Federated Hermes Inc

NYSE:FHI

Earnings Call Transcript 2020-Q2

[Operator]

Greetings and welcome to the Federated Herme Q2 2020 Analyst Call and Webcast Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.

I'd now turn the conference over to your host Mr. Raymond Hanley, President of Federated Investors Management Company. Thank you. You may begin.

[Ray Hanley]

Good morning and welcome. Leading today's call will be Chris Donahue, CEO and President of Federated Hermes; and Tom Donahue, Chief Financial Officer and joining us for the Q&A are Saker Nusseibeh CEO of the International Business of Federated Hermes, and Debbie Cunningham, our Chief Investment Officer for Money Market.

During the call, we may make forward-looking statements and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosure in our SEC filings. No assurance can be given for future results and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

[Chris Donahue, President and CEO]

Thank you and good morning, all. I'll review Federated Hermes' business performance and Tom will comment on our financial results. We continue to make progress establishing our brand as the leading provider of active responsible investment management, driven by the combination of strong fundamental analytical capabilities and the multi-sector insights provided by the EOS at Federated Hermes engagement operation.

EOS assets under administration were $1.1 trillion at the end of the second quarter and we expanded the EOS staff of engagers and specialist to 60 during the second quarter. Now recently, the international business of Federated Hermes was assessed by real impact tracker, which certifies institutions most committed to impact and we achieved the highest score in the history of its certification. As a result the firm has joined real impact tracker's certified community for which only around 5% to 10% of fund managers are eligible to qualify.

Real impact tracker identified our firm as a leader in creating impacts throughout its operation, investment process, corporate engagement and policy and advocacy. In particular the firm's philosophy and approach to stewardship was highlighted as the model for other firms looking to improve their active ownership. In addition and separately, the United Nations PRI just awarded the domestic portion of Federated Hermes with an overall A rating for our annual responsible investing assessment. The international business of Federated Hermes received an A+ rating.

Now turning to our equities business, assets close to quarter at $77 billion up from $68 billion at the end of the first quarter as market values rebounded by just under $11 billion offsetting net redemptions of $2.7 billion. While the overall net sales of combined equity and separate accounts were negative to $2.7 billion I just mentioned, we saw positive net sales in a number of strategies.

We had 12 equity strategies with net sales in the second quarter led by Kauffman small cap other equity funds with net sales in the second quarter included Global Equity ESG, Global Small-Cap Equity, MVP small Cap Core and the SDG engagement equity fund. Using MorningStar data for the trailing three years at the end of the second quarter, 30% of our funds nine out of 30 were in the top quartile and two thirds 20% to 30% were above median.

Looking at the strategic value dividend strategy, its objective as you recall is to provide a high growing dividend income stream from quality companies the domestic funds 12 month distribution yield was 4.4%, which ranked it in the second percentile of its MorningStar assigned category at the end of the second quarter. The SMA's strategy's gross weighted average dividend yield was 5.26 at the end of the second quarter.

The domestic strategic value dividend strategy had combined mutual fund and SMA outflows of $1.6 billion in the second quarter compared to $461 million of outflows in the first quarter. Q3 results through July 24 show combined fund and SMA net redemptions of just over $200 million. Dividend stocks were soundly out-of-favor during Q2 cyclical risk-on tech$-lead rally. The best-performing market sectors were lower dividend paying consumer discretionary and information technology type stocks. Low beta, underperformed high beta, high-yielding stocks, underperformed low yielding and high quality underperformed the lowest quality.

While the second quarter market characteristics were not conducive to our low volatility, high dividend strategy, we believe that our continued focus on the core goals of providing higher than market dividend yield from high quality business assets will resonate with investors over time, especially given the outlook for lower rates over an extended period of time and recall that even during these net redemptions times, through July 24, the gross sales, gross sales of the strategic value dividend and SMA strategy were just about $3.5 billion showing there is active life in the strategy.

