10-Q: Federated Hermes Q1: Revenue Up, Profit Down, AUM Grows

Federated Hermes reports increased revenue and assets under management in Q1 2026, but net income declined due to higher operating expenses and lower performance fees, with EPS boosted by share repurchases.

Summary

• Total revenue increased by $55.4 million (13.1%) to $478.9 million for the three months ended March 31, 2026, compared to $423.5 million in the prior year period.
• Net income decreased by $4.8 million (4.7%) to $96.4 million in Q1 2026, down from $101.1 million in Q1 2025.
• Diluted earnings per share (EPS) increased by $0.02 (1.6%) to $1.27, up from $1.25 in the prior year, primarily due to a decrease in shares outstanding from repurchases.
• Total managed assets (AUM) grew by 8% to $907.1 billion as of March 31, 2026, compared to $839.7 billion at March 31, 2025.
• Average managed assets increased by 9% to $915.6 billion for the three months ended March 31, 2026, from $843.2 billion in the same period last year.
• Operating expenses rose by $60.9 million (20.8%) to $352.6 million, driven by higher distribution expenses ($26.7 million increase) and a significant increase in 'Other' expenses ($18.2 million increase, partly due to a VAT refund in 2025 and foreign currency fluctuations).
• Performance fees, including carried interest, decreased significantly to $0.4 million in Q1 2026 from $5.9 million in Q1 2025.
• The effective tax rate increased to 26.1% in Q1 2026 from 23.6% in Q1 2025, mainly due to increased U.S. pre-tax income and foreign losses with associated valuation allowances.
• Cash dividends per share increased to $0.34 in Q1 2026 from $0.31 in Q1 2025.
• Approximately 1.2 million shares of Class B common stock were repurchased for $66.0 million during Q1 2026, with 3.4 million shares remaining available under the current program.

Sentiment

Score: 5

Explanation: StockSavvy.ai views this as a mixed report. While AUM and revenue growth are positive indicators of market presence and asset gathering, the decline in operating and net income, coupled with increased expenses and lower performance fees, raises concerns about core profitability. EPS growth is largely driven by financial engineering through share repurchases.

Positives

• Total revenue increased by 13.1% year-over-year, driven by growth in money market and equity revenue.
• Total managed assets (AUM) grew by 8% to $907.1 billion, indicating strong asset gathering and market appreciation.
• Average equity assets increased by 24% and average money market assets increased by 8%, contributing positively to revenue.
• Diluted earnings per share (EPS) increased to $1.27, partly due to effective share repurchase programs.
• The company completed the acquisition of an 80% interest in FCP Fund Manager, L.P., expanding its private markets and alternatives capabilities in the U.S.
• The Fifth Amended and Restated Credit Agreement was entered into, refinancing the prior facility and increasing the optional increase feature to $225 million, enhancing liquidity.
• The company maintains strong financial ratios, with an interest coverage ratio of 49 to 1 (required 4 to 1) and a leverage ratio of 0.59 to 1 (required max 3 to 1), indicating robust financial health and compliance with debt covenants.
• The board of directors declared an increased dividend of $0.38 per share, up from $0.34 per share in the prior year.

Negatives

• Net income decreased by 4.7% to $96.4 million, despite higher revenue, indicating pressure on profitability.
• Operating income decreased by 4.1% to $126.3 million, primarily due to a significant rise in operating expenses.
• Total operating expenses increased by 20.8%, with distribution expenses up $26.7 million and 'Other' expenses up $18.2 million (partly due to a non-recurring VAT refund in the prior year).
• Performance fees, including carried interest, saw a substantial decline from $5.9 million in Q1 2025 to $0.4 million in Q1 2026.
• The effective tax rate increased to 26.1% from 23.6%, impacting net income.
• Cash and cash equivalents decreased by $68.7 million from December 31, 2025, to March 31, 2026.

Risks

• Market conditions can significantly change, impacting asset flows, levels, and mix, potentially leading to revenue and net income declines, impairments, and increased Fee Waivers.
• The obligation to make purchase price payments for acquisitions is subject to adjustments and conditions, and contingent payments depend on achieving specific financial thresholds.
• Future cash needs, cash flows, and uses of cash are impacted by acquisitions, success in developing offerings, changes in AUM, terms of distribution and shareholder services contracts, and potential increases in legal and compliance expenses.
• Liquidity and credit risks exist in money market funds, and revenue risk is affected by yield levels, Fee Waivers, changes in fair values of AUM, regulatory reforms, investor preferences, and the ability to collect fees.
• The company is subject to a legal proceeding by Aberdeen City Council Pension Fund against its subsidiaries, Hermes GPE LLP and Hermes Infrastructure II GP LLP, alleging professional negligence and breach of contract related to a 2019 investment in the Ventus Portfolio, seeking approximately £87 million ($118 million) in alleged diminished value.
• An administrative error related to unregistered shares of a closed-end tender fund resulted in $23.3 million in costs, with an expected $15.9 million insurance reimbursement currently subject to litigation with two insurance carriers, and changes to these estimates could be material.
• Market volatility and other geopolitical or unexpected events could further reduce AUM, revenues, and earnings, potentially leading to impairment of indefinite-lived intangible assets.
• The complex and uncertain global regulatory environment, with numerous new or amended requirements, could have further material and adverse effects on the company's financial condition due to compliance costs and resource dedication.

