Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Vance Corp. Fourth Quarter and Fiscal Year Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today. Eric Senay, Treasurer and Director of Investor Relations. Thank you Please go ahead, sir.

Thank you, Lisa. Good morning and welcome to our fourth quarter and fiscal 2019 earnings call and webcast. With me this morning are Tom Faust, Chairman and CEO of Eaton Vance; as well as our CFO, Laurie Hylton. In today’s call, we will first comment on the quarter and fiscal year and then take your questions. As always, the full earnings release and charts we will refer to during the call are available on our website 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 uncertainty 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 website or upon request at no charge. I will now turn the call over to Tom.

Good morning, and thank you, everyone, for joining us. Earlier today, Eaton Vance reported $3.45 of adjusted earnings per diluted share for the fiscal year ended October 31, which is an increase of 7% from $3.21 per diluted share in fiscal 2018. For the fourth quarter of fiscal 2019, we reported $0.95 of adjusted earnings per diluted share, up 12% from $0.85 per diluted share in the fourth quarter of fiscal 2018, and up 6% from $0.90 in this year’s third fiscal quarter. Both the annual and quarterly results represent new record highs for the company. We ended fiscal 2019 with $497.4 billion of consolidated assets under management also a new record high, and up 13% from the end of last year. By mandate reporting category, changes in consolidated assets under management versus the prior fiscal year end ranged from growth of 22% for exposure management, 21% for fixed income, 20% for portfolio implementation, and 14% for equity, to declines of 22% for floating rate income and 31% for alternatives. Fiscal 2019 marked Eaton Vance’s 24th consecutive year of positive net flows. For the fiscal year, we generated $23.9 billion of consolidated net inflows, or $12.9 billion, excluding exposure management mandates, which have more volatile flows and lower average fee rates than our other mandate reporting categories. Fiscal 2019 net flows represent 5% internal growth in managed assets. Consolidated net inflows for the fourth quarter were $9.8 billion, or $2.8 billion, excluding exposure management, making the fourth quarter of fiscal 2019 our 21st consecutive quarter of positive net flows. Fourth quarter net flows represent 8% annualized internal growth in managed assets. Internal growth in consolidated management fee revenue was a modest 0.1% for fiscal 2019 as a whole, as growth achieved in the second, third and fourth fiscal quarters was…

Thank you, and good morning. Tom described, we are reporting reported adjusted earnings per diluted share of $3.45 for fiscal 2019, up 7% from $3.21 in the prior fiscal year. As you can see in attachment two to our press release, earnings under U.S. GAAP exceeded adjusted earnings by $0.05 per diluted share in fiscal 2019, reflecting the reversal of $5.4 million of net excess tax benefits related to stock-based compensation awards. Adjusted earnings exceeded GAAP earnings by $0.10 per diluted share in fiscal 2018, reflecting the add-back of $24 million income tax expense recognized in relation to the non-recurring impact of the U.S. tax law changes enacted in December 2017, and a $6.5 million charge recognized upon the expiration of the company’s option to acquire an additional 26% ownership interest in our 49% owned affiliate, Hexavest, partially offset by the reversal of net excess tax benefits related to stock-based awards a $17.5 million. In fiscal 2019, operating income decreased by 6% year-over-year, reflecting substantially flat management fee revenue, a 6% decline in non-management fee revenue and 2% growth in operating expenses. Our operating margin was 30.9% in fiscal 2019 and 32.8% in fiscal 2018. The difference between our reported 7% increase in adjusted earnings per diluted share and the 6% decline in operating income is explained principally by a $50 million positive change year-over-year in non-operating income and expense, a decline in the company’s adjusted effective tax rate from 27.6% in fiscal 2018 to 25.2% in fiscal 2019 and a 7% reduction in weighted average diluted shares outstanding. The improvement in non-operating income and expense was driven principally by higher net gains and other investment income from the company’s investments in sponsored strategies and an increase in income contribution from consolidated CLO entities. As Tom described, we are reporting…

Thank you. [Operator Instructions] And our first question comes from the line of Dan Fannon from Jefferies. Your line is open.

