Morgan Stanley (MS) — Q1 2020 Earnings Call Transcript

Thank you. Good morning and welcome to our fiscal 2020 first quarter earnings call and webcast. With me this morning are Tom Faust, Chairman and CEO of Eaton Vance; as well as our CFO, Laurie Hylton. In today's call, we will first comment on the quarter and fiscal year and then take your questions. As always, the full earnings release and charts we will refer to during the call are available on our website eatonvance.com under the heading Investor Relations. Today's presentation contains forward-looking statements about our business and financial results. Actual results may differ materially from those projected due to risks and uncertainties in our business including but not limited to those discussed in our SEC filings. These filings including our 2019 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 $0.86 of adjusted earnings per diluted share for the first quarter of fiscal 2020, which is up 18% from $0.73 per diluted share in the first quarter of fiscal 2019 and down 9% from $0.95 per diluted share in the fourth quarter of fiscal 2019. On a combined basis, seed capital and consolidated CLO entity investments contributed $0.03 to adjusted earnings per diluted share in the first quarter of fiscal 2020 and negative $0.02 in the first quarter of fiscal 2019 and $0.08 in the fourth quarter of fiscal 2019. Excluding these items, first quarter fiscal 2020 adjusted earnings per diluted share were up 11% year-over-year and down 5% sequentially. We ended the first quarter of fiscal 2020 with $518.2 billion of consolidated assets under management, which is up 17% from a year ago and up 4% from the previous quarter-end. First quarter consolidated net inflows were $6.1 billion or $5 billion excluding what we now call Parametric overlay services which we formerly referred to as exposure management. This was our 22nd consecutive quarter of positive net flows and a solid beginning to what we expect will be our 25th consecutive year of positive net flows. Our first quarter net inflows equate to 5% annualized internal growth in managed assets as calculated both with and without Parametric overlay services. Looking at our flow results on a revenue basis. In the first quarter, we achieved 5% annualized internal growth in consolidated management fee revenue, which compares to minus 4% in the first quarter of fiscal 2019 and positive 2% in the fourth quarter of fiscal 2019. Although revenue-based internal growth rates are not widely reported by other public asset managers, we continue to believe that Eaton Vance ranks among the investment industry leaders by this key growth measure. As we assess the performance of our business in the first quarter, achieving mid-single-digit organic revenue growth is certainly among the highlights. By this measure, the first quarter of fiscal 2020 was our best growth period since the third quarter of fiscal 2018. Last June, we announced an important strategic initiative involving our Parametric Eaton Vance Management and Eaton Vance Distributors affiliates. As we described at that time, the initiative has three principal components; rebranding EVM's rules-based systematic investment-grade fixed-income strategies as Parametric and aligning internal reporting consistent with this revised rebranding; integrating under Eaton Vance Distributors the sales teams serving Parametric and EVM clients and business partners in the registered investment adviser and multifamily office market; and combining under Parametric the technology and operating platforms supporting the individual separately managed account businesses of Parametric and EVM. I'm pleased to report that the internal change process supporting this initiative is substantially complete and that we are already starting to see real benefits to our business. Combining our systematic equity and investment-grade fixed-income strategies within the same investment affiliate and consolidating our separate account technology and operating platforms positions Parametric and Eaton Vance to build upon our market-leading positions in custom indexing and laddered bond separate accounts as market demand for these strategies continues to surge. As you can see in our press release and accompanying call slides, we have made certain changes in how we categorize our managed assets and flows for reporting purposes. The new Parametric Custom Portfolios reporting category consists of individual and institutional separate accounts managed by Parametric for which customization is a primary feature. The new classification includes the Parametric equity and multi-asset strategies that formerly composed our old portfolio implementation reporting category which are primarily Custom Core and centralized portfolio management as well as the laddered bond separate accounts that were formerly managed by Eaton Vance Management and previously categorized as fixed income for reporting purposes. In the press release and call slides, the presentation of managed assets flows for all prior periods has been revised to reflect the new classifications. As noted earlier, we have also changed the name of our former exposure management reporting category to Parametric overlay services. This reporting category consists primarily of futures-based overlay strategies and services offered to institutional clients to enable them to efficiently add or remove market exposure without affecting underlying portfolio holdings. While this is our lowest fee business with an average fee rate of 4.9 basis points, it is also nicely profitable and growing. Since entering the business through the acquisition of the former Clifton Group in December 2012, our managed assets in overlay services have more than tripled, growing from $32 billion at acquisition to a record $97.5 billion at the end of January. Looking at our first quarter flows in more detail, we had positive net flows for all of our mandate reporting categories except floating-rate income. Annualized internal growth in managed assets ranges from a high of 9% for Parametric custom portfolios, to 7% for fixed income, 5% for equity and Parametric overlay services, and 4% for alternatives. Although, our floating-rate income business saw $1.4 billion in net outflows and minus 15% annualized internal growth in AUM in the first quarter that’s a significant improvement