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EV > SEC Filings for EV > Form 10-K on 20-Dec-2013All Recent SEC Filings

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Form 10-K for EATON VANCE CORP


20-Dec-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Our principal business is managing investment funds and providing investment management and advisory services to high-net-worth individuals and institutions. Our core strategy is to develop and sustain management expertise across a range of investment disciplines and to offer leading investment products and services through multiple distribution channels. In executing this strategy, we have developed broadly diversified investment management capabilities and a powerful marketing, distribution and customer service organization. Although we manage and distribute a wide range of investment products and services, we operate in one business segment, namely as an investment adviser to funds and separate accounts.

Through our subsidiaries Eaton Vance Management ("EVM") and Atlanta Capital Management, LLC ("Atlanta Capital") and other affiliates we manage active equity, income and alternative strategies across a range of investment styles and asset classes, including U.S. and global equities, floating-rate bank loans, municipal bonds, global income, high-yield and investment grade bonds. Through our subsidiary Parametric Portfolio Associates LLC ("Parametric"), we manage a range of engineered alpha strategies, including systematic equity, systematic alternatives and managed options strategies, and provide portfolio implementation services, including tax-managed core and specialty index strategies, futures- and options-based portfolio overlay, and centralized portfolio management of multi-manager portfolios. We also oversee the management of investment funds sub-advised by third-party managers, including global, regional and sector equity, commodity and asset allocation strategies. Our breadth of investment management capabilities supports a wide range of products and services offered to fund shareholders, retail managed account investors, institutional investors and high-net-worth clients. Our equity strategies encompass a diversity of investment objectives, risk profiles, income levels and geographic representation. Our income investment strategies cover a broad duration and credit quality range and encompass both taxable and tax-free investments. We also offer a range of alternative investment strategies, including commodity-based investments and a spectrum of absolute return strategies. As of October 31, 2013, we had $280.7 billion in assets under management.

Our principal retail marketing strategy is to distribute funds and separately managed accounts through financial intermediaries in the advice channel. We have a broad reach in this marketplace, with distribution partners including national and regional broker-dealers, independent broker-dealers, independent financial advisory firms, banks and insurance companies. We support these distribution partners with a team of approximately 135 sales professionals covering U.S. and international markets.

We also commit significant resources to serving institutional and high-net-worth clients who access investment management services on a direct basis. Through our wholly owned affiliates and consolidated subsidiaries we manage investments for a broad range of clients in the institutional and high-net-worth marketplace in the U.S. and internationally, including corporations, sovereign wealth funds, endowments, foundations, family offices and public and private employee retirement plans.

Our revenue is derived primarily from investment advisory, administrative, distribution and service fees received from Eaton Vance funds and investment advisory fees received from separate accounts. Our fees are based primarily on the value of the investment portfolios we manage and fluctuate with changes in the total value and mix of assets under management. As a matter of course, investors in our sponsored open-end funds and separate accounts have the ability to redeem their investments at any time, without prior notice, and there are no material restrictions that would prevent them from doing so. Our major expenses are employee compensation, distribution-related expenses, facilities expense and information technology expense.

Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in

the United States of America ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to goodwill and intangible assets, income taxes, investments and stock-based compensation. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

Business Developments

Prevailing market conditions affect our managed asset levels, operating results and the recoverability of our investments. Fiscal 2013 was a period of favorable market action, as reflected by the 27 percent increase in the total return of the S&P 500 Index.

The Company's ending consolidated assets under management increased by $81.2 billion, or 41 percent, in fiscal 2013 to $280.7 billion on October 31, 2013, reflecting the acquisition of The Clifton Group Investment Management Company ("Clifton") on December 31, 2012, a 12 percent organic growth rate and favorable equity markets. Average consolidated assets under management increased by $58.4 billion, or 30 percent, to $251.3 billion in fiscal 2013. Fiscal 2013 was a year of significant growth for our floating-rate bank loan franchise, which had $14.9 billion of net inflows and ended the year with $41.8 billion of managed assets, an increase of 58 percent. Fiscal 2013 was also a landmark year for our Seattle-based subsidiary Parametric, which successfully absorbed Clifton as a new division and generated net inflows of $16.5 billion across its various franchises, most notably in its emerging market equity and implementation services franchises. Net outflows from EVM large-cap value funds and separate accounts slowed significantly in fiscal 2013 from levels experienced in fiscal 2012, with net outflows totaling $3.6 billion in fiscal 2013 compared to $11.9 billion in fiscal 2012.

