Eaton Vance Corp. (NYSE:EV)
Bank of America Merrill Lynch Financial Services Conference Transcript
November 14, 2012 8:00 AM ET
Tom Faust - Chief Executive Officer
Adam Beatty - Bank of America Merrill Lynch
Adam Beatty - Bank of America Merrill Lynch
Good morning and welcome. I know for sure, you’re still getting settled, but we are live on the internet. So we’ll go ahead and get started. I’m Adam Beatty. I cover the Asset Managers on the broker asset manager exchange team here at BofA Merrill Lynch. We are very pleased to kick off today with Eaton Vance. Today with us, we are pleased to have CEO, Tom Faust.
One of the things that’s characterized 2012 has been uncertainty in the macro economic and policy environment and besides having a broad equity in fixed income offering, Eaton Vance is known for its municipal bond strategies, its tax advantage and overlay strategies, as well as its sizable floating rate strategies.
So in addition, Eaton Vance this year has made opportunistic acquisitions in international manager, Hexavest, as well as overlay manager, Clifton, through its Parametric affiliate. So there is a lot to talk about.
I’ll go ahead and turn it over to Tom Faust. Thank you.
Good morning and thank you, Adam. So to kick things off, I’ll give just a quick overview of Eaton Vance, the few high points. We define ourselves. We think of ourselves by what we do which is asset managers, investment managers. We are based in Boston, operating from, I believe, 10 locations in U.S. and around the world. We manage about $200 billion in assets and we’ve been at this since 1924.
Some of the other things that distinguish Eaton Vance that characterized our business, all we do is investment management. We are an independent company, focused exclusively on this business. We think of ourselves as client focused. We think ourselves as value driven. We approach our business. We approach investing from a long-term perspective. We are employee centric company, valuing the long-term careers of many of our employees. The low staff turnover we enjoy and we are since the formation of Eaton Vance in 1979 through a merger. We are the top performing stock in the United States with our record of 32 consecutive years of dividend increases.
Our strategy is simple and straightforward and does change overtime, that strategy has three elements. First, to develop and sustain in-depth expertise across the range of investment discipline, second to apply that expertise across a range of products and services offer through multiple distribution channels, multiple geographies, multiple product forms to a variety of different clients, including traditional retail investor, institutional investors, high network, and family office.
And then finally the element in the strategy is, on a consistent basis to innovate, to be thoughtful about applying new strategies, new products to meet investors evolving needs in response to a changing investment landscape, tax landscape, regulatory landscape, et cetera.
What we think always our market-leading franchises include equity, fundamentally based equities and value dividend income, equity option income, tax manage small and SMID-Cap, global equity, income and alternative strategies, including falling rate, high yield bonds, so two of those together being a leverage credit investment expertise, global income, muni, tax advantaged income, multiple strategies and a variety of asset return strategies.
Through our affiliate, Parametric, based in Seattle, we are specialist in engineered investing with a range of engineer also seeking strategy, a range of engineered options strategies and a variety of what we think of as portfolio implementation services, what we call centralized portfolio management and customized benchmark tracking.
We have firm our traditional heritage of Boston based fundamental managers, expanded a bit over the last decade or so, through a series of now six acquisitions. These companies starting with our acquisitions of Atlanta Capital and Fox Asset Management in 2001, two Parametric-related acquisitions TABS, Tax-Advantaged Bond Strategies Group in 2008, and then two acquisitions announced earlier this year, including one this week that I’ll spend a little time talking about.
Our assets under management by manager, the four or five affiliates, I guess, four affiliates acquired product this year, that are reflected in our consolidated 2012 AUM account for just under 40% of our assets. So they contribute in a quite significant way to Eaton Vance's overall mix of business and our position in the marketplace.
Okay, that’s only our assets breakdown between equities and variety of income and alternative strategies of approximately 56% in equities, 25% in fixed income, 13% floating rate income and 86% in alternatives strategies. Again we’re different fund account for about 57% of assets, separate accounts balance of 43%, in that funds number, don’t think of these all has being retail products that would include some institutional and private funds design either for institutional or high network market, but a business where it breaks down, roughly 60%, 65% retail and the balance high network and institutional.
