Earnings Call Transcript - FHN Q3 2022

Operator, Operator

Good morning, everyone, and welcome to the FHI Q3 2022 Analyst Call and Webcast. It is now my pleasure to turn the floor over to your host, Mr. Ray Hanley, President of Federated Investors Management Company. Ray, you have the floor.

Raymond Hanley, President

Thank you. Good morning, all. 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 from 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?

John Donahue, CEO

Thank you, Ray, and good morning everyone. I will discuss Federated Hermes' business performance, and Tom will provide insights into our financial results. Despite challenging market conditions in Q3 across various asset classes, our business mix allowed us to attain positive net sales in equities, fixed income, private markets, and overall long-term assets. We also saw increases in revenue, operating income, and net income compared to the previous quarter, as growth in money market revenue offset declines in long-term asset revenues due to market fluctuations. Starting with equities, assets fell due to negative market and foreign exchange impacts. However, Q3 net sales reached $182 million, in contrast to net redemptions of $969 million in the prior quarter and $1.4 billion in Q3 of '21. Our equity net sales were primarily driven by the strategic value dividend strategy. The domestic strategy achieved third quarter net sales of nearly $1.6 billion, contributing nearly $600 million from the fund and about $1 billion from the SMA, resulting in strong net sales performance. We also experienced positive net sales in 15 equity fund strategies during Q3, which included several international equity strategies such as Asia ex-Japan, international strategic value, China equity, international equity, international growth, and emerging markets equity. The domestic MDT Small Cap Core and MBT Large Cap growth strategies also produced robust net sales. Net redemptions concentrated on growth strategies amounted to about $555 million in Q3, down from $955 million in Q2, reflecting the ongoing challenging market environment for these strategies. We continue to focus on asset classes and strategies that historically perform well during inflationary periods, including dividend income, international, emerging markets, and value strategies. Our equity performance at the end of Q3 compared to peers was strong. Data from Morningstar indicates that nearly 60% of our equity funds outperformed peers, with 40% landing in the top quartile of their categories. In the first three weeks of Q4, combined equity funds and SMAs reported net redemptions of $192 million, although we have 13 equity funds with positive net sales during this period, including strategic value dividend, Asia ex-Japan, international strategic value dividend, and international equity. Turning to fixed income, Q3 recorded overall net sales of approximately $1.1 billion. Fixed income separate account net sales totaled $3.2 billion but were partially counterbalanced by $2.1 billion in fund net redemptions. Net sales in fixed income separate accounts were primarily driven by multisector strategies, with most Q3 separate account net sales originating from a significant public entity. Our flagship fixed income strategy, the Core Plus total return bond fund, saw net sales of around $750 million, driven by a strong long-term performance record that has led to expanded distribution opportunities. Furthermore, Core Plus and other multisector fixed income SMA strategies contributed another $209 million in net sales. Within our fixed income funds, we encountered net redemptions of about $1.4 billion in three ultrashort funds. Additionally, high-yield funds experienced net redemptions of roughly $462 million, down from about $860 million in Q2. Nevertheless, we had 12 fixed income funds with positive net sales in Q3, including conservative Municipal Microshort, Muni high-yield advantage, total return, government bond, and others. In terms of performance, by the end of Q3, data from Morningstar indicated that just over 60% of our fixed income funds outperformed peers, with 22% ranking in the top quartile of their categories. During the first three weeks of Q4, fixed income funds and SMAs saw net redemptions of about $693 million, primarily from ultrashort funds, with around $400 million in high-yield redemptions. Despite this, we had 14 fixed income funds with positive net sales, led by conservative Municipal Microshort, Total Return Bond Fund, short-term income, and ultrashort government bond fund. In the alternative private markets category, we reported net sales of $17 million, which included real estate, Pru Bear, and MDT market neutral, though these were partially offset by net redemptions in various sectors like infrastructure, private equity, trade finance, absolute return, credit, and unconstrained credit. We are actively marketing the fifth vintage of PEC, our co-invest private equity structure, alongside the third vintage of the Horizon Private Equity Fund. As we began Q4, we had about $2.9 billion in net institutional mandates pending funding into both funds and separate accounts, with approximately $2.6 billion expected to be directed to private market strategies, including over $1 billion in private equity, around $1 billion in direct lending, and $400 million in unconstrained credit. Regarding money markets, assets increased in the third quarter compared to the second quarter. Money market fund assets rose by about $12 billion, benefiting from higher yields and sustained elevated liquidity levels in the financial system. Money funds also gained from higher yields compared to deposit alternatives. We believe that elevated short-term rates will continue to favor money market funds over time, especially relative to deposit rates. Conversely, money market separate accounts decreased by $10 billion, largely due to seasonal factors linked to tax payment timings. Our market share for money market mutual funds, including sub-advised funds, stood at approximately 7.4% at the end of Q3, an increase from about 7.3% at the end of Q2. As of a few days ago, managed assets are approximately $626 billion, which is composed of $437 billion in money markets, $77 billion in equities, $89 billion in fixed income, $20 billion in alternatives and private markets, and $3 billion in multi-asset. Specifically, money market mutual fund assets totaled $304 billion, which includes about $3.5 billion in fixed income assets resulting from the CW Henderson transaction that was finalized on October 1.

