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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 the Federated Investors Fourth Quarter 2018 Analyst Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Raymond Hanley, President Federated Investors Management Company. Thank you, you may begin.
Good morning, and welcome. Leading today's call will be Chris Donahue, Federated CEO and President; and Tom Donahue, Chief Financial Officer. And joining us for the Q&A are Saker Nusseibeh and Debbie Cunningham. Saker is CEO of Hermes and Debbie is our Chief Investment Officer for the 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 from 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. Good morning. I will briefly review Federated's business performance and Tom will comment on our financial results.
Looking first at equities. We closed the year with $72.5 billion of assets, down from $84 billion at the end of the third quarter with market-related losses leading to nearly 80% of the decrease.
For the full year, equity assets increased by about $10 billion with the gain from Hermes partially offset by net redemptions and market-related losses. We had 15 equity funds with positive net sales in the fourth quarter. The MDT Small-Cap growth and core funds and the Kaufman Small-Cap fund had inflows as well as the MDT All Cap Core and Large-Cap growth funds.
Several Hermes equity funds achieved positive net sales in the fourth quarter including the SDG engagement fund, the global equity ESG fund, the newly launched emerging markets SMID fund and the Asia ex-Japan fund. Using Morningstar data for the trailing 3 years at the end of the year, nearly half of our equity funds were in the top quartile and about 2/3 were in the top half.
Five-star equity funds include MDT mid-cap growth, Kaufman Small Cap, Hermes Asia ex-Japan, Hermes Global Emerging Markets. We also had 10 4-star equity funds, including multiple MDT funds, Kaufman and Hermes strategies.
Looking at the strategic value dividend strategy, its objective is to provide a high and growing dividend income stream from high quality companies. The fund's 12-month distribution yield, a little over 4% ranked it in the first percentile of its category in MorningStar at the end of the year. The fund had a return of minus 7.8%, in the fourth quarter, it ranked in the top fourth percentile of its Morningstar assigned large-cap value category for the fourth quartile -- for the fourth quarter. And that meant it was 42nd percentile for the trailing 1 year and 83rd percentile for the trailing 3 years. The domestic strategic value dividend strategy had a combined mutual fund and SMA outflows of $1.5 billion in the fourth quarter, down slightly from the third quarter's numbers.
Looking at early Q1 2019 results, combined fund and SMA net redemptions for this strategy were about $38 million for the first 3 weeks of January. Combined equity fund and SMA, this includes Federated and Hermes, net sales in the first 3 weeks of January were positive by approximately $216 million.
Funds with positive net sales in this period include Hermes' global emerging markets, MDT Small Cap, Kaufman Small Cap, MDT Small Cap growth and the Hermes SDG engagement fund.
Now lets turn to fixed income. Assets decreased by about $2 billion in the fourth quarter to $63 billion, mainly due to net redemptions and to a lesser extent, market-related losses. We saw fund inflows in ultrashort and other short-duration products, offset by outflows in high yield and other categories. For separate accounts, the net outflows were driven by approximately $1 billion of redemptions from state bond pools .
Our fixed income business has a variety of strategies that are performing well. At quarter-end, using Morningstar data for the trailing 3 years, we had 8 funds in the top quartile including total return bond and Hermes multi-strategy credit and 14 funds in the top half.
Fixed income fund and SMA net sales, again, combining Federated and Hermes are negative early in the first quarter by $179 million. Compared to the $216 million of positive that I mentioned earlier. This means that long-term assets in funds and SMA flows are modestly positive so far here in 2019.
We also begin the year with about $2 billion in net institutional mandates yet to fund. With about $1.5 billion in fixed income and $500 million in equities.
On the international side, we launched our first product with Hermes in the fourth quarter, the Federated Hermes SDG engagement equity fund, which is a U.S. compliment to the Hermes product that was launched in December of '17 and reached nearly $300 million in assets at year-end. We are moving forward in registering additional U.S. mutual funds to offer some of Hermes best investment ideas to our customers in 2019.
