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Federated Hermes Inc (FHI) Q2 2021 Earnings Call Transcript

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Federated Hermes Inc (NYSE: FHI)
Q2 2021 Earnings Call
Jul 30, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Federated Hermes Q2 2021 Analyst Call and Webcast Conference. [Operator Instructions] A question-and-answer session will follow the formal presentation.

I would now like to turn this conference over to your host, Mr. Ray Hanley, President of Federated Investors Management Company. Thank you, sir. You may begin.

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Raymond Hanley -- President, Federated Investors Management Company

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

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

Chris?

J. Christopher Donahue -- President, Chief Executive Officer

Thank you, Ray. Good morning all. I will review Federated Hermes' business performance, Tom will comment on our financial results.

Q2 ended with a record total assets under management of $646 billion, including record assets in each of equities $101 billion, fixed income $91 billion, and private markets $21 billion. Assets under advice by EOS at Federated Hermes also reached a record high of $1.5 trillion, with a T, at the end of the second quarter. We added two new clients in the second quarter, in addition to the three we added in the first quarter.

Now, while equity fund flows were slightly negative in the second quarter about $300 million, we saw positive Q2 net sales in 18 equity fund strategies led by international/global with about $1.1 billion in net flows. Here, net sales were strong again in our U.K. manage sustainable strategies, including SDG Engagement, Asia ex-Japan, Global Equity ESG, and Global Emerging Markets.

Our equity fund performance compared to peers was solid using Morningstar Data for the trailing of 3 years at the end of the second quarter, 50%, that 16 out of 30, of our equity funds were beating their peers 23%, which is 7 out of 30, were in the top quartile of their category. Among the performance highlights using Morningstar Data, the soft closed 5 Star Kaufmann Small Cap fund finished in the top 12% for Q2, in line with its long-term record. At the end of the second quarter it's trailing 3 year record was top 16% and it was top-decile for the trailing 5 and 10 years. It was fourth quartile for the trailing 1 year.

Equity SMAs had Q2 net redemptions of about $162 million down from about $450 million in Q1 and $900 million in Q4. Equity institutional separate accounts had about $950 million of net redemptions, including $817 million from a U.K. based client. For the first 3 weeks of the third quarter, equity funds and SMAs had positive net sales of about $115 million.

Turning now to fixed income. The second quarter was another very solid quarter of growth and end performance. Assets increased by $4.3 billion or 5% from the prior quarter, with about $3.2 billion or nearly 3 quarters of the growth coming from net sales. We had 21 fixed income funds with net sales in the second quarter, led by multi-sector funds with about $1.8 billion and high-yield and other corporate strategies with about $400 million. Within high-yield, net sales were again led by a U.K. sustainable strategy, i.e., the SDG Engagement High Yield Credit Fund with $350 million. Fixed income separate account net -- net sales of $1.1 billion were led by multi-sector mandates.

At the end of the second quarter and using Morningstar Data for the trailing 3 years, we had 10 funds 28% in the top quartile and 16 funds 44% above median. For the first 3 weeks of the third quarter, fixed income funds and SMAs had positive net sales of about $835 million.

In the Alternative/Private Market category, net sales were driven by our differentiated finance strategy with net sales of nearly $600 million. We begin the third quarter with about $1.9 billion in net institutional mandates yet to fund into both funds and separate accounts. These findings are expected to occur in private markets with the concentration in unconstrained credit and in fixed income.

Now moving to Money Markets. Assets were up nearly $11 billion in the second quarter with just under half from funds and the rest from separate accounts. Our money market mutual fund of market share, which includes our sub-advised funds, was about 7.4% at the end of the second quarter, up slightly from the first quarter percentage.

As we said on our previous call, we believe that Q2 was the high watermark for money market fund yield waiver impact. As we expected, the Fed raised the administered rates in mid-June moving repo rates from zero to 5 basis points and interest on excess reserves from 10 to 15 basis points. While the Fed movement was a step in the right direction, the money fund yield curve remains very flat and we are experiencing more waivers for competitive purposes. Tom will update our yield waiver outlook for the third quarter.

Taking a look now at recent asset totals. Managed assets were approximately $638 billion including $421 billion in money markets, $99 billion in equities, $93 billion in fixed income, $21 billion in alternative, and $4 billion in multi-asset. Money market mutual fund assets were at $293 billion.

Tom?

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Thanks. Thanks, Chris. Total revenue for the quarter was down from the prior quarter due mainly to the impact of higher minimum yield and competitive waivers. Q2 carried interest was $6.2 million lower than Q1, which included the impact of consolidating certain variable interest entities or VIEs from the 2020 Hermes GPE acquisition starting in Q1.

Other revenue increases from Q1 included the impact of higher money market assets, increasing revenue by $5 million and additional day increasing revenue by about $5 million, and higher equity and fixed income assets increasing revenue by $3.4 million. Q2 performance fees and carried interest were $4.4 million compared to $9.4 million in Q1, which included the catch-up in carried interest related to the VIE consolidation.

