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Federated Hermes, Inc. (NYSE:FHI)
Q2 2020 Earnings Call
Jul 31, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Federated Hermes Q2 2020 Analyst Call and Webcast Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Raymond Hanley, President of Federated Investors Management Company. Thank you. You may begin.

Raymond J. Hanley -- Senior Vice President

Good morning, and welcome. Leading today's call will be Chris Donahue, CEO and President of Federated Hermes; and Tom Donahue, Chief Financial Officer. And joining them with the Q&A are Saker Nusseibeh, CEO of the International business of Federated Hermes; and Debbie Cunningham, our Chief Investment Officer for money markets. During the call, we may make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosure in our SEC filings. No assurance can be given for future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

John Christopher Donahue -- President, Chief Executive Officer

Thank you, and good morning, all. I will review Federated Hermes business performance, and Tom will comment on our financial results. We continue to make progress establishing our brand as the leading provider of active, responsible investment management, driven by the combination of strong fundamental analytical capabilities and the multi-sector insights provided by the EOS at Federated Hermes engagement operation. EOS assets under administration were $1.1 trillion at the end of the second quarter, and we expanded the EOS staff of engagers and specialists to 60 during the second quarter.

Now recently, the international business of Federated Hermes was assessed by Real Impact Tracker, which certifies institutions most committed to impact and we achieved the highest score in the history of its certification. As a result, the firm has joined Real Impact Tracker's certified community, for which only around 5% to 10% of fund managers are eligible to qualify. Real Impact Tracker identified our firm as the leader in creating impact throughout its operation, investment process, corporate engagement and policy and advocacy.

In particular, the firm's philosophy and approach to stewardship was highlighted as the model for other firms looking to improve their active ownership. In addition and separately, the United Nations PRI just awarded the domestic portion of Federated Hermes with an overall A rating for our annual responsible investing assessment. The international business of Federated Hermes received an A+ rating. Now turning to our equities business. Assets closed the quarter at $77 billion, up from $68 billion at the end of the first quarter as market values rebounded by just under $11 billion, offsetting net redemptions of $2.7 billion. While the overall net sales of combined equity and separate accounts were negative, the $2.7 billion I just mentioned, we saw positive net sales in a number of strategies.

We had 12 equity strategies with net sales in the second quarter, led by Kaufmann Small Cap. Other equity funds with net sales in the second quarter included Global Equity ESG, Global Small Cap Equity, MDT All Cap Core and the SDG Engagement Equity Fund. Using Morningstar data for the trailing three years at the end of the second quarter, 30% of our funds, nine out of 30, were in the top quartile; and 2/3, 20 of 30, were above median. Looking at the strategic value dividend strategy. Its objective, as you'll recall, is to provide a high-growing dividend income stream from quality companies. The domestic fund's 12-month distribution yield was 4.4%, which ranked it in the second percentile of its Morningstar assigned category at the end of the second quarter. The SMA's strategy's gross weighted average dividend yield was 5.26% at the end of the second quarter.

The domestic strategic value dividend strategy had combined mutual fund and SMA outflows of $1.6 billion in the second quarter compared to $461 million of outflows in the first quarter. Q3 results through July 24 show combined fund and SMA net redemptions of just over $200 million. Dividend stocks were soundly out of favor during Q2's cyclical risk on tech-led rally. The best-performing market sectors were lower dividend-paying consumer discretionary and information technology type stocks: low beta, underperformed high beta, high-yielding stocks, underperformed low-yielding and high-quality underperformed the lowest quality.

While the second quarter market characteristics were not conducive to our low-volatility, high-dividend strategy, we believe that our continued focus on the core goals of providing higher-than-market dividend yield from high-quality business assets will resonate with investors over time, especially given the outlook for lower rates over an extended period of time. And recall that even during these net redemption times, through July 24, the gross sales, gross sales of the Strategic Value Dividend and SMA strategy were just about $3.5 billion, showing there is active life in the strategy.

Now turning to fixed income. Assets reached a record high of $73 billion at the end of the second quarter, driven by over $6 billion in net sales and nearly $2 billion of market gains in the quarter. Bond market conditions changed dramatically from the lows in March, and our broad array of solid fixed income strategies were well positioned to meet investor demand. We had 23 fixed income funds with net sales in the second quarter. High-yield funds led the net sales with over $2 billion. Multi-sector bond strategies also had solid net sales, led by $300 million in Total Return Bond Fund and also drove strong results in separate accounts. Corporates, international global, government, municipal bond funds all had net sales, as did our fixed income SMA strategies. Across sectors, short-duration strategies were also in demand.

