Morgan Stanley (MS) — Q3 2019 Earnings Call Transcript

Thank you, Julian, and good morning and welcome to our fiscal 2019 third quarter earnings call and webcast. With me today are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, 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 EatonVance.com under the heading Investors 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 discussed in our 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.

Good morning and thank you for joining us. Earlier today, we reported $0.90 of adjusted earnings per diluted share for the third quarter of fiscal 2019, an increase of 10% from $0.82 in the third quarter of fiscal 2018 and up 1% from $0.89 in the second quarter of fiscal 2019. Our adjusted earnings per diluted share this quarter include $0.04 of combined contribution from seed capital and consolidated CLO entity investments. By comparison, seed capital and consolidated CLO entity investments contributed a combined $0.10 to adjusted earnings per diluted share in the second quarter of 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 and up 7% from 12 months earlier, and up 10% for the fiscal year to date. By mandate, reporting category changes in consolidated assets under management versus the prior quarter end ranged from growth of 5% for fixed income, 4% for exposure management, 3% for portfolio implementation, and 2% for equities to declines of 4% for alternatives and floating rate bank loans. In the third quarter of fiscal 2019, we had $8 billion of consolidated net inflows or $5.3 billion, excluding exposure management mandates, which have lower average fee rates and more variable flows than our other reporting categories. This represents our 20th consecutive quarter of positive net flows. For the first nine months of fiscal 2019, we had $14.1 billion of consolidated net inflows or $10.1 billion excluding exposure management. Barring unforeseen fourth quarter reversals, we're 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 consolidated inflows, and then measure 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 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, EVM large 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 closed to new investors. Across a broad range of investment categories, active equity strategies managed by EVM, Calvert, and Atlanta Capital have delivered strong returns versus benchmarks and peers over recent periods. As of July 31, actively managed mutual funds whose iShares total returns ranked in the top quintile of their Morningstar category over each of the year-to-date, 1-year, and 3-year periods included the Eaton Vance large-cap value, balanced tax managed equity allocation, global income builder, and Atlanta Capital focused growth funds as well as the Calvert equity mid-cap, small-cap, 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 laddered 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 bonds with $200 million of net inflows, and 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 in 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 led by the Eaton Vance National Municipal income, short duration muni opportunities, muni opportunities, and high yield muni income funds. As of July 31, we offered 24 municipal income funds with one or more share classes currently rated 4 or 5 stars by Morningstar, including 11, 5-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 sales success during periods of falling interest rates can be a challenge, we continue to be pleased with the resilience of our bank loan business, particularly in U.S. retail. As the bank loan mutual fund category has experienced unprecedented net outflows this year, our managed assets and flows have held 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 iShare classes of each of the three Eaton Vance bank loan mutual funds we offer, not a lot of change in sentiment may be required for retail interest in bank loan investing to pick up. Our funds and separate accounts classified as alternatives had net outflows of approximately $650 million in the third quarter, a deterioration from approximately $475 million of net outflows in the quarter ended April, but a sharp improvement from $2.2 billion in net outflows in the quarter ending in January. Managed assets in this category are dominated by our two global macro absolute return mutual funds offered in 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. While not insulated from 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 could be especially appealing in 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 laddered bond individual separate accounts contributed $1.7 billion to net inflows in the third quarter. When combined with the $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 totaled approximately $4.2 billion in the third quarter. As shown on Slide 12 of our presentation, our custom beta individual separate accounts crossed the $100 billion AUM mark this quarter with nearly $105 billion of managed assets as of July 31. 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 EVM's rules-based systematic investment-grade fixed income strategies as Parametric and aligning internal reporting consistent with this revised branding; combining the technology and operating platforms supporting the individual separately managed account businesses, as Parametric and EVM; and integrating the distribution teams serving Parametric and EVM clients and business partners in the registered investment advisor and multifamily office market. As announced in June, this initiative will bring to Parametric industry-leading expertise in systematically managed investment-grade municipal, taxable, and crossover tax-free taxable fixed income strategies. Based on assets under management as of July 31, approximately $42.5 billion of systematically managed fixed income assets will transfer from EVM to Parametric, representing approximately 9% of Eaton Vance's consolidated assets under management. Along our driver of Eaton Vance's above industry growth trajectory, Parametric becomes even more of a differentiator going forward. As a result of this strategic initiative, Parametric's custom core benchmarked-based separate account offerings will expand to encompass fixed income securities and maturity-based and liability-driven portfolio benchmarks. Customized benchmark separate accounts, sometimes referred to as custom indexing, compete against index ETFs and index mutual funds on the basis of enhanced 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 as 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's 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 Parametric's position as a market leader and position this business for accelerated growth. In late June, we announced that Ranjit Kapila will join Parametric as Chief Technology Officer and Head of Operations, and the promotion of Desmond Gallacher to become Chief Technology Officer of Eaton Vance Management and Calvert. Ranjit 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 and Aladdin clients. Desmond joined Eaton Vance in 2014 and served most recently as EVM's Division Head of Investment Technology. This appointment supports the Parametric strategic initiative of continuing to advance the technologies underpinning the EVM fundamental active and Calvert responsible investment offerings and related services. Although Ranjit does not arrive at Parametric until next month, the change process supporting our strategic initiative is now well underway. Dedicated teams have been established to execute on each of the major components, targeting go-live dates predominantly in the first quarter of our fiscal 2020. While we anticipate a period of elevated investment to support the newly combined SMA platform, spending will be less than if we had continued to maintain separate platforms for Parametric and EVM. We expect these investments to be 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 stands. Through the expanded Parametric, we are the leader across asset classes and customized benchmark-based separate accounts, a market with strong current momentum and limitless growth potential. In Calvert, we hold one of the foremost brands and deepest research and engagement capabilities in responsible investing with a track record of significant sales 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, where active strategies continue to compete effectively against passive alternatives. EVM equities focus primarily on distinctive growing niches, focused on risk control and after-tax income and returns. Atlanta Capital now offers an array of exceptionally well-performing active equity strategies, 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 that 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 will now turn the call over to Laurie.

