Morgan Stanley (MS) Q2 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Shannon and I will be your conference moderator today. At this time, I would like to welcome everyone to the Eaton Vance Corporation Second Quarter Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. At this time, I would like to turn the call over to Mr. Dan Cataldo, Treasurer. Mr. Cataldo, you may begin.

Thank you and welcome to our second quarter 2015 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 then we will 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 contains 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 2014 Annual Report and Form 10-K are available on our website on request at no charge. I will now turn the call over to Tom.

Good morning and thank you for joining us. April 30 marked the close of our second fiscal quarter and the midpoint of our fiscal 2015. We finished the quarter with record assets under management, had one of our strongest quarters of net flows in company history and made progress advancing our NextShares, actively managed exchange traded product initiative toward market introduction. We reported adjusted earnings per diluted share of $0.58 for the second quarter, down $0.03 from the preceding quarter and down $0.01 from the year ago quarter. Because our second fiscal quarter has three fewer days than the other fiscal quarters, we experienced a seasonal decline in revenue and earnings every second quarter. Relative to the first quarter of fiscal 2015, we estimate that the day count effect lowered earnings by about $0.025 per diluted share, accounting for most of the sequential earnings decline. Also contributing to sequentially lower earnings was a decline of about $0.01 per diluted share in net income and gains on our seed capital portfolio. On a year-over-year comparative basis, the penny drop in adjusted earnings per diluted share was more than accounted for by lower performance fees received and a decline in net investment income and gains on our seed capital portfolio. Flat management fee revenues year-over-year reflect a 7% increase in average consolidated assets under management and an offsetting decline in average fee rates. As our AUM growth has been led by lower fee products. Laurie will provide more detail on the company's fee rates by product in her remarks shortly. Net flows of $6.8 billion in the second quarter are the third highest quarterly flow results in company history and represent a 9% annualized internal growth rate. As in most recent quarters, Parametric Exposure Management business led the way with $4.3 billion of second quarter net inflows. Assets in this franchise now total $62 billion, up from $32 billion at the time Parametric acquired Clifton Group at the end of 2012. Yes. This is low fee business, and yes, its growth has caused our average effective fee rate to go down, but this is good business for us. Not only is Exposure Management nicely profitable, but its growth has been built on establishing relationships of trust with many of the largest institutional investors in the United States, these institutions use Parametric as extensions of their internal staff to implement portfolio overlays to address cash drag, manage duration and currency exposures and to enhance overall portfolio efficiency. We not only foresee continued strong growth for Parametric and Exposure Management, but also view this as a gateway to broader relationships with these important institutions. Excluding Exposure Management, net flows in the second quarter were $2.4 billion. That is our best consolidated for results outside of Exposure Management since the third quarter of fiscal 2013, equating to a 4% annualized organic growth rate. Among investment categories, fixed income led the way with $2.6 billion in net inflows. Within fixed income, leading contributors to organic growth included institutional cash management, ladder municipal bonds, multi-strategy income and high-yield bonds, each of which contributed over $400 million to quarterly inflows. Within multi-strategy income, worth highlighting was the strong growth of our short duration strategic income fund, which saw net inflows of $0.5 billion in the second quarter versus net inflows of $130 million in the first quarter. Short duration strategic income is the five-star rated $2.5 billion mutual fund, whose Class A shares currently ranked in the top-5% of peer funds in the Morningstar short-term bond category for the year-to-date and over the past one, three, five and 10 years. This is one of the largest categories in the mutual fund industry with over $280 billion of net assets and annual sales of $75 billion, according to current ICI data. Given our top of class performance, small market share and differentiated profile within the category, we believe, we are poised for accelerating growth over coming quarters in this fund. The largest competing funds in the category are 5 to 10 times our current size and none of them match our track record. Also worth noting in the fixed income category is the continued development of our ladder municipal bond franchise, Eaton Vance muni laddered separate accounts had second quarter net inflows of $750 million and ended the quarter with managed assets of $4.6 billion. During the quarter, we established our first laddered muni bond mutual fund by converting an existing municipal income fund and then rolled out a second and third ladder muni fund in early May. With both, separate accounts and mutual funds now available, we have by far the broadest menu of letter muni offerings, plus unrivaled analytics and customization. We are convinced that this is going to be a huge market, potentially hundreds of billions of dollars and we are in the early lead. Our portfolio implementation category generated $1.6 billion in second-quarter net inflows. As a reminder, portfolio implementation consists of Parametric's tax managed core, centralized portfolio management and specialty index offerings. Tax managed core is the largest and fastest-growing of these businesses with $1.3 billion of second-quarter net inflows and ending assets of nearly 26 billion. In tax managed core, Parametric seeks to max the pre-tax returns of client specified benchmarks and to adding incremental return on an after-tax basis through systematic harvesting of tax losses and deferral of gains. Rapid development of Parametric's TMC business is being driven by the growing embrace of index-based strategies among financial advisors and financial offices and family offices, heightened sensitivity to investment tax effects in today's high-tax environment and expanded sales resources being devoted by us to this opportunity. With a 23-basis point average management fee, tax managed core is the highest earning product in our portfolio implementation category. Like muni ladders, we view tax managed core as an open-ended growth opportunity still in an early stage of development. In the alternatives category, we had net outflows of approximately $290 million, essentially flat versus the first quarter, but much improved from net outflows of $1.2 billion in the year ago quarter. Flow results in the current quarter were hampered by $390 million of withdrawals from global macro sub advisory mandates that we do not expect recur. Our two largest retail funds in the alternatives category, Global Macro Absolute Return and Global Macro Absolute Return Advantage, together generated positive net flows of $160 million this quarter, up from net inflows of $40 million in the first quarter of this year and net outflows of $630 million in last year second quarter, with continued demand for liquid alt strategies and our funds' competitive performance profile, we expect the positive contribution from these funds to continue. In equities, second-quarter net outflows of approximately $470 million compared to $560 million of net outflows in the first quarter and $1.35 billion of net outflows in last year's second quarter. The improvement is attributable to Eaton Vance Management equities, which