Federated Hermes

Federated exited June 2026 with $234.7 billion in long-term assets under management. With fee rates up 8.1% year over year, and average AUM up 8.7%, second-quarter revenue rose 18.3%. Adjusted operating margins declined 115 basis points, though, to 26.4% when compared with the year-ago period.

Why it matters: Higher short-term interest rates, equity and credit market volatility, and increased competition have affected Federated's fund flows and the level of managed assets in both positive and negative ways over the past several years. On the positive side, higher short-term rates have lifted money market fund assets to $676.9 billion at the end of June 2026 from $448 billion at the end of 2021 (before the Fed increased short-term rates). Federated is also getting paid more for these funds, with fee rates at 14-15 basis points over the past several years, compared with 5 basis points in 2021. On the negative side, Federated has faced outflows and subpar performance from its equity, balanced, fixed-income, and alternatives products. Net outflows from long-term AUM of $1.7 billion in the June quarter continued the trend of quarterly outflows that took hold in late 2021.

The bottom line: While the firm closed out the second quarter with $911.6 billion in total managed assets, up 0.5% sequentially and 7.8% year over year (and 35.6% from the end of 2021), the firm has generally been swapping high-fee-generating products for low-fee money market fund AUM. As there was little in no-moat Federated's second-quarter results that would alter our long-term view, we expect to leave our $54 per share fair value estimate in place. We view the shares as being slightly overvalued right now. The big question for Federated is where its money market AUM goes from here. The industry was sitting on a record $7.948 trillion in money market fund AUM at the end of June 2026, up 12.3% year over year (and 67.1% since the end of 2021).

Federated returned to form during the second quarter of 2026, reporting outflows of $1.7 billion from its long-term AUM after posting rare inflows of $1.8 billion in the first quarter. The company also reported $7.9 billion in outflows from its money market fund operations, which held $676.9 billion in AUM at the end of the second quarter, up 7.5% year over year. This ran contrary to the $137.0 billion in additional capital that flowed into money market funds overall during the June quarter. 

With fee rates averaging 15.1 basis points during the past year, the company's large money market platform (accounting for 8.5% of total industry AUM) has been a positive for the firm, with Federated posting $838 million in revenue (or 51% of total fee-based revenue) from money market funds in 2024, another $948 million (53%) last year, and $503 million in the first half of 2026. Should money market funds remain elevated, the firm is likely to generate more than $1 billion from its money market operations this year. 

The big question mark is how long it will take for this capital to come off the sidelines. With most money market funds yielding from 3.50% to 4.00% right now, it is hard to see much movement in the near term, given the belief that rates are more likely to go up than down in the near term, and our most recently updated 10-year valuation-implied annualized returns for US stocks and US aggregate bonds coming in at 2.4% and 4.8%, respectively. 

While returns look better further up the risk spectrum, with international developed stocks, emerging market stocks, and US high-yield bonds projected to generate 5.5%, 5.4%, and 6.4% annualized returns, respectively, over the next decade, the ability to potentially earn 3.5%-4.5% on a risk-free asset remains the more compelling option for a lot of investors. 

Federated's top line expanded 18.3% year over year to $503 million during the June quarter. As for profitability, second-quarter adjusted operating margins of 26.4% were 115 basis points lower when compared with the prior year's period. Federated reported second-quarter earnings per share of $1.38 on an adjusted basis, above the FactSet consensus estimate of $1.29 and our own internal estimate of $1.26. 

For more insight into the trends and other issues affecting traditional asset managers, which influence our long-term forecasts for firms like Federated Hermes, please see our latest Industry Pulse, "US Traditional Asset Managers: 2026 Q2," published on June 24, 2026. We also have a broader industry primer available for the US-based asset managers in our annually updated Industry Landscape, "US Asset Managers," which was last published on Dec. 18, 2025.