from $2.9 billion of net outflows, and minus 26% annualized internal AUM growth in the first quarter of 2019, and $2.6 billion of net outflows, and minus 27% annualized internal AUM growth in the fourth quarter of 2019. The abating of outflow pressures has been especially pronounced in our floating-rate U.S. mutual funds, where net outflows fell from $2.1 billion in last year's first quarter and $1.9 billion in last year's fourth quarter to approximately $450 million in the first quarter of fiscal 2020. Through Monday of this week, month-to-date outflows from our floating-rate mutual funds had slowed to barely a trickle. Although, net inflows into our alternative strategy were less than $100 million in the first quarter, here too we have experienced substantially improved flow trends compared to fiscal 2019 when we saw net outflows of $2.2 billion in the first quarter and approximately $550 million in the fourth quarter. Our managed assets and flows in the alternative category are dominated by the two Global Macro Absolute Return mutual funds we offer in the U.S. As a reminder, these funds hold long and short positions in currency and short-duration sovereign debt instruments of emerging and frontier market countries. After a disappointing performance in 2018, our global macro funds roared back to strong performance in 2019, contributing to the improved flow results and flow outlook for the category. February month-to-date flows remain modestly positive for both our global macro mutual funds and the alternative category as a whole. As mentioned earlier, annualized internal growth in our equity mandates was 5% in the first quarter. Calvert EVM and Atlanta Capital each made significant contributions to the quarter's $1.6 billion of equity net inflows. Calvert equity strategies contributed nearly $900 million with the Calvert Emerging Markets and Calvert Equity U.S. mutual funds each generating over $250 million of net inflows. EVM equity strategies contributed approximately $850 million to first quarter net inflows, driven primarily by privately offered funds in the U.S. On top of the more than $250 million net inflows into the Atlanta Capital sub-advised Calvert Equity Fund, Atlanta Capital contributed approximately $450 million of equity net inflows in core and growth mandates. In the first quarter, our fixed-income strategies had $1.1 billion of net inflows, which equates to 7% annualized internal growth in managed assets. On a combined basis, EVM and Parametric municipal bond strategies contributed over $700 million to quarterly net inflows and EVM, Calvert and Atlanta Capital taxable bond strategies contributed approximately $400 million. Flow leaders across our fixed-income mutual fund lineup included the Eaton Vance Emerging Markets Local Income Fund with nearly $200 million of net inflows and the Calvert Short Duration Income Fund, Eaton Vance Core Plus Bond Fund and Eaton Vance National Municipal Income Fund each with over $100 million of net inflows in the quarter. The newly constituted Parametric custom portfolios reporting category had net inflows of $3.5 billion in the first quarter, generating 9% annualized internal growth in managed assets. This reflects net contributions of $2.7 billion to custom core equity separate accounts and $1.4 billion into laddered bond separate accounts across municipal and corporate mandates, partially offset by approximately $575 million of net withdrawals from centralized portfolio management mandates. Sorted by client type, Parametric custom individual separate accounts had $43 billion of net inflows and Parametric custom institutional separate accounts had $800 million of net outflows. Focusing on custom core equity and laddered bond individual separate accounts, the quarter's $4.3 billion of net inflows equates to 15% annualized internal growth in managed assets. As shown on slide 12, Parametric custom portfolios reached a record $175 billion in managed assets as of January 31, 2020. This is a high-growth, highly differentiated investment management business in which Parametric is far and away the market leader across all key segments. We are investing to grow this business by expanding our product offerings, extending our service capability and achieving greater operating efficiencies to drive down costs. We continue to believe that the Parametric custom portfolios business is only scratching the surface of its long-term potential. Turning to Calvert, we continue to be very pleased with the business results and investment success we are achieving. In the recently completed first quarter, Calvert generated net inflows of $1.3 billion, which equates to 26% annualized internal growth in managed assets. Including the Calvert Equity Fund sub-advised by Atlanta Capital, Calvert's managed assets reached a new high of $21.8 billion at the end of the first quarter with continued strong investment performance across Calvert's diversified lineup of equity income and multi-asset strategies. As of the end of January, 21 Calvert U.S. mutual funds were rated four or five stars from Morningstar for at least one class of shares including seven five-star rated funds. We continue to see strong demand for Calvert's distinctive lineup of investment strategies that combine a record of investment excellence and a deep multi-decade-long commitment to the principles of responsible investing. As the investment management industry as a whole continues to struggle to grow revenues net of market effects, Eaton Vance's ability to deliver internally sourced, top-line growth sets us apart. The strength of our high-growth franchises and customized individual separate accounts, responsible investing and wealth management strategies and services, the range of active strategies that with top-tier performance that we offer across investment asset classes and the prospects for continued recovery in our floating-rate income and alternatives category flows combine to give us confidence that we can continue to grow our business at rates well above the overall asset management industry average. While market action over recent days reminds us that unforeseen forces can upset even the best-laid plans, we approach the balance of 2020 and our long-term future with optimism for continued growth and success. That concludes my prepared remarks. I will now turn the call over to Laurie.