Looking at operating expenses, the decrease in comp and related from the prior quarter of about $11 million was due largely to that Q1 consolidation of the VIEs previously meant -- previously mentioned and lower incentive compensation expense. The decrease in distribution expense of $6.3 million compared to the prior quarter was mainly due to the impact of minimum yield waivers, partially offset by higher distribution expense incurred for competitive purposes.

The negative impact on operating income from minimum yield waivers on money market mutual funds is currently estimated to be about $38 million for Q3, down from the $46.8 million in Q2. The Q2 waivers were slightly higher than expected, due mainly to related higher asset levels. The Q3 estimate is based on our investment team's expectations for portfolio yields and our recent asset levels and mix. The amount of minimum yield waivers and the impact on operating income will vary based on several factors, including, among others, interest rate, the capacity of distributors to absorb waivers, asset levels, and asset mix. Any change in these factors can impact the amount of minimum yield waivers including in a material way. As Ray said in the beginning, we are not undertaking any duty to update this information throughout the quarter.

In the U.K. recent legislation will increase the corporate income tax rate from 19% to 25% effective on April 1, 2023. As a result, our Q2 income tax provision of $35.2 million, included $14.5 million or $0.11 per diluted share to revalue certain deferred tax assets and liabilities. Non-controlling interest decreased from the prior quarter due mainly to the decrease in income earned by Hermes from this U.K. tax change, partially offset by an increase in the value of investments held by consolidated funds.

During Q2, we purchased 993,000 shares of our stock for approximately $32 million. As mentioned on our last call and as contemplated in the put call option deed executed when we purchased our majority interest in Hermes Fund Managers in July 2018, which we publicly filed at the time, a request for evaluation was made in April by the BT Pension Scheme evaluation firm was subsequently engaged. We continue to work with the Pension Scheme pertinent to the agreed upon procedures in the option deed. We are also planning to close on our -- close an amendment to our credit line extending maturity to 2026 and reducing the total line from $375 million to $350 million.

At the end of Q2, cash and investments were $424 million, of which about $314 million was available to us. Debt at the end of the quarter was $65 million.

That concludes our prepared remarks and Laura, we would like to open the call up for questions now.

Questions and Answers:

Operator

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ken Worthington with J.P. Morgan. You may proceed with your question.

Ken Worthington -- J.P. Morgan -- Analyst

Hi, good morning. Thanks for taking my questions. Maybe a first on the competitive fee waivers from money market funds being on the rise. I would have thought that given the pressure on revenue from lower rates that competitive fee waivers would be maybe diminished, not increasing. So, can you give us a little more flavor on what's driving? Like we know this is always like a competitive business. So, nothing really changes there. But why the increase in competitive fee waivers? Is it maybe one competitor in particular or is it broader base than that? And then last time when we think about sort of 6, 7, 8 years ago, did you see following the financial crisis in those year and environment, did competitive fee waivers increase then during that period or is this time different? And I guess ultimately, we're trying to figure out why.

J. Christopher Donahue -- President, Chief Executive Officer

With competitive fee waivers, as you know, Ken, it is a forever, a constant situation. And in this one, we cannot predict or figure out why certain competitors decide to do certain things over a certain period of time. There are a lot of variables in the equation. Some competitors want to increase their footing. Others have creative uses of how things work inside their funds. And we just try to do the best we can to stay competitive. And so, it is not a predictable or assignable thing. And, as you know, it's not possible for us or the competitors to find out from each other why they're doing certain things on the pricing. So that's the way it is. On -- I do not recall competitive waivers being ordered that much in the post '08 timeframe.

Ken Worthington -- J.P. Morgan -- Analyst

Okay, great. Thank you. And I want to wrap two --

J. Christopher Donahue -- President, Chief Executive Officer

Just a follow up on that, Ken. Can I just follow-up?

Ken Worthington -- J.P. Morgan -- Analyst

Yes.

J. Christopher Donahue -- President, Chief Executive Officer

Back then, or this time the rates are lower than they were back in the '08 timeframe.

Ken Worthington -- J.P. Morgan -- Analyst

Yeah, that's true.

Deborah A. Cunningham -- Chief Investment Officer, Global Liquidity Markets

I think one other -- this is Debbie. One other factor to add into that is the the mix of assets is so much more than government funds at this point compared to the 2008 timeframe where more than half of our assets were in prime funds. And the prime funds obviously maintain a higher yield, so the waivers at. Now that you've got 80% of the industry in government funds with the curve on the government side, that is 5 to 6 basis points, that's, I think, where some of the positioning and changes have occurred.

Ken Worthington -- J.P. Morgan -- Analyst

Okay, great. Thank you. I'm going to wrap two tiny questions together. One, trade finance, you guys mentioned, that seems to be taking off. I am a bit naive on the product, but the yield doesn't seem particularly good and the returns don't look good to other fixed income asset classes. So, clearly I'm missing something. What has driven this product to take off? And then the other tiny one is, any planned outflows of -- from BTPS over the next 6 months? Thanks.

J. Christopher Donahue -- President, Chief Executive Officer

So, on the trade finance, the beauty of trade finance is that, like other large institutional wins, it takes a long time to make these sales. And you have different people using the trade finance differently. Some use it inside a portfolio instead of using cash, others use it as a short-term investment where you get more yield than you get on cash, and you have a short portfolio and a diversified look at the assets in the marketplace. And so maybe from your perch on the tree you don't like the yield. But I assure you from these clients point on the view, for what they're doing and what they're looking at, it's a very, very strong offering.

