Federated Hermes (NYSE:FHI) released first-quarter financial results and hosted an earnings call on Friday. Read the complete transcript below.

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The full earnings call is available at https://www.webcaster5.com/Webcast/Page/2125/53870

Summary

Federated Hermes reported record assets under management of $907 billion for Q1, with significant gains in equity and money market strategies.

The company completed an acquisition of an 80% interest in FCP Fund Manager LP, adding $3.2 billion in managed assets and enhancing their expertise in multifamily housing.

Federated Hermes is actively developing digital initiatives, including the upcoming launch of a Money Market Management Digital Treasury Fund to enhance distribution efficiency and operational automation.

Money market assets reached a record high of $685 billion, though the market share slightly decreased to 6.9% from 7.0% at the end of 2025.

The company anticipates net institutional mandate inflows of about $1.1 billion in Q2, with expectations of net sales in fixed income and private market strategies.

Operating expenses increased by 2% from Q4 due to higher compensation and distribution expenses, while revenue saw a slight decrease due to fewer days and lower real estate development fees.

Federated Hermes highlighted a cautious but strategic approach to digital asset integration, emphasizing regulatory compliance and operational efficiency.

Management noted that the current demand for tokenized products is low, but they are preparing for future growth in this area.

Full Transcript

OPERATOR

Greetings welcome to the Federated Hermes Q1 Analyst call and webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star 0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

Ray Hanley (President)