Thank you, and good morning. As Tom described, we reported adjusted earnings per diluted share of $0.86 for the first quarter fiscal 2020, up 18% from $0.73 in the first quarter of fiscal 2019, and down 9% from $0.95 in the fourth quarter of fiscal 2019. Our adjusted earnings per diluted share this quarter, includes $0.03 of combined contribution from seed capital and consolidated CLO entity investments, compared to a negative $0.02 contribution in the first quarter of last year, and an $0.08 contribution in the fourth quarter of fiscal 2019. As you can see in Attachment two to our press release, earnings under U.S. GAAP exceeded adjusted earnings by $0.05 per diluted share in the first quarter of fiscal 2020, $0.02 per diluted share in the first quarter of fiscal 2019, and $0.01 per diluted share in the fourth quarter of fiscal 2019, reflecting the reversal of net excess tax benefits related to stock-based compensation awards during those periods of $4.9 million, $2.9 million, and $1.5 million respectively. Operating income increased by 11% in the first quarter of fiscal 2020 from the same period a year ago, reflecting an 11% increase in both revenue and operating expenses. Operating income was down 1% sequentially, reflecting a 4% increase in revenue and a 7% growth in operating expenses. Our operating margin was 29.8% in both the first quarters of fiscal 2020 and 2019, and 31.2% in the fourth quarter of fiscal 2019. As Tom noted, ending consolidated managed assets reached a new quarter-end high of $518.2 billion at January 31, 2020, up 17% year-over-year and 4% sequentially driven by strong net flows and positive market returns. Average managed assets this quarter were up 17% from the same period last year, driving management fee revenue growth of 13%. 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 32 basis points in the first quarter of fiscal 2019 to 30.8 basis points in the first quarter of fiscal 2020. Changes in our average annualized management fee rates over the comparative period primarily reflects shifts in business mix. Sequentially, growth in average managed assets of 4% matched growth in management fee revenue as our average annualized management fee rate of 30.8 basis points was unchanged. Performance-based fees, which are excluded from the calculation of our average management fee rates, contributed $0.2 million to revenue in the first quarter of fiscal 2020 versus negative $0.3 million in the first quarter of fiscal 2019 and positive $0.1 million in the fourth quarter of fiscal 2019. Turning to expenses. Compensation costs increased 12% year-over-year, reflecting higher salaries and benefits associated with increases in headcount and year-end merit adjustments, higher stock-based compensation and higher performance-based and operating income-based bonus accruals, partially offset by lower sales-based incentive compensation. Stock-based compensation in the first quarter of fiscal 2020 included approximately $5.5 million of accelerated expense recognized in connection with employee retirements. Sequentially, compensation expense increased 7% reflecting higher salaries and benefits driven by increases in headcount, seasonal compensation effects, higher stock-based compensation driven by employee retirements, and higher operating income-based bonus accruals, all partially offset by a decrease in severance costs. First quarter seasonal compensation pressures traditionally include the impact of payroll tax clock resets, the timing of our 401(k) funding and year-end base salary increases. The majority of these seasonal compensation pressures will continue into the second fiscal quarter before we see relief in the third. That said, we would not expect to see a recurrence of the roughly $5.5 million of stock-based compensation associated with first quarter retirements in the second quarter. In addition, we would anticipate seeing an incremental $1 million to $1.5 million decrease in stock-based compensation in the second quarter as the impact of divesting of stock-based compensation under our phantom equity plan for outside directors and the recognition of expense associated with our employee stock purchase plan tend to be heavily weighted to the first quarter of each fiscal year. Non-compensation distribution-related costs, including distribution and service fee expenses and the amortization of deferred sales commissions, increased 10% year-over-year and 4% sequentially, primarily reflecting higher marketing and promotion costs; higher upfront sales commissions, due to increased sales of closed-end funds, private funds and Class A mutual fund shares; and higher service fee expenses for Class A and private funds driven by higher average managed assets in those funds. The year-over-year increase further reflects