Earnings Call Transcript - FHI Q4 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Federated Hermes Q4 2021 Analyst Call and Webcast. It is now my pleasure to turn the floor over to your host, Raymond J. Hanley, President, Federated Investors Management Company. Sir, the floor is yours.

Raymond Hanley, President

Good morning, and welcome. Thank you for joining us today. 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 the International Business of Federated Hermes; 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 our 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?

Chris Donahue, CEO

Thank you, Ray, and good morning, all. I will review Federated Hermes business performance, and Tom will comment on our financial results. 2021 ended with record long-term assets under management of $221 billion, including record assets in fixed income, $98 billion, and records in alternative private markets, $23 billion. Gross sales of long-term strategies reached another record high in 2021, hitting nearly $70 billion, a 14% increase from 2020. Net sales in these strategies nearly doubled to just under $9 billion. Assets under advice by EOS at Federated Hermes were $1.6 trillion at the end of 2021. We added one new client in the fourth quarter and 10 during the year. Looking first at equities. Fund flows were negative in the fourth quarter by about $1.7 billion with outflows in growth and international strategies. Equity SMAs had fourth quarter net redemptions of about $56 million, and equity institutional separate accounts had $987 million of net redemptions, including $549 million from a UK-based client. We saw positive net sales, however, in 18 equity strategies, including global emerging markets SMID, U.S. SMID, and Global Equity ESG. Looking at areas of focus for the equity business in 2022, we are providing clients with research and thought leadership on asset classes and strategies that have responded well in past inflationary periods. Within equities, these include dividend income, international emerging markets, and value strategies. Our largest equity strategy, the strategic value dividend strategy, is off to a solid start in 2022 with positive returns and early net sales for both the fund and the SMA. We have a robust suite of international equity strategies managed both in London and in the U.S. Several of our London-managed equity strategies produced solid net sales in 2021, including: Global Equity ESG, $849 million; SDG engagement, $565 million; Asia ex Japan, $437 million; and Global EM SMID, $166 million. All three of the international strategies managed from our Cleveland office are rated 5 stars by Morningstar. We will continue to emphasize these and other strategies that offer solutions to clients as they manage against higher inflation. Our equity fund performance at the end of 2021 compared to peers was solid. Using Morningstar data for the trailing 3 years at the end of 2021, 59%, 20 out of 34 of our equity funds were beating peers and 26%, 9 out of 34 were in the top quartile of their category. For the first three weeks of 2022, equity funds and SMAs each had net positive sales showing a combined total of about $46 million, and we had 18 equity funds with positive net sales in these first 3 weeks of January. Turning now to fixed income. Q4 net sales were just under $500 million, as institutional account net sales of $752 million and SMA net sales of about $60 million were partially offset by fund net redemptions of $330 million. Fixed income separate account net sales were driven by high yield, $407 million, and multisector, $327 million strategies. Within fixed income funds, the high-yield strategy showed net sales of $424 million, led by the SDG engagement high-yield credit users funds. Net redemptions occurred in ultrashort bond funds and certain other short-duration strategies. We had 19 fixed income funds with positive net sales in the fourth quarter, including Strategic Income, Muni and Govy Ultrashorts, inflation-protected securities, floating rate, strategic income, and total return bond fund, and of course, others. In the fourth quarter, we successfully launched our first two active transparent ETFs, an investment-grade short-duration corporate bond fund and a high-yield short-duration bond fund. We are focused on the growth of these initial products while we also plan for additional ETF offerings in 2022. Regarding