Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Eaton Vance Corp, first fiscal quarter earnings conference call and webcast.
At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
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Now I'd like to hand, the conference over to Eric's names director of Investor Relations. Thank you. Please go ahead.
Thank you good morning, and welcome to our fiscal 2021st quarter earnings call and webcast with me. This morning are Tom Faust, Chairman and CEO of Eaton Vance as well as our CFO Lori help.
Today's call will first comment on the quarter and fiscal year and then take your questions. That's always the for the full earnings release in charge, we will refer to during the call are available on our website Eaton Vance dot com under the heading Investor Relations.
In today's presentation contain forward looking statements about our business and financial results. The actual results may differ materially from those projected due to risks and uncertainties in our business, including but not limited to those discussing RCC filings.
These filings, including our 2019 annual report on form 10-K available on our website or upon request at no charge.
I went out trying to call over to Tom.
Good morning, and thank you for joining us.
Earlier today, we reported 86 cents of adjusted earnings per diluted share for the first quarter of fiscal 2020, which is up 18% from 73 cents per diluted share in the first quarter fiscal 2019 and down 9% from 95 cents per diluted share in the fourth quarter fiscal 2019.
On a combined basis seed capital unconsolidated COO entity investments contributed three cents to adjusted earnings per diluted share in that first quarter fiscal 2020, a negative two cents in the first quarter fiscal 2019, an eight cents in the fourth quarter fiscal 2019.
Excluding these items first quarter fiscal 2020.
The chair were up 11% year over year and down 5% sequentially.
We ended the first quarter fiscal 2020, 518.2 billion, a consolidated assets under management, which is up 17% from a year ago and up 4% from the previous quarter end.
First quarter consolidated net inflows were 6.1 billion.
Excluding what we now called parametric overlay services, what we formerly referred to as exposure management.
This was our 22nd consecutive quarter of positive net flows and a solid beginning to what we expect will be our 25th consecutive year a positive net flows.
Our first quarter net inflows equate to 5% annualized internal growth and managed assets as calculated both with and without parametric overlay services.
Looking at our flow results on a revenue basis, and the first quarter, we achieved 5% annualized internal growth and consolidated management fee revenue.
Which compares to minus 4% in the first quarter fiscal 2019 and positive 2% in the fourth quarter of 20 in fiscal 2019.
Although revenue based internal growth rates are not widely reported by other public asset managers continue to believe that Eaton Vance ranks among the investment industry leaders by this key growth measure.
As we assessed the performance of our business in the first quarter, achieving mid single digit organic revenue growth. It's certainly among the highlights by this measure the first quarter fiscal 2020 with our best growth period since the third quarter fiscal 2018.
Last June we announced an important strategic initiative involving our parametric Eaton Vance management and Eaton Vance distributors affiliates as we described at that time. The initiative has three principal components rebranding EMS rules. The based systematic investment grade fixed income strategies as parametric and align.
During internal reporting consistent with this revised rebranding.
Internally and integrating under Eaton Vance distributors, the sales teams, serving parametric and the IBM clients and business partners and the registered investment adviser and multifamily office market.
And then third combining under parametric the technology on the operating platforms supporting the individual separately managed account business is a parametric and EM.
I'm pleased to report that the internal change process supporting this initiative is substantially complete and that we're already starting to see real benefits to our business.
Combining our systemic systematic equity in investment grade fixed income strategies within the same investment affiliates and consolidating our separate account technology, an operating platforms positions parametric and Eaton Vance to build upon our market leading positions in custom indexing and lighter bond separate accounts as much.
Demand for these strategies continues to surge.
As you can see in our press release, an accompanying cost wise, we have made certain changes in how we categorize our managed assets and faros for reporting purposes.
New parametric custom portfolios reporting category consists the individual an institutional separate account managed by parametric for which customization is a primary feature.
The new classification includes the parametric equity in multi asset strategies. The formally composed our old portfolio implementation reporting category, which are primarily custom core and centralized portfolio management.
Well, it's the latter bond separate accounts that were formally managed by Eaton Vance management and previously categorized as fixed income for reporting purposes.
In the press release and cost wise the presentation of man.
As for all prior periods, it's been revised to reflect the new classifications.
As noted earlier, we have already we have also changed the name of our former exposure management reporting category to parametric overlay services.
This reporting category consists primarily of futures based overly strategies and services offered to institutional clients to enable them to officially added removed market exposures without affecting underlying portfolio holdings.
Well this is our lowest feed business with an average current fee rate of 4.9 basis points. It is also nicely profitable and growing.
Since entering the business through the acquisition of the former Clifton Group in December 2012, or managed assets, an overlay services at more than tripled growing from 32 billion at acquisition to a record 97.5 billion at the end of January.
Looking at our first quarter four I was in more detail. We had positive net flows for all of our mandate reporting categories, except floating rate income annualized internal growth and managed assets ranged from a high up 9% for or for parametric custom portfolios to 7% for fixed income 5% for equity and.
Parametric overlay services and 4% for alternatives.
Although our floating rate income business fell 1.4 billion and net outflows and minus 15% annualized internal growth and a U.M. in the first quarter. That's a significant improvement from 2.9 billion of net outflows and minus 26% annualized internal are you in growth and the first quarter of 2019 and 2.6 billion.
And net outflows and minus 27% annualized internal are you in growth in the fourth quarter of 2019.
The abating of outflow pressures, it's been especially pronounced and our floating rate U.S. mutual funds, where net outflows fell from 2.1 billion in last year's first quarter and 1.9 billion in last year's fourth quarter, two approximately 450 million in the first quarter fiscal 2020.
