Morgan Stanley (MS) Q4 2013 Earnings Report, Transcript and Summary

Greetings and welcome to the Eaton Vance Corp. Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Cataldo, Vice President and Treasurer of Eaton Vance. Mr. Cataldo, you may begin.

Good morning, and welcome to our 2013 fiscal fourth quarter and year-end earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, our CFO. We will first comment on the quarter and fiscal year and then we'll take your questions. The full earnings release and charts we will refer to during the call are available on our website, eatonvance.com, under the heading Press Releases. Today's presentation does contain forward-looking statements about our business and financial results. The actual results may differ materially from those projected due to risks and uncertainties in our business, including, but not limited to, those discussed in our SEC filings. These filings, including our 2012 annual report and Form 10-K, are available on our website or on request at no charge. I'll now turn the call over to Tom.

Good morning. October 31 marked the close of our fourth quarter and fiscal 2013. We finished the fiscal year with $280.7 billion in consolidated assets under management, up 4% from the end of the third quarter and up 41% from the end of fiscal 2012. Excluding the managed assets gained in the December 2012 acquisition of The Clifton Group, our consolidated AUM were up 23% for the fiscal year, reflecting strong net flows and favorable equity markets. Not included in our 10/31 consolidated AUM are $16.7 billion of directly managed assets of 49%-owned affiliate Hexavest Inc., a Montréal-based global equity manager. Like the rest of Eaton Vance, Hexavest has experienced strong growth in managed assets, up 40% in fiscal 2013 and up 54% since we acquired our Hexavest interest in August 2012. We had consolidated net inflows of $3.9 billion in the fourth quarter and $24.7 billion for the full fiscal year, which equate to annualized internal growth rates of 6% for the quarter and 12% for the fiscal year. Hexavest net inflows were $200 million in the fourth quarter, $850 million in fiscal 2013 as a whole and $1.6 billion since we acquired our position last August. As in recent quarters, our net inflows in the fourth quarter were led by floating-rate income strategies, with $3.5 billion net flowing in there, and the implementation services offerings of the Clifton division of Parametric were $3.8 billion of net inflows. Leading sources of net outflows for the quarter were Eaton Vance Large-Cap Value at minus $1.4 billion and our municipal income strategies with $1.2 billion of net outflows. As Laurie will describe in more detail, we achieved record revenue, operating income and adjusted net income per diluted share in both the fourth quarter and fiscal 2013 as a whole. Compared to the fourth quarter of last year, this year's fourth quarter saw 15% growth in revenue, 18% higher operating income and 4% higher adjusted earnings per diluted share. For the fiscal year as a whole, revenue was up 12%, operating income was up 15% and adjusted earnings per diluted share were up 10%. Growth in adjusted earnings per diluted share trailed operating income growth for the quarter and fiscal year, due principally to an increase in diluted shares outstanding, a decline in net income and gains on seed capital investments and a higher tax rate. Fiscal 2013 was a busy year for Eaton Vance from a capital management perspective. In addition to the acquisition of The Clifton Group last December, we paid a special dividend of $1 per share and increased our regular quarterly dividend by 10%. We replaced $250 million of 6.5% senior notes due in 2017 with 325% -- $325 million of 3.625% senior debt due in 2023. And we used $74 million of cash flows to buy back 2 million shares of our stock. Fiscal 2013 was an important year for us strategically. Through the Clifton acquisition, we gained a market-leading position in futures and options-based overlay and risk management services and positioned our Parametric subsidiary to assume direct responsibility for its distribution and client service in the U.S. institutional market. The hiring of fixed income manager Kathleen Gaffney at the end of fiscal 2012 and this year's launch of Eaton Vance Bond Fund and a multi-sector income strategy for institutional clients under Kathleen give us a major new fixed income capability that we are confident we can grow into a significant franchise business. We continue to make progress during the year with our exchange-traded managed fund or ETMF initiative, filing an initial and amended exemptive application for SEC approval and otherwise moving closer to the approval and launch of this innovative fund structure. Fiscal 2013 was a year of unprecedented growth for our floating-rate bank loan franchise, which had $14.9 billion of net inflows and saw managed assets increase by 58% to $41.8 billion. Since the founding of Eaton Vance's dedicated bank loan group in the early days of the syndicated bank loan market in 1989, Eaton Vance has been one of the category's true leaders through multiple market cycles, a position we maintained in 2013. Fiscal 2013 was also a landmark year for our Seattle-based subsidiary Parametric. During the year, Parametric successfully absorbed Clifton Group as a new division; launched, as noted earlier, its own dedicated U.S. institutional marketing and client service organization and achieved strong organic growth across its various franchises with total net inflows of $16.5 billion. This September marked the 10th year anniversary of what has turned out to be an incredible successful investment for Eaton Vance. Parametric's $117 billion of managed assets at October 31 were up from $53 billion at the beginning of the fiscal year and $5.2 billion at the time of the 2003 acquisition. Excluding the $34.8 billion of managed assets gained in the Clifton acquisition, Parametric's AUM has grown at a compound annual rate of 31% in the 10-plus years that they've been part of Eaton Vance. Also contributing to our growth in fiscal 2013 was our Global Income group, which had net inflows of $1.9 billion. Most notable here was the success of our Diversified Currency Income Fund, which had over $700 million of net inflows and finished the fiscal year with net assets of $800 million. Atlanta Capital's core equity group and, particularly, the Eaton Vance Atlanta Capital SMID-Cap Fund they manage, also experienced significant growth in fiscal 2013. The Atlanta Capital core group had net inflows of $0.5 billion and finished the year with managed assets over $10 billion. The year, of course, was not without its challenges as we saw net outflows in several investment areas, most notably, Eaton Vance's Large-Cap Value equity and municipal income. Net outflows for the fiscal year were $3.6 billion for Large-Cap Value and $1.9 billion for municipals. Despite the net outflows, these both remain important businesses for us with managed assets at fiscal year end of $12.6 billion in Large-Cap Value and $25.6 billion in municipal. Getting these turned around and positioned for renewed growth is an important strategic priority for us. I know a question on many of your minds is whether Eaton Vance can repeat in fiscal 2014 the success we had in fiscal 2013. I don't know if we will hit a 12% internal growth rate again, but I do think we can continue to grow at an above-average rate. Let me tell you some of the reasons why I'm optimistic about our outlook. First, we fully expect Parametric to continue to grow strongly for the foreseeable future, as they are positioned as market leaders in a number of high-value, fast-growing investment areas, including systematic alpha, managed options, tax-managed core, centralized portfolio management and, through Clifton, exposure management and risk management services. As you may be aware, Parametric now accounts for 42% of our consolidated AUM and 21% of consolidated revenue. Think of Parametric's opportunities as falling in 3 principal areas: systematic alpha, managed options and implementation services. Parametric's systematic alpha strategies are led by their emerging market equities, which saw $3.2 billion of net inflows in fiscal 2013 and now represents over $20 billion in AUM. Parametric's systematic EME strategies continue to outperform their benchmark in what proved to be a difficult period for emerging markets relative to developed market equities. In recent years, Parametric has extended their rules-based systematic approach they use in EME to apply to a number of other asset classes, including global, global ex-U.S., global small cap and dividend equities, commodities, currencies, and a multi-asset, market-neutral strategy. While Parametric has had significant success with its EME strategies in