Federated Hermes Inc

NYSE:FHI

Earnings Call Analysis

Federated Hermes Sees Growth in Money Market and Fixed Income Assets

In Q3 2024, Federated Hermes reported a 1% increase in revenue to $5.9 million, primarily driven by money market assets. They ended the quarter with $800 billion in assets under management, fueled by record money market assets of $593 billion. Looking ahead, they expect a Q4 revenue decline of approximately $0.75 million due to sub-advised account redemptions. Operating expenses decreased significantly by $65.2 million, while the tax rate is anticipated to be between 26% and 28%. Despite minor setbacks in equity flows, healthy retail interest in money market funds and fixed income is projected to drive future growth.

A Steady Ground Amid Market Volatility

In the third quarter of 2024, Federated Hermes showcased resilience with record total managed assets reaching approximately $800 billion. This growth was propelled largely by the company’s robust money market assets, totaling $593 billion. Despite this success, the firm faced some headwinds, including net redemptions in its strategic value dividend strategies, which signify challenges in retaining equity funds during periods of market fluctuation.

Revenue Growth Driven by Money Market Strategies

Revenue for Q3 experienced a modest increase of $5.9 million, translating to 1% growth from the prior quarter. This was primarily attributed to a $5.1 million rise in revenue from money market assets and additional revenue from fixed income and equity markets. However, net redemptions in equity funds amounted to $1.5 billion, highlighting a competitive landscape that requires attentiveness to shifting investor preferences. Forward guidance indicates an anticipated annual revenue decline of approximately $6 million in Q4 due to sub-advisory account redemptions.

Operational Adjustments and Cost Management

Operating expenses saw a significant reduction of $65.2 million from the previous quarter, largely due to a non-cash intangible asset impairment recorded earlier. Yet, other operating expenses increased slightly by $1.1 million. The importance of efficient cost structures becomes evident as the firm navigates through staff restructuring, painful yet necessary for enhancing operational sustainability, evidenced by a reported $3.7 million in severance costs, mainly from its U.K. office.

Money Market Outlook: A Bright Spot Amid Changes

The firm’s strong presence in money markets was underlined by a record high in assets, peaking at $440 billion, before experiencing a slight decline down to $593 billion by the end of Q3. With favorable market conditions expected to persist, growth in money market strategies is likely, particularly given recent Federal Reserve cuts in target rates. These cuts are projected to enhance the attractiveness of money market fund yields relative to traditional bank deposits, possibly fostering greater inflows into this section of the business.

Emerging Opportunities in Equities and Fixed Income

Federated Hermes is witnessing a hint of positive momentum in its equity strategies despite current redemptions. An approximate $644 million in wins was noted, offsetting significant redemptions. Moreover, fixed income assets hit a record high and are projected to contribute positively in Q4, with expected net additions of $1 billion, driven by strategic investments across various fixed income categories.

Challenges and Competition in the Money Market Sector

While experiencing growth in the money market segment, Federated Hermes acknowledged competitive pressures, particularly from large retail and banking competitors gaining market share. The firm remains optimistic, however, citing a diversified client base and ongoing interest from investment advisers as key drivers for potential future recoveries in market flows. Further, the firm believes that institutional investor flows may gradually pick up as economic conditions improve.

Shareholder Value and Future Projections

The firm continues to prioritize shareholder value by approving a new share repurchase program encompassing five million shares, evidencing management's belief in undervaluation of the stock. Additionally, positive outlooks are set for private market strategies, with expected net wins of approximately $1.4 billion, which may provide essential buffers against any fluctuations observed in the public markets.

Concluding Thoughts on Overall Market Strategies

In summary, while Federated Hermes faces challenges imparted by market volatility and competitive pressures, it continues to demonstrate resilience through strategic management of assets and a strong positioning in money markets. With proactive cost management, an optimistic outlook for fixed income yields, and a focus on shareholder returns, Federated Hermes appears well-prepared to navigate the evolving landscape ahead.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the Federated Investors Management Company Q3 2024 Analyst Call and Webcast. [Operator Instructions]

I would now like to turn the call over to the President of Federated Investors Management Company, Ray Hanley. The floor is yours.

[Raymond Hanley, executive]

Good morning. Welcome to the FHI Q3 call. And leading today's call will be Chris Donahue, CEO and President of Federated Hermes; and Tom Donahue, Chief Financial Officer. Joining us for the Q&A are Saker Nusseibeh, the CEO of Federated Hermes Limited; and Debbie Cunningham, the Chief Investment Officer for Money Markets.

During today's 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 disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

[John Donahue, executive]

Thank you, Ray. Good morning all. I will review Federated Hermes business performance, and Tom will comment on our financial results.

We ended Q3 with record assets under management of $800 billion, driven by money market assets of $593 billion and record fixed income assets of $100 billion. Looking first at equities.