Now turning to fixed income, assets reached a record high of $73 billion at the end of the second quarter driven by over $6 billion in net sales and nearly $2 billion of market gains in the quarter. Bond market conditions changed dramatically from the lows in March and our broad array of solid fixed income strategies were well positioned to meet investor demand. We had 23 fixed income funds with net sales in the second quarter.

High yield funds led the net sales with over $2 billion. Multi-sector bond strategies also had solid net sales led by $300 million in total return bond fund and also grow strong results in separate accounts. Corporate, international global, government, municipal bond funds, all had net sales as did our fixed income SMA strategies. Across sectors, short duration strategies were also in demand. At quarter end using MorningStar data for the trailing three years we had eight funds, which is 24% in the top quartile and 18 funds, which is 53% in the top half.

Moving to money markets, assets increased about $6 billion in the second quarter to a record high of $458 billion with growth in money market funds of about $8.7 billion, partially offset by seasonal declines in separate account assets of $2.4 billion. Money market assets reached a high of $483 billion in late May in advance of tax payments, usage of care funds and other uses of cash. Our money market share including the sub advised funds at quarter end was 8.1% down fractionally from 8.8% at the end of the first quarter.

Now taking a look at recent asset totals and movements; managed assets were approximately $629 billion, including $452 billion in money markets, $80 billion in equities, $75 billion in fixed income, $18 billion in alternative and $4 billion in multi-assets. The money market mutual fund assets were $339 billion. In terms of flows third quarter through July 24, equity funds and SMAs were negative $240 billion. Fixed income funds and SMAs were positive $756 billion. By the subtraction method, we were $565 million through the positive so far in the third quarter. Now as we begin the third quarter, we begin with about $1 billion in net institutional mandates yet to find and most of those are in fixed income.

Now an overall comment as relates to COVID. We have continued to function well throughout these challenges. We are fully operational. Our technology resources have enabled us to have upwards of 95% of our employees successfully working from home. The portfolio management teams are connecting regularly and managing well through challenging market conditions. Our regional consultants and other sales and customer service personnel, are staying connected to their clients and while we continue to hire and onboard new employees in the second quarter, we do look forward to the time when we can come together in person in our facilities.

Now for the financials, we'll turn to Tom.

[Tom Donahue, VP, Treasurer, and CFO]

Thank you, Chris. Q2 includes a full quarter of results from the HGPE private market subsidiary, which became a consolidated entity effective March 1. Total revenue for the quarter was up slightly from the prior quarter, due mainly to a higher money market assets generating $30.5 million in additional revenue, a full quarter of HGPE results adding $6.1 million in revenue and higher performance fees of $5.4 million, partially offset primarily by money fund minimum yield waivers of $19.6 million and lower equity asset-related revenue of $13.7 million.

Looking at expenses, comp and related expense increased $8.2 million from the prior quarter. The growth was due mainly to higher bonus expense of about $6.1 million, primarily related to higher sales and $3.9 million from the impact of a full quarter of HGPE results, partially offset by $1 million of lower stock-based compensation expense and seasonally lower payroll tax expense down about $800,000.

The decrease in distribution expense compared to the prior quarter was due the impact of minimum yield waivers which reduced distribution expense by $17.6 million, partially offset by an increase of $10.5 million primarily from higher money market fund assets. The increase in other expense operating line item from the prior quarter was due largely to higher amortization of intangible expense from the MEPC and HGPE acquisition.

We expect amortization of intangibles expenses to be $3.1 million in the third quarter compared to $3.9 million in the second quarter. The impact of money fund yield-related fee waivers on operating income in Q2 was about $2 million.. Based on recent assets and expected yields, the impact of these waivers on operating income in Q3 could increase to about $4 million. Of course multiple factors impact waiver levels and we expect these factors and their impact to vary.

Non-operating income increased from Q1 due mainly to the increase in value of seed and other investments of nearly $15 million in Q2 compared to similar decreases in Q1 for a total swing of $29 million. This change was partially offset by the impact of the $7.5 million gain recorded in the first quarter related to the HGPE acquisition. The $4.5 million change from Q1 in net income attributable to non-controlling interest in subsidiaries was primarily from the increase in market value of consolidated funds.

