Brian Bedell: That’s great perspective. Thank you. Can I move to expenses for Tom, just the expenses simply has been very good. Maybe if you can just give some commentary around how you see that playing out for the year, particularly seasonally, obviously, compensation typically seasonally high in 1Q. And then we did have a shift down in office and occupancy all year last year. So just wanted to understand if the current run rate is rebased and stay there? And then just maybe a commentary on advertising seeing throughout the year.
Christopher Donahue: Okay, Brian. You’re right, Q1, the — well, for Q2 — and I’m not really talking about the whole year, but lease for comp. The payroll taxes were higher and the bonus-restricted stocks were higher in Q1. So we would expect that to go down in Q2. But of course, benefits and base go up. But I would expect for Q2 with all else being equal i.e. not getting carried interest or the related comp that comes with that, that the comp line would be down a little bit. The — you mentioned the office and occupancy and that was — that came down because we got out of an office space in London, and so now we’re kind of at the going rate there. So I wouldn’t expect much change there. The distribution line, of course, if AUM goes up, that’s going to go up, and we’re happy with that going up when AUM goes up.
On the systems and communications side, we would expect that to tick up as our tech spending continues to tick up. On the ads, that’s the timing. What we said for a long time is look at the whole year and when are we going to do our advertising programs. Well, we’re starting one right here in the second quarter now. So that would I expect tick up in the second quarter also. And a year comment on that would be that I would expect us to spend more in ’24 than we did in ’23 based on the timing and us committing more there. T&E was a little low in Q1, and we expect that to go up in Q2, and I don’t see much else on the other line items worth pointing out.
Brian Bedell: That’s great color. Just on the comp line for the seasonal drop in 2Q. I think you — maybe to look more — to a more normal year on that would be in 2022? Or is that was down about $6 million? Is that in rough terms a decent benchmark for that?
Thomas Donahue: The way I’d look at it is right now, with all else being equal, with at about — where we take out about $3 million of expenses for Q2. That’s about as far — and kind of I’m going to put all the qualifiers on it with bonuses change and carried interest changes, but all else being equal, that’s what I’d knock it down by.
Brian Bedell: Okay, great, great. Thank you very much.
Operator: Your next question is from Kenneth Lee with RBC Capital Markets.
Kenneth Lee: Hey, good morning. Thanks for taking my question. Wondering if there’s anything else to call out in terms of what was driving the equity net outflows in the quarter. And then perhaps, I wonder if you could just further expand with more details. You said that you were seeing accelerated sales in the MDT fund complex. Just want to see some sentiment or demand around specific products within that area. Thanks.
Christopher Donahue: Okay. On the MDT, we had gross sales of over $1 billion net sales of over $500 million bringing that franchise, the MDT franchise, SMA and funds and institutional all together to write about $10 billion. So that’s a big franchise. Their performance has been outstanding. You can check it all out, one, three and five-year excellent performance. And so that’s what’s behind that story. And that was an acquisition that we did back in ’06. And so this has been a long-term investment on the Federated Hermes part. In terms of what’s driving other redemptions, we’ve already talked about the strategic value dividend fund on this call. The other one, of course, is Kaufmann. And what’s happened there has been some changes inside the portfolios, especially the big fund to reduce the cash positions, change the percentage on biotech stocks.
And if you look at the rankings of the three funds in that area over the last year. They’re all right middle of the pack, 53, 44, 48 percentile on Morningstar over the last year. So that’s an improvement over where they have been. And if you go one step further and take a look at the three-month numbers or first quarter for the big Kaufmann fund, they’re now right at 50%. And if you look at the Small Cap Fund, they’re at 38% for the three months and that combines with Small Cap’s top 10% over 10 years. The reason I mentioned those is that this is what builds the case for diminishing redemptions and, in fact, increasing sales. Interestingly enough, you still have meaningful gross sales in all of those products that have — even have net redemptions.
Another story to call out would have been — would be the SMID product run out of London with $150 million worth of positive flows in the first quarter as well. And as I mentioned, there are a dozen funds with positives, but it’s very hard to work against those large negatives of Kaufmann and Strategic Value Dividend.
Thomas Donahue: And I would add that when you look at the last couple of quarters in growth, we’ve had — as a category, we’ve had meaningful but diminishing net redemptions. We still had them in Q1. But in the early part of Q2, driven by the strength of MDT, we actually have positive net flows in growth as a category.
