Morgan Stanley (MS) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the Eaton Vance Corp fiscal first quarter earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Eric Senay, please go ahead.

Thank you and good morning and welcome to our fiscal 2019 first quarter earnings call and webcast. With me this morning are Tom Faust, Chairman and CEO of Eaton Vance, and Laurie Hylton, our CFO. In today's call, we will 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 Web site, eatonvance.com under the heading, Investors Relations. 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 2018 Annual Report and Form 10-K, are available on our Web site or upon request at no charge. I will now turn the call over to Tom.

Good morning, everyone and thank you for joining us. Earlier today, Eaton Vance reported adjusted earnings per diluted share of $0.73 for the first quarter of fiscal 2019, a decrease of 6% from the $0.78 of adjusted earnings per diluted share we reported for the first quarter of fiscal 2018 and a decline of 14% from the record $0.85 of adjusted earnings per diluted share we reported in the fourth quarter of fiscal 2018. The market backdrop for the first two months of our fiscal first quarter was challenging in our respects. From the end of October till the close of trading on Christmas eve U.S. equity market is represented by the S&P 500 fell 13.4% as investors fled to safety amid concerns about a really hoc issue as monetary policy and rising trade tensions. In November and December Eaton Vance lost approximately $15.4 billion in managed assets to market price declines. During the first two months of the quarter, we also saw a sharp downward shift in our floating rate bank loan fund flows reflecting rising apprehension about the future course of the economy and tax motivated sign [ph] as the end of the calendar year approached. Across our lineup of us floating rate loan mutual funds, we moved from that inflows of approximately $500 million per month and the August to October timeframe to net outflows of nearly $600 million in November and net outflows of $1.8 billion in December. Flows of our global macro absolute return, mutual funds were told long and short positions in currency and sovereign credit instruments in emerging and frontier market countries were similarly affected with net outflows accelerating from an average of just over $200 million per month in August to October, to nearly $500 million in November and over $1.1 billion in December. Fortunately, January saw a big improvement in both market performance and our flow trends as investors responded to positive economic reports and Fed signaling of a more accommodative policy. From the Christmas Eve market bottom, the S&P 500 rallied 14.9% through the end of January, driving market related gains and are managed assets of $19.2 billion in the month of January, more than offsetting the November-December market related AUM declines. January also saw sharp abatement in our bank on mutual fund outflows to just over $200 million and a recovery in our global macro mutual fund flows to just about breakeven. On an overall basis, excluding exposure management, we improve to consolidate and then inflows of nearly $3 billion in October it's in excuse me, we improved to consolidate in that inflows of nearly $3 billion in January from that outflows of $1.3 billion in December, and that net inflows a $500 million in November. Despite the strong December headwinds, we closed the first quarter with consolidated net inflows at $1.5 billion or 2.2 billion excluding exposure management. This is our 18th consecutive quarter of reporting positive net flows, demonstrating the benefits of offering investment strategies that span the spectrum. The quarter’s net flow is equated to 1% annualized growth and consolidated managed assets. Our internal growth in management fee revenue was minus 4% annualized in the first quarter of fiscal 2019 but improved as the quarter progressed from not from minus 7% annualized in November-December to plus 4% annualized in January. As we have described previously, this measure of our underlying business growth subtracts management fees attributable to consolidated outflows from management fees attributable to consolidated inflows, and then measures that difference as a percentage of beginning of the period consolidated management fee revenue. We ended the first fiscal quarter with $444.7 billion of consolidated assets under management of 1% over the prior quarter end. For the quarter individual separate account assets under management increased 5%, private fund assets increased 2%, institutional separate accounts grew 1% closed in funds fell 2% and open in fund assets shrank by 3%. Among investment mandate reporting categories, changes in consolidated assets under management during the first quarter ranged from growth of 6% for fixed income and 4% for portfolio implementation to two kinds of 9% for floating rate bank loans and 18% for alternatives, a reporting category dominated by our global macro absolute return strategies. Fixed Income quarterly net inflows of $3.2 billion benefited from strong investor demand for short and ultrashort duration and high-quality income investments in what was primarily a risk off environment. With net inflows have over $1.6 billion during the quarter, the five-star rated Eaton Vance short duration government income fund was by a wide margin our top selling fun on a net basis. Other flow leaders among our fixed income funds or the Eaton Vance short duration municipal opportunities and floating rate miniscule income funds with over $250 million of combine net inflows. Fixed income net flows in the quarter also included $1.5 billion into municipal and corporate ladder bond individual separate accounts and $600 million into high yield bond institutional separately managed accounts. Portfolio implementation quarterly net inflows of $3.4 billion were dominated by parametric custom core equity separate accounts. Per metric remains the largest player in the rapidly growing market for custom indexing, sometimes also referred to as direct indexing. Custom indexing provides potential advantages over index funds and index ETFs that include greater tax efficiency and the tailoring of holdings to reflect client specified responsible investment criteria and other client directed portfolio exclusions. As this market continues to expand, we're committed to invest into support business growth drive increased operating efficiencies and to further extend our service capabilities. As in past quarters, we have included in the slides coming this presentation, a chart showing to managed assets inflows of what we refer to as our custom beta businesses, which are individual separately managed accounts offered to retail and high net worth investors that are invested in Parametric Custom Core equity or EVM laddered bond strategies. These high value offerings combine the benefits of passive investing with the ability to customize portfolios to meet individual preferences and needs. As shown in slide 12, our custom beta managed assets increase 6% from $84.3 billion at the end of fiscal 2018 to $90 billion at the end of our first fiscal quarter. The $3.9 billion of first quarter custom beta net inflows equates to annualized internal growth and managed assets of 19%. While these businesses