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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen. Welcome to the Federated Hermes, Inc. Fourth Quarter 2019 Analyst Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mr. Ray Hanley. You may begin, sir.
Good morning, and welcome. Leading today's call will be Chris Donahue, CEO and President; and Tom Donahue, Chief Financial Officer; and joining us for the Q&A are Saker Nusseibeh, who is CEO, International; and Debbie Cunningham, 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 than the results implied by such statements. We invite you to review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?
Thank you, Ray. Good morning. As of today, we have officially changed our name to Federated Hermes, Inc., and we are unveiling an updated corporate identity next week, focused on a commitment to responsible investing to achieve financial outperformance. The new name reflects the combining of 2 active management firms, Federated Investors, Inc. and Hermes Investment Management. Federated Hermes offers world-class active investment management and engagement services across a wide range of asset classes for investors around the world, guided by the conviction that responsible investing is the best way to sustainable wealth creation. Beginning on Monday, we will trade under the ticker FHI. Moving on to our business performance. And looking first at equities, assets reached an all-time record-high of $89 billion at the end of 2019, an increase of 23% from 2018. For the fourth quarter, in addition to positive market impact of about a little over $5 billion and gains from PNC funds acquisition, which closed in mid-November, a little over $2 billion, net sales of combined equity and separate accounts were slightly positive. Equity mutual fund sales were positive in the fourth quarter just under $230 million and for the full year of about $625 million. We had 16 equity funds with net sales in Q4, led by Kaufmann Small Cap, Hermes Global Equity ESG, Hermes Global Emerging Markets and Hermes SDG Engagement Funds. On a full year basis, equity gross sales increased 45%, and net redemptions were down 81%. Using Morningstar data for the trailing 3 years at the end of 2019, 1/4 of our equity funds were in the top quartile, and more than 1/2 were above median. Looking at the Strategic Value Dividend strategy, recall its objective is to provide a high and growing dividend income stream from high-quality companies. The domestic funds 12-month distribution yield was 3.8%, which ranked in the second percentile of its Morningstar category at the end of 2019. The domestic Strategic Value Dividend strategy had combined mutual fund and SMA outflows of about $350 million in the fourth quarter, down from $580 million in Q3. Looking at early first quarter results, combined fund and SMA net sales for this strategy were about $30 million through January 24. Overall, combined equity fund and SMA net redemptions year-to-date through January 24 were negative by $76 million. There were some lumpy redemptions in one of our European mandates. Turning now to fixed income. Equity -- assets increased to another record of $69 billion at year-end. On a full year basis, gross sales were up about 6% and redemptions decreased 8%. Full year net sales were slightly negative, $119 million compared to $3.2 billion negative in the prior year. For the fourth quarter, net sales of $1.4 billion, combined with gains from PNC acquisition of about $450 million and market gains of $1.2 billion to move assets to the record-high level. On the fund side, we saw net sales of High Yield funds, just under $500 million and Ultrashort Funds just over $300 million, among others. Separate account net sales included multi-sector, Total Return and High Yield strategies. At year-end, using Morningstar data for the trailing 3 years, we had 7 funds, 21% in the top quartile and 20 funds or 59% in the top half. Combined, fixed income fund and SMA net sales are $19 million year-to-date through January. These net positive sales have been led by Total Return Bond Fund, High Yield activity and Ultrashorts. Moving to money markets. Assets increased about $36 billion or 10% in the fourth quarter, including about $11 billion from the PNC acquisition. Money market assets increased $94 billion or 31% for the full year to close 2019 at record-high assets of $396 billion. Money market strategies continue to have a significant yield advantage compared to average deposit rates. Money market yields also compared favorably to applicable, direct market rates and longer duration securities. Our money market mutual fund market share including sub-advised funds at year-end was about 8.8%, up from about 8.4% at the end of Q3 and 7.9% at the end of 2018. Taking a look now at our most recent available asset totals, with Federated as of January 29, Hermes, January 