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Federated Hermes, Inc. (FHI) Q4 2020 Earnings Call Transcript

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Federated Hermes, Inc. (NYSE: FHI)
Q4 2020 Earnings Call
Jan 29, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to FHI fourth quarter 2020 analyst call and webcast. [Operator Instructions] I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

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Ray Hanley -- President

Thank you and good morning. Leading today's call will be Chris Donahue, CEO and President of Federated Hermes; and Tom Donahue, Chief Financial Officer; and joining us for the Q&A are Saker Nusseibeh, the CEO of the International business of Federated Hermes; and Debbie Cunningham, the Chief Investment Officer for Money Markets.

During today's call, we may make forward-looking statements and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. We invite you to review the risk disclosures in our SEC filings. No assurance can be given as to future results and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

Chris Donahue -- Chief Executive Officer

Thank you, Ray. Good morning, all. I will review Federated Hermes' business performance and Tom will comment on our financial results. We continue to grow and expand our EOS at Federated Hermes engagement activities. At year-end, our staff of engagers and other specialists reached 67, up from 49 at the beginning of last year. Assets under advice reached over $1.3 trillion, up from $877 billion, at the beginning of last year. And Saker may have some more interesting news on this subject later in the call. Total long-term assets under management closed the year at a record level of nearly $200 billion. Equity managed assets reached a record high of about $92 billion, up from $80 billion at the end of Q3, driven by market value gains and lower net redemptions and net sales, which were positive at nearly $800 million. Equity gross sales increased 34% from Q3, driving a two-thirds reduction in net redemptions. We saw positive net sales in 19 fund strategies in the fourth quarter, led by Kaufmann Small Cap, Global Emerging Markets, and the SDG Engagement Equity Users Fund. Others with positive flows included Global Equity ESG, Impact Opportunities, and the US Smith Fund. Using Morningstar data for the trailing three years at the end of the year, 23% of our funds were in the top quartile and 61% were above median.

Turning now to fixed income. Assets reached another record level of $84 billion at the end of the year, up nearly $5 billion or 6% from the third quarter, and up $15 billion or 22% for the entire year. The fourth-quarter growth was again driven by strong net sales of $3 billion. Our broad array of solid fixed income strategies was well-positioned to meet market demand. We had 22 fixed income funds with net sales in the fourth quarter. Fourth-quarter net sales leaders were Ultrashort Strategies was about $1.3 billion, high-yield with just over $600 million, and the multi-sector total return bond and short Intermediate total return bond funds which combined for about $600 million. Corporate high yield, mortgage back, multi-sector and municipal bond funds all had net sales, as did our fixed income SMA strategies, which grew $136 million to reach $1.4 billion in assets under management. Across sectors, short-duration strategies were in demand. Fixed income separate account net sales were led by high yield mandates. At year-end, using Morningstar data for the trailing three years, we had 29% of our funds in the top quartile and 50% were above median.

We began 2021 with about $500 million in net institutional mandates yet to fund. Moving to the money markets. The fourth-quarter asset decrease reflected lower fund assets of about $24 billion, partially offset by higher separate account assets of about $12 billion. Year-end money fund assets were down about $43 billion from mid-2020 peak and up about $15 billion from the prior year-end. As we have experienced in past cycles, our money market business has reached higher highs and higher lows once again.

Our money market mutual fund share including sub-advised funds at quarter-end was at about 7.8%, down from the prior quarter share of 8.1%. Taking a look now at recent asset totals. Managed assets were approximately $621 billion, including $416 billion in money markets, $95 billion in equities, $87 billion in fixed income, $19 billion in alternative, and $4 billion in multi-asset. Money Market Mutual Fund assets were $290 billion. As of now, we are planning for the stage return of more employees to our offices. While we expect to begin this process in the coming months, the decision about [Technical Issues] return more employees to our offices will be informed by the conditions and not by the calendar.

With that, I turn it over to Tom for the financials.

Tom Donahue -- Chief Financial Officer

Okay, Chris. Thank you. Total revenue for the quarter was about the same as in the prior quarter as growth in revenue related to long-term assets including equity, fixed income, private markets, and performance fees, and carried interest was offset by higher Money Market Fund waivers and the impact of lower Money Market assets, again showing our significant value of our diversified business mix. Q4 revenue included $11.2 million in combined performance fees and carried interest compared to $5.7 million in the third quarter. Over the last five years, including the period preceding the 2018 Hermes acquisition, annual performance fees ranged from about $7 million to $23 million and averaged about $11 million.

Annual carried interest ranged from about $3 million to $14 million and averaged about $7 million. But we still are unable to project these items for future periods. Looking at operating expenses. The increase in compensation and related from the prior quarter was due mainly to higher incentive comp expense of $5.9 million and expense associated with unused vacation time of $4 million. The decrease in distribution expense compared to the prior quarter was due mainly to the impact of minimum yield waivers and lower money market assets, which reduced distribution expense by about $15 million. This was partially offset by the impact of higher equity assets. Office and occupancy expense for Q4 included a non-recurring lease incentive gain of about $5 million. The impact of money fund minimum yield related fee waivers on operating income in Q4 was $8.7 million.

