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Eaton Vance (NYSE:EV)

Q1 2014 Earnings Call

February 19, 2014 11:00 am ET

Executives

Daniel C. Cataldo - Treasurer

Thomas E. Faust - Chairman, Chief Executive Officer, President, Interim Chief Equity Investment Officer and Chairman of Executive Committee

Laurie Greenwald Hylton - Chief Financial Officer, Chief Accounting Officer and Vice President

Analysts

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

William R. Katz - Citigroup Inc, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Andrew N. Donnantuono - Keefe, Bruyette, & Woods, Inc., Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Operator

Greetings and welcome to the Eaton Vance First Quarter Fiscal Year 2014 Earnings Release. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Dan Cataldo. Thank you. You may begin.

Daniel C. Cataldo

Good morning, and welcome to our fiscal first quarter earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, our CFO. We'll comment on the quarter and then we will take your questions. The full earnings release and charts that you'll refer to during the call and more detailed fund performance information are all available on our website, eatonvance.com, under the heading Press Releases.

Today's presentation contains forward-looking statements about our business and financial results. The actual results may differ materially from those projected due to risks and uncertainties in our business, including but not limited to those discussed in our SEC filings. These filings, including our 2013 annual report and Form 10-K, are available on our website or on request at no charge.

I'll now turn the call over to Tom.

Thomas E. Faust

Good morning. January 31 marked the end of a somewhat choppy first quarter for Eaton Vance as year-over-year increases in managed assets, revenues and earnings were offset by net outflows for the period. First quarter revenues of $360.3 million were up 13% from last year's first quarter, and up 1% from the prior quarter.

Adjusted earnings per diluted share of $0.58 were up 16% from the year-ago quarter and up 5% over the last quarter. We set new quarterly records for both revenue and adjusted diluted EPS and our operating margins improved year-over-year from 31.6% to 34.5%.

We ended the first quarter with consolidated assets under management of $278.6 billion, an increase of 12% from a year earlier, and a decline of 1% from the close of the prior quarter. The sequential decline in managed assets reflects $1.1 billion of net outflows and $1 billion of market price declines, most notably on emerging market strategies.

Net outflows for the quarter were concentrated in 4 areas: Global income and alternatives, Large-Cap Value equity, managed options and municipal bonds. Combined, these 4 strategies had net outflows of roughly $5 billion in the quarter.

Notable sources of net inflows in the first quarter included floating rate income and high-yield bond mandates and Parametric Clifton overlay in centralized portfolio management implementation services. On a combined basis, these 4 areas had net inflows of approximately $3.8 billion. Despite the widely reported turmoil in emerging markets, our Parametric emerging market equity strategies had positive net flows for the quarter of about $50 million.

Worth highlighting is the growing sales momentum of 3 of our newer mutual funds that we believe have the potential to become major franchises: Eaton Vance Bond Fund is managed by a team here led by Kathleen Gaffney; and our 2 global allocation funds are managed by former Wall Street strategist, Richard Bernstein. On a combined basis, these 3 funds had first quarter net sales of just over $400 million and closed the quarter with $1.2 billion of net assets.

At its first anniversary on January 31, Eaton Vance Bond Fund Class I ranked in the top 1% of all multi-sector bond funds as classified by Morningstar for 1-year performance, beating the peer group average by more than 730 basis points. Over the same period, the Class I Shares of Eaton Vance Richard Bernstein Equity Strategy Fund outperformed the Morningstar World Stock fund average by over 370 basis points, and Eaton Vance Richard Bernstein All Asset Strategy Class I outperformed the average of its Morningstar peer group by over 480 basis points.

Flows into these funds accelerated as the first quarter progressed and have continued to escalate early in the second quarter. In just the first 2 weeks of February, combined net assets of the 3 funds increased more than 10%. Given these funds' strong performance, the broad name recognition of the managers and the full backing of our distribution organization, I expect their flow momentum to continue to build as the year progresses.

While this quarter's overall flow results were disappointing, I'm optimistic that our net flow results will improve over the balance of the fiscal year. Appetite for floating rate bank-owned strategies continues to be strong, with retail demand now supplemented by significant institutional interests. We've recently won some sizable institutional mandates that will begin funding in the second quarter. Although our bank loan business have experienced dramatic growth in recent quarters, we're still seeing ample opportunity to put invested cash to work, thanks to the sizable growth the loan market itself has experienced.

In the fixed income category, we expect to see growing demand for our 2 high-yield mutual funds Eaton Vance Income Fund of Boston and High income Opportunities Fund, the Class I Shares of which that were currently ranked 4 and 5 stars, respectively, by Morningstar, lead managed by Mike Weilheimer since 1996, our high-yield funds are performance leaders in their category and natural complements to our industry-leading floating rate loan strategies.