17. Managed assets were approximately $583 billion, including $401 billion in money markets, $90 billion in equities, $70 billion in fixed income, $18 billion in alternative, $4 billion in multi-asset. On the money market mutual fund asset side, the assets were $283 billion. RFP and related activity levels continue to be solid and diversified in the fourth quarter, with interest in MDT, Kaufmann, and global emerging markets for equities, high yield, liquid credit and short duration for fixed income. We began 2020 with about $450 million in net institutional mandates yet to fund all on the fixed income side. On the international side, we have had a good response from clients for the initial new funds developed for U.S. distribution that are sub-advised by Hermes. Assets in these funds were just over $75 million at the end of the year with about $44 million externally sourced. By the subtraction method, that will tell you what the seed assets are. We are evaluating further U.S. mutual fund launches using Hermes strategies. We are actively presenting Hermes strategies with our institutional customers and are working with Hermes to develop opportunities for them to offer Federated strategies to their clients. We are progressing on the expansion of the EOS stewardship and engagement business in the U.S. and are working to hire several new engages. EOS assets under administration reached $877 billion at the end of the year, up from $781 billion at Q3 and about $500 billion at the end of 2018. Hermes managed assets at year-end were at $49 billion up from $44 billion at the end of the third quarter and $42.6 billion at the end of 2018. Hermes fourth quarter net sales were $1.3 billion, all third party. Favorable exchange rates and market gains contributed to the increase in assets as well. We are looking to grow our business relationships and opportunities, both inside and outside the U.S., including alliances and acquisitions to complement our domestic and U.K., European, Asia Pac and Canadian operations. Tom?
Thank you, Chris. Total revenue was up about $18 million or 5% from the prior quarter due mainly to higher money market revenue of about $12 million, primarily from higher average money market assets. Equity and fixed income revenue also increased from Q3, primarily from higher average assets. Performance fees of $2.8 million were recorded in Q4 compared to $1.5 million in Q3. 2019 total performance fees of $7.4 million, mostly from Hermes' strategies. Hermes performance fees in 2017 were approximately $7.4 million and $8.5 million in 2018. Revenue was up about $191 million or 17% for the full year due mainly to higher money market revenue of $115 million and the inclusion of a full year of Hermes results in 2019 compared to half of 2018, which accounted for $96 million. These increases were partially offset by lower domestic equity, multi-asset and fixed income revenue of about $19 million. Looking at operating expenses. Comp and related decreased about $800,000 from the prior quarter due mainly to lower incentive compensation expense of $4 million, partially offset by severance pay of about $2.7 million, resulting from the combining of certain administrative, operational, sales and investment teams. Distribution expense increased about $5 million in Q4 compared to the prior quarter and $53 million for the full year due mainly to higher average money market fund assets. As a reminder, for Q1, our revenue is negatively impacted by fewer days in the quarter, partially offset by lower related distribution expense. In addition, payroll taxes and employee benefit costs are seasonally high in Q1 compared to Q4. Expenses related to the PNC deal totaled about $1.3 million. During Q4, these costs, which were primarily recorded previously as professional service fees -- previously in previous quarters as professional service fees were capitalized as part of the asset purchase intangible asset. Subject to finalization of the PNC deal asset valuations, we do not expect an increase in amortization of intangible assets, asset expense due to the nature of the recorded assets. The decrease in other operating expense line items for Q4 compared to Q3 was due largely to the currency exchange rate impacting both the valuation of U.S. dollar assets at Hermes and the foreign exchange hedges used by Hermes to swap U.S. dollar-based revenue in the pounds in order to line up with their largely pound-based operating expenses. In Q4, this resulted in an expense credit of $1.8 million compared to the $1.2 million in Q3 of expense. In other words, a $3 million variance. This Q4 expense credit was partially offset by the overall negative impact of exchange rates on Hermes reported Q4 operating results, estimated at about $1.3 million across all operating line items. The increase in total operating expenses for 2019 versus 2018 was primarily due to the aforementioned