remains our largest equity group. Despite net outflows over the past several years. EVM equities is led by Eddie Perkin, who has been on the job year for about a year. Under Eddie's leadership, we have seen a marked improvement in investment performance and a company flow improvements. Over the past five quarters, net outflows from EVM equities have fallen from $1.5 billion to $1.3 billion to $1.2 billion to $500 million and now $280 million in the current quarter, with Eaton Vance large-cap value Class-I, now in the top quintile of peer funds over the past year and ahead of the peer group average over the past three years, flow pressures there have abated. With several top-performing EVM equity funds now beginning to attract marketing attention, a return to positive net flows appears to be a realistic near-term goal for this group. You may have seen the press release we issued earlier this month announcing the expansion of EVM's global equity team. Christopher Dyer and Aidan Farrell will join our London office next month from Goldman Sachs Asset Management to serve as Director, Global Equity and Global Small Cap Portfolio Manager, respectively. In floating-rate income, net outflows decreased to $1 billion in the second quarter from $2.7 billion in the first quarter, driven primarily by lower retail loan fund redemptions. The fact that the loan asset class has been in net redemptions remains perplexing to us in light of what we believe is a very attractive environment for investing in floating-rate bank loans. Credit quality is strong across the landscape of loan issuers Federal Reserve is signaling its intent to begin raising short-term interest rates later this year and floating-rate loan products offer attractive yields at a time when investors continue to look for income. Since bottoming out in December, our bank loan flows have been on an improving trend. In fact, our loan flows are net positive for the month of May to-date. While the favorable momentum we are seeing in our bank loan flows could certainly reverse, we view that as unlikely given the compelling attractions of the asset class and our leading reputation as a bank loan manager. Across our franchises, our persistent theme is improving flows driven by strong investment performance. As of April 30th, we had 41 mutual funds with at least one share class with an overall Morningstar rating of four-star or five-star, including a diverse lineup of equity, fixed income, floating rate income, alternative and multi-asset strategies. Coming out of the first fiscal quarter, we said we were quite optimistic about our business prospects for the remainder of 2015. We believed improving investment performance and favorable demand trends in major areas of Eaton Vance capability would enable us to achieve faster growth. Sitting here one quarter later, much of what we had hoped for in the second quarter did happen, enabling us to report healthy organic growth for the quarter. Looking ahead to the balance of the fiscal year, there are continuing reasons for optimism across our business as we see favorable demand trends and a robust institutional pipeline. By the end of the summer, we expect to fund three new multi-sector income mandates totaling over $1 billion. At Parametric, we have pending potential mandates totaling several billion dollars in managed options, centralized portfolio management, exposure management and specially index implementation that we expect to fund in a similar timeframe. One cross current that will affect reported third-quarter flows is the loss this month of $3.4 billion Parametric emerging market equity mandate with a large sovereign wealth fund. While disappointing, we view this as a one-time event with little bearing on our other business prospects and growth opportunities. Before I turn the call over to Laurie to discuss our financials, I would like to give an update on our NextShares initiative. As a reminder, NextShares are a new type of actively managed fund designed to provide better performance for investors. As exchange traded products, NextShares have built-in cost and tax efficiencies, and unlike conventional ETFs, NextShares protect the confidentiality of fund trading information and provide buyers and sellers of shares with transparency in control of their trading costs. NextShares offer significant advantages over both, mutual funds and ETFs as vehicles for active investment strategies. Our NextShares business plan includes both, introducing a family of Eaton Vance sponsored NextShares funds and licensing the underlying intellectual property in providing related services to other fund groups to enable them to offer their own NextShares funds. Eaton Vance received SEC exemptive relief to NextShares funds in December 2014. On the regulatory front, during April, we filed amended registration statement for the 18 initial Eaton Vance NextShares funds and NASDAQ with the SEC and request to list and trade each of those 18 funds. These are two necessary and expected steps in the process of bringing are NextShares funds to market, essentially the final regulatory hurdles to be overcome. We also continue to make progress building out the consortium of fund sponsors that will offer NextShares funds. Today our Navigate Fund Solutions subsidiary has entered into preliminary license and service agreements with 10 fund sponsors, including Eaton Vance, which on a combined basis manage over $500 billion of mutual fund assets and offer approximate 200 funds currently rated four stars or five stars by Morningstar. Of these six companies have announced initiatives to offer, NextShares, American Beacon, Eaton Vance, Gabelli, Hartford, Pioneer and Victory Capital Management. We continue to engage in active discussions with other fund companies and expect to announce additional agreements over the coming weeks. In addition to working with fund companies, we are also engaged in discussions with broker-dealers, market data providers, exchange traded products service providers, market makers and our partners at NASDAQ to prepare for the launch of NextShares. As we move toward completing the build out of the initial consortium of fund sponsors offering NextShares, a growing focus is working with broker-dealers to gain their support and to ensure that they will be ready to offer NextShares fonts to their clients from time of launch. At the beginning of April, NASDAQ released to the broker-dealer community the technical specifications for trading NextShares. With this information, broker-dealers can determine the enhancements to the trading systems that will be needed to accommodate NextShares. We are now starting to hear back from broker-dealers about the scope and cost of this is the modification requirements. One broker-dealer has provided us with an estimate of $200,000 which is consistent with expectations of our in-house experts. While not inconsequential, we certainly do not believe system conversion cost will be a stumbling block for broker-dealers that are otherwise motivated to offer NextShares the biggest issue for broker-dealers is how NextShares fit within the context of their overall fund business. We are making the case to them that NextShares are not only superior products their customers, but also good for broker-dealers. Leveling the playing field between active and passive, serves the best interests of broker-dealers as well as investors and active fund sponsors. Conditional upon the timing of final regulatory approvals and market readiness, we continue to anticipate introducing an initial NextShares funds in the second half of 2015. Although the success of our NextShares initiative is far from assured we are pleased by the market acceptance of the potential investor benefits of NextShares and it is willing to embrace this is the logical evolution of the structure of actively managed funds. We look forward to reporting further progress in future communications. With that, I will turn the call over to Laurie to discuss the quarterly financial results in more detail.