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

So on BTPS, Ken. We're not really too excited about talking about our client. They told us, as we said some time ago, last time we were addressing their asset levels, they had planned on taking out their public market money. And so, I think I'll just leave it there.

Ken Worthington -- J.P. Morgan -- Analyst

Great, thanks very much.

Operator

Our next question comes from the line of Dan Fannon with Jefferies. You may proceed with your question.

Daniel T. Fannon -- Jefferies Group LLC -- Analyst

Thanks, good morning. My question's on kind of the Alternatives bucket private markets, and you had decent flows or solid flows, I should say, in the second quarter, and just curious about kind of the fundraising environment. You mentioned an overall backlog of unfunded stuff around of -- just under $2 billion. So, curious around how much of that is -- what the breakdown of that is, in terms of the AUM, but also just the outlook for the Alternatives business as there seems to be some momentum there.

J. Christopher Donahue -- President, Chief Executive Officer

As we mentioned, this is -- the $1.9 billion is concentrated in unconstrained credit and fixed income. A further breakdown, I think, Ray, might be able to add some color.

Raymond Hanley -- President, Federated Investors Management Company

Yes. Dan, there is more to come on the trade finance side. So, we would have that along with the unconstrained credit. And in the Alternative category, and that would be in total about $1.2 billion out of the $1.9 billion. So, it's -- that's where the more recent momentum is. Within fixed income, it's high yield, but it's also absolute return credit and core bond and some short duration money.

Daniel T. Fannon -- Jefferies Group LLC -- Analyst

Okay, thank you. And then just a follow-up on the the option with Hermes and where that sits. I heard your comments, but can you update us on the time period. Just generally of what we should expect and how this -- the process evolves from here and so we can think about that? Helpful around that timing side.

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Okay, Dan. As you know we said April is when they requested a valuation and then we hired a firm and we have not received the report from the firm. Once we get a report, there's process. The whether it fits into a range where, if either party puts or calls it, it has to happen. And there is also an opportunity to, if either party is not happy with the valuation, then they can request another valuation. So, you see the first valuation took from April, and we don't have it yet, and how long will the second take, I don't know, but that's the dynamics that are involved in terms of timing.

Daniel T. Fannon -- Jefferies Group LLC -- Analyst

Okay, thank you.

Operator

Our next question comes from the line of William Katz with Citigroup. You may proceed with your question.

William R. Katz -- Citigroup -- Analyst

Okay, thanks very much. So, just backing away from fee waivers for a moment and looking at the long-term business. As you think about the incremental growth of what's coming in the door versus what's been going out the door, can you talk about how you sort of see the fee rate and the outlook for the base management fees relative to that growth?

J. Christopher Donahue -- President, Chief Executive Officer

I assume Bill here you're talking about money funds when you're talking about the waivers, but --

William R. Katz -- Citigroup -- Analyst

I'm saying -- I'm sorry to cut you Chris. Just to qualify, just stripping away the fee waivers. I think that's pretty straightforward. I'm just look at the long-term side of the business. Just trying to get a sense of volume versus fee rate.

J. Christopher Donahue -- President, Chief Executive Officer

Yeah. And what we see happening on the money market fund side is an increase in M3 or M2 or whatever M you want to look at, rather importantly. And that historically, money market funds are a percentage of that, 0.2%. The banks don't want the deposits. Now obviously, that can change and some banks can do balloon squishing between their deposits and, say, money funds. But net, that is a growth inspiration for the money fund. Overall -- since so about, I think it's 1990, the retail prime shareholders, retail prime shareholders have gone $200 billion more in yield than they would have gotten in an MMDA. That will always obtain because the banks pay administ [Phonetic] rates and the retail prime funds pay a market rate. So, overall those are a couple of influences in addition to the core fact, with the money fund is a beautiful thing giving individuals real pricing and real yields at the spear point of the short-term rates, and that applies to both issuers and to users, i.e., shareholders. So, now you say, well, what about competitors? Every year there is less and less competitors. And yet the competitors can be just as ferocious when there were a lot more of them. And as I've said in the answer to the first call, we can't predict how various organizations are going to evaluate how they should price these things. So, it's really hard to say what will happen longer term on the pricing. But we don't expect a dimunition in the economics that we have going right now on these things. Of course, we have to argue with the Fed about the delightful existence of the institutional prime products, which we all know about. But that's just the regular ebb and flow of the battles we've had for how many decades.

William R. Katz -- Citigroup -- Analyst

Okay, thank you for that. I just want to rephrase. I was actually more interested in the equity fixed income multi-asset and the alts bucket. As I sort of -- just trying to get a sense of as -- it seems like a lot of mandates are shorter duration and/or fixed income and/or SMA in scope. So I'm just trying to understand, as that volume comes in, and if we strip away the impact of the money market business, how should we be thinking about the base fee rate, the management fee rate, the blended fee rate for the Company as we look forward?

