Q2 2020 Earnings Call
Standing by and welcome to the Eaton Vance.
Second quarter fiscal 2020 earnings conference call and webcast.
At this time, all participants are in listen only mode.
The speakers presentation will be a question and answer session.
Ask a question during the session you need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now on the conference over to your Speaker today Ericsson. Please go ahead.
Thank you good morning, and welcome to our fiscal 2022nd quarter earnings call and webcast.
With me. This morning go Tom Proust, Chairman and CEO of Eaton Vance as well as our CFO Lori helping.
Today's call will go first comment on the quarter and then take your questions.
As always.
Well really before our next release in charge will be will refer to during the call are available on our website.
Since dot com under the headline.
The Investor Relations.
Today's presentation contains forward looking statements about our business and financial results.
Actual results may differ materially from those projected due to risks and uncertainties in our business, including but not limited to dosed discussing or since you filings.
These filings, including our 2019 annual report and form 10-K are available on our website or upon request at no charge.
I'll now turn to call over to Tony.
Good morning, and thank you for joining the call.
The continuing covert 19 pandemic I want to start by offering my sincere best wishes for good help to each of you and your families.
Over recent months, we've seen the tragic awesome human life in nearly every country around the world as well as massive disruption to the global economy and the world financial markets.
We've seen genuine heroism displayed by the countless helped your workers first responders another a central service providers, we're putting themselves in harm's way serving others.
How about that Eaton Vance are deeply grateful for their service.
In recognition of the sacrifices October 19 heroes and the suffering about was experiencing ill health or economic hardship due to the pandemic.
The company in our employees have contributed $1 million to support Cobot 19 relief efforts and our communities and around the world.
In the challenging period Eaton Vance his primary concerns or the health and safety of our employees and their families.
Resilience of our business, serving the needs of our clients and business partners each and every day.
Over the last couple of months, the creativity adaptability and team work of our staff have been put to good use meeting the challenges of operating amid a pandemic.
Since the middle of March nearly all that's employees have been working from home.
Connecting we checked with each other and our clients a business partners to play through video technology.
Well not the same it's being together physically our business its function seamlessly.
We have not experienced any notable disruptions due to operational issues also communication capabilities technology failure or cyber times.
Throughout a period of heavy account activity.
All the markets.
Our trading in operations teams have consistently kept up with unprecedented demand even more working from home.
We don't take these successes for granted and recognize that our ability to respond to changing market conditions. It's a tribute to the planning and hard work of our technology and operations teams.
Commitment and discipline of Bard poised as a whole and the strength of our corporate culture.
Our resiliency is also testament to the stability and longevity of our relationships with critical operations and distribution business partners and the benefits of a workforce. We're turnover is low and working relationships are long established.
From a distribution standpoint, our sales teams have adapted quickly to a world of virtual interactions with clients an intermediary.
But business travel shut down and person meetings canceled across the board, we're leveraging digital communications tools to remain connected.
We have dialed up our digital engagement with financial advisors and consultants, increasing the frequency of calls Webinars and blog posts.
We increased the update frequency of our popular monthly market monitor to weekly in order to help clients a business partner stay abreast of the markets and stay informed about Eaton Vance strategies.
And we are leveraging that Vance advisor Institute to provide financial advisors, we can Bible advice for connecting with clients and these unprecedented times.
Financially Eaton Vance is longstanding commitment to maintaining a strong balance sheet and ample liquidity has been well rewarded.
As of April Thirtyth, we had over 950 million of cash cash equivalents and short term income investments 300 million of available capacity, our corporate credit facility and no debt maturing until 2023.
Over the course of the quarter, we successfully demonstrated our ability to generate incremental liquidity if needed.
Continue to closely monitor our financial resources on daily basis.
In terms of capital management, we slowed the pace of share repurchases during the fiscal second quarter to maintain an ample supply of dry powder.
During the quarter, we prioritize spending on initiatives that support future growth and create operational efficiencies.
Turning to our financial results earlier today, we reported adjusted earnings per diluted share of 80 cents for the second quarter fiscal 2020 unchanged from the second quarter fiscal 2019.
6% from 85 cents of adjusted earnings per diluted share in the first quarter fiscal 2020.
Adjusted earnings differ from our earnings under U.S. gap.
I think somebody to remove gains and losses and other impacts of consolidated investment entities and the company's other seed capital investments.
Adjusted earnings also reflect the reversal of excess tax benefits related to the company stock based compensation.
Combined these adjustments added 15 cents to adjusted earnings per diluted share in the second quarter fiscal 2020.
Tracked at nine cents per diluted share in the second quarter fiscal 2019, and subtracted six cents per diluted share in the first quarter fiscal 2020.
By any measure financial markets were challenging to navigate over the first two months of our second fiscal quarter. That's the full scope of the global pandemic became apparent.
Between the end of January and March 31st the U.S. equity market as represented by the total return of the S&P 500 dropped to 19.6% and was down 30.4% at the low on March 23rd.
During those two month period, we all 72.5 billion and managed assets to market price declines. In contrast month of April served market. So market related gains in our managed assets of 28.9 billion covering almost 40% of the market related decline for the first two months in the quarter.
We ended the second quarter fiscal 2020, with 465.3 billion a consolidated assets under management.
On 1% from a year earlier down 10% from the end of the prior fiscal quarter.
Second quarter consolidated net outflows were 9.3 billion EUR 2.8 billion, excluding parametric overlay services.
Excluding this business our flows fluctuated from 2.4 billion of net inflows in February the 5.4 billion net outflows in March 200 million them net inflows in April.
Again, excluding parametric overlay services.
Hi, guys internal growth and managed assets was minus 3% for the quarter.
Plus 7% in February minus 16% in March and plus 1% in April.
Looking at flows on the basis of managed fee management fees generated our annualized internal growth in management fee revenue was minus 6% for the quarter.
Plus 5% in February minus 23% in March and minus 2% in April.
