Q3 2019 Earnings Call
At this time I would like to welcome everyone.
To the Eaton Vance Corp, third fiscal quarter earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you Ericson <unk> Treasurer and director of Investor Relations you May begin your conference.
Thank you Julie and good morning, and welcome to our fiscal 2019 third quarter earnings call and webcast.
With me today. This morning are Tom Faust, Chairman and CEO of Eaton Vance and though we help our CFO .
In today's call, we will first comment on the quarter and then take your questions.
The full earnings release and charts, we will refer to during the call are available on our website Eaton Vance dot com under the heading Investor Relations.
I will remind you that today's presentation contains 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 discussion or SEC filings.
These filings, including our 2018 annual report and Form 10-K are available on our website or upon request at no charge.
I will now turn the call over to Tom.
Hi, good morning, and thank you for joining us.
Earlier today, we reported 90 cents of adjusted earnings per diluted share for the third quarter fiscal 2019, an increase of 10% from 82 cents in the third quarter of fiscal 2018 and up 1% from 89 cents in the second quarter fiscal 2019.
Our adjusted earnings per diluted share. This quarter include four cents of combined contribution from seed capital and consolidated.
COO and the investments.
By comparison seed capital unconsolidated entity investments contributed a combined 10 cents to adjusted earnings per diluted share in the second quarter fiscal 2019 and had negligible impact in the third quarter of last year.
We ended the third quarter of fiscal 2019, with a record $482.8 billion of consolidated assets under management.
Up 3% over the prior quarter end up 7% from 12 months earlier and up 10% for the fiscal year to date.
My mandate reporting category changes in consolidated assets under management versus the prior quarter and raise from growth of 5% for fixed income 4% for exposure management three per cent for portfolio implementation and 2% for equities to declines of 4% for alternatives and floating rate bank loans.
In the third quarter fiscal 2019, we had we had 8 billion of consolidated net inflows were 5.3 billion, excluding exposure management mandates, which have lower average fee rates are more variable flows than our other reporting categories.
This represents our twentyth consecutive quarter of positive net flows.
For the first nine months of fiscal 29 team. We had 14.1 billion of consolidated net inflows or 10.1 billion excluding exposure management.
Barring unforeseen fourth quarter reversals were poised for fiscal 2019 to become our 24th consecutive year of positive net flows.
The consistency of our organic growth over the long term speaks to the diversity of our leading investment strategies the strength of our distribution organization. The performance excellence our investment teams have delivered and the compelling value proposition offered by the distinctive wealth strategies and services we provide.
Our third quarter net flows represent 7% internal growth in consolidated managed assets on an annualized basis or 5% excluding exposure management.
Annualized internal growth in consolidated management fee revenue was 2% in the third quarter, which compares to 5% in the third quarter of last year and 1% in the prior quarter to calculate this measure of internal growth, we subtract management fees attributable to consolidated outflows for the period from management fees attributable to call consolidated inflows and then measured the difference as a percent of beginning of period consolidated management fee revenue taking into account the fee rate applicable to each dollar in and out.
This quarter's 1.6 billion of net equity net inflows were led by 1.2 billion into parametric volatility risk management mandates, which include defensive equity covered call, writing dynamic hedged equity and other strategies incorporating equity options Calvert emerging markets large cap growth and responsible index strategies enlarge cap growth and Atlanta capital large cap core and growth strategies also contributed to the quarter's positive equity flows offsetting net outflows from parametric emerging markets and the Atlanta capital Smid cap and small cap strategies, which are close to new investors.
Across a broad range of investment categories active equity strategies managed by M. Calvert and Atlanta capital have delivered strong return versus benchmarks and peers over recent periods as of July 31st actively managed mutual funds as I share total returns ranked in the top quintile of their Morningstar category over each of the year to date, one year and three year periods included the Eaton Vance large cap value balanced tax managed equity allocation global income builder and Atlanta capital focus growth funds as well as the Calvert equity mid cap small cap international international equity and balanced funds.
In fixed income approximately half of the 3.4 billion of net inflows in the third quarter of fiscal 2019 were attributable to latter corporate and municipal bonds separate accounts, which had 1.7 billion of net flows among our taxable fixed income funds. The quarter's flow leaders included Eaton Vance short duration government income fund with more than 400 million of net inflows core plus bond with 200 million of net inflows in emerging markets local income with nearly $200 million of combined net inflows into the U.S. mutual fund and offshore versions of the strategy.
Having recently surpassed 1 billion and net assets our top performing emerging markets. Local income strategy is an increasing focus of our institutional sales efforts, particularly in offshore markets.
Across our family of municipal income mutual funds.
Net flows totaled just over 500 million.
But by the Eaton Vance National municipal income short duration muni opportunities many opportunities and high yield Muni income funds as of July 31st We offered 24 municipal income funds with one or more share classes. Currently rated four or five stars by Morningstar, including 11, five star rated municipal income funds.
Our floating rate bank loan strategies had net outflows of 1.2 billion in the third quarter, improving from 1.6 billion of net outflows in the second quarter and 2.9 billion of net outflows in the first quarter of fiscal 2019.
Third quarter net outflows reflect approximately 800 million of net redemptions from U.S. retail bank loan funds $500 million of institutional separate account withdrawals and a $200 million reduction in bank loan fund leverage amounts offset in part by $400 million of new collateralized loan obligation assets under management added during the quarter.
Although positioning floating rate investments for sale success during periods of falling interest rates can be a challenge we continue to be pleased with the resilience of our bank on business, particularly in the U.S. retail as the bank on mutual fund category has experienced unprecedented net outflows. This year, our managed assets inflows have held up better than most competitors, enabling us to expand our industry leading market share.
Although we can't predict when the market's appetite for high yielding floating rate investments will improve we know that it will.