the institutional and IRA channels, we see significant opportunity for EME in traditional retail and for Parametric's other systematic alpha strategies across all channels. Parametric's managed options strategies are implemented through both Parametric Risk Advisors in Westport, Connecticut and The Clifton Group in Minneapolis, totaling now over $5 billion in combined assets under management. Although a variety of managed options solutions are provided to clients, most involve selling covered call options to generate incremental return and to dampen the volatility of underlying asset performance. As equity markets revert to more normal levels, we think the appeal of systematically implemented managed options strategies is likely to increase. Included in the broad category of Parametric implementation services are several important subcategories. In terms of managed assets, the largest of these is Clifton overlay with $40.7 billion in AUM at the end of the fiscal year. Parametric's other IS businesses include tax-managed core equity with nearly $19 billion of AUM, centralized portfolio management with over $14 billion and specialized index implementation with nearly $10 billion. In all these businesses, Parametric provides low cost, efficient implementation of either index-based investments or active strategies in which other investment managers provide the underlying security selection. Given Parametric's strong position in each of these areas and their relentless search among investors for low cost market exposure and efficient portfolio implementation, we see significant growth opportunities in each of these areas. In fiscal 2014, we see a particular growth potential for Parametric's Tax-Managed Core separate accounts, which provides pretax returns tied to a client designated index and seek to add incremental returns on an after-tax basis through tax-loss harvesting and other active tax management. Selling to family offices and other high net worth taxpaying investors, TMC's growth has picked up over the past year. We expect interest to continue to grow in 2014 as investors respond to the dramatic increases in U.S. tax rates on investment income and gains instituted at the beginning of this year. To better capitalize on opportunities we see to offer Parametric's strategies in the high end retail market, we are in the process of building out a dedicated wealth strategy sales team with 12 people in total, 7 incremental new hires. The team will focus on selling Parametric and our other specialty strategies for the high net worth market, and we expect to have it up and running by the end of January. Outside of Parametric, we see a number of other growth drivers for fiscal 2014. Floating-rate income, the single largest source of our net flows in fiscal 2013, remains an attractive investment choice for investors looking for income with a little exposure to interest rate risk. With this year's dramatic growth in our managed bank loan assets, we get questions about our remaining capacity in the asset class. While certainly not unlimited, we do believe we still have room to grow in bank loans. At today's asset levels, our share of the U.S. loan market is roughly 6%. In the past, we have been as high as 8% of the market and believe we may be able to go there again. While we have seen strong growth in our bank loan assets in 2013, the loan market as a whole has also grown, which increases our effective capacity. Two other areas where we have high expectations for growth in 2014 are our Richard Bernstein sub-advised funds and the Kathleen Gaffney-managed Eaton Vance Bond Fund and multi-sector income strategies for institutional investors, both are managed by well-known and well-respected managers and both have excellent early performance records. The Eaton Vance Richard Bernstein Equity Strategy and All Asset Strategy Funds, are led by former Merrill Lynch investment strategist Richard Bernstein and were launched in October 2010 and September 2011, respectively. In these funds, Rich and his team use a top-down flexible approach to invest in markets around the world. With the older of the 2 funds having reached its 3-year anniversary and the other hitting that in 2014, sales momentum is building. Combined assets in the funds were over $700 million at fiscal year end, with $250 million of net inflows in fiscal 2013. We see lots of potential growth here in 2014. The Eaton Vance Bond Fund launched in January and is managed by a team led by Kathleen Gaffney. Since inception through October 31, the fund's Class I shares ranked as the top-performing fund out of 234 in the Lipper multi-sector income category, realizing returns of 7.9% in a period of flattish or negative returns from most peer funds. The fund's best-in-class performance, combined with Kathleen's strong reputation, is translating into strong early investor and broker interest. The fund ended the fiscal year with assets of $75 million. Also worth noting is the institutional interest we are seeing in multi-sector income strategies lead managed by Kathleen. We were recently awarded a $500 million multi-sector institutional mandate, which we expect to fund in our fiscal first quarter. Beyond the specific strategies cited, Eaton Vance has a broad range of offerings to help financial consultants and investors navigate some of today's most daunting investment challenges, including income, volatility and taxes. To help investors meet their income needs without the performance volatility and interest rate sensitivity of long-duration strategies, Eaton Vance now offers a suite of low-duration income funds, including short duration high income, short duration strategic income, short duration government income and short duration real return funds. Regarding taxes, Eaton Vance has long been recognized as a market leader in tax managed and tax-advantaged equity and municipal income funds. As noted earlier, we expect to see rising interest in tax-advantaged strategies in 2014 as investors respond to this year's investment tax increases and strong equity returns. Let me take a moment to give you an update on Eaton Vance Management's equity group here in Boston. As many of you know, Duncan Richardson, EVM's longtime Chief Equity Investment Officer, retired at the end of October. A search for Duncan' replacement is now well underway, and I am serving as head of the group on an interim basis until the new permanent leader is in place. Our goal here is a simple one: To restore this $39 billion AUM business to the ranks of performance leaders among equity managers and to make EVM-managed equities once again a leading growth franchise for the company. Although this won't happen overnight, I know we have all the elements in place to be successful. I've been quite pleased with the caliber of the candidates we have seen and look forward to moving forward with this transition over the coming months. I'll finish my portion of the presentation with an update on our exchange-traded managed fund initiative. I hope most of you are familiar with the idea at this point. But as a quick summary, ETMFs are a proposed new type of open-end fund that seek to provide the performance and tax advantages of exchange-traded funds to investors in active fund strategies, but doing so without disclosing their current portfolio or trading activity as ETFs do today. As proposed, ETMFs would utilize a new trading approach called NAV-Based Trading in which all bids, offers and execution prices and secondary market trading would be at a market-determined premium or discount to the fund's closing net asset value on that day. By linking secondary market trading prices to NAV, ETMFs can trade at tight premiums and discounts to NAV without having to disclose current holdings to the marketplace. Our commercialization strategy includes launching a family of Eaton Vance-sponsored ETMFs that mirror many of our most popular mutual funds and also licensing the underlying intellectual property and providing support services to other fund groups, so they can launch their own ETMFs. ETMFs are based principally on a series of patents that we acquired in 2010. In September, we reached a significant regulatory milestone when we filed with the SEC, an amended exemptive application. Also that month, we hosted an executive forum to provide detail about the ETMF concept to fund distributors, market makers and other fund sponsors, which was quite well received. Although there is still much work to be done before ETMFs are a reality, I continue to view this product as having the potential to transform how active investment strategies are delivered to fund investors in the U.S. If that happens, the financial implications for Eaton Vance will certainly be quite significant. That concludes my prepared remarks. I'll now turn the call over to Laurie.