Raymond Hanley -- President, Federated Investors Management Company

Sure, Bill. It's Ray. That is a little hard to predict because we do have a lot of products, a lot of strategies. And as I think you know, typically the separate accounts generally, including SMAs, would be lower fee than, say, mutual funds. If you look at the equity blended fee rate for Q2, it was down about 2 basis points compared to the prior quarter. And that's clearly a function of mix. That's not us changing the pricing. Fixed income was flat and multi-asset was actually up, and alternatives was were flat. So, it would be hard to give you a -- and I appreciate the difficulty of modeling it. I'm trying to predict it, given the number of strategies. But I think your -- if your premise is that we'll have lower fee rates, the more success that we have on the institutional side compared to the retail side, that's -- we would agree with that. So, we're happy to win that business.

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

I would add, Bill. That longer term, one of the reasons that we engaged with Hermes U.K. was for the private markets business. And I think it would just be instructive to let Saker make a comment or two about the real estate part of this at this time.

Saker Nusseibeh -- Chief Executive Officer, Hermes Fund Managers Limited

Thank you. So, two things that I'll say. The first one is about the real estate and then about the equity and fixed income business within the international operations of Federated Hermes. The real estate business, we have two main businesses, one is effectually a mutual fund or the equivalent of a mutual fund. And we have evolved that, it used to be only available for U.K. investors who are institutional and we have now evolved it to open -- be open up to other non-institutional investors from -- or non-U.K. institutional investors. And that is an important step for us. It has a very strong track record and very much top of the pile over 10 years. And has a steady flow of fees that are public denominated. So, that's strong. The other part of our business is where we really make much more of our income. And that comes in, something we call place making. And place making is, when we take cornerstone institutional investors with very large investments, typically on a journey to develop an area in a town, mostly in the cities, that we revive again by working very closely with the local authorities. And the journey is typically around 10% -- 10 years to 15 years. They have stages along the way, they pay us a base management fee, and a performance fee. And this business of ours continues to grow. Now, the issue with this one is you cannot predict a direct cash flow year-by-year because it's not like selling a mutual fund, but you can over the long term see an increase in our fees as we expand that business and we continue to have strong interest in it from clients, not just from the U.K., but actually from around the world. Some of our largest clients are non-U.K. based, and we look to expand that elsewhere in the future, but that will take time. Just to go forward to the other business, which is the fixed income and equity business run out of our London offices. Now, you're right. Institutional businesses will demand a lower fee than institutional businesses. But there are two factors to take into account into the mix of the London business. The first one is, our largest client, as you heard from Chris -- sorry, as you had from Tom, has indicated to us at the time of the acquisition that they will decline over time the public market exposure. Now, by definition they were the largest clients and you'd expect them to get the fees commensurate with being the largest client we have. As these are replaced by other clients, you would expect us to charge fees which are normal for other clients, and that implies an increase in the margin mix. And the other one is, as we increase the sales into new products, particularly in the so-called sustainability and SDG products, both on fixed income and equity, we can charge reasonably strong fees for those as well. So, over time, we would see that expanding as well.

William R. Katz -- Citigroup -- Analyst

Okay, that's much better. Thanks so much. And then just a follow-up. Just as we think about confident with the Small Cap Fund and BTPS, is there a way just sort of size what the ultimate assets that still may be at risk, in terms of potential run off?

J. Christopher Donahue -- President, Chief Executive Officer

You mean for the pension scheme?

William R. Katz -- Citigroup -- Analyst

Right, and also with the Small Cap being soft close, what's the aggregate size of that portfolio today?

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Well that fund is a little bit under $10 billion and on the BTPS side, we're just not at liberty to talk about them in -- with specificity.

William R. Katz -- Citigroup -- Analyst

Okay, thanks. And sorry if I wasn't clear in my initial question.

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Thank you.

Operator

Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.

Robert A. Lee -- Keefe, Bruyette & Woods -- Analyst

Great. Good morning, thanks for taking my questions, everyone. So, maybe the first and real simple, and I apologize, I may have missed this earlier if you guys highlighted, but the very simple. Just what the performance fee impact may have been, if any, in the quarter? And then I guess maybe Debbie a question for you. I mean, the Fed did what you expected last quarter? Here, we sit today. Maybe update us on what your thoughts are as you look out over the coming quarters for the prospects for either the short end of the yield curve to steepen again or any of the type of that action that you think could help the short end of the curve?

J. Christopher Donahue -- President, Chief Executive Officer

Yes, Rob. Hi. Of the performance fees for Q2 and carried interest were $4.4 million compared to $9.4 million in Q1, which had the catch-up from the VIE. And, Debbie?

