Federated Hermes Inc (FHI) 2023 Q4 法說會逐字稿

Greetings. Welcome to the Federated Hermes, Inc. Q4 2023 analyst call and webcast. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

Good morning, and welcome. Leading today's call will be Chris Donahue, Federated Hermes' CEO and President; and Tom Donahue, Chief Financial Officer. After some brief remarks we'll open up for Q&A and participating in Q&A will be Saker Nusseibeh who is the CEO of the Federated Hermes Limited; and Debbie Cunningham, the Chief Investment Officer for money markets.

During the call, we will make forward-looking statements, and we want to note that our 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?

Thank you, Ray, and good morning. I will review Federated Hermes' business performance, and Tom will comment on the financial results. We had solid asset growth in Q4 ending with record assets under management of $758 billion, driven by record money market assets of $560 billion.

Thank you, Ray, and good morning. I will review Federated Hermes' business performance and Tom will comment on the financial results. We had solid asset growth in Q4, ending with record assets under management of $758 billion, driven by record money market assets of $560 billion.

Now looking first at equities. Assets were first up about $2 billion from Q3 to $79.3 billion due to combined market gains and FX impact of $6.7 billion but partially offset by net redemptions of $4.7 billion. We did see Q4 positive net sales in 11 equities strategies, including MDT large-cap growth, MDT mid-cap growth and international small mid funds.

Looking at equity fund performance compared to peers and using Morningstar data for the trailing three years end of the year, 48% of our equity funds were beating peers and 24% were in the top quartile of their category. For the first three weeks of Q1, combined equity funds and SMAs had net redemptions of $319 million.

Now turning to fixed income, assets increased by about $5.1 billion in Q4 to $94.9 billion, with fixed income separate accounts reaching a record high of $51 billion. Fixed income institutional separate accounts had net sales of $1.4 billion, led by corporates and multi-sector. Fixed income SMAs had Q4 gross sales and net sales of $896 million and $584 million, respectively. Fixed income funds had net redemptions of about $988 million in Q4, and we have had slightly positive net sales for the first three weeks of January.

We had 12 fixed income funds with positive net sales in the fourth quarter, including the High Yield Bond Collective Investment trust and the Sterling Cash Plus Fund. We launched an actively managed ETF in the fourth quarter that uses a process similar to the core strategy of our Total Return Bond Fund.

Regarding performance at the end of 2023 and using Morningstar data for the trailing three years, 31% of our fixed income funds were beating peers, and 11% were in the top quartile of their category. For the first three weeks of Q1 combined, fixed income funds and SMAs had net sales of $105 million. In the alternative and private markets category assets increased by $214 million in Q4 from the prior quarter to $20.6 billion due mainly to positive FX impact, partially offset by market decreases.

We are in the market with Horizon III, the third vintage of our Horizon series of global private equity funds. As previously announced, Horizon III has closed on commitments of $100.05 billion through year-end. Hermes Innovation Fund two is also in the market. This is the second vintage of our pan-European Growth Private Equity Innovation Fund. We had our first close in 2003 in August for approximately EUR100 million. And we're also in the market with the first vintage of our UK Nature Impact fund.

We began 2024 with about $3.1 billion in net institutional mandates yet to fund into both funds and separate accounts. These wins are diversified across fixed income, equity, and private markets. About $1.9 billion of net total wins is expected to come into private market strategies, including private equity, direct lending, and unconstrained credit.

Fixed income expected net additions total about $850 million with wins in the ultra-short short duration, high yield and sustainable investment credit. About $340 million of the net total wins is expected to come into equity strategies, including bio-equity, global equity, GEMs, which is and the emerging markets ideas and MDT small-cap core.

Moving to money markets, we recently marked 50 years of innovation and successful management of money market funds as we launched the first fund to ever use the term money market on January 16 of 1974. At year-end 2023, we reached record highs for money market fund assets of $406 billion, money market separate account assets of $154 billion and total money market assets of $560 billion. Total money market assets increased by $83 billion or 17% during 2003 and by $35 billion or 7% in the fourth quarter.

Money market strategies continue to benefit from favorable market conditions for cash as an asset class, elevated liquidity levels in the financial system and attractive yields compared to cash management alternatives such as bank deposits and more recently, direct investments in money market instruments such as T-bills and commercial paper. In the expected upcoming period of declining short-term rates we believe that market conditions for money-market strategies will continue to be favorable compared to direct market rates and bank deposit rates. Our estimate of money market mutual fund market share, which includes sub-advised funds was about 7.4% at the end of '23, up from about 7.3% at the end of the third quarter last year.

