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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to Federated Investors Third Quarter 2018 Analyst Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Ray Hanley, President of Federated Investors Management Company. Please go ahead, Mr. Hanley.
Thank you, good morning, and welcome to our call. Leading today's call will be Chris Donahue, Federated's CEO and President; Tom Donahue, Chief Financial Officer. And joining us for the Q&A are Saker Nusseibeh, the CEO of Hermes; and Debbie Cunningham, our Chief Investment Officer for money markets. During today's call, we may make forward-looking statements, and we want to note that Federated's 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 assumes no duty to update any of these forward-looking statements. Chris?
Thank you, Ray, and good morning. I will briefly review Federated's business performance, and Tom will comment on our financial results. With the Hermes acquisition effective July 1, our Q3 results include a full quarter of Hermes impact. We have modified our asset and flow reporting by moving multi-asset and alternative strategies out of equities into their own categories. The addition of $47 billion in Hermes assets boosted our total long-term assets to $173 billion and our total managed assets to $437 billion at the end of the quarter. Now turning first to equity. We closed the quarter with $84 billion of assets, up from $58 billion at the end of Q2, reflecting the addition of about $25 billion from Hermes and market gains of $3 billion, partially offset by $1.5 billion of net redemptions, parenthetically, which were down from $2.3 billion in the second quarter. We had 17 equity funds with positive net sales in the third quarter. Our Small Cap funds continue to show strong performance and solid flows, highlighted by the Kaufmann Small Cap Growth Fund with top decile performance in its Morningstar category for the trailing 1, 3, 5 and 10 years at the end of the third quarter and net sales of over $150 million to reach $1.7 billion in assets at quarter end. MDT Small Cap Core with its top 1% Morningstar category ranking for the trailing 3 and 5 years at the end of the third quarter and net sales of almost $175 million to reach just under $1 billion in assets at quarter end. MDT Small Cap Growth with top decile performance for the trailing 3 and 5 years at the end of the third quarter and net sales of a little over $100 million to reach $668 million in assets at quarter end. Several Hermes funds achieved positive net sales in the third quarter, including the SDG Engagement Equity Fund, global equity ESG Fund, impact opportunities equity fund, European ex-U.K. fund and the global Small Cap Fund. Other equity funds with positive net sales in the third quarter included MDT Mid Cap Growth, MDT All Cap Core and Muni & Stock Advantage. Using Morningstar data for the trailing 3 years at the end of the third quarter, nearly half of our funds, about 11 -- exactly 11 out of 23, were in the top decile; 15 funds, just about 2/3, were in the top quartile; and 17 funds, or almost 3/4, were in the top half. Looking at Strategic Value Dividend strategy. Its objective is to provide a high and growing dividend income stream from high-quality companies. The domestic fund's 12-month distribution yield of 3.54% ranked in the second percentile of its Morningstar category at the end of the third quarter. The domestic Strategic Value Dividend strategy had combined mutual fund and SMA outflows of $1.5 billion in the third quarter compared to $2.3 billion of outflows in the second quarter. Looking at early fourth quarter results, combined fund and SMA net redemptions were about $190 million through the first 3 weeks of October.
