Federated Hermes Inc (FHI) 2020 Q4 法說會逐字稿

Greetings. Welcome to FHI Fourth Quarter 2020 Analyst Call and Webcast. (Operator Instructions)

Please note, this conference is being recorded. I'll now turn the conference over to your host, Ray Hanley, President of Federal Investors Management Company. You may begin.

Thank you, and good morning. 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, the CEO of the International Business of Federated Hermes; 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. We invite you to 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. Good morning all. I will review Federated Hermes business performance, and Tom will comment on our financial results. We continue to grow and expand our EOS at Federated Hermes engagement activities. At year-end, our staff of engagers and other specialists reached 67, up from 49 at the beginning of last year. Assets under advice reached over $1.3 trillion, up from $877 billion at the beginning of last year. And Saker may have some more interesting news on this subject later in the call.

Total long-term assets under management closed the year at a record level of nearly $200 billion. Equity managed assets reached a record high of about $92 billion, up from $80 billion at the end of Q3 driven by market value gains and lower net redemptions and net sales, which were positive at nearly $800 million. Equity gross sales increased 34% from Q3, driving a 2/3 reduction in net redemptions. We saw positive net sales in 19 fund strategies in the fourth quarter, led by Kaufmann Small Cap, Global Emerging Markets, and the SDG Engagement Equity Usage Fund. Others with positive flows included Global Equity ESG, impact opportunities and the U.S. SMID Fund.

Using Morningstar data for the trailing 3 years at the end of the year, 23% of our funds were in the top quartile and 61% were above median.

Turning now to fixed income. Assets reached another record level of $84 billion at the end of the year, up nearly $5 billion or 6% from the third quarter and up $15 billion or 22% for the entire year. The fourth quarter growth was again driven by strong net sales of $3 billion. Our broad array of solid fixed income strategies was well positioned to meet market demand. We had 22 fixed income funds with net sales in the fourth quarter.

Fourth quarter net sales leaders were: Ultrashort strategies was about $1.3 billion, High Yield with just over $600 million, and the multi-sector total return bond and Short-Intermediate Total Return bond funds, which combined for about $600 million. Corporate, high yield, mortgage-backed, multi-sector and municipal bond funds all had net sales as did our fixed income SMA strategies, which grew $136 million to reach $1.4 billion in assets under management.

Across sectors, short duration strategies were in demand. Fixed income separate account net sales were led by high-yield mandates. At year-end, using Morningstar data for the trailing 3 years, we had 29% of our funds in the top quartile, and 50% were above median. We began 2021 with about $500 million in net institutional mandates yet to fund.

Moving to the money markets. The fourth quarter asset decrease reflected lower fund assets of about $24 billion, partially offset by higher separate account assets of about $12 billion. Year-end money fund assets were down about $43 billion from mid-2020 peak, and up about $15 billion from the prior year-end. As we have experienced in past cycles, our money market business has reached higher highs and higher lows once again. Our money market mutual fund share, including sub-advised funds at quarter end was at about 7.8%, down from the prior quarter share of 8.1%.

Taking a look now at recent asset totals. Managed assets were approximately $621 billion including $416 billion in money markets, $95 billion in equities, $87 billion in fixed income, $19 billion in alternative and $4 billion in multi asset. Money market mutual fund assets were $290 billion.

As of now, we are planning for the staged return of more employees to our offices. While we expect to begin this process in the coming months, the decision about we return more employees to our offices will be informed by the conditions and not by the calendar.

With that, I turn it over to Tom for the financials.

Okay. Chris, thank you. Total revenue for the quarter was about the same as in the prior quarters as growth in revenue related to long-term assets, including equity, fixed income, private markets and performance fees and carried interest was offset by higher money market fund waivers, and the impact of lower money market assets, again, showing our significant value of our diversified business mix.

Q4 revenue included $11.2 million in combined performance fees and carried interest compared to $5.7 million in the third quarter. Over the last 5 years, including the period preceding the 2018 Hermes acquisition, annual performance fees ranged from about $7 million to $23 million and averaged about $11 million. Annual carried interest ranged from about $3 million to $14 million and averaged about $7 million, but we still are unable to project these items for future periods.

