EV
#Good morning.
In our first quarter, we were reminded once again that the business of investing exposes both clients and investment managers to market risk.
Over the course of the quarter, market price declines lowered our managed assets by $14.1 billion or 5% ---+ more than offsetting the quarter's $5.3 billion of consolidated net inflows.
Principally reflecting adverse market effects, our first-quarter revenue fell 7% from the first quarter of FY15, and 3% sequentially.
Lower revenue, combined with substantially unchanged ongoing expenses, drove Eaton Vance's adjusted earnings per diluted share down to $0.51 in the quarter, a decline of 16% year over year, and 4% sequentially.
In terms of revenue and profits, the first quarter of FY16 was certainly nothing to write home about.
While market effects adversely affected our financial results in the first quarter, in other respects, this was an outstanding period for us.
As noted previously, we realized consolidated net inflows of $5.3 billion in the quarter, which equates to an annualized organic growth rate of 7%.
As in most recent quarters, our internal growth was led by Parametric's portfolio implementation and exposure management franchises, and Eaton Vance Management fixed income, which had a collective $7.4 billion of net inflows.
Net inflows within fixed income were led by our high-performing municipal bond and high-yield franchises, with net flows of $800 million and $600 million, respectively.
Also contributing positively to first-quarter flows were our alternative mandates and EVM and Atlanta Capital managed equities.
First-quarter net outflows were concentrated primarily in two areas: floating-rate bank loans and Parametric emerging-market equities, which had net outputs of $1.5 billion and $500 million, respectively.
In both cases, net outflows appear to be somewhat exacerbated by year-end tax-loss selling, and abated in the month of January.
In addition to favorable net flows, the quarter also saw strong investment performance across a broad range of Eaton Vance and Parametric investment strategies.
As indicated in slides 13 to 15 accompanying this call, we ended the quarter with 54 mutual funds rated four or five stars by Morningstar for at least one class of shares, including 21 five-star rated funds.
Our top-performing funds include value, core, growth, small- and SMID-cap US equities, developed in emerging-market international equities, balanced and multi-asset funds, global macro, and floating-rate high-yield government income and strategic income funds, as well as a wide assortment of national and single state municipal income funds.
Given the large number of top-rated funds, it should not come as a surprise that high performers account for a significant percentage of our current mutual fund assets.
As shown on slide 12, as of December 31, 52% of our mutual fund assets were in funds in share classes ranked in the top quartile of their Morningstar peer group for one-year performance.
43% of our fund assets ranked in the first quartile on a three- and five-year basis, and 58% of fund assets were top quartile over 10 years.
The superior performance of our fund lineup was recognized in the annual Barron's/Lipper Best Fund Family rankings released earlier this month.
On a one-year basis, Eaton Vance ranked number one among 67 fund complexes for US Equity Performance, and number two overall for 2015 Fund Family Performance.
Since Barron's began its annual rankings in 1995, this is the third time Eaton Vance has finished either first or second, joining a small handful of fund sponsors with that distinction.
Our 5- and 10-year rankings were also strong, at the 28th percentile of rated fund families over five years, and at the 20th percentile over 10 years.
This is the fourth year in a row, and 12 for the past 13 years, that our 10-year returns rank in the top one-third of the fund-sponsor universe.
Our largest equity fund, the Eaton Vance Atlanta Capital SMID-Cap Fund, has been a particularly strong performer, closing the fiscal quarter ranked at number one among more than 600 funds and share classes in the Morningstar mid-cap growth category for one-year performance, and also ranking top decile for three, five and 10 years.
The fund's co-managers Chip Reed, Bill Bale and Matt Hereford, were named as finalists for Morningstar Domestic Equity Manager of the Year for 2015.
Another investment team with exceptionally strong near-term performance is our 49%-owned, Montreal-based affiliate Hexavest, which manages primarily global equity mandates following a distinctive top-down investment style.
The past three months of market turmoil has given Hexavest an opportunity to demonstrate what they do best, which is to outperform in down-markets.
Over the three-month period ending January 31, the Eaton Vance Hexavest global equity fund beat its benchmark by approximately 470 basis points in the average of its Morningstar category peers by roughly 440 basis points, placing the fund's class-by-shares in the top quintile of its peer group on both a one-year and three-year basis.
Hexavest reports that as of January 31, all of their institutional client accounts are now ahead of benchmark over the life of the mandate.
