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EV > SEC Filings for EV > Form 10-Q on 6-Jun-2014All Recent SEC Filings

Show all filings for EATON VANCE CORP

Form 10-Q for EATON VANCE CORP


6-Jun-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Item includes statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, intentions or strategies regarding the future. All statements, other than statements of historical facts, included in this Form 10-Q regarding our financial position, business strategy and other plans and objectives for future operations are forward-looking statements. The terms "may," "will," "could," "anticipate," "plan," "continue," "project," "intend," "estimate," "believe," "expect" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that they will prove to have been correct or that we will take any actions that may now be planned. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the "Risk Factors" section of this Form 10-Q and Item 1A in our latest Annual Report on Form 10-K. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors. We do not assume any obligation to update any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The discussion and analysis below should be read in conjunction with the consolidated financial statements appearing elsewhere in this report. Management has presumed that the readers of this interim financial information have read or have access to Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended October 31, 2013.

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- and currency- based investments and a spectrum of absolute return strategies. As of April 30, 2014, we had $285.9 billion in consolidated 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 equity and income market conditions and investor sentiment affect the sales and redemptions of our investment products, managed asset levels, operating results and the recoverability of our investments. During the second quarter and first six months of our fiscal year, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of 6.2% and 8.4%, respectively. Over the same periods, the Barclays U.S. Aggregate Bond Index, a broad measure of U.S. bond market performance, had total returns of 1.2% and 1.7%, respectively. The Company's ending consolidated assets under management increased by $7.3 billion, or 3 percent, in the second quarter to $285.9 billion on April 30, 2014, reflecting market appreciation partially offset by net outflows. Net outflows for the second quarter were concentrated in global income, large-cap value equity and Atlanta Capital mandates. Notable sources of net inflows for the quarter included floating-rate income and implementation services. Average consolidated assets under management increased from the prior quarter by $2.1 billion, to $284.4 billion in the second quarter.

The primary drivers of our overall and investment advisory effective fee rates are the mix of our assets by product structure, distribution channel and investment mandate, and the timing and amount of performance fees recognized. Shifts in managed assets among product structures, distribution channels and investment mandates with differing fee schedules can alter the total effective fee rate earned on our assets under management. Our overall average effective fee rate decreased to 50 basis points in both the second quarter and first six months of fiscal 2014, respectively, from 52 basis points and 55 basis points in the second quarter and first six months of fiscal 2013, respectively. Our average effective investment advisory and administrative fee rate similarly

decreased to 42 basis points and 43 basis points in the second quarter and first six months of fiscal 2014, respectively, from 44 basis points and 46 basis points in the second quarter and first six months of last year, respectively.

Consolidated Assets under Management

Consolidated assets under management of $285.9 billion on April 30, 2014 increased $25.6 billion, or 10 percent, from the $260.3 billion reported a year earlier. Consolidated assets under management on April 30, 2014 included $134.9 billion in long-term funds, $96.6 billion in institutional separate accounts, $21.0 billion in high-net-worth separate accounts, $33.2 billion in retail managed accounts and $0.2 billion in cash management fund assets. Long-term fund net inflows of $5.2 billion over the last twelve months reflect gross inflows of $40.8 billion offset by outflows of $35.6 billion. Institutional separate account net inflows were $5.7 billion, high-net-worth separate account net outflows were $0.4 billion and retail managed account net inflows were $0.2 billion over the past twelve months. Net price appreciation in managed assets increased assets under management by $14.9 billion over the last twelve months.

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. The "Implementation Services" category includes Parametric's tax-managed core, centralized portfolio management and specialty index business lines, as well as their futures- and options-based overlay and exposure management services.

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



                                                  April 30,
                                                                                           %
(in millions)               2014         % of Total        2013         % of Total       Change
Equity(3)                 $  93,733               33 %   $  89,534               35 %          5 %
Fixed income                 43,917               15 %      49,949               19 %        -12 %
Floating-rate income         45,115               16 %      33,679               13 %         34 %
Alternative                  12,112                4 %      16,022                6 %        -24 %
Implementation services      90,815               32 %      70,966               27 %         28 %
Cash management funds           177                0 %         127                0 %         39 %
Total                     $ 285,869              100 %   $ 260,277              100 %         10 %

(1)Consolidated Eaton Vance Corp. See table on page 46 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)Includes assets in balanced accounts holding income securities.