Thank you, and good morning. As Tom described, we are reporting adjusted earnings per diluted share of $0.90 for the third quarter of fiscal 2019, up 10% from the $0.82 in the third quarter of fiscal 2018 and up 1% from $0.89 in the second quarter of fiscal 2019. As you can see in attachment two to our press release, adjusted earnings per diluted share in the third and second quarters of fiscal 2019 equaled earnings per diluted share under US GAAP with no material adjustments. 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 of fiscal 2019, compared to 33.2% in the third quarter of fiscal 2018 and 30.9% in the second quarter of fiscal 2019. Ending consolidated managed assets reached a new record high of $482.8 billion on July 31, up 7% year-over-year and 3% sequentially, driven by strong net flows and positive market returns. Average managed assets this quarter were up 6% from the same period last year. Management fee revenue growth trailed growth in average managed assets year-over-year, primarily due to a decline in our average annualized management fee rate from 33 basis points in the third quarter of fiscal 2018 to 31.8 basis points in the third quarter of 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 was flat in comparison to the second quarter of fiscal 2019. Changes in our average annualized management fee rates over the comparative period primarily reflect shifts in our business mix and variations in fund subsidies. Included in management fees is a contra-revenue item, fund subsidies were down $1.8 million year-over-year and $3.2 million sequentially, primarily due to a 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 rate, were a positive $0.1 million in the third quarter of fiscal 2019, a negative $0.4 million in the third quarter of fiscal 2018, and a positive $1.8 million in the second quarter of fiscal 2019. In the third quarter of fiscal 2019, our annualized internal growth in management fee revenue of 2% trailed annualized internal growth in managed assets of 7%, primarily due to a 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 and 3% annualized internal growth in managed assets in the third quarter of fiscal 2018, and 1% annualized internal growth in management fee revenue and 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 payable 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, benefits, and performance-based bonus accruals. Non-compensation distribution-related costs, including distribution service fee expenses and the amortization of deferred sales commissions 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 of Class C mutual fund shares. This decrease was partially offset by higher service fee expense and commission amortization for private funds driven by higher average managed assets in these funds. Sequentially, non-compensation distribution-related costs increased 6%, primarily reflecting higher marketing and promotion costs, an increase in Class A and private fund service fee expenses, driven by higher average managed assets and Class A mutual fund shares and private funds. Funds related expenses increased 5% year-over-year, reflecting higher sub-advisory fees due to an increase in average managed assets in sub-advised funds. Sequentially, funds 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 in sub-advised funds. Other operating expenses increased 6% from the third quarter of fiscal 2018, primarily reflecting higher information technology, facilities, and travel expenses, partially offset by a 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 to gain operational leverage. Net gains and other investment income on seed capital investments contributed $0.06 to earnings per diluted share in the third quarter of fiscal 2019, compared to a penny in earnings per diluted share in the third quarter of fiscal 2018 and $0.03 to earnings per diluted share in the second quarter of 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 impacts net of income taxes and net income attributable to non-controlling interest, looking through the hedge to the market exposures of our seed capital portfolio to the extent practicable to minimize the associated earnings volatility. Although we hedged the 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 CLO entities of $3.5 million in the third quarter of fiscal 2019. This compares to net expenses of $1.2 million in the third quarter of fiscal 2018 and net income of $11 million in the second quarter of fiscal 2019. Other income/expense amounts related to consolidated CLO entities reduced earnings per diluted share by $0.02 in the current quarter, a penny in the third quarter of last year, and contributed $0.07 per diluted share in our second fiscal quarter of 2019. Other income/expense amounts related to consolidated CLOs 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 CLO equity remains to commit prudent amounts of our capital to support growth in this business, taking advantage of opportunities to recycle equity in existing CLOs to help fund new CLOs in the future. Turning to taxes. Our effective tax rate was 25.5% in the third quarter of fiscal 2019, compared to 26.2% in the third quarter of fiscal 2018 and 25.1% in the second quarter of fiscal 2019. The company's income tax provision for the third and second quarters of fiscal 2019 includes $1.1 million and $0.7 million respectively of charges associated with certain provisions of 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 $0.6 million in the third quarter of fiscal 2019, $1.3 million in the third quarter of fiscal 2018, and $0.3 million in the second quarter of fiscal 2019. As shown in attachment two 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 non-recurring impact of the tax law changes. On this basis, our adjusted effective tax rate was 25.9% in the third quarter of fiscal 2019, 27.1% in the third quarter of fiscal 2018, and 25.3% in the second quarter of 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 of fiscal 2019, we used $38.6 million of corporate cash to pay the $0.35 per share quarterly dividend declared at the end of our previous quarter and repurchased 1.5 million shares of nonvoting common stock for approximately $61.3 million. Our weighted average diluted shares outstanding were 113.5 million in the third quarter of fiscal 2019, down 8% year-over-year, reflecting share repurchases in excess of new shares issued upon investing in restricted stock awards and exercise on employee stock options and a decrease in the dilutive effect of 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 $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 a high priority on using the company's cash flow to benefit shareholders. Fiscal discipline around discretionary spending remains a top priority as we contemplate both volatile market and significant corporate initiatives. As Tom noted, the strategic initiative we announced in June will include investments in technology to support a consolidated individual separate accounts platform geared towards enhancing scalability and achieving higher levels of operating efficiency. We do not currently anticipate that there will be significant additions to staff associated with these investments. We can provide additional color on related headcount 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 would like to take any questions you may have.