Thank you, and good morning. As Tom summarized, we're reporting adjusted earnings per diluted share of $0.55 for the fourth quarter compared to $0.52 in the third quarter of fiscal 2013 and $0.53 in the fourth quarter of last year. As we've noted on previous calls, adjusted earnings differ from GAAP earnings in that we back out items that management deems nonrecurring or nonoperating in nature. Historically, these adjustments have included closed-end fund structuring fees and changes in the estimated redemption value of noncontrolling interest in our affiliates that are redeemable at other than fair value. In fiscal 2013, adjustments also included a first quarter add back in connection with the special dividend we paid in December 2012 and third quarter adjustments related to the loss on extinguishment of $250 million of our 6.5% senior notes due in 2017 and a charge to settle a state tax matter, both of which we discussed in detail on our third quarter call. As you can see in Attachment 2 to our press release, adjustments from GAAP earnings totaled a positive $0.10 per diluted share in the fourth quarter of fiscal 2013, $0.34 in the third quarter of fiscal 2013 and $0.08 in the fourth quarter of fiscal 2012. Net income and gains on seed capital investments were negligible in the fourth quarter, while losses, net of interest and dividend income, reduced diluted earnings by $0.02 per share in the third quarter of fiscal 2013. Net income and gains on seed capital investments contributed $0.02 per diluted share in the fourth quarter of fiscal 2012. Our fourth quarter revenue increased by 2% sequentially on a 3% increase in average assets under management. Expenses were held flat sequentially, resulting in a 6% increase in operating income and, ultimately, a 6% increase in adjusted earnings per diluted share. Operating margins increased to 35% in the fourth quarter from 34% in the third. We expect margins to remain in a similar range as we move into the first quarter of fiscal 2014. In looking at the full fiscal year, revenue increased by 12%, while expenses increased by 11%, resulting in a 15% increase in operating income. Growth in adjusted earnings per diluted share of 10% year-over-year trailed operating income growth, primarily reflecting the impact of the 6% increase in weighted average shares outstanding and lower net income and gains on seed capital investments. Our effective investment advisory and administrative fee rate dropped to 44 basis points in the fourth quarter from 45 basis points in the third, primarily reflecting a shift in asset mix. Implementation Services, our lowest effective fee rate business, increased to 30% of average assets under management in the fourth quarter from 28% in the third, contributing to the decline. Looking forward, we anticipate that our effective advisory and administrative fee rate for equity strategies will hold steady at approximately 65 basis points, fixed income strategies at approximately 45 basis points, floating-rate income strategies at approximately 55 basis points, alternative strategies in the low- to mid-60s, and implementation services at approximately 11 basis points. Average fee rates can be affected by changes in product mix and by the recognition of performance fees, which totaled approximately $3.4 million in the fourth quarter of fiscal 2013 compared to $850,000 in the third quarter and $3.7 million in the fourth quarter of last year. Shifting from revenue to expense. Operating expenses were flat sequentially, reflecting modest decreases in compensation and distribution-related expenses, almost entirely offset by increases in fund-related and other expenses. Compensation expense is down 2% sequentially, primarily due to decreases in sales-based incentives and operating income-based incentives, partially offset by an increase in stock-based compensation expense associated with our subsidiary long term equity plans. Sales-based incentives were down $2.5 million or 18% sequentially, primarily reflecting a quarter-over-quarter decrease in gross long-term sales on which sales-based incentives are paid, and a modest decrease in our overall retail incentive rate due to product mix. Operating income-based bonus accruals were sequentially lower in the fourth quarter, despite an increase in pre-bonus adjusted operating income, reflecting lower accrual rates heading into the end of the fiscal year. The increase in stock-based compensation expense is attributed to our subsidiary long term equity plans, with the results of a onetime adjustment related to administrative changes made to those plans in the fourth quarter and was offset by the increase noted in operating income-based bonus accruals. Distribution and service fees and the amortization of deferred sales commissions were largely flat sequentially, while fund-related expenses were up 28%, primarily reflecting the recognition of $1.5 million of onetime reimbursement costs and an increase in fund subsidy expense. Other operating expenses were up 2% sequentially, primarily reflecting increases in information technology costs, as well as higher legal and other professional service costs. Equity net income of affiliates increased to $5.6 million in the fourth quarter from $2.7 million in the third quarter of fiscal 2013, primarily reflecting an increase in the company's proportionate net interest in the earnings of Hexavest and gains in seed capital fund investments accounted for under the equity method. Equity net income of affiliates in the fourth quarter included $3 million as our 49% share of Hexavest earnings compared to $2.5 million in the prior quarter and $1.9 million in the fourth quarter of last year. The Hexavest contribution is reported net of tax and the amortization of intangibles. Nonoperating income for the fourth quarter reflects pretax investment losses, net of interest and dividend income, of $4.2 million, including the impact of corporate hedging activities, compared to $4.9 million of pretax investment losses in the third quarter of fiscal 2013. When combined with the seed capital net income and gains recorded in the equity and net income line, and the allocation of gains and losses to noncontrolling interest holders, net investment income and gains from our seed capital portfolio were negligible in the fourth quarter. Losses on seed capital investments, net of interest and dividend income, reduced earnings per diluted share by $0.02 in the previous fiscal quarter, while net investment income and gains contributed a positive $0.02 to earnings per diluted share in the fourth quarter of fiscal 2012. The decrease in interest expense in the fourth quarter compared to the third reflects interest savings resulting from the restructuring of our long-term debt in the third quarter, as well as the third quarter write-off of $900,000 of capitalized cost related to the tender in June. Our effective tax rate was 40.1% in the fourth quarter of fiscal 2013, down from the 52.9% recorded -- reported in the third quarter. Our effective tax rate in the third quarter reflects the $19.6 million tax settlement we discussed on our third quarter call. Excluding the effect of the tax settlement in the third quarter, as well as consolidated CLO entity earnings and losses in both periods, our effective tax rate for the fourth and third quarters of fiscal 2013 was 39.2% and 37.1%, respectively. Our effective tax rate in the fourth quarter of fiscal 2013 reflects the impact of the stock-based compensation adjustment related to our subsidiary equity plans, which increased our effective tax rate by just under 1.6%. We currently anticipate that our effective tax rate, adjusted for CLO earnings and losses, will be approximately 38.5% as we move into the first quarter of fiscal 2014, reflecting anticipated increases in state tax rates. This concludes our prepared comments. At this point, we'd like to take any questions you may have.