Equity and implementation services assets under management included $64.9 billion and $59.1 billion of assets managed for after-tax returns on April 30, 2014 and 2013, respectively. Fixed income assets included $25.5 billion and $29.6 billion of tax-exempt municipal bond assets on April 30, 2014 and 2013, respectively.

Net outflows for long-term funds and separate accounts totaled $0.9 billion in the second quarter of fiscal 2014 compared to net inflows of $6.6 billion in the second quarter of fiscal 2013. Long-term funds net flows were flat in the second quarter of fiscal 2014, reflecting gross inflows of $8.7 billion and redemptions of $8.7 billion. Net flows into long-term funds totaled $6.1 billion in the second quarter of fiscal 2013, reflecting gross inflows of $12.6 billion and redemptions of $6.5 billion.

Separate account net outflows totaled $0.8 billion in the second quarter of fiscal 2014 compared to net inflows of $0.5 billion in the second quarter of fiscal 2013.

The following tables summarize our consolidated assets under management and asset flows by investment mandate and investment vehicle for the three and six months ended April 30, 2014 and 2013:

Consolidated Net Flows by Investment Mandate(1)



                          Three Months Ended                            Six Months Ended
                               April 30,                %                   April 30,                %
(in millions)             2014          2013          Change           2014          2013          Change
Equity assets -
beginning of
period(2)               $  90,765     $  86,518              5 %     $  93,585     $  80,782             16 %
Sales and other
inflows                     3,669         5,270            -30 %         7,454         9,766            -24 %
Redemptions/outflows       (5,015 )      (4,990 )            1 %       (10,636 )      (9,949 )            7 %
Net flows                  (1,346 )         280             NM (3)      (3,182 )        (183 )           NM
Assets acquired(4)              -             -              -               -         1,572             NM
Exchanges                      20           124            -84 %           532           116            359 %
Market value change         4,294         2,612             64 %         2,798         7,247            -61 %
Equity assets - end
of period               $  93,733     $  89,534              5 %     $  93,733     $  89,534              5 %
Fixed income assets -
beginning of period        43,339        49,679            -13 %        44,211        49,003            -10 %
Sales and other
inflows                     2,626         3,289            -20 %         5,077         6,666            -24 %
Redemptions/outflows       (2,756 )      (3,348 )          -18 %        (6,037 )      (6,723 )          -10 %
Net flows                    (130 )         (59 )          120 %          (960 )         (57 )           NM
Assets acquired(4)              -             -              -               -           472             NM
Exchanges                      62           (59 )           NM             (37 )         (81 )          -54 %
Market value change           646           388             66 %           703           612             15 %
Fixed income assets -
end of period           $  43,917     $  49,949            -12 %     $  43,917     $  49,949            -12 %
Floating-rate income
assets - beginning of
period                     44,073        28,656             54 %        41,821        26,388             58 %
Sales and other
inflows                     4,170         6,092            -32 %         8,956         9,352             -4 %
Redemptions/outflows       (2,842 )      (1,153 )          146 %        (5,547 )      (2,512 )          121 %
Net flows                   1,328         4,939            -73 %         3,409         6,840            -50 %
Exchanges                     (49 )          50             NM               5            83            -94 %
Market value change          (237 )          34             NM            (120 )         368             NM
Floating-rate income
assets - end of
period                  $  45,115     $  33,679             34 %     $  45,115     $  33,679             34 %
Alternative assets -
beginning of period        13,171        14,345             -8 %        15,212        12,864             18 %
Sales and other
inflows                       767         2,767            -72 %         1,856         4,576            -59 %
Redemptions/outflows       (1,967 )        (960 )          105 %        (4,956 )      (2,015 )          146 %
Net flows                  (1,200 )       1,807             NM          (3,100 )       2,561             NM
Assets acquired(4)              -             -              -               -           650             NM
Exchanges                     (20 )        (103 )          -81 %           (68 )        (116 )          -41 %
Market value change           161           (27 )           NM              68            63              8 %
Alternative assets -
end of period           $  12,112     $  16,022            -24 %     $  12,112     $  16,022            -24 %
Implementation
services assets -
beginning of period        87,010        68,420             27 %        85,637        30,302            183 %
Sales and other
inflows                    11,549         7,252             59 %        28,970        13,731            111 %
Redemptions/outflows      (11,105 )      (7,576 )           47 %       (27,115 )     (10,892 )          149 %
Net flows                     444          (324 )           NM           1,855         2,839            -35 %
Assets acquired(4)              -             -              -               -        32,064             NM
Exchanges                      (5 )         (15 )          -67 %          (458 )         (15 )           NM
Market value change         3,366         2,885             17 %         3,781         5,776            -35 %
Implementation
services assets - end
of period               $  90,815     $  70,966             28 %     $  90,815     $  70,966             28 %
Long-term assets -
beginning of period       278,358       247,618             12 %       280,466       199,339             41 %
Sales and other
inflows                    22,781        24,670             -8 %        52,313        44,091             19 %
Redemptions/outflows      (23,685 )     (18,027 )           31 %       (54,291 )     (32,091 )           69 %
Net flows                    (904 )       6,643             NM          (1,978 )      12,000             NM
Assets acquired(4)              -             -              -               -        34,758             NM
Exchanges                       8            (3 )           NM             (26 )         (13 )          100 %
Market value change         8,230         5,892             40 %         7,230        14,066            -49 %
Total long-term
assets - end of
period                  $ 285,692     $ 260,150             10 %     $ 285,692     $ 260,150             10 %
Cash management fund
assets - end of
period                        177           127             39 %           177           127             39 %
Total assets under
management - end of
period                  $ 285,869     $ 260,277             10 %     $ 285,869     $ 260,277             10 %