Also in fixed income, we are optimistic that our municipal bond business has turned the corner and is poised for renewed growth after experiencing $1 billion of net outflows in the first fiscal quarter. Between the municipal team here in Boston and the TABS group in New York, we have some of the broadest management capabilities and one of the most comprehensive product offerings in the industry. Investment performance is strong across our muni lineup with 25 national and single state municipal income funds with at least one share class now ranked 4 or 5 stars by Morningstar. We are encouraged by the fund industry flow data that shows that Municipal Bond Funds have moved into positive flows for each of the last 4 weeks after 33 consecutive weeks of net outflows.

Although I'm optimistic that our muni income funds will see improved flows, I'm particularly excited about our prospects for dramatic growth in the municipal separate accounts. Today's $3.6 trillion municipal market breaks down roughly as: $1.6 trillion of municipal bonds held directly by households; $1 trillion held in mutual funds, closed-end funds and ETFs; and $1 trillion held by banks, insurance companies and other investors. Of the $1.6 trillion in munis held directly by households, less than $100 million -- $100 billion is managed by professional managers with specialized expertise in municipal securities according to industry data. That leaves some $1.5 trillion in household municipal assets lightly overseen by generalist financial advisors or not supervised at all.

Given all the recent headlines about municipal credit concerns in Detroit, Puerto Rico and other jurisdictions, that should spell opportunity for managers like Eaton Vance that have the research trading, portfolio management and systems capabilities and scale economies to handle large volume of muni separate accounts at attractively low fees.

Starting from 0 in the summer of 2011, we've grown our latter municipal separate accounts business to over $1.6 billion in assets at the end of January, with a real pickup in demand over the past 6 months, a period in which Muni Bond Funds were in significant net redemptions. We believe we're in just the first inning of what will prove to be a major growth opportunity for Eaton Vance in the latter muni separate accounts.

Another outsized opportunity, for which we are seeing strong demand, is the portfolio overlay services business that Parametric gained in the acquisition of the Clifton group at the end of 2012. As a reminder, Clifton's portfolio overlay services are used by sophisticated institutional investors to securitize cash into adjust their duration, currency and market exposures using futures options and other derivative instruments as implemented by Clifton.

Clifton's leadership position in this market and the exceptionally strong client relationships they have developed in this business were key factors in our decision to acquire Clifton. In the first quarter, Clifton added approximately 20 new overlay clients that are expected to generate annualized revenue approaching $3 million. Whereas, a year ago, there may have been concerns that Clifton's growth momentum might stall after the acquisition, the opposite has proven to be true.

On an overall basis, Clifton has grown its managed assets from $34.8 billion in acquisitions at the end of December 2012 to $46.5 billion at the end of January 2014. We see continuing growth opportunities for Clifton, not only in overlay, but also in broadening the menu of services they provide clients. Beginning last summer, the same sales team that supports Clifton is also representing the full complement of Parametric capabilities in the institutional market.

Another promising growth opportunity we see developing further over the course of 2014 is strategies for high-net-worth investors focused on tax management and risk management. Although it's no secret at this point that federal tax rates applicable to the investment income and gains of high-net-worth investors ballooned last year, we believe many investors were only now beginning to adjust how they manage their portfolios from a tax perspective. As those who have followed the company closely over time will know, both Parametric and Eaton Vance Management have a long history of specialized expertise and a range of strategies to help high-net-worth investors manage their portfolios more tax efficiently.

To boost our marketing efforts in this area, Eaton Vance's distributors recently formed a new wealth strategies group, a 12-person specialized sales organization charged with working in tandem with our wholesalers to promote the distribution of Parametric and EVM-sponsored wealth management solutions. Although our expanded focus on tax management and risk management strategies for the high-net-worth market is just getting started, we see significant potential for near-term sales success.

As I noted upfront, global income and alternative strategies were a significant driver on our flow results in the first quarter, with net outflows of nearly $1.9 billion. Although our global income strategies were net outflows all 3 months of the first quarter, the monthly trend was favorable, with December better than November and January better than either of the prior 2 months. Contributing to the quarterly net outflows were 2 main factors. First, disappointment with the performance of our Global Macro Absolute Return Fund, the Class I Shares of which had total return of negative 24 basis points for the 2013 calendar year and annualized returns of 1.14% for the 3 years ended December 31. And second, general concerns about the risk of investing in emerging market currency and debt markets given recent headlines.

In considering our global income business, it's important to understand that most of our assets here are in long/short strategies that seek to hold long positions in improving countries and economies, and short positions in places that are deteriorating. For this kind of strategy to work effectively, there needs to be a divergent performance across different countries and we need to make the right picks. While this may be an uncomfortable time to invest in emerging markets, it's also the kind of market environment in which our global macro strategy can generate outsized returns.

Getting that message out to clients, and again delivering the levels of uncorrelated positive alpha our strategy has historically delivered, will be critical to getting this important franchise turned around and again contributing positively to the company's organic growth.