Kenneth Lee: Got you. Very, very helpful color there. That’s all I had. Thanks, again.
Operator: Your next question for today is from Dan Fannon with Jefferies.
Daniel Fannon: Thanks. Good morning.
Christopher Donahue: Good morning.
Daniel Fannon: You mentioned several alternative products that you have in the market. I was just curious what the previous fund sizes were for the ones that are kind of in second or third generation? And how you would think about the potential targets for these funds versus what you did previously?
Christopher Donahue: Well, we — just to comment on the one we already closed was the PEC V, and that was an increase from prior. It was in the $600 million range. And now we’re starting to get organized on PEC VI. The Horizon Fund is larger at $1 billion plus, though I don’t have the number in front of me for the prior one. This was the third iteration of that. So in general, they’ve gone up.
Thomas Donahue: And it’s been a tough year, even 18 months of raising money in private markets, private equity, in particular. So that’s just an additional comment. I don’t have the numbers either.
Daniel Fannon: Understood. And just a follow-up on the modeling question. So the tax rate, I think you’re guiding to 26% to 28%. You haven’t been there in several years. I guess, what’s driving that higher as we think about the rest of this year?
Thomas Donahue: Yes. We don’t get to deduct or we have a valuation allowance in foreign subsidiary. So that’s where we used to be able to deduct losses and we can’t do that anymore before we get a higher tax rate.
Daniel Fannon: Understood. Okay, thank you.
Operator: Your next question is from John Dunn with Evercore.
John Dunn: Thank you. You guys — you touched on strategic value dividend and quant. But could you contextualize like the equity flow outlook?
Christopher Donahue: So equity always goes in ups and downs. And we are looking for, as I mentioned, a lot bigger, better things coming out of the MDT franchise. And as I tried to plant the seeds a rebound in the Kaufmann enterprise. And if you look historically at Kaufmann, when it has had some tough going, its spring back is really a beautiful thing to behold. And Strat Val is going to continue to do what it does in terms of its investment activities. So those are the principal ones. Now that’s why we mentioned about having a dozen others that keep that are positive that give us other opportunities for growth on the equity side as well. In terms of the FAs, when you ask about context, the FAs by and large, and this is obviously the business where we’re calling on RIAs, broker-dealers, et cetera.
There’s a little debate in between the FA generally and the client. The client is perfectly happy at 5%. The FA wants to get into the market. And we’re seeing more movement into the market. And I don’t be thinking this as an avalanche or a catalyst or all that. But when we have $265 million of positive flows in Ultrashorts coming off bigger negatives. And when we see more interest in Microshorts and when we hear the FAs talking about moving duration into one, three months or one, three year duration products, we’re beginning to see more movement. This is not a total risk on trade. But it sets the stage for getting closer. And when you look at the performance and the sales response on MDT, we’re getting more newer clients into those mandates.
And we think that is a good thing in terms of seed corn for the future as well.
John Dunn: Right. And then maybe like the puts and takes on the fixed income side. Total Return Bond is doing great but.
Christopher Donahue: Well, as we mentioned, the flows have been very solid, and that’s why I mentioned about the Ultrashorts coming in, they’re sort of an in-between product. And what we present to clients is a solution both out the yield curve and out the risk parameters and our people present solutions to clients, and they’re very well able to compete with people who want to go all passive or things like that. And that’s why we continue to have what amounts to robust sales in fixed income for exactly that reason. And remember that there’s a huge fraction of our business, maybe half, maybe a little less than half, that’s basically retirement-oriented. And the intermediaries are coming up with solutions for those clients over the long term that involve fixed income.
And so we’ve seen the assets move up and we would certainly see that continuing. And one that’s sort of a hidden jewel at this point in the cycle is the high yield, excellent long-term records a big franchise here at Federated Hermes, a great marketplace reception. And that one goes in ebbs and flows as well based on the nature of the clients going risk on. So we have a lot of buckets ready for when it starts raining money in other areas as well.
John Dunn: Thanks very much.
Operator: We have reached the end of the question-and-answer session and I will now turn the call over to Ray Hanley for closing remarks.
Raymond Hanley: Thank you, Holly. That concludes our call. Thank you for joining us today.
Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.