On an overall basis, it's fair to say that our investment performance has never looked stronger than it does today.
Not surprisingly, one of our key business objectives for 2016 is to translate the strong investment results we are seeing into strong net sales across our lineup of active strategies.
Although active managers as a whole are not growing in most major asset classes, there remains a tremendous amount of money in motion each year, creating significant opportunities for high-performing managers to grow their business by gaining market share.
Active management is increasingly a game by winners and losers, and our favorable performance positions Eaton Vance to be a winner.
During the quarter, we made progress advancing a number of important strategic initiatives.
We continued to build out our suite of Custom Beta separate account strategies, and gained broader distribution access for these products.
Over the past 12 months, we have grown managed assets and tax-managed core equity in laddered bond separate accounts, from $27.3 billion to $34.2 billion, an increase of 25%.
Our grouping of these and related strategies under the Custom Beta banner reflects their use in client portfolios to provide customized exposure to a range of markets, including a wide assortment of equity indexes and municipal and corporate fixed income.
Value-added elements of the strategies include direct holdings of securities that can be highly customized to reflect client needs and preferences, light-level tax management and the pass-through of realized losses.
And for the bond strategies, laddered portfolio construction and initial and ongoing credit oversight.
On the equity side, Parametric offers a range of strategies that track a client-designated benchmark, but which can deviate from the benchmark holdings to reflect ongoing tax management.
Client-specified, responsible and impact-investing screens and overlays and/or portfolio factor tilts, that may include value-quality momentum, dividend yield and low volatility.
All is established and maintained by the client.
In many respects, this is an ideal product for meeting investor demand for equity index investing.
Like an index fund, Custom Core provides low-cost, benchmark-based equity market exposure.
But unlike an index fund, Parametric can potentially enhance returns through ongoing tax management, and can deviate from the benchmark to reflect the wants and needs of the individual client.
It's a compelling offering that's experiencing growing demand.
In the first fiscal quarter, net inflows into Parametric Custom Core strategies offered to the high-net-worth and retail-managed account channels totalled $2.1 billion.
Based on these mandates, average approximately 23 basis points, which is highest among product groups in our portfolio implementation category.
On the fixed income side, our Custom Beta offerings currently consist of laddered municipal bond and corporate bond separate accounts.
Corporate ladders are a new product for us that began to pick up tracks in the first quarter, with managed assets increasing more than 50% to $400 million.
While more established laddered municipal bond separate account assets also grew strongly, from $5.8 billion to $6.7 billion in the quarter, reflecting over $600 million of positive net flows and favorable market action.
Here again, our Custom Beta products offer significant value over both bond index funds and unmanaged bonds held in a broker's account.
For reporting purposes, laddered bond mandates are included in our fixed-income category, and account for a significant percentage of the category growth.
Our Custom Beta products are well-suited for an environment in which a growing percentage of investors and advisors seek low-cost passive market exposures, yet recognize the benefits that custom-built portfolios of directly held individual securities can offer over bulk beta mutual funds and index ETFs.
We continue to view this as a huge market opportunity that remains at an early stage of development.
On both the equity and income sides, we have first-mover and scale advantages that position us well versus potential competitors.
The second strategic initiative that continues to progress from an earlier stage of development is the build-out of EVM's global equity and global income capabilities.
During the first quarter, we completed the build-out of our new London-based global equity group, transitioned approximately $6 billion of global and international equity mandates to the team, and lost three new global and international equity mutual funds.
On the fixed income side, we also continue to add our global capabilities, and to increase staffing in our London office.
In April, we are taking new space in London that will increase our office footprint there by approximately two-thirds.
By increasing our global investment capabilities, we seek to achieve two important business objectives: first, meeting the growing demand among US investors for global and international investment solutions.
And second, positioning ourselves to address markets outside the United States, which represent huge and relatively untapped potential for Eaton Vance.
Another new product development this quarter saw the introduction of the first-ever Eaton Vance-sponsored unit investment trust.
Our first three sponsored UITs raised nearly $50 million during their offering period, an impressive start for a new market entrant.
We view this is an attractive business that fits well with our distribution strength and product development capabilities.
While it will likely take time for this to develop into a meaningful part of our overall business, we're encouraged by the strong start.
