Executives: Eric Senay - Director of IR Thomas E. Faust Jr. - Chairman, CEO and President Laurie G. Hylton - VP and

CFO
Analysts: Gerald O'Hara - Jefferies & Company Ken Worthington - JPMorgan Chase Robert Lee - KBW Brian Bedell - Deutsche Bank Bill Katz -

Citigroup
Operator: Good morning. My name is Stephanie and I will be your conference operator today.

At this time, I would like to welcome everyone to the Eaton Vance Corp Fourth Fiscal Quarter Earnings Conference call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Eric Senay, you may begin your conference.

Eric Senay: Thank you and good morning and welcome to our Fiscal 2018 fourth quarter earnings call and webcast. With me this morning are Tom Faust, Chairman and CEO of Eaton Vance, and Laurie Hylton, our CFO. In today's call, 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 Web site, eatonvance.com under the heading, Press Releases. In today’s presentation contains forward-looking statements about our business and financial results.

The actual results may differ materially from those projected due to risks and uncertainty in our business, including, but not limited to, those discussed in our SEC filings. These filings, including our 2017 Annual Report and Form 10-K, are available also on our Web site or upon request at no charge. I will now turn the call over to Tom. Thomas E. Faust Jr.: Good morning.

Thank you, Eric, and thanks, everyone for joining us. Earlier today Eaton Vance reported adjusted earnings per diluted share of $3.21 for the fiscal year ended October 31st, which is an increase of 29% from the $2.48 of adjusted earnings per diluted share we reported for fiscal 2017. In the fourth -- for the fourth quarter of fiscal 2018, we reported adjusted earnings per diluted share of $0.85, which is up 21% from the $0.70 per diluted share of earnings we reported for the fourth quarter of fiscal 2017, and up 4% from $0.82 per diluted share in this fiscal year's third quarter. Both the annual and quarterly results we reported today are new record highs for the company. While lower income taxes have contributed significantly to this year's earnings growth, pre-tax adjusted operating income increased 14% for fiscal 2018 as a whole and was up 4% in the fourth quarter versus the fourth quarter of last year.

We ended fiscal 2018 with consolidated assets under management of $439.3 billion, up 4% from 12 months earlier with a volatile October raising the fiscal year's previous market gains, all our AUM growth in fiscal 2018 was attributable to net inflows. We generated $17.3 billion of consolidated net inflows in fiscal 2018, representing 4% internal growth in managed assets. Excluding exposure management, which has lower fees and more volatile flows than the rest of our business, net inflows for the year were $25.6 billion in fiscal 2018. This equates to 8% internal growth in managed assets and nearly matches the $26.4 billion of net inflows we delivered in the -- in fiscal 2017. Fourth quarter fiscal 2018 consolidated in -- net inflows of $2.1 billion represent 2% annualized internal growth in managed assets or 5% annualized internal AUM growth, excluding the $2.5 billion of exposure management net outflows we had in the fourth quarter.

While net outflows -- while net flows in internal growth and managed assets are customary measures of an asset managers organic growth. We also focus on internal growth in management fee revenue. Organic revenue growth as we define measures the change in consolidated management fee revenue resulting from net inflows and outflows, taking into account the fee rate applicable to each dollar in or out and excluding the impact of market action, adjustments in the fee rates of continuing managed assets and in the acquisitions of managed assets. In fiscal 2018, organic management fee revenue growth was 5%, slightly above our 4% organic growth in managed assets for the year. In the fourth quarter, management fee revenue grew organically at an annual rate of 2%, the same as the quarter's organic AUM growth rate.

Although peer companies typically do not disclosed organic revenue growth numbers, we believe Eaton Vance continues to rank highly among public asset managers by this measure with the fourth quarter of fiscal 2018 representing our 11th consecutive quarter of positive organic revenue growth. A number of factors have contributed Eaton Vance's -- this to Eaton Vance's sustained run of positive organic revenue growth, starting with strong investment performance. As of October 31, we had 66 U.S mutual funds with an overall Morningstar rating of four or five stars for at least one class of shares, including 28 five-star rated funds. As measured by total return, 50% of our U.S mutual fund assets ranked in the top quartile of their Morningstar peer groups over 3 years, 63% in the top quartile over 5 years and 56% top quartile over 10 years. In the rising interest rate environment of 2018, our floating-rate bank loan franchises demonstrated strong appeal to investors generating net inflows of $5.9 billion for the fiscal year, and $2 billion in the fourth quarter, representing annualized internal growth in AUM of 15% and 18%, respectively.

For both the fiscal year as a whole and the fourth quarter, our bank loan flows were driven primarily by strong sales of our floating-rate income mutual funds offered in the U.S., a market in which we are the share leader. Our lineup of fixed income mutual funds positioned as short or ultra-short duration, short-term or adjustable-rate has also proved attractive in the rising rate environment of 2018, gaining $1.8 billion of net inflows for the fiscal year, which equates to 29% internal growth in managed assets. In the fourth quarter, annualized internal growth in managed assets accelerated 40% with net inflows of $700 million. Among our leading funds in this category are the five-star rated Eaton Vance short duration government income and Eaton Vance short duration municipal income -- municipal opportunities funds. These funds are well-suited for income investors who have limited appetite for interest-rate risk and also seek to avoid exposure to corporate credit markets.