At quarter end, using Morningstar data for the trailing three years, we had eight funds, which is 24%, in the top quartile; and 18 funds, which is 53%, in the top half. Moving to money markets. Assets increased about $6 billion in the second quarter to a record high of $458 billion, with growth in money market funds of about $8.7 billion, partially offset by seasonal declines in separate account assets of $2.4 billion. Money market assets reached a high of $483 billion in late May in advance of tax payments, usage of care funds and other uses of cash. Our money market, market share, including the subadvised funds at quarter end, was 8.1%, down fractionally from 8.8% at the end of the first quarter.

Now taking a look at recent asset totals and movements. Managed assets were approximately $629 billion, including $452 billion in money markets, $80 billion in equities, $75 billion in fixed income, $18 billion in alternative and $4 billion in multi assets. The money market mutual fund assets were $339 billion. In terms of flows, third quarter through July 24, equity funds and SMAs were negative $240 billion. Fixed income funds and SMAs were positive $756 billion. By the subtraction method, we were $565 million to the positive so far in the third quarter. Now as we begin the third quarter, we begin with about $1 billion in net institutional mandates yet to fund, and most of those are in fixed income.

Now an overall comment as it relates to COVID. We have continued to function well throughout these challenges. We are fully operational. Our technology resources have enabled us to have upwards of 95% of our employees successfully working from home. The portfolio management teams are connecting regularly and managing well through challenging market conditions. Our regional consultants and other sales and customer service personnel are staying connected to their clients. And while we continue to hire and onboard new employees in the second quarter, we do look forward to the time when we can come together in person in our facilities.

Now for the financials, we'll turn to Tom.

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Thank you, Chris. Q2 includes a full quarter of results from the HGPE private market subsidiary, which became a consolidated entity effective March 1. Total revenue for the quarter was up slightly from the prior quarter due mainly to higher money market assets generating $30.5 million in additional revenue, a full quarter of HGPE results adding $6.1 million in revenue and higher performance fees of $5.4 million, partially offset primarily by money fund minimum yield waivers of $19.6 million and lower equity asset-related revenue of $13.7 million.

Looking at expenses. Comp and related expense increased $8.2 million from the prior quarter. The growth was due mainly to higher bonus expense of about $6.1 million, primarily related to higher sales, and $3.9 million from the impact of a full quarter of HGPE results, partially offset by $1 million of lower stock-based compensation expense and seasonally lower payroll tax expense, down about $800,000. The decrease in distribution expense compared to the prior quarter was due to the impact of minimum yield waivers, which reduced distribution expense by $17.6 million, partially offset by an increase of $10.5 million, primarily from higher money market fund assets. The increase in other expense operating line item from the prior quarter was due largely to higher amortization of intangible expense from the MEPC and HGPE acquisition. We expect amortization of intangibles expenses to be $3.1 million in the third quarter compared to $3.9 million in the second quarter.

The impact of money fund yield-related fee waivers on operating income in Q2 was about $2 million. Based on recent assets and expected yields, the impact of these waivers on operating income in Q3 could increase to about $4 million. Of course, multiple factors impact waiver levels, and we expect these factors and their impact to vary. Nonoperating income increased from Q1 due mainly to the increase in value of seed and other investments of nearly $15 million in Q2 compared to similar decreases in Q1 for a total swing of $29 million. This change was partially offset by the impact of the $7.5 million gain recorded in the first quarter related to the HGPE acquisition.

The $4.5 million change from Q1 in net income attributable to noncontrolling interest in subsidiaries was primarily from the increase in market value of consolidated funds. During Q2, we purchased 843,000 shares for $18.1 million, with nearly all of this purchased in the open market. At the end of Q2, cash and investments were $373 million, of which about $317 million was available to us. Debt at quarter end was $90 million. During March, we borrowed $100 million on our credit facility. We repaid that $100 million and an additional $10 million in Q2. The Q2 tax rate was 23.8%, down from last quarter, due primarily to market value gains in the consolidated funds which have no associated tax expense as the funds are not taxable entities to us. For 2020, we expect our combined federal state and foreign tax rate to be about 24% to 26%. Laura, that concludes our prepared remarks.

We'd like to open up the call for questions now.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Mike Carrier with Bank of America. You may proceed with your question.