Besides parametric overlay services, which I will return to in a few moments the primary driver for a net outflows in the second quarter was floating rate income mandates.
Following right now first of the quarter totaled 3.2 billion with 2.4 billion up that occurring in March as benchmark short term interest rates plans and fears of recession related credit losses escalate.
While prices fell sharply blown market, the not experienced interruptions and liquidity seen in other income markets. During this period.
Our floating rate net outflows for the quarter were concentrated primarily in U.S. mutual funds with institutional and sub advisory mandates experiencing approximately 300 million of outflows in the quarter.
Although one prices have now recovered nearly halfway back from the March lows are long professionals believed the asset class represents exceptional value at current levels.
At current levels, given historical default and recovery experience of senior secured floating rate loans in prior periods of economic distress.
Our alternatives category had net outflows of just under 700 million in the second quarter driven by outflows from our two global macro absolute return mutual funds and the final liquidation of the global macro sub advisory account that gave notice of termination in 2019.
Well not insulated from event risk a global macro strategies offer the potential for generating returns that are substantially uncorrelated to U.S. equity and bond market returns, which can be especially appealing in an environment apply economic uncertainty.
In equities, a continuing highlight of our business is a strong growth of Calvert, which contributed 1.1 billion to equity net inflows in the second quarter and a 1.9 billion to the first in the first half of fiscal 2020.
Net inflows into Calvert equity mandates were up 85% in the first half of fiscal 2020 compared to the same period in fiscal 2019.
And the second quarter covered equity fund had net inflows of over 400 million Everett small cap fund over 200 million in Calvert emerging markets in Calvert International equity funds over 100 million on a combined basis.
Calvert strong equity flows reflect both the power of the Calvert brand as a leader in responsible investing.
The outstanding investment performance of the Calvert equity strategies.
As can be seen on page 17 of the slides that accompany this call as of April Thirtyth 14, Calvert equity in multi asset funds were rated four or five stars by Morningstar for at least one class of shares including kept five Calvert funds that are rated five stars.
Atlanta capital equity strategies contributed over 600 million to net inflows in the second quarter with both the Atlanta capital core equity and growth equity teams generating net inflows.
Including the Calvert equity fund, which is managed by the Atlanta capital growth team net inflows into Atlanta capital managed equities exceeded $1 billion in the second quarter.
As in past periods of economic uncertainty Atlanta, Campbell's brand of high quality investing holds particular appealing to current environment.
So I wasn't Eaton Vance management equity strategies were substantially flat with net inflows into privately offered funds offset by outflows from other equity strategies.
Parametric saw equity net outflows of 2.15 billion driven principally by withdrawals from parametric emerging market equity strategy.
It's engineered strategy applies a modified equal weight approach to investing in emerging markets seeking to benefit from diversification and rebalancing alpha.
Rather performance for the year to date and over longer periods as suffered from a systematic underweighting China by far the largest constituent of emerging market indexes and a top performer among the emerging markets over recent periods.
Turning to fixed income second quarter net inflows of approximately 200 million were driven by high yield bond short term government income in emerging market local debt mandates.
And high yield both retail funds institutional separate accounts contributed to net inflows of 600 million.
We're especially pleased with the growth of our institutional high yield business, where the pipeline of new mandates expected. The fund in the third fiscal quarter now totals more than 1.3 billion.
I'm in an extraordinarily unstable period and the municipal securities markets are muni funds in separate account and approximately 600 million of net outflows.
In the second quarter parametric custom portfolios at 1.3 billion of net inflows, but by 2.7 billion of net contributions to custom core equity second to separate accounts matching first quarter net inflows of this parametric flagship offering.
Net inflows into latter bond separate accounts across municipal and corporate mandates declined to approximately 250 million in the second quarter from 1.4 billion in the first quarter, reflecting declining interest rates and bond market turmoil.
Within parametric custom portfolios centralized portfolio management centralized portfolio management mandates had net outflows of 1.6 billion during the second quarter.
Driven primarily by client decisions to reduce their exposure to equity investments during a period of high economic uncertainty and equity market voluntary volatility.
Periods of extreme market volatility like we are Ics like we have been experiencing create significant opportunities for parametric to add value to custom client portfolios.
Clients insecurity prices enable parametric harvest tax losses that can be used to offset client gains realized elsewhere in the portfolio either currently or in the future.
We continue to believe that the value proposition offered by custom separate accounts systematic tax management remains as attractive as ever.
Turning to parametric overlay services.
Quarter net outflows of 6.5 billion compared to net inflows of 1.1 billion in the first quarter.
The outflows reported for this category reflect decisions by continuing clients, the lower their risk exposure or reducing their derivative overlay positions managed by parametric.
These overlays functions exact function exactly that's intended in this period of exceptional market volatility, enabling clients to quickly and easily ship market exposures without disturbing underlying positions and security by accessing the highly highly liquid futures markets.
Turning to the value of the service in the current environment is the new client relationships established during the second fiscal quarter and the sizable pipeline of new overly business expected to fund in the third fiscal quarter.
Funding by new parametric overly clients older than that 1 billion in the second fiscal quarter with a pipeline of over 3.7 billion expected to fund in the third fiscal quarter.
As we look ahead to continue to focus on building on the distinctive strengths of our major business franchises to achieve positive organic revenue growth.
Through Eaton Vance management, we are the dominant provider a fun solutions for constrained stock positions.
Leading manager equity income closed end funds and the largest manager a floating rate bank loans and.
In fixed income, we have talked to your positions municipal bonds high yield corporate and emerging market local debt.
Parametric because the market leading provider of custom index separate accounts municipal and corporate bond letters outsource centralized portfolio management and portfolio derivative overlay services.
In a capital is among the leading equity managers focused on high quality investing with a strong lineup of high performing strategies.
And Calvert is among the largest and most respected specialists and responsible investing.
Number one in response, we managed U.S. mutual fund flows over the past 12 months and number two and managed mutual fund assets.
