Executives: Dan Cataldo - Treasurer Tom Faust - Chairman and Chief Executive Officer Laurie Hylton - Chief Financial

Officer
Analysts: Brian Bedell - Deutsche Bank Robert Lee - KBW Bill Katz - Citigroup Michael Carrier - Bank of America/Merrill Lynch Chris Shutler - William Blair Patrick Davitt - Autonomous Research Dan Fannon - Jefferies Ari Ghosh - Credit

Suisse
Operator: Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Eaton Vance Fourth Quarter Earnings Conference Call. [Operator Instructions] Dan Cataldo, Treasurer, you may begin your conference.

Dan Cataldo: Thank you and good morning and welcome to our fiscal 2017 fourth quarter earnings call and webcast.

Here this morning are Tom Faust, Chairman and CEO of Eaton Vance and Laurie Hylton, our CFO. We will first comment on the quarter and then take your questions. The full earnings release and charts we will refer to during the call are available on our website eatonvance.com under the heading Press Releases. Today’s presentation contains forward-looking statements about our business and financial results. The actual results may differ materially from those projected due to risks and uncertainties in our business, including but not limited to those discussed in the company’s SEC filings.

These filings, including our 2016 annual report on Form 10-K are available on our website or upon request at no charge. I will now turn the call over to Tom.

Tom Faust: Good morning and thank you for joining us. Today, we are reporting adjusted earnings per diluted share of $2.48 for the fiscal year ended October 31, which is up 16% from $2.13 in fiscal 2016. For the fourth quarter, we are reporting $0.70 of adjusted earnings per diluted share, that’s up 23% from $0.57 in the fourth quarter of last year and up 13% from $0.62 in this year’s third quarter.

We finished fiscal 2017 with record managed assets, record annual net inflows and a record quarterly earnings rate, all-in-all, a very strong year. One of the most notable events of our fiscal 2017 was the acquisition in December of the assets of the former Calvert Investments and the addition of the Calvert funds to Eaton Vance. The Calvert funds are one of the largest and most diversified families of responsibly invested mutual funds, encompassing actively and passively managed equity, fixed income and asset allocation strategies, all managed in accordance with the Calvert principles for Responsible Investing. Responsible Investing continues to be a leading trend in asset management, appealing to the growing universe of investors who seek both financial returns and positive societal impact from their investments. At the time we acquired Calvert, I talked about the opportunity we saw to apply Eaton Vance’s management and distribution resources to help Calvert become a larger and more impactful company.

Now, almost 11 months later, we are on the road to doing that and more excited than ever to have Calvert as part of Eaton Vance. Although many growth opportunities are yet to be realized, Calvert is already starting to contribute positively to our net flows. Total managed assets of our Calvert research and management subsidiary, including amounts sub-advised by other Eaton Vance affiliates, increased from $12 billion at acquisition to $12.9 billion at fiscal year end. We finished fiscal 2017 with consolidated assets under management of $422.3 billion, up 26% from 12 months earlier. The $37.8 billion of consolidated net inflows we had in the fiscal year represents 11% internal growth in managed assets and exceeds our previous high annual inflows by a wide margin.

Excluding our lower fee exposure management business, net inflows for the year were $26.4 billion, equating to 10% internal AUM growth. As we have mentioned in recent quarters, while net flows and internal growth in managed assets are customary measures of an asset manager’s organic growth, we find it increasingly important to understand and track internal growth in management fee revenue. Organic revenue growth, as we define it, is the change in the run-rate management fee revenue resulting from net inflows and outflows taking into account the net fee rate applicable to each dollar in and out. Like in the calculation of organic AUM growth, the impact of market action and M&A are excluded. Calculated on this basis, our organic revenue growth was 7% for fiscal 2017 and 5% in the fourth quarter, which was our seventh consecutive quarter of positive organic revenue results.

Although peer managers typically don’t disclose their organic revenue growth numbers, we suspect our numbers are – our results on this measure would rank among the highest in the industry. A key to Eaton Vance’s success in fiscal 2017 has been our ability to grow our higher fee actively managed business, while continuing the accelerated build-out of lower fee more passive businesses, our active investment strategies, which include a wide range of equity, fixed and floating rate income and alternative mandates, had net flows of $9.4 billion for the year, a very respectable 5% organic growth in managed assets. Growth in actively managed strategies was complemented by strong growth in passive mandates, which include Parametric’s portfolio implementation and exposure management businesses Eaton Vance Management’s laddered income separate accounts and Calvert index funds. Collectively, these strategies grew managed assets at an 18% internal growth rate for the fiscal year. Turning to the fourth quarter, our net inflows of $8 billion reflect positive results for every investment category, except equity which turned negative after net inflows in the second and third quarters.

Within equity, strong net inflows into the Parametric defensive equity strategy and positive contributions from Eaton Vance large cap growth and Calvert emerging market strategies were more than offset by $1.8 billion in combined net outflows from Parametric emerging markets and Eaton Vance large-cap value. Both of these strategies experienced a large single client or single platform redemptions during the quarter, accounting for much of these strategy’s negative flow results for the quarter. Fourth quarter net inflows into fixed income of $2.1 billion were largely driven by $1.5 billion of net inflows into municipal and corporate bond laddered separate accounts. Also contributing positively to fourth quarter fixed income flows were high yield, managed municipals and our top performing emerging market local debt strategies. Our floating rate bank loan business generated net inflows of just over $400 million in the fourth quarter, with U.S.

retail demand for floating rate products having slowed over the past couple of quarters, fourth quarter growth in our bank loan business was driven by demand from clients outside the United States, which now account for about 25% of our bank loan business. The diversity of our client base in this segment is a stabilizing influence on quarterly flow patterns. Net inflows into our alternatives category remained strong at almost $700 million for the fourth quarter, driven by growth in our global macro absolute return franchise. Global macro continues to gain traction as a result of a strong performance record over multiple periods, low volatility and low correlation to traditional income in equity markets. Portfolio implementation had quarterly net inflows of $2 billion driven by continued strong growth in Parametric Custom Core equity separate accounts offered to retail and high net worth investors.