Thanks. Just a clarification on some of the comments, Laurie, around severance. So did I hear right that it was $6.2 million here in the fourth quarter and you don’t expect much in the first quarter? And I guess, it sounds like in the aggregate number for the year was a little high, can you talk about where the changes are coming from a headcount perspective, and if there are any other one-time kind of expenses in this fourth quarter number?

Sure, Dan. The severance is largely focused around the initiatives that we announced in June associated with the separate account project with Parametric and Eaton Vance management. So I think, we had announced we have made some significant – we’ve made a very significant hire at Parametric in terms of the Chief Technology Officer and some of the severance related to some employee changes around that initiative. And in terms of other significant fourth quarter impact items, there really was nothing else that would identify as being significant in the quarter.

Okay. And then, so I guess just now that you’re a little bit further along in terms of that restructuring and some of those changes. As you think about next year, I get the comments that you’re focused on efficiency, but is there increased savings or operational leverage as a result of some of these changes that you maybe have greater clarity on today than you did when you first announced this?

Dan, we’re still in very early days. Obviously, we’re working through a lot of the internal changes. I think that we had identified that we’re going to be consolidating sales professionals into a one single channel to cover RIA and multi-family offices, and we’re well underway in actually making those changes. We’re also, as we identified, consolidating under the Parametric brands, our tabs laddered in our corporate laddered businesses, so all those changes internally are well underway. We do anticipate that we will have, as we identified previously, incremental technology spends that we will be – and we will be making those investments throughout fiscal 2020. I would anticipate that we’ll see a modest uptick in our technology spend related to those efforts. We do firmly believe, however, that those efforts over time will result in a significantly more efficient platform, and therefore, we will not be seeing significant increases in headcount associated with that.

Okay. Thank you.

And our next question comes from the line of Ken Worthington from JPMorgan. Your line is open.

Hi, good morning. Thank you for taking my question and really just to kind of follow-up on Dan’s question at first. As we think about 2020, if we’re in normal markets, if sales are sort of similar to the pace that you guys see this year, are margins expected to kind of rise/fall, or do they see the same based on your outlook for these investments?

I would not anticipate that we would see a significant change in margins. I think it’s important to keep in mind that roughly 55% of our costs at this point are fixed, 45% are variable. As I mentioned, we would anticipate seeing a modest uptick in the technology spend. But given the parameters that you outlined in terms of the forecast for next year, I would not anticipate seeing a significant change in margin.

Okay.

And I would just add, that’s assuming that market levels…

…right.

…stay in the range at where we are today.

Okay. Okay, thank you. And I know you’ve been at a couple of conferences and probably addressed this question a bunch. But just on UBS, the changing of pricing for SMAs beginning in, I think, January of next year, so a couple of questions around that. Is Eaton Vance going to opt into the UBS Access or UBS Strategic Wealth Portfolio offerings that have the new pricing? And if so, what might the impact be of that? UBS is calling SMA strategies this month, was Eaton Vance impacted by the calling? And then, ultimately what is the move by UBS mean for Eaton Vance, particularly if UBS becomes sort of the industry standard in how they’re treating the SMAs?

