Eaton Vance's (EV) CEO Tom Faust on Q2 2014 Results - Earnings Call Transcript

| About: Eaton Vance (EV)

Eaton Vance Corp. (NYSE:EV)

Q2 2014 Results Earnings Conference Call

May 21, 2014 11:00 AM ET

Executives

Dan Cataldo - Vice President and Treasurer

Tom Faust - Chairman and CEO

Laurie Hylton - Chief Financial Officer

Analysts

Michael Kim - Sandler O’Neill

Craig Siegenthaler - Credit Suisse

Ken Worthington - JPMorgan

Dan Fannon - Jefferies & Company

Andrew Donnantuono - KBW

Eric Berg - RBC Capital Market

Cynthia Mayer - Bank of America Merrill Lynch

Operator

Good morning. My name is Tania, and I will be your conference operator today. At this time, I would like welcome everyone to the Eaton Vance 2014 Fiscal Second Quarter Earnings Call and Webcast. All lines have been placed on mute to prevent any background. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Dan Cataldo, Vice President and Treasurer. You may begin your conference.

Dan Cataldo

Thank you. Good morning and welcome to our fiscal second quarter earnings call and webcast. Here 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.

We need to start with the remainder that 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.

Tom Faust

Good morning, everyone. Eaton Vance earned $0.59 per diluted share in the second quarter, a new record for the company. Adjusted earnings per diluted share increased 13% from $0.52 in the second quarter of last year and 2% from $0.58 in the prior quarter. In the current quarter our operating income increased 16% year-over-year and operating margins were 35.4% versus 32.6% in the year ago quarter.

Taking advantage of what we view as an attractive purchase range for our stock, we stepped up our share repurchase activity in the second quarter. During the quarter, we spent $92 million to purchase and retire 2.4 million shares of our non-voting common stock, netting the 0.4 million shares issued during the quarter in connection with equity incentive programs. We reduced outstanding shares by 2 million or about 1.6% during the quarter.

While increasing our share repurchased activity we continue to maintain significant financial strength and flexibility. We closed the quarter holding just over $5 million of cash and short-term debt securities and seed capital investment of more than $250 million against debt obligations of $575 million.

As opportunities to enhance shareholder value through future share repurchases at attracted prices or accretive acquisitions present themselves, we have the financial resources to take advantage.

We closed the second fiscal quarter with consolidated assets under management of $285.9 billion, an increase of 10% from a year ago and up 3% from the close of the prior quarter.

In the second quarter we had consolidated net outflows of approximately $900 million, which compares to net outflows of $1.1 billion in the prior quarter and net inflows of $6.6 billion in the year ago quarter.

Net outflows in the current quarter were concentrated in three areas, Eaton Vance Large-Cap Value Equity with net outflows of $1.3 billion, Atlantic Capital Equity and Fixed Income with net outflows of $1.2 billion and EVM Global Fixed Income and Alternatives with net outflows of $800 million.

Net outflows for Atlantic Capital are departure from that subsidiaries long-term organic growth record and reflect the loss during the quarter of a $600 million growth equity mandate as a long-standing client converted to passive management, as well as over $200 million in fixed income outflows.

In addition, net flows into the Eaton Vance Atlanta Capital SMID-Cap Fund have slowed considerably since the fund was closed to most of investors in early 2013. The $800 million of net outflows from the EVM Global Income mandates compares to $1.9 billion of net outflows in the prior quarter, an improving trend that is continued into the early weeks of the third quarter.

Performance of our global income strategies, which includes global macro absolute return, diversified currency income and emerging market debt offering has turn positive in recent months after a difficult 2013, no doubt contributing to the better flows.

As anticipated, we also saw a significant improvement in sequential flow results for two businesses that were major sources of net outflows in the first quarter, Municipal Bond Strategies and Parametric Managed Options.

On an overall basis, our muni flows improvement from $1 billion of net outflows in the first quarter to $100 million of net inflows in the second quarter. Better municipal flows were experience across the Board, open-end funds, managed muni separate accounts and Municipal Ladders separate accounts.

With a full suite of municipal capabilities, strong relative performance and a better tone of life for the municipal market, we expect to see continued improvement in muni flows over the balance of the fiscal year.

