Earnings Labs

Morgan Stanley (MS)

Q3 2017 Earnings Call· Tue, Oct 17, 2017

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Transcript

Operator

Operator

Good morning. My name is Denise, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Eaton Vance Corp. Third Fiscal Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Daniel Cataldo, Treasurer, you may begin your conference.

Daniel Cataldo

Analyst · William Blair. Your line is open

Good morning, and welcome to the Eaton Vance Corp fiscal 2017 third quarter earnings call and webcast. With me this morning are Tom Faust, Chairman and CEO; and Laurie Hylton, our CFO. We’ll first comment on the quarter, and then 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 upon request at no charge I’ll now turn the call over to Tom.

Tom Faust

Analyst · William Blair. Your line is open

Thanks, Dan. Good morning, everyone, and thank you for joining us. July 31 marked the end of our third quarter and first nine months of fiscal 2017. The strong internal growth we experienced in the first two quarters of the fiscal year continued through the third quarter, putting the company on pace to realize record net flows for the fiscal year and by a wide margin. This comes amid a challenging environment in which many peer companies have struggled to grow at all. For the quarter, we were reporting $0.62 of adjusted earnings per diluted share, up 11% from the third quarter of last year and flat versus the preceding quarter. As Laurie will discuss in a few minutes, this quarter’s adjusted earnings include $0.03 a share of cost in connection with employee terminations, special fund expense reimbursements and one-time legal and investigative costs not present in the preceding quarter and not expected to recur. We closed the third fiscal quarter with a record $405.6 billion of consolidated assets under management, up 5% from the prior quarter-end and up 21% from a year ago. Net flows in the third quarter were $9.1 billion, equal to a 9% annualized internal growth rate in managed assets. Backing out lower fee exposure management mandates, our quarterly net flows were $8.1 billion, which equates to 11% annualized internal growth. Through the first nine months of the fiscal year, net flows of $29.9 billion equates to 12% annualized internal growth in managed assets, which already exceeds our best-ever full year net flow results. Looking at our flows from the perspective of net income, net impact to management fee revenue, results remain very solid. We realized annualized internal growth in management fee revenues of 6% for the fiscal third quarter and the first nine months of…

Laurie Hylton

Analyst · KBW. Your line is open

Thank you, Tom, and good morning. Today, we reported adjusted earnings per diluted share of $0.62 for the third quarter of fiscal 2017, up 11% from $0.56 of adjusted earnings per diluted share in the third quarter of fiscal 2016 and unchanged from $0.62 of adjusted earnings per diluted share reported in the second quarter of fiscal 2017. On a GAAP basis, we earned $0.58 per diluted share in the third quarter of fiscal 2017, $0.55 in the third quarter of fiscal 2016 and $0.62 in the second quarter of fiscal 2017. As you can see in Attachment 2 to our press release, adjustments from reported GAAP earnings in the third quarter of fiscal 2017 includes $3.5 million of closed-end fund structuring fees paid in connection with the initial public offering of Eaton Vance Floating-Rate 2022 Target Term Trust in July and $5.4 million recognized on the extinguishment of debt associated with retiring the remaining $250 million aggregate principal amount of our 6.5% senior notes due in October 2017. The adjustment from reported GAAP earnings for the third quarter of fiscal 2016 reflects $2.3 million of closed-end fund structuring fees paid in connection with the initial public offering of Eaton Vance High Income 2021 Target Term Trust in May 2016. Adjusted earnings per diluted share equaled GAAP earnings per diluted share for the second quarter of fiscal 2017. As I’ll describe in more detail, costs in connection with employee terminations, special fund expense reimbursements and one-time legal and investigative costs, reduced adjusted earnings by $0.03 per diluted share in the third quarter of fiscal 2017 and $0.01 per diluted share in the third quarter 2016. Such costs were negligible in this year’s second quarter. As you can see in Attachment 2 to our press release, adjusted operating income, which excludes…

Operator

Operator

[Operator Instructions] Your first question comes from Chris Shutler with William Blair. Your line is open.

Chris Shutler

Analyst · William Blair. Your line is open

Yes. Good morning. In Parametric’s custom beta or Custom Core areas, I think the average fee rate is about 15 basis points. Maybe just confirm that. And then, can you talk about the competition in that space? And what are the kind of the hindrances in your view from this area taking off becoming as popular or even more popular than ETFs, at least with high net worth investors?