The year 2012 was the year in which we faced one notable challenge and that is declines in our large-cap value franchise. You see here both the growth in assets in our large cap franchise and then over the six quarter’s the decline in assets. We went from asset starting at about $16 billion at the beginning of fiscal 2009 to a peak of $33 billion roughly the middle of last year and that number we closed the year with just over $13 billion in assets.
So it’s been a pretty tough last 18 months for our large-cap value franchise. The good news there is that the rate of decline is slowing. Again I’ll about this in a few minutes. But we’ve seen about 12 billion of outflows in the current fiscal year -- the fiscal year that just ended rather. But we think most of that is behind us.
Despite losing some $12 billion, I think, $11.9 billion in large-cap value net outflows for the fiscal year, we still did finish the period with positive net flows and record ending assets under management and that’s really due of course to strengthen other franchises, most notably franchises run by our affiliate Parametric, our Atlanta Capital core equities mid-cap products in a range of Eaton Vance income strategies.
Assets under management again close the year just under $200 billion a record for us. Our growth inflows were about $50 million, down roughly 9% from last year. But an improving trend as the year progress.
Net inflows just picked up positive flows about $200 million net for the year. So we sold $50 billion gross to produce $200 million net, not the kind of ratio that you want to achieve. But we knew going in this would be a tough year for us in terms of net flows.
On a long-term basis, we have averaged just over 10% organic growth. We’ve been notably less than that the last two years, mostly due to this phenomenon of the shrinking large-cap value franchise.
With that now starting to stabilize, we’re somewhat optimistic that we’ll see something closer to that long-term historical norm, the long-term target norm of about 10% as we get into fiscal 2013.
So we’re feeling much better about our full outlook coming into fiscal 2013. Talking about that in more detail, if you look at the trend in growth flow, this is now focusing on the quarterly trend as opposed to the year-to-year trend. This shows that our growth flow are so low in the fourth quarter, we’re up about 32% on a sequential basis and we’re the largest growth flow, largest sales we’ve had in the last six quarter.
Also on a net basis, a very good quarter for us $2.2 billion of net flows for the quarter, again the best result we’ve achieved since the second quarter of last year and nice to see a positive trends reflecting two things, one is less pressure on outflows large-cap value. We were down about $2.7 billion in large-cap value in the quarter as opposed to the $11.9 for the year and included in that $2.7 billion of large-cap value outflows, it’s about $1.5 billion, that was the termination of a sub-advisor relationship that happened in early in the quarter, happened in August.
Since then, we’re losing about roughly at a rate of about $1 billion a quarter. So we’ve come down a good bit in terms of the outflows there and I’ll talk about that. But it reflects both improved performance and also the fact that the basis has shrunken quite significantly.
But on overall basis, we had between 4% and 5% organic growth in the quarter, not up to a 10% long-term target but certainly significantly improved from where we’ve been, which we think augurs very well for outlook in 2013.
Let’s talk about large-cap Value in little more detail. This shows the long-term performance trend of the strategy, green denotes quarters in which we outperformed our benchmark for Russell 1000 value index. You see after a period of very strong performance, we started to under perform as the market turned in the second quarter of 2009.
As the recovery in the market has matured, we’ve generally been performing better and have had outperformance each of the last two quarters and have notably closed the gap, not only versus our benchmark but also versus our peer group, all in now in the top third of managers in our category for year-to-date one year and three year that we continue to lag on a three and five-year basis.
But what we’ve seen is that we had austerity that based on strong long-term performance and particular strong risk-adjusted performance attracted very significant inflows in a period of 2007, 2008 and early 2009 versus the expectation of those investors we didn’t deliver and we’ve suffered from outflows from that group.
Now, we’re back to what we think are mostly longer term investors, many of them have been with us in this strategy for long time and that grows long-term success with us., We’re certainly hopeful that from where we sit today that the outflows from the strategy will be quite significantly reduced. That’s already happened and we certainly expect that to continue as we go into fiscal 2013.