higher private fund commission amortization, partially offset by lower Class C distribution and service fee expenses. Fund-related expenses increased 15% year-over-year, reflecting higher sub-advisory fees due to an increase in average managed assets of sub-advised funds. Fund-related expenses were flat sequentially, reflecting an increase in sub-advisory fees paid offset by a decrease in fund expenses borne by the company. Other operating expenses increased 11% from the first quarter of fiscal 2019, primarily reflecting increases in information technology spending, market data services, professional services 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 increased by 9% from the fourth quarter of fiscal 2019, primarily reflecting increases in information technology spending, market data services, professional services, travel expenses and charitable contributions. The increase in other expenses reflects investments we are making to support our strategic initiatives as well as the overall growth of our business. We continue to focus on expense management and identifying ways to gain greater operating leverage. Net gains and other investment income related to seed capital investments contributed $0.04 to earnings per diluted share in the first quarter of fiscal 2020 were negligible in the first quarter of fiscal 2019 and contributed $0.04 to earnings per diluted share in the fourth quarter of fiscal 2019. When quantifying the impact of our seed capital investments on earnings, we take into consideration, our pro-rata share of the gains, losses and other investment income earned on investments in 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 to minimize the associated earnings volatility. Non-operating income and expense also includes net expenses from consolidated CLO entities of $1.8 million in the first quarter of fiscal 2020. This compares to net expenses from consolidated CLO entities of $2.9 million in the first quarter of fiscal 2019 and net income from consolidated CLO entities of $6.3 million in the fourth quarter of fiscal 2019. The sequential decrease in contribution from consolidated CLO entities primarily reflects the sale of our subordinated interest in a CLO entity during the first quarter of fiscal 2020, which resulted in the deconsolidation of that entity. Other income and expense amounts related to consolidated CLO entities reduced earnings per diluted share by $0.01 in the current quarter and $0.02 in the first quarter of last year and contributed $0.04 per diluted share in the fourth quarter of fiscal 2019. Other income and 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 EV capital to support the growth of this business, then taking advantage of opportunities to exit our CLO position as market conditions allow, generating cash to help fund new CLOs for other corporate purposes. Turning to taxes. Our U.S. GAAP effective tax rate was 22.8% in the first quarter of fiscal 2020, 23.4% in the first quarter of fiscal 2019 and 22.7% in the fourth quarter of fiscal 2019. The company's income tax rate was reduced by net excess tax benefits related to stock-based compensation awards totaling 3.4% in the first quarter of fiscal 2020, 2.5% in the first quarter of fiscal 2019 and 1% in the fourth 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 removed the net excess tax benefits related to stock-based compensation awards. On this basis, our adjusted effective tax rate was 26.2% in the first quarter of fiscal 2020, 25.9% in the first quarter of fiscal 2019 and 23.7% in the fourth quarter of fiscal 2019. On the same adjusted basis, we estimate that our quarterly effective tax rate for the balance of fiscal 2020 and for the fiscal year as a whole will range between 26.5% and 27%. During the first quarter of fiscal 2020, we used $45.5 million of corporate cash to pay the $0.375 per share quarterly dividend we declared at the end of our previous quarter and repurchased 1.4 million shares of our nonvoting common stock for approximately $66.6 million. Our weighted average diluted shares outstanding were 114.7 million in the first quarter of fiscal 2020, down 1% year-over-year, reflecting share repurchases and excess of new shares issued upon vesting of restricted stock awards and exercise of employee stock options partially offset by an increase in the dilutive effect of in-the-money options and unvested restricted stock awards. Sequentially, weighted average diluted shares outstanding were up 1%. We finished our first fiscal quarter holding $824.7 million of cash, cash equivalents and short-term debt securities and approximately $315.9 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. 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. At this point, we'd like to take any questions you may have.

