EV (EV) 2016-05-25 Earnings Call Transcript

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Eaton Vance Corp.’s Second Fiscal Quarter Earnings Conference Call and Webcast. [Operator Instructions] Thank you. Mr. Dan Cataldo, Treasurer, you may begin your conference.

Thank you, and welcome to our fiscal second quarter 2016 earnings call and webcast. Here with me this morning are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, our CFO. We will first comment on the quarter, and then we will take your questions. The full earnings release and charts we'll refer to during the call are available on our website, eatonvance.com, under the heading Press Releases. We need to start this morning with a reminder that 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 on request at no charge. I'll now turn the call over to Tom.

Good morning and thank you for joining us. For the second quarter of fiscal 2016, Eaton Vance reported adjusted earnings per diluted share of $0.48, a decline of 17% from the second quarter of fiscal 2015 and a decrease of 6% from the first quarter of the current fiscal year. With operating expenses down about 1% in both comparisons, the earnings decline is attributable to lower revenues, which were down 8% year over year and 2% sequentially. Although the company continues to maintain positive organic growth, market movements, seasonal effects, and lower average fee rates driven primarily by changes in product mix pushed revenues lower in the quarter driving the earnings decline. While we are never happy to report lower earnings, in other respects this was a strong quarter for Eaton Vance. The performance of our managed funds and accounts continues to compare favorably to peer managers over multiple comparison periods. At the end of April, 83% of our managed mutual fund assets ranked in the top half of the Morningstar peer groups on a one-year basis and 82%, 79%, and 74% in the top half over three, five, and 10 years, respectively. Top quartile performance results were achieved by 49%, 44%, 47%, and 55% of managed fund assets over one, three, five, and 10 year periods. At the end of April, we offered 53 mutual funds rated four or five stars by Morningstar for at least one class of shares, including 21 five star rated funds. Our flow results for the second quarter were also comparatively strong. On an overall basis, we had consolidated net inflows of $2.1 billion, which equates to a 3% annualized internal growth rate. Excluding Parametric’s lower fee and more variable exposure management business, we had $3.8 billion of consolidated net inflows and 6% annualized internal growth in the quarter. Taking into account the different fee rates of mandates experiencing inflows and outflows, we realized annualized internal growth in advisory and administrative fee revenue of about 1% in the second quarter. While 1% organic revenue growth is nothing to brag about, we understand that it compares favorably to what a number of other public asset managers are now reporting. During the quarter, our consolidated assets under management grew to an all-time high of $318.7 billion, benefiting from the $2.1 billion of second quarter net inflows and $14 billion of market price appreciation during the quarter. The market rally over the course of our second quarter enabled us essentially to recoup the $14.1 billion of managed assets that we lost in the first three months of our fiscal year due to unfavorable market action. Second quarter average managed assets were roughly flat versus the first quarter. Digging into the net flow detail, the biggest contributors to our positive net inflows this quarter were Parametric's portfolio implementation mandates at $2.8 billion and engineered alpha strategies at $600 million, and Eaton Vance management's municipal bond funds at $1.6 billion, and high yield bonds at $1.3 billion. Second quarter net outflows were concentrated in three areas: Parametric exposure management with net outflows of $1.7 billion; floating-rate bank loans with net outflows of $1.2 billion; and Eaton Vance investment council with net outflows of $800 million. The outflows from Parametric exposure management reflect reductions in overlay positions by existing clients rather than losses of client relationships. The ease and low cost with which market exposures can be adjusted up or down is one of the attractive features of Parametric’s exposure management offerings for the large institutions that utilize this service, but it's also a source of variability in our consolidated asset flows. In some quarter, this variability works to the advantage of our reported flows. In the second quarter of fiscal 2016, it went the other way. As mentioned, we saw net outflows of $1.2 billion in floating-rate bank loan mandates in the second quarter. Although improved from $1.5 billion of net outflows in the first quarter, we continue to be disappointed by the persistent outflows and AUM declines we've experienced in bank loans over the past two years. Our performance record and reputation as a leading bank loan manager remains intact, so that's not the issue. The problem is that the bank loan asset class has been out of favor, especially with retail investors. Over the past eight quarters, we've seen over $11 billion in net outflows from our US retail bank loan funds, including $700 million in the recently concluded second quarter, but we believe our bank loan business is in the process of turning around. As we see it, loan investments are an