Assets increased by $5.7 billion from Q2 to $83.6 billion due mainly to market gains of $6.5 billion partially offset by net redemptions of $1.4 billion. The strategic value dividend strategies had net redemptions of $779 million in the funds in the SMA combined, whereas in Q2, that negative number was $1.9 billion.

We had Q3 positive net sales in 15 equity strategies including MDT Mid Cap Growth, MDT Large Cap Growth, MDT All Cap Core and U.S. U.S. SMID Equity UCITS fund. We continued to have success growing our MDT fundamental quant strategies and have recently expanded the MDT product set. This year, through the end of Q3, MDT fund and SMA strategies have had about $2.2 billion in net sales compared to a little over $400 million in net sales in '23.

In Q3, we expanded the distribution opportunities for MDT strategies with the launch of 4 new active ETFs and 1 new collective investment trust. We continue to look to these kinds of product enhancements and a variety of strategies to strengthen growth opportunities in domestic and international markets.

Looking at our equity fund performance at the end of Q3 and using Morningstar data for the trailing 3 years, 59% of our equity funds were beating peers and 41% were in the top quartile of their category. For the first 3 weeks of Q4, combined equity fund and SMAs had net redemptions of $51 million.

Turning now to fixed income. Assets increased by about $4.9 billion in Q3 to a record high of $100.2 billion. Fixed income funds had Q3 net sales of $305 million and fixed income separate accounts had net sales of $1.1 billion. The total fixed income net sales, therefore, were $1.4 billion, compared to $1.4 billion of net redemptions in the second quarter.

Fixed income fund net sales were driven by about $515 million of combined net sales in Total Return Bond Fund, ETF and collective investment fund. Fixed income separate account net sales were driven by institutional multi-sector strategies and by the Core Plus SMA strategy. We had 21 fixed income funds with positive sales in Q3, including Total Return Bond Fund net sales previously mentioned and the Government Ultrashort Fund.

Regarding performance. At the end of Q3, using Morningstar data for the trailing 3 years, 37% of our fixed income funds were beating peers and 18% were in the top quartile of their category. For the first 3 weeks of Q4, combined fixed income funds and SMAs had net sales of $365 million.

In the alternative/private markets category, assets increased by $622 million in Q3 to $20.7 billion, due mainly to the impact of FX rates, partially offset by net redemptions. We are in the market with 3 programs. The Federated Hermes GPE Innovation Fund II, which is the second vintage of our pan-European growth private equity innovation fund. The first close in this mandate was in '23 for approximately $110 million. Our target raise is $300 million. The first vehicle raised about $240 million.

Next, European Direct Lending III. The third vintage of our European Direct Lending Fund. We had our first close in Q3 for approximately $235 million. Our target raise is $750 million. EDL-1 raised about $300 million and EDL-2 raised about $640 million.

Next, European real estate debt fund, a new pooled European debt fund, we're targeting a Q1 first close and plan to continue marketing in '25. Our overall target is $300 million. We are also developing the global private equity co-invest fund, the sixth vintage of the PEC series, P-E-C, targeting a Q1 launch. The target raise is $500 million. PECS I through V raised about $400 million to $600 million in each fund.

We began Q4 with about $1.5 billion in net institutional mandates yet to fund into both funds and separate accounts. About $1.4 billion of total net wins is expected to come into private market strategies, with wins in private equity and direct lending and outflows in absolute return credit. Fixed income expected net additions are about $1 billion, with wins in Ultrashort duration, sustainable investment grade credit, emerging market debt, Core Ag government bond with a modest known loss and high yield.

For equities, we have $644 million in wins, offset by $1.5 billion of known redemptions, nearly all of that is from a subadvisory account that will be internalized by the fund sponsor in Q4.

Moving to money markets. In Q3, we reached another record high for money market fund assets of $440 billion, and total money market assets of the aforementioned $593 million (sic) [ $593 billion ]. Total money market assets increased by $6.4 billion in Q3 as money market fund gains of $14.8 billion were partially offset by seasonal money market separate account asset decreases of $8.4 billion.

Our money market fund assets peaked at about $447 billion on September 23, and decreased by about $7 billion over the last couple of days of the quarter. We believe a late quarter jump in SOFR rates led to certain investors shifting some assets into the direct market. We also saw certain large clients using money market fund assets to pay down debt going into quarter end.

Q3 saw the first of several expected reductions in the Fed funds target rate, driving substantial growth in industry money market fund asset levels, particularly in August and September. Looking ahead for the rest of '24 and into '25, we believe that market conditions for money market strategies will continue to be favorable and that money market fund yields will continue to be attractive compared to the direct market and bank deposit rates. Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.32% at the end of Q3, down from about 7.45% at the end of the second quarter.