Mike Carrier -- Bank of America -- Analyst

Good morning and thanks for taking the questions. First, just a question on money markets and the waiver outlook. And Debbie, maybe first, wanted to get an update on the outlook for yields as assets are getting reinvested, including, I know during the quarter just how much some of the Fed moves helped. And then just trying to figure out how that could play out in terms of like max waivers. Because it seems like a decent amount of the assets, by the time we're at sort of the end of the third quarter, would have been sort of reinvested at some lower rates. But just trying to get a sense on how that's playing out across the different products.

John Christopher Donahue -- President, Chief Executive Officer

Debbie, why don't you address the reinvestment rate, and Tom and I will talk about the impact on waivers.

Deborah Ann Cunningham -- Executive Vice President Chief Investment Officer Global Liquidity Markets, Senior Portfolio Manager

Absolutely. Good to talk to you this morning, Mike. And as for the Fed moves, they absolutely were extremely helpful during the quarter by changing their repo rates and procedures from a timing perspective that really influenced where overnight rates are. And for our government products that can have upwards of greater than 50% in that tentative market, it was extremely helpful.

So what basically we saw was an increase in the average rates that we were using on an overnight basis in those funds by, let's say, 7, eight basis points, somewhere in that neighborhood. And they have generally kind of leveled off right around high single digits to low double digits, as opposed to being down in the one to two to three basis point camp where they spent a good part of the beginning of the quarter and the end of the first quarter. So if you have 10% in overnight and an extra nine basis points in repo.

John Christopher Donahue -- President, Chief Executive Officer

It sounds like Debbie fell off. Tom, would you address the waiver impact? We'll reconstruct Debbie's connection.

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Yes. The we mentioned the $4 million, which would be up from our estimate of $2 million in the third quarter. And we stay very close with Debbie and her team on their forecast. And as I've said before, that's what we use when we project out one quarter. If you were to ask Debbie, what's she going to say for the rest of the year, and she would say, well, the rates will be similar to the third quarter but probably a little bit lower, and that would make our waivers be a little bit higher. But we only like to talk about one quarter. Debbie, have you returned?

Deborah Ann Cunningham -- Executive Vice President Chief Investment Officer Global Liquidity Markets, Senior Portfolio Manager

Did you guys hear my answer? Sorry, my phone dropped.

John Christopher Donahue -- President, Chief Executive Officer

I think we got the rate picture. So yes, we can move on.

Deborah Ann Cunningham -- Executive Vice President Chief Investment Officer Global Liquidity Markets, Senior Portfolio Manager

Okay. Thank you.

Operator

Our next question comes from the line of Ptarick Davitt with Autonomous Research. You may proceed with your question.

Ptarick Davitt -- Autonomous Research -- Analyst

Hey guys, good morning. Could you quantify the performance fee this quarter and kind of break out the nature of those performance fees and how they break into the various asset class revenue buckets, please?

John Christopher Donahue -- President, Chief Executive Officer

Well, the total was about $6.7 million and that was generated through Hermes strategies, so Saker may have a comment on that. The comparison number in the prior quarter was about $1.3 million. So as we've said before, those numbers are going to move around and are difficult to project. But Saker, do you want to comment on the nature of the Q2 performance, please?

Saker Anwar Nusseibeh -- Chief Executive Officer, Hermes Fund Managers Limited

Sure. So let's start by saying you can never predict performance fees any more than you can predict performance. And but you can get a pretty good idea if you go through our reported numbers, which are lodged in the U.K. for previous history. We make performance fees and carry fees primarily from two main sources. One is from our property portfolios, and that then breaks down into further sources. One is a unit trust in fact, two unit trusts, but one large unit trust. Unit trusts are like mutual funds, but they're essentially for institutional investors, which has an automatic performance fee. And that is triggered when we outperform our benchmark.

And we continue to be one of the best-performing funds in the market over the long term and the short term. The other way that we do it in property is in certain development projects, if at the end of the project, our shareholders benefit more than the accepted benchmark, that triggers a performance fee which is then paid to us. And the performance fees of properties have been consistent, at least for the last 10 years, not in terms of quantum but in terms of being paid. The other way in which we have performance fees is the carry on the private equity funds, which, like all private equity funds, tends to move around and gets paid whenever the private equity realizes a gain that is then distributed to shareholders and takes a part of the performance fee. Does that answer your question?