Our lineup of custom index equity and the laddered bond separate accounts offered to retail and high net worth investors also contributed significantly to growth in fiscal 2018. As we have described in prior calls, we frequently market Parametric Custom Core equity strategies in combination with EVM managed customized municipal and corporate bond ladders and refer to the combined offering as custom beta. As shown in Slide 12 of our presentation, managed assets in our custom beta strategies increased 24% from $68.3 billion at the end of fiscal 2017 to $84.3 billion at the end of fiscal 2018. The $14.8 billion of net inflows for the full fiscal year and $4.3 billion of net inflows in the fourth quarter represent annualized internal growth in managed assets of 22% and 21%, respectively. These market-leading offerings combine the benefits of passive investing with the ability to customize portfolios to meet individual preferences and needs.

Responsible investing continues to be a leading trend in asset management and a significant driver of growth for Eaton Vance. When we acquired the assets of Calvert Investments at the end of December 2016, I talked about the opportunity we saw to apply our management and distribution resources to help this longtime leader in responsible investing become a larger and more impactful business. Now less than 24 months later we are achieving that vision. Total Calvert managed assets, including amounts sub-advised by other Eaton Vance affiliates, increased 14% from $12.9 billion on October 31, 2017 to $14.7 billion at fiscal 2018 year-end. As measured from the close of the Calvert transaction on December 30, 2016, total managed assets of Calvert strategies are up 24%.

Net inflows in the Calvert strategies were $1.9 billion in fiscal 2018, representing 15% internal growth in managed assets. Fourth quarter net inflows of $600 million equate to 16% annualized internal growth in AUM. While the appeal of responsible investing does not rest solely on performance, it certainly helps to have competitive returns as of October 31, 2018, 15 Calvert funds were rated four or five stars by Morningstar for at least one class of shares with high-performing Calvert offerings across a broad range of equity in common multi-asset categories. While Calvert is the centerpiece of our responsible investment strategy, our commitment to responsible investing doesn't end there. In fiscal 2018, the investment teams at Eaton Vance management launched programs to integrate the consideration responsible investing criteria into their fundamental research processes, capitalizing on the proprietary research that Calvert provides.

Atlanta Capital also maintains a significant focus on responsible investing and Parametric manages over 20 billion of assets based on client directed responsible investment criteria. The Parametric responsible investment offerings incorporate portfolio screens and tilts and index customization capabilities to enable investors to tailor their investment holdings to align with their individual values. We continue to believe that responsible investing is here to stay and that it represents a major growth opportunity for Eaton Vance. While fiscal 2018 was a strong period for Eaton Vance in many aspects, the year was not without its challenges. Within equities, two leading Parametric franchise experienced significant outflows as their investment styles moved out of favor with investors.

The Parametric structure emerging market equity strategies had net outflows of $2.6 billion for the fiscal year as a whole and $900 million in the fourth quarter. On a net basis, Parametric single stock and portfolio call writing programs outflow of $800 million for the fiscal year and $500 million in the fourth quarter. Despite the bleeding of managed assets, we see reason for optimism that the outlook for these strategies maybe improving. After a period of below-average returns, Parametric structure EM equity strategy has been a standout relative performer over more recent periods. At the end of October, the Class I-shares of both the Parametric emerging market equity mutual funds ranked in the top decile of their Morningstar peer groups for three-month year-to-date and one year total returns.

While covered call writing programs don't lend them self to comparative investment performance, we believe the market appeal of equity call writing, which is fundamentally a risk mitigating strategy will likely improve its equity markets and become more defensive as equity investors become more defensive in response to choppier markets. Another leading franchise where we’ve faced performance headwinds and deteriorating flows is global macro, which constitutes most of the assets and flows of our alternative assets reporting category. Managed by the EVM global income team, global macro absolute return and global macro absolute return advantage strategies hold long and short positions in currency and short duration sovereign debt instruments of emerging and frontier market countries, seeking returns that are substantially uncorrelated with global equity markets in U.S interest rates, and that exceeds short-term treasury returns. As performance fell off in conjunction with weakness in selected emerging and frontier markets in which we’ve held the long exposures, our global macro strategies had net outflows of $700 million in the fourth quarter, reversing the $1.5 billion of net inflows in the first nine months of the fiscal year. Another leading franchise were we've been seeing net outflows is exposure management.

As a reminder, exposure management is a Parametric business offering primarily future space overlay of strategies to institutional investors, so they can add or remove or hedge market exposures within their portfolios in a transparent efficient and customized manner without disrupting their underlying investment holdings. At an average fee rate of 5 basis points, this is our lowest fee business, but historically a contributor to company growth. Since entering this business through the acquisition of the former Clifton Group at the end of 2012, we’ve more than double the assets in this franchise from $32 billion to $78 billion. While exposure management had net outflows of $8.3 billion in fiscal 2018 as a whole and $2.5 billion in the fourth quarter, it's important to understand that the outflows we've experienced here do not reflect the loss of clients rather lower average balances in ongoing client relationships. We do not budget for or attempt to forecast changes in the average balances of our exposure management clients, which can vary considerably due to changes in their portfolio cash levels or other investment considerations.

In most year since we entered this business, existing clients have on balance added to their portfolio -- over to their Parametric overlay exposures. While that was not the case in fiscal 2018, our client roster in this strategy has continued to expand with a net increase of nine new or significantly expanded relationships booked in the fourth quarter alone. Despite the volatility of quarterly and yearly asset flows, we continue to view exposure management as an important business franchise for us and a growth driver going forward. A key to Eaton Vance's long-term success continues to be our ability to grow our higher fee actively managed investment strategies, at the same time as we expand our lower fee more passive businesses. Our active investment strategies, which encompass a diverse range of equity, fixed and floating-rate income, alternative and multi-asset capabilities had net inflows of $10.6 billion for the fiscal year, representing 5% internal growth in managed assets.