are attracting each increased competition. We continue to believe they offer vast growth opportunities. Our Calvert responsible investment subsidiary was also significant driver of growth this quarter. Total Calvert managed assets including amount sub-advised by other Eaton Vance affiliates increased by approximately $700 million to $15.4 billion at the end of the first quarter covered $600 million of net inflows for the quarter equates to 17% annualized internal growth and managed assets. Ranking is the best growth quarter since we acquired the Calvert business just over 2 years ago. Our Calvert offerings spend a wide range of equity income and multi asset strategies managed in accordance with responsible investment principles. In support of building our leadership and responsible investing, we continue to invest in Calvert to expand their ESG research in corporate engagement capabilities. We are also investing to build greater connectivity across our investment organization to support the integrated consideration of responsible investing criteria into the fundamental research processes of Eaton Vance Management and Atlanta Capital. Capitalizing on the proprietary ESG research the Calvert provides. We are also working to expand Calvert's presence and influence in the growing dialogue around responsible investing. Earlier this month, Calvert collaborated with barons for the second year in a row to provide the research supporting the annual barons cover story identifying and ranking the 100 most sustainable of the thousand largest public companies headquarter in U.S. Based on measures of how each of these companies treat shareholders, employees, customers, their communities and the planet. Away from Calvert, our first quarter equity flows were mixed. We saw net inflows of $800 million into Parametric defensive equity mandates and over $600 million into Eaton Vance investment council's private wealth management business offset by $700 million of outflows from Parametric emerging market equities. Across all our affiliates, we realized approximately $750 million of consolidated net inflows into equity mandates in the quarter. As mentioned previously, we saw net investor outflows from our floating rate loan mutual funds, offering the U.S. totaling $2.6 billion in the quarter within that net withdrawals concentrated in December. Across the balance of our floating rate business net outflows were a more modest $300 million as institutional withdrawals were partially offset by higher borrowing balances in leverage loan funds. Within our floating rate loan business. We announced yesterday, the promotion of our long-time director of loan trading and capital markets Andrew Sveen to become Co-Director of the loan group effective March 1st. In that role, Andrew will serve alongside Craig Russ and replace Scott Page, who becomes the Senior Advisor to the group. Andrew's promotion reflects his outstanding contributions to Eaton Vance over his 20 years with the firm and our confidence in his leadership abilities. Scott's movement into a Senior Advisor role closes his remarkable leadership of the bank loan group dating back to 1996, a time when Eaton Vance's bank on business and the asset class as a whole were just beginning to emerge. We are fortunate that Scott will remain closely involved with the loan group of Senior Advisor and Andrew is ready to take the step in his career advancement. Turning to our alternatives reporting category, the quarter's net outflows of $2.2 billion were driven by $1.6 billion of net withdrawals from our global macro absolute return and global macro absolute advantage U.S. mutual funds. As previously mentioned like our floating rate mutual fund withdraws global macro net outflows were concentrated primarily in December and substantially abated in January. In exposure management, we saw $700 million in first quarter net outflows as net reductions in existing client positions more than offset assets gained in the net addition of three new client relationships during the quarter. What changes in client positions can move exposure management assets up or down from period to period the underlying growth in this business is measured by the number of active client relationships remains in place? Close readers of our financial statements will be noticed that we modified our reporting of assets inflows this quarter to combine the previously separate retail managed account and high network separate account reporting categories into a single individual separate account reporting category. This change recognizes the narrow distinctions between the previous reporting categories and better highlights our large and growing business of managing separate accounts for individuals and families. Led by the per metric custom core equity and EVMIR bond offerings that we group under our custom data label this business continues to expand at a rapid cliff. Today we are among the market leaders in individual separately managed accounts with managed assets of a 126.7 billion and some 80,000 in-house managed customized individual accounts. As we scale this business, we recognized the need for ever increasing operating efficiency and continue to invest in technology to advance that objective. You may have seen the press release issued last week announcing that Eaton Vance’s filed an exemptive application with the SEC seeking permission to offer ETFs that would employ a novel method of supporting efficient secondary market trading in their shares which we call the clear hedge method. Because disclosure of current holdings would not be necessary and ETFs portfolio trading activity could remain confidential. In addition to facilitating the introduction across fund asset classes of ETFs employing proprietary active investment strategies the clear hedge method could also be used by existing ETFs holding foreign and less liquid investments to enhance their secondary market trading performance. Aspects of the clear hedge method are subject to issued and pending U.S. patents held by Eaton Vance. In conjunction with filing an exemptive application Eaton Vance has formed a new subsidiary advance to fund solutions to manage the development and commercialization of ETFs utilizing the clear hedge method and other fund related intellectual property. Our next year solution subsidiary becomes part of advanced fund solutions and Steven Clarke President of Next Share Solutions is assuming the same roll at advanced fund solutions. We don’t know how or when the SEC will respond to the clear hedge method application or other proposals to offer proprietary active ETFs, we do believe there is a compelling case supporting our proposed approach. Positive action could set the stage for broader range of proprietary active strategies becoming available to ETFs investors for the first time, negative action could summit next year’s position as the only exchange related product structure that is compatible with proprietary active management. Either outcome could provide a significant opportunity for Eaton Vance. In closing let me say that these are busy active times at Eaton Vance as we continue to advance multiple growth initiatives and work to position our business for continued success in the evolving asset management industry. That concludes my prepared remarks and I will now turn the call over to Laurie.

