Executive Summary / Key Takeaways

• Federated Hermes (FHI) is strategically expanding its active investment capabilities, particularly in high-growth areas like quantitative equities (MDT strategies) and private markets, while fortifying its dominant money market franchise with digital asset innovation.
• The company reported robust financial performance for the nine months ended September 30, 2025, with total revenue increasing by 9.09% to $1.32 billion and net income surging by 61.36% to $296.26 million, driven by strong money market and equity asset growth.
• FHI's proprietary MDT fundamental quant strategies are a significant growth engine, demonstrating superior performance with 7 of 8 equity mutual funds in the top quartile for trailing 1 and 3 years, and all eight in the top quartile for 5 and 10 years as of September 30, 2025.
• Strategic acquisitions, such as Rivington Energy Management and the planned FCP Fund Manager deal, are pivotal for expanding FHI's private markets platform and entering the U.S. real estate sector, complementing its existing global expertise.
• The firm is actively embracing digital assets, developing GENIUS Act-compliant money market funds for stablecoin collateral and participating in blockchain initiatives, positioning itself for incremental growth in the evolving digital finance landscape.

A Foundation in Active Investing: Federated Hermes' Strategic Evolution

Federated Hermes, Inc. (FHI), founded in 1955, has evolved into a global leader in active investment management, overseeing $871.2 billion in managed assets as of September 30, 2025. The firm's core business revolves around providing investment advisory, administrative, distribution, and other services to a diverse range of investment offerings, including sponsored funds and separate accounts, across domestic and international public and private markets. A pivotal moment in its history was the 2018 acquisition of Hermes Investment Management, which significantly shaped its approach to fiduciary duties and the integration of ESG factors into investment decisions, emphasizing their role in achieving better long-term financial returns.

The company's overarching strategy is centered on expanding its active investment capabilities, particularly in areas exhibiting strong growth potential, while leveraging its established strengths in money markets. This involves a multi-pronged approach: organic growth through differentiated strategies, strategic acquisitions to broaden market reach and expertise, and pioneering innovation in digital assets. FHI's foundational strengths lie in its deep expertise across various asset classes, its client-focused service model, and a commitment to rigorous investment processes.

Technological Edge: Powering Performance and Future Growth

Federated Hermes differentiates itself through a blend of proprietary quantitative analysis and a forward-looking approach to digital asset infrastructure. Its MDT (MDT fundamental quant) strategies exemplify this technological edge. These strategies combine fundamental insights with sophisticated quantitative models to identify investment opportunities, aiming for superior risk-adjusted returns. The tangible benefits are evident in their performance: as of September 30, 2025, seven of the eight MDT equity mutual fund strategies ranked in the top performance quartile of their Morningstar categories for the trailing one and three years, with all eight achieving top-quartile status for the trailing five and ten years. This consistent outperformance underscores the effectiveness of FHI's quantitative methodologies in generating alpha.

Beyond traditional quantitative analysis, Federated Hermes is making significant strides in new technological frontiers, particularly in digital assets and blockchain. The firm is actively developing tokenized money market funds and digital asset infrastructure. A key initiative is the establishment of a GENIUS Act-compliant money market mutual fund, designed to meet the liquid reserve requirements for stablecoins. This positions FHI to capitalize on the rapidly expanding stablecoin market, which currently stands at approximately $250 billion. The GENIUS Act, signed into law in July 2025, mandates 100% liquid asset reserves for stablecoins, creating a new demand for compliant money market funds.

Furthermore, Federated Hermes has made two of its UCITS money market funds available in tokenized form through Archax, a U.K.-based digital assets operator. The company is also a subadvisor for the Superstate Short Duration U.S. Government Securities Fund, a private tokenized fund with approximately $735 million in assets, and is participating in a collaborative initiative with BNY Mellon (BK) and Goldman Sachs (GS) to use blockchain technology for maintaining records of money market fund ownership. These initiatives collectively enhance the utility and transferability of money market fund shares, providing incremental growth opportunities by reaching new customer segments and offering advanced collateral management tools. For investors, these technological advancements contribute to FHI's competitive moat by positioning it at the forefront of digital finance innovation, potentially leading to increased asset gathering and diversified revenue streams in the long term.

Competitive Landscape and Strategic Positioning

Federated Hermes operates in a highly competitive global asset management industry, vying with established players like BlackRock , State Street Corporation , Invesco Ltd. , and Franklin Resources, Inc. . While these competitors offer broad investment products, FHI distinguishes itself through its specialized expertise and client-focused approach.