Growth in actively managed strategies was complemented by momentum and more passive strategies, including Calvert index funds, Parametric portfolio implementation and exposure management strategies and services, and EVM's laddered bond separate accounts. Excluding exposure management, our more passive strategies had $15 billion of net inflows in fiscal 2018, which represents 12% internal growth in managed assets. As we enter fiscal 2019, Eaton Vance is focused on five strategic priorities. First, building upon and defending our leadership position in specialty strategies and services for high net worth institutional investors. Second, capitalizing on the current interest rate environment to grow our market position in floating-rate and short duration fixed income strategies.

Third, expanding our leadership position in responsible investing. Fourth, increasing our global investment capabilities and distribution reach outside the U.S., and fifth, positioning Eaton Vance to profit from a changing environment for the asset management industry. Constant change has long been a hallmark of the investment industry, changing market conditions and demographic trends, shifts in investor sentiment and outlook, advances in information technology, changes in the business strategies of wealth advisory firms, investment consultants and other key intermediaries and gatekeepers, and new tax and regulatory initiatives. Over time what distinguishes the most successful investment management organizations is often how they manage change. Do they offer strategies and services that respond to the changing needs of clients and business partners, do they evolve their business models to the changing opportunities and risk facing the asset management industry.

While change is a constant in asset management, the pace of change appears to be accelerating, positioning Eaton Vance for continued success amid accelerating change in our industry, is job one for our leadership team and is the driver of all our strategic thinking. With the successful 2018 under our belts, we now look forward to the opportunities and challenges of a new fiscal year. That concludes my prepared remarks. And I'll now turn the call over to Laurie. Laurie G.

Hylton: Thank you and good morning. Tom mentioned fiscal 2018 was a record year for Eaton Vance in terms of revenue, net income and earnings per share both on a U.S GAAP and adjusted basis. As you can see in attachment two of our press release, we are reporting adjusted earnings per diluted share of $3.21 for fiscal 2018, an increase of 29% from $2.48 of adjusted earnings per diluted share in the prior fiscal year. Adjusted earnings exceeded U.S GAAP earnings by $0.10 per diluted share in fiscal 2018, reflecting the add back of $24 million of income tax expense recognized in relation to the nonrecurring impact of the tax law change that became effective in January. And a $6.5 million charge recognized upon the expiration of the company's options to acquire an additional 26% ownership interest in our 49% owned affiliate Hexavest.

These add backs were partly offset by the reversal of $17.5 million of net excess tax benefits that new accounting guidance requires us to recognize in connection with the exercise of employee stock option and vesting of restricted stock awards during the year. In fiscal 2017, adjusted earnings exceeded GAAP earnings by $0.06 per diluted share, reflecting the add back of $5.4 million of costs associated with retiring the company's senior note that were due in October 2017. $3.5 million of structuring fees paid in connection with the 2017 initial public offering of a sponsored closed end fund and $0.5 million related to increases in the estimated redemption value of noncontrolling interest in our affiliates redeemable at other than fair value. Adjusted operating income, which excludes the closed-end fund structuring fees paid in fiscal 2017, increased by 14% year-over-year. On the same adjusted basis, our operating margin improved to 32.6% in fiscal 2018 from 31.8% in fiscal 2017.

As Tom mentioned, we’re also reporting record quarterly adjusted earnings per diluted share of $0.85 for the fourth quarter of fiscal 2018, up 21% from $0.70 in the fourth quarter of fiscal 2017 and up 4% from $0.82 in the third quarter of fiscal 2018. GAAP earnings exceeded adjusted earnings in the fourth quarter of fiscal 2018 by $0.02 per diluted share to reflect the reversal of $2.4 million of net excess tax benefits recognized from the exercise of employee stock options and vesting of restricted stock awards during the period. In the fourth quarter of fiscal 2017, adjusted earnings exceeded GAAP earnings by a penny per diluted share, reflecting the add back of $0.6 million related to increases in the estimated redemption value of noncontrolling interest and affiliates redeemable at other than fair value. GAAP earnings exceeded adjusted earnings in the third quarter of fiscal 2018 by a penny per diluted share. To reflect the reversal of $1.3 million of net excess tax benefits recognized from the exercise of employee stock options and vesting of restricted stock awards during the period.

Operating income in the fourth quarter of fiscal 2018 increased by 4% from the same period a year-ago and 2% sequentially. Our operating margin was 33.1% in the fourth quarter of fiscal 2018 versus 34.1% in the fourth quarter of fiscal 2017, and 33% in the third quarter of fiscal 2018. Ending consolidated managed assets of $439.3 billion at October 31, 2018 were up 4% from the end of fiscal 2017 driven by positive net flows. Consolidated managed assets were down 3% from the prior quarter end, reflecting positive net flows offset by the market price declines experienced in the final month of our fourth fiscal quarter. The decrease in our managed assets due to market price declines in the month of October totaled $20.1 billion, effectively wiping out market driven gains of the previous 11 months.

Despite a difficult October, average managed assets in fiscal 2018 increased 16% from the prior fiscal year, driving a 12% increase in management fee revenue. Growth in management fee revenue trailed growth in average managed assets during the fiscal year due to 3% decline in our average management fee rate from 34.5 basis points in fiscal 2017 to 33.5 basis points in fiscal 2018. This decline in our average management fee rate is primarily attributable to the shift in our business mix year-over-year as lower fee portfolio implementation and bond ladder businesses grew as a percentage of our assets under management. Performance fees which excluded from the calculation of our average management fee rate reduced income by $1.7 million in fiscal 2018 and contributed $0.4 million to earnings in fiscal 2017. As Tom noted, our fiscal 2018 internal growth in management fee revenue of 5% outpaced our internal growth in managed assets of 4%, primarily reflecting the impact of net inflows into higher fee strategies during the year.