Thank you and welcome to all. Thank you for joining us. 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 and A are Saker Nusseibeh, CEO of Federated Hermes limited And Debbie Cunningham, our 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 and good morning. I will review Federated Hermes business performance. Tom will comment on the financial Results. We ended Q1 with record assets under management of $907 billion, led by gains in equity and money market strategies. Equity assets closed Q1 at a record high of 101 billion. During Q1, equity assets increased by 2.9 billion or 3% from year end, driven by 2.2 billion in net sales. Gross equity sales reached A record high of 9.1 billion in Q1 equity sales. Results continue to be led by our MDT fundamental quant strategies. MDT equity and market neutral strategies together had a record 5.8 billion of gross sales to over 3.5 billion in net sales in Q1. For the second quarter through April 24, these MDT strategies had net sales in combined funds and separately managed account (SMA)s of 687 million. Now looking at fund performance rankings as of March 31, 7 of 9 MDT fund strategies are in the top performance quartile of their Morningstar categories for trailing three years. We also had net sales in 32 equity fund and separately managed account (SMA) strategies during the first quarter, including of course a variety of MDT offerings and the Asia Ex Japan Fund and the strategic value separately managed account (SMA). MDT's offerings were mid cap growth and large cap growth plus five others. Importantly for our global efforts, the MDT US Equity UCITS Fund, launched in June of 25, has seen strong demand from clients outside of the U.S. net sales in this strategy were 177 million in the first quarter and the fund has grown to about $800 million in assets. Looking at overall equity fund performance at the end of the first quarter and again using Morningstar data for trailing three years, 51% of our equity funds were beating peers and 30% were in the top quartile of their category. For Q2 through April 24, combined equity funds and separately managed account (SMA)s had net sales of $606 million. Now turning to fixed income, assets ended Q1 at just under $100 billion, down $329 million from year end. Fixed income had Q1 net redemptions of 422 million. However, we had 25 fixed income funds and separately managed account (SMA)s with net sales in the first quarter, led by three ultra short funds, Total Return Bond Fund, the Collective and the Fund combined Short Term Income and our Core AG and Core plus separately managed account (SMA)s. Regarding performance at the end of the first quarter and using Morningstar data for trailing three years, 41% of our fixed income funds were beating peers, 21% were in the top quartile of their category. For Q2 through April 24, combined fixed income funds and separately managed account (SMA)s had net redemptions of 214 million. In the alternative private markets category, assets decreased slightly in Q1 compared to year end as the impact of FX rates offset net sales of 82 million. The MDT market Neutral Fund and recently launched ETF combined for 341 million in net sales. Positive net sales were also achieved in trade finance strategies. We held the final close of our European Direct Lending 3, the third vintage of our European Direct Lending Fund. In the first quarter the fund raised $780 million. For reference, EDL 1 raised 330 million, EDL 2 raised 700 million. We are now in the market with Global Private Equity Co Invest Fund, the sixth vintage of the PEC series. To date we've closed on about 300 million. PEC 1 to 5 raised approximately 400 to 600 each and PEC V raised about 500 million. We are also in the market with the European Real Estate Debt Fund, a new pulled European debt fund. As previously announced. On April 9th we completed our acquisition of an 80% interest in FCP Fund Manager LP, a privately held US real estate manager. The acquisition added $3.2 billion of managed assets at closing in April. FCP brings us multifamily housing expertise complementing our long standing UK based real estate capabilities across our long term platform. We began the second quarter with about 1.1 billion in net institutional mandate yet to fund into both funds and separate accounts. Approximately 1.4 billion on a net basis is expected to come into private market strategies including direct lending, private equity and trade finance. Fixed Income is expected to have net sales of about 1.1 billion with a core plus win of about 1.8 billion, partially offset by about 800 million redeeming from a government bond strategy. Equity Strategies are expected to have net redemptions of about 1.4 billion with net global equity expected redemptions of 3 billion which offsets MDT's additions of 1.7 billion. The global equity redemptions are mainly sub advised assets from an institutional client who notified us of their intention to internalize the management of these assets. We continue to have a strong relationship with this client in the EOS part of our business. The client has made a strategic decision to internalize, not driven by performance which has generally been ahead of benchmark. Moving on to money markets, we reached another record high at the end of Q1 for total money market assets which increased by 2 billion to reach 685 billion. Reflecting seasonal patterns, money market separate accounts increased by 8 billion. Money market fund assets decreased by 6 billion in Q1 compared to the year end totals. Market conditions remain favorable for cash as an asset class. In addition to the appeal of relative safety and periods of volatility, money market strategies present opportunities to earn attractive yields compared to alternatives like bank deposits and direct investments in T bills and commercial paper. Our estimate of money market mutual fund market share including sub advised Funds was about 6.9% at the end of Q1, down from 7.0% at the end of 2025. Now let's have a little discussion on digital assets and what we're doing there. We are focused on this area as an infrastructure evolution, not a speculative asset class. We are working on digital initiatives designed to enhance distribution efficiency, settlement speed, transparency, operational automation and global reach while maintaining regulatory, fiduciary and governance standards. Importantly, digital structures must enhance access, efficiency and integration into modern treasury portfolio and collateral workflows. They must operate within regulatory frameworks, preserve investor protections and provide valuation integrity. Through deep engagement with our operational partners, we are well positioned to properly evaluate governance, ownership representation, transfer restrictions and risk management implications of tokenized funds as we build out our digital capabilities. While we are initially prioritizing products aligned with our core strength in liquidity management, we of course expect over time to see digital products developed for ETFs or other mutual funds private market vehicles across many or all market classes. The firm's digital initiatives include the upcoming launch of our Money Market Management Digital Treasury Fund which is expected to support both traditional and on chain distribution. The initial reserve shares class will provide a non tokenized Genius compliant structure geared to institutional investors and stablecoin issuers seeking high quality reserve assets. We are also developing an on chain share class intended to place official books and records on the blockchain infrastructure once a fully digital transfer agency model is available. This dual track approach offers flexibility between traditional custody and fully on chain models. We have selectively engaged with regulated digital asset intermediaries focusing on tokenized funds as regulated financial instruments. Initial use cases emphasize cash on chain liquidity solutions with a longer term view towards supporting additional asset classes as market structures evolve. As we have previously mentioned, we are participating in the launch of a collaborative initiative between BNY and Goldman Sachs that will involve mirrored tokenization of money market fund shares to improve transferability, collateral utility and real time ownership tracking of money market fund shares. We are also expanding digital engagement beyond US money markets towards a global strategy. In the UK and Europe we are exploring digital sterling liquidity products and assessing tokenization for broader regulated fund distribution. We are participating in tokenized offerings where federated Hermes funds are used as the underlying assets rather than being directly tokenized. This includes our alliance with Archax, the first FCA regulated digital securities exchange to offer tokenized access to a UCITS money market fund. The platform enables professional investors to hold beneficial ownership tokens across multiple blockchains and access money market liquidity directly on chain. We are exploring similar partnership opportunities finally looking at recent asset totals. As of a few days ago, Managed assets were approximately 902 billion including 668 billion in money market and money market 107 billion in equities, 101 billion in fixed income, 22 billion in alternatives private markets and 3 billion in multi asset money market mutual fund assets were 487 billion. Tom thanks Chris.