In Managed Options, net outflows declined from $800 million in the first quarter to $100 million in the second quarter due to a favorable swing in covered call writing business in the institutional channel.

As expectations for equity appreciation have abated after last years exceptionally strong market performers, more investors are becoming receptive using options overlays to manage equity volatility and potentially enhance returns in the less favorable market environment.

Net inflows into our floating rate income franchise were $1.3 billion in the second quarter compared to $2.1 billion in the prior quarter. We attribute the recent slowdown in retail loan fund demand to modest declines in loan fund yields due to tighter loan pricing and better bond fund performance in conjunction with declining interest rates.

But the underlying fundamentals of the loan market remains strong and the promise of floating-rate loans outperforming the bond market during periods of rising interest rates remains. When concerns about rising interest rates pick up again we suspect retail demand for bank loan funds will also increase.

In the meantime, we continue to see strong institutional demand for our bank loan strategies, institutional clients accounted for nearly 50% of our floating rate net inflows in the second quarter and our pipeline of new institutional bank loan business continues to be robust.

Net inflows into the Parametric emerging market equity strategy were over $200 million in the second quarter, up from less than $100 million in the first quarter. Our ability to maintain positive emerging market equity flows in the first half of fiscal 2014 is notable given the rocky performance of the category in 2013 and early 2014.

Parametric’s favorable flows are being driven by strong relative investment performance. At the end of April, Parametric flagship emerging markets, mutual fund ranks in the top quintile of its Morningstar peer group for the year-to-date and over the past one, three, five and 10 years. If the emerging markets continue to behave better, we would expect continued improvement in our flows here.

Net inflows into Clifton implantation services were modest $170 million in the second quarter, down from over $1.1 billion in the first quarter. As a reminder, Clifton’s portfolio implementation services are used by sophisticated institutional investors to securitize cash and to adjust their duration, currency and market exposures, using futures options and other derivative instruments.

Clifton is increasingly recognized as the premier provider of these services with the large and growing presence in the retirement plan and endowment and foundation markets. Quarter-to-quarter changes in the flows of Clifton’s portfolio overlay and exposure manager -- management services reflect both clients gain and loss, as well as adjustments in the value of positions held by existing clients.

We view the best measure of Clifton’s growth and portfolio implementation services to be revenue in number of active client’s, not necessarily net flows. From the second quarter of last year, Clifton implementation services revenues have increased by 17% and the number of clients at quarter end has grown by 27%.

If you take a look at the PowerPoint presentation that accompanies this call, you will see on slide 13 the graph depicting the growth in managed assets of four of our most promising emerging franchises.

Departing from our normal practice, these are grouped together because they invest not because they investment in similar types of assets, have similar structures or managed by the same investment organization. Instead of what this group of strategies has in common is a very significant growth potential they have and they are starting to realize.

Addressing these in order, the Eaton Vance Richard Bernstein equity strategy and all asset strategy funds, our mutual funds introduced in October 2010 and 2011, respectively. The funds are sub-advised by Richard Bernstein advisors and lead managed by Rich Bernstein, the former long time market strategist at Merrill Lynch.

Both funds compete in large and growing asset classes, employ a distinctive top-down investment approach and have favorable performance versus peer funds over multiple time periods.

In the first half of fiscal 2014, these funds had net inflows of $540 million. Install managed assets increased from $725 million to $1.3 billion. As the funds continue to build winning track records and as our relationship with RBI expand to encompass additional product, we create lots of room for -- we see lots of room for potential growth.

The second growth strategy on this list came to us in the acquisition of the Clifton Group by Parametric in December 2012. The Clifton Defensive Equity strategies offered to institutional investors in commingle fund in separate account formats and employs a transparent rule-based equity option strategy as an overlay to underlying equity and cash exposures. Institutions are using this strategy as a relatively low alternative investment without the potential based on persistent anomalies in the pricing of listed equity options.

When we purchased Clifton, assets in the Defensive Equity strategy were approximate $560 million. 16 months later at the end of April assets in the strategy have grown to $1.7 billion with $430 million of second quarter net inflows and a strong pipeline supporting continued growth over the coming quarters.