inclusion of Hermes full year results. Also higher distribution expense, primarily from higher average money market, fund assets and higher incentive compensation and related expense, nonoperating income expense of $1.4 million from Q3, primarily due to an increase in the market value of securities held by consolidated funds of $3.4 million, offset by lower private equity carried interest on assets managed by a nonconsolidated entity. The carry was $5.4 million in Q4 compared to $6.8 million in Q3. Nonoperating income increased $51.4 million in 2019 compared to 2018, primarily due to the 2018 FX loss in connection with the Hermes acquisition of $29 million, primarily higher equity carried interest on assets managed by the nonconsolidated entity of $9 million and an increase in the market value of securities held by consolidated funds of $7 million. As we have said previously, we are not able to forecast future private equity carried interest. In 2019, carried interest recorded was $11.3 million. In 4 of the previous 5 years, carried interest was approximately $3 million. In the fifth year, the carried was about $13.5 million. The $2.4 million increase in net income attributable to noncontrolling interest in subsidiaries from Q3 was primarily from consolidated funds and from Hermes. At the end of 2019, cash and investments were $341 million, of which about $276 million was available to us. Jeff, we would like to open the call up for questions now.
[Operator Instructions] Our first question comes from Brian Bedell with Deutsche Bank.
Congrats on the new name. Maybe just to start off with that, on the name change, maybe Chris, if you just want to elaborate a little bit, you -- why now instead of doing this when the deal closed. And then if you can just talk a little bit about the new marketing program, what you intend to do specifically and what the expense impact you expect for 2020 on -- with that new marketing program.
Yes. In terms of the timing of the name change, the excitement and all of the work that was done to get the deal together was also one of the reasons it didn't happen right away. There's a lot that goes into changing the name of 2 organizations whose lifetime has been under a different nomenclature. We were able to combine though the fiduciary heritage of Federated and the ESG and responsible investing activities of Hermes and felt that once we got all organized funds on the block where we are selling them with a responsible investment office opened at Federated, with the integration of ESG into money markets at Federated and then well on the way in several other of our investment management teams, and with the acceptance that the clients have had, we felt this was a very good timing. Behind the curtain in terms of intercurl, we announced all this internally last year at our sales conference, which is next week, wherein we have the 230 high-powered engine machines coming into Pittsburgh, and we felt this was a perfect time to launch that into the marketplace. So it was both an external and an internal decision-making.
Yes. On the expense side, it's a forecast. So it's a forecast, but somewhere around $5 million and that's advertising, signage, basically business cards, names of product. There's a lot that's involved in doing that, and we look forward to moving forward, Federated Hermes.
That's helpful. And then maybe just the third-party sales. It looks like that did -- on a net sales basis, it looks that did tick up in the fourth quarter. Maybe if you have any kind of expectation given -- especially given the branding and the additional marketing, and of course, the more recent excitement about ESG, so to speak. What are your expectations for third-party sales for Hermes products in 2020?
Saker, that's your turn.
So all that I can say is the RFP activity is very high. And we have seen net sales to continue in this -- beginning of this quarter. If I would give you the numbers, I'm going to give the numbers in pounds because that's the numbers that I see. In terms of inflows last year, that's gross inflows, we saw about GBP 8 billion of gross -- just over GBP 8.3 billion, that's gross inflows coming up last year. And I'd expect something slightly ahead of that without the sales in the United States through this year. It's not an exact answer, but I'm not going to give more of a guidance than saying it's going to be, we believe, better than the year just ended.
Right. Right. Okay. If I could just sneak one more in on the admin service fee increase in 4Q '19 versus 3Q. What was the driver of that? And what should we look -- up to $70 million from $64 million, what should we be thinking of for the run rate in 2020 from that?
So Brian, that's driven by mutual fund average assets generally. And given the volumes, money market, mutual funds, more specifically. So that will correlate to the change in average assets going forward.