Also, as I noted initially, our Eaton Vance Management Large-Cap Value Strategy was in net outflows for the quarter, to the tune of about $1.2 billion. This reflects clients' disappointment in the strategy's relative performance over the period since the market bottomed in early 2009. On an overall basis, our quality-oriented large-cap focused value strategy has not kept pace with the more aggressively managed competitors in the market recovery.

As discussed in previous calls, Eaton Vance continues to make significant investments in our equity team and in equity process to improve relative performance. And I'm pleased to report that those efforts are bearing fruit, with notable improvement in the performance of our large-cap strategies across-the-board from value to growth observed over the past 12 months, and particularly in the early stages of 2014.

Through yesterday, the Class Shares of both our Large-Cap Value Fund and Large-Cap Core Research Fund ranked in the top 5% of their respective Lipper peer groups for the year to date. Also contributing to better return comparisons, over the next few quarters, the 3- and 5-year performance of many of our equity strategies will benefit from the dropping off of the period of weak relative returns in 2011 and 2009.

Against this backdrop of an improving trend in performance, we announced last week the appointment of Eddie Perkin as Eaton Vance Management's new equity -- Chief Equity Investment Officer. Eddie joined us from Goldman Sachs Asset Management's London office, where he served most recently as Chief Investment Officer of International and Emerging Market Equities. At GSAM, Eddie was responsible for leading a 50-person team of portfolio managers and analysts in 8 locations, and was also a portfolio manager on several international and global value strategies.

Before relocating to London in 2008, Eddie was a portfolio manager and analyst on GSAM's U.S. value equity team in New York. He brings a proven record as a value stock investor and a skilled leader of investment teams. We are confident that under Eddie's leadership, our equity group can continue building an leading investment performance track record. Eddie will join us on April 29.

I'd like to close my prepared comments with an update on our exchange-traded managed fund or ETMF initiatives. I think most of you are familiar with the concept at this point, but as a brief summary, ETMFs are a proposed new type of open-end fund that seek to bring the performance and tax advantages of exchange-traded funds to active investment strategies, while maintaining the confidentiality of portfolio trading information.

Unlike conventional ETFs, ETMFs would not disclose their portfolio holdings on a daily basis. ETMFs will be bought and sold on an exchange utilizing a new trading protocol called NAV-based trading, which is designed to ensure that ETMFs can trade consistently tied to spreads to net asset value without having to disclose their holdings. Through our Navigate Fund Solutions subsidiary, Eaton Vance holds a series of related patents that we seek to commercialize by licensing them to funds sponsored by Eaton Vance and other fund groups.

Since our last earnings report, we have had 2 major positive regulatory developments related to ETMFs. First on January 28, we announced the filing of an amendment to our application seeking exemptive relief to offer ETMFs. The amendment reflects constructive dialogue with SEC staff to resolve outstanding issues related to their request for exemptive relief.

On Friday of last week, we issued a press release announcing that our partners in the development of ETMFs and NAV-based trading at the NASDAQ OMX group have filed a proposed rule change seeking to permit the listing and trading of ETMFs. Like the exemptive application amendment, the NASDAQ filing should be viewed as a sign of regulatory process and is a necessary step in advancing ETMFs toward approval. While we can't predict the timing or likelihood of approval, we remain confident that, if approved, ETMFs have the potential to transform the delivery of active investment strategies to fund investors in the U.S., with potentially quite significant financial implications for Eaton Vance.

With that, I'd now like to turn the call over to Laurie to discuss the quarterly financial results in more detail.

Laurie Greenwald Hylton

Thank you, and good morning. As Tom summarized, we're reporting adjusted earnings per diluted share of $0.58 for the first quarter of fiscal 2014, compared to $0.50 for the first quarter of fiscal 2013 and $0.55 for the fourth quarter of last year.

Adjusted earnings per diluted share increased by 16% as compared to the first quarter of last year, reflecting a 23% increase in operating income, partially offset by increases in our effective tax rate and diluted share count, and the decrease in the below-the-line contribution of our seed capital portfolio. Adjusted earnings per diluted share increased by 5% sequentially, despite a 1% decrease in operating income, reflecting an increase in the below-the-line contribution made by our seed capital portfolio and a modest decrease in our effective tax rate.

As you can see in Attachment 2 to our press release, adjustments from reported GAAP earnings related primarily to changes in the estimated redemption value of noncontrolling interests in our affiliates redeemable at other than fair value and in the First Quarter Fiscal 2013, an adjustment for the impact of the special dividend we paid in December 2012.

Year-over-year, our operating income increased 23% on a 13% increase in revenue, reflecting decreases in compensation- and distribution-related expenses as a percent of total revenue, and with operating margin improving to 34% from 32%, as Tom discussed earlier. Investment advisory administrative fees increased by 16% year-over-year, reflecting a 31% increase in average assets under management, offset by a decline in our effective fee rate. The increase in average assets year-over-year reflects both strong organic growth over the last 12 months and the impact of our December 2012 Clifton acquisition, which added $34.8 billion of lower fee implementation services to our consolidated total.

