On Mar 16, we issued an updated research report on Federated Hermes (NYSE:FHI) . The company has benefited from its focus on global expansion in the past few years. Also, continued acquisitions of money-market assets are encouraging. However, escalating expenses on higher compliance-related fees is affecting the company.
Federated Hermes’ move to acquire money market assets enables it to provide various new fund offerings, which would benefit its clients. Notably, it continues to seek alliances and acquisitions to fortify its business in Europe and the Asia Pacific region as well as in the United States and the rest of the Americas.
Though the company waived fees in money market funds to enable certain funds to maintain positive or zero net yields, the pace of such waivers has been declining recently. Notably, there was no waiver in 2019. We believe that such positive impacts will support Federated Hermes’ top-line performance in the near term.
Moreover, the company’s earnings estimates for the current year have been revised 5.2% upward to $3.05 over the past 60 days.
However, its operating expenses have witnessed a four-year CAGR (2016-2019) of 6.6%, with some annual volatility. Also, given the strictly-regulated nature of investment management business, compliance-related fees are expected to continue escalating in the near term.
Also, net investment advisory fees form a significant part of the company’s top line (68% of total revenues as of Dec 31, 2019). Significant fluctuations in the fair value of securities held by Federated Hermes may materially affect the amount of managed assets, thus negatively impacting revenues and profitability.
Further, along with Federated Hermes, players in the investment management industry such as Lazard (NYSE:LAZ) , SEI Investments (NASDAQ:SEIC) and Legg Mason (NYSE:LM) are subject to increased regulation and oversight.
Shares of Federated Hermes have lost 44.8% over the past six months compared with the industry’s 18.3% decline.
Currently, the company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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