We are advancing plans to grow the successful Hermes EOS business that features leading ESG stewardship engagement services to institutional asset owners and pension plans, and are working with Hermes to develop opportunities to offer them Federated strategies to their clients. Hermes managed assets at year-end were approximately $42.6 billion, down from Q3 $46.9 billion, with again, about 80% of the decrease coming from market losses.
Hermes' highlights include the successful Q4 launch of the global emerging markets SMID strategy previously mentioned and continued progress in the development and growth of a world-class, multi-asset credit platform with growth in both Hermes unconstrained credit fund and the Hermes European direct-lending fund, both launched in 2018.
In addition. Hermes EOS stewardship and engagement business added several new clients in the fourth quarter with assets under stewardship reaching nearly $500 billion. In the alternatives category, assets at year-end were $18.3 billion, down slightly from Q3. Net sales in Hermes European direct lending and unconstrained credit, as I mentioned, in infrastructure strategies and in approved bear fund were offset by private-equity withdrawals.
Now let's look at money markets. Total money market assets increased approximately $38 billion in the fourth quarter with funds up about $26 billion, separate accounts up about $12 billion. We saw positive money market fund flows from a variety of our institutional and intermediary clients during the quarter. Prime money fund assets increased about $7 billion or 18% from about $38.2 billion in Q3 to $45.1 billion in Q4. Our money market's fund market share, including sub-advised funds at year-end, was 7.9%, up from 7.3% at the third -- end of the third quarter.
Now if we look at some of the most recent available asset totals. Federated -- this is Federated as of the January 23 and Hermes on the 18th of January. Managed assets were approximately $468 billion including $306 billion in money markets and $76 billion in equities. $64 billion in fixed income, $18 billion in alternative and $4 billion in multi-asset.
Money market mutual fund assets were $205 billion. And Federated and Hermes RFP and related activity continues to be solid with diversified interest in MDT, Kaufman, global emerging markets, global equities, for equities high income, trade finance and core broad for fixed income.
Now in conclusion, in addition to the efforts with Hermes, we continue our business development in Asia PAC region with a focus on opportunities in greater China, Korea and Japan. We are actively working to establish strategic relationships with selected financial institutions to add regional distribution to Federated strategies. This effort complements Federated's European, U.K. and Canadian operations. Managed assets excluding Hermes in these markets totaled about $14.5 billion at the end of the quarter.
Finally, we were recently notified that we won a sovereign wealth fund, money fund, money market mandate of approximately $2.3 billion, which is expected to fund in the first quarter. Tom?
Thank you, Chris. Total revenue was down slightly from the prior quarter due mainly to a decrease in revenue from lower average equity assets of $12.7 million. Partially offset by higher revenue from higher average money market assets of $9.2 million and higher performance fees.
Performance fees were $5.8 million in Q4 compared to $1.7 million in Q3.
Revenue was up about $29 million compared to Q4 of last year, due mainly through the consolidation of Hermes revenue of $51.1 million including $5.8 million of performance fees and higher money market revenue of $8.1 million. These revenue increases were partially offset by lower equity-related revenue of $11.5 million, a decrease from the impact of the adoption of the new revenue recognition accounting standard, which was $8.3 million and a decrease from higher waivers from money market funds of $4.8 million.
The decrease in operating expenses from the prior quarter was mainly due to lower transaction-related cost from the Hermes acquisition. The increase from Q4 2017 was due mainly to the consolidation of Hermes expenses of $44.2 million, partially offset by a decrease in expense due to the adoption of the previously mentioned accounting standard, which was $9 million.
Comp and related was lower than our Q3 estimate, primarily due to lower bonus accrual related to the equity market declines in the fourth quarter. Because of the volatility in the markets and the significant variability in our bonus accruals throughout the year, we are not planning to estimate comp expense going forward. We incurred Hermes transaction-related operating expenses of approximately $13.3 million in 2018 with about $600,000 recorded in Q4. We continue to invest in the growth of Hermes with an emphasis on U.S. distribution of Hermes strategies.
