Morgan Stanley (MS) Q3 2016 Earnings Report, Transcript and Summary

Good morning. My name is Andrew and I'll be your conference operator today. At this time, I would like to welcome everyone to the Eaton Vance Corporation's Third Fiscal Quarter Earnings Conference Call. 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. Dan Cataldo, Treasurer, you may begin your conference.

Great, thank you and good morning and welcome to our 2016 fiscal third quarter earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO of Eaton Vance Corp; 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 2015 Annual Report and Form 10-K, are available on our website or at request at no charge. I'll now turn the call over to Tom.

Good morning, and thank you, for joining us. Our fiscal third quarter ending July 31, was in many respects a strong period for Eaton Vance. The $0.56 of adjusted earnings per diluted share we reported for the quarter is an increase of 17% over the second quarter and just a penny shy of what we earned in the third quarter of fiscal 2015. Our fiscal third quarter net inflows of $7.1 billion are the third best quarterly close in the company history and represented 9% annualized organic growth rate. Excluding Parametric’s lower fee and more variable exposure management business, our net flows were $5.3 billion an 8% annualized internal growth rate and still among the highest four quarters in the company history. Reflecting the quarter’s positive net flows and favorable market action during the period, our consolidated assets under management grew to a record $334.4 billion at July 31, a 5% increase over the prior quarter end and up 7% from the year earlier. Drilling down into our quarterly flow results, the biggest contributors were portfolio implementation with net inflows of $2.7 billion, fixed income with net inflows of $2.4 billion and exposure management with $1.8 million of net inflows. Within fixed income flow leaders included high-yield bond mandates, municipal and corporate ladders, and active muni strategies. Equity net inflows of $300 million were led by Parametric defensive equity, Atlanta Capital core equity and EVM balance in large-cap growth strategies. Alternative strategy net inflows of $200 million were driven by our two global macro mutual funds. Floating rate income strategies had net outflows of 500 million, while an improvement from net outflows of $1.2 billion and $1.5 billion in the two preceding quarters were still a long way from where we think our floating rates flows should be given a strong investment case for the floating rate bank loan asset class and our top performance record among leading bank loan managers. We believe floating rate bank loans now present one of the most compelling value propositions, among all our investment offerings. They are an attractive source of income and portfolio diversification, are not subject to rate driven price declines as interest rates move up and are senior unsecured in the issuance capital structure reducing exposure to credit risk. With LIBOR continuing to edge its way out we aren’t far from short-term interest rate levels at which bank loan investors will start to see a pickup in distribution rates. In sum, we believe the conditions are falling into place for floating rate income to begin contributing favorably to our net flows. In addition to positive business and financial results, we continued to report strong performance from many of our leading investment strategies. At the end of July we had 58 funds with overall MorningStar ratings of four or five stars for at least one class of shares including 24 funds rated five stars. As measured by total return at July 31, 84% of our managed mutual fund assets ranked in the top half of their MorningStar peer group on a one-year basis and 79%, 74% and 72% in the top half over 3, 5 and 10 years respectively. Top quartile performance results were achieved by 39%, 55%, 48% and 52% of managed fund assets over 1, 3, 5, and 10 years respectively. One investment team with standout performance worth highlighting is Hexavest, the Montréal-based global equity manager in which we acquired a 49% interest in 2012. At the end of July, Eaton Vance Hexavest global equity fund Class I was outperforming its MorningStar category average by over 950 basis points for one year and almost 270 basis points annually over three years. Hexavest's portfolios were exceptionally well-positioned going into and coming out of the Brexit vote in the UK building upon what was already a strong year. Prior to their affiliation with Eaton Vance, Hexavest made a name for itself by outperforming during periods of market disruption. Their performance over the past year demonstrates a continuing ability to do that on a recurring basis. We are confident that Hexavest's strong performance will provide a catalyst for renewed interest in this highly differentiated global equity manager. In our last quarterly call, I outlined some of the major challenges facing the asset management industry. These include a shift in investor demand from active to passive strategies, pressures on fees in both active and passive, a growing industry regulatory burden and rising costs of doing business. Unfortunately, nothing has changed over the last three months to lead me to believe that these challenges are going to abate anytime soon. Even with these headwinds however, the asset manager, asset management industry is big enough and diverse enough to permit some industry players to prosper. Last quarter I talked about the four initiatives we are undertaking to position Eaton Vance to be one or one of the winners in this new more challenging world of asset management. These are first, capitalizing on our industry-leading investment performance and distribution strengths to grow sales and gain market share in active strategies; second, becoming a more global company by building our investment and distribution capabilities outside the United States; third, extending the success we have had with our custom beta lineup of rules-based individually managed accounts to achieve this platform's major potential; and fourth, finishing the job to make NextShares as the vehicle of choice for investors in actively managed funds in the U.S. Let me take a few minutes to update you on where we are with each of these four initiatives. Regarding the first priority, building our actively managed investment business it is important to understand that this business is enormous and that huge sales opportunities continue to exist and there is no reason we cannot grow from our current market share of less than 1% even if the overall market continues to decline. Focusing just on actively managed long-term funds in the U.S. this is a $10.7 trillion AUM market with net sales in the range of $2.6 trillion annually. With net outflows in the first half of 2016 annualizing at a rate of about $170 billion, the market is contracting at a rate of approximately 1.5% a year, but the