Federated Hermes, Inc. 2026 Q3 Earnings Call

Thank you. Welcome to our call. Leading today's call will be Chris Donahue, CEO and President of Federated Hermes, and Tom Donahue, Chief Financial Officer. Joining us for the Q&A are Saker Nusseibeh, who is the CEO of Federated Hermes Limited, and Debbie Cunningham, the Chief Investment Officer for Money Markets. During today's call, we may make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements.

Chris? Thanks, Ray. Good morning, all.

I will review Federated Hermes' business performance. Tom will comment on our financial results. We ended the third quarter with record equity assets under management of $110.5 billion, up $949 million from Q2, as positive net inflows of $1.9 billion were partially offset by lower market valuations. Equity sales results were led by MDT Fundamental Quant Strategies. MDT Equity and Market Neutral Strategies had a record $6 billion in gross sales and $3.2 billion in net sales in the third quarter. Looking at fund performance rankings at the end of Q3, seven of nine MDT fund strategies were in the top performance quartile of their Morningstar categories for the trailing three years. We had net sales in 33 equity fund and SMA strategies during Q3, including a variety of MDT offerings.

Institutional separate accounts, including sub-advisory mandates, added $1.5 billion in Q3 net sales, nearly all in MDT strategies. Looking at our equity fund performance at the end of the third quarter and using Morningstar data once again for the trailing three years, 56% of our equity funds were beating peers, and 33% were in the top quartile of their category. For the fourth quarter through October 23rd, combined equity funds and SMAs had net sales of $242 million. Turning to fixed income. Assets ended Q3 at $99 billion. Net positive sales of $700 million were offset by a decrease of $1.8 billion due to lower market values.

We had 22 fixed income funds and SMAs with net sales in the third quarter, led by the Sterling Cash Plus Fund, our Ultrashort Bond Funds, Total Return Bond ETF, Conservative Microshort Fund, and the CW Henderson Short-Term Muni SMA. Fixed income institutional separate accounts had Q3 net sales of $924 million, driven by a large public entity that has regular sizable inflows and outflows. Regarding performance at the end of the third quarter and using Morningstar data for the trailing three years, 49% of our fixed income funds were beating peers, and 21% were in the top quartile of their category.

For Q4 through October 23rd, combined fixed income funds and SMAs had net redemptions of $2 billion, which includes $1.7 billion in redemptions from a client in the Total Return Bond strategy, who went in the direction of taking additional risk for this part of their multi-billion dollar mandate. On September 30, this fund, Total Return Bond Fund, ranked in the top third of its category for the trailing 10 years, 66th percentile for three years, top 28% for one year, and top 18% for the trailing three months. Now, in the alternative private markets category, assets were up slightly, reaching $21.7 billion. The MDT Market Neutral Fund and ETF combined for $180 million net sales.

We are in the market with the Global Private Equity Co-Invest Fund, the sixth vintage of our PEC series, and the European Real Estate Debt Fund, a new pooled European debt fund that will invest in senior and whole loans. Across our long-term investment platform, we began the fourth quarter with about $6.5 billion in net institutional wins yet to fund into both funds and separate accounts. Equity strategies are expected to have net sales of about $7 billion in MDT additions. Approximately $1.2 billion on a net basis is expected to come into private markets, including direct lending, private equity, and trade finance. Fixed income is expected to have net redemptions of about $1.7 billion, which includes the aforementioned redemption in the multi-sector fixed. Moving on to money markets.

Total money market assets decreased by $27 billion, or 4%, from the second quarter, as funds decreased by $13.6 billion, or 3%, and separate accounts decreased by about $13.4 billion, or 8%. Money market fund assets were impacted by the mid-September increase in interest rates by the Fed and by September's corporate tax payments. Money market separate account assets were impacted by the liquidity levels of large state pools that we manage, and typically peak with tax collections at the end of the year through April before decreasing in Q2 and Q3. Our estimate of money market mutual fund market share, including sub-advised funds, was about 6.6% at the end of Q3, down from 6.7% at the end of Q2. Turning to digital assets. We continue active collaboration with financial institutions and technology providers to explore digital distribution.

Our focus is liquidity, where our efforts are designed to enhance flexibility and accessibility while preserving the core structure and utility of money market funds. During the third quarter, our arrangement with Prometheum Inc. was announced. We are working with Prometheum, a market infrastructure provider for crypto assets, to expand the reach of tokenized securities through their SEC-registered FINRA member broker-dealer market infrastructure. Prometheum will make our tokenized products available to broker-dealers and RIAs through its correspondent clearing platform. This follows the launch of our Money Market Management Digital Treasury Fund, which is expected to support both traditional and on-chain distribution. We have also selectively engaged with regulated digital asset intermediaries, including participation in the BNY Goldman Sachs domestic initiative involving mirrored tokenization. Also, the Archax initiative to offer tokenized access to a UCITS money fund in the U.K.

Our arrangement with Conduit Digital Holdings to support the launch of Conduit's tokenized money market fund in the APAC region, with the Conduit fund investing in one of our offshore money market funds. We are engaged in digital asset development discussions with other intermediaries as well. Looking at recent asset totals, this is a few days ago, managed assets were approximately $890 billion, including $654 billion in money markets, $112 billion in equities, $98 billion in fixed income, $23 billion in alternative private markets, and $3 billion in multi-asset. Money market mutual fund assets were $489 billion. Money market fund assets have ranged from $485 billion to $493 billion during October, with average asset levels of $489 billion.

Tom? Thanks, Chris. For Q3 compared to the prior quarter, total revenue increased $4.6 million, or 1%.

Equity asset growth added $8 million of revenues, and additional day added $5.3 million of revenues. These increases were partially offset by lower Q3 money market average assets, resulting in $4 million of lower revenues. In addition, Q2 included a $2.9 million gain on the sale of a renewable energy property by Rivington, and the U.K. real estate business had a $2 million real estate development fee for a project that did not advance into construction. Total Q3 carried interest and performance fees were $726,000 compared to $1.4 million in the prior quarter. Approximately $428,000 of the Q3 fees were offset by compensation expense.

Q3 operating expenses decreased by $15.9 million, or 4%, from the prior quarter, due mainly to Q2 included approximately $11.2 million in transaction costs from the FCP acquisition in certain line items. Also, approximately $3.3 million of lower compensation and related expense, lower advertising and promotional activity. Intangible asset expense decreased $1.5 million, primarily due to most of the intangible assets from the Hermes acquisition being fully amortized. These expense decreases were partially offset by a withholding tax-related expense of $1.9 million recorded in the other expense line item. $1.7 million expense for an adjustment to the FCP contingent payment, also recorded in the other expense line item. The Q3 effective tax rate was 27.1%. We estimate the full-year tax rate to be in the 25%-28% range for 2026. At the end of Q3, cash and investments were $580 million.