Company Overview
Federated Hermes, Inc. (FHI) is a global leader in active, responsible investment management, with $800.5 billion in assets under management as of September 30, 2024. The company has a rich history spanning over five decades, having been founded in 1955 as Federated Investors, Inc. in Pittsburgh, Pennsylvania. Over the years, Federated Hermes has evolved into a diversified global asset management firm, offering a wide range of investment products and solutions to clients worldwide.
Business Model
Federated Hermes' business model is centered around providing investment advisory, administrative, distribution, and other services to various investment vehicles, including sponsored investment companies, collective funds, and separately managed accounts. The company's revenue is primarily derived from advising these investment products, with fee rates that vary based on asset class and offering type. Federated Hermes has a strong presence in the money market fund space, managing $593 billion in money market assets as of September 30, 2024, which accounted for approximately 75% of the company's total managed assets.
Historical Growth
The company's journey to becoming a global leader in active investment management began with its focus on serving individual investors and institutions. In 1998, Federated Hermes made its first major international expansion by acquiring Hertfordshire, a UK-based investment manager. This acquisition paved the way for further strategic acquisitions over the next two decades, which significantly enhanced the company's global footprint and investment capabilities.
During the 2008 financial crisis, Federated Hermes faced significant challenges, experiencing market volatility and outflows like many other asset managers. However, the company demonstrated its resilience by maintaining its focus on active investment management and client service, successfully navigating through this turbulent period.
Throughout its 70-year history, Federated Hermes has consistently adapted to various market cycles and regulatory changes, showcasing its ability to evolve and thrive in the dynamic investment management industry. The company's extensive experience and global research platform have been instrumental in its growth and success.
Financials
Federated Hermes has demonstrated solid financial performance in recent periods. For the fiscal year ended December 31, 2023, the company reported revenue of $1.61 billion and net income of $298.98 million. Operating cash flow for the same period was $311.83 million, with free cash flow of $303.92 million.
In the most recent quarter (Q3 2024), Federated Hermes achieved revenue of $408.46 million, representing a year-over-year growth of 1.4%. This increase was primarily driven by a $26.3 million rise in money market revenue due to higher average money market assets. However, this growth was partially offset by a $10.7 million decrease in carried interest and a $4.5 million decline in equity revenue due to lower average equity assets.
Net income for Q3 2024 stood at $87.54 million, with operating cash flow of $117.15 million and free cash flow of $123.70 million. The company's profitability has been impacted by higher operating expenses, including a significant intangible asset impairment charge during the second quarter of 2024.
Federated Hermes maintains a strong balance sheet, with $720.73 million in current assets and $947.75 million in total liabilities as of December 31, 2023. The company's debt-to-equity ratio is 0.34, indicating a conservative capital structure.
In terms of geographic performance, while Federated Hermes does not provide a detailed breakdown of revenue by region, it disclosed that 62.4% of its Q3 2024 revenue was earned domestically, while 15.3% was earned by non-U.S. domiciled subsidiaries.
Liquidity
Federated Hermes maintains a robust liquidity position. As of September 30, 2024, the company held $515 million in cash and investments (excluding non-controlling interests). The company's current ratio and quick ratio both stand at 2.75, indicating strong short-term liquidity.
Federated Hermes has access to a $350 million revolving credit facility, with an additional $200 million accordion feature. As of September 30, 2024, the full $350 million was available for use. Additionally, the company has $348 million in long-term debt, which matures in 2032.
Recent Developments
Federated Hermes reported record managed assets of $800.45 billion as of September 30, 2024, driven by strong growth in its money market and fixed-income businesses. The company's equity assets also increased during the third quarter of 2024, reaching $83.61 billion, though the company experienced net redemptions in its strategic value dividend strategies. Federated Hermes' alternative and private markets assets stood at $20.68 billion as of the end of the third quarter.
Federated Hermes has been actively expanding its product offerings, with the launch of several new active ETFs and collective investment trusts during the third quarter of 2024. The company's focus on delivering strong investment performance has paid off, with 59% of its equity funds and 37% of its fixed-income funds beating their respective peers over the trailing three-year period as of September 30, 2024.
The company has also been proactive in addressing regulatory developments, including money market fund reform and the implementation of new sustainability disclosure requirements in both the U.S. and Europe. Federated Hermes has been actively engaged in the public comment process and has also considered initiating or supporting legal challenges to certain regulations, when deemed necessary or appropriate.
Product Segments
Federated Hermes operates in several key product segments:
1. Money Market Funds: As of September 30, 2024, money market assets accounted for 75% of Federated Hermes' total average managed assets and 51% of its total revenue. The company's largest money market offerings include the Federated Government Obligations Fund and the Federated Prime Cash Obligations Fund.
2. Equity Funds: Equity strategies represented 10% of total average managed assets and 29% of total revenue as of September 30, 2024. The company offers a range of domestic and international equity funds spanning different market capitalizations and investment styles.
3. Fixed-Income Funds: Fixed-income strategies accounted for 12% of total average managed assets and 12% of revenue as of September 30, 2024. The company provides both taxable and tax-exempt fixed-income fund options.
4. Alternative/Private Markets Funds: This segment made up 3% of total average managed assets and 6% of revenue as of the third quarter of 2024.
5. Multi-Asset Funds: These funds represented less than 1% of total average managed assets and 1% of revenue as of September 30, 2024.
6. Separate Accounts: As of the third quarter, separate account assets made up 32% of Federated Hermes' total managed assets.
Future Outlook
Looking ahead, Federated Hermes is well-positioned to continue its growth trajectory, with a robust pipeline of institutional mandates, particularly in its alternative and private markets strategies. The company's strong brand recognition, diversified product offering, and focus on active management are expected to drive future success.
For the remainder of 2024 and into 2025, Federated Hermes anticipates favorable market conditions for money market strategies, with money market fund yields expected to remain attractive compared to the direct market and bank deposit rates. The company estimates its money market mutual fund market share was about 7.32% at the end of Q3, down slightly from 7.45% at the end of Q2.
Federated Hermes began Q4 with approximately $1.5 billion in net institutional mandates yet to fund, with about $1.4 billion expected to come into private market strategies and $1 billion in fixed income. The company expects its tax rate to be in the 26% to 28% range for Q4 2024 and 2025.
However, the company is not without its risks. Federated Hermes operates in a highly competitive and regulated industry, and any significant changes in the regulatory environment or market conditions could impact its financial performance. Additionally, the company's reliance on money market funds, which account for a significant portion of its assets and revenue, exposes it to potential yield-related fee waivers and changes in interest rates.
Industry Trends
The investment management industry has experienced a compound annual growth rate (CAGR) of approximately 8-10% over the past 5 years, driven by strong equity and fixed income market performance as well as net new asset flows. Federated Hermes' diversified business model across asset classes and client channels positions it well to capitalize on these industry trends.
Conclusion
Overall, Federated Hermes is a well-established and respected global asset manager with a solid track record of performance and growth. The company's diversified product offerings, strong brand, and focus on active management position it well to navigate the challenges and capitalize on the opportunities in the investment management industry. With its record assets under management, strong financial performance, and favorable outlook for money market strategies, Federated Hermes appears poised for continued success in the evolving investment landscape.