We repurchased 95,000 shares in Q4, and we've been able to pay down about $60 million of our revolver balance from the highest borrowing point after the Hermes transaction in Q3. At year-end, our outstanding balance was $135 million, and our cash and investments were $190 million of which about $145 million was available to us.
With this up, we would now like to open the call up for questions.
[Operator Instructions] Our first question comes from the line of Ari Ghosh with Crédit Suisse.
Maybe just starting with the money market business -- maybe, Debbie, so excluding the broader industry tailwinds that you've talked about. Can you talk about anything specific to internal initiatives that are driving the recent market share gains? Is it more on the pricing changes that you've made? Or a new distribution strategy? Winning new client relationships? Any color here would be really helpful?
Thank you. What it really represents is repeating the sounds and joy of many, many decades in the money-market fund business and a long-term steady commitment to it. And over the years, we really don't lose clients. We just have clients move money. And so when you're set up this way and you get a confluence of factors in the marketplace, like for example, increased volatility, like for example risk-off, like for example banks aggressively managing their betas on their deposits. You have a situation where money-market fund flows come in. But if you haven't developed the relationships and the products in advance, it doesn't come to the home team like it did here. Debbie?
I would just emphasize 3 specific reasons. Chris hit on all of them. Rates are above inflation at this point, so interest rates are something that are earning something for the underlying client. Volatility in the longer term, fixed income and equity markets, it's a great place to have a safety point in the liquidity markets and the preponderance of bank products that are now paying something that's grossly under what is being earned in money-market funds.
Got it. That's helpful. And then just a quick one maybe on overall pricing trends. Do you see any future pressure to your expense ratios? And that includes distribution expenses that you're incurring right now. Just trying to get a sense of, one, the current pricing that you see across on a net basis across both money markets as well as your long-term segments? Is that a good starting point? Or you're seeing some pressure longer term to that?
My answer to that would be that it is a relentless and there will always be "pricing pressure" as you describe it. And we see it as the competitive lay of the land in this business. And so it is -- it has been a part of this business since [ some IND men ] run a thought to the contrary and will continue to be. And those are the factors we have to evaluate in how we play in the marketplace.
Our next question comes from the line of Mike Carrier with Bank of America Merrill Lynch.
Tom, maybe first one for you. You mentioned -- you wanting to give new guidance on the comp. I guess just broader, how should we be thinking about expenses for '19, 20? Just given in a -- maybe the lower -- in the revenues that you're getting from the equity side, some of the initiatives with Hermes but then the offset of obviously robust flows on the money-market funds? It's just when you put that all together, how are you thinking about expenses overall in the future?
Yes, sure, Mike. So remember I mentioned that we're continuing to invest in Hermes distribution in the U.S. and Hermes is going to invest some distribution of Federated funds over in their marketplace. So that's going to bring additional costs. We've sent a big team of salespeople over to Hermes in the beginning of the year and so that's the sales cost. And we're starting -- we're going to start funds, we've already started one. We've started the process of filing and registering a number of other funds. And so those are all cost that are going to continue to grow, and we expect them to grow and then to grow revenue right along with it.
In terms of not talking about the comp. You know how the first quarter is with less days and the other various things that's going to drive the comp up. But we saw that missing the -- and expect -- a number that we gave out by $6 million or $7 million is a pretty big number. And -- so we're not really too comfortable in doing that in the future with the volatility that's going on. And we -- the margin took a jump down with incorporating Hermes into it, and we still will -- while Hermes is absolutely a growth engine and we're going to continue to invest in growth, we will still pay attention to the margin.
Okay. Thanks. And then maybe a follow-up either for Chris or Debbie. Obviously, a huge quarter for the money-market business. Debbie, you mentioned some of the attractive aspects given the yields relative to some of the bank products out there. I guess, I'm just trying to understand what maybe was more like either seasonal or environmental versus the core blocking and tackling in Federated, you're kind of winning in this environment given the history and given the competitiveness of the products. So just maybe any color on what you saw during the quarter that was more unusual given the environment versus the outlook?