The Clifton acquisition had a significant impact on our average effective fee rate in fiscal 2013, both overall and considering only investment advisory and administrative fees. Upon acquisition, the Clifton business had an average effective fee rate of approximately 7 basis points. The acquisition contributed to a lowering of our overall average effective fee rate to 54 basis points in fiscal 2013 from 62 basis points in fiscal 2012. Our average effective investment advisory and administrative fee rate similarly decreased to 45 basis points in fiscal 2013 from 51 basis points in fiscal 2012. The primary driver of our overall average effective fee rate continues to be the mix of assets by distribution channel and mandate.

Consolidated Assets under Management

Consolidated assets under management of $280.7 billion on October 31, 2013 increased $81.2 billion, or 41 percent over the $199.5 billion reported a year earlier. Consolidated assets under management on October 31, 2013 included $133.2 billion in long-term funds, $95.7 billion in institutional separate accounts, $19.7 billion in high-net-worth separate accounts, $31.8 billion in retail managed accounts and $0.2 billion in cash management fund assets. Long-term fund net inflows of $13.6 billion during the twelve-month period ended October 31, 2013 reflect gross inflows of $43.6 billion offset by outflows of $30.0 billion. Institutional separate account net inflows were $9.6 billion, high-net-worth separate account net inflows were $1.1 billion and retail managed account net inflows were $0.5 billion during the twelve-month period ended October 31, 2013. Clifton assets under management acquired totaled $34.8 billion and net price appreciation increased assets under management by $21.7 billion. The $24.7 billion of net inflows into long-term funds and separate accounts in fiscal 2013 equates to a 12 percent internal growth rate.

We report managed assets and flow data by investment mandate. The "Alternative" category includes a range of absolute return strategies, as well as commodity- and currency-linked investments. In fiscal 2013, we added a

new category, "Implementation Services," to reflect the growing importance to our business and distinctive attributes of Parametric's tax-managed core, centralized portfolio management and specialty index business lines and the futures- and options-based overlay and exposure management services added in the Clifton acquisition.

Consolidated Assets under Management by Investment Mandate(1) (2)



                                                             October 31,                                    2013       2012
                                            % of                      % of                      % of        vs.        vs.
(in millions)                  2013         Total        2012         Total        2011         Total       2012       2011
Equity (3)                   $  93,585          33 %   $  80,782          41 %   $  84,281          45 %       16 %       -4 %
Fixed income                    44,211          16 %      49,003          25 %      43,708          23 %      -10 %       12 %
Floating-rate income            41,821          15 %      26,388          13 %      24,322          13 %       58 %        8 %
Alternative                     15,212           5 %      12,864           6 %      10,650           6 %       18 %       21 %
Implementation services(4)      85,637          31 %      30,302          15 %      24,574          13 %      183 %       23 %
Cash management                    203           0 %         169           0 %         669           0 %       20 %      -75 %
Total                        $ 280,669         100 %   $ 199,508         100 %   $ 188,204         100 %       41 %        6 %

(1) Consolidated Eaton Vance Corp. See table on page 35 for managed assets and flows of 49 percent-owned Hexavest Inc.

(2) Assets under management for which we estimate fair value using significant unobservable inputs are not material to the total value of the assets we manage.

(3) Balances include assets in balanced accounts holding income securities.

(4) Balances include amounts reclassified from equity for the prior year period.

Equity and implementation services assets under management included $59.1 billion, $51.4 billion and $48.1 billion of assets managed for after-tax returns on October 31, 2013, 2012 and 2011, respectively. Fixed income assets included $25.8 billion, $29.5 billion and $25.6 billion of tax-exempt municipal bond assets on October 31, 2013, 2012 and 2011, respectively.