performance. At the end of 2021 and using Morningstar data for the trailing 3 years, we had 8 fixed income funds, 22% in the top quartile and 17 funds, 47% above median. For the first three weeks of Q1, fixed income funds and SMAs had net redemptions of about $34 million. During the same period, we had 17 fixed income funds with positive net sales, including solid results in total return bond fund and high yield. Ultrashort funds were negative. In the alternative private market category, net sales of over $200 million included unconstrained credit of $193 million, absolute return credit of $91 million, and private equity of $39 million. This was partially offset by net redemptions in direct lending and infrastructure. We successfully launched in Q4 a new vintage of our private equity series, PEC 5, and a new vintage of our European direct lending series; European direct lending to PEC 5 had initial funding of $342 million in the fourth quarter, and European Direct Lending II had $272 million in commitments for later funding. We are continuing marketing efforts to raise additional assets in each of these strategies this year. We began 2022 with about $800 million in net institutional mandates yet to fund into both funds and separate accounts. These additions are expected to occur in alternatives private markets, including unconstrained credit, direct lending, trade finance, and fixed income. Fixed income wins include core, flexible credit, and investment-grade credit strategies. Now moving to money markets. Assets were up about $34 billion in the fourth quarter with about $20 billion from funds and $14 billion from separate accounts. In addition to seasonal trends, we benefited from ongoing stimulus-driven liquidity growth as well as wins in certain institutional market segments. Our money market mutual fund market share, including sub-advised funds, was about 7.4% at the end of the year, up from 7.2% at the end of the third quarter. With the market pricing in a series of hikes in short-term rates in 2022, including the first increase in March, we have begun to see increases in the rates in the 3 months and longer portions of the money market curve. Tom will update how this impacts our yield waiver outlook. We believe that higher short-term rates will benefit money market funds beyond waiver relief. As in the 2009 to 2016 period of near-zero rates, money market funds have retained most of their assets even as alternatives offered higher yields. Over the span of the last Fed tightening cycle that began in the fourth quarter of '16 through the last rate hike in the fourth quarter of '18, after an initial decline, our money market fund managed assets increased about 15%. The industry followed a similar pattern when after an initial decline was followed by growth of 11% over that time frame. The higher rates helped us continue to grow these assets by an additional 22% through the third quarter of '19 when the Fed began to ease rates. Similarly, industry money market fund assets also grew in this period, showing a 14% increase. Now we closely monitor and comment on the SEC's proposed money market fund regulatory changes. The comments submitted to the SEC by us and others clearly note that swing pricing is not a workable alternative for Institutional Prime and Muni Money Market funds. We believe that most institutions would not use these products if swing pricing were to be imposed. In addition to uncertainty around redemption proceeds, large-scale system changes would be required by both money fund managers and investors to enable swing pricing to work. In our view, a few, if any, will undertake these efforts. As a result, we expect that most of the assets currently in Institutional Prime and Muni funds will shift to government money market funds, as many did during the last round of changes in 2016, or to products like our private prime fund that are not subject to 2a-7 money market mutual fund regulations. We have approximately $8 billion in client assets in institutional prime and muni funds that would be impacted if swing pricing were to be imposed as described. Taking a look now at recent asset totals. Managed assets were approximately $651 billion, including $436 billion in money markets, $90 billion in equities, $98 billion in fixed income, $23 billion in alternative private markets, and $4 billion in multi-asset. Money market mutual fund assets were $294 billion.