The other thing happening in the quarter, of course, was that a number of other franchises had very good, very healthy flows. The key drivers in the quarter are per metric emerging markets, per metric centralized portfolio management and a variety of Eaton Vance income and alternative strategies.
The quarter did have a couple of large mandates warranted, one was per metric since the last portfolio management mandate in Australia, another was a global macro absolute return sub-advisory assignment here in the U.S. But a good quarter above measures, growth, net and class of variety of strategies that makes us pretty optimistic about 2013.
Let’s talk about the New Year. On an October fiscal year, so we’re a couple of weeks into the fiscal year. We don’t what is going to happen, that’s necessarily in fiscal 2013 in total, but there are some things that we’re pretty confident that we can say about what the investment environment will be in 2013.
First, I’m going to make the ball prediction that taxes in the United States are headed higher. That’s something and I think we’re coming to accept to the extent that was not clear. The election last week, I think, made that very clear that tax rates are going up.
We think there will continue to be demand for alternatives among investors in the U.S. and internationally. Expectations for stock market performance, expectation for bond market performance are simply not high enough to me, return expectations of investors, the volatility that people have seen and expect to see going forward from stock and bond are simply not compatible with what investors are looking for going -- going forward, hence the desire for alternative strategies.
We also see, I think, an unrelenting source of income. Cash in the bank earns actually nothing. People need money to live on. That continues to drive demand for a variety of income strategies. Global, we’re in a period where increasingly investors everywhere recognize that the right approach, the best approach for many investors, for many types of investment is to take a global perspective.
Does it make sense to bucket assets by geography or does it make sense to look at the world in total. Our investors better off to have larger exposures to, I think, U.S., our U.S. investors here better off having most of all their assets in the U.S. or a significant portion outside.
There has been certainly a long-term trend toward increasing globalization in how clients view the strategies. We don’t see anything that will likely change that in the near term. With all these things happening, we think there is a great chance, these things will all play to the favor of Eaton Vance.
We don’t think any one is better positioned for this environment in Eaton Vance. Let’s talk first about taxes. Eaton Vance has for many years distinguished itself as having a focus on tax managed or tax sensitive investment. We have about $18 billion in tax managed mutual funds, we manage from Boston. We’ve about $9 billion in specialty what we call exchange funds for high network investors, our Parametric affiliate roughly half their assets are in there tax muni core, which is a benchmark-based product with active tax management. And we also offer about $30 billion in municipal bond or tax advantage bonds strategies.
So, about 40% of our assets in total $80 billion out of around $200 billion our tax-managed in somewhat. And that’s after decade or so when its investor focused on tax it’s been pretty minimal, right. Tax rate has been low and capital gain realizations have been pretty modest, so not a lot of focused on taxes.
We think there is a very significant chance with that change is going forward Eaton Vance is ideally position to benefit from that and we expect to be a significant part of our story, again in the coming higher tax environment as it was for us in the late 90s and early 2000s, when this was a key part of our story and key driver of our success.
Alternative, we have a range of absolute return strategies about $12 billion in assets. For us alternatives are primarily delivered in a mutual fund format. So we are not a hedge fund manager. We don’t have hedge fund mangers in our family. But we do have a broad range of successful products that taken absolute return perspective available in mutual fund format.
Our flagship product in this effort is Global Macro Absolute Return, which has a track record going back to mid-1990s. We’ve got a range of other strategies that are now in a process of building longer term track records.
We also have a business, small at this point, but growing business, offering exposure to commodities and currencies, put those together it’s almost $13 billion or about 6.5% of our overall assets that are in alternative strategies.
Income, long a focus of Eaton Vance, longer source of strength for us, a variety of capabilities, tax advantaged and muni bonds, foundational expertise at Eaton Vance about $30 billion and assets under management floating-rate bank loans, we are, if not, the market leader, certainly among the market leader in that category.