Thomas Donahue, CFO

Thanks, Chris. On the financials, total revenue for Q3 increased $15 million or 4% from the prior quarter, due mainly to lower money market fund minimum yield-related waivers of $9.5 million, higher average money market assets, increasing revenues by $6.6 million, lower money market competitive waivers, an additional day in the quarter, and higher carried interest and performance fees. These were all partially offset by lower average long-term assets, which reduced revenue by $12.8 million. Q3 carried interest was $3.9 million and performance fees were $300,000. Q3 operating expense increased $10.7 million or 4% compared to Q2, driven by $9 million of higher distribution expenses from lower money market fund minimum yield-related waivers. The decrease in compensation and related expenses from the prior quarter reflected lower Q3 FX rates per pound sterling-based compensation of $3.1 million, partially offset by $1.5 million of higher incentive compensation related to carried interest. The Q3 increase in the other category of operating expense compared to Q2 was due mainly to $1.3 million of net mark-to-market losses related to FX, including the currency forward used to hedge certain pound exposure. This expense was $4.9 million in Q3 compared to $3.6 million in Q2. This Q3 expense was largely offset by an estimated $3.8 million in higher pretax income related to the change in value of the pound in various revenue and expense line items such that our estimate of the net income impact of Q3 changes in the value of the pound was a loss of about $1.1 million pretax or about $0.01 of EPS. Investment losses after subtracting the impact attributable to noncontrolling interests reduced earnings per share for the quarter by about $0.04 due to the negative market impact on our investments. At the end of Q3, cash and investments were $481 million, of which about $427 million was available to us. Debt at the end of Q3 was $397.5 million. During Q3, we purchased 212,000 shares of our stock for approximately $7 million. Jenny, that completes our comments, and we would like to open it up for the question-and-answer session, please.

Operator, Operator

Your first question is coming from Patrick Davitt of Autonomous Research.

M. Davitt, Analyst

I think everyone has been a little surprised how anemic money fund flows have been in Q3. And I hear your comment on the tax issue, but still pretty bad here in October. You're clearly outperforming a lot of your competitors, but the picture is still, I think, off from what we would have expected. So a couple of questions on that. Firstly, could you frame any other dynamics that might be going on given how high rates have gotten? And secondly, should we still expect a big Q4 surge on the usual seasonality plus the higher rates?

John Donahue, CEO

Thank you, Patrick. There are some other dynamics. And next week, what's the Fed going to do - 75, what are they going to do in December? And what we've always said on several of these calls is that over time, this helps the money fund business. We often go back to the story of when the Fed was increasing rates where our assets then increased about 15% in the industry, about 11%. And then in the next period, once you're dealing with higher rates, our assets went up another 22% and the industry increased about 14%. So those 2 levels, we think, will obtain. When? I don't know. I'm going to let Debbie comment on other dynamics, and let her take a guess about fourth quarter avalanches.

Deborah Cunningham, CIO

Thanks, Chris. Patrick, there are a few points to consider. Historically, when looking at cycles, Chris mentioned the 16% to 18% range, but typically there's about a 6-month delay from when policy changes take effect. The Fed started making moves in March, so we're currently in that lag period. We anticipate seeing more growth soon. Secondly, we are moving away from zero interest rates. Many people may have spent most of the last 15 years experiencing zero rates, which is not typical. Cycles that begin from zero tend to react differently. Thirdly, since March, there has been significant growth in retail prime, which has increased by about 67% over the last six months. FHI industry assets in this category have risen even more, into the high 80s. This growth reflects the recovery of assets that were previously very low in a zero-rate environment, offering a stronger alternative to deposit products, which Chris noted are less responsive to rising rates. In contrast, prime institutional assets, encumbered by the 2014 reforms enacted in 2016 and subject to floating NAV, have only increased by 13%, while government funds, the lowest risk category, are up by just 1%. The current dynamics revolve around where industry assets are distributed, and we need to analyze that on an individual basis for each category. Ultimately, I believe that once people are confident that the Fed won't continue to raise rates every six months, we will begin to see more robust growth across all liquidity products. However, we have not reached that point yet.