Tom Donahue, CFO

Thanks, Chris. Total revenue for the quarter was down 2% from the prior quarter, due mainly to lower average equity assets, higher money market fund waivers, and lower performance fees, partially offset by higher money market assets, higher alternative private market assets and higher fixed income assets. Q4 carried interest and performance fees were $3.7 million compared to $5.1 million in Q3. Operating expenses increased slightly in Q4 compared to Q3, and compensation-related expenses were down due to lower incentive compensation expense. Advertising and promotional expenses increased due to higher advertising and conference expenses. We saw some restoration in travel and short-term rates moving up in anticipation of Fed rate hikes beginning in March. We estimate that the negative impact on operating income from minimum yield waivers on money market funds for Q1 will improve to about $22 million compared to $38 million in Q4. Assuming a Fed rate hike in March, we expect the Q2 negative impact to decrease about 90% from Q1 estimated levels. Estimates are based on our investment team's expectations for portfolio yields and recent asset levels, asset mix, and other factors. The amount of minimum yield waivers and the impact on operating income will vary based on several factors including, among others, interest rates, the capacity of distributors to absorb waivers, asset levels, and asset mix. Any changes in these factors can impact the amount of minimum yield waivers including in a material way. Now looking at expenses for a minute for the future, overall, most expense line items will be impacted by inflation for Q1 and for all of 2022. Known compensation and related items, including things like payroll tax and bonus restricted stock, will increase in Q1 by about $8 million. New hires, wage increases, bonus reset increases, we expect will occur in Q1, but we're not going to predict by how much. Of course, there are fewer days in Q1 versus Q4, reducing net revenue. Distribution expenses are expected to increase as rates rise. System and communication expenses are expected to increase as we continue to invest in the technology supporting our business. Advertising and promotion, the full year of 2022 should look similar to the full year of 2021. Travel should increase as we hope to return to more normal operations. As you heard Chris mention, our ETF and private markets business plans are being implemented along with the successes that he mentioned. So overall, we're going to continue to invest for growth, and we will deal with the reality of inflation. At the end of 2021, cash and investments were $427 million, of which about $397 million was available to us. During Q4, we purchased over 4 million shares of our stock for approximately $145 million. Debt at the end of the year was $223 million, reflecting both the acquisition of the remainder of the BTPS interest in Hermes during Q3 and the Q4 share repurchases. Now net cash and investments were $147 million at the end of the year. We continue to be active in buying our stock. We are monitoring the debt financing market and may pursue long-term financing arrangements to supplement our cash flow from operations to fund share repurchases, potential acquisitions, to pay down part of our existing debt, and for other corporate purposes. Depending on market conditions and other factors, we are considering long-term debt financing of approximately $300 million. That concludes our prepared remarks. And Kate, we would like to open the call up for questions now.

Operator, Operator

Our first question today is from Dan Fannon at Jefferies.

Dan Fannon, Analyst

Just I guess to start on the fee waiver guidance in terms of the assumptions. As you think about the improvement here to March without any Fed change? Is that assuming asset levels as of 12/31 or asset levels as of the numbers you gave today? And then is it based on the current yield expectations of further improvements? Just a little bit more color on the kind of shorter-term dynamics before the Fed actually moves.

Tom Donahue, CFO

Yes. The asset level is as of January 21st, and do you want to comment on that, Debbie?

Deborah Cunningham, CIO

Certainly. Yes. We're looking at what will continue to be, in our minds, expectations of a steepening yield curve as we get into the months of February and March and closer to that March FOMC meeting.

Dan Fannon, Analyst

Got it. Okay. And then in terms of the expenses, I appreciate the color around inflation and the seasonal dynamics for the first quarter and some of the other color, but is the fourth quarter levels a good starting point when we think about that comp reset because it came in lower, the 124 in the fourth quarter? Just thinking about was there a true-up and maybe also whether performance or incentive fees in the fourth quarter as well? Just trying to think about what we should just be adding aid and some inflation to the 124 if that was artificially low.

Tom Donahue, CFO

We didn't have a great year in 2021, which is why the incentive compensation decreased at the end of the year as we evaluated how much should be paid out. We have reset those figures for 2022. I mentioned the $8 million of normalized amounts. We do expect an increase, but we won't speculate on how much. The reason is that whenever I try to predict that, I end up being wrong because the marketplace changes significantly, and we grew tired of forecasting only to miss the mark.

Operator, Operator

Our next question today is coming from Patrick Davitt at Autonomous Research.

Patrick Davitt, Analyst

First on the waivers, some of the other large money fund complexes have suggested it can take a few months for the waivers to come off. As much as you guys are guiding to. So what gives you the confidence that you can be kind of 90% off that rapidly that quickly after the first hike?