As we consider the current environment, we see significant opportunities build on these strengths even as competitors faced the more uncertain future.
Well, we don't know the path of a pandemic from here or how financial markets will perform we're pretty sure our industry will continue to trend increasingly in the direction of customized individual separate accounts.
Sponsel investing and specialty wealth management strategies and services.
You can open ended opportunity, which Eaton Vance as a dominant are leading market position.
Since the founding of our predecessor Eaton Howard back in 1920 for our business has weathered many storms and I have no doubt that we will get through this one as well.
As in prior periods of disruption.
Goal is for Eaton Vance to emerge from the covert 19 pandemic stronger and better company.
Based on the continuing high growth potential of our leading investment franchises the strength of our financial position and culture.
In the resolve of our people I have every confidence that objective will be achieved.
That concludes my prepared remarks, I'll now turn the call over to Laurie.
Thank you and good morning.
I second kinda talk to each of you and your families are healthy and well. It's Tom described we reported adjusted earnings per diluted share of 80 cents to the second quarter fiscal 2020 unchanged from the second quarter fiscal 2019 and down 6% from 85 cents in the first quarter fiscal 2020.
Affected this quarter, our calculation of non-GAAP financial measures excludes the impact of consolidated sponsored funds and consolidated collateralized loan obligation any collectively consolidated investment.
Another seed capital investments.
Adjustments to GAAP operating income include the add back of management fee revenue received from consolidated investment entities that are eliminated in consolidation and the non management expenses. It consolidates sponsored funds recognizing consolidation.
[noise] adjustments to GAAP net income attributable to Eaton Vance crop shareholders include the after tax impact because adjustments to operating income and the elimination of gains losses and other investment income expense, a consolidated investment entities and other seed capital investments included in non operating income expense as determined net of taxes.
Controlling and other been especially strong.
I've gone, making these adjustments to provide investors and analysts the like a clear line of sight the company's core operating result.
All prior period non-GAAP financial measures have been updated to reflect this change.
If you can see an attachment to our press release adjusted earnings exceeded earnings into U.S. gap by 15 cents per diluted share in the second quarter fiscal 2020, reflecting the reversal of 16.8 million of net losses, the consolidated investment NVS and our other seed capital investments.
Back of 1.8 million of management fees and expenses, the consolidated investment entities and reversal of 1.1 million a bit excess tax benefits related to stock based compensation awards.
Burning study U.S. GAAP exceeded adjusted earnings by nine cents per diluted share in the second quarter fiscal 2019.
Taking the reversal of 11.4 million of net gains a consolidated investment entities another seed capital investments.
Add back of 1.8 million of management fees and expenses, the consolidated investment entity and reversal of point threemillion that excess tax benefits related to stock based compensation awards.
Earnings under Us GAAP exceeded adjusted earnings by six cents per diluted share in the first quarter fiscal 2020, reflecting the reversal of 3.6 million net gains a consolidated investment.
Another seed capital investments.
I'd like a 2.4 million of management fees and expenses of consolidating the best amenities and reversal of 4.9 million that excess tax benefits lead to stock based compensation Awards.
I started attachment three to our press release, our operating income as adjusted to include the management fee revenue and exclude non management expenses on a consolidated investment.
But down 4% year over year and 10% sequentially.
Our adjusted operating margin was 30.5% in the second quarter fiscal 2020, 31.4% in the second quarter fiscal 2019.
30.3% in the first quarter fiscal 2020.
As Tom noted ending consolidated managed assets were 465.3 billion that April Thirtyth, 2020 down 1% year over year, reflecting cobot 19, but they didnt negative market returns, partially offset by positive net flows over the last 12 months.
Ending consolidated managed assets were down 10% from the prior quarter end, reflecting sharply lower market prices in quarterly net outflows driven by investor uncertainty in the Mets in a couple of pandemic.
Although average managed assets this quarter were up 5% in the same period last year management fee revenue was down 1%, reflecting a 7% decline in our average annualized management fee rates and 31.8 basis points in the second quarter fiscal 2019 to 29.7 basis points in second quarter fiscal 2020.
The decline in our average annualized management fee rate was partially offset by the impact of one additional fee day in the second quarter fiscal 2022 that oneq here.
The decline in our average annualized management fee rate versus the comparative period was driven primarily by shifts in our business next from higher feet alone mandate.
Versus the prior quarter average managed assets were down 6% driving a 10% decrease in management fee revenue.
The decline in management fee revenue exceeded the decline in average managed assets sequentially, primarily due a 4% decline in our average mean average annualized management fee rate from 30.8 basis points in the first quarter fiscal 2020 to 29.7 basis points in the second quarter fiscal 2020, and the impact of two fewer fee days in the second quarter.
Performance based fees, which are excluded from the calculation of our average management fee rate contributed 2.5 million 1.8 million <unk> point 2 million to revenue in the second quarter fiscal 2022nd quarter fiscal 2019, and the first quarter fiscal 2020, respectively.
Management fees earned on consolidated investment entities, which are eliminated in consolidation and excluded from the calculation of our average management fee rates were 1.3 million 1.1 million and 1.9 million in the second quarter fiscal 2022nd quarter fiscal 2018 in the first quarter fiscal 2020, respectively.
Turning to expenses compensation costs decreased 3% year over year, reflecting lower operating income based investment performance based bonus accruals lower stock based compensation and lower severance costs.
These decreases were partially offset by higher sales based incentive compensation and higher salaries associated with increases in head count yearend compensation increases for continuing employees and the impact of one additional payroll during the second quarter fiscal 2020.
Sequentially compensation expense decreased 13%.
I think lower operating income based and investment performance based bonus accruals lower stock based compensation driven by the impact of employee retirements in the first quarter decreases in seasonal compensation expenses that are recognized primarily in the first fiscal quarter lower salaries and benefits driven by two fewer payroll days in the second fiscal quarter and a decrease in severance.
Hi.