Thank you. Can you provide clarification? Tom, you mentioned some of the quarter-to-date flows for certain segments, but I noticed you didn't touch on fixed income, equities, and some other metrics. Since you mentioned bank loans and alternatives, could you give us a broader update on the rest of the business?

Yes. Just to clarify the only thing I talked about was our mutual fund flows for the period just continuing the context of improvement. I'm not really prepared to talk about our overall flow trends for the quarter-to-date as that may or may not be a good indicator of what the quarter as a whole will be. I will say generally that in the same way that we had strong flows across our businesses in the fourth quarter we've had good flows for the month-to-date. But it's only a little over three weeks into the quarter, so I don't want to talk too specifically about anything other than those couple of exceptions I made in my remarks.

Okay. And then just a follow-up on kind of expenses and margins, I guess if we think about the last 12 months in the growth of both the beta in the market as well as your flows and essentially margins are flat year-over-year, so can you talk about an environment where you actually could see margin expansion? And then on the contrary given what's happened more recently with market how we should think about flexibility if that market tailwind is no longer there for a sustained period.

Hi. It's Laurie. I think we've talked a little bit about the pressures that we obviously see in the first quarter. It's difficult when we start the new fiscal year because we've got these seasonal pressures that we see each first quarter. Most of them relate specifically to compensation. We did our best to call those out. I would say as we're moving into the second quarter, I did call out specifically on stock-based compensation that we would anticipate seeing some level of relief recognizing that we had some material first quarter retirements that forced us to recognize about $5.5 million of incremental stock-based compensation expense and we've got some seasonal stuff that happens relating to our employee stock purchase plan and our directors plan that probably will provide us some relief as we move into the second quarter to the tune of about $1 million to $1.5 million. In terms of other operating expenses and the way we're thinking about the year, I think we had been telegraphing fairly clearly that we anticipate we're going to be continuing to make some significant investments in technology. I think that there was some – a little bit of first quarter noise associated with normal first quarter events and operations associated primarily with things like charitable giving which tend to be front-end loaded for us, the way that we actually interact with United Way. But we would anticipate that if we see a decrease in the charitable giving in the second quarter we are seeing a modest ramp-up in our technology spend. So overall, we'd like to see margin expansion. We do think that there is opportunity for that. Obviously, the volatility of the last several days has got all of us a little bit cautious about how we're thinking about the next quarter but we would anticipate that there is opportunity. That said, we are taking advantage of the initiatives that we've announced to start to really invest in some of our technology platforms to provide for future long-term growth and we're committed to that. If we anticipate we have to start making some changes because there's something very disruptive that happens, I'm sure we will address that in the coming quarters. But I think that we all recognize in our business that we are getting pressed from above and pressed from below there. But obviously pressures in terms of fee rates, we've talked about those in numerous calls but there's also pressure in terms of the overall cost structure.

Hi, good morning. On the custom portfolios, Tom you indicated that you're only scratching the surface. So maybe where are those large opportunities that you alluded to, say over like the medium term? And what is the strategy here to tap them?

Okay, I’d like to take a moment to discuss what custom portfolios entail. They generally fall into three main categories. The first category includes equity portfolios that replicate a stock market index but are customized for enhanced tax efficiency. This includes strategies such as in-kind funding to reduce upfront tax realization, tax loss harvesting, and gain deferral, along with customization for ESG and other requirements specified by clients. This is what we refer to as Custom Core equity under Parametric. The second category consists of laddered fixed-income separate accounts, which we recently transitioned from Eaton Vance Management to Parametric. The third category is our centralized portfolio management business, where Parametric collaborates with platforms that implement multi-manager strategies. Each underlying manager’s fee provides a model for Parametric to manage these strategies on a centralized basis, often with ongoing tax management as a crucial component. Those are the three main areas, with some smaller components on the side. When discussing our position, I feel we have just begun to explore the potential of what we term custom indexing, or as the market often refers to it, direct indexing. This approach allows investors to own a significant portion of the underlying stocks in a separate account, rather than investing in an index mutual fund or ETF, while benefiting from customization. Considering the size of the index ETF and mutual fund markets, which amount to trillions of dollars in the U.S., our business, around $110 billion across institutional and individual separate accounts, is relatively small, especially since most of it caters to individual investors. We believe there is a vast market of trillions of dollars in mutual fund and index ETFs that would be better suited to a similar market exposure through our approach, especially for taxable investors or those driven by personal values. On the fixed-income side, our business in this area is approximately $40 billion. This has been driven by financial advisors who initially utilized laddered separate accounts and began to appreciate the benefits of having a third-party manager providing ongoing credit oversight and institutional-quality trade execution. We see significant growth potential for this segment as well, with the possibility for direct indexing to expand beyond equities into fixed income, creating opportunities for multi-asset solutions. You can envision blending equity and income strategies into customized individual separate accounts that add value compared to available fund products or more bespoke, non-automated methods advisors currently use. While we anticipate growing competition and some price pressures in this market, we also see strong momentum. Recent organic growth rates for laddered bond and Custom Core equity accounts were about 15%, indicating solid growth off a large base. Although our centralized portfolio management business has been relatively stagnant, I believe it possesses long-term growth potential within our Parametric Custom Portfolio offering. This approach, which includes implementing multi-manager separate accounts, offers substantial growth opportunities due to efficient execution, portfolio tilts for improved tax outcomes, and ESG exposure—concepts that can certainly be applied outside of passive portfolios. We may not be seeing much growth in that area currently, but we believe it has the potential to become a significant driver for us in the Parametric Custom Portfolios category.

