FEDERATED HERMES, INC. (FHI) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1- Business, Item 1A - Risk Factors and Item 8 - Financial Statements and Supplementary Data.
General
Federated Hermes is one of the largest investment managers in the U.S. with $668.9 billion in managed assets as of December 31, 2021. The majority of Federated Hermes' revenue is derived from advising Federated Hermes Funds and Separate Accounts in both domestic and international markets. Federated Hermes also derives revenue from providing administrative and other fund-related services (including distribution and shareholder servicing) as well as stewardship and real estate development services. For additional information on Federated Hermes' markets, see Item 1 - Business - Distribution Channels and Product Markets.
Investment advisory fees, administrative service fees and certain fees for other services, such as distribution and shareholder service fees, are contract-based and are generally calculated as a percentage of the average net assets of managed investment portfolios. Federated Hermes' revenue is primarily dependent upon factors that affect the value of managed assets including market conditions and the ability to attract and retain assets. Generally, managed assets in Federated Hermes' investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement. Fee rates for Federated Hermes' services generally vary by asset and service type and may vary based on changes in asset levels. Generally, advisory fees charged for services provided to equity and multi-asset products and strategies are higher than advisory fees charged to fixed-income and alternative/private markets products and strategies, which in turn are higher than advisory fees charged to money market products and strategies. Likewise, Federated Hermes Funds typically have higher advisory fees than Separate Accounts. Similarly, revenue is also dependent upon the relative composition of average AUM across both asset and product types. Federated Hermes may implement Fee Waivers for competitive reasons such as Voluntary Yield-related Fee Waivers, to maintain certain fund expense ratios, to meet regulatory requirements or to meet contractual requirements. Since Federated Hermes' products are largely distributed and serviced through financial intermediaries, Federated Hermes pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products and strategies. These payments are generally calculated as a percentage of net assets attributable to the applicable financial intermediary and represent the vast majority of Distribution expense on the Consolidated Statements of Income. Certain components of Distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Federated Hermes generally pays out a larger portion of the revenue earned from managed assets in money market and multi-asset funds than the revenue earned from managed assets in equity, fixed-income and alternative/private markets funds.
Federated Hermes' most significant operating expenses are Compensation and Related expense and Distribution expense. Compensation and Related expense includes base salary and wages, incentive compensation and other employee expenses including payroll taxes and benefits. Incentive compensation, which includes stock-based compensation, can vary depending on various factors including, but not limited to, the overall results of operations of Federated Hermes, investment management performance and sales performance.
The discussion and analysis of Federated Hermes' financial condition and results of operations are based on Federated Hermes' Consolidated Financial Statements. Management evaluates Federated Hermes' performance at the consolidated level. Therefore, Federated Hermes operates in one operating segment, the investment management business. Management analyzes all expected revenue and expenses and considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new business. Federated Hermes' growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability of those assets, which is impacted, in part, by Fee Waivers. Fees for mutual fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds and, as required by law, fund shareholders. Management believes that meaningful indicators of Federated Hermes' financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.
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Business Developments
Equity Acquisition
On August 31, 2021, Federated completed the 2021 Acquisition of HFML Noncontrolling Interests. See Note (2) to the Consolidated Financial Statements for additional information.
The Pandemic
The outbreak of the Covid-19 respiratory disease was first detected in China in late 2019, spread globally in 2020, and continues to spread in 2022. The Pandemic initially resulted in travel bans, closing of borders, changes to the ways in which healthcare workers prepare and deliver services, enhanced monitoring and increased health screenings/testing, and increased data analytics. In addition, the Pandemic resulted in the development of effective vaccines without harmful side effects and identification of effective therapeutics, enhanced disinfection and contamination procedures, stay-at-home orders, quarantines, cancellations and disruptions to supply chains, workflow, operations and customer activity, as well as general concern and uncertainty. The Pandemic also initially resulted in economic uncertainty, market volatility, trading halts, market illiquidity and declining and variable stock prices, among other effects. These impacts continue, to varying degrees, in 2022. See Item 1A - Risk Factors - General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic) for additional information regarding the impacts, and potential impacts, resulting from the Pandemic.
Policymakers responded to certain apparent and acute economic and market consequences with multiple monetary and fiscal policy actions. Regulators pursued and, to a lesser degree, have continued actions focused on facilitating market function and preserving market integrity, as well as providing guidance and relief to market participants affected by the Pandemic. See Item 1 - Business - Regulatory Matters - Current Regulatory Environment sections for additional information regarding the monetary and fiscal policy actions taken by governmental authorities.
As of December 31, 2021, economies of various countries have rebounded from the global economic shutdown that began in the late first quarter and early second quarter 2020. With the world vaccination rate of people receiving at least one dose of a vaccine at over 58%, and vaccination rates nearing or exceeding 60% or greater in several jurisdictions, including the United States and the United Kingdom, economies in many jurisdictions have reopened as national, state/provincial, and local governments have removed or lessened travel restrictions and requirements for staying-at-home and quarantining, as well as other Pandemic-imposed restrictions. Spikes of coronavirus cases, however, continue to occur in certain jurisdictions. These spikes are reportedly being driven by more contagious variants of the initial strain of the coronavirus, including the Delta and Omicron variants. Breakthrough infections of vaccinated individuals are also prevalent in many jurisdictions. These variants, spikes and breakthrough infections have resulted in certain jurisdictions continuing or re-imposing certain travel and other restrictions, although in many cases not to the same degree as initially imposed. As a result, while many governments have taken action to open economies, economic, market, regulatory and other uncertainty persists as a result of the Pandemic. While economic uncertainty and market volatility have continued, in many cases it is not to the degree initially seen late in the first quarter and early in the second quarter 2020.
Federated Hermes has not implemented its business continuity plans in its U.S. offices as there has not been a significant disruption of its business processes, allowing it to remain fully operational and to continue to provide services to its customers. Federated Hermes' London office did activate its business continuity plans on March 20, 2020 to support the transition to a remote working environment per the advice of the UK's government and regulators.
