E449: Federated Hermes CEO on $400 Billion in Cash, the Private Markets Boom, and AI

What if the most overlooked asset in your portfolio is the one that gives you the freedom to invest in everything else? In this episode, I sit down with Christopher Donahue, President, Chair and CEO of Federated Hermes, to explore how the firm manages approximately $700 billion in money market assets and why cash is far more than an idle allocation. Chris explains how liquidity creates financial flexibility, why trust and scale have concentrated the money market industry among a handful of firms, and what stablecoins can learn from decades of cash management. We also discuss how corporations manage their cash reserves, why AI could improve investment management without replacing employees, and how Federated Hermes plans to expand its private markets business. After more than 50 years at the firm, Chris shares the principles behind its longevity and why culture, trust, and disciplined risk-taking remain essential to building an enduring financial institution.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  You mentioned you have $400 billion in cash. It's still blowing my mind. Maybe you could double click on why there's only a couple entities that manage so much cash.

• 0:10Speaker 01

  The oligopolization, if you will, of the cash management money market fund industry occurred for several reasons. One is regulation. All regulation oligopolizes by definition because they put up barriers, moats, whatever you want to call it.

• 0:26David Weisburd?

  It's what Bill Galley calls regulatory capture.

• 0:29Speaker 01

  That's what's called regulatory capture. Exactly correct. The next thing you need is size. Don't use the word scale, use the word size because size alone oligopolizes the business. Because someone won't go into a $500 million money fund if they have $100 million. They go, holy cats, if I redeemed, that place is shut down.

• 0:50David Weisburd?

  I have the CEO of iCapital, Lawrence Coquano, and he's got a number over $100 trillion in retail coming into the private markets. When I hear somebody that's worked at a firm for over 50 years, to some people that might sound boring or uninteresting. To me, it's fascinating because to me, that's 50 plus years of compounding knowledge and compounding experience within a single context. I'm curious in terms of how the organization has evolved and what advantage has continued to compound after five generations. I have said, so Chris, what do most investors fundamentally misunderstand about cash?

• 1:33Speaker 01

  What they misunderstand about cash is it adds enormous financial flexibility to their profile. And what I mean by that is if you have a good cash component, you will not get forced to sell when things are in a problem. You will have the flexibility to be able to take care of opportunities as they wash up on your beach. And you will be able to take care of your own needs if you have so many months or whatever of cash available. And this is how corporations look at it too. What are my needs? What do I have to do? What am I planning for? What's going to happen? Did I have a big IPO, money coming in? Do I have a big acquisition? I got to pile up money for money going out.

• 2:17Speaker 01

  All of these things come together to make a cash component.

• 2:22David Weisburd?

  And why cash? Why not just liquid securities or other like highly liquid instruments?

• 2:29Speaker 01

  Back in the day, I was a salesman for Federated Hermes selling bank trust departments on using money funds. And over here in Newark, there was a bank that did modern cash management in the seventies. And it consisted of a stolen shopping cart, passbooks for the local SNL and a plastic sheet. They would wheel the whole thing down to the SNL to post the interest. Well, it was so easy to do a money fund and it took care of all of that problem.

• 3:02Speaker 01

  Another bank across the street was rolling T bills and they had people, they had roll T bills. And that's a name for when they were coming due, whether to sell them or not. And it was a lot of operational difficulty and you had to figure it out. A money, a money fund solves that almost instantly and without a variation in NAV. Because what they want is a dollar in, dollar out liquidity at par.

• 3:30David Weisburd?

  And you invest a staggering $700 billion worth of cash in treasuries. Why is it that Federated Hermes has amassed this amount of cash? Isn't that more or less a commodity?

• 3:45Speaker 01

  Well, first of all, it's about 400 of the 700 is in Goffies. The rest is in munis and in prime securities as well. So with that difference, but the same question obtained. Why do we have a lot of cash? Do you could go buy all those things? Absolutely. But the whole thing about a money market fund and the liquidity is it's as much a cash management service as it is an investment. That means it's got to have good governance around it so that you know, where's the money? How's it going to work? How have you worked? Have you worked for 50 years? What is the size of the operation that you have?

• 4:24Speaker 01

  If you have a big pot of money, $100 million, are you going to put it somewhere where you have a challenge in liquidity? Or you blow up the fund by asking for your money? Do you have a diversification of clientele such that all those clients, broker dealers, individuals, corporations, pension plans, endowments? They're all moving at different paces with different amounts, which adds a strength to the money fund. What's the regulation look like? Well, you've got to have regulation and that's good. We have very good relationships with the SEC. But I think the thing you need the most is trust. And the trust is a combination of all of those things, plus Federated Hermes tradition of knowing the people

• 5:09Speaker 01

  and what we've done for over 50 years of doing this business.

• 5:13David Weisburd?

  Maybe you could double click on why there's only a couple entities that manage so much cash.

• 5:21Speaker 01

  There's a number of reasons for that. The oligopolization, if you will, of the cash management money market fund industry occurred for several reasons. One, a minor, a secondary reason is regulation. All regulation oligopolizes by definition because they put up barriers, moats, whatever you want to call it.

• 5:43David Weisburd?

