Federated undergoes face-lift, shifts focus
The 27-story Federated Investors tower visible from much of Downtown will be undergoing a face-lift in the near future when it receives a new name and sign — Federated Hermes.
“What we have done is what we call a reverse transformational merger, which is a lot of words that basically means Hermes was doing a lot of things that we liked to bring over here,” said Chris Donahue, chairman of Federated Investors Inc., in a recent interview.
In celebration of the company changing its sticker symbol from FII to FHI and the firm’s common stock trading under its new symbol for the first time Monday, Mr. Donahue rang the opening bell at the New York Stock Exchange at 9:30 a.m.
A new name and logo redesign for the Downtown-based mutual funds company is part of its broader effort to reinvent itself and to focus more attention on issues related to environmental, social and corporate governance (ESG) — a class of investing that the world’s largest investors are starting to care more about.
The Pittsburgh financial services giant is changing its name to Federated Hermes to reflect its acquisition of a majority interest in Hermes Fund Managers Limited. The London-based asset manager was a pioneer in the use of non-financial factors such as impact on the environment to predict a company’s future financial performance.
Federated has $527.2 billion in assets under management as a result of acquiring a majority interest in Hermes about 18 months ago. Hermes had $45 billion in assets under management, which was added to Federated’s balance sheet after the transaction.
A key idea driving Federated’s new focus on the ESG sector is that when companies focus on their social and environmental impact, they minimize risks to the business and operate more efficiently.
For example, a forestry company committed to planting more trees than it cuts down each year creates a more sustainable business. In other examples, unhappy and stressed employees are not likely to provide excellent customer service, and companies with poor diversity across the workforce, management teams and board rooms lose out on valuable insights and perspectives.
There’s plenty of anecdotal evidence that portfolios can
outperform by favoring companies with good ESG behavior, while several academic studies also suggest it can boost investing returns.
While some doubt the wisdom of making investments to make a political or social statement, an increasing number of large investors are making it one of their top priorities.
According to Chicagobased investment research company Morningstar, the estimated net flows into openend and exchange-traded sustainable funds available to U.S. investors totaled $20.6 billion in 2019. That figure is nearly four times the previous annual record for net flows set in 2018.
Big asset management firms and government pension funds have in recent years been putting more pressure on company leaders to focus on ESG metrics. And more mutual fund shareholders are demanding that companies focus on sustainability because they believe it will drive everything else that’s important to them — growth, market share and profitability.
“When you look at beneficiaries of trusts and foundations, they are clamoring to the people running their money that they want their money invested this way as well,” Mr. Donahue said. “Our job is to take those factors and turn it into excellent performance for the underlying investor.
“So this is a big monumental effort in the marketplace that affects everybody whether you are a passive fund or an active fund or a different kind of fund,” he said. “This kind of approach of trying to get companies to do well by doing good, that’s what we’re about.”
Mr. Donahue’s father, John F. Donahue, was one of three high school classmates who founded the Pittsburgh company in 1955. Today, it’s one of the world’s largest investment managers, offering 131 different mutual funds to clients ranging from banks to insurance companies to stock market broker-dealers.
In addition to the billions of dollars in assets directly under management at Federated, Hermes operates a division called Ownership Equity Services, which advises about $850 billion in assets for a number of foundations, equity managers and pension funds.
Hermes employs 25 people in this division whose job is to engage with companies that appeal to their clients to help those companies improve how they do their governance.
The division was not included in the Federated deal.
“They will go to companies and say, ‘We really think you should have diversity on your board,’ or they look at how a company’s relationship is with employees or they look up the supply chain and ask, ‘Are you really doing things to improve the supply chain?’ ” Mr. Donahue said.
And companies at least listen to those suggestions.
“The $850 billion is what those asset owners have that give them the power to go to a company and say we want you to look at this, or do that, or meet with the CEO,” Mr. Donahue said.
The Hermes purchase was an important one for expanding Federated’s international footprint. It took five years to work out the details, which also gave Federated time to be sure the two companies were culturally compatible.
“The culture thing is very important for making something work,” Mr. Donahue said. “What’s really important in the U.K. and here is we want everybody to enjoy coming to work.”
Headquartered in Pittsburgh, Federated employs 1,900 people in several offices worldwide including London, New York and Boston. There will be no changes in the workforce due to the merger.