Based on recent assets and expected yields, the impact of these waivers on operating income in Q1 could be about $14 million. The increase reflects primarily lower yields than previously expected. Multiple factors that are difficult to predict will continue to impact the waiver levels. Non-operating income increased from the prior quarter due mainly to the increase in the value of investments and consolidated funds compared to Q3. The $5.2 million increase from the prior quarter in net income attributable to noncontrolling interest in subsidiaries was from higher NCI related to Hermes and consolidated funds. The Q4 dividend payment of $1.27 per share, including the $1 special dividend reduced Q4 EPS by about $0.01 per share, due to the exclusion of the dividends paid on unvested restricted shares from net income under the two-class method of computing earnings per share. During Q4, we purchased approximately 516,000 shares for $14 million, with nearly all of this bought in the open market.

Shimali [Phonetic], we would like to open the call up for questions now.

Questions and Answers:

Operator

Sure. And at this time, we'll be conducting a question-and-answer session. [Operator Instructions] And our first question is from Ken Worthington with JPMorgan. Please proceed with your question.

Ken Worthington -- JPMorgan -- Analyst

Hi. Good morning and thank you. I'm not sure if Debbie is on the call, if she is, Debbie, can you talk about the repo market and what's happening there? We've seen yields really come in. There is a lot of chatter about the outlook for repo. So what is your view on repo? How big a part of the Money Market fund investments right now? or repo? And are there alternatives in the near term if the repo market continues to be, I'll call it, uneven?

Debbie Cunningham -- Chief Investment Officer

Sure, Ken. This is Debbie. With regard to rates and what size in the repo market to those lower rates, we're currently in somewhere of a 3-basis point to 7-basis point range, hit as low as 2 basis points [Technical Issues] treasury battery pub basis earlier this week, and in some late afternoon thin markets, at various times last week, was actually trading negative. Now, we didn't participate in any of that, again very thin. And a small portion of two-way flow, but nonetheless, it was a negative territory. It's driven by a couple of things. Number one, mainly just huge amounts of cash that needs to be put to work in the short end, and thankfully, we do have a fairly good supply of treasury and mortgage-backed securities. However, it hasn't grown much. Stimulus, as you know, did not come the second round until the end of the fourth quarter, and in addition to that, that amount of stimulus that was passed and what's been funded so far has come largely from balances that -- of cash that were already at treasuries, so not new funding. We would expect that to change as the second, or I guess, third round of stimulus, the first in the Biden administration proceeds forward, sometime in the middle part of this first quarter.

As far as allocations go with our Money Market and liquidity products to repo, obviously the largest amounts would be in our treasury and our government agency funds. We attempt to do term repo and other types of non-overnight securities in order to reduce our exposure to that overnight marketplace, we're going out the curve a little bit with different security types. You can get a little bit more in yield, although not a whole lot. I mean the whole treasury yield curve at this point is basically 5 basis points to 9 basis points from one month out to one year. But in the quest to do that, we still have repo physicians for liquidity purposes in those funds that are anywhere from 40% to 55%-ish type. And when you look at our other types of products, our prime products in particular, that would also be using repo in the taxable liquidity world. The exposure there is actually very small, less than 10%. They use other types of overnight paper that is generally [Technical Issues] but repo would be from a rate perspective, overnight promotion paper, overnight CDs, other types along those lines. So hopefully that's helpful.

Ken Worthington -- JPMorgan -- Analyst

That was great. And then maybe, Chris, for you, there's been a lot of talk of consolidation, maybe can you share with us how you're thinking about succession and succession planning? And the next generation of leadership at Federated, when you and Tom decide to spend more of your time fishing, and golf thing, and doing other things?

Chris Donahue -- Chief Executive Officer

Well, first of all, the consolidation thing and the succession thing are two completely different items, and we get plenty of time to do grandchildren stuff right now, anyway. So there are no current plans for that which you are discussing. However, we had our Board meeting yesterday and I spent the better part of an hour with our independent directors of FHI, going over the succession plans, not only at the level of me, if I get hit by a bus, Tom gets hit by a bus, or anybody else, and how that filters through each one of our executive staff and their reports and those discussions. And so, we're not going to give you chapter and verse on all of that, but there are good plans and good options. We have a very strong executive staff and I am most confident that if I get hit by a bus, the machine would continue to roll the way that it has into the past.

In terms of consolidation, and there is always consolidation and then new stuff happening at the other end. And the way we've looked at it is we've done our big hairy deal, the way I put it, because of our affiliation with Hermes, you've seen the whole thing. And we've now changed the name to Federated Hermes, Inc., reflecting what you've heard me call a reverse transformational merger. And now, we are busy about making that work. We completed that with the acquisition of the private markets business from Hermes and MEPC, and are working this year in order to get that ready for sale into the marketplace. So that's what we are about.