BlackRock , with its dominant position in passive investing and advanced Aladdin platform, generally exhibits stronger technological integration and broader market reach. FHI, while emphasizing fundamental and quantitative analysis, may lag in the sheer scale of technological sophistication compared to BlackRock , potentially impacting innovation cycles. However, FHI's specialized expertise in fixed income and municipal securities provides a niche advantage, appealing to clients prioritizing stability.

State Street , a leader in asset custody and servicing, offers an integrated operational model that can lead to greater efficiency in client onboarding. FHI, in contrast, differentiates through tailored balanced portfolios and a strong brand in fixed income management, which can foster client loyalty. While State Street's (STT) diversified revenue streams might lead to more resilient growth, FHI's focused strategies allow it to compete effectively in specific market segments.

Invesco and Franklin Resources , both active managers, offer a range of equity and fixed income funds. Invesco's focus on alternative investments and product innovation provides a broader product range, while Franklin Resources (BEN) has an established brand in retail investing. FHI's proprietary quantitative analysis tools, particularly its MDT strategies, offer a competitive edge in delivering risk-adjusted returns, potentially outperforming rivals in specific equity segments. FHI's emphasis on small- and mid-cap investments also provides a differentiation point against Invesco (IVZ).

Indirect competitors, such as robo-advisors and fintech companies, pose a threat by offering lower-cost, automated wealth management solutions. These alternatives could impact FHI's retail revenue opportunities and increase customer acquisition costs. However, FHI's strategic focus on institutional clients and complex investment solutions, coupled with its digital asset initiatives, helps mitigate some of these pressures. The firm's commitment to ESG as a factor in sustainability studies also resonates with a growing segment of the market, further strengthening its competitive stance.

Robust Performance Driven by Strategic Growth

Federated Hermes delivered strong financial results for the nine months ended September 30, 2025, reflecting the effectiveness of its strategic initiatives and favorable market conditions. Total revenue increased by 9.09% to $1.32 billion, up from $1.21 billion in the same period of 2024. This growth was primarily fueled by its Money Market and Equity segments. Net income saw a substantial increase of 61.36% to $296.26 million, compared to $183.60 million in the prior year. Diluted earnings per share (EPS) for the nine months ended September 30, 2025, rose to $3.75, a significant increase from $2.20 in the comparable period of 2024, driven by both increased net income and a reduction in shares outstanding due to repurchases.

Segment Contributions:

• Money Market: This segment remains FHI's largest revenue contributor, with revenue increasing by 12.31% to $694.63 million for the nine months ended September 30, 2025. Average managed assets grew by 9.35% to $639.15 billion, reaching a period-end record of $652.77 billion. The Federal Reserve's rate adjustments and the yield advantage offered by money market funds in a falling-rate environment continue to drive demand.
• Equity: Revenue from equity strategies grew by 6.24% to $371.95 million. Average managed assets increased by 8.75% to $86.04 billion, with period-end assets reaching $94.66 billion, primarily due to market appreciation. The MDT fundamental quant strategies were a key driver, with Q3 net sales of $2 billion and a robust institutional pipeline.
• Fixed-Income: This segment saw a modest revenue increase of 0.34% to $147.31 million. Average managed assets rose by 2.80% to $98.98 billion, reaching a record $101.81 billion at period-end, supported by market appreciation despite net redemptions.
• Alternative Private Markets: Revenue for this segment (included in "Other" revenue by asset class) increased by 12.95% to $103.95 million. However, average managed assets decreased by 3.79% to $19.64 billion, mainly due to a $1.1 billion impact from the restructuring of the U.K. Property Trust and real estate separate account redemptions.
• Multi-Asset: Revenue for multi-asset strategies (also included in "Other" revenue) grew by 12.95% to $103.95 million, though average managed assets slightly declined by 1.14% to $2.86 billion.

Profitability and Liquidity:
FHI maintains healthy profitability margins, with a TTM Gross Profit Margin of 69.07%, Operating Profit Margin of 28.05%, and Net Profit Margin of 21.86%. The EBITDA Margin stands at 29.96%. The company's liquidity position is strong, with liquid assets (net of noncontrolling interests) totaling $717.9 million as of September 30, 2025.

