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Eaton Vance (NYSE:EV)

Q1 2013 Earnings Call

February 20, 2013 11:00 am ET

Executives

Daniel C. Cataldo - Treasurer

Thomas E. Faust - Chairman, Chief Executive Officer, President, Director, and Chairman of Executive Committee

Laurie Greenwald Hylton - Chief Financial Officer, Vice President, Chief Accounting Officer and Member of Management Committee

Analysts

Roger A. Freeman - Barclays Capital, Research Division

Gerald E. O'Hara - Jefferies & Company, Inc., Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Greggory Warren - Morningstar Inc., Research Division

Rahul Nevatia - JP Morgan Chase & Co, Research Division

Operator

Greetings, and welcome to the Eaton Vance First Quarter Fiscal Year 2013 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Cataldo, Treasurer. Thank you. You may now begin.

Daniel C. Cataldo

Good morning, and welcome to our 2013 fiscal first quarter earnings call and webcast. With me this morning are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, our CFO. We'll first comment on the quarter, and then we will take your questions.

The full earnings release and charts we will refer to during the call are available on our website, eatonvance.com, under the heading Press Releases. Today's presentation contains forward-looking statements about our business and our financial results. The actual results may differ materially from those projected due to risks and uncertainties in our business, including, but not limited to those discussed in our SEC filings. These filings, including our 2012 annual report and Form 10-K, are available on our website or upon request at no charge.

I will now turn the call over to Tom.

Thomas E. Faust

Good morning. January 31 market closed on an exciting first quarter of fiscal 2013 for Eaton Vance. The $19.4 billion of growth sales and other inflows we realized during the quarter is a new record high, exceeding our previous record sales quarter by more than 20%.

We generated $5.4 billion of net inflows, which equates to 11% annualized organic growth, a great start for us in fiscal 2013. We closed the previously announced acquisition of The Clifton Group Investment Management Company at the end of December and made progress integrating Clifton's business with Parametric during January.

In December, we paid a special dividend of $1 per share and accelerated the payment of our $0.20 per share first quarter dividend. We finished the quarter with $247.8 billion of consolidated managed assets, up 24% from $199.5 billion at the beginning of the quarter.

Excluding the $34.8 billion of assets acquired in the Clifton purchase, our managed assets grew 7% over the course of the first quarter on the strength of positive net inflows and favorable markets.

Not included in our reported net flows for the quarter are the $1.8 billion of net inflows, or 49%-owned affiliate, Hexavest, Inc., achieved during the quarter. Since we closed the Hexavest transaction in August of last year, they have grown their managed assets from $11 billion to $14.5 billion, an increase of 32%, driven primarily by $2.7 billion of net inflows over the period.

We are pleased to welcome our Minneapolis-based colleagues from the Clifton Group to the Parametric and Eaton Vance families. Led by Jack Hansen, Kip Chaffee and Tom Lee, Clifton is recognized by major institutional investors and consultants as the leading provider of futures and options-based overlay services and risk management solutions.

The Clifton business complements and enhances Parametric's existing line up of engineered investment solutions and implementation services. Clifton strategies have made an immediate impact on our business growth, accounting for $1 billion in net inflows in the month of January.

You will notice that we have expanded the asset and flow disclosures in our press release and slides to include a new category called implementation services. We did this to give those who follow the company closely a better sense of how our business is evolving.

The major components of implementation services, as we define that category, are Parametric's tax-managed core, centralized portfolio management and specialty indexes businesses, and the former Clifton's groups futures and options-based overlay services.

We believe the market-leading lineup of implementation services now offered by Parametric is a real strength and differentiator for Eaton Vance. Increasingly, sophisticated investors are looking for solutions to help them manage their portfolios more efficiently. Through both legacy and new capabilities, Parametric is now positioned to be a key provider of investment solutions.

Whether the client's objective is to minimize cash drag, control volatility, balance risk, manage taxes or maximize risk-adjusted returns, we are well-suited for the task.

Parametric's rules based, engineered strategies and services work in harmony with both traditional active and passive investment approaches. We reported adjusting -- adjusted diluted earnings per share of $0.50, as compared to $0.47 for the year ago quarter and $0.53 in the previous quarter. The sequential decline in adjusted diluted EPS is largely due to lower performance fees received and higher compensation costs related to our strong sales success and normal seasonal increases.

Laurie will cover the financials in more detail in a few minutes. Gross sales and other inflows for the quarter of $19.4 billion were up 35% from the previous quarter and up 69% from the year ago quarter.

The investment disciplines in which we saw strong sales were largely consistent with previous trends. These include a continued investor appetite for income, growing demand for alternatives and increased appetite for global investment strategies and increased demand among institutions for lower-cost engineered strategies and implementation services.