Looking at operating expenses. The increase in compensation and related from the prior quarter was due mainly to higher incentive comp expense of $5.9 million, and expense associated with unused vacation time of $4 million. The decrease in distribution expense compared to the prior quarter was due mainly to the impact of minimum yield waivers and lower money market assets, which reduced distribution expense by about $15 million. This was partially offset by the impact of higher equity assets.

Office and occupancy expense for Q4 included a nonrecurring lease incentive gain of about $5 million. The impact of money fund minimum yield related fee waivers on operating income in Q4 was $8.7 million. Based on recent assets and expected yields, the impact of these waivers on operating income in Q1 could be about $14 million. The increase reflects primarily lower yields than previously expected. Multiple factors that are difficult to predict will continue to impact the waiver levels.

Non-operating income increased from the prior quarter due mainly to the increase in the value of investments and consolidated funds compared to Q3. The $5.2 million increase from the prior quarter and net income attributable to noncontrolling interest in subsidiaries was from higher NCI related to Hermes and consolidated funds. The Q4 dividend payment of $1.27 per share, including the $1 special dividend, reduced Q4 EPS by about $0.01 per share due to the exclusion of the dividends paid on unvested restricted shares from net income under the 2-class method of computing earnings per share.

During Q4, we purchased approximately 516,000 shares for $14 million, with nearly all of this bought in the open market.

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

(Operator Instructions)

And our first question is from Ken Worthington with JPMorgan.

I'm not sure if Debbie is on the call. If she is, Debbie, can you talk about the repo market and what's happening there? We've seen yields really come in. There's been a lot of chatter about the outlook for repo. So what is your view on repo? How big a part of the money market fund investments right now are repo? And are there alternatives in the near term, if the repo market continues to be, I'll call it, uneven?

Sure, Ken. This is Debbie. Just with regard to rates and what's driving the repo market to those lower rates. We're currently in somewhere of a 3 to 7 basis point range, hit as low as 2 on a treasury backed repo basis earlier this week. And in some late afternoon thin markets, at various times last week repo was actually trading in negative. Now we didn't participate in any of that. Again, very thin and small portion of 2-way flow. But nonetheless, it was in negative territory. It's driven by a couple of things. Number one, mainly just huge amounts of cash that needs to be put to work in the short end.

And thankfully, we do have a fairly good supply of treasury and mortgage-backed securities. However, it hasn't grown much. Stimulus, as you know, did not come, the second round until the end of the fourth quarter. And in addition to that, that amount of stimulus that was passed and what's been funded so far had come largely from balances that were -- of cash that were already at treasury, so not new funding. We would expect that to change as this second -- or I guess third round of stimulus, the first that the Biden administration proceeds forward sometime in the middle part of this first quarter.

As far as allocations go with our money market and liquidity products to repo, obviously, the largest amounts would be in our treasury and our settlement agency funds. We attempt to do term repo and other types of nonovernight securities in order to reduce our exposure to that overnight marketplace. Where everything is going out the curve a little bit. With different security types, you can get a little bit more in yield, although not a whole lot. I mean the whole treasury yield curve at this point is basically 5 to 9 basis points from 1 month out to 1 year. But in the quest to do that, we still have repo positions for liquidity purposes in those funds that are anywhere from 40% to 55-ish-type percent. And when you look at our other types of products, our prime products, in particular, that would also be using repo in the taxable liquidity world. The exposure there is actually very small, less than 10%. They use other types of overnight paper that is generally 2 to 3x what repo would be from a rate perspective, overnight commercial paper, overnight CDs, other types along those lines. So hopefully, that's helpful.

That was great. And then maybe, Chris, for you, there's been a lot of talk of consolidation. Maybe can you share with us how you're thinking about succession and succession planning and the next generation of leadership at Federated when you and Tom decided to spend more of your time fishing and golfing and doing other things?

Well, first of all, the consolidation thing and the succession thing are 2 completely different items. And we get plenty of time to do grandchildren stuff right now anyway. So there are no current plans for that, which you are discussing. However, we had our Board meeting yesterday, and I spent the better part of an hour with our independent directors of FHI, going over the succession plans, not only at the level of me, if I get hit by a bus, Tom gets hit by a bus or anybody else, and how that filters through each one of our executive staff and their reports, and those discussions. And so we're not going to give you chapter and verse on all of that. But there are good plans and good options. We have a very strong executive staff, and I am most confident that if I get hit by a bus, the machine would continue to roll the way that it has in the past.

