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Brandon Clark, Federated Hermes
Brandon Clark, Federated Hermes

Federated Hermes focuses on its core competencies

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Investment giant Federated Hermes with USD758 billion under management, dipped its toe into the ETF waters with the launch of its first actively managed ETF products in December 2021.

Brandon Clark, Senior Vice President, Director of ETF Business at the firm explains that it is a global asset manager with a large money market business, which represents assets of USD560 billion and fixed income and equities assets of USD95 billion and USD75 billion respectively.

“We are slowly working products out to the market, focussing on where our core competencies are,” Clark says. 

The firm started with two fixed income funds offering access to short duration corporate and short duration high yield: the Federated Hermes Short Duration Corporate ETF

and Federated Hermes Short Duration High Yield ETF.

“Our business is largely money market,” Clark says. “The thought process was ‘rates are going to go one of two ways and with our money market assets if rates stayed lower and money moved out looking for yield, it would be a great intermediate step. And the other view was that if rates went up and money moved out of long duration products, we would be in the right spot.

“Rates went up quickly and so it was a bit of a sweet spot for us.”

The decision to launch ETFs at all came on a more macro level, Clark says.

“We needed to meet clients where they wanted to be met and if they wanted that ETF wrapper – we needed to offer ETFs.”

Clark quotes last year’s Financial Planning Association’s annual survey of its US members, which found that 90 per cent of advisers use ETFs, the highest figure so far and higher than mutual funds.

“ETFs also have additional benefits, especially in the US,” Clark says. “As the path of travel continues to pick up we needed to be there.”

The next ETF launch from Federated Hermes came in November 2022 with the launch of the Federated Hermes U.S. Strategic Dividend ETF, which sought to provide exposure to US dividend paying companies.  It is an offshoot of their Strategic Value dividend franchise which is one of the firm’s largest with some USD30 billion in assets spread over SMAs and mutual funds.

The ETF seeks income and long-term capital appreciation by investing in US companies with dividend yields above the S&P 500 Index average.

The most recent launch came in January this year – the Federated Hermes Total Return Bond which seeks to provide total return by investing in a broad mix of bond sectors that the portfolio management team believes will benefit from changes in economic and market conditions, a process similar to the core plus investment strategy of the Federated Hermes Total Return Bond Fund, which has some USD12 billion in assets.

“The thought was that we were launching into our expertise,” Clark says. 

Assets in the ETF range total USD150 million at the moment. “The markets have not cooperated in some respects,” Clark says. “We launched fixed income products in 2022 which was the worst year ever for fixed income and then we had the product on the dividend side and high dividend yielding products last year were all negative in performance. But for us this is a marathon – we are building a business here. There are lots of things you have to focus on and challenges with the markets, but it is much more about the endurance.”

The firm is focusing on building the US ETF platform but has a mutual fund business in Europe already so keeps an eye on the ETF business in Europe, with Clark describing it as an opportunity set. 

“The lion’s share of the ETF industry is in the US,” Clark says. “Active ETFs in Europe today represent USD30 billion. If you look at the US, and backtrack three years, assets in the US active ETF sector was just over USD100 billion and now it’s USD545 billion so there has been huge growth over the short term. It’s grown year over year at USD100 billion, picking up pace. But if you look at mutual fund assets in active management, there have largely been outflows for the last 10 years, especially on the equity side.

“Clients are consuming investments differently and they see the benefits of the ETF wrapper and we see those green shoots in active growing in a different wrapper.”

Clark has also observed growing use of ETFs by institutions and they might use the US version of a fund or the UCITS version. “They go where the pools of liquidity live,” he says.

Later this year will potentially also see a new product based around equities.

“There has been a lot of watching the ETF industry and seeing if there was the right entry point,” Clark says. “The only surprise for me was how many advisers are out there that still don’t use ETFs and how many new clients who only use ETFs that we historically haven’t called on which opens up distribution opportunities for us.”

One third of advisers use nothing but ETFs in the US, according to Clark and the active assets in the ETF industry total only about 6 per cent still. However, when looking at active mutual fund assets ETFs only represent about 2 per cent so there is a huge amount of assets that could migrate to active ETFs.

“It’s potentially a huge opportunity for us.”

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