For all equity funds, which obviously includes Federated and Hermes, in the first couple of weeks of October, net redemptions were approximately $69 million, and equity SMA net redemptions were about $33 million. Please note that these numbers include 3 weeks of Federated funds and 2 weeks of Hermes funds. Turning to fixed income. Assets increased by about $4 billion in the third quarter to $65.4 billion due to the Hermes acquisition to -- up about $2.7 billion. Net inflows were about $745 million, and market gains about $455 million. Institutional separate accounts in the multisector area drove inflows. We also saw modest inflows in Total Return Bond Fund and in various short-duration strategies, while High Yield had slight net redemptions. Our fixed income business had a variety of strategies that are performing well. At quarter end, using Morningstar data for the trailing 3 years, we had 11 funds in the top quartile, including Total Return Bond, institutional High Yield and Hermes multi-strategy credit and 21 funds in the top half. Fixed income fund net sales are negative early in the fourth quarter, due mainly to high-yield redemptions. We have seen net sales in Total Return Bond Fund for the first 3 weeks of October. In the alternatives category, assets at quarter end were $18.5 billion, with most of that coming from the Hermes acquisition. Highlights in the quarter include the newly launched Hermes unconstrained credit fund, adding about $122 million in net sales and the Prudent Bear Fund with about $30 million in net sales. Now looking at money markets. Total money market assets increased approximately $9 billion, with funds up $10 billion and separate accounts down about $1 billion, mainly from seasonality. We had positive money market fund flows from a variety of institutional and intermediary clients in the third quarter. Our average investment advisory fee rates for money market funds was the same as it was in the prior quarter. Prime money market fund assets increased about $6 billion or 18% in the third quarter from $32 billion to $38 billion. Our money market mutual fund market share at the end of the quarter was 7.3%, up from Q2's 7.0%. Taking a look now at our most recent available asset totals, and once again, Federated as of October 24 and Hermes as of October 12, managed assets were approximately $436 billion, including $269 billion in money markets, $79 billion in equities, $65 billion in fixed income, $18.5 billion in alternative and $4.5 billion in multi-asset. Money market mutual fund assets were $187 billion. In the institutional channel, RFP and related activity continues to be solid with diversified interest in MDT, EFA and Kaufmann for equities and Trade Finance, Floating Rate and short duration for fixed income.
We began the fourth quarter with about $300 million in net fixed income institutional additions that are yet to fund. On the international side, with the addition of Hermes business, Federated's total assets in the international market reached $62 billion at the end of the third quarter. And we are working closely with Hermes to develop and begin implementation of a global growth strategy driven by Hermes' leading ESG integrated investment strategies and Federated's strong investment capabilities backed by our respective distribution strength. We have just launched efforts to present certain Hermes' strategies like credit, global equity and global small cap in the U.S. institutional market and are planning to register mutual funds to offer some of Hermes' best investment ideas to our customers in 2019. We're looking at ways to grow the successful Hermes EOS business that features leading ESG stewardship and engagement services to institutional asset owners and pension funds and are working with Hermes to develop opportunities for them to offer Federated strategies to their clients. Hermes managed assets at 09/30 were approximately $47 billion, up slightly from the second quarter. Third-party assets were $31.9 billion, up from 34 -- $31.0 billion at the end of the second quarter. BTPS, the pension scheme's assets, were $15 billion, down from $15.5 billion at the end of the second quarter, consistent with previous notice. Hermes net sales from third parties were $472 million, partially offset by the planned BTPS net outflows of $397 million. Hermes highlights from Q3 include progress in the development and growth of a world-class, multi-asset credit platform, following successful third-party SEED commitments into both the Hermes unconstrained credit fund, which has since grown to $371 million, and the Hermes European direct lending fund, which has commitments of over $100 million. In addition to efforts with Hermes, we continue our business development in the Asia-Pac region with a focus on opportunities in greater China, Korea and Japan and are actively working to establish strategic relationships with select financial institutions to add regional distribution of Federated investment strategies. This effort complements Federated's European, U.K. and Canadian operations. Managed assets, excluding Hermes, in these markets, totaled about $15 billion at quarter end. We also continue to seek additional alliances and acquisitions to advance our business. Tom?
