Morgan Stanley (MS) — Q2 2020 Earnings Call Transcript

Thank you. Good morning and welcome to our fiscal 2020 second 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 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 headline Investor Relations. 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.

Good morning and thank you for joining the call. Amid the continuing COVID-19 pandemic, I want to start by offering my sincere best wishes for good health to each of you and your families. Over recent months, we've seen a tragic loss of human life in nearly every country around the world, as well as massive disruption to the global economy and the world's financial markets. We see genuine heroism displayed by the countless healthcare workers, first responders and other essential service providers who are putting themselves in harm's way serving others. All of us at Eaton Vance are deeply grateful for their service. In recognition of the sacrifices of the COVID-19 heroes, and the suffering of those experiencing ill health or economic hardship due to the pandemic, the company and our employees have contributed $1 million to support COVID-19 relief efforts in our communities and around the world. In this challenging period Eaton Vance’s primary concern are the health and safety of our employees and their families, the resilience of our business and serving the needs of our clients and business partners each and every day. Over the last couple of months, the creativity, adaptability and teamwork of our staff have been put to good use meeting the challenges of operating amid a pandemic. Since the middle of March, nearly all Eaton Vance employees have been working from home, connecting with each other and our clients and business partners chiefly through video technology. While not the same as being together physically, our businesses function seamlessly. We've not experienced any notable disruptions due to operational issues, loss of communication capabilities, technology failure or cyber attacks. Throughout a period of heavy account activity and highly volatile markets, our trading and operations team have consistently kept up with unprecedented demand even while working from home. We don't take these successes for granted and recognize that our ability to respond to changing market conditions is a tribute to the planning and hard work of our technology and operations teams, the commitment and discipline of our employees as a whole and the strength of our corporate culture. Our resiliency is also a testament to the stability and longevity of our relationships with critical operations and distribution business partners and the benefits of the workforce, where turnover is low and working relationships are long established. From a distribution standpoint, our sales teams have adapted quickly to a world of virtual interactions with clients and intermediaries. With business travel shut down and in-person meetings canceled across the board, we are leveraging digital communications tools to remain connected. We have ramped up our digital engagement with financial advisors and consultants, increasing the frequency of calls, webinars and blog posts. We increased the update frequency of our popular Monthly Market Monitor to weekly in order to help clients and business partners stay abreast of the markets and stay informed about Eaton Vance strategies. Financially, Eaton Vance's longstanding commitment to maintaining a strong balance sheet and ample liquidity has been well rewarded. As of April 30th, we had over $950 million of cash, cash equivalents and short-term income investments, $300 million of available capacity on our corporate credit facility and no debt maturing until 2023. Over the course of the quarter, we successfully demonstrated our ability to generate incremental liquidity if needed, and continue to closely monitor our financial resources on a daily basis. In terms of capital management, we slowed the pace of share repurchases during the fiscal second quarter to maintain an ample supply of dry powder. During the quarter, we prioritized spending on initiatives that support future growth and create operational efficiencies. Turning to our financial results. Earlier today, we reported adjusted earnings per diluted share of $0.80 for the second quarter of fiscal 2020, unchanged from the second quarter of fiscal 2019 and down 6% from $0.85 of adjusted earnings per diluted share in the first quarter of fiscal 2020. Adjusted earnings differ from our earnings under U.S. GAAP principally to remove gains and losses and other impacts of consolidated investment entities and the company's other seed capital investments. Adjusted earnings also reflect the reversal of net excess tax benefits related to the company's stock-based compensation. Combined, these adjustments added $0.15 to adjusted earnings per diluted share in the second quarter of fiscal 2020, subtracted $0.09 per diluted share in the second quarter of fiscal 2019 and subtracted $0.06 per diluted share in the first quarter of fiscal 2020. By any measure, financial markets were challenging to navigate over the first two months of our second fiscal quarter, as the full scope of the global pandemic became apparent. Between the end of January and March 31st, the U.S. equity market, as represented by the total return of the S&P 500, dropped 19.6% and was down 30.4% at the low on March 23rd. During this two-month period, we lost $72.5 billion in managed assets to market price declines. In contrast, the month of April saw market-related gains in our managed assets of $28.9 billion, recovering almost 40% of the market-related declines for the first two months of the quarter. We ended the second quarter of fiscal 2020 with $465.3 billion in consolidated assets under management, down 1% from a year earlier and down 10% from the end of the prior fiscal quarter. Second quarter consolidated net outflows were $9.3 billion or $2.8 billion excluding Parametric overlay services. Excluding this business, our flows fluctuated from $2.4 billion of net inflows in February to $5.4 billion in net outflows in March to $200 million of net inflows in April. Again, excluding Parametric overlay services, annualized internal growth in managed assets was minus 3% for the quarter, up 7% in February, minus 16% in March and plus 1% in April. Looking at flows based on managed fees, our annualized internal growth in management fee revenue was minus 6% for the quarter, plus 5% in February, minus 23% in March, and minus 2% in April. Besides Parametric overlay services, which I will discuss shortly, the main contributor to net outflows in the second quarter was the floating-rate income index. Floating-rate net outflows for the quarter were $3.2 billion, with approximately $2.4 billion of that occurring in March, as benchmarked short-term interest rates dropped significantly and concerns about recession-related credit losses increased. While prices fell sharply, the loan market did not experience interruptions in liquidity seen in other income markets during this period. Our floating-rate net outflows for the quarter were concentrated primarily in U.S. mutual funds, with institutional and sub-advisory mandates experiencing approximately $300 million of outflows in the quarter. Although loan prices have now recovered nearly halfway back from the March lows, our loan professionals believe the asset class represents exceptional value at current levels, given the historical default and recovery experience of senior secured floating-rate loans in prior periods of economic distress. Our alternatives category had