Morgan Stanley (MS) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Shelby and I will be your conference operator. At this time, I would like to welcome everyone to the Eaton Vance Corp. Second Fiscal Quarter Earnings Conference 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] Dan Cataldo, Treasurer, you may begin your conference.

Thank you, and welcome to our fiscal 2017 second quarter earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, our CFO. We’ll 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 2016 Annual Report and Form 10-K, are available on our website or at request at no charge. I will now turn the call over to Tom.

Good morning, and thank you for joining us. Today we are pleased to report strong business and financial results for the second quarter and first half of fiscal 2017. In the second quarter, we earned $0.62 per diluted share, an increase of 29% from the $0.48 of earnings per diluted share we reported for the second quarter of fiscal 2016, and up 17% from $0.53 in the first quarter of fiscal 2017. The 29% year-over-year increase in quarterly earnings is our highest growth reported for any quarter since 2011. The strong earnings results this quarter reflect the ongoing organic growth we’re seeing across our businesses, appreciation in the value of our managed assets due to favorable market movements, and contribution from our acquisition of the business assets of Calvert Investment Management on December 30, 2016. We closed the second fiscal quarter with a record $387 billion of consolidated assets under management, up 6.4% from the prior quarter-end. In the second quarter, we had net inflows of $12.9 billion which is the highest amount of net inflows for any quarter in company history. The second quarter net inflows translate to a 14% annualized internal growth rate in managed assets. Backing out exposure management mandates, our net flows were $7.5 billion, equal to a 10% annualized internal growth rate. Over the past year our assets under management have increased by $68.3 billion or 21% reflecting $32.6 billion of net inflows, $25.8 billion of favorable market impact and $9.9 billion of new management assets gain in the Calvert acquisition. With the ongoing shift in investor preferences toward lower fee offerings, achieving positive revenue growth has become an increasing challenge for the asset management industry. I’m pleased to report that Eaton Vance $375 million of second quarter consolidated revenue is a new quarterly high for the company and an increase of 16% in the second quarter of fiscal 2016. Backing out the effects of positive market impact and the revenue contribution of managed assets gained in the Calvert acquisition, Eaton Vance realized annualized internal growth in management fee revenue of 7% for both the second quarter and first half of fiscal 2017. While asset managers generally do not report their internal revenue growth results, I’m confident that our current performance based on this metric is at or near the top of our publicly traded peers. As shown on Attachments 5 and 6 of our press release, in the second quarter we have positive net flows in all six categories of investment mandates we report, equity, fixed income, floating-rate income, alternative, portfolio implementation and exposure management; and across funds, institutional separate accounts, high network separate accounts and retail managed accounts. From a flows perspective, Eaton Vance is hitting on all cylinders. Second quarter equity net inflows of $800 million were led by Parametric’s defensive equity strategies, Atlanta Capital core equity and Eaton Vance growth strategies. Fixed income net inflows of $1.1 billion were driven by strong growth in laddered, municipal and corporate bond strategies, offset in part by outflows from higher bond mandates in conjunction with weak industry flows for the high yield category. In floating rate income, the $2.8 billion of net inflows we had in the second quarter is our best flow result in the category since the fourth quarter of fiscal 2013. Open-end floating rate funds accounted for $2 billion of net inflows with the balance from institutional funds and separate accounts. The classified shares of three floating rate mutual funds we offer in the U.S. have current distribution rates of 3.8% to 4.5%, comparing very favorable yields now available for money market funds and other cash instruments. Our floating rate funds have strong performance versus peer funds in ETFs, with each of our funds currently rated four or five stars by Morningstar. According to strategic insight, over the last three months, Eaton Vance has led the fund industry in floating rate loan fund net inflows. All those sales momentum for floating rate funds is slowed in recent weeks, we remain constructive on our growth prospects in the asset class, believing that floating rates loans will continue to have appeal as an option for generating income without exposing investors to meaningful interest rate risk. I should mention that it is not just our bank loan strategies that position Eaton Vance well for an environment in which more and more income investors may be seeking protection from interest rate risk. In addition to floating rate loans, we offer a broad array of four and five star rated ultra short and short-duration funds across taxable and tax free income categories. Our global macro absolute return strategies are from the U.S. and internationally continue to generate positive net flows in the second quarter, accounting for substantially all of the $344 million in alternative categories net inflows. Like our bank loan in short-duration income strategies, we view our global macro franchise as well positioned for growth in the current environment of extended equity valuations and interest rate uncertainty. Turning to our portfolio implementation category, the $2.4 billion of second quarter net inflows reflect continued strong demand for Parametric’s custom core equity strategies. Parametric custom core and EVM municipal and corporate-bond ladders offered us retail managed accounts and high net worth separate accounts, constitute our custom beta products suite, our primary approach to meeting investor demand for passive market exposures. Different from index funds ETFs, custom beta portfolios are individual separate accounts that can be customized to meet the needs and preferences of each client and are structured to take advantage of the more favorable tax treatment of holding securities directly rather than through funds. Customization and tax efficiency are powerful selling points in today’s market. There’s a slide in our presentation material showing