Floating-rate, leverage credit so these are typically single B, double B credits, LIBOR plus spread, 300 basis points or so, 350 basis point or so, depending on the market environment. Good business for us we have been doing it since 1989, clearly a market leader there.
Global income, another source of real expertise for Eaton Vance, this is supporting the Global Macro Absolute Return strategy, a range of emerging market and international equity and currency products all managed by our global income team.
High yield, again long-term area strength for Eaton Vance about $7 billion and dedicated high yield mandates. A range of multiple strategy products, some combining high yield and bank loans on one hand with international on the other, we see an opportunity to grow that business overtime and certainly think that we are poised to do that in 2013.
The -- Thank you. The -- on an overall basis our income strategies are about $85 billion, very important part of our business, a real source of differentiation for Eaton Vance, a range of high performance strategies.
Some we may haven’t seen a press release and announcement made a couple weeks ago that I -- an experienced market leading portfolio manager in the fixed income space by the name of Kathleen Gaffney has joined Eaton Vance from Loomis Sayles.
Kathleen was a part of their core bond strategy, their unconstrained bond strategy team, which I believe manages about $80 billion. We’re delighted to welcome here to Eaton Vance. We expect to be introducing a range of strategies that she will be leading. She is co-head of our investment grade income team.
We just filed yesterday for new mutual fund, Eaton Vance bond fund that she will be managing or co-managing. And we expect over the coming months to be introducing other products, other strategies to take advantage of her expertise, which encompasses a broad range of fixed income asset classes.
She gives us a new ability and enhanced ability to reach across the different segments of the income market, to invest not just on a specialized basis in bank loans or high yield, or global or muni’s, or converts or investment grade, but she has the experience in the expertise and reaching across the whole fixed income spectrum to find areas of particular value and we’re delighted to welcome her to the Eaton Vance income team.
In global, a number of franchises here for Eaton Vance and our affiliate, Parametric, one of their leading businesses in -- is in engineered strategies investing in emerging market equity about $16 billion of real flagship product for them.
They also offer in a same style a variety of global and international strategies. We have some dividend products we manage from Boston from our Eaton Vance equity team, our global income team is a leader in their space.
And then finally, we acquired earlier this year, we finalized the acquisition in August of Montreal-based company called Hexavest that we think has the potential to really very significantly expand our presence in global equity investing.
Let me talk about that acquisition and another one that we just announced just this week. But first the Hexavest acquisition, announced on August 6th that we would acquire a 49% interest in this Montreal-based global equity manager. This is a company that had been 100% employee-own, the employee owners will continue to own a majority interest in the company, where minority interest hold a 49%.
We will take as part of this arrangement responsibility for their sales efforts outside of Canada. So it’s an important new distribution relationship for us, as well as an important investment.
And then the final point to note about Hexavest on this slide, is that we have the option in 2017 on the fifth anniversary of the closing of the deal to increase our ownership to 75%. In other words to move this to a consolidate status.
But just a few points on, who Hexavest is and what they do, relatively small firm about 37 people, they manage about $12.1 billion in assets, that’s up about 20% in the three months or so, since we closed the acquisition. So we are excited about the continuing growth in their franchise that we’ve experienced in the short-term since the acquisition closed.
The business was founded in 2004, though the team had work together starting in 1991. So they have a track record that goes back more than 20 years in their non-U.S. and U.S. equities and track record in global equities that goes back to 1999.
I believe they are very good performance. They are top-down managers. They have a very distinctive approach. They have both risk-based models, quantitative models, but ultimately it’s a fundamentally-based top-down approach that has perform very well over variety of market conditions with particularly strong performance in protecting value in market declines. So, good, very good downside protection, extraordinarily good long-term record and our job is to take that story and introduce it to a significantly broader range of clients.
The business today, at least as of the end of September was quite heavily focused on Canada still, the home market about 45% of their assets, currently are managed for Canadian clients. Our job is to expand the distribution that they’ve achieved on their own in Canada to other markets.