Sure. I'll start with that. I think to some degree the volatility in the longer-term fixed income and the equity markets drove a substantial amount of the sales that occurred in the fourth quarter. And the allocations that customers were making to liquidity products were higher than necessarily they have historically been. Added to the fact that they were now comfortable 2-plus years post the reforms that took place to the money-market funds in 2016. And I think that they were happy to have that additional allocation in these products. Having said that, there was substantial amounts of, what I call, recurring types of sales also. But definitely, the volatility in the marketplace is something that was driving certain clients to increase those allocations.
Okay. Thanks. And then just -- this is a small one. But if the Fed decides to either change their balance sheet strategy, any view on how that would maybe change some of the dynamics given the market?
Sure. The balance sheet strategy has definitely added to supply in the marketplace in 2018. We expect to continue in 2019. However, if they decide to cut it back from the current $50 billion per month that is being undertaken to something less than that. It's not a huge issue with the market given the supply that is needed from a treasury perspective to continue to fund the deficit via expectation of continued issuance, once we're, kind of, pass the issue with the debt ceiling in the end of the first quarter or early parts of second quarter. It's something that will continue to see supply increase in the treasury sector, and obviously, that is impacting then not only the treasury sector but commercial paper, or other types of credit sectors.
What would potentially change the equation, a little bit more than the balance sheet, would be if Treasury decided to change their funding model. The additional funding that they've done in 2018 was substantially in the money-market sector. Treasury bills, they added a new bill. They increase settlements -- 2 settlements per week in the treasury bill market. And ultimately, if they change that strategy and go back to something that's longer-term issuance that may have some impact, although, still that could be used as collateral in the repo market, which is also -- has also been growing in 2018 and '19. So the outlook is still pretty good even if the Fed cuts back their balance sheet, not as attractive but still pretty good.
Our next question comes from the line of Ken Worthington with JPMorgan.
Maybe first on the money-market SMA business, it continues to show very big growth. Can you talk a little bit about what municipalities are doing with cash? There've been reports about cash building and you guys seem to be a beneficiary, so what are you seeing? And maybe what is the outlook from here for that SMA business?
Sure. I think Chris mentioned our 2a-7 assets are a little over $200 million, our total liquidity assets are little over $300 million, a substantial portion of that is the -- I'm sorry, billion, yes. A substantial portion of that is in the local government investment pool sector, a separate account. And in the end of the fourth quarter and during the first quarter, generally speaking, those types of accounts are gathering assets. So they are collecting taxes, they are collecting receipts from the various constituents within their pools. And it's not until late in the first quarter into the second quarter and third quarter that they actually start to pay those out. So it's a very seasonal business. And if you look, historically, that seasonality has been there since we started our first [ settlement ] investment pool management, which was back in the early 2002 with Texas. What has basically changed over the course of last several years has been with interest rates now above 0 in the -- that sector, you -- more municipalities, more school districts participating in those pools. And even though the seasonality is identical as it's been historically, the overall base and the volume has actually increased because of the higher rate environment.
Okay. Great. Thank you very much. And then, can you give us an update on the BT Pension Scheme withdrawals that you were expecting? What have we seen, if any, thus far? And what's the outlook for 2019 there?
Saker, that's your turn.
Sorry, can you repeat the question? The BT withdrawals?
Yes, what is the...
The BT withdrawals -- so the BT withdrawals that we saw were part of a process that's been agreed when the purchase was made and this is part of the reducing some of their exposure to, particularly, our global-equity fund, and that carried on as normal. I mean, I hesitate to -- I mean, we can take this offline because, obviously, there are clients and I'm not going to say how much the clients withdrew. But what I can say to you is it's within the bands of what were expected, and including the BT withdrawals, I can also say to you that for the year as a whole, we had net new assets of about $2 billion, which gives you an idea of how much we're growing out that part of business.
Our next question comes from the line of Robert Lee with KBW.