With distribution rates now in the 6% range for the I share classes of each of the three Eaton Vance bank on mutual funds, we offer not a lot of change in sentiment may be required for each at retail investor interest and bank on investing to pick up.
Our funds and separate accounts classified as alternative and net outflows of approximately 650 million in the third quarter, a deterioration from approximately $475 million net outflows in the quarter ended April but a sharp improvement from 2.2 billion them that outflows in the quarter ended January .
Managed assets and this flow and flows in this category are dominated by our two global macro absolute return mutual funds are from the U.S., which ended the quarter with a combined 7.1 billion under management.
Flows into these funds tend to rise and fall with their returns when returns of our global macro funds are well in excess of U.S. risk free rates as they have been this year net inflows normally follow.
Well not insulated from a rare event risk our global macro funds offer the potential for attractive levels of absolute returns that are substantially uncorrelated to U.S. equity and bond market returns, which can be especially appealing an environment of low bond yields and high economic uncertainty.
In our portfolio implementation reporting category third quarter net inflows of 2.1 billion reflect 2.5 billion of net contributions to parametric custom core equity individual separate accounts 250 million of net contributions to custom core institutional accounts and $650 million of net withdrawals from centralized portfolio management mandates as mentioned previously our municipal and corporate ladder Bon individual separate accounts contributed 1.7 billion to net inflows in the third quarter.
When combined with a 2.5 billion of net inflows into custom core equity individual separate accounts inflows into our industry, leading suite of custom beta strategies offered as individual separate accounts totaling approximately 4.2 billion in the third quarter.
As shown on slide 12 of our presentation, our custom beta individual separate accounts cross the $100 billion U M. Mark this quarter with nearly a 105 billion of managed assets as of July 30, Onest for the fiscal year to date net inflows into our custom beta individual separate accounts have totaled approximately 12 billion representing annualized internal growth of 19%.
In late June we announced a key strategic initiative involving our parametric and Eaton Vance management investment affiliates. The initiative has three principal components.
Rebranding EMS rules based systematic investment grade fixed income strategies as parametric and aligning internal reporting consistent with this revised branding.
Second combining the technology and operating platforms supporting the individual separately managed account businesses of parametric and EM.
And third integrating the distribution teams, serving parametric and even some clients and business partners and the registered investment advisor and multifamily office markets.
As announced in June the initiative will bring to parametric industry, leading expertise and systematically man is investment grade municipal taxable and crossover tax free taxable fixed and fixed income strategies.
Based on assets under management as of July 31st approximately 42.5 billion of systematically managed fixed income assets will transfer from EM to parametric representing approximately 9% of Eaton Vance is consolidated assets under management.
Long a driver of Eaton Vance is above industry growth trajectory parametric becomes even more of a differentiator going forward.
As a result of this strategic initiative Parametrics custom core benchmark based separate account offerings will expand to encompass fixed income securities and maturity base and liability driven portfolio benchmarks customize benchmark separate accounts.
Sometimes referred to as custom indexing compete against index Cts and index mutual funds on the basis of enhance tax efficiency increased client control over portfolio construction and management and the avoidance of pass through fund operating and trading costs.
Industry observers have identified custom indexing is one of the most promising trends in investment management. This is a market we lead today and are committed to growing aggressively.
By expanding parametric solution set and customized benchmark based separate accounts and investing in technology to enhance client service and realize operating efficiencies and scale economies. Our goal is to further solidify parametrics position as market leader and position this business for accelerated growth.
In late June we announced that run G. When GE capella, well join parametric as Chief Technology Officer, and head of operations and the promotion of Desmon Gallagher to become Chief Technology Officer of Eaton Vance management and Calvert.
Reggie formally served as global head of portfolio management investment systems for Blackrock, where he was responsible for leading strategy and development for portfolio management applications across equity fixed income and multi asset portfolios for Blackrock in OLED and clients.
Dennis joined Eaton Vance in 2014 and served most recently as Avi EMS Division head of investment technology.
There is a point so these appointments support the parametric strategic initiative, while continuing to advance the technologies underpinning that EM fundamental active in Calvert responsible investment offerings and related services.
Although Richie does not arrive at parametric until next month.
The change process supporting our strategic initiative is now well under way.
Dedicated teams have been established to Exxon execute on each of the major components targeting go live dates principally in the first quarter of our fiscal 2020.
While we anticipate a period of elevated investment to support the newly combined SMB platform spending will be less than if we had continued to maintain separate platforms for parametric and either yeah. We expect these investments to be offset offset by increased revenue growth and cost savings realized from greater operating efficiencies.
As we consider our strategic position in the evolving asset management industry.
We feel very good about where Eaton Vance sits.
Through the expanded parametric, we're the leader across asset classes and customize benchmark based separate accounts a market with strong current momentum and limit them less growth potential.
And Calvert, we hold one of the foremost brands and deepest research engagement capabilities and responsible investing where the trick with a track record of significant sale success over the two and two thirds years Calvert has been part of Eaton Vance.
Eaton Vance management is a market leader across a range of specialty income investment areas bank loans high yield bonds mortgage backed securities emerging market debt and municipal bonds were active strategies continue to compete effectively against passive alternatives EM equities focus primarily on distinctive growing niches.
Focused on risk control an after tax income in returns Atlanta capital now offers an array of an array of exceptionally well performing active equity strategies. They are poised for accelerated growth.
The strength of our investment offerings is supported by one of the top sales and marketing organizations in the business a culture of innovation and excellence in client service and a capital structure and leadership team. We believe are supportive of long term success.
While these continue to be challenging times for the asset management industry, we remain optimistic about the future of Eaton Vance, both near term and long term that concludes my prepared remarks, I'll now turn the call over to Laurie.
Thank you and good morning.
Tom described we're reporting adjusted earnings per diluted share at 90 cents for the third quarter fiscal 2019.
10% from the 80 cents in the third quarter fiscal 2018, and up 1% from 89 cents in the second quarter of fiscal 2019.
