Federated Hermes, Inc. (FHI) Q3 2026 Earnings Call Transcript

Greetings, and welcome to the Federated Hermes 3rd Quarter 2026 Analyst Call and Webcast. At this time, all participants are placed on a listen-only mode, and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Ray Hanley, President of Federated Investors Management Company. Sir, the floor is yours.

Thank you, and welcome to our call. Leading today's call will be Chris Donoghue, CEO and President of Federated Hermes, and Tom Donoghue, Chief Financial Officer. Joining us for the Q&A are Sacher Nasebi, 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.

You should see filings and market-neutral strategies of their Morningstar categories and SMA strategies during Q3. Institutional separate accounts, including sub-advisory mandates, added $1.5 billion in Q3 net sales, nearly all in MDT strategies. 56% of our equity funds were beating peers, and 33% were in the top quartile of their category. Through October 23rd, combined equity funds and SMAs had net sales by a decrease of $1.8 billion due to lower market value net sales in the third ETF in the C.W. Henderson short-term muni SMA. The institutional separate accounts had Q3 net sales of $924 million, an entity that has regular, sizable inflows. At the end of the third quarter, we started data for the trailing three years. 49% of our fixed income funds were beating peers, and 21% were in the top quartile of their category. October 23rd, combined fixed income funds and SMAs had net redemptions of $2 billion, which includes a third of its category for the trailing 10 years, 66 percentile for three years, top 28 percent for one year, and top 18 percent for the trailing three months. Assets were up slightly, reaching $21.7 billion. And ETF combined for $180 million, vintage of RP and debt fund that we'll invest in senior. We began the fourth quarter with about $6.5 billion in net institutional wins yet to fund and separate accounts. We're expected to have net sales of about $7 billion in MDT additions. Expected to come into private lending, private equity, multi-sector fees. It's decreased by $27 billion, or 4%, from the second quarter, as funds decreased by $13.6 billion, or 3%, and separate accounts decreased by about $13.4 billion, or 8%. The mid-September increase in interest rates by the Fed, corporate tax payments, money market separate account assets were impacted by the liquidity levels of large state pools that we manage and typically peak with tax collections at the end of the year through April before decreasing in Q2. Market Mutual Fund market share, including sub-advised funds, was about 6.6% at the end of Q3, down from 6.7% at the end of Q3. We continue active collaboration with financial institutions and technology providers' distribution. It's designed to enhance flexibility and accessibility while preserving the core structure and utility of money market funds. With Prometheum Inc. was announced, we're working with Prometheum, a market infrastructure and the reach of tokenized securities, broker-dealer, market, broker-dealers, and our market management digital treasury fund, which is expected to support both traditional and on-chain distribution. We're actively engaged with regulated digital asset intermediaries, including participation in the BNY-Goldman Domestic Initiative involving mirrored tokenization, access to a USITS money fund in the UK, money market fund in the APAC region, discussions with other intermediaries, managed assets, and $90 billion. $98 billion, JASET levels of $489.00.

For Q3, compared to the prior quarter, 1%. Additional day added $5.3 million of revenues. These increases were partially offset by lower Q3 money market average assets, resulting in $4 million. In addition, Q2 included a $2.9 million gain on the sale of a renewable energy property by Rivington, and the U.K. real estate business added $2 million. Interest and performance fees were $726,000 compared to $1.4 million in the prior quarter. Approximately $428,000 of the Q3 fees were offset by compensation expense. Operating expenses decreased by $15.9 million, or 4%, from the prior quarter. Domain lead to Q2 included approximately $11.2 million in transaction costs from the FCP acquisition in certain line items of lower compensation and related advertising and promotional activity. The intangible asset expense decreased $1.5 million, primarily due to most of the intangible assets from the Hermes acquisition being fully amortized. The cases were partially offset by a withholding tax-related expense of $1.9 million recorded in the other expense, $1.7 million expense for an adjustment to the FCP contingent. The tax rate was 27.1%. We estimate the full-year tax rate to be in the 25% to 28% range for 2026. At the end of Q3, cash and investments were $580 million. Cash and investments excluding the portion attributable to non-controlling interests were $483 million. Thank you.