We will continue to do both on areas of excellence if we see areas where that's possible. We will continue to do roll-ups, not unlike last year's PNC deal, which worked out very, very well. And so that's our role in consolidation.

Ken Worthington -- JPMorgan -- Analyst

Awesome. Thank you very much.

Operator

And our next question is from William Katz with Citi. Please proceed with your question.

William Katz -- Citi -- Analyst

Okay, thanks very much. First question centers around the Money Market business. Chris, I was wondering if you could, or maybe, Debbie, you could talk a little bit about where your prime exposure might be today and how the dialog with the regulators, particularly with the sort of the reformulated FSOC, and how that's going? And how to think about risks?

And then, underneath that, you mentioned that your market share was down a little bit sequentially, so wondering [Phonetic] if you can talk about some of the drivers there?

Chris Donahue -- Chief Executive Officer

I will cover some of the regulation, I'll let Debbie cover the prime exposure question. So on the regulation front, we've all seen the President's Working Group report, and that was basically the SEC throwing out everything that they had in their drawer on the subject, many of which had been totally rejected before all of which we have seen before. The most important one, as I've discussed on this call before, is the elimination of that 30% trigger, which is both unnecessary and unwise. And we pointed that out before and was really an artificial trigger to what was a government shutdown causing disruptions in the short-term markets. And we don't know what will happen under the new regime in Washington, and they are just getting started. So it's hard to -- it's hard to predict, but we are ready with our friends in Congress, and with all of the arguments we've had before because the Money Market Fund, especially on the tax-free side is especially relevant when there are tremendous efforts to get money to municipalities, as part of stimulus apropos of the pandemic. And this is a great financing vehicle and you could return $500 billion of marketplace oriented short-term cash into that short-term market by the beauty of those Money Market Funds to say nothing ever will happen on the prime side.

So, I'll let Debbie talk about the prime exposure and then I'll come back on the market share.

Debbie Cunningham -- Chief Investment Officer

Thanks, Chris. And good to hear from you, Bill. As far as our total prime assets go right now, there are about $125 billion, and that is more [Technical Issues] weighted toward the non-money parts of prime [Phonetic] side. And so, this [Technical Issues] or so in Money Market Fund assets with the remainder in other types of separate accounts offshore, LGIP type of assets.

As far as our allocation within those products to sectors of the prime market, the largest sectors remain with exposure to the asset-backed commercial paper world, the CDE world, and then other types of financial commercial paper. We also have some exposure in the non-traditional repo market, which back to Ken's question, first question, doesn't really have the same issues associated with it as does what would be traditional treasury and agency repo, and then ABS exposure, but in the shortest tranches and a very tiny exposure. As far as -- just to add to what Chris was talking about from a regulatory perspective, we've seen the ICI come out with what we thought was a very comprehensive piece that covered the Money Market, not just Money Market Funds. And I talked about some broader base [Technical Issue] we'll be focusing on that in particular. [Indecipherable] also came out with some ideas, and then the President's Working Group, and where I think the President's Working Group will end up focusing is, number one, on back with what the ICI and what Chris was saying, the broader market, but also some of the things that were changed in the 2014 amendments that went into effect in 2016, having to do with gates and fees and triggers on liquidity for those two items, whether they should be at all, whether they should be delinked from triggers of liquidity, and whether they should be considered separately entirely from a Gates [Phonetic] perspective versus a fees perspective -- perspective. So with that, I'll turn it back to you, Chris.

Chris Donahue -- Chief Executive Officer

Thank you, Debbie. With respect to market share, Bill, there is another aspect of market share that historically we have always looked at and it's a hard calculation, and that is market share of revenues. And part of the reason for our whole pricing history going back to the '70s on money funds has been as owner-operator, looking at the market share of revenues. So, at year-end, there were some moves in money, some of it was hot money, some of it was moving because some of the competitors quoted a higher net yield, and some of it is just the ebb and flow of regular business.

We've looked at the information on a daily basis and we see money going in and out at $3 billion, $4 billion, and $5 billion clips just like always. I would also mention that on the market share as we calculate it, if you go back to '14 when they put in the -- put those reforms in, our market share has been variously at those year ends 8.2, 8.02, 7.55, 7.38, 7.89, a high one at 8.78, and 8.12. So, as long as we over the long term are getting higher highs and higher lows, like I mentioned, we are not worried about the quarter-to-quarter market share.

William Katz -- Citi -- Analyst

All right, thanks. Just a quick follow-up. Normally you give some flow detail for sort of where we are today, we didn't hear that from you, maybe I missed it, if I did, I apologize. And then, relatedly on the institutional pipeline, any dynamic there in terms of where you're seeing the best of it? Thank you.