[Operator Instructions] Our first question comes from the line of Michael Kim with Sandler O'Neill + Partners.

This is actually James Howley filling in for Michael this morning. Just as we kind of look of at your new business, I appreciate the update on the $500 million win. But can you give us an update on how the rest of the institutional pipeline stands today? It sounds like you're pretty bullish in some of the separate accounts and other areas of the firm.

I would say it's okay. We have, as noted, that one big pending win for Kathleen and her team in multi-sector income. I think we've got a reasonable pipeline in bank loans that I know about. It's certain parts of our business, I'd say, particularly Parametric and some of their implementation business, we don't tend to have a whole lot of visibility in where things sit there. But as I look across the things that we do know about, the areas that I would point to as strength would be bank loans, multi-sector income, I think also high yield is an area where we feel like we've got a pretty good pipeline of new business building. We've had a good performance in high yield, and that's starting to show up in a better flow of new business activity.

Great. And then once again, maybe you've kind of termed out some of the debt. Your free cash flows continue to build. And you've got the credit facility if you were to pursue any incremental M&A. But all that said, the share repurchases are still a little bit below where they have been for prior run rates. So any additional insight into how you're thinking about capital management going forward?

Sure. No major changes in approach or philosophy. We still, going forward, will consider share buyback as an important way to return capital to shareholders. Looking back at what we did over 2013, we were -- our activity was somewhat curtailed during the first 2 quarters. So if you look at the second 2 quarters of the fiscal year, we purchased roughly $25 million each fiscal quarter. We want to be in the market. We expect to be in the market in the first quarter, but we also want to be smart about when we take advantage of our opportunities to buy. So I would say going into 2014 kind of a consistent approach to what you saw in the latter part of '13.