Deborah A. Cunningham -- Chief Investment Officer, Global Liquidity Markets

Sure, Rob. So, yes. Much like an autonomous, maybe we were a little bit early, but the Fed did what we wanted to do. In March they increased the amount per RRP participants from $30 billion to $80 billion in June. As Chris mentioned, they increased the technical factors by cost basis point. We're up to speed since -- is perhaps with the debt ceiling behind us next month, treasury has been paying down bills in order to get the government cash balance within the limits required for the debt ceiling by tomorrow, by July 31, so effectively today. And they will start using then, at the beginning of next week, other measures in order to fund the government and in doing so, we expect treasury bill issuance to pick back up again. So, we think that within the next -- over the next month and a half or so you'll continue to see -- until a debt ceiling is reached, you'll see not major but not minor either, medium-term increases in treasury bill issuance that will maybe get us a basis point or 2 on steepness in the curve. Now, does that translate into extra yields on the fund? Eventually it will, but only a basis point or so. We then think the next move by the Fed or discussions -- continued discussions by the Fed will be with tapering. We saw that at the June meeting. It was mentioned again by Chair Powell, we think will be discussed to some degree in Jackson Hole, and our expectation would be at the September meeting you see an announcement of when and how tapering will start. What security selection, what amounts, what time frame, and we think that will begin -- that process will begin before the end of the year, which likely adds another basis point or 2 in steepness to the yield curve. And the prime fund will back up commensurate with that. And then ultimately as that tapering discussion gets into more, or tapering process gets into more of a full force sort of mechanism in that first half of 2022, we'll see an extra basis point or 2 come from that. But ultimately, you still don't probably get to a yield curve that's much steeper than may be 15 -- 10 to 15 basis points. And where you finally then get a broader release comes with ultimate Fed funds target rate action, which we think could come by the end of -- in the second half of 2022 and we were very thankful with the release of the information from the June meeting on the updated expectations by the FOMC members themselves that they were integrate -- were in the 2022 range and 2020 range that had been previously with their March release of that economic data and expectations.

Robert A. Lee -- Keefe, Bruyette & Woods -- Analyst

Great, thanks for that comprehensive answer. Maybe Chris, I could squeeze in one more question on the ETF and ESG. So, you've touched on this in some prior calls. You've hired some people to run that business for you, and obviously there has been very strong demand for ETFs within sustainable or ESG framework. You could update us on where that initiative sits and maybe what we should be looking for over the coming year?

J. Christopher Donahue -- President, Chief Executive Officer

Yeah. I assume you were asking about EOS?

Robert A. Lee -- Keefe, Bruyette & Woods -- Analyst

Well, I was thinking about if you were --

J. Christopher Donahue -- President, Chief Executive Officer

Okay, OK.

Robert A. Lee -- Keefe, Bruyette & Woods -- Analyst

ETF, yes.

J. Christopher Donahue -- President, Chief Executive Officer

Okay, fine. Okay. Well, we are still very positive about doing it. And obviously we have a couple of short-term funds that are going to be the first ones out of the box. We still expect them to have birth dates with this year's handle on it. The active part of the business is only about 4% of the total ETF business right now. So, as we like to say, it's still early innings. And there are other structures that people are catching up with where you could actually do a mutual fund and an ETF in the same structure. Whether that works or not, whether the SEC likes it, whether there are patents and things like that involved? All have to be evaluated. But, basically it's a packaging thing where you've got at least half of the business, meaning the non-retirement half, who find the ETF to be a better mousetrap, primarily because of taxes and trading. It doesn't work in the retail and in the retirement half of the business. So, it's one of the packagings that we think is necessary for the future. So, we're working diligently with the providers, and that's about as much update as I have. Eventually, we will be adding products. We sort of have a line on who will be next in line, but that will be a '22 event. And those are subject to change, so I'm not going to give you the list of who's who next on the list.

Raymond Hanley -- President, Federated Investors Management Company

And Rob, while we're not going to go through a specific list, we are certainly evaluating and looking at sustainable strategies related to ETFs.

Robert A. Lee -- Keefe, Bruyette & Woods -- Analyst

Great, thanks guys for taking my questions.

Operator

Our next question comes from the line of John Dunn with Evercore ISI. You may proceed with your question.

John Dunn -- Evercore ISI -- Analyst

Hi, good morning. Your money market mix has changed a ton since the last peak. Could you maybe talk about some of the mix shifts you've been seeing recently or you might expect to see as you go forward? Things like, which products, what kind of -- how it shifts within products, client types, expense ratios, that kind of stuff?

J. Christopher Donahue -- President, Chief Executive Officer

Debbie, why don't you take it from the point of view of where you're seeing the moneys in the types of funds. And then, Ray will comment on the economics thereof?

Deborah A. Cunningham -- Chief Investment Officer, Global Liquidity Markets

Certainly. Well, we have seen more from a 2a-7 money market fund standpoint, more of the inflows have come into the government funds, and that has a whole lot to do with where net yields are right now. Most net yields are to 1 to 3 basis point level and to many investors who are comfortable and have been in prime funds, it doesn't really make a whole lot of sense because they're not getting any extra incremental income from a net yield perspective by being in those types of funds. So, we've seen our prime money fund, 2a-7 money fund assets decline. Where we've seen increases in the prime side, however, has come in the non-2a-7 business. So, offshore separate account, local government investment pools, they seem to be trending more toward the prime space. And the mix of assets on an overall liquidity business basis has remained fairly steady but with a larger proportion of governments in the 2a-7 space and a larger proportion of prime in the non-2a-7 space.