the impressive growth in managed assets of our custom beta strategies over the past 5.5 years. As you can see, managed assets now approached $58 billion, up over 50% from just a year ago. These are scale businesses in which we believe we are larger than anyone else in the industry. These are also service businesses in which we endeavor to offer best-in-class customer services. We see strong growth continuing across our custom beta line up. As one of example of the kinds of opportunities we’re seeing in custom beta, asset market leading turnkey asset management platform announced earlier this week the availability on their platform what they call Parametric custom portfolios, which combine passive tax managed equity exposure with bond ladders in a consolidated separate account. We believe Parametric custom core equities and the EVM managed bond ladders delivered on an integrated basis through a customized separate account, were proved to be a winning combination in the marketplace. Our final mandate reporting category exposure management is by custom beta also not reliant on investor demand for active strategies to generate growth. Exposure management is a Parametric business offering futures in options-based overlays strategies to institutional clients so they can add, remove or hedge market exposures within their portfolios in a transparent, efficient and highly customized manner without disrupting their underlying investment holdings. At an average fee rate of 5 basis points, this is our lowest fee business, but also one of our strongest growth areas. Exposure management mandates had net inflows of $5.4 billion in the second quarter, bringing managed assets to period-end to $80.9 billion. Since Parametric entered this business through the acquisition of the former Clifton group on the December 31, 2012, managed assets have increased over 150%, equating to a 24% annual growth rate; here again we see strong growth continuing. Our custom beta and exposure management businesses positioned Eaton Vance to grow outside of traditional active management and our key franchise is that help distinguish us from many traditional asset managers. In these businesses we are measured on making the right stock picks or the right cause on interest rates. Our success is dependent on delivering the market exposures specified by the client at a low cost and with high efficiency, something we have a long track record of doing successfully. Across our lineup of investment strategies, our performance remains solid with 70 mutual funds with at least one class of shares currently rated four or five stars by Morningstar. This includes 12 Calvert funds managed with a responsible investing mandate. . : Before I turn the call over to Laurie, I’d like to give you an update on two of our strategic initiatives; the recent acquisition of the business assets of Calvert Investments and the rollout of NextShares exchange-traded managed funds. Four months into our ownership of Calvert, I can report that things are going very well. The Calvert funds are now being offered through Eaton Vance’s distributors with greatly expanded market reach. Our sales organization is getting up to speed on the Calvert story and is excited by the opportunities arising from Calvert’s 35 year of heritage as a leader in responsible investing. And at Calvert front line that includes a dozen responsibly managed mutual funds currently rated four or five stars by Morningstar. All the major broker dealers now have internal initiatives around responsible investing and are looking to partner with asset managers they know to bring credible responsible investment strategies to their advisors. When we acquired Calvert, we know that there would be growth opportunities. As we’ve gotten into what I can say confidently it looks bigger than we initially thought. As Laurie will describe, Calvert is already contributing meaningfully to Eaton Vance’s bottom line and has done so from day one. We believe that Calvert is now poised to begin contributing to the Eaton Vance’s organic business growth. In the second quarter, the Calvert fund experience approximately $350 million of transaction related redemptions as former Calvert parent Ameritas withdrew it’s seed capital investments and assets in the District of Columbia 529 plan formerly administered by Calvert were reinvested. Excluding these one-time withdrawals, Calvert flows were approximately breakeven in the second quarter. As we ramp up our retail sales effort supporting Calvert and begin offering Calvert strategy in institutional markets, we expect to see positive Calvert flows in the quarters ahead. As you likely know, NextShares are an SEC approved new fund structure, combining proprietary active management with conveniences and potential performance in tax advantages of exchanged-traded products. Our NextShares solutions subsidiary holds patents and other intellectual property rights related to NextShares and is seeking to commercialize NextShares by entering into licensing and service agreements with fund companies. Since gaining SEC approval at the end of 2014, we have focused on two primary objectives; signing up fund sponsors to offer NextShares and gaining distribution access through broker-dealers. As detailed at NextShares.com, to-date, 15 fund companies have entered into preliminary NextShares license agreements and 14 of those have filed for SEC exemptive relief to offer NextShares. Eight NextShare’s funds, three from Eaton Vance, three from Waddell & Reed and two from Gabelli are now live in the market with funds from two additional sponsors Hartford and Pioneer currently in registration. On the distribution side, the UBS announced last year that they intend to offer NextShares funds through their network of 7,100 financial advisors in the U.S. beginning later this year. At a meeting in New York earlier this week of what we call the NextShares consortium, representatives of UBS provided details on their NextShares launch plans to participate in fund companies. Based on the significance of the pending opportunities at UBS, we expect a busy summer of NextShares’ registration statement filings and launch planning activities from a host of fund companies. The balance of 2017 promises to be exciting on the NextShares’ front. Also Eaton Vance is in the midst of a strong phase of growth with positive momentum across our portfolio of investment businesses and new opportunities poised to begin contributing meaningfully. Despite what remains a very challenging environment for an industry, I’m optimistic about our continued success. That concludes my prepared remarks. I will now turn the call back over to Laurie.