These decreases were partially offset by higher sales based incentive compensation.
Noncompensation distribution related costs, including distribution and service fees expenses in the amortization of deferred sales commissions decreased 1% year over year, primarily reflecting lower distribution and service fee expenses and condition amortization for classy mutual funds shares driven by lower average managed assets and a decrease in describe.
Okay marketing expenses.
These decreases were partially offset by higher upfront sales Commission expense service fee expenses and commissioning amortization for private funds.
Sequentially Noncompensation distribution related costs decreased 12%, primarily reflecting lower distribution expenses for classy mutual fund chairs lower service expenses for class eight mutual funds shares and private funds a decrease in intermediary marketing support payments lower discretionary marketing spending and Laura.
Sales Commission expense.
Fund related expenses increased 9% year over year, reflecting higher sub advisory fees due to an increase in average managed assets a sub advised fun.
Financially funds related expenses decreased 2%, reflecting lower sub advisory fees due to a decrease in average managed asset for sub advised funds and the impact of two fewer fee days in the second quarter, partially offset by an increase in fund expenses borne by the company.
[noise] other operating expenses increased 7% from the second quarter fiscal 2019, primarily reflecting increases in information technology spending and facility expenses, partially offset by lower travel expenses professional services and other corporate expenses.
Other operating expenses decreased 3% sequentially, primarily reflecting decreases in travel expenses professional services, partially offset by increases in information technology in facility expenses.
As Tom noted, we're continuing to invest in areas that are important for the future growth at the company or otherwise focused on tight expense management, reducing discretionary spending and.
And this period of volatility benefit greatly from the fact that more than 40% of our operating expenses are variable in nature, moving up and down the changes in operating income managed assets or sales results.
Non operating income expense was down 93.7 million from the second quarter fiscal training team, primarily reflecting a $65.7 million negative variance and net gain or loss and other investment income of consolidated sponsored funds and the company's investments another sponsored strategies a.
$27.5 million negative variance in net income of expense for expense of consolidated see a low entities and a half million dollar increase in interest expense.
Lots is related to consolidated investment entities are partially offset by related variances in non controlling and other beneficial interest.
Non operating income expenses down 81.7 million sequentially, primarily reflecting a 66.6 million dollar negative variance in next gain or loss in other income from the company's investments in consolidated sponsored funds and other sponsored strategies.
14.7 million dollar increase and the net expenses, a consolidated CLL entities and a half a million dollar increasing interest in interest expense.
As a reminder, our calculation of adjusted earnings per diluted share now backs out the gains and losses and other impacts consolidated investment entities and other seed capital investments.
Turning to taxes, a U.S. GAAP effective tax rate was 45.3% mid second quarter fiscal 2020, 25.1% and second quarter fiscal 19, and 22.8% in the first quarter fiscal 2020.
The company's income tax provision was reduced by net excess tax benefits related to stock based compensation awards totaling 1.1 million in the second quarter fiscal 2000 20.3 million in second quarter fiscal 2019, and 4.9 million in the first quarter fiscal 2020.
Shown an attachment to our press release or calculations of adjusted net income and adjusted earnings per diluted share removes the impact of gains losses, and other investment income expense of consolidated investment entities and other seed capital investments.
Add back the management fees and expenses, the consolidated investment entities and exclude the effectiveness excess tax benefits related to stock based compensation awards.
This basis, our adjusted effective tax rate was 24.9% in the second quarter fiscal 2020, 26.9% and second quarter fiscal 2019, and 27.6% in the first quarter fiscal 2020.
On the same adjusted basis, we estimate that our quarterly effective tax rate for the balance of fiscal 2020 for the fiscal years, a whole range between 26 and 27%.
We finished our second fiscal quarter, holding 951.3 million of cash cash equivalents in short term debt securities and approximately 257.1 million and seed capital investments.
We are carefully managing our cash flow to maintain our financial flexibility, while continuing to prioritize returning value to shareholders.
During the second quarter fiscal 2020, we repurchased 900000 shares of our non voting common stock for approximately 31 million and used 41.7 million of corporate cash to pay the 37 in half cent per share quarterly dividend, we declared at the end of our previous quarter.
Our weighted average diluted shares outstanding were 111.6 million in the second quarter fiscal 2020 down 2% year over year, reflecting share repurchases Nexus new shares issued upon vesting of restricted stock awards and exercise and employee stock options and a decrease in the dilutive effect in the money options and so.
Good stock awards sequentially weighted average diluted shares outstanding were down 3%.
Fiscal discipline tight management of discretionary spending and maintaining a strong balance sheet are among our top priorities and these unprecedented times.
We are well positioned to whether the current environment and are continuing to invest in our business to support future growth.
This concludes our prepared comments at this point, we'd like to take any questions you may have.
At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad. Your first question comes from the line of Dan Fannon from Jefferies. Your line is open.
Thanks, Good morning, just to follow on some of the monthly trends.
I appreciate your additional disclosure, but can you talk about you know kind of the did the variance between March and April and if you can comment about may so far with regards to grow sales versus redemptions in terms of the improvement was mainly just slower redemptions works you saw kind of gross sales also starting to pick up during goes.
Recent months.
Yeah, Dan This is Tom.
The somewhat odd thing about March was that although we had significant net outflows as we described.
Gross flows were very strong up approximately 50% from February March so it wasn't like there was no activity. It's in fact, there was hyper activity on both the the inflows and outflows side things have things have slowed a bit on.
Both sides of that thankfully.
Has indicated we had a positive for results for.
The month of April and May have been I guess I would say made today has been a broadly similar to what we saw yen.
For what we saw in.
April So you know were up.
We got hit pretty hard.
And the crisis period, a we bounce back in.
In.
We bounced back and I'm trying to find this report I was going to I can't pull it out, but we believe we Bob Weve stayed positive Oh, yeah in March and sorry made to date.
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Great and then I guess is another one on flows you mentioned 1.3 billion in high yield it's going to fund in the third quarter I guess just.