Ptarick Davitt -- Autonomous Research -- Analyst

Yes. So it sounds like it was all in the alternative revenue bucket?

Saker Anwar Nusseibeh -- Chief Executive Officer, Hermes Fund Managers Limited

So it's all in the alternative revenue bucket, and a lot of it is generated in property, yes. We do have some also in some private I'm sorry, in public markets, but primarily, it is the alternative bucket.

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Patrick, this is Tom. Just to give you some of the numbers that Saker mentioned. So year-to-date, for performance fees, we have about $8 million. In 2019, we had $7.4 million. In 2018, we had $8.5 million. 2017, we had $7.4 million. For the carry, year-to-date, we have $2.5 million. And 2019, we had $11.3 million. In 2018 was $2.7 million. 2017 was $13.5 million. So you see why we don't want to predict the numbers.

Ptarick Davitt -- Autonomous Research -- Analyst

Yeah. Thank you.

Operator

Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.

Robert Lee -- KBW -- Analyst

Great, thanks. Thanks for taking my questions. I hope everyone is doing well. I guess maybe a little bit, Tom, a little bit of a modeling question. So can you give us a sense on compensation. Obviously, you've had the consolidation of the rest of the kind of buy-in and the acquisition. You talked about some comp accruals, bonus accruals. But how should we be thinking about kind of on a go-forward basis with some of the increases that have this kind of a good run rate to be basing off of? Was there anything kind of whether there's catch-up accruals or anything that we should be thinking about? So how should we think of comp kind of on a go-forward basis?

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Yes. Sure. Sure, Rob. And we're doing well here, thank you. The in my remarks, I mentioned that the biggest drivers in the comp was sale and sales related. And of course, if you look at the numbers that Chris mentioned, we're pretty happy with that. In the old days, we call that a success item. Because if we have increased sales, we're going to earn more money eventually. So that increased. But also investment performance and incentives aligned with investment performance has increased here in the States, and so that line has increased.

And then our operating teams and administration have just done an outstanding job in this environment. So I expect that will continue to improve. Of course, that depends on earnings also. And then over in our international area, in Saker's area, with the performance across the board and they take a more holistic approach as things improve, that those numbers we'll expect to go up, too.

Robert Lee -- KBW -- Analyst

Okay. I'm just curious on kind of maybe most of the money fund business. So I mean, after kind of the industry surge back in March and Q1 and beginning of Q2, I guess, the pace of all industry slowdown, there's tax payments and whatnot that happened. But how do you kind of think of money fund demand for here, particularly as kind of the yields kind of come down so much. The gap between the government fund and bank deposits have certainly narrowed substantially. And how does that if at all, do you think kind of that impacts kind of the institutional demand we should think about going forward?

John Christopher Donahue -- President, Chief Executive Officer

Well, I'll make a couple of comments, Rob, to start, and then allow Debbie to comment on the difference in yield between govi funds and deposit rates and commercial paper funds. But overall, we always like to repeat the sounding joy of the fact that the clients are in there for daily liquidity at par and the yield is a secondary consideration. And this is a cash management service as much as it is an investment. And therefore, overall, in a long-term big picture, we are looking at higher highs and higher lows on our charts as the ebb and flow of money market activities change, as you dutifully point out. And this has been true since we got into this business in the mid-70s. Debbie?

Deborah Ann Cunningham -- Executive Vice President Chief Investment Officer Global Liquidity Markets, Senior Portfolio Manager

Thanks, Chris. If you look at most bank deposit rates, they're at a basal point. So they're low on the totem pole from an earnings perspective. Look at the gross yields on our money market funds for the government sector, it's about 25 basis points. The gross yields on our prime funds are currently about 37 basis points, so about 12 basis points over the govi. If you look at the growth rate of assets on a year-to-date basis for bank deposits versus money market funds, because both have grown substantially given the environment and the risk mitigation that investors are seeking and the buildup in cash, frankly, but bank deposits have grown by a little over 12% on a year-to-date basis, where money market funds in total have grown about 17%. So again, although the numbers on a base average or base level are different, the growth rate has been higher in money market products.

And I do believe that, that will continue given the very, very, very low rates that are available on bank deposits. You can find the occasional teaser rate, but it's not sustainable. And generally, there are restrictions with withdrawals. And obviously, that's not the case when you're talking about a money market fund, government or prime.

