Federated Hermes (FHI) Q3 2025 Earnings Transcript Motley Fool Transcribing, The Motley FoolNovember 1, 2025 at 11:32 PM 0 Image source: The Motley Fool. Friday, Oct. 31, 2025, at 9 a.m. ET CALL PARTICIPANTS President — Raymond J. Hanley Chairman and Chief Executive Officer — J. Christopher Donahue Chief Financial Officer — Thomas Robert Donahue Need a quote from a Motley Fool analyst? Email [email&160;protected] TAKEAWAYS Assets Under Management (AUM) Record high of $871 billion at the end of fiscal Q3 2025, led by money market and equity strategies.
- - Federated Hermes (FHI) Q3 2025 Earnings Transcript
Motley Fool Transcribing, The Motley FoolNovember 1, 2025 at 11:32 PM
0
Image source: The Motley Fool.
Friday, Oct. 31, 2025, at 9 a.m. ET
CALL PARTICIPANTS -
President — Raymond J. Hanley
Chairman and Chief Executive Officer — J. Christopher Donahue
Chief Financial Officer — Thomas Robert Donahue
Need a quote from a Motley Fool analyst? Email [email protected]
TAKEAWAYS -
Assets Under Management (AUM) -- Record high of $871 billion at the end of fiscal Q3 2025, led by money market and equity strategies.
Equity AUM growth -- Equity assets increased by $5.7 billion, or 6%, from the prior quarter, primarily due to market gains.
Equity net sales -- Equity net sales were slightly negative at $130 million, with fund net sales of $1.4 billion offset by $1.5 billion in separate account redemptions from two large clients changing investment approaches.
MDT equity net sales -- $2 billion in net sales and seven out of eight MDT equity mutual fund strategies in Morningstar's top quartile for one- and three-year performance as of fiscal Q3 2025.
International MDT distribution -- The MDT U.S. Equity UCITS Fund achieved $340 million in net sales since its June launch, driven by non-U.S. client demand.
Equity fund performance -- 53% of equity funds outperformed peers over the trailing three years as of fiscal Q3 2025; 33% ranked in Morningstar's top quartile for the trailing three years as of fiscal Q3 2025.
Equity inflows (Q4 to Oct. 24) -- Combined equity funds and SMA net sales reached $580 million through Oct. 24.
Fixed income AUM -- Rose by $3.1 billion to a record $101.8 billion.
Top fixed income sales contributors -- Three ultra-short funds generated $579 million in combined net sales; sustainable global investment grade UCITS contributed $240 million.
Fixed income net flows (Q4 to Oct. 24) -- Net redemptions of $250 million for fixed income funds and SMAs through Oct. 24, as outflows in high yield bonds outweighed gains in ultra-shorts and total return funds.
Alternative/private markets AUM -- Decreased by $1.7 billion, predominantly from a $1.1 billion UK property trust restructure and $446 million in real estate account redemptions tied to client asset shifts.
Carried interest and performance fees -- $3.6 million recognized, up from $1.4 million the previous quarter; $733,000 offset by equivalent compensation costs.
Notable alternative fundraises -- European Direct Lending III closed on about $680 million to date; global private equity co-invest fund sixth vintage raised approximately $318 million as of fiscal Q3 2025.
FCP acquisition -- Announced agreement to acquire a controlling interest in FCP, a U.S. real estate manager with $3.8 billion AUM as of June 30; intended closing by end of 2026; upfront purchase price of $216 million in cash plus $23 million in Class B stock expected for the FCP controlling interest acquisition.
Institutional pipeline funding -- Started fiscal Q4 with $2.1 billion in unfunded institutional mandates; $1.6 billion expected for private market strategies as of the beginning of fiscal Q4 2025, $1.2 billion expected addition for equities.
Money market AUM -- Reached a record $653 billion at the end of fiscal Q3 2025, with fund assets up $24.7 billion, or 5%, to $492.7 billion in fiscal Q3, and separate accounts down $6.3 billion in fiscal Q3, reflecting seasonality.