Thinking about risk profiles and client engagement or would you say that you're seeing you know kind of re risking or just opportunistic where you have good performance or certain strategies that are doing well, you're seeing the kind of uptick. So I guess just broadly any other commentary on the institutional portfolio and kind of client behavior based on what your.
Hearing and seeing.
No I would say it [laughter] mix there are certainly clients that are.
Looking at where risk assets or price than where they have been price than a and have stepped in.
In some cases those might have been clients that work, we're early to Ah so take off risk exposure.
The fact that we're seeing high yield and flows.
I think is indicative of that were up a we've seen a good period, Oh, we had actually quite strong month, a in high yield and in April.
And were as indicated expecting some.
Some quite important significant institutional flows on if you can you say in both cases.
That represents a maybe up.
I think generally sophisticated clients looking at prices of risk assets in concluding that from a long term investment perspective that that these are attractive entry points. We've seen some of that in bank loans as well flows there have.
Continued on an improving path.
In may so where they're not.
They are modestly negative but.
Better than they work in.
Better than they were in April and vastly better than they were.
In in March so it feels like that.
Our experience is it's probably been consistent with what just the trend of of the equity market would suggest that people have been increasingly willing to.
To take the view that weve likely seen the bottom of the cycle in terms of.
No stock prices, then and economic activity and that while there's obviously a lot of pain could be still absorb.
As we typically start to come out of a pandemic period.
Investors want to work through that and we we see that in our and our four results, which it which have been certainly much better in April and cost of trend has continued.
In may for let's call it risk assets, so equities and up and floating rate income and how your bonds, a principally would be our exposure there.
Thank you.
Your next question comes from the line of Patrick David Autonomous Your line is.
We can't hear anything Hello, Dan Your line is open.
[noise] [noise] Dan can you please check to see if you're on mute.
[laughter].
Well offer to maybe we can move to the next question and then we'll circle back with their current.
After that.
Your next question comes from the line of Craig She getting salary from credit Suisse. Your line is open.
Thank you good morning, everyone. My first one is on the fee rate and I heard lorries earlier comments on that day count I was looking for additional color on the two basis point decline in both the equities and the ALKS blended fee rate from last quarter.
Hi, Craig its Laurie and in terms the equities I think where we're seeing the decline is due to the net outflows that we've seen it parametric emerging markets with within that category tends to be one of the higher.
Higher fee products and then in all because the same it's the same issue. So it's just a question of product mix within the category.
Got it and then just a follow up to that last question.
Can you provide us an update on the bank loan business I'm just thinking with.
Very low interest rates today, and rising corporate defaults in the U.S. How is this products sold to both retail institutional investors and do you have any updated thoughts on the forward flow trends from this business.
So, though as I mentioned flows for excuse me for made today have been modestly negative less than 100 million of outflows for them for the month to date through.
And that's through Monday.
So were you know, we're not seeing a significant continuation of the negative trend that we saw.
In March the appeal of this asset class.
I would say for many investors and it is from a total return perspective as you point out.
Rates are oh, absolutely benchmark rates are low.
But spreads are wider so.
A place where.
Hi.
It's an environment, where cash yields are zero are headed close to that.
This asset class offers a true floating rate exposure. So you can get Oh high levels of current income without being exposed to meaningful amounts of interest rate risk and also.
The opportunity for significant Oh price appreciation, yeah, and this is a big yeah. This economic cycle is similar to others, where.
The experience of past cycles has been that the default and recovery experience a senior secured floating rate bank loans.
It's such that from current prices.
There's a significant opportunity for for price appreciation certainly no guarantees a these there these are risk assets below investment grade.
Securities.
But but high current yield a negative.
No exposure to interest rate risk.
So to speak of.
And a price that reflects.
Still a pretty pretty pretty dire outlook for for the economy, which.
Again looking after we're taught a historical defaulting recovery.
Experience a bank loans. This is proving to be a good good price point for entry.
Thank you Tom.
Your next question comes from nine of Patrick Davitt from and Autonomous Your line is open.
Hey can you hear me now.
Have we can't.
Okay. Good morning, Oh, sorry about that yeah, I, just as a follow up to Dan's question I. Appreciate the pipeline guidance are there any known offsetting redemption to the none wins.
I'm not not really speak up.
General generally you don't have a whole lot of generally is not a whole lot of visibility on right outflows. So I wouldn't take too much comfort from the fact that we don't have up a significant pipeline of outflows, but the fact is that we don't we've said in a in previous quarters that we have.
A a large bank on client that for.
A multiyear period has been.
Redeeming out of their physician, that's not over with yeah.
But you know there's some there's some still some outflows there to go up but that's something we've been living were thinking and total were expecting you know maybe a in the range of 1 billion and a half dollars over an extended period of likely multiple quarters.
Potentially even multiple years for that come out, but that's really the only.
Significant oh net out for where we have visibility on.
The rest of our business I would say generally we're not expecting to to see a significant net outflows, but we live in a volatile world than we'd always get a heads up and win win redemptions are coming but the pipeline looks good in terms of of outflows, but I'd take that with a bit of grain of salt because that's.
Generally true that theres not much in the way about what pipeline.
Helpful. Thanks, and then obviously the U.S.G. investing team continues unabated and obviously, helping Calvert could you update us on any plans or or or discussion around perhaps backward integrating.
The Calvert for off process across the whole complex.
Oh, yeah. So that's that I would describe is well underway.
I hesitate to say finished but certainly a well established.
A.
Priority for Us I'll say, beginning two years ago.
Was to integrate Calvert research into the investment the fundamental investment processes of both Eaton Vance management, and and calibre and to build a systems connections and relationships among analysts teams and portfolio managers to accommodate that so we're working on this fall.
For two years, we have a full access to the Calvert research system and the calmer Calvert research analysts.
By all of our equity analysts and fixed income analysts and portfolio management at both Atlanta capital and EM and that's been true.