(1) Consolidated Eaton Vance Corp. See table on page 46 for managed assets and flows of 49 percent-owned Hexavest Inc.

(2) Includes assets in balanced accounts holding income securities.

(3) Not meaningful ("NM")

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

Consolidated Net Flows by Investment Vehicle(1)



                          Three Months Ended                          Six Months Ended
                               April 30,                %                 April 30,                %
(in millions)             2014          2013          Change         2014          2013          Change
Long-term fund assets
- beginning of period   $ 131,984     $ 119,162             11 %   $ 133,198     $ 113,249             18 %
Sales and other
inflows                     8,684        12,629            -31 %      18,918        21,708            -13 %
Redemptions/outflows       (8,751 )      (6,506 )           35 %     (19,013 )     (13,382 )           42 %
Net flows                     (67 )       6,123             NM           (95 )       8,326             NM
Assets acquired(2)              -             -              -             -           638             NM
Exchanges                      81            (3 )           NM            47           (22 )           NM
Market value change         2,944         1,732             70 %       1,792         4,823            -63 %
Long-term fund assets
- end of period         $ 134,942     $ 127,014              6 %   $ 134,942     $ 127,014              6 %
Institutional
separate account
assets - beginning of
period                     94,869        83,350             14 %      95,724        43,338            121 %
Sales and other
inflows                    11,101         8,102             37 %      27,903        14,887             87 %
Redemptions/outflows      (12,249 )      (9,071 )           35 %     (29,721 )     (12,892 )          131 %
Net flows                  (1,148 )        (969 )           18 %      (1,818 )       1,995             NM
Assets acquired(2)              -             -              -             -        34,120             NM
Exchanges                     (96 )           -             NM           (96 )           5             NM
Market value change         2,939         2,343             25 %       2,754         5,266            -48 %
Institutional
separate account
assets - end of
period                  $  96,564     $  84,724             14 %   $  96,564     $  84,724             14 %
High-net-worth
separate account
assets - beginning of
period                     19,374        16,245             19 %      19,699        15,036             31 %
Sales and other
inflows                       968         1,497            -35 %       1,682         2,876            -42 %
Redemptions/outflows         (988 )        (573 )           72 %      (2,092 )      (1,771 )           18 %
Net flows                     (20 )         924             NM          (410 )       1,105             NM
Exchanges                     402             9             NM           402            (6 )           NM
Market value change         1,212           849             43 %       1,277         1,892            -33 %
High-net-worth
separate account
assets - end of
period                  $  20,968     $  18,027             16 %   $  20,968     $  18,027             16 %
Retail managed
account assets -
beginning of period        32,131        28,861             11 %      31,845        27,716             15 %
Sales and other
inflows                     2,028         2,442            -17 %       3,810         4,620            -18 %
Redemptions/outflows       (1,697 )      (1,877 )          -10 %      (3,465 )      (4,046 )          -14 %
Net flows                     331           565            -41 %         345           574            -40 %
Exchanges                    (379 )          (9 )           NM          (379 )          10             NM
Market value change         1,135           968             17 %       1,407         2,085            -33 %
Retail managed
account assets - end
of period               $  33,218     $  30,385              9 %   $  33,218     $  30,385              9 %