Ladies and gentlemen, at this time, we'll be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question key, and you may press star 2 if you wish to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the stutter keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from Patrick Davies with Autonomous Research. Your line is live.

Hey, good morning, everyone. I'm not money fund flows. I understand that 3Q is always a seasonally weaker fund flow quarter for you, but there was a pretty big gap with many of your largest competitors. Like BlackRock had big inflows, JP Morgan had big inflows, and Vesco had big inflows. So I'd like to give a little bit more color on what you think explains that big gap with some of those big competitors and to what extent you're seeing more, you know, pricing competition, people trying to compete more aggressively on fees.

I'll go first, and then we'll have – overall, there's nothing new either with fees, and that's what was – And if you look at it over the 50-year period that we've been involved in this, this is like a routine deal. Debbie will give you more details.

So, Patrick, as you know, we manage our money funds with a bias to daily liquidity at par. And as part of that process on a daily basis, we identify maturity restrictions for different security types that we use, as well as for each of the approved issuers from our database that we use. And these restrictions, for the most part, are based on liquidity in the marketplace for those different security types, for those different issuers as they go out the curve, in addition to our own internal credit rating, which ranges from one to five for the various issuers. And this process really involves all three members of our team. It's our portfolio managers that are looking at the structure of the fund. It's our analysts that are reviewing the issuers, and it's the traders that are looking at the security types and the selections on a daily basis. And what we've determined is that, you know, historically and in this particular case, we haven't been willing to extend our maturities beyond what I would traditionally call our comfort zone just because there's maybe some inordinate value and pursue that incremental yield out the curve. While in our minds, that would mean, you know, sacrificing some of that true daily liquidity. So it's basically a performance issue based on our choice of what I'll call the most liquid and highly rated sectors in the marketplace at this time. The other thing that I would note is that the FOMC did move rates in September, and we, as well as others, were lagging the direct market. But that's across the board.

And to elaborate on that, so basically we've caught up. And if you look at the recent stats for October 28th, our money market fund assets are up $3.7 billion so far. And if you look at some of those other competitors you mentioned, some of their assets have walked out the door a little bit on them. So things are coming back to normal.

Okay. Interesting. Thank you. My follow-up is on expenses. Good control, again, in 3Q, which is nice to see. Could you maybe expand on how sustainable that is, what you're seeing heading into 4Q, and if you have any early view on how things are tracking in 27? Thank you.

I don't have a comment on 27, except, you know, you see our margin, which we are happy to see that. Thank you.

Thank you. Our next question is coming from Bill Katz with TD Cowan. Your line is live.

Good morning. This is Robin Holdian for Bill Katz, and thank you for taking the question. Did you speak to the success you saw on the SMA side of the business during the quarter in equity and fixed income? Is there anything specific you've done in those channels that's resonating with investors and that might have driven the acceleration there?

That's a case of successfully repeating the sounding joy, and doing it for a long time. If you look at the MDT field, you see consistent outperformance with SMAs. It takes a little longer to make the sales redemption as well. So there was no magic. There was no silver bullet.

The performance, which is obviously outstanding for the MDT strategies, and I would just emphasize that the success we've had on the institutional account is diversified within several of the SMA strategies, so we've had nice wins and good pipeline composition from a variety of those strategies, all-cap core, large-cap value, small-cap growth, large-cap core, large-cap growth, and which reflected itself in lower mutual fund flows, we were able to have strong line by the strength. Also note that ETFs and CIT products also had net inflows.

Great. Thank you. That's helpful. And for a follow-up, we thought the Prometheum announcement was an interesting development. Aside from your current digital products, where do you see this going? Does this accelerate the tokenization of some of your other non-tokenized funds, for example, I

don't think it actually accelerates anything. It is just steady as we go in exploring this new field. As I've said to this audience before, the clients aren't beating down the doors to get these products. This is getting the infrastructure ready for tomorrow, no different than a lot of other examples of where the infrastructure has to change for the future. And so we are excited about our deal with Promethium, with BNY. Hard to say, oh, we're focused, as I said in my remarks, on the liquidity portion. And I would say the other securities are behind that from our point of view, but we'll be ready for that as well.