During Q2, we purchased 843,000 shares for $18.1 million with nearly all this purchased in the open market. At the end of Q2, cash investments were $373 million of which about $317 million was available to us. Debt at quarter end was $90 million. During March, we borrowed $100 million on our credit facility, we repaid that $100 million and an additional $10 million in Q2. The Q2 tax rate was 23.8% down from last quarter due primarily to market value gains in the consolidated funds, which have no associated tax expense as the funds are not taxable entities to us. For 2020, we expect our combined federal, state and foreign tax rate to be about 24% to 26%.

Laura, that concludes our prepared remarks. We'd like to open up the call for questions now.

[Operator]

[Operator instructions] Our first question comes from the line of Mike Carrier with Bank of America. You may proceed with your question.

[Mike Carrier, Bank of America Merrill Lynch]

First just a question on money market and the way we're all looking Debbie, maybe first just wanted to get an update on an outlook for yield, those assets are getting reinvested including I know during the quarter just how much the fed needs help. And then just trying to figure out how that could play out in terms of like mass waivers because it seems like a decent amount of the assets by the time were at the end of the third quarter, would have been reinvested at some lower rates, but just trying to get a sense on how that's playing out across the different products?

[Chris Donahue, President and CEO]

Debbie, why don’t you address the reinvestment rate and Tom and I'll talk about the impact on waivers.

[Debbie Cunningham, CIO, Money Markets]

Absolutely. Good to talk to you this morning Mike and as for the fed moves they absolutely were extremely helpful during the quarter by changing their repo rates and procedures from a timing perspective that really influenced where overnight rates are and for our government products that can have upwards of greater than 50% in that type of market. It was extremely helpful.

So what basically we saw was an increase in the repo rates that we were using on an overnight basis in those funds by let's say seven, eight basis points somewhere in that neighborhood and they have generally kind of leveled off right around [ph]. So for example they just as opposed to being down in the one to two to three basis point camp where they spend a good part of the beginning of the quarter and the end of the first quarter. So we have 10% in overnight and an extra nine basis points in repo.

[Chris Donahue, President and CEO]

It sounds like Debbie fell off. Tom, would you address the waiver impact we'll reconstruct Debbie's connection?

[Tom Donahue, VP, Treasurer, and CFO]

We mentioned $4 million which would be up from our estimate of $2 million in the third quarter and we stay very close with Debbie and her team on their forecasts and as I've said before, that's what we use when we project out one quarter. If you were to ask Debbie what's she going to say for the rest of the year and she will say well, the rates will be similar to the third quarter, but probably a little bit lower and that would make our waivers be a little bit higher, but we only like to talk about one quarter.

[Debbie Cunningham, CIO, Money Markets]

Did you guys hear my answers? Sorry, my phone dropped.

[Tom Donahue, VP, Treasurer, and CFO]

I think we got the rate picture. So yes, we can move on.

[Operator]

Our next question comes from the line of Patrick Davitt with Autonomous Research. You may proceed with your question.

[Patrick Davitt, Autonomous Research]

Hey guys, good morning. Could you quantify the performance fee this quarter and break out the nature of those performance fees and how they break into the various asset class revenue buckets please?

[Tom Donahue, VP, Treasurer, and CFO]

Well the total was about $6.7 billion and that was generated through Hermes strategy so Saker may have a comment on that to the comparison number in the prior quarter was about $1.3 million. So as we've said before, those numbers are going to move around and are difficult to project, but Saker do you want to comment on the nature of the Q2 performance fees?

[Saker Nusseibeh, CEO, International]

So let's start by saying you can never predict performance fees anymore than you can predict performance but you can get a pretty good idea if it goes through our reported numbers which are launched in the UK for previous history. We make performance fees in counter fees primarily from two main sources. One is from our property portfolios and that then breaks down into further sources. One is a unit-trust, in fact two unit-trust but one large unit-trust. Unit-trust are like mutual funds but they're essential for institutional investors, which has an automatic fluency and that is triggered when we outperform our benchmark and we continue to be one of the best performing funds in the markets over the long time and the short term.

