Federated Hermes' Q3 2025: Contradictions on Institutional Demand, Financial Projections, and ETF Growth

Date of Call: October 31, 2025

Financials Results

• Revenue: Total revenue increased $44.6M (10%) quarter-over-quarter; drivers: $17.6M from higher money market assets, $14.8M from higher equity assets, extra day +$4.9M, higher performance fees +$2.4M, Rivington acquisition +$1.2M, and a $4.6M termination fee from UK property trust restructure.

Guidance:

• Expect to close the FCP controlling-interest acquisition around end of Q1 2026 and fund upfront consideration of ~ $216M cash plus ~$23M in FHI Class B stock; management expects the deal to be accretive after transaction costs.
• Plan to resume open-market share repurchases in Q4 2025.
• Institutional pipeline ~ $2.1B; expect ~2/3 to fund in Q4 2025; alternatives to continue funding through Q1–Q2 2026.
• Do not expect outsized near-term expenses from digital/money-market initiatives; any incremental spend should be revenue-accretive.

Business Commentary:

• Assets Under Management (AUM) Growth:
• Federated Hermes reported record AUM of $871 billion at the end of Q3, driven by gains in money market and equity strategies.

• Equity assets increased by $5.7 billion or 6% from the prior quarter, primarily due to market gains.

• MDT Funds Performance and Sales:

• MDT equity strategies had Q3 net sales of $2 billion, with 7 of the 8 MDT equity mutual fund strategies in the top performance quartile of their Morningstar categories for the trailing 1 and 3 years.

• The growth was fueled by strong performance and a solid pipeline of RFPs and institutional interest, particularly outside the U.S.

• Money Market Funds and Digital Assets:

• Money market assets increased by $18 billion to reach a record high of $653 billion, driven by favorable market conditions and opportunities for attractive yields.

• Federated Hermes made two of its UCITS money market funds available in tokenized form through Archax, marking its initial non-U.S. digital asset initiatives.

• Fixed Income Sales and Performance:

• Fixed income assets increased by $3.1 billion from the prior quarter to reach a record high of $101.8 billion.

• Fixed income total net sales improved by $4.1 billion, with notable contributions from two large public entities and strong performance in ultrashort funds.

• Alternative Private Markets and Acquisitions:

• Assets in alternative private markets decreased by about $1.7 billion due to the restructuring of the U.K. Property Trust.
• Federated Hermes announced the acquisition of a controlling interest in FCP, a U.S.-based real estate investment manager, to expand its U.S. real estate market presence.

Sentiment Analysis:

Overall Tone: Positive

• Management reported record AUM of $871B and record money market assets ($653B total; $492.7B in money market funds), highlighted strong MDT momentum (net sales running ~$660M through Oct. 24), described a $2.1B institutional pipeline with global wins, and called the FCP acquisition accretive; CFO emphasized revenue drivers and manageable expense outlook.

Q&A:

• Question from Michael Cho (JPMorgan Chase & Co): How should we frame the potential sizing and pace of AUM/flows growth for the MDT franchise as you scale and as non-U.S. distribution grows?
  Response: Management: Be optimistic—MDT momentum is strong with ~ $660M net sales through Oct. 24, a diverse global pipeline across geographies and client types, and growing international distribution opportunities.

• Question from Robin Holby (TD Cowen): Heading into 2026, what are you hearing from institutional investors on allocations, where are you seeing opportunities, and how are you thinking about the pace of deployment for the institutional pipeline?
  Response: Management: Institutional pipeline is robust (~ $2.1B) with specific wins across regions; expect ~2/3 to fund in Q4 2025, equities/fixed-income to fund sooner, and alternatives to fund through Q1–Q2 2026 (longer tail).

Contradiction Point 1

Institutional Interest in Money Market Funds

It involves differing perspectives on the level of institutional interest in money market funds, which affects expectations regarding potential asset movement and revenue growth.

Looking ahead to 2026, what are institutional investors expecting for allocations, where opportunities exist, and how do you plan to manage deployment pace in the institutional pipeline? - Robin Holby(TD Cowen)

2025Q3: The institutional pipeline is strong, with over $2 billion in mandates from various countries and sectors. - John Donahue(CEO)

With likely Fed rate cuts approaching, are more institutions discussing a rotation into money funds? - Michael Patrick Davitt(Autonomous Research)

2025Q2: Institutional interest in money funds has been alive and well since late 2024. - Deborah Ann Cunningham(CIO)

Contradiction Point 2

Expenses and Revenue Trajectory

It involves differing projections for expenses and revenue growth, which are critical for understanding the company's financial health and strategic direction.

How should we think about expense trends over the next 12 months considering recent initiatives and acquisitions? - Michael Cho(JPMorgan Chase & Co.)

2025Q3: Expenses are expected to increase due to FCP acquisition, but it should be accretive. Revenue is expected to follow. - Thomas Donahue(CFO)

What is the expected exit pace for expenses? - William Raymond Katz(TD Cowen)

2025Q2: Compensation and distribution expenses are likely to rise with increasing sales and incentives. - Thomas Donahue(CFO)

Contradiction Point 3

Institutional Funding in Q4

It involves expectations for institutional funding in Q4, which is crucial for revenue projections and investor expectations.

Can you clarify the funding pace for the institutional pipeline? - Robin Holby (TD Cowen, Research Division)

2025Q3: We expect about two-thirds of our $2 billion plus pipeline to fund in Q4. The slower funding for alternatives will continue through Q1 and Q2 of 2026. - Raymond Hanley(CFO)

What are institutional allocations like? - William Katz (TD Cowen)

2025Q1: We are very happy about the $3.9 billion in mandates yet to fund, with interest in MDT and private equity. We see good interest in MDT due to their risk controls and performance. - John Donahue(CEO)

Contradiction Point 4

MDT ETF AUM and Growth

It involves the reported assets under management (AUM) for MDT ETFs, which impacts the perception of the company's growth and market presence.

Can you clarify the funding pace for the institutional pipeline? - Robin Holby (TD Cowen, Research Division)

2025Q3: The ETFs are over 1.2 billion right now. The MDT ETFs collectively have about 250 million. We're in the early innings on the active ETFs and ready to proceed. - John Donahue(CEO)

What is the MDT ETF's AUM, and what are the plans for expanding the active ETF lineup? - John Dunn (Evercore ISI)

2025Q1: We are also very excited about the active ETF platform. The ETFs are over $800 million right now. The MDT ETFs collectively have about $250 million. - John Donahue(CEO)