Now looking at recent asset totals as of a few days ago, managed assets were approximately $764 billion, including $568 billion in money markets, $78 billion in equities, 95 billion in fixed income, $20 billion in alternative private markets, and $3 billion in multi-asset. Money market mutual fund assets were at $406 billion. Tom?

Thanks, Chris. Total revenue for Q4 decreased $11.2 million from the prior quarter, due mainly to lower average equity assets and lower total carried interest in performance fees. This was partially offset by higher average money market assets.

Total Q4 carried interest and performance fees were $9.7 million compared to $14.9 million in Q3. Q4 operating expenses decreased by $12.3 million from the prior quarter, due mainly to lower compensation expense related to carried interest in consolidated vehicles and lower incentive compensation expense. Advertising expense increased in Q4 due to the launch of our new campaign. The other operating expense line item decreased mainly due to the impact of FX.

Looking ahead to Q1, certain seasonal factors will impact results. The impact of fewer days is expected to result in about $4 million in lower operating income, all else being equal. In addition, based on our early assessment, compensation and related expense is expected to be higher than Q4, primarily to about $8 million of seasonally higher expense for stock compensation, payroll taxes, and base pay increases. We also expect to have higher incentive compensation expense. Of course, all these items will vary based on multiple factors.

[Holly], we would like to now open the call up for questions.

Certainly. At this time, we will be conducting a question-and-answer session. (Operator Instructions)

Ken Worthington, JPMorgan Chase.

Hi, good morning. Thanks for taking the question. Maybe starting particularly high level for you, Chris, I'd like to ask you about strategy over the next three to five years. So maybe starting what are the top two or three goals you have for the company? And then can you talk about your expectations for some of the businesses? In particular, I'm curious about what your goal is for the ESG franchise and the strategy there and then the outlook and goals for the money market fund and the alternatives business.

Let's go in reverse. On the ESG, we are doing more work in order to tag various ESG features to actual financial information and financial statements. This is not ready for prime time, but it's a way to show the fluency that we have on this subject and further defend the integration of ESG concepts into the various funds where these features have been integrated as part of the risk-reward analysis, and we continue with that unabated.

We also continue in the European [Specter] to do what the clients want, which is to have sustainable funds that are going on beyond the regular fiduciary duty concepts that we have here in the US. So we are remaining where we were on that.

We also believe that this will very much help on the risk-reward analysis across the board. So we continue to go forward with that. On the money market funds, remember that over 50 years, we have had the strategy of keeping the money funds alive and well, and they work on the basis of higher highs and higher lows over all of that timeframe. And our dedication to it in terms of arguing with the SEC, dealing with the realities of the marketplace have been well rewarded.

These money market funds in the future will continue to serve as ballast for the ship of FHI, which it has done to date. Noting that when there are variations in the marketplace, money market funds prove the viability of a differentiated franchise for all seasons. And we continue to maintain that. And don't forget that as the money supply is now back up, that is really the engine of money is going into money funds. So we think that it is a permanent, good long-term business.

And in terms of top goals for various enterprises, the one way to look at the way we internally view growth in various spheres is simply double them all in five years. Now that's going to happen on the money funds, but that's certainly -- what we would establish is the goals for fixed income equity and especially private markets.

And as I said to this group before, the private markets has the potential to be bigger than the fixed income and equity enterprise that we already manage here. And we have a lot of good things going on that side of the business. Now mind you it's less than $20 billion, but nonetheless, it is -- they have all good records. The real estate is excellent. The private equity is excellent. The private credit is excellent, and we're working on the infrastructure deal.

Now there are other structures that we have to get right. And those are -- we like to provide the investment management; we are indifferent as to what the structure is. So now you see me mentioning about the ETF for Total Return Bond Fund. We have some more plans to add another handful onto our ETF offerings. And the idea is to make a full complement of ETF offerings as we go forward, and that will be a big move for us in the future.

Don't forget, these are active ETFs, and the active ETFs are only about 6% of the total ETF market. So we think there's plenty of room to grow in those areas. I'm sure I skip some of the other great goals that we have. But don't forget, we're spending tons of money on technology and to not have goals on getting that right would be a mistake.

Okay, great. Thank you. And then maybe for Debbie, Chris called out the attractive yields in money market funds versus direct markets. So can you talk about the dynamics here and impact of PPP, QT in the pivot and what that sort of has on the outlook for the money market business?