attractive source of high floating rate income and portfolio diversification. Unlike fixed income investments, floating rate bank loans are positioned to increase their pay outs as short term rates increase and are not subject to rate driven price declines as interest rates move up. Because most bank loans are senior and secured, they're less exposed to credit risk than other debt obligations of the same issuer. With market attention now again focused on the prospect of Fed action to raise short-term rates, we believe that bank loan category and our bank loan business could be poised for renewed growth. This past week, I served as Chairman of the General Membership Meeting of the Investment Company Institute, which is the largest annual gathering of investment industry executives. In my remarks to open the meeting, I discussed the challenges now facing the asset management industry, including the shift in investor demand from active to passive strategies, the pressures on investment management fees, growing regulatory uncertainties and compliance burdens, and rising costs. The broker dealers that are major distribution partners face their own regulatory issues following enactment of the new Department of Labor rule establishing a fiduciary standard for investment advice to covered retirement accounts. While aimed at financial advisers, not investment managers, the DoL fiduciary rule is widely expected to lead the significant changes in how funds and other investment products are used in the future. In this period of disruptive change in our industry, every investment manager is being forced to consider how to respond. Our strategy has four primary elements. First, we are not willing to concede that we can't grow our traditional active business. At the end of April, we managed $70 billion in actively managed US mutual funds giving us about a 70 basis point market share in a $10.7 trillion market. Industry-wide, new sales of active mutual funds currently run about $2.6 trillion annually, at which our sales represent just less than 1%. Given the favorable performance [ph] of many of our leading strategists, the strength of our distribution, and our tiny market share, I see no reason why our active fund sales cannot increase substantially from current levels even in the face of a weak overall market. As we have said before, we view traditional active management is now a game of winners and losers with Eaton Vance’s performance and distribution strengths positioning us to be a winner. We continue to devote significant sales and marketing resources to growing our high performing active strategies. Our second strategic initiative in the active management space is our sponsorship of NextShares’ exchange traded managed funds. As a reminder, NextShares are a new type of fund that for the first time combine proprietary active management with the convenience and potential performance advantages of exchange trading. Our NextShares solutions affiliate hold patents and other intellectual property rights related to NextShares and is seeking to commercialize NextShares by entering into licensing and service arrangements with fund sponsors. In late February, we launched the first ever NextShares Fund, Eaton Vance Stock NextShares which was listed and began trading on NASDAQ on February 26. That was followed by the launch at the end of March of two more NextShares funds, Eaton Vance Global Income Builder and Eaton Vance TABS 5-to-15 Year Laddered Municipal Bond NextShares. Our goal in launching the funds is to gain live experience and to demonstrate the investment and trading performance of NextShares funds of different types. Results so far are consistent with expectations. Although the funds are available on a limited commercial basis, primarily through online broker dealers Folio Investing and Folio Institutional, we do not expect significant flows into NextShares until we gain broader distribution. A first step in that direction was the announcement earlier this month that Interactive Brokers Group intends to offer NextShares through its investing and trading platforms. Interactive Brokers is a global electronic broker that provides financial professionals and investors with state-of-the-art trading technology, superior execution capabilities and sophisticated risk management tools. Interactive Brokers views NextShares as a gateway product to boost their position as an [RA] platform provider. As a relatively new entrant to that market, IB is not encumbered by concerns about cannibalizing legacy offerings. As I have discussed in past calls, broadening access to NextShares to include major fund distributors is critical to near term commercial success. Significant progress continues toward that goal. Since the publication in March of the final Department of Labor rule adopting a fiduciary standard for advice to covered retirement accounts, our conversations with broker dealers are increasingly highlighting the potential role of NextShares in helping advisors address their heightened responsibilities as fiduciaries under the DoL rule. In a couple of respects, NextShares may be ideal vehicles for delivering proprietary active management in a fiduciary environment. First, we expect NextShares to be the lowest cost and highest performing format for proprietary active fund strategies. As exchange traded products operating much like traditional ETS, NextShares can substantially avoid the transfer agent fees for related trading costs and cash drag effects that can