M. Davitt, Analyst

Okay. One quick follow-up for Saker. It looks like Hermes might have had a fairly sizable announced realization in Q3 that's set to close this quarter, a big Greek resort group. It's not clear how much Hermes owned, but it looks like the MOC is quite high. So do you have any visibility on how additive that deal could be to Q4 performance fees?

Saker Nusseibeh, CEO, Federated Hermes Limited

So thank you for the question. Sorry. Thank you. Thank you very much for the question. And the answer is that I'm afraid we don't give you breakdown of deal by deal of what we do close. So we can discuss this more offline if you'd like. But generally, we did not give you a deal by deal breakdown because it's unfair to all of the other clients that are also in the deals that we do.

Thomas Donahue, CFO

And Patrick, this is Tom. Regarding the timing, Saker and the team are unsure, and we don't have information on the carried interest for Q4 or any other period. We simply don't know.

Operator, Operator

Your next question is coming from Dan Fannon of Jefferies.

Daniel Fannon, Analyst

I wanted to follow up on the unfunded wins. I think you mentioned they were all in private markets. So could you talk about the momentum across that side of the business? And whether this is just the timing where they're coming in, in terms of the fourth quarter or prospectively thinking about momentum, fundraising other things across the private side, that would be helpful.

John Donahue, CEO

Okay. I will talk a little bit about this first. I'm going to let Saker have a swing at this one. On the institutional business, we've been focused on solutions-based type campaigns and sort of unique types of capital allocation, stimulus pools, infrastructure pools, opioid settlements, and things like that. And the emphasis has been on fixed income type mandates. And so that's been the workflow of the institutional business. And that reflects a U.S. domestic thing, which we think is pretty good. In addition, on the domestic side, the state pools have been a very successful business for us, and we look forward to continuing to grow that as well. I think we're up to about $137 billion or $140 billion or so in state monies, not just state pools, but in-state monies. And that remains a very, very strong business. On the private market side, I'm going to let Saker comment on those.

Saker Nusseibeh, CEO, Federated Hermes Limited

Thank you very much. And here, we have a variety of projects going on. Our private equity team, which has had an excellent track record, as you've heard from Chris, is continuing our raise in PEC, which is our co-investment private equity fund and the horizon where we have commitments. Now the reason for that is that there's a strong move from many institutional pension clients towards investing in private assets for the long term. In addition to that, our direct lending strategy, which has had a very successful track record again, has continued a strong grade of assets as we go through, and we see increased demand for that, both in the U.K. and in Europe. And constrained credit is also another area where we see demand. So this is part of the trend, I think, where particularly institutional clients see value and where previous strong track record and strong teams and processes seem to attract the flow.

Daniel Fannon, Analyst

Got it. Okay. And then for a follow-up, just wanted to talk about capital return. Buybacks obviously slowed versus the pace in the first half. You announced the acquisition of CW Henderson. So in terms of the backdrop, where things sit today, how you want to capitalize capital return and maybe characterize it also in the context of the M&A environment and kind of the bolt-on deals you've been known to do over time.

Thomas Donahue, CFO

Sure, Dan, it's Tom. Regarding buybacks, if you look at our track record from last year and the beginning of this year, we bought back 10 million shares. Historically, our share buybacks have decreased when we’ve made deals. However, we continually assess our expectations for the company's future, taking into consideration the stock price and our models. Currently, we have $5 million remaining in our approved buyback program, and our activity will depend on our outlook for the quarter. As for M&A, we are enthusiastic about the CW Henderson deal. There’s been a significant amount of sales enthusiasm, and our goal is to grow that successfully, ensuring they receive their contingent payments over the years. Our team is still actively searching for deals, but right now, we are focused on the current deal and how we can foster its growth.

Operator, Operator

Your next question is coming from Ken Worthington of JPMorgan.