Thank you and good morning. As Tom mentioned, we are reporting adjusted earnings per diluted share of $0.58 for the second quarter of fiscal 2015 compared to $0.59 for the second quarter fiscal 2014 and $0.61 for the first quarter of fiscal 2015. On a GAAP basis, we earned $0.58 per diluted share in the second quarter fiscal 2015, $0.59 in the second quarter fiscal 2014 and $0.24 in the first quarter of fiscal 2015. As you can see in attachment two to our press release adjustments from reported GAAP earnings in the first quarter of fiscal 2015, primarily reflect a one-time payment made to terminate closed end fund service and additional compensation arrangements. As a reminder, in the first quarter, we made a $73 million one-time payment to terminate service and additional compensation arrangements with the major distribution partner that were in place for certain closed end funds. The arrangements required us to make quarterly payment based on the managed assets of these funds. The $73 million payment was recorded at distribution expense in the first quarter of 2015. Terminating the arrangements reduces distribution expense by roughly $.07 per diluted share annually. Excluding the effect of the one-time payment, our operating margin remained flat at 34.8% in the second quarter fiscal 2015, compared to the first quarter fiscal 2015 and declined from 35.4% in the second quarter fiscal 2014. Second quarter total revenue decreased 1%, sequentially, and year-over-year, primarily reflecting a decrease in distribution and service fee revenues. The sequential and year-over-year decrease in distribution service fees reflects the continuing shift in managed assets away from fund share classes in which distribution and service fees are paid. Investment advisory and administrative fees were flat sequentially and year-over-year, despite the increase in assets under management, reflecting a lower blended effective fee rate due primarily to changes in product mix. Also contributing to the sequential decline in effective fee rate were three fewer fee days in the second quarter. Contributing to the year-over-year fee rate decline was a reduction in performance fees received of approximately $1 million. Going forward, our overall effective management fee rates will continue to be driven primarily by the mix of business among mandates with different fee levels with swings in performance fees in the number of fee days in the quarter also contributing to short-term variability. In second quarter fiscal 2015, we realized average effective management fee rates of 64 basis points in equity, 62 basis points in alternatives, 52 basis points in floating-rate income and 43 basis points in fixed income. Portfolio implementation, which includes Parametric's tax managed core specialty index and centralized portfolio management services, had an average effective fee rate of 17 basis points in the second quarter. Parametric exposure management business had an average effective fee rate of five basis points in the quarter. So long as exposure management, portfolio implementation and other lower fee mandates continue to grow faster than the company as a whole, you can expect our overall average fee rate to continue trending downward. The key to achieving overall growth in management fee revenues in the face of declining average fee rates will be avoiding outright declines in our higher fee businesses. Given the upturn in flows, we are seeing across these businesses, we believe, we are well-positioned for resumed growth in management fee revenues. Shifting from revenue to expense, compensation expense increased 5% compared to the same quarter last year, reflecting headcount-driven increases in base compensation, employee benefits and stock based compensation, partially offset by a decreases in operating income based bonus accruals. Sequentially, however, compensation expense remained largely flat. Headcount growth, which is approximately 4% year-over-year, was 1%, sequentially. Compensation expense as a percent of revenue came in 34% for the quarter, in line with last quarter. Although, we are not in a position to specifically quantify it at this point, I would anticipate that there will be some additional compensation related pressure in the next several quarters as we continue to build our global equity team in London and add staff in support of our NextShares initiatives. Distribution related costs, including distribution and service fee expenses and the amortization of deferred sales commission, but excluding the $79 million first quarter payment to determine closed end fund arrangements, decreased 7% in the second quarter fiscal 2015 from the first quarter fiscal 2015, and 11% from the same quarter a year ago, reflecting lower closed end fund related payments and reduced intermediary and marketing support payments. Fund related expenses were up 6% year-over-year, primarily due to an increase in non-advisory expenses borne by the company on certain comingled institutional calming of funds, for which we are paid all-in management fees. Other operating expenses were up 5% in the second quarter versus the same period a year ago, and up 7% sequentially, primarily reflecting an increase in information technology and other corporate expenses. Expenses related to our next year's initiative totaled approximately $1.8 million in the second quarter fiscal 2015 compared to $1.3 million last quarter and are currently anticipated to scale up to roughly $8 million for fiscal 2015 as a whole. Net income and gains on seed capital investments had no impact on earnings in the second quarter fiscal 2015, compared to contribution of roughly a penny per share to earnings in both, the second quarter fiscal 2014 and the first quarter fiscal 2015. When quantifying the impact of our seed capital investments on earnings each quarter, we take into consideration our pro rata share to gains, losses and other investment income earned on investments and sponsored products, whether accounted for as consolidated funds, separate accounts or equity method investments as well as the gains and losses recognized on derivatives used to hedged these investments. We then report the per share impact net of non-controlling interest expense and income taxes. Changes in quarterly equity and net income of affiliates both, year-over-year and sequentially, reflect changes in net income and gains recognized on sponsored products accounted for under the equity method. Our 49% interest in Hexavest, which is reported net of tax and the amortization of intangibles in equity net income of affiliates, contributed approximately $0.02 per diluted share for all quarterly periods presented. Excluding the effect of CLO entity earnings and losses, our effective tax rate for the second quarter fiscal 2015 was 38%, 38.1% in the second quarter of fiscal 2014 and 36.4% in the first quarter of fiscal 2015. We currently anticipate that our effective tax rate adjusted for CLO earnings and losses will be in the 38% range for fiscal 2015 as a whole. In terms of capital management, we repurchased 1.5 million shares of non-voting common stock for approximately $64 million in the second quarter of fiscal 2015. When combined with repurchases over the preceding three quarters, our average diluted share count for the first six months of fiscal 2015 was down 3.3% from the same period of fiscal 2014. We finished second fiscal quarter holding $382 million of cash and short-term debt securities and approximately $328 million in seed capital investment. Our outstanding debt consists of $250 million or 6.5% senior notes due in 2017 and $325 million or 3.625% senior notes due in 2023. We also have a $300 million five-year line of credit, which we entered into in October to replace our previous three-year line that was due to expire in fiscal 2015. The line is currently undrawn. Given our strong cash flow, liquidity and overall financial condition, we believe we are well positioned to continue return capital to shareholders through dividends and share repurchases. This concludes our prepared comments. At this point, we would like to take any questions you may have.