meaningfully reduce active mutual fund returns. Second, unlike mutual funds, NextShares are exempt from the security law restrictions that now inhibit broker dealers’ ability to level set commissions and other payments it receives on funds of different sponsors. By minimizing the conflicts of interest and perceived conflicts that may arise from offering similar funds at different compensation levels, broker dealers may reduce the potential litigation risk they face in connection with the new fiduciary standard. As financial intermediaries come to better understand the implications of the DoL fiduciary rule for their business, we expect interest in NextShares to continue to rise. On an overall basis, we’re pleased with our progress on NextShares. We now have funds in the market demonstrating that the structure works. We have a broad consortium of fund sponsors preparing to offer their own NextShares and we continue to move forward on the distribution front. It remains our belief that if we succeed in achieving broad distribution, NextShares can transform how actively managed funds are delivered. Our third major strategic initiative is what we call Custom Beta, which are rules based separately managed accounts offered to retail and high net worth investors. Our Custom Beta lineup encompasses Parametric tax managed and non-tax managed custom core equities and EVM municipal bond and corporate bond ladders. Our Custom Beta retail and high net worth separate account assets under management now exceed $38 billion and have grown more than 50% over the past 18 months. Value added elements of our Custom Beta offerings include direct holdings of securities which permits portfolios to be customized to fit client needs and preferences, a lot level tax management and the pass through of realized losses and for bond strategies, the ladder portfolio construction and ongoing credit oversight and additional selling point is that positions can be funded in time which can meaningfully reduce transition costs and taxes for clients. From an Eaton Vance perspective, there are two attractive elements of our Custom Beta business. First, Custom Beta products are well positioned for an environment in which a growing percentage of investors and advisors prefer passive and rules based strategies. That's exactly what our Custom Beta strategies deliver with distinctive value added elements that distinguish them from index funds and ETS. Another attractive aspect of Custom Beta for us as investment advisor is stickier assets and lower client turnover. Investors and advisors interested in performance chasing aren't Custom Beta customers. Although our Custom Beta business is now sizable, we believe it remains at an early stage of development and we see accelerated growth opportunities continuing for a long time to come. Our fourth area of strategic focus is becoming more global. I don't know exactly what the right mix of US versus non-US business is for us, but I doubt that it's sourcing roughly 95% of our managed assets from the 5% of the world's population that lives in this country which is where we are today. In addition to owning 49% of Montreal based global equity manager Hexavest, Eaton Vance operates internationally from offices in London, Sydney and Singapore. This month, we moved to new space in London that increases our footprint there by about two thirds to accommodate a growing staff that now includes both global equity and global income teams. We are now investigating how best to service our growing Japanese business and may add additional resources to support that effort. And we have a search underway for a new head of non-US distribution. As our investment capabilities grow more global, it seems natural to focus more attention on serving clients in international markets. While it is unlikely that we’ll do something dramatic, the changes afoot in the US market lend greater urgency to our desire to make Eaton Vance a more global company. As a final topic before turning the call over to Laurie, I want to spend a minute on yesterday's announcement that Eaton Vance has acquired a minority equity interest in SigFig, a leading independent business to business focused wealth management technology and advising firm based in San Francisco. SigFig is an emerging leader in the rapidly developing enterprise wealth management technology market and has recently announced a series of partnerships with banks and wealth management platforms including UBS and Pershing. These companies are partnering with SigFig to apply state-of-the-art digital technology to enhance investment experience they provide their advisors and clients. We expect SigFig technology to soon be supporting many of the same financial institutions that are Eaton Vance’s most important distribution partners. SigFig’s focus on cost and tax efficient investing is also well aligned with our NextShares and Custom Beta initiatives. By investing in SigFig and me joining their board, Eaton Vance gains a seat at the table in the development of the tools that will guide the future of investment advice. If SigFig can achieve success and realize its commercial potential, we see both significant direct financial rewards and indirect rewards for Eaton Vance. While we have no plans to make minority investments in development stage companies a regular part of our strategy, we felt this opportunity was too important and too attractive for us to pass up. That concludes my prepared comments and I'll now turn the call over to Laurie.