Federated Hermes designated an internal task force (which meets as necessary) to address events related to the Pandemic that have impacted or that can potentially impact Federated Hermes' business. Federated Hermes has supported its employees by moving initially to remote, and then hybrid, working arrangements. With input and guidance from senior management and the internal task force, increased vaccinations, and the removal of Pandemic-related restrictions, beginning in April 2021, Federated Hermes encouraged (but did not require) its employees to begin to return to working from its U.S. offices. Beginning on July 6, 2021, Federated Hermes implemented a structured return to office plan that requires most of its U.S. employees to work from Federated Hermes' offices at least two days a week, or at least three days every other week, depending on their work location and office or work station configuration. All U.S. employees have been asked to work from the office for at least three days a week beginning on March 1, 2022. Managers also have the flexibility to alter work arrangements to address individual employee circumstances. In the UK, from February 1, 2022, all full-time employees have been asked to be in the office for at least two days a week through February 28, 2022, and, thereafter, all full-time employees have been asked to be in the office for at least three days a week. Part-time employees have been asked to prorate their time in the office according to days worked
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based on the foregoing. Any structured return to office plans for Federated Hermes' non-U.S. employees will be consistent with applicable government requirements.
Federated Hermes intends its remote and hybrid working arrangements to allow employees the flexibility to work from home or in the office, while continuing to support the operation of Federated Hermes' business and meet business needs. Federated Hermes continues to monitor the ongoing Pandemic situation (as described in more detail below) and will continue to assess its return to office plans for U.S. and UK employees.
Federated Hermes has developed and implemented a series of return to office protocols intended to assure employees that it is taking the safety and well-being of its employees seriously as return to office plans are implemented. Federated Hermes continues to review and, in certain cases, revise or enhance these protocols to provide for the safety of its employees, to seek to ensure the resiliency of Federated Hermes' business and to keep its customers informed.
Among other actions, Federated Hermes has taken the following steps:
•Federated Hermes made technology investments, including laptops for employees, expanded internet bandwidth, video conferencing and collaboration software, and added video equipment. Federated Hermes also has increased usage and reliance on virtual meeting tools and prioritized the deployment of additional equipment and technology. These actions have allowed Federated Hermes to remain fully operational with minimal disruptions, support a remote and current hybrid working environment and continue to deliver Federated Hermes' investment products and services to customers.
•Federated Hermes continues to undertake to comply with any remaining requirements applicable to Federated Hermes under relevant Federal, state, and local government orders or laws, as well as remaining requirements applicable to Federated Hermes under the Center for Disease Control and Prevention's (CDC) and state health departments' guidance and cleaning procedures.
•In addition to maintaining enhanced cleaning protocols and other measures, Federated Hermes continues to make available hand sanitizer stations and disinfectant wipes for employees in the office, and encourage employees to take standard precautions such as washing their hands with soap and water and staying home if sick.
•As a result of a travel advisory issued by the CDC, the company instituted a travel ban on February 27, 2020 to certain countries, including those designated as high risk by the CDC. Federated Hermes now recommends that employees follow national, state/provincial, local and CDC requirements or recommendations when traveling, as well as specific venue requirements when planning or attending conferences or other events. Planning activity for conferences and events scheduled for the fourth quarter 2021 and for 2022 increased in the second half of 2021 over the first half of 2021. Fourth quarter 2021 travel reservations were down from the third quarter 2021 peak during the Pandemic, although fourth quarter 2021 was the second most active quarter since the first quarter of 2020. Travel reservations remain below pre-Pandemic levels.
•Federated Hermes Fund Board meetings, Federated Hermes corporate Board meetings, and offshore fund and subsidiary Board meetings, are being held in person as well as via teleconference allowing those who prefer to participate remotely to do so.
•Federated Hermes has continued to on-board new hires, providing necessary equipment to them and conducting training remotely when necessary.
•Federated Hermes has introduced a range of resources to provide employees with information and support to remain physically and emotionally healthy during the Pandemic.
•Federated Hermes investment professionals and strategists continue to publish fresh content to the Insights section of Federated Hermes' website, offering their unique perspectives to investors.
Federated Hermes continues to take a measured approach that involves implementing procedures aimed at safeguarding employee health while maintaining a high level of customer service. Federated Hermes expects those procedures and related timelines to vary by location in order to endeavor to meet local regulatory requirements and support community health practices. Federated Hermes is also prepared to continue to implement a variety of other strategies to ensure the resiliency of its business. Examples include transferring processes to alternate personnel, prioritizing technology resources to service critical processing, and leveraging service providers and counterparties to promote efficient delivery of services.
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Federated Hermes continues to monitor the ongoing global health situation through resources provided by, or contact with, the CDC, the SEC, the World Health Organization and the Securities Industry and Financial Markets Association (SIFMA), a financial services industry trade association, among others. As of December 31, 2021, while Federated Hermes' stock price has fluctuated amidst the volatility in stock prices on major exchanges, and Federated Hermes' business operations have had to adapt to a remote and current hybrid working environment, the Pandemic has not materially affected Federated Hermes' financial condition or cash flows except to the extent that the increased net Voluntary Yield-related Fee Waivers discussed below resulting from the near-zero interest rate environment can be attributed to the Pandemic. A further prolonged period of economic and financial distress and volatility as a result of the Pandemic could exacerbate human resource capital management, economic, market and other risks, and could impact, including in a material way, Federated Hermes' Financial Condition. See Item 1A - Risk Factors - General Risk Factors – Economic and Market Risks and General Risk Factors - Other General Risks - Recruiting and Retaining Key Personnel (Human Capital Resource Management Risk) and Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic) for additional information.
Low Short-Term Interest Rates
In March 2020, in response to disrupted economic activity as a result of the Pandemic, FOMC decreased the federal funds target rate range to 0% - 0.25%. The federal funds target rate drives short-term interest rates. As a result of the near-zero interest-rate environment, the gross yield earned by certain money market funds is not sufficient to cover all of the fund's operating expenses. Beginning in the first quarter 2020, Federated Hermes has implemented Voluntary Yield-related Fee Waivers. These waivers have been partially offset by related reductions in distribution expense as a result of Federated Hermes' mutual understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee Waivers.
For the year ended December 31, 2021, Voluntary Yield-related Fee Waivers totaled $420.3 million. These fee waivers were partially offset by related reductions in distribution expenses of $277.1 million, such that the net negative pre-tax impact to Federated Hermes was $143.2 million in 2021. For the year ended December 31, 2020, Voluntary Yield-related Fee Waivers totaled $113.0 million. These fee waivers were partially offset by related reductions in distribution expenses of $98.4 million, such that the net negative pre-tax impact to Federated Hermes was $14.6 million in 2020.
