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Thursday, November 29, 2018

Faust Wants Diversification Deals, Not Scale Ones

Reported by Neil Anderson, Managing Editor

Tom Faust is still on the M&A hunt, but for new offerings and capabilities, not scale.

"We are looking to diversify our business," Faust — chairman, CEO, and president of Eaton Vance [profile], said yesterday on the Boston-based asset manager's fiscal Q4 2018 earnings call (as transcribed by Seeking Alpha) in response to a question from KBW analyst Robert Lee. "But if I had a choice of doing an acquisition that took Eaton Vance from, let's call it $500 billion in AUM to a trillion in AUM, that did nothing for us in terms of our growth rate and did nothing for us in terms of our current earnings power, I wouldn't see a lot of point in doing that kind of transaction."

Later in the call, in response to questions from Citigroup Bill Katz about what kinds of "product gaps or geographic opportunity" Faust might look to tackle via acquisitions, Faust shared several hints. For one, he noted that Eaton Vance has "pretty big geographic gaps."

"We've good coverage of the U.S. and limited coverage outside the United States. So we are still about 95 percent of our assets and revenues sourced from the U.S.," Faust said. "So finding the right partner and finding the right opportunity to grow outside the United States is certainly something that we'd consider, in terms of acquisition activity."

Yet Faust cautioned that the Eaton Vance team has been looking for such an overseas deal for some time now, to no avail.

In terms of product areas, Faust stressed the importance of Eaton Vance's "long-term initiative related to responsible investing," which he described as an "increasingly important part of [Eaton Vance's] business."

"We think we are still in the early stages of growing out our capabilities in responsible investing," Faust said.

Faust added that Eaton Vance has "pretty good coverage across the landscape of most equities." Yet he's potentially interested in complementary opportunities to expand in private real estate or private debt in terms of M&A.

"We kick the tires on a few things there, but haven't bitten on anything as yet," Faust said.

In terms of scale, Faust left the door open on whether or not having, say, $500 billion in AUM (a bit above Eaton Vance's $439.3 billion as of October 31) would make the whole company "at scale". Yet he stressed that he's focused more on scale in terms of investment strategies. He pointed to Parametric's custom indexing and exposure management businesses, muni and corporate ladder strategies, global income, high yield, and some equity strategies as places where Eaton Vance is "certainly at scale."

"What we believe is more relevant is the scale of our leading investment franchises," Faust said, pointing to the due diligence process of FAs, platform gatekeepers, and consultants. "You need to have a critical mass to be on that short list and in places where we are active, by and large we think we are big enough to be on that short list."

Yesterday the Eaton Vance team reported adjusted earnings per diluted share of $0.85 for fiscal Q4 2018, beating expectations by $0.02 and up 21 percent year-over-year (while up four percent from fiscal Q3 2018). Fiscal Q4 revenue of $435.97 million beat expectations by $1.94 million. 

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