Finally, I want to report on the progress we are making with our NextShares Exchange-Traded Managed Fund initiative.
In January, we announced plans for the first NextShares fund to list to begin trading on NASDAQ on Friday of this week.
And for the fund to be available for public purchase through the online broker-dealers Folio Investing and Folio Institutional, beginning next Monday, which is February 29.
As of now, the first fund will be Eaton Vance Stock NextShares, which will seek long-term capital appreciation by investing primarily in the diversified portfolio of common stocks, following a research-driven actively managed core investment style benchmarked to the S&P 500.
The fund will utilize a master-feeder structure to invest in the same portfolio as used by Eaton Vance Stock Fund, an open-end mutual fund whose load weight [ratios] are currently rated five stars by Morningstar.
This is the first of what we expect will be several NextShares fund launches this year, with the next scheduled for the month of March.
I'm pleased to report that the Stock NextShares launch is on track and expected to take place on the announced timeframe.
Getting to this point in the NextShares initiative has been a multi-year process, with many twists and turns.
And we certainly could not have gotten here without an extraordinary effort by many people, both within and outside Eaton Vance.
While the introduction of the first fund is a critical step in the development of NextShares, we still have a lot of work to do to get where we want to be.
We have a broad consortium of 11 other fund sponsors that have already filed and received approval of their exemptive applications to offer their own families of NextShares funds.
We will continue with our efforts to enlist more fund sponsors to become NextShares licensees, and are hopeful that seeing a NextShares fund up and running will spur additional fund sponsors to consider entering into licensed agreements.
Most critically, we need to broaden distribution by enlisting more broker-dealers to offer NextShares to their customers.
While there are no breakthrough to announce today, we continue to make progress in discussions with major firms, and are encouraged by what we see and hear.
In-depth discussions are now taking place with firms that have meaningful market share in each of our three primary distribution channels ---+ wirehouse, independent and RIAAs.
One of the objectives of the staged rollout of NextShares is to demonstrate to broker-dealers that NextShares are straightforward to implement, and trade and perform consistent with expectations.
If we are successful in gaining broad distribution access, we continue to believe that NextShares have a very bright future, with the potential to transform the delivery of active investment strategies to US fund investors.
Stay tuned, as we expect continued positive developments with our NextShares initiative over the coming months.
As we look forward to the remainder of the fiscal year, we see both significant opportunity and significant uncertainty.
If macro headwinds and a difficult market environment continue to take their toll on our managed assets and revenue, we will be prepared to adjust our discretionary spending accordingly.
However, we seek to avoid making decisions based on short-term market moves that could impair or impede our ability to grow over the long term.
In fact, the most opportune time to invest in our business is very often during periods of market disruption.
Wherever the markets take us, we believe our lineup of high-performing and value-added strategies, innovative new product offerings, and strong financial characteristics position Eaton Vance very well versus competitors.
That concludes my prepared remarks.
I'll now turn the call over to <UNK>.
Thank you, <UNK>, and good morning.
We are reporting adjusted earnings per diluted share of $0.51 for the first quarter of FY16, compared to $0.61 for the first-quarter FY15 and $0.53 for the fourth-quarter FY15.
On a GAAP basis, we earned $0.50 per diluted share in the first quarter of FY16, $0.24 in the first-quarter FY15, and $0.53 in the fourth quarter of last fiscal year.
As you can see in Attachment 2 to our press release, adjustments from reported GAAP earnings in the first quarter of FY16 reflect changes in the estimated redemption value of non-controlling interests in our affiliates, that are redeemable at other than fair value.
Adjustments from reported GAAP earnings in the first quarter of FY15 primarily reflect the payment of $73 million, or approximately $0.37 per diluted share, to in-service and additional compensation arrangements for certain Eaton Vance closed-end funds.
Although average managed assets of $308.3 billion for the quarter were up slightly from the $306.4 billion reported in the prior quarter, and up 3.6% over the year-ago quarter, first-quarter revenue decreased 3% sequentially and 7% year over year, reflecting shifts in asset mix in a down market.
The shifts in managed asset mix reflects strong net inflows and lower fee strategies ---+ such as portfolio implementation, exposure management and bond ladders ---+ in a quarter when higher-fee strategies such as floating rate and emerging markets were net outflows.
Performance fees, which contributed approximately $2 million in the prior fiscal quarter, were negligible this quarter, creating an incremental headwind in terms of our sequential quarterly revenue comparison.