Ray Hanley -- President

Hey, so, it's Ray. So, through the early part of the quarter, obviously with about three weeks of data, the equity funds and SMA combined are positive, a couple of hundred million. The fixed income continues to be a positive, a bit stronger. And actually, the results are slightly positive. So long term flows continue to be running positive for the first three weeks of the quarter. In total, it's about $1.6 billion. So again, it's fixed income, really, ahead, but equity is solidly positive.

William Katz -- Citi -- Analyst

Thank you. Thanks.

Operator

And our next question is from Robert Lee with KBW. Please proceed with your question.

Robert Lee -- KBW -- Analyst

Great. Good morning, everyone. Thanks for taking my questions. Now, maybe, Tom, question for you. So, just wanted to think through comp as we look to next year, understanding there is the $4 million-ish kind of one time that goes away. You mentioned the incentive comp, but you've also had the nose [Phonetic] run-up in EOS employees. So should we -- if we exclude the $4 million one-time, is that kind of giving us a good jumping, off the point, for next year as part of the incentive? You know, some -- I know, I guess, I'm following a little bit of a catch-up for the year. You had a good fund performance and whatnot to make that jump [Phonetic], some of it. Just trying to kind of level set for next year.

Tom Donahue -- Chief Financial Officer

Sure. So, our dedicated employees at Federated decided to work instead of take their vacation, basically, in 2020. And so, what normally would -- expense that would occur in Q1 to Q2 to Q3, we had to take all the expense in Q4 because we expect them to take vacation in 2020 -- 2021, I mean.

So, it's not -- it's a full year bundled up in one quarter and probably the normal run rate number is around $1 million there, so we said it was $4 million, so a normal run rate is $1 million. And that's about how I would look at the vacation days.

Chris Donahue -- Chief Executive Officer

So, and the last part of your question, Rob, I'd like Saker to comment on EOS because you phrased it, the run-up in people at EOS, but I think you need to hear what's going on there. Saker?

Saker Nusseibeh -- Chief Executive Officer, International business

Thank you, Chris. So there's a few things about deals. One is that the run-up was in fact part of our long-term plan to bolster our positioning, particularly in North America, and that was part of the acquisition by Federated going back to '18, so that was part of the plan. The second part is that we continue to increase our clients. And since the beginning of this year, we've had two major institutional clients sign up to the EOS services out of Holland with a combined value of about EUR130 billion. So it's -- and we continue to grow that business and the more we grow it, obviously the more that we need to put resources in it because one leads to the other. Back to you, Chris.

Chris Donahue -- Chief Executive Officer

Thank you, Saker. And what's going on here, Rob, is an investment in the life bud of the future of engagement, and it's very, very important, and will basically impact all of investment management here at Federated and around the world.

Robert Lee -- KBW -- Analyst

Got it. And maybe the part -- I mean, just -- I'm sorry, just to keep on the comp. Thanks. So if I exclude the $4 million, obviously, maybe $1 million just stays. Is that -- should I think about $134 million as being the right jumping-off point for kind of your revenues, your comp base heading into next year?

Chris Donahue -- Chief Executive Officer

Yeah, Rob, in the end, I'm not going to be that helpful because I just stopped predicting that as -- if you remember how wrong we were, off by $9 million in one quarter, off by $5 million, another quarter. And it depends on all the things, the sales, and how those bonuses happen, the investment management, and how that comes about, and then everything that's going on in Hermes, which factors in. And you see this quarter, the performance fees and the carried interest, and how Saker is managing through, you know what he delivers to the enterprise. And so, like I said in the beginning, a long, long -- long or short talk, not to really give you all that much guidance on it.

Robert Lee -- KBW -- Analyst

[Indecipherable] can't hurt to try. But I think on the other -- maybe, back to the ESG and EOS. Can you just update us on where those initiatives are in the US? And I know pension stampings [Phonetic] is related to building that out here. Also on the product side, right now most of the thematic products or SICAVs, or obviously in the Hermes' U.K. part of the business. But where are you kind of getting that up and running and products launched here in the US well?

Chris Donahue -- Chief Executive Officer

Well, I will talk about some of the products, but we put our sixth product that's being managed by our friends in the U.K., and all of it is informed by what comes out of EOS. There is no direct product thing coming out of EOS. What EOS at Federated Hermes does is talk to 1,200 companies on separate issues for their clients, create data on the engagement that then is put into the decision-making process across the board at Federated Hermes. And I'll allow Saker to make some more particular comments.