Thank you and good morning. We're reporting earnings per diluted share of $0.48 for the second quarter of fiscal 2016 compared to $0.58 for the second quarter of fiscal 2015 and $0.50 for the first quarter of fiscal 2016. Adjusted earnings per diluted share equaled GAAP earnings per diluted share in the second quarters of 2016 and 2015 and exceeded GAAP earnings by $0.01 per diluted share in the first quarter of fiscal 2016 to reflect an adjustment in the value of non-controlling interest in our affiliate Atlanta Capital Management. Although average managed assets of $309.5 billion for the second quarter were up fractionally from the prior quarter and up 2% over the year ago quarter, second quarter revenue decreased 2% sequentially and 8% year over year. The 2% sequential decline in revenue is primarily attributable to two fewer days in the second quarter. The 8% decline in revenue year over year reflects lower average managed assets in certain high fee franchises, most notably floating rate bank loans and emerging market equities, offset in part by growth and lower fee franchises, including exposure management, portfolio implementation and bond ladders. In the second quarter, aggregate net outflows from our higher fee strategies abated with emerging market equity flows turning positive. Ending assets under management were $9.2 billion higher than average assets under management for the second quarter, which together with two more fee days in the third quarter should provide a nice tailwind to next quarter’s sequential revenue comparison. Product mix continues to be the most significant determinant of our overall effective investment advisory and administrative fee rate. Although swings in performance fees in the number of fee days in a quarter can also contribute to short term variability. As you can see in attachment 10 to our press release, our average annualized effective investment advisory administrative fee rate excluding performance fees declined to 36 basis points in the second quarter of fiscal 2016 from 37 basis points in the first quarter of fiscal 2016 and 40 basis points in the second quarter fiscal 2015. Within investment mandate categories, average effective fee rates for fixed income declined both sequentially and year over year, primarily reflecting strong growth of lower fee municipal and corporate bond ladder assets. Effective fee rates in the portfolio implementation category were similarly affected by strong growth and lower fee centralized portfolio management mandates. Performance fees had little impact on quarterly comparisons as they were negligible in all three quarters presented. In the quarter, we realized 1% annualized internal revenue growth despite continuing net outflows from bank loans and certain other higher fee strategies. Although strong growth and lower fee franchises will likely continue to exert downward pressure on our overall average fee rates going forward, we believe we can sustain positive organic revenue growth if outflows from higher fee strategies continue to abate as we expect. Our operating margin was 30% this quarter, substantially unchanged versus the first quarter, but down from 35% in the second quarter of fiscal 2015. The year over year decline in second quarter operating margin reflects a math of an 8% decrease in revenue and 1% lower expenses. I'll forestall some of the questions regarding margin guidance for the remainder of the fiscal year by saying that we do see opportunities for modest margin expansion, given higher managed assets today than what we averaged in the first and second quarters and continuing tight control over discretionary spending. By modest I mean 1% to 2%, but that guidance is made in the context of flat markets for the remainder of the fiscal year. Approximately 45% to 50% of our total expenses are variable, driven by managed asset levels, gross sales or operating income. So there are a number of factors that can dampen margins no matter how disciplined we remain in terms of our discretionary spending. Shifting from revenue to expense, compensation expense declined 1% sequentially, primarily reflecting modestly lower incentive compensation accruals and a decrease in other compensation expenses, including severance and signing bonuses. Compensation expense ticked up 1% from the second quarter of fiscal 2015, driven in part by hiring to support strategic initiatives. Year over year increases in compensation expense to support these initiatives were partially offset by lower incentive compensation accruals. Compensation expense increased to 38% of revenue this quarter from 37% last quarter and 34% in the second quarter of fiscal 2015, mostly as a function of the decline in revenue. Controlling our compensation costs and other discretionary spending remains top of mind given the revenue headwinds we're facing. We remain committed to investing for growth despite these headwinds, but are aware of the cost levers that we can pull if necessary. Variable distribution related costs including distribution and service fee expense and the amortization of deferred sales commissions declined with a decrease in related distribution service revenue. Other operating expenses were unchanged from the first quarter, but up 5% from the same period a year ago, primarily reflecting increases in information technology and professional services. Expenses related to our NextShares initiative totaled approximately $1.9 million for the second quarter of fiscal 2016 compared to $1.8 million in the first quarter of fiscal 2016 and $1.8 million in the second quarter of fiscal 2015. Net income and gains on seed capital investments contributed just under $0.02 to earnings per diluted share in the second quarter of fiscal 2016, a $0.01 in the first quarter of fiscal 2016 and were negligible in the second quarter of fiscal 2015. In quantifying the impact of our seed capital investments on our earnings each quarter, we take into consideration pro rata share of the gains, losses and other investment income earned on investments and sponsored products that are 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 impact net of non-controlling 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. Equity and net income of affiliates contributed $2.4 million in the second quarter versus $2.5 million in the prior quarter and $3 million in the second quarter of 2015. This primarily reflects the company's 49% position in Hexavest. Excluding the effect of CLO entity earnings and losses, our effective tax rate for the second quarter of fiscal 2016 was 38.7% as compared to 38.4% in the first quarter of fiscal 2016 and 37.6% in the second 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 2.1 million shares of non-voting common stock for approximately $70.7 million in the second quarter of fiscal 2016. Over the past four quarters, we've repurchased 8.8 million shares for $303 million, driving our average diluted shares outstanding for the quarter down by 5% compared to the second quarter of fiscal 2015. Shares outstanding of 113.9 million at the end of this quarter are down 4% from the 117.9 million reported a year ago and down 1% from the 115.2 million reported on January 31, 2016. We finished the second fiscal quarter holding $432.8 million of cash in short term debt securities and approximately $280 million in seed capital investment. 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 five-year line of credit which is currently undrawn. Given our strong cash flow, liquidity and overall financial condition, we believe we 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.