Thank you. As Chris noted, our Q3 results include a full quarter of Hermes impact. Total revenue increased by $52.6 million from the prior quarter, due mainly to the addition of Hermes revenue, which was $49.7 million; an additional day, about $3 million; and higher average money market assets, which brought up about $1.5 million. Revenue was up $30 million compared to Q3 of last year due mainly to Hermes, partially offset by the impact of the adoption of the revenue recognition standards, about $9 million; higher waivers primarily from money market funds, about $5 million; and changes in asset mix of average money market assets also impacted the revenue by about $2 million. Operating expenses increased $51.5 million compared to the prior quarter and $37.1 million from Q3 of '17. The increase from the prior quarter was due to Hermes' $44.7 million and Hermes transaction-related expenses, about $8.6 million. The increase from Q3 of 2017 was due primarily to Hermes and Hermes transaction-related expenses of about $10 million and the adoption of the revenue recognition standard, which reduced distribution expense by $7 million and reduced other expense by $1.6 million. Q3 comp was $103 million. This included a number of Hermes-related items. And normalized comp number was about $105 million. And an early estimate of Q4 comp and related expense is $106 million. In July, we estimated that we would incur $19 million in Hermes transaction-related operating expenses during 2018. We have incurred $12.7 million in operating expenses year-to-date with $9.9 million recorded in Q3. The $9.9 million in Q3 was included in the following line items; comp and related, $3.8 million; professional services fees, $4.1 million; travel and related, $400,000; and other, $1.6 million. For Q4, we estimate that we will incur about another $1 million in transaction-related costs for a total of approximately $13.7 million in 2018 transaction-related operating expenses. We expect to occur additional expenses in '19 related to the implementation of growth strategies with Hermes, as Chris mentioned. We view these as ongoing investments and not transaction expenses. Amortization expense related to the Hermes transaction was approximately $2.7 million in the third quarter. We expect Hermes deal-related amortization to be about $11 million in 2019. We repurchased 277,000 shares in the third quarter. At quarter end, cash and investments were $157 million, of which about $106 million was available to us. Rob, we would like to open the call up now for questions.
[Operator Instructions] Our first question is coming from the line of Michael Carrier with Bank of America Merrill Lynch.
Maybe, first question, just with Hermes on board, you're -- I think, Chris, you're talking about some of the growth strategies that you'd get into year '19 and beyond. When you think about maybe the distribution channels and the distribution team in the U.S., I mean, where you've kind of been seeing certain demand, whether it's on the ESG side? Just wanted to get some context on where you see most of those opportunities on the growth side with Hermes on board?
The 4 funds and things that we're looking at, 2 of them are in -- one is an absolute return credit strategy, and one is an unconstrained bond strategy, which we think are going to be very strongly received by the client base. The other 2 would be a global equity and a small-cap global mandate. There are also other things that we are thinking about, an EP approach and others that are in registration that I'm not allowed to say what they are.
Okay. And then Tom, maybe just on the expenses. You gave the guidance on the comp. I guess, just when you look at with Hermes on and some of the guidance that you guys gave when the deal was announced versus today, and I know there's a lot of moving parts, so it's a little bit tough, but just when you think about the accretion, are things heading like roughly as you expected? Is that -- it has been a little bit better, a little bit worse? Just want to kind of get a sense on how you think things are trending on the financial side.
Sure, Mike. There are a lot of moving parts. And that's why I took you through the comp number. And if you remember, I said there are a lot of Hermes-related items, and they move -- some of them move up, some of the move down. We closed earlier than we thought when we talked about when we're going to close. So we actually closed on July 1. We did all our modeling to close on August 1. We had -- so that brought in higher earnings to us. We had less expenses. As you've seen me take you through, each time, in April and then in July and today, our closing costs have gone down from what we expected each time. That's partly because we closed earlier. We didn't have to address a lot of things that we thought we're going to have to address. The amortization expense, which we told you what it was, came in lower than what we thought. A couple of the moving items that are in comp are, we had -- Hermes had accrued for Q1 and Q2 their regular incentive comp. And then when we closed, management decided to take some of that comp and defer it over a 3-year program. So then that's why we had, basically, a reversal of an accrual. So that sent comp higher. We didn't have that in our numbers. Some of the upfront payments that Federated made to the pension scheme and to the employees, the part that they owned, management took a part of the -- of that payment and actually put it in a deferred remuneration plan, and that sent -- it actually sent the expenses lower. So I'm only giving you 5 of the items that changed. And if I -- if you force me to answer from when we did it back in April, where those -- it probably looked better than we thought. But that's not addressing where are assets now, where are -- where are the markets, the last couple of weeks in the markets, and it's not addressing a whole lot of other things. So it's not really something I want to get into any more than that.
Next question comes from the line of Ken Worthington with JPMorgan.
Maybe, start on the deal. What is the right tax rate? And I guess, as the deal-related costs fall off, how should we expect that tax rate to kind of evolve going forward?
So in the future, we're still looking at a 24% to 25%. The tax rate, I think, was 26%.
26%. Yes.
Okay. So it came in a little bit above but still...