Looking now at recent asset totals as of a few days ago, managed assets were approximately $799 billion, including $594 billion in money markets, $83 billion in equities, $99 billion in fixed income, $20 billion in alternative private markets, $3 billion in multi-asset. Money market mutual fund assets were $441 billion. Tom?

[Thomas Donahue, executive]

Thanks, Chris. Total revenue for Q3 increased $5.9 million or 1% from the prior quarter, due mainly to $5.1 million of higher revenue from money market assets, $6.4 million from the impact of an additional day in the quarter and $2.6 million from higher revenue from equity, fixed income and private market assets combined. These increases were partially offset by $5.9 million of higher waivers related to fund proxy costs as discussed during last quarter's call.

Total Q3 carried interest and performance fees were $3.5 million compared to $2.8 million in Q2. Looking forward, the Q4 sub-advised account redemption Chris mentioned, will impact annualized revenue by approximately $6 million. The impact for Q4 is expected to be approximately $0.75 million. Q3 operating expenses decreased by $65.2 million from the prior quarter due mainly to the $66.3 million noncash intangible asset impairment charge in Q2. All other operating expenses increased by $1.1 million from the prior quarter.

Compensation and related expense included an increase in severance and related costs of $3.7 million, primarily from our U.K. office as we take steps to enhance the sustainability of our operations there. FX-related gains decreased the other expense line item by $5.2 million from the prior quarter as the pound strengthened versus the dollar. We expect the tax rate to be in the 26% to 28% range for Q4 and for 2025.

At the end of Q3, cash and investments were $565 million. Cash and investments excluding the portion attributable to noncontrolling interest was $515 million.

Kelly, we would like to open the call up for questions now.

[Operator]

[Operator Instructions] Your first question is coming from Patrick Davitt with Autonomous Research.

[Patrick Davitt, analyst]

First one on money fund market share. I guess the $15 billion money fund inflow you announced last night was a lot better than the publicly available data we could see. So maybe the real-time data we're getting is just wrong. But it still certainly looks like you lost some flow share in 3Q and that continues in October. So do you think you're losing flow share? And if so, what is the nature of these big chunky flows we're seeing going to your competitors that has you missing out on those big chunky mandates?

[John Donahue, executive]

Well, first of all, over a longer-term period, as you've heard me say 100 times, we end up with higher highs and higher lows over the 50 years we've been doing the money market funds. And so a little noise here in the quarter does not disturb us.

I mean, we have one client who took $6 billion out because we were paying down debt. And that's the kind of lumpy things that happened that you got to be ready for, and that's just part of normal life.

I would like Debbie to comment briefly on this dynamic from her perch on the tree.

[Deborah Cunningham, executive]

Thanks, Chris, and thanks for the question, Patrick. And the -- ultimately, Chris' explanation, the information that was provided with regard to the quarter explanation of SOFR rates. That's a very real one. We have a lot of institutional clients who go between the direct market on an overnight basis and money funds. And really since the Fed rate cut in mid-September, most of those flows have come into the fund side of the market. However, with the jump in SOFR rates at the end of the quarter, there were some that went back out into that sector of the market temporarily on a direct basis.

We also are comparing ourselves against a very large group of competitors in the marketplace. In particular, it seems as though some of the larger retail players that are in the direct retail market have been gaining market share on a little bit faster basis. I believe that might have something to do with some of the heat that they've been taking with regard to deposit rates and the customers that have been earning the lower deposit rates rather than money funds. So I believe some of that has been more directed into the money funds sector. Obviously, that's not something we can control or are necessarily even really part of.

And then it also looks like in some of our banking competitors, there are some internal funds that have been going along those ways. So in general, I think there's lots of explanations. We are not seeing anything on a client basis that would lead us to have concern. In fact, I would say exactly the opposite. When you look at the complexity and the variation of the client base that we have, broker dealer, RIA, trust, wealth management, family offices, they all seem to be very pleased and continuing their increased participation with us.

[Patrick Davitt, analyst]

Very helpful. And then a quick follow-up on the other expense line. You mentioned $5.2 million decrease from FX. So is the right run rate there looking into 4Q kind of in the 3.5% to 5% range. Just trying to make it clear what that number should have been without the FX noise.

[John Donahue, executive]

Well, if there were no changes in the rate, the pound went up. And so giving a run rate on that, if the pound goes up, we're going to get more FX help on the expense side because we're hedging our expenses in London. If the pound goes down versus the dollar, it will go the opposite way.

[Patrick Davitt, analyst]

Yes. I mean more just like what's the kind of regular way number there in the quarter without any FX impact is what I'm trying to get.

[Thomas Donahue, executive]

Take off 3/4 of the number because we hedge basically a year's expenses, and if the pound doesn't change for the rest of the year, then we will have had this quarter or Q3's expenses in there at the higher rates and we'll get the higher expenses in the next 3 quarters.