Robert Lee -- KBW -- Analyst

Great. If I can have just one quick financial follow-up on the performance fees, the $6.7 million, did that include carry? Or was that just performance fees?

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

The $6.7 million for Q2 was just the performance fees. There was an additional $1.8 million of carry. So $8.5 million total for those two items.

Robert Lee -- KBW -- Analyst

Great, thanks so much for taking my questions.

Operator

Our next question comes from the line of William Katz with Citigroup Investment Research. You may proceed with your question.

William Katz -- Citigroup Investment Research -- Analyst

Okay, thank you very much for is doing. I hope everyone is doing OK. You didn't spend much time talking about the multi-asset or the alternatives business, which had a bit of a lackluster quarter when you look at the net flows. They weren't really part of your flow update. Can you talk a little bit about why you're seeing weakness there? And how to think about the growth rate, particularly for alternatives, particularly given just the tremendous growth we're seeing elsewhere in the industry for that bucket?

John Christopher Donahue -- President, Chief Executive Officer

On the alternatives, which we consider the private markets, as you know, we just spent the first quarter getting that organized in terms of corporate structures, ownership and getting ready for the future. And we did make it clear when we were doing those transactions on the last call that we weren't going to be looking for growth numbers in this calendar year from those activities, although they are extraordinary opportunities into the future. And I would let Saker comment on some of the things that are going on there that are setting up the future growth plans there.

Saker Anwar Nusseibeh -- Chief Executive Officer, Hermes Fund Managers Limited

Sure. Thank you, Chris. So again, you've got to think of alternatives in different buckets, if you like. If you look at start with the real estate portfolio, which is where we've had a lot of performance fees in the past, generally, these are sold in big lumps to institutional partners. It takes several years to get one of those deals set up. They're typically quite large deals and they're typically invested for the next 10 to 15 years. Now for that, we are beginning to think about expanding our product capability into the United States, and that will take some time to set up, some time meaning more than one year.

In the meantime, within our home territory in the United Kingdom, we continue to attract interested parties. It's also dependent on finding the right projects to invest in. The unit trust, which is the mutual fund in property, is pretty much at capacity. We have a long line of waiting investors wanting to come in when they can. If you move to private equity, we have a plan that was agreed with the team when the acquisition was completed, of expansion plan of increasing the client base, and we will see that come to fruition in the next two to three years, primarily by expanding within, again, North American markets. We have other funds within what you'd call alternative which we put for the private markets which are seeing some growth, but they're not as substantial as these two particular ones.

So I'd say that the private markets is being prepared for expansion, particularly in terms of the private equity, and that the real estate actually is on track. It's just you will not see it quarter-on-quarter. These are elephants that will pick off. It takes time to get one in, and then they're in for the long term.

William Katz -- Citigroup Investment Research -- Analyst

Okay. That's helpful. And then just a follow-up, I don't know, for Tom or Debbie. Just as you think about the money market fee waivers, and thanks for the update, any thoughts of how the relationship with on the sharing side might be different this cycle versus the prior 0 rate backdrop with the distributors? So in other words, the question is, how much sharing should we anticipate? Is there any risk that Federated might need to absorb a higher percentage of those fee waivers as we look ahead?

John Christopher Donahue -- President, Chief Executive Officer

Well, Debbie, I'll answer first and if you have a follow-up. We were very put in a lot of effort the last time in the low cycle to meet with everybody and work through the sharing arrangement and pro rata thought process and were very successful in the last time around. And we're still get asked by our partners for increased participation that they get versus us. But on terms of the waiver sharing, we have not seen any issue with our structure and sharing arrangements.

Deborah Ann Cunningham -- Executive Vice President Chief Investment Officer Global Liquidity Markets, Senior Portfolio Manager

I have nothing to add to that. Thanks, Tom.

William Katz -- Citigroup Investment Research -- Analyst

Okay, thank you all

Operator

Our next question comes from the line of Kenneth Lee with RBC Capital Markets. You may proceed with your question.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, good morning. Thanks for taking my question. Outside of the compensation expense, I'm wondering if you could just share with us any of your latest thoughts on how operating expenses could trend, especially in this current environment.

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Yes. One of the things we didn't talk about because I think everybody knows why we don't have T&E, the salespeople aren't traveling and neither really is anybody else. We're hoping that, that picks up some time. And so as soon as that does, the low expense item in T&E would go up. We're continuing to invest in our technology and have a number of different projects across the company to improve, upgrade, do things better.