A key component of our custom beta product set managed assets in this business grew from $32.6 billion at the beginning of the fiscal year to over $50 billion on October 31. As we have mentioned in prior calls, we frequently market Parametric Custom Core strategies in conjunction with Eaton Vance municipal and corporate bond ladders and refer to the combined offering as custom beta. As can be seen on Page 17 of the call slides, our total managed assets in custom beta strategies offered as retail and high net worth separate accounts is now $68 billion, up 57% from the beginning of the fiscal year. These market leading offerings combined the benefits of passive investing with the ability to customize portfolio to meet individual preferences and needs. Our final mandate reporting category, exposure management, had net inflows of $3 billion in the fourth quarter.

Exposure management is a Parametric business offering primarily futures based overlay strategies to institutional investors so they can add, remove or hedge market exposures within their portfolios in a transparent, efficient and highly customized manner without disrupting their underlying investment holdings. At an average fee rate of 5 basis points, this is our lowest fee business, but a leading growth contributor. Since entering this business through the acquisition of the former Clifton Group at the end of 2012, we have grown our exposure management AUM at a rate of 23% annually. Turning to investment performance, our story remains strong. At the end of October, we had 68 funds with overall Morningstar ratings of 4 or 5 stars for at least 1 class of shares, including 30 5-star rated funds.

As measured by total return, at October 31, around 50% of our fund assets ranked in the top quartile of their Morningstar peer groups over 3 and 5 years and 75% of assets ranked above median. And presenting at an investor conference last week, I outlined Eaton Vance’s most important strategic priorities heading into fiscal 2018. The list hasn’t changed much from last year, but that shouldn’t be a surprise, consistency and continuity have long been hallmarks of Eaton Vance. As described last week, our major priorities are first, capitalizing on our investment performance leadership and distribution strengths to grow sales and gain market share and active strategies. Second, extending the success that we have had with our custom beta lineup of rules-based separately managed account products.

Third, leveraging our Calvert acquisition to lead the growth of Responsible Investing. Fourth, becoming a more global company by building our investment and distribution capabilities outside the United States. And fifth, positioning NextShares to become the vehicle of choice for investors and actively managed funds in the U.S. I have already touched on the first three initiatives, but let me update you on the last two, our global expansion in NextShares. While still a small part of our business, our international footprint is expanding significantly.

In addition to owning 49% of Montreal-based global equity manager, Hexavest, we operate internationally from offices in London, Sydney, Singapore and a new location this year in Tokyo. In London, we now have a staff of nearly 50 people, up from just a handful 2 years ago. I am pleased to report that our increased focus on growing our international business is beginning to pay off. In the fiscal year, assets managed for non-U.S. clients contributed over $5 billion to the company’s consolidated net inflows, equating to 30% internal growth in managed assets.

Leading contributors to this year’s international growth include bank loans and exposure management. Still representing less than 6% of managed assets, we see lots of room to run for additional growth outside the U.S. On NextShares, I suspect everyone on the call knows by now that this is a new type of fund vehicle, first launched in early 2016, combining proprietary active management with the conveniences and potential performance and tax advantages of exchange traded products. Our NextShares subsidiary holds patents and other intellectual property rights related to NextShares and is seeking to commercialize NextShares by entering into licensing and service agreements with fund companies. To-date, 16 fund companies have entered into preliminary or final NextShares agreements.

Last week, we announced the launch of what becomes the ninth NextShares fund, joining 3 Eaton Vance, 3 Waddell & Reed and 2 Gabelli NextShares offerings already in the market. The new Eaton Vance Oaktree Diversified Credit NextShares fund provides access in an exchange traded structure to the Oaktree diversified credit strategy, which is not otherwise available to retail investors. In other major NextShares news, UBS and NextShares Solutions issued a joint press release yesterday, announcing that NextShares are now available to UBS’ network of 7,100 U.S. financial advisers through the UBS brokerage and strategic adviser programs. With this announcement, UBS becomes the first full service wealth manager to offer NextShares through its financial advisers.

The launch of NextShares at UBS brings NextShares to a large audience of financial advisers and their clients and for the first time, provides our distribution team a significant opportunity to promote the NextShares funds we manage. Now, that we have UBS as the major distribution partner, we expect the number of NextShares funds to be introduced by Eaton Vance and other sponsors to ramp up over the coming weeks and months. There are currently about 15 NextShares funds from various sponsors in the registration process. With the Oaktree diversified credit strategy now available in a NextShares’ format and UBS engaged as a major distribution partner, the next few months promise to be very interesting on the NextShares front. As it has been throughout our long involvement in this initiative, our goal remains to position NextShares to become the fund vehicle of choice for active strategies and to use this innovation to help address the competitive imbalance that now exists between active and passive funds.