Maybe, Tom, I'm sorry to do this, but maybe go back to the comp question. Understanding about the reluctance to give specific guidance and just given that the Hermes acquisition is still new, still trying to kind of get the levels set a bit. Is it fair if we're trying to think of a run rate, so to speak, now if we were to simply, kind of, average the last 2 quarters, I mean, and I know in 2016 for example, you had a similar kind of step down versus what expectations had been in Q4. So it means it's not uncommon to have these reversals in Q4, given the environment that you've faced. So just trying to level set, kind of, where you think we should be?
Yes. And I feel your pain, Rob. Because we don't like giving a number out that then is pretty far off. Of course, we didn't particularly enjoy the market in Q4 either.
So the first quarter, we kind of recalibrate all the incentive pools and look at it. And we generally view things in an optimistic fashion as that would generally lead you to, say, you're going to have a higher pay off. And reality comes, each quarter and then, particularly, in the fourth quarter, when you actually have a pretty good idea of what you're going to pay and change the numbers around. And there are definitely higher numbers because of the payroll and other things that happened in the first quarter. I don't want to go through and guess at a number by saying this number and that number and divide it up because we've seen the changes, millions and millions of dollars.
Okay. Then, well, maybe a -- Chris, a question for you on capital management. So clearly a lot of focus on leveraging the acquisition here and in Europe and spending time and effort on that. So how are you prioritizing capital management at this point? Including appetite for additional transactions, or just kind of -- at least for the immediate term, this is it. And where is kind of dividends versus share repurchase kind of -- any kind of changes subtle or otherwise maybe on how you're -- where you're leaning?
Okay, the first position on capital management revolves around leveraging the acquisitions. We always said that, the acquisitions were the highest and best use of that capital, not to diminish dividends and share repurchase. And so we are going to be looking at that, because we think that the Hermes deals is a transformational deal for both entities and a great growth opportunity for the combined enterprise.
In addition, in terms of acquisitions, we will continually be looking at roll -- what we call roll-ups, you guys call bolt-ons, et cetera, without any pause in our giddyup. But you should not suspect -- and you should not expect that we would be doing any larger type deals, such the size of Hermes or something like that but simply not on the agenda, because we spent, as I've told you all before, 5 to 6 years working on this particular deal and have discovered the beauty of a 6-year, 5-year cultural due-diligence process in addition to all of the factors that you're well aware of. And we want to do the best we can to make this successful into the marketplace. As you noted on our dividend policy, we love dividends around here and have since our whole time being public. And so we are very happy with the dividend that we just declared yesterday, and then we are also active on share repurchases. And they remain within a range, obviously, because of the monies we spent on the Hermes acquisition, but we still remain active there.
Our next question comes from the line of Kenneth Lee with RBC Capital Markets.
Just a follow-up on the sovereign wealth fund, money-market fund mandate, wondering does this represent a new market opportunity? And how much current exposure do you have to that kind of client type?
We have been calling on these types of entities for many years. So this is just one of -- a number of those that we have as clients. And so it's not exactly a whole brand new thing.
And what was the second part of your question?
Just the relative exposure you have to sovereign wealth fund in general?
I think it's around a $10 billion.
Got you. And just in terms of the alternative products set within Hermes. Maybe could you comment on what you're seeing in terms recent client demand for these kind of products, especially in this kind of environments? And which product sets represents -- or like the greatest growth opportunities going forward?
Saker?
Thank you. So the answer is, we are seeing opportunities across the board. We continue to see a demand for some of our real estate investments and they continue to return very good returns. And this is particularly for larger clients who've come on to invest in deals or club deals with us. We have seen demand for our direct-lending product, which is part of our private market's business and also for infrastructure. So the answer is, that it's varied, and we see growth in all of them. We will continue to see strong growth from this area as from other areas. And I would say that in general we -- despite the difficulty of last year, the general flow within Hermes is, I just said, was positive for the whole year, which was very strong and it's well dispersed amongst most products.