As <UNK> noted earlier, market losses this quarter reduced assets under management by just over $14 billion, more than offsetting the $5.3 billion in net inflows.
And the assets under management were $5.8 billion lower than average assets under management for the quarter, which will put additional pressure on revenue in the second quarter.
Product mix continues to be the most significant determinant of our overall effective investment advisory administrative fee rate.
As you can see in Attachment 10 to our press release, our average annualized effective interest advisory and administrative C rate, excluding performance fees, declined to 36.7 basis points in the first quarter of FY16 from 37.7 basis points in the fourth-quarter FY15 and 40.6 basis points in the first-quarter FY15.
Although mandate-level annualized effective B rates were relatively stable, we did see some downward pressure on our effective equity and fixed income fee rates this quarter, primarily reflecting the loss of higher-fee, emerging market equity assets, and the growth of lower-fee bond laddered managed assets, respectively.
While our asset base remains highly diversified, we anticipate additional downward pressure on our overall average effective investment advisory and administrative fee rate if growth in our Custom Core exposure management and bond ladder franchises continues to outpace that of our active equity and income franchises.
That said, even if average fee rates continue to trend downward, we can achieve organic revenue growth by reducing outflows from higher-fee strategies, which appears to be happening.
Our operating margin decreased to 30.3% this quarter from 32.5% last quarter and 34.8% in the first-quarter FY15, reflecting the impact of lower revenue in a period when total expenses were held largely flat in both sequential and year-over-year comparisons.
After adjusting for the $73 million charge in the first quarter of last year to terminate certain closed-end fund service and additional compensation arrangements.
Although variable expenses, such as distribution and servicing expenses,, declined with the decrease in related distribution service fee revenue, compensation expense ticked up both sequentially and year over year.
Sequentially, compensation expense increased 3%, largely due to seasonal compensation factors, including fiscal year-end merit increases, as well as calendar employee benefit and payroll tax clock resets, partially offset by lower operating income-based bonus accruals and lower sales-based incentives.
Year over year, compensation expense increased 2%, driven primarily by increases in headcount at Parametric to support growth, add to staff in our London office to support the build-out of our global equity capabilities, and incremental adds to staff to support our NextShares initiative.
Year-over-year increases in base benefits, stock-based comp, and another compensation expense to support these initiatives were partially offset by lower operating income-based accruals and sales-based incentives.
Compensation as a percentage of revenue ticked up to 37% in the first-quarter FY16, compared to 35% in the prior sequential quarter, and 34% in the first quarter of FY15.
Given current market headwinds, second-quarter compensation as a percent of revenue is forecast to stay in the 37% range.
Other operating expenses were up 12% in the first quarter versus the same period a year ago, primarily reflecting increases in information technology, certain professional services and other corporate expenses.
Other operating expenses declined modestly on a sequential basis.
Expenses related to our NextShares initiative, which are included in multiple expense categories, including compensation expense and other operating expenses, totalled approximately $1.8 million for the first-quarter FY16, compared to $1.3 million in the first quarter of FY15, and $2.3 million in the fourth quarter of FY15.
As <UNK> highlighted earlier, fiscal discipline around of both hiring and other discretionary spending will remain top-of-mind in FY16, given the revenue headwinds we are facing.
We remain committed to investing for growth, despite these headwinds, but are certainly mindful of the current market environment and the associated profitability pressures we face.
While we will be very careful with our spending going forward, we have no plans for staff cuts.
That said, we are certainly aware of the levers that we can pull in terms of the timing of project launches, and the hiring to support in those markets remain unsettled.
Net income and gains on seed capital investments contributed roughly a penny to earnings per diluted share in the first quarters of FY16 and 2015.
And we do [stern] pay a penny per diluted share in the fourth-quarter FY15.
In quantifying the impact of our seed capital investments on our earnings each quarter, we take into consideration pro rata share of the gains, losses and other investment income earned on investments and sponsored products that are accounted for as consolidated funds, separate accounts or equity method investments as well as the gains and losses recognized on derivatives used to hedge these investments.
We then report the per-share impact of non-controlling interest expense and income taxes.
We continue to hedge our seed capital exposure to the extent we reasonably can, which allowed us to avoid significant investment losses this quarter in volatile markets.