They have a reasonable foothold in the U.S. and some marketplace. They have a reasonable foothold in Australia. But other than that they are mostly unknown in most major markets around the world, a little bit of foothold then in Europe. But our job -- one of our key job for our distribution teams in 2013 and beyond will be taking the Hexavest story and introducing it much more broadly. I’m very encouraged by the response we’ve had in the early days.
Almost everything they do is either global our country, global ex-U.S. strategy. They do have very important, those significant Canada-only equity mandate but other than that pretty much everything they do is global equities, global and global all country.
They do have a small taxable asset allocation business that we are hoping to grow as well. But it’s been institutionally focused business, dominated by Canadian clients both presence in U.S. and Australia.
We’re looking to grow in all markets but also to grow not only geographically, but also to add retail customer basis. We’ve started a family of mutual funds, managed by Hexavest here in the United States and now in the process of also launching. Hexavest managed uses funds for offshore markets. But very pleased with how things are going there and what they can add to the Eaton Vance family.
We have in conferences like this and meetings like this for many years talked about our desire to significantly add to our global equity capability and we think Hexavest finally achieves that objective.
We like the people. We like the way they manage money. We like the distinctiveness of their investment approach and we have great confidence that we can help them growing an accelerated rate over the coming years.
Second acquisition announced on Monday of this week comes through our affiliate Parametric. Parametric is based in Seattle, specializes in a range of implementation and engineered strategies. While Clifton just -- maybe just the first a few particulars about the acquisition announced this week expected to close end of year.
We expect that to be like the Hexavest acquisition modestly accretive through earnings. Just a little bit about Clifton growth. They are specialist in overlay and risk management for institutional clients, about $33 billion in assets under management based in Minneapolis, staff of about 49 people, including 21 investment professionals.
Most of their products are based on the use of index features or options. So a typical application would be a client that’s got some cash that they want to maintain in cash, but they want market exposure. They can achieve that exposure synthetically by through futures overlay and we’ll work with Clifton to achieve that. You also may see application for clients on a transition basis. We want to add exposure or take the exposure away from the particular asset class. We want to do that, again synthetically by futures.
They have in recently years introduced a range of risk management solutions, many cases involving a variety of option strategies. They are an early leader in the developing field of risk security strategies.
So we are thinking that it fits very well with what Parametric does with their market position and are optimistic that working together we can meaningful accelerate the growth of Clifton by working with current Clifton clients to expose them to a broader range of strategies, but also through Parametric to expose the Clifton strategies to a broader range of clients then they have currently, including clients outside the United States, including clients in the multi-family office market.
We don’t see this is a significant retail opportunity, but certainly think that they are much broader institutional and high network possibilities for growing the business of Clifton Group going forward.
And thinking Clifton it’s -- I think helpful to think about where they fit in to Eaton Vance and where they fit into, particularly our subsidiary Parametric. And it’s important to understand, what is our vision, what’s our goal, what’s the positioning for Parametric?
And the way we think about it is that the business of Parametric is really a solution driven business, where they seek help sophisticate investors make their portfolios work harder and smarter to meet their objective, looking to optimized exposure across different asset classes to balance risk and the control risk and make risk in assets and align to control cost, for tax sensitive clients to control taxes. But generally to work to maximize risk adjusted and maximize tax adjusted return.
It’s a broad menu. They are not fundamentally based alpha seeking managers instead they are something different. They are rules based. They are systematic. They describe themselves as portfolio engineers and they tell us story that resonates very well with a broad range of clients that has really worked very well. And we see Clifton is adding a significant range of new capabilities. We think Parametric is today having deep expertise in securities based implementations and offense based implementation.
Clifton now gives them that same kind of depth of expertise in futures related strategies as well as a range of other related products, including some offense-based strategies that are differentiated from some of the historical Parametric offering.
But the way we think about Parametric and the way we hope to position them and expect to position them increasingly post the Clifton acquisition, a market leader in providing a whole range of implementations services, risk management, tax management, engineered alpha enhanced data and customized portfolio solution, not only the institutions but also the family offices and high network investors, both in the U.S. and internationally.