Before I close, I would like to comment briefly on the tax reform initiative now underway in Washington. Eaton Vance has long supported the goals of tax reform to adopt the simpler, fairer tax code that enhances the global competitiveness of U.S. business and promotes faster U.S. economic growth. Few companies would benefit more than Eaton Vance from the lowering of the U.S.

corporate tax rate to 20% as proposed in both the House and Senate bills. One provision of the Senate, but not the House bill that we don’t support and are working to combat is the small revenue raise that scored at $2.4 billion over 10 years that would generally require taxpayers other than regulated investment companies to determine the cost basis of the securities they sell, gift or otherwise dispose of on a first-in, first-out basis. Effective for dispositions on or after January 1, 2018, non-RIC investor could no longer select specific shared lots when they dispose of securities unless they hold multiple positions. Eaton Vance is among the large number of securities firms working to prevent this provision from becoming law. In our view, adopting mandatory FIFO would be bad for investors, bad for our markets and ultimately bad for the U.S.

economy, inflicting harm far out of proportion to the provision small contribution to paying for tax reform. Plus, implementation would be an administrative nightmare that we don’t see how it can be accomplished by the proposed effective date of January 2018. If enacted, the mandatory FIFO provision would affect Eaton Vance’s business by complicating the management of non-RIC assets for after-tax returns, including the Parametric Custom Core franchise. Since the Senate proposal first came to light 12 days ago the Parametric Research team has been feverishly evaluating the potential impact of mandatory FIFO on their tax managed strategies. While it would certainly change certain aspects of how they build and manage client portfolios, the research to-date shows that substantial tax alpha could still be achieved if FIFO is required.

As the legislative process for tax reform plays out over the coming weeks, we will be working both to help ensure that mandatory FIFO does not become law and to prepare our business for the possibility that it does. That concludes my remarks. And I will now turn the call over to Laurie.

Laurie Hylton: Thank you and good morning. As Tom mentioned, we are reporting adjusted earnings per diluted share of $2.48 for fiscal 2017, an increase of 16% from $2.13 adjusted earnings per diluted share in the prior fiscal year.

On a GAAP basis, we earned $2.42 per diluted share in fiscal 2017 and $2.12 per diluted share in fiscal 2016. As you can see in Attachment 2 to our press release, adjusted earnings differed from GAAP earnings in fiscal 2017 by $0.06 per diluted share to reflect $5.4 million of debt extinguishment costs associated with the May 2017 retirement of $250 million of senior notes due in October 2017. $3.5 million of structuring fees paid in connection with our July closed end fund initial public offering and $0.5 million to reflect increases in the estimated redemption value of non-controlling interest in our affiliates redeemable at other than fair value. Adjusted earnings differed from GAAP earnings in fiscal 2016 by $0.01 per diluted share to reflect $2.3 million of structuring fees paid in connection with our May 2016 closed-end fund IPO. Adjusted operating income, which excludes the impact of closed-end fund structuring fees paid, increased by 17% year-over-year.

Our adjusted operating margin was 32% in fiscal 2017 versus 31% in fiscal 2016. Tom mentioned we are reporting record quarterly adjusted earnings per diluted share of $0.70 for the fourth quarter of fiscal 2017. That’s an increase of 23% from $0.57 in the fourth quarter of fiscal 2016 and up 13% from $0.62 in the third quarter of fiscal 2017. Adjusted earnings differed from GAAP earnings in the fourth quarter of fiscal 2017 by $0.01 per diluted share to reflect increases in redemption value of non-controlling interest and affiliates redeemable at other than fair value. Adjusted earnings per diluted share matched GAAP earnings in the fourth quarter fiscal 2016.

Adjusted earnings differed from GAAP earnings by $0.04 per diluted share in the third quarter fiscal 2017 to reflect the earlier referenced debt extinguishment costs and closed end fund structuring fees paid this fiscal year. Excluding closed end fund structuring fees paid, our fourth quarter adjusted operating income increased by 25% from the fourth quarter fiscal 2016 and 11% sequentially. Our adjusted operating margin was 34.1% in the fourth quarter of fiscal 2017 versus 32% and 31.6% in the fourth quarter of fiscal 2016 and the third quarter of fiscal 2017 respectively. Tom mentioned it was a record year for us in terms of managed assets. Ending consolidated managed assets climbed to a record $422.3 billion at October 31, 2017, an increase of 26% from the end of fiscal 2016, reflecting record annual net inflows, favorable markets and the impact of the Calvert acquisition at the end of calendar 2016.

Ending consolidated managed assets increased 4% from the prior quarter end primarily driven by strong net flows and positive market returns. Average managed assets in fiscal 2017 increased 19% in comparison to the prior fiscal year, generating a 14% increase in revenue. Revenue growth trailed growth in average managed assets during the fiscal year due to a decline in our average managed fee rate from 35.8 basis points in fiscal 2016 to 34.5 basis points in fiscal 2017. This decline in our average management fee rate is primarily attributable to the ongoing shift in our business mix as lower fee exposure management, portfolio implementation and bond ladder businesses have become a larger percentage of our assets under management. Performance fees which are excluded from the calculation of our average fee rates, contributed $400,000 in fiscal 2017 and $3.4 million in fiscal 2016.

Comparing fourth quarter results to the same quarter last year, 22% growth in average managed assets drove a 17% increase in revenue. Sequentially, average managed assets increased 5%, driving revenue growth to 3%. Our average annualized management fee rate was 33.9 basis points in the fourth quarter fiscal 2017, down 3% from 35 basis points in the fourth quarter of fiscal 2016, and down 1% from 34.2 basis points in the third quarter fiscal 2017. Although strong flows into our lower fee strategies continue, net inflows into higher fee strategies helped to mitigate the overall fee rate decline. Performance fees reduced earnings by $300,000 in the fourth quarter fiscal 2017 and contributed $600,000 and $500,000 to earnings in the fourth quarter of fiscal 2016 and third quarter fiscal 2017, respectively.

