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Rating:Three Things to Know From Eaton Vance's Earnings Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, May 23, 2013

Three Things to Know From Eaton Vance's Earnings

Reported by Tommy Fernandez

So, we at MFWire reported yesterday that Eaton Vance had a solid year thanks to some bets made by chief executive Thomas Faust and his team paying off.

For example, Eaton reported adjusted net earnings for the second quarter of $66.02 million, or 52-cents, versus $53.97 million, or 45-cents, in the same period last year. More on these details can be found here.

If you look at the company earnings as well as the SeekingAlpha transcript of Tuesday's analyst call, you'd notice at least three powerful themes related to Eaton's current growth. In particular, they are related to progress related to three product areas.

They include: POINT 1: The Clifton Acquisition is Making a Home for Itself
POINT 2: Eaton's Managed ETF Initiative is Building Steam
POINT 3: Bank Loan Products Are Hot

Now to drill down further into these three areas: POINT 1: The Clifton Acquisition is Making a Home for Itself
Eaton subsidiary Parametric Portfolio Associates completed its acquisition of Clifton Investment Management in December 2012. Faust had this to say about Eaton's progress with integrating the unit to an analyst. In particular, the company had experienced some client rebalancing.
I think I'd first tell you that we're learning new things kind of at the same time you are. This is a new business for us, acquired at the end of December. So we're only getting -- now starting to get a feel for how the dynamics in this business work. Recall, we had a very significant net inflows in January, which helped our first quarter results and we had net outflows in this quarter, which affected us.

As I said in my prepared remarks, this did not reflect client's -- the firing them or moving out of the strategy in a total sense. But this is, we are learning, a fairly valuable business in terms of reported flows. To some degree, we think there is a tendency that as markets move up, there's a little bit of a counter cyclicality to the flows that, for example, if you are using overlay to get equities to a certain target level, it may well be that you're doing less overlay as the market moves up. I can't say that's true in all cases or even necessarily most cases. But we do think there is some connection between what the market does and how clients respond by rebalancing. We think we're getting it right as to how you think about market action versus flows.

So it's less straightforward in this than it is for many things. Remember, these are overlays where it doesn't take a dollar to produce -- a dollar in to produce a dollar of flow or a dollar out, because there's built-in leverage in the derivatives. It takes much less than a dollar of actual cash movement on the part of a client to produce a dollar of inflow or outflow. So probably not a very helpful answer, but we are learning. We look at the business primarily on the same basis that the management of Clifton does, which is what is it producing in terms of revenues and profits.

And I think it's probably worth noting that when Clifton was a private company or part of a private company, they didn't really think in terms of flows. They thought in terms of revenues and profits, because the volatility of the markets can cause the value of managed assets to go up in the same way that would apply to the rest of our business, but also can have impact on flows, because clients are really taking advantage of the flexibility and the low cost of moving positions using futures to make this a more volatile part of their asset mix just in terms of flows than we would normally be expecting in our business. So unfortunately, we view going forward as the Clifton overlay business is likely to produce some noise in terms of our flow numbers that we're all going to have to get used to.
POINT 2: Eaton's Managed ETF Initiative is Building Steam
One of the products that Eaton is devoting a lot of time and resources developing is managed ETFs. Faust had this to say on the initiative.
Finally, I want to comment on our exchange-traded managed fund initiative. As many of you are aware, at the end of March, we filed an application with the U.S. Securities and Exchange Commission, seeking exemptive release for a new type of actively managed fund that combines features of ETF and mutual funds. For over a decade, sponsors who've actively managed funds have been searching for ways to provide the cost and tax efficiencies and shareholder protections of the ETF structure to investors and actively managed funds, while preserving the confidentiality of fund portfolio trading information.

While the regulatory approval and market acceptance certainly cannot be assured, we believe our ETMF may very well provide the solution the market has been looking for. As a reminder, ETMFs are based on patented intellectual property we acquired in 2010. Our commercialization strategy is to launch of family of Eaton-Vance-sponsored ETMFs that mirror many of our most successful mutual funds and offer the enabling technology per license by other fund families to allow them to offer replicating ETMF versions of their most successful mutual funds.

As we await SEC action on our exemptive application, we continue to work with our business partners at NASDAQ and BNY Mellon to prepare for implementation. Over the coming weeks, you can expect us to become more active, reaching out to potential licensees. Although it's a long row and there's much work to be done, I continue to view ETMFs as having the potential to transform the delivery of active fund strategies in the U.S. If that happens, the financial implications for Eaton Vance will be profound.
POINT 3: Bank Loan Products Are Hot
Products that include at least some underlying assets related to bank loans were important drivers in Eaton's flow recently. Faust had this to say on the subject:
So bank loan assets and capacity, obviously, something that's important to us. This is one of our flagship businesses that's accounting for roughly 3/4 of our flow in this quarter. We have, if you count not only our dedicated bank loan mandate, but also, we have some bank loans in some multi-strategy accounts. We manage just about $35 billion in bank loan. I think $35.5 billion was the number as of a couple of weeks ago, which is slightly higher than the reported number.

And again, that reflects bank loans that are in multi-income -- multi-strategy, income strategies that would show up in other places. That compares to a market size, our guys say that today, the syndicated -- that the bank loan market in the U.S. and Europe totals about a little over $700 billion in terms of current amounts outstanding. And so we represent about 5% of the addressable market. We don't own every loan. In fact, there's a large percentage of the credits that we don't participate in. But -- so were -- but in terms of the addressable market, we're about 5%. We think we are, if not the largest player, certainly one of the handful of 2 or 3 largest.

How we think about capacity is mostly in terms of -- based on liquidity in the marketplace, do we have the ability currently to put money to work as money comes in, and also to meet redemptions during periods when we're in net outflows. The reports from our trading desk continues to be that we're quite comfortable with how we're doing in terms of putting the money to work. We -- we've seen a lot. We've taken roughly $5 billion of net bank loan assets. So we've been buyers of bank loans over the last 3 months. But even during that period of quite strong inflows, we feel like we've been able to keep up with buying demands.
Read the company earnings as well as the SeekingAlpha transcript of Tuesday's analyst call

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