As you can see an attachment to our press release adjusted earnings per diluted share in the third and second quarters of fiscal 2019 equal earnings per diluted share into U.S. gap with no material adjustment.
GAAP earnings exceeded adjusted earnings by a penny per diluted share in the third quarter of fiscal 2018, reflecting the reversal of 1.3 million of net excess tax benefits related to stock based compensation Awards.
In the third quarter fiscal 2019 operating income decreased by 4% year over year, reflecting a 2% increase in management fees, a 7% decline in non management fee revenue and 3% growth in operating expenses.
Operating income was up 8% sequentially, reflecting a 5% increase in management fees, 6% growth in non management fee revenue and 3% higher operating expenses compared to the prior quarter.
Our operating margin was 31.8% in the third quarter fiscal 2019, 33.2% in the third quarter fiscal 2018.
And 30.9% in the second quarter fiscal 2019.
And the consolidated managed assets reached a new record high of 482.8 billion at July 31st up 7% year over year and 3% sequentially.
Driven by strong Nexmos and positive market returns.
Average managed assets this quarter were up 6% in the same period last year management fee revenue growth trailed growth in average managed assets year over year, primarily due to decline in our average annualized management fee rate 33 basis points in the third quarter fiscal 2018 to 31.8 basis points in the third quarter fiscal 2019.
Versus the prior quarter average managed assets were up 3%.
On a sequential basis management fee revenue growth exceeded growth in average managed assets, primarily due to the impact of three more fee days in the third quarter.
This quarter's average annualized management fee rate of 31.8 basis points as flat in comparison to the second quarter of fiscal 2019.
Changes in our average annualized management fee rates over the comparative periods, primarily reflect shifts in our business mix and variations in fund subsidies.
Included in management fees as a contra revenue item phone subsidies were down 1.8 million year over year and 3.2 million sequentially.
Primarily due to the reduction in fund custody expenses, resulting from the renegotiation of a service provider contract.
Performance based fees, which are excluded from the calculation of our average management fee rates were a positive point 1 million in the third quarter fiscal 2019 negative point $4 million in the third quarter fiscal 2018, and a positive $1.8 million in the second quarter fiscal 2019.
In the third quarter fiscal 2019, our annualized internal growth in management fee revenue, 2% trailed annualized internal growth in managed assets of 7%.
Primarily due to the mix of higher fee and lower fee strategies within our inflows and outflows during the quarter.
This compares to 5% annualized internal growth in management fee revenue on 3% annualized internal growth in managed assets in the third quarter fiscal 2018.
And 1% annualized internal growth in management fee revenue on 4% annualized internal growth in managed assets in the second quarter of fiscal 2019.
Turning to expenses compensation costs increased 4% year over year, primarily driven by higher salaries and benefits associated with increases in headcount and higher stock based compensation, partially offset by lower operating income based bonus accruals and lower sales based incentive compensation.
Sequentially compensation expense increased 3%, primarily reflecting higher salaries driven by increases in headcount and the impact of three more payroll days in the third fiscal quarter higher stock based compensation higher operating income based bonus accruals and higher sales based incentive compensation, all partially offset by decreases in payroll taxes benefit performance based bonus accruals.
Non compensation distribution related costs.
Leading distribution service fee expenses and the amortization of deferred sales Commission.
Decreased 2% from the same quarter, a year ago, primarily reflecting lower class C distribution and service fee expenses driven by a decrease in average managed assets a classy mutual fund shares.
This decrease was partially offset by higher service fee expense and commissioning amortization for private funds driven by higher average managed assets in these times.
Sequentially Noncompensation distribution related costs increased 6%, primarily reflecting higher marketing and promotion costs and an increase in class a and private fund service fee expenses, driven by higher average managed assets and clapping mutual fund shares in private fund.
Fund related expenses increased 5% year over year, reflecting higher sub advisory fees due to an increase in average managed assets to sub advised funds.
Sequentially fund related expenses decreased 2%, reflecting a decline in other fund expenses paid for by the company, partially offset by an increase in sub advisory fees due to higher average managed assets and sub advised funds.
Other operating expenses increased 6% from the third quarter fiscal 2018, primarily reflecting higher information technology utilities and travel expenses, partially offset by decrease in amortization expense related to certain intangible assets that were fully amortized during the first quarter of fiscal 2019.
Other operating expenses were flat sequentially, reflecting increases in information technology facilities and travel expenses offset by a decrease in professional services expenses.
We continue to focus on overall expense management and identifying ways operational leverage.
Next gains and other investment income on seed capital investments contributed six cents to earnings per diluted share in the third quarter fiscal 2019, a penny to earnings per diluted share in the third quarter fiscal 2018, and three cents to earnings per diluted share in the second quarter fiscal 2019.
When quantifying the impact of our seed capital investments on earnings each quarter, we take into consideration our pro rata share of the gains losses and other investment income earned on investments and sponsored strategies, whether accounted for as consolidated funds separate accounts or equity investments.
As well as the gains and losses recognized on derivatives used to hedge these investments.
We then report the per share impact net of income taxes, and net income attributable to non controlling interests.
We continue to hedge the market exposures of our seed capital portfolio to the extent practicable minimize the associated earnings volatility.
Although we are hedged from majority of our seed capital portfolio gains on the unhedged portion drove the positive contribution to earnings this quarter.
Non operating income expense includes net expenses from consolidated CLL entities $3.5 million in the third quarter fiscal 2019.
This compares to net expenses of $1.2 million in the third quarter fiscal 2018, and net income of 11 million in the second quarter fiscal 2019.
Other income and expense amounts related to consolidated CLL entities reduced earnings per diluted share by two cents in the current quarter a penny in the third quarter of last year and contributed seven cents per diluted share in our second fiscal quarter of 2019.