Thank you, and good morning. Today we reported adjusted earnings per diluted share of $0.62 for the second quarter of fiscal 2017 versus $0.48 for the second quarter of fiscal 2016 and $0.53 for the first quarter of fiscal 2017, which represents an increase of 29% year-over-year and 17% sequentially. Adjusted earnings per diluted share equaled GAAP earnings per diluted share for all periods presented. As Tom mentioned, it was a record quarter for us in terms of managed assets. Ending consolidated managed assets at April 30, 2017 increased 6% from the prior quarter-end, reflecting record quarterly net inflows and positive market returns. Ending consolidated managed assets increased 21% from April 30 of last year, again, reflecting strong net flows in favorable markets over the last 12 months, as well as the impact of the Calvert acquisition at the end of calendar 2016. Average managed assets in the second quarter of fiscal 2017 increased 22% versus the second quarter of fiscal 2016, driving a 16% increase in revenue. Revenue growth trail, the growth in average managed assets year-over-year primarily due to a decline in our average management fee from 36.1 basis points in the second quarter of fiscal 2016 to 34.7 basis points in the second quarter of fiscal 2017. This decline in our average management fee rate is primarily attributable to the ongoing shift in our business mix as lower fee exposure management, portfolio implementation and bond laddered businesses have become a larger percentage of our assets under management. Sequentially, our average management fee rate shows signs of stabilization, declining 35.1 basis points in the first quarter to 34.7 basis points in the second quarter. Although strong flows into our lower fee strategies continue to put pressure on our average management fee rate, net inflows and the higher fee strategies are providing an offset. Performance fees, which are excluded from the calculation of our average fee rates, were negligible in both the second quarter of fiscal 2017 and the second quarter of fiscal 2016 and contributed approximately $200,000 in the first quarter of fiscal 2017. As Tom noted, we realized 7% annualized internal growth in management fees on 14% annualized internal growth and managed assets in the second quarter of fiscal 2017, which represents a significant improvement over the second quarter of fiscal 2016 and we realized 1% annualized internal growth in management fees on 3% annualized internal growth in managed assets. This also compares favorably to the first quarter fiscal 2017 when we generated 7% annualized internal growth in management fees on 9% annualized internal growth in managed assets. We’re pleased to see asset growth translating into demonstrable revenue growth and are optimistic about our ability to continue to build on this momentum as we move into the second half of our fiscal year. As Tom noted, second quarter consolidated revenues were the highest in company history. Turning to expenses. Compensation expense increased by approximately 11% from the second quarter of fiscal 2016, reflecting increases in sales-based incentive accruals driven by strong product sales, higher operating income-based bonus accruals driven by increased profitability, incremental compensation expenses associated with the Calvert acquisition and higher salaries and benefits associated with other increases in headcount. Compensation expense in the second quarter of fiscal 2017 was flat versus the first quarter of fiscal 2017 as the full effect of the Calvert acquisition on compensation and increases in operating income-based bonus accruals were largely offset by a modest decrease in sales-based incentives and three fewer payroll days in the quarter. Non-compensation distribution-related costs, including distribution and service fee expenses and the amortization of deferred sales commission, increased 14% and 3% versus the second quarter of fiscal 2016 and the first quarter of fiscal 2017, respectively, reflecting increases in sales in average managed assets and fund share classes that drive these expenses as well as a full quarter impact of the Calvert acquisition. Fund-related expenses increased by 48% and 9% versus the second quarter of fiscal 2016 and the first quarter of fiscal 2017, respectively, primarily reflecting increases in fund subsidies associated with the addition of the Calvert funds acquired at the end of calendar 2016 and an increase in sub-advisory fees paid. Other operating expenses were up 8% and 9% versus the second quarter of fiscal 2016 and first quarter of fiscal 2017, respectively, primarily reflecting increases in information technology spending related to corporate initiatives and expenses associated with the Calvert acquisition. In terms of specific initiative spending, we continue to spend approximately $2 million per quarter in connection with NextShares. Net gains and other investment income on fee capital investments contributed $0.02 to earnings per diluted share in both the second quarter of fiscal 2017 and fiscal 2016 versus no impact on our earnings per diluted share in the first quarter of fiscal 2017. When quantifying the impact of our seed capital investment 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, whether accounted for as consolidated funds, separate accounts or equity method investments as well as the gains and losses recognized on derivatives used to hedge these investments. We then report the per share impacts, net of income taxes and net income attributable to non-controlling interest. We continue to hedge the market exposures of our seed capital portfolio to the extent practicable to minimize the effect on quarterly earnings. Net gains and other investment income in the second quarter of fiscal 2017 include $1.9 million recognized upon the release from escrow of payments related to the Company’s sale of its equity interest in Lloyd George Management in fiscal – excuse me, in fiscal 2011. Our effective tax rate for the second quarter of fiscal 2017 was 37.5%, excluding the effective consolidated CLO entity earnings and losses allocated to other beneficial interest holders in the quarters where applicable, our effective tax rate was 37.5% for the second quarter of fiscal 2017, 38.7% for the second quarter of fiscal 2016 and 37.3% for the first quarter of fiscal 2017. With among the highest tax rates of corporate taxpayers worldwide, Eaton Vance would be a major beneficiary its efforts in Washington to lower the U.S. corporate tax rate approved to be successful. The full quarter contribution of Calvert to our financial results was consistent with our expectations. In the second quarter, Calvert contributed $21 million to our consolidated revenue and $3.5 million to operating income versus $7.6 million of revenue and $1.5 million of operating income in the first quarter of fiscal 2017. Adjusting to remove roughly $1.2 million in non-recurring transition services costs recognized this quarter, the second quarter Calvert contribution to operating income would have been between $4.5 million and $5 million. We expect the Calvert will continue to contribute positively to our financial results both near and long-term. In April, we issued $300 million in aggregate principal amount of 3.5%, 10-year senior notes due in 2027, initiative redemption notice for our $250 million of 6.5% senior notes due this October. On May 6, we used $256.8 million of the net proceeds received from the April debt offering to retire the 6.5% senior notes and paid $6.8 million in accrued interest fees and expenses associated with the debt extinguishment. $5.3 million of which will be recognized in the third quarter as it may call expense. Going forward, we should see an annual reduction in interest expense of approximately $5.8 million associated with the issuance of 3.5% senior notes and subsequent redemption of the 6.5% senior notes despite the modest increase in long-term debt. In terms of additional liquidity, we also have a $300 million 5-year line of credit, which is currently undrawn. In other capital management activities, we repurchased 600,000 shares of nonvoting common stock for approximately $25.4 million in the second quarter of fiscal 2017. We anticipate continuing to pursue repurchases in the third quarter. We finished our second fiscal quarter holding $730 million of cash, cash equivalents and short-term debt securities and approximately $373.2 million in seed capital investments. Our cash equivalent balances at the end of April reflected debt proceeds received in April, which as I noted previously, were used in May to retire senior notes due in October. As a final note, it is worth mentioning that different from what the balance sheet may suggest, we did not significantly increase our seed capital portfolio this quarter. The increase in investment shown on our balance sheet is largely offset by a corresponding increase to redeemable non-controlling interest reflecting the impact of new consolidation guidance that necessitates the consolidation of a greater number of funds in our seed capital portfolio at lower levels of ownership. This concludes our prepared comments. And at this point, we’d like to take any questions you may have.