We've raised our fair value estimate for Federated Hermes to $63 per share from $58 to account for revised expectations for AUM, revenue, and profitability since our last update. Our new fair value estimate implies a price/earnings multiple of 11.4 and 10.5 times our 2026 and 2027 adjusted earnings estimates, respectively. For some perspective, during the past five (10) years, the company's shares have traded at an average of 11.3 (11.8) times trailing earnings on an adjusted basis, with the highest (lowest) multiple during the past decade being 17.8 (9.4) times. We use a 21% US statutory corporate tax rate and an 8.4% (8.0%) cost of equity (weighted average cost of capital) in our valuation.

Federated ended June 2026 with $234.7 billion in long-term AUM, up 7.8% year over year. Money market fund AUM stood at $676.9 billion at the end of the second quarter, up 6.7% when compared with the prior-year period. Net long-term inflows of $0.1 billion during the first half of 2026 were down from $0.6 billion in the year-ago period, but the 0.0% annualized organic AUM growth rate was an improvement on the negative 0.3% rate put up during 2025, as well as the negative 6.3% rate posted during 2024, and the average annual rate of negative 1.7% during 2021-25.

The firm continues to offset the weaker flows for its long-term AUM with inflows into its money market funds. Despite carrying lower fees than its long-term AUM, Federated has benefited from both inflows and the increase of fee rates for money market funds to a more normalized 13-15 basis points from their historic lows of around 7 basis points when short-term rates were near zero. Money market fee rates being where they've been for the past four and a half years have been a net positive for Federated, with the firm posting $948 million in revenue (or 53% of total fee-based revenue) from money market funds last year, and on pace to generate more than $1 billion this year.

We expect Federated to generate annual organic long-term AUM growth in a range of negative 5% to positive 2% during 2026-30. We also expect money market AUM levels to remain elevated over the next few years. This, along with market gains, should allow Federated to produce low- to mid-single-digit average AUM growth annually during our forecast period, with the net result being a 4.3% compound annual growth rate for revenue during 2026-30 (up from 2.6% previously). We also expect Federated to generate adjusted operating margins of 27%-30%, compared with 28.5% last year and 26.5% on average annually during 2021-25.

We project a bull-case fair value estimate of $98 per share and a bear-case valuation of $38. The key factors affecting our scenario analysis include the level of short-term interest rates, whether fee waivers are required for money market funds, and the contribution that Federated's long-term AUM makes to overall growth, revenue, and profitability.

Our upside scenario implies a P/E multiple of 14.2 and 131 times our 2026 and 2027 adjusted earnings estimates, respectively. In this case, we assume Federated's top line expands at a higher rate than in our base case, as the firm's equity, fixed-income, and alternatives offerings become even larger contributors to the overall business. The net result is a 7.7% CAGR for revenue during 2026-30, with adjusted operating margins exceeding 30% by the end of our five-year forecast.

Our downside case implies a P/E multiple of 9.2 and 8.4 times our 2026 and 2027 adjusted earnings estimates, respectively. This scenario assumes the firm's top line struggles to grow at a favorable rate during most years as money market fees are compressed and equity and fixed-income AUM growth stalls. The net result is a negative 0.4% CAGR for revenue during 2026-30, with adjusted operating margins dropping below 27% over the course of our projection period.

We believe the asset management business can be conducive to establishing economic moats, with switching costs and intangible assets being the most durable sources of competitive advantage. Although switching costs might not be explicitly high, inertia, uncertainty about achieving better results by moving from one manager to another, and the potential tax consequences of selling a fund with significant gains tend to keep investors in place.

For the industry overall, the average narrow retention rate, which excludes exchange redemptions, has been 75% or higher annually for much of the past three decades. Including exchange redemptions, the rate has been just over 70%. Firms offering niche products with significantly higher switching costs—like retirement accounts, funds with lockup periods, and tax-managed strategies—have tended to hold on to assets longer. Invesco's average annual retention rate has been 71% over the past 5 and 10 calendar years, slightly below the industry average.