The decrease in our effective fee rate to 43 basis points from 49 basis points year-over-year, reflects both the full quarter impact of the Clifton acquisition on product mix and a decrease in performance fees, which totaled approximately $140,000 in the first quarter of fiscal 2014 compared to $1.6 million the first quarter of last year. Sequentially, the 1% decrease in operating income reflects 1% increase in revenue and a 2% increase in total expenses. Although we had no significant changes in cost structure this quarter and continue to exercise strong fiscal control over discretionary spending, our operating margin decreased to 34% from 35% in the fourth quarter of last year, primarily reflecting the impact of the $3.3 million decrease in performance fees and seasonal first quarter adjustments to compensation.

Investment advisory administrative fees increased by 1% sequentially, reflecting a 4% increase in average assets under management offset by a decrease in our effective investment advisory administrative fee rate to 43 basis points in the first quarter from 44 basis points in the fourth quarter of last year. The decrease in effective fee rate reflects a very modest shift in product mix to lower fee implementation services, and the previously mentioned $3.3 million decrease in performance fees.

As we move further into the new fiscal year, we anticipate that our effective advisory administrative fee rate for active equity strategies will hold steady at approximately 65 basis points, fixed income strategies at approximately 45 basis points, floating rate income strategies at approximately 55 basis points, alternative strategies in the low- to mid-60s and implementation services at approximately 10 basis points.

Shifting from revenue to expense, operating expenses were up 2% sequentially, reflecting modest increases in compensation- and distribution-related expenses, offset by decreases in fund related and other expenses. Compensation expense was up 5% sequentially, primarily due to increases in base salaries, benefits, payroll taxes and operating income-based incentives, partially offset by a decrease in stock-based compensation.

Base salaries increased 4% sequentially, reflecting a 1% increase in average headcount, manual increases in base salaries that take place in the first quarter of each fiscal year. Seasonal increases in benefits and payroll taxes of more than 25% primarily reflect the front-end funding of the company's 401(k) match in calendar year payroll tax resets. Operating income-based bonus accruals were sequentially higher in the first quarter, despite a slightly lower pre-bonus adjusted operating income, reflecting somewhat higher operating income-based incentive accrual rates heading into the new fiscal year. Sales and revenue-based incentives were down less than 1%, reflecting modestly lower compensated retail long-term sales and revenue-based institutional incentives.

Stock-based compensation expense is down 22%, reflecting a return to more normalized stock-based compensation expense rate following adjustments made in the fourth quarter to address administrative changes in our subsidiaries long-term equity plan. Overall, compensation expense was 33% of revenue in the first quarter of fiscal 2014, up from 32% in the fourth quarter of last year, but down from 34% in the first quarter a year ago. Distribution expense increased by 2% sequentially, primarily reflecting an increase in intermediary marketing support payment, driven by higher average assets under management subject to these payments.

Service fee expense increased by 2% sequentially consistent with the 1% increase in service fee revenue and the increase in assets subject to service fees. Fund-related expenses were down 20% sequentially, primarily reflecting the recognition of $1.5 million of onetime reimbursement costs in the fourth quarter fiscal 2013, and a decrease in fund subsidy expense. Other operating expenses were down 1% sequentially, reflecting strong controls over discretionary spending, particularly in information technology and other professional services, partially offset by modest increases in other corporate expenses driven by a seasonal increase in corporate charitable giving as part of the company's matching gift program.

In quantifying the impact of our seed capital investments on earnings each quarter, we take into consideration gains, losses and other investment income earned on securities in the portfolios of consolidated funds and separate accounts; the contribution made by seed investments accounted for under the equity method; and gains and losses on corporate hedges related to our seed capital portfolio in its entirety, all net of related noncontrolling interest and income taxes.

On that basis, net income and gains on seed capital investments contributed $0.01 to earnings in the first quarter of fiscal 2014, made no contribution in the fourth quarter, and contributed $0.03 to earnings in the first quarter of fiscal 2013.

Equity and net income of affiliates decreased to $3.3 million in the first quarter from $5.6 million in the fourth quarter of fiscal 2013, primarily reflecting a decrease in net income in gains recognized on seed capital investments accounted for under the equity method. Equity and net income of affiliates in both the first quarter of fiscal 2014 and the fourth quarter of fiscal 2013 included approximately $3 million or $0.02 per diluted share as our 49% share of Hexavest earnings. The Hexavest contributions reported net of tax in the amortization of intangibles.

Excluding the effect of CLO entity earnings and losses in both periods, our effective tax rate for the first quarter of fiscal 2014 were 37.7% compared to 39.2% in the fourth quarter of fiscal 2013. Our effective tax rate in the fourth quarter of fiscal 2013 reflects the impact of a stock-based compensation adjustment related to our subsidiary equity plan, which increased our effective tax rate by just under 1.6%. We currently anticipate that our effective tax rate, adjusted for CLO earnings and losses, will be approximately 38% as we move into the next fiscal quarter and the remainder of the fiscal year, reflecting anticipated increase in state tax rates.