So a few things in there, I can respond to. So as far as I know, we were not impacted by any calling of products to use your words, so I don’t – we haven’t seen any changes yet. My understanding of the timing of the UBS initiative in separate accounts is that, they’re offering some, what I’ll say, internally or maybe technically managed by not UBS Wealth Management, but UBS Asset Management, but affiliate company offerings will begin entering the market in January 2020, and that they’re looking to add third-party managers to this new program that they announced, I believe starting in July. So we’re still some months away and we certainly have not committed to being a part of that program. Whether or not or to what degree it affects this business, I think, will largely be based on participation levels and I mean, that in two different respects. First, how active are UBS Financial Advisors in introducing these programs to their clients or converting their client business into these new programs. So is there a significant opt-in to these internal programs that will take effect in January? And then second, when the program becomes available to third-party managers, such as ourselves in the second-half of next year, what’s the participation rate among asset managers? And also, again, what’s the participation rate among UBS Financial Advisors? So it’s pretty early days. My impression is that some of the pricing and terms of these offerings are still at least somewhat in flux. One of the things we do like about this is importantly, that it recognizes the distinctive value of tax management and responsible investing with the – I believe under their proposal, this would – there would be a extra client charge, extra payment that would be passed through to the investment advisor associated with assets that are tax managed and assets that offer responsible investing as a component of that, and we are – we believe the market leader in both tax advantage and responsibly managed individual separate accounts. So in some ways, that’s an endorsement of our position in this business. They have described this as a move to bring institutional pricing to the individual separate account business. But from what we understand, the pricing levels that we’re proposing are generally quite a bit lower than our understanding of where institutional prices are. So I think it’ll be a challenge for advisors to embrace the UBS pricing without potentially adversing pricing of other business, where, in many cases, that most favored nation provisions will limit the ability to offer better prices to UBS clients, for example, than are offered to compliance of other broker dealers or other institutional clients. So I think, it’s pretty early days in terms of trying to anticipate what the impact of this will be, but maybe I’ll stop there on that topic.

Okay. Well, that was helpful. I really appreciate it. Thank you very much.

Thank you.

And our next question comes from the line of Patrick Davitt from Autonomous. Your line is open.

Good morning. Thank you. You mentioned, the Fed – the change in Fed stance on rates potentially helping flows in the bank loan business, but there has been a lot of increasing chatter about credit weakness in leveraged loans. So could you kind of parse out that view through the lens of potential concerns about credit weakness? In other words like, how could we expect that much better flow picture, people are worried about credit in that product?

Yes. And that’s the – you’re right. That’s – why do people buy or sell bank loan strategies? These are below investment-grade strategies. So in addition to being floating rate, there is a credit component, that’s what you get paid for as a loan investor as to take credit risk during periods when credit risk is perceived as widening prices of loans typically fall. We have not seen a lot of price action. Bank loan prices have actually been quite stable. Overall moves in terms of the stock market and other sort of broad measures of economic expectations have generally been positive over the last couple of months. There’s certainly nothing in our portfolio of loan exposures, at least to the extent I’m aware, that suggests there are major concerns about credit emerging in the bank loan asset class. At some point, there will be a turn in the economic cycle. We certainly don’t believe that economic cycles have been in some way repealed, but there’s nothing in our crystal ball that suggests that a downward trend is imminent. And from the perspective of our team, the spreads offered and – the spreads and rates offered by floating rate bank loans are quite low today, are quite – sorry, quite attractive today and that the risk of a near-term downturn is seemingly quite low. I would also observe that the history of this asset class through market downturn has been generally quite attractive rates of recovery on loans that default reflecting the senior secured status of these assets. So we don’t see a cycle turning down anytime soon. We know at some point it will turn down, but the history of this asset class is that based on spreads in the market today and in the market over time that investors are being well compensated for the credit risk they’re taking by investing in floating rate bank loans.

That’s all I have. Thanks.

Thank you.

Our next question comes from the line of Bill Katz from Citi. Your line is open.

Okay. Thank you very much for taking the question. Maybe just, Tom, sticking with maybe your thinking a little bit more, you had mentioned in some of your prepared comments some of the three or four things you want to focus on for this year. Could you expand a little bit on maybe two of those points just in terms of “the spending” some of the franchise, parts of the business, the bank loan and global macro? And then, just sort of how you sort of see the industry from a consolidation perspective and how you might think about capital deployment?