net outflows of just under $700 million in the second quarter driven by outflows from our two Global Macro Absolute Return mutual funds, and the final liquidation of the Global Macro sub-advisory account that gave notice of termination in 2019. While not insulated from event risk, our global macro strategies offer the potential for generating returns that are substantially uncorrelated to U.S. equity and bond market returns, which can be especially appealing in an environment of high economic uncertainty. In equities, a continuing highlight of our business is the strong growth of Calvert which contributed $1.1 billion to equity net inflows in the second quarter, and $1.9 billion in the first half of fiscal 2020. Net inflows in the Calvert equity mandates were up 85% in the first half of fiscal 2020 compared to the same period in fiscal 2019. In the second quarter Calvert equity funds had net inflows of over $400 million, Calvert Small-Cap Fund over $200 million and Calvert Emerging Markets and Calvert International Equity Funds over $100 million on a combined basis. Calvert's strong equity flows reflect both the power of the Calvert brand as a leader in responsible investment and the outstanding investment performance of the Calvert equity strategies. As can be seen on Page 17 of the slides that accompany this call, as of April 30th, 14 Calvert equity and multi-asset funds were rated four or five stars by Morningstar for at least one class of shares, including five Calvert funds that are rated five stars. Atlanta Capital equity strategies contributed over $600 million to net inflows in the second quarter with both the Atlanta Capital core equity and growth equity teams generating net inflows. Including the Calvert Equity Fund, which is managed by the Atlanta Capital growth team, net inflows into Atlanta Capital managed equities exceeded $1 billion in the second quarter. As in past periods of economic uncertainty, Atlanta Capital's brand of high-quality investing holds particular appeal in the current environment. Flows into Eaton Vance management equity strategies were substantially flat, with net inflows into privately offered funds offset by outflows from other equity strategies. Parametric saw equity net outflows of $2.15 billion, driven principally by withdrawals from Parametric’s emerging markets equity strategy. This engineered strategy applies a modified equal weight approach to investing in emerging markets, seeking to benefit from diversification and rebalancing alpha. Relative performance for the year-to-date and over longer periods have suffered from a systematic underweight in China, by far the largest constituent of emerging market indexes, and a top performer among the emerging markets over recent periods. Turning to fixed income, second quarter net inflows of approximately $200 million were driven by high yield bonds, short-term government income and emerging market local debt mandates, and high yield both retail funds and institutional separate accounts contributed to net inflows of $600 million. We're especially pleased with the growth of our institutional high yield business, with a pipeline of new mandates expected to fund in the third fiscal quarter now totaling more than $1.3 billion. Amid an extraordinarily unstable period in the municipal securities markets, our muni funds and separate accounts had approximately $600 million of net outflows. In the second quarter, Parametric custom portfolios had $1.3 billion of net inflows, led by $2.7 billion of net contributions to custom core equity separate accounts matching first quarter net inflows of this Parametric flagship offering. Net inflows into laddered bond separate accounts across municipal and corporate mandates declined to approximately $250 million in the second quarter from $1.4 billion in the first quarter, reflecting declining interest rates and bond market turmoil. Within Parametric custom portfolios, centralized portfolio management mandates had net outflows of $1.6 billion during the second quarter, driven primarily by client decisions to reduce their exposure to equity investments during a period of high economic uncertainty and equity market volatility. Periods of extreme market volatility like we have been experiencing create significant opportunities for Parametric to add value to custom client portfolios. Declines in securities prices enabled Parametric to harvest tax losses that can be used to offset client gains realized elsewhere in the portfolio, either currently or in the future. We continue to believe that the value proposition offered by custom separate accounts for systematic tax means remains as attractive as ever. Turning to Parametric overlay services second quarter net outflows of $6.5 billion compared to net inflows of $1.1 billion in the first quarter. The outflows reported for this category reflect decisions by continuing clients to lower their risk exposure by reducing their derivative overlay positions managed by Parametric. These overlays functioned exactly as intended in this period of exceptional market volatility, enabling clients to quickly and easily shift market exposures without disturbing underlying positions and securities by accessing the highly liquid futures markets. Funding by new Parametric overlay clients totaled a net $1 billion in the second fiscal quarter, with a pipeline of over $3.7 billion expected to fund in the third fiscal quarter. As we look ahead, we continue to focus on building on the distinctive strengths of our major business franchises to achieve positive organic revenue growth. Through Eaton Vance Management, we're the dominant provider of fund solutions for concentrated stock positions, the leading manager of equity income closed-end funds, and the largest manager of floating-rate bank loans. In fixed income, we have top tier positions in municipal bonds, higher corporates, and emerging market local debt. Parametric is the market-leading provider of custom index separate accounts, municipal and corporate bond ladders, outsourced centralized portfolio management and portfolio derivative overlay services. Atlanta Capital is among the leading equity managers focused on high quality investing with a strong lineup of high performing strategies. And Calvert is among the largest and most respected specialists in responsible investing, number one in responsibly managed U.S. mutual fund flows over the past 12 months, and number two in managed mutual fund assets. As we consider the current environment, we see significant opportunities to build on these strengths even as competitors face a more uncertain future. While we don't know the path of the pandemic from here, or how financial markets will perform, we're pretty sure our industry will continue to trend increasingly in the direction of customized individual separate accounts, responsible investing, and specialty wealth management strategies and services, each an open-ended opportunity in which Eaton Vance has a dominant or leading market position. Since the founding of our predecessor Eaton & Howard back in 1924, our business has weathered many storms, and I have no doubt that we will get through this one as well. As in prior periods of disruption, our goal is for Eaton Vance to emerge from the COVID-19 pandemic, a stronger and better company. Based on the continuing high growth potential of our leading investment franchises, the strength of our financial position and culture and the resolve of our people, I have every confidence that objective will be achieved. That concludes my prepared remarks. I will now turn the call over to Laurie.