Leading products from a growth sales perspective, including a number of our income strategies, floating-rate municipal and global income, all had strong sales in the quarter. EVM's absolute return strategies, Parametric emerging market equities and implementation services and Atlanta Capital's SMID-Cap strategy also contributed to the strong gross flows.

Our net flows were largely led by the same line up, with the exception of municipal bonds, where net flows were only modestly positive in the quarter. We saw a period of accelerated redemptions from municipal funds and accounts heading into the calendar year-end due to concerns that pending new tax laws might change the tax-exempt status of municipal income.

As you are likely aware, the tax status of municipal income was unaffected by the American Taxpayer Relief Act, which was passed into law at the beginning of January. Starting in January, we have seen -- resumed positive net flows into municipals.

Strong flows into our areas of business growth were partly offset by net outflows from EVM's Large-Cap Value and other Large-Cap equity disciplines. Fortunately, and as expected, the rate of net outflows from our Large-Cap Value franchise has declined significantly from fiscal 2012 levels.

On a sequential quarter basis, net outflows from Large-Cap Value fell from $2.7 billion in the fourth quarter of fiscal 2012 to about $770 million in the first quarter of fiscal 2013.

After experiencing $11.9 billion of Large-Cap Value net outflows in fiscal 2012, we expect this strategy to exert much less drag on our flow results in fiscal 2013.

As yet, the 2013 tax law changes have not translated into increased flows as direct-tax managed products. We think there's a good chance that will happen. We see the biggest opportunity resulting from the substantial increase in effective long-term capital gains rates for the wealthy.

Factoring in the 20% new maximum long-term cap gains rate, the 3.8% health care investment income surtax and the 1.2% tax effect of the reinstated, itemized deduction limitation, maximum federal rates on long-term capital gains have gone up from 15% to 25%. That's a 67% increase.

Factoring in state taxes, capital gains tax rates for top-bracket California tax payers are now as high as 33%. High-net worth investors now have much greater incentive to minimize, offset and defer realized capital gains.

Our tax-managed equity strategies are designed to help investors do exactly that. There are several developments on the new product front that are worthy of comment. We expect to be in the market in March with a municipal bond closed-end fund. The underwriting syndicate is shaping up well, and we expect a successful transaction.

At the end of January, we launched the Eaton Vance bond fund managed by Kathleen Gaffney. You may recall that Kathleen joined us this past October from Loomis Sayles as Co-Head of Investment Grade Fixed Income.

At Loomis, Kathleen managed or co-managed a number of successful mutual funds and institutional accounts, including core plus, multi-sector and high yield mandates. In addition to her work on the new Eaton Vance bond fund, Kathleen is co-manager of Eaton Vance Strategic Income Fund and has been involved in a number of institutional separate accounts purchase.

We are excited to have Kathleen at Eaton Vance and are working hard to maximize the business opportunities to her joining our team presents.

You may have seen our February 4 press release announcing the launch of Eaton Vance Institutional Cash Management Services, a new business for us focusing on providing cash management services to institutional investors in the U.S. and internationally through customized separate accounts.

The catalyst for this initiative was our hiring of an experienced team of institutional cash managers who most recently worked together at Dwight Asset Management.

The team of 5, led by John Donahue, became available when Dwight was sold last year to Goldman Sachs. Prior to joining Dwight, this team managed as much as $60 billion in cash management assets at Lehman Brothers. We viewed this as an opportunity to gain a robust improvement institutional cash management capability at a time of unusual opportunity in that marketplace.

Large corporate cash balances, regulatory changes in the institutional money fund business and an ongoing thirst for yield, leave us optimistic that the chances of success here are high.

Finally, we continue to make progress with our exchange rate and managed fund initiative. We've had productive conversations with regulators, potential business partners and potential licensees and remain convinced that, if approved, ETMFs can be game-changing products for Eaton Vance, and the actively managed fund industry as a whole.

Our goal here is an ambitious one. To transform the delivery of active fund strategies into a higher-performing, more tax-efficient structure with built-in operating cost savings and shareholder protections.

We view 2013 as a pivotal year for this initiative. Looking ahead, our second fiscal quarter is shaping up well, with solidly positive net flows continuing so far in February and a strong pipeline of visible new business ahead of us.

On the fund side, our floating-rate income funds are picking up momentum from an already high rate of sale. We continue to see strong flows into our Global Macro Absolute Return Fund and Parametric's emerging market funds. An up and coming strategy for us is a diversified currency income. The retail version of this has been one of our best-selling funds since the beginning of the calendar year. The institutional pipeline also looks good with strong indications across floating-rate income, Parametric emerging markets and implementation services.

All told, we are encouraged by our new business prospects and look forward to continued progress over the balance of 2013. I'd now like to turn the call over to Laurie.

Laurie Greenwald Hylton

Thank you, and good morning. In our press release this morning, we've reported adjusted earnings per diluted share of $0.50 for the quarter compared to $0.53 in the fourth quarter of fiscal 2012 and $0.47 in the first quarter of last year.