[Operator Instructions] Your first question comes from Dan Fannon from Jefferies. Your line I open.

Thanks. Good morning. I guess, Tom, to start, flows, as you highlighted, were solid across the board. It really looks as if redemption trends across each segment were down pretty significantly. Can you help us think about that trend? Is it seasonal? Obviously, gross sales are also doing reasonably well, but the redemption trend seems like a big delta quarter-over-quarter to drive the improvement in the net number?

Yes. Thanks, Dan. I don’t have a lot of great insight. There was – we have, as you point out, benefited from a decline of redemptions. To us, the highest quality source of net flows is solid positive and particularly solid negative, that is low redemptions. I can’t particularly attribute it to anything we did to have in the prior quarter on lumpy redemptions that didn’t occur in this quarter. We expected that – I think we may have discussed that in the last quarter’s release, but nothing particular. I would say just the nature of certain number of business, particularly exposure management, is quite lumpy. We had a pickup in outflows, which, in the first quarter, that largely reflect rebalancing activities among existing clients. So we’re going to have period to period volatility in redemptions. What is notable to us about the quarter and the first half is that, that despite that we’ve achieved solid net flow across the whole range of our business.

Okay. And I guess as a follow-up, just with Calvert and kind of the outlook for expenses, can you help us think about the synergy opportunity from here kind of what you have identified as or already the kind of taken out in terms of costs and how we can about kind of the flow-through through the back half the year with regards to potential synergies and/or margins at an aggregate level?

I guess, I would highlight that most of the synergies have already been achieved. We did have, as Laurie pointed out, I think was it $1.2 million of…

Transition services …

Transition costs that were incurred in the second quarter. We had a team of transition employees that stayed on the job at Calvert through – primarily through the end of March. And those are – those people are generally gone, maybe a couple of holdovers still in place. But I would say most of the cost savings are in place adjusting for that $1.2 million that Laurie called out in her comments. From here, really, the growth potential for Calvert as we see yet in terms of the earnings contribution is going to be led by the top line. And as I commented, we think we’re poised for growth there. If you adjust for some onetime items, we will essentially flat in terms of our second quarter flows. We’re optimistic that we can do better than that. Calvert is up – is a franchise that’s broadly known and respected across the industry as a long-term leader in responsible investing. I think as people are well aware, there is broad interest among broker-dealer firms, individual advisors and their clients and they’re increasing their exposure to different types of responsible investment and people are looking for partners, and we’re certainly working hard to position Calvert as the partner of choice for many broker-dealers across a whole range of strategies both active and passive equity and fixed income in the responsible investing space. And so we know the opportunity is there. The challenge for his is completing our integration and positioning Calvert to take advantage of the growth opportunities that we see.

Great, thank you.

Your next question comes from Bill Katz with Citigroup. Your line is open.

Okay. Thank you very much. Just a question coming back to custom beta broadly for the category, Tom. Obviously, your numbers are very impressive, both absolute and relative to what your peers are experiencing. Can you maybe break it down maybe one, two more points of why you see in such good traction? Is it price, is it the solutions orientation, is it performance? Just trying to understand what’s driving the overall appetite and then maybe relatedly open-ended question, but any capacity constraints in any of the different buckets within customized beta?

