Federated(US:FHI)2023-01-27 15:29Financial Data and Key Metrics Changes - The company ended 2022 with record total assets under management of $669 billion, driven by a growth of $35.6 billion in money market assets in Q4, reaching a record high of $477 billion at year-end [27] - Total revenue for Q4 decreased by $7.2 million or about 2% from the prior quarter, primarily due to lower average long-term assets and lower performance fees, partially offset by higher average money market assets [32] - The effective tax rate was lower in Q4, primarily related to a one-time recognition of a capital loss for tax purposes [15] Business Line Data and Key Metrics Changes - In equities, assets increased by about $7 billion to $81.5 billion due to market gains, FX impact, and net positive sales in separate accounts, despite net fund redemptions [8] - Fixed income assets increased by about $1.3 billion in Q4 to $86.7 billion, with net redemptions from funds of $2.6 billion and separate accounts of $1.3 billion [4] - The company reported Q4 net sales of about $652 million in its flagship Core Plus strategy total return bond, benefiting from a long-term performance record [4] Market Data and Key Metrics Changes - The money market mutual fund market share, including sub-advised funds, was about 7.7% at the end of 2022, up from about 7.4% at the end of Q3 2022 [12] - For the first three weeks of Q1, combined equity and SMAs had net positive sales of $328 million, with 23 equity funds showing positive net sales [9] - Fixed income funds and SMAs had net positive sales of $466 million led by total return bond and SDG engagement high yield credit [10] Company Strategy and Development Direction - The company continues to market its private equity structures, with PEC 5 raising about $400 million and Horizon Private Equity Fund having commitments of over $1 billion [5] - The focus for equity strategies in 2023 is on those that have performed well in inflationary times, including dividend income, international, emerging markets, and value [28] - The company is investing in a dedicated sales force to enhance distribution capabilities in private markets [23] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future growth potential, particularly in private equity and direct lending, despite recent challenges in public markets [61] - The company anticipates that higher short-term rates will benefit money market funds over time, especially compared to deposit rates [12] - Management noted that the impairment charge was due to changes in projected cash flows and a higher discount rate, reflecting a cautious outlook on certain assets [14][59] Other Important Information - The impairment charge represented about 6% of the total acquisition price from the 2018 Hermes Fund Managers Limited acquisition [14] - The company expects compensation and related expenses could be $13 million higher than Q4, primarily due to seasonally higher expenses for stock compensation and payroll taxes [15] - Cash and investments at the end of 2022 were $522 million, with about $466 million available for use [34] Q&A Session Summary Question: What is the trajectory for non-comp expenses? - Management expects non-comp expenses to increase due to inflation and price increases across various categories [36] Question: Can you provide details on the Hermes impairment? - The impairment was due to cash flow downgrades and changes in market conditions, with a focus on future growth opportunities [40][41] Question: How is the company thinking about cash levels and capital allocation? - The company has seen cash grow significantly and is considering various options for capital allocation, including potential buybacks and investments in growth [44][66] Question: What drove the outflows in ultrashort fixed income? - Outflows were attributed to rising interest rates and a broad-based exit from various investor segments [47] Question: Is there an expectation of a surge into money fund flows from deposits? - Management believes that significant flows into money market funds will occur when interest rates plateau and begin to decline [74]