Adjusted earnings differ from GAAP earnings in that we back out changes in the estimated redemption value of non-controlling interest in our affiliates that are redeemable other than fair value.

As you saw in Attachment 2 to our press release, these adjustments totaled $0.09 in the first quarter of fiscal 2013, $0.08 in the fourth quarter of last year and $0.07 in the first quarter of fiscal 2012.

First quarter earnings per diluted share were also adjusted for the $0.03 impact of the special dividend we declared and paid in December. The $0.03 impact of the special dividend on our earnings per diluted share calculation reflects the disproportionate allocation of distributions in excess of earnings to common shareholders under the two-class method.

As Tom noted earlier, ending assets increased by $48.3 billion, or 24%, $247.8 billion on January 31, reflecting assets acquired of $34.8 million, net inflows at $5.4 billion and market appreciation of $8.2 billion in the quarter. Average assets under management increased by $19.6 billion, or 10% in the first quarter, reflecting 1 month of Clifton ownership and the partial effects to the quarter's net inflows and market appreciation.

The Clifton acquisition, as anticipated, had a significant impact on both our overall effective fee rate and our effective investment adviser and administrative fee rate in the quarter. The impact of the acquisition to our overall effective fee rate, down to 59 basis points in the first quarter from 53 basis points in the fourth quarter of last year.

Our effective invested advisor administrative fee rate similarly decreased to 49 basis points from 52 basis points in the fourth quarter of last year.

Looking forward, we see our effective investment adviser and administrative fee rate dropping to somewhere between 44 and 45 basis points, as we recognize a full quarterly impact of the Clifton acquisition. We anticipate that our effective advisory administrative fee rate for equity strategies, as now defined, will settle in at approximately 65 basis points, fixed income at approximately 44 basis points, floating-rate income at approximately 54 basis points, alternatives is approximately 63 basis points and our newly defined implementation services at around 11 basis points.

Although effective advisory administrative fee rates for each investment area can certainly change over time, we see the primary driver of our overall effective fee rate as a mix of assets by mandate type going forward.

Even absent the Clifton acquisition, growth in Parametric implementation services has outpaced most of our other businesses. If that continues, as we expect it will, our overall effective advisory and administration fee rate will likely trend lower over the coming quarters.

Shifting from revenue to expense. Operating expenses increased 7%, both sequentially and year-over-year, largely reflecting increases in compensation and related costs. Compensation expense is up 13% sequentially, reflecting increases across nearly all compensation expense categories. Significant contributors included the consolidation of Clifton, which added $1.2 million in compensation costs for the month of January, first quarter-based compensation increases, increases in sales and revenue-based incentives associated with strong first quarter sales and revenue growth, increases in operating income base and bonuses, an increase in severance recognized in the quarter and an increase in payroll taxes, reflecting both the reset of the calendar-based payroll tax clock and an increase in stock option exercises in the first quarter.

Group long-term sales and other inflows, which drive sales-based incentives, were up 35% in the first quarter compared to the fourth quarter of last year, a quality problem that we hope we will continue despite the near-term adverse effect of strong sales on operating margins.

Similarly, institutional and high-net worth invested advisory and administration fees, which drive revenue-based incentive, were up 10% in the first quarter compared to the fourth of last year, again, a quality problem, but one less likely to impact our overall margin.

Distribution expense is up 3% sequentially, primarily reflecting an increase in intermediary marketing support payments, driven by an increase in average fund assets subject to these arrangements and an increase in commissions paid on certain Class A share fund sales.

Given flat or rising fund assets, we would anticipate seeing modest upward pressure on intermediary marketing support expense going forward. Quarterly service fee expense decreased 1% sequentially, consistent with both the decrease in service fee income as a long-term shift away from share classes of service fees to no-load Class I shares. Amortization of deferred sales commission increased 6% sequentially, primarily reflecting the sequential increase in growth Class C share sales.

Quarterly fund expenses increased 7% sequentially, primarily reflecting increases in sub-advisory fees and other non-advisory expenses born by the company on funds for which we are paid an all-in fee. Harder [ph] expenses were up 1% sequentially, primarily reflecting increases in professional services and the amortization of intangible assets associated with the Clifton acquisition.

Our operating margin was 32% in the first quarter, down from 34% in the fourth quarter of fiscal 2012, reflecting a 3% increase in revenue on an operating expense base of about 7%.

Based on preliminary forecasting, we currently anticipate that margins will continue in the 30% to 34% range -- 32% to 34% range, through the remainder of fiscal 2013. Clifton's operating margins for the month of January was commensurate with our overall corporate margin.