Kenneth Worthington, Analyst

Maybe first, in terms of money market fund mix. In recent months, we've seen money coming out of government obligation funds and going into prime obligation funds, and it feels like this phenomenon of institutions taking money out and retail putting money in. Assuming my interpretation is correct and this trend persists, how should this impact management fee rates and distribution costs for money market funds? It feels like if we're seeing a little bit of a transition from institutional to retail that both should be going higher, but would love to hear your comments.

Raymond Hanley, President

Ken, it's Ray. Just from a fee standpoint, the retail-oriented funds will tend to have both higher revenue and higher related distribution expense, but if you consider it on a net revenue basis, it would be fairly comparable to institutional. So we should not see a meaningful change there in our blended, if you will, fee rate.

Kenneth Worthington, Analyst

Okay. So even distribution channels are all sort of equivalent for money market funds in terms of the net rate that they're generating?

Raymond Hanley, President

Yes, roughly.

Kenneth Worthington, Analyst

Okay. You're having great success in SMAs in both equities and fixed income. Can we discuss how SMA fees compare to fund fees? For instance, with the largest equity product, strategic value dividend, there's a significant fund presence, but possibly an even larger SMA presence. How do the fees stack up? Are SMA fees lower than fund fees, or are they more similar? Please help us understand this, and is this trend consistent across SMAs and funds?

Raymond Hanley, President

Sure, SMAs are similar to what could be classified as institutional accounts, even though they usually cater to high net worth individuals and are structured as wrap accounts. When it comes to fees, we are dealing with the SMA sponsor, which makes it more akin to an institutional account. Generally, in the industry, mutual fund fee rates can be up to twice as high as the average institutional account fee rates. We were aware of this when we entered the SMA market and have found considerable success, approaching $30 billion in assets. While we emphasize the strategic value dividend, we've seen solid growth over the last few quarters, particularly in our Core Plus fixed income product within the SMA segment. Additionally, as Todd pointed out, the Henderson acquisition provides us with high-performing strategies that are distinct from our existing offerings in the municipal space, supported by a strong team and a solid long-term record. We anticipate that this business will continue to diversify and maintain its strength in fixed income.

Operator, Operator

Your next question is coming from Brian Bedell of Deutsche Bank.

Brian Bedell, Analyst

Could you provide insight into the distribution channels for your money market funds, particularly what percentage of those assets is included in sweep programs? Are you observing any activity in this area where sweep deposit investors are moving uninvested cash into money market funds? Additionally, regarding institutional investments, do institutions have the option to directly invest in fixed income securities for a better yield? If that resets, do you anticipate it will contribute to increased flows in money fund separate managed accounts?

Raymond Hanley, President

Right. On the sweep front, it's hard to identify a lot of our clients do with us on an omnibus basis. And so we don't always have visibility to the end use. I would peg it at somewhere in the neighborhood of 10% to 15% of our money fund AUM. But again, it's difficult to get a precise figure at that.

Deborah Cunningham, CIO

The suite clients shifted entirely to government products after the recent reforms due to challenges with the institutional prime floating NAV at four digits, which created complications from a programming and platform perspective. This has led to a focus on government products. In terms of institutional growth, it typically lags historically, and it seems even more pronounced when coming off a zero base. The expectation is that institutions will start to engage significantly when we approach a peak or recognize a terminal rate in the Fed funds target. A stable or declining rate environment tends to drive inflows into institutional money market funds, provided we do not return to a zero rate scenario. Currently, we are distant from either of those situations—either the Fed reaching a terminal rate soon or trending back toward anything close to zero. Therefore, institutional growth is beginning to manifest and is likely to gain momentum in 2023 compared to 2022.

Brian Bedell, Analyst

It makes sense. What is your sales team hearing from financial advisers about when retail investors might return to bond funds, considering they want to avoid NAV losses from rising rates? Could it be that as we approach terminal rates, we could see an increase in retail investments in funds? Additionally, the yield appears to be quite close to short-term rates, providing equity optionality. Are you witnessing or anticipating more interest in this as we head into 2023?