Yes, just on the capacity strengths. We served constraints. We certainly don’t see anything on the horizon. I mean, in any rapidly growing business, there’s a question of how quickly can you scale up the business. And even in that respect, we think we’ve got the resources to handle the kinds of growth we’re seeing, which is a very significant, as you mentioned. What’s driving the growth? Its several things. One is the big movement from active to passive. We’re seeing it across the industry. I don’t think I need to comment further on that. These are inherently passive investment exposures. What’s different about this and the other things we’re feeding on is the desire for financial advisors to maintain relevance and to continue to add value as they shift their clients, clients increasingly into passive. So if an adviser says I’m going to put all my clients portfolios in these 6 index ETFs, it may be difficult to justify the fees of the advisors charging. If the advisor has access to solutions like custom beta that provide value add through either customization or tax or some combination of those things, it certainly becomes much easier for the advisor to justify his ongoing role in the clients financial situation. So that’s part of what we do for advisors and advisory firms. I think that is broadly recognized by the broker-dealer firms. It’s probably recognized by many certainly, not all, individual financial advisors that these custom beta solutions can be meaningful – meaningfully important to them and positioning their business for growth in an environment increasingly focused on passive investing. Hopefully, I’d say it comes down to the investor benefits. It’s not only what you do for the firm and for the individual advisor. It’s particularly what you do for the in client. And the current tax regime we have, if you own a mutual fund or an ETF, whether active or passive, if you realize – if the manager realizes a loss in the underlying securities in those funds, those losses are effectively trapped inside the vehicle. If those same asset or same securities are held directly, the losses can be harvested on a systematic basis, can be used to offset gains in the clients – in other parts of the client portfolio. Also, if you’re moving into a passive exposure, if you’re funding that by selling securities, you likely in today’s market will realize a gain when you go from owning an active portfolio of securities to a passive portfolio. But if you’re moving from active to passive or shifting exposures within passive through separate accounts, you can do it in such a way that you can minimize the realized gains by continuing to hold the same underlying positions. And in fact, for a significant percentage, I’d say roughly half of our custom beta positions. They’re funded wholly or partly in kind, so there’s a significant tax advantage on the way in. On the fixed income side, which is important part of this, an additional contributor to growth is this broad movement from advisor overseeing municipal and corporate bond portfolios held in brokerage type arrangements to what we offer, which is low fee, relatively passive, but with ongoing credit oversight arrangements in an advisory relationship. So the advisor is no longer getting paid on sales charges in connection with selling individual bonds, but rather it’s charged like another advisory relationships, the advisors getting an advisory fee. Most of the major firms maybe even all of them are trying to move their business to advisory, certainly trends, regulatory trends, DOL fiduciary rule and other things are moving business towards advisory. There remains a large book of muni and corporate bond books that are held in the portfolios of clients of individual financial advisors at the major warehouses and independent firms and registered investment advisors. On the fixed income side of our custom beta opportunity, a big part of our push is to say, we think we can do a better job in overseeing those assets in an advisory relationship, where you hire us to manage those assets at a low fee versus you taking on that responsibility yourself. With the volatility that we’ve seen to be in the municipal market recently, the lessor role that the insurers are playing in that market. That’s been a relatively easy sell to both individual financial advisors and the firms to migrate their business from brokerage to advisory and not to hold portfolios of laddered bonds or the municipal and corporate and client portfolios, but move those into advisory. So there are a lot of favorable trends here. Eaton Vance was early in this opportunity. Eaton Vance has scale in this opportunity. Eaton Vance has invested significantly in technology, and particularly in client service. How we want to be distinguished in the marketplace and how we think we are distinguished in the marketplace today is by the depth and breadth of our capability, in particularly by the high service levels we deliver. We’re sensitive to the fact that these are – there can be competition in this market base primarily on price. We compete against other often lower cost solutions everyday. What allows us to win is offering a better solution and a better outcome for the client in an attractive price point. And we do think this is a business. As I said in my comments, where we’re still in the quite early stages of growth, even though this has been, is today, a quite significant business with roughly $60 billion of combined assets.

That’s very helpful. And just one quick follow-up for Laurie, and thanks for taking the questions, good morning. If you look at comp – certainly appreciate your prepared comments, but I’m still surprises flat sequentially just given the very good net growth of the company or maybe some gross sales dynamics sequentially. As you look ahead, I was looking at comp to revenue and also comp to investment management fees and both those ratios, I know you don’t want a company on a ratio basis, but both those ratios are a little bit low compared to both the last quarter and the year ago quarter, how you thinking about that on a go-forward basis just given some of the underlying growth trends you have?

To your point that we don’t manage the business on the ratios that were certainly cognizant of what they look like. The decrease in the ratio in terms of our comp to revenue this quarter versus last quarter is due a couple of things. One is that we had a blowout sales quarter last quarter, and there was a significant increase in our sales-based incentives. This quarter, we did ramp up a little bit on our Calvert hiring to support some of the functions that are now up in Boston, but we saw a decrease in the sales-based incentives. So that offset a little bit. So right now, we were – for this quarter, we were about 36% of revenue in terms of our comp ratio. I would think that, that would be our comp ratios through the third and fourth quarter would look something like that or in that sort of 36% to 36.5% range. Now having said that, there obviously variable costs, but if they do come through in terms of having a really strong sales quarter that is above and beyond expectations, that will put pressure on that number. But I would think that we would anticipate being in that range. We don’t see anything significant that should flow it out, and as Tom mentioned at this point, we think that we’ve largely got our Calvert fixed cost base established in terms of the employees. We don’t anticipate we’ll be taking any costs out, but we also don’t anticipate that any significant hiring. So again, I think that 36% to 36.5% will be a good one to think about.

And keep in mind, Bill, the fewer number of payroll days in this quarter did help us as well.

Right, okay. Thanks for taking the question today.

Your next question comes from Patrick Davitt with Autonomous. Your line is open.