We'll move next to Patrick Davitt at Autonomous Research.
So you talked about the $5 million in marketing. How should we think more broadly about the expense trajectory, bringing in a full quarter of the PNC assets in 1Q? And then beyond now that [Audio Gap]
So the expenses on PNC. We've got the -- as Chris went through the list of the money markets and the equity and the fixed. And we're not -- we said today, we don't expect to have amortization related to that. So the expenses with the money markets will primarily be related to distribution payments, and all the other funds merged into our existing funds so where there's distribution payments there. We also picked up a great team in Cleveland with 3 funds. So we're picking up the expense of that team in the Cleveland office and the connections into Federated and the new efforts to sell and distribute that fund -- those 3 funds in a wired fashion. So we're pretty excited about the whole outlook on the merger and the growth of the new funds.
I guess -- I mean more broadly, though, like, do you have a view on including that $5 million of extra marketing where expenses will be kind of in 2020 versus 2019? Flattish, up a bit?
Well, we talked about $5 million in 2019 related to Hermes, and that included a broad list of things, new products, people, as Chris mentioned, in responsibility office and kind of across the board. So we would expect to see -- and then when you start new funds and you hire new people, you have a continuing expense. So we think that some of this expense related to advertising and the other changes might all -- might not reoccur, but then we might switch to do more advertising into the future. So we'll just see. So all we can talk about is basically a $5 million number for 2020.
And that -- is that on top of the $5 million in Hermes that you had in 2019 or it just kind of move into now this?
Yes, I think it's -- I'd say, when we hire people, then this is in addition to that. We didn't go through and say, we spent exactly $5 million. That was an estimate from work that we've done in advance. And do we hire all the people or when we're going to hire the rest of them in 2020. It's not exact science. We're trying to give you some indication of what we were looking to do. And we're trying to implement it.
We'll move next to Dan Fannon at Jefferies.
Just a follow-up again on expenses. I guess, first, on comp 4Q here. You had revenues sequentially rise, but comp down. Just curious if there was anything specific in that number. And then the normal seasonal step up, as you mentioned, for payroll. Just remind us for you guys, how much that is and anything else that, I guess, as you kind of bridge between 4Q and 1Q that might be more notable.
So Dan, on the second part of that, the bump up in payroll tax and 401(k) seasonality will probably be in the $3 million range for Q1 compared to Q4. And as Tom mentioned, a lot of our revenue, most of our revenue is based on -- is calculated on a daily basis. And we didn't work through the numbers. We -- coming into 2019, we estimated about $5 billion for Q1 of '19 of lower sequential net revenue. So it is a significant change in Q1 because of the fewer days.
And the last thing -- the first part of your question was why the recalibration of the down in the incentive compensation. And it's basically what it is. We're looking every quarter to get that number right and come into the end of the year and recalibrate everything. And we had to adjust down.
Okay. And then can you elaborate a bit, I think, on the equity year-to-date trends, the negatives, I think it was $76 million, and you talked about some international products, maybe that saw some outflows, I guess, little more color on that. And I think, I guess, you said the backlog, and I think the activity levels are there are positive. So just so if there's anything else to unpack there, please.
The -- there was a lumpy redemption that came out of one of our Hermes funds. And I don't have any more to say on it than that. It was over $100 million and that was greater than what was the negative. And that's why I mentioned it as lumpy. But when you have big customers, you get big moves. We've discussed that before. There is nothing going on in the performance. That move was not a performance move. So it doesn't worry us in terms of future flows.
And on the forward numbers, the $450 million that we talked about was fixed income. There are some institutional type of wins, but we expect those to go into funds. And that sometimes happens as well, and that's probably a couple of hundred million dollars, but we did not include that in the $450 million. That's all fixed income.
We'll go next to Michael Carrier with Bank of America.