Raymond Hanley -- President, Federated Investors Management Company

And John, I would just add to that, we think of liquidity as a kind of a spectrum and we recently put a couple of new short duration, micro-short funds out to sit between the money fund choice and the ultra-short bonds that we already are very, very strong in. And so, I would not tell you that we've had any significant shift in the client mix. We're active with our bank clients, we're active directly with corporations, including some of the largest, on a direct basis. And those clients have a very sophisticated and tiered approach to how they manage cash and hence, our product line has evolved to give them options that fit with the segmentation that they're doing on their cash.

J. Christopher Donahue -- President, Chief Executive Officer

One more thing I'll add, John, and that is that, when Debbie talks about the non-2a-7 products increasing in prime, one of the things behind the curtain there is that because of the SEC rule, that the 30% weekly liquidity threshold, if it's threatened or crossed then you threaten the client with a fee or a gate. This caused more redemptions in the prime funds that were subject to 2a-7. And when you look at the charts, we didn't have any of those issues in the other funds that that are non-2a-7. So, this inspires part of our commentary to the SEC that you've got to eliminate this link. It was a mistake when they put it in. And so they just ought to remove it because it did hurt the resiliency of those funds because the 30% which was supposed to be a liquidity buffer actually ended up being a floor and you couldn't hardly use it. So, that's one point I'd like to make. The second point is, as things have changed over 4 plus decades in money funds, we don't lose clients. They may move from over this type of product to another type of product, or another solution, whether it's a private solution, whatever, even when the massive amounts of prime were shut down because of the 14 amendments implemented in '16, the clients moved over to our dubbie [Phonetic] funds. So, part of the reason for that is our heritage and devotion to the business, our defense of the stakeholders here, but also because, as Ray mentioned, these clients are diversified, that's what he means by tiered approach. They do not put all their money with one purveyor. They move it around and keep it diversified and that of course is helpful to us.

Raymond Hanley -- President, Federated Investors Management Company

John, just one other thing. When you talk about the clients, while the nature of the clients haven't changed, how they think about their cash, does. For example, the banks, certain of the larger banks that we're working with are managing their balance sheet and looking at their deposit level and are looking for alternatives for placing cash. And we work actively with them as to help solve that dilemma.

John Dunn -- Evercore ISI -- Analyst

Great, thanks. And then on the long-term side, just as we hopefully continue to move to a more normal environment, what's the outlook and maybe your plans for Hermes Strategies for U.S. institutional clients?

Raymond Hanley -- President, Federated Investors Management Company

We are active in presenting Hermes Strategies through our institutional sales effort, and we've had some success there over the last quarter. Some of our wins have been in the Hermes Strategies. So, that's very much an active effort. The add-on to that would be, we're working on the private market business and expansion of that in the U.S. That's a little -- that's going to have a longer time horizon to it, but we're looking to port the success that Hermes has had in the U.K. and the EU over to the U.S. market.

John Dunn -- Evercore ISI -- Analyst

Thanks very much.

Operator

Our next question comes from the line of Kenneth Lee with RBC. You may proceed with your question.

Kenneth S. Lee -- RBC Capital Markets -- Analyst

Hi, good morning, and thanks for taking my question. I know that Federated has historically been open to bolt-on acquisitions. So, just wondering if you could give us any update or outlook for the potential for M&A? Thanks.

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Yes, Ken. Federated Hermes has been interested in acquisitions for a long time. We talked about the the put call. So, that's obviously out there and we continue to have our team out there particularly looking at money fund transactions. And we're -- continue to be in discussions and looking there. You mentioned bolt-on acquisition. So, we'd call those centers of excellence type of deals. We continue to be interested in those and meeting with people. There's nothing that I'm pointing to now, in terms of some imminent thing going on though.

Kenneth S. Lee -- RBC Capital Markets -- Analyst

Got you. Very helpful. And then one follow-up, if I may, just on the money market side. Wondering if you could just further qualify the level of competitive activity you're seeing? Are you seeing competitors doing relatively uneconomic or irrational actions, and therefore you would think these kind of actions are relatively unsustainable longer term? I just wanted to get a better sense of that. Thanks.

J. Christopher Donahue -- President, Chief Executive Officer

Well, I would prefer not to use any adjectives in order to describe how I think about what the competitors are doing. And I have no way of knowing what their relative economics are, or with some of the bigger ones what other things they have going that enable them to do things here that we might not see as the wisest thing to do. So, it's just really tough for me to jump on all the adjectives, even though I might be enthusiastic to do so.

Kenneth S. Lee -- RBC Capital Markets -- Analyst

Understood. Thanks again.

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Thank you.

Operator

Our next question comes from the line of Patrick Davitt with Autonomous Research. You may proceed with your question.

Patrick Davitt -- Autonomous Research -- Analyst

Hey, good morning, everyone. A follow-up on the trade finance and the broader kind of Alternatives traction, which is obviously good to see and to Bill's question on the mix of these. As we're kind of new to -- we're still kind of getting our heads around what you're Alternative business is doing. Could you walk through how the management fee structures of all these products are structured? Are they market-to-market type structures, committed capital type structures? Thinking about the tenure of the management fees that will be coming in from this $1.9 billion of mandates you're talking about.