  It's what Bill Galley calls regulatory capture. This episode is presented by Juniper Square, the operations partner for private markets.

• 5:52Speaker 01

  That's what's called regulatory capture. Exactly correct. And whatever regulation is, that's its effect. I don't exactly like it, but I take it as a given. On that score, yes. Next thing you need is size. Don't use the word scale, use the word size. Because size alone oligopolizes the business. Because someone won't go into a $500 million money fund if they have $100 million. They go, holy cats, if I redeemed, that place is shut down. And you say, okay, well, what if I have tons of money and decide I want to do one? Well, that's really nice, except that you don't have the ability to get other customers and start moving

• 6:36Speaker 01

  like a calliope among your clients. So that not everybody is doing the same thing at the same time. So it is a combination of regulation, of size and of experience and how long you've been in it. So when we came out with the, we were made effective in January of 72. There was one money fund out ahead of the three of us. And then there were three of us made effective that day. We're still three of the top money funds from the seventies. It hasn't changed. Those guys are still big competitors, just like always.

• 7:13David Weisburd?

  It's wild. It really makes me think about in the stablecoin market. Because a lot of people are trying to figure out in the stablecoin market, how many competitors are there going to be? Because it's a similar model. What do you think about the stablecoin market?

• 7:26Speaker 01

  Let's talk about it on the money funds first, then get into that. So there used to be over 200 firms offering money market funds. Today it's less than 50 and only 20 of them are really competitive to getting big amounts of money from big customers. So over time, you've seen that happen. I think you will see a similar thing happen. I don't think the stablecoins are going anywhere. The key to them will be, will they offer a dollar in and out? And there were some of them that came out that didn't exactly work out that way. And they went the way of the dodo bird. So you've got to be able to have daily liquidity at par.

• 8:08Speaker 01

  You cannot take undue risk with what you're having behind the curtain in terms of the security of those funds.

• 8:17Speaker 01

  And that's where the big mistakes occur. They go, well, you know, it's 90%, just like you do your money funds, but this 10%. Yeah, that's sport fishing. We won't do it. And that's where you run the risk of not being able to. So if they do it right, then they'll, they'll be good and they'll have winners and losers. And we welcome them to the foray.

• 8:37David Weisburd?

  And Federated Hermes has made a decision, a very strategic decision not to compete with your customers. Talk to me about that decision and are you guys leaving a lot of money on the table?

• 8:50Speaker 01

  The answer to that, last part would be, yeah, we probably are, but that isn't the point. Back in the seventies, when interest rates went below passbook rates, we found out that we could really do well selling money market funds to bank trust departments because it was a cash management service. So even though the yield was below passbook rates, or you could get a half a point more, so we found tremendous interest in it. And so when others in the industry went retail, we went institutional. And did we leave money on the table? Would it have been better to go on retail? Who knows? We were a little company in Federated trying to survive.

• 9:33Speaker 01

  And we felt that was the best thing to do at that time. So we've now used it as a strength. Because when big customers look at money fund providers, they go, well, wait a second. I got to divide my money into at least three of them. They want diversification too.

• 9:53David Weisburd?

  In case one of them goes down.

• 9:54Speaker 01

  Or they have a problem with them, but they want to diversify again. Remember, they want their cash back. So they go with three of them and they say, oh, we look at Federated, look at those guys. They're not going to take my client. So they'll be one of the ones that we put in there. The other people, you know, they're after the client directly. But we are go through intermediaries and are very happy with where we are right now.

• 10:20David Weisburd?

  You mentioned you have $400 billion in cash. It's still blowing my mind. But give me a sense for your customer base. Are these large banks? Are these large nonprofits? Who are the types of customers?

• 10:34Speaker 01

  The 400 was the 400 of 700 that's in GOVIs. So the other 300, we still have 700 total. And in terms of the customers, they are retail customers who come through basically broker dealers. And these are the individuals who are managing their life. And they have regular needs, tuitions, vacations, all the things that are going on. And they're running a big portfolio. And it's a lot of the things, like I said at the beginning, where they don't want to be forced to sell. And they want to be able to take care of opportunities and flexibility. So there's a big retail component. And when there's a retail component, those guys like higher yields. Anything with a four handle is great.

• 11:19Speaker 01

  Three is good. Five is nirvana. If it's a five point something, that's nirvana. And so rates are now going to be higher for longer. Retail customers, this is going to be fine. A lot of them are perfectly sanguine with a larger portion of their money and money funds, even though the market may go up and up because they go four and a half, 4%. Maybe I don't want to make a decision. So that's retail. Then you've got the bank trust I've talked a lot about. That's a service they offer to their customers. And we like to say, as I discovered calling on them, that 20% of their money is in cash all the time anyway. And that's just because of the lifeblood of their customers doing the same kinds of things.

• 12:02Speaker 01

  They're doing estate planning, tax, they're doing all these things. And no matter what happens, they end up with 20% cash, even though the market's exploding. The institutions, depending on what kind they are, endowments, they've got to look at what their uses of cash are. The pension plans are governed that way. The corporations have a pretty sharp CFO or treasurer who has a platform now, who looks at all of the funds, where he has all his money, how he's doing on the yield, and where he wants to go, and whether he wants to go out the yield curve. Because maybe he can do an ultra short fund or a different type of fund going out the yield curve a little bit because he's going to have the money a little longer. So that's pretty much an array of the customer base.