The other way we do it in property is in certain development projects. If at the end of the project, our shareholders benefit more than the accepted benchmark, that triggers a performance fee which is then paid to us and the policies of properties have been consistent at least for the last 10 years, not in terms of quantum, but in terms of being paid.

The other way in which we have performance fees is the carry on the private equity funds, which like all private equity funds tends to move around and get paid whenever the private equity realizes a gain that is then distributed to shareholders and takes a part of their performance fee. Does that answer your question?

[Patrick Davitt, Autonomous Research]

So it sounds like it was all in the alternative revenue bucket.

[Saker Nusseibeh, CEO, International]

So it's in the revenue buckets and a lot of it is generated in property yes. We do have some pulls in some private equity, sorry in public markets, but primary just delta in the bucket.

[Tom Donahue, VP, Treasurer, and CFO]

Patrick, this is Tom. Just to give you some of the numbers as Saker mentioned, so year-to-date for performance fees, we have about $8 million. In 2019 we had $7.4 million. In 2018 we had $8.5 million, 2017 we had $7.4 million. For the carry year-to-date we have $2.5 million and 2019 we had $11.3 million, in 2018 was $2.72 million. 2017 was $13.5 million. So you see why we don't want to predict the numbers.

[Operator]

Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.

[Robert Lee, Keefe, Bruyette & Woods]

I guess maybe a little bit Tom of modeling question. So can you give some sense now on compensation? Obviously you’ve had consolidation in the rest of the volume in the acquisition and talk about some [indiscernible] bonus accruals that how should we be thinking about kind of on a go-forward basis of some of this kind of good run rate to be basing off, is there anything kind of whether it is cash at the pools or anything we should be thinking about? So how should we think of comp kind of on a go-forward basis?

[Tom Donahue, VP, Treasurer, and CFO]

Sure Rob and we're doing well there, thank you. In my remarks I mentioned that the comp and sales related and of course you look at the numbers that Chris mentioned, we're pretty happy with that, real days we call that a success item because we have increased sales, we're going to earn more money eventually. So that increase, but also investment performance and incentive aligned with investment performance has increased here in the States and so that line has increased and then our operating teams and administration have just done an outstanding job in this environment.

So I expect that will continue to improve. Of course that depends on earnings also and then over in our international area and sectors area with the performance across the board and they take a more holistic approach as things improve that -- those numbers will expect to go up too.

[Robert Lee, Keefe, Bruyette & Woods]

And just curious on kind of maybe the money fund business, so after the kind of industry surge back in March of Q1 and in Q2 I guess the pace of all industries slowing down and now there is tax payment want now being happened, but how do you kind of think of the money fund demand for particularly as kind of the yields just kind of come down so much gap between the government fund, bank deposits and how substantially, how does that -- is that all of every type of institutional demand we should think about going forward?

[Tom Donahue, VP, Treasurer, and CFO]

I'll make a couple of comments Rob and then allow Debbie to comment on the different in yield between giving funds and deposit rates and commercial paper funds. But overall, we always like to repeat the sounding joy of the fact that the clients are in there for daily liquidity apart and the yield is a secondary consideration. And this is a cash management service as much as it is an investment. And therefore, overall long-term big picture, we are looking at higher highs and higher lows on our charts as the ebb and flow of money market activities change as you do to fleet point out. And this has been true since we got into this business in the mid-70s. Debbie?

[Debbie Cunningham, CIO, Money Markets]

Thanks, Chris. If you look at most bank deposit rates, they're at a basis point. So there's low on the totem pole from an earnings perspective. If you look at the gross yields on our money market funds for the government sector, it's about 25 basis points. Its gross yields on our prime funds are currently about 37 basis points, so about 12 basis points over the given.