And that -- yes, that changes without -- there are a lot of variables there, including Federated stock price, which is interesting. If our stock price is higher, our tax rate changes because of the way we go through with our restricted stock and how that gets dealt with.
Okay, great. And then maybe for Debbie. Debbie, what are you seeing in the money market fund business? Maybe, to what extent, if at all, are you seeing a movement back to funds from bank balance sheets? And I would love it if you could maybe comment retail versus institutional, and any color on the broker/dealer versus the bank trust channels?
Sure. We are definitely seeing a movement back into money market funds. Our assets are higher. The industry's assets are higher. And I think this is probably reflective of both in that sort of it's getting comfortable with the regulatory changes that went through in 2016 at this point, but in addition, just higher interest rates in general. From a retail versus institutional perspective, on the retail side, it's been a lights out positive from a business perspective. Traditionally, that business was in the prime sector. After money market reform, it moved into the government sector. It is now moving in a large fashion into retail, again, not with money coming out of the government side of it, but more ticket trades that are new business that presumably are coming out of some sort of a bank products, some other type of liquidity products, and going into the prime products. From a sweep perspective, there is still not much on the retail side that is set up with prime products. There are few intermediaries that are able to do that. But for the most part, sweep products continue to be through government funds, and prime products are generally on the retail side, generating business from a ticket trade perspective. On the muni side, also, we are seeing quite a few flows on the retail side. That's in opposition to the industry. The industry itself is fairly flat on the muni side. We are actually experiencing quite healthy flows in our municipal products, both the national as well as the state specific. Switching to institutional. We're seeing on our government funds, a lot of growth that came basically in chunks from what would be M&A activity. There's been a huge amount of M&A activity that's taken place year-to-date 2018. Also from a repatriation trade perspective, much of that cash, which is, again, chunky, goes into the government funds mainly because it doesn't stay there for too, too long. It goes back out again once either the deal closes on the M&A side or the intended use of the repatriated funds are then put into their final form. On the prime side, we've seen a lot of corporate customers. Similar on the municipal side, we've seen corporations going back into those products. So definitely, we're seeing an uptick in flows. And it doesn't seem to be between sectors, but rather coming from outside sectors. I think, post money market reform, the assets in the industry were at about $2.6 trillion. We're now just under $3 trillion.
Okay, great. I'm going to steal one more because I was confused. Just Tom, on your guidance for deal-related costs. Is it $1 million for the fourth quarter? Or $1 million more than we saw in 3Q for the fourth quarter?
$1 million for the fourth quarter.
The next question is from the line of Bill Katz, Citi.
So just staying with the Hermes platform for a moment. Appreciate the extra detail in terms of where the assets are and then the split between the pension and then the third party. Could you sort of remind us of sort of the outlook for the pension side of the equation? And then how are those fee rates incrementally tracking as the third party grows relative to the pension plan?
You have just asked Saker his first question of the day.
Thank you. So the answer is that when the deal was done, we had a pre-agreed slide path for the pension scheme. So we know how much they're going to track down the assets. And that explains that if you look at our third-party business, the net flows were very strong and continue to be very strong. Now our third-party business, by definition, is higher-margin business. So that increases our margin the more that we create third-party. And if you look at revenues, which is what we look at, within the Hermes business, some 74% of our revenue now comes from third-party, which is quite substantial.
Okay. And is it the same expectation that it will -- the BT side will bleed down over the next several years? Just trying to get an update on sort of that glide path.
I mean, there is a glide path that we think is there now. The thing is with the fact that we're now part of Federated, there may be opportunities for stuff that the BT Pension Scheme might want to be interested in that Federated offers. So there's a possibility that there might be additional or reversal of the agreed slide path. But there was an agreed slide path at the beginning, which was well within the numbers. And our profitability, in fact, gets enhanced because our margins get enhanced the more that we build up the third-party business.
Okay. And here's a follow-up question. Tom, thank you for the guidance on the compensation side. Stripping off the distribution side. So we look at the remainder of the business and stripping out as well the amortization as well as the charges. Is the rest of the non-comp, if you will, is that a reasonable start point? And you had mentioned that you're going to spend a little bit to enhance growth. Could you quantify what that might look like and the timing of that growth -- spend, excuse me?