In terms of consolidation, there's always consolidation and the new stuff happening at the other end. And the way we've looked at it is we've done our big hairy deal the way I put it because of our affiliation with Hermes. You've seen the whole thing. And we've now changed the name to Federated Hermes Inc., reflecting what you've heard me call a reverse transformational merger. And now we are busy about making that work. We completed that with the acquisition of the private markets business from Hermes and MEPC and are working this year in order to get that ready for sale into the marketplace. So that's what we are about. We will continue to do bolt-on areas of excellence. If we see areas where that's possible, we will continue to do roll-ups, not unlike last year's PNC deal, which worked out very, very well. And so that's our role in consolidation.

And our next question is from William Katz with Citi.

Okay. First question centers around the money market business. Chris, I was wondering if you could or maybe, Debbie, you could talk a little bit about your prime exposure might be today and how the dialogue with the regulators, particularly with the sort of the reformulated FSOC and how that's going and how to think about risks? And then underneath that, you mentioned that your market share was down a little bit sequentially. So I was wondering if you could talk about some of the drivers there.

I will cover some of the regulation. I'll let Debbie cover the prime exposure question. So on the regulation front, we've all seen the President's working group report, and that was basically the SEC throwing out everything that they had in their draw on the subject, many of which has been totally rejected before, all of which we have seen before. The most important one, as I've discussed on this call before, is the elimination of that 30% trigger, which is both unnecessary and unwise, and we pointed that out before and was really an artificial trigger to what was a government shutdown causing disruptions in the short-term markets.

And we don't know what will happen under the new regime in Washington. And they're just getting started, so it's hard to predict. But we are ready with our friends in Congress and with all of the arguments we've had before because the money market fund, especially on the tax-free side, is especially relevant when there are tremendous efforts to get money to municipalities as part of a stimulus APROPOS of the pandemic. And this is a great financing vehicle, and you could return $500 billion of marketplace oriented short-term cash into that short-term market by the beauty of those money market funds to say nothing of what will happen on the prime side. So I'll let Debbie talk about the prime exposure, and then I'll come back on the market share.

Thanks, Chris, and good to hear from you, Bill. As far as our total prime assets go right now, there are about $125 billion. And that is more slated towards the nonmoney market fund side. So [$53 million] or so in money market fund assets with the remainder in other types of separate accounts, offshore, LGIP type of assets. As far as allocation within those products to sectors of the prime market, the largest sectors remain with exposure to the asset back commercial paper world, the CD world and then other types of financial commercial paper. We also have some exposure in the nontraditional repo market, which -- back to Ken's question, first question doesn't really have the same issues associated with it as does what would be traditional treasury and agency repo.

And then ABS exposure, but in the shortest tranches and a very tiny exposure. As far as -- just to add to what Chris was talking about from a regulatory perspective. We've seen the ITI come out with what we thought was a very comprehensive piece that covered the money market, not just money market funds, and talked about some broader base and we'll be focusing on that in particular. IOSCO also came out with some ideas, and then the President's Working Group. And where I think the President's Working Group will end up focusing is, number one, on back with what the ITI.

And what Chris was saying, the broader market, but also some of the things that were changed in the 2014 amendments that went into effect in 2016, having to do with gates and fees and triggers on liquidity for those 2 items, whether they should be at all, whether they should be delinked from triggers of liquidity and whether they should be considered separately entirely from a gates perspective versus a fees perspective. So with that, I'll turn it back to you, Chris.

Thank you, Debbie. With respect to market share, Bill, there's another aspect of market share that historically we have always looked at. And it's a hard calculation, and that is market share of revenues. And part of the reason for our whole pricing history, going back to the '70s on money funds has been as owner operator, looking at the market share of revenues. So at year-end, there were some moves in money. Some of it was hot money, some of it was moving because some of the competitors quoted a higher net yield. And some of it is just the ebb and flow of regular business.