Short-term interest rates remained near historic lows during the fourth quarter of 2021 as technical factors at the front end of the yield curve kept yields on short-term government securities—including repurchase agreements and Treasury bills—just above zero. Market expectations are that the FOMC will raise interest rates multiple times in 2022, starting in March. Higher yields in 2022 will lower the impact of Voluntary Yield-related Fee Waivers. The net negative impact on pre-tax income from Voluntary Yield-related Fee Waivers in the first quarter 2022 may result in a net negative pre-tax impact on income of approximately $22 million. Assuming an increase in interest rates of 25 basis points by the FOMC in March 2022, the first quarter 2022 estimated $22 million of net negative impact on pre-tax income from Voluntary Yield-related Fee Waivers is expected to be reduced by approximately 90% for the second quarter 2022. The actual amount of future Voluntary Yield-related Fee Waivers and the resulting negative impact of these fee waivers could vary, including in a material way, from management's estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, changes in yields on instruments available for purchase by the money market funds, including changes due to the level of government measures to further stimulate the economy which could result in the issuance of additional Treasury debt instruments, actions by the FOMC, the U.S. Department of Treasury, the SEC, the FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets, changes in customer relationships, changes in money market product structures and offerings, demand for competing products, changes in distribution models, changes in the distribution fee arrangements with third parties, Federated Hermes' willingness to continue the Voluntary Yield-related Fee Waivers and changes in the extent to which the impact of these fee waivers is shared by any one or more third parties.
Current Regulatory Environment
Federated Hermes and its investment management business are subject to extensive regulation both within and outside the U.S. Federated Hermes and its products, such as the Federated Hermes Funds, and strategies are subject to: federal securities laws, principally the 1933 Act, the 1934 Act, the 1940 Act and the Advisers Act; state laws regarding securities fraud and registration; regulations or other rules promulgated by various regulatory authorities, self-regulatory organizations or exchanges; and foreign laws, regulations or other rules promulgated by foreign regulatory or other authorities. See Item 1 - Business - Regulatory Matters and Item 1A - Risk Factors - General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in Laws, Regulations and Other Rules for additional information.
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Asset Highlights
Managed Assets at Period End
| in millions as of December 31, | 2021 | 2020 | 2021 vs. 2020 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| By Asset Class | |||||||||||
| Equity | $ | 96,716 | $ | 91,788 | 5 | % | |||||
| Fixed-Income | 97,550 | 84,277 | 16 | ||||||||
| Alternative / Private Markets | 22,920 | 19,084 | 20 | ||||||||
| Multi-Asset | 3,780 | 3,948 | (4) | ||||||||
| Total Long-Term Assets | 220,966 | 199,097 | 11 | ||||||||
| Money Market | 447,907 | 420,333 | 7 | ||||||||
| Total Managed Assets | $ | 668,873 | $ | 619,430 | 8 | % | |||||
| By Product Type | |||||||||||
| Funds: | |||||||||||
| Equity | $ | 57,036 | $ | 54,312 | 5 | % | |||||
| Fixed-Income | 59,862 | 53,557 | 12 | ||||||||
| Alternative / Private Markets | 14,788 | 12,100 | 22 | ||||||||
| Multi-Asset | 3,608 | 3,744 | (4) | ||||||||
| Total Long-Term Assets | 135,294 | 123,713 | 9 | ||||||||
| Money Market | 312,834 | 301,855 | 4 | ||||||||
| Total Fund Assets | 448,128 | 425,568 | 5 | ||||||||
| Separate Accounts: | |||||||||||
| Equity | 39,680 | 37,476 | 6 | ||||||||
| Fixed-Income | 37,688 | 30,720 | 23 | ||||||||
| Alternative / Private Markets | 8,132 | 6,984 | 16 | ||||||||
| Multi-Asset | 172 | 204 | (16) | ||||||||
| Total Long-Term Assets | 85,672 | 75,384 | 14 | ||||||||
| Money Market | 135,073 | 118,478 | 14 | ||||||||
| Total Separate Account Assets | 220,745 | 193,862 | 14 | ||||||||
| Total Managed Assets | $ | 668,873 | $ | 619,430 | 8 | % |
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Average Managed Assets
| in millions for the years ended December 31, | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| By Asset Class | ||||||||||||||||||
| Equity | $ | 98,040 | $ | 80,591 | $ | 81,212 | 22 | % | (1) | % | ||||||||
| Fixed-Income | 91,564 | 74,403 | 65,375 | 23 | 14 | |||||||||||||
| Alternative / Private Markets1 | 20,754 | 18,206 | 17,896 | 14 | 2 | |||||||||||||
| Multi-Asset | 3,879 | 3,813 | 4,192 | 2 | (9) | |||||||||||||
| Total Long-Term Assets | 214,237 | 177,013 | 168,675 | 21 | 5 | |||||||||||||
| Money Market | 418,562 | 436,895 | 340,505 | (4) | 28 | |||||||||||||
| Total Average Managed Assets | $ | 632,799 | $ | 613,908 | $ | 509,180 | 3 | % | 21 | % | ||||||||
| By Product Type | ||||||||||||||||||
| Funds: | ||||||||||||||||||
| Equity | $ | 58,426 | $ | 45,585 | $ | 42,712 | 28 | % | 7 | % | ||||||||
| Fixed-Income | 58,095 | 46,899 | 41,938 | 24 | 12 | |||||||||||||
| Alternative / Private Markets1 | 13,266 | 11,424 | 11,317 | 16 | 1 | |||||||||||||
| Multi-Asset | 3,696 | 3,622 | 4,003 | 2 | (10) | |||||||||||||
| Total Long-Term Assets | 133,483 | 107,530 | 99,970 | 24 | 8 | |||||||||||||
| Money Market | 293,644 | 324,490 | 238,876 | (10) | 36 | |||||||||||||
| Total Average Fund Assets | 427,127 | 432,020 | 338,846 | (1) | 27 | |||||||||||||
| Separate Accounts: | ||||||||||||||||||
| Equity | 39,614 | 35,006 | 38,500 | 13 | (9) | |||||||||||||
| Fixed-Income | 33,469 | 27,504 | 23,437 | 22 | 17 | |||||||||||||
| Alternative / Private Markets | 7,488 | 6,782 | 6,579 | 10 | 3 | |||||||||||||
| Multi-Asset | 183 | 191 | 189 | (4) | 1 | |||||||||||||
| Total Long-Term Assets | 80,754 | 69,483 | 68,705 | 16 | 1 | |||||||||||||
| Money Market | 124,918 | 112,405 | 101,629 | 11 | 11 | |||||||||||||
| Total Average Separate Account Assets | 205,672 | 181,888 | 170,334 | 13 | 7 | |||||||||||||
| Total Average Managed Assets | $ | 632,799 | $ | 613,908 | $ | 509,180 | 3 | % | 21 | % |
1 The average balance for the year ended December 31, 2019 includes $8.2 billion of average fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment. Effective March 1, 2020, HGPE became a consolidated subsidiary. See Note (2) to the Consolidated Financial Statements for additional information.