So if you want to look at it that way and say it's 3/4 of the number, its going to be higher expenses coming through not in the other category, but in all the rest of them.

[Operator]

Your next question is coming from Ken Worthington with JPMorgan Chase.

[Kenneth Worthington, analyst]

Maybe first on regulation. I believe in October, the final wave of the SEC's money market fund reform rules took effect. Can you just remind us what went into effect? And to what extent you're seeing an impact to interest in your prime funds?

[John Donahue, executive]

So we have seen, unlike the last round back in the day where basically almost $1 trillion left those funds. The customers are basically sticking with it and our prime funds are up. And if you look at the stats for, say, a year, the industry assets are up to over $1 trillion and that's up 17% over the year and our assets in that category are up 25%.

So we're ahead of the industry on that category. So our clients, I think, were quite appreciative of the fact that we hung in there with those funds, even though we did consolidate from 3 of those funds down to 2. But we went through all the work to make the extra so many basis points available. Ray?

[Raymond Hanley, executive]

Ken, if we isolate just the prime money market funds for the first 3 weeks or so of October, they're up just a fraction. So if there have been any changes, we would have had puts and takes. Because the prime funds are still very attractive from a retail standpoint, we're still getting considerable interest there, even post the rate cut, yields are very attractive. But there's no discernible impact in October from the last of the rule changes going into [indiscernible]

[John Donahue, executive]

I'd like to add a couple of other things about the rules. You sort of hinted, hey, what went in. Well, remember, they told us we had to have 25% in daily cash. Well, that has a big impact on how these funds work and how people look at them.

The other thing is these funds were already a variable net asset value type funds. So people aren't keeping the money they need tomorrow here. They're willing to deal with this modest changes in NAV. So I think those are important dynamics. And I'm sure we skip something that Debbie is just anxious to say.

[Deborah Cunningham, executive]

You're always very thorough, Chris. But I think ultimately, in the end, we had absolutely no shareholders leave our institutional prime or our institutional muni sectors because of the rule changes that went into effect on October 2 of this year, Ken. And yes, there is a daily process by which we now have to pour those funds, which I might note are the smallest sector in the total universe of money funds. But on a daily basis, we -- on a continuous monitoring basis, have to review where we are from a flow activity, whether we're in a net purchase or a net redemption phase. And if we get beyond a 5% net redemption phase, we also have a simultaneous process that is running that would look at the price, the cost of redeeming what that greater than net 5% redemption phase would be.

And if that price is greater than 1 basis point, which, ultimately, with the 50% now, let's say, weekly liquid assets always at par, that's a very difficult hurdle to exceed, then we would have to review the potential for adding some sort of a fee to those who are redeeming.

In the end, this is a process that we are running daily. We are monitoring on a continuous basis. We did historical backpack testing on it prior to the implementation of the rule. And we're very comfortable that the impact of this on the marketplace and the actual implementation of this that would result in a fee would be very, very few, if any times.

[Kenneth Worthington, analyst]

Okay. Great. Tom, maybe to follow-up for you. You mentioned the proxy costs, and I think there's director costs that flow in maybe this current fourth quarter. Can you remind us of the dollar amounts and where those costs hit? I think some are contra revenues rather than outright expenses?

[Thomas Donahue, executive]

Yes, Ken, the proxy costs. When we talked about it last quarter, said it would happen in the third and fourth quarter. We didn't know exactly the timing. Well, all the expense came in the third quarter. And it's a contra revenue, $5.9 million. And so that should not happen and it will not happen in the fourth quarter.

[Operator]

Your next question is coming from Bill Katz with TD Cowen.

[William Katz, analyst]

So just going back to money markets shockingly. So just big picture down, if I look at where you ended the quarter and where your intra-quarter update is, at what point do you start to think you see the behavior more robustly migrate back to money markets, if you will? Because what we continue to hear from many of your peers, whether it be the traditional managers or the alternative managers that money sitting on the sideline is going to find its way into risk assets, whether it be fixed income, equity or alternatives. And I'm looking at sort of flattish quarter-to-date update despite the 50-basis-point cut in the Fed.

So at what point might we see the behavior change? And how do you sort of see that interplay between maybe the retail part of the business and the institutional side? And maybe you can help quantify that mix for us?

[John Donahue, executive]

So it's really tough to come up with a point or a catalyst, Bill. But we are seeing from the financial advisers a lot of interest in the short duration, a lot of interest in lengthening duration. We've covered those themes before. And we're seeing moves there as I tried to comment on the changes in our fixed income flows during my opening remarks.

But these things do not happen in a catalytic way. And it is one FA and one customer and one firm at a time. In terms of the dynamic from what Debbie might see on the money market side, I'll let her comment.