Equity net income of affiliates increased to $3.2 million in the first quarter from $1.8 million in the fourth quarter of fiscal 2012, primarily reflecting an increase in the company's proportionate net interest and the earnings of sponsored funds accounted for under the equity method. Equity in net inflows affiliates in the first quarter fiscal 2013 included a $2 million contribution from Hexavest, which represents our 49% share of Hexavest earnings, compared to $1.9 million contribution in the fourth quarter of last year.

The Hexavest contribution is net of both tax and the amortization of intangibles. Non-operating income for the first quarter reflects net investment gains and other investment income of $5.2 million, compared to $5.5 million in the fourth quarter of last year. As seen in Attachment 3 to our press release, $1.1 million and $1.2 million of net investment income is allocated to non-controlling interest holders in our consolidated funds in the first quarter of fiscal 2013 and fourth quarter of fiscal 2012, respectively.

Non-operating income also includes income associated with the company's consolidated CLO entity, the majority of which is attributed to other beneficial interest holders in the strategy .

The consolidated CLO entity contributed approximately $900,000 to earnings in the first quarter fiscal 2013.

This combines the company's management fee and the net returns on our $1.8 million investment in the entity, and compares to an $800,000 earnings contribution in the fourth quarter of fiscal 2012.

The residual contribution to earnings can be calculated by subtracting the non-controlling interests attributed to other CLO beneficial interest holders, provided in Attachment 3, from the total non-operating income contribution during the period.

As seen in Attachment 3 to our press release, fluctuations in non-controlling interests have been largely driven by the performance of our consolidated CLO entity and the non-controlling interest value adjustments related to our subsidiaries whose non-controlling interests are redeemable at other than fair value.

The non-controlling interest value adjustment in the first quarter of fiscal 2013 related primarily to an adjustment in the estimated redemption value of the non-controlling interest in Parametric Portfolio Associates.

In December, we accelerated the call that entitled us to purchase the remaining direct capital and profits interest in Parametrics for $43.5 million, thereby, eliminating the remaining non-controlling interest in Parametric redeemable at other than fair value.

As a result, there will be no future first quarter non-controlling interest value adjustments associated with Parametric Portfolio Associates.

Although management at Parametric continues to hold indirect profits interest through grants made under launch [ph] and equity plans, these are redeemable at fair value and therefore, are not subject to the first quarter non-controlling interest value adjustments that we recognize annually.

Our effective tax rate was 37.9% in the first quarter fiscal of 2013, up from the 34.1% reported in the fourth quarter of last year. Excluding the effect of consolidated CLO entity earnings and losses, which are substantially allocated to other beneficial interest holders and therefore, not subject to tax in the calculation of our provision, our effective tax rate for the first quarter of fiscal 2013 and the fourth quarter of fiscal 2012 was 36.6% and 36.1%, respectively.

We currently anticipate that our effective tax rate adjusted for CLO earnings and losses, will be between 37% and 37.5% for the remainder of fiscal 2013.

Some notes on future stock-based compensation expense. As discussed on previous calls, there's historically been a degree of seasonality in our stock-based compensation expense that derives from the recognition on grant date with the full accounting cost of stock options awarded to retirement-eligible employees. As a result, with our elevated stock-based compensation expense in the first quarter of each fiscal year as new grants are made.

In the fourth quarter of fiscal 2012, we amended our stock-based compensation plan such that we would not see significant seasonality going forward. We continue to anticipate that our run rate on stock-based compensation through the remainder of fiscal 2013 will be somewhere in the neighborhood of $13 million to $14 million per quarter. A this point, I'd like to turn the call over to Dan to provide some commentary on our balance sheet and liquidity.

Daniel C. Cataldo

Thanks, Laurie. We finished the quarter with $218 million of cash and equivalents, down from $462 million at the end of the fourth quarter. The reduction was the result of the very active quarter for us from a capital management perspective. We returned an incremental $144 million in cash to shareholders in the form of a special dividend paid in December, which totaled $120 million, and the acceleration of the regular first quarter dividend, which typically would have been paid in February.

We have $67 million to close the Clifton acquisition on December 31. And as Laurie mentioned, we used $43 million to exercise our call to purchase the remaining interest in Parametric related to the 2003 acquisition.

We did close stock repurchases to $13 million in the first quarter due to the heavy demands on our cash. With those demands behind us, we expect to be back in the market as opportunities arise. How much of our stock we repurchased in any period will depend on a number of factors, including other uses of the cash, the stock price, the macro environment and the outlook for our business.

You may have noticed that our diluted shares outstanding used in the diluted EPS calculation increased 3% from the fourth quarter.

The cause of the increase was twofold. First, we saw a high-volume of employee stock option exercises in the quarter, particularly in December, due to a higher stock price in the impending tax rate increases.

Second, under the treasury stock method, the diluted impact of outstanding in-the-money options increases as the average stock price for the quarter increases, a scenario that we experienced this quarter. I would expect to see a somewhat higher diluted share count again in the second quarter as the calculation is based on average outstanding shares, and we will feel the full effect of the option exercises that took place during the first quarter.