Okay. The reason why I pulled out the comp and list that is -- as that's what I see as something that I can grab hold of. I have to put it in, in order to do our filings for the quarterly reports. And that's kind of the biggest standout number. If I go through all the expense categories, some of them change up, some of them change down. Hermes spends money in the fourth quarter. They don't spend it in the third quarter. We spend money in the third quarter and not in the fourth quarter. And so they're -- I'm not going to go through a line item, this one up, this one down. And I think it's okay to look and say, "Hey, we're saying we expect about $3 million more in expenses," and that's kind of an overall biggest item. In terms of -- that's for 2018 or for Q4. In terms of future expenses for our growth. When we were using the $19 million in closing costs, some of the closing costs we were talking about in terms of really building distribution -- or not building distribution, but building the growth plans. And so we're just trying to get out of talking about that and going to be saying that, "Hey, that's part of the normal costs." We had a $4 million number in there. And that's when you take $19 million and abort $14 million. And we're going to expect to spend another $1 million in Q4. And that's $4 million. But that was -- that's an estimate that we don't know exactly what the numbers are going to be. And that's about as far as I can go. I've already talked enough about it.
The next question is from the line of Patrick Davitt with Autonomous Research.
Just follow up on Bill's question in a different way, if you can, I guess, assuming that BT doesn't reinvest in some other products like you said, is that kind of $300 million to $400 million out a quarter that you talked about, the right glide path to think about, as we model this?
So I don't think it's appropriate that I share with you what a client has agreed with us because BT is also a client. What I can say to you is that our business plan and the models that we used within building business plan when Federated acquired majority stake, assumes a glide path. It was agreed with BT, and they have stuck to that. And we don't expect them to deviate from it. Like I said, if anything, there might be actually a positive side to it if we manage to show them some Federated stuff. Now within that, the only thing I can say to you is that the growth of our third-party assets has consistently meant that we have been able to not only grow our top line but also grow our margin and our profits. And that does not look as of the end of the last quarter to be off-track. That seems -- remains on track.
Fair enough. A bigger-picture question on kind of money fund flow dynamics. I think if we exclude that big one you had in 4Q '17, it looks like, on a run-rate basis, you had been fairly consistently losing money market flow share for a year or 2. But then suddenly, this quarter and it looks like now in the fourth quarter as well, you're taking almost all of the flow. So I'm wondering if there's anything that changed about the nature of the broader market flows or your business that kind of changed that dynamic in terms of the flow share you're seeing?
Well, one of the elements of that dynamic was the money that went out to broker/dealer sweep into their own deposit bank deal. And this was when rates were low. And now people realize that rates are rising and you can get 2% on a money fund. And so that big bunch of money that left for that reason. And it was a combination because if the stage was set when the new regs came in, and it really wasn't appropriate for accounting, for mechanics, for operations, for all of those broker-dealers to use a money fund for a sweep vehicle. And that was one of the big questions. So when you had that, and then you had the relative profitability to the client, broker/dealer, that moved a bunch of money out. And that has slowed down, abated, diminished. And then as Debbie said, the flip side of that is now occurring, where you're seeing more money coming in prime, muni and govi, both institutional and retail.
Our next question is from the line of Ari Ghosh with Crédit Suisse.
So just a quick one on the alts and multi-asset segments. So if you look at flow trends over the past 12 months and what you are projecting for 2019, is this something that -- is this the business that you're looking to grow organically? Do you think there's enough capacity out there that you can do that? Or is this something that you might be looking at opportunistic bolt-on deals to try and get scale here to kind of have it to account for a bigger piece of the pie if you look at it over the next couple of years?
Short answer: Yes, we see it as a growth opportunity. Long answer: It's now Saker's turn.
Sorry, I didn't get the beginning of that question. So say it -- repeat it to me again and I will answer you.
Yes, so if you look at the alts and the multi-asset segments. Is this something when you look at the next -- your -- the business plan for the next 12 to 24 months, do you think you can see some meaningful organic growth from this business via the plans that you have in place? Or is this something that you need to look at maybe more on the opportunistic bolt-on and M&A side to try and gain scale here?