Defensive Equity is a key element of Parametric’s strategy to leverage the close relationship Clifton has built in the institutional channel through its implementation services business.

Our third feature new product is one we’ve talked about in the past, which continues to grow in size and importance. We see vast potential for our Municipal Bond Ladder Separate Accounts business as the over $1 trillion in municipal bonds now held directly by individual investors migrates to a more managed solution.

Starting from nothing in the summer of 2011, this innovative and low-cost product developed by our TABS Group in New York has grown to over $2.1 billion in managed assets.

Second quarter net inflows of $450 million were up over 75% from the preceding quarter. Although, additional market entrants are expected and will take some share, we continue see huge upside for our business as this opportunity continues to develop.

Our fourth feature emerging franchise has certainly the most dynamic and maybe also the most exciting. As most of this audience is aware we hired Kathleen Gaffney in October 2012 as Co-Head of Investment Grade Fixed Income to develop an Eaton Vance multi-sector income strategy.

Eaton Vance Bond Fund was introduced at the end of January 2013 as the mutual fund vehicle for that strategy. The fund has got off to a terrific start both in terms of investment performance and business development.

As of April 30th, the fund classed by shares ranked number one our of 310 multi-sector income fund in its Morningstar peer group for 12-month returns being the peer group average by over 800 basis points and investors have certainly taken notice.

The fund closed the second quarter with net assets of over $635 million versus only $75 million at the end of our fiscal 2013. Second quarter net inflows of $370 million were up over 270% from the prior quarter.

Strong fund flows and net asset growth is continuing in May and we expect to start picking up new institutional business as the year progresses. Based on the ramp up we are experiencing it could certainly be a very interesting second half for multi-sector income.

On the combined basis these four emerging franchises have grown to $5.9 billion in managed assets with net flows ramping up from $460 million in the fourth quarter of last year to $760 million in this year’s first quarter and now to over $1.5 billion in the April quarter. And we think that in all four cases were just getting started. I look forward to reporting future progress for these emerging growth areas in subsequent calls.

Turning to investment performance, we have seen a broad improvement across a number of different asset classes in recent quarters. As shown in the presentation slides, we now have nine -- 42 funds with overall Morningstar rating of four, five stars for at least one class of shares, up from 30 such funds a year ago.

Particularly notable among the 42 funds is a broad line of national and single state municipal funds covering intermediate and loan maturity in both investment grade and non-investment grade holdings. We expect the strong performance to lead to improve muni fund flows in investors’ appetite for muni bond funds continues to gain steam.

In management development, I’m pleased to report that Eddie Perkin joined Eaton Vance management as Chief Equity Investment Officer as planned on April 29th. As mentioned last quarter, Eddie comes to Eaton Vance from Goldman Sachs Asset Management London office, where he served most recently as Chief Equity Investment Officer of international and emerging markets.

At GSAM, Eddie was responsible for leading a 50 person investment team, was also a portfolio manager on several international and global strategies. Eddie brings both demonstrated capability leading investment teams and a proven track record as a value stock investor.

You may have seen our press release yesterday announcing a related change in the EVM equity group. Mike Mach lead portfolio manager of our Large-Cap Value strategy will be retiring on June 30th. Mike will be replaced by Eddie in that role who becomes both head of the value team in addition to being CIO.

Since Mike joined Eaton Vance in 1999 to manager our two Large-Cap Value funds, he has played enormous role in the growth and success of Eaton Vance equity group. Over Mike’s tenure Eaton Vance Large-Cap Value and tax managed value fund have rank in the top 40% and 30%, respectively of Morningstar’s Large-Cap Value category based on gross returns as of April 30th.

Assets in our Large-Cap Value strategy have grown from less than $200 million when Mike started to the current $10.6 billion with the peak of more than $33 billion before a fall off in relative performance triggered net outflows starting in 2011. Mike leaves Eaton Vance with the respect, admiration and affection of the entire company. We wish him all the best in retirement.

For Eddie and carry-over value portfolio manager John Crowley. The task is straight forward, enhance the implementation of our valuable philosophy and process to generate improve performance. I know the equity group has energized by Eddie’s arrival and are looking forward to his leadership.