Sure, I think what it does mostly take the direction of flows and increase it more towards the institutional side. Doesn't take away the retail side that has certainly been the driver of the flows in 2022 and 2023. But I think it emphasizes more the institutional side. And that is because in the context of what's been happening from a pivot perspective with the yield curve itself as well as expectations from a QT standpoint, you've seen what has been over the course of the last 18 months, a fairly steep money market yield curve turn into something that's relatively flat from a prime perspective and relatively inverted from two months out on the government side.

And ultimately, that means that the institutional buyer of cash securities, of cash in some way is going to go out of the securities market where they've been for the last 18 months and into something that holds onto the yield a little bit longer. And that would, in most instances, be money market funds. So our outlook is very positive with regard to flows and somewhat of a shift that occurs based on 2022 and '23 being mostly retail into institutional coming a lot from the -- '24 being institutionally driven.

Great. Thanks very much.

Adam Beatty, UBS.

Thank you and good morning. Just wanted to follow up on your most recent comments and get some additional thoughts around retail behavior. Obviously, strong flows over the year as rates have gone up, but I'm still seeing articles in the press about folks with quote unquote high-yield savings accounts that are paying 10 or 20 bps. So that suggests maybe more retail inertia than some might have suppose.

So I just wanted to get your thoughts around how long a tail, how much of a time lag there might be with continuing inflows in retail and maybe even strengthening? And then on the backside of maybe some rate cuts, how sticky that money might be in your money market funds?

Sure. Let me just start with a little bit of a history lesson. And if you go back prior to the financial problems in 2008, deposits at that point were in the little over $8 trillion area. They ran up to something that was close to $20 trillion -- just under $20 trillion during the zero-rate environment that started from a 2008 standpoint and then really continued through the pandemic with just a year and a half or so -- 2016 and '17 of higher rates.

So ultimately, deposit product doubled not because of the attractiveness of the yield, but because there really wasn't any yield in the marketplace. And the concern was on from a safety perspective, they thought -- I think retail trades went into deposits in that environment.

What you've seen over the course of the last year and a half has been a small reversal of that, which is why I'm not saying that the retail trade is done. Certainly, it's not surprising that with money funds increasing $1.2 trillion in the past year, deposits -- or decreasing $1 trillion, that those two numbers are equatable. Having said that, there's still $17 trillion left in deposits out there, many of which, as you know, are in the 10, 20, 30 basis point camp from a payment perspective.

So the expectations would be that that trade continues. Certainly, when you look at deposit betas from a banking perspective for their deposit products, they have been loans to increase with markets as rates are increasing but have been very quick to decrease.

Now I'm not sure that that will be the case at this point in this scenario, given that they haven't gone up very far to begin with, but in all cases, I think the retail trade has been awakened, and it will continue. I think it will be matched basically by the institutional trade in 2024, but certainly will be a factor that continues to contribute to the flows in this market.

That's great perspective. Thank you, Debbie. And then just wanted to turn to compensation, particularly around incentives. Tom gave some guidance around 1Q and the step up there. But just wanted a reminder on kind of what drives incentive comp.

Recently we've had pretty strong markets, obviously very strong asset growth and in the money market funds and separate accounts, but also some outflows in some of the long-term funds. So if you could just put some context around what really drives incentive comp? Thank you.

Yeah, Adam, we recalibrate for the year. And I did say we expect that sustainable top line to go up for the year. To kind of break it down in the sales group, they are paid based on how sales go. In the investment management side of things, they're primarily compensated on performance and then the operation side is on how well the company does.

So we expect to continue to grow. We expect pretty good sales, and we're expecting the investment performance to uptick. So that's why I come in and we expect that the company earnings to grow. So that's why I'm saying I expect the comp to go up.

Got, it. Appreciate it. Thanks very much.

Bill Katz, TD Cowen.

Great. Thank you very much. Just a couple of questions this morning. First of all, thank you for taking the question. Just to push back a little bit on sort of the money market dynamic, how sticky is the benefit to the institutional argument if ultimately the Fed funds does go down, follows the path, and you get equilibrium between the T-bill direct market and money markets, let's say, a year from now. So it's just more transitory in scope or you think that there are higher highs here just given the structure of the market?

Bill, first of all, welcome back and to my answer to that is higher highs and higher lows. And Debbie is closer to the market on that, and I'll let her comment.