This compares to 7% internal growth in management fee revenue and a 11% internal growth in managed assets in fiscal 2017. Comparing fourth quarter results to same quarter last year, 10% growth in average managed assets drove an 8% increase in management fee revenue. Sequentially, average managed assets increased 2%, driving management fee growth of 1%. Our average annualized management fee rate of 33.4 basis points in the fourth quarter of fiscal 2018, down 1% from 33.9 basis points in the fourth quarter of fiscal 2017, and substantially unchanged from 33.5 basis points in the third quarter of fiscal 2018. Although strong flows into our lower fee strategies continue, net inflows into higher fee strategies helped mitigate the overall fee rate decline.

Performance fees reduced income by $0.3 million in the fourth quarters of fiscal 2018 and fiscal 2017, and reduced income by $0.4 million in the third quarter of fiscal 2018. In the fourth quarter of fiscal 2018, we realized 2% annualized internal growth in management fees and 2% annualized internal growth in managed assets. This compares to 5% annualized internal growth in management fees and 8% annualized internal growth in managed assets in the fourth quarter of fiscal 2017, and 5% annualized internal growth in management fees, and 3% annualized internal growth in managed assets in the third quarter of fiscal 2018. The deterioration in our annualized internal growth in management fee this quarter was driven by reduced net inflows in a less favorable mix of higher fee and lower fee strategies within our inflows and outflows. Turning to expenses.

Compensation expense increased by 9% in fiscal 2018, primarily reflecting higher salaries and benefits associated with increases in headcount and year-end salary increases from the previous fiscal year, higher operating income and performance based bonus accruals driven by increased profitability and an increase in stock-based compensation, partially offset by lower sales-based incentive compensation. Compensation expense as a percentage of revenue decreased to 35.5% in fiscal 2018 from 36.2% in fiscal 2017. We anticipate the compensation as a percentage of revenue in the first quarter of fiscal 2019 will be closer to 36%, given seasonal pressures associated with payroll tax clock reset 401(k) funding and year-end based salary increases. Controlling our compensation costs and other discretionary spending remains top-of-mind as we moved into -- as we move into the new fiscal year, particularly given the more challenging market environment of late. Non-compensation distribution related costs, including distribution and service fee expenses and the amortization of deferred sales commissions increased 4% in fiscal 2018.

The increase primarily reflects higher marketing and distribution related costs, mainly driven by higher average managed assets and open end funds and an increase in service fees and commission amortization for private funds. Backing out the closed-end fund structuring fees paid in fiscal 2017, which we do in calculating adjusted operating income and adjusted earnings per diluted share. Our non-compensation distribution related costs in fiscal 2018 were up 6%. Fund related expenses increased 32% in fiscal 2018, primarily reflecting higher fund subsidy accruals and sub-advisory fees, driven by strong asset growth in certain Calvert and Global Macro strategies, and an increase in fund expenses borne by the company on funds for which we earn an all in fee, partially offset by $1.9 million in fund reimbursements made by the company to certain funds in fiscal 2017 that were one-time in nature. Other operating expenses increased 13% in fiscal 2018, reflecting higher information technology spending attributable mainly to expenditures associated with the consolidation of our trading platforms and enhancements to Calvert's research system.

Higher facilities expenses related to an increase in rent expense due to the expansion of space and the acceleration of 1.59 of depreciation expense in the second quarter of fiscal 2018, and higher professional services expenses, primarily attributable to an increase in corporate consulting engagements and external legal costs. We continue to focus on overall expense management and identifying ways to gain operational leverage. Net gains and other investment income on seed capital investments contributed a penny to earnings per diluted share in each of the comparative quarterly periods presented. 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 strategies, 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 noncontrolling interests.

We continue to hedge the market exposures of our seed capital portfolio to the extent practicable to minimize the associated earnings volatility. Net gains and other investment income in fiscal 2018 included a $6.5 million charge related to the expiration of the company's Hexavest option in the first quarter of fiscal 2018. Non-operating income expense in fiscal 2017 included $5.4 million of debt extinguishment costs incurred in connection with retiring the remaining $250 million aggregate principal balance of the Company's 6.5% senior notes that were due in October 2017. These one-time charges are excluded from our calculations of adjusted net income and adjusted earnings per diluted share for the fiscal years in which they occurred. The $3.9 million decrease in interest expense year-over-year reflects the impact of last year's debt retirement, partially offset by the April 2017 issuance of $300 million of 3.5% senior notes due in April of 2027.

Non-operating income expense in fiscal 2018 also includes $1.6 million of income contribution from consolidated CLO entities. Net gains and other investment income in fiscal 2017 included a $1.9 million gain recognized upon the release from escrow of payments received in connection with the sale of the Company's equity interest in Lloyd George management back in fiscal 2011. Turning to taxes. Our effective tax rate was 28.8% in fiscal 2018 and 37% in fiscal 2017. The Company's income tax provision for fiscal 2018 includes a nonrecurring charge of $24 million to reflect the effects of the U.S federal tax law changes that were enacted in the first quarter.

The tax increase associated with the nonrecurring charge was partially offset by net excess tax benefits of $17.5 million related to the exercise of stock options and vesting of restricted stock awards during fiscal 2018. Accounting guidance adopted in the first quarter requires these net excess tax benefits to be recognized in earnings. As shown in attachment two to our press release, our calculations of adjusted net income and adjusted earnings per diluted share removed the nonrecurring impact of the tax law changes and the net excess tax benefits recognized under the new accounting guidance. On this basis, our adjusted effective tax rate was 27.6% in fiscal 2018. On the same adjusted basis, we estimate that our effective tax rate will range between 25.9% and 26.4% for fiscal 2019.