[Operator Instructions] Your first question comes from the line of Chris Shutler with William Blair. Your line is open. Please go ahead.

Hi. This is actually Andrew Nicholas filling in for Chris Shutler. Thanks for taking my questions. My first question just has to do with the $200,000 estimate for broker-dealer costs related technology specific to the next year's build out. I am curious if you can kind of walk us through whether or not there would be something that Eaton Vance would be willing to help pay for? If so does that change your $8 million next year spending estimate for fiscal 2015?

Yes. We have said and this was - you may have seen this and there were a couple news articles that came out last week on this topic, but we have said publicly that for broker-dealers that are at the front of the line that are early in embracing NextShares, where they have some level of what strike us as reasonable estimates of their internal costs to implement those systems that we will help pay for that. At the moment, I would say that is included in the current estimates. We have said approximate $8 million of spending this year. Clearly, we do not have a huge amount of room in that for paying lots of six-figure bills, which is where we think this will be, but for the right partner, for the right broker-dealer, we want to take this issue off the table by providing financial support that conversion. To me, this should not come as a big shock. There has been, I would say, pretty extensive involvement over the years of financial partnership and financial support between fund companies and broker-dealers. This is just one element of that that's new and different here, because there is really no precedent for up a product structure of this of this type, so just to repeat, yes, we do intend to offer selected broker-dealers who are motivated to be first movers that we will contribute to their development costs on converting their systems to accommodate trading in NextShares. It is our hope and expectation at this point that that will fit within our current budget numbers for the year, but for the right advisor, for the for the right broker-dealer firm, we would certainly be willing to make this worth their while and part of that is certainly the conversion economics.