Certainly, Bill. How sticky? I think very sticky. Ultimately, institutional investors generally have more options than the retail investor does. But once a trend is begun, given what markets -- in response to what market conditions are, it stays for a while. So in a what I'll call flat to inverted or declining rate environment, you're going to see institutional investors in a product that has more duration associated with it.

Now institutional investors in the 0% rate environment ultimately, became more measured about how their cash was put into play in the market. They created buckets essentially from a cash perspective -- operating cash, which is very short-term overnight type needs, and then what would be strategic cash and core cash dependent upon transactions and maybe longer-term needs of the of their firms.

And ultimately in a declining and stable environment, almost all of that cash becomes part of the sort of the money market franchise. It is only when you start to see interest rates start to go back up that it becomes a little bit more transitory in the context of strategic and operating trying to capture those higher yields for a longer -- or the yields for a longer period of time.

So it is ultimately something that we've kind of seen as a trend in the flows over time and expect it in the last rising rate environment of '16, '17, and '18. We saw that we saw similarly change on the decline during COVID. But our expectations are that there is nothing really that drives it. There's no different products in the marketplace that would drive different dynamics in this current cycle.

Okay. Thank you. And Chris, thanks for the well wishes. Good to be back. Just one follow-up -- I don't know if it's for Saker or for Tom. Just sort of wondering as your private markets business continues to get a bit larger and you are building some more performance fees and/or carry opportunities is there way to help us understand how much you have in terms of carry eligible AUM or how to think about trying to monitor or track for performance fees. It's becoming a bigger number and it's not that much transparency versus some of your peers. Just wondering if you could help us triangulate to how to think that through? Thank you.

Yeah. We -- I understand your dilemma there. We've tried to give out the numbers in the past, and we know that we cannot predict it. And we've kind of said, hey, here's the range of what the performance fees has been over the past, and we're willing to do that again. We're just not willing to go out and say how much is going to come each quarter for the year. So I'm not really giving you much our guidance there. Saker, I don't know if you have a follow up to my non-answer.

So, no -- other than to reiterate what you just said, Tom, and maybe to (technical difficulty) explain. The other difference about our private markets business is we're building a very diversified private market business, which makes us different. So we carry performance fees from private equity, and yeah, that's comparable to other private equity players for example.

But if you take our real estate where we also have performance fees, that is varied. Some of it has to do with renting out the buildings, when to finish place making, some has to do with achieving targets. And in other strategies, we have also similar performance fees. So I'm afraid it's not much help.

The only thing we can say to you is, here are the historical numbers; you can look at what they look like. We can't predict whether we win performance fees over time or not. That is not right and proper that looks at our track record. And then we're growing our private market business, which implies a future growth -- obviously assuming that we hit our performance targets, which is something we can't guarantee. So I'm afraid not much help other than to tell you it's just the nature of our business.

Okay. Well, I tried. Thank you.

Kenneth Lee, RBC Capital Markets.

Hey, good morning. Thanks for taking my question. In terms of the equity outflows in the quarter, was there anything to call out there? any changes in mandates that you saw? Thanks.

One comment I would make on those, if you just -- it's getting less worse; let's put it that way. And the way I would phrase it is that if you look at the strategic value dividend fund -- and sure there were pretty good sizable redemptions for the whole year. In October, they were about negative 350; in November, they were negative 280; in December, they were negative 250. And so far, this year, they're negative about 30 or 35 this month.

And so it's declining. What's going on there? Well, what's going on there is that some of the clientele is wanting to go out into the market more -- a little more risk going -- and they see the beauty of a product that does just what it says, namely a dividend product with growth of dividend. And the people who are selling it understand that that's what it is. So that's one observation that I would make.

Got you. Very helpful there. And just one follow-up, if I may. Given the meaningful share repurchases in the quarter, wondering if you just give any updated thoughts around outlook for potential M&A acquisitions, especially in this environment? Thanks.

Yeah, Ken. It's Tom. We bought shares, and we continued to think that we will be active doing that. In terms of M&A, we have our group out there active, and they're working on some things. We're always interested in the roll-ups. We're interested money fund. We're looking a little more actively in Europe as maybe we'll be able to buy some roll-up type things there.

And then as we've talked before, in the private markets, we've put some effort in to see where we can purchase in the US to complement our UK team. And there's nothing to announce or talk about specifically though.

Got you. Very helpful there. Thanks again.

Dan Fannon, Jefferies.