• 12:49David Weisburd?

  And let's just pick corporation. You mentioned a lot of, a lot of the liquidity is required on daily basis. And let's say it's a corporation. What's a small portfolio in terms of 30-year treasuries, money markets? And how should investors think about how to build a portfolio around their cash?

• 13:07Speaker 01

  Well, if it's a corporation, the odds of them owning a 30-year bond are almost nonexistent. What the corporation in that example is thinking about is what is the CFO? What is the strategy? What is our cost of capital? Are we doing acquisitions? Are we building plants? All of the regular needs of a corporation are baked in there. It's completely different than what, say, an institution, a pension plan, or a retail investor would do and/or a charity of some kind. And so each one of those has individual cash needs.

• 13:50Speaker 01

  And what, what we preach is at base, you have to decide what's a proper amount of cash. So you say, stay safe on base. You don't want to be hanging 10. And then you are forced to sell, forced to do something you don't want to do, miss out, all the things I've said before. And all of those people have a different array of answers for that. And a lot of them will balance the short-term cash, really short-term cash, with a longer-term cash, maybe up to two years, and go back and forth between those kinds of products. But they're all looking at it the same way. I want my cash when I need it. What do I need it for?

• 14:34Speaker 01

  And I really want daily liquidity at par on that part of it.

• 14:38David Weisburd?

  So then retailer, institutional investors, they have a portfolio. So in general, only call it 5% of their funds. Maybe if it's a retail investor, maybe 10%. They want super liquid so that they can make some purchases. But endowments, they need to have to pay for their yearly, yearly expenses. But on corporations, the cash is kind of like the leftover thing. The cash is what they need on a daily basis.

• 15:03Speaker 01

  Well, it, sometimes it's not leftover. Sometimes that treasurer is told, I want X% of something, or I want X number of dollars in cash available all the time. If I want to do an acquisition, I'm going to have cash available. Now, maybe cash should be available through a loan or through revolving credits, and that counts. But almost all treasurers are going to have several months of payroll in the bank and not be a living hand to mouth. And so it isn't what's left over. To me, it would be the reverse. It's what's first.

• 15:42David Weisburd?

  There's almost like these two buckets. There's a money spend that you're going to have to spend over the next couple of months. And then there's like these cash positions. We've all heard of Apple or Google or name your tech company having just enormous amounts of cash, hundreds of billions of dollars. Now, you can't talk about specific clients, but if you were one of those tech companies, what do those positions look like when you double-click? Is it all just in one-day treasuries?

• 16:14Speaker 01

  No, it would be out the array. And some of those companies have money in our money markets.

• 16:20David Weisburd?

  Yes, so without, without mentioning companies.

• 16:21Speaker 01

  Well, I don't mention them.

• 16:22David Weisburd?

  But maybe talk about what those look like, what those portfolio.

• 16:26Speaker 01

  I don't know what their whole balance sheet looks like. But, you know, they trade in billions. And these are big numbers. And they've got to be in a fund that can handle that. And if we can use an example, I can talk about FHI, Federated Hermes. And because we're owner-operators and because we have no net debt, we have a lot of financial flexibility to borrow, okay? And if we have excess cash, we tend to pay special dividends, do acquisitions, and buy stock back. And then we're always debating which, which of those are the best for the long-term interest of the enterprise and the shareholders.

• 17:12Speaker 01

  Those guys are all doing the same thing. As you know, they're spending more money than God out on building on their capex expenditure.

• 17:19David Weisburd?

  Data centers.

• 17:21Speaker 01

  And yeah, I mean, getting, you know, getting the compute, you know? We got to get the compute. So fine, get the compute. That's what they're doing. It's really hard for me to say what their balance sheet should look like or how, how they want to structure that.

• 17:35David Weisburd?

  But in their cash position that they have with you, is it all one instrument?

• 17:38Speaker 01

  No, they would be in one or two funds, different funds. And some of them are okay with going into a prime fund. Others are in the GOV fund. Some really want a conservative and are in the treasury fund.

• 17:55David Weisburd?

  Maybe you could double-click on those. What are the differences between them?

• 17:58Speaker 01

  So a prime fund would have about a 15 basis point higher yields in prime securities, highly rated, minimal credit risk is the standard under the SEC rules. And this is something we've been doing for many, many decades. So that would be one. Then the actual GOV, it was 15 basis points over the GOVIs. So that would be government securities, agencies and things like that. And then the treasuries would be the lowest of the yield of all of those and a few basis points less than the GOVIs. So that's the array.

• 18:41Speaker 01

  Now, they're not going to be, generally speaking, using tax frees, which is a whole different ballgame as a general rule.

• 18:48David Weisburd?

  And because they're optimistic?

• 18:50Speaker 01

  Because, you know, they have other ways to deal with their taxes than trying, like an individual wants a tax-free New York money market fund because they pay New York taxes. I don't want to deal with.