Sure. I guess I would say two things. One is we've had pretty good performance, both on an absolute basis and relative through the end of April. I think there's something like 4% returns in our bank loan funds, which are pretty good. Although these are not cash investments, sometimes they're compared to cash returns and certainly that's a much more attractive return than people are earning today on cash investments. That's number one. The other factor, which I think maybe gets too much emphasis, but it's certainly been important overtime is the rising expectation for short-term interest rates. So you own a fixed income fund when interest rates move up, your income is unchanged generally, and you're subject to loss of principal value due to duration effects on the value of the bond. With a floating rate investment like a bank loan, it works the opposite way, which is because there's essentially no duration here in floating rate assets. You don't get the negative effect on valuation, but you get the positive impact on distribution rates on income rates. So two things, strong performance of late, I would say, and the rising expectation for another round of interest rate increases sometime between now and the end of the year.

Sure. The two areas that have really hurt us over the last, I'll say maybe six to eight quarters, have been emerging market equities and bank loans. And as I talked about in my remarks, those have primarily been asset class effects, not issues related to Eaton Vance performance or other issues related to changes in our team or changes in our strategy. In both cases, things are looking much better. We actually had modestly positive, just barely positive net flows in emerging market equities for the quarter, but that's a significant improvement from where we were just a couple of quarters ago, and that’s a nice fee rate asset class. The second one which we just talked about is bank loans, which I said in my prepared remarks about $11 billion of net outflows over the last eight quarters. We'd like to think that's coming to an end. You see it in better flows, retail in the US and I think if you just look at the industry data that comes out, I don't know what you look at weekly or monthly, you'll see a much improved tone to bank loan fund flows. So those would be the two primary things. The other thing is we did have as I mentioned about $800 million in outflows from our investment counsel business, which is our in-house investment advisory business. We view that as a one-time nature, one time in nature and was related to the departure of two people from that organization. So our optimism for flows is really primarily focused on emerging markets, bank loans, and this one-time event in counsel. Talking more generally about pipeline, an area of strength for us, just a few to tick off, one has been Eaton Vance high yield which has been really a product in the sweet spot with a team that's been in place for over 20 years, very strong performance, good risk characteristics where we're starting to see some fairly meaningful success there and a good building pipeline. If you talk to our institutional sales team here in Boston, that's an area that's one that they're focusing on. Parametric, across a wide range of strategies is doing well. It's seeing lots of interest in their - in what we call engineered Alpha strategies. The growth product continues to be what they call defensive equity which is essentially an options-driven hedged product that they offer to institutions. They also have a growing business in Australia where we've got some pending flows in what they call centralized portfolio management, which is essentially where institutional investors turn over the implementation of their portfolio trading from a disparate group of individual managers to having those managers submit models to Parametric and have them implement the trades and there's a building pipeline there as well with a notable win that we expect to fund in the third quarter. But generally, business is pretty good. We have positive flows, positive pending flows, really across most of our - most if not all of our subsidiaries. I should add, Atlanta Capital Management is an area where we saw some outflows last year, some performance driven effects in their growth team. That's largely been addressed and flows there have moderated. But the other thing that's happening there is that we're starting to see stronger institutional interest in what they call select equity strategy which has about an eight-year track record. But really outstanding results and is a focused type large and mid-cap equity strategy with strong performance that’s up to now about $600 million in assets and potentially in a position to see accelerated demand.