Digital asset initiatives -- Announced tokenized share classes for Sterling Prime and U.S. Dollar Prime UCITS funds via Archex; acts as sub-adviser to the $735 million Superstate tokenized fund; participating in forthcoming BNY/Goldman blockchain project for money fund share record-keeping.
Market share in money market mutual funds -- Estimated at 7.11% at the end of fiscal Q3 2025, including sub-advised funds.
Expenses -- Operating expenses increased by $32.2 million, or 10%, over the prior quarter, primarily from higher distribution and FX expenses, and $2 million in FCP acquisition transaction costs.
Tax rate -- Effective tax rate was 24.4%, including a $1.6 million impact from R&D tax credits.
Share repurchases -- Repurchase program paused in fiscal Q3 during FCP negotiations, with plans to resume activity in fiscal Q4.
The call highlighted Federated Hermes (NYSE:FHI)'s expanding global presence in both core and innovative asset classes, with digital asset initiatives advancing through tokenized fund launches and blockchain partnerships. The planned acquisition of FCP marks a strategic entry into the U.S. real estate market, diversifying the alternatives platform. Management detailed a robust institutional funding pipeline, with allocations weighted toward private markets and MDT equity products in the near term.
Chairman Donahue said, "We are committed to the digital space where we expect ongoing innovation and growth," signaling continued product development in tokenized and blockchain-based assets.
Chief Financial Officer Donahue stated, "after transaction costs, it would be an accretive thing. And also in '27, you know, much more accretive based on our estimates," clarifying projected positive financial contributions from the U.S. real estate acquisition.
Chief Financial Officer Donahue noted, "about two-thirds of [the pipeline] we expect to fund here in the fourth quarter," with a longer funding tail for private alternatives extending through the first half of next year.
INDUSTRY GLOSSARY -
MDT: Federated Hermes' proprietary "Market Driven Trading," referring to a suite of quantitative and fundamental equity strategies frequently cited for strong peer-relative performance.
UCITS: Undertakings for Collective Investment in Transferable Securities; a regulatory framework that allows for cross-border sales of mutual funds and pooled products within the EU and select global jurisdictions.
SMAs: Separately Managed Accounts; individually managed investment accounts offered to institutional and high-net-worth clients, distinct from pooled funds.
FCP: In this context, First Capital Partners; a U.S.-based real estate investment manager being acquired by Federated Hermes.
Carried interest: A share of profits from investment funds that is paid to the fund manager in excess of the amount contributed to the fund.
Performance fee: Compensation based on the excess return of a portfolio or fund relative to a benchmark, distinct from base management fees.
Tokenized fund: An investment fund whose shares are represented on a distributed ledger (blockchain), enabling fractional ownership and enhanced settlement capabilities.
Full Conference Call Transcript
Raymond J. Hanley: Thank you, Ray. Good morning. I will review Federated Hermes, Inc.'s business performance. Thomas Robert Donahue will comment on the financial results. We ended the third quarter with record assets under management of $871 billion, led by gains from our money market and equity strategies. Equity assets increased by $5.7 billion or 6% from the prior quarter due mainly to market gains. Q3 equity net sales were slightly negative $130 million as solid net fund sales of $1.4 billion were offset by about $1.5 billion of separate account net redemptions driven by one client and all their CIT strategies moving to passive ETFs.
And another client where pension funds were merged and the surviving plan happens to use private strategies, passive strategies. Interestingly, we are also seeing other clients interested in moving from passives into our MDT strategies, which have had several RFPs come in from investors considering this switch. The MDT fundamental quant strategies produced solid results again in the third quarter. MDT equity strategies had Q3 net sales of $2 billion. Looking at MDT fund performance ranking, as of September 30, seven of the eight MDT equity mutual fund strategies are in the top performance quartile of their Morningstar categories for the trailing one and three years. And all eight are top quartile for the trailing five and ten years.
And four of these strategies are in the top decile for the trailing three years. We had net sales in 20 equity fund strategies during the third quarter, including obviously a variety of the MDT offerings and the Asia ex Japan fund leading the pack.