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 pushed 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 maybe identified a bigger operating leverage opportunity on the cost side as you've gone through the process over the last couple of months.

Yes, I would agree that it might be a matter of interpretation. We are still early in this process to form a substantially different view on spending levels and their impact on operating efficiencies and economies of scale. We are actively working on it and have made significant progress. As I mentioned, Ranjit, who will be joining Parametric at the end of next month, is not here yet, which adds some uncertainty since he will be leading this effort. We have not been inactive; in fact, we have done a lot to prepare for the launch of this new platform. However, it is too soon to quantify how this will affect our overall business margins or the profitability of this specific segment. Continuous investment in technology is essential in this business. We have scaled up to around 80,000 separate accounts and are seeking opportunities to expand that number significantly. If we execute this properly, we anticipate substantial cost leverage. It will not require twice as many people to manage 160,000 accounts compared to 80,000, especially with the right technology investments. I apologize for being a bit vague in my response. While we expect to increase our spending in the short term, we are confident that this will lead to operating efficiencies and economies of scale as we grow the business.

Thank you. And as a follow-up, there has been some chatter about some larger asset management properties in Europe becoming available. As we think about M&A as a piece of the capital return story, could you update us on your thinking around your appetite for deals like that and within that any detail on what kind of asset classes, wrappers, or distribution channels would be most attractive to you?