Thank you and good morning. As Tom mentioned we reported adjusted earnings per diluted share of $0.72 for the first quarter fiscal 2019 a decrease of 6% from $0.78 of adjusted earnings per diluted share in the first quarter fiscal 2018 and a decrease of 14% from $0.85 of adjusted earnings per diluted share reported in the fourth quarter fiscal 2018. As you can see an attachment to our press release GAAP earnings exceeded adjusted earnings by $0.02 per diluted share in the first quarter fiscal 2019 to reflect reverse full of $2.9 million of net excess tax benefits recognized during the period related to stock-based awards. In the first quarter of fiscal 2018 adjusted earnings exceeded GAAP earnings by $0.15 per diluted share reflecting the add back of $24.7 million of income tax expense recognized in relation to the non-recurring impact of the tax law changes and a $6.5 million charge recognized from the exploration of the company’s option to acquire an additional 26% ownership interest and our 49% owned affiliate additional 26% ownership interest in our 49% own affiliate Hexavest, partially offset by the reversal of $11.9 million of net excess tax benefits related to stock-based awards. In the fourth quarter fiscal 2018, GAAP earnings exceeded adjusted earnings by $0.02 per diluted share to reflect the reversal of $2.4 million of net excess tax benefits related to stock-based awards. As Tom mentioned, the market backdrop for the quarter, particularly for the first two months was particularly challenging. Operating Income decreased by 11% year-over-year and 16% sequentially, primarily driven by the decrease in management fee revenue this quarter. Our operating margin was 29.8% in the first quarter fiscal 2019 versus 32.3% in the first quarter fiscal 2018 and 33.5% in the fourth quarter fiscal 2018. Having exited our fiscal year 2018 reporting new highs in terms of both quarterly and annual earnings, it was disappointing to take a market driven step back and operating income in this quarter ending consolidated managed assets of 444.7 billion at January 31, 2019 were down 1% year-over-year as positive net flows over the past 12 months were more than offset by market price declines versus the end of our fiscal 2018 consolidated managed assets were up 1%, reflecting modestly positive market returns and net flows during the quarter. Although average managed assets were up 1% from the same period last year, management fee revenue was down 3%, reflecting a 4% decrease in our average annualized management fee revenue rate from 33.3 basis points in the first quarter of fiscal 2018 to 32 basis points in the first quarter of fiscal 2019. Average managed assets in the first quarter of fiscal 2019 were down 4% sequentially driving a 6% decrease in management fee revenue. The decline in management fee revenue exceeded the decline in average managed assets, primarily due to a 2% decrease in our average annualized management fee revenue rate from 32.7 basis points in the fourth quarter fiscal 2018 to 32 basis points in the first quarter fiscal 2019. The decline in our average annualized management fee rate over the comparative periods was driven primarily by shifts in our business mix from higher fee to lower fee mandate. In the first quarter of fiscal 2019, annualized internal growth and management fee revenue of negative 4% trailed annualized internal growth and manage assets of 1%, primarily due to the mix of higher fee and lower fee strategies within our outflows and inflows during the quarter. This compares to 4% annualized internal growth in management fee revenue on 7% annualized internal growth in managed assets in the first quarter fiscal 2018 and 1% annualized internal growth in management fees on 2% annualize internal growth in managed assets in the fourth quarter of fiscal 2018. Turning to expenses, compensation decreased by 1% from the first quarter fiscal 2018, primarily driven by lower operating income-based bonus accruals, and a decrease in stock-based compensation partially offset by higher salaries and benefits associated with increases in headcount and year end merit adjustments. Sequentially, compensation expense increased by 4% from the fourth quarter fiscal 2018, primarily reflecting an increase in stock-based compensation related to the annual awards granted to employees in November, higher salaries and benefits driven by increases in headcount and seasonal compensation factors including payroll tax clock resets 401-K funding and fiscal year end merit increases, all partially offset by lower operating income based bonus accruals. Non-compensation distribution related costs, including distribution and service fee expenses and the amortization of deferred sales commissions decreased 6% from the same quarter a year ago, and 7% sequentially, primarily reflecting lower distribution service fee expenses driven by a decrease in average managed assets and share classes that are subject to these fees and lower marketing and promotion costs partially offset by higher commissioning amortization for certain private funds. Funds related expenses were up 5% year-over-year reflecting higher average managed assets and sub advised funds versus a year ago quarter and were down 2% sequentially reflecting lower average managed assets and sub advised funds versus the prior quarter. Other operating expenses increased 13% from the first quarter of fiscal 2018 and decreased 2% from the fourth quarter fiscal 2018. The year-over-year increase