And I guess one thing to add, maybe this was obvious, but we did pay that $1 a share of special dividend at the beginning of the year. And although it's not dollar for dollar a substitute for share repurchases, it certainly did have an impact on our share repurchases. And I would say, we're not anticipating a similar special dividend in fiscal 2014. So perhaps that could result in a faster rate of repurchases going forward.

Our next question comes from the line of Bill Katz with Citi.

So the first question I have is just -- I appreciate the ticking off of the 4 or 5 different growth initiatives you have, Tom. But I'm sort of curious, how do you translate that AUM growth into earnings lift? You have had a 40% increase in assets year-on-year and for the most part, your earnings are flat. What's the key here to drive the earnings growth from the asset growth?

Flat -- what do you mean by flat earnings?

Well, if you look at adjusted earnings per share, I think you had $0.55 this quarter, $0.52 last quarter and $0.53 a year ago. So maybe equivalent, but that's relatively flattish earnings growth -- earnings per share growth versus the AUM lift. Just trying to see what drives the earnings growth from here.

So I guess, in my head, the number I look at is the 10% year-over-year growth in adjusted EPS. So maybe that's flattish, but that's -- we think of that as maybe a little better than flattish. Fourth quarter, for reasons that we talked about, was a little bit less. I think we feel like we're in a position, as Laurie mentioned, to see margins stable to potentially somewhat on the rise, depending on how the year progresses and what happens with the markets. We're certainly aware that our goal in life is not to drive asset growth. It's to drive earnings growth and more specifically, growth in shareholder value. And think that we're in position to do that. I don't see really things in our business mix or trends in our business that, to me, that suggest that as we grow revenues that we can't see at least commensurate growth in earnings. We did have some special things that hit us in 2013 that produced a pretty big delta between our growth in operating income. What was the number for the year? 18% or something? We had an 18% growth, I believe, in operating income for the year that only translated in...

15%.

Sorry, 15% in operating income that only translated into 10% growth for the year in adjusted income per diluted share. We don't expect those same kinds of things to revert next year. They might. Every year brings its own onetime surprises. But in balance, on balance, nonoperating items contributed pretty materially to the lower growth in adjusted earnings that we saw this year, including -- and I mentioned these items, the growth in share count, which relates somewhat to the special dividend we paid, the slowing down of the repurchases in connection with that, which as I mentioned, we don't expect that to recur in fiscal 2014. We had some onetime items that resulted in a higher tax rate, and when we also saw year-over-year declines in net investment income and gains. So I think if you adjust appropriately for those factors, I think flat is probably not a accurate characterization of our earnings growth historically or certainly how we see it going forward.

Okay. Appreciate the color. And second question is just -- maybe it's in your guidance for the margin into the fiscal first quarter of '14. When you think about comp on a more normalized level, if you will, or think about it. I guess what I'm looking at is your trend in gross sales, which has been down for the last couple of quarters and also you mentioned you had reduction in those related compensation. So I guess the real question is, do you need to spend ahead of bulking up the gross sales or does reacceleration of gross sales automatically suggest higher comps? And maybe some guidance on how you're thinking about comp into the new year, that will be helpful.

Yes, I think that we've had some, obviously, a number of conversations about that internally, but I think that if you look at the fourth quarter numbers, we were at $112.9 million. We were down from July. We were $115.4 million. The delta there is almost entirety related to the point-of-sale variable cost associated with gross sales in terms of the -- particularly on the retail side. So I think as you're thinking about going into the first quarter, I guess the things I would be looking at would be, where gross sales are going on a retail basis. To the extent that those increase because the incentives there are point-of-sale, you're going to see an increase. And then you need to make any adjustments necessary to accommodate for, certainly, some projected headcount growth as we're moving into the first quarter, as well as just sort of the normal base salary increases and payroll tax resets and other things that would normally happen. So I think that from a very baseline run rate basis, the October numbers, the fourth quarter numbers are a reasonable basis off of which to work in terms of developing your first quarter estimates.

Our next question comes from the line of Ken Worthington with JPMorgan Chase. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: The government announced that it'll be starting to issue floating-rate securities beginning next year. Are your bank loan business -- sorry, bank loan funds able to invest in floating-rate government securities? And to what extent might this alleviate kind of capacity constraints on these products?

Maybe by prospectus. We are not sure if that's the case or not. I think as a practical matter, the answer is probably no. These are below investment grade-oriented funds. Our average credit rating is B to BB. We earn spreads over LIBOR, on a gross basis, something north of 300 basis points. So it would be a pretty different risk/return profile for a floating-rate government security versus the types of things that we and other bank loan managers typically hold. So I don't think that would likely be something that we would invest in significantly. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. And then...

We may in other places, but not in our bank loan fund. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. And I guess, this question goes to just equity performance. In the last 2 pages, you highlight kind of the firm's top Morningstar-rated funds. And there's relatively few kind of Eaton Vance Management equity funds. There's a couple from Parametric and I think SMID from Atlanta Capital, but few from the mothership. Maybe highlight, why aren't we seeing more representation there? Like what is the issue with performance on the equity side? And what are you seeing from the leading indicators? You've got better data than we do. As we think about what we might see in these presentations, in these slides 2 quarters from now, 3 quarters from now, 4 quarters from now, are we going to start to see more representation? Do you think key leading indicators represent that things are getting better on the equity side?