Net cash provided by operating activities for the nine months ended September 30, 2025, was $136.1 million. Federated Hermes is in excellent financial health, demonstrated by its compliance with debt covenants, boasting an interest coverage ratio of 47 to 1 (well above the required 4 to 1) and a leverage ratio of 0.61 to 1 (below the maximum 3 to 1).

Strategic Outlook and Growth Initiatives

Federated Hermes' forward-looking strategy is characterized by an aggressive pursuit of growth in private markets and continued innovation in digital assets, underpinned by a robust capital allocation framework. Management expresses "enthusiasm and optimism" for the MDT franchise, anticipating sustained growth from its strong sales momentum and a pipeline of over $2 billion in institutional mandates. This pipeline is expected to be accretive to the overall blended fee rate due to its skew towards private markets and equity. Approximately two-thirds of the institutional pipeline is expected to fund in Q4 2025, with alternative strategies having a longer funding tail into the first half of 2026.

Recent acquisitions are central to FHI's expansion. The April 2025 acquisition of a majority interest in Rivington Energy Management Limited, a U.K.-based renewable energy project development business, strategically enhances FHI's private markets platform by adding expertise in the energy transition sector. This move is expected to provide access to an existing renewables pipeline and critical deal flow for future fundraising. Looking ahead, the agreement to acquire an 80% interest in FCP Fund Manager, L.P., a U.S. real estate investment manager with $3.8 billion in AUM, will facilitate FHI's entry into the U.S. real estate market, complementing its established U.K. real estate business. This transaction, expected to close in the first half of 2026, involves an aggregate purchase price of up to $331 million, including $215.8 million in cash and $23.2 million in Class B common stock at closing, plus contingent consideration.

Management anticipates an increase in compensation and related expenses due to rising sales and incentive compensation, viewing these as "positive success items." Distribution expenses are also expected to rise in line with higher average assets. Investments in technology and market data are projected to lead to a quarterly step-up in systems and communication expenses. The effective tax rate for 2025 is projected to be in the 25% to 28% range. FHI plans to invest approximately $253 million over the next three years in technology-driven initiatives, including $65 million in external spend.

Risks and Challenges

Despite a positive outlook, Federated Hermes faces several risks inherent in the asset management industry. The regulatory environment remains complex and uncertain, with ongoing developments in the U.S. and internationally. Changes such as the SEC's Regulatory Flexibility Agenda, shifts in enforcement trends, and rulings like the Fifth Circuit Court's remand of securities lending and short-sale rules, could impact FHI's business operations and compliance costs. The increasing scrutiny of governance, environmental, and social (ESG) initiatives by state attorneys general and financial officers, exemplified by cases like Texas v. Blackrock (BLK), presents a challenge to ESG-aligned investment strategies, potentially affecting asset flows and product development.

Market conditions, including volatility and interest rate fluctuations, can significantly impact FHI's asset flows, levels, and mix, directly affecting revenues and net income. The money market fund business, while currently favorable, is susceptible to liquidity and credit risks, as well as revenue risk influenced by yield levels and fee waivers. Acquisitions, while strategic, carry inherent risks related to integration and the achievement of financial thresholds for contingent payments. The company also disclosed costs related to an administrative error concerning unregistered shares of a closed-end tender fund, totaling $22.2 million as of September 30, 2025, with $15.9 million expected from insurance, currently subject to litigation. Finally, while no impairment indicators were identified in Q3 2025, market volatility or geopolitical events could lead to future impairments of indefinite-lived intangible assets.

Conclusion

Federated Hermes is actively shaping its future through a clear strategy of targeted growth, technological innovation, and disciplined capital allocation. The firm's strong financial performance in the nine months ended September 30, 2025, underscores the resilience of its core money market business and the accelerating momentum of its MDT quantitative equity strategies. Strategic acquisitions in renewable energy and U.S. real estate are poised to diversify its private markets platform, while its pioneering efforts in tokenized money market funds position it at the forefront of digital finance.

While navigating a complex regulatory landscape and intense competition, FHI's commitment to active management, proprietary technology, and expanding its global footprint provides a compelling investment thesis. The company's robust liquidity, conservative debt profile, and ongoing share repurchase programs further enhance shareholder value. Investors should closely monitor the execution of its private markets expansion, the adoption rate of its digital asset offerings, and its ability to adapt to evolving regulatory and market dynamics, as these factors will be crucial in determining Federated Hermes' long-term growth trajectory and sustained competitive advantage.