So no. We think that we have opportunities to grow it organically. We had already built, by the time we were acquired by Federated, a first-class capability to be able to do this. And in fact, almost ready for launch by the time we were acquired. And I can say that of the new firms that we've raised within this, it is noticed that in the last quarter, and given the deal closed in the last quarter, on the 1st July, we continue to have clients actually seed parts of our strategies to help us grow them. And that tells you the strong demand that we have. So I think it's a strong organic growth. Now will there be opportunities in future for M&A activity? One, one sees, but there is strong organic growth as it is within our plan.
The next question is from the line of Brian Bedell with Deutsche Bank.
Maybe just one more on the money market side for Debbie or Chris. Do you have a sense of what the sweep assets or sweep deposits rather would total in your broker/dealer and wealth management channels in terms of an opportunity for market share gains versus those deposits if we continue to see the yields taking behavior of those sweep deposit clients' move to money markets?
Brian, are you asking about the total opportunity beyond what we have in sweeps? Is that the question?
Yes, but like when you are an outsourced version of your money market, within those clients, those broker/dealer clients, and, I guess, to the extent wealth management, bank trust departments, a sense of -- your sense of what the deposit levels are within those bank sweeps that could eventually migrate to money market funds sort of to gauge the opportunity....
If you were to ask -- and this would be an impressionistic number. If you were to ask the sales individuals here who have those relationships on the broker/dealer side for those broker/dealer sweeps, they would contend that they -- that $20 billion has moved out or some number like that. And so if you said, "What's the opportunity?" Well, maybe a bunch of that comes back. But you cannot look at that as a catalyst or, "Oh boy, now that money is coming rolling back" because some of those clients have either put the money market fund into a transaction-oriented mechanic versus an automatic mechanic. And some of those clients have simply taken the money fund off of the list so that it's even one step more than a transaction. So that would be how I would scope what was lost and look at earning it back, but it will not be a catalyst or a quick deal.
Right. Yes -- yes, no that -- trying to get a sense of bank to money market fund. I mean, we're seeing this in the online brokers where clients are moving to purchased money market funds, they purchased a swap for example, from the bank sweep. So kind of see what your future opportunity is from that dynamic, given that, obviously, the yield's very competitive with your funds. Okay, then maybe just a question on the -- maybe this will be for Chris and Saker. Just what the sentiment is for your sales -- from your sales distribution partners in the last week or so given the pullback in the environment? Are they generally looking at this as a buying opportunity? Or are they more frozen? And I just have one follow-up on distribution costs for Tom after that.
Chris, do you want me to take this first?
Yes, yes, please.
Okay. So what we see is the pipeline for strategies remain strong. And we have continued to see inflows into our funds, including in emerging markets in the last quarter, which is quite interesting. And so people are taking this as a buying opportunity. Over the last week, I've also been talking to some clients in the United States, and in fact, I'm joining this call from our offices in Boston. And it remains positive in terms of people seeing this as still positive despite the market comeback. We -- particularly in what we offer because essentially, what we offer is high equity share, high alpha. And we incorporate ESG in everything we do. And we have a very strong track record. Generally speaking, the kind of buyers, including wholesale or, if you will, advised buyers tend to be with us despite the dips, and we talk to people about the dips. And we, in fact, told them that there would be something like a correction coming. And as it came through, people have followed through and continued to invest with us. So I mean, you can never dismiss market comebacks. But in terms of flows, it still remains positive.
But the thing I would add to that, Brian, is use the word frozen. And there's nothing I know of in the life of a PM team about the word frozen or in our client. And so you do have some variety depending on which mandate as to what people are doing. But if you were to talk to the -- a head of equities in New York, he would retain his positive stance much the same as Saker said about expecting a correction and many of the PMs buying on the dips.
And I meant that like the broker/dealers that you're selling to in the wirehouses, are they -- just their sentiment, I guess, are they viewing it as a buying opportunity or their clients sort of on the sidelines for this.
It would be almost an unnatural act at this point to try and characterize them all with one way or the other. And I for one, haven't run the traps that quickly enough to be able to give you an honest pulse on how the wirehouse community thinks. So I have to demur.