overall industry flow numbers don't tell the full story. There remain numerous asset classes where active strategies continue to compete effectively against passive alternatives and continue to attract positive flows. In many of those asset classes Eaton Vance is an established player with high-performing strategies. In fact, in the 15 top-selling MorningStar mutual fund categories, Eaton Vance today offers 20 four and five star rated funds. Even as the actively managed fund industry continues to contract, we see no reason why we can't grow our active business. In the third fiscal quarter we realized aggregate net inflows into active strategies of $1.1 billion which equates to 2.5% organic growth rate [indiscernible] we know we can do better. Our second area of strategic focus is becoming more global. Even though we see lots of room to grow our U.S. business, there are also major opportunities to power our investment capabilities internationally. In addition to owning 49% of Montréal-based Hexavest, Eaton Vance operates internationally from our offices in London, Singapore and Sydney. Until recently, our presence outside the United States consisted primarily of sales and client service personnel. That is quickly changing however. By the end of this year we expect to have 26 EVM investment professionals located outside the United States up from just three at the end of 2014. Locating investors around the world not only puts us in closer touch with local market developments it also contributes immeasurably to accessing and serving local clients. On the distribution side, in July we announced a new leader for Eaton Vance's London-based global sales organization, TJ Halbertsma who will join us in September. As mentioned in the call last quarter we are also pursuing adding sales and client service personnel in Japan, our largest market outside the U.S. We see a world of opportunity in international markets and are investing to position Eaton Vance to capitalize. Our third major strategic initiative is what we call Custom Beta. As I described last quarter, custom beta encompasses rules based, separately managed account strategies offered to retail and high net worth investors. Our Custom Beta lineup includes Parametric tax managed and nontax managed custom core equities and EVM managed municipal bond and corporate bond ladders. While this is a comparatively low fee business, it is an area that we believe has vast potential as investors and advisors increasingly demonstrate a preference for passive management. Compared to index ETFs and index mutual funds our Custom Beta offerings give clients the ability to tailor their exposures to meet personal preferences and needs. For equity accounts the customization may include active tax management and portfolio tilts to reflect the client's responsible investing criteria or the client's other portfolio holdings. Unlike ETFs and mutual funds Custom Beta separate accounts can pass through harvested tax losses to offset client gains and other investments. For Custom Beta income accounts, the fixed income market exposures obtained through directly held municipal or corporate bonds in a ladder portfolio customized to fit the client's maturity and credit profile preferences. An added benefit of our Custom Beta offerings is that accounts can be funded in kind thereby helping reduce transition costs and taxes for the client. For both clients and advisors, our Custom Beta strategies offer compelling advantages over ETFs and index funds. In the third quarter, Custom Beta strategies attracted net inflows of $1.8 billion, which equates to a 19% organic growth rate. From a current AUM base of just under $42 billion we see huge growth opportunities in Custom Beta as we further build out our distribution network and product offering. Our fourth major strategic initiative is NextShares exchange traded managed funds. As a reminder, NextShares are a new type of fund that for the first time combined proprietary active management with the conveniences and potential performance and tax advantages of exchange traded. Our NextShares solution subsidiary holds patents in other intellectual property rights related to NextShares and is seeking to commercialize NextShares by entering into license and servicing agreements with Eaton Vance and other fund sponsors. The first three NextShares funds were launched by Eaton Vance and began trading on NASDAQ in February and March of this year. In the third fiscal quarter we made good progress in our efforts to gain broader distribution for NextShares. In May Interactive Brokers Group an automated global electronic broker and market maker announced plans to offer NextShares to retail investors and financial professionals through its investing and trading platforms. We expect Interactive Brokers to begin making NextShares available by the end of the summer. In July, UBS Financial Services announced plans to offer NextShares through its network of 7100 financial advisors in the United States. NextShares will initially be offered on the UBS brokerage platform in the first part of 2017 and then on its advisory platform later in the year. Constructive conversations with other major intermediaries continue and we hope to be in a position to announce additional distribution arrangements soon. Other NextShares developments of note in the quarter include adding UBS asset management to the stable of fund sponsors announcing their intent to offer NextShares and our announced agreement with the investment consulting firm NEPC for them to lead a selection process to identify potential managers to sub advise a series of new Eaton Vance sponsored NextShares funds. Conversations with other major fund sponsors about offering NextShares continue and we've certainly been boosted by the recent distribution announcements. The three NextShares funds we launched early this year now have four to five months of live investment and share trading experience, both of which have been consistent with expectations. All three NextShares funds are comfortably outperforming in the lowest cost share class of the corresponding mutual fund and their shares are trading at consistently tight bid as spreads and there are premium discounts to fund NAV. As expanded distribution comes on board, we expect to transition our NextShares initiative from a conceptual success into a significant business success. We continue to believe that NextShares have the potential to transform the delivery of actively managed funds in the U.S. At Eaton Vance's summer sales meeting earlier this month, the theme was Strategies for What's Next. I don't believe there is any investment manager that is better positioned for what's next in our industry than Eaton Vance. Our third quarter results demonstrate that we are on the right track and I see no reason why we can't continue to succeed as we make further progress advancing our key initiatives. That concludes my prepared remarks. I will now turn the call over to Laurie.