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Changes in Equity Fund and Separate Account Assets
| in millions for the years ended December 31, | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Equity Funds | |||||||
| Beginning Assets | $ | 54,312 | $ | 48,112 | |||
| Sales | 14,265 | 14,457 | |||||
| Redemptions | (15,915) | (15,675) | |||||
| Net Sales (Redemptions) | (1,650) | (1,218) | |||||
| Net Exchanges | (362) | (64) | |||||
| Acquisitions/(Dispositions) | 408 | 0 | |||||
| Impact of Foreign Exchange1 | (522) | 509 | |||||
| Market Gains and (Losses)2 | 4,850 | 6,973 | |||||
| Ending Assets | $ | 57,036 | $ | 54,312 | |||
| Equity Separate Accounts | |||||||
| Beginning Assets | $ | 37,476 | $ | 40,899 | |||
| Sales3 | 7,564 | 6,006 | |||||
| Redemptions3 | (10,846) | (11,046) | |||||
| Net Sales (Redemptions)3 | (3,282) | (5,040) | |||||
| Net Exchanges | 403 | (6) | |||||
| Acquisitions/(Dispositions) | 0 | (71) | |||||
| Impact of Foreign Exchange1 | (574) | 686 | |||||
| Market Gains and (Losses)2 | 5,657 | 1,008 | |||||
| Ending Assets | $ | 39,680 | $ | 37,476 | |||
| Total Equity | |||||||
| Beginning Assets | $ | 91,788 | $ | 89,011 | |||
| Sales3 | 21,829 | 20,463 | |||||
| Redemptions3 | (26,761) | (26,721) | |||||
| Net Sales (Redemptions)3 | (4,932) | (6,258) | |||||
| Net Exchanges | 41 | (70) | |||||
| Acquisitions/(Dispositions) | 408 | (71) | |||||
| Impact of Foreign Exchange1 | (1,096) | 1,195 | |||||
| Market Gains and (Losses)2 | 10,507 | 7,981 | |||||
| Ending Assets | $ | 96,716 | $ | 91,788 |
1 Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
3 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
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Changes in Fixed-Income Fund and Separate Account Assets
| in millions for the years ended December 31, | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Fixed-Income Funds | |||||||
| Beginning Assets | $ | 53,557 | $ | 44,223 | |||
| Sales | 30,862 | 29,453 | |||||
| Redemptions | (24,902) | (22,564) | |||||
| Net Sales (Redemptions) | 5,960 | 6,889 | |||||
| Net Exchanges | (33) | (16) | |||||
| Acquisitions/(Dispositions) | 17 | 0 | |||||
| Impact of Foreign Exchange1 | (90) | 129 | |||||
| Market Gains and (Losses)2 | 451 | 2,332 | |||||
| Ending Assets | $ | 59,862 | $ | 53,557 | |||
| Fixed-Income Separate Accounts | |||||||
| Beginning Assets | $ | 30,720 | $ | 24,800 | |||
| Sales3 | 11,764 | 7,830 | |||||
| Redemptions3 | (4,842) | (3,574) | |||||
| Net Sales (Redemptions)3 | 6,922 | 4,256 | |||||
| Net Exchanges | (48) | 1 | |||||
| Acquisitions/(Dispositions) | 0 | (1) | |||||
| Impact of Foreign Exchange1 | (43) | 61 | |||||
| Market Gains and (Losses)2 | 137 | 1,603 | |||||
| Ending Assets | $ | 37,688 | $ | 30,720 | |||
| Total Fixed-Income | |||||||
| Beginning Assets | $ | 84,277 | $ | 69,023 | |||
| Sales3 | 42,626 | 37,283 | |||||
| Redemptions3 | (29,744) | (26,138) | |||||
| Net Sales (Redemptions)3 | 12,882 | 11,145 | |||||
| Net Exchanges | (81) | (15) | |||||
| Acquisitions/(Dispositions) | 17 | (1) | |||||
| Impact of Foreign Exchange1 | (133) | 190 | |||||
| Market Gains and (Losses)2 | 588 | 3,935 | |||||
| Ending Assets | $ | 97,550 | $ | 84,277 |
1 Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
3 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
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Changes in Alternative / Private Markets Fund and Separate Account Assets
| in millions for the years ended December 31, | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Alternative / Private Markets Funds | |||||||
| Beginning Assets1 | $ | 12,100 | $ | 11,389 | |||
| Sales | 3,699 | 2,277 | |||||
| Redemptions | (2,657) | (2,047) | |||||
| Net Sales (Redemptions) | 1,042 | 230 | |||||
| Net Exchanges | (2) | (4) | |||||
| Acquisitions/(Dispositions) | 81 | 0 | |||||
| Impact of Foreign Exchange2 | (162) | 400 | |||||
| Market Gains and (Losses)3 | 1,729 | 85 | |||||
| Ending Assets | $ | 14,788 | $ | 12,100 | |||
| Alternative / Private Markets Separate Accounts | |||||||
| Beginning Assets | $ | 6,984 | $ | 6,713 | |||
| Sales4 | 1,124 | 563 | |||||
| Redemptions4 | (513) | (568) | |||||
| Net Sales (Redemptions)4 | 611 | (5) | |||||
| Acquisitions/(Dispositions) | 0 | 452 | |||||
| Impact of Foreign Exchange2 | (92) | 215 | |||||
| Market Gains and (Losses)3 | 629 | (391) | |||||
| Ending Assets | $ | 8,132 | $ | 6,984 | |||
| Total Alternative / Private Markets | |||||||
| Beginning Assets1 | $ | 19,084 | $ | 18,102 | |||
| Sales4 | 4,823 | 2,840 | |||||
| Redemptions4 | (3,170) | (2,615) | |||||
| Net Sales (Redemptions)4 | 1,653 | 225 | |||||
| Net Exchanges | (2) | (4) | |||||
| Acquisitions/(Dispositions) | 81 | 452 | |||||
| Impact of Foreign Exchange2 | (254) | 615 | |||||
| Market Gains and (Losses)3 | 2,358 | (306) | |||||
| Ending Assets | $ | 22,920 | $ | 19,084 |
1 The beginning assets at December 31, 2020 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment. Effective March 1, 2020, HGPE became a consolidated subsidiary. See Note (2) to the Consolidated Financial Statements for additional information.
