Federated Investors’ acquisition of a 60% stake in Hermes Investments for £246 million ($350 million) is designed to target environmental, social and governance (ESG) in the US and help expand ESG and cash management products into Asia, especially China, say senior executives at both companies.
Speaking to AsianInvestor on April 13, the day the acquisition was announced, Saker Nusseibeh, chief executive of UK asset manager Hermes, stressed that the purchase would not cause any redundancies and that Federated Investors wanted to use Hermes’ international client base to extend its Asian reach.
“They understand more than anybody [that] they are buying people not a book of business,” he said, adding that Hermes would be able to use Federated’s strong US network to expand its products and particular ESG operations to a new US base. “We have a presence in Singapore and are beginning to build deep relationships there.”
As at the end of 2017, Pennsylvania-headquartered Federated Investors had assets under management totalling $397.6 billion , of which $270 billion was in cash management investment products. Hermes, born from the pension scheme of Britain's former telecoms monopoly BT, had AUM of £33 billion at the end of last year , largely invested into equity funds. Hermes EOS, its ESG advisory arm, advised on a further £336.1 billion.
“We are excited to bring all the options to the US that Hermes has, including in ESG,” Gordon Ceresino, vice-chairman for Federated Investors said. He also noted that while Federated Investors had a presence in the US and Latin America it lacked any presence in Australia.
“If you forecast the numbers it’s hard to predict [the potential assets under management growth] but one plus one can equal five,” he said, noting that Federated intends to retain Hermes as a separate brand.
Ceresino said he saw some opportunity for the development of cash management products, in which Federated is particularly well-versed, in Asia.
That has been an area of growing concern, particularly with interest rates rising in the US and China, resulting in more market volatility and dented fixed income returns. Higher rates mean that cash positions have a greater potential to drag on an investment portfolio's performance, increasing the incentive for investors to find short-term liquid fixed income instruments that they can invest into.
“Asia is a very important part of the strategy; if you see the changes occurring in China it creates opportunities, and with the addition of Hermes it will help enhance us in terms of penetration [into that market],” he said.
Increasingly, international investors look set to start putting more money to work in China’s domestic equity and bond markets, after having largely avoided or been underweight the market.
Index provider MSCI is set to introduce a 0.73% weighting of domestic A-shares in its Emerging Market Index from June, which will require all funds tracking it (which account for over $1 trillion in funds) to take a position in these shares. In addition, MSCI could eventually raise this weighting to a potential 18.8% of the index in the coming years. Similarly, fixed income index providers are adding Chinese renminbi bonds into their indexes, requiring international institutional investors to look for fund houses that can help them raise their exposure to renminbi-denominated bonds.
China has underlined its interest in green financing but few of its institutional investors have underlined their interest in ESG as of yet. Nusseibeh said he thought this would change soon, noting that Chinese fund managers showed interest in ESG integration when attending meetings on the topic last year, and given Chinese President Xi Jinping’s comments on having local sectors invest “properly”.
“I’m hopeful the Chinese client base move quickly and that their interests in stewardship will help us develop a strong presence,” he said.
RISING ASIA PRESENCE
Federated Investors has had a growing interest in building an Asia presence and last year created a regional team of five executives, Ceresino said. However, it has no presence in Australia, where Hermes does have clients.
Hermes, meanwhile, has a regional presence, with business development headed by Jakob Nilsson, who hired Lin Chew from Winton Capital Asia as a sales director in January. The combined regional team of the two fund houses would be around nine people.
Ceresino said he originally met Nusseibeh in 2012 and that Hermes “ticked all the boxes” when it came to finding an experienced management team with in-depth international experience and a track record.
Added to that he pointed to the asset manager’s strong equity products — two of Hermes’s equity funds won in the asset class category of AsianInvestor’s recently announced Asset Management Awards — and its strong ESG emphasis (Hermes EOS was named ESG Adviser of the Year in our awards as well).