Thank you and good morning. I share Tom’s hope that each of you and your families are healthy and well. As Tom described we reported adjusted earnings per diluted share of $0.80 for the second quarter fiscal 2020, unchanged from the second quarter of fiscal 2019 and down 6% from $0.85 in the first quarter of fiscal 2020. Effective this quarter, our calculation of non-GAAP financial measures excludes the impact of consolidated sponsored funds and consolidated collateralized loan obligation entities, collectively consolidated investment entities and other seed capital investments. Adjustments to GAAP operating income include the add back of management fee revenue received from consolidated investment entities that are eliminated in consolidation and the non-management expenses of consolidated sponsored funds recognized in consolidation. Adjustments to GAAP net income attributable to Eaton Vance Corp shareholders include the after-tax impact of those adjustments to operating income and the elimination of gains, losses and other investment income expense of consolidated investment entities and other seed capital investments included in non-operating income expense, as determined net of tax and non-controlling and other beneficial interest. Our goal in making these adjustments is to provide investors and analysts alike a clear line of sight to the company's core operating results. All prior periods’ non-GAAP financial measures have been updated to reflect this change. If you can see in attachment 2 to our press release, adjusted earnings exceeded earnings under U.S. GAAP by $0.15 per diluted share in the second quarter of fiscal 2020 reflecting the reversal of $16.8 million of net losses of consolidated investment entities and our other seed capital investments, the add back of $1.8 million of management fees and expenses of consolidated investment entities, and reversal of $1.1 million of net excess tax benefits related to stock-based compensation awards. Earnings under US GAAP exceeded adjusted earnings by $0.09 per diluted share in the second quarter fiscal 2019 reflecting the reversal of $11.4 million of net gains of consolidated investment entities and other seed capital investments, the add back of $1.8 million of management fees and expenses of consolidated investment entities, and reversal of $0.3 million of net excess tax benefits related to stock-based compensation awards. As shown in attachment 3 to our press release, our operating income as adjusted to include the management fee revenue and exclude the non-management expenses of our consolidated investment entities was down 4% year-over-year and 10% sequentially. Our adjusted operating margin was 30.5% in the second quarter fiscal 2020, 31.4% in the second quarter fiscal 2019 and 30.3% in the first quarter fiscal 2020. As Tom noted, ending consolidated managed assets were $465.3 billion at April 30, 2020 down 1% year-over-year, reflecting COVID-19 related negative market returns partially offset by positive net flows over the last 12 months. Ending consolidated managed assets were down 10% from the prior quarter end reflecting sharply lower market prices and quarterly net outflows driven by investor uncertainty in the midst of the global pandemic. Although average managed assets this quarter were up 5% in the same period last year, management fee revenue was down 1%, reflecting a 7% decline in our average annualized management fee rate and 31.8 basis points in the second quarter of fiscal 2019 to 29.7 basis points in the second quarter of fiscal 2020. The decline in our average annualized management fee rate was partially offset by the impact of one additional fee day in the second quarter of fiscal 2020 due to the leap year. The decline in our average annualized management fee rate versus the comparative period was driven primarily by shifts in our business mix from higher fee to lower fee mandates. Versus the prior quarter average managed assets were down 6% driving a 10% decrease in management fee revenue. Decline in management fee revenue exceeded the decline in average managed assets sequentially, primarily due to a 4% decline in our average annualized management fee rate from 30.8 basis points in the first quarter of fiscal 2020 to 29.7 basis points in the second quarter of fiscal 2020 and the impact of two fewer fee days in the second quarter. Performance based fees which are excluded from the calculation of our average management fee rates contributed $2.5 million, $1.8 million and $0.2 million to revenue in the second quarter of fiscal 2020, the second quarter of fiscal 2019, and the first quarter fiscal 2020 respectively. Management fees earned by consolidated investment entities which are eliminated in consolidation and excluded from the calculation of our average management fee rates were $1.3 million, $1.1 million and $1.9 million in the second quarter of fiscal 2020, the second quarter fiscal 2019 and the first quarter of fiscal 2020 respectively. Turning to expenses, compensation costs decreased 3% year-over-year, reflecting lower operating income-based and investment performance-based bonus accruals, lower stock-based compensation and lower severance costs. These decreases were partially offset by higher sales-based incentive compensation and higher salaries associated with increases in headcount, year-end compensation increases for continuing employees, and the impact of one additional payroll day in the second quarter of fiscal 2020. Sequentially, compensation expense decreased 13%, reflecting lower operating income based and investment performance-based bonus accruals, lower stock-based compensation driven by the impact of employee retirements in the first quarter, decreases in seasonal compensation expenses that are recognized primarily in the first fiscal quarter, lower salaries and benefits driven by two fewer payroll days in the second fiscal quarter, and a decrease in severance costs. These decreases