Deborah Cunningham, CIO

Everybody’s factors are a little bit different. It’s asset levels, asset composition, how much is in government, how much is in Prime, how much is in Muni. The dynamics of the curves between those sectors, what to what the actual outlook would be on an expectation, whether it’s additional moves beyond March or only 1 or 2 moves throughout the year. You also have the expense factors that are being charged. Those are not uniform across the market. And as such, the waivers aren’t uniform based on those. So lots of different factors that go into that determination and calculation.

Patrick Davitt, Analyst

Got it. And I appreciate the guidance on, I guess, $8 billion in funds that would be impacted by the swing pricing. But swing pricing appears to have been accepted in Europe. So why are you so draconian on the reaction in the U.S., just out of curiosity?

Chris Donahue, CEO

It requires a severe response. In Europe, they don’t really implement this on true money market funds, but they are effectively pricing them in a way that is not transparent. This leads to pricing that renders the product ineffective. When a 4% redemption occurs, it necessitates a swing price, and customers will not be aware of this happening in a stable market. As a result, they will be negatively surprised, as it effectively acts like a redemption fee through a swung price. The systems that need to be established are costly, labor-intensive, and provide no real benefit. So, why would customers choose to engage in this? Why should we pursue it? It appears to me that it echoes what the Fed stated years ago about either eliminating Prime and Municipal funds or “regulating them out of existence.” We believe that from a genuine stakeholder perspective, issuers should have the right to issue, and buyers should have the right to purchase these products that have demonstrated resilience and success over the years, despite what the Fed may claim.

Operator, Operator

Our next question today is coming from Ken Worthington at JP Morgan.

Ken Worthington, Analyst

Chris, you noted that short and ultrashort bond fund outflows, I believe, in 4Q, and I think you highlighted again so far in 1Q. Given the market is anticipating higher interest rates, why are these funds seeing outflows? And I noticed this has happened in the past, too. But I would kind of think that investors would be allocating more to short and ultrashort not less as we approach and as we enter a rising rate environment?

Chris Donahue, CEO

Some of those products have experienced a decline in the NAV and some clients were not really happy with having a decline in the NAV. And I think it was about $0.04, and so that caused some of those redemptions but that's just the nature of the product. So I agree with you, people ought to be coming into those. And this is a great time for them to be doing that. But we're still living on the backside of that. Debbie?

Deborah Cunningham, CIO

Yes, Ken. I would add that looking at the flows over the last several years in the recent zero rate environment, they have been very positive in those products. A significant portion of those positive flows has resulted from liquidity assets being allocated into different buckets, segmenting their cash, and investing in the ultrashort space. Clients are now seeking to invest in even shorter products in a rising rate environment, where we have a range of liquidity products that have been growing, alongside our new Muni micro short product. I believe that ultrashorts will attract assets over the long term as bond players transition to shorter durations. However, they may experience asset outflows back to even shorter products like micro short and money markets in a rising rate environment.

Ken Worthington, Analyst

Great. I'm not sure if Saker is on the call, so maybe Chris can answer if he isn't. Does BT still have significant investments with Federated Hermes funds? Is there a schedule for planned redemptions or returns of capital to BT? I remember that when the deal was initially made, Federated mentioned that those assets would be released over time. I just wanted to check on the status of that process.

Chris Donahue, CEO

Saker is on the call.

Saker Nusseibeh, CEO of International Business

Thank you. So, I mean, first off, I don't want to talk in great detail about BTPS because it's the main client. But insofar as it relates to the publicly available information, which is to do with the deal, we did say at the beginning that certain assets of BTPS primarily in public markets were due to have a declining life because as a fund, it's a direct benefit fund, and it is a maturing fund. However, we also run substantial assets for BTPS in private markets and not only do they remain invested with us, we continue to discuss with them new opportunities, which they are interested in.

Ken Worthington, Analyst

So where do we say on the public side to update us?

Saker Nusseibeh, CEO of International Business

On the public side, they are very much on track as per our original agreement with them. So there's no surprises there. The decline is incorporated within our funds. And the key for us is the private side, which is where the majority of our assets stand.