Hey, good morning, thanks for taking my questions. My question is on the bank loan front. When you last peak back in 2014, I think you said you were comfortable with 8% market share. I’m calculating you now at only about 4.5%. Is that in line with what you guys think you’re at? And is 8% still a good bogey to assume what you’re comfortable with in terms of market share?

By market share, you just mean how much of the bank-owned asset class that we own?

Right. Yes, exactly.

I don’t think that, that’s changed. I guess, I think the questions getting at what’s our capacity of our strategies. Those are, I guess, I’m pleased to say not conversations that we’ve been having actively, so I think we say like we’ve got quite a bit of run way from where we are currently. I would – I have no reason why the investment teams would take a different view on capacity today versus – capacity in terms of market share relative to where we were at the prior peak. So I would think that’s probably still pretty good number.

Great. And then just a quick follow up, I’m really surprised to see you calling out a pickup in sales of AMC shares given the broader trends you’ve seen and now a little bit of a surprise that you all go into effect on June 9. So could you maybe speak to the trend do you think drove that when there’s a broader view that there share classes are in secular decline?

Patrick, I don’t think we meant to imply pick up in the low share classes. I think what you may be referring to is Laurie’s reference to the increase in distribution and service costs in the expense section, is that – could that be…

Right, okay.

So this distribution encompasses a number of things, including marketing assistance, payments made to the intermediary. So there’s been constant pressure on that line item. That will – that’s something that contributes at a higher cost this quarter. And then also, service fees are paid on load weight A shares. In this quarter, we did pull in a full quarter’s worth of Calvert fund service fee. So I think those are going to be the major dynamics driving the increase there. We do have privately offered equity funds that we pay commission out on, and that shows up in the amortization expense, and those have been – the sales of that product have been strong as well. So I think it’s combination of those things that we’re behind the increases in those line items.

We’re not seeing an increase in AMC share business.

Great. Thanks for the clarification.

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

Hi, this is actually Andrew Nicholas filling in for Chris. Thanks for taking my questions. First question, I was hoping you could provide a bit of extra color on the equity flows during the quarter, obviously, a pretty good quarter given the current landscape for active equity. I think mostly, I’m interested in the split between institutional and retail. And if it is mostly retail, excuse me, mostly institutional as I suspect, how much is that is maybe more onetime and lumpy in nature, any extra color there would be helpful.

Yes, we have three equity businesses as leading the growth in the quarter. One of them Parametric’s defensive equity business, which is about, I think, about $6 billion in AUM and today essentially 100% institutional and the growth there is basically all institutional. We did – we have introduced a retail fund in the U.S. or a mutual fund in the U.S. that primarily we expect to be sold institutional share classes, but there is a new Parametric volatility risk [indiscernible] defensive fund. I think it’s called. So we have a new fund there. But it’s – it is a large and growing business that is not benefiting from onetime lumpy flows, but rather a broadly based institutional sales base. And we have a good pipeline and expect the sales success with defensive equity to continue. We are, in addition to bringing out a mutual fund version, we’re also – we’ve expanded from the initial version of the product was a U.S. version. We’re now doing a global version that we’re offering both in the U.S. and internationally. And so we expect that to continue to grow based on visible pipeline. The second business that we highlighted that’s contributing to the growth is the Atlanta Capital core. The biggest piece of that business is their SMID-Cap fund, which is a retail product, so you can track the flows of that through industry sources, but that’s the Eaton Vance Atlanta Capital SMID-Cap Fund, which is a five-star rated fund, that’s a category leader based on long-term performance. We also, in the quarter, had recently significant flows into the Atlanta Capital select equity strategy, and that’s both funds and increasingly retail managed account flows. We’ve gotten that strategy accepted into some model portfolios of the major broker-dealers. And so we’re seeing model assets into select equities. And then the third area we highlighted was Eaton Vance large-cap growth. That’s primarily in the private funds, so that would not show up in the form of industry mutual fund flows. So I would say your supposition that the flows are primarily institutional rather than retail is probably right. But I can confirm that there are – they’re not major lumpy factors that hit in the quarter that drove the positive result, rather broad-based success across a range of client types.

Great. That’s very helpful. And then separately, I think maybe for Laurie, repurchases flow to decent bid in the quarter, particularly relative to the pace of the past couple of years. I just wanted to understand the primary reasons for the slowdown and then how we should think about repurchases through the back half of the year. Thank you.

Yes, we don’t set targets in terms of our repurchases each quarter. I think that we’re very sort of practical as we get through the quarter in terms of when we’re going to lean and when we’re going to pull back in terms of our purchases. We were comfortable at the rate that we did our purchases this quarter. We anticipate being in a market in the third and fourth quarter. But again, we’re not setting targets at this point. So I can’t really provide any distinct direction in terms of how big those purchases might be.

I’ll just add to that. I would say the amount of repurchase activity is a function of two things. One is the availability of capital. We did, just as a reminder, complete the acquisition of Calvert at the end of December, so we spent a fair talk of change that may have otherwise been available for repurchases on what we think is a highly accretive acquisition and strategic acquisition. And then the second is, as Laurie suggests, tactically does it look like and particularly attractive price. We lean in and buy more when we think the stock is experiencing short-term weakness and looks particularly attractive as that happens in the future, which no doubt it will at some point. So you can expect us likely to step up our repurchases.