John Donahue, CEO

Well, the answer on when do the clients expect the worm to turn, it's not yet and they don't have a time on it. In fact, that's one of their principal questions of asking us or asking anybody. And if anybody knows, they're going to make a fortune. Right now, the word we get from our financial advisers is that, on the whole, they're bearish and defensive. And as you suspect, money funds are front and center. And you're seeing some moves in government ultrashort, which I mentioned and microshorts. Now when you talk about total return bond, that still has strong legs and there's some amount of tax loss harvesting that's going to go on in other funds. And so that will be playing some musical chairs out in the marketplace that could be interesting. And because of exactly what you said where the dividend rates on the strategic value dividend fund are roughly comparable to some other rates, some FAs are getting more comfortable with that. And you see that in some of the flow numbers. But I understand that on the other side, you still have upticks in the Pru Bear fund, which is basically a short fund. And I'd say, overall, what our people are telling us is that their RFAs are having some of the toughest conversations with clients for a while, and it's very, very challenging. And that's why we try to offer things like products that are sensitive to inflation, which we've talked about before. And our portfolio construction activities where you can actually get a hold of the portfolio and show the FA and the underlying client exactly what risks are being run and make adjustments even to include things like the MDT market neutral fund to change the dynamic in some of those portfolios. And so even though I'm telling you that the FAs or the bearish or defensive and all of that, there are many things that can be done to advance the ball.

Operator, Operator

Your next question is coming from Mike Brown of KBW.

Michael Brown, Analyst

If we start on the ESG topic, that's obviously been facing greater political scrutiny these days, and I know it's integral to the investment process at Federated Hermes. So what are you seeing in terms of pressure or pushback from investors on, I guess, either side of the aisle and how have you been navigating this kind of greater scrutiny on ESG?

John Donahue, CEO

Okay. What we see is the repeating the sounding joy of the beauty of an integrated ESG analysis where you are investment managers managing money in the best interest of the shareholders. And we are going to repeat this as long as we can because we are investment advisers. And I mentioned the $137 billion in state money that we had. If you look at the top 10 states on that list, 5 are red and 5 are blue. So what is going to be Federated Hermes' answer? The answer is we are not going to politicize or get into the jambalaya of the politics of ESG. We are going to use those factors in order to improve performance, work on investment management techniques. And that's how we deal with it. So when you say we get pressure, you're going to get pressure everywhere, every day on everything you do, get over it and get on with it. Now my dear friend Saker, who was at the beginning of this. And basically, the UN PRI wrote their documents in his office printed 100 years ago. I'm going to let him comment on this subject.

Saker Nusseibeh, CEO, Federated Hermes Limited

Thank you, Chris. Look, we started down this journey back in 1983. That's before I even joined here. And the objective has always been to improve performance. And we would argue that ESG factors put into effect improve the performance of companies and improve ultimately the long-term performance of shares. The politicization of ESG from the perspective of this side of the pond is partly to do with the model that people have between SRI, socially responsible investments, which has a place. And by the way, we run some thematic funds for people who so wish and mainstream ESG. We have found through our internal numbers and some external evidence, some truth that we believe in engaging with companies while holding their shares, not divesting shares. Engaging with companies while holding their shares will add performance over the long term. So we use ESG as a factor and as a way of understanding companies. We are fundamental analysts on both sides of the pond, we do fundamental understanding of the companies, and we integrate the fundamental understanding of companies in our stock selection. The politics going on both sides is interesting, but it's not investment. So I leave it to the politicians, and we stick to our knitting, which is acting as fiduciary managers looking after the funds of our clients and trying to create wealth sustainably over the long term. Back to you, Chris.

Michael Brown, Analyst

Thank you, Chris and Saker, I appreciate the thoughts there. A lot of my questions have been asked about the money fund business. Maybe just 1 more there. What's the latest on the regulatory front as it pertains to the money funds business? And can you remind us how much of your business is at risk from swing pricing?

John Donahue, CEO

Yes, it would be about $8 billion. We haven't deviated from that number. Various events at the SEC and other factors have delayed the implementation of the rule by at least a quarter. We are uncertain when it will be introduced as we anticipated it would have already happened. Due to some issues in their systems, they needed to extend the timeline and are moving forward. Additionally, the GAO is conducting a study on money funds to assess their impact, requested by certain congressional representatives. We await the results expected in the fourth quarter, which might provide further insights. As we highlighted previously, we firmly believe that swing pricing on money funds is unjustified and lacks any foundational data or precedent. Recently, the SEC announced plans for swing pricing on bond funds, which has already been tested in Europe, but we are unsure of the specifics or implications of that proposal. The idea of applying similar concepts to money funds seems illogical. We've also been discussing potential scenarios, such as the possibility of negative rates, which seems far-fetched given current conditions. Nevertheless, there are regulations in place that could complicate matters for intermediaries or clients. We have recently talked about the reverse distribution method to help funds manage long-term effects of negative rates, which no one anticipates happening. It’s perplexing why any actions being considered would harm currently successful funds when there is ample time to evaluate the situation. The regulations have been delayed and there’s been considerable industry pushback against the proposed changes, but we will need to wait and see how it unfolds.