Saker Nusseibeh -- Chief Executive Officer, International business

Thank you, Chris. So, you've got to understand EOS sort of in two ways. First off, in representing our clients and the engagements with the companies that we do, we work with these companies on behalf of our clients to ensure and enhance long-term returns and best business practices for the long term. That's a benefit to all of us. But also, because of this way that we engage and the depths of engagement that we have, because of the history of engagement, typically we engage with the same company over a very long period, stretching more than 10 years because of the depth of expertise we have. We're the oldest engagement team anywhere in the world, we're the largest engagement team anywhere in the world, and we would claim we have the best, experienced engagement team anywhere in the world. That gives us particular insights about specific companies, but also about sectors and markets. All of that then is available as part of the integrated information that are used across all assets that are actively managed within Federated Hermes. These are the assets managed out of our Pittsburgh office, our Boston office, our London office, or any other office that we may have. That is the beauty, if you like, of having this stewardship business as part and parcel of what we do. Now, additionally, with the changes in the market and a move toward s requirement of more stewardship activity for passive investors, particularly out of the European markets, we see an increased demand for our stewardship services, and that inevitably over time will lead us to invest more into it.

So we get two things out of it, if you like, it's a business in its own right, it helps enhance returns to our clients, and it helps us in making better, informed decisions as part of the information that feeds into our matrix of client making -- of decision making trees for our active management. I hope that answers the question on EOS. And back to you, Chris.

Robert Lee -- KBW -- Analyst

Okay. Thanks, guys.

Operator

And our next question is from Mike Carrier with Bank of America. Please proceed with your question.

Mike Carrier -- Bank of America -- Analyst

Good morning and thanks for taking the question. This is probably for Sacker, but just in terms of the performance fees and carried interest, the historical levels are always helpful, but given what seems like a challenging year for real estate, generally, it seems like the overall level of performance fees and carried interest is strong. Just curious if the asset base has increased significantly, that could those levels or from like a portfolio standpoint, are we just in a more like season portfolio, I mean, than an average year and that's what's throwing off some of the -- the higher level of performance fees and carried interest?

Saker Nusseibeh -- Chief Executive Officer, International business

So, I'll -- I'll try to answer that the best that I can. Now, the first thing to say is you cannot extrapolate forward performance fees from back looking performance fees. Generally speaking, when we say performance fees, we're referring to our real estate, but not exclusively our real estate. But that's where most of our performance fees are gathered.

Now, if you remember, I have said on previous calls that there are two things that generate performance fees. One is, there is performance fees generated for the equivalent of what you would call in the United States a neutral bond, what's called here a unit trust, and to some degree, you can see the trend of that over time because it's calculated over three years, and you can see the trend of performance, and although you can't predict it, you can see the directionality.

The way we generate performance fees in that and indeed in separately managed portfolios is that we tend to enhance the value of the buildings that we buy for our clients and the investments we make for our clients through better management through integrating ESG Funding off into real estate. We're the pioneers in doing that as well. And I'll remind you all that if you go back in time in the United Kingdom, there is a massive development in King's Cross, which is a living example of how integrating ESG factors into the development actually increases return over the long term.

So we do that for the buildings that we manage. We manage them well and we tend to, over time, go into sectors that we think are growing. Now, that is the average performance fees. But in addition to that, we get, every now and then, additional performance fees when projects are finished or finalized or when we reached a landmark in investment for a major client. These tend to happen not as readily as the other bit of performance fees, and that's why you occasionally see spikes.

Now, if you look back historically, you can average the performance fees for our real estate. Going forward, you cannot predict performance fees, but I have no reason to think that our top methodology, which has been alpha-creating, is in danger of not being as alpha-creating as it's always been, but the level of performance fees, cannot be predicted and therefore we do not. I'm sorry, I can't [Speech Overlap] more than that.

Tom Donahue -- Chief Financial Officer

Mike, this is Tom. Well, I mentioned that performance fees and carried interest is $11.2 million, and last quarter was $5.7 million in my remarks. So our team did a little work because -- just to help people think through because there is the NCI and tax, and where does it occur, which tax rate, and we view performance fees and carried interest as core to us. But somebody says, what's core earnings, if you look at Q4 versus Q3 and bring it down $0.01 per share difference with those numbers that I just went through, it's basically about a $0.03 difference quarter-to-quarter.

Mike Carrier -- Bank of America -- Analyst

Okay, guys. That's helpful. And then, just a follow-up on Money Market, Debbie. Thanks for that earlier comments and realizing team only gives waiver guidance for the current quarter. I'm just curious how you and the team are thinking about like rates over the year. You mentioned stimulus, that could be a potential benefit. I mean any other catalysts that you're watching throughout the year that could either pressure or lift some of the yield?

Debbie Cunningham -- Chief Investment Officer

We are the -- obviously, short-term rates are anchored to Fed policy. And at this point, you know, Chair Powell, earlier this week, you know, told us we're still in a very good environment, that's going to be also stimulative, and it's not going to change in the near term. So, we tend to believe them.