Changes in quarterly equity and net income of affiliates, both year over year and sequentially, primarily reflect changes in the Company's position in 49%-owned Hexavest.
Our 49% interest in Hexavest, which is reported net of tax and the amortization of intangibles and equity in net income of affiliates, contributed approximately $0.02 per diluted share for all quarterly periods presented.
Excluding the effect of CLO entity earnings and losses, our effective tax rate for the first quarter of FY16 was 38.4%, as compared to 36.4% in the first quarter of FY15, and 38.6% in the fourth quarter of FY15.
We currently anticipate that our effective tax rate, adjusted for CLO earnings and losses, will be approximately 38.5% for FY16 as a whole.
In terms of capital management, we repurchased 2.3 million shares of non-voting common stock for approximately $73.3 million in the first quarter of FY16.
When combined with repurchases over the preceding three quarters, average diluted shares outstanding decreased 4% compared to the first quarter of FY15.
Shares outstanding of 115.2 million at the end of this quarter are down 3% from the 118.4 million reported a year ago, and down 1% from the 115.9 million reported on October 31, 2015.
We finished the first fiscal quarter holding $419.1 million of cash and short-term debt securities, and approximately $268.4 million in seed capital investments.
Our outstanding debt consists of $250 million of 6.5% senior notes due in 2017, and $325 million of 3.625% senior notes due in 2023.
We also have a $300- million, five-year line of credit, which is currently undrawn.
Given our strong cash flow liquidity and overall financial condition, we believe we are well-positioned to continue to return capital to shareholders through dividends and share repurchases.
This concludes our prepared comments.
At this point, we would like to take any questions you may have.
In terms of the comp, we are looking at that in relation to the assets that we came out of at the end of the quarter, assuming flat markets now.
Obviously if markets continue to be volatile, that could ratchet up.
But approximately ---+ in terms of our compensation, about 40% of it is variable, 60% fixed.
So I think the 37%, as it looks today, looks like a pretty good number for the second quarter.
But again, things might change.
In terms of our NextShares spend, we were a little bit later this quarter.
I would anticipate in the first quarter and the second quarter, we may be ramping up a little bit.
I think we had given previous guidance that we anticipated our overall spend in 2016 would probably be in the $8 million to $10 million range.
I don't think that we're moving off of that at this point.
I'm looking at <UNK>, just making sure, and he's nodding his head.
Yes, I would say if there's any change of significance from the current run rate level, it would likely reflect significant progress with a distribution partner, where we are contributing or helping them in their implementation costs.
So that would be the only driver.
But even there, we don't see a major change from that ---+ or, we don't see a significant risk of change from the indicated guidance.
It's primarily priorities, resources, uncertainty, particularly related to the DOL initiative.
We argue, and I think this is right, that on balance, a world that is more tilted towards advisory solutions than brokerage solutions ---+ which is likely the direction of the DOL initiative ---+ is clearly favorable for NextShares.
The uncertainty as to the effect of that, and certainly as to the technology requirements of that, is a somewhat chilling factor in NextShares.
So that we've had major broker-dealers that say: we find this interesting, but we really need to get our hands around this DOL initiative, what's going to be required, both in terms of the rules themselves, as well as perhaps the systems of business modifications that will flow from that.
We need to get our hands around that before we do something that we view as discretionary.
The DOL affects their core business every day.
Arguably, this is an add-on.
This is something new that they don't necessarily need to do.
I would certainly say in terms of our ---+ more broadly, the conversations, I think there's a significant change that we expect to happen when we have a product in the market.
I think my view was that, that would not be all that significant.
We've known this was going to happen.
We don't expect any surprises.
But there are significant constituencies out there in the world where this is a big deal, the fact that we will have funds that are demonstrated to trade and to perform, and they can watch those and see how they perform every day.
A lot of the questions, a lot of the mystery of NextShares get taken out by when we are in the marketplace, which starts at the end of this week.
So we're not hearing objections, people that say this is a bad idea, I don't want to do this.
What we're hearing overwhelmingly is, interesting concept, let's see how this develops; let's see how this fits into our time frame.
But we are ---+ I do want to reemphasize, we are making significant progress with major broker-dealers from all three major channels.
And our view, which I think is right, is that you get one major in each category, it makes it much easier for others in that category to want to follow.