2 Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
3 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
4 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
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Changes in Multi-Asset Fund and Separate Account Assets
| in millions for the years ended December 31, | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Multi-Asset Funds | |||||||
| Beginning Assets | $ | 3,744 | $ | 4,000 | |||
| Sales | 299 | 214 | |||||
| Redemptions | (894) | (688) | |||||
| Net Sales (Redemptions) | (595) | (474) | |||||
| Net Exchanges | 41 | (19) | |||||
| Acquisitions/(Dispositions) | 54 | 0 | |||||
| Market Gains and (Losses)1 | 364 | 237 | |||||
| Ending Assets | $ | 3,608 | $ | 3,744 | |||
| Multi-Asset Separate Accounts | |||||||
| Beginning Assets | $ | 204 | $ | 199 | |||
| Sales2 | 2 | 27 | |||||
| Redemptions2 | (42) | (36) | |||||
| Net Sales (Redemptions)2 | (40) | (9) | |||||
| Net Exchanges | 1 | (1) | |||||
| Impact of Foreign Exchange3 | (1) | 1 | |||||
| Market Gains and (Losses)1 | 8 | 14 | |||||
| Ending Assets | $ | 172 | $ | 204 | |||
| Total Multi-Asset | |||||||
| Beginning Assets | $ | 3,948 | $ | 4,199 | |||
| Sales2 | 301 | 241 | |||||
| Redemptions2 | (936) | (724) | |||||
| Net Sales (Redemptions)2 | (635) | (483) | |||||
| Net Exchanges | 42 | (20) | |||||
| Acquisitions/(Dispositions) | 54 | 0 | |||||
| Impact of Foreign Exchange3 | (1) | 1 | |||||
| Market Gains and (Losses)1 | 372 | 251 | |||||
| Ending Assets | $ | 3,780 | $ | 3,948 |
1 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
2 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
3 Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
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Changes in Total Long-Term Assets
| in millions for the years ended December 31, | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Total Long-Term Fund Assets | |||||||
| Beginning Assets1 | $ | 123,713 | $ | 107,724 | |||
| Sales | 49,125 | 46,401 | |||||
| Redemptions | (44,368) | (40,974) | |||||
| Net Sales (Redemptions) | 4,757 | 5,427 | |||||
| Net Exchanges | (356) | (103) | |||||
| Acquisitions/(Dispositions) | 560 | 0 | |||||
| Impact of Foreign Exchange2 | (774) | 1,038 | |||||
| Market Gains and (Losses)3 | 7,394 | 9,627 | |||||
| Ending Assets | $ | 135,294 | $ | 123,713 | |||
| Total Long-Term Separate Accounts Assets | |||||||
| Beginning Assets | $ | 75,384 | $ | 72,611 | |||
| Sales4 | 20,454 | 14,426 | |||||
| Redemptions4 | (16,243) | (15,224) | |||||
| Net Sales (Redemptions)4 | 4,211 | (798) | |||||
| Net Exchanges | 356 | (6) | |||||
| Acquisitions/(Dispositions) | 0 | 380 | |||||
| Impact of Foreign Exchange2 | (710) | 963 | |||||
| Market Gains and (Losses)3 | 6,431 | 2,234 | |||||
| Ending Assets | $ | 85,672 | $ | 75,384 | |||
| Total Long-Term Assets | |||||||
| Beginning Assets1 | $ | 199,097 | $ | 180,335 | |||
| Sales4 | 69,579 | 60,827 | |||||
| Redemptions4 | (60,611) | (56,198) | |||||
| Net Sales (Redemptions)4 | 8,968 | 4,629 | |||||
| Net Exchanges | 0 | (109) | |||||
| Acquisitions/(Dispositions) | 560 | 380 | |||||
| Impact of Foreign Exchange2 | (1,484) | 2,001 | |||||
| Market Gains and (Losses)3 | 13,825 | 11,861 | |||||
| Ending Assets | $ | 220,966 | $ | 199,097 |
1 The beginning assets at December 31, 2020 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment. Effective March 1, 2020, HGPE became a consolidated subsidiary. See Note (2) to the Consolidated Financial Statements for additional information.
2 Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
3 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
4 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
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Changes in Federated Hermes' average asset mix year-over-year across both asset classes and product types have a direct impact on Federated Hermes' operating income. Asset mix impacts Federated Hermes' total revenue due to the difference in the fee rates earned on each asset class and product type per invested dollar and certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship. The following table presents the relative composition of average managed assets and the percent of total revenue derived from each asset class and product type over the last three years:
| Percent of Total Average Managed Assets | Percent of Total Revenue | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||
| By Asset Class | ||||||||||||||||||
| Money Market | 66 | % | 71 | % | 67 | % | 19 | % | 40 | % | 40 | % | ||||||
| Equity | 16 | % | 13 | % | 16 | % | 52 | % | 38 | % | 40 | % | ||||||
| Fixed-Income | 14 | % | 12 | % | 13 | % | 18 | % | 13 | % | 14 | % | ||||||
| Alternative / Private Markets | 3 | % | 3 | % | 3 | % | 8 | % | 6 | % | 3 | % | ||||||
| Multi-Asset | 1 | % | 1 | % | 1 | % | 2 | % | 2 | % | 2 | % | ||||||
| Other | 0 | % | 0 | % | 0 | % | 1 | % | 1 | % | 1 | % | ||||||
| By Product Type | ||||||||||||||||||
| Funds: | ||||||||||||||||||
| Money Market | 46 | % | 53 | % | 47 | % | 15 | % | 37 | % | 37 | % | ||||||
| Equity | 9 | % | 7 | % | 8 | % | 41 | % | 29 | % | 30 | % | ||||||
| Fixed-Income | 9 | % | 8 | % | 8 | % | 15 | % | 11 | % | 12 | % | ||||||
| Alternative / Private Markets | 2 | % | 2 | % | 2 | % | 5 | % | 3 | % | 1 | % | ||||||
| Multi-Asset | 1 | % | 1 | % | 1 | % | 2 | % | 2 | % | 2 | % | ||||||
| Other | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||
| Separate Accounts: | ||||||||||||||||||
| Money Market | 20 | % | 18 | % | 20 | % | 4 | % | 3 | % | 3 | % | ||||||
| Equity | 7 | % | 6 | % | 8 | % | 11 | % | 9 | % | 10 | % | ||||||
| Fixed-Income | 5 | % | 4 | % | 5 | % | 3 | % | 2 | % | 2 | % | ||||||
| Alternative / Private Markets | 1 | % | 1 | % | 1 | % | 3 | % | 3 | % | 2 | % | ||||||
| Multi-Asset | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||
| Other | 0 | % | 0 | % | 0 | % | 1 | % | 1 | % | 1 | % |
Total managed assets represent the balance of AUM at a point in time, while total average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.
