Federated Hermes Earnings Call Highlights Record AUM

Federated Hermes, Inc. ((FHI)) has held its Q4 earnings call. Read on for the main highlights of the call.

Federated Hermes Ends Year With Record AUM Despite Cost and Fixed-Income Headwinds

Federated Hermes closed the year on an upbeat note, with management emphasizing record assets under management (AUM), strong equity and money market flows, and notable progress in private markets and digital initiatives. While the firm acknowledged pressure from fixed-income outflows, higher distribution expenses, and softer performance fees, executives repeatedly underscored the breadth of growth drivers across the platform, painting an overall positive picture of business momentum heading into 2026.

Record Assets Under Management Across Core Franchises

Federated Hermes ended the fiscal year with a record $903 billion in AUM, which has since risen to roughly $909 billion. Money markets remain the foundation of the franchise, with about $684 billion in money market assets. Beyond liquidity products, the firm manages approximately $101 billion in equities, $101 billion in fixed income, $19.5 billion in alternative and private markets, and $3 billion in multi-asset strategies. The diversified asset base underscores the company’s evolution from a money market specialist into a broad-based asset manager, giving it multiple levers for future growth.

Equity and MDT Strategies Deliver Strong Sales Turnaround

Equities were a standout category, with full-year 2025 gross equity sales reaching a record $31 billion, including $9 billion in the fourth quarter. Q4 equity assets rose $3.2 billion, or 3% sequentially, driven in part by net equity inflows of $1.5 billion. For the full year, net equity sales totaled $4.6 billion, a sharp reversal from net redemptions of $10.7 billion in 2024. Within equities, MDT quantitative strategies were a major growth engine: Q4 saw record MDT gross sales of $4 billion and more than $2 billion in net inflows, while the MBE range logged record full-year gross sales of $19.1 billion and net sales of $13 billion. The turnaround in equity flows highlights growing client confidence in the firm’s equity and systematic capabilities.

Solid Investment Performance Supports Distribution

Management cited improving performance as a key underpinning for recent sales strength. Among MDT strategies, six of nine products ranked in the top performance quartile and four in the top decile over the trailing three years, based on Morningstar data. Across the broader equity complex, 49% of funds outperformed peers over three years, with 27% landing in the top quartile. In fixed income, 42% of strategies beat peers and 18% ranked in the top quartile over the same period. While not uniformly exceptional, these metrics suggest a generally competitive performance profile that can support continued asset gathering across active offerings.

Money Market Franchise Hits New Highs But Market Share Slips

The money market business continued to expand, with total money market assets rising by $30 billion to $683 billion at year-end. Money market mutual fund assets increased by $6 billion in the fourth quarter to $508 billion, while separate accounts grew by $14 billion over the same period. Despite this absolute growth, estimated money market fund market share edged down slightly to about 7% from 7.1% in the prior quarter, pointing to mild competitive pressure. Even so, Federated Hermes remains one of the industry’s largest liquidity providers, and record balances in the current rate environment are feeding directly into higher money market-related revenues.

Private Markets Fundraising and Mandate Pipeline Strengthen Alternatives

The firm continued to build out its alternatives and private markets platform. European Direct Lending III closed at $780 million, up from $330 million for the first fund and roughly $700 million for the second, marking a steady scaling of this strategy. The latest PEC global private equity co-investment vehicle (vintage six) has raised about $300 million so far, with prior vintages typically landing in the $400–$600 million range, including approximately $500 million for PEC V. Looking ahead, Federated Hermes reported roughly $2.7 billion in net institutional mandates that have yet to fund, with an estimated $1.2 billion earmarked for private markets, $1.4 billion for equities, and about $0.1 billion for fixed income. This unfunded pipeline provides visible support for future inflows.

Revenue Growth Backed by Asset Gains, Expenses Rise With Scale

Fourth-quarter revenue climbed $13.4 million, or 3% sequentially, powered mainly by higher assets in money markets and equities. Money market-related revenues increased by about $8 million, while equity assets contributed an additional $5.5 million. Operating expenses grew more modestly, up $7.3 million or 2% quarter-over-quarter, driven largely by higher distribution costs tied to larger fund assets. While the topline benefited directly from asset growth, the margin impact was partially offset by these rising expenses, underscoring the balance between scale gains and the cost of distributing more advisor-sold and institutional products.

Digital Asset and Tokenization Initiatives Target Future Infrastructure

Federated Hermes highlighted a series of digital asset and tokenization projects as a strategic bet on the future of market infrastructure. The firm partnered with Archax to launch tokenized money market funds, took on a sub-advisory role for a private tokenized fund, and joined a mirrored tokenization initiative alongside large banking partners. Management outlined a pipeline of potential tokenization use cases—ranging from collateral and margining to real-time settlement—that could open new channels to both institutional and retail investors over time. While still early-stage, these efforts signal that the firm aims to be an active participant in the evolution of digital market plumbing rather than a passive observer.