Chris Donahue: Excuse me. We are actively developing MDT distribution opportunities outside of the U.S. and are finding considerable interest from institutions, intermediaries, and others. For example, the MDT U.S. Equity UCITS Fund, that means it's registered for us in Dublin, launched in June. It's off to a great start. We are seeing strong demand from clients outside of the U.S. and have already had $340 million in net sales from inception through last week. Now looking at our equity fund performance at the end of Q3 and using Morningstar data for trailing three years, 53% of our equity funds were beating peers, and 33% were in the top quartile of their category.
For the fourth quarter through October 24, combined equity funds and SMAs had net sales of $580 million. Now turning to fixed income. Assets increased by $3.1 billion from the prior quarter to reach a record high of $101.8 billion at the end of Q3. Fixed income total net sales improved by $4.1 billion as we had $1.7 billion of net sales in the third quarter compared to net redemptions of $2.4 billion in the second quarter. Q3 net sales included about $1.4 billion from two large public entities that have regular sizable inflows and outflows.
We had 24 fixed income funds with net sales in the third quarter, led by the three ultra-short funds with $579 million combined, and the sustainable global investment grade UCITS fund about $240 million. Regarding performance at the end of the third quarter, using Morningstar data for the trailing three years, 44% of our equity fixed income funds were beating peers, and 15% were in the top quartile of their category. For Q4 through October 24, combined fixed income funds and SMAs had net redemptions of about $250 million. This was occasioned by positives in ultra shorts and total return bond fund that were overcome by negatives in high yield bonds.
In the alternative private markets category, assets decreased by about $1.7 billion from the prior quarter, mainly due to a $1.1 billion in real estate fund transactions from that we have previously discussed. The restructuring of the UK property trust in the third quarter. This fund was successfully managed by us for many years. It was specifically designed for defined benefit clients. There are very few of these left. The liquidity was an important factor. The decision was made to move it to one of the last remaining managers of this type of DB fund. For which we received financial consideration that Thomas Robert Donahue will address.
Real estate also had net redemptions of $446 million from separate accounts in Q3 due mainly to property sales that were driven by a client's change to their asset composition. The MDT market neutral alternative strategy had net sales of $173 million in Q3. And now stands with assets of about $1.7 billion. We are currently in the market with European Direct Lending III, the third vintage of our European Direct Lending Fund. To date, we've closed on about $680 million. For information, EDL raised $300 million and EDL II raised about $640 million. We are also in the market with our global private equity co-invest fund, which is the sixth vintage of the PEC series.
Today, we've closed on approximately $318 million, and PECs one through five raised approximately $400 million to $600 million in each fund. We're also in the market with the European real estate debt fund, which is a new pooled debt equity fund debt fund. And the marketing will continue here into 2026. We're also actively working on energy solutions product development plans following the Q2 acquisition of a majority interest in Rivington. Last week, we announced the agreement to purchase a controlling interest in FCP, a U.S.-based real estate investment manager with $3.8 billion of assets under management as of June 30.
The acquisition will facilitate Federated Hermes, Inc.'s entrance into the U.S. real estate market at a time when the U.S. multifamily sector, where FCP concentrates its efforts, enjoys strong fundamentals and significant growth opportunities. FCP has a strong experienced management team who have led the firm's growth through changing market conditions for over twenty-five years. We believe that FCP will be an excellent complement to our UK-based real estate business. There, with more than forty years of experience, our UK-based team has more than 55 professionals managing $5.5 billion as of the end of Q3. Now back on FCP, we're planning to close the purchase around the end of 2026.
Across our long-term investment platform, we began Q4 with about $2.1 billion in net institutional mandates yet to fund in both funds and separate accounts. Let's delve into that. Approximately $1.6 billion is expected to come into private market strategies, which include direct lending over $800 million, private equity a little over $650 million, and trade finance at $100 million. Equities are expected additions of $1.2 billion with about $875 million into MDT and about $365 million into international and global equity strategies. Fixed income is expected to have net redemptions of about $650 million with wins of about $380 million in high yield and short duration offset by a single $1 billion high yield redemption.