primarily reflects higher information technology spending attributable mainly to expenditures associated with the consolidation of our trading platforms and enhancements to Calvert's research system and higher facilities expense related to expansion of rental space and higher depreciation of leasehold improvements. The sequential quarterly decrease primarily reflects lower professional services expenses due to a decrease in corporate consulting and external legal costs, partially offset by an increase in charitable contributions. We continue to focus on overall expense management and identifying ways to gain operational leverage. Net gains and other investment income on seed capital investments were negligible in the first quarters of fiscal 2019 and fiscal 2018 and contributed a penny to earnings per diluted share in the fourth quarter fiscal 2018. When quantifying the impact of our seed capital investments on earnings each quarter, we take into consideration our pro rata shares the gains losses and other investment income earned on investments in sponsored strategies, whether accounted for us consulted funds, separate accounts for equity investments, as well as the gains and losses recognized on derivatives use to hedge these investments. Within report the per share impact net of income taxes and net income attributable to non-controlling interest. We continue to hedge the market exposures of our seed capital portfolio to the extent practicable to minimize the associated or in volatility. Net gains and other investment income in the first quarter fiscal 2018 included a $6.5 million charge related to the exploration of the company's option to acquire an additional interest in Hexavest. We excluded this one-time charge from our calculation of adjusted net income and adjusted earnings per diluted share for the first quarter fiscal 2018. Non-operating income expense included $2.9 million of net expense allocation from consolidated CLO entities in the first quarter fiscal 2019 and that income contribution of $1.6 million and $0.4 million from consolidated CLO entities in the first quarter fiscal 2018 and the fourth quarter fiscal 2018 respectively. Year over year and sequential decreases in income contribution from consolidated CLO entities primarily relates to a decline and fair value of the company's beneficial interest in these entities, resulting from a downturn in the loan market during the first quarter of fiscal 2019. Turning to taxes. Our effective tax rate was 23.4% for the first quarter fiscal 2019, 36.3% in the first quarter fiscal 2018 and 26.4% in the fourth quarter fiscal 2018. The company's income tax provision for the first quarter fiscal 2019 includes $0.6 million of charges associated with certain provisions of the 2017 Tax Act relating to limitations on the deductibility of executive compensation that began taking effect for the company in fiscal 2019. The company's income tax provision was reduced by net excess tax benefits related to stock-based awards totaling $2.9 million in the first quarter fiscal 2019. $11.9 million in the first quarter fiscal 2018, and $2.4 million in the fourth quarter fiscal 2018. The company's income tax provision for the first quarter fiscal 2018 also included a non-recurring charge $24.7 million to reflect the estimated effects of the U.S. federal tax law changes that were enacted in the first quarter fiscal 2018. As shown an attachment 2 to our press release, our calculations of adjusted net income and adjusted earnings per diluted share remove the net excess tax benefits related to stock-based awards and the non-recurring impact of the tax law changes. On this basis, our adjusted effective tax rate was 25.9% in the first quarter fiscal 2019, 26.7% in the first quarter of fiscal 2018 and 28.6% in the fourth quarter fiscal 2018. On the same adjusted basis, we estimate that our quarterly effective tax rate for the balance of fiscal 2019 and for the fiscal year as a whole will range between 25.9% and 26.4%. During the first quarter fiscal 2019, we use $43.2 million of corporate cash to pay the $0.35 per share of quarterly dividend declared at the end of our previous quarter, and repurchased 3.1 million shares of non-diluting common stock for approximately $115 million. Our weighted average diluted shares outstanding $115.5 million in the first quarter fiscal 2019, down 7% year-over-year, and 5% sequentially, reflecting share repurchases and exits of new shares issued upon investing of restricted stock awards and exercise employee stock options and a decrease in the diluted effect of in the money options and unvested restricted stock award. We finished our first fiscal quarter holding $698.6 million of cash, cash equivalents and short-term debt securities, and approximately $337.4 million and seed capital investments. These amounts compared to outstanding debt obligations of $625 million. We continue to place high priority on using the company’s cash flow to benefit shareholders. Given revenue weakness and growth in fixed expenses fiscal discipline around discretionary spending remains top of mind in fiscal 2019. Based on our strong liquidity and overall financial condition we believe we are well positioned to continue managing our business for long term growth through the current weakness while also continuing to return capital to shareholders through dividends and share repurchases. This concludes our prepared comments and at this point we’d like to take any questions you may have.