• 19:02David Weisburd?

  Is that not a good idea?

• 19:04Speaker 01

  Oh, it's a great idea. But for the corporation, it's got to be almost like a flip of the yields where they look at what they're getting on the, if there's a disparity in the municipal market where the yields are so high that they're happy to do it, then they're, they're happy to do it almost on a taxable basis. And that happens once in a while, but that's not the general rule at all.

• 19:30David Weisburd?

  One thing I've learned from talking to hundreds of investors is that great investment firms aren't built on investment returns alone. The firms that Under are great at the things most people don't see their operations, their relationship with LPs, and the quality of information they use to make decisions. And here's what AI has changed. Every firm now has access to the very same models, so the intelligence isn't the edge anymore. The edge is what you could feed it. A firm with its fund operations and data in one connected record can actually put AI to work. A firm running on disconnected systems simply can't. That's why thousands of GPs run their funds on Juniper Square. Juniper Square puts your fund operations, data and administration together in one connected record.

• 20:11David Weisburd?

  That means less time managing disconnected systems and more time investing, working with LPs and building your firm. This episode is brought to you by Juniper Square, the operations partner for private market GPs. Learn more at junipersquare.com/ how I invest. That's junipersquare.com/ how I invest.

• 20:31David Weisburd?

  Everyone I talked to on the show is chasing the same thing, an edge. And more and more, the edge comes down to your information, not just having it, but being able to trust it when the stakes are highest. AI is doing more of that information gathering for you every day, and most tools are very good at sounding right. The summary reads clean, but can you trace it back to filing the transcript, the specific passage that drove the answer? Or are you just trusting the confidence of the output? For investors, that's not a minor concern. And this filing and misweighted source, context that got lost somewhere in the retrieval chain. Those aren't edge cases, they're how decisions go wrong. AlphaSense is the AI market intelligence platform built specifically for this. They own the content, over 500 million curated documents from broker research and expert transcripts to filings and earnings calls.

• 21:17David Weisburd?

  And they own the retrieval layer on top of that. So every answer links back to an exact, verifiable source, because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. The edge goes to whoever can trust their information and prove it. See it for yourself. Start your free trial at alphasense.com/ how I invest. That's alphasense.com/ how I invest. It's funny, because a lot of people might say, why do a podcast on cash? And I think there's somewhat of a cognitive dissonance here in that everybody wants to think that they have some perfect crystal ball, they're perfectly efficient allocator of capital where

• 21:58David Weisburd?

  they look on their balance sheet and there's always just a couple hundred dollars in their cash and everything is perfectly allocated. But if you look at people's behavior and it's rational, you have to have, if you look at, you know, I probably have $20, $30,000 in just cash. Why? Because I have to pay rent or I just have to make some decisions with it or I'm busy those couple of weeks that I got that cash in and I have to make a decision. So having this default strategy on your cash is actually pretty.

• 22:24Speaker 01

  Or you get to pay for a growing family. These are new expenses that didn't exist five minutes ago. We are well experienced in that.

• 22:33David Weisburd?

  Talk to me about your business model for Federated Hermes. How is it that you guys get money?

• 22:43Speaker 01

  We are investment advisors. And so what we do is present the product to the customer. The funds generally are headed up by an independent board of directors as per SEC regulation. And that's the fun side. And then we go direct where we offer mandate to get mandates from institutions, pension plans and the like. Now, we charge an investment advisory fee, an administrative fee. And then we have 230 some salespeople who go out and tell the story. So the best way to think about Federated is really the Pittsburgh geography where we have three rivers. The one river, the Allegheny comes down, that's investment performance.

• 23:28Speaker 01

  You got to have that or you are out of business. The other rivers of Managua, which is the sales, you got to have somebody telling the story. Then you have the banks of both rivers are important. They flood, they commit, they have to be controlled. One bank is the bank of compliance, also known to humans as trust, because you've got to have trust. The other bank, customer service, you've got to have that. We call that love. So on each bank, both the rivers, you have love and trust. Then they form together in the Ohio and you go west, young American, go west. And that's how Federated Hermes is basically structured. You've got to have the investment management, you've got to have somebody telling the story on the distribution side.

• 24:12Speaker 01

  And you've got to get each of those banks with love and trust. And that's our business model.

• 24:17David Weisburd?

  One thing that I've learned from talking to hundreds of investors, founders and business leaders is that planning for the future isn't just about growing assets. It's also about protecting the people who matter most. Life comes with a lot of important milestones. Maybe you're buying a home, starting a family, planning for college, or simply thinking more intentionally about your financial future. As those responsibilities grow, it's worth making sure you protect those you love. Not sure what kind of life insurance you may need? Concerned about how much it may cost? Think life insurance is too complicated? Your local State Farm agent can help answer those questions. They can help you explore your options for life insurance and choose coverage that you can adjust as your family's needs change over time. Financial protection for your loved ones when it matters most. Learn more about life insurance at statefarm.com. Like a good neighbor, State Farm is there.

• 25:01David Weisburd?