We are relatively early in that story we believe. When we acquired Parametric in 2003, when we acquired the controlled interest in 2003 at about $5 billion in assets under management. Most of that is focused on their tax managed core strategy offered to high network investors where our initial goal is to take that capability to the U.S. retail registered investment advisor market through Eaton Vance distribution.
We’ve done that. We’ve grown the business significantly. We’ve grown the business significantly. Again, in an environment where tax rates have been low and focus on avoiding capital gains or offsetting capital gains with active tax loss servicing is pretty minimal, because they haven’t made a lot of money over the last decade.
Despite that we’ve seen, 10 times growth in the assets of Parametric and also a modest trending up in their effective fee rates. This is a very good business for us. It’s very key to our future. They are today about $53 billion in assets. Clifton adds about $33 billion to that.
One thing to understand about Clifton is that, it is a fully low price point offering. It’s about eight basis points on average for their business, compared to Parametric in total. I think it’s somewhere in the low to mid-30s. But Clifton has been able to operate their business with margins that compliments to the Eaton Vance overall corporate margins.
So we see it as being additive, not only to assets, not only to revenues but also additive to profits from day one. But beyond, what it does to us in terms of near-term profit impact, what gets us excited is the ability it gives us to continue to position.
Parametric is a differentiated solutions provider, growth-based systematic for sophisticated investors, U.S. and international, focusing on issues of risk management, tax management and engineered alpha and enhanced data solutions.
If this stays, we think about the world that we live in as challenging for traditional asset managers like Eaton Vance. Some of the things that we think about, pressure on fees, rising cost distribution, heightened competition from passive strategies, less patience on the part of many investors with underperforming strategy, generally growing pessimism about the market, growing pessimism about investments strategies to add a return.
Many of these strategies actually play to the strength. Many of these issues, concerns play to the strength of the, Parametric organization. And so we think about them as being a real differentiated for us and a way for us to address, what is a very significantly evolved investment landscape today versus 2003, when we made our initial investment in Parametric.
We think about Eaton Vance for this environment, an environment of, a likely continuing pressure on fees, continuing shift of assets from active to passive or at least shifting share are going share passive. We think Eaton Vance is very well positioned for this environment. We got good momentum in our current business. We are coming off a very solid quarter, the best quarter we’ve seen in at least six, in terms of near-term flows.
We see the pressure coming off, the large-cap value outflows. We see a rising trend of inflows from a number of strategies that I’ve talked about. We see the impact of the tax increase bring it closer into the conversation with financial advisors relating to taxes.
We really do think that this is an environment in which, Eaton Vance can again shine. We’ve been through a tough series of quarters. Last six quarters have been not really fun for us, as we’ve seen generally slow to no growth for our business, thanks to shrinkage in large-cap value.
But from here, we are pretty excited about where the company stands and feel like we are quite well positioned for what's coming, likely to come in the years ahead, a world of continuing pressures on costs and fees and skepticism about active management, skepticism about equity returns, rising taxes. We think Eaton Vance can be a leader and a strong performer in that environment.
So, with that I want to thank you for your time and attention, and we’ve got a few minutes to take some questions.
Excellent. Do we have questions?
Adam Beatty - Bank of America Merrill Lynch
Maybe I’ll go ahead and kick it out. A question on, maybe the competitive landscape in tax advantaged strategies. Obviously, you’ve got a robust offering out there in the market and through the process -- the search process that eventually yielded the Clifton acquisition, you maybe even more aware of potential competitors out there. Obviously several, permanent managers offer newly bond strategies.
In terms of maybe, tax advantaged equity and what have you, how you see the competitive landscape and how you plant to respond?
Yeah. So, you can think of the tax managed or tax advantaged equity space as being having significant components of both active and passive management. And on the passive side, I think you would say that ETFs and to maybe a lesser degree tax managed index funds are formidable competitors. But what those structures do not allow you to do is, pass through the value of tax losses.
So you own a mutual bond or you own an ETF structure as a mutual fund, you can’t realize losses. So if your goal is to realize losses on a portion of your portfolio to offset short-term gains on hedge funds or other strategies, you can’t really use ETFs and index funds for that. That’s where Parametric comes in and it’s on that basis, as they build their tax managed business.