Future Outlook

Management expects to use cash primarily for funding business acquisitions, global expansion, distribution expenditures, compensation, shareholder dividends, debt obligations, taxes, stock repurchases, and developing new offerings. The company plans to invest approximately $283 million over the next three years in technology-driven initiatives. Expenditures for compliance and investment management personnel, systems, and professional fees are anticipated to increase due to the highly regulated nature of the business. Management believes it has sufficient liquidity to meet both short-term and reasonably foreseeable long-term cash needs.

Management Comments

• The SEC's new enforcement emphasis represents an end to regulation by enforcement and is aimed at misconduct that creates the greatest harm to investors.
• Regarding mandatory redemption fees under the SEC's 2023 money market fund reforms, 'All these things are open and Yes, we're looking at all of these things.'
• Federated Hermes strongly supports the proposed Form N-PORT amendments, commending the SEC for reassessing the 2024 amendments and proposing new ones designed to reduce reporting burdens without significantly affecting the SEC's use of the data and the public's ability to assess relevant information about a fund.
• Federated Hermes believes the SEC's adoption of the 2023 amendments to Rule 2a-7 related to the mandatory liquidity fee framework for institutional prime and institutional municipal (tax-exempt) money market funds violated the Administrative Procedures Act and should be repealed.
• Federated Hermes submitted a comment letter to the FSOC expressing its continued belief that the FSOC's 2023 guidance was substantively and procedurally defective and should be withdrawn, and that SIFI designation of mutual funds, particularly money market funds, is inconsistent with statutory text and Congressional intent.
• Federated Hermes fully supports efforts to eliminate annual shareholder meetings for exchange-listed CEFs, viewing them as more akin to registered mutual funds and susceptible to activist shareholders.
• Management believes an insurance reimbursement of $15.9 million is probable based on contractual terms for the administrative error related to unregistered shares.
• Management does not believe the outcome of the Aberdeen City Council Pension Fund lawsuit will have a material adverse effect on its consolidated financial position, results of operations, or cash flows, given the lack of merit to Plaintiff's allegations and claims.
• The disclosure that companies provide in response to the myriad requirements of Regulation S-K does not always reflect information that a reasonable investor would consider important in making an investment or voting decision, prompting a comprehensive review to focus on eliciting material information.

Industry Context

StockSavvy.ai notes that Federated Hermes' growth in AUM and revenue, particularly in money market and equity assets, occurs within a mixed market environment where the S&P 500 experienced a decline in Q1 2026. The company's strategic acquisitions in real estate investment (FCP) and renewable energy project development (Rivington) align with broader industry trends towards expanding private markets and sustainable investing. The extensive regulatory discussion highlights the complex and evolving global landscape for asset managers, with significant attention on private funds, money market fund reforms, ESG disclosures, and the shift to T+1 settlement cycles. Federated Hermes' active participation in these regulatory dialogues positions it as a key industry voice.

Comparison to Industry Standards

• Federated Hermes' equity assets increased by 25% period-end and 24% average, which appears to outperform the S&P 500's total return of (4.33%) for the three months ended March 31, 2026, indicating strong relative performance or net inflows in this segment.
• The company's interest coverage ratio of 49 to 1 significantly exceeds the required minimum of 4.0 to 1, demonstrating exceptional debt servicing capacity compared to industry benchmarks.
• The leverage ratio of 0.59 to 1 is well below the maximum permitted ratio of 3.0 to 1 (or 3.75 to 1 during an Increased Leverage Ratio Period Due to Material Acquisition), indicating a conservative capital structure relative to its debt covenants.
• The acquisition of FCP Fund Manager, L.P. expands the company's private markets and alternatives capabilities, a strategic move consistent with many large asset managers seeking diversification and higher-fee revenue streams in less liquid asset classes.
• The Rivington Energy Management Limited acquisition positions Federated Hermes in the growing renewable energy project development sector, aligning with global trends in sustainable infrastructure investment.

Management Changes

Corporate Governance

Legal Proceedings

• Hermes GPE LLP and Hermes Infrastructure II GP LLP, wholly-owned subsidiaries, are facing a lawsuit in the High Court of Justice, Business and Property Courts of England and Wales, Chancery Division, initiated by Aberdeen City Council as the administering authority of the Aberdeen City Council Pension Fund. The plaintiff is asserting derivative claims for professional negligence and breach of the Fund's limited partnership agreement in connection with a 2019 investment in the Ventus Portfolio, which declined in value, seeking approximately £87 million (approximately $118 million) in alleged diminished value and other unquantified damages. Direct claims against General Partner are also asserted for breach of duty.
• The company is involved in litigation with two of its insurance carriers regarding a claim for $15.9 million in reimbursement for costs incurred from an administrative error related to unregistered shares of a closed-end tender fund. Total costs related to this issue were $23.3 million as of March 31, 2026.