Other income expense amounts related to consolidated seal 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 CLL equity remains to commit prudent amounts of capital to support growth in this business taking advantage of opportunities to recycle equity in existing CLL was to help fund new CLL. This in the future.
Turning to taxes, our effective tax rate was 25.5% in the third quarter fiscal 2019, 26.2% in the third quarter fiscal 2018.
25.1% in the second quarter fiscal 2019.
The Companys income tax provision for the third and second quarters of fiscal 2019 includes $1.1 million in point 7 million, respectively charges associated with certain provisions at the 2017 tax act relating to limitations on the deductibility of executive compensation that began taking effect for the company in fiscal 2019. The company's income tax provision was reduced by net excess tax benefits related to stock based awards totaling point 6 million in the third quarter fiscal 2019 $1.3 million in the third quarter fiscal 2000 $18.3 million in the second quarter fiscal 2019.
As shown on attachment to our press release, our calculations of adjusted net income and adjusted earnings per diluted share remove the net excess tax benefits related to stock based awards and the nonrecurring impact of the tax law changes.
On this basis, our adjusted effective tax rate was 25.9% in the third quarter fiscal 2019, 27.1% in the third quarter fiscal 2018, and 25.3% in the second quarter fiscal 2019.
On the same adjusted basis, we estimate that our quarterly effective tax rate for the balance of fiscal 2019 and for the fiscal year as a whole will range between 25.9 and 26.4%.
During the third quarter fiscal 2019, we used $38.6 million of corporate cash to pay the 35 cents per share quarterly dividend declared at the end of our previous quarter and repurchased 1.5 million shares of non voting common stock for approximately 61.3 million.
Our weighted average diluted shares outstanding were $113.5 million in the third quarter fiscal 2019 down 8% year over year, reflecting share repurchases in excess of new shares issued upon vesting of restricted stock awards, an exercise of employee stock options and a decrease in the dilutive effect of the in the money options and Unvested restricted stock Awards.
Sequentially weighted average diluted shares outstanding were down 1%.
We finished our third fiscal quarter, holding 770 $777.8 million of cash cash equivalents and short term debt securities.
And approximately $368.6 million in seed capital investments.
We continue to place high priority on using the company's cash flow to benefit shareholders.
Fiscal discipline around discretionary spending remains top of mind as we contemplate both volatile markets and significant corporate initiatives as Tom noted that strategic initiative, we announced in June will include investments in technology to support a consolidated digital separate account platform geared towards enhancing scalability in achieving higher levels of operating efficiency.
We do not incur if we do not currently anticipate that there will be significant adds to staff associated with these investments, but can provide additional color on related to head count and spending.
When we report our earnings for the fiscal year.
Based on our strong liquidity and overall financial condition. We believe we are well positioned to continue to invest in our business to support long term growth, while returning capital to shareholders.
This concludes our prepared comments and at this point, we'd like to take any questions you may have.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from Patrick Davitt from Autonomous Research Your line is open.
Hi, good morning, Thank you.
I might be splitting hairs here, but I feel like when you announced the repositioning in June .
You kind of push back on the view that it could drive more incremental efficiency on the cost side, but Tom's comments. This morning highlighted cost savings and efficiency. Just curious if you could maybe identified a bigger operating leverage opportunity on the cost side as you've gone through the process just over the last couple of months.
Yeah, I would put it maybe you would agree with your assessment that it's maybe splitting hairs here I don't I don't think we're far enough into this to have a really.
Very different view on.
Kind of what the what the spend levels will be and what the resulting impact on operating efficiencies and scale economies would be we're working on and put a lot of effort into this we've made some real progress.
As I noted a rent jeter, who will be joining parametric.
Toward the end of next month isn't here yet so we can we can lay a little bit of this.
Uncertainty on the fact that the building the person that is going to be driving this.
Isn't isn't here yet it's not like we havent done anything in fact, we've done quite a bit.
To prepare for the launch of this new platform.
But in terms of.
Quantifying the margin impact of how this is how this is going to impact our overall business or even impacted profitability of that particular part of our business I think it's quite premature to say that I will say that.
Yes, this is a business where.
Continuous investment in technology.
Our just par for the course, we've scaled this thing up.
To something like 80000 separate accounts and we're looking for ways to continue growing that business to a multiple of its current size. We know if we do this right there will be significant scale economies. It does not take twice as many people to run 160000 accounts as it does 80000 accounts, particularly if we invest in technology and the right way so a little bit.
Vague on the answer sorry, I can't be more helpful Directionally.
We know we're going to be spending.
A bit more money in the near term, but we're highly confident that is going to pay off with with operating efficiencies and scale economies down the road as we grow that business.
Thank you.
As a follow up.
There's been some chatter about some larger asset management properties in Europe , becoming available.
As we think about M&A as a as a piece of the capital return story. It could you update us your thinking on on round your appetite for deals like that and within that any detail on what kind of asset classes wrappers or distribute distribution pipes would be most attractive to you.
Certainly can't comment on anything specific.
We're not aware of there aren't major opportunities that we're looking at in Europe that.
We're at a point.
Where we could comment on im not that we would.
I would say areas of interest to us.
Relate primarily to a rounding out our business in ways that are that we view as complimentary to what we're doing now.
I would I would put on that list.
Extending our credit capabilities into private assets. We've also looked at things recently expanding our.
Our small wealth management business to to leverage our capabilities in wealth management solutions.
Beyond that I would say, we're we're opportunistic we thought we'd like to grow and responsible investing we have a we think very strong platform are really a couple of platforms, there with with Calvert and what parametric doesn't and customized separate account solutions with responsible investing being one of the key value adds there. So those are probably the areas I would I would highlight for us.
We are.
Our business continues to be approximately 95% in the U.S. and 5% outside we've stated our long term goal to.
Become more diversified internationally, but we're only going to do an acquisition that we think makes sense to us and we're highly confident is going to bring value to our shareholders.
