Federated Hermes, Inc. (FHI), a global leader in active, responsible investing, reported its second quarter 2024 financial results, showcasing a resilient performance amidst a challenging market environment. The company ended the quarter with record assets under management (AUM) of $782.7 billion, driven by strong growth in its money market strategies.

Financials

For the full year 2023, Federated Hermes reported annual net income of $298.98 million and annual revenue of $1.61 billion. The company's annual operating cash flow stood at $311.83 million, while its annual free cash flow reached $303.92 million. These robust financial metrics demonstrate Federated Hermes' ability to generate consistent cash flows and profitability, even in the face of market volatility.

In the second quarter of 2024, the company reported revenue of $402.58 million, a 7.1% decrease compared to the same period last year. This decline was primarily attributable to a $36.1 million decrease in carried interest revenue, which was partially offset by a $11.8 million increase in money market revenue due to higher average assets. Net income for the quarter was $21.03 million, down 71% year-over-year, largely due to a $66.3 million non-cash impairment charge related to an intangible asset.

Business Overview

Federated Hermes' diverse asset mix and product offerings continue to be a key strength. As of June 30, 2024, the company's AUM was comprised of $586.65 billion in money market assets, $95.29 billion in fixed-income assets, $77.85 billion in equity assets, and $20.06 billion in alternative/private markets assets. This diversification has helped the company navigate the changing market landscape and capitalize on evolving investor preferences.

The company's money market strategies have been a standout performer, with assets reaching a record $586.65 billion as of the end of the second quarter. This growth was driven by favorable market conditions, elevated liquidity levels in the financial system, and attractive yields compared to cash management alternatives. Federated Hermes expects the market conditions for money market strategies to remain favorable, even in a declining short-term rate environment, as investors continue to seek the stability and yield offered by these products.

In the equity segment, the company's assets decreased by 6% year-over-year to $77.85 billion, primarily due to net redemptions of $3.26 billion, partially offset by market gains of $933 million. However, the company has seen a shift in investor preferences, with certain equity strategies, such as the MDT large-cap growth and mid-cap growth funds, experiencing accelerated sales and net inflows. This suggests that investors are starting to rotate towards more actively managed equity strategies, which could bode well for Federated Hermes' future growth.

The fixed-income business also saw a decline in assets, down 9% to $95.29 billion, due to net redemptions of $1.44 billion. This was partially offset by market appreciation of $593 million. The company noted that the fixed-income outflows were largely attributable to the departure of a senior portfolio manager in the UK, which led to redemptions in certain high-yield and unconstrained credit strategies. Federated Hermes is in the process of harmonizing its US and UK-based fixed-income teams to leverage the strengths of the global platform.

In the alternative/private markets segment, assets decreased by 7% to $20.06 billion, primarily due to net redemptions in the unconstrained credit fund. However, the company reported a successful final close of its Horizon 3 global private equity fund, raising $1.08 billion. Additionally, Federated Hermes is currently in the market with its Federated Hermes GPE Innovation Fund II and European Direct Lending III funds, which could help drive future growth in this segment.

Outlook

Looking ahead, Federated Hermes provided an optimistic outlook for the remainder of 2024. The company expects to see continued strength in its money market strategies, driven by favorable market conditions and investor demand for stable, yield-generating products. Additionally, the company is cautiously optimistic about the potential for a rotation towards more actively managed equity and fixed-income strategies, which could benefit its diverse product lineup.

Liquidity

Federated Hermes' strong liquidity position, with $452.9 million in cash and other investments as of June 30, 2024, provides the company with the financial flexibility to pursue strategic initiatives, such as potential acquisitions or product development, to drive future growth. The company's long-term debt stood at $347.9 million, indicating a prudent capital structure.

Conclusion

Overall, Federated Hermes' second quarter results demonstrate the company's ability to navigate challenging market conditions and capitalize on evolving investor preferences. The company's diversified asset mix, strong money market performance, and strategic initiatives position it well for continued success in the years ahead.