During the quarter, we repurchased 1.1 million shares of nonvoting common stock for $43.5 million. Going forward, we expect to continue to be active repurchasers of our stock. We finished the quarter with $361 million of cash and equivalents, $91 million in short-term cash management investments and almost $300 million in seed capital investments. Our strong liquidity, cash flow and credit ratings and access to an untapped $300 million credit facility should allow us to continue to invest in the business and take advantage of opportunities as they arise.

This concludes our prepared comments. And at this point, we'd like to take any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Ken Worthington with JPMorgan.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

You hired a new CIO, Eddie Perkin; maybe you can just talk about what attracted you to him and what his initial game plan is?

Thomas E. Faust

Okay. This is Tom. So Eddie, as I mentioned, comes to us from Goldman Sachs Asset Management. He's been a manager there since 2008. He is, by background, a hands-on value investor. So our expectation is that not only will he lead the group, but he will also play a day-to-day role in the management of value accounts here. So it's 2 things, primarily. First and foremost, it's the record and reputation that Eddie brings as a really a star investor with a value orientation which, obviously, is a big franchise for us in our equity group. And then number two is the fact that he's a proven manager and has demonstrated real leadership and management skills in the 6 years that he's run the London office, and really overseeing the whole non-U.S. operations for GSAM's active equity strategies. I'd say, just to clarify, his job is, he's head of -- he's Chief Equity Investment Officer of Eaton Vance Management. So he's not involved on the fixed income side; that continues to be overseen by Payson Swaffield.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Okay. There is a number of products that have had challenging performance. So I guess, does he have a strategy in mind to kind of help turn that performance around?

Thomas E. Faust

So I talked about some things that we've been doing to address performance, both process and some personnel changes, particularly in the analysts ranks. Eddie doesn't start here until April 29, so we can't really talk particularly in detail about what he might do. We are very much of the same mind on what the objective here, which is to, on a consistent basis, to be benchmarks in peer groups within the appropriate risk tolerances for our portfolios. But we're also in alignment on how to do that, which is fundamentally based active investing, which -- so the approach won't change, but you should expect to see incremental changes in process and perhaps, some changes in personnel over time. Because we want to get better, and hiring him is certainly a step in that direction. As I mentioned, things are already getting better. The nature of our performance in equities has been, in recent years, that we tended to do relatively well in flattish or down markets and have struggled to keep up with the market in strong up markets. And given the way things have played out over the last 5 years, that's put us in a tough position. More recently, with some more volatility in the market, our strategies have generally performed better. So I would like to think between, perhaps a different outlook for equities over the next 5 years versus what we've seen over the last 5 years, the investments we've made to date in upgrading our process and our personnel, plus the new leadership that Eddie brings, I think we're quite well positioned to resume performance leadership in our equity strategies.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

And then fast approaching tax season, one of the areas that you're very well known for and you talked about the kind of the new wealth management group. But what products are really most sellable here outside of the muni business? Like do you have the appropriate suite of products, with the performance needed to really take advantage of increased demand in tax-managed equity products as we look forward over the next 9 months?

Thomas E. Faust

The areas I would focus on, and where we're focusing on with that wealth strategies sales group, first is Tax-Managed Core, which is a leading Parametric capability where, essentially, what they do is, a client provides either an active or a passive benchmark and says, "Replicate this within defined tolerance bands on a pretax basis and through active tax loss harvesting and other tax techniques, perform better on an after-tax basis." So any strategy that can be represented in an ETF, can be represented by Parametric in Tax-Managed Core. In an ETF, there is no ability to harvest losses and have those losses flow through to the current benefit of clients across all equity strategies. Parametric would have the ability to do that and has built a business on the basis of doing that. So that's where we start. We also have strategies for concentrated stock positions, which include covered call writing strategies and other managed sale products, as well as some specific private funds focused on that opportunity. So that's the primary suite. Our Tax-Managed Growth Bond, if you may remember from Eaton Vance, was a big seller for us in the late '90s. We think as our equity performance improves across our equity group and that performance in particular, then we'll also see opportunities to, again, be active in selling our actively managed Tax-Managed Equity Funds. But for the moment, we see most of the focus, most of the opportunities on the tax side in equities being Tax-Managed Core and concentrated stock solutions.

Operator

[Operator Instructions] And your next question comes from the line of Michael Kim with Sandler O'Neill.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

First, just assuming retail investors continue to rotate out of fixed income in favor of equity strategies more broadly, just curious to get your thoughts on which of your funds are maybe best positioned for a step up in demand versus which strategies may not necessarily fully participate, just given performance and/or positioning headwinds?