We've looked at the information on a daily basis and we see money going in and out at $3 billion, $4 billion and $5 billion clips, just like always. I would also mention that on the market share, as we calculate it -- if you go back to '14, when they put in the -- put those reforms in, our market share has been variously at those year ends, 8.2%, 8.02%, 7.55%, 7.38%, 7.89%, a high one at 8.78% and 8.12%. So as long as we, over the long term, are getting higher highs and higher lows, like I mentioned, we are not worried about the quarter-to-quarter market share.

Just a quick follow-up. Normally, you give some flow detail for sort of where we are today. We didn't hear that from you, maybe if I missed if I did, I apologize. And then relatedly, on the institutional pipeline? Any dynamic there in terms of where you're seeing the best demand?

Bill, it's Ray. So through the early part of the quarter, obviously, about 3 weeks of data, the equity funds and SMA combined are positive, a couple of hundred million. The fixed income continues to be positive, a bit stronger. And actually, the alts are slightly positive. So long-term flows continue to be running positive for the first 3 weeks of the quarter. In total, it's about $1.6 billion. So again, it's fixed income really ahead, but equity is solidly positive.

And our next question is from Robert Lee with KBW.

Maybe, Tom, a question for you. So just want to think through comp as we look to next year, understanding there's the $4 million-ish kind of one-time that goes away. You mentioned the incentive comp, but you've also had run-up in EOS employees. So should we -- if we exclude the $4 million onetime, is that kind of giving us a jumping off the point for next year? Or was part of the incentive, some -- I know I guess I'll call it a little bit of a catch-up for the year. You had good fund performance and whatnot, so maybe that drove some of it. Just trying to kind of level set for next year.

Sure, Rob. So our dedicated employees at Federated decided to work instead of take their vacation basically in 2020. And so what normally would -- expense that would occur in Q1, Q2, Q3, we had to take all the expense in Q4 because we expect them to take vacation in 2020 -- 2021, I mean. So it's not -- it's a full year bundled up in 1 quarter. And probably the normal run rate number is around $1 million there. So we said it was $4 million. So a normal run rate is $1 million. And that's about how I would look at the vacation days.

So on the last part of your question, Rob, I'd like Saker to comment on EOS because you phrased it the run-up in people at EOS. But I think you need to hear what's going on there. Saker?

Thank you, Chris. So there's 2 things to know about EOS. One is that the run-up was, in fact, part of our long-term plan to bolster our positioning, particularly in North America, and that was part of the acquisition by Federated, going back to '18. So that was part of the plan. The second one is that, we continue to increase our clients. And since the beginning of this year, we've had 2 major institutional clients sign up to the EOS services out of Holland, with a combined value of about EUR 130 billion.

So it's -- we continue to grow that business. And the more we grow it, obviously, the more that we need to put resource in this because one leads to the other. Back to you, Chris.

Thank you, Saker. And what's going on here, Rob, is an investment in the lifeblood of the future of engagement. And it's very, very important and will basically impact all of investment management here at Federated and around the world.

Great. And maybe a bit of follow-up. I mean just -- I'm sorry, just to keep on the comp thing. So if I exclude the $4 million, obviously, maybe $1 million stays, is that -- should I think of $134 million as being the right jumping off point for kind of your revenue, your comp pay heading into next year?

Yes, Rob. In the end, I'm not going to be that helpful because I just stopped predicting that. As -- if you remember, how wrong we were off by $9 million in 1 quarter, off by $5 million another quarter. And it depends on all the things, the sales and how those bonuses happen, the investment management and how that comes about. And then everything that's going on at Hermes, which factors, and you see this quarter, the performance fees and the carried interest and how Saker is managing through what he delivers to the enterprise. And so like I said in the beginning, a longer short talk, not to really give you all that much guidance on it.

Right. Well, can't hurt to try. But on another maybe back to ESG and EOS. Can you just update us on where those initiatives are in the U.S.? I mean I know a bunch of staffing was related to building that out here. Also, on the product side, right now, most of the EM products or CCAS or, obviously, the Hermes U.K. part of the business. But where are you kind of getting that up and running products launched here in the U.S.?

Well, I will talk about some of the products. But we put our sixth product that's being managed by our friends in the U.K. And all of it is informed by what comes out of EOS. There's no direct product thing coming out of EOS. What EOS at Federated Hermes does is talk to 1,200 companies on separate issues for their clients, create data on the engagement that then is put into the decision-making process across the board at Federated Hermes. And I'll allow the Saker to make some more particular comments.