They will have business reasons, maybe even a business imperative, to want to come in if one of their closest competitors is seeing any kind of movement in their business toward NextShares.
No, at this point, I think that we're very comfortable with our cash position and with our ability to continue to generate cash from operations.
We don't generally give any guidance on what our intention is in terms of repurchases for the quarter, outside of saying that we intend to be in the marketplace.
So we're watching the markets, like everyone else is.
But at this point, we don't see any particular cash constraints that would keep us out of the market.
So those are pretty well reflected in the first quarter.
The big hiring initiative there was in connection with our equity team that's now based in London, though we have one person in Tokyo, and there are a handful of people in Boston connected to that team as well.
That's done.
The people there that were hired in that group, I think the last ones came the first week of November or something like that.
So think of those numbers as effectively baked in.
I did mention that we are taking some new space, expanded space in London.
But that's a relatively small item.
I think I said we are expanding by two-thirds.
That means we're going to stay in the same building.
We're going from half a floor or thereabouts to ---+ or two-thirds of a floor to a full floor.
So it's not enough to be meaningful.
But it's a significant initiative for us, that we are optimistic that we're going to be in a position to bring in international assets that will produce revenues to offset that incremental spending.
I was over there last week, and quite encouraged by the pipeline and the level of activity.
Primarily today, on the fixed income side, I would say particularly high-yield, but also we are starting to see some interest in equity products also, as well.
But I would say the hope would be that over the coming quarters, that we will see significant flows of international income assets, and the beginning of flows on international equity assets.
So January was a significant ---+ while it was still negative on an overall basis, January was an improvement from November and December.
We would attribute that primarily to year-end effects, tax-loss selling or anything else that might be happening around the end of the year.
I would say the flows have maybe moderated a bit.
It still befuddles us that we are seeing net outflows.
We see bank loans as an incredibly attractive asset class today, really offering a compelling risk-reward opportunity with floating-rate income, but from current levels, the opportunity for capital appreciation ---+ unless this credit cycle proves to be an unusually weak one.
If we're staring into the face of a recession, and recovery rates on defaulted loans, or the rate of default itself, is significantly worse than historical norms, people will have some credit effects.
But from our point of view, those are more than priced in to current bank loan prices.
My theory is that we saw a big growth in both our business and the mutual fund assets in bank loans going back to ---+ 2013.
2014.
What was the big growth year.
2013.
And to some degree, we're still working through those assets.
These are people that perhaps didn't really understand the asset class and what they were buying.
At that point, you might remember there was a significant fear that interest rates were going to go up sharply, at the short end, as well as the long end.
And obviously that hasn't happened.
And as that hasn't happened, we've been seeing ---+ again, this is my theory ---+ a lot of those relatively new players in the asset class come out of the asset class.
Demand on the institutional side remains solid.
I wouldn't say it's a spectacular, but it is certainly solid.
People get, that have been through this asset class, get that it's a significant diversifier.
It has potentially no exposure to interest-rate risk.
These are dollar-based loans, so for a US investor, there is essentially no exposure to currency risk.
But it does have exposure to credit risk.
But we've been doing this for many years, going back to the late 1980s, more than 25 years, and we have experience in knowing what a typical experience through a credit cycle is, in terms of losses to credit events.
All of that experience tells us that the asset class is compellingly attractive today.
And we're certainly doing what we can to make that case to both current clients and potential clients.
So couple of answers.
One answer, from an exchange perspective, the amount of capital is quite minimum.
What is it.
$1 million or something like that.
Two creation units, which is $1 million.
So not significant.
We do expect to have larger positions than that, but from where we sit today, we don't see the need to build materially large positions in NextShares compared to our currency capital portfolio, which is ---+ how much.
$268 million.
So we don't think it is likely that it will move the needle on that.
Sometimes a driver of seed capital needs is minimum investment requirements that a particular broker-dealer may impose on a new strategy.
For the most part, we would expect and hope that those requirements wouldn't apply to NextShares, because these are not new strategies.
In all cases, these are established strategies, where we're just applying that same strategy in a lower-cost, more efficient vehicle.
And we would expect in our work with broker-dealers that we should be able to convince them that there should be no requirement for significant Eaton Vance investment in NextShares to validate those strategies.
So bottom line, we don't expect it to be a major factor, a major use of cash over the next year, based on everything we know today.
