10-K: Federated Hermes Updates Code of Ethics and Reports $757.6 Billion in Assets Under Management for 2023

Federated Hermes files its annual 10-K report, highlighting a code of ethics update, $757.6 billion in assets under management, and a detailed overview of its business and regulatory environment.

Summary

• Federated Hermes, a global investment management firm, reported $757.6 billion in assets under management (AUM) as of December 31, 2023.
• The company operates in one segment, the investment management business, offering various investment products and strategies.
• Federated Hermes' revenue is primarily derived from investment advisory fees based on AUM.
• The company manages 180 Federated Hermes Funds, including money market, equity, fixed-income, alternative/private markets, and multi-asset funds.
• Separate Account assets totaled $249.9 billion as of December 31, 2023.
• Average managed assets for 2023 were $705.978 billion, a 12% increase compared to 2022.
• Total revenue for 2023 was $1.609 billion, an 11% increase compared to 2022.
• The company's distribution strategy targets over 10,000 institutions and financial intermediaries.
• Federated Hermes faces intense competition from other investment managers, ETF providers, and financial institutions.
• The company is subject to extensive regulation in the U.S. and internationally, including SEC, FCA, CBI, and other regulatory bodies.
• The report details various regulatory developments and their potential impact on Federated Hermes' business.
• The company has 2,025 employees as of December 31, 2023, with a focus on competitive compensation and employee development.
• Federated Hermes has a dual-class stock structure, with Class A shares held by the Donahue family trust, making it a controlled company.
• The company's code of ethics for senior financial officers was updated in January 2024.

Sentiment

Score: 7

Explanation: The document presents a balanced view of Federated Hermes' performance, highlighting both positive results and potential risks. The tone is professional and informative, suggesting a moderately positive outlook from an investment perspective.

Positives

• Federated Hermes experienced an 11% increase in total revenue, reaching $1.609 billion.
• Average managed assets increased by 12% year-over-year, indicating strong growth.
• The company has a diversified range of investment products and strategies across various asset classes.
• Federated Hermes has a strong presence in the money market sector, managing $560.0 billion in AUM.
• The company is actively integrating ESG factors into its investment process.
• Federated Hermes has a robust employee development program and a commitment to diversity and inclusion.
• The company has a strong sales force of over 200 representatives and managers.

Negatives

• The investment management business is highly competitive, with many competitors having greater resources and brand recognition.
• The company is subject to extensive and evolving regulations, which can increase compliance costs.
• The company's dual-class stock structure can limit its inclusion in certain financial indexes.
• Poor investment performance can lead to decreased sales and increased redemptions.
• The company faces risks related to interest rate changes and market volatility.
• The company's reliance on third-party service providers exposes it to operational risks.
• The company is subject to cybersecurity risks and potential data breaches.

Risks

• A significant portion of Federated Hermes revenue is tied to money market assets, which are subject to interest rate risk and regulatory changes.
• The company faces intense competition from other investment managers, ETF providers, and financial institutions.
• Changes in laws and regulations can have a material adverse effect on Federated Hermes' business and offerings.
• Poor investment performance can lead to decreased sales and increased redemptions.
• The company is exposed to market risks, including volatility, illiquidity, and rising or falling interest rates.
• The company's dual-class stock structure can limit its inclusion in certain financial indexes.
• The company faces risks related to recruiting and retaining key personnel.
• The company is subject to cybersecurity risks and potential data breaches.
• The company's reliance on third-party service providers exposes it to operational risks.
• The company is subject to litigation, investigations, and other claims.

Future Outlook

The report includes forward-looking statements regarding various aspects of Federated Hermes' business, including asset flows, interest rates, regulatory matters, and market conditions. The company acknowledges that these statements are subject to risks and uncertainties and that actual results may differ materially.

Management Comments

• Management believes that money market funds provide, and will continue to provide, a more attractive investment opportunity compared to other competing products.
• Management believes that money market funds are investment products that have proven their resiliency.
• Management believes that it is appropriate within the context of an investment advisors fiduciary duty to customers and shareholders to integrate the proprietary insights from fundamental investment analysis, including ESG factors and engagement interactions within other traditional investment analysis of risk/returns for purposes of assessing risks and opportunities within the investment objective and the time horizon of an investment strategy in an effort to obtain long-term risk-adjusted returns for customers and shareholders.

Industry Context

The announcement reflects the ongoing trends in the investment management industry, including increased regulatory scrutiny, the growing importance of ESG factors, and intense competition among asset managers. The company's focus on active, responsible investing aligns with current industry trends.

Comparison to Industry Standards

• Federated Hermes' AUM of $757.6 billion positions it as one of the largest investment managers in the U.S., as stated in the report.
• The report mentions that the Investment Company Institute (ICI) reported over 7,000 open-end mutual funds and over 3,000 ETFs at the end of 2023, highlighting the competitive landscape.
• The company's focus on money market funds, with $560.0 billion in AUM, indicates a significant presence in this sector, which is comparable to other large asset managers.
• The report notes that Federated Hermes competes with investment alternatives offered by insurance companies, commercial banks, broker/dealers, and other financial institutions, which is consistent with the broader industry competition.
• The company's launch of fixed-income and dividend income equity ETFs aligns with the industry trend of expanding ETF offerings.

Management Changes

Corporate Governance

Legal Proceedings

• A class action lawsuit was filed against Federated Hermes and certain other defendants alleging breach of fiduciary duties relating to administering the Federated Hermes, Inc. Employees Profit Sharing/401(K) Plan.
• Federated Hermes and a subsidiary also filed suit against its first two primary insurance carriers relating to Federated Hermes claims for coverage of certain losses incurred.

Stakeholder Impact

• Shareholders: The company's performance and financial results directly impact shareholder value.
• Employees: The company's compensation and benefits programs, as well as its commitment to diversity and inclusion, affect employees.
• Customers: The company's investment products and strategies, as well as its customer service, impact its clients.
• Suppliers: The company's relationships with service providers and other third parties are important for its operations.
• Creditors: The company's financial health and debt obligations impact its creditors.

Next Steps

• Federated Hermes will continue to monitor and assess regulatory developments and their impact on its business.
• The company will continue to invest in technology and human capital to support its growth.
• Federated Hermes will continue to evaluate potential acquisition opportunities.
• The company will continue to focus on integrating ESG factors into its investment process.

Key Dates

Keywords

investment management, assets under management, AUM, money market funds, equity investments, fixed income, alternative investments, regulatory compliance, financial intermediaries, separate accounts, ESG, sustainability, code of ethics, ETFs, risk management