So maybe first one, just on the Hermes Federated, like the rebranding. And then maybe just going a little bit more in detail. And particularly on the U.S. side, when you look at maybe 2020 versus 2019, just like what initiatives maybe are in place, whether it's by the different distribution channels, whether it's through the trust, the banks or the retail, some of the products that were launched. What are the sales force? Like, which products are they going to be focused on? Just any more granularity to try to see that traction starts to pick up within the U.S. side?
We are very, very excited about what now amounts to a broad-based family of international products to bring to our U.S. distribution. This includes the products that Tom mentioned, from Cleveland, New York products, Pittsburgh products and London products that now represent a complete array. And part of the effort, as I mention in our sales meeting next week, will be to focus on these products into the future. So that's one pretty big push. Another area that we're going to be making a bet on is Asia Pac through Harriet Steel's operation inside Hermes. And we think that is something that's going to be -- get some focus as well. And as you know, on the institutional side, these things are not -- these sales are not made in a short time frame. It takes a minimum of a year, sometimes into the second year before you begin to actually win mandates having ploughed the ground, it's just the timing that's involved. So those are some of the things. Internally -- and this wouldn't be for 2020 that we're talking about, but internally, we're looking at getting organized the private markets area. We already announced the completion of the purchase of MEPC, which is a real estate development company that the pension scheme in Hermes had worked on for many years. We're looking at the private equity side of it as well. We've added people to the infrastructure side. And we're trying to get that all organized for building into the future. But as I said, that's not a 2020. That's more down the road. So those are some of the main things.
Chris tonight also mentioned -- this is Debbie, tonight also mentioned, basically, the full integration of ESG analysis into our credit review process for all of our liquidity products. That was something we had been driving toward since the 2018 acquisitions and accomplish that in 2019. Now it's evolutionary, not revolutionary, it will continue to develop, but we have absolutely included from the analysts and the engagers, the information that's coming out of the Hermes proprietary model and use that within the qualitative aspects of our credit analysis process for our money market fund.
Okay. And then just a quick follow-up, just on that fixed income side. So in the quarter, you saw pretty good strength. And then it sounds like that's continuing into 2020. Just anything particularly in the quarter just given that the number was over $1 billion, just anything that was more lumpy that you'd call out?
Well, on the institutional side, Mike, there were some good wins on the multi-sector side. And so institutional accounts are by definition lumpier when they come. We also saw a return to strength in High Yield. So in -- with the yield challenges in the marketplace. High Yield came back into more significant flows. And we mentioned -- that's continued early into the first part of 2020, the Total Return Bond Fund. So it's the spread products that have been responsible for the inflows. Ultrashorts were a meaningful part of the Q4 positive. Just to correct, they're actually a little bit negative in the first part of 2020. And that's really just more technical analogous to what happens in the money market fund side, where money tends to come in, especially late in the year, and then go [Audio Gap] you can kind of think of that as much -- more like long cash than the spread products that really have driven the inflows on fixed income.
We'll move next to Bill Katz at Citi.
Just to spend a little time talking through some of the choppiness on the multi-asset and the alternative buckets, you're seeing better growth elsewhere. Sort of wondering what might be going on underneath that, just as we think ahead.
Well, those sales are slow and take a long time, and as you've noticed, the numbers are roughly flat. And that's one of the reasons, I mentioned that we were looking to get better organized on the ownership and -- of those entities, even though we control some of them. We have to get those things organized first before we decide to make big investments into them into the future. And that's why I characterized it as getting organized this year with ideas of having them put points on the board next year. And that's pretty much the theme in all of those private markets. I think the multi-asset credit product, however, has had good, strong positive flows, good reflection on the new product. And I'd ask Saker to comment on that particular one.