Thank you.

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

Great, thanks. Good morning and thanks for taking my questions. I guess my first one is just thinking about kind of the margin, overall margin, and where we can go from here. I mean, I guess you’ve come back off the bottom, I’ll call it, last several quarters. What are you – what do you think it would take to kind of start to approach maybe some of your prior peak margins? And as part of that, I would assume that to some degree, some of your faster-growing parts of your business thinking portfolio implementation, custom beta, may just be inherently somewhat less scalable compared to the fund business given that their separate accounts and that probably has maybe just inherently a little bit less scalable than the mutual fund would be?

Yes. Hi, Bob, I think that is definitely the case. I think that we see some of the more service-intensive franchises are going to have fixed costs associated with them in order to actually and partially variable costs in order to support those businesses. So I think that there’s going to – not necessarily be the same level of leverage that you can achieve with open-end funds. I would also say that obviously, there are a lot of different pressures on the business right now. There’s obviously revenue pressure in terms of fee rate, and then to the extent that we’ve got great sales, there’s going to be pressure on our variable cost base, because we’re going to have to actually pay our salespeople. So I would like to tell you that we’ve got a magic formula for actually pushing up the margin, but I think there’s so many different pieces that are going to impact it. It’s very difficult to say that I anticipate seeing the margin go from X to Y over the course of the next year or so. I think we’re comfortable with the margin in terms of guidance that we’ve given in the past in terms of be in this range. We clearly believe we’ve got leverage opportunities in our business, but we also recognize the pressures that are coming both from above and below in terms of being able to do that.

Great. And then maybe just a follow-up, just kind of to setback a second, Tom, you’ve seen some of your peers try to fight some of the indexing trend through different fee structures, you made an alliance clearly filing, getting approval for more focused fee, performance fee-oriented funds. I’m just kind of curious, your take, I mean, is that a direction you think Eaton Vance and the industry broadly needs go in or how do you – I mean, how do you kind of think about the pricing dynamics at least than the traditional fund business?

I think the challenge for active managers is the same as it’s always been which is to deliver performance and the expectation of performance above benchmark that exceeds the cost of providing that. I don’t see performance-based fees as particularly a magic bullet that’s going to change that dynamic. If you put a good performance and you can demonstrate the ability to provide alpha that exceeds what you charge, people today and in the future will continue to find that attractive. As I see it, the biggest challenge that the industry has faced, the source of all this movement from active to passive and the pressure on fee and the consideration of new fund structures like NextShares and the fee structure like what you’re talking about is that we’ve gone through a pretty long period where, particularly in the U.S. equities, the average active fund has really struggled relative in performance net of fees relative to passive alternatives. There are various solutions to that. Some of them relate to fees and structure. NextShares is our answer to that and inherently lower cost better performing structure. I also think that there are market dynamics in terms of the way stocks have performed, the U.S. versus international, stocks versus bonds in cash that have exerted a drag on active manager performance. But I guess I don’t – you should not expect Eaton Vance to be a particularly early advocate of converting our business to a nominal-based fee and a high-performance-based fee. There may be clients that want that. If the structure is attractive, we’ll certainly compete for that business. But I think by enlarge, the way active managers compete more successfully is by delivering better performance net of fees. And our approach for doing that is in part driven by inherently lower cost structures, like NextShares, where it’s not just lower management fees, but potentially other – lower other costs that included the benefit of the long-term investors in those strategies.

Thanks, and maybe if I could just one more follow-up. Tom, I think on the last call after you – had Calvert, I guess, a month or so under your belt, at least my takeaway seem to be that while you guys have always done – for many years have done bolt-on strategic transactions, you seem to be talking a little bit more of that maybe there’s going to be either more of those opportunities going forward or you’d be – or Eaton Vance would look to be a more active participant maybe than it had been in the past. So, and I don’t want to read too much into it, so is that really just more that you’ll think there will be more strategic bolt-ons available in the marketplace, or is that kind of [indiscernible] there maybe things that in the past, you wouldn’t have considered because they don’t add as much incremental capability, but they could be more attractive financially to this even if the strategic contribution is going to be less than what the Calvert maybe or Parametric was years ago?