Our fee capital portfolio at December 31 totaled $275 million, up roughly $10 million from the end of the fourth quarter. Redemptions in some of our maturing key [ph] Products were offset by new key [ph] Investments and our double in registered Hexavest sub-advised funds, and the new Eaton Vance bond fund. After the anticipated product launches, we would expect to see capital initiatives to be a modest use of cash over the remainder of the year.

Our strong cash flow, our $300 million untapped credit facility and assets to the capital market based on our A- and A3 investment-grade credit ratings, give us ample financial flexibility to continue to invest in our business as we see attractive opportunities.

That concludes our prepared comments. We'd now like to open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Kim with Sandler O'Neill + Partners.

Unknown Analyst

This is actually James Hally [ph], filling in for Michael this morning. My first question is about the closing of the Atlanta's SMID-Cap fund last month to new investors. I was hoping you could provide some color on the mix of flows more recently between new and existing investors and kind of any lumpiness that might have happened, inflows just prior to the close. And I know with GMAR, you guys were able to reopen it after some infrastructure build out. So just curious as to whether this is a similar situation or if that strategy is really is just approaching an absolute capacity.

Thomas E. Faust

No, we expect it will be different this time. The assets and the strategy ultimately are limited by liquidity and the underlying stocks which really wasn't the driver with the closing of the Global Macro strategy back in 2010. So we certainly do not expect to reopen the strategy unless markets change or we see significant outflows. We have been in a modest net inflows since the time the strategy changed the both growth -- and growth and net sales are off, but continue to be positive, as you might expect. The performance of the strategy has been good. The strategy continues to be open on a limited basis to existing investors. So we will expect to see modest growth going forward. And I certainly would not encourage you to think that we're likely to reopen the strategy.

Unknown Analyst

Okay, great. And then maybe one for Laurie on the comp. Obviously, you guys broke down what drove the increase but -- and in terms of the comp ratio to revenue, just wondering if this is more of a stable run rate or is it with -- revert back down to where it had been running?

Laurie Greenwald Hylton

Yes. I think that we're more likely to see this as sort of our new reality going forward. And keeping in mind that roughly 43% of our total compensation is variable. So to the extent that we continue to have strong sales, revenue growth and operating income growth, we're going to continue to see pressure in terms of their total compensation. So I think, in removing it to the second quarter, there are probably a few things there that are going to drop off that were unique to the first quarter, in terms of normal first quarter events, you've got first quarter resets. There are things associated with payroll taxes and funding our 401(k), et cetera. But in the second quarter, we're also going to pick up 2 additional months of Clifton compensation. So I think we're more likely to see this as a somewhat normalized run rate.

Operator

Our next question comes from Roger Freeman with Barclays Capital.

Roger A. Freeman - Barclays Capital, Research Division

Just curious of -- within Hexavest and the strong flows that you called out. Is there anything in particular that's driving that, product-wise, that investors have been -- kind of going for?

Thomas E. Faust

I guess, I would highlight may be the general factors that attracted us to Hexavest, which is that they've got a very strong, long-term track record. They have a quite differentiated top-down or primarily top-down approach. And they have a generally strong position of better performance in periods of market weakness. And although we've been in the period of market strength, and that's usually the case, they've been underperforming in that environment. There are enough investors out there that are cautious about the long-term outlook that are attracted to that track record and the current positioning of Hexavest, which by the way, remains somewhat defensive. I would add to that, that the growth of Hexavest has certainly been influenced in a positive way by adding the distribution resources of Eaton Vance. And certainly, some of the inflows they've had, Eaton Vance sales team plays a significant role in that. I would also just, in closing, comment that they are in the institutional business and the nature of institutional flows is that they are somewhat lumpy. And I wouldn't necessarily expect that the rate of growth that we've seen over the last 6 months or so since we acquired them will necessarily continue for the near-term. But nonetheless, we see Hexavest as a highly differentiated and attractive manager in the global equity space. And we do see significant room for long-term growth.

Roger A. Freeman - Barclays Capital, Research Division

Okay, that's helpful. And then on the, first, the tax advantage investing strategies. When do you think that you might see investors really focused on this? Is it a function of all the changes sinking in or is it something that happens maybe more later in the year as we kind of start to [indiscernible] ?

Thomas E. Faust

Yes, it's a little hard to pin that down. I think, it's a combination of things. Certainly, as equity markets go up, concerns about capital gains will rise. And so now we've seen the effect of both higher capital gains rates on wealthy taxpayers as well as now increased capital gains. So it's a little hard to say. There's naturally an increased focus on taxes and tax efficiency in, really, 2 times of year. One is as we approach the year-end, but the other one is around tax season. And we're certainly endeavoring as we approach April 15 to make sure that people for whom this is a significant consideration, which is primarily higher income, higher bracket individual taxpayers who've got significant investment income, our focus will be to make sure we're getting the message out, that there are strategies, proven strategies out there for minimizing, deferring or offsetting capital gains and that Parametric and Eaton Vance will broadly have a leading position in that -- in providing that to investors.