We estimate that the reduction in our statutory U.S federal income tax rate due to the enactment of the tax law changes resulted in tax savings of approximately $59.7 million or $0.49 per diluted share for fiscal 2018. Excluding the impact of these tax savings, our fiscal 2018 adjusted earnings per diluted share would have been approximately $2.72, an increase of 10% from the $2.48 of adjusted earnings per diluted share in the prior fiscal year. During the fourth quarter of fiscal 2018, we used $35.3 million of corporate cash to pay the $0.31 per share quarterly dividend declared at the end of our previous quarter and repurchased $2.1 million shares of nonvoting common stock for approximately $100.6 million. Weighted average diluted shares outstanding were $122.9 million at fiscal 2018, up 6% from a $116.4 million at fiscal 2017. We finished our four fiscal quarter holding $873.4 million of cash, cash equivalents and short term debt securities and approximately $358.8 million in seed capital investments.

These amounts compare to outstanding debt obligations of $625 million at fiscal year-end. We continue to place high priority on using the Company's cash flow to benefit shareholders. Fiscal discipline around discretionary spending will remain top-of-mind in fiscal 2019. We are very mindful of the more difficult market environment its now upon us, and the associated pressure on revenues that this bring. Given our strong liquidity and overall financial condition, we believe we are well-positioned to continue managing our business for long-term growth, but also continuing to return capital to shareholders through dividends and share repurchases.

This concludes our prepared comments. At this point, we would like to take any questions you may have.

Operator: [Operator Instructions] Your first question comes from the line of Dan Fannon with Jefferies. Your line is open. Gerald O'Hara: Great.

Thanks. Actually Jerry O'Hara sitting in for Dan this morning. Just a question around fee rates, and specifically the alternatives. It looks like that segment despite some outflows that you cited has continued to kind of march forward or higher with that fee rate, perhaps you could give a little color or context around that dynamic?
Thomas E. Faust Jr.: Yes.

So the assets in that category are unusually concentrated in the global macro absolute return and global macro absolute advantage mutual funds. The fee rate on the advantage strategy, which has effectively built-in leverage is significantly higher than the base strategy. So as Eaton Vance global macro advantage grows relative to Eaton Vance global macro absolute return fund, which has happened, you will see the fee rate in that asset category move up. Gerald O'Hara: Understood. That’s helpful.

And then perhaps one on Hexavest flows just sort of looking at Slide 7, it seems to be little -- I guess, a little choppy. Perhaps you could talk a little bit about kind of what the trends look like there. And then one maybe kind of follow-on, if there's any color you might be able add on quarter-to-date flow trends. I know it's still early, but that would be appreciated. Thank you.

Thomas E. Faust Jr.: Yes, maybe I will add. Laurie or Eric, take the quarter-to-date, but just on Hexavest, Hexavest is a top down global equity manager based in Montreal. We own 49%, acquired that position in 2012. Since then, they’ve for the most part been pretty defensively positioned and certainly have been over the last, I will say 2.5 years.

Not surprisingly, that meant that until recently they’ve lagged the market in terms of their performance, and again, not surprisingly, given that they lag the market, they’ve seen harder times winning new business and have seen some acceleration of outflows not surprising, but given that they’re defensively positioned and that’s well known to their clients, we'd think that performance during the market rallies of 2017 and earlier parts of this year. It shouldn't have been, it shouldn't have been a surprise. Given the turn in the market recently, not surprisingly, they’ve been performing better. They’ve had good performance, well above market performance since the market started to correct. May not happen immediately, but certainly our expectation is that as that happens, they will see less pressure on outflows and potentially be in a position to see a greater trend of new business won as well.

Gerald O'Hara: Great. Thanks. And then -- yep, go ahead. Thomas E. Faust Jr.: Go ahead.

Gerald O'Hara: No, I was just going to say then any additional on quarter to date would be helpful. Laurie G. Hylton: This is Laurie. We don’t have a lot of visibility into the current quarter to date, given that we are only a couple weeks into it, but I think that as Tom noted, their performances has improved significantly. We are waiting to see how that’s actually going to play out in largely institutional business.

Operator: Your next question comes from the line of Ken Worthington with JPMorgan. Your line is open.

Ken Worthington: Hi, good morning and thanks for taking my questions. On the bank loan product, it seems like the industry is focusing maybe a touch more on the credit deterioration more so than higher interest rates, and at least we’ve seen a reasonable step up in the outflows from the bank loan ETFs. To what extent do you think the ETF outflows is sort of a leading indicator for what you will see in floating rate products? And then maybe just how are the floating rate products holding up more recently given what we are seeing elsewhere?
Thomas E.

Faust Jr.: Yes. Just focusing on the U.S mutual fund business, we’ve seen outflows from the bank loan categories. So similar to what you are describing on the ETF side in the last -- based on industry data that we’ve seen in the last four weeks of industry flows for bank loans have been negative. As you point out that, we believe that relates to increasing concerns about credit. We’ve not been immune to these effects.

We’ve seen some outflows at least on some days from our bank loan strategies this month. So there has been a reversal at least partly from the strong inflows that we experienced over the course of fiscal 2018. It's a little hard to say whether there's carry through on this current concern. There has been a little bit, but not much price volatility in the bank loan sector and in some ways that’s healthy, because one of the concerns has been that as new loans are brought to market, they’re brought with tighter spreads or that rates reset on existing loans, which brings down the spread we earn over LIBOR. With the softening of the market, there's we think a healthy effect of mitigating some of those downward pressures on spreads.