Great. Thank you. That is helpful. Then to switch gears a little bit, it was obviously a strong quarter for fixed income products, particularly on the institutional side. I was just wondering if you guys could add a little color there as to what strategies, particularly in institutional channel were strong. If there are any indications of those strategies continuing their strength through the rest of 2015? Thank you.

In the call slides, Slide #11, is listing and I think, this is in order of the leading areas of the contribution for the quarter. This is not just in fixed income, but several of these are fixed-income categories and I can comment on the ones that were in fixed income. I believe I said that, within fixed income we had at least $400 million of contribution from four areas. Those being cash management, Municipal ladders, multi-strategy income and high-yield; cash management, I believe was roughly $900 million. That was institutional business. Municipal ladders, I believe, I said a number of $750 million multi-strategy income. This is from memory. This was somewhere in the 4s, I believe, and most of that was that was in mutual funds high-yield income, again, from memory I believe also was in the 4s, also primarily for mutual fund business. The other part of question do we view those as potentially recurring, and I would say in all cases, yes, we do. The one of those that is the lumpiest would be cash management that those are the big mandates by assets. They tend to be relatively low fees, but that would be the one that is I would say that maybe speculative as to whether we have more of those coming in the next quarter. The other one is I think it is pretty likely that we have got a strong trend of current business with - it is not lumpy institutional business, but for the most part broad-based retail business.

Thanks again.

Your next question comes from Craig Siegenthaler of Credit Suisse. Your line is open. Please go ahead.

Thanks. Good morning.

Hi, Craig. Good morning.

Just to start I have a few questions here related to NextShares, so first one, can you help us frame the rest that NextShares would need delay the launch in Q1 or Q2. The reason I am asking I sounds like there is still a lot of work need to be get done in terms of getting the funds on a broker platforms, final SEC approvals and also the pluming. It just sounds like there was a lot to do over the next six months, so maybe you can help us think about that.

Yes. The first on the regulatory side, we do need a couple of approvals. We need approval of the registration statements on the individual funds and we also need what I'd call 19(b)(4) listing and trading approval of those. In the case of Eaton Vance funds, the filings have been made and we certainly do not control the timing of that, but we do not expect that to be a delay. NASDAQ has communicated publicly their intent to be ready to trade by October 1st so again that means third quarter is probably unlikely assuming they are going to push towards the end of that timeframe. Whether launching in the fourth quarter beyond SEC approval of our product and beyond NASDAQ's readiness, primarily hinges on two things. One of those is, our desire to launch this as part of a consortium of fund companies. At some point, we draw the line and say that the consortium is in place. If you are not going to be ready by a certain date, you are not going to be part of that particular group in terms of what we envision is some joint marketing efforts in conjunction with product launches. You are probably aware that three of the applicants, three of the other licensees, have now either received SEC exemptive relief or expected in the next couple of days they have got notice of relief in a couple of cases, we need more fund companies to apply for and receive exemptive relief. We need more fund companies to get a registration statements filed for individual funds to file 19(b)(4)s for those. There is a fair bit of work to be done there. Though that certainly could be done in time for a fourth quarter launched, can we have no 30 fund companies ready? I think, that is unlikely, but could we have, let us say, 6 to 12 fund companies ready to offer NextShares products before the end of the year, I think that is certainly possible still at this point. As you point out, there is still some a fair bit of work to be done for those other companies to get a final list of products out registration statements filed and then get the listing and trading approval, which assuming that this works the way we hope, that will be a very straightforward easy process, but again we do not control how that works. The last part is the broker-dealer part, which is the part that as I mentioned in my remarks, we are increasingly focusing on and there are really two parts of that as I think about it. One is, getting their systems up and running up and ready to accommodate this, we do not have a lot of data points and this will vary by broker-dealers, but the same firm that gave us the $200,000 systems accommodation cost estimates and also put a number of person months on that and that number as communicated to me anyway was seven, so seven person months is one person working for seven months, but more likely meaning a team of a few people working for a collective amount of person months totaling seven, so it is conceivable that can get done in two or three months at that particular broker-dealer. We would like to think that is representative of what it is for the broader market among broker-dealers. We do not know that for sure. We have got a couple of other data points, including the experience of our own staff that suggest that that is in a reasonable range, but that is not a number that's intimidating to the most broker-dealers as they think about technology projects or systems build. The bigger issue, I think, and really the thing that ultimately I think will drive this is, we need to I would say finish making the case to broker-dealers. We have been working on this, but finish making the case to broker-dealers that this is a compelling enough opportunity that relative to their other priorities in their business for not only technology projects, but other business initiatives that this is important enough to them that they want to make this a priority and that is important enough to them to want to take a lead in this. Over the next number of weeks, this is very much a focus of mine and our navigate team is, working with all these firms that we have got longstanding relationships with making the case to them that NextShares is good for their business. They all understand it is good for their clients and that this should be a priority for them. If we can make this case successfully in our firms, we can get this done and launch before the end of the year. I cannot promise that that will happen, but that certainly what we are shooting for. If that does not happen, this will happen sometime in early 2016, we would expect, but the nature of any exchange traded product like this is that it is bought and sold through a broker-dealer and we have to make sure that we have a sufficient number of broker-dealers that this is available to not just clients of one particular broker-dealer, but a broader range and we are making that case. I would say, I am optimistic that we can get there. In some cases, these are easy conversations in the sense that this would be incremental business. It is not disruptive versus things that they are doing today. In other cases, the analysis are a little more complicated where they are potentially losing one revenue stream and replacing it with other revenue streams or they are looking at the potential benefits of building their business by offering greater products versus a potential desire to not cannibalize what might be higher earning assets that they have on their books today. With our business today, our mutual fund business today at 75% or so of our of our flows being in funds that do not pay 12b-1 fees, distribution and service fees as they are called. That is not a huge issue for us. There are different companies that have a different mix. There are broker-dealers that have a different mix than that, but the vast majority of our business 12b-1 fees is not a significant issue in terms of converting from mutual funds to NextShares, but still there are other considerations beyond just 12b-1 fees. We make the case that it is not a good thing for broker-dealers to see their business convert rapidly to an overwhelming emphasis on passive products. We do not think that is the best choice for their customers and we do not think that is the best solution for them as financial advisors, so that is the case we are trying to make over the coming weeks.