[Deborah Cunningham, executive]

Thanks, Chris. I think I mentioned on this call before that when you look at the flows in 2023 and really through midyear of 2024, 80% of the flows came from retail. And that retail trade was out of deposits and into money market funds, and you could almost follow it dollar for dollar. That will continue because banks have already started lowering their deposit rates after having never raised them to the rate of money market fund market rates. So that trade will continue, maybe not with as robust a pace, but it will continue.

Of the other 20% inflows, I'd say probably 10% to 15% is what you're referring to, Bill, as sideline cash. Those that would be naturally in riskier assets with higher return potentials and longer time frames associated with those. And we're starting to see those move. You heard from Chris' introductory remarks, the increases that we're seeing in various of our equity and longer-term fixed income products. And that's absolutely a portion of that sideline cash moving back into and fueling those markets in a positive way, which we obviously want to see occur. It's a reflection of healthier markets and healthier economies.

On the institutional cash side, that was probably only 5% to 10% of the asset flow in the money markets that we saw. We would expect that as the Fed cuts rates, which we are not expecting to be in that 50-basis-point clip, which was sort of a surprise in a start to this declining rate cycle. But as they continue to go from a 5-plus percent rate down to what we think is a terminal rate of around 3%, you're going to see that institutional flow pick up. It's not going to reduce the strength or it's not going to match the strength that we saw in the retail flow, but it will still be a positive so that ultimately, in the end, when we look at industry assets as reported by Crane at this point, as an industry source at $6.8 trillion, I can still see $7 trillion by the end of this year growing further into 2025 and ultimately, FHI catching a good portion of those flows.

[Raymond Hanley, executive]

And Bill, just on your question about the mix. So the terms are not precise between retail and institutional. But an estimate of that for us would be about 60% of the money market fund assets, including what we sub-advised -- about 60% would be considered institutional and 40% retail, which for us is still coming through an intermediary. And by the way, that 60-40 split would be about what the industry split is as well using ICI data.

[William Katz, analyst]

That's helpful. And then maybe -- just a question maybe for Saker or whomever, and this might just be rounding. So you laid out a nice pathway for several funds in the market or sort of coming into the market as we look out over the next 6 to 12 months. But you also -- maybe just rounding, but the AUM in the alts bucket does seem to be down about $700 million quarter-to-date, again, it might be rounding.

Can you talk a little bit about what we should expect in terms of distributions as we look out through the next 6 to 12 months? Or realizations coming out of the portfolio? And can you actually grow the alt bucket given all the growth opportunities against that?

[Thomas Donahue, executive]

Saker, your turn.

[Saker Nusseibeh, executive]

Thank you. Well, thank you very much indeed. And you're right, that's part of the nature of particularly private equity funds, but other aspects of private markets is there's constantly a 2-way flow, which is the funds that you've got -- the clients expect you to pay out and then you get some more funds coming in.

And I can't provide a very detailed structure of what we're going to see. But I can say this, if you look at all the funds that you've heard Chris talk about, the innovation funds, direct lending fund, if you think about the global private equity funds, all of these funds are growing by -- going back to our client base, and in many cases, they're re-upping at a higher level than they had in before.

Now we can't quantify this until the close is finished. But the general trend, as far as we can see, is that not only our clients re-upping, but there is, in some cases that we see so far, an increase in re-upping, but we can't confirm that when all the closes are finished.

The second aspect of it is we're not sitting still. We're coming up with new funds within the alternative state of the old space, which gives us extra flows. You heard Chris again mentioned real estate debt fund, and we're doing some stuff in infrastructure as well. So it's a 2-way bet. We think that the re-ups will be from existing clients will increase. We're adding to our client base. That's also important. So there's new clients coming in, and we're innovating our funds and increasing them. All of that leads us to feel that we continue to generate higher revenues as we go forward.

[Operator]

Your next question is coming from Kenneth Lee with RBC Capital Markets.

[Kenneth Lee, analyst]

Just one on the money markets. And I think you mentioned previously that you saw some clients, corporate clients, shift money on an overnight basis between direct paper and money markets. Just wanted to get a little bit more detail on that. How easy is that? And to the extent that there's some uncertainty around the Fed rate cuts and the trajectory there, could you see some lumpiness in terms of money market flows just based on how easy it is to shift one way or the other?

[John Donahue, executive]

Debbie?

[Deborah Cunningham, executive]

So for the vast majority of our clients, Ken, it is not an easy switch because they don't -- repo -- basically, the SOFR rate indicates what type of return you can get on overnight repo in the marketplace. Overnight repo is not really security, it's a contract. And as such, you have to have repo contracts in place with dealers and banks in order to go into that sector of the market. So for the vast majority of our clients, that is not possible.

But for very large clients, large tech firms from the Midwest and West Coast, large oil firm like -- large energy firms, some of the large banks that are players in our market, they have those contracts available and usable by them on a daily basis and are able to switch pretty easily. So even though it's only a small minority of the actual customers that have that capability to do that switch on a daily basis if they choose to do so, it's still a large volume when that dynamic in the market comes into play.