As Tom noted, we realized 7% internal growth in management fees and 11% internal growth in managed assets in fiscal 2017. This represents a significant improvement from fiscal 2016 when we realized 1% internal growth in management fees on 6% internal growth in managed assets. We are pleased to see asset growth translating into demonstrable revenue growth and are optimistic about our ability to continue to build on this momentum in the next fiscal year. Fiscal 2017 consolidated revenues were the highest in company history. In the fourth quarter fiscal 2017, we realized 5% annualized internal growth in management fees on 8% annualized internal growth in managed assets.

This represents a significant improvement over the fourth quarter of fiscal 2016 when we realized 2% annualized internal growth in management fees on 6% annualized internal growth in managed assets. The spread between management fee and AUM growth rates in this year’s fourth quarter matched the preceding quarter when we generated 6% annualized internal growth in management fees on 9% annualized internal growth in managed assets. Turning to expenses. Compensation expense increased by 13% in fiscal 2017, primarily reflecting higher sales-based incentive accruals driven by strong product sales, higher operating income-based bonus accruals driven by increased profitably, higher salaries and benefits associated with increases in headcount, partly in connection with the Calvert acquisition, and higher stock-based compensation. As a percentage of revenue, compensation expense decreased to 36% in fiscal 2017 from 37% in fiscal 2016.

Even with continuing revenue growth, we anticipate that compensation as a percentage of revenue will stay in the 36% range in the first quarter of fiscal 2018, given seasonal pressures associated with payroll tax clock resets, 401(k) funding, year-end base salary increases and stock-based compensation acceleration associated with employee retirement. Controlling our compensation costs and other discretionary spending remains top of mind as we move into the new fiscal year. Non-compensation distribution-related costs, including distribution and service fee expenses and the amortization of deferred sales commissions, increased 13% in fiscal 2017, reflecting an increase in closed-end fund structuring fees and higher marketing and distribution-related costs, primarily driven by higher average managed assets and the addition of the Calvert funds acquired at the end of calendar 2016. Backing out closed-end fund structuring fees paid, which we do in calculating adjusted operating income and adjusted earnings per diluted share, our non-compensation distribution-related costs in fiscal 2017 were up 12%. Fourth quarter distribution-related expenses were up 12% year-over-year and down 6%, sequentially.

Fund-related expenses increased 36% in fiscal 2017, primarily reflecting increases in sub-advisory fees paid and higher fund subsidies associated with the addition of the Calvert funds, increases in fund expenses born by the company on funds for which we earn an all-in fee and $1.9 million in onetime reimbursements made to the funds by the company during the third quarter fiscal 2017. Other operating expenses were up 7% in fiscal 2017, primarily reflecting increases in travel, communications, professional services, other corporate expenses and information technology spending. In terms of specific initiatives spending, expenses related to Next Shares totaled approximately $7.4 million in fiscal 2017 versus approximately $8 million in fiscal 2016. We continue to spend approximately $2 million per quarter in connection with our NextShares initiative. Net gains and other investment income on seed capital investments contributed $0.01 to earnings per diluted share in each of the fourth quarter of fiscal 2017, the fourth quarter fiscal 2016 and the third quarter fiscal 2017.

When quantifying the impact of our seed capital investments on earnings each quarter, we take into consideration our pro rata share of the gains, losses and other investment income earned on investments in sponsored products, whether 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, net of income taxes and net income attributable to non-controlling interest. We continue to hedge the market exposures of our seed capital portfolio to the extent practicable to minimize the associated earnings volatility. Our effective tax rate was 36.5% for the fourth quarter of fiscal 2017, 39% for the fourth quarter of fiscal 2016, and 36.9% for the third quarter fiscal 2017. Excluding the effect of consolidated CLO entity earnings and losses allocated to other beneficial interest holders in the fourth quarter of fiscal 2016, our effective tax rate would have been 38.3% for the quarter.

So among the highest tax rate of corporate taxpayers worldwide, Eaton Vance would be a major beneficiary if efforts in Washington to lower the U.S. corporate tax rate to 20% proved to be successful. In April, we issued $300 million of new 3.5% 10-year senior notes and issued a redemption notice for our $250 million of 6.5% senior notes due in October 2017. On a net basis, these transactions result in an annual reduction in our interest expense of approximately $5.8 million. In other capital management activities, we repurchased 549,000 shares of nonvoting common stock for approximately $26 million in the fourth quarter of fiscal 2017.

Our weighted average diluted shares outstanding increased by 2% during the fiscal year from $114 million on October 31, 2016, to $116.4 million on October 31, 2017. We finished our fourth fiscal quarter holding $824.4 million of cash, cash equivalents and short-term debt securities and approximately $336.9 million in seed capital investments. This past August, the company invested $18.8 million in a new warehouse-stage CLO entity that we began consolidating in the fourth quarter of fiscal 2017. Our total outstanding debt at the end of fiscal 2017 consists of the $300 million of 3.5% senior notes issued earlier this year and $325 million of 3.65% senior notes due in 2023. We also have a $300 million credit facility, which is currently undrawn.

It’s worth mentioning that different from what our balance sheet may suggest, we did not increased our seed capital portfolio significantly during fiscal 2017. The increase in investment shown on our balance sheet is largely offset by an increase in redeemable non-controlling interest, reflecting the impact of new consolidation guidance adopted during the first quarter of fiscal 2017 that necessitates the consolidation of a greater number of funds in our seed capital portfolio at lower levels of ownership. As a final note, I would observe that Eaton Vance continues to operate at high levels of profitability while maintaining significant financial flexibility, even as we support strong business growth. Looking forward to the next fiscal year, based on what we see today, we expect earnings comparisons to benefit from growth in revenue driven by higher average assets under management. If tax results if tax reform results in lower taxes in our fiscal 2018 U.S.

income, after-tax results will be further enhanced. These remain good times for Eaton Vance. This concludes our prepared comments. And at this point, we would like to take any questions you may have.