Through month through Monday of this week month to date outflows from a reporting right mutual funds had slowed to barely a trickle.
Oh that although net inflows into our alternative strategy well less than 100 million in the first quarter here too we have experienced substantially improved flow trends compared to fiscal 2019. When we saw net outflows of 2.2 billion in the first quarter and approximately 550 million in the fourth quarter.
Our managed assets and flows in the alternative category are dominated by the two global macro absolute return mutual funds, we offer in the U.S.
As a reminder of these funds hold long and short positions and currency in short duration sovereign debt debt instruments of emerging and frontier market countries.
After a disappointing performance in 2018, our global macro funds roared back to strong performance in 2019, no doubt contributing to the import proved for result inflows outlook for the category.
Have you were a month to date flows remain modestly positive for both our global macro mutual funds and the alternatives category as a whole.
As mentioned earlier annualized internal growth and our equity mandates was 5% and the first quarter.
Calvert, EM and Atlanta capital each made significant contributions to the quarters 1.6 billion of equity net inflows Calvert equity strategies contributed nearly 900 million with the Calvert emerging markets in Calvert equity U.S. mutual funds east generating over 250 million of net inflows.
M. equity strategies contributed approximately 850 million to first quarter net inflows driven primarily by privately offered funds in the U.S.
On top of the more than 250 million net inflows into the Atlanta capital Subadvised Calvert equity fund Atlanta capital contribute approximately 450 million of equity net inflows in core and growth mandates.
In the first quarter fixed income strategies had 1.1 billion of net inflows, which equates to 7% annualized internal growth and managed assets on a combined basis E. B M and parametric municipal bond strategies contributed over 700 million to quarterly net inflows and EM Calvert and Atlanta capital taxable bond.
And strategies contributed approximately 400 million.
Well leaders across our fixed income mutual fund lineup included Eaton Vance emerging markets local income fund with nearly 200 million of net inflows in Calvert short duration income fund Eaton Vance core plus bond fund and Eaton Vance National Municipal income fund each with over 100 million I'm net inflows in the quarter.
The newly constituted parametric custom portfolios reporting category and net inflows of 3.5 billion in the first quarter generating 9% annualized internal growth and manage the assets.
This reflects net contributions of 2.7 billion to custom core equity separate accounts and 1.4 billion into Laddered bond separate a crown accounts across municipal and corporate mandates.
Partially offset by approximately 575 million of net withdrawals from centralized portfolio management mandates sorted by client tight parametric custom individual separate accounts at 4.3 billion up net inflows and parametric custom institutional separate accounts at 800 million of net outflows.
Focusing on custom core equity in the latter Bon individual separate accounts the quarters 4.3 billion of net inflows equates to 15% annualized internal growth and managed assets.
As shown in slide 12, parametric custom portfolios reached a record 175 billion and managed assets as of January 31st 2020.
This is a high growth highly differentiated investment management business, which parametric is far and away the market leader across all key segments.
We are investing to grow this business by expanding our product offerings, extending our service capability and achieving greater operating efficiencies to drive down costs.
We continue to believe the parametric custom portfolios business, it's only scratching the surface of its long term potential.
Turning to Calvert, we continue to be very pleased with the business results in investment success, we're achieving.
And the recently completed first quarter Calvert generated net inflows of 1.3 billion, which equates to 26% annualized internal growth and manage the asset.
Including the Calvert equity fund sub advised by Atlanta Capital Calverts managed assets reached a new high of 21.8 billion at the end of the first quarter with continued strong investment performance across Calvert diversify lineup of equity income and multi asset strategies.
As of the end of January 21, Calvert U.S. mutual funds were rated four or five stars for Morningstar for at least one class of shares including seven five star rated funds.
We continue to see strong demand for Calverts distinctive lineup of investment strategies that combine a record of investment excellence and a deep multi decade long commitment to the principles the responsible investing.
As the investment management industry as a whole continues to struggle to grow revenues net of market effects Eaton Vance his ability to deliver internally sourced topline growth sets us apart.
The strength of our high growth franchises and customize individual separate accounts responsible investing in wealth management strategies and services.
The range of active strategies that with top tier performance that we offer across investment asset classes and the prospects for continued recovery in our floating rate income and alternatives category flows combined to give us confidence that we can continue to grow our business rates well above the overall asset management industry average.
Well market action over recent days reminds us that unforeseen forces can upset even the best laid plans, we approached the balance of 2020, and our long term future with the optimism for for continued growth and success.
That concludes my prepared remarks, I will now turn the call over to Laurie.
Thank you and good morning.
Tom described we reported adjusted earnings per diluted share of 86 cents for the first quarter fiscal 2020 up 18% from 73 cents in the first.
<unk> down 9% 95 cents in the fourth quarter fiscal 2019.
Our adjusted earnings per diluted share this quarter three cents combine contribution from seed capital and consolidated CLL and the investment compared to a negative two cents contribution in the first quarter of last year and eat and contribution in the fourth quarter fiscal 2019.
You can see in.
It's really earnings under Us GAAP exceeded adjusted earnings by five cents per diluted share in the first quarter fiscal 2022 cents per diluted share in the first quarter fiscal 2019, and a penny per diluted share in the fourth quarter fiscal 2019, reflecting.
And excess tax benefits related to stock based compensation awards. During this period of 4.9 million 2.99, and 1.9, respectively.
Operating income increased by 11% in first quarter fiscal 2020 from the same period, a year ago, reflecting an 11% increase both revenue and operating expenses.
The income was down 1% sequentially, reflecting a 4% increase in revenue and a 7% growth in operating expenses.
Our operating margin was 29.8%, but the first quarters of fiscal 2020, and 29 team and 31.2% in the fourth quarter fiscal 2019.