[Operator Instructions] Your first question today comes from the line of Daniel [ph] of Jefferies. Your line is open.

Great, thanks. Actually, Gerry O'Harris [ph] sitting in for Dan this morning. Appreciate the color around the bank loan flows for into quarter but perhaps you could maybe elaborate a little bit on the outlook for flows products was a flat to even potentially declining interest rate environment going forward?

Yes, so there were a couple of things that occurred in the quarter that adversely affected the flows. One, relating to a changing view on where short-term interest rates might be going. Second, relating to where it looked like the economy might be going is the potential there for credit losses in full investment grade assets like floating rate loans. And the third was, yearend tax law [ph] selling. And as we look at the outlook from here, we’re not in a position where we’re going to see yearend tax law selling at least not anytime soon. From our read of the economy, there is not a substantial chance of a recession or a dramatic weakness occurring over the next few quarters anyway for what’s visible. In terms of where rates are going, I think we’re in a position where investors could see long term rates frankly move either way and also where there is some potential albeit diminished for continuing upward movement in short term rates. What people need to understand about bank loans is that you don’t need increases in short term rates for this to be a favorable investment. If you can look at yields on the funds today based on where rates are today and the potential for recovery overtime of some of the old ground that was lost on valuations in the December declines, we think we’re positioned for high single-digit type annualized returns in the asset class even in the absence of upward movement in short term rates which we believe many investors will find attractive.

That’s helpful. And perhaps one for Laurie looks like there is an accounting change in early November could you perhaps help us unpack this solo maybe which line items and revenue or even expense side of the P&L were impacted?

Yes, the most significant impact of the new accounting pronouncement related to the reclassification of fund subsidies so previously under the old accounting guidance, we recorded fund subsidies as a component of fund expenses and under the new guidance we need to actually bring that up to the top line and actually report that as a contour revenue amount against the management fees. So, you’ll see that we adopted the new account pronouncement using a full retrospective application so the numbers you’re seeing are full apples-to-apples comparison going back for all periods presented. But just to kind of give you the numbers that really kind of moving the numbers around a little bit on the revenue side. The subsidies that we moved from expense up to a control management fee representation where a total for the quarter were $9.2 million for the previous quarter so Q4 of 2018 were $8.7 million and then for the first quarter of 2018 more felt $5.7 million so those are the numbers that are now being netted against management fees and are affecting not only the obviously the absolute dollar amount of management fees presented but also impacting our affective fee rates and then all the calculations. So again, we did the full retrospective application all prior periods had been changed to reflect those that movement including our effective fee calculation by mandate category.

So, the net impact of that is that the revenues go down and reported expenses also go down. So, margins go up. There was also a second aspect of that change, although smaller had the opposite effect on margins. You want to talk about that?

Yes. At the end of the day and just be clear, operating income didn't change at all, this is all just movement around categories. But on the distribution side, there was a modest required between distribution expense and distribution income. And by quarter, it was somewhere in the neighborhood of $3.5 million to $4.5 million. So that was far less impactful, because obviously one of the biggest drivers of the business right now is looking at our effective fee rates in terms of our management fees. So that had far less impact, but it muted the impact on margin of the management fee change.

Okay. That's helpful. Thanks for taking our questions.

Your next question today comes from the line of our Ari Ghosh of Credit Suisse. Your line is open.

Hi. Good morning, everyone. Maybe the first one for Laurie back on expenses. I know that the restatement impact of the distribution and services lines on this quarter. But can you help us think about comp and other expense line for 2019? Is the 36% still a reasonable called margin range for fiscal '19 and then on the other expenses? Should we expect the 53 million per quarter to drift low a little bit, just given that you're done our platform in creation projects?

Yes, I think we're still continuing to invest. So, I wouldn't make any assumptions about our longer-term investments on the technology side. I think that we've got, and Tom identified in his comments earlier. We're continuing to invest both in Calvert and also on our platforming around separate accounts and will be thinking more about that as the year progresses. From a comp perspective, I think that the comp range is reasonable. I think that obviously in periods like we saw this quarter, where you had a significant downturn -- down take in the management fees, the mix between variable and fix is going to shift a little bit. But we would not anticipate seeing anything significantly changed in terms of our overall comp ratios.

Got it. And then on the fee rates. Can you talk about the core trends that drove the lower fee rate this quarter? Was more mix shift driven by product to channel within these asset classes? Any additional color here would be helpful. And then you mentioned the improvement in the organic revenue growth in January and throughout the quarter. Is -- are you seeing that in Feb as well? Can you just give us an update on how that's tracking for that?