Thank you.
Your next question comes from Brian Bedell from Deutsche Bank. Your line is open.
Hi, This is actually moving to Roy filling in for Brian Bodell, maybe just a couple more on the retail estimated businesses.
Can you talk about what portion of the business is concentrated in parametric strategies, and where you see most growth coming from in the intermediate term and then on the combination of the easier compare metrics platforms. How specifically do you think that could.
Organic growth once the.
The combination of kind of complete.
Yeah. So.
I think as I say scaled the business at about 105 billion of what we call custom beta so thats.
That's the parametric custom core business as well as the.
Municipal and corporate bond ladder to offer well laddered products offered as individual separate accounts, we have additional individual separate account businesses.
There are actively managed muni pieces there are.
Active managers.
Equity businesses as well.
To recap.
But do you have for total fair.
Got 100.
The.
But the.
The biggest growth opportunities, we see are in what we call custom beta which is I believe slide 12 of the top of the handout.
Had the growth.
Trajectory with that we've been on there a year to date, 19% annualized internal growth, we think were up.
Positioned to see we hope we that we don't know this but we hope.
An acceleration of that growth as we as we move the.
The muni and corporate capabilities there under parametric.
We think there will be.
New product strategies that will emerge out of that.
That will give us the potential to do things that we don't do today.
We think the investments that we're making in technology to enhance the service levels and and drive scale economies will position us more attractively versus competitors where.
Our goal would be to gain market share over time.
We think there is a there is room in this market for multiple competitors, but we intend to to maintain our position as the market leader.
Right. Thank you.
Your next question comes from Mike Carrier from Bank of America. Your line is open.
Hi, good morning, and thanks for taking the question.
Maybe first just on the the operating leverage so lorie you guys.
Populated leverage quarter over quarter and some of that's in the days in the markets.
But it sounds like you guys are focused on that.
And some of the expense discipline. He also mentioned just some of the investments with the parametric initiatives. So just wanted to get your thoughts on how we should be thinking about expenses.
Maybe operating leverage, particularly just given the strength that you guys are seeing.
On the flow side.
Yes, we're not prepared to provide any guidance at this point, but in terms of way that we're thinking about it we recognize that we've got a significant investment that we are looking to make in this project and I think what we are very much aware of is that we are going to have to stay very very tight and all of our under spending in order to ensure that we can focus our attention and our resources on this initiative and be as efficient as we can in terms of deployment of capital and recognizing that when you're talking about technology projects, obviously, they're going to be there's a portion of this that will be operating a portion that will be capital and as we finalize our thoughts around our longer term strategic vision for the platform, we're going to figure those components out and we certainly will hope to be able to provide more guidance as we move into the fourth quarter.
But I would say that overall, we are looking to really keep our spend tight as we're moving into the fourth quarter on all of our other or other general corporate spending recognizing that we want to be able to put as much as we can into this project and because we do believe that there is tremendous long term leverage to be gained by building a scalable platform is going to be highly efficient and it's going to have a solid operational back.
Foundation for us to do the types of product initiatives that Tom mentioned earlier.
Okay. That's helpful and then.
Maybe just on the the overall liggett investment performance and flows you things have been very strong pretty be relative to the to the industry on the shorter term performance is probably a little bit weaker.
We've seen just any color on maybe what's driving that any concerns.
Three 510 is still very solid, but just give any any concerns on the shorter term side.
I guess it depends where you are where you are looking we've got up.
Pretty broad business.
If you look at our equity performance just starting there, we're really having a quite strong year, where.
Calvert strategies.
Vance managed equities, and particularly the Atlanta capital strategies, which in many ways, our our our purest.
So for compete on performance equity mandates.
Really exceptional high performance there.
That group as you as you May know also runs the Calvert equity fund, which also.
Has had strong performance so we're saying.
Flows into into.
Positive flows into active equity strategies.
That you never know completely but what we would have we would assume are being driven largely by that the strong performance numbers that we've been putting up over the last.
Let's say year and three year periods.
On the income side I think generally a good story.
Our.
Because our bank loan assets are up.
A fairly large percentage of our total we have seen up let me as somewhat of a falling off and performance there nothing that we're worried about.
But we had up a significant boost to performance last year that came as some some loans that we had.
Held through a restructuring process paid off in a major way.
As well as to us as equity holders as they as they came to our restructuring we havent had that.
Same effect of this year so our.
Our bank loan performance has been more muted.
Across fixed income.
The.
The primary driver of relative performance year to date, and particularly over the last three months has been duration exposure. So if you're a long relative to your peers.
You've had the wind at your back if you're if your shorter duration relative to peers.
You've had the wind a bit in your face.
We have an array of.
Short duration.
Income strategies are the biggest being our short duration government income fund, which.
Really had exceptional performance Ron has been facing a bit of a performance headwind this year.
Primarily because.
Relative to its peers it is shorter duration than its peers and in the government category.
Duration is going to be up.
A primary driver of short term periods, particularly during.
Months like we've seen recently when we've had sharp movements.
Short movements in this case down.
In in Treasury yields so there's really nothing that from a competitive point of view, we're fighting against we continue to see.
Good flows into that short duration government income fund despite a fall off in relative performance versus other funds in that government category.
Same with bank loans, a relative performance versus peers over the year to date period as has.
As falling a bit.
The longer term track record there is exceptional and higher because I mentioned our market share there based on the numbers. We see continues to grow so so there's certainly.
We don't see a performance problem for.
The minutes overall or for any of our major strategies in fact, I would would point to performance of our active equity strategies.
Calvert branded.
And Atlanta capital managed and particular as creating opportunities for us to sell places that that we wouldn't if we had more pedestrian returns.
Okay Thats helpful. Thanks.
Your next question comes from Ken Worthington from Jpmorgan. Your line is open.