Net inflows totaled $24.7 billion in fiscal 2013, compared to $0.2 billion in fiscal 2012 and $3.9 billion in fiscal 2011. Long-term fund net inflows totaled $13.6 billion in fiscal 2013, compared to net outflows of $3.8 billion in fiscal 2012 and net inflows of $0.5 billion in fiscal 2011. Long-term fund gross inflows increased to $43.6 billion in fiscal 2013, from $27.1 billion in fiscal 2012 and $33.0 billion in fiscal 2011, reflecting primarily an increase in inflows into funds with floating-rate mandates, while long-term fund gross outflows decreased to $30.0 billion in fiscal 2013, from $30.9 billion in fiscal 2012 and $32.5 billion in fiscal 2011, reflecting a decline in outflows from Eaton Vance Large-Cap Value Fund. Fund net inflows and outflows reflect an increase in fund leverage of $1.3 billion in fiscal 2013 and a decrease in leverage of $0.9 billion and $0.9 billion in fiscal 2012 and 2011, respectively.

Separate account net inflows totaled $11.1 billion in fiscal 2013, compared to $4.0 billion in fiscal 2012 and $3.3 billion in fiscal 2011. Institutional separate account net inflows increased to $9.6 billion in fiscal 2013, from $2.0 billion and $2.5 billion in 2012 and 2011, respectively. High-net-worth account net inflows totaled $1.1 billion, $1.3 billion and $0.4 billion in fiscal 2013, 2012 and 2011, respectively, while retail managed account net inflows totaled $0.5 billion, $0.7 billion and $0.4 billion in fiscal 2013, 2012 and 2011, respectively.

As of October 31, 2013, the Clifton division of Parametric managed $45.6 billion of client assets, an increase of 31 percent from the $34.8 billion of assets managed by Clifton on December 31, 2012, the date of acquisition. Net inflows into Clifton-managed funds and accounts were $8.9 billion from the time of acquisition. The

managed assets and flows of Clifton subsequent to the acquisition are included in Eaton Vance consolidated totals and are reflected as assets and flows of Parametric.

The following tables summarize our consolidated assets under management and asset flows by investment mandate and investment vehicle for the fiscal years ended October 31, 2013, 2012 and 2011:

Consolidated Net Flows by Investment Mandate(1)



                                                                                   2013           2012
                                              Years Ended October 31,              vs.            vs.
(in millions)                            2013          2012          2011          2012           2011
Equity assets - beginning of
period(2)                              $  80,782     $  84,281     $  85,912           -4 %           -2 %
Sales and other inflows                   16,989        16,572        23,202            3 %          -29 %
Redemptions/outflows                     (19,459 )     (26,033 )     (24,282 )        -25 %            7 %
Net flows                                 (2,470 )      (9,461 )      (1,080 )        -74 %          776 %
Assets acquired(4)                         1,572             -           352           NM (3)         NM
Exchanges                                    328            15            35           NM            -57 %
Market value change                       13,373         5,947          (938 )        125 %           NM
Equity assets - end of period          $  93,585     $  80,782     $  84,281           16 %           -4 %
Fixed income assets - beginning of
period                                    49,003        43,708        46,119           12 %           -5 %
Sales and other inflows                   10,881        12,278        10,336          -11 %           19 %
Redemptions/outflows                     (14,015 )      (9,455 )     (11,827 )         48 %          -20 %
Net flows                                 (3,134 )       2,823        (1,491 )         NM             NM
Assets acquired(4)                           472             -             -           NM             NM
Exchanges                                   (510 )          84          (180 )         NM             NM
Market value change                       (1,620 )       2,388          (740 )         NM             NM
Fixed income assets - end of period    $  44,211     $  49,003     $  43,708          -10 %           12 %
Floating-rate income assets -
beginning of period                       26,388        24,322        20,003            8 %           22 %
Sales and other inflows                   21,729         7,401         9,331          194 %          -21 %
Redemptions/outflows                      (6,871 )      (5,662 )      (5,220 )         21 %            8 %
Net flows                                 14,858         1,739         4,111          754 %          -58 %
Exchanges                                    397            45            53          782 %          -15 %
Market value change                          178           282           155          -37 %           82 %
Floating-rate income assets - end of
period                                 $  41,821     $  26,388     $  24,322           58 %            8 %
Alternative assets - beginning of
period                                    12,864        10,650        10,482           21 %            2 %
Sales and other inflows                    8,195         6,736         5,250           22 %           28 %
Redemptions/outflows                      (5,688 )      (4,348 )      (4,784 )         31 %           -9 %
Net flows                                  2,507         2,388           466            5 %          412 %
Assets acquired(4)                           650             -             -           NM             NM
Exchanges                                   (184 )         (94 )         (79 )         96 %           19 %
Market value change                         (625 )         (80 )        (219 )        681 %          -63 %
Alternative assets - end of period     $  15,212     $  12,864     $  10,650           18 %           21 %
Implementation services assets -
beginning of period(5)                    30,302        24,574        21,588           23 %           14 %
Sales and other inflows                   39,841         7,096         6,771          461 %            5 %
Redemptions/outflows                     (26,887 )      (4,411 )      (4,886 )        510 %          -10 %
Net flows                                 12,954         2,685         1,885          382 %           42 %
Assets acquired(4)                        32,064             -             -           NM             NM
Exchanges                                   (118 )          (1 )           -           NM             NM
Market value change                       10,435         3,044         1,101          243 %          176 %
Implementation services assets - end
of period                              $  85,637     $  30,302     $  24,574          183 %           23 %
Long-term assets - beginning of
period                                   199,339       187,535       184,104            6 %            2 %
Sales and other inflows                   97,635        50,083        54,890           95 %           -9 %
Redemptions/outflows                     (72,920 )     (49,909 )     (50,999 )         46 %           -2 %
Net flows                                 24,715           174         3,891           NM            -96 %
Assets acquired(4)                        34,758             -           352           NM             NM
Exchanges                                    (87 )          49          (171 )         NM             NM
Market value change                       21,741        11,581          (641 )         88 %           NM
Total long-term assets - end of
period                                 $ 280,466     $ 199,339     $ 187,535           41 %            6 %
Cash management fund assets - end of
period                                       203           169           669           20 %          -75 %
Total assets under management - end
of period                              $ 280,669     $ 199,508     $ 188,204           41 %            6 %