A couple of comments. One is that you're absolutely right. We would like to see more Eaton Vance managed equity on that page showing 4 and 5 star funds. In terms of a leading indicator, the best leading indicator is probably when you look at your 3-, 5- and 10-year performance numbers as you move forward quarter-to-quarter, do you have good quarters that are flowing out of the historical results? Or do you have bad quarters that are flowing out of your historical result? I don't have a sense in my head on the 10-year numbers. But certainly on the 3 and the 5-year basis, we are in the process or moving into a process of starting to replace some pretty poor numbers. We, as a general matter, we've struggled to keep up with the market, the equity markets in our U.S. equities really since the bottoming of the market in the first quarter of 2009 with the worst relative performance occurring in 2009. So those numbers will be flowing, will be coming out of our 5-year numbers, which should help our Morningstar ratings. Of course, the other factor that drives ratings and performance is what are you doing on a current basis, not what happens historically. There too, we are also working hard to improve performance. As I mentioned in my prepared remarks, we are in the process of searching for a new head of our equity group here in Boston. And the focus of that search is very much a leader that can position the group for a return to strong performance. And we had a very long period of quite outstanding performance results through most of the decade of the 2000s until that turn of the market in 2009. Since then we've lagged, and we're looking for a leader to help us, to position us again for a winning performance record in equities.

Our next question comes from the line of Cynthia Mayer with Bank of America Merrill Lynch.

So I have a question just on the alternatives. It looks like the flows to alternatives turned negative this quarter. And I noticed that the Global Macro Absolute Return Fund performance is slightly negative this year, about pretty close to flat. So I'm wondering if you could give some color just on how much of the $15 billion in your alt assets is similar to that fund? And in general, what kind of expectations do you think investors in that fund have in terms of, how disappointing would a minus 1% year be for them? Would that be likely to increase outflows?

Yes. So most of the assets that we call alternatives are in some version of global macro. I'm just looking at our U.S. bond business -- U.S. fund alternative business, which is -- most of the total which is about $9.6 billion Global Macro Absolute Return and Global Macro Absolute Return Advantage Fund represent about $7.5 billion of that. So global macro -- and think of global macro advantage as more or less being a more leveraged, high risk, higher potential return version of the base global macro. That represents an overwhelming portion of the category. Also included in there is the Diversified Currency Fund, which is about $800 million, which is run by the same group. And then also was about a $600 million commodity fund. Those are the biggest constituent to that. There's a Multi-Strategy Absolute Return, which is about $500 million. The challenge we faced with the global macro strategy this year, as you point out, we've had modestly negative return. The challenge has been that the strategy and the positioning that we've had as we've been net long currencies in Asia. And with the strength in the dollar, we've seen on balance, a weakening of those currencies versus the dollar. So there's nothing inherent -- I guess I'd say 2 things. One is that with the LIBOR so low, with risk-free rates so low, your starting point of a neutral strategy net of expenses, you're in a hole, right? You start with LIBOR. You subtract out the expense ratio of the fund. You're in a hole. So if you're not adding, let's say, 100 basis points or more of alpha through positioning, you're going to have negative returns. And so that's the challenge we've had is that our base strategy for producing positive returns has included a fairly significant bet, net long position in emerging market, particularly Asian currencies, and that's modestly -- what modestly cost us. It's a little hard to say how performance jives with client expectations. I think the implication of absolute return is something north of 0, most of the time. I think we'd all agree that, that's what people want. And certainly, our objective is to get something meaningfully north of 0. And it's perhaps not surprising that in a year in which we've struggled to get on the positive side of 0, that we've seen some outflows. And that -- you're right to observe that as the year -- as the fiscal year has progressed, that those franchises have gone from being a source of inflows in the early part of the year to being a source of outflows in the fourth quarter. In particular, the currency strategy was a quite strong contributor in the first couple of quarters, but is more or less at breakeven flows currently. And that also reflects movement in the dollar and some disappointment with performance there. The pitch with that fund has been that, you get current income, current distribution rates and I think about a 5% range with the potential for appreciation as the dollar depreciates versus a basket of foreign currencies that we select, principally oriented towards emerging markets. That's still the pitch, but unfortunately for that strategy in the current year, the dollar has appreciated versus that group of funds. Through the end of October, our Class I shares of our diversified currency strategy are down about 1.5%, though the 1-year numbers are only down about 30 basis points.

And they are very strong in the -- in its peer group. Its relative performance. So to the extent currencies turn back in favor, which at some point we think they will, we should be very well positioned there.

So we're not losing people a lot of money. But nonetheless, people don't want to lose money at all. And with strong equity markets and general enthusiasm about risk assets, it's been, I think, a relative easy decision for people to grab for more risk in higher return potential assets than these are, particularly in a period when our returns have been modestly negative.

Okay. And then just quickly on the -- you mentioned in the release, the increase in stock-based comp relating to the affiliate equity plans. So are those plans sort of adjusted annually? And are those linked to AUM? Or if we see an increase like this, should we just sort of build it in as a recurring expense from here that doesn't adjust upward?

No. This is actually a onetime adjustment, Cynthia. We had made some administrative changes to the plan to ensure that we could continue to get equity treatment under the accounting rules. So this is an adjustment related to that. It was onetime. It will not be recurring. And I think that these are just -- these plans are based on an annual valuation that we do. It's a true valuation of the entity that we have an outside valuation expert perform in order to come up with an enterprise value. And then we grant profit interest to individuals who are participating in the plan based on that enterprise value. So they only have one opportunity to get a grant each year at the beginning of November. There's only one opportunity each year to redeem their units, if you will, based on the terms of the plan. And everything is based on that 1-year valuation.