[Kenneth Lee, analyst]

Got you. Very helpful there. And just one follow-up, if I may. Any updated thoughts around capital management and outlook for any kind of potential inorganic opportunities out there?

[Thomas Donahue, executive]

Well, you saw we approved a new share -- the Board approved a new share repurchase program of 5 million shares. We have 1.2 million left on the existing one, and we bought over 800,000 shares last quarter, and we expect to still be active. We don't think the price is at an appropriate level. Therefore, we expect to be active.

On the acquisition side, nothing to point to. We're still working away in a lot of different areas, but I don't have anything to get you excited about or get us on an announcement process.

[Operator]

Your next question is coming from Dan Fannon with Jefferies.

[Daniel Fannon, analyst]

I think you mentioned in the prepared remarks, $3.7 million of severance, I think, associated with Hermes. Curious if this is a part of a broader restructuring or cost-cutting effort that's more elaborate or more of a one-off?

[John Donahue, executive]

I'll make an initial comment, then Tom will comment on the numbers. We always have a duty to run the business better. Tom?

[Thomas Donahue, executive]

Yes. So $3.7 million is the severance number out of the London -- primarily the London office. And we are looking across the board to, as Chris said, run the business properly and in a sustainable effort. You know that we had the impairment last quarter, and this is a look at that and make sure we are handling things in a proper fiscal manner.

So yes, we're looking at things beyond just the severance in terms of expense reductions as we can try to manage it as best we can. And I think [Technical Difficulty] have to Saker give a follow-up because we don't want to do expense things that hurt the business. We want to drive the business toward growth. And maybe Saker could give a comment on our expectations and excitement about the London office.

[Saker Nusseibeh, executive]

Thank you very much Tom. So just a couple of comments. As Chris said, we have a duty to manage the business, and that means managing the cost of the business. As we integrate the business together, as we get closer to working in the market, there are many opportunities to do 2 things. One is to become more efficient in the way that you run the business and the other one is to increase your opportunity. So the more efficient you kind of got the severance costs and you've heard Tom talk about other efficiencies that can be done through scale, through combined purchasing and so on. But that should not, in any way, shape or form, take away from the positive things that are happening and briefly, I can point to the following.

One is, we have seen, on the back of strong performance, interest come back to risky assets that we run here. I mentioned specifically sustainable global equity, global equity ESG, the U.S. small and mid-cap funds and the Asia ex Japan fund. And as I say, that came on the back of 2 things, better performance and also on the back of people coming back more to risk assets.

We talked about private markets and the excitement of launching new vintages and new ideas and becoming known as a specialist player in the market. But we're also doing other stuff that's exciting. I mean, when we talk about money market funds, generally speaking, Federated Hermes has tended to concentrate mostly on the U.S. for the money markets. What we're now doing is bringing those to sales force here out of Europe, and we've seen lots of positive responses, the presentations. The sterling prime money market fund has hit an all-time high with GBP 8.4 billion. So that gives you a potential of growth of money markets here and in Asia, by the way, where we've seen flows coming in from 23 new family offices totaling approximately $300 million in money market flows. Not a huge amount yet, but it tells you about the potential that you can see coming through.

MDT, which has had such a fantastic run for us in our home market, the U.S., you come to this market, we've been taking it out to our client base here. And again, we've had some very positive views within that. And you won't expect me to finish on a positive note without mentioning our stewardship business, EOS. And I would say we've gone over $2 trillion, or we are at $2 trillion of assets that we represent, and that includes winning of a major U.S. state pension funds.

So we can see the green shoots of recovery here, and we can see the effects of the right kind of investment paying dividends for both assets or funds managed out of London and managed out of the United States. But at the same time, you would expect us to manage our costs in a responsible and dynamic manner.

[Daniel Fannon, analyst]

Great. That's helpful. And then just as a follow-up, you talked about a sub-advised mandate loss in the quarter or I think prospectively. Can you just talk in aggregate what the sub-advised total AUM is for you and maybe the context of the opportunity set for that?

Is that a shrinking pool of assets? Or is it a bit a source of growth? Just curious -- some more context around that part of the business.

[Raymond Hanley, executive]

Well, in total, the sub-advised accounts would be about $37 billion of our AUM. That's as of the end of the quarter. And that would be weighted toward cash to money market, but it does include equity and fixed as well.

[Daniel Fannon, analyst]

And has that been a growing source of AUM or shrinking?

[Raymond Hanley, executive]

It's -- the money market part of it has been growing. It has a retail orientation. And on the institutional side, it's sort of pluses and minuses. It's been relatively stable.

[Operator]

Your next question is coming from Brennan Hawken with UBS.