Thank you, Chris. So you've got to understand sort of EOS in 2 ways. First off, in representing our clients, and the engagements with the companies that we do, we work with these companies on behalf of our clients to ensure and enhance long-term returns and best business practices for the long term. That's a benefit to all. But also, because of the way that we engage, and the depth of engagement that we have, because of the history of engagement, typically, we engage with the same company over a very long period, stretching more than 10 years.

Because of the depth of expertise we have, we're the oldest engagement team anywhere in the world, we're the largest engagement team anywhere in the world. And we would claim we have the best experience engagement team anywhere in the world. That gives us particular insights about specific companies, but also about sectors and markets, all of that then is available as part of the integrated information that are used across all assets that are actively managed within Federated Hermes, be that the assets managed out of Pittsburgh office, our Boston office, our London office or any other office that we may have. That is the beauty, if you like, of having the stewardship businesses part and parcel of what we do.

Now additionally, with the changes in the market and the move stores a requirement of more steward activity for passive investors, particularly out of the European markets. We see an increased demand for our stewardship services. And that inevitably, over time, will lead us to invest more into it. So we get 2 things out of it. If you like, it's a business in its own right. It helps enhance returns to our clients, and it helps us in making better informed decisions as part of information that feeds into our matrix of client making -- of decision-making trees for our active management. I hope that answers the question on EOS. And back to you, Chris.

Okay.

And our next question is from Mike Carrier with Bank of America.

This is probably for Saker. But just in terms of the performance fees and carried interest, the historical levels are always helpful. But given what seems like a challenging year for real estate, generally, it seemed like the overall level of performance fees and carried interest was strong. So just curious that the asset base has increased significantly, that could shift those levels or from a portfolio standpoint, are we just in a more like seasoned portfolio mean in an average year, and that's what's throwing off some of the higher level of performance fees and carried interest.

So I'll try to answer that the best that I can. Now the first thing to say is you cannot extrapolate forward performance fees from back-looking performance fees. Generally speaking, when we say performance fees, we're referring to our real estate, but not exclusively our real estate, but that's where most of our performance fees are gathered. Now if you remember, I have said on previous calls, that there are 2 things that generate performance fees. One is there is performance fees generated for our equivalent of what you would call in the United States a mutual fund, what's called here a unit trust. And to some degree, you can see the trend of that over time because it's calculated over the 3 years, and you can see the trend of the performance and although you can't predict it you can see the directionality.

The way we generate performance fees in that and indeed separately managed portfolios is that we tend to enhance the value of the buildings that we buy for our clients and the investments we make for our clients through better management, through integrating ESG fondly enough into real estate, we're the pioneers and doing that as well. And I remind you all that if you go back in time in the United Kingdom, there's a massive development in King's Cross, which is a living example of how integrating ESG factors into development, actually increases return over the long term. So we do that for the buildings that we manage. We manage them well, and we tend to, over time, go into sectors that we think are growing. Now that is the average performance fees. But in addition to that, we get every now and then additional performance fees when projects are finished or finalized or when we reached a landmark in an investment for a major client. These tend to happen not as regularly as the other bit of performance fees, and that's why you occasionally see spikes.

If you look back historically, you can average the performance fees for our real estate. Going forward, you cannot predict performance fees, but I have no reason to think that our methodology, which has been alpha-creating is in danger of not being as alpha-creating, as it's always been, but the level of performance fees cannot be predicted, and therefore, we do not. I'm sorry, I can't [guestimate].

Yes. Mike, this is Tom. When I mentioned that the performance fees in carried interest was $11.2 million, and last quarter was $5.7 million, in my remarks. So our team did a little work because just to help people think through because there's the NCI and tax and where does it occur, which tax rate. And we view performance fees and carried interest as core to us, but somebody says what's core earnings. If you look at Q4 versus Q3 and bring it down to a cents per share difference with those numbers that I just went through, it's basically about a $0.03 difference quarter-to-quarter.

Okay. Got it. That's helpful. And then just a follow-up on money market. Debbie, thanks for the earlier comments and realize the team only gives waiver guidance for the current quarter. But just curious how you and the team are thinking about like rates over the year. You mentioned stimulus that could be potential benefit. I mean any other catalyst that you're watching throughout the year that could either pressure or lift some of the yields?