If you look at the growth rate of assets on a year-to-date basis for bank deposits versus money market funds, because those have grown substantially given the environment and the risk mitigation that investors are seeking and the build-up in cash frankly, but bank deposits have grown by a little over 12% on year-to-date basis where if you see market funds in total have grown about 17%. So again, although the numbers on a base -- average or base level are different, the growth rates has been higher in money market products. And I do believe that that was since the given very, very, very low rates that are available on bank deposits. [Audio Gap]

[Thomas Donahue]

The 6.7 for Q2 was just the performance fees. There was an additional 1.8 of carry. So 8.5 total for those two items.

[Robert Lee, Keefe, Bruyette & Woods]

Great. Thanks so much guys for taking my questions.

[Operator]

Our next question comes from the line of William Katz with Citigroup Investment Research, you may proceed with your question.

[William Katz, Citigroup]

Okay, thank you very much. I hope everyone's doing okay. You didn't spend much time talking about the multi-asset or the alternatives business, which had a bit of a lacklustre quarterly looking at the net flows, they weren't really part of your flow update. Could you talk a little bit about why you're seeing weakness there, and how to think about the growth rate particularly for alternatives, particularly given just the tremendous growth we're seeing elsewhere in the industry for that bucket?

[Christopher Donahue]

On the alternatives, which we consider the private markets, as you know we just spent the first quarter getting that organized in terms of corporate structures ownership, and getting ready for the future. And we did make it clear when we were doing those transactions on the last call that we weren't going to be looking for growth numbers in this calendar year from those activities, although they are extraordinary opportunities into the future. And I would let Saker comment on some of the things that are going on there that are setting up, the future growth plans there.

[Saker Nusseibeh, CEO, International]

Sure. Thank you, Chris. So again, you've got to think of alternatives in different buckets if you like. If you look at, start with the real estate portfolio, which is where we've had a lot of performance fees in the past, generally these are sold in big clumps to institutional partners. It takes several years to get one of those deals set up, the typically quite large deals and typically invested for the next 10 to 15 years.

Now for that we’re beginning to think about expanding our product capability into the United States. And that will take some time set up, some time meaning more than one year. In the meantime, within our Home Territory in the United Kingdom, we continue to attract interested parties. It's also dependent on finding the right projects to invest in. The Unit Trust, which is the mutual fund and property is pretty much at capacity. We have a long line of waiting investors, wanting to come in when they can.

If you move to private equity, we have a plan that was agreed with the team when the acquisition was completed of expansion plan of increasing the client base. And we will see that come to fruition in the next two to three years, primarily by expanding within again, North American markets. We have other funds within which is called Alternative, which we put for the private markets, which are seeing some growth, but they're not as substantial as these two particular ones.

So I'd say that the private markets is being prepared for expansion, particularly in terms of the private equity and the real estate actually is on track is just you will not see it quarter-on-quarter. These are elephants that will pick-off fixed time to get one in and then they're in for the long-term.

[William Katz, Citigroup]

Okay, thank you for that, that’s helpful. And then just to follow-up to Tom or Debbie, just as you think about the money market few waves and thanks for the update, any thoughts of how the relationship on the sharing side might be different this cycle versus the prior zero rate backdrop with the distributors. So in other words, the question is how much sharing should we anticipate? Is there any risk that Federated might need to absorb a higher percentage of those fee waivers as we look ahead?

[Thomas Donahue]

Well, Debbie I'll answer first, if you have a follow-up. We were very put in a lot of effort, the last time in the low cycle to meet with everybody and work through the sharing arrangement and pro-rata thought process. And we're very successful in the last time around and we're still getting asked by our partners for increased participation that they get versus us. But on terms of the waiver sharing, we have not seen any, any issue with our structure and sharing arrangements.

[Debbie Cunningham, CIO, Money Markets]

I have nothing to add to that. Thanks Tom.

[William Katz, Citigroup]

Okay, thank you all.

[Operator]

Our next question comes from the line of Kenneth Lee with RBC Capital Markets. You may proceed with your question.

[Kenneth Lee, RBC Capital Markets]

Hi, good morning. Thanks for taking my question. Outside of the compensation expense, wondering if you could just share with us any of your latest thoughts on how operating expenses could trend especially in this current environment? Thanks.

