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Rating:Three Things to Know From Eaton Vance's Earnings Not Rated 5.0 Email Routing List Email & Route  Print Print
Wednesday, November 21, 2012

Three Things to Know From Eaton Vance's Earnings

Reported by Tommy Fernandez

Tom Faust, chairman and chief executive of Eaton Vance [profile] outlined to analysts Tuesday his company's vision for the coming year.

There is a lot of evolution planned for Eaton in the coming 12-months.

There were three primary take-away messages from the conference call:
  • Point 1: Eaton Is Aggressively Expanding its Comfort Zone
  • Point 2: Eaton Wants to Go Global, in a Big Way
  • Point 3: Eaton Sees Opportunities in Tax Products, But Is Approaching Them Cautiously

    First, the numbers. In the fourth quarter, Eaton had adjusted earnings per diluted share of 53-cents, up 23 percent from the preceding quarter and up 13 percent from last year. Faust said this was the second highest quarterly earnings in company history, exceeded only by the 55-cents of adjusted earnings per diluted share in the third quarter of fiscal 2011.

    During the conference call, Faust said that his company achieved 5 percent annualized growth in the fourth quarter, the fastest growth achieved since the second quarter of fiscal 2011. This was well below the company's 10 percent organic growth target, though.

    Moreover, fourth quarter gross sales of $14.4 billion were up 32 percent from the prior quarter and up 30 percent from the year ago quarter with each of its primary investment areas, equity, fixed income, floating-rate income and alternative experiencing sequentially improved sales.

    Now to the points.

    Point 1: Eaton Is Aggressively Expanding its Comfort Zone

    Eaton is working hard to grow outside of its traditional equity-focus, launching a number of new alternative products, acquisitions and a new hire.

    The move makes sense. Net flows for the quarter were positive in taxable and tax-free fixed income, floating-rate income and alternatives. However, Eaton saw reduced net outflows from equity, largely due to lower net withdrawals from its large cap value franchise. For the full fiscal year, they saw $11.9 billion of net outflows from the large cap value franchise, which finished the year with $13.8 billion of managed assets.

    This is what Faust had to say about the expanding product lines:
    The continuing investor appetite for income, our renewed investor focus on tax efficiency with higher investment taxes now pending in the U.S., growing acceptance of alternative as a mainstream asset class and increased appetite for global investment strategies, and finally, increased demand amongst sophisticated investors for low cost engineered alpha-enhanced data strategies, risk and tax management solutions, and portfolio implementation services. In each of these areas we believe we are well-positioned. Looking first to income strategies, Eaton Vance has long been recognized as a market leader in floating rate bank loans, tax advantage municipal bond, high yield, global income and U.S. government income strategies. In total, we managed about $85 billion in income assets representing approximately 42% of our total managed assets.
    A big component of this expansion was Eaton's hiring this month of Gaffney. Faust had this to say of the hiring:
    Our income capabilities were significantly enhanced when Kathleen Gaffney joined us earlier this month as Co-Director of Investment Grade Fixed Income. Kathleen had been with Loomis Sayles for 28 years, where she co-managed the Loomis Sayles bond fund and also managed or co-managed a number of other mutual funds and institutional accounts, including core-plus, multi-sector and high yield mandates. Kathleen is well-known and well-respected in the industry, and we are very excited to have her join our team.

    At Eaton Vance, she will be responsible for managing investment portfolios that draw upon the analytical resources of our entire income team. In fact, we recently filed for SEC approval of the new Eaton Vance bond fund to be managed by a team led by Kathleen. Overtime, we believe this and related offerings have the potential to become major additions to the Eaton Vance income strategy line up.
    Two acquisitions are also important to Eaton growing out of its comfort zone.

    The first acquisition, which is also key to Eaton's global plans, was that of 49% of Montreal-based global equity manager Hexavest Inc., which was closed on August 6th. As part of the deal, Eaton entered into a distribution arrangement with Hexavest for all markets outside Canada.

    Faust had this to say of that deal:
    We are very pleased with how our partnership with Hexavest is beginning and the business momentum may continue to exhibit.

    During the quarter, we launched four Hexavest advice mutual funds for U.S. distribution and are preparing to launch four Ireland-based Hexavest funds for the international market.

    While we suspect it may take some times to gain traction with the new funds, we are seeing lots of interest and good progress in the institutional channel. From the close of the transaction through October 31, Hexavest had over $700 million of net inflows and saw assets under management increased from $11 billion to $12.1 billion.