Operator: [Operator Instructions] Your first question comes from the line of Brian Bedell of Deutsche Bank.

Your line is open.

Brian Bedell: Hi good morning. Thanks very much. Maybe, Tom, you talked about the FIFO, both on the Senate side, and thanks for the color on Parametric’s initial stake on it. Is there any sense of what portion of the tax alpha that Parametric has historically generated is coming from, choosing the timing of the securities? Realize that, that might be a difficult thing to answer but just to get a sense of what type of impact they could have on the historical tax alpha if that is implemented?

Tom Faust: Yes, I don’t - thanks for the question, Brian, I don’t know that and I think it might be a hard thing to quantify in total.

Obviously, it’s going to vary a lot by circumstances of an individual account. Paul Bouchey is the Head of Research at Parametric. And I have been in touch with him and with Brian Langstraat, who runs Parametric, over the last couple of weeks as this issue has been out there. And they have been doing as I said in my remarks, they have been doing a lot of work. I’m looking at the ability in a mandatory FIFO regime if that’s what happens, to generate tax alpha.

And there, I would say that the results, as reported last night by Paul, are quite encouraging, that you can get to essentially comparable levels of tax alpha, but you have to do it in a somewhat different manner. Essentially, what you want to avoid is having a single security purchased at multiple different price points. So I think that means, generally, as you build out your portfolio over time, you are adding new positions as opposed to adding different layers to existing positions. So you have to you got to think about it more, the way you build portfolio will be different. I think one of our challenges is, if this becomes a law, the proposed effective [date] [ph] is about 5 or 6 weeks from now, so there may be some planning that needs to be implemented before this takes effect.

And certainly, there will potentially be some changes in algorithms to be affected so that the new way of operating is reflective of this rule, of this information if it comes through. I would say there is a potential positive for perhaps significant in there for their Custom Core business in that and tax reform and that it’s looking like for higher-income investors, federal rates will be probably flat, but the effective rates, including the state tax is net of federal deductions, in places like California, New York, Massachusetts and Connecticut, places that have relatively high state taxes, then that tax rate doesn’t go down and in fact, could go up likely would go up quite sharply on a net basis in some of those places, which not surprisingly represent a pretty big part of our tax-managed business. So as mentioned, this is something that we oppose. We think it works against what tax reform is trying to accomplish. It complicates the lives of investors, but in some ways, it makes the importance of being smart about tax management even greater.

And hard to say, but on balance, we think it could well be a positive for our business.

Brian Bedell: Okay. Okay, that’s great color. And then maybe just a follow-up on the NextShares with UBS, with that starting up, any sense of aside from the different advisory agreement that you will be having with the other managers, a sense of how the financial advisers at UBS are viewing the product and whether they are going to begin shifting to that en masse, I mean, I guess, just based on conversations, I imagine there’s not really a lot of evidence yet of any traction at this stage?

Tom Faust: Yes, it’s obviously very early. I think it was officially turned on in their system either Friday or yesterday.

So this is brand new. Also, there’s a process that UBS is undergoing of vetting individual funds. And I know not all of the NextShares funds are yet through that process, including the Oaktree fund that we announced launch of last week. We are very encouraged that UBS is putting funds through an expedited review process. They have lowered the normal standards in terms of how much assets have to be in the fund, recognizing that practically speaking, that since they are the main market here that they can’t realistically expect a lot of flows into the fund to be there before they come in.

But we are optimistic. There’s a training module that has been implemented across UBS. I think that’s been well received. As I mentioned in my remarks, this is really the first time that we can wholesale NextShares. The two smaller broker-dealer relationships that we started last year really don’t fit with our distribution model and that of other NextShares sponsors.

But this is right down our alley. I should say we are particularly excited about the Oaktree strategy. Oaktree has of course, has an outstanding reputation as a credit manager and this is the first time this diversified credit strategy is available to retail investors. How I think UBS advisers will think about this is strategy by strategy. You put an uninteresting strategy in a NextShares structure I don’t think that’s going to be compelling for an adviser.

But you put but if you put an interesting compelling strategy in front of a NextShares adviser, we think that will motivate that adviser to learn about and to invest in NextShares. And that, that success we certainly hope, will lead that adviser and other advisers and ultimately other broker-dealers, to embrace NextShares, not only for that strategy, but in time for a whole broad array of strategies. So, one step forward, maybe a small step, but certainly, in the whole process here, quite significant. We I would say, in thinking about flows to expect out of UBS, a couple of cautions. One was the one I just said, that all the products are not yet approved and there will be a rollout of product of NextShares at UBS over some period of weeks and months.

I think there’s a handful that are approved today and certainly, we expect that to grow by the week for the foreseeable future. But the other thing is that it’s not available yet on all the platforms at UBS. UBS has, for several years, been involved in a major systems upgrade that’s expected to conclude, I think sometime around the middle of next year, and we won’t to be fully available everywhere at UBS in terms of systems until that’s done that process is done. So right now, we are available in brokerage and strategic advisory, but not available in their other advisory programs.

Brian Bedell: The strategic advisory is their [wrap] [ph] program, I believe, it’s that correct?

Tom Faust: Yes.

Or it is a [wrap] [ph] program. I think they have other ones as well.

Brian Bedell: Great thanks for all the color.

Tom Faust: Yes. Thanks, Brian.

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

Robert Lee: Great, thanks. Good morning, everyone. Can you maybe just as a starting place I noticed that you have kind of made a comment in the release about a CLO entity.