Related Party Transactions

• Investment Advisory Fees, net from Affiliates totaled $252.4 million for the three months ended March 31, 2026, compared to $223.4 million in the prior year.
• Administrative Service Fees, net from Affiliates amounted to $110.3 million for the three months ended March 31, 2026, compared to $101.1 million in the prior year.
• Other Service Fees, net from Affiliates were $44.8 million for the three months ended March 31, 2026, compared to $30.9 million in the prior year.
• Investments in Affiliates and Other were $50.7 million as of March 31, 2026, down from $56.3 million at December 31, 2025.
• Receivables from Affiliates totaled $43.4 million as of March 31, 2026, compared to $42.2 million at December 31, 2025.
• Fee Waivers, including Voluntary Yield-related Fee Waivers, totaled $110.1 million for the three months ended March 31, 2026, with $83.8 million related to money market funds, compared to $105.6 million and $79.1 million, respectively, in the prior year.
• The FCP acquisition included Federated Hermes Class B common stock with a fair value of $23.1 million issued at closing to the selling parties.
• The Stock Incentive Plan involves awards of restricted Class B common stock to key employees, with 323,347 shares awarded during Q1 2026.
• Transfers of Class A common stock are permitted among officers, directors, employees of the Loan Parties, and their respective families and affiliates.

Stakeholder Impact

• Shareholders: Will receive an increased dividend of $0.38 per share. EPS increased, partly due to ongoing share repurchases, which also benefit shareholders by reducing share count. However, the decline in net income could be a concern for long-term profitability.
• Employees: Benefit from increased compensation and related expenses, including incentive compensation and share-based awards under the Stock Incentive Plan. The FCP acquisition may create new opportunities.
• Customers (Funds and Separate Accounts): Benefit from continued Fee Waivers designed to maintain competitive yields and expense ratios. The FCP and Rivington acquisitions expand the range of investment offerings, particularly in private markets and renewable energy.
• Creditors: The company maintains strong interest coverage and leverage ratios, indicating a healthy financial position and ability to meet debt obligations. The renewed credit agreement provides stable financing.
• Regulatory Bodies: The company is actively engaged in numerous regulatory comment processes and is adapting to evolving requirements in areas such as private funds, money market funds, ESG, and climate disclosure, demonstrating a commitment to compliance.

Next Steps

• The company will provide preliminary purchase price allocation for the FCP acquisition in connection with its second quarter 2026 reporting.
• Public comment periods are ongoing for several regulatory proposals, including SEC/CFTC Form PF amendments, SEC Consolidated Audit Trail concept release, DOL 401(k) alternative assets safe harbor, and FSOC SIFI designation guidance.
• Federated Hermes is evaluating whether to file an application for multi-class ETF structures following recent SEC exemptive relief.
• The European Commission is expected to adopt regulatory standards on EU EMIR III by May 25, 2026.
• Firms are advised to prepare for the T+1 settlement of securities trades, scheduled to start on October 11, 2027, in the U.K. and EU, with operational system changes by the end of 2026.
• New U.K. Sustainability Reporting Standards (U.K. SRS) rules are expected to come into force beginning January 1, 2027.
• Public statements regarding progress on U.K. and EU money market fund reforms are expected.
• Management will continue to monitor and update its assessment of potential exposure to Pillar Two income taxes.
• The company plans to invest approximately $283 million over the next three years in technology-driven initiatives.
• A $0.38 per share dividend was declared on April 30, 2026, payable on May 15, 2026, to shareholders of record as of May 8, 2026.

Key Dates

Recommendation

Federated Hermes demonstrates solid AUM and revenue growth, driven by strategic acquisitions and market performance in key asset classes. The company's financial position remains strong with excellent debt ratios and a renewed credit facility. However, the decline in operating and net income, coupled with a significant increase in operating expenses and lower performance fees, indicates challenges in translating revenue growth into bottom-line profitability. While EPS increased, it was largely supported by share repurchases. The extensive and evolving regulatory landscape, along with ongoing legal proceedings, introduces a degree of uncertainty. Given these mixed signals, a 'Hold' recommendation is appropriate for seasoned investors, allowing time to assess if operational efficiencies improve and regulatory impacts stabilize.

Keywords

Investment management, Asset management, Financial services, Mutual funds, Money market funds, Equity funds, Fixed-income funds, Alternative investments, Private markets, Real estate investment, Renewable energy, SEC, Regulatory compliance, AUM, Financial performance, Corporate governance, Share repurchase, Dividends, Credit facility, ESG, Climate risk, Insider trading, Form 10-Q