Thanks. Good morning. One more question just on the alts business and the backlog, I think was around 1.9 billion that you mentioned. Can you give us a expectation of what's a reasonable time to see that fund and/or show up as a flow? And then what is the kind of average fee rate of that backlog?

Yeah, Dan. The private markets money has a longer runway than the other wins that we talked about. So that's really -- we'll take up to two years to fund and be fee earning. And that's typically -- we get commitments, and then depending on the strategy, when the money is actually drawn down and investing, that's when it would become an actual flow -- move out of the pipeline, move into the flow numbers when it becomes fee earning.

But that typically happens over longer timeframes. Equity and fixed income or more a couple of quarters; the private market is out a year or two.

And the private markets, part of that 1.9 billion is about half and a bunch of the other is direct lending and unconstrained credit, and that comes in faster. And maybe Saker has a timing on that would be more illuminating.

Thank you, Chris. The difference is things like direct lending and so on, we'd expect to come in within two quarters normally, if it's been committed. And we as soon as we have it in, we start drawing it down and investing. And that is different, as you've heard from things like private equity where there's horizon or private equity growth, which has a longer time horizon.

When we do -- and we haven't announced any at this date -- when we do launch real estate deals funding of that does tend to take about a year as well. So that's the best guidance that I can give at this stage. But direct lending certainly quite fast. And so is unconstrained lending.

And the average fee rate of that backlog roughly?

It's very --

Shall I speak?

Go ahead, Saker.

No, no, I was going to say exactly the same. So it varies on the strategy, and it's very hard to give you -- and I know you guys like guidance and so on, but it is very hard to give because it varies on the strategy. The private equity strategy will be taken of private equity with the base fee and then a percentage of performance fees. For example, other strategies would have different kinds of structures, performance fees and the different kind of base fees.

So I'm afraid because our alternative or private market business is so varied, it's very difficult to give a singular number like you do for equities or fixed income. It just depends from strategy to strategy.

Okay. And then just as a quick follow-up. It's on the ad campaign that drove 4Q a bit higher. Is that an ongoing -- or what's your reasonable run rate for ad spend in '24?

Yeah, Dan. I'd then look at the whole year of '23 as a guidance, and then I expect we're going to do more than '23. But I wouldn't use Q4 as a run rate. I'd take the whole '23, divide it up. And when exactly we're going to run the campaigns -- we're still working on, but I'd add a little bit to '23's number.

Great. Thank you.

Brian Bedell, Deutsche Bank.

Great, thanks. Good morning, folks. Thanks for all the answers to these questions. It's pretty interesting. A couple of expansions from prior comments. So maybe Debbie, we'll start with the money market fund side. Just -- again, great color on the dynamics there. But do you have a sense of what the addressable market might be for Federated inflows into money market funds coming from things like T-bills? And should we be thinking of the 2019 into 2020 as ever general proxy for that? Or do you think the addressable market is larger now and could see better inflow?

I think on a percentage basis using the -- the '16 to '19 timeframe and the experience there is probably a good one. Obviously, that goes up with the market's increase, but on a percentage basis and you know, sort of in the high 10s, I think that's probably something that we're expecting, let's say.

Okay, okay. That's helpful. And then just back on the private markets triangulating some answers -- back to Chris's first answer and Saker's couple of answers on this. In terms of - so if you think about infrastructure and energy transition, and I know you obviously you have the infrastructure fund and the UK nature-based fund as well, but the market for these particular assets or growing very substantially, and you've got a great brand name and good track record.

I guess what's your view on really scaling that up? It's kind of dramatically more than you are now. Is it a capacity constraint? Do you need to acquire more teams? Or if you feel like you have the infrastructure in place, and it's something that you can really start launching funds on and going after that market more dramatically?

I'll take a swing at the pitch first and then Saker will follow up. When we originally bought the Hermes enterprise, there was a lot of work that needed to be done in order to gain proper control of all of those of private markets entities and all of the structures. The next thing that needed to be done was we needed to make it a viable open market type operation.

Generally in the old days, it was a single client, and if the client called, you answered the question. And it wasn't a platform for doing things. So over the last couple of years, we have been working on those two things that had to get right. And we're still working on some of the things on the infrastructure, in particular, on those subjects. So there's internal things that have to happen.

The next thing that happens, as I say, we're in the market, it's repeat the sounding joy of sales. And we had a great sales conference in London in person last week. We have our global sales conference coming up next week coming out of Pittsburgh; it will be virtual. But the point is that it's now time for the sales to take over and play squirrel in the marketplace.