Average managed assets increased 3% for 2021 as compared to 2020. Period-end managed assets increased 8% at December 31, 2021 as compared to December 31, 2020 primarily due to an increase in money market assets and, to a lesser extent, an increase in fixed-income assets. Total average money market assets decreased 4% for 2021 compared to 2020. Period-end money market assets increased 7% at December 31, 2021 as compared to December 31, 2020. Average equity assets increased 22% for 2021 as compared to 2020. Period-end equity assets increased 5% at December 31, 2021 as compared to December 31, 2020 primarily due to market appreciation, partially offset by net redemptions. Average fixed-income assets increased 23% for 2021 as compared to 2020. Period-end fixed-income assets increased 16% at December 31, 2021 as compared to December 31, 2020 primarily due to net sales.
In the U.S., a vibrant job market, wage and income gains, rising capital expenditures and robust consumer spending overwhelmed the impact of a lingering Pandemic, driving economic growth and the equity markets higher. For the year, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite rose 26.9%, 18.7% and 21.4%, respectively, with the S&P ssetting 70 record highs during the year, the most since 1995. Overseas, where Pandemic-related restrictions created more havoc, economic and equity performance was less enthusiastic but still positive, with the MSCI World ex USA rising 10.1% on the year and the MSCI All Country World ex USA gaining 5.5% in 2021. In the fixed-income markets, the combination of inflation at multi-decade highs and a Federal Reserve pivoting toward tightening earlier than had been expected in 2022 sent yields rising across the Treasury curve, with the biggest increases on the short-to-intermediate end. For example, yields rose by 65 basis points on the 10-year Treasury to close 2021 at 1.51% and by 79 basis points on the 3-year Treasury to end the year at
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0.96%. Lower-quality segments of the credit market performed better, bolstered by strong corporate balance sheets and increasing corporate earnings.
For an explanation of the changes in managed assets at December 31, 2020 compared to December 31, 2019 and changes in average managed assets for 2020 as compared to 2019, see Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2020, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Highlights.
Results of Operations
For an explanation of changes for 2020 as compared to 2019, see Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2020, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.
Revenue. Revenue decreased $147.8 million in 2021 as compared to 2020 primarily due to an increase of $307.3 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to expense and the net pre-tax impact) and a decrease in money market revenue of $38.1 million primarily due to lower average money market assets. These decreases were partially offset by an increase in equity and fixed-income revenue of $127.6 million and $46.6 million, respectively, due to higher average assets, an increase of $11.0 million as a result of the consolidation of certain variable interest entities (VIE) not previously consolidated prior to 2021 related to the HCL Acquisition (see Note (2) to the Consolidated Financial Statements) and an increase in alternative/private market revenue of $7.3 million due to the revenue of a previously nonconsolidated entity being recorded to operating revenue beginning in March 2020.
Federated Hermes' ratio of revenue to average managed assets for 2021 was 0.20% as compared to 0.23% for 2020. The decrease in the rate was primarily due to the reduction of revenue from higher Voluntary Yield-related Fee Waivers, partially offset by a higher proportion of revenue earned on average equity assets during 2021 as compared to 2020.
Operating Expenses. Total operating expenses for 2021 decreased $95.9 million compared to 2020. Distribution expense decreased $157.5 million primarily related to an increase of $178.7 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net pre-tax impact), partially offset by an increase of $19.5 million in competitive payments. Compensation and Related expense increased $29.1 million driven by (1) an increase of $13.6 million due to the increase in the average GBP/USD exchange rate for 2021 as compared to 2020, (2) an increase of $11.0 million as a result of the consolidation of certain VIEs not previously consolidated prior to 2021 related to the HCL Acquisition (see Note (2) to the Consolidated Financial Statements), (3) an increase of $6.6 million related to an increase in staff and compensation rates and (4) an increase of $5.4 million related to the compensation expenses of a previously nonconsolidated entity being recorded to Compensation and Related expense beginning in March 2020. These increases in Compensation and Related expenses were partially offset by a decrease of $14.7 million in incentive compensation primarily due to decreased sales and investment performance. Systems and Communications expense increased $10.7 million due primarily to technology-related projects.
Nonoperating Income (Expenses). Nonoperating Income (Expenses), net, decreased $17.9 million in 2021 as compared to 2020. The decrease is primarily due to an $8.5 million decrease in Gain (Loss) on Securities, net due primarily to a smaller increase in the market value of investments in 2021 as compared to 2020 and a $7.5 million gain from a fair value adjustment to an equity investment of a previously nonconsolidated entity recorded in Nonoperating Income (Expenses) - Other, net in 2020.
Income Taxes. The income tax provision for 2021 and 2020 was $104.0 million and $110.0 million, respectively. The provision for 2021 decreased $6.0 million as compared to 2020 primarily due to a decrease in pre-tax book income less non-taxable, non-controlling interests ($15.2 million), partially offset by the net increase in deferred taxes associated with the change in the UK tax rate in 2020 from 17% to 19% and in 2021 from 19% to 25% effective April 1, 2023 ($11.1 million). The effective tax rate was 27.6% for 2021 and 24.7% for 2020. See Note (15) to the Consolidated Financial Statements for additional information on the effective tax rate, as well as other tax disclosures.