Thanks, Tom. Then final question, do you think there will be an acceleration in licensee sign-ups by July 1st just given that the early window, I think, is going to expire on July 1st and there were few reasons before really now to sign-up, but there now there is sort of a firm reason to sign-up.

I think that is right. We have been pretty transparent about our pricing on this and part of that pricing is that there is a 30% reduction in licensing and services free rate that would apply generally to firms that sign a preliminary agreement with us and then file an exemptive application by the end of June, so there is an incentive to do that. That 30% is about 1.5 basis points. To so some firms that may not be particularly motivating, but for many firms it is quite motivating and I think it is likely that we will see a significant of additional firms become early adopters and, because the process of filing for SEC exemptive relief is a public process, we should also see the identity of the firms that have signed with us today, but we are not yet public of that changing also over the next six weeks or so. The biggest thing for us in going from the current 10 companies that are under agreement to up 20-year or some excess of that, really I think it is getting comfort that this is something that the broker-dealers will support. I think we have come a long way in helping the broker-dealers understand that this is good for the business and something they should embrace. If we get in a position where major broker-dealers are in effect encouraging other fund companies to do this, because their publicly supporting this, I think, we are potentially in a position where we will see a quite rapid acceleration in the rate of adoption by fund companies.

Thanks, Tom.

Your next question comes from the line of Bill Katz of Citi. Your line is open. Please go ahead.

Hi. This is actually Ryan Bailey filling in for Bill. Our questions were also related to NextShares. We were kind of wondering without giving too much detail if you could size the licensees who have signed up, but have not been public yet. That is the first. Secondly, what are your thoughts on fixed income for the ETMF opportunity? We were wondering it seems like fixed income or the licensee so far had more than [ph], so wondering what the opportunity that is there?

Yes. We included in the release the number of $500 billion of mutual fund assets across the 10 companies, so that includes the six companies names which have been disclosed as well as the four that have not been so, I think you can probably do the math on figuring out what the average is and what the total is on that. Due to confidentiality agreements, we are not in a position really to try and size individual firms that have not been disclosed for obvious reasons. The way we think about NextShares generally and this is answering the part of your question related to fixed income. This is the only exchange traded structure that is fully compatible with active management and works fully for all asset classes. As I think your question acknowledges, there have been some limited uptake of fully transparent active ETFs as approved since 2008. I think currently there are about $20 billion roughly or so in that structure that compares to roundly $10 trillion in actively managed mutual funds, so it is a tiniest drop in the bucket. That is 0.2%. If you really drilled down and look inside that $20 trillion, the largest category by a significant amount is ultra short bond funds, which I think it is something like $6 billion or $7 billion out of the $20 billion. I think that is maybe an indication that we have had seen the most success there probably telling that that is not an area where at least some active managers are particularly worried about preserving their secrets sauce. This is one step or half a step away from a money market fund. In that range, we are seeing activity and some success in a fully transparent structure. A handful of other companies have been willing to be fully transparent as to their daily holdings in core fixed income, but that is still up a pretty small number of companies and it is also a relatively limited range of strategies. You are not seeing fully transparent high-yield bond funds, which I think would be similar to equities would be probably a bad idea. The way we look at this is, first, there is a benefit of having a single structure that covers all your strategies as opposed to we do this over here and we do this over there. NextShares can be that one structure in a way that a fully transparent ETF cannot. The other is, I think, it is still to be proven whether or not fund companies or even those that have announced and had initiatives in this area, whether the lack of concern about portfolio holdings disclosure really stands up at scale. As I think about it, there are three areas of concern. The one that tends to get the most focus is front running risk. The idea that if I put out my daily holdings disclosure every day then someone will be able to anticipate the pattern of my future trading and then trade ahead of me and then in their report, drive up my trading costs and reducing fund returns. The second and third are also very significant to investment managers. Those being the likelihood that if you make your holdings available on a daily basis, if you charge a fee that exceeds the cost of portfolio implementation, you are just inviting others to try and replicate your strategy at lower cost. If you are successful at scale, if you want to charge of full fee, I can guarantee there will be someone in our industry that will try and undercut you on price in your fully transparent strategy. The other one maybe which is slightly less obvious is the concern that if I am running out, let us, say a fixed income shop and I am very proud of the analysts I have and the work they do, I mean, in fact giving away the ultimate embodiment of their work which is the portfolio I own, if I make that available to all my competitors on a daily basis so. We have talk to a lot of fund companies. I have talked to a lots of fund companies CEOs personally and we do not get a lot of pushback that the model of full transparency is very limited in its application. Yes it may work for an enhanced cash product. It may work for some managers for core fixed income, but there is nobody out there that I am aware of that runs a large-scale fund business that thinks to that is an alternative to NextShares as the broad industry solution for how active managers can compete more effectively with passive by making structural changes.