Roger A. Freeman - Barclays Capital, Research Division

Okay. And just lastly, real quickly. The proposal you have down on the active ETF with the SEC, are they focusing on this now? And I think there were some issues with capacity constraints last year.

Thomas E. Faust

Capacity constraints within the agency.

Roger A. Freeman - Barclays Capital, Research Division

Yes, within the agency.

Thomas E. Faust

I don't want to comment specifically on where things stand. I think there's been some external developments that have given us encouragement. You might have seen that the news back in December that the SEC has, in effect, lifted the moratorium on ETF, on active ETF, sorry, on approval of new active ETF that have derivatives as part of their investment strategy. I think that's one sign that, perhaps, if there was a backlog at the SEC that, that's starting to abate. And I think generally, there has been increased activity in the area of ETF in new events [ph] of applications that give us hope that if we can pull things together that we, perhaps, can get a better and quicker response than might have been possible in 2011 or 2012.

Operator

[Operator Instructions] Our next question comes from Daniel Fannon with Jefferies & Company.

Gerald E. O'Hara - Jefferies & Company, Inc., Research Division

It's actually Gerry O'Hara, sitting in for Dan this morning. Just a couple of quick questions. The first is a follow-up on the first. But with the closing of the Atlanta SMID product, are there -- and the growth, clearly strong growth of the bank loan products, is there any capacity issues in those floating rate products that we might -- that we should be aware of?

Thomas E. Faust

There is. I would say, probably, in everything we do, there is some level of capacity that's out there. We recently went over $30 billion, if you look at all the assets we have invested in bank loans. Some of that is invested in strict bank loan strategies and some of it shows up in other places. But all told, we, I think, either beginning of this month or sometime last month, passed $30 billion, which is a fairly significant number. The overall size of the U.S. bank loan asset class is about $550 billion. So we're little over 5% of that market. Today, the team seems very comfortable that we've got ample ability to select the loans that we like, ample ability to buy and sell those as needed with adequate liquidity. But there will be a size if -- we don't know quite what that is. But certainly, not something that we expect to be up against over the next couple of quarters. But it's conceivable that given the rapid growth that we've been experiencing, that if the market doesn't grow and we continue to grow, that as we go forward over the next several quarters, this might become a real issue. As we sit today, it is not an issue. But it is certainly something that we're starting to think about. You might recall that there have been at least a couple of occasions in the past where we've gotten close to capacity in bank loans, but never actually had to implement a slowdown in business growth. We may be headed towards that, we're not there yet today.

Gerald E. O'Hara - Jefferies & Company, Inc., Research Division

Okay, fair enough. One quick follow-up. Apologies if I missed it. But the $1.6 million in performance fees realized during the quarter, can you potentially give some context as to where this came from and what sort of run rate recurring outside of the fourth quarter we might expect, if any?

Laurie Greenwald Hylton

Yes. We generally don't have a lot of performance fees. We have this one account is generally every year in the first quarter. We've got another significant account, generally, that we have performance fees, assuming that we actually hit our target in the fourth quarter. So I don't think we really have anything that we're looking at in terms of the second quarter, in terms of

[Audio Gap]

performances. I wouldn't be baking that into any significant modeling.

Thomas E. Faust

Yes, I would just add that our business is somewhat in move -- I'd say, slowly moving more in the direction of performance fees. We have, I believe, no mutual funds that have performance fees that affect our income. But on the institutional side, there are a number of relationships. I would also point out that Hexavest has a fairly significant part of their business that includes a performance component. And also at Clifton, there is an element of performance fees that will affect their business results. Typically, those fees are paid once, annually, under a variety of arrangements, and that introduces a certain level of lumpiness to our revenue numbers, but beyond what we've seen in the past -- hard to predict, obviously, but I expect we'll be seeing somewhat more than we've seen historically.

Operator

Our next question comes from Cynthia Mayer with Bank of America Merrill Lynch.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Maybe just another question on comp. You reference sales incentives as a high class problem, but also said you expect the comp levels in the quarter are a new run rate. So I guess, is it possible to quantify the impact of sales incentives in the quarter in terms of the incremental lift? And also, looking ahead in terms of your guidance, what kind of sales level does that assume?