Total long-term
assets - beginning of
period                    278,358       247,618             12 %     280,466       199,339             41 %
Sales and other
inflows                    22,781        24,670             -8 %      52,313        44,091             19 %
Redemptions/outflows      (23,685 )     (18,027 )           31 %     (54,291 )     (32,091 )           69 %
Net flows                    (904 )       6,643             NM        (1,978 )      12,000             NM
Assets acquired(2)              -             -              -             -        34,758             NM
Exchanges                       8            (3 )           NM           (26 )         (13 )          100 %
Market value change         8,230         5,892             40 %       7,230        14,066            -49 %
Total long-term
assets - end of
period                  $ 285,692     $ 260,150             10 %   $ 285,692     $ 260,150             10 %
Cash management fund
assets - end of
period                        177           127             39 %         177           127             39 %
Total assets under
management - end of
period                  $ 285,869     $ 260,277             10 %   $ 285,869     $ 260,277             10 %

(1) Consolidated Eaton Vance Corp. See page 46 for managed assets and flows of 49 percent-owned Hexavest Inc.

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

The following table summarizes our assets under management by investment affiliate as of April 30, 2014 and 2013:

Consolidated Assets under Management by Investment Affiliate(1)



                                    April 30,               %
(in millions)                  2014          2013        Change
Eaton Vance Management (2)   $ 144,892     $ 142,211           2 %
Parametric                     122,562       100,760          22 %
Atlanta Capital                 18,415        17,306           6 %
Total                        $ 285,869     $ 260,277          10 %

(1) Consolidated Eaton Vance Corp. See page 46 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 April 30, 2014, 49 percent-owned affiliate Hexavest Inc. ("Hexavest") managed $17.1 billion of client assets, an increase of 12 percent from the $15.3 billion of managed assets on April 30, 2013. Other than Eaton Vance-sponsored funds for which Hexavest is adviser or sub-adviser, 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 three and six months ended April 30, 2014 and 2013:

Hexavest Assets under Management and Net Flows



                           Three Months Ended                          Six Months Ended
                               April 30,                 %                 April 30,                %
(in millions)              2014          2013          Change         2014          2013          Change
Eaton Vance
distributed:
Eaton Vance sponsored
funds - beginning of
period(1)               $      212     $     135             57 %   $     211     $      37            470 %
Sales and other
inflows                         12            17            -29 %          42           111            -62 %
Redemptions/outflows           (17 )          (1 )           NM           (42 )          (6 )          600 %
Net flows                       (5 )          16             NM             -           105             NM
Market value change             14            10             40 %          10            19            -47 %
Eaton Vance sponsored
funds - end of period   $      221     $     161             37 %   $     221     $     161             37 %
Eaton Vance
distributed separate
accounts - beginning
of period(2)                 1,383         1,185             17 %       1,574             -             NM
Sales and other
inflows                        307             3             NM           383         1,151            -67 %
Redemptions/outflows           (74 )           -             NM           (79 )           -             NM
Net flows                      233             3             NM           304         1,151            -74 %
. . .
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