I would say my comments are, at the time, were and continue to be that the Calvert transaction really gave us a chance to look under the covers, and to some degree, experience life in the world of – in a $10 billion to $20 billion asset manager that’s really struggling to achieve scale economies in their business, is struggling to maintain distribution access and is struggling to in a cost-effective way achieve compliance with a growing burden of regulatory expenses. It clearly makes sense for Calvert, we believe, to merge with a company like Eaton Vance to help them address all of those things to shore up distribution, to give them the financial resources to invest in their investment teams, to piggyback on our efforts, our technologies, our legal and compliance staff, to comply with the new and growing regulatory burden. But Calvert is not alone. There are dozens of fund companies at or above that same business size that I think many of them will probably disappear into what I view as stronger hand as happened in the case of Calvert. That’s not going to be a linear process. Those companies are controlled, in many cases, by individuals whose a degree of optimism or pessimism about the future, those companies will be a critical factor in determining whether they look to partner with someone else or not. But I think that looking from the outside, there’s a compliant logic for those transactions to take place. From the point of view of the seller – rather of the buyer, so Eaton Vance, in the case of Calvert, this was an opportunity to do two things. One which is I think maybe a common opportunity, which is to achieve positive earnings contribution through taking out a redundant expenses, we did that quickly, and we think reasonably aggressively in the case of Calvert, other buyers of other properties would have we think similar ability to do the same thing. What’s different about Calvert and what made it particularly compelling to us is what we see as the ability to grow that business based on their 25-year record as a responsible investment manager, 35-year record as a responsible investment manager, their reputation as a leader in that and there’s much rooming interest in this whole concept of responsible investing. Not every potential acquisition is going to bring that to an acquire. Whether Eaton Vance is active in this or not from this point or the degree of activity we have is, I think it’s largely a function of what opportunity presents itself. The way these things work is that typically is the highest bidder that gets the opportunity to do a transaction. We are a company that values our financial resources very highly, we’ll certainly bid on things that other people will end up buying because it’s more valuable to them, then we’re willing to pay for it. But we expect to be active in looking at things. Whether that translates into a lot of activity for Eaton Vance, I think it’s a bit hard to say. If there are – but if there are circumstances where we can find the right property and become the high bidder or become the best bid, and we think we know we have the resources to close transactions and to execute on integration implementation plan. We’ve done it in Calvert, we’ve done it successfully in a number of times before in connection with other acquisition. So we think – we believe we’re an attractive bidder and buyer. Unfortunately, we may not always be the highest price, and these things as I said, tend to go to the highest price even where that may not be the best strategic fit. So we definitely are kicking the tires. Laurie and I talk regularly with investment bankers. We’ve got ideas of things that we should be looking at. And I want to say not just on the scale of Calvert, but potentially larger transactions. I think our industry is going through consolidation, we’ll go through consolidation. There will be fewer asset managers five and 10 years from now I believe than there are today. And I believe in that process of consolidation, there will likely be opportunities for buyers to benefit financially from that consolidation. And we want to be a part of that and expect to be a part of that, but we’re going to be approaching that on a very discipline financial basis.

Great. I appreciate your insight and color. Thank you.

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

Thanks. Just a couple of quick follow-ups. In the conversation earlier on fixed income moving from brokers to advisory and that opportunity is transferring bonds into a managed account totally get the opportunity. Curious if, A, do you have an active selling effort to help FA’s transition in that book? Or are really talking about the opportunity as you wait for actual bonds own to mature off?

No, no, no. That’s – we have an active – for sure, we have an active selling effort. We have a wholesaling force calling on broker-dealers, warehouse, independent banks and registered investment advisors. And this is a key part of their ongoing conversation is to make the case that advisors should transition their book of bond business from brokerage advisory. And that Eaton Vance is the best partner for them to work with as they do that. So that is an ongoing daily conversation that takes place across many, many different financial advisory offices across the country.

And that’s happening at the same time that they’re considering transferring their entire client relationship into a fee-based account, it won’t necessarily be both, is that correct? Meaning some advisers with transition their whole book into a managed platform on their end, and then you guys represent an alternative on the fixed income side?

That’s right. We’re not in – generally, we’re not out evangelizing for why advisory versus brokerage makes sense generally. That’s – those conversations, in many firms, most firms have already taken place. We’re talking very specifically about converting muni ladders and corporate bond ladders, which I would say almost every financial advisors been doing this for a while has some clients for whom they hold fixed income securities on some sort of laddered basis. They know the concept of the ladder. They understand that, the clients know and understand it. What we’re proposing to them is something relatively discrete, which is move it for some block of your clients, not necessarily all of them, but for some block of your clients. Move those from brokerage to advisory, and we will work with you to manage that transition as seamlessly as possible to manage that transition with the lowest possible cost to the clients, transacting as necessary at institutional level pricing with full transparency of what we charge and with a level of ongoing credit research backing those portfolios that few, if any, advisors on their own can match in their separately managed muni laddered portfolios, that they do for their clients today. We think it’s a compelling proposition and it’s not surprising to us that this has become a big business for us.

Yes. Look, I think it’s compiling too. They also have underwriting businesses that they own. So I’m sure it will be one-step forward, one-step back for a little while. One other follow-up. You had mentioned earlier the Atlanta SMID-Cap Fund, which is doing great, great performance and great flows. It’s getting close to $10 billion, is there a thought on capacity constraint there? I mean, traditional small-cap fund would be already past, but SMID-Cap Fund, I’m sure, has more, but just curious on that front specifically?

Yes. So just a little history there. The team that manages that started in small-cap and – but that’s – it’s close, hard closed and has been for a while. This SMID-Cap strategy has been closed to almost all categories of new investors for, I want to say, three years, four years, something in that range. The only place that you can buy this where we’re taking – where it affect new clients’ in retirement relationship. So it’s an existing retirement relationship, they can add new clients to that. But it’s – we’re already closed in most classes of new investors today. But despite that, we continue to see net inflows.

Well. That took over $200 million in the quarter and that’s all existing retirement relationships?

Existing customers and – so existing clients and existing retirement platforms. It may be new individuals on existing retirement platforms.

Understood. Okay, got it. Okay, thank you very much.

There are no further questions at this time. I will now turn the call back over to Dan Cataldo.

Great. Thank you for joining us this morning. We hope you all enjoyed the upcoming Memorial Day weekend, and we look forward to reporting back to you at the close of our third fiscal quarter. Thank you.

This concludes this afternoon’s conference call. You may now disconnect.