Deborah Cunningham: I like that word, Chris. Nirvana is one that I use quite often, and I agree wholeheartedly from a future expectations environment standpoint, measured is good, which is effectively your first scenario, Brian, where interest rates go down in a measured and orderly fashion expected, the curve is predictive of such declines. The key, I think, to that scenario is, it’s, again, a perfect type of scenario for gathering cash and keeping the cash very diversified amongst different players, different investor bases. But the key is that it goes to what I’m going to call maybe the 3% level, so 100 basis points above where the target inflation rate is. Not to the 0% level, which is where it stood for a very long period of time and just caused more angst.
Now the angst in the market then did not, as Chris mentioned, result in money funds losing everything. It’s the — it is the eighth wonder of the world. However, that’s the worst environment you can come up with. In the stagflationary environment, your second sort of scenario. That’s not — it’s a slow growth environment with inflation creeping up to some degree. That’s not something that’s really too problematic for us either. It’s maybe not Nirvana, but either one of those scenarios works with the first one being the preferred and what we think at this point is the expected. Now with that start date being moved out. When Chris started asking me that question, we were in the first half of the year. Now we’re in the second half of the year, and I hate to get specific or more specific, but I’m forced to, my most recent has taken us from June to July to September for a start date.
And could there be a scenario where it doesn’t start where the declining rate environment doesn’t start at all in 2024, I think, the answer is potentially, yes.
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.