Tom Faust

Analyst · William Blair. Your line is open

I think your average fee estimate is low. Maybe we can – maybe Dan has that number. I think it’s more in the 20 basis point range. Is that…

Daniel Cataldo

Analyst · William Blair. Your line is open

Yes.

Tom Faust

Analyst · William Blair. Your line is open

Okay.

Daniel Cataldo

Analyst · William Blair. Your line is open

Chris, if you look at the Custom Core equity business that we package in the custom beta product set, the Custom Core equity fee rates are roughly 20 to 21 basis points.

Chris Shutler

Analyst · William Blair. Your line is open

Okay. Great.

Tom Faust

Analyst · William Blair. Your line is open

I think that – maybe I’ll take the rest of the question. This is a business that we’re seeing strong growth, and I mentioned we’re up roughly 50% in assets in revenues just in the last nine months. So clearly, we’re seeing significant growth there. And that’s looking at – I’m isolating that what we sell to high net worth and retail investors from – we have a, I’ll call, legacy business that’s related but not serving the same kind of clients. It doesn’t have those same kind of growth dynamics, but it’s – I think it’s around like $50 billion at the end of the quarter in retail and high net worth, growing about 50% for the first nine months. We see a lot of potential for growth there, as you suggest. It doesn’t work for everyone. For one, it’s a minimum investment at Eaton Vance or Parametric of $250,000, so it’s not a mass-market product. It’s for higher net worth investors. There are several competitors. The most significant is a company called Aperio, A-P-E-R-I-O, based in San Francisco, that is largely focused on this opportunity. I think we’re roughly, I’m going to say, three times the size they are in this business, two times to three times the size. But they’re a significant competitor for us. For larger mandates, we will run up against them. There are some other competitors, not of particular size. That’s the – Aperio is the major competitor today in a direct sense. Indirectly, obviously, we’re competing against other providers of separately managed accounts. And more particularly, we’re also competing against other providers of index-based solutions, most notably, the big ETF and index fund providers. This is a very different business than managing an ETF or index mutual fund. These portfolios are highly customized.…

Chris Shutler

Analyst · William Blair. Your line is open

All right. Great, thanks, Tom. And then, how for along do you think you are in terms of just awareness of this capability amongst both retail and institutional? I don’t know if you can break out the AUM and custom data between those two.

Tom Faust

Analyst · William Blair. Your line is open

Yes. So it’s not retail versus – most institutional market you think of as being non-taxable. This is primarily serving a taxable customer base. There are plenty of exceptions to that. But the most significant part of the assets, I think in our slides, we break it out between the tax managed and the non. But the – for most customers, the tax advantages of holding securities directly is the primary appeal that’s changing at the margin, but we see it continuing to be primarily a retail and high net worth-driven as opposed to traditional institutional business. At a very large size, customers can do this themselves, but for customers in a range of $250,000 to maybe $10 million to $50 million, having a third-party specialist like Parametric take on this activity is, I think, a significant benefit. And we’re investing quite significantly to grow this to add product features and to scale up the technology to allow us to meet the growing demand and to serve a growing base of clients. Big opportunities.

Daniel Cataldo

Analyst · William Blair. Your line is open

And Chris, just in terms of the breakdown of the custom beta assets, think of it, and these are what’s reflected in Slide 17 in our charts is $64.5 billion in total AUM. $15.9 billion of that would be in the laddered products, both muni and corporate. And the balance would be Custom Core equity strategies managed by Parametric.

Chris Shutler

Analyst · William Blair. Your line is open

All right. Thanks a lot.

Operator

Operator

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

Robert Lee

Analyst · KBW. Your line is open

All right. Thanks. Good morning, everyone.

Laurie Hylton

Analyst · KBW. Your line is open

Good morning.

Robert Lee

Analyst · KBW. Your line is open

A couple of questions, maybe first starting with the separate account, the SMA business, managed account business. So obviously, the portfolio implementation is the big driver of that. But if I do my numbers correctly, it looks like you had pretty good flows outside of portfolio outside of those businesses. So can you maybe give us a little bit of an update of your retail SMA business and what’s happening there outside of the – outside of this?

Tom Faust

Analyst · KBW. Your line is open

Yes. I think the piece – the other piece that’s not in the portfolio implementation category is our muni and corporate bond ladders, which are – we put in this custom beta suite. So the primary drivers of retail managed account growth is Parametric Custom Core and Eaton Vance muni and corporate ladders. Parametric Custom Core shows up under implementation. The ladders show up under fixed income flows.