But I don't I view those are in the regular context of what we spend and what we work on, so I don't see outsized surprise things coming there either. The distribution line item, we've pretty much covered that, and we know that, that flows as asset flows. And I just went over the waiver thing, so that we'll continue to deal with that. The nonconsolidated items, we've covered. And I don't have anything further.

Kenneth Lee -- RBC Capital Markets -- Analyst

Okay. Great. Helpful. And just one quick follow-up, if I may. You repurchased some shares in the quarter. Wondering if you could just give us your latest thoughts on capital allocation priorities and perhaps any thought on potential M&A opportunity?

John Christopher Donahue -- President, Chief Executive Officer

Sure. On the breakdown, we are very active at buying shares back. You see the numbers for the first and second quarter. And the priorities haven't really changed. As you hint in your in the form of your question, M&A remains the highest and best use. But we are very active on the share buyback, and we, of course, like the dividend as well. On the M&A side, I see Tom first thing to come to the podium.

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Well, it's pretty difficult to go out and meet people face-to-face, more than difficult. And so doing centers of excellence, I think, will be a challenge here. But roll-ups, we remain active and hope to still close some deals here.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great, that's very helpful. thanks again.

Operator

Our next question comes from the line of John Dunn with Evercore ISI. You may proceed with your question.

John Dunn -- Evercore ISI -- Analyst

Thanks and good morning. Could you maybe talk about how your relationships with the different distributors are evolving during this period of time?

John Christopher Donahue -- President, Chief Executive Officer

The relationships with the distributors are very, very strong. And the evolution is now going deeper into the relationships with the distributors and the individual FAs. As people have less ability to go and visit, they're doing more on the phone, more by the Zooming and all of that. And the FAs, as I mentioned I think on the last call, are doing increased quality evaluation of their portfolios. And this is where our portfolio construction team comes into the mix. Because now we're able to present our FAs with the idea of looking at the portfolio and say, they may have 10 great funds, but they don't know how the bets are really being made inside those funds.

And so we can help them with portfolio construction and find opportunities for various Federated products along the way. And so the way I would characterize it is that there is some degree of oligopolization in the business when you can't go around and get new clients the way you would like to. So those who have them are boxed up to those who don't. And I don't know how good that is over the long haul, but right now, it tends to oligopolize and strengthen the relationships that are already there. We have been able to continue discussions on adding products. We had the sixth Hermes product, and those new products continue to work well.

And as you note on our sales numbers, we have the highest monthly average sales in our history. Our previous high had been about $3 billion a month in gross sales, and now we're well over an average for the first six months of $4 billion per month. And so this is telling you that even though the regional consultants can't spend T&E money, they're still able to tell the story and present a solution. To summarize, I think the relationships have strengthened, and I think they have gotten deeper and stronger.

John Dunn -- Evercore ISI -- Analyst

Got you. And then maybe a follow-up. You guys are fortunate to be able to keep investing. Can you just maybe remind us of the top areas of investment spend for you guys at this point?

John Christopher Donahue -- President, Chief Executive Officer

Well, we will give everybody a shot at that. One of the areas which we announced recently was a new hire in the active ETF space, and we are beginning to get ready for that. So that's one which we think is important. I'm sure Saker has a view on his agenda, and I'll let him have a say there.

Saker Anwar Nusseibeh -- Chief Executive Officer, Hermes Fund Managers Limited

Thank you. I mean, besides the one that we continue to invest in the EOS, which we just mentioned, which is a substantial investment in senior seasoned professionals to join our stewardship team, we've also hired a couple of additional people to our impact team in the U.K., which is strong. We've added expertise into our responsibility office where we do some research. That particular individual is, in fact, was a doctor and has a particular specialization in pandemics as well. So these are the areas that come to mind in this last quarter. But we've continued to hire we've also hired or have finalized the hire of an MD for the private markets business that we've established, as we've said, and that went quite well.

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Yes. In the Kaufmann team, they've done so well and their performance speaks for itself. And we are looking for a number of new hires in there. And they point out that the recent hires that they've made have turned out very well. So more investing in the Kaufmann team.

John Dunn -- Evercore ISI -- Analyst

Thank You Very Much.

Operator

Our next question comes from the line of Brian Bedell with Deutsche Bank. You may proceed with your question.