Got it. Thank you very much.

Your next question comes from the line of Robert Lee of KBW. Your line is open. Please go ahead.

Great. Thank you. Good morning. Hey, maybe keeping with the NextShares theme, but this also I guess relates to capital management. I think of back in the fourth quarter when you first announced that the approval from the SEC, it came up about having to seed some of these products that potentially given I think you are going to market or plan to go to market with, I think, it is about a dozen products. Are you still thinking that seed demands at least initially could be a fairly hefty and should how should we be thinking that as we look later in the year that may or may not impact how are your thoughts around share repurchase or can you just recycle existing seed into those?

We filed for 18 funds. I think, we probably will not launch all 18 on the same day, but we do have the expectation that that number or something very close to that will be our initial products set. We probably we will be able to do that in such a way that some of the capital that we use for seed purposes gets recycle among those different products where the first way is get up to scale then we recycle some of the capital into following product. I do not think we have definitive answers to how big these funds will be in terms of seed capital requirements from our NASDAQ exchange requirements number right? What was it?

It was $200,000 or $2 million.

Yes. I think it is something like $2 million, so that is not a big number relative to our overall currency capital portfolio and I do not think ultimately it is going to be the determining number here. The determining number here is going to be what do we need to do to in a practical business sense to get these up and running. I think we are thinking about on the order of $20 million of fund that is a little bit premature, it may be different than that. We are at a point with $300 and some million seed capital portfolio. I think, it is likely that that portfolio away from NextShares we will be shrinking rather than growing over the next six months. That is certainly our intent in part, because we are looking at NextShares as a potential use of capital, but I guess we do not see this 20 times. Let us say, we did 20 times 10. Then recycled some of that capital and then also potentially pull down some of the other positions we have today. I think, we are looking at possibly, this is really just a guess at this point, but maybe $100 million to $200 million of seed capital requirement to get these funds up and running, netting some of the offsets from more over seed capital and some of the other things. It is a guess at this point. We do not really know that answer, but we certainly do not see a need to do an outside financing to make this work. We have not particularly explored this, so there are third-party sources of financing for seed capital for funds that we are aware of, so it won't necessarily all be funded off our own balance sheet. It is possible that there will be outside investors that could do this. Just as a reminder, we have roughly $380 million today in cash and short-term investments.

Great. Maybe a follow-up, two questions or two-part question maybe around flows, I mean, the first one is in fixed income, you obviously had a pretty meaningful step up in gross sales and I know you pointed out that there was a $900 million, I guess, in the cash management which I believe flows through there, but it was a pretty again a pretty decent step up. Is there anything else there they maybe we should think of it as, I do not know, maybe I will use non-recurring. Maybe that is not the right way to put it, maybe call it non-recurring or kind of one other big kind of chunky mandates that may have driven that besides cash management?

No. In fact, I would say if anything that was - the other thing we highlighted that went the other way was we had a roughly $400 million one-time withdrawal from - I guess, this is actually in the alternatives category, but it is from global macro. There was nothing else. You highlighted the one piece, the $900 million or so in cash management, the two fastest growing, I think, will likely be the two fastest growing parts of that over the next few quarters that were in this current number. One is the muni ladder business which was $750 million and I think every quarter that number has been growing. It is a broad-based business and we think we are in the very early innings of a very major business there. The second one I highlighted is the short duration strategic income fund that we got all the stars are aligned in terms of performance and yields and a very large category and it is getting a lot of sales attention it is a mutual fund asset, so you can follow the flows of that from standard mutual fund sources, but we expect that to continue to ramp up pretty nicely. The other one we did which was not much of a factor and this current quarter is our multi-sector income strategy and I highlighted that we have a pipeline of a roundly $1 billion of institutional accounts that we expect to fund. I mean they are supposed to fund. I think most of that supposed to fund within the next month or so, but even with some delays there we would expect to get most of that $1 billion in the third quarter, so if there is a one-time item that in cash in the second quarter, we expect some one-time items in multi-sector income with some visible wins one not funded opportunities that we expect all of that we expect to fund by the end of this month or 1st of June.

Yes. Maybe just one last question, thanks for indulging me. I just thought was the private fund assets if my numbers were correct, were up about 13% year-over-year. I am just kind of curious, is that the old exchange funds? Are you seeing any kind of resurgence in interest or demand for those?