Thank you, Tom and good morning. As detailed in our earnings release, in the third quarter of fiscal 2016 we reported earnings per diluted share of $0.55 and adjusted earnings per diluted share of $0.56. The $0.01 difference between GAAP earnings and adjusted earnings reflects the add-back of closed-end fund structuring fees paid in the quarter. This quarter's adjusted earnings per diluted share were up 17% from the $0.48 we reported for the second quarter of fiscal 2016 and down 2% from $0.57 in the third quarter of fiscal 2015. Average managed assets of $324.9 billion for the third quarter were up 5% in comparison with the prior fiscal quarter, driving both revenue growth and margin improvement. Revenue increased by 6% sequentially reflecting higher average managed assets, two additional fee days in the quarter and approximately $2.7 million in performance fees. Excluding performance fees the average effected investment in bonds were administrative fee rates were substantially unchanged from the prior quarter. Adjusted operating income increased 14% sequentially, reflecting continuing tight control over discretionary spending and the operating leverage inherent in our business. All in all, a strong showing versus the previous quarter. Comparing third quarter results to the same period last year, the benefit of 5% growth in average managed assets was more than offset by declines in average fee rates. As you can see in attachment 10 to our press release, our average annualized effective investment advisory and administrative fee rate declined to 36 basis points in the third quarter of fiscal 2016 from 39 basis points in the third quarter of fiscal 2015. Product mix continues to be the most significant determinant of our overall average fee rate, although fluctuations in the number of fee days in a quarter can also contribute to short-term variability. Within the fixed income category, lower average fee rates year-over-year primarily reflects strong growth of our comparatively low fee laddered municipal and corporate separately managed accounts. In the floating rate income category, lower average fee rates were primarily driven by net redemptions from bank loan funds. Performance fees, which are excluded from the calculation of our average effective fee rates, contributed $2.7 million in the third quarter of fiscal 2016, compared to $1.7 million in the third quarter of last year. On an overall basis, our third quarter revenue was down 4% year-over-year and adjusted operating income was 7% lower. In the third quarter, we've realized 3% annualized internal revenue growth, as the revenue contribution from new sales during the quarter exceeded revenue loss from redemptions and other withdrawals. Despite continuing expected declines in average fee rates, we believe we can continue to sustain positive organic revenue growth, provided the withdrawals from our higher fee strategies don't accelerate. Turning to expenses. In the third quarter, our compensation expense was substantially unchanged from the second quarter fiscal 2016, and down 2% from the third quarter of fiscal 2015, driven by lower incentive compensation accruals and a decrease in stock-based compensation expense. Compensation expense decreased to 36% of revenue this quarter from 38% last quarter, mostly as a function of the increase in revenue. Controlling our compensation costs and other discretionary spending, obviously remains top of mind as we move into the fourth quarter. Our third quarter distribution expense was up 12% sequentially and 1% year-over-year, and included $2.3 million of structuring fees paid in connection with our closed-end fund offering in May. Excluding these costs, distribution expense was up 4% from the prior quarter and down 6% from the third quarter of fiscal 2015. Other operating expenses were up 3% sequentially and 1% year-over-year, primarily reflecting increases in information technology spend related to corporate initiatives. In terms of specific initiatives spending, expenses related to NextShares totaled approximately $2.4 million for the third quarter of fiscal 2016 compared to $1.9 million in the second quarter of fiscal 2016 and $2 million in the third quarter of last year. Our operating margin improved to 31.3% in the third quarter of fiscal 2016 from 29.6% last quarter, reflecting both revenue expansion and fiscal discipline. Absent the $2.3 million in closed-end fund structuring fees paid in the third quarter, our operating margin for this quarter would have been 32%. We continue to see opportunities for modest margin expansion given higher managed asset levels and continuing tight control over discretionary spending. In the context of flat markets for the remainder of the fiscal year, we see the potential for an incremental bump in margin to something closer to 33% in the fourth quarter. As we repeatedly caution, however, approximately 45% to 50% of our tax total expenses are variable, driven by managed asset levels, gross sales or operating income. But there are number of factors that can dampened margins no matter how disciplined we remain in terms of our discretionary spending. Net income and gains on seed capital investments contributed $0.01 to earnings per diluted share in the third quarter of fiscal 2016, $0.02 in the second quarter of fiscal 2016 and were negligible in the third quarter of fiscal 2015. When quantifying the impact of our seed capital investments on earnings each quarter, we take into consideration our pro rata share of the gains, losses and other investment income earned on investments and sponsored products, but are accounted for as consolidated funds, separate accounts or equity investments as well as the gains and losses recognized on derivatives used to hedge these investments. We then report the per share impact, net of noncontrolling interest expense and income taxes. We continue to hedge the market exposures of our seed capital portfolio to the extent practicable to minimize the effect on quarterly earnings. Excluding the effects of CLO entity earnings and losses, our effective tax rate for the third quarter of fiscal 2016 was 38.5% as compared to 38.7% in the second quarter of fiscal 2016 and 38.9% in the third quarter of fiscal 2015. We currently anticipate that our effective tax rate adjusted for CLO earnings and losses will be approximately 38.5% for fiscal 2016 as a whole. In terms of capital management, we repurchased 1.7 million shares of nonvoting common stock for approximately $61 million in the third quarter of fiscal 2016. Over the past four quarters, we have repurchased 8.7 million shares for $296.2 million, driving our average diluted shares outstanding for the quarter down by 4% compared to the third quarter of fiscal 2015. The 113.2 million of shares outstanding at the end of this quarter are down 3% from the 116.6 million reported a year ago, and down 1% from the 113.9 million reported on April 30, 2016. We finished the third fiscal quarter holding $476.4 million of cash in short-term debt securities and approximately $279 million in seed capital investments. Our outstanding debt consists of $250 million of 6.5% senior notes due in 2017 and $325 million of 3.625% senior notes due in 2023. We also have a $300 million 5-year line of credit, which is currently undrawn. Given our strong cash flow, liquidity and overall financial condition, we believe are well-positioned to continue to return capital to shareholders through dividends and share repurchases. This concludes our prepared comments. At this point, we'd like to take any questions you may have.