As Tom noted ending consolidated managed assets reached a new quarter end type of 518.2 billion at January 31st 2020.
Up 17% year over year, and 4% sequentially driven by strong net flows and positive market returns.
Average managed assets this quarter were up 17% in same period last year driving management fee revenue growth, 13% management fee revenue growth trailed growth at an average managed assets year over year, primarily due to declining average annualized management fee rate 32 basis points in first quarter fiscal 2000 1932.
Eight basis points in the first quarter fiscal 2020.
Changes in our average annualized management fee rates over the comparative period, primarily reflect ships and business next.
Sequentially growth, an average managed assets at 4% matched growth in management fee revenue is our average annualized management fee rate of 30.8 basis points was unchanged.
Performance based fees, which are excluded from the calculation of our average management fee rate contributed point 2 million to revenue in the first quarter fiscal 2020 versus negative 2.3 million in first quarter fiscal 2019, and positive point 1 million in the fourth quarter fiscal 20 Nike.
Turning to expenses.
Compensation costs increased 12% year over year, reflecting higher salaries and benefits associated with increases in headcount you rent merit adjustments.
Higher stock based compensation and higher performance based in operating income based bonus accruals, partially offset by lower sales based incentive compensation.
Stock based compensation the first quarter fiscal 2020 included approximately 5.5 million of accelerated expense recognized in connection with employee retirement.
Sequentially compensation expense increased 7%, reflecting higher salaries and benefits driven by increases in headcount seasonal compensation effects higher stock based compensation driven by employee retirement and higher operating income based on <unk>.
All partially offset by decrease and severance costs.
First quarter seasonal compensation pressures traditional include the impact of payroll tax resets the timing of our far when Keith funding and year end base salary increases.
The majority of these seasonal compensation pressures will continue into the second fiscal quarter before we see relief in the third that said, we would not expect to see a recurrence of roughly 5.5 million of stock based compensation associated with first quarter retirement in the second quarter.
In addition, we would anticipate seeing an incremental one one and a half million dollar decrease in stock based compensation in the second quarter at the impact of the vesting of stock based compensation under our Phantom equity plan for outside directors and the recognition of expense associated with our employee stock purchase plan tend to be heavily weighted.
Each year.
Noncompensation distribution related costs, including distribution and service fee expenses in the amortization of deferred sales commissions increased 10% year over year, and 4% sequentially, primarily reflecting higher marketing.
Higher upfront sales conditions did increase sales a closed end fund private fund in class a mutual fund chairs and higher service fee expenses for class, a and private funds driven by higher average managed assets in no signs.
Year over year increase further reflects higher private fund commissioning amortization, partially offset by lower classy distribution service fee expenses.
Fund related expenses increased 15% year over year, reflecting higher sub advisory fees due to an increase in average managed assets. It's got a diversified.
And related expenses were flat sequentially, reflecting an increase in sub advisory fees paid offset by decreases fund expenses borne by the country.
Other operating expenses increased 11% from the first quarter fiscal 2019, primarily reflecting increases in information technology spending market data services professional services and travel expenses, partially offset by decrease in amortization expense related to certain intangible assets that were fully amortized during the first quarter fiscal 2019.
Other operating expenses increased by 9% in the fourth quarter fiscal 2019, primarily reflecting increases in information technology spending marketing services professional services travel expenses and charitable contributions.
Increased and other expenses reflects investments, we're making support our strategic initiatives as well as the overall growth of our business.
We continue to focus on expense management and identifying ways to gain greater operating leverage.
Net gains another investment income related to seed capital investments contributed four cents.
During the first quarter fiscal 2020 negligible in the first quarter fiscal 2019 and contributed four cents earnings per diluted share in the fourth quarter fiscal 2019.
The quantifying the impact of our seed capital investments on earnings we take into consideration or pro rata share of the gains losses and other investment.
Sponsored.
Well there accounted for as consolidated funds separate accounts or equity investments.
Well the gains and losses recognized on derivatives used to hedge these investments.
We don't report the per share impact net of income taxes, and net income attributable to non controlling interest.
Continue to hedge the market exposures are seed capital portfolio to the extent practicable to minimize he says he did earnings volatility.
Non operating income expense also includes net expenses from consolidated see yellow entities of 1.8 million in the first quarter fiscal 2020.
Compared to net expenses from consolidated CLL entities of 2.9 million in the first quarter fiscal 2019 net income from consolidated CLL entities at 6.3 million fourth quarter fiscal 2019.
The sequential decrease in contribution from consolidated CLL entities, primarily reflects the sale of our subordinated interest since yellow entity during the first quarter fiscal 2020, which resulted in deconsolidation of that entity.
Other income and expense amounts related to consolidated CLL entities reduced earnings per diluted share by a penny in the current quarter and two cents in the first quarter last year and contributed four cents per diluted share in the fourth quarter fiscal 2019.
Other income and expense amounts related to consolidated steel those reflect changes in our economic interest in these entities, including the fair market value of our investment distributions received and management fees earned our strategy for Siloed equity remains to commit prudent amounts of capital to support growth this business and taking advantage of opportunities to exit.
Hello conditions as market conditions allow generating cash to help fund new seal those for other <unk> or for other corporate purposes.
Turning to taxes are U.S. GAAP effective tax rate was 22.8% the first quarter fiscal 2000 2020, 23.4% in the first quarter fiscal 2019, and 22.7% in the fourth quarter fiscal Fynineteen.
The company's income tax rate was reduced by net excess tax benefits related to stock based compensation awards totaling 3.4% in the first quarter fiscal 2000, 22.5% in the first quarter fiscal 2019, and 1% in the fourth quarter fiscal 2019.