[Christopher Donahue]

Yes, one of the things we didn't talk about because I think everybody knows why we don't have T&E. Salespeople aren't travelling and either really is anybody else. We're hoping that that picks up sometime. And so as soon as that does, the low expense item in T&E would go up, we're continuing to invest in our technology and have a number of different projects across the company to improve, upgrade, do things better, but I don't have you those are in the regular context of what we spend and what we work on.

So I don't see outsized surprise things coming there either, the distribution line item we pretty much covered that and we know that that flows as asset flows and I just went over the waiver thing, so that we are continuing to deal with -- to deal with that. The non-consolidated items we we've covered. And I don't have anything further.

[Kenneth Lee, RBC Capital Markets]

Okay, great. Helpful. And just one quick follow-up if I may. You repurchased some shares in the quarter, wondering if you could just give us your latest thoughts on capital allocation priorities and perhaps any thought on potential M&A opportunity? Thanks.

[Christopher Donahue]

Sure, on the breakdown, we’re very active at buying shares back, you see the numbers for the first and second quarter. And the priorities haven't really changed. As you hint in the form of your question, the M&A remains the highest and best use, but we're very active on the share buyback and we of course like the dividend as well. On the M&A side, I see Tom thirsting to come to the podium.

[Thomas Donahue]

Well, pretty difficult to go out and meet people face to face more than difficult. And so doing Centers of Excellence, I think will be a challenge here but roll-ups we remain active and hope to still close some deals here.

[Kenneth Lee, RBC Capital Markets]

Great, that's very helpful. Thanks again.

[Operator]

Our next question comes from the line of John Dunn with Evercore ISI. You may proceed with your question.

[John Dunn, Evercore ISI]

Thanks and good morning. Could you maybe talk about how your relationships with the different distributors are evolving during this period of time?

[Christopher Donahue]

The relationships with the distributors are very, very strong. And the evolution is now going deeper into the relationships with the distributors and the individual FAs, as people have less ability to go and visit, they're doing more on the phone more by the Zooming and all of that. And the FAs as I mentioned, I think on the last call are doing increased quality evaluation of their portfolios.

And this is where our portfolio construction team comes into the mix because now, we’re able to present our FAs with the idea of looking at the portfolio is a construct where they may have 10 great funds, but they don't know how the bets are really being made inside those funds. And so we can help them with portfolio construction and find opportunities for various Federated products along the way.

And so, the way I would characterize it is that there is some degree of oligopolization in the business, when you can't go around and get new clients the way you would like to, so those who have them are bucks up to those who don't. And I don't know how good that is over the long haul. But right now it tends to oligopolize and strengthen the relationships that are already there.

We have been able to continue discussions on adding products, we add the sixth Hermes product, and those new products continue to work well. And as you note on our sales numbers, we have the highest monthly average sales in our history. Our previous high had been about $3 billion a month in gross sales and now we're well over an average for the first six months of $4 billion per month. And so this is telling you that even though the regional consultants can't spend T&E money, they're still able to tell the story and present a solution.

To summarize, I think the relationships have strengthened, and I think they have gotten deeper and stronger.

[John Dunn, Evercore ISI]

Got you. And then maybe a start-up, you guys are fortunate to be able to keep investing. Can you just maybe remind us of the top areas of investment spend for you guys at this point?

[Christopher Donahue]

We will give everybody a shot at that. One of the areas which we announced recently was a new hire in the active ETF space. And we’re beginning to get ready for that. So that's one which we think is important. I'm sure Saker has a few on his agenda, and I'll let him have a say there.

[Saker Nusseibeh, CEO, International]

Thank you. I mean, besides the one that we continue to invest in the EOS, which we just mentioned, which was a substantial investment in senior seasoned professionals to join our stewardship team, we've also hired a couple of additional people to our Impact team in the U.K., which was strong. We've added expertise into our responsibility office where we do some research, that particularly individual is in fact, was a doctor and has a particular specialization in pandemics as well.

