Federated Hermes, Inc. (FHI) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presents a generally positive outlook with strong equity fund sales, strategic acquisitions, and innovative product developments like tokenized money market funds. Despite increased expenses and distribution costs, the company maintains positive operating leverage and plans for expansion. The Q&A highlighted effective succession planning, robust demand for MDT strategies, and promising collaborations with BNY Mellon and Goldman Sachs. While tokenization demand is slower than expected, the company's strategic initiatives and optimistic guidance suggest a positive stock price movement over the next two weeks.
Key Financial Performance
Assets Under Management (AUM) Record high of $903 billion, led by gains in money market and equity strategies. Equity assets increased by $3.2 billion (3%) from the prior quarter, with half of the increase from net sales. Reasons include strong equity sales driven by MDT fundamental quant strategies.
Equity Sales Record gross equity sales of $31 billion in 2025, including $9 billion in Q4. Full-year net equity sales of $4.6 billion, a significant improvement from net redemptions of $10.7 billion in 2004. Driven by MDT strategies with record gross sales of $19.1 billion and net sales of $13 billion.
Fixed Income Assets Ended the year at $100 billion, down $1.7 billion from the prior quarter. Q4 net redemptions of $2.8 billion, including $1.7 billion from two large public entities with regular inflows and outflows. High-yield fund net redemption of $1 billion also contributed.
Money Market Assets Record high of $683 billion at the end of 2025, an increase of $30 billion. Money market fund assets increased by $16 billion (3%) in Q4 to $508 billion. Separate accounts increased by $14 billion, reflecting seasonal patterns. Favorable market conditions for cash as an asset class contributed.
Revenue Q4 revenue increased by $13.4 million (3%) from the prior quarter. $8 million of the increase came from higher money market assets, and $5.5 million from higher equity assets. Real estate development fees of $8.2 million also contributed.
Operating Expenses Q4 operating expenses increased by $7.3 million (2%) from the prior quarter. Higher distribution expenses of $8.8 million from higher fund assets were the main driver. Transaction costs from the FCP acquisition added $1.3 million.
Cash and Investments Ended 2025 at $724 million, with $680 million excluding noncontrolling interests. $215.8 million in cash and $23.2 million in FHI Class B stock allocated for the FCP acquisition.
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Operating Highlights
MDT U.S. Equity UCITS fund: Launched in June 2025, it has seen strong demand from clients outside the U.S., with over $500 million in net sales from inception through year-end.
European Real Estate Debt Fund: A new pooled European debt fund currently in the market.
Hong Kong office expansion: Plans to open a Hong Kong office to capitalize on the region's rapidly growing wealth market, complementing existing offices in Singapore, Tokyo, and Sydney.
Record assets under management: Ended the year with $903 billion in assets under management, driven by gains in money market and equity strategies.
Money market fund growth: Reached a record high of $508 billion in Q4, with total money market assets increasing by $30 billion to $683 billion.
Digital asset initiatives: Advancing tokenization projects, including partnerships with Archax, BNY, and Goldman Sachs, to integrate blockchain technology into money market funds.
FCP acquisition: Progressing towards closing the acquisition in the first half of 2026, adding U.S. multifamily housing expertise to existing U.K.-based real estate capabilities.
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Risk or Challenges
Fixed Income Net Redemptions: Fixed income assets experienced net redemptions of $2.8 billion in Q4, including $1.7 billion from two large public entities with regular sizable inflows and outflows. This indicates potential volatility and dependency on large clients.
Decline in Fixed Income Assets: Fixed income assets ended the year at $100 billion, down $1.7 billion from the prior quarter, reflecting challenges in maintaining asset levels in this category.
Real Estate Strategy Redemptions: Net redemptions were observed in real estate strategies, partially offsetting gains in other alternative and private market categories.
FCP Acquisition Costs: Transaction costs related to the FCP acquisition are estimated to be approximately $9.2 million in 2026, with $1.3 million already incurred in Q4. These costs could impact profitability.
Regulatory and Operational Challenges in Hong Kong Expansion: The planned opening of a Hong Kong office is subject to regulatory and other necessary approvals, which could delay or complicate the expansion.