Okay, no that's fine. And then just one follow-up on distribution. Tom, the -- just wanted to see if the third quarter run rate now with Hermes in there, this -- the distribution expense of the $72 million if that's a reasonable run rate on a go-forward basis. Or are there significant -- substantial deviations from that potentially going forward?
So getting into one other line item, I would say that, that number, based on what we see, would -- could be a similar number.
Our next question is from the line of Kenneth Lee with RBC Capital Markets.
Wondering if you could give us a sense of what the recent flow trends and current client demand for the alternative products within Hermes, specifically, the real estate, private equity infrastructure?
So I'll take that.
Saker, your turn.
Thank you. So we've seen steady growth of demand for particularly our unconstrained credit, which is part of our private markets and our direct lending, which has been very strong. With property, we continue to see demand for our property products as well. So that's, again, been pretty strong. And as you know, things like private equity and infrastructure tend to be long-term gathering momentum, meaning we go out to the market, we talk to our clients and normally it goes onto a long cycle, and the cycle is there. And I think there is still -- the conclusion of all of that is that demand for our private markets business remains very, very robust. If you want me to highlight one area, I'd say, the multi-credit and the unconstrained seems to be accelerating. And I would say that private equity, infrastructure and property seems to be going as normal with no slowdown. So that's how I'd characterize it.
Yes, okay. Great. And just as a follow-up. Could you give us a sense of the average fee yields you're getting for these alternative products?
So that we need to take off-line because it has obviously quite a lot of impact on a lot of clients.
Next question is from the line of Robert Lee with KBW.
Really, I guess, for Debbie or maybe Chris if you'd like to answer it. On the money fund business, I guess, maybe a little bit bigger picture. I mean, as you mentioned, clearly you're seeing some increased demand for prime funds. But if we look at the overall industry, 2 things: number one that one of your large competitors has taken to describing the money fund business as increasingly a technology-driven business and made some type of acquisition, I guess, of a portal or some type of technology. Would you agree with that assessment? And do you feel that you have kind of the right infrastructure or connectivity to really fully -- obviously, you're benefiting from increased demand, but to really kind of fully maintain or pick up share over time?
We believe that we have the technology to be able to service these clients as well as anybody in the world. And you can always characterize this. We try to characterize the whole business as a technology business in order to try and get the PE up. So I think you'd see this was a technology business. There've been others in the business, not the one you're referring to, who've been able to push that income into technology. So it's nomenclature. But what the clients see is the investment management expertise and the need for the underlying product. And the one other thing that I would add on this bigger picture score is that we and many, many others, including issuers and the marketplace, have been working on a Senate bill, S. 1117, which basically restores money market funds in the prime area and in the muni area to $1 net asset value. And this would be a great boon to the marketplace to restore the pricing that the capital markets have on exactly these products right at that point of the short-term area of the curve. And we're still working on this. Others in the industry seem to not be as enthusiastic about this. Debbie also has some comments on this subject.
Certainly, if you look at sort of just from a history lesson standpoint, when financial crisis happened back in 2008, at that point in time, deposit products and money market mutual funds were both around $4 trillion. And since that time because of deposit insurance, because of the 0 interest rate environment, because of the concerns in the marketplace, money fund assets went down to $2.6 trillion. They're now about $3 trillion. And deposits soared to, depending on what deposits you're looking at, anywhere between $10 trillion and $13 trillion. The fact is though that those assets have stagnated in the context of their growth. They're growing 2%-ish on an annual basis. And that's compared to more like double-digit -- just barely double-digit growth, 10%-ish-type growth in the money market mutual fund marketplace. So I think there were moves that were made by the broker/dealer clients that we've talk about that make it a more difficult path to reverse. Nonetheless, I think economics win out and with a continuing rising rate environment, which we would expect to see in 2019, we don't see any reason why the product should lose its momentum. Does it get prime back to the peak of $1.7 trillion? Probably not, at least not in the immediate future. Maybe, with Senate Bill 1117, it does. Time will tell on that one. But it certainly -- because of technology, because of investment expertise, because of client-driven relationships and the business that we -- that the provision of information that we provide to them on a pretty easy basis instantaneously, we have a very positive outlook for the future.