[Operator Instructions] Your first question comes from the line of Ken Worthington with JPMorgan. Your line is open.

Hi good morning. Sort of a higher-level question/observation. On Slide 3 of the deck, you show pretty substantial asset growth. Just looking over the last 5 years, it's up 77% since 2011. As we look at the EPS earnings is essentially unchanged. EPS in the first two quarters of 2011 is basically equivalent to the first three quarters of 2016. So you show and highlight great AUM growth, number of new initiatives. We are not seeing a great translation of the AUM growth into earnings growth. You've called out the mix shift a number of times. As we think about the look forward, how should we think about the way you monetize the asset growth so that we're getting better translation into earnings? And as we think about the opportunities to kind of manage both the costs as well as the investments, is there something to be said about you going from a period of investing into more harvesting? Is that maybe a concept we should think about to improve that translation?

Okay, this is Tom. I'll take a crack at responding. I guess, first thing to observe, starting on your comment about the AUM growth on Slide 3, recall that we did an acquisition in the early part of fiscal 2013. We bought the former Clifton group. How much did that add in assets?

$32 billion I think so.

$32 billion, so a big part of the jump in fiscal 2013 was from an acquisition. Everything since then is essentially organic growth. Clearly, the growth that we've achieved since, whatever starting point you want to choose has been higher on an asset base than it's based on a revenue base or an earnings base. With that Clifton acquisition, we really pretty substantially accelerated the move of our overall business toward what had been, primarily a, what I guess I would call, primarily a higher fee active business to more of a blend of active strategies and variations on passive strategy, generally with some customization. Because those come at lower price points than traditional active strategies and because those have grown over a period in which our active business has grown in some periods and shrunk in some business, probably grown modestly overall, I don't have that in front of me. Certainly, we haven't seen revenue growth over that time period that has matched the asset growth. So revenues are a function, no surprise of both changes in assets and changes in average fee rates, assets have grown nicely, fee rates have come down primarily reflecting mixed shift. Over that period, translating growth in revenues to growth in earnings, we've benefited from the fact that our share count has been moving down over that period, but we've also, as you point out, made significant and ongoing investments in some of these key initiatives that I described. NextShares, where we're spending roughly at a rate of $8 million to $10 million a year, our Custom Beta, which is really now in a mode where it's contributing nicely to profitability, our international efforts, which has involved essentially creating a fully staffed investment office in London what had previously been primarily a sales and service office. So those things don't come cheap. I wish I could tell you that we're on the verge of moving from an investment mode to a harvesting mode. I don't think that's likely accurate. We're certainly in a in a positive mode in our Custom Beta initiative. And but I don't – we're not we're not about to turn the corner and as far as I can tell in terms of NextShares moving to positive cash flow. We're still very optimistic about the potential there, but that won't be over the next couple of quarters that we turn positive there. And similarly the investment that we're making internationally is from a multi-year perspective. We hired - the biggest piece of that is we hired a global equity team a year ago, and we're in the process of building a track record. We've had – we've been able to move some assets from that team to that team rather from our U.S. operations, but we haven't as yet achieved significant inflows, because they're still building track record. So, we're making progress on many fronts. I wish, I could say that our earnings progress has matched our asset progress, but I feel like we’re certainly advancing maybe on an overall basis relative to the industry and certainly we feel like we're advancing our long term potential through both the results that we’re achieving and the steps we're taking to invest for our future.

Okay, great. Thank you very much.

Your next question comes from the line of Glenn Schorr with Evercore. Your line is open.