I can't comment on anything specific at this time. We are not aware of any major opportunities in Europe that we can discuss, even if we could. Our interests mainly focus on enhancing our business in ways we consider complementary to our current operations. This includes expanding our credit capabilities into private assets and growing our small wealth management business to better utilize our wealth management solutions. Additionally, we want to be opportunistic and expand in responsible investing. We believe we have a strong foundation with our platforms like Calvert and Parametric, especially in customized separate account solutions, where responsible investing adds significant value. Overall, about 95% of our business is in the U.S. and 5% internationally. We have expressed our long-term goal of becoming more diversified globally, but any acquisitions will be carefully considered to ensure they are valuable for our shareholders.

Hi. This is actually Melinda Roy filling in for Brian Bedell. Maybe just a couple more on the retail SMA business. 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 culmination of the EVM and Parametric's platforms, how specifically do you think that could improve organic growth once the combination is kind of complete?

Yes. So, I think I scaled the business at about $105 billion of what we call custom beta. So that's the Parametric custom core business as well as the municipal and corporate bond laddered offerings at individual separate accounts. We have additional individual separate account businesses. There are actively managed muni pieces, there are actively managed equity businesses as well.

Yes. I think I scaled the business at about $105 billion of what we call custom beta. So that's the Parametric custom core business as well as the municipal and corporate bond laddered offerings at individual separate accounts. We have additional individual separate account businesses. There are actively managed muni pieces, and there are actively managed equity businesses as well.

The biggest growth opportunities we see are in what we call custom beta, which we believe has a positive growth trajectory. Year-to-date, we have achieved a 19% annualized internal growth rate. We are positioned to potentially see an acceleration in that growth as we integrate municipal and corporate capabilities under Parametric. We anticipate that new product strategies will emerge from this integration, enabling us to pursue opportunities that we currently do not explore. We believe that our investments in technology to enhance service levels and drive economies of scale will improve our competitive positioning, allowing us to aim for market share growth over time. We recognize that there is room for multiple competitors in this market, but our intention is to sustain our position as the market leader.

All right. Thank you.

Good morning and thanks for taking the question. Maybe first just on the operating leverage. So, Laurie, you guys had positive operating leverage quarter-over-quarter. I’m assuming that’s the days in the markets. But it sounds like you guys are focused on that, in terms of the expense discipline. You also mentioned just some of the investments with the Parametric initiative. So just wanted to get your thoughts on how we should be thinking about expenses, maybe operating leverage, particularly given the strength that you guys are seeing on the flow side?

We are not ready to provide any guidance at this time. However, we understand that we have a significant investment to make in this project. We are very aware that we need to keep a tight control on all other spending to focus our attention and resources on this initiative and ensure efficient capital deployment. When it comes to technology projects, part of the effort will be operational while another part will be capital. As we finalize our long-term strategic vision for the platform, we will clarify these components and hope to provide more guidance as we approach the fourth quarter. Overall, we intend to keep our spending constrained as we enter the fourth quarter concerning general corporate expenses, as we aim to invest as much as possible into this project. We believe there is tremendous long-term potential in developing a scalable, highly efficient platform that will provide a solid operational foundation for the types of product initiatives mentioned earlier.

Okay. That's helpful. And then maybe just on the overall investment performance inflows. Things have been very strong, particularly relative to the industry. The shorter-term performance, it's probably a little bit weaker that we’ve seen. Just any color on maybe what’s driving that? Any concerns, the 3, 5, 10 is still very solid, but just any concerns on the shorter-term side?

It really depends on where you're looking. We have a diverse business, and if you examine our equity performance, it's been a strong year. The Calvert strategies, Eaton Vance managed equities, and particularly the Atlanta Capital strategies, which are among our best-performing equity mandates, have shown exceptional results. This group also manages the Calvert equity fund, which has performed well. We are witnessing positive flows into active equity strategies, which we believe are largely driven by the strong performance numbers we've delivered over the past year and the last three years. On the income side, the story is generally positive. Our bank loan assets constitute a significant portion of our total, but we've noticed a slight decline in performance, although it’s not a major concern. Last year, we benefitted from a substantial boost in performance as some loans we held during the restructuring process paid off significantly. We haven't experienced the same effect this year, resulting in more subdued bank loan performance within fixed income. The main driver of relative performance this year, especially over the last three months, has been duration exposure. If your duration is longer compared to your peers, you've had an advantage; if shorter, you've faced some headwinds. We have a variety of short duration income strategies, with our short duration government income fund being the largest, which had an excellent performance run but is facing some challenges this year due to being shorter duration than its peers. In the government category, duration largely affects short-term performance, especially during periods of sharp movements, like the recent decline in treasury yields. However, from a competitive standpoint, we aren’t facing significant issues. We continue to see strong inflows into our short duration government income fund, even despite a drop in relative performance compared to other funds in that category. Similarly, our bank loan performance has also fallen a bit relative to peers this year, but our long-term track record remains exceptional, and our market share continues to grow. Overall, we don't perceive a performance problem for Eaton Vance or any of our major strategies. In fact, the performance of our active equity strategies, particularly those managed by Calvert and Atlanta Capital, presents opportunities for us to sell where we might not have if our returns were more average.