Sorry, the pauses in adoption of the Department of Labor initiative, you mean?

No, with NextShares, like the broker dealers and some of your distribution efforts that you're trying to get launched, I would assume the DoL and [the dynamics] that those broker dealers are dealing with that might delay what would otherwise be an adoption of the NextShares product or using that from a distribution perspective?

We don't think so. We view that the Department of Labor initiative and the fact that they've got these pending deadlines of whatever it is, March or April of next year and then the end of 2017, to really convert their business over to at least some parts of the business a different way of operating. It's not a hard argument to make to people that NextShares fit very well with this new world and can be a solution to some of the problems they face. We're viewing it and I think the broker dealers are viewing this as an added incentive to take a look at NextShares as opposed to a reason to defer looking at it beyond the implementation. If there were no connection between NextShares and Department of Labor, given the focus there is within broker dealers on ensuring compliance, maybe that could be a rational for deferring looking at NextShares. But we see it as the opposite where broker dealers are likely to be more interested in NextShares. It has been helpful to conversations to make that connection with broker dealers.

I'll try and address those in order. In terms of margin, as we noted we came in at 30% this quarter. When I said the 1% to 2%, I would say as we're looking forward if you look at what we anticipate we might see in the third quarter, we would be ticking up somewhere between 31 and 32 on flat markets. That's our expectation. Again, a lot can happen and a lot can happen in terms of - what happened in terms of overall operating income, what happens in terms of sales, in terms of market. So there are things that can push us around, obviously. In current conditions, we would anticipate seeing a 1% to 2% uptick in relation to where we were in the second quarter. In terms of the non-op, CLO, we have one consolidated CLO entity at this point and it's just whatever happens within that entity ultimately flows through. So there's just noise. But if you look at where we actually cordon off as CLO activity, net and then down at the bottom obviously most of it, if not definitely the majority comes out through the non-controlling interest. So there's not t a lot of net impact in terms of the operations of the CLO entity. Pretty much what falls to the bottom line is our management fee and our modest portion of our investment income associated with our investment. Outside of that, in terms of our gains and losses on other investments, we've been running at roughly a penny a quarter. We were just over a $0.01 this quarter. So it's just south of $0.02. There's really been no significant change there.