were partially offset by higher sales-based incentive compensation. Non-compensation distribution-related costs including distribution and service fees expenses and the amortization of deferred sales commissions decreased 1% year-over-year, primarily reflecting lower distribution and service fee expenses and commission amortization for Class C mutual fund shares driven by lower average managed assets and a decrease in discretionary marketing expenses. These decreases were partially offset by higher upfront sales commission expense, service fee expenses and commission amortization for private funds. Sequentially non-compensation distribution-related costs decreased 12%, primarily reflecting lower distribution expenses for Class C mutual fund shares, lower service fee expenses for Class A mutual fund shares and private funds, a decrease in intermediary marketing support payments, lower discretionary marketing spending and lower upfront sales commission expense. Fund-related expenses increased 9% year-over-year reflecting higher sub-advisory fees due to an increase in average managed assets of subsidized funds. Sequentially, fund-related expenses decreased 2% reflecting lower sub-advisory fees due to a decrease in average managed assets with sub-advised funds and the impact of two fewer fee days in the second quarter, partially offset by an increase in fund expenses borne by the company. Other operating expenses increased 7% from the second quarter of fiscal 2019, primarily reflecting increases in information technology spending and facility expenses, partially offset by lower travel expenses, professional services and other corporate expenses. Other operating expenses decreased 3% sequentially, primarily reflecting decreases in travel expenses and professional services partially offset by increases in information technologies and facility expenses. As Tom noted, we're continuing to invest in areas that are important for the future growth of the company, while simultaneously focusing on highly expense management and reducing discretionary spending. In this period of volatility, we benefit greatly from the fact that more than 40% of our operating expenses are variable in nature, moving up and down with changes in operating income, managed assets or sales results. Non-operating income expense was down $93.7 million from the second quarter fiscal 2019, primarily reflecting a $65.7 million negative variance in net gain or loss and other investment income of consolidated sponsored funds and the company's investments in other sponsored strategies, a $27.5 million negative variance in net income of expense or expense of consolidated CLO entities and $0.5 million increase in interest expense. Losses related to consolidated investment entities are partially offset by related variances in non-controlling and other beneficial interests. Now our operating income expenses down $81.7 million sequentially, primarily reflecting a $66.6 million negative variance in net gain or loss and other income from the company's investments in consolidated sponsored funds and other sponsored strategies, $14.7 million increase in the net expenses of consolidated CLO entities and $0.5 million increase in interest expense. As a reminder, our calculation of adjusted earnings per diluted share now backs out the gains and losses and other impacts of consolidated investment entities and other seed capital investments. Turning to taxes. Our U.S. GAAP effective tax rate was 45.3% in the second quarter fiscal 2020, 25.1% in the second quarter of fiscal '19 and 22.8% in the first quarter of fiscal 2020. The company's income tax provision was reduced by net excess tax benefits related to stock-based compensation awards totaling $1.1 million in the second quarter of fiscal 2020, $0.3 million in second quarter of fiscal 2019 and $4.9 million in the first quarter of fiscal 2020. As shown in attachment 2 to our press release, our calculations of adjusted net income and adjusted earnings per diluted share remove the impact of gains, losses and other investment income expense of consolidated investment entities and other seed capital investments, add back the management fees and expenses of consolidated investment entities and exclude the effective net excess tax benefits related to stock-based compensation awards. On this basis, our adjusted effective tax rate was 24.9% in the second quarter of fiscal 2020, 26.9% in second quarter fiscal 2019 and 27.6% in the first quarter fiscal 2020. On the same adjusted basis, we estimate that our quarterly effective tax rate for the balance of fiscal 2020 and for the fiscal year as a whole will range between 26% and 27%. We finished our second fiscal quarter totaling $951.3 million of cash, cash equivalents and short-term debt securities, and approximately $257.1 million in seed capital investments. We are carefully managing our cash flow to maintain our financial flexibility, while continuing to prioritize return of value to shareholders. During the second quarter of fiscal 2020, we repurchased 900,000 shares of our non-voting common stock for approximately $31 million and used $41.7 million of corporate cash to pay the $0.375 per share quarterly dividend we declared at the end of our previous quarter. Our weighted average diluted shares outstanding were 111.6 million in the second quarter of fiscal 2020, down 2% year-over-year, reflecting share repurchases in excess of new shares issued upon vesting of restricted stock awards and exercised 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 3%. Fiscal discipline, tight management of discretionary spending and maintaining a strong balance sheet are among our top priorities during these unprecedented times. We are well positioned to weather the current environment and are continuing to invest in our business to support future growth. This concludes our prepared comments. At this point, we'd like to take any questions you may have.