Our next question comes from the line of Bill Katz with Citigroup.
First one is actually a set of ones, is in the money market business. Debbie, if the Fed is on hold here, potentially for the rest of this year and potentially moving into more of an easing backdrop as the forward curves are suggesting. How do you think that sort of plays through for the money markets in terms of volume? And then relatedly, Tom, I think you mentioned, I missed that, I apologize. There was some fee waivers in the quarter, could you compare them to last quarter? And then, how you think about that as sort of a net yield impact on the growth?
From the Fed's perspective, we're actually not in the camp of them being on hold at this point. We think their process is maybe a little bit more scrutinous as to the data that's released, although that's somewhat tenuous given the government shutdown currently. But we are still of the thinking that they are likely to see -- they're likely to add 2 more moves to their tightening schedule, bringing them to, what we think would be clearly in their, neutral rate zone for 2019. We don't think it'll happen in the first quarter. We probably think it's more second, maybe third or fourth quarter related. And for that reason, we're not real excited with what the yield curve is giving us right now. So we're keeping our weighted average maturities a little bit shorter. We have, generally, our longer end of our barbell situated in the shorter end, not all the way out at the 12- and 13-month sector, which is as far out as we can go.
Quite honestly, though, I think if you would translate that into volumes, it continues to -- the volume in the fourth quarter was exceptional, I think, because of what we were talking about with market volatility in the other sectors of the market. But I don't think that what would be, sort of, the traditional volume will have any problems with even if rates do stay on hold, they're still at inflation or above inflation and a good place to capture some incremental income while they're waiting for whatever purpose their liquidity is being allocated. So I don't think it will -- has a huge impact on volume. Generally, the first quarter is, from an industry perspective, one that is a negative-volume quarter. I don't know whether we'll see that this year or not, we didn't last year. But traditionally, it is a negative-volume quarter, not necessarily related to rates or what's happening or on an expectation basis. I don't know that we see anything different, though, based on the Fed moving 2 times in 2019 or being on hold.
So on the waivers, what I said was, compared to last year's fourth quarter, the waivers were $4.8 million, the change. And basically the assets are going up. And so as the assets go up, and we're waiving -- the waivers increase. The difference between this -- of the Q3 and Q4 is not -- and I didn't mention anything because it's not a big enough difference to really call out.
Okay, then my second follow-up question. Just going back to Hermes, just in terms of the performance fee in the quarter, maybe provide just a little color on where you generated the performance fees? And how should we be thinking about that line item, specifically, for '19 either in absolute sense or the timing and pacing of potential performance fees?
Saker?
Thank you. So I'm not going to comment about timing, but I can comment about regularity. And that's to say that where we do take performance fees, and it's primarily in 2 areas; one is in our property business, and one is in our global equity business.
Where we do take them over the last several years, these have been consistent in coming every single year. And why? Because we, in some cases, sell our business on very low performance fees, for example, in some equity product with a -- sorry, very low base fee with a performance fee on top and in terms of the property it's to do with how we manage them and harvest the fees back, and we consider them, in this case, to be part of our normal management fee. So they are reasonably repeatable as evidenced in the past few years. As for timing during the year, if you don't mind, we can take that offline.
Okay, I'd be curious about that. And then, maybe just one last one. Just, Tom, going back to expenses, if you look at the non-comp line that -- and it's stripped out, I think, some of the deal costs and adjust for the amortization. It's looks like non-comps about flattish quarter-on-quarter third to fourth quarter. How do you think about, collectively, non-comp and non-distribution? How do you think about that for next year in the construct of trying to build that Hermes? Is there a natural pace of growth against that? Or is there enough things you can do to offset that so that's more of a flattish construct?
Well, Bill, we went through our budget process, and we're trying to -- given the marketplace and you've seen what others have done, which we have not done. But we're trying to manage the variable things as well as we can. And of course, the flexibility with the comp number, I know you asked about non-comp, but the flexibility in the comp number shows the company's flexibility in how we manage given what's going on in the marketplace. So the comp is actually somewhat easier to manage than the other more fixed cost, and we're just doing the best we can. And I don't really think I can go further than that.