So these are the areas that come to mind in this last quarter, but we've continued to have we've also had or finalized the hire of an MD for the private markets business that we've established, as we've said and that went quite well.

[Christopher Donahue]

Yes, in the Kauffman team, they've done so well and their performance speaks for itself and we’re looking for a number of new hires in there and they point out that the recent hires that they've made have turned out, turned out very well. So, more investing in the Kauffman team.

[John Dunn, Evercore ISI]

Thank you very much.

[Operator]

Our next question comes from the line of Brian Bedell with Deutsche Bank. You may proceed with your question.

[Melinda Roy, Deutsche Bank]

Hi, this is Melinda Roy filling in for Brian. Maybe just one more follow-up on the fee waivers. Did you parse out the expected changes in management fees versus distribution expenses in 3Q versus 2Q in the context of your expected negative $4 million impact from fee waivers next quarter?

[Christopher Donahue]

Melinda, we don't really do that as a line item basis. So that would be tough to do. We could if you want to talk about that, following up after the call, I'll be happy to try to help you there.

[Melinda Roy, Deutsche Bank]

Okay, no problem. And then maybe just one cleanup question. The other service fees declined pretty significantly in 2Q versus 1Q, could you maybe talk about the driver there and the $32 million levels and going forward?

[Christopher Donahue]

Yes, that would have been where the bulk of the revenue impact from the minimum yield waivers occurred. So that would explain just about the biggest portion of that change. There were some other things that happened in there in Q1, we had $1.2 million of non -- we pointed out $1.2 million of non-recurring revenue in one of the private market. Companies are wired. So that was booked in Q1 and obviously not in Q2. But the minimum yield waivers would explain the bulk of the step-down there.

[Melinda Roy, Deutsche Bank]

Okay, great. Thank you so much.

[Operator]

Our next question comes from the line of Ken Worthington with JPMorgan. You may proceed with your question.

[Ken Worthington, JPMorgan]

Hi, good morning, I jumped on a touch late. So hopefully you haven't covered this. But if you watch a series of Hermes ESG Focused Funds in the U.S. Can you talk more about progress in bringing those products and services to the U.S.? And I think you said you've launched six funds thus far. How is dialog going with distribution? And are those products getting on platforms? Or maybe it's just too early. And then you mentioned in prior calls, I think really last year, about the incremental costs and investments to bring these products to the U.S., how much have you spent thus far? And what's the outlook for incremental investment to further launch these products over the next year or so?

[Christopher Donahue]

Ken the reception has been excellent. And the assets in those funds were about $88 million at the end of the second quarter. And nearly all of that was externally sourced. So the seed assets in there about $5 million. And so we're evaluating other strategies to look at and we've just launched our first SMA product based on our Hermes strategy, which will be coming out, so it is a little early to see how big these things will get. But the receptions have been good and we've been able to onboard them and get on some platforms.

Obviously, we want to get on more. In terms of the expense associated with that, yes, we talked when we did the deal and had forecast and put out millions of dollars of expected expense, but we now view ourselves as one company and aren't saying here's some extra expenses, it's normal fund cost and normal people cost but it's not some extra thing to do to have the Hermes team manage the money over there.

We haven't figured out and we don't break that out and don't look at it that way, we have our research committees get together and figure out what's the best product to bring out and what can we sell and it's in our normal process now.

[Ken Worthington, JPMorgan]

Okay, I think it's fair enough. Thank you. And then maybe some more color on performance fees. I know they're hard to predict, but maybe just some guidelines. Is there anything you can give us on the timing of when funds are eligible to pay to clearly this was a bigger quarter is 2Q a big quarter maybe 4Q so timing there. And then anyway to size unrealized performance fees or unrealized carry. How big is the pool that we might have to look forward to based on where things are at this point in time?

[Tom Donahue, VP, Treasurer, and CFO]

Yes, Saker, you can follow up with my non-answer. they just -- it involves selling a building and when does that going to happen or the private equity realizing and monetizing something that they own and the timing is just total variable we've had things where we've asked them for projections and interwork this at Federated Hermes to try to ask them for projections and it's just, all the way to take longer, will this thing didn't sell, what happened while the legal is this and it's just across the board, too difficult for us to figure it out.