So let me just make sure I hit on everything. And if I miss something maybe one of these guys can remind me. But mutual funds versus separate accounts, we had positive - not by much, but we had positive net flows into mutual funds in the current quarter, which you can think of as flows into areas like high yield, we have a strong balance fund. Our five star SMID cap fund, munis, we had good fund flows. Those things were substantially offset by outflows from primarily bank loans. So trending positive there. And I would say probably the biggest swing factor in, as I see it in our - turning that mutual fund number strongly positive is really probably in bank loans which is turning negative bank loan flows into what I think pretty quickly could turn positive. Obviously, there are other factors there which I mentioned 21 or 22 five star rated funds. Some of those are niche products, state-specific munis, we have a number of those in that range. But we have quite a few broadly based funds that are today positioned to gain market share and sell. As I tried to address in my remarks, there are $2.7 trillion of money in motion invested today in actively managed funds. That's not active to passive. That's sales of active funds. On an overall basis, the active fund business is shrinking by about 2% a year, just net flows divided by beginning of period assets. But that still creates enormous opportunity for fund sponsors that as we do have a broad base of distribution and have a broad menu of high performing funds. If we had 25% market share, it would be very hard to do, very hard to outrun a negative asset, a negative business. But with less than 1% market share, we feel we've got excellent opportunity to continue to grow in that, even though as we see it flows will continue to move from active to passive on an overall basis, at least until something happens to change the relative performance dynamic that we've seen over the last few years. So our mutual fund business, which is essentially all active business, has been trending positive, trending better. It was positive in the current quarter and my baseline expectation would be it will continue to trend positive with the biggest swing variable likely to be the performance of bank loans in a flow sense. In our separate account business, you touched on a couple of areas. One is exposure management, the other portfolio implementation. The exposure management, let me just maybe spend a minute talking about what this is. This is sold to large institutions, a service sold to large institutions where Parametric provides an overlay, so that if they have more cash in their portfolio than they would like, they arrange with Parametric on a systematic basis to put that cash to work synthetically using derivatives. And it's a growing opportunity. There are only a couple of major players in that business. It was a business that was bought by Parametric at the end of 2012. We've essentially doubled the business since then. We've expanded our roster of institutional clients. The penetration of that market we believe is still quite low, just the number of large institutions that are using this is relatively limited. And we see continued growth there with some volatility quarter to quarter as positions are added and subtracted. As we talked about in this quarter, it worked against us. But the underlying trend of client flows and new business, net new business remains strongly positive for that business. Portfolio implementation is a category that includes both institutional and retail and high net worth within that. Actually, I think this is different than your question, Michael, but it's primarily driven by individual investors, not by institutional. And this fits in with our Custom Beta product offering that I talked about which is growing quite strongly, where Custom Beta which again is Parametric tax managed separate accounts and non-tax managed separate accounts customized in different ways, plus Eaton Vance managed corporate ladders and municipal ladders, those are sold into our traditional broker dealer relationships and then sold also on a direct basis to the RAA marketplace and the multifamily office marketplace. There, what we’re doing is essentially competing against index funds and index ETFs where we're saying to the client or saying to the financial advisor, we can provide index like or benchmark like returns but with customization to take into account other holdings that the investor might have, social objectives or social screens that the manager wants to impose and the ability to achieve better tax treatment because in a separate account you can manage taxes down to the individual lot level and you can pass through losses. So it's a very powerful message. It's resonating with financial advisors. We have a large and growing business with most of the major warehouse firms on the retail side. And we have a growing business also serving registered investment advisors and family offices as I mentioned. Assets there are up about 50% to the current $38 billion over the last six quarters, so growing nicely. What we're really identifying as a key growth franchise for us on the passive side of the business. So think of Eaton Vance as before straddling the active/passive divide, most of our traditional business is active management. We think we can grow there based on strong performance by using NextShares to differentiate us and to enhance performance based on a more efficient structure. But then also on the passive side, growing through this Custom Beta suite of products as well as the broader capabilities that Parametric offers institutions, including exposure management.

The costs of what exactly?

So we’ve talked in past calls about implementation cost and the fact that Eaton Vance has said that we would, with early adopters, that we would be willing to pick up their costs for becoming distributors, again early adopters. We’ve disclosed that we did that in the case of the Folio arrangement, maybe not in all cases, but we would expect the first few arrangements that we would again do that. The costs is six figures, we think, generally low six figures, maybe more than that for firms that have bigger and more complicated operations. But it’s something that we believe we can fit within our existing budget parameters for NextShares. On top of that, with some lead partner arrangements, there may also be other incentives to compensate them for their internal training costs, but those aren’t things that have been necessarily committed to at this time.

We don’t tend to give direct guidance in terms of what we anticipate we’re going to buy back in the next quarter. I think that we would say as we have in prior quarters that we anticipate we will continue to be active in the market. We obviously had a slightly accelerated pace in the first two quarters of this year compared to last year. I don’t think at this point we’d be willing to give any additional guidance outside of the fact that we intend to be in the market as we have been in prior quarters.

Sorry, for non-Eaton Vance-sponsored products?