Thanks. Good morning. So just a follow-up on some of the monthly trends, certainly appreciate the additional disclosure. But can you talk about the variance between March and April? And if you can comment about May so far with regards to gross sales versus redemptions in terms of the improvement, it was mainly just the slower redemptions or if you saw kind of gross sales also starting to pick up during those most recent months?

Yes, Dan, this is Tom. The interesting aspect about March was that despite experiencing significant net outflows, gross flows were quite strong, increasing by about 50% from February to March. There was actually substantial activity on both the inflows and outflows sides. Thankfully, things have slowed down a bit on both fronts. As mentioned, we saw positive flow results for April, and May so far has been generally similar to what we experienced in April. We faced a tough period during the crisis, but we've managed to maintain positive flows in March and in early May.

And then I guess just another one on flows. You mentioned $1.3 billion in high yield that's going to fund in the third quarter. I guess, just thinking about risk profiles and client engagement, would you say that you're seeing kind of re-risking or just opportunistic where you have good performance or certain strategies that are doing well, you're seeing the kind of uptick. So I guess, just broadly, any other commentary on the institutional portfolio and kind of client behavior based on what you're hearing and seeing?

Yes, I would say it's mixed. There are definitely clients evaluating the pricing of risk assets and making moves based on that. Some of these clients may have been early to reduce their risk exposures. The recent inflows into high yield funds reflect this trend, especially after a strong month in April. We are also anticipating significant institutional flows. In both cases, this indicates that generally sophisticated clients are viewing current risk asset prices as attractive long-term investment opportunities. We have observed some positive movement in bank loans as well, with flows improving in May. While the situation remains modestly negative, it's an improvement compared to April and significantly better than March. Overall, our experience aligns with the broader equity market trend, suggesting that investors are increasingly convinced we have likely reached the bottom of the cycle in terms of stock prices and economic activity.

My first one is on the fee rate and I heard Laurie's earlier comments on the day count. But I was looking for additional color on the 2 basis point decline in both the equities and the blended fee rate from last quarter?

Hi Craig, it's Laurie. In terms of equities, I think why we're seeing the decline is due to the net outflows that we've seen in Parametric emerging markets. Within that category tends to be one of the higher fee products. And then all it's the same issue. So it's just a question of product mix within the category.

And then just a follow up to the last question. Can you provide us an update on the bank loan business? I'm just thinking with very low interest rates today and rising corporate defaults in the U.S. how is this product sold to both retail and institutional investors? And do you have any updated thoughts on the forward flow trend from this business?

So, as I mentioned, flows for May to date have been modestly negative, with less than $100 million of outflows for the month-to-date through what I believe is Monday. We are not seeing a significant continuation of the negative trend observed in March. The appeal of this asset class for many investors comes from a total return perspective. As we noted, benchmark rates are low, but spreads are wide. In an environment where cash yields are near zero, this asset class offers true floating rate exposure, allowing for high levels of current income without substantial interest rate risk and also the potential for significant price appreciation. This is contingent on a major factor. Throughout this economic cycle, similar to previous ones, the historical performance of senior secured floating-rate bank loans suggests substantial potential for price appreciation from current prices. While there are no guarantees—these are risk assets below investment-grade securities—there is a high current yield with minimal exposure to interest rate risk and a price that reflects a rather bleak outlook for the economy. Historically, the default and recovery experience of bank loans indicates this may be an opportune entry point.