Joining attachment to our press release, a calculations of adjusted net income and adjusted earnings per diluted share removed the net excess tax benefits related to stock based compensation awards.
On this basis, our adjusted effective tax rate was 26.2% in the first quarter fiscal 2020, 25.9% first quarter fiscal 2019, and 23.7% in the fourth quarter fiscal 2019.
On the same adjusted basis, we estimate that our quarterly effective tax rate for the balance of fiscal 2020 and for the fiscal year as a whole range between 26, and a half and 27%.
During the first quarter fiscal 2020, we used 45.5 million of corporate cash to pay the 37 and a half cent per share quarterly dividend, we declared at the end of our previous quarter and repurchased 1.4 million shares of our non voting common stock for approximately 66.6 million <unk>.
Our weighted average diluted shares outstanding were 114.7 million into first quarter fiscal 2020 down 1% year over year, reflecting share repurchases in excess of new shares issued upon vesting of restricted stock awards, an exercise employee stock option.
Partially offset by an increase in the dilutive effect in the money options and Unvested restricted stock awards.
Sequentially weighted average diluted shares outstanding were up 1%. We finished our first fiscal quarter holding 824.7 million of cash cash equivalents in short term debt securities and approximately 315.9 million seed capital investment.
T to place high priority and using the company's cash flow to benefit shareholders.
Fiscal discipline around discretionary spending remains top of mind does it contemplate both volatile markets and significant corporate initiatives.
Based on our strong liquidity and overall financial condition. We believe we are well positioned to continue to invest in our business support long term growth, while returning capital to shareholders.
This concludes our prepared comments at this point, we'd like to take any questions you me.
Ladies and gentlemen in order to ask a question you do need to press Star and then one on your telephone. Please stand by what we can probably given a roster.
Your first question comes from Dan Fannon with Jefferies. Your line is open.
Hi, Thanks, Yeah can you clarify thank you.
Tom you discuss some of the quarter to date flows for a certain segments, but left out I think fixed income and equities and somebody other metrics. So maybe just given that you did mention bank loans.
And alternatives I guess give us a kind of a broader update on the rest of the other business.
Yeah, just to clarify the only thing I talked about was our mutual fund flows for the for the period, just just continuing there the context of improvement I'm not really prepared to talk about our overall flow trends for the quarter today does that may or may not be.
A good indicator of what the a quarter as a as a whole will be I would say generally that a in the same way that we had a strong flows across the across our businesses and the fourth quarter. We've had a good flows for the for the month today, but it's up for only a little over three weeks ended the quarter. So I don't want to talk.
Two specifically about any things other than those those couple of exceptions I made in my remarks.
Okay, and then just a follow up on.
It's kind of expenses.
In margins I guess, if we think about the last 12 months and the growth of both the beta in the market as well as your flows and essentially margins are flat year over year.
So can you talk about an environment, where you actually could see margin expansion and then on the contrary given what's happened more recently with the market you know how we should think about flexibility. If you know that market Tailwinds is no longer there for assisting period.
Hi, its Laurie I think we we talked a little bit about the pressures that we obviously see in the first quarter, it's difficult when we when we let me start to any fiscal year, because you've got these seasonal pressures that we see each first quarter.
Most of them relates specifically to compensation, we did our best to call those out I would say as we're moving into the second quarter I did call out specifically on stock based compensation that we wouldn't be seen some level of relief recognizing that we had a material first quarter retirement that that.
Of course, that's recognized about 5.5 million of incremental stock based compensation expense and we've got some seasonal stuff that happens relating to our employee stock purchase plan and our our directors plan that probably will will provide us some relief as you move into the second quarter to the tune about a million 2 million has.
In terms of other operating expenses and the way we're thinking about a year I think we have been telegraphing fairly clearly that we anticipate we're going to be continuing to make some significant investments in technology.
I think that there was some a little bit of first quarter noise associated with normal first quarter Benson operations associated primarily with things like charitable, giving which tend to be front end loaded for us the way that we actually interact with.
The United way.
But we would anticipate that if we see a decrease in the trouble getting the second quarter. We are seeing on a modest ramp up in our technology spend so.
Overall, we were.
We.
I would like to see margin expansion, we do think that there's opportunity for that.
Obviously, the volatility of the last several days and it's got all of us a little bit cautious about how we're thinking about the next quarter, but we would anticipate that there is opportunity that said we are taking advantage of the initiatives that we that now to start to really invest in some of our technology platforms to provide for future long term growth and we're committed to that.
If we anticipate we had to start making some some changes because there's something very disruptive that happens I'm sure. We what we will address that im not in the coming quarters, but.
I think that we all recognize in our business that we are getting pressed from above and press from below there. There's obviously pressures in terms of fee rates. We've we've talked about those who on numerous calls, but there's also pressured terms. The overall cost structure and we recognize it seems like technology and market data are going to be significant components of our overall cost structure.
We're going have to continue to invest in both.
So good markets I think there is opportunity for market expanding margin expansion just if we get the lift from market. That's a that's a that goes straight to the top line.
But we also recognize it got it can change when best actually grow the company.
Your next question comes from a 10 Worthington with JP Morgan Your line is open.
Hi, good morning, and custom portfolios, Tom you indicated that you're only scratching the surface I'm, so maybe where those large opportunities that you alluded to say over like the medium term and what does this strategy here to top them.
Okay I'm pretty open ended so I'm, just maybe just to take a second to talk about what custom portfolios are what's what's in that.
Three broad categories of things one is.
Equity portfolios that are managed on a basis that broadly raft replicates, a a stock market index, but with customization to achieve.