Thomas E. Faust

So we can review. So I don't think demand for income strategies and alternative strategies are going away. We've got a strong complement of capabilities and track records across the whole range of income strategies, so that's one thing. We highlighted a few of those, bank loans, high-yield, munis, where we expect to see in the case of bank loans and high-yields, a continuing positive flow of funds. But also in munis, where we think we're in the early stages of a turnaround there. I also highlighted our Eaton Vance Bond Fund and the multi-sector income strategy, where we're seeing really quite strong momentum as that fund now has passed its first anniversary and has great performance. On the equity side and away from income strategies, I guess, I would point to a few things. I highlighted the 2 Richard Bernstein managed strategies, the Eaton Vance Richard Bernstein Equity Strategy Fund and the Eaton Vance Richard Bernstein All Asset Strategy Fund. Both of which are quite popular at the moment based on the differentiated approach that Rich Bernstein brings, his reputation as a thought leader in top-down approaches to managing equity and all asset portfolios. And increasingly, the performance track record that these funds have developed. The first of those funds, just hit its 3rd year anniversary in, I think in August or September of last year. And then the second one will hit its 3-year anniversary later this year. So those funds are seeing strong momentum. These are equity or equity-type investments primarily. Another area where we have strong performance is in the Parametric Emerging Market Strategies. Of course, that's strong relative performance on an absolute basis; emerging markets have lagged most other equity markets over the past year or so. But we think emerging market equities are attractively priced. At some point, we'll see a resumption of interest there and the track record that Parametric has built, we believe, positions them for continued growth. I would also say that in our core lineup of equity strategies, we're probably in a better position from a performance standpoint than many people would realize. As I said, we're anniversary-ing out weak performance in, particularly in 2009 and 2011, and we're adding outperformance in 2012 and 2013 for most of our strategies. On a 1-year basis from where we sit today, we're either in first or second quintile performance for Large-Cap Value, Large-Cap Growth and on Large-Cap Core Research Strategies. So we think that in our traditional fundamentally based core equity basis, although the track record is not as good as we'd would like to see it today, we're very much on an improving trend and we'll see that continue to get better as the year progresses.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Okay. That's helpful. And then maybe a question for Laurie. Any incremental color on how we should be thinking about blended fee rates or margins looking ahead? It seems like the mix continues to skew towards lower fee mandates and you continue to build out the franchise. So I was just wondering how those factors may play out in terms of thinking about fee rates and margins?

Laurie Greenwald Hylton

Yes. In terms of fee rates, I think in -- previously, I gave some color on a mandate-by-mandate basis, if you will, where we anticipate the fee rate being. Obviously, looking forward on a blended basis, so we can't forecast that with any certainty because we don't know what the asset mix is going to look like. So to the extent that there's a significant uptick in implementation services, that will bring it down. As some of our other strategies see inflows, net inflows in upcoming quarters, we may see some pressure pushing that back up. So I don't have a crystal ball on that. From a margin perspective, we are pleased to see sort of our -- particularly, the year-over-year trend moving from 32% margin up to 34%, just slightly off of where we were at the end of the fourth quarter. But again, first quarter, we do have the normal resets in compensation and had anticipated we would see some of those pressures in the first quarter. From a discretionary spend perspective, we don't see anything significant on the horizon. We do have some IT projects that we're working on, largely around investment systems and that will likely put some incremental pressure on operating expenses, but I don't think we're anticipating anything seismic in the course of the year.

Operator

And our next question comes from the line of Bill Katz with Citi.

William R. Katz - Citigroup Inc, Research Division

Tom, I was wondering if you could maybe round out your discussion of the dynamics into a new quarter of flows. You highlighted the Bernstein and the bottom ones which is impressive. Maybe holistically, what are you seeing in terms of your aggregate flow trends into the new quarter?

Thomas E. Faust

I'm sorry, so just in the first couple of weeks of the quarter, what do we think for overall flows?

William R. Katz - Citigroup Inc, Research Division

Right. Just when you mentioned you had some nice wins with the 2 Bernstein funds and the bond, Multi-Strat Fund, just sort of curious what you're seeing elsewhere?

Thomas E. Faust

The flows, overall, are flattish. I believe based on numbers, I think this was as of yesterday, we're modestly positive for the first, whatever that would be, 2.5 weeks of the quarter. So from what we know, we're off to a decent start. I guess, that's significantly improved from the outflows we had, particularly in November, as last quarter started. But we're off to a decent start and are quite hopeful, as I expressed, that we'll see an improving flow of trends as the fiscal year progresses.

William R. Katz - Citigroup Inc, Research Division

And just given your -- the hiring of Mr. Perkin, any thoughts, any update, what are you doing in terms of trying to leverage some performance trends outside the United States and then build up some of your non-U.S. AUM?

Thomas E. Faust

Relating to Eddie and Eaton Vance Management, specifically, our focus for the -- certainly, for the foreseeable future is getting better performance into our existing funds and accounts. It's certainly not an accident that we hired someone who's spent the last 6 years building and overseeing global equity strategies from a base in London. We would certainty acknowledge that, over the long term, we need to get better and broader in our perspective on global equity investing. And that experience that he has will be invaluable as we seek to do that. But that's not a 2014 initiative; that will come a little later.