  One thing that I've learned from talking to hundreds of investors, founders and business leaders is that planning for the future isn't just about growing assets. It's also about protecting the people who matter most. Life comes with a lot of important milestones. Maybe you're buying a home, starting a family, planning for college, or simply thinking more intentionally about your financial future. As those responsibilities grow, it's worth making sure you protect those you love. Not sure what kind of life insurance you may need? Concerned about how much it may cost? Think life insurance is too complicated? Your local State Farm agent can help answer those questions. They can help you explore your options for life insurance and choose coverage that you can adjust as your family's needs change over time. Financial protection for your loved ones when it matters most. Learn more about life insurance at statefarm.com. Like a good neighbor, State Farm is there.

• 25:45David Weisburd?

  One thing that I've learned from talking to hundreds of investors, founders and business leaders is that planning for the future isn't just about growing assets. It's also about protecting the people who matter most. Life comes with a lot of important milestones. Maybe you're buying a home, starting a family, planning for college, or simply thinking more intentionally about your financial future. As those responsibilities grow, it's worth making sure you protect those you love. Not sure what kind of life insurance you may need? Concerned about how much it may cost? Think life insurance is too complicated? Your local State Farm agent can help answer those questions. They can help you explore your options for life insurance and choose coverage that you can adjust as your family's needs change over time. Financial protection for your loved ones when it matters most. Learn more about life insurance at statefarm.com. Like a good neighbor, State Farm is there.

• 26:30David Weisburd?

  We referenced earlier the data center build out and the large tech companies. AI is coming for every industry. What risks or opportunities does AI pose to your company?

• 26:43Speaker 01

  I would look at it as primarily opportunities, although there is some beware the jabberwock, okay? But to me, we aren't going to have

• 26:54Speaker 01

  less than 2,000 people, which is about what we have now down in the road. When we have our

• 27:02Speaker 01

  summer interns come in, the first question is always, oh, AI is going to take care of me. I won't be able to have a job. And my answer is always, look, pay the extra 20 bucks a month, learn how to use AI and then you'll get the job. And we are going to be looking at it more as a developer of quality. I tend not to use the word efficiency when we're talking about AI, especially in an employment circle. Because efficiency means FTE, I'm dead. Quality means, oh, I could do it better. One example of that is we had a lot of phone calls from investors and they have to be screened. And then you have to have quality control and all that. And the managers do that. And then they grade them.

• 27:45Speaker 01

  Well, when you have AI do that, all of a sudden, instead of only listening to one out of every 50 or 100 calls, you listen to them all. And then the AI grades them on things that are really good. Did you show love? Did you use the name of the customer while you were doing this? Were there a lot of, huh, I don't know, you know, things that distract from a direct communication? Did you get the answer right? What about the substance? Do we have less managers because they don't have to do that job anymore? No, we have higher quality calls, higher quality training and a better overall result.

• 28:27Speaker 01

  And the same is true with requests for proposal, RFPs, where you can continually enhance them. Humans involved all the time. But those are just a couple of examples where it's going to work. The fears, they're all well-publicized in the marketplace. And, you know, I don't buy that they're going to blow up human beings, you know, 2001, a space odyssey. I know Hal wins, but I don't think Hal is going to win. And I think it's no different in pattern than product liability. Your responsibility, put a good product out. If you don't, you're going to get hammered. So be responsible for what you put out.

• 29:11Speaker 01

  And I think a lot of that is hitting home with the AI companies. You know, when they delay coming out with something because they're worried about what it's going to do. And all the stories about escaping the sandbox, will you let them escape the sandbox? So don't let them escape the next time.

• 29:29David Weisburd?

  One of the industries that I'm really fascinated by right now that I think is undercover, cybersecurity. How much are you investing into cybersecurity and how much more of an issue is that today with AI?

• 29:42Speaker 01

  It is a huge issue and very big. And how much investing? A lot of our investing is done with our custodian banks and transfer agents. They were all, are all on the glass wing operation where they're studying

• 30:01Speaker 01

  what has happened with that release of the.

• 30:04David Weisburd?

  Methos.

• 30:05Speaker 01

  Methos, methos. And they are putting the big money because we don't do the custody, the handling the money with the transfer agency work. And that's where you really need the good. Now, we have our own cybersecurity. We get attacked all the time, just like everybody else. And we have the concert concentric rings of defense, just like everybody else does. But I can't tell you how much money we're spending on that. I don't know.

• 30:34David Weisburd?

  You're known in the industry as, if not the longest-serving CEO in the mutual fund industry, certainly one of the very longest-serving CEOs. What's been the secret to your tenure?

• 30:48Speaker 01

  The founding of the company was by my father and two of his buddies went to the same high school I went to.

• 30:54David Weisburd?

  In Pittsburgh.

• 30:55Speaker 01

  In Pittsburgh. So I cheated, okay? On the other hand, I started working there in nineteen seventy-two or so. And I've worked in a lot of different positions. And it's the culture that really drives the truck. And it is preserving the culture established by those founding fathers that I am very articulate with and very comfortable with, and it helps a lot. Like, for example, we had several big changes in people's succession this past year and a half, where we were replacing forty-year people with twenty-five and thirty-year people. Now, how does that happen? It's because of the culture.