Okay. That’s helpful. Thanks.

Hi. Good morning. First on the leverage loan market. We've seen some leverage loan deals slip in recent weeks. Talk about the CLO 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 CLO business. I think they’re 4 or 5 active CLOs that we manage. It is a pretty small balance sheet exposure. Overall, bank loans are an important business for us. We have been in net outflows there as described. There is 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 expecting 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 to date. We're 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. 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 and in other Western economies are broadly supportive of good credit performance and bank loans. So on the one hand, shorter rates can make floating rate assets less appealing from a yield perspective. They also have the effect generally of reducing economic risk of significant credit losses. But we're mindful that 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 coming prudence of economic weakness. But to date, we are not seeing that in our bank loan portfolios.

Okay. Okay. Thank you. In terms of the $42.5 billion transferred to Parametric, do your clients need to affirm the transfers in any way, or are there new contracts that result with this transfer? Trying to get a sense if there's any risk to either the fee agreements that you have, or even the assets. Is there any chance that assets may slip here?

No. The important point is that this is not considered an assignment under the contracts. We have a legal opinion confirming this, which we are sharing with our business partners, particularly in the separate managed account area where this might be a concern. However, we have not encountered any pushback from clients or intermediaries regarding the change. There is no change in control. We currently manage these businesses through Eaton Vance Management and will continue to do so in the future through Parametric, which is a controlled subsidiary. The same team will remain in charge of the strategies with the same investment approach. This is merely a rebranding and a shift in organizational reporting responsibilities. We believe clients should not be worried about this, and based on our observations, we don't think clients are concerned that performance records will be affected. From the client's perspective, the only difference is a new name associated with the brand.

Hi. Good morning. It's Ben Herbert filling in for Bill. Thank you for taking my question. I wanted to follow up on Mike's inquiry about operating leverage. Laurie, last quarter you indicated that the compensation ratio is expected to decline in the future. However, today you mentioned that there will be no change in headcount related to the strategic initiatives announced at the end of June. Can we still expect the compensation ratio to decrease over time as we move into 2020?

Into what?

2020.

Oh, into 2020. I wouldn’t be making any prognostication at this point about 2020. I would anticipate that the compensation ratio in the fourth quarter is probably not going to look dramatically different from the comp ratio in the third quarter. So I think that’s probably a fair assessment. But I wouldn’t be making any prognostications beyond that.

Okay. And then a follow-up would just be on the ALPS fee rate. There was a significant tick up quarter-over-quarter. Just wanted to understand kind of the underlying dynamics behind that.

Yes. We talked about how we benefited during the quarter from a renegotiation of a custody fee agreement, because the custody fees are highest for emerging markets, non-U.S markets, which are where those assets tend to be concentrated in alternative strategies. The impact of that on our effective fee rates was positive during the quarter, which reflects the fact that a fair bit of the subsidy activity that we’ve had in our funds is connected to those strategies and where the relief in terms of lower custody fees fell in part to benefit the fund, then also fell in part to us to the extent we're providing subsidies to keep fund fee levels at a flat level.

Thank you.

Thanks for taking my questions. Tom, you mentioned earlier some good success in a more defensive equity strategy. Could you break that down a bit, particularly how it compares between retail and institutional investments, and any insights you have on the institutional pipeline related to those strategies or Calvert?