Yes. So, let me just -- I'll start with the organic revenue growth. We don't calculate work, it's a fairly involved calculation. So, we don't do a daily updated organic revenue growth this was actually the first time, we've broken it out on a monthly basis into quarter. So, we don't -- I have a sense of exactly where we are in February, but it feels like the tone of the business remains positive. We do see daily flow data, we can approximate what that looks like from an organic revenue growth perspective. So, generally the positive tone of January continues with solid net inflows for the month to date in February. In terms of drivers of -- our declining average fee rate. It's 2 things, it is mix of business that is both across categories and within reporting categories. Generally, we're adding business or adding more business at lower fee rates. And in some cases, we're losing higher fee assets. There was also some, I would say it's a secondary effect, but also there was some re-pricing of existing mandates. Particularly in the first quarter, I highlighted in my comments. The net outflows from our bank on mutual funds and our global macro mutual funds, both of which happened to be among our higher fee strategies. So, in this particular case, it was really the outflows from those plus the fact that our inflows are in things like custom beta that are lower fees. That really accounts for the continuing movement downward. But we view this as a long-term secular trend and expect to manage our business accordingly.

I'll get back in the queue.

Your next question comes from the line of Patrick Davitt of Autonomous Research.

Thank you, good morning. On the exposure -- on the parametric side and custom data stuff, I know you’ve always kind of highlighted how high touch that can be. As a part of the investment process, working towards ways to maybe automate that business a bit more in order to eke out a bit more operating leverage?

Well, so we manage across parametric. I think it's something on the order of 40,000 individual separate accounts. So it has to be highly automated for that to work, particularly given average fee rates across that business in 20 basis point range. So let's say -- so we're -- we think we're already pretty good at serving customized individual separate accounts investors on an cost effective basis. We expect over time to get even better to continue investing in technology and improving our operating efficiency to drive down service costs. And those costs are primarily reflective of the number of accounts. So it's -- although our fees tend to be AUM-based or [indiscernible] O-AUM base, our cost in that business are primarily account based. So the margin is sensitive to average account size and also to our costs per account. And we very much focus on trying to drive those down as much as possible because we expect and we hope that as our business grows, we will expand the range of assets and investors that we serve. That will likely have the effect of driving down average account sizes. So we need to drive up our operating efficiency so that we can drive down our per unit operating costs, so that we can maintain profitability levels as we bring down average account sizes.

Helpful. Thank you. And then I think you just mentioned the re-pricing of some existing mandates. Could you expand on that a bit? And is it something that you think was fairly idiosyncratic to the quarter or a trend developing with -- a certain core climates or something?

No. There were no material individual repricings during the quarter, certainly nothing to call out. I was just commenting on the general trend in our business that fees are moving lower. Sometimes that's in response to agreements with individual clients, or intermediaries or fund trustees, but frankly more often it's driven by competitive forces where our sales teams or marketing organization generally recommends that we lower prices in a particular asset class because we think that will make our strategies more saleable.

Thank you.

Your next question comes from the line of Brian Bedell of Deutsche Bank. Your line is open.

Great, thanks, good morning. Maybe just following on that question on the pricing pressure; obviously mix shift there as you alluded to is a major driver of that. But within the two buckets where we saw the biggest compression in the equity area and the alternative area, I guess maybe Tom, if you could comment on to what extent that was caused by the repricing versus just simply mix shift within those categories. And if it's mix shift, should we expect that fee rate to bump back up in the next quarter, given that positive trends within geography.

Yes, Brian in both of those categories, it would certainly be overwhelmingly mix shift. I can't promise that it's going to reverse in future quarters. If you look at the alternatives category, the Global Macro Absolute Return Advantage Fund, which has embedded leverage in it, and therefore has a higher return potential commends a higher fee. We saw an increase in the average fee rate within that category a year ago or over the early quarters of fiscal 2018 as the global macro advantage version grew relative to the category as a whole. With the outflows from the global macro strategies including global macro advantage in the fourth quarter that reversed. Within equities, I would say the primary driver, there has been new business gained at relatively low fee rates. That includes a large investment council client, that includes our parametric defensive equity mandates which are at lower than average equity fee rates. Also, some of the inflows at Calvert are in index-based strategies, including their largest index-based bond, which is at 19 basis point expense ratio for the institutional share class. So it's really very much in those two cases in particular, very much driven by mix shift for.

Parametric emerging markets.

Yes, thanks, Laurie. To go on the other direction parametric emerging markets where we had I think about $700 million of net outflows in the quarter, is an above average fee rate. So it's gaining assets in lower fee strategies and losing assets in higher fee strategies. Unfortunately that's the way of the world these days in asset management.

Yes. Now it's very clear. Thank you. And then just to follow up, I mean maybe Tom if you could talk a little bit about the clear head application, how you think that's differentiated from the I think it's probably closest to sort of a T row [ph] type of application as opposed to precision. But maybe how you see that differentiated and you mentioned also if there's negative action -- no action on it. Do you think that will become a catalyst for the ETM app and maybe you could give a sense of timing on that I guess if that's possible?