For several quarters now like anything.
The amount of influence that has been our investment decision, making is maybe a bit hard to measure, but certainly the connectivity is there a and if you if you talk to our portfolio managers.
And hear them describe what we view with our competitive advantage is the fact that we have access to this team of.
Caliber specialists analysts, who bring a very different perspective, and a very different skill set than traditional fundamental analyst.
Something I would say that consistently are our plans have been talking about for several quarters. It varies a bit by asset class bigger and in equities, but it also becoming increasingly important in fixed income.
The other place where we're increasingly integrating Calvert is is relative to parametric parametric is not in the business of making a active calls on on stocks or bonds. So there's no fundamental process to integrate into.
However, a significant part of the customized separate account business parametric relates to the ability to do customization.
<unk> clients specified.
Gee since abilities to the extent that we can back that out.
With Calvert research that we can provide with counterpart impact a measurement that we can provide.
With collaboration and engagement with issuers.
That strengthens the value of that of those parametric offerings and so that's a I would say that's more of a current priority that's something we've been focusing on historically and still some work to do there, but we're optimistic that.
At the conclusion on this cross that that in parametric like Atlanta capital and and Eaton Vance management, we will see a significant enhancement of their offerings in the marketplace based on the connection or through the through Eaton Vance.
Parametric I'm, sorry to say Calvin.
Thank you.
Your next question comes from a line of Ken Worthington JP Morgan Your line is open.
Hi, good morning.
Maybe first on a your changes to the reporting of adjusted earnings. So it looks like the changes make this quarter's results look much better.
In prior quarters look a little bit worse, so maybe a couple of questions around this.
It looks like it's a changes were not in place your earnings would be 17 cents lower.
This quarter as per page 10 of the release I guess first thing is that correct and then the timing of the changes seemed a bit gimmicky Ah you took the benefit when it enhanced earnings and now that the CLL CLL outlook has changed your adjusting out the losses. So can you further flush out your comments on why this version of earnings.
Is better than the prior.
Yeah, I can tell US army worried let me start to lauritsen himself. So so headline earnings our GAAP earnings.
Putting all these adjustments we aren't 65 cents, but that's the top line.
Do you want to go with gap.
65 cents.
This quarter consistent with.
Most recent quarters certainly over the last several years every quarter.
We've called out the the contribution of seed capital investments.
And COO investments to our earnings these are investments that are.
Mark to market.
I'm not all but I would say most analysts look through to try and.
Uncovered the underlying earnings power of our business.
Have a excluded those so we called out the numbers in terms of earnings per share impact.
I read of what most analysts report on our earnings have back those out of our I reported earnings.
As you point out during past periods.
We're positive contributor so consistent with a rising markets.
Oh, absolutely this adjustment here.
Our adjusted earnings higher than if we had included the then if we had.
Not reflected sorry, then if we had a then if we had reflected the losses.
Our business realized on seed capital investments and COO gains and losses.
We've also tracked competitors among public companies, what we're doing is.
Fully consistent with what we think the prevailing trend is of other managers.
Theres a lot of disclosure here about the impact then you in every other analysts has the ability to pick and choose you want to see the GAAP number at 65 cents, a you want to know with or without different adjustments. We quantify every one of them two cents per share and you have the ability to choose whatever earnings you want.
On a choose that's being most relevant.
We believe.
That for most people not all but not everyone perhaps.
The most relevant measure of our performance is what work today, describing as adjusted earnings per diluted share.
Marty you might want to add to that.
Yeah, I would just I would just add can that we may be putting in tabular form and actually including its part of our adjusted earnings calculation, but we have consistently been actually providing that information quarterly for quite some time and I think as we were actually looking at how other peers were handling their seed capital portfolio as we realize that our pay.
Arent that ICL disclosure was not necessarily consistent with what others, we're doing and that quite frankly, if we were going to provide it parent that we should just provided as part of that the reconciliation we thought it would be cleaner and it would be easier to get at so that was that was the rationale for actually providing in the adjusted number and I do believe it sounded as Tom said that this is.
A better indicator from our perspective, the earnings power of the company and it takes out a lot of the noise associated with consolidating large portfolios of products that but quite frankly had very little to do when you actually back out to non controlling interest had very little to do with what our core operations actually look like.
Okay, great. Thank thank you for that and then on the Muni business the mini latter business.
To what extent is cope with 19 still weighing on the outlook for sales.
Or or is that business sort of recovered like you know some of your other businesses that you highlighted.
Let me.
Just pull up some.
Some numbers.
So we have.
Uh huh.
[noise] they are still being it's it's a good business for you and we've got you know municipalities under pressure and we can see what muni funds are doing.
But the latter business is sort of a different entity or different animal and it's been a very good one for you.
Yeah, I would say that business has not.
It's not really recovered to.
I'll say pre pre crisis levels were not seeing outflows, we never really saw outflows and.
And bond ladder during this period, but we the first challenge. We had this is more about February challenge or was that I'm, giving you need a rate got so low that.
Income levels were not particularly attractive in investment grade.
So so one of the issues we're dealing with.
It's just a when you when you layer in the advisers expenses at interest rate as they have been for Muni sort of February timeframe.
Wasn't a lot of income available that was one of the thing that was what's weighing on US then as we got into March yields picked up because because muni spread versus treasuries are starting to gap out but you.
Muni market was not functioning, particularly well during.
During the month of March and I think advisors were somewhat leery of up but coming back to.
Coming back to the coming back to the the asset class. So it's been a I guess I'd say, it's been up maybe a partial recovery.
But you know we're not seeing the kinds of activities that we did before I'm looking at for per month to date.
You know modestly positive flows I guess, probably consistent with maybe a little better than the yeah, a little better than the trend of the second quarter, but but not where we were.
In the first quarter in prior periods. So it sounds like it looks like it'll take some time for that business to come back.
Great. Thank you very much.