Tom Donahue, CFO

And we gave out the levels there when we did the deal. And we kind of did that, so everybody could see where it stood and anticipated not really going into a client detail after that. So that was in August, right, in August. Yes.

Operator, Operator

Our next question today is coming from Kenneth Lee at RBC Capital Markets.

Kenneth Lee, Analyst

Want to get further color on the potential demand for money market fund products, especially as rates start going up. And thanks again for the historical perspective there. Would you also expect a similar dynamic this time in which case you would see declines followed by growth over time?

Deborah Cunningham, CIO

Sure, Kenneth. This is Debbie, obviously. Historically, when interest rates have gone up, the initial reaction is for money market funds to lose assets. And generally speaking, over most cycles, it lasts longer than it did in the ‘16 to ‘18 cycle. We think this will be more like the ‘16 to ‘18 cycle of a couple of characteristics. Number one, we’re starting from zero again. So that’s different than prior increasing rate cycles. And number two, it was caused by a sort of a major event, in this case, a pandemic. And ultimately zero has been experienced for a long time because of that particular factor. When you have a Fed though, like we have now and like we had in '16 to '18, where you've got the preference for communication and a yield curve that effectively reflects expectations of Fed movement. Now it is dynamic, obviously. If you asked me 3 months ago or even 3 weeks ago, my opinion would have been different for what that Fed movement would have been. But the Fed that we have now is very communicative. There are Fed speakers out there in unison. And as such, products reflect that from a yield curve standpoint faster than they have in what I’d call more historic Fed tightening cycles. And in this case, again, I’m not even calling it and the Fed isn’t calling a tightening cycle, as they did not in ‘16 to ‘18, it’s more normalization. It’s getting rates back to where they should be in a more normalized environment with an inflationary environment that also becomes more normalized.

Chris Donahue, CEO

Ken, let me add also a couple of other factors. One is to take a look at the money supply. And all the money market funds are a function of that in the hands of all the individuals that have money. And so this is a look at what you might call core money market funds where people just need a cash management service. And this is an inexorable thing that grows. I don’t think they’re going to start shrinking the money supply. Now it’s not a direct factor and it certainly doesn’t turn in quarters like we’re looking at but it is an underlying feature, which enables us to get to higher highs and higher lows. It’s one of the ingredients. Another one is these products over all these decades have shown tremendous resilience and tremendous ability to give the clients what they want. And so that’s another big factor why these products continue to be successful.

Kenneth Lee, Analyst

Got you. Very helpful there. One follow-up, if I may. I’m wondering if you could update us on capital allocation priorities, as there were meaningful share repurchases in the quarter, and you mentioned a bit about long-term financing solutions. Could you provide further insight on that?

Tom Donahue, CFO

Yes, to provide more detail based on our fourth-quarter performance, we were not pleased with the stock price, but we believe in the company's bright future. As a result, we have been purchasing additional shares. We are implementing a new share buyback program amounting to $7.5 million. We plan to remain active in this regard. Additionally, concerning our debt levels, we are exploring long-term financing options to ensure we have short-term availability while also addressing our longer-term rate needs.

Operator, Operator

Our next question today is coming from John Dunn at Evercore ISI.

John Dunn, Analyst

With waivers fading and the outlook for flow looking quite positive, how does this impact discussions with small and money market participants? Does it delay the roll-up deals, and how does this dynamic function at this stage of the cycle?

Chris Donahue, CEO

What we have discovered is that the cycle really doesn't drive that truck. It's more of a longer-term internal decision by other potential roll-up candidates as the CEO and the business people and the CFO of those enterprises decide whether those things make sense for them given the risk profile and the growth profile. So it just doesn't work as an accelerant. We've been in this a long, long time, and it's hard to connect something that happened in the marketplace within things releasing. So what's our answer? We simply call on them all the time so that when the opportunities arise, everybody knows that Federated Hermes is a warm and loving home for their money fund.