• 31:40Speaker 01

  And the culture can be made up of a lot of things, but maybe the way to talk about it is in terms of some of their rules of thumb. Uh, my dad's one rule of thumb was, we want everybody to enjoy coming to work. Well, that's a good rule of thumb.

• 31:55David Weisburd?

  It's not high bar.

• 31:55Speaker 01

  If you don't, if you don't, then can we fix it? Yeah, well, if we can't fix it, maybe you should graduate. Um, and then by the subtractor method, you get a lot of people enjoy coming to work. That makes everything, um, a lot better. Another one of their, uh, statements was, um, you know what? If you get hired at Federated, you get to paint your own picture. You just have to stay on the canvas. What does that mean? That means that you, as an individual, have dignity and respect because you're an individual and because you have this position. So the PMs and their team have the paintbrush on the portfolio.

• 32:36Speaker 01

  Salespeople and others can say, well, you know, you need some more red in that or more yellow. And they could say, well, that's a very good idea. No, because they have the brush on painting that picture. Sales individuals can say the same thing. This is my territory. I got it figured out.

• 32:54Speaker 01

  PM comes, says, look at the record. This thing is terrific. You ain't selling nothing now, but you should. Well, yes, but the customers don't want that yet. And so you can see how that kind of culture allows the thriving, uh, of individuals.

• 33:08David Weisburd?

  Yes. People are essentially CEOs of their own position.

• 33:12Speaker 01

  They are, they are. And that makes for longevity. The customers, uh, like it. Now, we bring people in, nothing's perfect and, and it works like that. But, um, another one of the ones that, that I like is, since I did time in law school, is that there's no dying for the wrong reason. My dad was a West Pointer class of forty-six. There's no dying for the wrong reason. Now, dying for the right reason isn't all that good, but dying for the wrong reason is stupid. Dying for the wrong reason is messing up on compliance or with the SEC or doing some stupid deal that, you know, they turn a switch on for five minutes that you know down the road it doesn't work. When we do acquisitions, we do them for the long haul.

• 33:57Speaker 01

  We don't want to just spread pixie dust over the marketplace, say, oh, is it this whoop-de-whoop? We get to live with it for a long time. So we want the cultural, the cultural fit. And I'll tell you one more that's very interesting. When we bought Hermes in eighteen, they had a, uh, a code that they, an honor code, a code that they agreed to. And they said, well, you guys should have this. We said, we don't need no code. We're Americans. We don't need a code. Then we read it. So we'll just read it. So we read it. We go, well, we agree with all this stuff. And so what happens is over ninety-five percent of their people just signed up voluntarily. And we don't use it against them. It doesn't get weaponized. So he said, okay, we'll do it.

• 34:43Speaker 01

  But there's two things you, you, we're gonna, um, comment on, on that. Number one, you're gonna put the word fiduciary in your code, which it wasn't in there. We thought that was important. And the other thing is we're gonna let you spell behavior wrong with an I-O-U-R. So that was our deal. And now we have, uh, their code as part of our deal. And we have over ninety-five percent of our people look at it, sign up, say, yeah, that's, that's kind of like what I do. And it, and it is customer focus, be nice to them, dignity and respect, respect even the regulators, um, improve the community, improve your activities, be working on, you know, that, that kind of thing.

• 35:21David Weisburd?

  What's downstream of having employees sign the honor code?

• 35:24Speaker 01

  Nothing. It doesn't, hopefully it doesn't change anything. Hopefully it's just an endorsement. They understand what the culture is at Federated Hermes. And now they're part of it. They go, yeah. But we don't go after them and say, whoa, whoa, whoa, right here it says this. No, it doesn't get used like that. It's, uh, it's just part of the deal.

• 35:45David Weisburd?

  Reminds me a little bit about how the North Vietnamese, uh, turned some of the captors against the Americans. Have you heard about this?

• 35:55Speaker 01

  No.

• 35:55David Weisburd?

  They would have them every day. They would have, they would have them just, uh, they were starving and they, they would starve them and then they would have them. They would give them food, which was very scarce, just for writing certain things. And they would say something, and they started very light. They would just say, capitalism is not a perfect system. And then next one, they would say, America is great, but not the best country in the world. And by then they were saying, we are communists. Like, you know, several months later, sometimes getting people to do things that you want, obviously in this case, it's a very positive thing. But sometimes just having people sign something and write something is extremely, uh, powerful.

• 36:34Speaker 01

  Well, we call it, repeat the sounding joy, repeat the sounding joy. And the things that are in there are, um, not with a nefarious end. Um, the other thing I would say about the prisoner of war camp is that there are things that happen like, um, when the markets shut down for an extended period of time on nine eleven, okay? Or when oh eight happened, or when COVID hit. And so everyone said, when is this gonna be over? And our attitude about it is, we go day by day. We make it work. We do everything we can, but I can't give you a deadline.

• 37:16Speaker 01

  And this is what ruins guys inside prisoner war camps. They make their own deadline. I'll be home by my daughter's birthday. I'll be home by spring. I'll surely be out by next year at Christmas.

• 37:28David Weisburd?

  Expectations.