Tom Donahue

For Q1 compared to the prior quarter, total revenue decreased 3.9 million or 1%. Fewer days resulted in 10.5 million of lower revenue. Q4 revenue included 8.2 million of real estate development fees. Higher Q1 money market average assets provided 8.3 million of higher revenue while higher equity average assets added 5.6 million million. Total Q1 carried interest and performance fees were 388,000 compared to 1.6 million in the prior quarter. Approximately 283,000 of the Q1 fees were offset by compensation expense. Q1 operating expenses increased by 5.4 million or 2% from the prior quarter due mainly to seasonally higher compensation and related expenses of $8.5 million, higher incentive comp expense of 3.5 million and higher distribution expense of 3.4 million from higher average fund assets. Transaction costs from the FCP acquisition were about 1.5 million in Q1 compared to 1.3 million in Q4, nearly all in the professional service fees category. Now Looking ahead to Q2, additional FCP transaction and related costs incurred in Q2 already include 4.2 million in purchase price treated as compensation and related expense and 4.2 million and 6 million of primarily FCP lender consent fees recorded in professional service fees for a total estimated transaction related EPS impact of $0.11 for Q2. Also for Q2 we expect that FCP will add approximately 12 million in revenue and 11 million in operating expenses, including a preliminary estimate of 3.8 million of intangible asset related expense for Q2. Now back to Q1. In the other expense line item, the Q1 decrease was mainly due to low contributions in Q1 compared to Q4. The effective tax rate was 26.1%. We estimate the tax rate to be in the 25 to 28% range for 2026. At the end of Q1, cash and investments were 645 million. Cash and investments excluding the portion attributable to non controlling interest were 607 million. We often talk about our desire to use free cash flow of the business to drive value over time for our shareholders in three primary ways, acquisitions, share repurchases and dividends. All three of these methods have been utilized in a meaningful way so far in 2026. During Q1 we purchased 1.2 million shares of FHI stock for 66 million. In April we used 216 million in cash and 23.1 million in FHI class B stock for the initial purchase price of the FCP controlling interest acquisition for payment in May, the FHI Board of Directors declared a dividend of $0.38. The quarterly dividend increased $0.04, up nearly 12% from the previous quarter marked our 113th consecutive quarterly dividend.

Ray Hanley (President)

Holly we would now like to open the call up for questions.

OPERATOR

Certainly at this time we will be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the STAR keys once again. That is Star one To ask a question. One moment, please, while we poll for questions. Your first question for today is from ken Worthington with J.P. Morgan.

Ken Worthington (Equity Analyst)

Hi, good morning. Thanks for taking the question. Chris, you spent a lot of time thinking about digital cash. A couple questions on this. What portion of your existing clients today do you think care about and will utilize digital money market funds versus traditional cash product structures over time? If you think out about a decade, what portion of the entire cash market do you think cares about tokenized money market funds versus other forms of tokenized cash out?

Chris Donahue (CEO and President)

10 years is pretty tough to see right now. It's a very low percentage of the clients that are asking for, demanding or wanting these tokenized products. And so what you see with us and with others is a grand effort to get ready for tomorrow. If you want to say you're feeling us protecting our franchise, you're right. If you want to say you're feeling us with a little FOMO in it., you're right. This is not the usual customer demand, we got to have it type deal. But over time, as you see the digitization of things catching on, we are going to be there. So over 10 years, I think it would be a routine deal, but it's really hard for me to say how much it would be. And I would let Debbie offer her guests as to 10 years.

Debbie Cunningham (Chief Investment Officer for Money Markets)

Wow, for 10 years. That's a long time. That's visionary, which I'm generally not. And to add to what Chris was saying, I mean, if you build it, they will come. So that's sort of the attitude now with that historically as sort of a premise, success has followed. So I don't know, maybe probably less than 25% of retail customers. But I think from an institutional customer standpoint, you're looking at something that maybe is in the 25 to 50% utilization once all the comfortability is there with the fiduciary aspects of it that Chris was mentioning at the beginning.

Chris Donahue (CEO and President)

I'll close with this one more, Ken, and that is that, remember, the basic product is merely liquidity of the coin. And however all the fancy stuff works, that's what you need. And the next thing is if they don't have fundamental trust in the whole thing, then it doesn't work. So you've got to work on those two things in addition to all of the neat toys that are being created.