For the -- we're -- obviously, short-term rates are anchored to Fed policy. And at this point, Terry Powell earlier this week, told us we're still in a low rate environment, it's going to be also stimulative, and it's not going to change in the near term. So we tend to believe him. What we also know is that when virus distribution -- or vaccine distribution for the virus becomes more widespread. There's a whole lot of pent-up demand out there. It's necessarily with the consumer, but it's also in the business sector as well. And depending upon the sector of business, it can be high or extremely high or moderately low. But in any case, there's pent-up demand that we think will need to be satisfied. And what that will drive is at least pockets of inflation from our expectations, to this point. And pockets of inflation are not really what the Fed gets concerned about with their dual mandate of inflation and employment.

However, we think that as travel begins to pick up again, business from a more traditional mode begins to pick up again, those things will begin to drive the inflation rate up. And I think what that means is the Fed is not in play in 2021. There's just no way that's going to happen. But we also think that the guidance that they have given that leads us to a 2023 time frame, might be a little bit too long given some of those scenarios. And that what we're probably thinking about for a steeper yield curve with Fed policy is likely to be in the second half of 2022, at least at the rates that we're currently progressing.

So where does that put us in the context of this year, this day, these funds, it's essentially kind of a technical market at this point. That's going to be driven a lot by supply and demand. A lot of front-end cash is existing if that front-end cash starts to get more comfortable as the yield curve on the bond side backs up. Or if the equity market maybe pulls off a little bit and they reenter those markets. Some of the cash will leave the liquidity markets. And that in and of itself, less demand will cause the yield to steepen. On the other side of the equation, on the supply side, if you get additional treasury supply, GSE supply, it probably pretty stagnant for the year. Commercial paper should tick up, though, as the industry picks up. That's the supply side. You've got more supply, less demand in that situation, perhaps you get a little bit of a steeper money market yield curve. That doesn't mean you get 15 or 20 basis points. It probably means you get 2 to 5. So that's sort of the neighborhood that we're looking at from a steepness standpoint in 2021.

Our next question is from Kenneth Lee with RBC Capital Market.

We've seen strong -- very strong net sales for fixed income over the past few quarters. Just wondering if you're able to highlight what you think could be some of the key contributing factors for that?

Some of the key factors are that the clientele is still anxious to see yield. And we see this across the board inside our distribution. And there is renewed interest in muni space. We're getting more questions on that because of the obvious implications of potential tax increases. And there remains just a strong appetite for short duration at most firms. And for anyone who is allocating money, not making a brand-new decision, oh, are we going to go in all bonds, all stocks and all that. Our products proved very, very strong last year. That's why we had, I think it was 19 of them with positive flows. So it was across the board, enhancement of quality that occurred last year. And it was focused on positive flows in the fixed income, which are continuing, as Ray mentioned.

But what's really going on behind the curtain is that even though the sales people are not traveling, they are enhancing the relationships they already have because if you already have the e-mail, the phone number and you know the golf courses and the places where your clients are going, you can still build up relationships. And yes, it does put a little crimp on new stuff going in or getting into new clients, but you get to enhance the quality omens, as I've mentioned here before, which means a broader look at the federated array of products and an in-depth look at the portfolios through portfolio construction. So the portfolio construction, when you tear into these portfolios, ends up with a lot of our short intermediate or total return bond-fund-type products as the answer to the types of bets that are being made by our clients. So this move to quality in the marketplace and the still current demand by many people for yield keeps the fixed income as a positive flow situation.

Yes. Ken, I just highlight, as Chris said, short duration has been strong. High Yield has certainly been strong. And then within high yield, our institutional domestic product. But we've also seen last quarter and into the first part of this quarter, the Hermes product. Mind you, the SDG engagement high-yield credit fund has gotten off to a very solid start and had a very solid fourth quarter. So we're up to 23 funds in the first part of Q1 on the fixed income side that have positive net sales, and they really are spread through sectors with a concentration in short duration across sectors, high yield. And as I mentioned, SDG coming on.

Great. That's very helpful color. And just one quick follow up, if I may. I know it's been a while since we talked about this but wondering if there are any updated thoughts on potential -- the potential BT Pension Scheme outflows. What's the expectations for this year? And should we expect to see any kind of meaningful impact on net sales on those flows?