Raymond Hanley -- President, Federated Investors Management Company

Well, Patrick, the way they're priced differently than the funds. So, we have a fee schedule, but each one of them gets priced individually, because typically they're larger than what -- than the top end of the fee structure. So, I don't have a rate that I could give you on the upcoming wins. I mean, I can -- we can talk about the overall blended rate of those businesses. So, away from the funds, the private market accounts are around a 40 basis point blended advisory fee rate. But again you have individual accounts all around that blended number.

Patrick Davitt -- Autonomous Research -- Analyst

Okay. Fair enough. And last one, around few years ago you had talked about searching for an Asian partner, is that something we should still consider an aspiration or if you pivoted to building that distribution out yourself?

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Okay. Yes, Chris will follow-up. So remember, we put the Federated Hermes London team together with the Pittsburgh team and the London team is working on expansion plans and maybe Saker, you want to talk a little bit about that, which is -- their expansion plans are organic growth right now. But, Saker?

Saker Nusseibeh -- Chief Executive Officer, Hermes Fund Managers Limited

So, sure. So, since we took -- combined both teams, we have consolidated in our Asian headquarters which is -- presence is based in Singapore. From Singapore, we have strong relations with South Korea, which we have our dedicated team members visit on a regular basis and we are also looking at Japan where we are looking in the future to have a permanent position. And we've also started a permanent office in Australia. So, we're putting down, if you like, a flag in each of the main markets and we continue to grow our business organically. Our contention is that the combination of the products managed out of Pittsburgh and managed out of London are particularly attractive to clients in the Asian region. They tend to be institutional and long-term, and that's something that we have experience in doing. So, it takes time to bring them in, but they tend to be very good long-term clients. And that's the plan that we continue to work on for the present.

J. Christopher Donahue -- President, Chief Executive Officer

And Patrick, in specific answer to the question about what we were talking about a few years ago. There's not been a -- high on the agenda on that right now, but we haven't abandon the concept of finding a big distribution partner who appreciates exactly what Saker just said, and therefore we can have a confluence of arrangements. The COVID-ization of this process was not helpful because, basically, you got to be able to travel to deal and spend the time, the long time that's necessary in order to create one of these bigger type partnerships. So, that's the specific answer, Patrick.

Patrick Davitt -- Autonomous Research -- Analyst

Great. Thanks, guys.

Operator

Our next question comes from the line of Brian Bedell with Deutsche Bank. You may proceed with your question.

Brian Bedell -- Deutsche Bank Securities -- Analyst

Great, thanks. Thanks very much. Good morning, folks. So I apologize I joined the call late. So, I'm not sure if you covered this, but if not, can you update us on net flows into what you consider dedicated sustainable products that -- I think they were very strong in the first quarter? I just wanted to get an update on that if you have it. And then if you can just frame the total AUM and dedicated ESG funds across the franchise, but between, of course, Hermes Liquid and Alternative products, and the Federated product -- Federated branded products in the U.S. that have started on that as well? And then I have a second follow-up related to that.

Raymond Hanley -- President, Federated Investors Management Company

So, Patrick. We -- Brian, I'm sorry. We talked about the international global where we had about $1 billion one on the fund side of net flows, and virtually all of that, let's say, $1 billion of it, would have been coming from sustainable U.K. based sustainable strategies. On the fixed income fund side the -- we mentioned the SDG Engagement High Yield Credit Fund, which had about $350 billion. There were some others in there as well. So, that would be another, say, $400 million, and then the other thing to add to that would be -- that would be the fund side that you asked about. We also have institutional accounts, unconstrained credit, and others, and I don't have that total handy. That's something we could follow-up with you on.

Brian Bedell -- Deutsche Bank Securities -- Analyst

Okay. Yeah, that'd be great. And then just on the -- in terms of the product development. Not sure if you covered this as well. But any thoughts on launching cash management strategies that are dedicated to ESG. I know BlackRock converted quite a few of their cash strategies over to dedicated sustainable investment processes. I wanted to know if there was any interest in doing that for Federated?

J. Christopher Donahue -- President, Chief Executive Officer

Well, I'm going to let Debbie run a victory lap on this one, but let me introduce it by saying that, when we did the reverse transformational deal with Hermes, we wanted to integrate all of our investment management with ESG so that you get ESG baked in the cake. And guess who was the first at the starting line and the finish line to get that accomplished? Was the money market fund. And I will let Debbie tell you how that worked and how that plays in the funds.

Deborah A. Cunningham -- Chief Investment Officer, Global Liquidity Markets

Thanks, Chris. And certainly, Brian, given the high-quality short-term security types that we used in the money funds, what we basically did was add an additional layer of inputs into our credit process. So, our team management approach for money market funds consist of team members that are investment analysts, portfolio managers, and traders. So, through our investment analyst transitions, we added the EOs and ESG informational content that was provided both by external as well as more importantly internal sources, and we are using that actively in our assessment for the credit securities that we're using within our portfolio. Our funds were the first ones to be integrated and just simply because they are -- their large use of international global banks and industrial types of firms and the coverage of those types of issuers by the ESG assessors and analysts. But most recently, we've made a lot of progress integrating our government funds as well with the beginning of engagement strategies with all our various GSEs that we use within our portfolios for the government funds. The home loan banks, Fannie Mae, Freddie Mac, TVA, the Farm Credit System. We are beginning discussions or have begun discussions with all of them fully integrating then our government fund as well. In addition, because many of our municipal funds also rely on the banking system for their letters of credit and guarantors, those have also been fully integrated. So, our level is very high and our amount of input, given the high-quality short-term issuers that we use in these portfolios has been very impactful and substantive.