Robert Lee

Analyst · KBW. Your line is open

All right. Great. And I mean, equity flows in the quarter were very strong, certainly bucking industry trend. I mean, can you maybe just update us a little bit on some of the drivers there whether they may be some a lot of – perhaps a large private fund closing or anything of that nature that may have helped it in the quarter?

Tom Faust

Analyst · KBW. Your line is open

The biggest factor or the biggest driver of the growth is a Parametric business that most commonly described as defensive equity. Sometimes, we call it volatility risk premium, but these are equity strategies with built-in option overlays. And they’re having strong success selling this primarily to institutional clients where it’s frequently positioned as a lower-cost, more transparent and frequently better performing alternative to hedge funds. And that’s a significant part of the growth of our overall equity business. Maybe, Dan, I don’t know if you have any numbers there to share.

Laurie Hylton

Analyst · KBW. Your line is open

Over $900 million.

Daniel Cataldo

Analyst · KBW. Your line is open

Yes, a couple of other contributors in the quarter, as has been in past quarters, the Atlanta Capital SMID-Cap Fund contributed positively. And we did have a successful closing of a private fund in the quarter as well.

Robert Lee

Analyst · KBW. Your line is open

Great. And maybe, if I could, one last question on Hexavest, a really two-parter. Yes, I noticed that clearly, not all their flows are included in your flows, but it looks like they turned positive in the quarter. Can you maybe update us on their business trends and – which looked like they’ve improved? And then also, if memory serves me, you should be coming up towards a point where you may have the option to buy in a larger stake in Hexavest. Are we approaching that? And kind of what are your thoughts around that?

Tom Faust

Analyst · KBW. Your line is open

Yes. So the – I’d comment on both of those. The business has turned up. The full numbers that show up on some of our slides and in the exhibits to the release indicate that, I think, they had $0.5 billion or so of net inflows in the quarter, which is an upturn from generally negative flows recently. And that’s fairly broad-based. It’s primarily driven by global equity mandates, some in the U.S., some in markets around the world. We see pretty good momentum there. They’ve had an upgrade in ratings from several consultants, and this is a product that based primarily on the very strong performance they had on a relative basis in the market downturn in late 2015, early 2016. We’re able to position this as a defensively oriented equity strategy that can be thought of as a nice complement to other sort of higher-octane global equity strategies that investors have. So we’re having some success positioning that way. Your memory serves you right about the option we have. Just to some of the particulars, the fifth anniversary of the closing of our acquisition of a 49% interest in Hexavest was in early August. At the end of this month, there will be – let’s say, we’ll have – for the – we’ll have an option to acquire up to a 75% interest in Hexavest based on a fixed multiple of earnings for the 12-month period ending on August 31. And so some time, there’s a period – so sometimes, between now and end of the year, roughly, let’s call it, November, December, that option period will kick in. We’ve certainly had preliminary discussions with Hexavest. We like this business very much. And I think it’s fair to say that if we can get comfortable with the terms of both the transaction and the terms of the ongoing business relationship going forward, that we’d like to own a majority of this company. But we’re not there yet, and there’s some negotiations that has to happen between now and doing it. But positively disposed and on the right terms, we’d certainly be eager to do this.

Unidentified Analyst

Analyst · KBW. Your line is open

Great. Thanks for taking my question.

Operator

Operator

[Operator Instructions] Your next question comes from Bill Katz with Citigroup. Your line is open.

Bill Katz

Analyst · Citigroup. Your line is open

Thank you very much, I appreciate taking the question. So Laurie, maybe for yourself. Just as we look ahead, the $3 million of severance this quarter, is there a way to sort of think about what kind of incremental savings there might be longer term? And then on the fee rate disclosure, which we certainly appreciate, how should we think about just the averaging impact? It seems like you had a very strong July in terms of both overall asset growth as well as flow and what that might mean for fee rates within the bigger picture of a bit of a downward trend. That’s my first question.