Sure. So let’s first talk about bank loans and global macro. So our bank loans have been in this pretty significant outflow. I’m really focused on U.S. retail, where the flow numbers are quite visible. Remarkable outflows over the last 12 months after a period of inflows and, yes, it pretty well attracts changes in interest rate expectations, though it feels like this cycle of inflows and outflows has been rather amplified relative to the changes in short-term rates that we’ve seen and certainly what we expect from here. As I mentioned in my prepared remarks, we’re pleased that we’ve gained market share in that environment. We are the flow leader in the category in terms of market share and are gratified that through the downturn, we’ve seen smaller shrinkage in our business than the retail market as a whole, so that’s good. So we feel like we’re entering this – we’re going through this down period by strengthening our position. And I would say broadly that one of the benefits of being an industry leader, and certainly this is a category where we are an industry leader, is that that’s often the case is that opportunities to hold and build market share, capitalizing on leadership positions tend to be the greatest during periods of market weakness and that’s what we’re going through, and that’s what we’re experiencing. And while we don’t like to see the shrinkage in our business, we’re pleased that we are seemingly adding to our position based on industry statistics. In terms of our global macro, this is a business that we’ve grown over the last maybe 10 or so years pretty significantly. Here, too, there’s a certain cyclicality of performance and flows. What tends to happen is that, during periods of general equity market strength…

Okay. And just as a follow-up, and thanks for taking these questions. Maybe a two-part or one, can you just – Tom, I lost you a little bit when you were talking about some of the pricing complexities with the UBS in terms of the most favored nations. Just wondering if you could sort of flush that out? And then, stepping back, there has been a bunch of sea chain events on the retail broker/dealer models just in terms of combination of moving to the zero pricing on certain trading, as well as some potential M&A. How full would those events impact Eaton Vance’s pro or con?

Yes. I guess to be determined, but let me start with the UBS question just to clarify. So maybe I use the term most favored nation provision, which I assume most people would know means that we have arrangements with broker dealers who offer retail managed account platforms. And also in some cases with institutional clients that that say broadly, that we want to offer the same strategy at a better price to a competitor. That is put in there typically at the insistence of the customer. But it also has a somewhat protective effect by enforcing an element of price discipline. So if somebody says within our organization, jeez, this is a great opportunity. We ought to offer this at a discounted fee level. It’s somewhat helpful to our business discipline, if we can say, no, we can’t offer that at that discounted fee level, because that means we have to reprice that same strategy to everyone, but to everywhere where we have a most favored nation provision in place. So that’s the – I think that’s the general idea. I’m not going to get into the specifics on contracts with individual organizations. But I think it’s fair to understand that there are most favored nations provisions employees covering these managed account programs of the type that UBS is – that we participate in a UBS. The other question was about, I guess, specifically the Schwab, TD Ameritrade merger proposal or announcement. And back a few weeks earlier, the elimination of trading commissions in certain retail brokerage transactions initiated also by Schwab. In the short run, I would say those changes, at least, the second, but the first one hasn’t happened yet. The merger of the two companies hasn’t happened yet. But what has happened is the elimination of…

Thanks, Tom.

Thank you.

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

Great, thanks. Good morning. Thanks for taking my questions. Maybe, Tom, could you just update us – I think it was back in the spring or so exactly when you had kind of filed for your clear hedge non-transparent ETF technology and, obviously, we’ve seen some others get approvals on their submission. So could you kind of update us kind of what you’re thinking about timing with getting some – getting through the SEC, I mean, more optimistic less? And then I guess, I have a follow-up to that.