Got it. And can you size the adjustment?

I'm sorry?

How big was the adjustment?

The adjustment was about $5.2 million in the fourth quarter. And it was largely offset by adjustments that we had made to our accrual rates and our operating income-based bonus, which is why I gave the guidance earlier when Bill asked the question about compensation going forward. If you'd look at the delta in the composition expense from the third quarter to the fourth, really, the only significant issue there was the decrease in our sales-based incentives because the other 2 adjustments effectively cancel each other out.

Offset. Got it. And so there wouldn't be another one like it for 1 year? And then perhaps not?

No.

It's probably also worth adding that, that adjustment that Laurie talked about effectively represents an acceleration of compensation expense the would've been recognized in connection with those plans going forward. So if anything, this isn't a recurring $5 million. This is something that $5 million onetime that reduces future year compensation connected with those plans by the same amount.

Our next question comes from the line of Robert Lee with Keefe, Bruyette, & Woods. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Just a couple of questions. First is, with the buildout of the new wealth management team, marketing team, is that -- is part of that already kind of in the run rate? Or is most of that spend expected to happen as you get into the first half of fiscal 2014? Or is that kind of cost largely in the mix already?

For the new hires. Actually, for the new hires, that would be incremental in the first and second quarter of next year. I think we're hopeful that we'll have most of the team built out in the first quarter.

I was just going to say, Rob. We don't expect it to be significant.

No.

We're repurposing some folks on staff. And as Tom mentioned, we'll probably add 7 or so individuals in the incremental fixed cost as a result of the initiative. It will probably be in the $1 million to $2 million range.

Annual.

Annually. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Great. And maybe a follow-up question. As we look out to 2014, I mean, one of the drags, if you will, on EPS this year was the jump in the share count, partially reflecting just the rise in the stock price or maybe largely reflecting that. But you guys have always been a fairly heavy user of equity-based comp over the years, but you obviously can't predict stock price performance. How are you looking out and what should we be expecting for incremental increases in kind of the share count, I mean? And maybe a second question to that is, have you thought about or to what extent when you think about your comp plans, and knowing that they're based largely on kind of a pretax, kind of pre-bonus number, how do you think about kind of future share issuance within kind of -- within the mix of your plans? Is there any thoughts to maybe try to incorporate it in a different way?

I'm going to take the first half and let Tom take the second. But I think that just in terms of how we're looking at our share count going into the first quarter, to Dan's point earlier, we have every expectation that we will be in the market. And we're hopeful that we'll be buying back shares in the first quarter, consistent with what we were doing in the third and the fourth. But we do anticipate that there will probably be some upward drift. To your point, there has been some increase in share price, and we recognize that, that does have an impact on our diluted share count. So I think that we -- we would anticipate we may be edging up towards the 124 million as we're going into the first quarter. You probably want to be thinking about building that in. But we, again, are hopeful that we will make in the market, and we will be repurchasing shares.

I would say philosophically, we are as committed as we've ever been to equity incentive being a substantial part of the compensation mix of employees throughout the company. We're probably one of a handful, if not the only company, that literally pays every employee -- I think every employee who's been here for a year gets some amount of equity award this year. We see lots of cultural and business benefit from tying everyone in the company, but particularly people that are at high levels of compensation and high levels of performance to the -- tying their pay to the performance of Eaton Vance stock going forward. There was a time, not too many years ago, when our equity programs consisted entirely of the grant of options. We're now maybe 60% restricted stock and 40% options with people in higher pay bands getting somewhat more options than the population generally. In terms of making sure that the equity award doesn't get out of hand, that is something we watch quite carefully. And we make adjustments, including making an adjustment this year in the adjustment downward in the relationship between total comp and equity to make sure that we don't get that out of whack. But it's something we monitor carefully. I think Eaton Vance has clearly benefited from -- as the company has grown, maintaining a relatively stable balance of shares outstanding, where over time, we've repurchased essentially equivalent amounts of stock as we have issued to employees. In a given year, as we saw this year that, that balance may not match exactly. But we certainly see, we have the cash flow to repurchase our shares. We see that as generally a good use of our stock. We do tend to be opportunistic if we see a chance to buy at what we view as notably attractive prices. We will step up activity and have the flexibility to do that. But we're also committed to a regular program of repurchases in which we aren't particularly trying to time those repurchases to what we see as special opportunities in the market, because it's hard for us to judge whether the stock is cheap or expensive on a short-term basis. And normally, we don't spend a lot of energy trying to figure that out. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Great. And maybe just one last question. And I apologize, I had missed some of the remarks previously. You may have gone through this, but I'm just kind of curious, the seed capital was -- it was actually pretty good markets in the quarter. Did you attribute that mainly to, I guess, the hedging program on seed capital, which I guess brings another -- if that's the case, would bring a second question, why even bother hedging it to begin with?