Laurie Hylton

Analyst · Citigroup. Your line is open

Okay. So just in terms of the compensation, I think if you’re trying to sort of forecast that what the rest of the year might look like, we’ve disclosed that we had roughly $3 million worth of severance associated with employee terminations. I think pulling that out, the third quarter run rate is a pretty good run rate. Now I’ll caveat that with our normal disclosures around the fact that roughly 40% of our compensation is variable. So to the extent that there’s a distinct change in either sales patterns or there’s a distinct change in our profitability for the fourth quarter, that could change. But barring any unforeseen anomalies, I would anticipate that our third quarter run rate, excluding that $3 million charge, is a pretty good number work with for the fourth quarter. In terms of the fee rates, I don’t – I think that there’s obviously continued pressure associated, particularly in the fixed income category associated with the growth in the separate accounts associated with our ladders business. So you will continue to see that. Third quarter flows were strong. There were certainly strong flows in July, but I don’t think that necessarily, the timing of our flows impacted the effective fee rate. I think it’s more a function of what’s actually happening within the category in the mix. Most of our categories, we would not anticipate seeing any significant changes as we’re moving into the fourth quarter. The two categories where we have seen changes this quarter and we would conceivably see some additional changes going forward just because of the pressures of the mix on the business would be in the equity category just as we see the shift in where the flows are coming in and then in fixed income because of the pressure on the ladders.

Bill Katz

Analyst · Citigroup. Your line is open

Okay, that’s very helpful. And just a follow-up, Tom, you spoke very constructively on where you are with Calvert. It seems logical based on what we’re seeing as well. I guess, two-part question. First part is, how do we think about the incremental fee rate? And then secondly, you highlight the fixed income win, but maybe more broadly, how do we think about sort of sizing that income opportunity?

Tom Faust

Analyst · Citigroup. Your line is open

Yes. So fee rates on Calvert business, I would say, are broadly representative of our overall business. Their fixed income is similar to Eaton Vance’s historical fixed income. Their equity is similar to Eaton Vance’s equity fee rates. They do have a – some index products that, as you would expect, operate at lower average fee rates, not surprisingly, given this environment. Some of their growth has been in those kinds of mandates. On the equity side, their biggest growers currently are sort of opposite ends of the fee rates. Spectrum 1 is a 5-star-rated emerging market equity fund, which is actively managed and full fee; and the other is a U.S. core responsible index fund, which is priced like an equity index fund. So it kind of is all over the map but broadly representative of the kinds of fund business, fund assets that we have and fee rates that we have typically in our fund business. They don’t have a lot of business today outside of mutual funds, so the fee rates there are pretty transparent, and the flows are also pretty transparent. The opportunity that I highlighted this recent win, which is not yet funded but which was awarded earlier this month, is for an institutional separate account. It will be at a lower average, a lower fee rate than they get on their fund business like most institutional separate accounts. For us, the interesting thing is Calvert really didn’t have an institutional business prior to becoming part of Eaton Vance. And they have an excellent fixed income capability that involves a range of high-performing strategies across various asset classes but quite distinctively, with included responsible investment criteria baked into the investment decision-making and baked into what we deliver to clients. And that’s a fairly rare thing…

Operator

Operator

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

Glenn Schorr

Analyst · Evercore ISI. Your line is open

Hi, thanks very much. A question on margins. Because I’m watching like the markets are up, and you’re getting great growth across a bunch of your different products. Some of them are super leverageable like bond ladders, exposure management, portfolio implementation. I’m curious why margins don’t expand more. And maybe if you could talk about that in the context of is there a purposeful spend while the markets are good? And clearly, it’s producing growth. Maybe you could talk about it in terms of the profitability bogey that you use for the profitability-based comp. Just curious why we wouldn’t see bigger margin expansion.

Laurie Hylton

Analyst · Evercore ISI. Your line is open

Yes. A couple of things that I would say on that. One, obviously, we have a little bit of a quality problem going here, and that we’ve got significant growth in the business in terms of our inflows. And we’ve got a sales team that is going to be compensated on that. So to the extent that we’ve got strong periods of organic growth, we’re going to see increases in comp are going to tick up associated with that. I think that in terms of our overall margins, we obviously had some sort of one-time pressures this quarter that muted the results. We’ve talked about that. We’ve also talked about what margins might look like if you pull some of those numbers out. So I think there would have been some incremental growth this quarter if we haven’t had some of those one-time events. I also would acknowledge that we are now in an environment where there is going to be some increased spending associated with both trying to ensure that we’ve got technology platforms that are scalable, particularly given these sort of factory businesses that Tom has referenced in terms of our ladders and our Custom Core as well as regulatory pressures that will require us to do some incremental spend to ensure that we’re keeping up to date in those areas. So I think that we’re not unlike other advisers or other traditional asset managers out there facing these challenges. I do think that we’ve got some opportunities for margin expansion if we’re able to control our discretionary spend and make some of these growth-related investments very tactically. But I think it’s just the nature of the game right now that they’re going to be – there’s going to be pressure on margin in a period of strong growth and some technology investment.

