The ‘quest for income’ is top concern for investors in the U.S.: Federated Hermes CEO

Christopher Donahue, president & CEO of Federated Hermes, Inc., joins Yahoo Finance to discuss impacts of a financial transaction tax and the company’s growth.

Video Transcript

MYLES UDLAND: Let's move on here. Today on the markets, talk a little bit more about everything going on these days. We're joined now by Chris Donohue, who is the president and CEO of Federated Hermes. Chris, thanks for jumping on this morning to talk with us a bit about everything that's happening over in your world. Let's just start it this way, when we about how different the world is today, what's happened in markets over the last year, what the last year of business has been like for you guys navigating this environment and how different our situation is than you would have expected it to be maybe just six or nine months ago.

CHRISTOPHER DONAHUE: Well, thank you, Myles, and I welcome the opportunity. The year was really a tremendous year. We sold $60 billion worth of mandates and generations of assets into the funds as compared to '19 when we sold $43 billion. So a combination of performance and strong relationships with regional consultants basically carried the day. On the money market fund area, we were a very strong participant in up money fund assets at the beginning of the year and then flattening out as we go to the end of the year.

So that when we sit here today, we have about $420 billion in liquidity assets, just under $90 billion in fixed income, and just under $100 billion in equities, and about $23 billion or so in alternatives. And so 95% of our people are working successfully from home, developing relationships, improving qualities. And all of this was quite a surprise to me because they had on my desk the first week of March last year a flexible work program, which I wasn't all that enthusiastic about.

But now you've seen the performance, and we will have a robust type program coming into the future here.

JULIE HYMAN: And Chris, I think we talked last year after you had also completed an acquisition, right, Federated Hermes?

CHRISTOPHER DONAHUE: Yes.

JULIE HYMAN: Hermes, Hermees, depending on where you're saying it. And so effectively, you guys were closing on and then integrating another company amidst the pandemic, but also amidst what turned out to be a good time for the markets, by and large. So what was that like doing that integration at that time?

CHRISTOPHER DONAHUE: Because we had had five years of cultural due diligence, Julie, it worked very well. Remember, we called that a reverse transformational merger, which basically meant that we wanted to bring the beauty and strength of Hermes, ESG, and responsible investing into the Federated enterprise, which we have now integrated into the Federated workstations on the portfolio side. 98% of our asset management is now integrated in that way.

We also really liked the idea of Federated Hermes EOS, which is basically the engagement stewardship arm of the enterprise, where we talked to over 1,200 companies last year, managed $1.3 trillion in assets under engagement there, and basically, we're talking to companies with subject-matter experts about how to improve things, whether it's the environment, whether it's their supply chains. And all of these things are a little different than what a regular analyst does.

So the fact that our fiduciary heritage married up with Hermes ESG and responsible investing heritage was really the strength of the organization and made it work. In order to symbolize that to the marketplace, we changed the name of the company to Federated Hermes, Inc, FHI's new ticker symbol, in order to show people that we're baking the Hermes into the cake at the Federated Hermes Enterprise.

JULIE HYMAN: And as you've done that integration also, of course, it's been a changing world. And I'm curious now at this point, it's also, you guys got more global with this acquisition as well. We tend to talk a lot about US investors and firms, US clients. What are you hearing from your clients as the top concern for 2021, both in the US and globally?

CHRISTOPHER DONAHUE: In the US, it's a quest for income, and you see this in many respects looking for longer-term, short-term income products, the short intermediates. We came out with a program called micro shorts, which are in between ultra short funds and money market funds simply to respond to this quest for yield. The bond market isn't quite sanguine about how what Powell was saying, and so people are thinking about where to go.

With the reverse in trade from growth to value, we're seeing movement on the strategic value dividend fund and people getting more interested in standard quality companies paying dividends, and we're seeing those trends. Internationally, we're seeing interest in unrestrained credit, we're seeing it in trade finance, and we're seeing another short-term instrument type things as well. We turned over our Far East effort to the Hermes Asia Pac area, and set up operations in Singapore and in Australia. And we've also opened up new efforts in Latin America, and we're expanding those in addition to where we've obviously been in Europe and in Canada.

- Chris, how harmful would a financial transaction tax be to the financial services industry?

CHRISTOPHER DONAHUE: I think it would be very harmful, and it would cause a lot of shifting depending on where it was. It has been analyzed and done in Europe, and it was done not very successfully. They didn't ever raise the money that they thought they would raise, and they forced the transactions to move to other locations. And so those would be the things that would happen. They always estimate some grand number based on what happens, but then they don't take account for the changes that will occur in order to avoid it.

Another thing that goes on is people go for short-term instruments, calculating how you're going to take so many basis points, if even only one out of a short-term instrument that's only paying one basis point is, indeed, a very interesting question. And on the shorter side, you have faster turnover. Maybe a stock fund is three years, four years, five years. Money market funds trade over, maybe four or five or six times a year. So in that transaction tax, you've got a lot of complication as well.

MYLES UDLAND: And Chris, before I let you go, just kind of on this topic, it seems that that conversation around how we're going to regulate or tax businesses has changed a little bit. As you think about the next couple of years, as we get into the Biden administration here, what kind of conversations are you guys hoping to have with folks about things that make sense and things, maybe, that would be a little more damaging to your sector of business more broadly?

CHRISTOPHER DONAHUE: Our goal, overall, is to build a franchise for all seasons so that we are not determined by what the Fed does, what the Federal government does, what taxing authorities do. We're always searching for solutions for clients. It is our view that the tax increase on corporations that's being discussed is largely going to be felt by workers. When the tax cuts went through, we had increases in our 401(k), increases in the bonuses in order to put that money into people's hands. And I think the reverse happens there. No, we're not going to reduce our 401(k).

So those aren't the best ways to do things. But overall, we, as an enterprise, have to grow faster than what the regulators or the taxing agents do. And this has been a theme for my whole career here, that we can't predict or control what's going to happen there, so we have to stay out ahead of it.

MYLES UDLAND: All right, Chris Donohue, president and CEO, Federated Hermes. Chris, really appreciate you take some time to talk with us this morning. We'll talk soon.