Yes, just as a follow-up to Dan's question, I appreciate the pipeline guidance, are there any known offsetting redemptions to the unknown wins?

Not much to mention. Typically, there isn’t a lot of visibility on outflows. So, I wouldn’t feel overly reassured by the absence of significant outflow pipelines, but it's true we don’t have one. In previous quarters, we noted that a large bank loan client has been redeeming from their position over multiple years, and that isn't finished yet, so there will still be some outflows. We anticipate that in total, it could be around $1.5 billion over an extended period, likely extending across several quarters or even years. This is basically the only significant net outflow we can see. For the rest of our business, we’re generally not expecting major net outflows, but since we operate in a volatile environment, we don’t always receive advance notice of redemptions. The outlook for outflows appears reasonable, but I would advise caution since it’s generally accurate that there isn’t much in the way of an outflow pipeline.

Helpful. Thanks. And then, obviously, the ESG investing theme continues unabated and obviously helping Calvert. Could you update us on any plans or discussion around perhaps backward integrating the Calvert process across the whole complex?

Yes, I would say that this is well underway. While I’m cautious about saying it's completely finished, it is certainly well established. About two years ago, we prioritized integrating Calvert Research into the investment processes of both Eaton Vance Management and Calvert. We aimed to build connections and relationships among analyst teams and portfolio managers to support this integration. We've been working on it for two years, and now our equity and fixed income analysts, as well as portfolio managers at both Atlanta Capital and EVM, have full access to the Calvert Research system and its analysts. This has been the case for several quarters. However, measuring the extent to which this has influenced our investment decision-making is somewhat challenging. But certainly the connectivity is there and if you talk to our portfolio managers and hear them describe what we view with our competitive advantage is, the fact that we have access to this team of Calvert specialists, analysts who bring a very different perspective and a very different skill set than traditional fundamental analysts. It's something I would say that consistently, our PMs have been talking about for several quarters. It varies a bit by asset class, it's bigger in equities, but it's also becoming increasingly important in fixed income. The other place where we're increasingly integrating Calvert is relative to Parametric. Parametric is not in the business of making active calls on stocks or bonds. So, there's no fundamental process to integrate into. However, a significant part of the customized separate account business of Parametric relates to the ability to do customization to reflect client-specified ESG sensibility. To the extent that we can back that up with Calvert Research that we can provide with Calvert impact measurement that we can provide with collaboration and engagement with issuers, that strengthens the value of those Parametric offerings.

Maybe first on your changes to the reporting of adjusted earnings. So, it looks like the changes make this quarter's results look much better and prior quarters look a little bit worse. So, maybe a couple of questions around this. It looks like if the changes were not in place, your earnings would be $0.17 lower this quarter as per Page 10 of the release. I guess, firstly, is that correct? And then the timing of the changes seem a bit gimmicky. You took the benefit when it enhanced earnings and now that the CLO outlook has changed, you're adjusting up the losses. So, can you further flush out your comments on why this version of earnings is better than the prior?

Let me begin, and then Laurie can add her thoughts. For our headline or GAAP earnings, excluding any adjustments, we earned $0.65. That's the primary figure. If you prefer the GAAP perspective, then we earned $0.65. This quarter, similar to recent quarters and consistent with the past few years, we have highlighted the contribution of our seed capital investments and CLO investments to our earnings. These investments are marked to market, and while not all analysts consider this, most of them tend to overlook these factors when assessing the true earning power of our business. We have provided clarity on how these affect our earnings per share. Many analysts have excluded these from their earnings reports. In previous periods, these contributions were positive, reflecting favorable market conditions. Yes, this adjustment has led our adjusted earnings to be higher than if we accounted for the losses from our seed capital investments and CLO gains and losses. We have also monitored our competitors in the public market, and we believe our approach aligns with the broader trends among other managers. There is extensive disclosure regarding the impact of these adjustments, and all analysts can choose which figures to focus on. If you want the GAAP number, it's $0.65. If you're interested in different adjustments, we've detailed each one down to its impact on cents per share, allowing you to select the earnings figure that best suits your needs.

Yes, I would just add, Ken, that we may be putting in tabular form and actually including it as part of our adjusted earnings calculation, but we have consistently been actually providing that information quarterly for quite some time. And I think as we were actually looking at how other peers were handling their seed capital portfolios, we realize that our parenthetical disclosure was not necessarily consistent with what others were doing. And then, quite frankly, if we were going to provide it parenthetically, we should just provide it as part of the reconciliation, and we thought it would be cleaner and it would be easier to get at. So that was the rationale for actually providing it in the adjusted number. And I do believe, as Tom said, that this is a better indicator from our perspective, the earnings power of the Company and it takes out a lot of the noise associated with consolidating large portfolios of products that quite frankly have very little to do when you actually back out the non-controlling interest, had very little to do with what our core operations actually look like.