Glenn Schorr

Analyst · Evercore ISI. Your line is open

Got you. And I guess, the one follow-up I had is on your comments. I heard you loud and clear on UBS coming online in November. When they launch, what should we expect? How are they rolling that out? Are you behind the scenes educating them on the product? Like with eight funds up and running, should we expect it to be a gradual process over the next year? I’m just curious on your thoughts.

Tom Faust

Analyst · Evercore ISI. Your line is open

Yes. There is a – there’s a training process that is ongoing at UBS now. They do all training modules and are in the process of making that available to advisers and branch managers. That’s ultimately a UBS initiative at Eaton Vance, and NextShares Solutions were – clearly contributed to that. We do expect additional product, both Eaton Vance-sponsored and non-Eaton Vance NextShares funds to be available and in the marketplace by the time of that anticipated November launch of NextShares within UBS. It will actually be a staged launch. There won’t be a full menu of products available from day one. Also, it won’t be available across all UBS platforms from day one. So I think what you should anticipate is a staged introduction where our focus is just from a business standpoint, is trying to make available, I think, the word I used was compelling investment strategies as NextShares and to drive adviser interest in NextShares by putting very strong investment structures, very strong investment capabilities inside this unique vehicle of NextShares. And so we’re thrilled with how this is going, the support we’re getting across UBS. They feel like this is something that they can offer to their clients that today is highly differentiated. And that they’re very committed to this, but it’s not going to be – I’m not going to raise $1 billion on – in the middle of November. This is setting the stage for a broad-based success built around a few key product strategies, some of which will be launched by November, and then some of which will be coming out over the following months.

Glenn Schorr

Analyst · Evercore ISI. Your line is open

Okay. Thanks so much, Tom.

Operator

Operator

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

Michael Carrier

Analyst · Bank of America Merrill Lynch. Your line is open

Hi, thanks a lot. Laurie, maybe just one on costs, and thanks for breaking out the one-time items, and probably less focused in the fourth quarter and more as we head into the next year. Just given your comments on some of the tech rig spend, is there maybe like a base of expense growth that we should be expecting and maybe nonperformance-related because, obviously, that will ebb and flow? And then just on the compensation related to sales, if the fee rate on the sales product is much different across the products that you guys sell, is that taken into consideration, meaning there’s no real comp pressure if something on like the portfolio implementation versus equities? So I just wanted to get a sense on how that works just given that we haven’t seen a ton of operating leverage.

Laurie Hylton

Analyst · Bank of America Merrill Lynch. Your line is open

I can – I’ll start with the first question regarding what our technology spend is anticipated to look like for next year. And I’ll tell you that we’re in the process of looking at that right now. We’re obviously – we’re in our budgeting and planning process. We’ve got a pretty robust process that we go through that’s cross-functional, looking at all of our initiatives and how they intertwine, particularly amongst our core company at Eaton Vance as well as our city areas. So I don’t have specific guidance to give you on that outside. I don’t think there’s anything that is going to seismically change the way that we’ve made investments spend. Some of these projects are projects that are already underway and won’t necessarily impact the financials incrementally. I just would caution everybody that obviously, there are a number of things that are going into effect in 2018, not the least of which is some of the method initiatives and other things that we have to deal with. So there will be some incremental spend there. In terms of the sales incentive, you’re absolutely correct. There is a very different sales compensation paid on lower fee business and on higher fee business based on – particularly when you start doing a breakout between mutual fund sales and some of our very rapidly growing separate account, retail managed account franchises. So that definitely has taken into consideration, and we wouldn’t see necessarily a disproportionate impact in comp related to those businesses that isn’t necessarily coming to on the revenue side.