Hi, thanks very much. So, maybe if you could help us understand what's going on between both the distribution revenue line and the distribution expense line, they might normally move a little bit more in tandem, but distribution revenues are down 7%, expenses were up 1%? Just curious on how much of that is just kind of some seasonal stuff or just inter quarter stuff versus an actual trend of some fees going away with certain assets as being sold? Thanks.

Yes, so the biggest factor which we highlighted is there was a $2.3 million of distribution expense related to the closed-end fund that we offered in May. If you adjust for that, I don't know if there's anything else to really talk about of a special nature in the quarter.

I mean you did touch on a key point Glenn in that as the fund – the industry evolves and we sell less fund and shares with distribution and service fees, the revenue line – distribution service fee revenue line is going to go down. There will be a reduction in the distribution service fee expenses related to those share classes, but we continue to have distribution expenses outside of those that are related simply to the different share classes. And we do disclose in the 10-Q and 10-K the breakdown of the distribution expenses and that would be I think a good place to look to understand what part of the expenses are tied to distribution in service fee revenues versus what are just straight up distribution expenses.

Definitely we’ll do, I appreciate that. Just may be a related one on an attachment 10 when you show the effect investment management advisory fee rates. At first glance I thought that the move towards more or the growth in the portfolio implementation exposure management funds would be the mix shift that would cause some of the fee pressure. But here it looks like there's some fee compression within just about every asset class. So, I'm curious on how much of that would you describe as a move into lower fee either funds or asset classes or has there been some actual price cuts across the franchises?

I think, the biggest move that you're seeing, Glenn, is in fixed income. And there we are seeing the move for the growth in some of our lower fee franchises and there we're really seeing the increase in our laddered munis and corporates and those are the significantly lower fee rates and our traditional fixed income and because it's growing faster than the rest of the fixed income portion of our complex you are going to see the compression there and that's really driving that. In terms of floating rate income, because we've had some weakness on the retail side, I think you're seeing support on the institutional side and the weakness on the retail side, and that's actually just sort of pushing the effective fee rate around a little bit because those are operating at different fee rate.

But I would say within mandates, forget mix, we're not getting any fee increases. And in some places we are lowering fees to match competition or to meet requests to do that, to be more competitive. And I think that's very consistent with broad industry trends. But for us, by far the biggest effect is really mix, both among categories and also to some extent within categories.

Okay, that’s very helpful thank you.

Your next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Your line is open.

Hi, thanks. This is Jeff Ambrose [ph] filling in for Mike. I just had a question on like the longer-term expense outlook. So if we assume flat market in your fiscal 2017, I guess where would you expect the core expense growth rate to shake out? Thanks.

I think, you have to keep in mind roughly 45% to 50% of our expenses are variable. So those are going to move with what's happening in terms of revenue and operating revenue and asset levels. In terms of our core, we've talked a little bit about the fact that we're doing everything we can to keep a very tight rein on our discretionary spend, but we clearly have got some significant initiatives that we have been making incremental investments in and we're likely to continue to do so for the next fiscal year, particularly the NextShares initiative. So, we're doing everything we can to keep our fixed and discretionary spending tight and not fees increases there. We're being extraordinarily cautious with headcount increases, but we do recognize that there are something’s that are outside of our control because they're variable and some areas where we are going to need to continue to make investments because we believe that these are extremely important for the long-term viability of the company.