On the active side, this is a business that right now is they are probably -- maybe a half-dozen to maybe even approaching a dozen fund groups that rolled out a range of tax managed equity strategies. Most of those have probably gone away. With the term in the market in 2000, the term market again in 2007, mutual funds weren’t making big capital gain distribution.
So advisors and clients weren’t typically focused on that. So we are almost alone in having a family of mutual funds managed for after-tax. Again, where they are going, like a passive strategy is after-tax returns, but it’s done with the combination of not only active tax loss harvesting, but also active stock selection to achieve positive free cash outflow. So, it’s not a very crowded space, but that may change. We’ll have to see.
Adam Beatty - Bank of America Merrill Lynch
The remaining large-cap value assets, can you breakout what is retail versus institutional? And also now that that seems to be abating, can you discuss if there is any impact or has there been a major impact on your distribution and administration and servicing line revenues, which I know are mainly a pass-through. But does the slowing down of large-cap value outflows tamper some of the trends in that aspect of your business?
So the overall mix of large value between the – what do you want to say, Dan? So broadly, around two thirds retail, one third institutional. The retail would be both, mutual fund assets as well as retail managed accounts, so called wrap accounts. The institutional would include some off-shore business, some U.S. institutions as well as some sub-advisory relationship.
We had been in this -- the stickiest part of our business, if you want to try and look at what's stayed versus what's gone away, I think it probably breaks down better by when the client joined us. So, no matter what type it was -- retail, institutional sub-advisory. If they signed on in 2008, when we had great, absolute and risk-adjusted returns and they saw none of that as we underperformed coming out of the market bottom.
Lots of those clients have left us. The ones that have had the long-term positive experience, but those tend to be the one that have stayed with us. The sub-advisory business in particular is one we are very competitive space. It was probably few places in asset management where there are more competitors than there are in U.S. large-cap value, and also where pessimism about the ability of active managers to persistently outperform. That is very pervasive in this space.
So it’s a pretty tough place and I think our experience has been pretty humbling that we put together a great track record. You build up $33 billion in assets and you go through a couple of weak years and now you got $13 billion.
Your question about distribution, why don’t you ask that again?
Yeah. So if you look at our revenue line, in addition to investment management revenues, we have a variety of what we call distribution related revenues. And typically those – it’s almost exclusively mutual fund revenue and it would be either the service fees we collect on Asian mutual funds or the distribution and service fees that we collect on B shares and C shares.
So at the same time as large-cap value has been shrinking, there has been a long-term trend that’s been in place, probably a half dozen years for our mutual fund business, consistent with what’s happening industrywide to migrate from C shares and B shares and A shares to more iShares.
I think our current sales mix is about 60% iShares, something little bit more than 30% a shares, almost all which are in load waved from and then the balance fees and almost no fees at this point. As that business has migrated, we have lost. Our distribution revenues have shrunk.
Now, keep in mind that those distribution revenues in many cases are almost fully offset by related expenses. So that change has a negative impact on revenues and negative impact on fee realization rate. But maybe surprisingly a positive impact on margins, because we are pulling out low margins distribution revenues.
On balance, I would say that trend is modestly negative because we get -- we do make some net distribution profits. But that’s I would say is relatively manageable year-to-year. It doesn't change that much and it's not that big a deal.
We see, at the same time a growth in distribution expense that shuts space high payments. It also is growing costs. That’s kind of happening separate from that trend of moving from As, and Bs and Cs to increasingly Is. So you will see – I think Eaton Vance’s P&L, five years from now you will see not a very big line for distribution related revenues and not a very big line for associated distribution related expenses.
It seems like we are going in the direction of offering mutual funds in a form where those embedded distribution costs are pulled out and paid directly by the client, which I think is probably a better way of doing it.
Adam Beatty - Bank of America
One more quick question or follow-up?
Everybody good. Well, thank you very much.
Adam Beatty - Bank of America
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