Your next question comes from the line of my carrier from Bank of America. Your line is open.
Alright. Thanks, good morning, Thanks for taking the questions.
The first given the parametric overlay flows Tom you mentioned you some of the drivers in the quarter, you know as well as the pipeline of new client.
Just in terms of the current clients that de risk during the quarter, maybe based on past trends and these volatile backdrops do you tend to see those clients like come back in in re risk you guys kind of the market start to stabilize I'm just wanted to get some perspective on yes. Some of the had a de risking that we saw in the quarter.
Her University yeah.
Good question. So we have obviously been through different downturns before.
And it is not uncommon as were good coming into are going through a crisis period, when there's a lot of volatility in the markets.
Where a institutions enough that through these clients are well say I want to pull back from market exposure at some point, maybe it's early before the crisis hit the as it gets a little bit after the worst whatever it is.
It's certainly not uncommon for for people to de risk their portfolios.
During up during market declines and again these are sophisticated institutional investors. So this is not up there's not a knee jerk reaction the primarily how these how the services use the biggest application or lots of other ones, but the biggest application.
Yes, securitizing cash that's in a client portfolios. So if you've got three or 4% cash in your portfolio that is not there for a particular investment reason it's there.
Maybe just I'll say say sloshing around at the bottom of the portfolio. We've made the case historically that the best way to put that cash to use is using futures so you're not disturbing.
The investments of the underlying managers, who are running different sleeves are the portfolio.
You have ultimate liquidity as to be able to take on or take all exposures quickly.
So this is designed to be.
Quick.
Quick Twitch.
Asset movement positions that historically when markets go down you see people take off exposures, but I think is your question suggest generally as you get beyond the crisis period, particularly in periods like now and cash returns or.
Nothing that a you start to see a the resumption of putting back on position by existing client, there's certainly nothing in our experience or nothing in our communications.
Clients through this period that would suggest anything other than those positions are likely to come back overtime or what's exciting for us is as I mentioned in my prepared remarks is that.
This period has been a great reminder, to the prospects some prospects we've been talking through for half dozen years or more of the tremendous value of this service.
That.
If you put some of your assets in with with US you have the ability to at very low cost and essentially.
Immediately to add or subtract a market exposure consistent with.
Whatever view there is of the the policy committee or the CIO that that's running the portfolio highly valuable service.
During this period Unfortunately from our from a flow perspective, it contributed negatively to the reported flows the the revenue impact of that I should probably mentioned it is pretty modest generally the conditions that were taken all whereby larger clients where incremental fee rate even relative to an over.
Overall averaged five basis point for the business I'm in many cases were a fair bit less than that for those incremental assets that came up came all I'm not a huge revenue impact, but because we report these as managed assets and they are included in our flows.
We get to talk about them during periods when money is moving in are moving out of these exposures.
Okay. That's helpful and then or just.
<unk> expenses were met well manage the margin held up relatively well and I heard your comments on focusing on discretionary expenses.
In the quarter, where there any unusual declines are items.
And the expense base and then just how are you thinking about the outlook given obviously uncertain backdrop, yet it fairly strong rebounding market. So you know any context on how we should be taken.
Yeah, and just in terms of did the current quarter. There I don't think there was anything that was sort of a onetime item that we would call out. There is obviously just a lot of unusual activity to the extent that we no longer have people traveling and we no longer.
Generally speaking you're gonna have some decline in just started discretionary spend I'm personally with being because being managed very carefully and personally just because people are working out of their homes and there's just not as much activity.
I think that is you're looking at the quarter I think what's probably what's most notable just the decline in certain categories from last quarter and I think that's the biggest could that is obviously compensation and we highlight every year in the first quarter that we've got seasonal compensation expense it hits related to benefits that research.
That payroll tax clocks that reset and stock based compensation that we recognized in relation to and employee retirements. So I think you'll see that notable decline in in terms of what I would think of some of the more fixed components of our of our compensation that isn't that roughly 40% of our costs are variable so in periods where you.
Volatility that we've seen in sales and a decline in average assets were going to you know, we're going to roll that I'm asking them to a certain extent that's a testimony to the fact that our cost structure is pretty flexible.
Yes.
Okay, I just want to isn't getting any kind of forecasting I think I've declined to do that at this point I just don't think anybody knows where this is going.
Yes.
Your next question comes from the line of Robert Lee from KBW. Your line is open.
Thanks, Thanks for taking my question in the.
Doing well sometimes.
They just starting with the expense initiatives Laurie.
<unk> expense guidance per se can you.
Maybe update us what are some of your new business initiatives, you're spending on I know there was parametric.
Really.
Technology.
Pure technological lead there can you just fresh precious and some of the she initiatives.
Yes, I can start maybe comment there you know wants to comment as well I'm just the to the two big ones that we ask that we're currently undergoing I think we've talked about number on a number of caused the first is as you referenced the operations and technology platform parametric, where we are really making investment there to build out that platform.
Recognizing the opportunity that we see just in terms of grosses that business in custom corporate killer. The other big one that were there we're well underway with right now is migration to the cloud I think that like many competitors, where we're on moving off of our out of our data centers and trying to actually move into cloud technology. So we've got a bridge.
Really large project that's going there that we're going to continue to invest in.
That's right the tail end up most of our our.
Initiative to effectively get our.
Trading platforms standardized across the organization that we've done a lot with their fixed income teams getting everybody on the same platform.
And I think that we've pretty much gotten to the tail end of that but down theres still some residual central work being done and enough to anything else on that you think that we should we should comment on.
Yeah, you highlighted the ones that I would point to certainly the though the work at parametric and the move to the cloud or the or the big.
The pretty big spend the item that we've made the determination that these are strategically important to us and you know if they're going to continue.
I would say also calvert at the business isn't isn't area of obvious growth and growth opportunity for us. So there are calvert related spending initiatives that I'm not not necessarily technology related but just in general that.
Continued to be reflected and will likely continue in the in the future even though were.