What we also know is that, you know, if -- when virus distribution or vaccine distribution for the virus becomes more widespread, there is a whole lot of pent-up demand that's out there. It's necessarily with the consumer, but it's also in the business sector as well. And depending upon the sector of business, it can be high or extremely high or moderately low, but in any case, there is pent-up demand that we think will need to be satisfied. And what that will drive is at least pockets of inflation from our expectation [Technical Issues]

And pockets with inflation are not really what the Fed gets concerned about with their dual mandate of inflation employment. However, we think that, as travel begins to pick up again, business from a more traditional mode begins to pick up again, those things will drive -- begin to drive that -- the inflation rate up. And I think what that means is the Fed is not in play in 2021. There is just no way that's going to happen. But we also think that the guidance that they've given that leads us to a 2023 timeframe might be a little bit too long, given some of those scenarios and that what we're probably thinking about for a steeper yield curve with that policy is likely to be in the second half of 2022, at least at the rate that we're currently progressing.

So where does that put us in the context of this year, this day, these funds? It's essentially a kind of a technical market at this point that's going to be driven a lot by supply and demand. A lot of frontend is of -- or a lot of frontend cash is existing if that frontend cash starts to get more comfortable as the yield curve on the bond side backed up or if the equity market may be pulled off a little bit and they reenter those markets, some of the cash will leave the liquidity market and that, in and of itself, less demand will pause the yields of the season. On the other side of the equation, on the supply side, if we get additional treasury supply, GST supply is probably pretty stagnant for the year. Commercial paper should pick up though as industry picks up, that's the supply side. You got more supply, less demand in that situation. Perhaps, you get a little bit of a steeper money market yield curve. That doesn't mean you get 15 basis points or 20 basis points. It probably means you get to the five. So that's sort of the neighborhood that we're looking at from a steepness standpoint in 2021.

Mike Carrier -- Bank of America -- Analyst

Okay. It's great color. Thanks a lot.

Operator

And our next question is from Kenneth Lee with RBC Capital Markets. Please proceed with your question.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, thanks for taking my question. We've seen strong -- very strong net sales for fixed income for the past few quarters. Just wondering if you're able to highlight what you think could be some of the key contributing factors for that?

Chris Donahue -- Chief Executive Officer

Some of the key factors are that the clientele is still anxious to see yield, and we see this across the board inside our distribution. And there is renewed interest in muni space, we're getting more questions on that because of the obvious implications of potential tax increases. And there remains just a strong appetite for short duration at most firms, and for anyone who is allocating money, not making a brand new decision, oh, are we going to go in all bonds, all stocks now. Our products proved very, very strong last year. That's why we had, I think, it was 19 of them, with positive flows. So was an across-the-board enhancement of quality that occurred last year, and it was focused on positive flows in the fixed income, which are continuing, as Ray mentioned, but what's really going on behind the curtain is that even though the salespeople are not traveling, they are enhancing the relationships they already have, because if you already have the emails, a phone number, and you know the golf courses in the places where your clients are going, you can still build up relationships. And yes, it does put a little crimp on new stuff going in, we're getting into new clients, but you get to enhance the quality [Indecipherable], I've mentioned here before, which means a broader look at the Federated array of products and an in-depth look at the portfolios through portfolio construction.

So the portfolio construction, when you tear into these -- these portfolios, ends up with a lot of our short intermediate or total return bond fund type products as the answer to the types of bets that are being made by our clients. So this move to quality in the marketplace and the still current demand by many people for yield, keeps the fixed income as a positive flow situation.

Tom Donahue -- Chief Financial Officer

Yeah, can I just highlight, as Chris said, short duration has been strong, high yield has certainly been strong, and then within high yield, our institutional domestic product. But we've also seen last quarter and into the first part of this quarter, the Hermes product menu, the SDG Engagement high-yield Credit Fund has gotten off to a very solid start and had a very solid fourth quarter. So we're up to 23 funds in the first part of Q1 on the fixed income side that have positive net sales and they really are spread through sectors, with a concentration in short duration across sectors, high yield, and as I mentioned SDG coming on.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great. That's very helpful color. And just one quick follow-up if I may. I know it's been a while since we talked about this, but wondering if there are any updated thoughts on potential -- the potential BT Pension Scheme outflows? What's the expectations for this year? And should we expect to see any kind of meaningful impacts on net sales from those flows? Thanks.

Chris Donahue -- Chief Executive Officer

Because they are a big, big beautiful client, we don't like to get into the specifics of their redemption or investment profile. As you know, they have a substantial assets with us on the long-term nature, and as we discussed way back at the beginning, they had announced, and we repeat that they were going to be taking down the mutual fund or products that they're in over time, related to their own circumstances. And we have no reason to think that that won't continue. But we're just not at liberty to give what their redemption profile may or may not be. And sometimes we don't even know.

Kenneth Lee -- RBC Capital Markets -- Analyst

Understood. Thank you very much.

Operator

And our next question is from John Dunn with Evercore ISI. Please proceed with your question.

John Dunn -- Evercore ISI -- Analyst

Hi, guys. I mean, I was wondering, are there any products that can be sold kind of as a substitute for Kaufmann Small Cap and how much of flows typically come from new versus existing clients? So basically, just a notion of being able to ship clients between strategies.