So -- but everything cuts both ways here, right. So people are more concerned about credit. So that means spreads on new issues are better from the standpoint of buyers, but it also means that at least in the short run we are experiencing some retail flows in connection with growing concerns about credit markets. I would say that looking at the underlying fundamentals, which ultimately will govern whether this is a good time or a bad time to be selling or buying bank loans, certainly, our team is not seeing anything in our portfolios to suggest that there's been a change in credit market conditions. That doesn’t mean that there won't be at some point.

We’re pretty long into the current economic cycle. We’re mindful of that just like everyone else is, but we’re not seeing anything in our portfolio that would appear to justify the market concern or the softness in prices that we’ve been seeing in loans over the last couple of weeks. And that softness -- pricing softness has been quite modest. It is not surprising, given the flow dynamic we've experienced.

Ken Worthington: Okay, great.

Thank you for that. And then just maybe an update on NextShares. I believe during the quarter one of your partners either announced or did dissolve, I think two of their NextShares funds. Maybe what happened there and what were the -- you usually call the expenses that you’ve incurred. If you did, I apologize, I missed it.

But if not, what were the expenses you incurred for NextShares this quarter?
Thomas E. Faust Jr.: Yes. So the announcement that you are referring to was not during the quarter. It was actually the last week that Gabelli announced that they would be converting two of their four NextShares funds into mutual fund. Hasn't happened yet, but they’ve announced that they will be doing that.

I don’t know exactly when, but sometime coming up. I guess, the implications of that maybe are obvious, which is that they’ve been disappointed with the sales success that they’ve had with those strategies and think they might be able to sell more with the same strategy and our conventional mutual fund structure. That doesn’t surprise us. We’ve seen -- we look closely at all the mutual -- all that flows into NextShares' funds, not just our own, but those of our licensees and there really hasn’t been a lot of activity, which is reflective of the limited distribution that we’ve had. We’ve been as talked about on the last quarter, we’ve in the absence of significant sales, we’ve been ramping down our marketing activities and bringing down expenses related to NextShares.

We are in the range roughly of $2.5 million to $3 million annual spending currently.

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

Robert Lee: Great. Thank you.

Good morning. Thanks for taking my questions. Maybe starting with you Tom, I would like to -- maybe like dive into a little bit more about your comment about positioning Eaton Vance for kind of a changing environment. Maybe give us some sense of specific initiatives that maybe you’ve underway that you think are doing that? And then, as part of that, has the kind of rapidly changing environment in your view at all maybe changed how you think about perspective M&A. Obviously, you -- Calvert and others in the past, you’ve done these bolt on transactions, but -- now you kind of maybe change how you are thinking in light of M&A, particularly given what investors are doing that kind of change the landscape at all?
Thomas E.

Faust Jr.: Yes. Thanks, Rob. The -- there are several things going on related to changes in the industry dynamics that I'd point to. Maybe first and most obviously with the market sell off over the last few weeks that has an immediate effect on revenues and so we’re -- we will be tightening up certain spending initiatives in response to that, assuming that there are some carry forward of that. You shouldn’t expect large changes from us on the expense side.

We’ve generally taken the view that our strong financial position and margins and cash balances give us the flexibility to invest during periods of market weakness and we will continue to do that. Some of the things on the new initiative side that I'd point to relating to a changing industry environment, clearly our lineup of customized index and laddered bonds, separate accounts, very much play to a couple of current themes in the market. One of those is the growth of passive versus active and the other is the increased desire among investors and intermediaries for customized positions. We’re the market leader in each of those markets and while we expect increased competition, we also see those as significant growth areas where we’re very committed to maintaining our leadership position. Another thing I would point to is our long-term initiative related to responsible investing.

You mentioned the acquisition of Calvert, we think we are still in the early stages of growing out our capabilities in responsible investing and seeing that translate into increasingly important part of our business. This is more cyclical than long-term, but we do see a cyclical benefit to us from our floating rate, short duration, adjustable rate, ultra short, a lot of categories of income strategies where we’ve planted seeds and are now seeing strong growth in strategies that are designed to appeal to investors who are concerned about rising interest rates. So at some point that changes, but we made the decision maybe four or five years ago that we were nearing the end of a long bull market in bonds and that it made sense for us to add to our portfolio, a number of bonds that typically carry like short duration, sometimes variations on that, but that enable income investors to invest with less exposure to interest rate risk. And so we think we are quite well positioned to benefit from that theme as well. In terms of industry consolidation and how Eaton Vance might or might not fit into that idea, I certainly believe that our industry is ripe for consolidation.

We think that for our key intermediaries there are far more people knocking on their door requesting shelf space than there are available slots and that one way or another that will translate into increased consolidation. By its nature, the passive businesses is an economy of scale business where it makes sense that market share will be relatively concentrated, although that’s not true on the same basis. In active management, we feel like the decreased opportunity will ultimately lead to consolidation there as well. In terms of the specifics of the Invesco transaction, I certainly won't comment on that, but one thing we and other potential acquirers look at is how transactions are received in the marketplace. So critical to us or anyone else looking at a potential acquisition is not only what an acquisition might do for us in terms of increasing our earnings power or improving our strategic position, but we are also very mindful of how that -- how acquisitions are perceived in the marketplace.

So if we lose more in PE than we gain in E, we don’t view that as a positive transaction. Of course, you don't know those things in advance, but we want to look at things that we might do that will add to the long-term value of our franchise, both in terms of earnings near-term, but also in terms of our ability to grow over the long-term. Our earnings acquisition is nice, but if it comes at the expense of long-term growth potential, that’s not particularly interesting to us. But if we can do as we did in the case of Calvert, add something that really enhances our strategic position, which has positive implications for a multiple, at the same time as we do something that’s accretive to our earnings, that’s the kind of transaction that we are -- that we would be potentially very interested in.