Enhance tax efficiency, so funded in kind to.
At least in part in kind to to minimize upfront tax realization incorporating tax loss harvesting and gained deferral as part of that strategy and also customization for for MSG and other client specified characteristic so so one piece.
Is that is what we used to call custom core or car stone, so do call custom core equity under parametric. So that's that's one big piece a second piece.
<unk> is laddered fixed income separate accounts. This is the business that.
The only moved over from Eaton Vance management to parametric.
And then the third piece is is a parametric business called centralized portfolio management.
That is where.
Parametric is engaged by a a platform that that does multi manager strategies, where those strategies are the weather, where the model where each of the underlying managers fees a model for parametric for implementation on a centralized basis typically with.
With with ongoing tax management as a key part of that so those are the the three key pieces. There's there's a couple of small odds and ends in addition to that but what can talk about generally where we are with with with each of those in terms of the the comment I made about we think we've just scratched the surface of this first talking about.
What we'd like to call custom indexing or what the market seems to be calling primarily direct indexing. So that's instead of investing in a.
Index Mutual fund or index MTF to achieve a index like exposure.
Own us a significant represented a fraction of the underlying stocks in a separate account with the benefits of customization.
If you look at the size of the.
Of the index ETF business and the index mutual fund business.
Certainly in the trillions of dollars just in the U.S. and you compare that to our business.
Which is about I think about $110 billion across both institutional and and individual separate accounts, but the bulk of that being individual where the biggest player. A you know we're a tiny fraction of the percent.
Of the overall market as well as invested in index strategies through funds.
So to me for a for a taxable investor or someone who's motivated significantly by.
Their own personal values.
The ability to achieve better results by owning the underlying if holdings.
Approach is being self evident it this is a relatively easy case to make that in applications where.
After tax returns matter, where a responsible investing matters.
We're particularly if you're funding that in in kind or in part in kind for investors and higher tax brackets.
And we don't know this for a fact, but but our strong supposition that is that there are.
Trillions of dollars invested in mutual fund index mutual funds in index Dts that would be ideal candidates for achieving very similar market exposure and what we think of as I as a better vehicles. So so it's so number one is thinking about direct indexing as a as an opera.
Unity and number two switching over to the fixed income side that business, which is which is on the order of for US I think about $40 billion.
In this in this category, maybe but I think between 35 and $40 billion.
This traditionally developed as financial advisors, who have used the laddered separate accounts for there for their clients.
Increasingly saw the benefit of using a third party manager that brings ongoing credit oversight that brings institutional quality trade execution and the other things that we offer a in that strategy.
That business, we think has significant growth opportunities as well, but we also see the potential for.
These two businesses to converge that is.
For direct indexing to move from being what is today.
And equity concept to it to being a concept that's embrace not only by equity investors, but also by fixed income investors and also the potential to combine.
Equity and fixed income together and multi asset solution. So you can imagine multi asset target date or multi asset target risk kinds of portfolios are custom LDR lots of different ways. You can think about putting a equity and income strategies together and customized individual separate accounts that are demonstrably value.
Added versus either fund products that are available in the marketplace or or perhaps a more fully bespoke that is a non automated approaches that are that may be used by financial advisors today to achieve a similar underlying exposures.
No doubt there will be a growing competition that's market no doubt in places will see price competition.
But we see strong momentum across these markets I'm as I mentioned, if you if you isolate the.
The latter bond individual separate accounts and the cut them core equity individual separate accounts.
The quarters organic growth rate was about 15% so were.
Still growing pretty nicely in that business off a relatively large base. The third the third piece of this business, which has been I'm kind of stagnant of like what we referred to as centralized portfolio management. I also think has a significant long term growth potential that's about a $30 billion business within the I think roughly 175 billion.
Of our.
Of our parametric custom portfolio business.
Again this is parametric implementing a multi manager us separate accounts on a consolidated basis, where we act is essentially as the implementation specialists for that manager of growth opportunities here.
Hi, John.
As a efficiency of execution as the ability to tilt portfolios to achieve better tax results and is the ability to it to tilt portfolios to achieve.
Desired, yes, you exposures.
Those are not concepts that only apply to passive portfolios and you can certainly imagine a world where that business.
Accelerated growth today, we're not really growing much in that business, but we think it has potential also to be a driver for us within this this category of parametric custom portfolios. So hopefully that's helpful. Ken.
Hey that that was pretty comprehensive I appreciate it. Thank you.
Your next question is from my carrier with Bank of America Merrill Lynch. Your line is open.
Good morning, Thanks for taking the questions.
Overall, another quarter strong diversified flows.
Just the one area a little later was on the institutional size just more curious what drove it if there was any rebalancing and any color you know in terms of the pipeline.
The institutional pipeline overall is quite good we've had we have.
I guess.
Three a multimillion dollar a multi hundred million dollar.
Pieces of institutional business that were.
Expecting and thus in the second quarter that gives US you know certainly confidence in a in general momentum in our institutional business I'm not I'm I'm separating out the exposure management business, which is in our institutional flows, but we show those separately. So so in thinking about my comments and institutional separate from a exposure management.
One of the things that has been working against US and worked against us in this quarter.
We have Oh, a large institutional client in bank loans, I think which over the last several quarters has been a drawing down their position Oh overtime.
This was a this is wasn't as a multibillion dollar clients. So there will be some pressure there were most of the way through that through that draw down but this is a this is a long term allocation that over the last.
Maybe maybe four or five quarters has seen a.
Fairly significant drag on both our our bank loan business looked at looking at from a mandate a point of view, but also from our institutional separate account.
Business not to double count that was but we report both of those things so.