Tom Faust

Analyst · Bank of America Merrill Lynch. Your line is open

And my comment, just on the sales-based compensation. The way things work here, and I suspect other places, is we set sales compensation for different – for an array of different strategies at the beginning of the year. And with limited exceptions, we don’t change those much during the year. And so what happens in a year like this when sales for a lot of our products are way, way, way over what we budgeted, we’re paying a lot of salespeople for bringing the assets in. We normally think of a new asset that’s brought in as not really contributing to the bottom line for the first six to 12 months, depending on what it cost to bring it in. We’ve had a lot of that this year. We’re paying a lot of salespeople this year. But we don’t want to turn off the spigot and disincentivize our good salespeople by stopping paying them on new business. So it’s just the nature of the business that when you see this surge in sales like we’ve experienced this year, we’re already three quarters into the year, we’re already at net – record net flows. You see this expense bump that we don’t think sales are going to necessarily stay at these elevated levels on an ongoing basis. As they normalize, we like to see sales expense normalize, and we should see more of the revenues that we’re generating from these new sales fall to the bottom line. That’s kind of the way our business works.

Operator

Operator

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

Patrick Davitt

Analyst · Autonomous Research. Your line is open

Hi, good morning and thank you. So it sounds like you’re attributing most of the fee compression and the individual kind of higher fee buckets to mix. One of the key themes we heard in July from those reporters was either the beginnings or process of a more comprehensive fee review and even some hints that those cuts are being made. Is any of that feeding into the compression we’re seeing? And/ or do you feel like that there’s increasing pressure to do a similar type fee review? And if not, why do you think you’re less exposed to that trend than the others?

Tom Faust

Analyst · Autonomous Research. Your line is open

Well, we – investment management is a competitive business. And there are fee cuts in many kinds of businesses. It’s probably stronger on the passive side than it is on the active side and at least on the commodity end of the passive business. But it also applies to a range of active strategies. We are not immune to that. We – clearly, for us, the primary driver of declining fee rates is mix, but that’s not the whole story. There are places where we used to manage money for x, and now we manage money for 90% of x. And in some cases, it’s less than that. So we’re going to be competitive in the marketplace. What we prefer to do is to have fees that are not the lowest in the industry. But based on performance and service, we justify that fee differential, but there are times and places where we compete on a fee basis just as much as anybody else in our business.

Operator

Operator

Your last question comes from Ken Worthington with JPMorgan. Your line is open.

Ken Worthington

Analyst · JPMorgan. Your line is open

Hi, thanks for squeezing me in. Maybe just a little flyer here on the portfolio implementation, exposure management. Obviously, very successful asset gathers for you and businesses for you. A number of these strategies have used futures and options. So we’re curious to see does, and if so, how does a low-volatility environment impact both these businesses, either from an attractiveness of offering or pricing of the products?

Tom Faust

Analyst · JPMorgan. Your line is open

Yes. So portfolio implementation, unless I’m missing something, there’s no element of derivatives in that. That’s – those are directly owned securities. The exposure management business is heavily derivatives-based. It’s primarily futures. We’re using futures to provide a low-cost efficient way to add exposure or to take exposure away. We have the ability if futures are trading rich relative to cash instruments to use cash instruments instead. Generally, the underlying client here is not using these for leverage purposes, though they certainly have that capability. We don’t – so we don’t really – whether a low-volume environment, I don’t think, meaningfully impacts the exposure management business. Where we do have some exposure to this is we highlighted that the defensive equity strategies and other, what we call, managed options or volatility risk premiums, these are offerings that Parametric has. In reporting, those fall into our equity bucket. And we do certainly because these are option strategies that when volatility is low, that the premiums that can be earned by selling options are lower. And I would say that the business continues to work well, perform well. Primarily, what we’re doing in these businesses is to, on a risk – in a risk-managed way, position clients to capture the, what we call, volatility risk premium. That is the – what someone described as the fees that are earned by writers of insurance or providers of leverage. You can think of buying a – selling a put option and selling insurance. You can think of as selling a call option as providing a source of leverage, and there is compensation for that. So under – much of the underlying thesis that we offer and selling these products is capturing that substantially uncorrelated source of alpha that you can add on to an underlying equity or fixed income portfolio. Despite the low volatility, we may be able to grow that business. And frankly, I don’t see a significant threat to that business if we continue in a low volatility environment for a while.

Operator

Operator

And there are no further questions queued up at this time. I’ll turn the call back over to Daniel Cataldo.

Daniel Cataldo

Analyst · William Blair. Your line is open

Thank you, and thank you all for joining us this morning. We hope you enjoy the rest of the summer, and look forward to reporting back to you upon the close of our fiscal 2017 in November. Thanks.

Operator

Operator

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