So it kind of sounds like you are looking to get heavier into the CLO business in managing CLOs. Could you maybe kind of update us on your plans there? And I saw you had a little bit warehouse, so do you have some kind of CLOs you are thinking are coming to market in the next couple of months and just kind of how you are thinking about that business?

Tom Faust: So we have one CLO that’s in process that we have mentioned that’s in that’s, I guess, come out of the warehouse stage. We have, I would say, a renewed interest in this business. We have a team here that’s been doing CLOs for certainly well over a decade. We think we are pretty good at this.

It’s a huge part of the bank loan market. For public companies, it’s a bit challenging because of the reporting requirements. There are also risk retention rules that effectively require us to own, I think it’s 5% of the entity. You can do that by owning a pro rata strip of the different risk levels or by owning much of the equity. We are I don’t think you can you should expect to see Eaton Vance become primarily a CLO shop.

This is a big business, but there are their capital needs here, the risk considerations, there are accounting complexities. But having said all that, this is an asset class that we like. We think we are very good at managing bank loans. We think we understand how CLOs work. There is a stickiness to the assets that we like and we would expect, I would say, relatively slowly to be ramping up our CLO exposure.

Robert Lee: Okay, great. And then maybe just following up on Hexavest, I guess you are – I assume you are in negotiations with them right now about the buying up the majority stake. I don’t know if there’s any update on expectations that we should think of around that. Or to some degree, is that impacting how you are thinking in the short term at least about kind of share buyback or capital management?

Tom Faust: I think it’s if we were to exercise our option, it would be about a $90 million item. So it’s not an insignificant spending amount.

So at the margin, that would influence other uses of capital. I would say that, as your question suggests, we are in the middle of negotiations and would prefer not to say too much. We like these guys very much. We like the way they run their business. But it’s not ultimately recent agreement on whether or not to exercise that option.

We have, I think the period expire sometime in the middle of December. So time is getting short and so stay tuned.

Robert Lee: Okay and then thanks. Patience is maybe one more question is, can you maybe update us on any kind of how you are thinking of the institutional business of your pipeline. You mentioned, obviously, some success with some of the global macro and obviously the bank loan products in the U.S.

and outside, but any kind of color on how we could think about institutional activity on any pipelines?

Tom Faust: Yes. So we have a pipeline report that we circulate weekly internally. And as of the end of last week, when the last pipeline report was circulated, happily, lots of indicated inflows and not many indicated outflows, which is good. The areas of growth anticipated based on these are one, not funded. One is a global high-yield mandate for an international client.

There’s a quite interesting Calvert-enhanced cash strategy that is pending funding that we think perhaps could be a model for other similar responsibly managed enhanced cash mandates, the parametric pipeline in terms of Custom Core, defensive equity and exposure management continues strong. I was in Japan, I guess, 2 weeks ago, working with our sales team there, meeting with clients. Japan is our largest market outside the United States, and we have seen very strong growth there, that accounts for much of the overall growth in our international business we have seen this year. Strategies we talked about during those sessions when I was there included bank loans, included global macro, included taxable municipal securities, which is kind of interesting, somewhat new market. You wouldn’t think on its face that municipal bonds would be interesting to investors in Japan or places outside the United States.

But there’s a market of about $500 billion today for securities issued by municipal issuers, but that don’t qualify for the favorable tax treatment. Therefore, they traded yields that are more comparable to corporate securities. Those corporate those municipal issuers have different risk characteristics than our corporate issuers that make them potentially attractive for taxable investors around the world including outside of the United States. Interestingly, one of the proposals in the tax reform initiative would potentially curtail, it varies a little bit by the House and the Senate version. But in both cases would limit certain types of tax-exempt municipal bond issuances, which interestingly could help address one of the issues we are facing in the taxable market is that it’s a relatively small market with limited supply.

So what was released in one side might be a source of growth on the other. But quite active across a range of strategies in institutional, U.S., international, certainly Eaton Vance, Hexavest, Parametric, Atlanta Capital, every one of our subsidiaries is actively trying to build business institutionally, it’s not easy. There tends to be longer selling cycle. Obviously, these are competitive times with lots of pressure from passive and particularly in equities, but we think that maybe, particularly outside the United States as we build a bigger presence, there could be some low-hanging fruit for us in building out that institutional business relatively quickly.

Robert Lee: Okay, great.

I appreciate the color. Thanks for taking my question.

Tom Faust: Right. Thank you, Rob.

Operator: [Operator Instructions] Your next question comes from the line of Bill Katz of Citigroup.

Your line is open.

Bill Katz: Okay. Thank you very much for taking my questions. So maybe a two-parter, Laurie, you mentioned that comp to be about 36% of revenue is looking to the first quarter. So within that, what are some of your baseline assumptions as you look out for the rest of the year? And just remind me if that is sort of a seasonal high point in terms of that ratio in absolute dollar spend? And then on the other side of that, other expense looked like it’s rather high this particular quarter, you didn’t call anything out either in your prepared remarks or in the press release? So is this a new run rate? Was there any sort of mapping of items this quarter? Just trying to get a sense as we look ahead into the new year.

Laurie Hylton: Yes, Bill, this is we’re going to address the comp question first as we move from the fourth quarter into the first quarter, we’ve always got the sort of the seasonal adjustments that we recognize in terms of a number of things. We’ve got base increases, we’ve got benefit resets, we’ve got payroll tax clock resets. And I think, last year, as we moved from the fourth quarter of last year to the first quarter of this year that was about a $4.5 million increase. As we look at the same numbers going into – from the fourth quarter of this year going to the first quarter of 2018, I think we’re probably looking at something a little north of $5 million in terms of incremental pressure on our fixed compensation expenses. You’d have to do your own math based on your expectations about sales to come up with what the pressure might be in terms of our variable compensation, but that’s generally that pressure that we hit each first quarter and that it certainly colors our expectations about that 36% number in the first quarter.