So the only one that’s been announced which you probably know is [indiscernible] announced plans to launch, I believe, it’s three funds in August timeframe. And we’re certainly supportive and encouraging of that effort. I’d say beyond that we have, I guess, it’s 10 other fund firms that have received exemptive relief to offer NextShares and there’s, I would say, a longer list that that of firms that have expressed interest, if, and this is always the big if, if distribution emerges. And to see significant progress in additional firms offering NextShares, we’ll need to see progress in terms of at least announcements of other distribution arrangements. As it is now, we’re happy to be working with Folio in supporting the existing three products. But they are relatively a small company. They don’t have a big distribution footprint at this point. And that’s not much of a lure to other fund companies to go through the process of training their sales organization and launching new products. As we’ve said before, the key to success is gaining distribution access and that continues to be a primary, if not the primary, focus for us with our NextShares initiative.

Great. Thank you very much for joining us this morning. We look forward to reporting back to you in August. And I hope you all enjoy the upcoming Memorial Day weekend. Thank you.

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

[Operator Instructions] Your first question comes from Ken Worthington from JPMorgan.

This is [Amanda] stepping in for Ken. My question is net sales have been trending positively in the floating rate fixed income mutual funds. Can you speak to maybe a couple of positive factors that have driven this more recent improvement?

Your next question comes from Dan Fannon from Jefferies.

I guess another couple questions on flows. You mentioned an outlook for slowing redemptions in some of your higher fee products. Can you talk about that in more detail? Obviously, performance broadly looks better, if that's it or if there are other things factoring into that. And then also just maybe talk about any institutional activity that is either out there or conversations around products maybe that aren't necessarily as in focus today that maybe have the potential to grow over the next kind of 12 months?

Just a follow-up on NextShares, to characterize your comments with regard to the DoL, it seems like generally that's positive as a backdrop for maybe adoption, but given all the uncertainty in implementation and things that are happening that it probably pauses or people are kind of keeps the adoption rate a little bit lower, is that a fair characterization?

Your next question comes from Michael Carrier from Bank of America Merrill Lynch.

Laurie, maybe two quick things. Just on your comment on the cost and the margin outlook, just given where the markets ended the quarter, just wanted to get - I think you mentioned 1 or 2 percentage points. Just wanted to make sure we were clear. Is that off of where the run rate was this quarter? Is it the year to date run rate? And then just on the non-op, when we look at some of the volatility, did anything change? I know in the industry there were some change in the quarter on either consolidating or deconsolidating entities, but just seemed like there was a little bit more volatility around some of the items, mostly on the CLOs which I know not a big impact but just so we understand it.

And Tom, flows, different products and channels, just had two follow-ups. Just on the institutional side, when I think about the portfolio implementation and exposure management, when you guys look at that, the landscape or the opportunity, like how much of the market are you able to target? I'm just trying to gauge, because the growth rate even though the fees have been low, like the growth rate has been pretty impressive, just want to try to understand like what that opportunity is and where the competitors are? And then on the retail side, you mentioned the performance has gotten better. There were some asset class issues maybe over the last year or so. But that's starting to shift. When you look at it from like an active/passive, like where there's still demand for the products, do you feel like you have that product set that you need? And when I look at the mutual funds versus high net worth, in the quarter it was just unusual just in terms of the divergence. Just wanted to get any color on that.

Your next question comes from Robert Lee from KBW.

This is actually [Andy] sitting in for Rob Lee. I guess my first question is, I know you touched briefly on the status of getting more distributors for NextShares and you’re seen increasing interest in light of DoL. But just going forward, how do we think about the costs around that?

Just going out finding more distributors and kind of getting them signed on and started up, I guess?

And just as a follow up, we’re wondering just on the share repurchase, it’s kind of been accelerated and you still have 6 million shares roughly remaining. How do we think about that going forward? The pace of it?

Your next question comes from Eric Berg from RBC Capital Markets.

This is actually [Rose] filling in for Eric. Given that you had three NextShares product launches so far, we’d like to get your thoughts on what’s going well and what potentially needs more work. And then could you update us on your outlook and the potential timeline for the rollout of non-Eaton Vance-sponsored fund product?

That’s right.

This is all the time we have for questions. Mr. Cataldo, I will turn the call over to you.