Yes, we don't have much of a pipeline in active equity institutional accounts. Most of the sales success we are seeing for active equity is retail either funds or in some cases individual separate accounts. Most of that active business is through model programs. But the places where we're seeing sales success are primarily high-performing equity strategies, branded Calvert. So it's the one-two punch of strong performance, which is a distinctive factor and also the strong brand of Calvert in responsible investing. So we're benefiting, I would say, across the board. Almost without exception across Calvert active strategies from strong performance and 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 reputation that Calvert has. You marry that with strong performance and we’ve been able to grow Calvert's business in active equities pretty meaningfully. The other brand manager I would point to is our Atlanta Capital affiliate, which, although Atlanta Capital in total has been a net redemption in the 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, small-cap, SMID-cap, large-cap in their active equities. Atlanta Capital's mantra is high-quality investing, which they’ve practiced for decades. We are 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 seeing growing interest in that as you would expect. This is a group of funds and separate accounts that are distinguished not only by strong performance over time, but also a consistent investment approach, low turnover investing in high-quality companies that resonates with a lot of investors looking at alternatives to passive investing. So beyond that I would say small-cap generally as a place where we're seeing positive flows both branded Calvert and branded Eaton Vance, both U.S and international. So you don't think about active equities as a place where there's a lot of growth opportunity, but we're seeing some potential for our business to grow there based on performance and based on the distinctiveness of the Calvert brand.

Great. And maybe as a follow-up. Could you maybe talk a little bit about the competitive environment within custom beta and the ladders? Specifically, look any time I guess you’ve good growth opportunities, people try to come into the markets, 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? I mean, kind of talk about how you see that?

This business is definitely more challenging than managing funds. With 80,000 individual accounts, we have a scale that is difficult for competitors to match, making us, according to industry data, the largest player in this market. Our primary focus is on service. This applies to both Parametric and Eaton Vance Management branded strategies that may transition to Parametric. In the past two years, we've noticed several new entrants in the market, particularly in laddered bond separate accounts and custom core equities. These competitors are attempting to challenge us on both the income and equity fronts. Our growth has been strong, with a 19% organic growth rate year-to-date on a combined basis. We expect to see more competitors attracted to this opportunity for growth, but we believe we maintain a unique position due to our reputation for service. So far, we have managed to fend off competitors and sustain our growth. Many competitors have attempted to challenge us by focusing primarily on price. While we have largely maintained our pricing, we remain flexible enough to be competitive when needed. Our value proposition hinges on delivering value relative to cost, which we are confident in, and we believe this will support continued growth. Most of our competition is centered around equity, competing against index funds and ETFs rather than other managers of customized individual separate accounts. In the realms of municipals and taxable bond portfolios, we primarily compete against unmanaged portfolios. While there are indeed more competitors entering the space, we remain significantly larger at $100 billion compared to the overall market size, which we see as encompassing much of the index ETF and mutual fund market outside of qualified retirement plans and institutions using ETFs for short-term exposure. We believe this market has the potential to exceed trillion dollars. When considering municipal bonds, the value held by individuals that is actively managed compared to unmanaged is substantial, indicating a substantial opportunity for conversion. The rise of index investing adds another layer to this, as many funds do not offer the customization advantages or the tax benefits associated with managed separate accounts. Therefore, we see enormous growth potential. Our goal is to enhance our market share as this sector expands. This may be challenging due to the anticipated influx of new entrants, but few others are positioned like us to invest in technology that enhances service quality. Many will likely think it’s too difficult to compete with Parametric and Eaton Vance in terms of service excellence, which may lead them to pursue alternative approaches.

Great. That was helpful. Thank you.

I think we have time for two more participants before we wrap up the call today.

Thanks. My question is on fee rate. If we look on a year-over-year, you’ve 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 the rate of decline we’ve seen?

I don't see any improvement. The last I checked fee rates aren't going up across any parts of asset management that we participate in. Our primary driver of those fee rates that will continue to be mix, even both across categories and inside categories. The biggest changes in average fee rate have 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 high-yield bond portfolios or mortgage-backed securities portfolios. We are seeing some price competition, some level of fee concessions in existing businesses. I don't think it's accelerating. It feels like it's more on a steady modest decline in average fee rates across most of our businesses if you look at true apples to apples comparison. We think we can manage through that. I’ve been in the investment business well over 30 years and there has never been a time when 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 reductions in fee rates tied to per dollar of assets by growing up the base of assets you managed and leveraging the spending in support of that asset management. So no real change in our business mix. We expect continued modest declines in our average fee rates.

Okay. And then as a follow-up, the global macro product seemed to improve performance. You mentioned historically that's dovetailed with or correlated with improved flows. Can you talk about just the positioning of the fund and kind of historically it's had a 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 that segment as well would be helpful.