John Dunn, Analyst

Got it. And then you mentioned the strategic value dividend on doing better so far in '22. Can you remind us how that product sold and do you think there's potential for a pickup there to take up some of the slack in other areas of equities this year?

Chris Donahue, CEO

We do. And that's why I mentioned the thought leadership that we were putting out into the marketplace. This began many months ago with a belief that perhaps inflation was not "transitory" and that's to look at the index betas to CPI of various investment areas. And those charts and works showed that dividend stocks, value stocks, and as I mentioned, even international and small-cap, and obviously tipped are the gang of solutions that you can work with to help clients manage around these higher inflation and higher inflation expectations. And so the strategic value dividend fund is right in the middle of the mix for that. And that just underscores one other point here, and that is we like to call ourselves a franchise for all seasons. And so when you get these giant reversals from growth to value and you have inflation, which are different situations that we've had over the last several years, you have solutions for products that are ready and able to go.

Operator, Operator

Our next question today is coming from Robert Lee at KBW.

Robert Lee, Analyst

Just want to maybe go back to expenses a little bit and Tom understanding, I don’t want to give forward guidance. But maybe just to level set 2021, I mean, on comp, I mean, clearly some reversal of prior accruals. So if we’re trying to think of kind of select a better way of putting a normalized comp level? Should we be just averaging the 4 quarters, understanding in the first quarter last year, there was a bunch of noise that would kind of get us to around the $130-ish million level? Is that the best way to think of it as kind of as we head into next year?

Tom Donahue, CFO

In the first quarter, I discussed inflation and expenses. If we're correct about the company's earnings being impacted by rate increases, it will affect our predictions for bonuses and compensation for the year. By the first quarter, we will need to set an accrual number. Given our expectations of rising rates and fewer waivers, we have an important decision to make, which is why I hesitate to make a prediction. We significantly reduced compensation in the fourth quarter due to earnings and other factors, so if earnings improve, we would consider restoring compensation.

Robert Lee, Analyst

Okay. Regarding the EOS business, with a trillion in assets under advisement, it has certainly been a focus in the U.S. You've made investments to understand how it supports the investment process across the firm. How should we evaluate the economic impact of that advisory business? Is it primarily about gaining better insights, or is there potential for significant earnings or revenue growth that we should consider from that business?

Chris Donahue, CEO

Saker, it’s your turn.

Saker Nusseibeh, CEO of International Business

Thank you, Chris. I think, look, first and foremost, you have to think about it as essential to our brand at FHI as being the main differentiator with everybody who wants to play within the ESG space because it gives us particularly deep understanding of all the factors that come into play. And remember that for us, we believe that putting these factors in leads to sustainable wealth creation, meaning they actually add to our alpha. So in many ways, the value that you see with our clients see are reflected also in the understand we have with the company that we engage with in the environment that these companies operate in and so on. So there is an inherent value in brand has an inherent value in understanding companies and inherent value of actually improving our own performance as the insight that we get is unique to our teams, whether in Pittsburgh, in Boston, or in London. The second thing you should take into account is that, generally speaking, the clients who do have our clients we have in other areas. And that means that it’s a holistic relationship. And it tends to tie clients, and you hear Chris talking about us being a franchise for all seasons. And the one thing that is an overarching in all seasons certainly has been in the markets outside of the U.S. has been the EOS relationship because it doesn’t matter what you’re in, there’s always going to be for the clients, a degree of index investments and call a lot of the time, we try to get the EOS services for that index investment that gives us contact and commitment to the clients. If you’re asking me is EOS going to make us an enormous amount of money? The answer is, it is, by definition, motors high margin as other directly high market in other asset management businesses are concerned, but it’s a business that we believe is worth pursuing both from a financial point of view but also from event and from an understanding point of view.

Robert Lee, Analyst

Great. And then maybe one last question, focusing on the SMA business. There's a noticeable trend in the industry towards model portfolios, with many trying to create and place them on various platforms. This aspect hasn't been discussed much by your team in the past. Could you share how you're approaching model capabilities within your SMA business to enhance placement, rather than relying solely on the traditional strategy-by-strategy SMA approach?