So if I may, Chris, I'll comment just briefly on the private market. And then on to this one. On the private market one, I will just remind people that it's a longer sales cycle because, generally speaking, the assets remain with us for many, many years to come. It also affects our income because quite often times, there are 2 kinds of additional revenue besides the fee revenue we get, which is the management fee revenue, one is performance fees and property funds, generally speaking, and then a carry fee in private equity funds. And that means that it's sometimes difficult to look on them on a quarter-by-quarter or year-by-year basis for these 2 reasons. And if you look at our multi-assets, this is a capability that we've been holding over several years. It exhibits the same standards of alpha that others have. And again, just to remind everybody, the Hermes product offering effectively is all high market -- high active share, which means very different from benchmark, integrates ESG and has very strong performance fees, and that is beginning to come in multi-assets, and that's why we're seeing the flows coming through as we are in other parts of the business.
And I'd make one other comment. Saker doesn't make a comment like this because of the reason I'm going to say, but we did have $1.6 billion in sales in private equity. But those are basically numbers that we already had before, where they're just rolling over. But it is a positive indicator about the underlying strength of the organization.
Okay. I'll follow-up post line. I'm just going to track into the outflows you're talking there in your disclosure. Just one last question. Just in terms of how you think about a lot of different flows, different segments, different geographies. How do you think about the interplay between net new assets on the long side of the business, long-only side of the business versus fee rates from here?
Well, the fee rates are -- we haven't had immediate or current or grand disputations on those in our plans, especially for this year. On the institutional side, they're generally individually negotiated as per the disclosures we've made. On the fund side, there are the normal discussions with distributors about sharing and the regular marketplace that is unchanged. So we aren't currently dealing with meaningful reductions in fee rates.
We'll move next to John Dunn at Evercore.
I wonder if you could give us a little more flavor of the Hermes sale discussions with institutional clients and maybe how big an opportunity that could be and if we could start to see more of an impact in the second half of 2020.
Well, since Saker was on that roadshow with the institutions, I will let him comment, and then I will add.
Thank you. So we continue to see a strong interest in our products for institutional clients. Again, to remind everybody before the majority stake was acquired by Federated, we already had some marquee clients in the United States. So although we weren't big, it's not as if we were not known. But these sales, as you well know, typically take some time to come through, but we're seeing a lot of positive reception, some to our fixed income. It might surprise some of you, but some to our U.S. small cap and certainly to our SDG Fund as well. So we're hopeful that this will begin to come through in this year and translate into assets.
And I would add a couple of things. We are adding to our institutional sales force here. It's like onesie-twosie, but it is because we have a lot of confidence in these mandates. And at a macro level, one of the reasons is exactly the reason for the combining of the name, you bring Federated's fiduciary heritage, which is a drive for performance, an alpha hunter and active manager with Hermes, who shares exactly those views along with a lifetime commitment to responsible investing. This is the overall message that we are bringing to the institutions. And we think we are able to bring it in a unique way because of the focus on the fiduciary and because of the beauty of the engagement the way Hermes has done it. And the way Hermes has done it that makes it unique is it is a third-party effort. So there is a group that does EOS that sends the 40-person team into various companies to get data that looks forward into what is going to happen in addition to taking all the data that's backward-looking as to how people did do. And these kinds of things are good messages in the institutional world, and if you have the numbers to go along with it, we think it makes for an excellent project.
Got you. And then just one on Strategic Value Dividend. It seems to be trending in a better direction. But where do you think we are in the sales cycle for that? And maybe just some of the environments in the past where you've -- that have been good for that strategy.
Well, in terms of the sales cycles, as I've mentioned, we've seen the sales continuing to increase and redemptions continuing to decrease. And so far in January, it's a positive flow story. Part of the reason for that is, in continuing low rate environment, this 3.8% distribution yield with a growing dividend stream is a very, very viable product. And people, at least some of the thoughts from the marketplace are that they are continued interest in this product. And they are continually interested in the yield. Some are not willing to jump full scope into the market, but they like getting the yield to keep them interested. So overall, the tone we're finding from the broker-dealer SMA world is that they're cautiously optimistic. And that's a good situation for Strategic Value Dividend.
We'll move next to Kenneth Lee at RBC Capital.