Chris Donahue -- Chief Executive Officer

So we have a broad array, as you know, of Kaufmann product. Obviously, the mid cap and obviously the large cap, and for those that are focused on the Kaufmann-methodology, there very good alternatives. On the MDT side, we have a couple of small-cap funds that have very strong performance and have picked up good assets and good flows over the timeframe. And also, you have the All Cap Core, which includes -- I'm talking about MDT, which includes the small cap as well.

In addition, on the international side, we have the international SMID product, and frankly, our friends in Cleveland are basically all over the Cap scale in their investments as well. So we have some specific Kaufmann, some specific small cap, and some other general funds that include small caps, that enable us to continue to talk to clients, very, very successfully about where they could invest for the future.

John Dunn -- Evercore ISI -- Analyst

Great. And then, you guys had talked about how Money Market deals -- Money Market deals being idiosyncratic, but how should we think about different rate scenarios and people's willingness to throw in the towel, like eventually, when we get higher rates, would people may be -- if [Technical Issue] think needed to get a better price, and to that spur more activity?

Chris Donahue -- Chief Executive Officer

In the whole history of money funds going back into the '70s, to me the way to look at it is, people will always need to have their cash managed. And there are various things that occur in the marketplace that incent them more. Yes, higher rates would be more helpful. But on the other hand, if you go back into a standard-issue wealth management sequence, about 20% of that money is always in cash in any event, whether they're long the market, whether there are bets on, bets off, it's just the ebb and flow of life. And you couple that with the increase in money supply, the overall increase in markets, and portfolios being a percentage of those increases in value, there is always constant demand for the cash.

Tom Donahue -- Chief Financial Officer

John, if you're also referring to M&A and money markets, you know, the way we look at that is to work out long-term arrangements with the people that we do deals with, where they continue to earn what is available to earn. So, in that low-interest environment, of course, there isn't as much to earn, and -- but if people throw the towel in and say they want to hook up with us, we are still available, ready, and willing to do that. And it's pretty easy to look at what's being earned and we share the risk with anybody who we do transactions with, and it's worked out well and we're still ready, willing, and able to do them.

John Dunn -- Evercore ISI -- Analyst

Thanks very much.

Operator

And our next question is from Dan Fannon with Jefferies. Please proceed with your question.

Dan Fannon -- Jefferies -- Analyst

Thanks. Just a follow-up on the fee waivers. The guidance for Q1, I assume that's as of the balances today, but just, we've seen outflows to start the year in recent months. So, just can you talk about some of the inputs that could make that number -- or variable that could make that number, either higher or lower, as we think about the current backdrop?

Tom Donahue -- Chief Financial Officer

Yeah, when we did the forecast, the assets were about where they are today. So basically, not much change. Of course, we always -- we used to have a whole paragraph on all the variables and we stopped giving that, but all the variables are there. Assets go up, changes in assets go down, it changes, and then, all Debbie's rates discussions. But that's our current forecast updated with assets currently.

Dan Fannon -- Jefferies -- Analyst

Okay. And then, just with regards to the sharing with the distribution partners. So it seems like this quarter the relationship between, what was I think, other revenue and the distribution expense, was a little bit more disproportionate. Have you -- has the economic share of -- with your partners changed as those fee waivers have increased or has that -- how should we think about that going forward?

Chris Donahue -- Chief Executive Officer

Dan, it's really -- it's not anything like an active change on our part. It's really just each one of the funds, and each really, each class of shares has a different level of distribution revenue and expense. And then, what comes out at the end is really a blend across all of those funds and classes of shares. So it is now, of course, as gross yields come down, which they did by a couple of basis points overall, during Q4, you have funds that weren't waiving the day before that begin to waive when they cross a threshold. And this is why we've always said that this is very difficult to model, it's not linear. You have funds move in and out, and they can have very different fee characteristics. And it's just one of the variables that makes predicting this difficult.

Dan Fannon -- Jefferies -- Analyst

Okay, thank you.

Operator

And our next question is from Brian Bedell with Deutsche Bank. Please proceed with your question.

Brian Bedell -- Deutsche Bank -- Analyst

All right. Great, thanks. Good morning, folks. Just one follow-up on Dan's Money Market question, and then, a few ESG questions. On that distribution side, is there a, I guess, a natural floor that we should be thinking about in terms of the distribution fees that -- or the distribution waivers that you're sharing with your distribution partners? I guess the question would be, how should we think about the magnitude of what that could come to, and then would there be more pressure on your actual asset management fee waivers that you've reached [Phonetic], if that words [Phonetic] is reachable?