Melinda Roy -- Deutsche Bank -- Analyst

This is Melinda Roy filling in for Brian. Maybe just one more follow-up on the fee waivers. Could you parse out the expected changes in management fees versus distribution expenses in 3Q versus 2Q in the context of your expected negative $4 million impact from fee waivers next quarter?

John Christopher Donahue -- President, Chief Executive Officer

Melinda, we don't really do that at the line item basis, so that would be tough to do. We could if you want to talk about that following up after the call, I'd be happy to try to help you there.

Melinda Roy -- Deutsche Bank -- Analyst

Okay. No problem. And then maybe just one cleanup question. The other services declined pretty significantly in 2Q versus 1Q, if you can maybe talk about the driver there. And is this $32 million levels of run rates going forward?

John Christopher Donahue -- President, Chief Executive Officer

Yes. That would have been where the bulk of the revenue impact from the minimum yield waivers occurred. So that would explain just about the biggest portion of that change. There were some other things that happened in there in Q1. We had $1.2 million of non we pointed out $1.2 million of nonrecurring revenue in one of the private market companies we've acquired wired. So that was booked in Q1 and obviously not in Q2. But the minimum yield waivers would explain the bulk of the step down there.

Melinda Roy -- Deutsche Bank -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from the line of Ken Worthington with JPMorgan. You may proceed with your question.

Ken Worthington -- JPMorgan -- Analyst

Hi, good morning. I jumped on a touch late, so hopefully you haven't covered this. But you've launched a series of Hermes ESG-focused funds in the U.S. Can you talk more about progress in bringing those products and services to the U.S.? And I think you said you've launched six funds thus far. How is dialogue going with distribution? And are those products getting on platforms? Or maybe it's just too early?

And then you mentioned in prior calls, I think really last year, about the incremental costs and investments to bring these products to the U.S. How much have you spent thus far? And what's the outlook for incremental investment to further launch these products over the next year or so?

John Christopher Donahue -- President, Chief Executive Officer

Ken, the reception has been excellent. And the assets in those funds were about $88 million at the end of the second quarter and nearly all of that was externally sourced. So the seed assets in there are about $5 million. And so we're evaluating other strategies to look at. And we've just launched our first SMA product based on Hermes strategy, which will be coming out. So it is a little early to see how big these things will get, but the receptions have been good, and we've been able to onboard them and get on some platforms. Obviously, we want to get on more. In terms of the expense associated with that...

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Yes, we talked when we did the deal and had forecast and put out millions of dollars of expected expense, but we now view ourselves as one company and aren't saying here's some extra expenses. It's normal fund cost and normal people cost, but it's not some extra thing to do to have the Hermes team manage the money over there. We haven't figured it out. And we don't break that out and don't look at it that way. We have our research committees get together and figure out what's the best product to bring out and what can we sell, and it's in our normal process now.

Ken Worthington -- JPMorgan -- Analyst

Okay. I think it's fair enough. And then maybe some more color on performance fees. I know they're hard to predict, but maybe just some guidelines. Is there anything you can give us on the timing of when funds are eligible to pay. So clearly, this was a bigger quarter. Is 2Q a big quarter? Maybe 4Q? So timing there. And then any way to size unrealized performance fees or unrealized carry? How big is the pool that we might have to look forward to base on where things are at this point in time?

John Christopher Donahue -- President, Chief Executive Officer

Yes. Saker, you can follow up with my long answer. Ken, they just it involves selling a building and when is that going to happen? Or the private equity realizing and monetizing something that they own and the timing is just total variable. We've had things where we've asked them for projections, and this is kind of inner works at Federated Hermes to try to ask them for projections and it's just, oh, why did it take longer? Will this thing didn't sell? What happened? Well, the legal is this, and it's just across the board. Too difficult for us to figure it out. Now on a higher level, I think Saker can talk about that's why I took you through the numbers to give you the past, not that that's going to be the future. But so Saker, look, hey, I don't know if you want to follow up with that.

Saker Anwar Nusseibeh -- Chief Executive Officer, Hermes Fund Managers Limited

So yes. I mean I think it's very difficult to try to project the future. But from the numbers that Tom has given you, you can see historically what a property performance fees look like. This is just the historic. This is just the past. It doesn't mean the future is going to be the same, but it gives you an idea. And private equity is more variable. I think in becoming one firm, as we become part of Federated Hermes, one of the things about that differentiates our business is it tends to be very institutional, very long-term based. And so quite often, the projects that we work on, which then pay us handsome dividends, are not necessarily traceable on a quarter-to-quarter basis, but a much more long-term basis.