Yes. Thanks, Rob. So we are in discussion with the SEC. They control the timing of that, not us. So we can’t really speculate on timing. But I can confirm that we did submit a proposal. We’ve gotten comments back. We’ve been in dialogue with the SEC. We view the approval or the – I don’t think it was the final approval, but notice of intent to approve something to that effect, and being a positive for their openness to innovation in the space. We looked carefully at the terms of those approvals. One thing we would note is that, none of the approaches approved so far permit investments in asset classes other than cash and things that trade on exchanges during U.S. market hours. So generally, U.S. stocks and a few other categories of things, but it does not include traditional fixed income investments, which don’t trade on U.S. exchanges. It doesn’t trade – it doesn’t include foreign stocks. And we certainly believe that there is an advantage to the clear hedge method that should enable it, if approved, to provide funds that follow this method to invest across asset classes with greater confidence of maintaining tight trading markets and also greater confidence that they can maintain tight trading markets across all types of market conditions. So we think the window is open. We don’t know the timing. We’re up – we’re a newer submission than any of those that were approved. So nobody – nobody has jumped us in line in terms of the applications that got a favorable nod last week. But we feel good about the opportunity that’s here. Clearly, it’s going to be a very competitive landscape assuming some version of these now five approved ideas will make their way to the marketplace and time. In some ways, who wins or who loses will be defined by product features, relationships also will come into play, also, pricing will certainly come into play. But we want to continue to be active in this space and think that we have a differentiated technology that potentially, if we can persuade the SEC of this positions us to facilitate the offering of less transparent ETFs across all markets – across all asset classes.

Okay, great. And this is my follow-up. Tom, you mentioned kind of, obviously, continuing to look at strategic initiatives, including acquisitions, and I guess, really, maybe it’s a two-part question. Can you maybe update us on some of your non-U.S. ambitions three, four years ago or so, you – obviously, you spent time and money kind of building out London. And that kind of almost feels like it’s been, I don’t want to say back-burnered a bit, but there was so much to do in the U.S. kind of hasn’t been front of mind and update us on that? And then if you are thinking about incremental M&A, could you maybe kind of refresh our memories on what some of your priorities would be?

Sure. Just talking about our initiative in London, it certainly has not been a back burnered. We’ve continued to maintain and grow staff in our London office. We recently opened a small satellite office in Dublin as well. So we are committed to and expect to maintain a presence in the UK and Europe. And what maybe has been back burnered a bit is our ambitions and hopes to do a significant acquisition that would bring us broader non-U.S. distribution and investment capabilities outside of the United States. And it’s not for a lack of wanting, it’s for a lack of confidence that there’s a partner out there that makes sense for us. We kick the tires on a number of potential opportunities. And after, as you said, a few years of trying to do this in a significant way, I know that we’ve concluded that there’s no good partner for us. But we certainly are a bit frustrated that we haven’t found the right partner that in a transaction structure that would make sense for us. So that part of it has been has been back burnered. But certainly, our ambition to grow our business outside the United States organically or through strategic partnerships remains. In terms of things that we are looking for in potential acquisitions, I guess, I would highlight a couple. I’ve talked about our ambitions and our strong platform and responsible investing, if there’s a way to grow that, incrementally, we would be certainly open to that. In the past, I’ve talked about our strong position in credit markets, primarily through bank loans and high yield bonds. But the idea that that can provide a natural springboard for us into the private credit space is also something that we have looked at and continue to pursue. But as always we’ll be price-sensitive as we look at potential opportunities there. A third thing we’ve talked about, I think, I’ve been in this on a call earlier this year is the growth of our private client business or wealth management business, where we’ve seen a good organic growth and where we think there could be opportunities to benefit by participating in industry consolidation among wealth management firms, increasing our global – increasing our footprint across the U.S. and creating avenues for selling our wealth management strategy. So those are the three areas I would focus on. I would identify as focus areas responsible investing private credit in various forms and then wealth management businesses.

Great. And if I could maybe squeeze one last one in the the exchange fund business, which has been around a while. I mean, we’re pretty far into a decade or so bull market. Just kind of curious if you’re seeing how that business is doing? Is it still kind of resonating as much with investors as it used to and kind of status on that?