Just one on the Hermes EOS. You touched upon -- mentioned that you're in the process of hiring new engagers right now. Wondering what other further milestones would you expect in the near term. And could we potentially see implementation in the U.S. sometime this year?
Well, the implementation is in the U.S. this year. We've already hired some and they are more on the docket. And overall, my expectation is we'll cross -- we'll go from $877 million over $1 trillion in assets under administration in some time frame here in the future. I hate to put exact date on it. It's -- Saker, obviously, can be, who runs it. I'll let him tell you about it.
So we already, prior to this, of course, engaged with companies in the United States. Our commitment to increase our key engagement capability in the U.S. is partly -- was partly also to service the fund managers within the Pittsburgh and New York and Boston offices for Federated. Because our view has always been that the use of ESG, which we pioneered from 30 years ago and the use of stewardship, which we pioneered again from 30 years ago and formalized 15 years ago with the launch of the EOS theme is, in fact, a way in which helps us find better data on companies and helps us with that alpha. So this has always been a commitment there. The increase in people in the states engagers allows us a deeper engagement with American companies and a better way of servicing our increasing number of U.S.-based clients. And again, to remind people, we run EOS and that's a different way from others, we run it as a kind of a club, where all of our clients decide collectively on the topics that they want to pursue with the companies and the companies they want to talk to including, by the way, the teams that we have here who act as a client. So the Federated Hermes teams act as a client to the EOS. And this is different from perhaps others out there who are trying to enter the stewardship arena by pursuing what they see as the right teams to pursue. Now that allows us to focus on companies in a way of improving the long-term performance and that way, actually, release better value creation and wealth creation in the long term. So we are there. We've added more people. There is a segment of the floor in Pittsburgh, which is already EOS, and that will continue to grow over time. It's something we've been building for 15 years. We're the market leaders. We will continue to build.
Great. And then just one follow-up, if I may. Just on the money market funds. You touched upon that money market fund rates are still favorable compared to some competing products. I wonder if you can just give us a little further detail in terms of your current competitive landscape.
Debbie?
Sure. I'll take that one. Deposit rates are still, I think, over the last spring bank brokerage deposit rate index came in at 14 basis points. So it's not much above where money funds were in a 0 rate environment, and we're no longer in a 0 rate environment. Most of our funds are somewhere on a net yield basis between 160 and 180. The interest rates went down with the coronavirus over the course of the last several weeks and concerns about what that might do from an economic activity perspective and how the Fed may need to react. The Fed, however, on Wednesday, confirmed rates and actually raised IOER and the RRP, which is overnight lending by 5 basis points. So that's beneficial to our products and has made the yield curve look a little bit more attractive on a fund basis. So I don't expect those yields to drop very much. So when you're talking about deposit rates, you're talking at least 150 basis point advantage over what most customers in those types of accounts are receiving at this point.
We'll move next to Ken Worthington with JPMorgan.
This is Will Cuddy filling in for Ken. So first, the compensation ratio has bounced around a little. Could you remind us of how you think about the growth of compensation relative to revenue over the long term? And more specifically, with revenue growth, how should we be thinking about that trending over time?
Yes. Well, this is Tom. We don't look at it based on revenue. We are more granular in the U.S. in terms of how the sales force is, how the compensation is done here, and that's based on how sales go. And of course, then you go to investment management. And a huge portion of their pay is on -- and incentive is on how performance is done, then the operation. And the rest of the nonsales and noninvestment management are more tied to an operating income view. So that would have a little bit of revenue look at it, but it's certainly more of a bottom line approach. And we don't look at the ratio comp to revenue. We've never calculated that. We've never used that in our budget process. We're really doing a build from ground 0 and up.
Okay. Got it. And did I hear correctly earlier, is $1.6 billion of sales in private equity? And if so, what products are seeing those sales?
We're referring to Hermes did a press release actually in November, talking about the Hermes GPE raising $1.6 billion for private equity, and Saker, you might want to comment on that more. But essentially, the point that Chris was making is this business is largely rolling over from other successful vehicles, and it's a good indicator of the quality of the results that have been delivered through that enterprise.