Moving on to money markets. We reached another record high at the end of Q3 for total money market assets, which increased by $18 billion to reach $653 billion. Money market fund assets increased by $24.7 billion or 5% in Q3 to reach a record high of $492.7 billion. Money market separate accounts decreased by $6.3 billion in Q3 reflecting seasonal patterns. Market conditions remain favorable for cash as an asset class. In addition to the appeal of the relative safety in periods of volatility, money market strategies present opportunities to earn attractive yields compared to alternatives like bank deposits, direct investments in T-bills, and commercial paper.
Chris Donahue: We're also developing money market funds and share classes available in tokenized form and working with parties on digital asset infrastructure. These efforts include a planned Genius Act compliant money market fund designed to serve as collateral for stable coins. Last week, we announced that we have made two of our UCITS money market funds, Sterling Prime and U.S. Dollar Prime, available in tokenized form through Archex. Archex is a well-known digital assets operator in the UK, having launched in 2018 and become the first FCA-regulated digital securities exchange broker-dealer and custodian. This represents Federated Hermes, Inc.'s initial non-U.S. digital asset initiative. The Archex relationship complements our digital efforts where we are the sub-adviser for the Superstate short duration U.S.
Government securities fund, a private tokenized fund with about $735 million in assets. We will also participate in the launch of a collaborative initiative between BNY and Goldman that will use blockchain technology to maintain a record of their customers' ownership of select money market funds. A significant step towards enhancing the utility and transferability of existing money market fund shares. We are exploring numerous other additional digital asset opportunities. We are committed to the digital space where we expect ongoing innovation and growth. Our estimate of money market mutual fund market share, including sub-advised funds, remained at about 7.11% at the end of the third quarter.
Now looking at recent asset totals as of a few days ago, managed assets were approximately $865 billion, including $645 billion in money markets, $96 billion in equities, $102 billion in fixed income, $19 billion in alternatives, private markets, $3 billion in multi-asset, money market mutual fund assets, stood at $486 billion. Tom?
Thomas Robert Donahue: Thanks, Chris. For Q3 compared to the prior quarter, total revenue increased $44.6 million or 10%. Revenue from higher money market assets provided $717.6 million of this increase, while higher equity assets added $14.8 million. An extra day in the quarter added $4.9 million, higher performance fees added $2.4 million, and the Rivington acquisition added $1.2 million. Q3 revenue also included a termination fee of $4.6 million from the restructure of the UK property trust, and this was about one year of revenue from that mandate. Total Q3 carried interest and performance fees were $3.6 million compared to $1.4 million last quarter. Approximately $733,000 of the Q3 fees were offset by nearly the same amount of compensation expense.
Q3 operating expenses increased by $32.2 million or 10% from the prior quarter, due mainly to higher distribution expense from higher fund assets of $14.2 million. We had about $2 million in transaction costs from the FCP acquisition in Q3 in the professional service fees line. And other expense line items, FX and related expense increased by $9.4 million in Q3 compared to the prior quarter. These expenses were $3.7 million in Q3 compared to a credit of $5.7 million for Q2 as the pound weakened against the dollar in Q3. The other expense line item for Q3 also included $2.8 million related to a U.S. withholding tax matter on certain non-U.S. funds. The effective tax rate was 24.4%.
The tax rate was impacted by $1.6 million related to R&D tax credits. At the end of Q3, cash and investments were $647 million. Cash and investments excluding the portion attributable to non-controlling interests were $610 million. We expect to use about $216 million in cash and about $23 million in FHI Class B stock for the upfront purchase price of FCP controlling interest acquisition. During Q3, the company paused its open market share repurchase as we entered exclusive negotiations with FCP. We expect to be active again in Q4 and repurchase shares in the open market. Ollie, we'd like to open the call up for questions now.
Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from Ken Worthington with JPMorgan.
Michael Cahill: Hi. Good morning, Ken. This is Michael Cahill in for Ken. Thanks for taking my questions today. For my first question, just wanted to touch on MDT. I mean, there's clearly some growing momentum there. You called out some new RFPs, a pretty sizable pipeline, as well as some initiatives to expand distribution more notably outside the U.S. I mean, so how do we think we should kind of frame the potential sizing and maybe the pace of AUM or flows growth of the overall MDT franchise as you continue to scale and as the non-U.S. distribution starts to pull up? I'm just trying to get a sense of how we should frame that opportunity set.