Thank you for that. Regarding the municipal ladder business, how much is COVID-19 still impacting the sales outlook? Has that business started to recover like some of your other highlighted businesses?

Yes. I would say that business has not fully recovered to pre-crisis levels. We haven't experienced any outflows; in fact, we didn't see outflows in bond ladders during this period. The initial challenge we faced, particularly in February, was that rates dropped so low that income levels for investment-grade municipal bonds were not particularly appealing. One of the issues we're encountering is that when you consider the advisor expenses alongside the prevailing interest rates for municipal bonds around that February period, there wasn't much income available. This weighed on performance. As we moved into March, yields increased because the spread between municipal and treasury bonds widened, but the municipal market struggled to function effectively throughout March. Advisors seemed hesitant to re-engage with this asset class. Overall, we have experienced some partial recovery, but not the level of activity we saw before. For the month to date, there have been modestly positive inflows, likely better than the trend observed in the second quarter, but not as strong as in the first quarter and earlier periods. It appears that it will take some time for this business to fully bounce back.

So, first, maybe on the Parametric overlay flows. Tom, you mentioned some of the drivers in the quarter as well as the pipeline of new clients. Just in terms of the current clients that derisked during the quarter, maybe based on past trends and these volatile backdrops, do you tend to see those clients like come back in and rerisk as kind of the markets start to stabilize? I just wanted to get some perspective on some of the kind of derisking that we saw in the quarter...

Yes, that's a great question. We've certainly experienced various downturns in the past, and it's not unusual for institutions, which make up our client base, to decide to reduce their market exposure during periods of increased volatility. This can happen before a crisis hits, during it, or immediately after, and it's quite common for investors to de-risk their portfolios during market declines. These clients are sophisticated institutional investors, so this isn't just a reflexive response. The primary use of our service involves securitizing cash within client portfolios. If there's 3% or 4% cash that isn't earmarked for specific investments and is simply sitting in the portfolio, we've advocated that utilizing futures is the best way to manage that cash. This approach allows clients to maintain the integrity of their underlying investments managed by different teams while also providing the liquidity to quickly adjust exposure when necessary. This approach is intended for rapid asset movement positions. Historically, during market downturns, individuals tend to reduce their exposures. However, as your question indicates, usually after the crisis period, especially now when cash returns are low, we observe clients gradually reinstating their positions. Based on our experiences and communications with clients during this time, there’s no indication that these positions won’t return over time. What's particularly exciting is that this period has reinforced for some of the prospects we've been engaging with for years the significant value of our service. By allocating some of their assets with us, clients can easily and cost-effectively adjust their market exposure in alignment with the perspectives of the policy committee or the Chief Investment Officer managing the portfolio. This has proven to be a highly valuable service during this time, although from a flow perspective, it had a negative impact on reported flows. The revenue effect from this situation, I should note, is relatively minor.

Okay. That's helpful. Laurie, expenses are well-managed and the margin held up relatively well. I heard your comments about focusing on discretionary expenses. Were there any unusual declines or items in the expense base during the quarter? Also, how are you considering the outlook, given the uncertain backdrop but a fairly strong rebounding market? Any context on how we should be thinking?

Yes. In the current quarter, there was nothing particularly notable that we would consider a one-time item. However, we have experienced a lot of unusual activity due to reduced travel. Generally, there is a decline in discretionary spending, partly because it is being managed very carefully and partly because people are working from home, resulting in less activity. What's most significant this quarter is the decline in certain categories compared to last quarter, with compensation being the most impacted. Every year in the first quarter, we highlight that there are seasonal compensation expenses related to benefits and payroll taxes that reset, as well as stock-based compensation recognized due to employee retirements. You will notice a significant decrease in some of the more stable components of our compensation. However, approximately 40% of our expenses are variable. This means that during times of sales volatility and a drop in average assets, we will adapt accordingly, which indicates that our cost structure remains quite flexible in such periods.

Thanks. Thanks for taking my question, and I hope everyone is doing well in these tough times. Maybe starting with the expense initiatives, Laurie, about kind of pulling back expense guidance per se, can you and Tom maybe update us on what are some of your new business initiatives you're spending on? I know there was Parametric, clearly and technology to kind of keep your technological lead there. But, can you just refresh us on some of the key initiatives?

Yes. I can start, and perhaps Thomas would like to add his thoughts as well. The two primary initiatives we are currently pursuing include the operations and technology platform, Parametric, where we are investing to enhance the platform, particularly to capitalize on growth opportunities in Custom Core. The other significant initiative we are actively engaged in is our migration to the cloud. Like many of our competitors, we are transitioning away from our data centers to adopt cloud technology, and we have a substantial project underway that we will continue to invest in. I think that we're at the tail end of most of our initiatives to effectively get our trading platform standardized across the organization. So, we've done a lot with our fixed income teams getting everybody on to the same platform. And I think that we've pretty much gotten to the tail end of that, but there is still some residual work being done. I don't know if there's anything else, Tom, that you think that we should comment on.