Correct. So the way that our private equity business works is that we raise tranches that go into essentially funds, although they're not funds in the sense that you think about them in the United States, but they're, in fact, private equity funds, and each tranche raises money over a certain amount of time, and then it's closed and then the performance is calculated over the next -- depending on the fund between 3 and 5 years, and then the carried is paid out accordingly. And this increase was getting around to primarily all of our existing clients. We are very pleased with the performance of our previous funds, which, remember, when a private equity fund performs, you actually give the money back because you're selling the underlying assets, and therefore, reinvesting it back into our new fund, which then allows us to go out and invest again. And so the cycle starts again. And that's typical for private equity cycles. And the clients are widely dispersed, including some major clients we've got in North America as well.
And Will, it's Ray. Just from a reporting standpoint, you won't see the $1.6 billion. We would not put that in there as a new sale. So it's not in the Q4 number. Those are commitments going forward. And as Saker indicated, they'll largely roll over from existing mandates. So you won't see that in the numbers, but it's obviously a very positive development.
Just as a quick clarification. Actually, the $1.6 billion, like, is that mostly re-up? So it's not new clients coming in, it's just -- it's them rerolling back into the new funds?
Yes.
Yes.
Yes. And sorry, and remember, we make our money in 2 ways in private equities. One is, we make our money, obviously, on the management fee, but also, we make our money on the carry on the upside that we create and the alpha we create for our clients over the long term. A bit different than property where it's performance fee and slightly over a shorter time horizon, but they both have that basic model within it.
We'll move next to Robert Lee with KBW.
Most of my questions were asked, but I guess I will ask the inevitable capital management question. I mean Chris, knowing you like to hit on acquisitions, dividends and buyback. Just with the apparently increased earnings power of the company kind of coming through, say, last quarter, this quarter, any subtle changes, particularly maybe in how you're thinking of the dividend or repurchase part of that? Because, I guess, haven't raised the dividend in a while and payout ratio is, I guess, trending towards a little bit lower than peer average. So how do you think of that?
Well, we certainly don't want this price to go down to improve that ratio. But acquisitions remain on the table. And doing all of these other things, which we talked about on capital assets, I mean, we are looking at all the things I mentioned on the marketing side, I'm not going to go through them again. We have some internal things we're doing on our data management and warehousing, and we've accelerated those. We're putting a new CRM in. We're going with sales force for the Federated part of it, which Hermes already has that. So that will be put together. And that will take a few bucks. So internal is added to that list of the dividend, share buyback and acquisitions. Now in dividends, we always look at that in April, and we are well aware of all of the statistics that you're commenting on. And we will have a hardy look at that in April. On share buybacks, we were up a little bit from our polite activity in the past, and we continue to be active on that. And that's about as much as I can give you on that activity.
We'll return to Patrick Davitt at Autonomous Research.
I remember some chatter last year. You had kind of mentioned that there were some discussions to may be roll some of the BTPS money that had come out back into other strategies. Are those discussions ongoing? Any update on the potential for some of that money to come back in?
Saker?
Well, I just realized I had my mute on. I had a mute on, sorry. As I said, we have some rollover of money from BTPS, but net-net, we have net decline as per the plan that we agreed with them when the majority stake was purchased, but we continue to show them other stuff that we have, particularly in money market and fixed income. And again, they're in institutional clients, and you'd expect them to take some time. I would repeat what I said, I think previously on these calls, which is the following: as you would expect the net fee basis that I can -- that we can charge BTPS is commensurate with the size, which means as they free capacity in our high alpha in demand funds and we sell the same capacity to new clients, our margins actually go up.
With no other questions holding, I'll turn the conference back to management for any additional or closing comments.
Well, that concludes our call, and we thank you for joining us today.
Thank you, again, ladies and gentlemen, for your participation. You may disconnect at this time, and have a great day.