Chris Donahue: I think you should frame it with enthusiasm and optimism. If you look at the sales to date through this time frame, they're still running net sales of up through October 24 of about $660 million. So the pipeline continues. But for us, the exciting thing is the fact that we were able to sell these mandates across the globe. And if you look at where they're coming from, they're coming from different countries in different ways and in different of the mandates exactly on MDT. I can't get into exactly who the clients are, but in those pipeline numbers, is a great variety of client types and geographies.
Michael Cahill: Thanks. Understood. Then if I could just ask a quick follow-up on expenses. Just broader, over the year ahead, you have a number of initiatives. You called out a bunch today, clearly alternatives and the FCP acquisition is ahead. But you also have a number of things happening within money markets and blockchain digital assets, and clearly kind of expansion of some of your key franchises. So I just think about the expense base and over the next twelve months or so, how should we kind of think about the trajectory there as you continue to invest organically and inorganically across the business?
Thomas Robert Donahue: Okay. Mike, well, first thing, FCP, you know, we closed that near the end of the first quarter. Then, of course, those expenses will come in. But we've kind of factored that in on last week's discussion about our view of, you know, after transaction costs, it would be an accretive thing. And also in '27, you know, much more accretive based on our estimates of what we think is going to happen there. So of course, revenue will go up and the expenses will go up. And in terms of, you know, you're calling out a few things, you know, obviously, the digital things and money market stuff and other expansions, I don't see outsized expenses coming in here.
And if they do, we would fully expect them to come with revenue shortly thereafter. And if you wanted me to go through the, you know, not for the year, but for the next quarter, a few comments on the line items. I'd expect comp and related to go up as sales are increasing and therefore incentive comp is going up and investment management performance is causing us to increase the incentives there. And on the corporate side, we're also increasing the incentive. These are all, you know, positive success items. You know, on the distribution line item, we expect that to go up as you look at average assets, distribution line item, another success item goes up.
You know, on the professional service fees, you know, are looking at it, you know, today, we already said we'd expect some more FCP closing costs in Q4, but we had a couple million as I mentioned in Q3. So maybe we have $3 million more as a change. And then, you know, the other line has FX in it and that has that tax payment that we talked about and, you know, what's gonna happen in FX we will see. But those are all comments on a quarterly, not a yearly basis.
Michael Cahill: Great. Thank you.
Operator: Your next question for today is from William Raymond Katz with TD Cowen.
Robin Holby: Good morning. This is Robin Holby on for William Raymond Katz, and thanks for taking the question. Heading into 2026, what are you hearing from your institutional investors on allocations? Where are you seeing opportunities? And how are you thinking about the pace of deployment for the institutional pipeline?
Chris Donahue: The institutional pipeline, I tried to hint at this a few minutes ago, is very, very strong. As we told you, we've got over $2 billion in it. And if you look into that, the pipeline is to see performance and different countries. So I was a little more general the last time, but you know, we have a Belgium all cap core MDT big mandate that we've won. In Canada, it's an international leaders mandate that we've won. In the UK, a global equity mandate. In South Korea, a blended MDT. Another UK client came into the all cap core MDT. We have an MDT win in the Mideast as well. So it's across the board of performance-oriented activity.
And then if you look at the style box purity of the various MDT offerings, you get a sense that people are looking at it that way. And then I did hint that we are seeing some clients, this is not an avalanche, don't go writing big hairy articles. The people are looking at what they really own inside a passive or indexed situation and are thinking that maybe they need to look at some of the MDT mandates as alternatives.
Thomas Robert Donahue: And Robin, in terms of the pace of the funding of the pipeline, about two-thirds of it we expect to fund here in the fourth quarter. With the equity and fixed income equity inflows, fixed income outflows happening this quarter. And about half of the Alt funding happening this quarter. The alts usually have a longer tail, so they will continue to fund through the first half of next year. Q1 and Q2 pretty evenly.
Chris Donahue: Okay. Holly, we must go to the next question.
Operator: We have reached the end of the question and answer session, and I will now turn the call over to Raymond J. Hanley for closing remarks.
Raymond J. Hanley: Okay. Well, thank you for joining us. That concludes our call.
Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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