Yes. You mentioned the key areas that I would highlight. The initiatives at Parametric and our transition to the cloud are significant investments we believe are strategically vital, and they will continue. Additionally, Calvert is clearly a growth area for us, presenting various spending opportunities. These initiatives related to Calvert are not exclusively technology-focused, but they will persist even as we aim to cut discretionary spending. For any project to receive funding, it must support business growth in areas with clear opportunities or offer quick cost savings. Otherwise, it will be challenging to get new projects approved.

As a follow-up to that, historically, you have explored new opportunities relative to some peers. I'm curious about your version of these non-transparent ETFs that you have on file, not ETFM, but regarding the technology you've announced. Could you provide an update on where that stands and if there are any other investments you are considering, besides Calvert, that you believe could lead to new business opportunities in the next couple of years?

Yes. Thanks for that. I would just comment on the less transparent active ETF filing that was put in front of the SEC in, let's say, February of last year or maybe January of last year. So, we've had a fair bit of back and forth with the staff there. I feel pretty good about the progress there and I think we're optimistic of a favorable outcome, but we certainly can't promise that that will be achieved and don't know the timing of that. But I feel good about the prospects of entering that growing field at a time and it's really just getting started. And I think the thing that we're watching about that space, maybe a couple of things, but the most important one I would say is on the uptake of these is, will sponsors allow the same or substantially identical strategy to be offered, both at the mutual fund and as an ETF. And there certainly has been a view at times that we've heard by distributors that causes concerns for them, I think primarily come up from a business risk management compliance perspective. There's certainly no absolutes there, but that was one of the things that slowed us down with NextShares. And if that changes, and I think there are signs that it may be changing at least at some distributors, we think that's a very bullish sign for the potential of these products. Obviously, the other key will be the ability to gain asset classes other than US equities. So far, all of the approvals have been just for US equities. And certainly, our ambitions, and I'm sure everyone else's ambitions in the space, would be to come out with a methodology that can provide for good assurance of good trading results in other asset classes where the challenge for efficient market making is greater than it is in US equities. So I think we're both increasingly optimistic about the potential of this business, having seen now a number of firms that are announcing products and apparently a better receptivity on the part of distributors to establish strategy. Our business, in general, remains very hard to bring a new strategy out. If you can take a successful strategy and make it available in what many people believe is a better structure, that has real potential. So, we're increasingly optimistic about that and certainly, very hopeful about our own ability to enter the fray with our patented technology that's in front of the SEC now. In terms of other initiatives that I would highlight, I think, certainly, Calvert is an area of a lot of interest from a new product development standpoint, lots of ideas. It was essentially a US mutual fund brand and our challenge has been both to increase our share of that business, which has really driven the growth of Calvert to date, and to explore ways to extend the Calvert brand into other markets. We have started to see success in institutional and various investment approaches, specifically in two promising areas: less transparent ETFs and Calvert in general. Additionally, within Parametric, there are different ways to utilize and combine their customized individual separate accounts, which will be a focus for us in new product development.

Yes, let's take one last question. Thank you.

Hey, guys. Thanks for squeezing me in here. I hope you're all well. Regarding, let's see, so the core equity separate accounts, Tom, maybe just provide an update on how you see the competitive environment evolving over the medium term in that space? I know that direct indexing is getting a lot more attention these days throughout the industry, including from some of the large custodians. Thanks.

Yes. There has been quite a bit of discussion about this topic, including some related to the recently announced acquisition activity. In terms of the business we're involved in, the competitive landscape hasn't changed significantly. A few new competitors have entered the market, but to my knowledge, they haven't captured much market share. From our experience, it's relatively easy to create an appealing brochure or a nice website. However, when it comes to the detailed and precise management of customized individual accounts, delivering true customization—where each account is managed independently—it's not as simple. What became evident in March was that this business is not for those who only dabble in it. Excelling in this field is challenging. As the market leader, we invest a substantial amount of resources and management effort, and Parametric is dedicated to providing consistently high levels of client service in all market conditions, including in difficult times like those we experienced in March. So it's more conversation about direct indexing, that term has entered the vernacular of our business. People recognize that one of the distinctive strengths of Eaton Vance is our leadership through Parametric in that business. Nobody had any real impact on reducing our market share. We're taking our business there. We continue to prosper in that business. But there's certainly the possibility, which we're very much open to that there will be more competition from credible players. By and large, we're of the view that, that can be helpful, because the visibility of the market opportunity is still relatively low. This is still a pretty small business in the range of maybe a couple of hundred billion dollars relative to index mutual fund and index ETF opportunity that many, many, many times that, trillions of dollars of assets. So, I think there is lots of opportunity. If there is going to be more competition, there is lots of opportunity for that competition to help drive market growth, not just take business from each other.

Thank you. And thank you, everyone, for joining us today, and we hope everyone continues to stay safe and healthy. Thank you.