Now in average, every year, we make performance fees and we make carriers. And you can also see that in our industry because one comes after the other. But projecting how much it's going to be in a particular quarter, sometimes even in a particular year, is very hard. All that we can say is we've been really successful, what we've done historically. You can see historically how much we've generated. But past performance is no indication of future performance, as you always say, when you're talking to investors. I'm sorry I can't be any more specific than that.

Ken Worthington -- JPMorgan -- Analyst

Thank you very much.

Operator

Our next question comes from the line of Robert Lee with KBW. You may proceed with your question.

Robert Lee -- KBW -- Analyst

Great, thanks for taking my follow-up. So, I just was curious on your ETF business, the you did mention the higher in the press release. Could you maybe talk a little bit about what your plans there? Are you talking about active ETFs that have you licensed one of the approved technologies out there? Your thoughts around that versus I'm not sure if you have a filing yourself, but your own technology, so to speak.

John Christopher Donahue -- President, Chief Executive Officer

All angles are up in the air being analyzed. And Brandon Clark just joined the firm. I met with him on Wednesday. And so we are just getting started on that. And we are going to figure out what the best way to go is. And don't forget, that overall business on the active side is really in the first inning. It may even still be in spring training. And there's only $120 billion of over a $4 trillion ETF business. And this is why we looked at it this way. Federated is interested in strong alpha, high- active share type projects, and which ones we now put together and how we structure it is what we're going to be about. So I don't have the math, because we brought in someone with a good deal of experience at a number of the big players, and this is the brainstorming that's going to go on here to see how the Federated Hermes' active ETFs should look.

Robert Lee -- KBW -- Analyst

Thanks for taking my question.

Operator

Our next question comes from the line of Mike Carrier with Bank of America. You may proceed with your question.

Mike Carrier -- Bank of America -- Analyst

Thanks. Just a follow-up figure. Quarterly, you put a $6 billion of inflows in fixed income. I wanted to get a little bit of color. But Chris, you gave some details on like the product on the high yield and corporation. I guess just on the distribution side, if you can provide any color on institutional, if it was sort of money market, some money shifting into some of the short duration strategies, you see a little bit more income. Retail we can see. And then anything on the international side, just given that some of the relationships have built over time. So just trying to get a sense of how like kind of broad-based that was in the quarter.

John Christopher Donahue -- President, Chief Executive Officer

It's very, very difficult. And we don't usually make the speech about how money move from money markets into other products. As you know from history, we deal with most of these clients on an omnibus basis, and so we can't exactly track the cash flow. We can say, as I said on the other on the call last quarter, that there is increasing interest in active management projects because people are beginning to see that maybe they don't want to own the whole index. So that's another factor. In terms of the high yield, though, with those net sales over $2 billion, if you were to look at the performance of high yield versus any of the passives or the ETFS, the high-yield projects that we have are considerably better performers. And I think that's very helpful.

On the total return bond fund, what customers are looking for is people making judgments for the long term and not just buying the index. And so you're seeing some of those footprints come through there, and you're even seeing it in the SMA strategies as well on the fixed income side, where the performance has been really excellent. Let's see. On the international, you've seen some growth there as well, not as much but it's alive and well.

Mike Carrier -- Bank of America -- Analyst

All right, thanks a lot.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn this call back to Mr. Raymond Hanley for closing remarks.

Raymond J. Hanley -- Senior Vice President

Well, that will conclude our call for today, and we thank you very much for joining us.

Operator

[Operator Closing Remarks].

Duration: 55 minutes

Call participants:

Raymond J. Hanley -- Senior Vice President

John Christopher Donahue -- President, Chief Executive Officer

Thomas Robert Donahue -- Chief Financial Officer, Vice President, Director and Treasurer

Deborah Ann Cunningham -- Executive Vice President Chief Investment Officer Global Liquidity Markets, Senior Portfolio Manager

Saker Anwar Nusseibeh -- Chief Executive Officer, Hermes Fund Managers Limited

Mike Carrier -- Bank of America -- Analyst

Ptarick Davitt -- Autonomous Research -- Analyst

Robert Lee -- KBW -- Analyst

William Katz -- Citigroup Investment Research -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

John Dunn -- Evercore ISI -- Analyst

Melinda Roy -- Deutsche Bank -- Analyst

Ken Worthington -- JPMorgan -- Analyst

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