Robert Lee: I mean, would it be fair to say that you don’t feel that you particularly have say a scale issue in the U.S mutual fund business or anything that you feel kind of your size and scale that’s good?
Thomas E.

Faust Jr.: I fell like our size and scale is good, not in the context of $500 billion is necessarily at scale. It might or might not be. What we believe is more relevant is the scale of our leading investment franchises. We are certainly at scale world class by any measure in bank loans. We are certainly at scale world class in the Parametric Custom Indexing business and their exposure management business, in the muni and corporate ladder business with Eaton Vance, our global income business, our high yield business, certain of our equity strategies, we could go on.

But that to us is critical is that when an advisor or gatekeeper or consultant is thinking about introducing an asset class into a client's portfolio, what providers are on the short list of names that they consider while performance is important there, so also is scale. You need to have a critical mass to be on that short list and in places where we are active, by and large we think we are big enough to be on that shortlist. We are looking to diversify our business. A key part of that is playing into the trend and responsible investing that continues to emerge. But if I had a choice of doing an acquisition that took Eaton Vance from, let's call it $500 billion in AUM to a trillion in AUM, that did nothing for us in terms of our growth rate and did nothing for us in terms of our current earnings power, I wouldn’t see a lot of point in doing that kind of a transaction.

Operator: Your next question comes from the line of Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell: Great. Thanks. Good morning, folks.

Maybe just Tom, you made some good comments earlier in the presentation on the portfolio implementation in custom beta on the equity side and the covered call writing outflows. Maybe you could just give a little perspective on your outlook for flows within the portfolio and Parametric portfolio implementation products and the sales environment moving into 2019 and whether you see any competition that is emerging that might mute that or do you view this as continuing to be an exceptional growth at that growth category in the industry?
Thomas E. Faust Jr.: Yes. So the -- so within the portfolio implementation segment that we report, that’s all Parametric business. A smaller part of that is what they call centralized portfolio management, lower fee, relatively modest flow expectations in that business.

But the bigger opportunity there's, the bigger business, the higher fee business and the bigger opportunity is what they refer to as custom core. So this is customized index-based strategies offered in a variety of markets, but U.S retail into the high net worth, multi-family office market and also offered in institutional versions of that strategy. This is a big business for Parametric and one where we’ve very measure, we know market leadership today. There have been announcements of players that are either bringing out new products into this business or increasing their offerings there, that doesn’t surprise us. We think this is today something on the order of maybe let's say $100 billion to $200 billion in assets across the industry, hard to say exactly what that is.

But when we look at the opportunity versus multiple trillions of dollars in indexing, just reflected in index mutual funds and index ETFs, we see significant opportunity for custom indexing to grow relative to what we call bulk indexing. Custom indexing has clear tax advantages, in that if you own the same portfolio of stocks in an individual separate account, you can do tax loss harvesting and recognize the value of losses currently, which you cannot do in a fund structure. Also in a fund structure, typically you cannot fund positions in kind, therefore the deferring recognition of gains on initiating a position. Also in a separate account format, you’ve the ability to customize holdings to fit the clients' responsible investing criteria or to account for oversight positions the investor might have in other parts of his or her portfolio. These are things you can't do in a bulk index fund or index ETF.

We are quite convinced that custom indexing is positioned to grow and to grow rapidly. And we are quite determined that as that happens, that we will maintain our leadership position in that market. We think increased competition is inevitable, but we also think extensive growth of that market is also inevitable and we’re happy to welcome competitors, because in part, they are going to help make the case that this is a better way to invest in indexed strategies than what many investors are doing today, which to our thinking, if you are investing significant amounts of taxable money in an index-based strategy, with very limited exceptions, you are going to be better off being in a custom index type strategy just -- such as Parametric offers. So we think there is lots of growth opportunity and while we expect more competition, we see lots of room for Parametric to grow in that market even with more competition.

Brian Bedell: This is a pretty durable positive net flowing segment of your business even with that and obviously if we do get into tougher market environment in '19, you have a lot of confidence in this still being a positive net flow contributor.

Thomas E. Faust Jr.: Certainly based on everything we can say.

Brian Bedell: Yes, okay. And then just follow-up on expenses. Thanks for your comments, Laurie on that.

Just two of the buckets, the fund related expenses and the other categories those are obviously elevated this quarter. So the comments -- at least on that, but as we think about our run rate going forward in fiscal '19, do we expect to revert back on that? And then, I guess, just from an operating margin perspective for fiscal '19, if we have say a flat market environment and you continue doing what you are doing on the organic growth side, is that a good recipe for significant positive operating leverage. Laurie G. Hylton: Well, just addressing the first question related to fund expenses, I would think that I would not anticipate that our fund expenses in the first quarter are going to go down for all the reasons we highlighted on the call as well as in our text. There are couple of products that have been performing well, where we do have sub-advisory expenses and we’ve also got some funds subsidies associated with those.

I don't anticipate given the growth in those franchises that we are going to see a decrease there. So I would not anticipate seeing that go down. In terms of our other expense categories, there are a few significant drivers both for the quarter and for the fiscal year that I would highlight. Facilities, I think we talked a little bit about some increased depreciation expense we took earlier in the year, but looking forward, Parametric is in the process of moving their corporate offices and we will have some incremental headwinds there in terms of our rent expense and other facilities expenses associated with that move. And I would think if you are thinking about your sort of the first quarter of fiscal '19, I would think a mid single-digit expense increase there would be appropriate something in the neighborhood of 5%.