Strategic Expansion and FCP Acquisition Advance Global Footprint

The company is pushing ahead with geographic and product expansion. The planned acquisition of FCP, expected to close in 2026, is intended to bolster Federated Hermes’ UK-based expertise in U.S. multifamily housing. In parallel, its UK real estate team was chosen as the exclusive developer for a significant mixed-use project in Manchester, adding to its real asset credentials. The firm also announced plans for a Hong Kong office, subject to regulatory approvals, to deepen its presence in the Asia-Pacific region. Together, these moves underscore a strategy of broadening the firm’s global reach and diversifying its real estate and alternatives capabilities.

Fixed Income Outflows Weigh on Segment Assets

Not all segments moved in the right direction. Fixed income assets ended the year at about $100 billion, down $1.7 billion sequentially. The quarter saw net redemptions of $2.8 billion, driven in part by roughly $1.7 billion in withdrawals from two large public entities and a previously flagged $1 billion redemption from a high-yield mandate. Ultra-short strategies did attract roughly $624 million in inflows, but that was not enough to offset broader outflows. The fixed income pressure highlights the challenge of competing for bond assets amid changing rate expectations and institutional repositioning.

Distribution Expense Spike Reflects Share Class Mix Shift

One of the more notable cost pressures came from a jump in distribution expenses. Fourth-quarter distribution expense rose about $8.8 million versus the prior quarter and was described as nearly 25% higher year-on-year. Management attributed much of the increase to a shift toward share classes that carry higher-than-average distribution fees. This mix change added roughly $10 million to both distribution revenue and distribution expense, essentially inflating both the top and bottom lines of the distribution P&L. While largely a pass-through, this shift can blur underlying margin trends and introduces some variability tied to investor preferences across share classes.

Lower Performance Fees and Deal Costs Temper Earnings Upside

Variable revenue streams provided less of a boost in the quarter. Carried interest and performance fees fell to $1.6 million from $3.6 million in the prior period, trimming potential upside from alternatives and performance-linked mandates. Around $570,000 of those fees in the quarter were almost fully offset by related compensation expense, limiting their impact on net income. On top of that, the company booked approximately $1.3 million in transaction costs related to the FCP acquisition, mostly professional services. Management expects additional transaction-related costs of about $9.2 million in 2026 as the deal moves toward its anticipated close, further confirming that near-term earnings will carry some M&A-related noise.

Seasonal Q1 Headwinds to Near-Term Operating Leverage

Looking to the first quarter, management flagged several seasonal and timing-related headwinds. Fewer calendar days in Q1 are expected to reduce revenues by about $10.2 million compared with Q4, while lowering distribution expenses by roughly $2.6 million. At the same time, compensation and related expenses are forecast to rise, including around $8 million in seasonally higher stock-based compensation and payroll taxes. The combination of slightly lower revenue and higher compensation points to mixed near-term operating leverage, even though the underlying business momentum and AUM levels remain strong.

Guidance Points to Continued Scale With Near-Term Noise

Management’s guidance emphasized sustained scale, incremental growth, and some near-term cost and seasonal noise. The firm exited 2025 with $903 billion in AUM and has since reported approximately $909 billion, with around $683–684 billion in money market assets, near $500–508 billion in money market mutual funds, and roughly $101 billion each in equities and fixed income. Alternatives and multi-asset stand at about $19.5 billion and $3 billion, respectively, supplemented by an unfunded institutional mandate pipeline of roughly $2.7 billion, mostly directed to private markets and MDT-driven equity strategies. For 2026, the company expects the FCP acquisition to close around the second quarter, with an initial purchase consideration of about $215.8 million in cash plus $23.2 million in Class B stock and additional transaction costs of roughly $9.2 million. The tax rate is projected in the 25–28% range, compared with an effective rate of 24.4% in Q4. Near term, Q1 revenue is expected to be about $10.2 million lower than Q4 due to seasonality, partly offset by a $2.6 million decline in distribution expense, while compensation-related costs rise by around $8 million. Even with these short-term pressures, management’s tone suggested confidence that strong equity flows, growing private markets, and record money market balances can support further earnings power over time.

Federated Hermes’ latest earnings call painted a picture of a firm capitalizing on record AUM, robust equity and liquidity franchises, and a growing alternatives platform, while investing in digital initiatives and global expansion. Investors will need to look past fixed-income outflows, higher distribution costs, and seasonal Q1 headwinds, but the overall narrative remains one of broad-based growth and strategic positioning for the next leg of the cycle.