Sure. So the clear hedges one of now a series of half dozen or so exempted applications before the SEC, relating primarily to the ability to offer ETFs that don't disclose their full holdings on a current daily basis. Most of those the proposition is that the fund will disclose on a daily basis using different technology, but different terminology. But I'll call them a reference portfolio that was something that looks like smells like behaves like the fund's actual portfolio but does not include all the current holdings where the delta is designed to preserve the confidentiality of current trading. The concern has been that a proxy portfolio, I'll call it, while on clear days may perform adequately particularly in asset classes like U.S. equities that in harder asset classes like international securities or less liquid securities, or across all asset classes during periods of significant market volatility, that, that won't be good enough. And that the reference portfolio and the actual portfolio will be subject to what's called basis risk, which market makers will deal with in a very clear way, which is during those times, and for those types of funds they'll deal with, by widening their bid-ask spreads and causing investor trading costs to go up. Our proposed approach called Clear Edge builds on that approach by not only disclosing a reference portfolio, but also by incorporating a swap facility whereby a market maker or other arbitrage --could enter into transactions with the fund to an effect lay off the relative performance risk between the known hedge portfolio, and the unknown underlying portfolio, so providing a much more reliable basis for ensuring that the funds can be arbitrage effectively across all market environments and across all fund asset classes. As mentioned in my comments, we were issued a patent on this approach back in October. And it's on that basis that we're looking to not only get approval for these application, but also potentially to license that technology across the fund business. We don't claim to be unbiased but we certainly think that we're all that to the other applications our proposed approach up stacks up very well, in terms of broad applicability and the most assured level of strong secondary market trading performance. In terms of the impact of this on NextShares, we continue to support our NextShares initiatives. We still face the issue that we have very limited distribution access. As we’ve talked about in previous quarters one of the biggest challenges perhaps the biggest challenge with NextShares has been the competition against the idea that the SEC is about to approve something else that is an ETS, not something like next year’s exchange trader managed fund that requires more of an education process to the advisor and to the underlying and investor as to what this is. What the clear hedge method exemptive application does for us is essentially puts us with a significant leg in both camps, that is if the SEC were to act to approve some or all of these exemptive applications for ETS that don’t disclose their holdings on a daily basis we think we have an idea that stacks up very-well against the competition, and we hope that would translate into approval for our idea and potentially broad market application. If things go the other way and the SEC somehow puts a nail on the coffin on the idea that these things will become approved, that opens up we believe a much greater opportunity to introduce NextShares across the broader range of distribution. As it stands now the NextShares effort is largely on hold in terms of adding new distribution relationships, pending what many perceive as maybe a near term resolution of this issue at the SEC. Many people are saying we don’t know if this is true or not, that 2019 will decide one way or another whether some of these or all of these concepts get approved.

Okay very good, great, thanks for that. And then cost for the turnout are relatively immaterial I guess continues to stop [ph] in the distribution in the ETMF?

Relatively in material yes.

Okay great.

And we don’t expect the same kind of cost to be incurred in connection with launching Clear Edge if we’re so lucky to have that opportunity. Our expenses for next years if you look back on it were principally related to training of advisors educating the market and developing technology at the broker-dealer level to accommodate the special way in which NextShares trade. ETFs involving the Clear Edge method will still be ETFs and will trade in exactly the same way as other ETS and don’t require significant investor education.

Okay, great, thank you so much.

Thank you.

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

Good thanks good morning everyone. Could you maybe just follow up a little bit on some of the investment priorities I mean obviously time you called out, contained investment in scaling the separate account business and investing in Calvert in ESG but can you maybe talk a little about some other initiatives and I guess maybe particularly you built out London a few years ago kind of your thoughts about on progress there as well as maybe more globally.

Yes thanks so just check off you hit most of our list strategic priorities for the year, so building out our specialty solutions for high net worth investors led by the custom beta offerings, responsible investing and when you did mentioned but which I’ll just highlight is floating rate and short duration strategies building on our historical basis of market leader and [indiscernible] to encompass a broader range of short, ultra-short duration strategies. Some of them connected to Calvert some not, some primarily fund vehicles some offered a separate account but broadening our portfolio of businesses relating to short duration floating rate type assets. The fourth priority and the one you’re asking about specifically is growing our business internationally. We seem to be in a holding pattern with about 95% of our assets managed for clients in the U.S. and that’s [indiscernible] of trying to grow our business outside of the United States. You mentioned an effort that we undertook about 3.5 years ago to put in place an equity investment team in London that team continues to operate there. We are at a point where our lead strategies managed by that team recently gained three year track records and in some cases those were quite attractive three year track records. Particularly in small cap global and international equities, we see an opportunity to gain significant business in 2019, driven by the strength of that three year track record, the reputation of the team that precedes their coming to Eaton Vance. And also just the fact that small cap is an area of the market where good managers tend to talk with capacity. And so there tends to be more demand for let's call it new managers. And also there's maybe a broader belief that active managers can add value in small cap then in the larger cap asset classes. So I would point to first what we hope will be expanding business in small cap there. Another angle that we're pursuing to growing our international business relates to Calvert and specifically to the integration of Calvert source ESG Research into our menu of internationally offered, both equity and income strategies, particularly in Europe having a demonstrated integration of responsible investing criteria into your research process is a must have not a want to have, and having Calvert is part of Eaton Vance. And the work we've done over the last couple of years to integrate their research into our investment offerings -- and when I say our I mean things branded Eaton Vance management as well as things branded Calvert, we hope will begin to pay dividends in the market in 2019. Very strong demand in the market for responsibly invested solutions, very strong respect in the market for what Calvert stands for in that market and the capabilities of its research team, the challenge and the opportunity for us to marry those two things, and to bring out a range of strategies that incorporate that research inside Eaton Vance managed equity and income strategies, particularly focused on the European market.