Laurie Greenwald Hylton

Yes. I don't think we're necessarily -- we're trying to project sales levels and tie the comp to that. We were just making the comment and to the extent that we have increases in sales, and we obviously had a very strong sales quarter, and then we have increases in revenue operating income, we will continue to see increase in comp. I think that, probably, not providing too much detail, but in terms of our total increase over the course of the quarter, I think that business growth is probably responsible for somewhere in the probably 34% -- maybe 35% to 40% of the total increase. So again, we've got -- there were a number of things that we're going into increase this quarter and sales growth was one component of that. I think, as you're trying to look at sequentially, if you're trying to compare fourth quarter to the first quarter, there are a number of resets. And I think that we need to keep that in the back of our minds as we're looking at the overall comp increase.

Thomas E. Faust

I guess, I would add one thing, and you may have a follow-up on this. But this one thing is that, one of the reasons that comp is going up is because we did this acquisition, and Laurie said earlier, that, that will increase. We had one quarter's worth of -- one month's worth of Clifton-related comp in the first quarter and we'll have 3 months of Clifton-related comp in the second quarter. But keep in mind, that's going to be offset by 3 months of revenue associated with that business. So in my mind, you have to sort of pull that out and treat that as a separate item and look at the rest of the business. And if you pull that out, from what I see, the increase is driven by, and as Laurie mentioned, 2 primary things: One is, we've had a really strong sales period, by far, the best in company's history. 20% more than we've sold than any other quarter ever. That's one factor. And the other is, sort of normal turn of the year type -- turn of the calendar year type thing related to the fact that most of our employees get increases in base salary that take effect from November 1, relating to the fact that payroll taxes reset for all companies on January 1, relating to the fact that because our income is up, income-based incentives go up. And all those things combined to make this a quarter where we felt unusual pressure on compensation. I don't expect -- we don't expect necessarily that comp rates will go down. But what we do expect is that those same kinds of pressures incrementally won't be the same in the second quarter relative to the first, as they were in the first quarter relative to the fourth.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay, great. And then maybe for the second question, you mentioned you did the special, you had an active capital management quarter and you're interested in buying back shares again, but all those factors did affect that. What -- so can you maybe talk a little bit about your philosophy just on share count, overall. Looking out over the year, say, are you interested in trying to keep it steady or allowing it to grow with restricted stock awards? How important is it to you to keep it steady or hold it to a certain growth rate?

Thomas E. Faust

We don't necessarily look to keep our share count steady. What we've looked to do is use our cash flow, use the company's free cash flow, to return it to shareholders in an intelligent and advantageous manner. We looked at where we were in December with the likelihood, which actually happened, of tax rates going up on dividends, and felt that this was a good opportunity to divert the direction in which we return cash to shareholders from being long-term primarily more focused on repurchases due in this period to be more focused on dividends. The -- and that was, I think, that was a relief, as far as I know, a universal welcome from our investors, including those who don't pay taxes. But -- so there was this onetime factor there that was a significant draw on our cash during this period that's consistent with the idea this was a special dividend, we don't expect that to recur. So we have this another high-quality problem that -- and as we significantly ramp up our dividend, we have this cash that will start to build on our balance sheet. And certainly, consistent with past practice, we think an efficient intelligent way to return that cash to shareholders is through stock repurchases. And we certainly expect that as the year progresses that we will likely see higher repurchase activity than we did -- than we saw in the first quarter. It's not driven by some goal -- we need to have 115 million fully diluted shares outstanding. It's about trying to use the company's cash resources to best return that to shareholders in the most efficient and highest value way.

Operator

Our next question comes from Greggory Warren with Morningstar.

Greggory Warren - Morningstar Inc., Research Division

Yes, I'm just wondering how you guys are looking at equity flows. And I see the things improved significantly, and I got to think that part of that was just the change in attitude on the part of the investors in January. But it also looks like your Large-Cap Value Fund, things are trending down, the outflow situation there over the last year. Do you think we potentially get in a situation this year where flows turn positive for equities for you guys?

Thomas E. Faust

I mean, it certainly could be. We were, I believe, very close to that in the first quarter. Our -- on an overall basis, just sort of big picture is we've been growing in emerging market and international equities, much of that has been strategies managed by Parametric. And we've been shrinking in U.S. equity strategies. Much of that managed by Eaton Vance, where we've had growth at Atlanta Capital that has been offset by shrinkage, primarily in U.S. Large-Cap Value, driven by our Eaton Vance teams. This is a reminder, that was a strategy that was really a big source of our growth in the 2006 to 2009 period, where we got up to $33 billion in assets. We're now down to about $13 billion. So we think that with the improvement in performance that we've seen and we're significantly ahead of our peer group average over the last 12 months, that given the pressure of a lot of the short-term oriented, performance-sensitive money, a lot of that's already gone, we think that we will see less pressure there on outflows going forward. One of the key parts of our equity strategy, of course, doesn't show up in our consolidated flow numbers and that's Hexavest. Those are all equity flows, primarily, global or global all country mandates, where we've seen an incremental, I think, $2 billion, a little over $2 billion of net flows since they became part of the Eaton Vance family in August. So generally, a better outlook. We think the Parametric strategies have performed well and continue to attract nice flows. The Eaton Vance strategies show signs of stabilizing. One, it's a manageable challenge, but one that relates to an earlier question is we have a closed, other than to new -- we've closed to new investors, I should say, our Eaton and Atlanta Capital, SMID-Cap on, which was a source of significant inflows last year. And we'll see somewhat lower flows there this year, certainly. I would also remind you that a significant part of our equity assets and franchise is what we call tax-managed and is positioned to benefit from an increased focused on tax efficiency and avoidance of capital gains distribution. Some of that shows up in our -- most of that shows up in our equity line. Some of it now also shows up in our implementation services category, which is where Parametric's Tax-Managed Core business now resides on our reporting.