Yes. That was pretty comprehensive. I appreciate it. Thank you.

Good morning. And thanks for taking the questions. So overall another quarter strong diversified flows. It looks like just the one area a little lighter was on the institutional side. So just more curious what drove it if there was any rebalancing? And any color in terms of the pipeline?

The institutional pipeline is generally strong. We are anticipating several multimillion dollar institutional business opportunities in the second quarter, which gives us confidence in our institutional segment. I want to clarify that I'm separating this from our exposure management business, which is included in our institutional flows but reported separately. A factor that has been impacting us this quarter is a significant institutional client in bank loans that has been gradually reducing their position over the past several quarters. This is a multibillion dollar client, so there will be some pressure from this. We are nearing the end of this drawdown, but it has affected our bank loan business and our institutional separate account business over the last four or five quarters. We think we are approaching the conclusion of this issue, and overall we expect good flows in institutional areas. We are seeing success in our emerging market local income strategy, which is a substantial asset class outside the United States and is gaining traction with institutional clients. Additionally, we recently secured a significant institutional core fixed-income mandate under the Calvert brand and expect to fund a large institutional high-yield bond separate account offering in the current quarter. Overall, it’s a mixed situation with one notable challenge from the bank loan client reducing their exposure, but we are experiencing broad strength in other areas. On the equity side, Atlanta Capital has performed very well in recent years, particularly in 2019, and they have seen an increase in their institutional business, which involves traditional large-cap U.S. investments. Despite a tough environment for growth in this sector, their strong performance and investment approach have enabled them to expand over the past few quarters and build a solid growth pipeline.

Hi. Good morning. This is Jeff Drezner on for Rob Lee. I have a quick question regarding the compensation line. I wanted to revisit that briefly to ensure I understand everything correctly. There was a $5.5 million expense, and a decrease of about $1 million to $1.5 million that we should not expect to see again in fiscal Q2, is that right? Was there anything else I might have missed? I just want to be sure.

Hi, it's Laurie again. What I mentioned was that there was $5.5 million in stock-based compensation expense this quarter related to retirements that will not happen again in the second quarter. Additionally, there was about $1 million to $1.5 million of additional stock-based compensation expense in the first quarter that will not be repeated in the second quarter. So, effectively, stock-based compensation expense is expected to decrease by between $6 million and $6.5 million in the second quarter.

So just to clarify, we're looking to add the two numbers together rather than subtracting one from the other to arrive at the expectations for the second quarter compared to the first quarter.

Got it. I appreciate that. I have a quick question regarding the institutional business. Can you provide some insight into the ESG strategies at Calvert and how you envision that developing?

We acquired Calvert at the end of 2016, when nearly all of their business was focused on U.S. mutual funds. Since then, we have almost doubled Calvert's business from approximately $11.9 billion at the time of acquisition. So far, the growth has primarily come from mutual funds in the U.S. However, our vision for Calvert and its strategies extends well beyond just U.S. mutual funds. We are rolling out various Calvert strategies as institutional separate accounts in collaboration with Parametric under our Parametric Custom Portfolios brand. This includes both Calvert indexes and opportunities to offer Calvert active strategies through Parametric. Recently, we secured a significant partnership with a U.S. pension plan attracted to Calvert for its strong investment performance and commitment to responsible investing. We see great potential alignment with many mission-driven organizations in the U.S. and globally that aim to achieve strong investment returns while aligning their portfolios with their missions. This includes various non-profits, pension funds, and educational endowments where responsible investing is a core focus. We believe we are just scratching the surface in terms of expanding the Calvert brand from its roots as a U.S. mutual fund provider to becoming recognized both in U.S. mutual funds and internationally, as well as in individual and institutional separate accounts. This is an ideal time for Calvert, given the rising interest in responsible investing. There's a lot of confusion around the concept, but Calvert, with its long history, can help educate the market, backed by a strong investment performance across various strategies. I noted Calvert's 26% organic growth rate in the first quarter, and we are optimistic about continuing to grow Calvert at an above-average rate, focusing on both mutual fund and separate account clients in institutional and individual markets.