Chris Donahue, CEO

We would be on both streets, Rob. The reason, I think we talked about this in prior calls. We had one client, especially who wanted models along the ESG line, which we set up and are implementing here, I think, in the first quarter, and that was a whole new deal for us. But the model thing and the SMA thing are related. So naturally, we’re going to keep repeating what we’ve been doing on the SMA side. And in addition, working on these models in response to client demand.

Operator, Operator

Our next question today is coming from Brian Bedell at Deutsche Bank.

Brian Bedell, Analyst

Chris, I like the warm and loving home comment on money market funds. You should make that a marketing brochure especially here in the frigid temperatures here in the Northeast at this time of the year. But maybe if I can ask Debbie about one more on the money market fund flow trajectory and specifically on brokerage sweep. If we think about how brokerages tend to lag deposit pricing, they have very low deposit betas in the first couple of hikes of the cycles. Therefore, clients that do want to get a yield would naturally migrate to money market funds in the sweep systems. Maybe if you can comment on your thoughts on whether you think that would be a positive contributor. Is the cycle certainly if the Fed hikes once per quarter or at a sustained momentum. And if you can refresh us on the AUM that is in the brokerage with the money fund complex.

Deborah Cunningham, CIO

Sure. Well, first of all, those brokerage sweeps at this point are within our government sector. That's because of the FNAV nature of the prime institutional and municipal institutional that went into effect in 2016. I don't know that we actually break that out from an FHI standpoint. I think from an industry standpoint, from a public standpoint anyway. But from an industry standpoint, I think about 20% to 25% of the government assets in the market are in that type of a sweep arrangement. And Ray, do you have additional insight from an FHI?

Raymond Hanley, President

We do not purchase all financial intermediaries, so we don't specifically categorize brokers. However, one of the reasons we examined the historical growth in two phases after the 2016 cycle was that as interest rates increased, we noticed precisely what you mentioned. Cash yields became a more appealing asset class. While this has institutional implications, it certainly helped us engage with brokers and other intermediaries who were motivated to move away from the default option, which was the simplest choice for their cash, and instead access significantly higher yields with us. We actively pursued this right up until the Federal Reserve aggressively lowered rates again.

Deborah Cunningham, CIO

We would expect a similar type of pattern to occur here. So I think it's a repeated pattern that we have some history associated with, as Ray mentioned.

Brian Bedell, Analyst

That's helpful. Regarding expenses, I understand it's challenging to predict, particularly in the compensation area, and I recognize there's an inflation aspect to consider. When thinking about the money market fee waivers and potentially recouping those from the $30 million to $38 million range, specifically concerning the $38 million improvement to pretax earnings, what kind of offset might we expect in compensation due to this better performance? This would help us understand the potential impact on the bottom line.

Tom Donahue, CFO

Yes. So Brian, we're just not going to do it. There's so many variables, just the equity decline in the first quarter and what they do whether we make that up in the marketplace by recovery or we make it up in sales or in fixed income or in the private markets. And we're also looking at the new hires that we're trying to get. And whether we're going to succeed and how much the cost is with the tight labor market, it's just not going to give you any more help on it. Sorry.

Brian Bedell, Analyst

Yes, that's fine. I appreciate that information. Just one last clarification. Chris, did you mention that $8 billion of institutional prime was the risk related to that swing pricing?

Chris Donahue, CEO

$8 billion of institutional and muni prime. So that if swing pricing goes in, we’ve looked at it and said that's about what would be the subject matter. And then as I said, like the last time, they’ll chase that money into the govies. The last time we didn’t lose any clients, the money just all played musical chairs, and there was less financing in the real market.

Operator, Operator

We have no further questions in the queue at this time. I would now like to turn the call back over to Ray Hanley for any closing remarks.

Raymond Hanley, President

Thank you, Kate. That concludes our call for today, and we thank you for taking the time to join us.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.