Because they are a big, beautiful client, we don't like to get into the specifics of their redemption or investment profile. As you know, they have substantial assets with us on the long-term nature. And as we discussed way back at the beginning, they had announced, and we repeat that they were going to be taking down the mutual fund or products that they're in over time related to their own circumstances. And we have no reason to think that, that won't continue. But we're just not at liberty to give what their redemption profile may or may not be. And sometimes, we don't even know.

And our next question is from John Dunn with Evercore ISI.

I was wondering, are there any products that can be sold kind of as a substitute for Kaufmann Small Cap? And how much of flows typically come from new versus existing clients? Basically, just the notion of being able to shift clients between strategies.

So we have a broad array, as you know, of Kaufmann product. Obviously, the mid-cap, and obviously the large cap. And for those that are focused on the Kaufmann methodology, they have very good alternatives. On the MDT side, we have a couple of Small Cap Funds that have very strong performance and have picked up good assets and good flows over the time frame. And also, you have the All Cap Core, which includes -- I'm talking about MDT, which includes the small cap as well. In addition, on the international side, we have the international SMID product and frankly, our friends in Cleveland are basically all over the cap scale in their investments as well. So we have some specific Kaufmann, some specific small cap and some other general funds that include small caps that enable us to continue to talk to clients very, very successfully about where they could invest for the future.

Great. And then you guys have talked about how money market deals are being (inaudible) credit. But how should we think about different rate scenarios and people's willingness to throw in the towel? Like eventually, when we get higher rates, would people maybe -- some of us think maybe they get a better price, and could that spur more activity?

In the whole history of money funds, going back into the '70s, to me, the way to look at it is people will always need to have their cash managed. And there are various things that occur in the marketplace that incent them more. Yes, higher rates would be more helpful. But on the other hand, if you go back into a standard issue, wealth management sequence, about 20% of that money is always in cash, in any event whether they're along the market, whether they're bets on, bets off. It's just the ebb and flow of life. And you couple that with the increase in money supply, the overall increase in markets and portfolios being a percentage of those increases in value, there is always constant demand for the cash.

John, if you're also referring to M&A and money markets, the way we look at that is to work out long-term arrangements with the people that we do deals with, where they continue to earn what is available to earn. So in the low interest environment, of course, there isn't as much to earn. And -- but if people throw the towel in and say they want to hook-up with us, we are still available, ready and willing to do that. And it's pretty easy to look at what's being earned. And we share the risk with anybody who we do transactions with, and it's worked out well, and we're still ready, willing and able to do them.

And our next question is from Dan Fannon with Jefferies.

Just a follow-up on the fee waivers. The guidance for Q1, I assume that's as of the balances today. But just we've seen outflows to start the year in recent months. So just can you talk about some of the inputs that could make that number -- or variables that could make that number either higher or lower as we think about the current backdrop.

Yes. When we did the forecast, the assets were about where they are today. So basically, not much change. Of course, we always -- we used to have a whole paragraph on all the variables, and we stop giving that. But all the variables are there. Assets go up, it changes, assets go down, changes, and then all Debbie's rates discussions. But that's our current forecast updated with assets currently.

Okay. And then just with regards to the sharing with the distribution partners. So it seems like this quarter, the relationship between what was, I think, other revenue and the distribution expense was a little bit more disproportionate. Have you -- as the economic share of with your partners changed as those fee waivers have increased? Or has that -- how should we think about that going forward?

Dan, it's really -- it's not anything like an active change on our part. It's really just each one of the funds and each -- really each class of shares has a different level of distribution, revenue and expense. And what comes out at the end is really a blend across all of those funds and classes of shares. So it -- and now, of course, as gross yields come down, which they did by a couple of basis points overall, during Q4. You have funds that weren't waiving the day before that begin to waive when they cross a threshold. And this is why we've always said that this is very difficult to model. It's not linear. You have funds move in and out, and they can have very different fee characteristics, and it's just one of the variables that makes predicting this difficult.

And our next question is from Brian Bedell with Deutsche Bank.