A little bit. That would not be driving. I think that is probably slightly positive flows. We have had some more interest there. I think it is probably CITs [ph] that are the main driver of that business what asset classes are that?

Just looking.

Bob, the big drivers there are

Just okay.

Rob I think drivers there are comingled institutional product and the growth has been primarily in the emerging markets. You mentioned the exchange funds those have been growing as interest has picked up there. The other category of asset that shows up there is, CLOs and we have issued a couple of floating rate CLO, so I would say some combination of those products.

Great. Thanks for taking my questions guys and girls.

Thank you.

Your next question comes from the line of Eric Berg of RBC Capital Markets. Your line is open. Please go ahead.

Hi. This is Kenneth Lee filling in for Eric. Just I think you touched upon this briefly, but I wanted to get a better sense on your continuing dialogue with fund companies on NextShares. Just to clarify, did you see that fund transparency is not a big concern among the fund companies you have been talking to? If so, would you says that the biggest pushback you have been receiving when speaking with potential partners. What is holding up potential partners from signing up? Thanks.

Maybe I did not understand you right, so I think I had said that the holdings transparency is a big concern, and that one of the attractive features about NextShares is that allows them to offer the benefits of an exchange traded product with better performance and better tax efficiency without requiring daily holdings disclosure. I think, maybe that is what you said. The question about why do not we have 100 fund companies as opposed to 10 or 20 as opposed to 10, is that basically the question?

Yes. Well, just in your dialogue like what could be preventing potential partners from signing up - fund transparency. Are there any other major issues that are…

Well, again, the transparency is not really an issue. That is an issue in our favor. No one says I am not going to do this, because I will only offer product that has daily transparency. No mutual fund company offers daily transparency, so that is a positive. Not a negative. Why do not we have more fund companies? I guess, I would offer maybe a handful of reasons. One is that fund companies are busy, executives are busy, generally, the bigger the company the more involved the decision-making process. We have been talking to fund companies really primarily since December. That is when we got our exemptive order approved, was early December. Typically a decision like this involves many parts of the organization and this is not just the marketing group, but it involves discussions with portfolio management, fund operations, legal, in most cases they are going to consult with their fund board before they commit to doing this, so it is a process to get this approved. I would say, in many companies also there is an issue of where this fits in with their other priorities, so I met with the CEO yesterday who is I think very interested in doing this likes the concept, at least that was what he told me, but he says over the next 6 to 12 months we are very focused on building out an international family of funds, funds that we can use its funds, we can sell outside the United States. It is not a vote against NextShares. He said we will probably be there if this is successful, but we have got other priorities, so that is the second reason. In some cases, there is something in-house that somehow in the exchange traded product world that is already in process. To the extent that they have hired a team or a person that is focused on building some kind of exchange traded product structure, whether it is a fully transparent fixed income or fund-to-funds or strategic data or all kind of different thing. To a little degree we run a file of some plan that is in the works internally, so we start to get slided behind that, because it has got external sponsorship in a way that perhaps we would not have on our own. The biggest issue is I say overwhelmingly is, what other broker-dealers say and come back to me when you have got major broker-dealers that are committed to this. I mean that is the biggest issue is why should I do this until my distribution partners have blessed this and said they are going to offer this? As I explained that everyone on both sides of this, it is a big chicken and egg issue, fund companies want to make sure broker-dealers are behind this, broker-dealers wanted to make sure that major fund companies are behind this. Really our challenge to get NextShares successfully to market is to breakthrough that chicken and egg by both, arguing to big fund companies that they should take the initiative in this and also arguing to big broker-dealers that they should take initiative to this. For this to work, that has to break one way or the other, and I think it is working. We have a very nice complement of initial fund companies that are signed up to launch this. We are engaged in serious dialogue with broker-dealers about how this fits in with their business and what we can do to help them get into this business, so it takes time nobody is more impatient for success here than I am. I can assure you of that, but overall I am quite pleased with our progress we have made. Just having been quite involved in a lot of discussions, particularly over the last three or four weeks, we have come a very long way in advancing peoples' understanding of what this, of what the investor benefit is and how this can fit in with the business plans of broker-dealers as well as fund companies. One of the things that makes that easier, is that we have seen tremendous growth over the course of this year in ETFs, and traditional broker-dealer advisor programs and that is a bit alarming to traditional active managers. It is also a bit alarming frankly to the broker-dealers themselves and that is the catalyst for people to think about solutions and this is the solution at hand to how do we respond to that as an industry and restore a fair competitive balance between active and passive to the benefit of investor returns.

Great. Thank you. That is very helpful.

Yes. Thank you.

This concludes questions period for our call today. I would like to turn the call back to Mr. Cataldo for closing remarks.

Great. Thank you and thank you very much for joining us this morning. If you do have follow-up questions, we will be available to take those. If we did not get to your questions, we apologize and we will do our best to get all questions answered. That said, thank you and have an enjoyable Memorial Day weekend.

This concludes today's conference call. You may now disconnect.