Yes, that remains a good business for us. Those are private offerings. So we don’t provide a lot of detail on how that business is progressing. But it’s a – these are strategies offering diversification out of concentrated stock positions into broadly-based equity portfolios. And you would imagine, as the market cycle matures and people have large gains that those strategies continue to have broad appeal.

Okay, great. Thanks for taking my questions. Have a great Thanksgiving.

Thank you. I think, we have time for one more question on our call today.

Okay. Your last question comes from Brian Bedell with Deutsche Bank. Your line is open.

Great. Thanks very much for getting me in. Most of my questions have been asked and answered. But maybe, Tom, if we could just maybe one more on the active ETF approvals. Just in terms of the two different models that have been approved the Precidian model versus the T. Rowe model, maybe just your perspective on what investment managers might do if they’re keeping that information proprietary in – which appears to be the structure of the T. Rowe model. And then how your clear hedge model would fit in into that and whether you see the demand not to pick a winner or loser, anything like that. But whether – to what extent you see demand in future demand in what your clear hedge model would you for that type of structure?

Sure. So, I guess, maybe first to say that what I think people here know, but just to clarify, none of these things are actually approved in the marketplace and there are still some significant steps involved. With our next year’s initiative, we got a – we got an exemptive order issued, I think, in December of 2014, and we launched our first product in February of 2016. So I can’t say what the time window will be for these other strategies, but that was our experience. And we also got a listing and trading approval in the November, December 2014 timeframe. And I don’t believe any of these concepts have listing and trading approval. And I think for many of them, there’s not even an application that’s been filed. So I think it’ll be a while before these still come to market. I think, there have been some speculation that these might be in the market before the end of 2019. I think that’s not going to happen. In terms of clear hedge and where clear hedge – where funds utilizing the clear hedge method might fit into this. We are broadly in the camp of disclosing our proxy portfolio. So in that sense, similar to what you’re calling, the T. Rowe Price proposals, these four different ideas that got preliminary approval last week. What’s different about our approach is that, we include a second step, not only disclosing a proxy portfolio, but adding a second step whereby market makers can lay off the basis risk, that is the relative performance risk between the disclosed proxy portfolio and the funds are underlying assets by transacting with the fund itself through a swap type arrangement. The – so based on this sort of belt-and-suspender approach to achieving better trading efficiency,…

That’s great color. And then, just I guess in terms of the investment managers going down this path in the future, do you think they would prefer to have proxy portfolios with if they could develop those and thereby keep the – their information private or proprietary to their shops?

Well, I think, the underlying premise of all these ideas is that disclosing your holdings every day, which is the current fully transparent ETF model, is not consistent with proprietary active management. So if I’m telling the world what my holdings are every day, I don’t consider that proprietary. And if I do that, they’re at least a couple of adverse effects on me that’s the investment advisor or my clients. One is other people can by seeing my changes in daily holdings can learn to anticipate my trades and potentially front run my trades and drive up my trading costs and then drive down returns. The other one is to the extent that on disclosing what is in effect my intellectual property, that is my model portfolio, giving that away to the market for free, I’m inviting other people to take advantage of that by offering the same or similar strategies at a lower price point similar to a generic drug. You don’t want to give away the $4 million and put it out in an unprotected form, which is what fully transparent ETFs do. But also, you’re providing significant information about if it’s a bond portfolio, how you’re feeling about the world in terms of how you’re shifting your duration exposure, how you’re shifting your credit exposure in a way that could give you insights in – give insights to your competitors to take or potentially use to improve their performance potentially and harm your performance. So it’s – do you believe in proprietary management and do you believe there’s something that’s worth protecting about that? If you do, the fully transparent structure, we think falls short. All of these ideas, including our own, are seeking to provide the benefits of truly proprietary active management to end customers in an ETF form, which is not heretofore been available.

Okay, great. Thanks for the color.

Yes. Thank you.

Okay. Well, this concludes today’s earnings call. I want to thank everybody who participated in the call today and we look forward to speaking with you next quarter. Thank you very much.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.