Got it. Okay, that's helpful. And then just on like the high fee flows this quarter, the strong number there, and I guess, your outlook for those products, I guess, does your expectation for fee rate pressure, are they more favorable now given the strong close in the quarter in your outlook on what you're seeing there?

I'm going to say, generally, yes. I think, you're referring to the fact that I mentioned that our active business had positive net flows of a little over $1 billion or 2.5% organic growth rate. That's certainly an improvement from where we've been most of the last two years when outflows from primarily from bank loan funds have driven down and offset growth in other parts of our active business. Also last year, you may remember that emerging market equity strategies were pretty significant contributors to net outflows. That's essentially gone away as a negative. I think it was slightly positive in the year-to-date or at least the last couple of quarters. But bank loans are still a modest drag, and we continue to believe we're not on the verge of this happening as far as we can tell, but we continue to believe that bank loan flows will turn positive and as that happens, that's a pretty important swing factor for us in our overall growth rate and particularly our ability to grow our active business, and we've had great performance in bank loan strategies for the year-to-date. The asset class we think is positioned to be attractive with relatively high yield in a world where yield is very hard to find, still quite benign credit conditions, and because we're starting to see LIBOR creep up, we're closer and closer to the day when we'll start to see distribution rate increases in bank loan funds where you're not seeing that in a whole lot other fixed income asset classes.

Okay, great thank you.

Your next question comes from the line of Bill Katz with Citi. Your line is open.

Good morning. This is actually Ryan Bailey filling in for Bill. Tom, you'd mentioned that conversations have been pretty strong with distributors following the UBS announcement. Wondering if you could give us some color around maybe some timelines for other distributors? Whether the DoL is still the major headwind to hold up? And how distributors are reacting to the fund's performance?

Yes. I can't be real specific. We don't, unfortunately, control the timing of when those conversations. We do think that we're, at least in a couple of cases, pretty close to having something to announce, but what pretty close means I can't be real specific about. You mentioned the Department of Labor, in the, let's call it six to 12 months leading up to the announcement back in April, I think it was of what the final group proposal was going to look like. There was definitely a chilling effect on our conversations with broker-dealers because they were uncertain as to the size, the scope, the nature of the change to their business that would come from the DoL fiduciary rule and particularly the amount of technology spend that they would have to undergo in connection with that. We're now I guess four or five months post knowing what the final rules are and I believe at this point there's a broad understanding, a broad consensus that NextShares fit in as a part or can be a part of the solution. Simply as a way to deliver active strategies in the lowest cost version that appeals to advisory accounts, which we expect to grow as a result of the DoL rule change that’s certainly, the consensus view which we agree with. And we also think that there could be potential for NextShares to be part of the answer to traditional brokerage account because of the fact that NextShares are like ETFs but different from mutual funds effectively give broker-dealers the ability to set their own price so that they can level set distribution payments across the whole category of products in a way that they can't do today for mutual funds because essentially every mutual fund has its own somewhat varying pricing structure and while it doesn't permit them to make adjustments or add or subtract cost in addition to what the fund charges. So on balance, we think the Department of Labor has moved from a pretty significant headwind in the short run, six to 12 months ago to a long-term positive, clearly and perhaps also, a short term benefit as well in terms of as broker dealers are looking for ways to position their business for this very important change coming in 2017, there is quite a bit of interest in NextShares as part of the solution to that.

Great. And could you give us some sort of color around what percentage of the AUM in those funds are seed versus third-party claims?

I didn't follow that. Say it again?

It was just what percentage of the AUM of the funds are seed? The vast majority of AUM in the funds now are Eaton Vance Corp.'s seed. The only platform over which the funds are available currently are folio institutional and folio and we felt it important to launch through them, but didn't realistically expect to see significant flows through that single platform.

Great, thank you very much.

Your next question comes from the line of Chris Shutler with William Blair. Your line is open.

Hi guys, good morning. Tom, maybe first could you just give us an update on the institutional pipeline in August flows to date?

Dan, you want to take that?

Sure. The institutional pipeline is certainly solid in particularly in the disciplines that we've been had recent success in. And I would point to high yield as probably the leader there. We continue to get interest on and off in floating rate, which is consistent with what we've experienced over the past several quarters. There are some, I think, interesting developments, which could provide sources of new institutional flows. First and foremost, Tom mentioned the great success – performance success Hexavest had this year. That's starting to generate increase in opportunities for our institutional group. Another area which we've seen some very good interest is institutional muni bond sales into Japan, which is starting to generate some meaningful flows. So, to think about high-yield, Hexavest municipal bond into Japan, believe it or not, we're getting some bank loan interest as well as interest in our global macro absolute return strategy. So I'd say solid and steady. And I don't know, Tom if you would add anything to that.