Net Income Attributable to Federated Hermes, Inc. Net income decreased $56.1 million in 2021 as compared to 2020 primarily as a result of the changes in revenue, operating expenses, nonoperating income (expenses) and income taxes noted above. Diluted earnings per share for 2021 decreased $0.48 as compared to 2020 primarily due to decreased net income ($0.57), partially offset by a decrease in shares outstanding due to share repurchases ($0.09).
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Liquidity and Capital Resources
Liquid Assets. At December 31, 2021, liquid assets, net of noncontrolling interests, consisting of cash and cash equivalents, investments and receivables, totaled $492.7 million as compared to $432.5 million at December 31, 2020. The change in liquid assets is discussed below.
At December 31, 2021, Federated Hermes' liquid assets included investments in certain money market and fluctuating-value Federated Hermes Funds that may have direct and/or indirect exposures to international sovereign debt and currency risks. Federated Hermes continues to actively monitor its investment portfolios to manage sovereign debt and currency risks with respect to certain European countries (such as the UK in light of Brexit), China and certain other countries subject to economic sanctions. Federated Hermes' experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis. Further, regarding international exposure, certain money market funds (representing approximately $173 million in AUM) that meet the requirements of Rule 2a-7 or operate in accordance with requirements similar to those in Rule 2a-7, include holdings with indirect short-term exposures invested primarily in high-quality international bank names that are subject to Federated Hermes' credit analysis process.
Cash Provided by Operating Activities. Net cash provided by operating activities totaled $170.4 million for 2021 as compared to $373.2 million for 2020. The decrease of $202.8 million was primarily due to (1) a net increase of $166.4 million in cash paid for trading securities in 2021 as compared to 2020, (2) a decrease in cash received related to the $147.8 million decrease in revenue previously discussed and (3) an increase of $23.1 million in cash paid for incentive compensation for the year ended December 31, 2021 as compared to 2020. These decreases were partially offset by a decrease in cash paid related to the $157.5 million decrease in Distribution expense previously discussed.
Cash Provided by Investing Activities. In 2021, net cash provided by investing activities was $10.8 million which primarily represented $36.0 million in cash received from redemptions of Investments—Affiliates and Other, partially offset by $10.4 million paid for property and equipment, $9.4 million paid for purchases of Investments—Affiliates and Other and $5.3 million paid for an asset purchase during 2021.
Cash Used by Financing Activities. In 2021, net cash used by financing activities was $249.5 million. Of this amount, Federated Hermes paid $228.3 million to repurchase shares of Class B common stock primarily in connection with its stock repurchase programs (see Note (14) to the Consolidated Financial Statements for additional information), paid $165.9 million to acquire additional equity of HFML (see Note (2) to the Consolidated Financial Statements), paid $147.3 million in connection with its debt obligations and paid $105.8 million or $1.08 per share in dividends to holders of its common shares. This activity was partially offset by $295.7 million borrowed from Federated Hermes' revolving credit facility and $107.6 million of contributions from noncontrolling interests in subsidiaries.
Borrowings. On July 30, 2021, Federated Hermes entered into an unsecured Fourth Amended and Restated Credit Agreement by and among Federated Hermes, certain of its subsidiaries as guarantors party thereto, a syndicate of eleven banks as Lenders party thereto, PNC Bank, National Association as administrative agent, PNC Capital Markets LLC, as sole bookrunner and joint lead arranger, Citigroup Global Markets, Inc., as joint lead arranger, Citibank, N.A. as syndication agent, and Toronto-Dominion Bank, New York Branch as documentation agent (Credit Agreement). The Credit Agreement amended and restated Federated Hermes' Third Amended and Restated Credit Agreement, which was dated June 5, 2017 and scheduled to mature on June 5, 2022 (Prior Credit Agreement). The Credit Agreement consists of a $350 million revolving credit facility with an additional $200 million available via an optional increase (or accordion) feature. The original proceeds were used for general corporate purposes including cash payments related to acquisitions, dividends, investments and share repurchases. As of December 31, 2021, Federated Hermes has $126.6 million available to borrow under the Credit Agreement. See Note (11) to the Consolidated Financial Statements for additional information.
The Credit Agreement includes an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated EBITDA) as well as other customary terms and conditions. Federated Hermes was in compliance with all of its covenants, including its interest coverage and leverage ratios at and during the year ended December 31, 2021. An interest coverage ratio of at least 4 to 1 is required and, as of December 31, 2021, Federated Hermes' interest coverage ratio was 359 to 1. A leverage ratio of no more than 3 to 1 is required and, as of December 31, 2021, Federated Hermes' leverage ratio was 0.51 to 1. The Credit Agreement also has certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of debt outstanding if not cured within the applicable grace periods. The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, notice
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of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.
Dividends. Cash dividends of $105.8 million, $207.8 million and $109.1 million were paid in 2021, 2020 and 2019 respectively, to holders of Federated Hermes common stock. Of the amount paid in 2020, $99.3 million represented a $1.00 per share special dividend paid in the fourth quarter. All dividends were considered ordinary dividends for tax purposes.
Contractual Obligations. As of December 31, 2021, Federated Hermes has material future cash requirements from contractual and other obligations relating primarily to long-term debt and operating lease obligations. Further discussion of the nature of each obligation is included below.
Long-Term Debt Obligations. Outstanding principal is to be paid no later than the expiration date of the Credit Agreement. The interest is variable, based on LIBOR plus a 100 basis point spread, in accordance with the Credit Agreement. See Note (11) to the Consolidated Financial Statements for additional information.
Federated Hermes continues to monitor the debt financing market, and may pursue longer term financing arrangements to supplement its cash flow from operations to fund share repurchases, potential acquisitions, the full or partial repayment of existing debt and for other general corporate purposes. Based upon market conditions and other factors, Federated Hermes is considering longer-term (e.g. ten-year) financing of approximately $300 million during 2022.
Operating Lease Obligations. See Note (17) to the Consolidated Financial Statements for additional information.
Purchase Obligations. Federated Hermes is a party to various contracts pursuant to which it receives certain services, including services for marketing and information technology, access to various fund-related information systems and research databases, trade order transmission and recovery services as well as other services. These contracts contain certain minimum noncancelable payments, cancellation provisions and renewal terms. Costs for such services are expensed as incurred. As of December 31, 2021, Federated Hermes had purchase obligations of approximately $42 million payable within 12 months and an additional $44 million thereafter.
