Eaton Vance [profile] had a record sales fourth quarter driven in part by revved up new businesses, an embracing of a "solutions"-focused model of marketing and a resuscitated equities market.
First, the basics. According to the company's earnings information, Eaton reported adjusted earnings per share of $0.50 for the first quarter of 2013, up 6 percent over the $0.47 reported in the first quarter of 2012. Under GAAP, the company reported $0.38 per share for the quarter, compared to $0.40 the previous year.
The company reported net inflows of $5.4 billion into long-term funds and separate accounts in the first quarter of fiscal 2013 compared to net outflows of $1.1 billion in the first quarter of fiscal 2012.
Consolidated assets under management were $247.8 billion on January 31, 2013, a new high. This represents an increase of 29 percent from managed assets of $191.7 billion on January 31, 2012 and an increase of 24 percent from the $199.5 billion of managed assets on October 31, 2012. Consolidated assets under management on January 31, 2013 included $36.3 billion managed by the former Clifton Group Investment Management Company (“Clifton”), which was acquired by the Company’s subsidiary Parametric Portfolio Associates LLC (“Parametric”) on December 31, 2012.
Consolidated gross sales and other inflows were $19.4 billion in the first quarter of fiscal 2013, up 69 percent from $11.5 billion in the first quarter of fiscal 2012. Gross redemptions and other outflows were $14.1 billion in the first quarter of fiscal 2013, up 11 percent from $12.6 billion in the first quarter of fiscal 2012.
Meanwhile, in the first quarter of fiscal 2013, revenue increased eight percent to $318.5 million from revenue of $295.6 million in the first quarter of fiscal 2012. Investment advisory and administrative fees were up 10 percent, reflecting a 15 percent increase in average assets under management and lower average effective fee rates, primarily as a result of the Clifton acquisition.
There are at least three strong takeaways from Eaton's earnings if you read through SeekingAlpha's transcript of Eaton's earnings call featuring chief executive Thomas Faust.
POINT #1: Eaton is Embracing the Idea of Solutions
Eaton is one of growing number of asset managers that have embraced the idea of "solutions"-focused products, i.e. tailoring funds and products to needs expressed by advisors and customers.
Faust summed up Eaton's philosophy in this way:
Whether the client's objective is to minimize cash drag, control volatility, balance risk, manage taxes or maximize risk-adjusted returns, we are well-suited for the task.
Faust described at least three growth areas for these solutions, with the first being tax-management products. At different points in the conference call, Faust had this to say on the subject:
As yet, the 2013 tax law changes have not translated into increased flows as direct-tax managed products. We think there's a good chance that will happen. We see the biggest opportunity resulting from the substantial increase in effective long-term capital gains rates for the wealthy.
High-net worth investors now have much greater incentive to minimize, offset and defer realized capital gains.
Our tax-managed equity strategies are designed to help investors do exactly that. There are several developments on the new product front that are worthy of comment. We expect to be in the market in March with a municipal bond closed-end fund.
Another growth area was, of course, alternatives, on which Faust had this to say:
The investment disciplines in which we saw strong sales were largely consistent with previous trends. These include a continued investor appetite for income, growing demand for alternatives and increased appetite for global investment strategies and increased demand among institutions for lower-cost engineered strategies and implementation services.
A third area was ETFs. Faust described the opportunity in this way:
Finally, we continue to make progress with our exchange rate and managed fund initiative. We've had productive conversations with regulators, potential business partners and potential licensees and remain convinced that, if approved, ETMFs can be game-changing products for Eaton Vance, and the actively managed fund industry as a whole.
Our goal here is an ambitious one. To transform the delivery of active fund strategies into a higher-performing, more tax-efficient structure with built-in operating cost savings and shareholder protections.
We view 2013 as a pivotal year for this initiative. Looking ahead, our second fiscal quarter is shaping up well, with solidly positive net flows continuing so far in February and a strong pipeline of visible new business ahead of us.
POINT #2: Eaton's Newly Acquisitions Are Helping the Firm Jump at These Growth Areas
A big driver behind Eaton's stretch out of its comfort zones were a number acquisitions and new hires, including those of Hexavest as well as the Clifton Group, which was conducted by Eaton subsidiary Parametric. Also critical was the hiring away of Kathleen Gaffney from Loomis Sayles. These moves helped to significantly bolster Eaton's reach in a number of areas.
During various points in the conference call, Faust had this to say on these new assets.