Greggory Warren - Morningstar Inc., Research Division

Okay. I mean, it's one of those things that, I think, is -- hung over the stock a little bit in the past. People are a little bit concerned about Large-Cap Value and our take has always been that you guys have got strength throughout the organization that you can compensate for the failings of one particular fund for a period of time. And it's just good to see the trend moving in a more positive direction here. Just a quick follow-up. When we look sort of the fixed income flows, just a straight fixed income, not the floating-rate bank loan funds. It seems to have dropped a bit in the quarter? Do you think that is a reflection of sort of the disinterest we saw in fixed income the last month or so of the year? Or do you think that this was probably a more legitimate run rate as we go forward?

Thomas E. Faust

No, and we had a couple of things going on in the quarter. One is munis, for the reasons that we talked about, were very modestly positive and thanks -- it went through a period of net outflows during, I think, it was November and December, when the headlines were about munis, potentially, losing their tax-favored status that we went from inflows into munis to outflows. That's reversed itself, so we're back positive in January and February today, I believe, and muni flows are franchise -- are leading franchise funds, Eaton Vance National Municipal Income has very strong performance and has category leading distribution rates. So I think we're confident that we'll see a better year in munis than where we ended up 2012, the calendar year. I would also say that high-yield is an area that -- is an important business for us. I believe, we were modestly outflows and high yields in the first quarter. And I think that reflect, more than anything, a concern among some investors anyway, that the high-yield asset class is extended and bonds are priced rich. And we've seen some from reallocations of that, that hit us during the quarter. The numbers I'm looking at show that high yields, which has been nicely positive in the fourth quarter, was very modestly negative in the first quarter. So I think, we've got some room for recovery in our reported bond fund or fixed income business. I would also note that in what report as alternatives, we have a mutual fund that's actually one of our strongest -- fastest-growing income funds, called Eaton Vance Diversified Currency Income, we classified as currency and therefore, alternative. But it could also be viewed as an income strategy. It's a nondollar, low duration strategy. And it appeals to -- and I think, the yield on the iShares is something in a 4% range, I believe. But it appeals to investors that want short duration, nondollar sovereign exposure with active management of currencies that are -- exposures into currencies that are expected over the long term to appreciate relative to the dollar. So the promise there, the hope there is that you get a nice current income limited exposure to duration risk, diversification away from the dollar and the potential for price appreciation, capital appreciation and the dollar continues to depreciate against stronger currencies as it has been for the last number of years. So that's a nice product, but that shows up in the alternative category.

Operator

Our next question comes from Ken Worthington with JPMorgan Chase.

Rahul Nevatia - JP Morgan Chase & Co, Research Division

This is Rahul speaking for Ken this morning. A couple of questions again on performance fees. Performance fees are $1.6 million. Was there an offset here in terms of expenses?

Thomas E. Faust

There would have been some. So yes.

Rahul Nevatia - JP Morgan Chase & Co, Research Division

Is it possible to quantify it to some extent or...

Thomas E. Faust

No, I don't. Not off the top of our heads. I think, it would be a fairly modest direct offset that would show up in the same quarter, but there will be some.

Rahul Nevatia - JP Morgan Chase & Co, Research Division

And you mentioned Clifton will also have some sort of performance fees, which kind of lumpy. When do Clifton's performance fees hit the statement? Is it, again, first quarter and the fourth quarter? Or is it only the fourth quarter? Any sense on that?

Thomas E. Faust

The biggest relationship they have that has performance fees, I believe, is tied to a June 30 performance a year. So that would fall in our third fiscal quarter. And that's helpful for us to have some staggering across the year, performance fees. We don't like the lumpiness of that any more than investors that are trying to figure out what our earnings -- true earnings power is.

Operator

Thank you. I would like to turn the floor back over to management for closing comments.

Daniel C. Cataldo

Great. Well, thank you for joining us this morning. We hope you agree with us that it was a really strong quarter from a business momentum standpoint and one that we hope to continue for the remainder of the year. And we look forward to reporting back to you at the close of our second fiscal quarter. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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