Our next question comes from the line of Brian Bedell with Deutsche Bank.
Chris, I think you -- in fact -- also you talked earlier about developing Hermes products in the U.S., some duplicate products. Can you talk a little bit more about what structures you're doing this in, whether there is mutual funds, SMAs or both? And in terms of just the ramping of that product and I know it's always hard to predict with the sales are going to be, but if we look at the potential of what you think you can launch, if I look at Hermes, say, third-party AUM ex-North America, tell me if I'm right on this, it's about $25 billion. Do you think you can, sort of, launch duplicate product for -- maybe how much of that asset base, I guess?
Well, let's deal with the first part, in terms of the products that are being offered or being filed right now that we mentioned, there were 4 of them. And they involve 2 equities and 2 fixed income, including the unconstrained credit. So those 4 funds are marching through the registration process, which causes me to be less effusive in discussing them specifically than otherwise I might be inclined to do. And we expect to offer those products to the investing public here in the United States in our clientele through our distribution here in the U.S. And so that would not be a function of whatever other numbers Hermes has on the international side. In addition, we are in discussions with people about the possibility of creating some SMA vehicles with those types of mandates and perhaps others funds that will be ahead of that. And of course, on the institutional side, we have already done the road shows with our major clients where we had individuals from Federated and Hermes going on big-picture discussions with our major clients. And we would expect to be -- starting to offer the exact products, sometimes the beginning of the second quarter or so on various mandates, which I'm not going to articulate exactly which ones at this point. So it would be an all-points effort on expanding those things here in the U.S.
Now as to your second question, which I'm going to let Saker comment on related to the $25 billion that you ascribe to them on the international side. I'll let Saker comment on that.
So I'm trying to calculate. Do you mean that $25 billion is from international clients, meaning outside of the United Kingdom?
Yes. What I'm just doing is taking the third-party assets of $29 billion and subtracting out of the North America distributed products, which I think are $4 billion of the -- of your total $42 billion. $4 billion or so so getting to $25 billion, based on that is that...
So our third-party clients would include some in North America, some in Europe and some in Asia and some in the U.K. And obviously, BT as a client, is a U.K.-based client. And so it's hard to untangle the 2. In terms of what we distribute, we already distribute some clients in the United States, which is why it's not an easy untangling. And as I say, I -- we give less information about this because then one can work out some more information about one client, which is not correct.
Okay. Yes, I'm taking the -- well, I'm taking the 11% -- on Slide 16 I'm taking 11% of North America and multiplying that by the $42 billion to get $4 billion or so and then subtracting that from the $29 billion third-party to get that $25 billion.
So like I'm saying to you, it's -- we have a mixed bag of third-party clients and they're distributed equally around the world as is actually some of our BT assets. I'm not -- I'm sorry, I can't help more than that.
Yes, yes. That's -- maybe just to tie it back, Chris, in terms of the product launches, to get a feel of the products that you mentioned that are in registration and maybe what you're thinking about for the pipeline for this year. What is the sort of the duplicate assets that are currently managed by Hermes that we're talking about? I'm just trying to get a sense of the size of the potential of ramp-up of that?
Well, it's what you're -- what you're talking about is, we're starting funds and the funds are similar. Hermes is starting funds that we're going to run in the U.S. that are similar to other funds that they run.
Yes. Yes. I'm trying to get those -- yes, the assets, are they similar to -- I'm trying to get the asset level of that similarity at Hermes right now.
Yes, Brian, I don't think we have that number at hand so that's something we could follow-up.
Okay. Yes, great. And then, maybe just a follow-up, going back to the comp -- maybe just the structures, as you do ramp this up and you're investing, I think, Tom, you mentioned earlier about the, sort of, the need to ramp-up on the growth initiative including in comp. Is this -- is the comp structure based on gross sales or for these new product launches? Or is there a deferral that is somewhat based on asset retention?