[Brennan Hawken, analyst]

You guys saw a constructive outcome with the flows on the bond side. And I'm kind of curious whether or not given some of the struggles at a large bond manager, whether or not there was any change in either flows or RFPs that you noticed since late August? Or any interesting trends that you might note in retail versus institutional engagement regarding your bond offering?

[John Donahue, executive]

The clients were attentive to the incident you're talking about. And to some extent, we're there to help our clients when they run into challenges. So it's impossible for us to detect what asset flows came from what challenges in the marketplace versus the regular blocking and tackling that we do all the time.

So overall, you've seen money come out of that outfit and it went somewhere, and we got some of it. But boy, that's hard to follow the bouncing ball.

[Brennan Hawken, analyst]

Sure, sure. That's why I was asking about whether or not there's a change in engagement post late August?

[John Donahue, executive]

It depends on what you mean by engagement. What goes on is when you are in the marketplace with your clients, constantly repeating the sounding joy of the Federated Hermes product array, then when opportunities arrive, you're there to hit the bid, whereas my father used to say, if it's raining money, get your buckets out. And so I think we are engaged with the clients all the time. It's not like, "Oh, let's go do something new." This is what we've been doing. And it's a lot like the football analogy. Those that are running hard and running to the ball, they're going to get an intersection. Look at what Pit did last night. Okay, let's get on with the meeting.

[Operator]

Your next question is coming from John Dunn with Evercore ISI.

[John Dunn, analyst]

Could you maybe talk a little bit about the time to funding or the pipeline and directionally where you might expect it to go over the next year or so?

And then also, could you describe the kind of the temperature of institutional investors and consultants looking into next quarter and then '25?

[Raymond Hanley, executive]

I can talk about the time line, and then we'll get to the rest of it. So of course, in Q4, because of the sub-advisory mandate that we talked about, we would expect negative from an equity standpoint and positive, both fixed income and alternative. But those -- and fixed income is weighted so that the pipeline amounts come in more over Q4 and Q1. Alternative has portions that come in more ratably. Some of that, a good chunk of it, is money that's already been committed, but is not yet earning fees. So you'll see that really on kind of almost ratable growth over the next several quarters out through the end of next year.

So fixed income more front-loaded, equity, the negative more front-loaded and then alternative more spread out.

[John Donahue, executive]

And in terms of RFP activity, it is very, very strong. And that's why on the fixed income side, I go to the trouble of listing the various mandates where we're actually scoring wins. You can go back to the beginning of the call and see the list. And it's a half a dozen real strong ones. And we see continued RFP interest there. So that's where that pipeline builds.

And I just said in the answer to the last question, we're in the market all the time waiting, looking and bringing solutions to clients as needs change.

[John Dunn, analyst]

Got it. And then I think we're all going to be talking more about active ETFs than we were in the past. Have you made any -- had to make any additions or behavioral changes to market the active ETF suite? And how significant do you think that segment can be for you guys?

[John Donahue, executive]

Well, we think it could be very big, very strong. Right now, the active ETFs make up about 7% of the overall ETF market. And they're continuing to have an increasing percentage of the flows, maybe up to 30% or something depending on what numbers you look at.

And then if you look at our numbers from the gang that we have, we're seeing good results in the total return bond fund and in the Strategic Value Dividend Fund. And the whole suite of products is now over $500 million. And I think Ray can give you the accurate numbers.

[Raymond Hanley, executive]

No, that's about right. Over $500 million weighted toward the 2 strategies that Chris mentioned. But we've had a lot of good response out of the gate on the MDT strategies that we recently added both. Four of them that we launched active ETFs, one we launched also in a collective format.

And we'll continue to look at the product line. You should expect us to continue to add to the active ETF menu over time, but we've certainly covered some of the bigger strategies, both in terms of equity and fixed income with total return bond and strategic value.

[Operator]

Your next question is coming from Brian Bedell with Deutsche Bank Securities.

[Brian Bedell, analyst]

Just one back on the institutional cash management, and I know we've talked about that a lot during this call. Obviously, it's difficult to predict what types of cash flow needs those clients will have, both coming in and going out. But do you have a sense of for those clients that are using your money market funds, what level of assets roughly at least are parked in overnight rate agreements. So almost like an addressable market, if you will, if they were to, let's say, switch all to money funds in a rate-cutting cycle?

[John Donahue, executive]

Well, if someone knows how long our clients want to keep their money in and what percentage of them are thinking overnight, they'd be smarter than I. And that's why I mentioned the longer-term trends, 50 years, 1 year's numbers on Prime. And Debbie has gone through the catalog or the variety of clients that we have, which is an underlying strength to the business because they move at counter times, counterbalancing one from the other. And I don't think we can go past this question without letting Debbie have a comment.