Operator, Operator

Your next question is coming from Kenneth Lee of RBC Capital Markets.

Kenneth Lee, Analyst

In light of the current market environment, could you share your thoughts on how operating expenses, particularly discretionary items, might trend?

Thomas Donahue, CFO

Yes, I think you're asking about the trend in our expenses. Regarding compensation and related costs, as outlined in the press release, we anticipate an increase in both incentive and base salaries due to the inflationary pressures affecting everyone. For distribution, if our projections hold true and we manage to increase our money fund assets, we can expect that distribution expenses will rise, and we would welcome that. In terms of systems and communications technology, we foresee an ongoing need for increased technology spending to support our transition into a global company, which should enhance our overall performance. I don't have specific comments on professional fees and office-related expenses. However, we did notice a slight increase in advertising costs as we continue to promote our strong products. Looking ahead, we plan to concentrate on these successful products, and we are also open to introducing new ones. Therefore, it wouldn't be unexpected to see more investment in advertising. As for travel expenses, we have been experiencing lower pandemic-related costs in the past quarters, so you can anticipate a year-over-year increase as our teams resume engaging with clients to sell our outstanding products. As for the other category, that covers foreign exchange matters, which remain uncertain.

Operator, Operator

Your next question is coming from John Dunn of Evercore.

John Dunn, Analyst

Maybe an extension of the ESG question, an update on the EOS business, where you think it could translate into inflows and maybe the evolution of conversations with U.S. institutional clients?

John Donahue, CEO

Let me just make a few comments on EOS, and then I'm going to let its founding father talk. To us, EOS is a grand source of data that has been accumulated over the long term that has an edge against the rest of the marketplace because it helps you look through the front of your car where you're going and not just the rearview mirror, which everybody always already has, plus because it's a long-term engagement you get good judgments, good people who are subject matter experts making real determinations about which way things go. In terms of its growth and the impact that Saker has seen, I'll let him speak on that.

Saker Nusseibeh, CEO, Federated Hermes Limited

Thank you, Chris. To expand on Chris's introduction, we have been operating for nearly 18 years as EOS, with a bit longer experience prior to that. Our focus is on engaging with our clients. We believe there are two main advantages to EOS. The first, as Chris mentioned, is that we have specialized analysts who communicate with global companies over a 10-year horizon. The insights we gain from these interactions serve as a valuable resource for our portfolio managers, aiding our investment decisions. The second advantage is our service to clients, primarily institutional clients with index exposure. We assist them in ensuring that the stocks they are invested in, which are part of the index, continue to deliver strong returns. Interest in EOS surged a few years ago when legislation in the Nordics made stewardship a priority. This trend is also evident in advanced markets like Australia, where we find opportunities to expand our business. Generally, we are growing our presence globally. The process of onboarding clients can be slow, as it is a partnership; unlike other models, EOS does not engage on behalf of FHI but on behalf of our clients, involving them in all engagement decisions. Therefore, we are confident that this business will continue to grow and provide value both to shareholders and to us as investors. Thank you.

John Dunn, Analyst

Got it. Could you remind us about the gaps in your strategy and distribution, and share your thoughts on how willing firms are to partner with you?

John Donahue, CEO

Well, in terms of gaps with the CW Henderson, we feel one that we have articulated for several years of Muni SMA adviser, which has a great record, great people. And as Ray points out, and it gets us pretty close to $30 billion in SMA assets, which is a pretty good size in there. So we're not exactly focused on any particular gaps right now, but there's the whole focus and the planned integration going on right now. Our team that goes out and looks for deals is still out looking but we're talking about the past deal right now, which is the current real thing is how can we grow that.

Thomas Donahue, CFO

The business in the London office focusing on private equity, infrastructure, real estate, and direct lending has primarily been centered on real estate in the U.K. We have mentioned that we are interested in exploring similar opportunities in the U.S. There is some belief that this might necessitate an acquisition to effectively initiate those efforts, similar to the time it took with the Henderson deal and the London office acquisition. We plan to maintain our discipline by ensuring that any potential partner aligns with our culture and beliefs, and we will not move forward until those criteria are met. We believe that our London team, which also has U.S. offices, presents a strong opportunity for growth.

Operator, Operator

Thank you very much. There appears to be no further questions in the queue. I'm now going to hand back over to the management for any closing remarks.

Raymond Hanley, President

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

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.