What's the CEO of a traditional asset manager to do when faced with big outflows and increased pressure on the firm's bread-and-butter business? Eaton Vance
] CEO Tom Faust
stresses flexibility — building on what works and, especially, acquiring less traditional money managers.
Faust spoke with analysts
at the Bank of America Merrill Lynch Financial Services Conference
about how he plans to respond to the slow growth of the firm's traditional asset management arm.
First, he plans to build up the less-traditional money managers he's acquired. And second, he hopes to promote the traditional strategies that Faust thinks can get traction in the current low-yield environment, strategies like tax-managed and income funds.
Faust outlined several challenges to the traditional business, like reduced distribution earnings coupled with rising distribution costs, as well as ongoing equity outflows. But the biggest problem for Eaton Vance is the outflows from its large-cap value strategies.
"[The] last six quarters have not really been fun for us, as we've seen generally slow to no growth for our business, thanks to a shrinkage in large-cap value," said Faust. Eaton Vance's large-cap value strategies have lost about $20 billion in the last 18 months, Faust said, due to outflows and the termination
of a sub-advisory contract this past summer.
But Faust says that "the rate of decline is slowing" — down to about $1 billion a quarter from large-cap value — and he sees the "pressure coming off" in the next year. In the third quarter of 2012, Eaton Vance saw $2.2 billion of net inflows, their best result in over a year.
Faust also thinks that the firm will get a boost from the tax increases that are likely to be implemented and the continuing demand for income funds. Income strategies make up about $85 billion of Eaton Vance's $200 billion of AUM — which is roughly two-thirds retail, one-third institutional assets — while about $80 billion is in tax-managed strategies. And, as Faust notes, "that's after a decade or so when … [the] tax rate has been low and capital gains realizations have been pretty modest, so not a lot of focus is on taxes." With tax rates likely to go up, Faust sees that part of the business ready to grow.
Then there's Faust's acquisitions. Last week, Eaton Vance subsidiary Parametric Portfolio Associates bought
Minneapolis-based overlay and risk-management specialist Clifton Group Investment Management Company
. And this summer, Eaton Vance acquired
a 49 percent stake in Montreal-based Hexavest
. These two acquisitions have added about $45 billion combined to Eaton Vance's AUM.
Faust stressed that these firms, along with Parametric, are "really differentiated" from Eaton Vance's traditional mutual funds business. This diverse group of affiliates, Faust says, can help the firm face the challenges that many fund shops are facing these days, a list that includes "pressure on fees, the rising cost of distribution, heightened competition from passive strategies, less patience on the part of many investors with underperforming strategies, generally growing pessimism about the market, [and] growing pessimism about investment strategies to add a return," in Faust's words.
See the full transcript
of Faust's talk for more.
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