In Federated's case, the firm's average annual retention rate for its long-term AUM was 71% (71%) during the past five (10) years, slightly worse than the industry average. During 2021-25 (2016-25), Federated's organic growth rate for its long-term AUM (which excludes money market funds) averaged negative 1.7% (negative 0.9%) with a standard deviation of 4.1% (4.9%), which meant the firm was struggling on average to fully compensate for investor redemptions with new flows into its equity, multi-asset, fixed-income, and alternative asset funds.

We expect the firm to generate negative 1.5% average annual organic growth with its long-term AUM during 2026-30, with a standard deviation of 3.6%. By these measures, we believe Federated has a below-average switching-cost profile for its long-term AUM compared with the industry and our coverage group.

We believe that the traditional asset managers can improve on the switching cost advantage inherent in their business with organizational attributes (such as product mix, distribution channel, and geographic reach) and intangible assets (such as strong and respected brands and manager reputations from a record of generating above-average investment performance relative to peers).

While the barriers to entry are not significant for the industry, the barriers to success are extremely high, as it takes time and skill to build a long enough record of investment performance to start gathering assets and to build the scale necessary to be competitive. This has meant the larger, more established asset managers in the industry have tended to have an advantage over smaller players, especially when it comes to gaining cost-effective access to distribution platforms. That said, we do not think the cost advantage moat source applies to traditional asset managers—except for index fund and ETF providers—as scale does not always confer better-than-average operating profitability, and the industry tends to behave as an oligopoly when it comes to pricing.

Competition for investor capital can be stiff and has traditionally centered on investment performance. Although institutional investors and retail gatekeepers are exerting pressure on pricing, price-based competition has been rare, aside from what we've seen in the US market for exchange-traded funds. While compensation remains the single-largest expense for most traditional asset managers, supplier power has been manageable as many firms have reduced their reliance on star managers and have tied manager and analyst pay to both portfolio and overall firm performance.

Asset managers that have demonstrated an ability to gather and retain investor assets during different market cycles have tended to produce more stable levels of profitability, with returns exceeding their cost of capital for longer periods. While the more broadly diversified asset managers are structurally set up to hold on to assets regardless of market conditions, firms with solid product sets across asset classes (built on repeatable investment processes), reasonable fees, and singular corporate cultures dedicated to a common purpose have done a better job of gathering and retaining assets.

In our view, Federated does not have an economic moat. With $911.6 billion in total AUM as of the end of June 2026, the company has the size and scale necessary to remain competitive in the asset management industry. Still, it has not always translated into solid organic growth or above-average profitability. Federated is also not as diversified as it needs to be, with 12% of total AUM derived from equity strategies, 11% from fixed-income funds, 2% from alternatives, and less than 1% from multi-asset portfolios. Money market funds (which are expected to generate 52% of fee-based revenue this year) accounted for 74% of Federated-managed assets at the end of the second quarter of 2026.

While Federated has developed expertise in managing cash for institutions, which typically have stringent requirements for regulatory compliance, relative safety, liquidity, and competitive yields, we don't believe its money market operations confer any sort of competitive advantage for the firm. The company has made some strides to expand its equity, fixed-income, multi-asset, and alternatives offerings, but continues to lack the scale that we feel is necessary in these businesses to be truly competitive, or at least, in a worst-case scenario, to offset the losses it would experience if there were large outflows from its money market funds.

With $676.9 billion in money market assets at the end of June 2026, Federated is one of the largest domestic money market managers, despite holding less than 10% of the market.

Federated has historically used its scale in the money market business to pick up additional assets, especially as other asset managers look to unwind part or all their cash management offerings.

Federated's equity and fixed-income strategies have previously posted solid investment performance, which would provide the firm with a competitive platform for investors if fund performance got back on track.

With 61% of money market AUM in government agency and Treasury funds, Federated has had to waive fees on a large part of its business during periods of extremely low interest rates.

Federated, in our view, lacks the scale necessary in its equity, multi-asset, fixed-income, and alternative offerings to offset the losses it would see if there were large outflows from its money market funds.

At the end of June 2026, the firm's small- and mid-cap equity funds were outperforming while its large-cap equity funds underperformed, and it bond funds had mixed results.