Federated Hermes reported its Third Quarter earnings late Thursday and hosted its Q3'26 earnings call on Friday. CEO Chris Donahue comments, "Turning to fixed income, assets ended Q3 at $99 billion. Net positive sales of $700 million were offset by a decrease of $1.8 billion due to lower market values. We had 22 fixed income funds and SMAs with net sales in the third quarter, led by the Sterling Cash Plus Fund, our Ultra Short Bond funds, Total Return Bond ETF, Conservative Micro Short Fund, and the CW Henderson Short Term Muni SMA. Fixed income institutional separate accounts had Q3 net sales of $924 million, driven by a large public entity that has regular sizable inflows and outflows."
He continues, "Moving on to money markets, total money market assets decreased by $27 billion, or 4%, from the second quarter as funds decreased by $13.6 billion, or 3%, and separate accounts decreased by about $13.44 billion, or 8%. Money market fund assets were impacted by the mid-September increase in interest rates by the Fed and by September's corporate tax payments. Money market separate account assets were impacted by the liquidity levels of large state pools that we manage and typically peak with tax collections at the end of the year through April before decreasing in Q2 and Q3. Our estimate of money market mutual fund market share, including sub-advised funds, was about 6.6% at the end of Q3, down from 6.7% at the end of Q2."
Donahue says, "Turning to digital assets, we continue active collaboration with financial institutions and technology providers to explore digital distribution. Our focus is liquidity, where our efforts are designed to enhance flexibility and accessibility while preserving the core structure and utility of money market funds. During the third quarter our arrangement with Promethium Inc. was announced. We are working with Promethium, a market infrastructure provider for crypto assets, to expand the reach of tokenized securities through their SEC-registered FINRA member broker-dealer market infrastructure."
He explains, "Promethium will make our tokenized products available to broker-dealers and RIAs through its correspondent clearing platform. This follows the launch of our Money Market Management Digital Treasury Fund, which is expected to support both traditional and on-chain distribution. We have also selectively engaged with regulated digital asset intermediaries, including participation in the BNY/Goldman domestic initiative involving mirrored tokenization. Also the Archex initiative to offer tokenized access to a UCITS money fund in the UK; and our arrangement with Conduit Digital Holdings to support the launch of Conduit's tokenized money market fund in the APAC region, with the Conduit fund investing in one of our offshore money market funds. We are engaged in digital asset development discussions with other intermediaries as well."
Donahue also comments, "Looking at recent asset totals, a few days ago managed assets were approximately $890 billion, including $654 billion in money markets, $112 billion in equities, $98 billion in fixed income, $23 billion in alternative private markets, and $3 billion in multi-asset. Money market mutual fund assets were $489 billion. Money market fund assets have ranged from $485 to $493 billion during October, with average asset levels of $489 billion."
During the Q&A, one analyst asks, "On fund flows, I understand that 3Q is always a seasonally weaker fund flow quarter for you, but there was a pretty big gap with many of your largest competitors, like BlackRock had big inflows, J.P. Morgan had big inflows, Invesco had big inflows. So I'd like to get a little bit more color on [that]."
Donahue replies, "Overall, there's nothing new about people periodically doing things either with fees or with portfolio construction that cause intermediate short-term alterations in the flows, and that's what was going on in this past quarter. And if you look at it over the 50-year period that we've been involved in this, this is like a routine deal."
Money Market CIO Debbie Cunningham adds, "As you know, we manage our money funds with a bias to daily liquidity at par. As part of that process, on a daily basis we identify maturity restrictions for different security types that we use as well as for the approved issuers from our database that we use. And these restrictions for the most part are based on liquidity in the marketplace for those different security types for those different issuers as they go out the curve, in addition to our own internal credit rating which ranges from 1 to 5 for the various issuers."
She states, "This process really involves all three members of our team. It's our portfolio managers that are looking at the structure of the fund, it's our analysts that are reviewing the issuers, and it's the traders that are looking at the security types and the selections on a daily basis. And what we determined is that historically and in this particular case, we haven't been willing to extend our maturities beyond what I would traditionally call our comfort zone just because there's maybe some inordinate value and pursue that incremental yield out the curve, while in our minds that would mean sacrificing some of that true daily liquidity. So it's basically a performance issue based on our choice of what I'll call the most liquid and highly rated sectors in the marketplace at this time."
Cunningham adds, "The other thing that I would note is that the FOMC did move rates in September, and we, as well as others, were lagging the direct market. But that's across the board, and to elaborate on that ... basically we've caught up. If you look at the recent stats for October 28th, our money market fund assets are up $3.7 billion so far. And if you look at some of those other competitors you mentioned, some of their assets have walked out the door a little bit on them."
Responding to a question on growth from tokenized money funds, Donahue replies, "I don't think it actually accelerates anything. It is just steady as we go in exploring this new field. As I said to this audience before, the clients aren't beating down the doors to get these products. This is really getting the infrastructure ready for tomorrow, no different than a lot of other examples of where the infrastructure has to change for the future. So we are excited about our deal with Promethium, with BNY, with Archex, and with Conduit, all of them, but it's hard to say, oh, this accelerates other things. We are focused, as I said in my remarks, on the liquidity portion. And I would say the other securities are behind that from our point of view, but we'll be ready for that as well."
Finally, another analyst asked about "relative revenue" and assets. Donahue says, "So you're touching on something that we don't have great information on, which is market share of revenue. And this has been one of [our] crusades for a long time that to an owner-operator. That's a very important statistic, but we can't get it. So we don't know. We only do it by inference. But it's what's behind the curtain in not doing the things that others do to periodically jump their yield, jump a bunch of assets and then get back to regular."
President Ray Hanley adds, "I would just echo that, Chris. We can't really do comparable revenue [vs. competitors]. I would stress that we have a lot of different pricing options across our money market franchise, reflecting our reach into different portions of the intermediary channels. But a lot of the attention of course [is] in the most institutional products, which tend to have the lower fee rate among the products that are more geared to retail applications, which for us is not direct retail. It's still through intermediaries. `But to the end client of the intermediary, we have tended to traditionally do better. If you bifurcate the asset market share in that retail channel, which would be a positive influence to the blended fee rate overall for money markets."