Yes, just a couple of things. First, to clarify the Japanese muni opportunity, that is taxable muni bonds. So from their perspective, it's – these are infrastructure investments, but they're offered by state and local government entities in the U.S. but it's an area where we've had some initial success and as Dan said, we've got a nice pipeline there. The other thing I would highlight is, we've developed a multi-asset credit capability and are starting to launch that in the institutional markets and are getting a positive response, multi-asset credit in our product lines means a combination of high yield bonds, bank loans and to some degree also investment grade bonds. And so, the concept is rather than investing separately in those asset classes and making allocation decisions at the customer level, turn it over to a team that has got real strength and market leadership in all of those areas and included as part of the mandate responsibility to tilt from one asset class to the other depending on our assessment of risk and opportunity.

Okay, got it, thanks. And then just one follow-up on the floating rate category. Tom, where do you think that the, I guess the LIBOR floors on those products today on average where they're around 100 basis points or so I think, is that right?

That's right, yes. We're – that's on average around 100. LIBOR, I think three months LIBOR is around 80 basis points currently.

Like 80, 82.

So we're pretty close with – I think, there is some maybe, if I remember right, 20%, 25% of the market where we've already effectively cleared the floor rate, but the vast majority of the market is still in that 100 basis point range. So potentially, it seems likely with the next Fed increase that we'll start to see some potential increases in distribution rates there. The other thing that's happening that maybe doesn't get a lot of attention, I think, there was an article about it recently in the Wall Street Journal is that LIBOR has been creeping up relative to Fed funds rate or other short term interest rates, primarily reflecting changes in the money market world. So if prime money market funds are no longer buyers or if those funds are shrinking in relation to government funds because of changes in regulation, that is having an effect that these people think that's what's driving it, that's having an effect to drive up commercial paper rates, driving up LIBOR funding rates, which comes to the benefit of bank loan fund investors.

And do you think that those products, some of the products still being below the floor is a bigger issue or do you think it's generally concerned around credit conditions recognizing whether those are funded or not?

We're not really hearing much about credit. I think, it's - the perception, I think, wrongly is that bank loan funds are investments you want to buy when you think rates are moving up, and there's a perception that rates aren't moving up. So I think it's more of that than anything else. So I don't think many advisors are hearing from their clients. I think, rates are going up 50 basis points, how can I prepare for that. We're still in a mode where we had a huge surge of bank loan business, I think, about $15 billion in our fiscal 2013 where there was this expectation of rising interest rates. There was a lot of money that is flooded into the asset class on the expectation that rates were going to be going up. But rates didn't go up, and I think, since then, we've still been sort of digesting that period of quite significant growth not only for us but for other investors in the asset class, because people have - in some sense they bought this for an eventuality that didn't happen, and they've been peeling back exposures to go into other things. Mostly that money at this point is – the short-term aspect of that money is probably pretty well flushed out. To me the opportunity here is investors and look at the asset class is offering diversification benefit, it did offer the potential for yield with both the protection that you're not going to lose money because of rising rates, and you can potentially get a yield pickup if the Fed acts again.

Okay, thanks.

Your next question comes from the line of Dan Fannon with Jefferies. Your line is open.

Thanks. My questions are just clarification around the margin outlook for next quarter. I think, you said assuming flat market I just wanted to make sure that's from quarter end as of kind of these levels? And then also, within the quarter comp came in below kind of where we were looking for. I was wondering if there was any onetime in that line item in the period?

Oh, hi. Yes, we are talking about flat market off of the end of the quarter. And in terms of the...

End of July.

End of July, yes end of this current fiscal quarter. In terms of anything that really came through this quarter, there really wasn't. There was nothing in particular that was driving it down. I think, as we are looking at it as a percent of revenue, we talked about it. The fact that it actually dropped as a percentage of revenue is more a function of the fact that revenue went up as opposed to anything significant happening on the comp side. So there really wasn’t anything that was one-time in there.

I think we did have some maybe some one-time related employment costs either severance or hiring costs that might have pushed that number up over the last couple of quarters that didn't recur on the same basis in the third quarter.

Yes last quarter it was 121.5 and this quarter is 121.8. We really didn't have anything, so we're really flat.

Yes, okay I have already said that wasn’t much of a factor. I stand corrected.

Got it and then just, Tom you mentioned profitability of NextShares, and I think, you said a couple of quarters out. I guess what is the reasonable time period based on some of the announcements you have, the momentum and pipeline I think you've cited, I guess, do you expect the expense levels to ramp from here kind of over the next 12 months or is this a steady state for NextShares and expenses and now the revenues need to catch up and what is a reasonable kind of breakeven across over threshold time period?