• 37:28Speaker 01

  And it's a revolution of rising expectations. And it diminishes your ability to survive. Now, today we call that sustainability. But owner-operators call it survival on account of, we don't want to be dead. And this is the message, and, and you brought that up about the prisoner of war camp, that we try to breach when there really, really are difficulties. We're gonna do everything we can right now. We're working day to day on this and we are not gonna tell you when it's over. Oh, Chris, tell me when it'll be over. And I can't tell you that. I don't know when this will be over.

• 38:05David Weisburd?

  I could, uh, count on a small handful of companies in the world that the majority of people really love coming to work.

• 38:13David Weisburd?

  How do you get people to love coming to work?

• 38:17Speaker 01

  It begins at learning. One of the other little articles of faith that we had was that when you're doing something new, you are motivated because you're now, you're learning something. If you're in the financial service business, you're doing new stuff all the time. You can't avoid it. It's always working. So you have an underlying, uh, impetus, uh, to be learning and to be motivated. But it also begins if your philosophy is that each human being has dignity and is demanding of dignity and respect long before any of this fancy stuff became part of government regulations. Uh, this was a very important part of how we function.

• 39:00Speaker 01

  And that's why I said before that, you know, you don't enjoy this, can we fix it? Well, no. Um, then we have something else. Well, then maybe we're not the right place for you. And so we call that graduation. Um, so that's really what's, what's going on is you, you've gotta have it be where you respect the individual, let them paint their own painting, like I told you. And you've gotta have comp programs and pleasant things. You know, in, in Pittsburgh, you can be full executive, running money, doing lawyer line. You could coach your daughter's soccer team. And it's not a problem because it's a twenty-minute commute, you know? It's not gonna take you two hours in a train. That's an important thing.

• 39:46Speaker 01

  We get a lot of people who come, uh, to work for us, even if they work somewhere else. They grew up in Pittsburgh and they realize they want to raise their kids or they want to come back. And, um, we are a warm and loving home.

• 39:59David Weisburd?

  When I hear somebody that's worked at a firm for over fifty years, uh, to some people that might sound boring or uninteresting. To me, it's fascinating because to me, that's fifty-plus years of compounding knowledge and compounding experience within a single context. I'm curious in terms of how the organization has evolved and what advantage has continued to compound out after five generations.

• 40:27Speaker 01

  Well, not five generations, two generations, okay? Um, what, what has happened is the principles stay the same. They, they don't really change. You get new people in. We just had a retirement of our head of equity. He came, uh, right at the beginning of this century and then graduated, now replaced by someone who's been here over twenty years. Um, and that gives you an idea that you actually bring people in. They're not all the same for fifty years. Um, we did hire a lot in the eighties and had a big growth spurt. So we have a lot of graduations, uh, uh, uh, coming up. Um, but if the real question is, why do they stay and how does it happen? It's because of the community.

• 41:11Speaker 01

  It's because of the company and it's because of all of these principles. Pittsburgh is not, you know, exactly like New York. Nothing against New York. Um, but it's not a lot of braggadocio. It's, you know, hard work, defense, you know, things like that. And when you have seven hundred billion dollars of money funds and you guys say, well, you know, we're gonna keep this dollar in, dollar out. They go, oh, those guys, they're pretty, uh, pretty straightforward on what they want to do. And then the customers aren't, oh, they do what they say they're gonna do. Then that's really good. And then that helps us with a hundred billion in equities and a hundred billion in, uh, fixed income and twenty-five billion in private markets.

• 41:56David Weisburd?

  So this trust continues to compound. It kind of goes back to the beginning. You, you mentioned that.

• 42:03David Weisburd?

  Basically, all the competitors in this space have been there since the early seventies?

• 42:07Speaker 01

  Yes, seventy-two, basically.

• 42:10David Weisburd?

  Because basically, they're also compounding these same advantages. And it's almost like this industry where it's a whoever survives the longest ends up winning. It's almost like a Highlander episode.

• 42:22Speaker 01

  That's a tontine scheme in Britain, and they're illegal. The guy who lives longest gets all the money because everybody tries to kill everybody else. But here, that's not what happens. What happens is the clients have different ways of dealing with different of the bigger money fund operators. Like I told you before, they want to have three of them. And there's enough to make it go around. And you still get competition and you still have rigorous desires of customers to have bigger share of what's available. And that has been constant for the whole time.

• 43:02David Weisburd?

  What's in the plans for the next generation, the next twenty, twenty-five years for FHI?

• 43:08Speaker 01

  Well, twenty-five years, I will probably have graduated by then. Nonetheless, when we went public in ninety-eight, we called ourselves a franchise for all seasons. And so as we go forward, I would expect the money fund to continue to grow. Why do you say that? How does that happen? If you have the money stock growing at like six or seven percent a year, then that's what you should grow in your money funds, maybe a little more. So if you look at it for the last thirty or forty years on that kind of a scale, the money stock's been up six percent, we've been up like almost nine, the industry's up eight.