Future Cash Needs. In addition to the contractual obligations described above, management expects that principal uses of cash will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, repaying debt obligations, paying taxes, repurchasing company stock, developing and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and equipment (including technology). Any number of factors may cause Federated Hermes' future cash needs to increase. As a result of the highly regulated nature of the investment management business, management anticipates that aggregate expenditures for compliance and investment management personnel, compliance systems and technology and related professional and consulting fees may continue to increase.
On January 27, 2022, the board of directors declared a $0.27 per share dividend. The dividend was payable to shareholders of record as of February 8, 2022, resulting in $25.0 million being paid on February 15, 2022.
After evaluating Federated Hermes' existing liquid assets, expected continuing cash flow from operations, its borrowing capacity under the Credit Agreement and its ability to obtain additional financing arrangements and issue debt or stock, management believes it will have sufficient liquidity to meet both its short-term and reasonably foreseeable long-term cash needs.
Financial Position
The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations.
Investments—Consolidated Investment Companies at December 31, 2021 increased $14.2 million from December 31, 2020 primarily due to an increase of $90.7 million related to the consolidation of three voting rights entities (VRE) and a VIE in 2021, partially offset by a $77.9 million decrease due to the deconsolidation of four VREs and one VIE during 2021.
Investments—Affiliates and Other at December 31, 2021 increased $42.2 million from December 31, 2020 primarily due to the deconsolidation of two VREs in 2021 which reclassified Federated Hermes' investment of $42.2 million into Investments—Affiliates and Other.
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Right-of-Use Assets, net at December 31, 2021 decreased $13.8 million from December 31, 2020 due primarily to annual amortization and Long-Term Lease Liabilities at December 31, 2021 decreased $16.7 million from December 31, 2020 primarily due to payments made on leases during 2021.
Long-Term Deferred Tax Liability, net at December 31, 2021 increased $17.3 million from December 31, 2020 primarily due to the revaluation of the foreign net deferred tax liability associated with the change in the UK tax rate from 19% to 25% effective April 1, 2023.
Variable Interest Entities
Federated Hermes is involved with various entities in the normal course of business that may be deemed to be VIEs. Federated Hermes determined that it was the primary beneficiary of certain Federated Hermes Fund VIEs and, as a result, consolidated the assets, liabilities and operations of these VIEs in its Consolidated Financial Statements. See Note (5) to the Consolidated Financial Statements for more information.
Critical Accounting Policies
Federated Hermes' Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management continually evaluates the accounting policies and estimates it uses to prepare the Consolidated Financial Statements. In general, management's estimates are based on historical experience, information from third-party professionals and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from those estimates made by management and those differences may be material.
Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that indefinite-lived intangible assets included in its Goodwill and Intangible Assets policy involves a higher degree of judgment and complexity.
The process of determining the fair value of identifiable indefinite-lived intangible assets at the date of acquisition requires significant management estimates and judgment. If subsequent changes in these assumptions differ significantly from those used in the initial valuation, the indefinite-lived intangible asset amounts recorded in the financial statements could be subject to possible impairment. An impairment could have a material adverse effect on Federated Hermes' business, results of operations and financial condition.
Indefinite-lived intangible assets are reviewed for impairment at the accounting unit level annually as of October 1, or when indicators of a potential impairment exist. Federated Hermes has combined certain indefinite-lived assets into three distinct units of accounting for impairment testing purposes. The factors considered in determining the asset grouping include, among others, the highest and best use of the assets and the inseparable nature of the cash flows. Such asset grouping determination is reconsidered annually and may change depending on the facts and circumstances. Federated Hermes' current indefinite-lived intangible assets' units of accounting are: (1) HFML rights to manage fund assets; (2) HFML trade name; and (3) all other rights to manage fund assets. Management may use a qualitative or quantitative approach which requires the weighting of positive and negative evidence collected through the consideration of various factors to determine whether it is more likely than not that an indefinite-lived intangible asset or asset group is impaired. In 2021, management used both a quantitative and qualitative approach. Management considers macroeconomic and entity-specific factors, including projected AUM, projected revenue growth rates, projected pre-tax profit margins, tax rates, discount rates and, in the case of a trade name valuation, a royalty rate. In addition, management reconsiders on a quarterly basis whether events or circumstances indicate that a change in the useful life may have occurred. Indicators of a possible change in useful life monitored by management generally include changes in the expected use of the asset, a significant decline in the level of managed assets, changes to legal, regulatory or contractual provisions of the rights to manage fund assets, the effects of obsolescence, demand, competition and other economic factors that could impact the funds' projected performance and existence, and significant reductions in underlying operating cash flows.
The continued uncertainty caused by the Pandemic resulted in management determining that an indicator of potential impairment existed as of each quarter end in 2021 for the HFML rights to manage fund assets totaling £150.3 million ($203.4 million as of December 31, 2021) acquired in connection with the 2018 HFML Acquisition. A discounted cash flow analysis resulted in no impairment for the first three quarters of 2021 since the estimated fair value of these intangible assets exceeded the carrying value by less than 10% each quarter. The discounted cash flow analysis prepared as of December 31, 2021 resulted in the estimated fair value exceeding the carrying value by less than 10%. The key assumptions in the discounted cash flow
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analysis include revenue growth rates, pre-tax profit margins and the discount rate applied to the projected cash flows. The risk of future impairment increases with a decrease in projected cash flows and/or an increase in the discount rate. As of December 31, 2021, assuming all other assumptions remain static, an increase or decrease of 10% in projected revenue growth rates would result in a corresponding change to estimated fair value of approximately 6%. An increase or decrease of 10% in pre-tax profit margins would result in a corresponding change to estimated fair value of approximately 12%. An increase or decrease in the discount rate of 25 basis points would result in an inverse change to estimated fair value of approximately 3%. The market volatility and other events related to the Pandemic could further reduce the AUM, revenues and earnings associated with these intangible assets and may result in subsequent impairment tests being based upon updated assumptions and future cash flow projections, which may result in an impairment. For additional information on risks related to the Pandemic, see Item 1A - Risk Factors - General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic).
At December 31, 2021, Federated Hermes had $400.9 million in indefinite-lived intangible assets recorded on its Consolidated Balance Sheets. No impairments were recorded during the years ended December 31, 2021, 2020 or 2019.