So here's the philosophy. The philosophy is that, we want to hedge out the impact, to the extent we can, to hedge out the impact of market movements on our quarter-to-quarter earnings report so that we don't have big swings in reported earnings depending on whether the market was up or down based on what happens in our hedge portfolio. So we do that with most categories of seed investments. We hedge the related market exposure. There's some asset classes where that -- it's very hard to do that. There's some asset classes that we think of really as more as absolute return-type investments, global macro being one of those where, I'm not sure what we'd do to hedge that. And I'm not sure what market risk it would be that we're hedging. It's essentially designed to be a neutral-type strategy. But so the philosophy in practice results in more or less us being immunized from market performance. Unfortunately, it does not match perfectly. And unfortunately, during periods in which our managers are producing negative alpha, that number can be modestly negative. And I did highlight in response to Cynthia's question that we've been struggling in global macro. And that's a place where we have seen modestly negative returns. And I think that is a fairly significant part of our seed capital portfolio in terms of exposure. Also generally, we've struggled to keep up with the equity market. And to the extent that we're not beating our benchmarks, we're also not beating our hedges and, therefore, we're losing money. And it's always anytime you're doing hedging and you lose money on your hedges, it's always easy on -- come Monday morning to say, "Gee, I would have been better off had I not hedged." But we've thought about this pretty carefully and think ultimately that the volatility that an unhedged equity exposure or market exposure that we would -- if we had that in our earnings, that, that would be potentially a significant distraction. And instead of talking about earnings being affected by $0.00 or $0.01 or $0.02 as a result to investment gains or loss on our seed capital portfolio, we'd been talking about swings of $0.05 and $0.10 potentially in that. So it's really a function of managing and mitigating the volatility of our reported earnings more so than hedging our market exposure in a more fundamental sense. I mean, clearly, if you think about our business with $280 billion of assets managed and which we get paid a fee that goes up or down with the markets in which those assets are invested, we have enormous exposure unhedged to stocks and bonds and everything else. But we believe that people that invest in our stock understand and appreciate that's part of the deal, whereas we've taken the position -- and maybe over time, this changes. But we've taken the position that volatility in the earnings driven directly quarter by quarter to changes in the value of seed capital investments tied directly to our position as an equity investor or income market investor is not something that people are looking for normally when they buy shares of an asset management company stock.

Our next question comes from the line of Dan Fannon with Jefferies & Co.

It's actually Gerry O'Hara sitting in for Dan this morning. Just a couple of quick follow-ups at this point. First off is in terms of competing for future mandates. Was Kathleen Gaffney able to take her prior track record with her and/or I suppose is the multi-sector bond fund that she's running a very similar strategy as to what she was doing previously?

She did not bring with her a track record per se. She certainly brought with her a reputation as a strong performing manager. And she brought with her closer clients with an investment style that was very successful in her previous shop and which, under her leadership, has continued to be successful here. But it's really a new record built on her reputation and her, I think, 28 years of experience of doing broadly similar style of asset management before she joined Eaton Vance.

Fair enough. And also as a follow-up to the ETMF strategy. And I'm not sure how much you can really comment on this or go into it. But it seems that some of your peers have -- are sort of in the process of getting the ball rolling as well. But everybody sort of has a somewhat unique approach to this. Is there anything that you can kind of point to for your NAV-Based Trading that might be a competitive advantage or really differentiating you from some of those peers?

Yes, a couple of thoughts on that. The big challenge that actively managed fund sponsors have faced as they've tried to bring the benefits of ETFs to active strategies has been, how do you ensure that if you offer a strategy in a nontransparent or more precisely in less than fully transparent form, what ensures that, that fund will trade successfully, will trade tight to underlying asset value in the marketplace? Because normally with ETFs, the mechanism that keeps price and value in close alignment is the ability of market makers, when they go in and take inventory positions in the ETF, to be able to hedge the market exposure they assume by entering into offsetting positions in the underlying assets of the fund or a suitable proxy for that. So the challenge is, if you're trying to do a less than fully transparent exchange-traded structure, what mechanism is in place to ensure that it will trade well, because a normal mechanism is one that depends on full transparency. There are, as you pointed out, other approaches to doing this. And maybe in the most extreme version of that, a sponsor might say, "Well, there is no mechanism." But there's nothing that says inherently that a fund traded in the market needs to trade at a particular closed spread to NAV, and would point to the example of closed-end funds. And tell you that closed-end funds do not have any underlying mechanism to keep price and value in line. And those -- they're out there and they trade. Why can't we do something that is no more transparent than a closed-end fund? But the regulators, and I think appropriately, have taken the position that if any ETMF or exchange-traded fund is trying to get approved as an open-end fund structure, it needs to include a mechanism to ensure that price and value will stay in close correspondence. Where we think we fit the bill quite nicely is that the nature of our trading approach, NAV-Based Trading as we call it, fundamentally removes the market makers' intraday exposure to market risk and, therefore, removes the requirement for hedging and, therefore, removes the associated requirement for knowing the assets to do the hedging. So the thought with our approach is that using NAV-Based Trading, we remove intraday market risk that would otherwise be there for the market maker and, therefore, take away the reason that portfolio transparency is normally required for ETFs. So the big difference here versus some other approaches is, we use NAV-Based Trading, which means that when a market maker goes in intraday and takes a short position in a particular ETMF, it will not have to hedge because there is no market exposure until the end of the day. And as long as that market maker at the end of the day, closes out its books or finishes more or less flat in that particular security, it doesn't have any risk to manage. Therefore, there is no need for transparency. That is an approach that is unique to us. It is protected by patents. It's a whole series of patents that were issued several years ago and which we acquired in 2010. So we think it's a quite differentiated approach. And we think it -- from a regulatory standpoint, it puts us in a very different position from others that might argue that, well, our particular approach might trade almost as well -- or might trade almost as close to NAV as a traditional ETF with full transparency. Whereas we're saying, our approach should trade better than a traditional ETF with full transparency because of this unique trading approach that we take.

Ladies and gentlemen, we've come to the end of our time for questions. I'd like to turn the floor back over to Mr. Cataldo for closing comments.

Thank you for joining us this morning. We hope you all have a safe and happy Thanksgiving and a great holiday season. And we look forward to reporting back to you in 2014. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.