Yes. So our cost structure is that the investment management is based -- primarily based on performance. And then, this is Federated, I'm talking, and then I'll go through Hermes in a second. And the sales is, primarily, based on sales. And then the operation, executive members, everything else is exactly how the company does. And Hermes has a more of a thought process from their -- where they come from and their history of a percentage of revenue of how they've used that as a guideline in the past. And so it's all the things are variable, and we have to -- I have to put down and Chris and I have to sign a SEC document that says here is what we think is our best estimate each quarter and that's what we do.
Okay. And maybe if I could just squeeze one clarification. The institutional mandates, Chris, you mentioned the $2.3 billion that's going to get funded this quarter. The $2 billion of the long-term mandate in equity and fixed income, do you think those are going to get funded this quarter as well?
Brian, it's Ray. That's kind of hard to say because that involves working out contracts and getting to the finish line and actual funding. So I would not put all of that into Q1. It's likely to extend into the year.
Our next question comes from the line of Macrae Sykes with G. Research.
I think you may be the only asset manager to have increased AUM last quarter. Given that we are kind of in a new environment for higher rates, can you just talk about how you're adjusting your advertising or marketing, both individually as a firm and maybe working with clients to raise more awareness about kind of this higher rate environment? And are you using different sources of technology [indiscernible] engagement to do that?
So we have a couple of things there, we have a PR effort where our friend Debbie here spends pretty significant amount of time on the airways. And then we have a lot of the other portfolio managers and client portfolio managers, out and about talking about rates and talking about the market and talking about whatever else is going on. So that's from a PR standpoint. From the advertising, it's -- that's a -- which products are we advertising and what's going on there. And I know Chris' view for Hermes -- Saker may want to follow-up with that, too..
Well, over time, there is been a dramatic shift from what would be regular advertising to digital social media advertising. It's been a dramatic shift inside of how we're allocating those dollars. The next thing, I would say, is that we are going to be coming up with some ideas on how to do a joint/branding marketing effort with our friends at Hermes and that's being worked on as we speak. So I can't get into more detail on that.
And then the last thing, Mac, is not exactly on your question of advertising. But we have maintained and expanded a sales force dedicated to the growth of that business and so a lot of that promotion and contact and growth happens due to their -- the good efforts of the sales force.
Our next question comes from the line of Robert Lee with KBW.
Just a -- real quickly -- I mean, just wanted to see if there were any expense line in other or maybe still lingering deal costs or things? But were there anythings in the other expense lines worth , kind of, calling out that may have -- that would suggest that maybe this quarter wasn't kind of a good starting point for next year?
No, and we've said about $600,000, the transaction cost in Q4. And we're viewing the rest of the investments with growing Hermes as a regular business going forward.
Okay, great. And then, maybe just one other quick follow-up. The Pipeline is in a pretty healthy -- I assume you probably would have called it out, just want to double check that there's no, kind of, known large redemptions that you're, kind of, expecting over the next -- we'd be notified of over the next quarter or 2?
Well, those were -- the numbers that Chris gave were net numbers. So there are some redemptions factored into that. But we've -- both of the numbers, fixed income and equity are on a net basis.
Our next question is a follow-up from the line of Bill Katz with Citigroup.
Okay. Hard to believe I have one but I do. Just you had given out some flows for the first part of the year in both equity and fixed income and just trying to triangulate some of the other disclosure around alts and the multi-asset. Do you have a sense of what the volume has been quarter-to-date in those 2 bucket of assets? Or is that embedded in the mutual funds and fixed income? If it is, I apologize for asking.
So the fund portion is embedded. We have both fund and separate account in both on multi-asset. The bulk of the assets are in funds. And so that would've been included in the numbers that -- in our overall flow numbers.
On the alternatives, there are a mixture of funds and separate account. And so less of that would have been included, and we wouldn't consider 3 weeks of activity on the alternative side to be a significant time period.
Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Hanley for any follow-up comments.
That would conclude our call then, and we thank you very much for your time today.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.