The opportunity for us is really to take advantage of the strong performance record that a lot of our strategies have today.
I mentioned high-yield as an area of significant activity.
Honestly, I don't think that's reflective of a huge demand incrementally for new allocations to high-yield, more than the fact that ---+ more so it reflects the fact that there are other managers who have disappointed a client, and there are searches that are driven by replacements.
And because we have one of the top track records, and certainly a compelling story related to the size and strength and longevity of our team, we are in a position to compete very effectively for those transfers.
I did ---+ when I was in London, I did meet actually with a potential new client, who is attracted to risk-reward characteristics of high-yield today.
They look at spreads in the marketplace and historical levels of the market, and historical returns from current spread levels, and they are looking at potentially adding to the asset class.
I think that's probably the exception, rather than the rule, today.
I mentioned Hexavest has had very strong performance of late, that really, in many ways, validates their approach, which has been one of general caution on the markets.
They made up a lot of ground in the fourth quarter, and now have very compelling performance, and also particularly attractive performance on a risk-adjusted basis.
We expect to see increased activity of Hexavest in searches.
Atlanta Capital ---+ again, another very high-performing manager in our stable.
They have a relatively new strategy.
It's been offered institutionally for the last three or four years, it's called Select Equity, that had some meaningful wins.
That's approaching $500 million in assets in the strategy that, potentially, if things go right ---+ that is, we have another quarter or two of favorable performance and we can get over that $500 million threshold ---+ that we put ourselves in a position to compete effectively for new business there.
So I would say those are three areas I would highlight away from bank loans and away from the more implementation- and exposure-oriented parts of our business, which continue to see very strong demand.
But again, our key charge to our sales organization currently is, we need to figure out ways to translate high-performing investment strategies into strong business performance.
And that applies to both retail and institutional.
So I think, as you're referring to, there was an SEC proposal that came out late last year that would impose additional regulations and new limitations for mutual funds ---+ or I should say, I believe it is registered investment companies ---+ and their use of different kinds of derivatives.
We have a number of strategies that are fairly intensive users of derivatives.
Those fall generally into two categories.
One is, we have ---+ primarily on the closed-end fund side, we have equity funds that write call options.
In some cases, it's single stock options, and in other cases, it's index options.
In some cases, they write call options in connection with also selling, or in some cases buying, put options.
So we have strategies that are primarily equity funds that have an options overlay.
That is one category of derivative-intensive product that we offer in a registered investment fund format.
The other broad category of products we have is in our global macro area, where, often, the most efficient way to gain a desired market exposure is through the derivatives market.
So a credit-default swap or a forward position in a currency would probably be the two most typical ways of gaining exposure.
How this affects those businesses, how these proposed regulations affect these businesses is still up in the air.
These regulations are being proposed.
Eaton Vance is part of the ICI, our fund industry association, and is participating in the development of the comment letter to be submitted by the ICI.
We also expect to submit our own comment letter on this.
We expect our comment letter to focus on, as you would expect, the areas of how we use derivatives.
We believe the intent of that initiative is primarily to limit the use of derivatives for leverage purposes, which primarily is not how we use leverages.
We are using ---+ in the case of writing call options, that doesn't add market exposure to a fund.
Arguably, it takes away market exposure.
And similarly, with our derivative strategies on the global income side, often these can be replicated in a very similar way by operating in the cash markets.
So I guess, bottom line, we are monitoring this quite closely.
We expect to have a comment submitted to the SEC.
We are participating in industry comments.
Depending on how things go, there could be changes in the implementation of some of our strategies that, at the margin, could increase fund costs, lower fund returns.
But there's nothing that would cause us to say that something we're doing today likely we couldn't do if these proposed regulations are implemented.
Rather, they may require us to do things in a somewhat different way.
Yes, so we are not in the robo-advisor business.
We do offer these custom beta strategies on a retail basis through relationships we have with broker-dealers, financial advisors, generally with a minimum of investment of $250,000 in the strategy.
So we're not, today, placing these tools in the hands directly of retail investors.
That not necessarily would be a bad thing, but that is not our focus today.
The range of customization that we offer, down to the client or advisor level, does vary by firm.
In some cases, a firm, even some that use some of the strategies quite actively, give a limited ability for a financial advisor to choose a custom solution.
While these are customizable, sometimes that customization sort of stops at the firm level.