We think we're getting near the near the end of that on a on a more broadly we expect good flows in institutional some of the thing places, where we're achieving a institutional success.
One is our emerging market local income strategy.
Which is a big quite a big asset class outside the United States, where we are seeing some.
Success growing that with up with institutional clients also under the Calvert banner, we Ah we recently landed.
A significant.
Institutional fixed income core fixed income mandate and also or in the all thing is is a large high yield bond individuals institutional separate account offering that.
We expect to fund in the in the current quarter. So so I would say overall, maybe a mixed bag with with with one fairly significant negative. That's this ER. This bank loan client that's been a that's been pulling down over time their exposure to us and other managers that they've hired and this and this category offset by.
Pretty broad strength and other things maybe on the equity side just to comment you probably have noticed that Atlanta capital has had a quite strong performance over.
Recent years very strong 2019 numbers and they also have seen a pickup in their institutional business and that's a well you can think of as traditional large cap U.S. business, which has been as everyone knows a very tough place to grow institutionally, but there is the distinctiveness of their flow.
Its record and their investment approach has allowed them to grow.
Over the last few quarters and have a have a decent growth pipeline even in an industry environment were very few people are growing a actively man is large cap a U.S. equity mandates.
Okay. Thanks, a lot.
Your next question comes from Robert Lee with Keefe create and what's your line is open.
Hi, Good morning, this is Jeff treasure on for probably.
Just a quick question I know you touched on the.
Compensation line I, just wanted to circle back that for a second just to make sure I caught everything. So there was a 5.5 million dollar expense and then a decrease of about one to one and a half million that we should not expect to to occur again in Q in fiscal Q2 is that correct. As it was there anything else there that I had I missed that I'm not sure no no.
Hi, sorry, again, no actually what I said was that there was 5.5 million stock based compensation expense. This quarter. Since he was retirement that would not recur in the second quarter and then there was approximately one to one and a half million of incremental stock based compensation expense that is in the first quarter that will not repeat in the second floor.
I would anticipate I think what we're saying is effectively that stock based compensation expense is likely to go down between 66, and a half million in the second quarter yeah.
So just to add the two numbers up at the two numbers up not to subtract one from the other to get the expectation for second quarter versus first quarter right.
I appreciate the and then a quick question on institutional business and it didn't get just some color around you see strategies at Calvert <unk>.
So calverts, but we are what we acquired Calvert at the end of 2016 at that time very close to 100% of their business was U.S. mutual funds and we've we've grown that business with just about doubled Calvert business, we're not quite there, but just about doubled calverts business from the I think 11.9.
<unk> billion at the end up 2016, when we acquired Calvert So.
That business today, the business growth is today still been primarily a mutual funds mutual funds in the U.S., but our ambitions fourq for Calvert Calvert strategies in the Calvert brand or certainly.
A U.S. mutual funds were.
Implementing a variety of Calvert strategies as institutional separate accounts in conjunction with parametric has a offering under our parametric custom portfolios banner. So these are both Calvert indexes as implemented.
Bye bye parametric, but also the opportunity to offer Calvert active strategies as implemented by parametric institutionally as I mentioned, a we recently had a.
Significant a win with a with the U.S. pension plan.
That is.
That was attracted to Calvert based on both the strength of their investment performance capability.
But also on the strength of their commitment and support of responsible investing a there are many many many mission driven organizations around the U.S. and internationally.
That we think theres, an excellent potential fit between.
They're doing their desire to achieve both.
Strong investment returns, but also alignment.
Of their portfolio holdings with the mission of that organization. So so think about.
All kinds of a mission driven nonprofits as well as.
Pension funds, and and and broader or and broader organization and down months, where a responsible investing is a key initiative and a key focus.
Of those organizations, so or not to overplay that term, but again, we think we're just scratching the surface in terms of our ability to take the Calvert brand from a heritage as the U.S. mutual fund provider to making that broadly known and broadly represented not only in.
Mutual funds in the U.S., but also a funds outside the United States and individual separate accounts and institutional separate accounts in the U.S. and international It clearly this is a time when.
Calvert is in many respects ideally positioned to grow with.
Surging interest in the market and the general category of responsible investing a lot of confusion about what that is and what that means.
That's the Calvert based on its long history, there can help educate the market on and all that backed by a really quite an exceptional.
Investment performance record across a wide range of of strategy. So I mentioned that Calvert had 26% organic growth rate a in the in the first quarter. We're certainly optimistic that we can can continue to grow calvert at up well above average rate not only drawing upon.
Mutual fund clients, but increasingly separate account clients in both institutional and individual markets.
Great appreciate the color on that thanks, I can just one quick follow up just on custom data product and just any competition, you're seeing there and maybe competition on price or whatnot.
So in in parametric custom portfolios.
There is competition, Oh, we will and growing competition. There's there's also growing opportunity and so oh, well, we'll see how that plays out we think there is a a much bigger market opportunity for us and other competitors.
It's not surprising given the growth profile of this business that there are other people that are are trying. This we think there are significant advantages of scale significant advantages of experience that we have that new market entrants do not have.
But we don't expect this to be up one player market. There are a handful of other significant players and.
On the edges that or maybe dabbling with this.
I don't think there's room for a lot of Dab worse to achieve success, but there will be a likely up a handful of of market leaders in this business.
Which we would expect parametric to continue to be the largest among those market leaders as we are today.
Price is isn't always has been one element of the company of the competition in the customize individual separate account business.
Mostly it's been about.
Features and service.
And to some degree also access or can you can you get in front of the financial adviser can you get access to that advisor.
Can you articulate the advantages of a customized individual separate account a better than the other guys can you demonstrate.