Tom Donahue -- Chief Financial Officer

So it would be a similar answer, Brian, the -- within each individual fund, it would have a level of distribution fees, typically distribution fee revenue, but then when you blend them all in, it wouldn't be a floor level that we could give you that would say, beyond this point for the complex waivers change. It's really that would occur at the fund level.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. Okay, fair enough. And then, probably a few questions too. One is just on the traction of your ESG 100 funds in the US. I guess the broader question really here is, how you're seeing demand improve in the US, and especially on the EOS side. Sort of a question for Sacker. You're getting from that $877 billion to $1.3 trillion this year, how much of that has come from US clients. And then, what's -- probably more importantly, what do you see as the demand as the US is really sort of catching up due to -- or beginning to catch up to the trends in Europe?

Chris Donahue -- Chief Executive Officer

Saker?

Saker Nusseibeh -- Chief Executive Officer, International business

Sorry, yeah. Of course. So, the answer is that you've got to think about it in three separate buckets. So the demand in Europe for EOS is driven partly by not just market move as a whole, but also regulatory moves. We can see increasing demand for it in the United States, but that will take time to catch up, as you'd expect. So, as a separate product, in time we will see increasing demand for US and we are really getting some indications of that, that would catch up with the demand in Europe. But also in Asia, where it's growing, and the best indication of that is the VIX index providers are talking very actively about stewardship as being something that they do. That's because they're reflecting demand. That's one way you should think about it.

The other way you should think about ESG, in general, though, is how much do we integrate ESG as a firm without necessarily calling our products ESG, because this is another factor that's taken into to enhance the returns and create sustainable wealth over the long term, and the answer that, we're well past the 90% mark, right across the Board in what we do, that we consider are active -- are active, the managed accounts integrates the data we get from ESG. Why do we need that? Because actually, it helps to make better decisions to create better wealth over the long term, that's the second part of it. And then the third one is, specific products that clients want to buy that are labeled an ESG, and in my own mind, I think of those more as domestic products.

Now, yeah, there is going to be discrepancy between the US and Europe, because it's the same discrepancy that you get in any kind of market. So, high yield SDG might appeal across the Board, for example. But on the other hand, something that the Europeans call sustainable might be very specific to Europe. And we'll see that. But in general, if the question is, do we see the trend strengthening? The answer is: yes. There is acknowledgment it does enhance returns, there is an acknowledgment that there would be more specific products coming out of it. But obviously, the United States is a different market with a different fiduciary law structure. It takes time.

Brian Bedell -- Deutsche Bank -- Analyst

Yeah, so [Speech Overlap]

Chris Donahue -- Chief Executive Officer

Brian, if I may? I interpret two other questions inside your comment. And the first one is: where are we on integration of our teams, both US, obviously, and Hermes, they're already there. And the other is: what is the interest in the ESG offerings inside our client base?

And on the first: we are well, well along the way, with most if not all, well along our three-stage integration process of analysis, customization, and full integration. And we are very proud of our RIO office, which is Responsibility Investing Office for accomplishing this and making the Federated Hermes Enterprise with ESG baked in the cake.

On the question of interest, we've done some surveys with our clients, and overwhelmingly, two things are happening. First, they are getting more, meaning our FAs are getting more questions from their clients regarding ESG. This will increase with the activities of the new administration and we are discovering that more and more of the advisors are incorporating it into their methodologies. Now, this is not universal. Okay? This is not universal. But it is a very, very strong force.

Brian Bedell -- Deutsche Bank -- Analyst

Yeah. No. I saw the survey, that's very compelling. And are you seeing, I guess, just on the funds that you've launched, I know it takes a lot of time to build them through distribution. But, I guess, what are the asset levels of the ESG Funds that are US-domiciled as of the end of this year?

Tom Donahue -- Chief Financial Officer

So, Brian, the group of products that we started over the last year-and-a-half, they're relatively new, but the asset base is up around $130 million, and that would have been up from just over $100 million at the end of the third quarter. So, progress, but as you know, with mutual funds, they need to be bigger to open up additional distribution opportunities, and they need -- typically need additional seasoning in terms of track record. That said, because of the topical interest in ESG, these have proceeded along nicely, again with relatively recent inception dates.

Brian Bedell -- Deutsche Bank -- Analyst

Yep. No, that all makes sense, and thanks so much for all the detail on that. I really appreciate it.

Operator

And we have reached the end of the question-and-answer session. I will now turn the call over to management for closing remarks.

Ray Hanley -- President

Well, thank you. That concludes our call for today. And we thank you for joining us.

Operator

[Operator Closing Remarks].

Duration: 52 minutes

Call participants:

Ray Hanley -- President

Chris Donahue -- Chief Executive Officer

Tom Donahue -- Chief Financial Officer

Debbie Cunningham -- Chief Investment Officer

Saker Nusseibeh -- Chief Executive Officer, International business

Ken Worthington -- JPMorgan -- Analyst

William Katz -- Citi -- Analyst

Robert Lee -- KBW -- Analyst

Mike Carrier -- Bank of America -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

John Dunn -- Evercore ISI -- Analyst

Dan Fannon -- Jefferies -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

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