Operator

And your next question comes from the line of Cynthia Mayer with Bank of America.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Just circling back maybe to the fees, I think it sounded like the guidance on a strategy-by-strategy basis was similar except for the implementation fee rate is down a bit; I think, from 11 basis points to 10 basis points. So does that reflect lower Parametric emerging markets assets or higher Clifton or something else, and what's the trend there?

Thomas E. Faust

So Parametric Emerging Markets is not -- that's not in the implementation.

Cynthia Mayer - BofA Merrill Lynch, Research Division

That's not in the implementation. Okay. Sorry.

Thomas E. Faust

Yes. That's not in there. I think that to the extent that we're expecting fee rates to come down, that really speaks to the growth in the overlay services business of Clifton relative to the other things that we've put in that implementation services bucket. So just to -- maybe just to recap what's in there, so Tax-Managed Core, which is historically a Parametric strategy is in that implementation services bucket. They have a range of what they call specialty index strategies, where they're implementing -- it's kind of like Tax-Managed Core but there's not a tax element per se of the management. They have what they call centralized portfolio management, which is primarily overseeing retail separately managed account portfolios. And then finally, they have the businesses that came with Clifton that are in the implementation services category, primarily this policy overlay service. The policy overlay service of Clifton is growing quite rapidly, currently. They are -- had a terrific first quarter in terms of new business, but that is a lower fee business. Interestingly, Clifton is seeing upward pressure on its fees, but from a low base. Historically, they've been, I think, 7 or 8 basis points as a company. They're seeing that start to trend up a little bit as they're adding some higher-value strategies. But on an overall basis, relative to our base of -- full base of implementation services, including the historical Parametric strategies, we expect to see a modest pullback in fee rates as overlay grows relative to other things in that category.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. Great. And in terms of institutional flows, I think last quarter you mentioned $500 million multi-sector income institutional mandate you expected to fund in the quarter, did that fund? And how is the pipeline, the institutional pipeline going into this quarter?

Thomas E. Faust

That account is still awaiting funding. Unfortunately, it didn't happen for reasons beyond our control. But it's still expected imminently. We -- I guess, we said 3 months ago, we expect it within the next 3 months, and we still expect it within the next 3 months. The pipeline is pretty good in terms of institutional business. As I mentioned in my remarks, we've had, just in the last weeks, last few weeks, several quite significant bank loan lends. So on an overall basis, things look to be pretty good. We feel like the pipeline is pretty robust. Good visibility for net growth in the second quarter across a range of strategies. But probably, most significantly, in bank loans in the Clifton overlay business but some other areas of strength, including emerging markets.

Operator

And our next question comes from the line of Robert Lee with KBW.

Andrew N. Donnantuono - Keefe, Bruyette, & Woods, Inc., Research Division

This is actually Andrew Donnantuono, sitting in for Rob. I guess, firstly, I just kind of wanted to ask about if you had any updates on how Hexavest is doing. It looked like in the quarter the directly distributed products drove the net outflows, but if you could just kind of provide any color on kind of what's going on with Hexavest of late?

Thomas E. Faust

Hexavest is doing fine in terms of their business dynamic. They did have some net outflows in the quarter which they, with very limited exceptions, they're not client withdrawals but are simple reallocation away from equities, and after a year in which equities have outperformed essentially every other asset class. So some of that is giving back performance in the form of reallocation of assets, the lower performing categories. Hexavest is a manager that principally distinguishes itself by outperforming in down markets and staying close to their benchmarks in up markets. They're not always positioned that way. They are active managers and do change their points of view and their portfolio positioning. They were too bearish in 2013 based on how the year actually developed. They continue to have a cautious stance on the market. So far, clients have respected them for that and appreciated the diversity of view they bring and the stability, the long-term stability of their performance. But I think they recognize that after a challenging relative performance year in 2013 that they're going to need to perform this year if they expect to hold their business together. That's just the nature of how active management works. They think they particularly need to outperform if the year does in fact turn out to be a year of weak performance. So things are okay. Based on not great numbers last year, not surprisingly, the pipeline is not as strong as it was a year ago. And people are looking for them to show better performance than they have. But the team is stable. The business is stable, I think for the most part. From everything we know, clients are happy, they haven't changed anything about what they do, they have a differentiated approach. Their approach, however, has not led to outperformance over the last year or so. And to get back in a growth mode, they'll need to see a better relative performance. Which based on their positioning, likely will need a different market environment than we saw last year. And if the market goes up 30% this year, they probably will underperform. But if the market is choppy, they would certainly hope to outperform and add value.

Andrew N. Donnantuono - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Great. That's very helpful. Appreciate it. And then just kind of switching gears a little bit just a kind of a simple question. With respect to share repurchase, just given the kind of stock performance year to date, relatively speaking, would you be able to kind of give us any color on, I guess, kind of the -- your expected timing in terms of using the $8 million of authorized share repurchases kind of available to you. Do you have any updates there? Just trying to think about how we should, I guess, model out the expectations for share repurchase for you guys.