(1) Consolidated Eaton Vance Corp. See table on page 35 for managed assets and flows of 49 percent-owned Hexavest Inc.

(2) Balances include assets in balanced accounts holding income securities.

(3) Not meaningful ("NM")

(4) Balances represent Clifton assets acquired on December 31, 2012.

(5) Balances include amounts reclassified from equity for fiscal 2012.

Consolidated Net Flows by Investment Vehicle(1)



                                                                                   2013         2012
                                              Years Ended October 31,              vs.          vs.
(in millions)                            2013          2012          2011          2012         2011
Long-term fund assets - beginning of
period                                 $ 113,249     $ 111,705     $ 113,978            1 %         -2 %
Sales and other inflows                   43,606        27,080        33,035           61 %        -18 %
Redemptions/outflows                     (29,970 )     (30,895 )     (32,486 )         -3 %         -5 %
Net flows                                 13,636        (3,815 )         549           NM           NM
Assets acquired(2)                           638             -             -           NM           NM
Exchanges                                   (279 )         (13 )        (175 )         NM          -93 %
Market value change                        5,954         5,372        (2,647 )         11 %         NM
Long-term fund assets - end of
period                                 $ 133,198     $ 113,249     $ 111,705           18 %          1 %
Institutional separate account
assets - beginning of period              43,338        38,003        34,593           14 %         10 %
Sales and other inflows                   41,108        12,496        12,350          229 %          1 %
Redemptions/outflows                     (31,548 )     (10,514 )      (9,832 )        200 %          7 %
Net flows                                  9,560         1,982         2,518          382 %        -21 %
Assets acquired(2)                        34,120             -             -           NM           NM
Exchanges                                    183            38           (18 )        382 %         NM
Market value change                        8,523         3,315           910          157 %        264 %
Institutional separate account
assets - end of period                 $  95,724     $  43,338     $  38,003          121 %         14 %
High-net-worth separate account
assets - beginning of period              15,036        13,256        11,883           13 %         12 %
Sales and other inflows                    4,763         3,609         2,848           32 %         27 %
Redemptions/outflows                      (3,699 )      (2,283 )      (2,419 )         62 %         -6 %
Net flows                                  1,064         1,326           429          -20 %        209 %
Assets acquired                                -             -           352           NM           NM
Exchanges                                    (16 )        (990 )          (8 )        -98 %         NM
Market value change                        3,615         1,444           600          150 %        141 %
High-net-worth separate account
assets - end of period                 $  19,699     $  15,036     $  13,256           31 %         13 %
Retail managed account assets -
beginning of period                       27,716        24,571        23,650           13 %          4 %
Sales and other inflows                    8,158         6,898         6,657           18 %          4 %
Redemptions/outflows                      (7,703 )      (6,217 )      (6,262 )         24 %         -1 %
Net flows                                    455           681           395          -33 %         72 %
Exchanges                                     25         1,014            30          -98 %         NM
Market value change                        3,649         1,450           496          152 %        192 %
Retail managed account assets - end
of period                              $  31,845     $  27,716     $  24,571           15 %         13 %
Total long-term assets - beginning
of period                                199,339       187,535       184,104            6 %          2 %
Sales and other inflows                   97,635        50,083        54,890           95 %         -9 %
Redemptions/outflows                     (72,920 )     (49,909 )     (50,999 )         46 %         -2 %
Net flows                                 24,715           174         3,891           NM          -96 %
Assets acquired(2)                        34,758             -           352           NM           NM
Exchanges                                    (87 )          49          (171 )         NM           NM
Market value change                       21,741        11,581          (641 )         88 %         NM
Total long-term assets - end of
period                                 $ 280,466     $ 199,339     $ 187,535           41 %          6 %
Cash management fund assets - end of
period                                       203           169           669           20 %        -75 %
Total assets under management - end
of period                              $ 280,669     $ 199,508     $ 188,204           41 %          6 %