    Our deep pipeline of new opportunities gives us encouragement that Hexavest will see strong business growth in our fiscal 2013 as they begin to benefit from partnering with Eaton Vanceís power house distribution organization.

    The second acquisition was that of Clifton Group, a Minneapolis based provider of futures- and options-based portfolio implementation services and risk management solutions for institutional investors, by Eaton subsidiary Parametric.

    Faust said this of the deal:
    As of September 30th, Clifton managed $33.4 billion of overlay and funded assets managed on behalf of approximately 180 institutional clients. The acquisition is expected to close on or about December 31st of this year and is subject to certain customary closing conditions.

    Clifton has been providing overlay services and risk management solutions to institutional investors for over 25 years, and is a well-recognized brand among large institutions and consultants.
    Parametric itself is important for Eaton's expansion into new product areas as well.

    Faust described Parametric's importance in this way.
    With $87 billion of pro forma assets under management, Parametric is quickly emerging as a power house provider of portfolio of solutions. Todayís challenging markets require investors to work their portfolios harder and smarter to optimize exposures, balance risks, control costs and maximize risk adjusted returns.

    It is the mission and focus of Parametric to help clients achieve these objectives. As they expand their capabilities through the Clifton acquisition and continue their internal development, we see great growth opportunities for Parametric for many years to come.

    Although Eaton Vance is often thought of as a traditional asset manager, the large and growing position of Parametric inside Eaton Vance certainly blurs that characterization. Different from the rest of Eaton Vance, Parametricís portfolio managers are not engaged in making predictive judgments about markets or individual securities.

    Instead, the rules-based engineered strategies seek to provide diversified market exposures, often coupled with value-added risk management, tax management and volatility capital trading.

    Because Parametric strategies are generally offered at lower price points and competing traditional active those managers, the relentless fee pressures seen across our industry affect Parametric differently, sometimes working to their advantage.


    Point 2: Eaton Wants to Go Global, in a Big Way

    Faust said that although Eaton is not traditionally been known as a global manager-- "that is certainly changing."

    He outlined three factors behind this change. The first two involved developments within Eaton's global income team and Parametric.
    The first is our global income team, and the global macro emerging market debt and currency income strategies they manage, which now total over $10 billion in assets. Over the past several years, we have developed a sophisticated global income investment expertise and the critical infrastructure to support income and currency investing around the world.

    The second core element of our global investment capability is Parametricís emerging market equity discipline, a $16 billion franchise. This rules-based engineered strategy has achieved superior long-term performance, using an approach that Parametric is now applying to a number of different asset classes.
    The third element was the acquisition of Hexavest, which was discussed in the previous point.

    Point 3: Eaton Sees Opportunities in Tax Products, But Is Approaching Them Cautiously

    Faust said that with the U.S. election behind them, there is a lot more clarity on where investment taxes are headed, "which is up."

    He had this to say about what this opportunity means:
    We are market leaders in active tax-managed equity and tax advantage municipal income strategies, and Parametric is the market leader in benchmark-based tax-managed equity strategies.

    In total, we manage about $81 billion in tax-managed equity and income assets representing more than 40% of our total managed assets. With tax rates on the rise we expect to see a growing focus on tax efficient investing in 2013. No firm is better positioned to benefit from that than Eaton Vance.
    However, Faust warned that a lot of work needs to be done to figure out how to best capitalize on this new market demand:
    ,Ö how things are going to work in terms of the taxation of investments in United States. Until thatís resolved, there is no great opportunity. But I think we and most people think that weíre certainly on the verge of some truly significant changes. Some of those changes may make an element of tax efficient management, less important.

    So, for example, if the tax rate on dividends goes up and dividends or tax are the same as interest then the tax advantage dividend part of our business, which is a relatively small part, either is transformed or goes away or something happens to that, that probably adverse. Most of our business in tax-managed product is focusing on either the generation of tax fee income that would be our immunity and tax advantage income strategies or focused on either reducing or deferring capital against taxes or related to that, actively generating capital losses.


    Later during his comments, Faust said this:
    We donít know exactly when that will happen. We donít know exactly what the final rules will be but we are quite optimistic that that on balance this will be a positive for our tax and tax sufficient investing business.


    The transcript of Faust's comments can be found on SeekingAlpha

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