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

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

Good morning. October 31 marked the close of our fourth quarter and fiscal 2013. We finished the fiscal year with $280.7 billion in consolidated assets under management, up 4% from the end of the third quarter and up 41% from the end of fiscal 2012. Excluding the managed assets gained in the December 2012 acquisition of The Clifton Group, our consolidated AUM were up 23% for the fiscal year, reflecting strong net flows and favorable equity markets. Not included in our 10/31 consolidated AUM are $16.7 billion of directly managed assets of 49%-owned affiliate Hexavest Inc., a Montréal-based global equity manager. Like the rest of Eaton Vance, Hexavest has experienced strong growth in managed assets, up 40% in fiscal 2013 and up 54% since we acquired our Hexavest interest in August 2012. We had consolidated net inflows of $3.9 billion in the fourth quarter and $24.7 billion for the full fiscal year, which equate to annualized internal growth rates of 6% for the quarter and 12% for the fiscal year. Hexavest net inflows were $200 million in the fourth quarter, $850 million in fiscal 2013 as a whole and $1.6 billion since we acquired our position last August. As in recent quarters, our net inflows in the fourth quarter were led by floating-rate income strategies, with $3.5 billion net flowing in there, and the implementation services offerings of the Clifton division of Parametric were $3.8 billion of net inflows. Leading sources of net outflows for the quarter were Eaton Vance Large-Cap Value at minus $1.4 billion and our municipal income strategies with $1.2 billion of net outflows. As Laurie will describe in more detail, we achieved record revenue, operating income and adjusted net income per diluted share in both the fourth quarter and fiscal 2013 as a whole. Compared to…

Thank you, and good morning. As Tom summarized, we're reporting adjusted earnings per diluted share of $0.55 for the fourth quarter compared to $0.52 in the third quarter of fiscal 2013 and $0.53 in the fourth quarter of last year. As we've noted on previous calls, adjusted earnings differ from GAAP earnings in that we back out items that management deems nonrecurring or nonoperating in nature. Historically, these adjustments have included closed-end fund structuring fees and changes in the estimated redemption value of noncontrolling interest in our affiliates that are redeemable at other than fair value. In fiscal 2013, adjustments also included a first quarter add back in connection with the special dividend we paid in December 2012 and third quarter adjustments related to the loss on extinguishment of $250 million of our 6.5% senior notes due in 2017 and a charge to settle a state tax matter, both of which we discussed in detail on our third quarter call. As you can see in Attachment 2 to our press release, adjustments from GAAP earnings totaled a positive $0.10 per diluted share in the fourth quarter of fiscal 2013, $0.34 in the third quarter of fiscal 2013 and $0.08 in the fourth quarter of fiscal 2012. Net income and gains on seed capital investments were negligible in the fourth quarter, while losses, net of interest and dividend income, reduced diluted earnings by $0.02 per share in the third quarter of fiscal 2013. Net income and gains on seed capital investments contributed $0.02 per diluted share in the fourth quarter of fiscal 2012. Our fourth quarter revenue increased by 2% sequentially on a 3% increase in average assets under management. Expenses were held flat sequentially, resulting in a 6% increase in operating income and, ultimately, a 6% increase in adjusted earnings…

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

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

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

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

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

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

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

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

Flat -- what do you mean by flat earnings?

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

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

15%.

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

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

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

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

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

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

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

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

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

Yes. So most of the assets that we call alternatives are in some version of global macro. I'm just looking at our U.S. bond business -- U.S. fund alternative business, which is -- most of the total which is about $9.6 billion Global Macro Absolute Return and Global Macro Absolute Return Advantage Fund represent about $7.5 billion of that. So global macro -- and think of global macro advantage as more or less being a more leveraged, high risk, higher potential return version of the base global macro. That represents an overwhelming portion of the category. Also included in there is the Diversified Currency Fund, which is about $800 million, which is run by the same group. And then also was about a $600 million commodity fund. Those are the biggest constituent to that. There's a Multi-Strategy Absolute Return, which is about $500 million. The challenge we faced with the global macro strategy this year, as you point out, we've had modestly negative return. The challenge has been that the strategy and the positioning that we've had as we've been net long currencies in Asia. And with the strength in the dollar, we've seen on balance, a weakening of those currencies versus the dollar. So there's nothing inherent -- I guess I'd say 2 things. One is that with the LIBOR so low, with risk-free rates so low, your starting point of a neutral strategy net of expenses, you're in a hole, right? You start with LIBOR. You subtract out the expense ratio of the fund. You're in a hole. So if you're not adding, let's say, 100 basis points or more of alpha through positioning, you're going to have negative returns. And so that's the challenge we've had is that our base strategy for producing positive returns has included…

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

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

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

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

Got it. And can you size the adjustment?

I'm sorry?

How big was the adjustment?

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

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

No.

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

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

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

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

No.

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

Annual.

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

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

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

So here's the philosophy. The philosophy is that, we want to hedge out the impact, to the extent we can, to hedge out the impact of market movements on our quarter-to-quarter earnings report so that we don't have big swings in reported earnings depending on whether the market was up or down based on what happens in our hedge portfolio. So we do that with most categories of seed investments. We hedge the related market exposure. There's some asset classes where that -- it's very hard to do that. There's some asset classes that we think of really as more as absolute return-type investments, global macro being one of those where, I'm not sure what we'd do to hedge that. And I'm not sure what market risk it would be that we're hedging. It's essentially designed to be a neutral-type strategy. But so the philosophy in practice results in more or less us being immunized from market performance. Unfortunately, it does not match perfectly. And unfortunately, during periods in which our managers are producing negative alpha, that number can be modestly negative. And I did highlight in response to Cynthia's question that we've been struggling in global macro. And that's a place where we have seen modestly negative returns. And I think that is a fairly significant part of our seed capital portfolio in terms of exposure. Also generally, we've struggled to keep up with the equity market. And to the extent that we're not beating our benchmarks, we're also not beating our hedges and, therefore, we're losing money. And it's always anytime you're doing hedging and you lose money on your hedges, it's always easy on -- come Monday morning to say, "Gee, I would have been better off had I not hedged." But we've thought about this pretty…

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

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

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

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

Yes, a couple of thoughts on that. The big challenge that actively managed fund sponsors have faced as they've tried to bring the benefits of ETFs to active strategies has been, how do you ensure that if you offer a strategy in a nontransparent or more precisely in less than fully transparent form, what ensures that, that fund will trade successfully, will trade tight to underlying asset value in the marketplace? Because normally with ETFs, the mechanism that keeps price and value in close alignment is the ability of market makers, when they go in and take inventory positions in the ETF, to be able to hedge the market exposure they assume by entering into offsetting positions in the underlying assets of the fund or a suitable proxy for that. So the challenge is, if you're trying to do a less than fully transparent exchange-traded structure, what mechanism is in place to ensure that it will trade well, because a normal mechanism is one that depends on full transparency. There are, as you pointed out, other approaches to doing this. And maybe in the most extreme version of that, a sponsor might say, "Well, there is no mechanism." But there's nothing that says inherently that a fund traded in the market needs to trade at a particular closed spread to NAV, and would point to the example of closed-end funds. And tell you that closed-end funds do not have any underlying mechanism to keep price and value in line. And those -- they're out there and they trade. Why can't we do something that is no more transparent than a closed-end fund? But the regulators, and I think appropriately, have taken the position that if any ETMF or exchange-traded fund is trying to get approved as an open-end fund structure,…

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

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

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