(1) Consolidated Eaton Vance Corp. See page 35 for managed assets and flows of 49 percent-owned Hexavest Inc.

(2) Balances represent Clifton assets acquired on December 31, 2012.

The following table summarizes our assets under management by investment affiliate as of October 31, 2013, 2012 and 2011:

Consolidated Assets under Management by Investment Affiliate(1)



                                    Years Ended October 31,            2013      2012
                                                                        vs.       vs.
(in millions)                  2013          2012          2011        2012      2011
Eaton Vance Management (2)   $ 144,693     $ 131,004     $ 133,128        10 %      -2 %
Parametric                     117,044        53,332        41,983       119 %      27 %
Atlanta Capital                 18,932        15,172        13,093        25 %      16 %
Total                        $ 280,669     $ 199,508     $ 188,204        41 %       6 %

(1) Consolidated Eaton Vance Corp. See page 35 for managed assets and flows of 49 percent-owned Hexavest Inc.

(2) Includes managed assets of wholly owned subsidiaries Eaton Vance Investment Counsel and Fox Asset Management LLC, as well as certain Eaton Vance-sponsored funds and accounts managed by Hexavest and unaffiliated third-party advisors under Eaton Vance supervision.

As of October 31, 2013, 49 percent-owned affiliate Hexavest Inc. ("Hexavest") managed $16.9 billion of client assets, an increase of 40 percent from $12.1 billion of managed assets on October 31, 2012. Net inflows into Hexavest-managed funds and separate accounts were $2.3 billion in fiscal 2013 and $0.8 billion in fiscal 2012. Other than Eaton Vance-sponsored funds for which Hexavest is advisor or sub-advisor, the managed assets of Hexavest are not included in Eaton Vance consolidated totals. The following table summarizes assets under management and asset flow information for Hexavest for the fiscal years ended October 31, 2013 and 2012:

Hexavest Assets under Management and Net Flows



                                                                                      2013
                                                   Years Ended October 31,             vs.
(in millions)                                      2013             2012 (2)          2012
Eaton Vance distributed:
Eaton Vance sponsored funds - beginning of
period(1)                                      $         37       $          -              NM
Sales and other inflows                                 162                 36             350 %
Redemptions/outflows                                    (15 )                -              NM
Net flows                                               147                 36             308 %
Market value change                                      27                  1              NM
Eaton Vance sponsored funds - end of period    $        211       $         37             470 %
Eaton Vance distributed separate accounts -
beginning of period(3)                         $          -       $          -              NM
Sales and other inflows                               1,381                  -              NM
Redemptions/outflows                                    (33 )                -              NM
Net flows                                             1,348                  -              NM
Market value change                                     226                  -              NM
Eaton Vance distributed separate accounts -
end of period                                  $      1,574       $          -              NM
Total Eaton Vance distributed - beginning of
period                                         $         37       $          -              NM
. . .
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