Focusing on.
Reducing discretionary been spending so.
If you want to get funded or for any kind of a project.
Two things, it's got to be supportive of business growth in areas that have.
Demonstrated pretty clear opportunity.
And or.
A quick payback cost savings beyond that it's pretty hard to get a new initiatives approved.
You know maybe as a follow up to that I mean.
Historically, you guys would then the.
Maybe relative to some peers.
Try new things.
It's kind of curious.
With that in mind.
You have your own version of the Nontransparent ETF on file, but not yet but you.
Your other technology that.
But thats announcements about and just maybe update us and kind of where somebody that's fans and if there are any kind of.
Things are your other things you may Besides Calvert you may be investing in that you think you know our if you look a year or two or three down. The road you think could be a new businesses for you.
Yeah.
Thanks for that.
Good day.
Good comment on the the less transparent active VTR filing.
That was put in front of the FCC and Oh, Let's say February of last year, maybe January of last year. So we've had a fair bit of back and forth with the staff there feel.
Pretty good about the progress there and I think are optimistic of a favorable outcome, but we certainly can't promise that that will be achieved and don't know the timing of that but feel good about the prospect of entering that.
That growing field at a time when it's it's really just getting started and I think the thing that we're watching.
About that space.
Maybe a couple of things, but but the most important when I would say on the uptake of these is.
We'll.
We'll sponsors allow.
The same are substantially identical strategy to be be offered both as a mutual fund and as Oh anti TNF and.
There are certainly has been a view at times that we've heard by distributors that.
That completes that causes a.
Concerns for them I think somebody from a from a business risk management compliance perspective.
They don't know absolutes, there, but that was one of the things that that slowed us down with Nextshares and.
If that if that if that changes and I think there are signs that it may be changing at least at some distributors.
We think that's a very bullish sign for the for the potential of these.
These products obviously, the the other key.
Will be the ability to.
To gain access the asset classes other than other than U.S. equities. So.
So far all the approvals have been just for U.S. equity you can certainly.
Our ambitions and I'm sure everyone else's ambitions in the space would be.
To come up with a methodology that can provide for.
A good assurance of good trading results.
In other asset classes, where the challenge for efficient market, making is is it's greater than it is in.
In the U.S. equity so I think we're we're both increasingly optimistic about.
The potential of the of this business having.
Seeing no.
No no one now a number of firms that are announcing product and apparently a better receptivity and on the part of distributors.
Establish strategy.
Our business in general.
Remains very hard to bring a new strategy out if you can take a successful strategy and make it available in what many people believe is a better structure.
That has real potential.
So we're increasingly optimistic about that and certainly very hopeful about our own ability to.
To enter the freight with our Oh with our patented technology that's in front of the.
The FCC now in terms of other initiatives that I would highlight I think.
Certainly Calvert is an area.
A lot of interest from a from a new product development standpoint lots of ideas for extend expanding.
Calworks a range of strategies and range of markets that they addressed when we when we acquired Calvert at the end of 2016. It was essentially a U.S. mutual fund brand and our our our challenge focus has been.
Both the increase our share of that business and that really has been the driver of growth today of Calvert.
But also to look for ways to.
Extend the Calvert brand into other markets and we started to have success in institutional and.
Different approaches to investing but those are I would say, maybe two fertile areas of focus the less transparent <unk> and caliber generally and maybe a third I would add is.
Within parametric are there different.
Different ways of using in combining.
They are customize individual separate accounts as.
We will be an area of growth and focus for us on on new product development.
Great. Thank you the answer I appreciate it.
Thank you.
Excuse me do we have time for one more question.
Yeah, let's take one a one last question. Thank you.
Your last question will come from Chris Shutler from William Blair. Your line is open.
Hey, guys. Thanks for squeezing me in here I hope, you're all well [laughter] regarding.
Let's see so the core equity separate accounts comment maybe just provide an update on how you see the competitive environment evolving over the medium term in that space I know that direct indexing is getting a lot more attention. These days throughout the industry, including for example, the a large custodians. Thanks.
Yeah, So there's there.
I think a fair bit of conversation about this topic, including some related to a acquisition activities.
Most recently I'm now.
The the actual business that were in I would say the competitive situation hasn't changed very much a there've been a.
Few new competitors that have come in and they have to my understanding haven't really.
Taking a lot of market share I think our experiences. This is an easier place to put together and if the brochure and up in some cases, a nice looking website, but in terms of the blocking and tackling a.
Customized individual separate accounts literally delivering on the promise of customization I mean every account is meaning separately.
It's not so easy and I think one of the things that was demonstrated during the month of March.
Was that this is not a business for the dampers. This is a hard thing to do well and we at the market leader a committed an enormous amount of resources and the tremendous amount of management energy at parametric.
It's focused on achieving a consistently high level of coin service in a you know market environments, including the challenging work environments like we went through March.
So with you know more conversation about direct indexing. It's that term is entered the vernacular of our business.
People recognize that one of the distinctive strengths of of Eaton Vance is our leadership through parametric in that business.
Nobody.
Had any real impact on on a reducing or market share, we're taking our business there.
We continue to prosper in that business.
But there's certainly the possibility which were a very much open to that there will be more competition from.
From credible players.
By and large wherever the view that that can be helpful. Because.
The visibility of the market opportunity, it's still relatively well Oh. This is still up a pretty small business.
Rains have you know maybe a couple of hundred billion dollars.
Relative to index mutual fund and index ETF opportunity that you know many many many times that trillions of dollars of assets.
So I think there's lots of opportunity.
If there is going to be more competition, there's lots of opportunity.
For that competition to help drive market growth not just pick business from each other.
Alright, Thanks, a lot.
Thank you.
[noise] there no further questions at this time I'll turn the call back over to the presenters.
Thank you and then thank you everyone for joining us today, and we hope everyone can sheet, you stays fail safe and healthy. Thank you.
This concludes today's conference call you may now disconnect.
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