In terms of technology, as we’ve noted, we’ve been making some significant investments in terms of our trading platforms and also making investments in Calvert's research platform. I would anticipate, we will continue to make investments in 2019 and also in that sort of investment technology category you got market data that is just going up as a function of doing business in this industry. So I would also anticipate in those areas you are going to see some probably mid single-digit percentage increases just given the level of investment. Maybe just as we think about trying to prognosticate what margins might look like in the first quarter and I’m not going to give a percentage, but if you think about our overall cost structure, about 45% of our costs are variable and about 55% are fixed. The fixed we kind of covered as we talked about the expenses related to facilities into software and market data etcetera, but in terms of our overall comp structure within that, 40% of our comp is variable, around 60% is fixed.

And if you look at what we did in fiscal '18, our revenue was up 11%, our operating income was up 15%, our variable compensation was only up 8%. So we are very, very mindful of the rates at which we pay out on our variable compensation and manage that carefully. In terms of the fixed portion of our comp structure, which is again about 60%, you are largely looking at headcount driven expense and our ending headcount was up 8%. Our average is about 7% for the year. Our fixed compensation was up about 9%.

Again, we are very, very careful, we are mindful of that headcount adds because we recognize that adding to our fixed cost base that we are not necessarily going to be able to pull levers on immediately in the event of a downturn. So, I think that going into the first quarter, if you kind of keep those metrics in mind, I think the one thing you’ve to also keep in mind is we’ve got seasonal pressures every year in compensation, we highlighted a couple of them in my comments. I would anticipate that sort of the benefit in payroll tax clock reset a headwind that we're going to be facing is roughly in the neighborhood of about $3.5 million to $4 million. We see that every first quarter. We are also going to have the impact of base increases and you will probably have some increase in stock compensation associated not only with retirements in our fourth fiscal quarter, which generally will recognize in terms of the accelerated stock-based compensation expense in the first, but also just increased new grants, the impact of those grants on stock-based compensation in the first quarter.

So, some seasonal headwinds that you will see going into the new fiscal year, but we are very, very mindful of how our cost structure works. Very mindful of the triggers that we can pull as we are trying to control the margin. And as we noted on the call, we are just going to be very, very mindful of how we think about expenditures going into fiscal '19 recognizing that we are coming out of a pretty volatile market environment.

Operator: I would now like to turn the conference call back over to our presenters.

Eric Senay: Do we have any other questions left in the queue.

I think we’ve time for maybe one more.

Operator: We’ve a question from the line of Bill Katz with Citigroup. Your line is open.

Bill Katz: Okay. Good afternoon.

Thanks so much for squeezing me in. I really appreciate it. So just maybe a two-part question. Tom, you mentioned that doubling your AUM for sort of marginal growth or earnings power is probably not likely. So you step back and think about your franchise.

You think about the five initiatives you laid out. Where, if any, do you see some product gaps or geographic opportunity maybe to potentially expand the platform?
Thomas E. Faust Jr.: Yes, we’ve a pretty big geographic gaps in almost everything we do. We’ve good coverage of the U.S and limited coverage outside the United States. So we are still about 95% of our assets and revenues are sourced from the U.S.

So finding the right partner and finding the right opportunity to grow outside the United States is certainly something that we'd consider, in terms of acquisition activity. Having said that, I feel like a bit of a broken record, we’ve been thinking that way for a long time, but haven't found a suitable partner and frankly don’t know that there's a suitable partner that could -- would make sense for us to jumpstart our business growth outside the United States. We have been growing organically outside the United States, we’ve expanded our office in Tokyo. We added a new facility earlier this year in Frankfurt, we are opening an office in Dublin. So we are growing incrementally, but still would love to find an opportunity to jumpstart that international acquisition -- international expansion through an acquisition, but haven't been able to find it yet.

In terms of product areas, I think we’ve pretty good coverage across the landscape of most equities that we -- equity categories, public equities that we carry about fixed income, floating rate income, multi asset strategies. We’ve looked a bit at private assets, maybe there are places either in real estate, private real estate or private debt that might make sense as a complement to our public market securities businesses. So those are things that are possibly of interest and we kick the tires on a few things there, but haven't bitten on anything as yet, but we were interested. We look at lots of different things on the acquisition front. But today have yet to bite on anything.

Bill Katz: Okay. And just one last one. Thanks for that answer. Just as I think about your distribution margin and maybe we are not capturing all these ins and outs between what’s going through the management fee line versus what goes through the distribution expense line. How do you sort of see that ratio evolving over the next several years given your focus of where you are growing other products or by distribution segment?
Thomas E.

Faust Jr.: So just to clarify, what do you mean by distribution margin, Bill?

Bill Katz: Well, just if I look at the [indiscernible] revenues less the expenses and think about that ratio, again I apologize if some of that might be embedded in the manufacturing fee space on private mix or even geographic contribution, but it just looked to me like the distribution expenses relative to the revenues were disproportionate over the last couple of quarters, I’m trying to see if there's more of a trend that [indiscernible]. Thomas E. Faust Jr.: Yes, so you are looking at distribution relative to revenues, relative to distribution expenses, is that right? Do you want to try and answer that?
Laurie G. Hylton: I think the only thing I would say is obviously there's significant pass-throughs in terms of distribution, service fee income and distribution expense and one other component that's in the distribution expense obviously is other marketing expenses associated with for example, our marketing support payments to our third-party intermediaries, which is never an expense line item that’s going down, given that it's largely driven by asset growth. So we haven't noticed anything structurally in terms of a significant change there.

So I’m not sure what is driving your question, but hopefully recognizing that there are other distribution line items including promotion and marketing that are going into the distribution expense line item that might actually be factoring into what you're seeing. Thomas E. Faust Jr.: I think, we may have lost the line. Okay. Very good.

Well, operator I think this concludes our call for today.

Operator: This concludes today’s conference call. You may now disconnect. Thomas E. Faust Jr.: Thank you.