J. Christopher Donahue -- President, Chief Executive Officer

And so, Brian. The answer you should detect from that without mentioning any particular competitor is that, when you're dealing with a Federated Hermes Money Market fund, the word Hermes basically embeds ESG in the process. And when you look at our money market funds, it's designed to go for minimal credit risk. Anytime you see risk somewhere, you want to evaluate it for your purposes. And that's what we're doing here. So, we view our products as fully integrated on ESG and able to stand up against anybody on that score.

Brian Bedell -- Deutsche Bank Securities -- Analyst

Yes, that's great. That's great color. Thank you.

Operator

Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.

Robert A. Lee -- Keefe, Bruyette & Woods -- Analyst

Great, thanks for taking my follow-up and I appreciate the patience today for all the questions. But, Chris, going back to the -- sticking with the money fund business, I guess, certainly in the last year or so, post March of '20 has been a lot more -- I was wondering if you could talk about the reforms put in at work, in air quotes, that were instituted which I don't think really surprised you or most observers but obviously going back to drawing board and trying to -- regulators rethink or think about what they can do. It seems like most of what they're talking about is a rehash of all old proposals that were discarded. But is there anything that you're hearing or seeing in terms of the old proposals or something new that is, I'd say, more concerning to you or you're more focused on, that regulators seem to be focused on, and we should be aware of?

J. Christopher Donahue -- President, Chief Executive Officer

Rob, the list of things is, as you say, a rehash. I consider a whole lot of zombies coming back from the dead, because most of them are just different forms of killing money funds or killing prime money funds or killing muni money funds. And if that's what they want to do, then they got to be straightforward about doing it. So, I'm not aware of anything other than removing the mistake that was made by linking the 30% weekly liquidity with the threat of fees and gates, which did compromise the resiliency of funds. But part of the issue really here is that the Fed from the mid-70s has wanted to eliminate these money funds and uses any opportunity to do so. And we make the argument that the money fund is simply a transparent collection device, a de facto operating entity of bank paper and commercial paper, and don't forget the Fed in 1913 was started in order to help and assist the commercial paper market. And so, when the Fed takes an action by simply looking at the transparent and available money market funds, they can put a nice softening touch to the entire market by just dealing with the $53 billion that they dealt with the last time, lose no money, take no risk, and do their liquidity deals. So, we look at the whole thing as the only structural vulnerability that was created, was really the link of the 30%. We also think that the Fed could do a lot more and certainly ought to, before they go about shooting money funds. For example, doing it all all-type market where people can really trade these short-term securities. And there are things they can do related to leaving the discount window open, reevaluating SLR in a crisis, and things like that to make the liquidity work smoother and still do everything totally consistent with Dodd-Frank, where all you do is help liquidity and don't help individual people in advance. P.S. that's not what they did when they helped ETFs.

Deborah A. Cunningham -- Chief Investment Officer, Global Liquidity Markets

Let me add one thing to that, Rob. This is Debbie. In addition to what Chris was saying about the Fed, we do think one of the things that they did at their meeting this week where they announced the standing repo facility, takes away some of the emergency actions they need to do. So, they -- this replaces their temporary market open op -- open market operations that they beefed up in the February, March and April time frames and then allow the opposite. This standing repo facility, it's the opposite of the standing reverse repo facility that they have. It's therefore borrowing not investing. So, people putting transaction back to them, putting collateral back to them, rather than them taking the cap and giving the collateral. But in fact we think maybe that is a sign of their willingness to look at facilities that are more permanent in nature and able to help in a crisis, rather than just coming up with emergency lending facilities, when they are on the brink of problems.

Robert A. Lee -- Keefe, Bruyette & Woods -- Analyst

Great. That was helpful. Thanks for taking my questions and your patience this morning.

Operator

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Ray Hanley for closing remarks.

Raymond Hanley -- President, Federated Investors Management Company

Well, we thank you all for joining us today and that will conclude today's call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Raymond Hanley -- President, Federated Investors Management Company

J. Christopher Donahue -- President, Chief Executive Officer

Thomas Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Deborah A. Cunningham -- Chief Investment Officer, Global Liquidity Markets

Saker Nusseibeh -- Chief Executive Officer, Hermes Fund Managers Limited

Ken Worthington -- J.P. Morgan -- Analyst

Daniel T. Fannon -- Jefferies Group LLC -- Analyst

William R. Katz -- Citigroup -- Analyst

Robert A. Lee -- Keefe, Bruyette & Woods -- Analyst

John Dunn -- Evercore ISI -- Analyst

Kenneth S. Lee -- RBC Capital Markets -- Analyst

Patrick Davitt -- Autonomous Research -- Analyst

Brian Bedell -- Deutsche Bank Securities -- Analyst

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