Hi, good morning on first on the leveraged loan market, we've seen some leverage loan deals slipping in recent weeks.
Talk about the CLL market, the floating rate market more broadly any implications for Eaton Vance, including any balance sheet exposure you might have here.
So we have a.
Relatively small COO business I think were there.
Four or five active seal lows that we manage.
It is a pretty small balance sheet exposure.
Overall bank loans are important business for us we have been in net outflows there.
As as.
Subscribed.
There's nothing systemic there that we're particularly worried about we believe the outflows have been primarily driven by the fact that these are floating rate assets and people are.
I'm expecting a short term rates to come down that's a strong market consensus probably will prove right.
But we don't see significant issues on the credit side, nothing is showing up in our portfolios.
Today, we are very aware that these are.
Below investment grade loans and that these are.
Subject to credit risk, we maintain broadly diversified portfolios.
To date, we have not had issues with.
Liquidity or.
So we generally feel that things are okay.
On balance we think that the.
Stimulative moves that are starting to happen.
In the U.S. than another western economies.
Our broadly supportive of good credit performance and bank loans, so on the one hand shorter rates.
Mike.
Can make floating rate assets less appealing from a yield perspective.
They also have the effect generally of.
Reducing economic risk.
Significant credit losses, but we're mindful that we're at we're we're.
Long into the current economic cycle.
We are mindful of the fact that.
Flat or inverted yield curves are.
Sometimes viewed and have been markers of.
Of coming periods of economic weakness, but today, we're not seeing that in our in our bank loan portfolios.
Okay. Okay. Thank you.
In terms of the 42 and a half billion transferred to parametric do your clients paid to affirm the transfers in any way.
Or are there new contracts that result, with this with this transfer trying to get a sense, if there's any risk to either the fee arrangements that you have or even the assets is there any chance at assets may slip here.
No. The key is that it is not deemed an assignment for for purposes of the contracts and we've Oh, we have a legal opinion to that effect, which weve.
Our making available to our.
Through our business partners.
Primarily this is the separately managed account business, where this is potentially an issue.
But we've gotten.
I'd say no pushback from.
Clients are intermediaries about the change.
There is no change in control.
We control these businesses through Eaton Vance management today, we will control them in the future.
Through parametric, which is a controlled subsidiary.
The same people will be running the same strategy is the same investment style.
It's a change in in branding and and ultimately organizational reporting responsibilities, but nothing that we think clients should be concerned about and nothing that we think based on evidence that.
Clients are concerned about.
Performance Records will carry over.
No change from a clients point of view other than.
A different name associated with the brand.
Okay, great. Thank you.
Your next question comes from Joel Katz from Citi. Your line is open.
Hi, Good morning, Ben Herbert on for Bill Thanks for taking the question.
Just wanted to follow up on Mike's question regarding operating leverage and Lori last quarter, you mentioned the comp ratio should trend down going forward and recently you said the today said.
No head count change with the strategic initiatives announced at the end of June . So can we still think that that comp ratio should kind of moved down overtime here at the 2020.
Into what.
2021 to 2020.
I wouldn't be making any prognostications at this point about 2020, I would anticipate that the comp ratio.
In the fourth quarter is probably not going look dramatically different from the comp ratio in the third quarter. So I think thats, probably a fair assessment, but I wouldn't be making any any prognostications beyond that.
Okay and then.
A follow up would just be on the alts fee rate there was a significant pick up quarter over quarter and just wanted to.
Understand kind of the underlying dynamics behind that.
Yes, we talked about.
How we benefited during the quarter of a of a renegotiation of custody fee agreement where.
Because the custody fees, our highest for emerging markets non us markets, which are where those assets tend to be concentrated and alternative strategies the impact of that on our effective fee rates was positive during the quarter.
Which reflect that reflects the fact that up a fair bit of the subsidy activity that we've been had a in our funds is connected to those strategies and where the relief in terms of.
Lower custody fees fell in part to the benefit of the fund that also fell in part to us to the extent, we're providing subsidies to keep fund.
C level set up at a flat level.
Thank you.
Your next question comes from Robert Lee from KBW. Your line is open.
Great. Thanks, Thanks, Susan Thanks for taking my questions.
Maybe just to talk a little bit Tom you had mentioned early on thing.
Some pretty good success in what I'd call more defensive equity strategy. So can you maybe break that down a little bit kind of how that's.
[noise] comparison to retail versus institutional and then maybe any color you may have on any institutional pipelines, whether it's through those strategies calvert or otherwise.
Yes, we don't have much of a pipeline in active equity institutional accounts most of those the sale success. We're seeing for active equities is is retail either funds or in some cases.
Individual separate accounts most of that active businesses through model programs.
But the places where we're seeing sales success.
Our primarily high performing equity strategies.
Branded Paramount Britt branded Calvert sorry.
So.
It's the it's the one two punch of strong performance.
Which is a distinctive factor and also the strong brand of Calvert and responsible investing so.
Where we're benefiting.
I would say across the board almost without exception across Calvert active strategies.
From strong performance and this this wind at the back in terms of marketing because.
Although there are a lot of players that have come into the responsible investing space few of them have the credibility and the reputation that Calvert has.
You marry that with strong performance and we've been able to.
To grow Calverts business in active equities pretty meaningfully.
The other the other the other brand manager I would point to is our Atlanta capital affiliate.
Which.
Although Atlanta capital and total has been has been a net redemptions last couple of quarters, primarily because their largest strategies which are the.
Smid cap and small cap strategies are at capacity.
They've had very strong across the board performance Smallcap smid cap large cap.
In their in their active equities.
Atlanta Capital's mantra is high quality investing.
Which they have practiced for decades.
We were in a market cycle, where high quality is performing very well.
They have.
Not just top quartile, but top decile performance across most of their equity strategies.
And they're staying seeing growing interest in that as you would expect that this is a this is a group of funds and separate accounts that are staying a distinguished not only by strong performance over time, but also a.
