Company Reports

There was little in no-moat-rated Federated Hermes first-quarter results that would alter our long-term view of the firm. We are leaving our $38 per share fair value estimate in place and view the company's shares as being slightly to modestly undervalued right now.

All the US-based asset managers we cover have reported their December-quarter earnings, and in some cases revealed assets under management, or AUM, data for January 2024. We now have a better sense of how recent market activity has been affecting results. In our third-quarter earnings wrap, we had assumed that the malaise that had crept into the markets during August-October 2023 might continue through the rest of the year.

We've increased our fair value estimate for no-moat-rated Federated Hermes to $38 per share from $36 to account for revised near-term expectations for assets under management, revenue, and profitability since our last update. With the US equity markets rising 12% in the fourth quarter of 2023, and the credit markets also rising 7%, Federated Hermes reported a 6% increase in its AUM during the period. This left the firm in a better position than we had been expecting coming into 2024, allowing us to raise our fair value estimate 6%.

Several issues have made it increasingly difficult for asset managers that are running predominantly active portfolios to generate positive organic AUM growth. Poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel are leaving them more dependent on market gains to increase their managed assets. We believe there will always be room for active management, but the advantage of getting and retaining placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

While there was little in no-moat Federated Hermes fourth-quarter results that would alter our long-term view of the firm, we expect to increase our $36 per share fair value estimate slightly once we've incorporated the results into our valuation. This would leave the company's shares slightly undervalued relative to their Jan. 25 trading price.

While the runup in the equity markets the past several weeks is likely to have a positive impact on assets under management for the U.S.-based asset managers, we don't expect it to have too significant an impact on our fair value estimates, which are based on 10-year forecasts for AUM growth, fee rates, revenue, and profitability. As of the Nov. 29 market close, the traditional U.S.-based asset managers we cover were trading at an average price/fair value multiple of 0.97, making them only slightly undervalued, while the alternative-asset managers we cover were trading at an average price/fair value multiple of 1.09. This is far from the margin of safety we would need to recommend these more volatile names to long-term investors.

With all the U.S.-based asset managers we cover having reported quarterly earnings, and in some cases revealing assets under management data for October, we have a better sense of how the ongoing equity and credit market volatility is affecting results. Due to their lack of organic AUM growth—a product of having large exposure to higher-cost, poorer-performing active equity products in a market where low-cost passive products are preferred—most of the traditional U.S.-based asset managers have become dependent on equity market gains to expand their AUM. In an environment where fees are under pressure and profit margins are being affected by a need to spend more to maintain (if not improve) performance and enhance distribution, a precipitous decline in managed assets, like we saw during 2022, has a large negative impact on revenue and profitability, given the amount of operating leverage inherent in the asset manager business model.

Several issues have made it increasingly difficult for asset managers that are running predominantly active portfolios to generate positive organic AUM growth. Poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel are leaving them more dependent on market gains to increase their managed assets. We believe there will always be room for active management, but the advantage of getting and retaining placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

While there was little in no-moat-rated Federated Hermes third-quarter results that would alter our long-term view of the firm, we expect to lower our $38 per share fair value estimate 5%-10% to account for the impact that continued equity and credit market headwinds will have on results in both the near and long term.

Several issues have made it increasingly difficult for asset managers that are running predominantly active portfolios to generate positive organic AUM growth. Poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel are leaving them more dependent on market gains to increase their managed assets. We believe there will always be room for active management, but the advantage of getting and retaining placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

With the U.S.-based asset managers having reported their latest quarterly earnings, and in some cases revealing assets under management data for the end of July 2023, we have a better sense of the impact the recovery in the U.S. equity markets is having on results. As we've noted in the past, most of the traditional U.S.-based asset managers have become wholly dependent on equity market gains to grow their assets under management, given their lack of organic AUM growth, due to large exposure to higher-cost, poorer-performing active equity products relative to low-cost passive products. In an environment where fees are under pressure and profit margins are being affected by a need to spend more heavily to improve investment performance and enhance distribution, a precipitous decline in managed assets as we saw during 2022 has a large negative impact on revenue and profitability—especially considering the amount of operating leverage inherent in the asset manager business model.

There was little in no-moat-rated Federated Hermes' second-quarter results that would alter our long-term view of the firm. We expect to leave our $40 per share fair value estimate in place. We view the company's shares as being slightly undervalued right now.

There was little in no-moat-rated Federated Hermes first-quarter results that would alter our long-term view of the firm. We are leaving our $40 per share fair value estimate in place. We view the company's shares as being only slightly undervalued right now.

We've increased our fair value estimate for no-moat-rated Federated Hermes to $40 per share from $35 after updating our valuation model to include higher income streams from the company's money market operations in the near term.

Several issues have made it increasingly difficult for asset managers that are running predominantly active portfolios to generate positive organic AUM growth. Poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel are leaving them more dependent on market gains to increase their managed assets. We believe there will always be room for active management, but the advantage of getting and retaining placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

While there was little in no-moat Federated Hermes fourth-quarter results to alter our long-term view of the firm, we expect to raise our fair value estimate slightly to account for higher levels of assets under management than we were forecasting for the start of 2023. Federated closed the December quarter with a record $668.9 billion in managed assets, up 7.1% sequentially and basically flat on a year-over-year basis, which was better than our forecast for $642.4 billion. Net long-term outflows of $4.8 billion during the fourth quarter were, however, worse than our expectations for $1.1 billion in outflows, driven primarily by the company's fixed-income operations, which reported $4.0 billion in outflows for the period.

While there was little in no-moat Federated Hermes' third-quarter results that would alter our long-term view of the firm, we expect to increase our fair value estimate to $35 per share from $33 owing to higher income streams from the company's money market operations than we had been forecasting. We view the shares as being slightly undervalued relative to our revised fair value estimate.

Several issues have made it increasingly difficult for asset managers that are running predominantly active portfolios to generate positive organic AUM growth. Poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel are leaving them more dependent on market gains to increase their managed assets. We believe there will always be room for active management, but the advantage of getting and retaining placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

There was little in no-moat Federated Hermes' second-quarter results that would alter our long-term view of the firm. We maintain our $33 fair value estimate and consider shares to be slightly overvalued.

Many investment service firms (wealth managers, retail brokerages, custody banks, and asset managers) have material exposure to interest rates. Clients at wealth management firms and retail brokerages typically have 5%-20% of their account balance in cash that the financial institution sweeps into a bank subsidiary. The deposits are then used to make loans or invest in fixed-income securities. They may also earn asset management or distribution fees on client assets in money market funds.