Federated Investors reported 4th quarter earnings last week and hosted its quarterly earnings call Friday. The company, which is changing its name to Federated Hermes, barely discussed money market funds in its latest call, a rare event. (See the press release, "Federated Investors, Inc. Reports Fourth Quarter 2019 Earnings" and see the Q4 Earnings Call Transcript on Seeking Alpha here.) J. Christopher Donahue, president and chief executive officer, commented in the earnings release, "Federated reached new records across all three major asset classes -- equity, fixed income and money market -- with the latter increasing by $94 billion in 2019 as Federated's diverse lineup of liquidity products offered competitive yields for investors seeking cash-management solutions." The release explains, "As announced earlier this month, Federated will change its name to Federated Hermes, Inc., and the company will change its NYSE ticker symbol from FII to FHI. The name change will be effective Jan. 31, 2020.... Also, on Feb. 3, Federated Hermes will launch a multi-faceted campaign to reintroduce the combined company to the investing public."
On the call, Donahue comments, "As of today, we have officially changed our name to Federated Hermes, Inc. and we are unveiling an updated corporate identity next week, focused on a commitment to responsible investing to achieve financial outperformance. The new name reflects the combining of two active management firms, Federated Investors, Inc. and Hermes Investment Management."
He continues, "Moving to Money Markets, assets increased about $36 billion or 10% in the fourth quarter, including about $11 billion from the PNC acquisition. Money Market assets increased $94 billion or 31% for the full year to close 2019 at record high assets of $396 billion. Money Market strategies continue to have a significant yield advantage compared to average deposit rates. Money Market yields also compared favorably to applicable direct market rates and longer duration securities."
Donahue tells us, "Our Money Market mutual fund market share, including sub-advised funds at year-end was about 8.8%, up from about 8.4% at the end of Q3 and 7.9% at the end of 2018.... Taking a look now at our most recent available asset totals ... managed assets were approximately $583 billion, including $401 billion in Money Markets.... On the Money Market mutual fund asset side, the assets were $283 billion."
CFO Tom Donahue states, "Total revenue was up about $18 million or 5% from the prior quarter due mainly to higher Money Market revenue of about $12 million, primarily from higher average Money Market assets.... Revenue was up about $191 million or 17% for the full year due mainly to higher Money Market revenue of $115 million and the inclusion of a full year of Hermes results in 2019 compared to half of 2018, which accounted for $96 million.... Distribution expense increased about $5 million in Q4 compared to the prior quarter and $53 million for the full year due mainly to higher average Money Market fund assets."
During the brief Q&A, Tom Donahue adds on the PNC funds merger, "So the expenses with the Money Markets will primarily be related to distribution payments and all the other funds merged into our existing funds. So where there [are] distribution payments there, we also picked up a great team in Cleveland with three funds. So we're picking up the expense of that team and at Cleveland office and the connections into Federated and the new efforts to sell and distribute those three funds in a wider fashion."
When asked about the Federated Hermes rebranding, Money Markets CIO Debbie Cunningham comments, "The full integration of ESG analysis into our credit review process for all of our liquidity product, that was something we had been driving toward since the 2018 acquisition and accomplished in 2019. That was evolutionary, not revolutionary. It will continue to develop, but we have absolutely included from the analysts and the engagers the information that's coming out of the Hermes proprietary model and used that within the qualitative aspects of our credit analysis process for our Money Market fund."
On flows, Tom Donahue says, "So it's the spread products that have been responsible for the inflows. Ultrashorts were a meaningful part of the Q4 positive.... They are actually a little bit negative in the first part of 2020, and that's really just more technical, analogous to what happens in the Money Market fund side where money tends to come in especially late in the year and then go.... You can kind of think of that as much more like long cash than that the spread products that really have driven the inflows on fixed income."
When asked about spreads over bank products, Cunningham states, "Deposit rates are still [dismal].... The last [sweep] brokerage deposit rate index came in at 14 basis points. So it's not much above where money funds were in a zero rate environment, and we're no longer in a zero rate environment. Most of our funds are somewhere on a net yield basis, between 160 and 180 [bps]. The interest rates went down with the coronavirus [scare] over the course of the last several weeks and concerns about what that might do from an economic activity perspective and how the Fed may need to react."
Finally, she adds, "The Fed, however, on Wednesday confirmed rates and actually raised IOER and the RRP, which is overnight lending by five basis points. So that's beneficial to our products and has made the yield curve look a little bit more attractive on a fund basis. So I don't expect those yields to drop very much. So when you're talking about deposit rates, you're talking at least 150 basis point advantage over what most customers in those types of accounts are receiving at this point."
An earlier press release, entitled, "Federated Investors, Inc. to Change Name and Ticker Symbol," tells us, "Federated Investors, Inc. (FII), a leading global investment manager, intends to change its name to Federated Hermes, Inc. In relation, the company also intends to change its NYSE ticker symbol from FII to FHI. It is expected that the name change will be effective Jan. 31, 2020, and that Federated's Class B Common Stock will begin trading on the NYSE under the FHI ticker symbol on Feb. 3, 2020. These changes will come a little more than 18 months after Federated's July 2018 acquisition of a majority interest in London-based Hermes Fund Managers Limited, which operates as Hermes Investment Management, a pioneer of integrated ESG investing. Federated will provide more information about these changes in February 2020."