Yes, just to be clear, I didn't predict that we'd turn positive in a couple of quarters. I'm predicting that as far as I can see, there's no possibility of turning positive in the next couple of quarters, if you get that distinction. So, the key to profitability here is primarily on the revenue side, which is a function of - it's going to be a function of AUM. I don't see significant changes on the expense side, certainly, don't see that dropping materially over the next 12 months. If we're going to make a success of this, and we're determined to make a success of this, we'll have to start seeing assets and revenues in NextShares funds. The biggest impediment to that was and is distribution access. The biggest single event I would say in the history of NextShares after initial approval has been UBS announcement that came during the quarter, and it falls upon us to capitalize on that by working with UBS to make sure that their fund companies that they work closely with understand the opportunity to offer NextShares at UBS, but also to make the case to other broker-dealers that for the same reason this makes sense for UBS, it also makes sense for them. So, it continues to be a chicken and egg game, where we're building distribution, making it more compelling for major fund companies to launch NextShares' initiatives. The more fund companies that launch NextShares' initiatives, the easier it is to gain more broker-dealers as sponsors of NextShares. So we're trying to push through that. We're spending money to do that. We're working hard to do that. Certainly, leverage - and looking to leverage our distribution relationships with the broker-dealers and our contracts with other firms that are under normal circumstances our competitors. It's moving forward, it's not moving forward as quickly as I would like, but we are making progress and the UBS development is hugely significant for our NextShares initiatives.

Dan, just adding one more thing on the comp question, we do provide breakouts on our comp categories in the Q at a pretty detailed level, and that will be coming out at the beginning of September. So I think you can look to that if you're looking for more information in terms of exactly what was happening within the comp category.

Great, thank you.

Your next question comes from the line of Robert Lee with KBW. Your line is open.

Hi, everyone. Thanks for taking my question. This is actually Andy Magoff [ph] standing in for Rob Lee. Kind of two-part NextShares question, with NEPC agreement to create a sub-advisors spine, do you guys have any kind of timeframe where that is going to start to show up? And you kind of talked about NextShares expenses you had given guidance I think for fiscal 2016 of around $8 million. Judging by the fact that you said you are going to remain pretty confident, is it a good run rate for 2017 maybe around $8 million to $10 million?

I think that's a best guess a lot will depend on what happens we've said publicly that we will be willing to work with major distribution partners to help them offset some of their expenses in implementing NextShares if we get a lot of agreements next year and expenses hit, that number could be somewhat higher. But assuming something close to the status quo, we think that's a reasonable estimate. The NEPC agreement, I would say 2017 is a reasonable timeframe. It's a little hard to be more specific than that. We, I think, we've had one follow-on meeting with NEPC since the announcement. So they're fairly early in their process. We announced that, I believe, in July vacation season. So I don't know that a whole lot has happened. But certainly, as this year progresses we want to be in a position where we can identify and potentially wet the commercial opportunity that might exist with managers that are identified by any PC as potential sub-advisers for NextShares funds.

Great, thanks. And if I could just ask one more question about the equity inflows in the quarter. Just any color as to the split between institution and retail in the quarter? And then any color on the pipeline going forward, just specifically forward equity? Sorry.

While these guys are looking for specific numbers, I can do some filibustering. On the retail side, which tends to be mostly funds business, the strongest selling products are the Atlantic Capital's, mid-cap fund which is a five star fund. It's closed the most classes of most investors but we'll continue to make it available to retirement platform potentially and because we've got such a strong track record there, that continues to see very nice inflows. We've also - on the Eaton Vance side, our balance fund and our growth fund are both seeing positive flows. That's, again, driven primarily by performance. Institutionally, one of our leading strategies, probably the largest institutional strategy in terms of current flows is that defensive equity strategy that's offered by Parametric, which at least as yet, is still only an institutional strategy. We may in the future offer that in a fund, but it's essentially a transparent rules-based alternative to hedge fund strategies with - like a market beta of about 0.4, 0.5 that has had very favorable performance relative to typical hedge funds at a much, much lower price point than hedge fund fee rates.

Just in terms of the breakout between institutional and retail, I think if you're looking at the equity category, where we really saw the strength this quarter was in the sort of what we call the private fund category where with the exchange funds, are private equity funds that are managed by Eaton Vance management. We saw some significant close there. And then, we also saw for the Fed's equity strategy, there is a co-mingle vehicle that is intended for institutional investors that also had some significant inflows. So they're modestly positive in terms of our open end strongly positive in terms of the private fund category and then a little bit weaker on the institutional side.

Great, thank you so much.

That is all the time we have for questions today. I would now like to turn the call back over to Dan Cataldo for closing remarks.

Okay, great. Thank you, and thank you for joining us. We hope you enjoy the remaining weeks of summer and look forward to reporting back to you upon the close of our fiscal 2016 at the end of October and beginning of November. Thank you.

This concludes today's conference call, you may now disconnect.