Great. I appreciate the color on that. If I could just get one quick follow-up just on custom beta products. And just any competition you're seeing there? And maybe competition on price or whatnot?

In Parametric custom portfolios, there is competition and growing opportunities. We are observing how this will unfold. We believe there is a much larger market opportunity for us and other competitors. The growth profile of this business indicates that others are attempting to enter as well. We have significant advantages in scale and experience that new entrants may lack. However, we do not expect this market to be dominated by a single player. There are several major players and a few smaller ones exploring this space. While not many newcomers will likely succeed, we anticipate a select group of market leaders, with Parametric positioned to remain the largest among them, as we are currently. Pricing has always been part of the competition in the customized individual separate account business, but the focus has largely been on features, service, and access. Having the ability to connect with financial advisers, effectively communicate the advantages of a customized separate account, and provide superior service are crucial. Service should include both high-touch, as-needed assistance and an increasing reliance on technology for enhanced service, which is vital for sustaining profitability, especially if prices continue to decline over time. In fixed income, the situation is different. There are several competitors in the laddered bond market, but we haven't seen intensified price competition there. We are concerned about equal market access, particularly regarding broker-dealers offering in-house strategies that compete with third-party solutions. As I previously mentioned, we believe there is a significant emerging opportunity in fixed income, particularly with direct indexing best solutions, and we feel well-positioned to offer these options in the marketplace due to the development work we have done. We are excited about the long-term potential to expand how this category is perceived. It goes beyond merely replicating an equity index; it involves integrating fixed income and eventually developing solutions that exceed simple benchmark tracking to help clients and financial advisers meet a broader range of financial needs, including target risk, target date concepts, and custom liability-driven investment strategies.

Great. Thanks so much.

Okay. Thank you very much. Appreciate all the color. Maybe just two questions. Tom, maybe start with you. Just big picture down, there's been a fair amount of M&A in the landscape, both on the sort of manufacturing side as well as on the distribution side and in varying forms. What if any impact do you think that has in your business?

I’ll start by saying that time will tell. We don't have all the answers yet since most of the acquisitions that have been announced are still pending completion. The areas where we feel most confident are the consolidations within the asset management industry. Typically, during a lengthy transition period, there is some transfer of assets between the merging companies, strategies may be put on hold, and there can be disruptions to investment teams. Merging firms aim to minimize these disruptions, while their competitors see opportunities to take advantage of them. Customers and gatekeepers are closely observing this situation, concerned about potential negative impacts on their end. While some opportunities may arise, it's difficult to quantify their size. Generally, consolidation among competitors tends to create short-term opportunities due to the disruptions related to mergers. In the long run, success depends on the ability to execute and factors that are challenging to predict during the acquisition announcement phase. For those deals more focused on distribution and wealth management, like Schwab TD Ameritrade or E*TRADE Morgan Stanley, it’s harder to assess the immediate impact. Our priority is to maintain market access, which is crucial for our success. We must consistently demonstrate our value compared to what these firms could do on their own. This has always been the case in our business, especially since we primarily sell to financial intermediaries who continually weigh the decision of building versus buying. Any of these firms could opt to do asset management internally, but their track record has generally not been strong. Asset management and wealth management are distinct businesses, and few companies can excel at both. Considering industry changes, I find reassurance in the fact that even though Eaton Vance is significant with about $0.5 trillion in assets under management, we represent a small fraction of the larger asset management sector, holding only about 1% or 2% of the market share. When evaluating the broader wealth management market, I believe our $0.5 trillion position offers a considerable advantage, enabling us to grow if we effectively implement our strategy, remain adaptable, and deliver for our clients, even amidst challenging industry conditions. If we can outperform many others in the field, we can continue to thrive as a firm without being overly constrained by the industry's growth potential.

Okay. That's very helpful. Thank you. And Laurie just one for you a little bit of a nasty question, so I apologize in advance. Can you break down a little bit on where you're sort of spending the technology? What kind of time line you talk about here? Is this a multiyear effort? And then just as I think about the ins and outs of flows versus fee rates it sounds like a very good flow story. But also I hear nothing about the competition in lower-fee products. So how do you sort of see the dynamic between organic growth versus revenue growth notwithstanding this was a very good quarter of itself?