Now on a higher level, I think Saker can talk about business why I took you through the numbers to give you the path, but that's going to be the future. So Saker if you want to follow-up with that?

[Saker Nusseibeh, CEO, International]

I think it's very difficult to try to projects the future, but from the numbers that Tom has given you, you can see historically what's a property performance fees looked at. This is just a historic. This is just a buff. It doesn't mean the future is going to be the same, but it gives you an idea and private equity is more variable.

I think in becoming one firm as we become part of Federated Hermes, one of the things about the differentiating business, is it tends to be very institutional, very long-term based and so quite often, the projects that we work on which then pay us some dividends are not necessarily traceable on a quarter-to-quarter basis, but a much more long-term basis.

Now in average, every year we make performance fees and we make carry and you can as I say see that in our history because one comes off the other, but projecting how much is going to be in the particular quarter, sometimes even in a particular year is very hard. All that we can say is we've been really successful what we've done. Historically, you can see historically how much we've generated, but past performance is no indication of future performance as you always say when you're talking to investors. I'm sorry, I can't be any more specific than that.

[Operator]

Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.

[Robert Lee, Keefe, Bruyette & Woods]

Great. Thanks for taking my follow-up. So just curious on your ETF business you did mention the higher, the press release, but you can maybe talk about it that way plans there and talk about active EPS that have you licensed one of the compete, one of the approved technologies out there, your thoughts around that versus I am not sure you’ve been filing yourself but your own technology so to speak.

[Tom Donahue, VP, Treasurer, and CFO]

All angles are up in the air being analyzed and Clark just joined the firm. I met with him on Wednesday and so we are just getting started on that and we're going to figure out what the best way to go and don't forget that overall business on the active side is really in the first inning. It may even still be in spring training and it's only $120 billion of over $4 trillion of ETF business and this is why we look at it this way.

Federated is interested in strong Alpha high active share type projects and which ones we now put together and how we structure it, is what we're going to be about. So I don't have the math because we brought in someone with a good deal of experience at a number of the big players and this is the brainstorming that's going to go on here to see how the Federated Hermes active ETF should look.

[Operator]

Our next question comes from the line of Mike Carrier with Bank of America. You may proceed with your question.

[Mike Carrier, Bank of America Merrill Lynch]

Just a follow-up bigger, quarterly $6 billion of inflows in fixed income. Wanted to get a little bit of color, but Chris some you details on the product and the high-yielding incorporation, Just on the distribution side, if you can provide any color on institutional was sort of money market, some money shifting into short duration strategies, just to get a little bit more income. Retail we can see and anything on the international side just given that some of the relationship that build over time, just trying to get a sense of how kind of broad based that was in the quarter thanks.

[Tom Donahue, VP, Treasurer, and CFO]

It is very, very difficult and we don't usually make a speech about how many moved from money markets into other products. As you know from history, we deal with most of these clients on an anonymous basis and so we can't exactly track the cash flow. We can say as I said on the other -- on the call last quarter, that there is increasing interest in active management projects because people are beginning to see that maybe they don't want to own the whole index. So that's another factor.

In terms of the high yield though, with those net sales over $2 billion, if you were to look at the performance of high yield verses any of the passives of the ETFs, the high yield projects that we have are considerably better performers and I think that's very helpful. On the total return bond fund, what customers are looking for is people making judgments for the long term and not just buying the index and so you're seeing some of those footprints come through there and you're even seeing it in the SMA strategies as well on the fixed income side where the performance has been really excellent. Let's see, on the international, you're seeing some growth there as well, not as much, but it's alive and well.

[Operator]

Ladies and gentlemen, we've reached the end of the question-and-answer session. I'd like to turn this call back to Mr. Raymond Hanley for closing remarks.

[Ray Hanley]

Well that will conclude our call for today and we thank you very much for joining us.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.