Thomas E. Faust

So we don't give, certainly, give specific guidance on timing of share repurchase. Our approach is primarily an opportunistic one. When we see the stock trading at attractive levels, we have the cash, we have the repurchase authorizations, and we will be active in the market as we see those opportunities. I would say that I do think our stock is attractively priced based on what we know about our business and expect to be active repurchasers going forward.

Operator

And our next question comes from the line of Mike (sic) [Marc] Irizarry with Goldman Sachs.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Marc Irizarry, Goldman Sachs. I just, Tom, have a question on GMAR and the alternative flows. I guess, one of the things that we've been hearing a lot about has been growth in liquid alternatives. And I'm curious how sort of GMAR fits into that, into that bucket. And then also, can you give us an update in terms of the performance of inflows just given the uptick in volatility, particularly as it relates to GMAR?

Thomas E. Faust

Yes. So let's see, year-to-date performance of GMAR, if I have the right numbers, so we're down 82 basis points for the year to date. Not great, but not horrible. So in the move to liquid alternatives in the mutual -- in the liquid alternatives it primarily means alternatives in mutual fund form with the daily liquidity like mutual funds offer. Our goal in macro strategy, we're certainly at the forefront of that with very significant growth and broad acceptance, particularly in the 2009 period, I believe, maybe 2010. And that was based on a track record of the strategy and the promise of the appeal in that market environment of return expectations of cash or LIBOR plus 200 to 400 basis points. And at that time, that seemed pretty good. If I can earn cash returns and earn it plus 200 to 400, or hopefully, 300 to 400 basis points over time and do it on a basis that is not correlated with stock and bond market returns, that was a very compelling proposition. The strategy brought in a lot of assets. You may remember, we closed the fund for a while then reopened. So what's happened since then is that investors that wanted to diversify away from, certainly, equity exposure have seen very strong performance in equities and they've seen pretty modest performance for a range of alternatives, including our global macro strategy. As I mentioned, we had total return last year of minus 24 basis points, and I think our 3-year numbers as of the end of December were something like annualizing like 115 basis points a year of performance, something in that range. So it's been a modest pedestrian performance, certainly in relation to equity performance. One of the things that has -- I'd say 2 things have hurt our performance, perhaps relative to expectations and relative to our history over this time period. One is that short-term rates have been very low. So these are LIBOR plus the spread products and when LIBOR is something close to 0, you take that, you subtract expenses. If we don't add any value through active security selection, we're in a hole. Because LIBOR less our expenses is a negative number. Last year, as I said, we were positive to the tune of 24 basis points. We added a little value, but not enough to offset the fact that the LIBOR is so low and the fact that even though this is a quite low-fee strategy, that we were still in the hole on a net basis. So people want alternatives to stock and bonds, particularly when stock and bond performance is weak. During a period when stock performance is strong, like we saw last year, alternatives don't look quite so compelling. That's one thing we've experienced. That was sort of our problem in November and December, and affected flows when people were looking at, as we approached the year end, a performance that was different than what people were hoping for. The other thing that happened, really, more in January was that -- some excitement about emerging markets, lots of individual emerging markets, quite a few had market-specific volatility. And while that may have spooked some people, it also creates opportunity for us. We're country pickers. And to the extent that all countries performed the same, it's hard for us to add value as country pickers and therefore, it's hard for us to beat our benchmark and produce positive returns. But if there is significant deviation in the performance of different countries and different instruments representing those countries' currency and sovereign debt, that creates opportunity for us. So if we're right, if we can be good at country picking, as we have been historically, I feel like we're in a much better position today than we were in the second half of last year when there really wasn't all that much going on in terms of volatility related to emerging markets. Here, I think we're in a position to have a good year if we can get the picks right. So I know there's a broad trend toward liquid alternatives, as you talked about, we've certainly benefited from that. But the particulars of our strategy, being long and short in emerging market countries, did not produce significant positive alpha in 2013. We've been punished for that with outflows, but we're optimistic that the environment in terms of opportunities available to managers that do what we do in the global macro space running long and short absolute return strategies is actually pretty good right now. And that as those returns improve, we hope to see an abating of the outflows. But we can't promise that. We don't really have great visibility into what flows will be here. So it's certainly, clearly, one of the wildcards for us in the balance of the year. It's what happens with global macro flows, which is going to be driven by, primarily, what happens with performance. Do we trend up and have positive performance, or do things stay in a sort of muddle, as they have been in recent quarters?

Operator

And that is all the time we have for questions. I would like to turn the floor back over to the Dan Cataldo for closing remarks.

Daniel C. Cataldo

Thank you, and thank you for joining us today. We look forward to reporting to you in May after the close of our second fiscal quarter. Thank you.

Operator

This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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