In terms of other expenses, this was actually a very clean quarter from an expense perspective. So I don’t know that there was anything in particular that I would call out in terms of our other operating expenses. We’ve been able to keep a pretty good lid on it and I think that we’ve been exercising a lot of control over discretionary spend. So I really don’t – I can’t think of anything off the cuff that would really – that we would need to address in terms of something unusual in the fourth quarter.

Operator: Your next question comes from the line of Michael Carrier of Bank of America/Merrill Lynch.

Your line is open.

Michael Carrier: Hi, thanks a lot. Tom, just on the acquisition side to Parametric, just whether it was timing strategy, turned out very well. You look at what you guys see with Calvert, maybe when you did the transaction. And then over the past 11 months, you’ve been – you’re talking in the different distribution channels.

Just wanted to try to gauge either how you see that playing out, whether it’s the core products you mentioned, maybe this enhanced cash product being like a potential opportunity, just where you’re seeing the demand now that you’ve had 11 months on the platform?

Tom Faust: Yes. Thanks, Michael. The – one of the challenges we’ve had with Calvert is there are growth opportunities in lots of different directions. We had a Calvert-devoted strategy session toward the end of last week to try and get some kind of consensus on where do we go. And there’s – do we focus on building out institutional business? Calvert traditionally has been a retail brand but in many ways, the demand for Responsible Investing is more developed in certain institutional markets.

Do we take Calvert overseas because, again, particularly in Europe, demand in many places for Responsible Investing is more developed there than it is here. We – within U.S. retail, which has been the focus of Calvert traditionally, they have a relatively underdeveloped business historically in the warehouses. And many of those firms, including yours, have major initiatives to build the Responsible Investing business and are looking for partners to work with them to do that. So I’m not maybe a greedy person because I – my vote in the strategy session was to do all of these, but we are somewhat constrained by resources.

But we’ve got funds, we’ve got separate accounts, we’ve got retail, we’ve got institutional, we’ve got U.S. and international. And then certainly within different strategies, we’ve got opportunities. In terms of the objective to sell more now as opposed to lay the groundwork for things that might take 6 or 12 or 18 or 24 months to result in flows, the most compelling Calvert offerings today are their 5-star-rated emerging market equity fund, their range of shorter duration, short duration, ultrashort income strategies; and their index products, primarily on the equity side. We think we’ve got plenty to do in the near term to get our sales force focused on selling those in the right areas of the country where Responsible Investing matters.

But also, we’re doing a lot of work laying groundwork for potentially interesting longer-term opportunities for different product structures perhaps in certainly different markets. I mentioned the – I think your question, you mentioned this as well was the institutional enhanced cash market where we have one pending funding awaiting, but certainly in coastal markets where you’ve got large pools of corporate cash and corporations that are committed a social mission that includes principles very similar to the Calvert principles for Responsible Investing, we think there could be a very nice match not only in corporate cash but also working with those same firms to get placement of Calvert strategies in 401(k) programs, for example. So we’re in a target-rich environment. We’re coming out of a period where Calvert is a stand-alone, who had gone through some struggles for a period of years, so we’ve had to right the ship in some ways, but we’re gratified that as that’s happened, we’ve been able to begin the process of putting Calvert on a growth trajectory and the comparison to Parametric, I hope it turns out like Parametric. I think it wouldn’t be completely out of the realm of possibility that, that happens, but the kind of success we’ve had with Parametric over the last 16-or-so years that they’ve been part of Eaton Vance is – I guess 14 years as part of Eaton Vance is not something we can necessarily count on from every acquisition.

Operator: Your next question comes from the line of Chris Shutler of William Blair. Your line is open.

Chris Shutler: Hi, guys. Good morning. On the floating rate side of the business, can you give us a little more color on the demand dynamics that you’re seeing between retail and institution.

And then talk about the supply in the bank loan market right now and how you’re feeling about capacity? Thanks.

Tom Faust: Yes. So just maybe starting on the capacity side, we are at, I think, roundly $40 billion. It is a market – I don’t have the number off the top of my head, but I think it’s globally, around a $1 trillion market, something like that. So we’re at 4% or – which is we’re a major player, but I think the last time we thought about – the last time we thought we were close to capacity, I think we had assets in the mid- to high-40s, but the asset class was probably more like $600 million at that time.

So I think we feel like we’ve got a fair bit of running room in terms of the ability to grow our bank loan franchise from current level. The demand, as I highlighted in my prepared remarks in the quarter was really driven by institutional and particularly driven by clients outside the United States. Retail, I think, was pretty close to – was modestly positive but certainly not what we saw in the first couple of quarters of the fiscal year. Explaining retail demand for – is always a little hard, but what seems to be clear in bank loan flows is that when people are fearing increases in interest rates on the long side and anticipating increases in rates on the short side, it would see more bank loan inflows. Certainly right after the election, we were in one of those kinds of environments where people were optimistic about economic growth, expecting to see potentially a lot of stimulus, were worried about inflation.