Yes. These strategies are somewhat challenging to categorize concerning their alignment with broad market trends. We consider ourselves to be selective investors, focusing on both long and short positions in emerging and frontier markets, primarily through currency and short-duration sovereign credit instruments. Year-to-date returns are approximately 6%, which we find quite promising. While a 6% return may not be particularly exciting in some years, achieving this with less volatility than long-duration fixed income or most equity strategies can be very attractive, especially given the low correlation of these strategies to the major asset classes that U.S. investors typically favor, such as developed market equities and U.S. duration assets. Recent global events have undoubtedly caused some disruptions, but we are managing well through the challenges, and those performance numbers reflect the current year-to-date data.

Okay. Thank you.

Thanks. Good morning, everyone.

Good morning.

I just have a follow-up to Rob's last question on the competitive landscape and custom beta. I wanted to see if you saw a pickup in product launches, SMA wins, fund registrations from some of your competitors just given the success of Parametric?

Let me address the question in two parts. One part pertains to the equity side, specifically regarding the Parametric business, while the other concerns the fixed-income side, which involves Eaton Vance Management that will soon integrate with Parametric. On the equity front, our main competitor in this market has been Aperio, which remains a strong player in our sector, but the competitive dynamics between Parametric and Aperio have not notably changed. Other competitors, such as Goldman Sachs and Natixis, also engage in this market. The competitive landscape is heavily influenced by access to platforms, whether offered through major broker-dealers or specific registered investment advisors, and the types of strategies available. Aspects like whether products are linked to a single index or multiple indexes, features offered, tax loss harvesting approaches, and performance reporting all serve to differentiate players in this customized business. If your customization level doesn't meet expectations, success becomes difficult. Service quality significantly impacts customization as well. So far, we've successfully navigated competitive pressures and continue to expand, even as this market grows. While some may think our accomplishments seem easy, we're working on strategies that will raise the entry barrier for other asset managers by better serving our clients. On the fixed-income side, the scenario is quite similar, albeit with different players. Aperio lacks a fixed-income offering, while competitors like Nuveen, Lord Abbett, and BlackRock are present. Generally, we've maintained success in this area. This year, we introduced a systematic, year-round tax loss harvesting service as part of our core offerings without an additional fee, enhancing our appeal. We are in the process of getting platform approvals for this service. We see this move as a way to set ourselves apart from competitors, as not many provide similar services. Ultimately, service quality is crucial; it matters how quickly we respond to inquiries about potential transactions and how effectively we cater to advisors. In this market, the fee rate differences tend to be slight, and our offerings aren't seen as commodities due to the emphasis on service. Despite not being the lowest-cost provider, our high service satisfaction levels have helped us secure business. We believe this market has potential for growth with numerous competitors, and we expect the competitive landscape will soon adjust, making it less attractive for new entrants due to the high standards we and a few others are setting in terms of scale, technology, and service.

Thanks, Tom. Very comprehensive. I just had one follow-up on your retail SMA strategy, which I know you’re in the process of upgrading here. What do you see as the key qualities of asset managers that have succeeded in the RIA market? Because this has been a very challenging segment for traditionals to crack.

Yes, I understand. One aspect of our strategic initiative involves integrating our sales organization that focuses on the RIA channel. Previously, Parametric had a dedicated sales team managing various strategies, primarily custom core in that channel, while Eaton Vance had its own separate mutual funds and accounts. As you've mentioned, like many asset managers, we've faced challenges at Eaton Vance in achieving success in this area, whereas Parametric has established a strong business with significant market share for its custom core products aimed at the RIA channel. Our goal is to build on Parametric's achievements and expand that success into a wider range of asset classes. While we currently lead in custom equity index separate accounts, we aim to also lead in custom bond separate accounts, whether indexed or laddered. We want to capitalize on the strength of the Parametric brand and the relationships they've built over the past 25 years to successfully introduce fixed-income strategies into this channel beyond our limited success so far. As you noted, most of our fixed-income assets are currently with wirehouses and independents. Through this reorganization, rebranding, and updates to our sales strategy for the RIA channel, we are determined to replicate that success in fixed-income separate accounts within the RIA space.

Got it. Thank you, Tom.

All right. I think this concludes our call. Thank you very much for everybody participating in this call and we will speak with you in the fourth quarter earnings webcast. Thank you very much.