Just one follow up on Dan's money's market question and then a few ESG questions. On that distribution side, is there a, I guess, a natural floor that we should be thinking about in terms of the distribution fees that -- or the distribution waivers that you're sharing with your distribution partners? I guess the question would be, how should we think about the magnitude of what that could come to? And then would there be more pressure on your actual asset management fee waivers if you reach, the backward is reachable?

So it would be a similar answer, Brian. The -- within each individual fund, it would have a level of distribution fees, typically distribution fee revenue. But then when you blend them all in, it wouldn't -- there wouldn't be a floor level that we could give you that would say, beyond this point, for the complex waivers change. It's really -- that wouldn't occur at the fund level.

Okay. Okay. Fair enough. And then a couple of ESG questions, too. One, just on the traction of your ESG, how many funds in the U.S. I guess the broader question really here is how you're seeing demand improve in the U.S. and especially on the EOS side, sort of a question for Saker. You're getting from that $877 million to $1.3 trillion this year. How much of that has come from U.S. clients? And then what's probably more importantly, what do you see as the demand as the U.S. is really sort of catching up to -- or beginning to catch up to the trends in Europe.

Saker?

Yes, of course. So the answer is that you've got to think about it in 3 separates buckets. So the demand in Europe for EOS is driven partly by, not just market move as a whole, but also regulatory moves. We can see increasing demand for it in the United States, but that will take time to catch up, as you'd expect. So as a separate product, in time, we will see increasing demand for U.S., and we're already getting some indications of that would catch up with the demand in Europe, but also in Asia where it's growing. And the best indication of that is the VIX index providers are talking very actively about stewardship as being something that they do. That's because they're reflecting demand.

That's one way you should think about it. The other way you should think about ESG in general is how much do we integrate ESG as a firm without necessarily calling our products ESG because this is another factor that's taken into to enhance the returns and create sustainable wealth over the long term. And the answer is that we're well past the 90% mark, right across the board in what we do that we consider our active, the managed accounts integrate the data that we get from ESG. Why do we need that? Because actually, it helps make better decisions to create better wealth over the long term. That's the second part of it.

And the third one is specific products that clients want to buy, that are labeled an ESG. And in my own mind, I think of those more as thematic products. Now there is going to be a discrepancy between the U.S. and Europe because it's the same discrepancy that you get in any kind of market. So high-yield SDG might appeal across the board, for example. But on the other hand, something that the Europeans called sustainable might be very specific to Europe. And we'll see that. But in general, if the question is, do we see the trend strengthening? The answer is, yes, there is acknowledgment. It does enhance returns. There is an acknowledgment that there will be more specific products coming out of it. But obviously, the United States is a different market with a different fiduciary law structure, it takes time.

So Brian, if I may. I interpret 2 other questions inside your comment. And the first one is, where are we on integration of our teams, both U.S., obviously, at Hermes there already there. And the other is, what is the interest in the ESG offerings inside our client base. And on the first, we are well, well along the way, with most, if not all, well along our 3-stage integration process of analysis, customization and full integration. And we are very proud of our RIO office, which is Responsibility Investing Office for accomplishing this and making the Federated Hermes enterprise with ESG baked in the cake. On the question of interest, we've done some surveys with our clients and overwhelmingly, 2 things are happening. First, they are getting more -- meaning our RFAs are getting more questions from their clients regarding ESG. This will increase with the activities of the new administration. And we are discovering that more and more of the advisers are incorporating it into their methodologies. Now this is not universal, okay? This is not universal. But it is a very, very strong force.

Yes. No, I got the survey. That's very compelling. And are you seeing, I guess, just on the funds that you've launched, I know it took a lot of time to build them through distribution. But what's -- what are the asset levels of the ESG funds that are U.S. domiciled as of the end of this year?

So Brian, the group of products that we started over the last 1.5 years, they're relatively new. But the asset base is up around $130 million, and that would have been up from just over $100 million at the end of the third quarter. So progress, but as you know, with mutual funds, they need to be bigger to open up additional distribution opportunities, and they need -- typically need additional seasoning in terms of track record. That said, because of the topical interest in ESG, these have proceeded along nicely, again, with relatively recent inception dates.

And we have reached the end of the question-and-answer session. And I'll now turn the call over to management for closing remarks.

Well, thank you. That concludes our call for today, and we thank you for joining us.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.