A consistent investment approach low turnover investing in high quality companies that resonates with a lot of investors that are looking at alternatives to.
To passive investing so beyond that I would say a small cap generally as a place where we are.
Seeing positive flows both branded.
Calvert and branded Eaton Vance, both us and international so.
You don't think about active equities as a place where there's a lot of growth opportunity, but were saying.
Some potential for our business to grow there based on performance and based on the distinctiveness of the the Calvert brand.
Great and maybe as a follow up.
Could you.
Maybe talk a little bit about the competitive environment within custom beta beta and ladders and specifically me look anytime I guess you have good growth opportunities people try to come into the market often try to compete on price.
Can you talk a little bit about what you're seeing and to what extent do you feel like you have.
There's maybe a barrier to entry so to speak given that it is a technology heavy kind of business mean kind of talk about how you see that.
Yes. This is a business.
There is a lot harder business than managing funds.
80000 separate accounts gives us a scale that's hard for.
Anyone to come close to we think we are based on industry data the largest player in this market we compete on service more than anything.
And when I say, we this is both parametric and what are today Eaton Vance management brand of strategies that would be in some cases moving over to parametric.
We have over the last.
I'll say two years seen a number of new competitors come into the market.
Both in terms of.
Laddered bond separate accounts.
But also on the custom core equities so competing against.
US on both the income side as well as the equity side.
You've seen our numbers, we continue to grow that business.
19% organic growth for the year to date on a combined basis, we will see no doubt more competitors into this other people, we think will be.
Attracted to the same opportunity to grow in the space, but we think we have today.
A differentiated position based on our reputation for service and so far we've been able to hold off competitors and keep that business growing.
Some of our competitors have not surprisingly tried to compete largely on the basis of price.
For the most part we've we've held the line on price but.
Have the flexibility to be competitive when necessary. This is a.
This is a value proposition if we can deliver.
Value relative to cost, which we think we can we think this business will continue to grow for the most part our competition here.
It is more about competing against.
On the equity side index funds and he asked as opposed to other managers of customize individual separate accounts.
And in the case of communities and taxable bond portfolios, it's primarily competing against unmanned is portfolios. So yes, there are more competitors into the space, but.
Yes, $100 billion, where.
By far the largest player in this business, but tiny compared to the size of the addressable market, which we which we view as.
Consisting of most of the index ETF and index mutual fund market.
Held outside of a qualified retirement plans and.
Maybe away from institutions that are using F. says.
Short term market exposure vehicles, but we think this is.
You sketch it out. This is these are these are potentially trillion dollar plus markets you look at the number of municipal bonds. The value of municipal bonds that are owned by individuals how much of that is managed versus how much is unmanaged. We think there is a huge potential for that market to convert to from unmanned is to manage you look at the growth of.
Index investing how much of that is held through.
Funds, where there's not the advantages of customization not the advantages of.
Pass through tax pass through treatment of.
Realize tax losses that you can achieve with customized separate accounts, we think theres enormous growth potential here.
Our objective is to grow our market share over time as this market continues to grow maybe that's a challenge because we'll see new entrants into this market, but there aren't many people that are in a position like we are to make the kinds of investments and technology to drive service levels that other people I think are going to look at this and say.
I don't want to do that Alex really hard I don't think I can compete with parametric and Eaton Vance on the basis of of service Excellence I think I'll do something else.
Great that was helpful. Thank you.
I think we have time for two more participants before we wrap up the call today.
Your next question comes from Dan Fannon from Jefferies. Your line is open.
Hi, Thanks, my questions on fee rate.
If we look kind of year over year, youve seen compression across the longer term categories.
I guess as you think about the mix of business today, and where you're seeing strength in the ins and outs do you see that stabilizing improving or kind of continuing kind of the rate of decline we've seen.
I don't see any improvement last I checked fee rates aren't going up across any parts of.
Asset management that we participate in a primary driver of those fee rates, though continues to be mixed Steven both across categories and inside categories.
The biggest.
Change in average fee rate has been within fixed income that really reflects the growth of this.
Business that we call custom beta the muni and corporate ladder business, which is fundamentally quite different than managing.
Hi of bond portfolios or mortgage backed securities portfolio.
We are seeing.
Some price competition.
Some level of fee concessions in existing businesses I don't think it's accelerating it feels like its a.
More on a steady modest decline in average fee rates across most of our businesses. If you. If you look at true apples to apples comparisons.
We think we can manage through that.
I've been in the investment business.
Well over 30 years, and there's never been a time on fee rates have been going up.
How you grow and how you achieve.
Attractive margins in this business tends to be based on scale the ability to offset.
Uh huh.
Reductions in fee rates tied to per dollar of assets by growing the base of assets you manage and leveraging.
The spending in support of that that asset management, So no real change in our in our business mix. We expect continued modest declines in our average fee rates.
Okay, and then as a follow up.
The global macro products seen.
Improved performance you mentioned historically, that's dovetailed with theater are correlated with improved flows can you talk about the just the positioning of the fund and kind of.
Historically, it's had fair amount of currency exposures and other things to it but.
Any kind of near term dynamics in terms of shift in terms of flow outlook for the cat in that segment as well would be would be helpful.
Yes. So this is it's these strategies are.
A little hard to to pigeonhole in terms of.
What's the where their position relative to two.
To broad market trends, we describe ourselves this country pickers investing.
Both long and short in emerging and frontier markets, using primarily currency and short duration sovereign credit instruments.
We.
Returns or you can look this up I think are.
6% or so in the range of 6% year to date through yesterday through the for the for the I. shares of these funds. So we think thats thats pretty good.
Some years, 6% returns are.
Nothing to get too excited about in other years.
If you can deliver something like that.
In a in a way that is less volatile than.