Digital Asset Initiatives Risks: The firm is advancing tokenization and blockchain initiatives, which involve regulatory, technological, and market adoption risks.
Seasonal Revenue Decline in Q1: Seasonal factors are expected to result in $10.2 million lower revenues and $2.6 million lower distribution expenses in Q1, based on Q4 average asset levels.
Higher Compensation Expenses in Q1: Compensation and related expenses are expected to increase by $8 million in Q1 due to seasonally higher stock compensation and payroll taxes.
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Guidance & Outlook
Equity Strategies: For Q1 through January 23, MDT strategies had net sales in combined funds and SMAs of just under $700 million. Approximately $1.3 billion in net additions is expected into MDT strategies in 2026.
Fixed Income: For Q1 through January 23, combined fixed income and SMAs had net sales of $139 million. Fixed income is expected to have net sales of about $100 million into a low-duration strategy in 2026.
Private Markets: Approximately $1.2 billion on a net basis is expected to come into private market strategies, including direct lending, private equity, and trade finance in 2026.
Money Markets: Market conditions remain favorable for cash as an asset class. Money market strategies are expected to continue benefiting from their appeal of relative safety and attractive yields compared to alternatives.
FCP Acquisition: The FCP acquisition is progressing towards closing during the first half of 2026, adding U.S. multifamily housing expertise to the company's real estate capabilities.
Hong Kong Office Expansion: Plans to open a Hong Kong office to capitalize on the region's rapidly growing wealth market, subject to regulatory and other necessary approvals.
Digital Asset Initiatives: Advancing tokenization projects in the U.S. and abroad, including the development of GENIUS-compliant money market funds and integration with digital technology for on-chain trading and settlement.
Tax Rate: The effective tax rate is estimated to be in the 25% to 28% range for 2026.
Q1 Seasonal Factors: Seasonal factors in Q1 are expected to result in about $10.2 million in lower revenues and about $2.6 million in lower distribution expenses based on Q4 average asset levels.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Why did distribution costs increase by 25% in Q4 compared to the previous year, despite only a 10% growth in money market fund assets?
A:The increase was due to a significant amount of assets moving into share classes with higher-than-average distribution expenses, resulting in a $10 million jump in both distribution revenue and related expenses. There is no direct offset to these higher costs on the revenue side.
Q:How is the company managing the transition of five high-profile PMs scheduled to retire this year?
A:The company has a long-standing succession planning process, replacing retiring PMs (with 35-40 years of experience) with individuals who have 25-30 years of experience. The transition is expected to be smooth, with no disruption in investment management techniques or performance.
Q:What is the current demand for tokenization opportunities, and what milestones are needed for faster adoption?
A:Demand from clients is not as robust as expected, with clients still comfortable using current products. Milestones for faster adoption include significant money flows into tokenized products and regulatory clarity. The company is actively monitoring and working on various structures globally, including partnerships in Asia.
Q:What is driving the demand for MDT strategies, and are there any capacity constraints?
A:Demand is driven by both retail and institutional clients, with strong interest in mutual funds, ETFs, and separately managed accounts. There are no current capacity constraints, and the company rigorously analyzes the ability to maintain alpha in its offerings.
Q:What is the outlook for institutional rotation into money funds given the Fed's cutting cycle?
A:The company expects a terminal Fed funds rate of 3.25%-3.5% in 2026, with money market funds generating yields in the mid-3% range. Institutional rotation into money funds remains compelling due to their low-risk, high-quality, and instantaneous liquidity features.
Q:How is the company achieving positive operating leverage on the compensation ratio?
A:Positive operating leverage is being achieved due to the large scale of money fund inflows. While compensation costs are expected to rise with continued inflows, the increase will be slower, resulting in continued positive leverage.
Q:What are the plans for MDT product development and expansion?
A:The company plans to expand MDT offerings into new wrappers (e.g., ETFs, CITs) and markets (e.g., UCITS format for Europe). It also aims to replicate the success of existing products in new geographies and formats.
Q:What is the seasonal trend for money market fund flows in the first half of the year?