Ken Worthington (Equity Analyst)

Great, thank you. I think what you're doing is great. Just whatever. My two cents on the $3 billion. Chris, you mentioned on the global equity withdrawal. I don't think you mentioned timing. What is the timing of that and how do the fees on that mandate compare to, say, the. The new MDT asset wins?

Chris Donahue (CEO and President)

Okay, that's probably a Q2 departure. And the fees on that were lower than the average.? Is that what you're asking? Yep.

Ken Worthington (Equity Analyst)

Perfect. Thank you so much.

OPERATOR

Your next question is from Bill Katz with TD Cowan.

Robin Houlion

Good morning. This is Robin Houlion for Bill Katz, and thank you for taking the question. Could you remind us of the timeline on SCP's next fund launch and the demand for real assets. that you are currently seeing from LPs?

Tom Donahue

Yep. Robin, this is Tom. The fund launch. So they're investing Fund 6 right now, and I think they're at about 30% invested. So they've got to, you know, figure out what's the right timing, what's the best timing in order to continue to invest that. And they won't start fund seven until they're well down the path to finishing fund six. So that will be maybe mid year in 2027. And on the FCP transaction, I just wanted to correct a number. I said on the purchase price that was treated as compensation. I think I said 4.2 million. It's 6.2 million that will come in the second quarter. So also on FCP, since we closed, we had their team in here and our team of product marketing and a bunch of other people getting geared up and studying and preparing for the launch of Fund 7. And we're pretty excited about it, even though it's sometime down in the future.

Robin Houlion

Great, thank you.

Tom Donahue

And then as a follow up, could you speak to the demand for MDT's ETF suite? Are the ETFs attracting a new customer, or is much of the demand coming from existing customers that like the ETF wrapper? Well, since we go through intermediaries, we're using a lot of the same intermediaries, but we're extremely expanding that footprint through more RIAs, which are very attentive to the ETF. So it is a combination of old intermediaries, new intermediaries, the underlying clients who are actually the owners. We don't see that much, but what we are seeing is a bigger push for what we call portfolio construction, or PCs, where you are seeing our intermediary clients wanting to see how these things fit, how they work, and how they make solutions. And so that's another overlay in a more general answer to your question. Understood, thank you.

OPERATOR

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

Patrick Davitt

Hey, good morning, everyone.

Debbie Cunningham (Chief Investment Officer for Money Markets)

Debbie, last quarter you suggested that Money Fund organic growth could be a bit lower this year. It's tough to tell what's going on in Money Fund's last couple of months obviously given the tax noise. So with more signs the Fed could be on hold all year. I'd be curious to get your updated thoughts on the potential for more rotation into the asset class from either retail or institutional or or both given that change in outlook. Thank you. Sure. Thank you. It hasn't changed much. I mean we've seen double digit growth in the high teens and then in the lower teens in both 2024 and 2025 in my opinion is going to be more in the single digit growth area. But I do think it's something that from a safe haven standpoint and from just a general utilization with yields, you know, in three government yields 372 to 375ish area prime yields, 386 to 390, you know, with tax free taxable equivalents, you're still looking depending upon what you know, whether it's state tax free or just federally tax free. You know, yields in the 4, 5 and 6% from A, from a taxable equivalent standpoint. So those are real long term returns in a very, very low risk product. So I think the growth will continue. I think it probably we find new use cases as some of these digital product innovations are rolled out for the funds. And I think that the traditional as well as new clients into the asset class will grow just not as quickly as it has in the 24 and 25 time frame. I mean with assets reaching it depends on who you're looking at, whether it's Crane, imoney net, the ICI, but somewhere in the 7.5 to 8.2%, $2 trillion range, as a peak, I think that continues to grow steadily over the $8 trillion range. But the larger it gets, the more obviously the percentage growth, even if it's the same dollar amount, starts to go down.

Patrick Davitt

Right, right, right. Okay, that's helpful. And then it looks like the money funds had a really strong day yesterday, the last day of the month. So I'm curious if the AUM number you gave would include that or not.

Debbie Cunningham (Chief Investment Officer for Money Markets)

No, the AUM number we gave would have have been as of Wednesday actually. Great. Okay, thanks a lot.

OPERATOR

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

Ray Hanley (President)

That concludes our call and we thank you for joining us today.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.