Not included in our reported net flows for the quarter are the $1.8 billion of net inflows, or 49%-owned affiliate, Hexavest, Inc., achieved during the quarter. Since we closed the Hexavest transaction in August of last year, they have grown their managed assets from $11 billion to $14.5 billion, an increase of 32%, driven primarily by $2.7 billion of net inflows over the period.
We are pleased to welcome our Minneapolis-based colleagues from the Clifton Group to the Parametric and Eaton Vance families. Led by Jack Hansen, Kip Chaffee and Tom Lee, Clifton is recognized by major institutional investors and consultants as the leading provider of futures and options-based overlay services and risk management solutions.
The Clifton business complements and enhances Parametric's existing line up of engineered investment solutions and implementation services. Clifton strategies have made an immediate impact on our business growth, accounting for $1 billion in net inflows in the month of January.
At the end of January, we launched the Eaton Vance bond fund managed by Kathleen Gaffney. You may recall that Kathleen joined us this past October from Loomis Sayles as Co-Head of Investment Grade Fixed Income.
I guess, I would highlight may be the general factors that attracted us to Hexavest, which is that they've got a very strong, long-term track record. They have a quite differentiated top-down or primarily top-down approach. And they have a generally strong position of better performance in periods of market weakness. And although we've been in the period of market strength, and that's usually the case, they've been underperforming in that environment. There are enough investors out there that are cautious about the long-term outlook that are attracted to that track record and the current positioning of Hexavest, which by the way, remains somewhat defensive. I would add to that, that the growth of Hexavest has certainly been influenced in a positive way by adding the distribution resources of Eaton Vance. And certainly, some of the inflows they've had, Eaton Vance sales team plays a significant role in that. I would also just, in closing, comment that they are in the institutional business and the nature of institutional flows is that they are somewhat lumpy. And I wouldn't necessarily expect that the rate of growth that we've seen over the last 6 months or so since we acquired them will necessarily continue for the near-term. But nonetheless, we see Hexavest as a highly differentiated and attractive manager in the global equity space. And we do see significant room for long-term growth.
The major components of implementation services, as we define that category, are Parametric's tax-managed core, centralized portfolio management and specialty indexes businesses, and the former Clifton's groups futures and options-based overlay services.
We believe the market-leading lineup of implementation services now offered by Parametric is a real strength and differentiator for Eaton Vance. Increasingly, sophisticated investors are looking for solutions to help them manage their portfolios more efficiently. Through both legacy and new capabilities, Parametric is now positioned to be a key provider of investment solutions.
Whether the client's objective is to minimize cash drag, control volatility, balance risk, manage taxes or maximize risk-adjusted returns, we are well-suited for the task.
Parametric's rules based, engineered strategies and services work in harmony with both traditional active and passive investment approaches. We reported adjusting -- adjusted diluted earnings per share of $0.50, as compared to $0.47 for the year ago quarter and $0.53 in the previous quarter. The sequential decline in adjusted diluted EPS is largely due to lower performance fees received and higher compensation costs related to our strong sales success and normal seasonal increases.
POINT #3: Things Seem to Be Looking Up for Eaton When it Comes to Equities
Faust had this to say on whether Eaton's equity flows would turn positive this year:
I mean, it certainly could be. We were, I believe, very close to that in the first quarter. Our -- on an overall basis, just sort of big picture is we've been growing in emerging market and international equities, much of that has been strategies managed by Parametric. And we've been shrinking in U.S. equity strategies. Much of that managed by Eaton Vance, where we've had growth at Atlanta Capital that has been offset by shrinkage, primarily in U.S. Large-Cap Value, driven by our Eaton Vance teams. This is a reminder, that was a strategy that was really a big source of our growth in the 2006 to 2009 period, where we got up to $33 billion in assets. We're now down to about $13 billion. So we think that with the improvement in performance that we've seen and we're significantly ahead of our peer group average over the last 12 months, that given the pressure of a lot of the short-term oriented, performance-sensitive money, a lot of that's already gone, we think that we will see less pressure there on outflows going forward. One of the key parts of our equity strategy, of course, doesn't show up in our consolidated flow numbers and that's Hexavest. Those are all equity flows, primarily, global or global all country mandates, where we've seen an incremental, I think, $2 billion, a little over $2 billion of net flows since they became part of the Eaton Vance family in August. So generally, a better outlook. We think the Parametric strategies have performed well and continue to attract nice flows. The Eaton Vance strategies show signs of stabilizing.
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