In other cases, the firm will allow customization down to the advisor group level within agreed-upon constraints.
But in no case currently do we provide customization down to the individual client level, at least in terms of retail clients.
I guess, first, I would say, not materially.
We don't have a big international business.
This was ---+ as I said, I was in London last week, and this is certainly a topic of discussion.
I can pass on what I heard, though the impact on our business rounds to zero.
Because we don't have a big base of operations in the UK.
We are moving from two-thirds of a floor to a full floor in a building there.
But I think the concern there in the financial sector is that London could lose its status as the financial center of Europe, which is maybe somewhat arguable today, but probably not something that the French or the Germans are happy about.
And my guess is that if Britain is not part of the EU going forward, that, that could change.
With implications not only for markets, but also for how and where investment managers, like Eaton Vance, staff to serve clients and meet market opportunities in Europe.
Because we are really at the beginning stage of our development, we don't have a particular commitment to UK.
If the new center of Europe is in Frankfurt or Paris or wherever, it wouldn't be a significant disruption to our business to pick up and move, effectively.
I think the bigger concern, the more likely concern, the more significant concern for Eaton Vance, is just what does this do to the markets.
We're in the business where our revenues go up or down with the markets.
And to the extent that the possibility of a British exit from the EU is weighing on markets, the primary financial impact of that on Eaton Vance is that, if that weighing on the markets caused market prices to go down, our revenues go down.
That's the way it works in the asset management business.
So I would put it in the same category as, other things that are bringing uncertainty and adding risk to global financial markets today is much more significant to us than the specifics of how we address markets in Europe.
Certainly something we're interested in.
I don't believe it's accurate that today, a core offering of most robo-advisors is individual holdings of securities and lot-level tax management.
I believe the ---+ my understanding is, the predominant model is that they invest in ETFs primarily, and perhaps other pooled vehicles, as their primary way of gaining market exposure.
I'm not familiar that, that [wells] front has an offering with individual securities.
So I believe, with that exception, the robo-advisor world is essentially a world of investing in ETFs and other fund vehicles, as opposed holding direct investments in securities primarily.
Clearly there is an interest here, and a potential overlap with our capabilities.
I don't think there is great market data on this.
But we believe it's highly likely that our affiliate Parametric is today the largest player in, what I will call the tax-managed separate account business.
We have the largest account base.
I'm sure we would claim the most sophisticated technology.
And potentially could consider ramping that up to potentially bring down minimum investments and service clients to robo-advisors, or other means on a broader basis than we are doing today.
So I don't see it as a threat our business, but I do see it as potentially an opportunity.
And we're certainly open to discussions on additional ways to gain access for this product suite.
Which, as we've talked about in previous quarters and as I emphasized in my remarks today, continues to be a growing part of our business, and something that really sets us apart from what I will call other traditional active managers.
Yes, so, to date, the only fund sponsor that has approved fund registration statements is Eaton Vance.
So any near-term launches would be of Eaton Vance-sponsored products.
A key milestone for other licensees, the other 11 fund sponsors that have exemptive relief to offer NextShares and have entered into preliminary agreements with our affiliate to permit that ---+ a key milestone for them was when Eaton Vance got our registration statement approvals in December.
Because by design ---+ I would say both by design from our end, as well as from the SEC ---+ that was intended to be a template that other fund sponsors could use.
So in other words, the language that was agreed to and negotiated by us and the SEC, that essentially can be plugged into registration statements for other fund sponsors.
Certainly one of our objectives in including 18 registration statements in that initial filing, was to make sure that we essentially covered all the bases, in terms of asset classes and issues that might arise, to make it easier for follow-on managers to expedite the process of getting their own registration statement approvals.
We are certainly in contact with other fund companies.
We understand that they are making progress towards filing registration statements relatively soon.
But we obviously can't control the timing of that.
But I would say here, again, as with our conversations with broker-dealers and other fund companies, the fact that we have a product alive with the market is a stimulus for action by the fund companies that have already entered into agreements with us and are trying to make decisions about the timing of their law options.
But again, also important to them is, what does the distribution landscape look like.
They are happy for the test phase of the development of NextShares to be dominated by Eaton Vance.
They, like we, are permanently interested in the commercial development, which requires a broader range of distribution outlets than we have today.
But we expect to see registrations filed for NextShares funds by other sponsors in the coming weeks.