That was an environment where we saw, literally overnight, a major pickup in bank loan demand. What’s happened over the last couple of quarters is with maybe a lessening of concern about rates on the long end and a tempering of expectations about the pace of Fed action on the short end. There’s been a bit of a reversal of that – of those strong inflows that happened a year-or-so ago. Fortunately, for Eaton Vance, we’ve been in a quite strong performance cycle, which you layer on a good 1-year numbers with a very strong history, we have an excellent performance story to tell today. So we’re in – we feel like we’re in the hunt for bank loan mandates wherever they are to be won, retail, institutional, U.S., international, the catalysts for the next wave of growth, I suspect, likely will be some change in interest rate expectations, either short end or long end or both.

But for the moment, we have a relatively stable business that’s experiencing modest growth.

Operator: Your next question comes from the line of Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt: Thanks for taking the question. I have a quick follow up on Hexavest.

Is it still fair to kind of use the guidance you gave in 2012 around fee rates and accretion to kind of estimate the potential impact to your earnings estimates in margin from the integration of the additional – well, actually, the 75%, if you decide to pull the trigger there?

Tom Faust: You may have a better memory than mine, what was my guidance from 2012?

Patrick Davitt: I think you said mid-30s fee rates, which suggested a margin in the 60% to 70% range.

Tom Faust: The fee rates are – that’s ballpark in the right area.

Dan Cataldo: Patrick, if you look in our disclosures in the press release, we just – the contribution from Hexavest to our P&L shows up in the equity and income of affiliates. And that – as we’ve I think said in the past, is almost entirely Hexavest. So that will give you a sense of the current contribution of the 49% ownership of Hexavest.

Patrick Davitt: Okay. Thank you.

Operator: Your next question comes from the line of Dan Fannon of Jefferies. Your line is open.

Dan Fannon: Hi, thanks.

My question is on tax, I guess as a major corporate tax beneficiary as you guys have highlighted, can you talk about the priorities of that kind of excess cash flow in terms of how it will either to be sent back through capital return through buybacks and dividends or investing more in the business or M&A? Can you talk about what you’re – how you’re thinking about that?

Tom Faust: Yes. Well, I like your optimism that this is going to be enacted. So I’ll start with that. Just to maybe level set, our expectation is that once this is sort of all run through, whenever that is or if that’s going to happen, assuming that the corporate rate stays at the 20% level that’s in the – currently in the House and the Senate bill, we expect our blended combined rate to be around 25%. There’s an adverse effect in there of some of the changes in how executive comp is treated that’s reflected in that number.

But compared to that 38.5%-or-so range where we are today, that’s a – I think that’s about a 22% earnings increase once the tax increase – once the tax cut comes through, assuming, importantly, this is a big caveat, that some of that doesn’t get pass through to in higher cost or competed away in some ways in terms of – or a revenue realization. We’ll get – we likely will have some of that effect. But in terms of the overall effect if this happens, we certainly would expect the net effect on after-tax earnings and earnings per share to be strongly positive. Your question is what do we do with the money. I think it’s the same as how we think about things now.

I think about – so there’s a – we could get a windfall from the market going up. We could have some big growth surge in our business, but I don’t think those would fundamentally change how we think about capital uses. Our options are the same as they’ve always been, dividends, share repurchases, so returning money back to shareholders or investing in the business either in the form of seed capital or acquisitions. I would say we wouldn’t feel any particular greater urgency to do acquisitions because we’re earning at a higher rate and producing more cash flow. We would certainly consider an increase in the dividend to maintain something like the current payout rate, but that’s obviously a bit speculative and in the future.

Whether we would ramp up share repurchases would depend on in part on our view of whether the stock represented good value at that particular time. So the options would be the same as today. The choices would be very much dependent on the situation as we see at the time.

Operator: Your next question comes from the line of Craig Siegenthaler of Credit Suisse. Your line is open.

Ari Ghosh: Hi, good afternoon, everyone. This is Ari Ghosh, filling in for Craig. So just on the Parametric and custom data business, could you provide an update on the competitive pressures that you’re seeing here including from property bands and robos? And then has there been any changes to the pricing trends here that would pressure the fee rate? And I believe yours is currently around the 15, 20 bp range on a blended basis? Thanks.

Tom Faust: That’s right, and thanks for the question. This is an area like many parts of our business where there is price competition.

We’re seeing strong volumes and we’re seeing, at least in some pockets, some increased pricing pressure. There are not particular new entrants that we’re worried about or that are driving prices down. It’s – I think it’s largely that the – this is viewed as a passive or maybe quasi-passive investment strategy and people are quite aware that the cost of passive generally is going down. When we look at the value proposition of producing tax – after-tax alpha, somewhere in the 150 basis point range or hopefully better than that over time, we think this represents an extraordinary value relative to what we generate and benefit and also an extraordinary value relative to other passive alternatives that don’t provide tax alpha. I talked in my prepared remarks a bit about the tax bill and the mandatory FIFO provision.

It is interesting that if this goes into effect that, that may have some competitive effects, the firms that are maybe more sophisticated in their management and the capability and are more developed in their systems like Parametric, we would hope would be in a position to respond more quickly to implement changes in systems as necessary and that perhaps that can be helpful in terms of pricing dynamic in the marketplace with a fairly disruptive change in how people would have to implement tax management. But we are a bit speculative, but we are – we think by a considerable margin, the largest player in the business. There are real economies of scale that come in this, but we’re aware that this is something that other firms, at least can think they can do and that we need to distinguish ourself in the marketplace, not only by service levels and performance in terms of generated tax alpha and tracking of benchmark, but also in terms of being cost competitive where required.

Operator: Due to time restriction, we are unable to take any further questions. I’ll turn the call back over to Dan Cataldo for final remarks.

Dan Cataldo: Great. And thank you all for joining us this morning. We appreciate your continued interest in Eaton Vance, and hope you all have a happy and safe Thanksgiving.

Operator: This concludes today’s conference call. You may now disconnect.