And I'll let Saker make some comments as well.

Thank you, Chris. So to add to what Chris has just said, we were doing some work, particularly on the infrastructure side, which we hope to finish, and we are in the marketplace. Nature is a new endeavor where we are seen as very much the innovators, and we're hoping for more sales with that.

Now what I would say in general about the old Hermes franchises is follows, which is everything we did, we did because we thought we could enhance returns, not just because it was trendy or it was the theme of the moment, and that is true of the transition. So we are very much involved in looking at ways that we could invest in the whole theme of energy transition across the board in various ways and in various strategies, not just by the market and benefit our clients in the process. And the difference is when we do something, we do it right. We kind of go fast slow if that makes sense to you in this sense, which is we make sure that we're in the right place.

I'm going back to something that Chris said, right at the beginning of this call. I think what differentiates us as an enterprise from others -- not everybody, but I think it's a differentiator -- is that the way that we approach it, whether it's integrating ESG for a risk-return profile, whether it's thinking about thematic funds, whether it's launching the nature fund that we've launched, we do so thoughtfully, and I think with stronger foundations because we believe that the strong foundations will bring the rewards and the sales will happen when this is the time when we hope to start rewarding -- seeing rewards.

And do you feel you have the internal capacity to execute that strategy right now or do you think bolt-on M&A would accelerate?

Well, so let's put the question this way first. We have the choice to do it right now. We would love some bolt-ons. Tom has talked before about how we could accelerate the real estate efforts, place building -- Saker mentioned it on this call already -- as a viable thing in the United States. But we're not hot to try out something like that right now. We would love to do it.

So yes, bolt-ons would be good, but they are mutually exclusive. Just because you're looking for a bolt-on or we do it doesn't mean that you don't have the choice to be able to get to the future anyway.

Okay. Great. Fair enough. Thank you.

John Dunn, Evercore.

Thank you. For the fixed income franchise, how do you think that the next phase of the rates picture affects you guys? It seems like you should be a beneficiary. What are the big puts and takes for the major product areas?

Well, there are several there. I'm going to start off with munis. And the record here in terms of the performance of both the funds and the SMAs has been excellent, and we're seeing increased interest there including in CW Henderson in terms of them growing assets under management. So as people look for bigger yield, that's one place to go.

And other place is our core strategy -- obviously, Total Return Bond Fund and the core SMAs where the records are simply outstanding. That's why we did the ETF with that type of strategy. Sooner or later, the excellent history in our opportunistic high yield gets more and more visibility. It's all a question now of which companies you own and whether you own the ones that are having a lot of trouble refinancing. And we think we do a good job on the on the credit analysis there.

So if you then say, okay, what about across the spectrum of maturities and you look at it, you go money funds and micro shorts, the ultra shorts, the intermediates -- all the way out the spectrum we have reliable, solid product that when people want to really gauge and ladder their fixed income approach, we have the answers, and we are very helpful to them when they want to do that. So the fixed incomes franchise is very strong, and I think very, very well set up for the future.

Got you. And then as you seem to be going into a more normal environment over the course of '24, what's kind of the outlook for Hermes' strategies specifically both in the US and the UK and retail and institutional?

I'll let Saker take a swing at that one.

Thank you. So if you break it down in our equity franchise in the UK, we have a large exposure to emerging markets. That's an exposure that's been somewhat out of favor. As you know, if you look at the performance of the emerging markets, particularly China versus the rest of the world, it tells you why we have two kinds of strategies there. One is an outstanding over the strategy, which we have -- we run here, and another one by a separate team, which is one of the best performing value strategies.

Now our contention is at some stage things get so attractively valued that they will see some more inflows. And as we see more inflows this year come back, and particularly with the general environment worldwide, we'd imagine that asset allocators would put more assets into those strategies. We have other equity franchises, the thematic bonds of biodiversity, the impact and so on, and we would expect people to continue to want to allocate them.

If you look at fixed income, our teams continue to see good demand as you've seen from our release, and we expect that flows to continue. So happy with that. And direct lending we've already covered, and we've already talked about the pipeline, which is very strong in our alternative markets, franchises.

So none of this is a prediction, obviously because you can't predict. But that's how I would imagine the markets to behave as we move forward in this market environment because of a tough market environment for the last couple of years.

Thanks very much.

We have reached the end of the question-and-answer session. And I will now turn the call over to Ray Hanley for closing remarks.

Thank you, Holly. And that concludes our call. We thank you for joining us today.

Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.