A:January typically sees outflows, with additional outflows in March and April due to tax season. Growth generally picks up in the second half of the year, with December being the strongest month.
Q:What is the collaboration with BNY Mellon and Goldman Sachs on tokenized money funds?
A:The collaboration involves BNY Mellon maintaining dual books (traditional and digital ledgers) and Goldman Sachs providing a tokenized platform. This approach ensures a secure and seamless transition to tokenized products.
Q:What is the company's role in stablecoin reserve management, and how does it compare to tokenized money funds?
A:The company manages tokenized money funds under the GENIUS Act, which can serve as collateral for stablecoins. Stablecoins must be 100% backed by defined collateral but cannot pay interest, making them complementary to tokenized money funds.
Q:What is the outlook for money market roll-ups?
A:Money market roll-ups depend on the decisions of other fund operators. Increased regulation and competition have reduced roll-up opportunities, but the company remains open to acquiring funds when opportunities arise.
Q:What is the outlook for the Strategic Value Dividend Fund?
A:The fund continues to see positive flows despite market challenges, with strong performance and a focus on dividend growth. It has grown to $36 billion in assets and is expected to continue growing.
Q:Review of Unclear Management Responses
A:The management avoided providing a direct answer to the question about the number of entities they are engaging with on tokenization efforts, stating they would 'take a pass on that one.'
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Asia Pacific
Asian Financial
Assets income
Assets sale
Dividend ETF
ETF sale
Equity UCITS
FCA security
FCP acquisition
FHI Analyst
Finance Tender
Hong Kong
Kong office
Lending Fund
MDT strategy
PEC series
QA
SMA strategy
capability
category trailing
chain
duration
effort
equity sale
estate
expertise
fund share
income redemption
ownership
record high
region
relationship
strategy equity
technology
tokenization
year equity
FHI Transcript
Federated Hermes, Inc. (FHI) Q4 2025 Earnings Call Transcript
Positive1-30
The earnings call presents a generally positive outlook with strong equity fund sales, strategic acquisitions, and innovative product developments like tokenized money market funds. Despite increased expenses and distribution costs, the company maintains positive operating leverage and plans for expansion. The Q&A highlighted effective succession planning, robust demand for MDT strategies, and promising collaborations with BNY Mellon and Goldman Sachs. While tokenization demand is slower than expected, the company's strategic initiatives and optimistic guidance suggest a positive stock price movement over the next two weeks.
Federated Hermes, Inc. (FHI) Q3 2025 Earnings Call Transcript
Unknown10-31
The earnings call summary presents mixed signals. Record high AUM and revenue increases are positive, but the restructuring led to asset decreases. The pause in share repurchase and high-yield bond redemptions are concerning. The Q&A section reveals management's lack of specific guidance and expense increases due to acquisitions and digital initiatives, causing uncertainty. The company's market cap suggests a moderate reaction, leading to a neutral overall sentiment.
Federated Hermes, Inc. (FHI) Q2 2025 Earnings Call Transcript
Positive8-1
The earnings call reflects a positive sentiment due to strong organic growth, record high money market fund assets, and increased revenue. The dividend increase and share repurchase indicate shareholder-friendly actions. Despite some concerns about stablecoin impacts and expense increases, the overall tone remains optimistic, with management highlighting potential growth areas and strategic acquisitions. The Q&A session didn't reveal significant negative trends, and the company's market cap suggests a moderate reaction, leading to a positive prediction for the stock price.
Earnings call transcript: Federated Investors Q1 2025 beats EPS expectations
Unknown4-25
The earnings call presents a mixed picture: strong shareholder returns with increased dividends and share repurchases, and positive growth in money market assets. However, challenges include FX volatility, substantial outflows due to margin calls, and unclear management responses in the Q&A, which raise concerns. While financial health appears stable, with decreased operating expenses and increased carried interest, the lack of clear guidance and potential economic headwinds temper optimism. Given the market cap of $2.75 billion, the stock is likely to remain neutral, with minor fluctuations within the -2% to 2% range over the next two weeks.
FHI Report
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