[Deborah Cunningham, executive]

Thanks, Chris. Sorry, I was having difficult getting it off of mute. Brian, we definitely have a very rigorous KYC, know your customer, process. And so yes, we have various spreadsheets that provide information on expectations for various clients, their needs, their cyclicality to some degree and what their other options are. We have both from a sales perspective, close relationships with, especially the largest clients and also from a portfolio management standpoint. And we review and look at that on a regular basis.

And although when you look at it on an individual basis, Chris noted the $6 billion that went out right at the end of the quarter due to debt repayment. When you think of it in the context of the $600 billion that we manage in this type of liquidity, it's not a large number. Nonetheless, if you had 10 of those $6 billion altogether for all the same reason on all the same day, that would be a different type of an environment.

Thankfully, I think the complexity and the diversification of our clients works in our favor. And oftentimes, when you see a $6 billion outflow, you may see somebody else six $1 billion inflows that offset that. In this particular case, it just happened to be highlighted because it was at a quarter end.

[Brian Bedell, analyst]

Okay. But do you have a sense of what potentially could move over to institutional that's being allocated overnight right now then in aggregate?

[Deborah Cunningham, executive]

Yes. I think it's probably something that's less than 10% of the total assets at this point, which is not insignificant, but it's not out of the realm of consideration and into the problematic phase, anything like that.

[Raymond Hanley, executive]

Debbie, you're talking about going out from money market to direct...

[Deborah Cunningham, executive]

To direct security.

[Raymond Hanley, executive]

And I think your question is how much could go the other way?

[Brian Bedell, analyst]

Yes. How much can go the other way, that's exactly right.

[Deborah Cunningham, executive]

How much could go the other way in going into riskier types of assets, longer term [indiscernible].

[Brian Bedell, analyst]

No, going from direct overnight cash into money market bonds. When the...

[Deborah Cunningham, executive]

Okay. Okay. So on the inflow side of things. Well, I think going back to raise split of about 60% institutional, 40% retail. At different points in time, that number has been higher towards the institutional side. So I think it's somewhat substantial, probably at least another 10% to 20% of asset flows as a potential if, in fact, money funds are able to maintain a yield that is better than the direct securities market, especially in a declining rate environment.

That would have been very difficult to do after the Fed's initial 50-basis-point rate cut back in September. The curve was anticipating faster cuts by the Fed, and we were not in agreement with that. So having difficulty buying longer-dated securities to keep our yield for a longer period of time. Having said that, with some of the stronger economic numbers that have come to fruition over the course of the last 3 weeks, that has changed. And so the market has been able and given us the opportunity to maintain and lengthen our weighted average maturity so that we will maintain that healthy advantage over the direct securities market.

And I think probably with that, attract some portion of increasing institutional flows over the next quarter.

[John Donahue, executive]

Right. My answer to you is one word, trillions, period. And then you go, "Okay, we could go through catalogs of where all that money is," but it's so much that we're certainly optimistic about our ability to play in that game.

[Brian Bedell, analyst]

Yes. Okay. No, that is fantastic color. Maybe I'll just finish up with strategic value. Performance has improved rather dramatically. It looks like -- I know you don't like to compare this fund in the Morningstar categories. But your top quartile over the past 2 quarters, by our measure, you're top third in that over a 1-year and 3-year time frame. The product still in outflows. Do you expect this performance to convert to inflows anytime soon?

[John Donahue, executive]

Anytime soon, I hate putting deadlines on it like that, but that's why I gave you the changes over quarter-to-quarter so that you could see what was going on. And we're seeing it in the marketplace. And we get comments now from the field like, boy, I'm sure glad I hung on to my strategic value dividend versus what the heck is happening with the performance on Morningstar with strategic value dividend. And months and months ago, that was the comment you were getting from the field. Now it's, boy, I'm glad I'm still there. And it is still a way that the underlying clients can keep some income, get in the market and buy the kinds of stocks that are owned in strategic value dividend.

So yes, I would expect those trends to continue. Exactly when it will cross over to positive is really hard for me to predict.

[Operator]

You have a follow-up question coming from Patrick Davitt with Autonomous Research.

[Patrick Davitt, analyst]

Just another quick housekeeping. On the $5.9 million contra revenue, was that all in management fees or split across the 3 buckets? And then if there is some in management fees, how should we adjust the individual asset buckets? Just trying to get our fee rates that helps.

[Thomas Donahue, executive]

Yes. So that was all in management fees.

[Patrick Davitt, analyst]

Okay. And how is it split across the equity buckets? I mean, the asset markets, do you know?

[John Donahue, executive]

Well, it's every fund shares.

[Raymond Hanley, executive]

[indiscernible] proportionately would be for modeling purposes.

[John Donahue, executive]

By the way, we got the vote. It was successful.

[Operator]

There are no further questions in queue at this time. I would now like to turn the floor back over to Ray Hanley for any closing remarks.

[Raymond Hanley, executive]

Well, thank you very much. That concludes our call. Thank you for joining us today.

[Operator]

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.