Yes. I'll start with the technology question. As we consider our technology spending, I view it as part of a new normal. We're not planning on a single large-scale replacement of a system that would allow us to stop investing in technology altogether. Instead, we are focusing on a more consistent incremental investment in technology, particularly related to our recent initiatives with Parametric and Eaton Vance, where we're integrating technology platforms. Our aim is to invest in technology that enhances our efficiency and effectiveness while reducing the costs associated with managing separate accounts individually. Therefore, we expect our technology spending to increase over the long term, ultimately allowing us to lower our overall operating expenses in the future. This is a long-term strategy for us. Regarding revenue, when we analyze our effective fee rates, as shown in Attachment 10 of our press release, we do not observe a decline in our effective fee rate across categories such as equity, fixed-income, and alternatives. Instead, we see shifts in the mix from quarter to quarter that affect the average effective fee rate for that period. While there has been discussion about decreases in effective fee rates, we are not experiencing that by mandate. However, there is a year-over-year decline in our overall average effective fee rate at the top level, mainly driven by the mix. The positive note is that for the quarter ending January 31 compared to October 31, we experienced no decrease in our overall average effective fee rate, which gives us confidence in the stability at the mandate level. We have a solid opportunity for our organic growth in assets to correlate with our organic revenue growth going forward. This is particularly true as we continue to develop our active equity strategies with higher fees alongside our more passive strategies, which typically have lower fees. This quarter, we effectively demonstrated our ability to achieve 5% organic growth in both assets and revenue.

I can make a couple of comments. If you examine the charts that accompany the call, you'll notice a disconnect between our ability to achieve organic growth in assets and our organic revenue growth over fiscal 2019. This is reflected in slides ten and eleven. Slide ten presents annualized internal growth in consolidated managed assets as a percentage, while slide eleven translates those figures into revenues. The key reason for the differences in 2019 was the approximately $12 billion in net outflows that year in two high-fee categories: floating-rate income and global macro strategies that are significant in our alternative strategies. To achieve organic revenue growth that aligns with our organic asset growth, halting the outflows in those two strategies is essential. We made progress in alternatives in the first quarter and believe we are close to achieving the same in bank loans. Our expectation for the remainder of the year, subject to market conditions, is that you will see a much closer alignment between asset growth and revenue growth tied to those assets, as we do not anticipate the negative factors that caused last year's disconnect to continue this year.

Its all very helpful. Thank you for the detail.

Hi thanks. Two quick follow-ups on sustainable investing if I could the conversation. One is I'm curious to get your thoughts on the client interest that you noted and are clearly seeing in terms of dedicated product versus just part of the process of ongoing product. And two is how you think passive plays a role ESG investing. It's counterintuitive but there are products they are getting flows. So, curious on how you think passive impacts pricing and flows yes and sustainable.

Yes. Calvert offers a wide range of strategies in responsible investing, covering both active and passive approaches. We are experiencing growth in both areas, with strong performance in both active and passive equity strategies. In fixed income, we focus exclusively on active strategies. There's a facet of responsible investing that doesn't neatly fit into the active versus passive distinction: engagement. This involves efforts to foster value creation and improve the performance of the companies we invest in through proxy voting, participation in shareholder resolutions, and discussions with management to encourage better outcomes. These activities can apply to both active and passive strategies. As this field evolves, there is much to sort out due to the rapid changes and various confusing terms. Different terminology can lead to differing interpretations among individuals. It will take time to clarify these concepts. However, it is evident that engagement is becoming increasingly vital in distinguishing between different strategies or managers. The way they vote proxies, engage in shareholder resolutions, and interact with management adds another layer of performance beyond traditional return measurements. Additionally, we’re beginning to explore how we can assess performance not solely on financial outcomes but also on non-financial metrics, such as how our portfolios stack up against indices or competitors in terms of ESG impact, carbon emissions, and other various metrics. Currently, the available information is limited, but we anticipate improved reporting in this area over time, leading to a more nuanced understanding of responsibly invested strategies. I was recently on a call regarding this topic, and there are numerous efforts underway to provide clarity on defining different funds and the terminology used. While the language remains somewhat fluid at the moment, we support industry initiatives aimed at establishing more consistency. Our growth is clearly driven by a combination of strong performance and credible thought leadership, along with disciplined ESG efforts by our investment teams. This includes research, engagement, and impact measurement, reinforced by the Calvert brand's long-standing history since the early 1980s. Our credibility as a manager, extensive ESG resources, and connection to high-performing teams contribute significantly to our success. As for the future of active versus passive management, we believe active managers have greater opportunities to add value in this area, although, as you mentioned, there is still movement towards passive products in this space.

All right. Well, thank you very much for those of you who participated in today's call and we'll speak with you when we have our next webcast for the second fiscal quarter. Thank you very much and have a good day.