That you're achieving those advantages better than the other guys and also importantly can you service that relationship a better than than the competition in service here is both.
As needed high touch service, but also ideally <unk>.
<unk>, increasing element of low touch service that is using technology.
To drive enhanced service, which we think is gonna be critical to maintaining profitability in this business if.
Prices on average continue to fall, which we expect by and large they will over time in this business.
In the on the fixed income side, it's a it's a bit of a different story. There are several competitors in the in the Laddered bond space.
It doesn't feel like that the the competition the price competition. There is intensified we worry a bit about equal market access a in that market relative to broker dealers offering in house strategies that can compete against a third party strategies also as I mentioned.
In in my earlier comments in response to Ken's question, we do think there's a small.
In emerging opportunity for.
Fixed income a direct indexing based solutions that we think we're in a far better position to offer those today than literally anyone else in the marketplace based on the development work we've done on those on those kinds of strategies, which we're pretty excited about the potential for a long term to expand.
And how people think about this category, it's not just replicating or roughly replicating an equity index, it's taking that combining it with fixed income.
And over time developing solutions that moved well beyond replication are tracking of a benchmark to helping clients and and financial advisors meet their financial needs more broadly, including concepts of target risk and target date and custom LDR.
Great. Thanks, so much.
Our next question comes from Bill Katz with Citi. Your line is open.
Okay. Thank you very much appreciate all the color maybe just two questions. Tommy's told you just big picture down there's been a fair amount of our M&A in the landscape telephone or sort of manufacturers side as well as on the distribution side in varying forms what if any impact if they didn't have any business.
Okay, well I guess I'll start with a time will tell a week we don't.
We don't know most of the acquisitions that have been announced a haven't haven't been completed so they're the ones that I think we feel most comfortable we know the answer to our consolidation within the asset management industry and not how about usually plays out may not play out and the indicate.
So the recently announced transaction, but now that usually but plays out is that during a fairly prolong transition period.
Theres some amount of migration of assets from.
The two companies that are merging two competitors.
Strategies get put on hold there are changes disruptions to investment teams.
Those are the kinds of things that the firms that are merging or trying to.
Minimize and those are the things that their competitors.
Our trying to take advantage of and those are the things that.
Their customers and gatekeepers are watching for and and very concerned that.
There may be negative fall out of this transaction from the point of view of them and their client. So there's always some opportunity how big that is.
As always very hard to gauge, but in general a consolidation among.
Competitors in the short run creates opportunity for those competitors just because of the the disruption associated with the with the merger longer term wants the thing happens.
It's it.
Very much depends on their ability to execute and lots of things that are very hard to foresee.
During the period when acquisitions are being announced in terms of the.
The the more distribution oriented or or once affecting wealth management more than than asset management. So this would be the the schwab TD ameritrade or E trade Morgan Stanley just that's just clear when I'm, what I'm talking about.
Those are a little hard to judge what.
What is important to us.
Is that we continued to maintain.
Market access and.
That is.
Obviously critical to our business success.
What we have to do to maintain that is demonstrate a that were worth that that we provide value added relative to what they can do themselves. That's always been true that continues to be true in our business with limited exceptions.
We sell sell to financial intermediaries, where a build versus buy a is a decision that they always have a any one of these firms could decide that they're going to do asset management in house.
Era, who knows but.
But and the record generally of these firms as not been good these are very dear.
Yes that management versus wealth management and few companies are able to do both well because I think about industry change I take comfort in the fact that.
Vance, while we're up while we're up.
I guess, a meaningful company in many respects with about half a trillion dollars of assets under management.
We are in the and the Grand scheme of the asset management business.
A pretty small temple, a with a tiny market share in the range of one or 2% as you think about.
The addressable wealth management marketplace, and where our half a trillions stands versus the size of that market I continue to believe that that size of the big It is a significant advantage for us, allowing us to the grow if we if we execute effectively on our plan. If we're nimble if we're smart if were innovative if we can build.
Liver for our clients even.
Even as things happening around us that might be viewed as adverse to our overall industries prospects.
If we can be a better than most of the rest of the other guys.
We can continue to be very successful as a from a we're not we're not slavish only a limited and our growth.
By the growth prospects of our industry.
Okay. That's very helpful. Thank you and Lloyd just one for you a little bit of Investor questions I apologize in advance could you break down a little bit on where you sort of spending the technology.
What kind of what kind of timeline you talk about here is this a multi year yet for it and then just as I think about the ins and outs so flows versus fee rates. It sounds like a very good flow story, but also I hear nothing but competition lower fee products. So how do you sort of see the dynamic between organic growth versus revenue grew.
Notwithstanding this was a very good corner of itself.
Yeah, maybe I'll just be the technology question first I think as we think about technology spend I'm starting to think about this in terms of new normal I don't think when I started talking about a one time big Bang, we're going to replace the big system and then all the time, we're going to stop spending on technology.
Looking about but we are talking about is a slightly more consistent incremental spend on technology recognizing that a lot of this is in relation to the initiative that we recently announced associated with parametric and Eaton Vance that we're combining technology platforms. We are looking to invest and technology to ultimately increase our efficiency.
Increase our effectiveness, bringing down the cost of what it actually takes to manage separate accounts on an account by account basis. So our goal is to continue to make those investments and we will see an increase our technology spend over a longer term period, but our goal is to ultimately ben be able to leverage that reduce our overall operating expenses in the future. So this is from our perspective very.
Such a long term play and long term investment.
In terms of revenue I think as we're looking at our effective fee rates I think if you look at a attachment tend in our press split press release, you can see that they really on a category by category basis, you're not seeing a diminished in our effective fee rate by equity fixed income alternative et cetera, but we are seeing is just shifts in mix quarter over quarter that ultimately impacts the.
