Federated Hermes reported Q1'25 earnings and hosted its Q1'25 earnings call on Friday. On the call, President & CEO J. Christopher Donahue, comments, "We ended Q1 with record assets under management of $840 billion, driven by record money market assets of $637 billion.... Turning to fixed income, assets increased by about $1.4 billion in the first quarter from year-end due mainly to higher market valuations, partially offset by net redemptions. We had 19 fixed-income funds with net sales in the first quarter, including government Ultrashort Fund and the municipal Ultrashort Fund.... Fixed income expected net additions total about $400 million, and the wins are in sustainable investment-grade credit, active cash short-duration, and government bonds."
He continues, "Now moving to Money Markets, we reached another record-high for money market assets at the end-of-the quarter, $465 billion and total money market assets of $637 billion. Total money market assets increased by about $7 billion in the first quarter as money funds added $3.2 billion and money market separate accounts added $3.6 billion. We were able to increase our money market managed assets in Q1 against seasonal factors that have often resulted in lower assets."
Donahue explains, "Against the recent backdrop of market volatility, market conditions remain favorable for cash as an asset class. And in addition to the appeal of relative safety in periods of volatility, money market strategies present opportunities to earn attractive yields compared to alternatives such as bank deposits and direct investments in T-bills and commercial paper. Our estimate of money market mutual fund market-share, including our sub-advised funds, was about 7.10% at the end of Q1. Down slightly from about 7.22% at the end of 2024."
He says, "Looking at our money market fund, market-share changes from Q4 to Q1 over the prior four years, we saw an average decrease in that timeframe of about 34 basis points. Now, as we look at recent asset totals of the last few days, managed assets were approximately $828 billion including $629 billion in Money Markets, $78.5 billion in equities, $98 billion in fixed-income, $20 billion in alternative private markets, $3 billion in multi-asset. Money market mutual fund assets were $456 billion."
CFO Tom Donahue adds, "Total revenue for Q1 decreased slightly from the prior quarter as higher revenue from money market assets of $9.8 million were offset mainly by lower revenue of $9.2 million from fewer days and lower revenue of $3.2 million from equity assets.... At the end of Q1, cash in investments were $542 million, cash in investments excluding the portion of -- attributed to non-controlling interest was $476 million. In addition to investments for growth, we seek to use acquisitions, dividends and share repurchases as levers to add value for shareholders. So far in 2025, we've used all three."
During the Q&A session, Money Market CIO Deborah Cunningham responds, "Usually the first quarter is the worst quarter of the year on a cyclical basis for all the industry from a liquidity business standpoint. This has to do with a lot of strength that comes from flows from the fourth quarter in a window-dressing manner to some degree, reversing in the first weeks and early part of January.... That didn't happen this year. So that's a positive from an industry standpoint. What I'd also note is that from a percentage standpoint within the first quarter, through the middle of March, our assets were up substantially more than what they ended up being positive for the end of the first quarter."
She explains, "That had a lot to do with -- starting with March 15 -- a substantial outflow due to corporate taxes that I think was probably a little bit worse for us just simply because of our larger institutional nature. And then secondly, towards the end of the quarter, it was a rougher quarter-end. I think a lot of that had to do with what was happening from a broader macro perspective, with the tariff issues that had not yet been fully understood or announced, but concerns about them and the volatility that was happening in many of the other markets. Again, looking at our institutional nature, we had substantial outflows due to margin calls, I think, on other customer -- institutional customers other assets that came out of their liquidity portions."
Cunningham continues, "If we even carry that further now into the month of April, personal taxes and additional margin calls from institutional customers continue to be a negative plague despite the fact that it's been a general positive trend to today within the month of April. But definitely a different first quarter than would be the norm in the Money Markets."
Asked about Fixed-Income outflows, Chris Donahue responds, "Well, the numbers there were basically made up of Total Return Bond Fund and High Yield. With about three-fourths of the [outflows] being in Total Return and another -- the rest of it in High Yield. One of the things that ... we're happy with is that the Total Return Fund's performance is improving. It hasn't moved, the three-year number yet, but it has moved the recent numbers. And so, we are optimistic about that."
Asked about flows since tax outflows, Cunningham answers, "Just to give a little bit of an update since the personal tax date on April 15, for the next week, basically, we have [seen] pretty substantial flows back in. This is both from a retail as well as an institutional standpoint, a little bit less so this week. If I look at what we're expecting going through the 2025 timeframe, from a rate cut standpoint, two to three [cuts] that's from where we kind of started the year.... But in any case, the expectations are for higher for longer. If you look back to when this cutting season started in September of 2024, were expected to be close to 2% already by now given that we started with that 50-basis point rate cut back in September."
She says, "So we're not anywhere near to there, and I think that both retail and institutional continue to enjoy the four-plus handles that they have on their money market investments at this point with the expectation that even if they go down into the mid-three's, that's still a substantial win over where they had been for a very long period of time when rates were back at zero. Inflation definitely is a wildcard. We continue to see sort of the hard data of inflation, the hard data of employment leaning toward a Fed that would be maintaining higher rates for a longer period of time and not lowering them at the pace that some of the industry is assessing."
Cunningham also comments, "But when you look at some of the softer data, the confidence data, the survey data, ultimately, you've got a deterioration in that data that would lead you to maybe expect a little bit faster rate-cutting policy by the Fed. And that still remains to be seen. We're going with the hard data for now. We're looking at fewer rate cuts than what necessarily the beginning of the year and the rate-cutting cycle would have initially expected. And ultimately, that still brings continued positive flows from retail and institutional into the product. So it's happening. We continue to that -- to expect to keep that pace, if not grow it."
Finally, on separate accounts and state pools, Cunningham adds, "We have two accounts that we'll be funding, actually, especially at the end of June. It will now happen in the beginning of July, after the 4th of July Holiday. That is a substantial win from another state perspective. We are at a point in time, however, when most of the state accounts that we have are in basically the period where their assets start to decline on a cyclical basis. But if you look at the growth that they've experienced on a year-over-year basis, it's still pretty substantial. So even though we would expect those assets to go down still on a year-over-year basis, they're substantially higher than before."