Thank you for taking the questions.

Thank you. Our next question is coming from Michael Chiu with J.P. Morgan. Your line is live.

Hi, good morning. Thanks for taking my question. I just wanted to touch on the money funds discussion that we were having before. I mean, you share the AUM data, which is very helpful, but I'm actually wondering how the relative revenue capture share might compare to some of the stats you provide on the AUM share, and if there's any bifurcation between the two that you might envision and any implications you might be able to help us frame there. I know you gave a discussion on the yield and performance, which makes sense, but also thinking about how the revenue share might compare both to those statistics. Thanks.

So you're touching on something that we don't have great information on, which is market share of revenue. And this has been one of Chris's crusades for a long time, that to an owner-operator, that's a very important statistic. But we can't get it, so we don't know. So we only do it by inference. But it's what's behind the curtain in not doing the things that others do to periodically jump their yield, jump a bunch of assets, and then get back to regular. And I'll let Ray comment on the specifics of our revenue picture as much as we know.

Yeah, I would just echo that, Chris. We can't really do comparable revenue. I would stress that we have a lot of different pricing options across our money market franchise reflecting our reach into different portions of the intermediary channels, but a lot of the attention, of course, are in the most institutional products, which tend to have a lower fee rate among the applications, which for us is not direct retail. It's still through intermediaries, but to the end client of the intermediary, we have tended to traditionally do better if you bifurcate the asset market share in that retail channel, which would be a positive influence to the blended fee rate overall for money markets.

Great. No, thanks for all that, Caller. If I could just switch gears to MDT, you've had quite a bit of success there, and you continue to make progress across a number of different channels. Just broadly, from an industry perspective, there's been a lot made about tax-aware, long-short products, the demand and the penetration that's having in terms of those products in market. I was wondering, you know, given the success you've had with MDT, if tax-aware, long, short, is something you are or you may consider in the future, just given the demand appetite there in the market today. Thanks.

Yes, we are working with – that basically get added to by the advisor or the existing mandates. And I can't get into the details on any of those, but, yes, we're looking at that. But as soon as you say tax-aware, I think C.W. Henderson. I know that wasn't your question, but that's on the muni side and on managing the gains and the tax situation. And that was what I mentioned in my remarks as doing quite well. Overall, the message is that tax-aware is very important, but what we tell everybody is don't let taxes drive the truck. Underneath that, you've got to have good projects that are heading in the right direction for you and not just having taxes control the outcome.

And I would just add to that, the MDT market neutral strategy is a long-short strategy, and we've done well with that in terms of both performance and picking up consistent net inflows.

Thank you.

Thank you. Our next question is coming from John Dunn with Evercore ISI. Your line is live.

Thanks. Maybe just a little more on the institutional pipeline. Can you talk about any client concentrations and how quickly do you think mandates will fund and maybe the impact on the firm-wide fee rate? And then on the other end, any chunky redemptions you wanted to call out that you might see on the horizon?

We're going to stop and cheer on the number of 6.5.

Sure. When we talk about funding, John, the equity portion we expect to fund over the next two quarters, and there are some large sub-advised mandates in there as well as some more regular institutional separate accounts. As you know, the fee rates on applications would be less than what we would realize in regular funds. We are happy to add as much of this as we can, even if it would have the impact of diluting the blended fee rate.

And then maybe just on fixed income, could you kind of frame where you expect demand for your suite to go from here and which products do you think are going to catch a bid?

And it's going to drive the truck, but we're never going to really be behind on total return bond fund, which was basically our highest gross selling product during the third quarter. But the answer specifically to your question will be on the short side, and we have a beautiful array of products with ultra-shorts, micro-shorts, et cetera, for people who are wanting to step out the yield curve just a little bit.

Thank you. Thank you. Ladies and gentlemen, we have reached the end of our question and answer session, so I would like to turn the call back over to Mr. Hanley for closing remarks.

Thank you.

Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.