Great. And then maybe a follow-up on pricing in the money fund business. Is it fair to think that -- and understand that your fee rates are relatively stable sequentially, but is it fair to say that fee competition kind of in the government fund side of business is possibly more intense than on the prime side, simply because maybe it's harder to differentiate yourselves in treasury and government fund versus prime, where credit skills and whatnot play a bigger role?
I think part of the government fund fee discussion had to do with the point in time when there was a lot of asset gathering occurring into that sector, not necessarily from an industry standpoint, but into that sector. So sort of switching out of prime and muni and into government from a sector perspective, the $1 trillion that moved in 2016. There were fee waivers that were done to capture market share at that point. And I won't say that it set a new standard. Certainly, once that movement occurred, fees began to normalize, although not back to the pre-financial -- to pre-reform levels. You might see something like that occur again if, in fact, we had the bills pass and the restoration of the $1 NAV for prime and muni. So you could see it on those particular products. And again, it would be in an attempt to capture market share in that asset gathering or asset movement time period. But that's, again, something that's really pretty hard to predict at this point.
Great. And then just -- and I appreciate your patience. Just one more follow-up question maybe for Tom or Ray, if he's on. And maybe this is something we could do off-line afterwards. But is it possible to get an update given the changes in your AUM disclosure and reallocation, get a sense of kind of fee rates by buckets, so to speak, so we can obviously, better model in kind of the changing pattern of assets and flows?
Rob, it's Ray. Yes, I can help you with that. That probably would be better off-line though.
Our next question is a follow-up from Patrick Davitt with Autonomous Research.
So you mentioned the quarter-to-date strategic value flows, which appear to be a continuation of the improvement we saw last quarter. The performance has been a lot better, obviously, and there appears to be a shift from growth to value. So have you started to notice a change in the behavior of your clients with that fund? Maybe people that were thinking about redeeming not anymore? Just curious about the dynamics and how they've evolved as the performance has gotten better and the growth-value dynamic has changed.
The answer is a hopeful yes. As you point out the numbers of -- the size of the redemptions month-to-month have been going down, and the amount of sales is, sort of, hanging in there. We noticed that the fund was ranked in the first percentile month-to-date, so don't get all that excited, through October 24, which just restores the comment we've made here many times that, that fund is either leader of the pack or back of the pack, but still, always doing that which it says it wants to do, which is, pay a good dividend and own big, good companies that have increasing dividends. So what we have seen is there is a diminishment in the amount of angst inside that marketplace so that we can have more positive calls on the subject of the fund. But it's very difficult to say that the downslope is over. But certainly, seeing it on this kind of a slope is a much improvement coupled with the performance in that bucket, which is, as I've said before, not exactly the way to evaluate that fund.
Our next question is a follow-up from Ken Worthington of JPMorgan.
Sorry, Tom, just on the compensation, maybe help me here. So $103 million in 3Q, I think you said ex deferrals, it should be around $105 million. But includes $3.8 million of the deal-related costs this quarter. So the right number might be something like $101.2 million. Your guidance is for something like $106 million. As we think about the right place to be for 2019, is it the $101.2 million? Or is it $106 million? And why is there such a big variance between those 2?
Sure, Ken. I wouldn't use the $101 million like you're saying. If you remember, I kind of took through my -- in answering the accretion question, that Hermes was accruing their bonuses Q1, Q2, Q3 as though they were going to be paid in 2018. After we acquired them, management decided to defer a portion of those bonuses into 2019, 2020, 2021. And so that was a significant number that -- because why the run rate actually should have gone the other way. And that's why I'm saying that the $103 million on a normalized basis would be $105 million. And I'm including in that the deal-related incentive comp that was paid. And so the best I can give you is $106 million for Q4. And '19, I don't have a comment on it.
Okay, no, you answered it. The $105 million actually includes the deal-related costs. That's the part that I missed.
Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back to Ray Hanley for his closing remarks.
So that concludes our call, and we thank you for joining us today.
Thank you. Ladies and gentlemen, and you may disconnect your lines at this time. Thank you for your participation.