And maybe, thank you. Maybe kind of corollary or follow up to that. I mean look historically the firm has been reasonably acquisitive. And then looking at well, it was Calvert or Parametric many years ago, along the way in acquiring new capabilities. So when you think of the industry landscape, can you may be helpful if it's possible, kind of thinking about how are you thinking about it incremental, inorganic, opportunities are there specific -- whether it is regions or distribution channels or asset classes that are would be most interested in if there was an inorganic opportunity that came along.

Yes, we certainly subscribed to the view that the industry needs to consolidate and is likely ripe for consolidation. There have been some challenges to that, in that the rising equity markets of let's say 2017, 2016, 2017 covered a lot of sense for companies that while they were experiencing organic declines in their business, we're seeing top line growth driven by rising prices. With the declines in the market last year, particularly the acceleration of those in the fourth quarter. I think more companies are aware of the fact that on the active side and unless you have scale also in the passive side, this is a pretty tough business and that there can be significant advantages by combining to gain market strength and potentially also to realize some cost synergies. We have not done what we would consider consolidation type acquisitions. For the right kind of target we would certainly be interested, they would have -- they would have to be a cultural complementarity, there would have to be clear potential to save costs. But probably most importantly, we would have to have a clear path to understanding that revenues were going to be sustained post transaction. Always in these things that the risk is that you lose more in revenues then you save in costs. But we're looking at this, Laurie and I spent a fair bit of time chasing down different potential opportunities in most cases we proved to be to price sensitive to be the cases, we proved to be to price sensitive, to be the winners that things come to an auction, where it's outside of an auction situation where people are more focused on the past, supportive owner and supportive investment culture, we tend to do pretty well in those conversations. Objectives that we have in considering acquisitions, I'd say, first and foremost, adding to the value of our firm. That's number one. So that's a function of -- if we buy something, what does that do potentially for earnings and what does that do potentially to the multiple that the market applies to those earnings recognizing that, if we were to merge with a lower growth company. We might get back more in multiple then we gain in terms of earnings accretion. If you go down a bit and say, well, what strategic objectives would we like to perhaps advance by growing inorganically. Certainly making our business more global would be one objective. There are certain asset classes that perhaps we would be interested in growing. We don't have a fundamental emerging market equity capability within our company, at least not of size. We have been interested in expanding and leverage credit perhaps into private markets. That's probably covers the landscape. We're interested in growing the Parametric business, if there are complementary businesses that perhaps, we can acquire, that fit in with their systematic rules based approach to investing that would perhaps either add scale or add complementary features or perhaps help us gain new geographies. But we kick the tires on a fair bit of things and so far haven't come up -- haven't emerged victorious in anything since the Calvert transaction two years ago.

Great. Very helpful. Thanks for taking my questions.

Thank you.

Our next question today comes from the line of Mike Carrier of Bank of America. Your line is open.

Thanks, and good morning. Just one for me. Just given some of the mix shift trends that we've seen and then some of the strength that you're seeing in the individual separate accounts, I just wanted to get maybe some color on how we should think about or how you guys are thinking about like the fee rate trends, but then, you probably more importantly, the incremental margins in that channel and the business overall. Laurie, I think you mentioned just given like the market dynamics and expense discipline and then some of the investments to try to drive down like improving efficiency overtime. So just any color on -- what you guys are working on? Or what can give some of the fee rate in the trends in the industry?

That's a -- that's pretty broad question. I think that we're very mindful as Tom mentioned, that when we start entering and continue to scale the separate account business, that the margin profile is a little bit different, because it is far less about the variable costs as it is about that sort of fixed cost base that you have to deal with, because it really is an account driven business. So I think we're really being very thoughtful about that business right now. Because we do recognize that going forward, if we want to scale way beyond the roughly 80,000 separate accounts across the complex that we're currently managing. And we certainly have every intent and desire to do so. We're going to have to make some investments to ensure that we can remain as efficient as possible and ensure that our platforms are scalable as possible. So I would anticipate that we will see incremental investment there, I don't think we have anything that we're quantifying at this point, but we will be making incremental investment. But to that end, if we're able to make those investments, we would hope that we would become on an account-by-account basis, effectively more -- will be able to leverage the business in a more efficient way. So we continue to think that both sides of the business sort of, our traditional active, as well as the direct indexing and other separate account parts of our business are equally attractive to us and are certainly capable of generating significant operating leverage. But we need to be really thoughtful as we continue to grow these businesses going forward.

Okay. Thanks a lot.

Okay. Very good. I think we're out of time for today. So at this point, I want to thank everybody for your participation. And we look forward to speaking with you soon.

And this concludes today's conference call. You may now connect.