A long duration fixed income are less volatile than most equity strategies that can be quite appealing, particularly given.
The very low correlation of the performance of these strategies to.
The major asset classes that most of us investors are heavily weighted in namely.
Developed market equities and and us.
Duration assets.
There have been some upsets in the world recently.
Maybe putting that thing that modestly.
So far we are weathering the storm quite well and those those performance numbers are our current numbers for the year to date.
Okay. Thank you.
Your last question comes from Craig Siegenthaler from Credit Suisse. Your line is open.
Thanks, Good morning, everyone.
I just had a follow up to Rob last question on the competitive landscape and custom beta I wanted to see if you saw a pickup in product launches.
SDMA wins fund registrations from some of your competitors just given the success of parametric.
There have been a.
So let me answer the question in two parts one is on the equity side, which is the parametric business than the other is the is on the fixed income side, which is the Eaton Vance management business that is going to become part of parametric so on the equity side.
The traditional player in this market that we've competed with is a is a firm focused on this business called Appirio that.
I think continues to grow and our business, but as an established competitor no particular change that I'm aware of in the parametric versus appirio competitive dynamic.
There are other players who.
Then in this market and have.
Put more of a focus on that Goldman Sachs.
Has been investment offering here.
The Texas has a subsidiary that has a has an offering here.
The the competitive landscape.
Is his first about getting access to the platform. So so are you offered at major broker dealers or are you available.
Through a particular registered investment adviser and what kind of strategies are you offered though so was it is it tied to a single indexes that across a range of indexes, what's the expectation in terms of.
Product features are you are you.
What kind what approach are you taking to tax loss harvesting.
What kind of your business is funding funded in kind.
Do you do after tax performance reporting.
Is that performance reporting.
Appropriately tranche the by the age of the account.
These are all things that differentiate.
Players in this market.
It is it is a very customized business.
If your level of customization is not as good as the next guys.
You're going to struggle to be successful here.
An element of customization is that service is often challenging so what kind of turnaround is therefore, whatever customization that a particular advisor clients looking for.
So far we've been able to.
Withstand the competitive challenge and continue to grow that business. Despite.
No secret that this is a this is a growing market people look at the success, we've achieved and said, yes that doesn't look all that hard.
But one of the things, we're trying to do with us.
Strategic initiative is to.
As to make it less attractive and make it harder for for other.
Asset managers to try and get into this into this space by doing a better job for our clients.
On the fixed income side. The story is probably similar the names or the names are different appirio I don't believe has a fixed income.
Offering.
Names here are.
The vein.
Lord Abbott I think Blackrock has an offering in this market there may be a couple of other players there.
By and large we've we've continued to.
Be successful in that market one of the things that.
Notable about our competitive offering is that earlier this year.
We launched a.
A systematic year round tax all of us tax loss harvesting service as part of our core offering.
No upcharge and price something what we make available we've been in the process of rolling that out getting approval at various platforms to offer that for clients.
But we view that as a as a bit of a raising of the bar.
To differentiate us from competitors not everyone. Most people don't offer something similar.
Again beyond the service beyond the features that we offer a lot of this comes down to service how good are we at.
Responding to requests to evaluate a particular hypothetical a transaction.
What's our turnaround relative to somebody else's, what kind of service that we provide to advisors and general fee rate differentials in this market are small and that.
These are not viewed as commodity products because of the.
Intensity of the service experience and the.
Hi high level of satisfaction, we've delivered on the service side has allowed us to in many cases when business were not the low cost provider, but where we are.
At or near the top end of the fee range for people bidding on the business, but we think it's a business that has.
The potential to grow to accommodate a number of competitors, we expect fairly soon the competitive landscape.
To shake out where this won't be a competitive market. This won't be an interesting market from new people to get into simply because.
We and perhaps some others will have.
Such a high bar in terms of scale and technology and service levels that people look at this and say.
I don't think I can be successful here.
Thanks, Tom very comprehensive I, just had one follow up on your retail estimate strategy, which.
I know you are in the process of upgrading here.
What do you see as the key qualities of asset managers that have succeeded in the or a market.
Because this has been a very challenging segment.
For traditional crack.
Sorry, So you said our market.
Yes, so long term I believe most of your strategic positioning that you are going through now.
It is a big chunk of that is targeting the Ari channel. So I wanted to see what qualities you think will make Eaton Vance successful and maybe what isn't qualities that you've seen it appears that had been successful is channel because very few happen.
Got it.
So.
One of the us you're referring to the strategic part of this strategic initiative is that were combining our sales organization.
Covering the right channel heretofore parametric has had a dedicated sales team.
Covering an array of their strategies, but primarily custom core in that channel and that Eaton Vance has separately offered or mutual funds and separate account offerings, there and as you said.
Well I like most asset managers, that's been a bit of a struggle for us.
From the Eaton Vance side to be successful there, whereas by contrast, parametric has built quite a business.
With with dominant market share in that.
Custom core product offered into the R&D channel.
What we're hoping to do is not surprisingly leverage the success that parametric has achieved there.
Across a broader array of asset classes and so if we're the leader today in custom equity index separate accounts, we want to be the leader in custom bond separate accounts, both indexed and Laddered and otherwise.
But its really leveraging the strength of the parametric brand the relationships that they built up over the last 25 years to allow us to successfully introduced fixed income strategies into that channel beyond the small success that we've had to date there are.
I think as your question implies.
Most of the assets that we have today.
On the fixed income side.
Our in the the wire house and independent side.
Through this.
Reorganization and rebranding and changing in this in the sales coverage for the or a channel. It is very much our objective to extend that success into our a. for fixed income separate accounts.
Got it thank you Tom.
Yes, Thanks, Greg.
Alright, I think this concludes our call. Thank you very much for everybody for shipping into this call and we will speak with you in the fourth quarter earnings webcast. Thank you very much.
This concludes today's conference call you may now disconnect.