yield.

Yes. Fair enough. And then just on MDT, having wild success here with that franchise. How do we think about capacity in some of the MDT Mid and Small Cap products? I don't know what sort of separate account assets are sort of there as well. But how do we think about the capacity for those given the inflows you're seeing?

Well, at this point, on all of the funds, each of the funds, we don't expect any capacity issues. The methodologies and the ability to buy shares is robust. And so believe me, we're looking at that, too, to see if something is going to poke a hole in our balloon. But at this point, we're not seeing it.

Our next question is coming from Bill Katz with TD Cowen.

Tom, maybe to start with you. Just given how you've been hedging maybe some of the pound versus the dollar, can you talk a little bit about where you think exit pace is for expenses? Maybe break that down between comp and maybe the noncomp line. Particularly the other line has been sort of negative last few quarters.

We've reduced our hedging notional amount and switched to reviewing it quarterly instead of annually. This change has lowered our exposure to the pound and has been beneficial. For the compensation line, we anticipate an increase of a couple of million dollars next quarter, though predictions can be unpredictable. Regarding the distribution line, we've seen a significant rise in our assets, especially in money funds, which should lead to a higher distribution payout. Earlier this year, I mentioned that we expected an increase in the systems and communication line, and although it has taken a bit longer to see progress, I still expect it to rise by a couple of million dollars next quarter. As for the other line items, I don't expect any major changes.

Okay. I'll circle back on the other expense line still. So maybe, Chris, one for you. Just been a lot of M&A in the industry. It seems like the opportunity with your alts business is percolating a little bit, but still so much small in the grand scheme of things. You bought back a lot of stock in the second quarter. You ramped up the authorization as well. How do we think about maybe capital return priorities from here? And is there a way to be a bit more strident on the M&A side to maybe accelerate the opportunity on alts where I think a lot of the incremental growth seems to sit for the industry.

We have previously stated that the best use of our cash is for acquisitions, and we are actively in discussions about various opportunities, particularly in private markets. Until we have an announcement, we won't share details. Reflecting on our history, from 2012 to 2018, we consistently indicated our intent to pursue an international acquisition, despite the time it took. When we commit to initiatives, we follow through, although it may not happen immediately. We are continuously searching for acquisition opportunities, as you mentioned. However, that doesn’t mean we are neglecting other attractive options, such as roll-ups. For instance, we have positioned ourselves as a favorable choice for anyone with a more bond-focused fund.

So Bill, back on the other, I don't expect to have a bat and we don't forecast what's going to happen FX. And so if you take those things both out of there, our other line has lots of items in it. And if you look back June 30, 2024, that line was $5 million. And I would say it would be a little higher than that would be our forecast, maybe $6.5 million. But so many things changing there. That's why I don't really like doing what I just did.

Our next question is coming from Brian Bedell with Deutsche Bank.

Great. Advancing to the next century here. I joined late, so pardon me if you've answered part of this on the tokenization side, but maybe a different angle. To what extent do you see the tokenization of money market funds expanding the overall size of the money market fund industry? How dramatic could that be if it's much easier to hold this in a digital format?

It is very, very difficult to say what that kind of number would be. We haven't done any numbers on that. Both Debbie and I believe it's incremental to the business. But as with any of these things, especially when you're doing blockchain, you've got a lot of a lot of people on there first in order to have it grow. It's a little bit of a chicken/egg thing. And so everybody is working on it now and there's a lot of excitement and a lot of articles and all of that. But the assets are not yet there. We're ready for when it goes, but it's just hard for us to say. And maybe Debbie has done some research that I'm not aware of on how big that could be, but I don't know...

No, Chris, exactly. We believe it serves as an extra distribution method and a further tool for managing collateral. However, it's really too early to accurately estimate the size of the growth at this point.

Thank you. As we have no further questions on the lines at this time, I would like to hand the call back over to Mr. Hanley for any closing remarks.

Okay. Well, thank you for joining us today. That concludes our call.

Thank you, ladies and gentlemen. This does conclude today's call, and you may disconnect your lines at this time. We thank you for your participation.