Average effective fee rate for the period. So I know, there's a lot to talk about decreases and effective fee rate. We are not necessarily seen that by mandate, but we are seeing an <unk> decrease year over year in our average effective fee rate at the top of the house recognizing that that is being driven by mix.
I think what is what is positive from my perspective is that if you look at the this quarter ending January through the quarter ending January 31 versus the quarter ending October 31, we saw no decrease in our overall average effective fee rate. So we feel very very positive that we've got some level of stability asset mandate.
Level and that we've got every opportunity to see our average organic growth in assets. If you will.
We actually see our organic growth in revenue near our organic growth in assets going forward. If we're able to continue to advance the ball honor.
Active equity strategies, where there are higher fees, while growing our somewhat more passive strategies, where the fees are lower so I think that we demonstrated this quarter that we could effectively do that by producing 5% organic growth in assets and organic growth.
Maybe I can just jump in with a couple of comments if you look at our our charts accompanying the the <unk> the the slides accompanying the the call.
You can see that over though over the course of fiscal 2019. There was up there was a bit of a disconnect from our and our ability to grow to achieve organic growth in assets versus our ability to achieve organic revenue growth. So that's that's comparing a slides.
Nine and 11, if you if you look at the slides.
I guess, it's a slides 10, and 11 10 looks at annualized internal growth in in consolidated man. It managed assets on a percentage basis, and then 11 looks at that same the same numbers just converted into revenues the real difference the driver of the differences in 2019, a was primarily the.
Back that we saw over the course of that year.
We saw a I think roughly 14 billion of net.
12, sorry, 12 billion of net outflows over the year.
In two relatively high fee categories floating rate income.
And global macro the goal macro strategies that dominate our alternative strategies.
The best thing that can.
Forms of our ability to achieve.
Organic revenue growth in the same ranges are organic asset growth is to stop the outflows in those two strategies.
We came we got there on alternatives in the first quarter, we think we're getting very close to that happening in bank loans.
Our expectation is for the balance of the year subject to a you know markets is that you will see a much closer alignment between our ability to grow assets and our ability to grow revenues tied to those assets simply because we don't expect that negative which drove that disconnect last year.
To continue into this year.
It's all very helpful. Thank you for the the detail.
Maybe we have time for.
One more question.
Okay or last question comes from and Glenn Schorr with Evercore. Your line is open.
Hi, Thanks.
Two quick follow ups on sustainable investing if I could the conversation.
One is.
I'm just curious to get your thoughts on the client interest that you that you noted that clearly saying.
In terms of dedicated product versus just part of the process of ongoing product.
And two is how you think passive plays a role and he is she investing its counterintuitive, but there are products. They are getting flows. So curious on how you think passive impacts pricing inflows.
Yes, so we're a.
Covered has a broad based menu of strategies in the responsible investing space, including both active and passive a we have we are growing in active we're growing in passive we have good performance in active we had good performance.
In passive.
That's on the equity side fixed income, we really it's a it's an all active strategy business.
I think.
There's an element of responsible investing that doesn't really cut quite neatly between active and passive and that's the aspect of it.
Engagements. So what are you doing to help drive value creation and help improve performance of the company's in which you invest and you do that through how you about your proxies, how you participate if at all and shareholder resolutions and the conversations that you engage either individually or as part of groups with the man.
But to try and get them to achieve a better results those kinds of activities to some degree can cut across both active and passive strategies as its as this business is developing a there's still a lot of this is a pretty fast moving turf lots of confusing terms that are out there are things that I use one term.
You use another a what I would assume I use might mean something different to me that it does to you I was going to take a while for that to sort out but one of the things that I think is clear.
Is that the role of engagement is becoming more and more important and differentiating strategy a from strategy be or manager a for manager be how do they both are proxies, how do they participate in shareholder resolutions or how do they if at all engage with management. So it's a it's a slow.
Second level of performance beyond the normal way that we measure measure return. The other thing that's I think I'd say, we're in the early innings of is.
Measuring performance not only in terms of financial results, but but also in terms of a non financial results that is or how does my portfolio compare to have an index or some other competitor.
In terms of.
Tons of BSG tons of carbon emitted are kinda tons of carbons.
Lots of different metrics and again, it's pretty early days or information is not great, but I think overtime as information develops we're gonna see more and more and better and better reporting on this so that they're gonna be multiple dimensions to how you think about a different categories a responsibly invested.
Strategies lots of other I was just on a I see I call on this topic yesterday, but lots of efforts ongoing to try and bring some clarity to the categorization of different funds. What are these words mean, but it wasn't is a and likely will be for the near term pretty fluid in terms of.
The terminology.
And.
We certainly support industry efforts to to bring a little more consistency to that terminology, but what's what's what's driving our growth. We think is pretty clear. It's the combination of strong performance plus.
Very credible.
The discipline and performance.
In terms of the U.S.G. efforts that back our investment teams its research it's engagement.
Its impact measurement and all that backed by having done this under the Calvert brand.
Since the early eighties, so credibility as a manager depth the resources, a as a as a U.S.G. manager.
And the tie to a strong performing teams we think.
That's the that's the key to success active versus passive we'll see how that plays out we we tend to think that.
He's where there's greater opportunity for active managers to add value, but as you point out there also flows going into passive products in this category.
All right. Thanks, so much.
Alright. Thank you very much for those of you participate in today's call and we'll speak with you or when we have over next what gas for the second fiscal quarter. Thank you very much and good day.
Ladies and gentlemen, this does conclude todays conference calls. Thank you for your participation and you may now disconnect.
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