• 43:48Speaker 01

  And you know, you look at that trade, so oh, that's a pretty good engine as to what money funds should do. On the equity and on the fixed income side, you know, they should double every ten years. And that's how, if you, we asked, if you asked me to, what's the growth for, those would be it. Now, is that what's going to happen? No. Then on the private market side, which we're twenty-five billion now, we bought a real estate endeavor and a infrastructure, a real estate endeavor in Chevy Chase, Maryland, and a realist, and a infrastructure endeavor in London. And so we would expect that to grow at an even faster rate.

• 44:29Speaker 01

  So if you look at it as a worse race, the money market funds are kind of the Clydesdale and the equities and fixed income are more like quarter horses moving along. And perhaps our friends at private, private markets could be like the thoroughbred on a, on a growth rate basis. Of course, this is a smaller base, so it can grow faster. So I would expect all that to continue, but mostly I would expect the principles and the code that we have to continue.

• 45:04David Weisburd?

  I have the CEO of iCapital, Lawrence Coquano, and he threw out a number over a hundred trillion in retail coming into the private markets, which would be the equivalent and in some ways larger than the entire institutional market going into the private markets alone.

• 45:20Speaker 01

  I have said, not recently, because I get it's too big. I said, the private markets business in Federated can easily be bigger than the entire operation that's in Federated Hermes right now. And that's consistent with those numbers you're talking about. We should be able to grow that, that kind and, and get it there. Now, I didn't put a time limit on it or a time set. So that's, that's hard to say. You've got to get a lot of things right in that business.

• 45:49David Weisburd?

  And the rationale being that you have people's trust on the cash business and you can now extend that trust into other products.

• 45:59Speaker 01

  You can extend the trust, yes, but you've got to have good mandates, products underneath that really makes sense. If we only had the money funds and had poor performance on the stock side, you would get no money on the stock side, even though you're, you're doing great on the money funds. And so you've got to have good underlying projects that really make sense. I'll give you an example. This year, we closed a private market, a private credit deal, seven hundred million European. Now, seven hundred million, the big boys say that's nothing. Okay, that's true. On the other hand, we'd have a problems with private credit.

• 46:41Speaker 01

  Why? The yield on is about three and a half over a Europe R, so that makes it, you know, seven and a half, eight percent. Not twelve, not like that. So you don't have yield chasers driving these products. The customers are insurance companies who know what they want to do with the money and why they're in it and what they're doing. The investments are mid-tier European companies. And everybody knows what everybody's doing. So it wasn't a lot of sport fishing. Most importantly, it's in a closed-end vehicle. So everybody understands what it is. There's no, oh, well, you might get cash, you might not get cash if things go south type deal. So we're working on shining up another one.

• 47:26Speaker 01

  And there's no pause in our giddy up on that.

• 47:30David Weisburd?

  If you go back to nineteen seventy-two,

• 47:34David Weisburd?

  and you could give yourself one timeless piece of advice that you could carry throughout your career, what would that have been?

• 47:40Speaker 01

  Back then, remember that it's going to be a little different because by the time I took the bar exam in seventy-four, we already had four children. And in seventy-two, we had two. And so when you ask me a question like that, I'd say it was get ready because it's quite a ride when you have eight children eventually. And my advice to myself that I gave later was when you're young, stupid and indestructible, that's the time to have these kids.

• 48:23Speaker 01

  And that's one lesson that I would say. Young, stupid and indestructible is a perfect combination for raising these kids.

• 48:32David Weisburd?

  It's like the confidence anticipation and the David statue.

• 48:35Speaker 01

  Very good. Excellent. It is exactly that. And that's exactly what you need because the Goliaths out there are going to be after you. And they're bigger than you and they're stronger than you and they got more weapons than you. But on the other hand, a little confident anticipation goes a long way. The same lesson applies to taking risks in the marketplace. It's a confident anticipation. You've done your own work. Not all of them work. We have stuff that doesn't work.

• 49:06Speaker 01

  But if you keep doing it often enough and confident anticipation, it, enough of them work that you get ahead.

• 49:12David Weisburd?

  I'm wondering whether this beginner's mind or almost this ignorance early in your career could be an asset. Do you think there's something to that and that the ignorance itself gets you to take the kinds of risks that people later that don't take?

• 49:25Speaker 01

  I would say, first of all, getting married is a huge risk. And if you really knew how many people would actually, if you were told what was going to happen. It's not perfect, okay, but it's beautiful and well worth it. And not knowing is better than knowing. And what does an entrepreneur do? Takes risk. You put money out, you do not know what's going to happen. So you have to have some anticipation. That's the way the whole free market works. The only reason people make lots of money, whether it's these AI companies or anybody else, is they're getting stuff to people that they want. But they didn't know that in advance. They thought it would work. And so they had to take the risk of doing it.

• 50:10Speaker 01

  And I wouldn't have called it bliss. I would have called it risk-taking. And that's what entrepreneurs do. Then, if you really ask me what I call it, it's entrepreneurial splendor. Because that's what's at the end. That's the goal. That's what has to light you up. Because that one doesn't work and you're back down, now you've got to go back up again. And it's entrepreneurial splendor that's, that's the right term.

• 50:39David Weisburd?

  Well, Chris, this has been an absolute masterclass. Thanks so much for jumping on.

• 50:42Speaker 01

  Oh, I'm delighted to. I'm delighted to, David. Thank you very much.