I want to close with an update on our exchange traded managed fund or ETMF initiative. As many of you know, ETMF’s our proposed new type of open-end fund that seek to provide the performance and tax advantages of ETFs to active investment strategies while maintaining the confidentiality of portfolio trading information.

Unlike ETFs, ETMF would not disclose their portfolio holdings on a daily basis. ETMFs would be bought and sold on an exchange, utilizing a new trading call -- trading protocol called NAV-based trading, which is designed to ensure that ETMFs can trade consistently tight spreads in 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 are seeking to commercial licensing them to funds sponsored by Eaton Vance and other fund groups.

Since our last earnings report we have continued to make progress toward the regulatory approval and commercial launch of the ETMFs. On February 26th the NASDAQ stock market filed with the SEC a proposed rule change to permit the listing and trading of ETMFs, a very significant development milestone.

While we can’t predict the outcome of the regulatory process, we remain confident that if approved ETMFs have the potential to transform how actively managed strategies are delivered to fund investors in the U.S. with the potentially quite significant financial implication for Eaton Vance.

With that, I’ll turn the call over to Laurie to discuss the quarterly financial results in more detail

Laurie Hylton

Thank you, Tom, and good morning. Tom summarized reporting adjusted earnings per diluted share of $0.59 for the second quarter fiscal 2014, compared to $0.52 for the second quarter of fiscal 2013 and $0.58 for the first quarter of this year. This represents an increase of 13% as compared to the second quarter last year and an increased of 2% sequentially.

On a GAAP basis we earned $0.59 per diluted share in the second quarter of fiscal 2014, $0.50 in the second quarter fiscal 2013 and $0.56 in the first quarter of this fiscal year.

As you can see an attachment to our press release, adjustments from reported GAAP earnings in the comparison quarters related primarily to changes in the estimated readmission value of non-controlling interest in our affiliates redeemable at other than fair value and in the second quarter of fiscal 2013, an adjustment for the impact of closed-end fund offering.

Operating income increased 16 % year-over-year and 1% sequentially, but our operating margin improving to 35.4% from 32.6% in the second quarter of last year and 34.5% last quarter. Consists with increase is noted in adjusted earnings per diluted share, our adjusted net income increased 30% year-over-year and 2%, sequentially.

Revenue increased 7% year-over-year, reflecting an 8% increase in investment advisory and administrative fee, partially offset by a low signal-digit percentage declines in distribution and service fee.

Looking specifically at investment advisory administrative fee, the 8% increased year-over-year reflects the 12 % increase NAV adjusted under management, offset by a decline in our effective fee rate.

The decline in our effective fee from 44 basis points in the second quarter of last year to 42 basis points in the second quarter of this year can be primarily attributed to a shift in product mix from higher fee equity and alternative mandate to lower fee implementation services mandate.

Revenue declined by 2% sequentially, primarily reflecting the impact of having three fewer days in the second quarter compared to the first. We feel this drag on both revenue and our effective fee rate in second quarter each year as more than half our investment advisory and administrative fee revenue and all of our distribution and service fee revenue is calculated on the basis of the number of calendar days in the quarter.

The day count drove our effective investment advisory and administrative fee rate down from 43 to 42 basis points sequentially, despite a 1% increase NAV adjusted under management and relative stability and product mix.

Performance fees did not materially affect effective fee rates for any other periods presented. Contributing $932,000 in the second quarter of fiscal 2014 compared to $139,000 in the first quarter of fiscal 2014 and $170,000 in the second quarter of fiscal 2013.

We anticipate that our effective investment advisory and administrative fee rates for active equity strategy will remain 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 for the remainder of the fiscal year. As always, our future overall effective fee rate will be impacted to the extent that there are meaningful changes in product mix.

Shifting from revenue to expense, operating expenses were up 2% year-over-year reflecting single digit percentage increases in compensations, fund related expenses and discretionary spending partially offset by decreases in distributions related expenses. Operating expenses decreased 3% sequentially, reflecting modest decrease in all expense category.

Compensation expense increased 4% year-over-year primarily due to increases in base salaries, operating income base incentive and stock-based compensation, partially offset by decrease in sales-based incentive compensation. The increases in base salaries and stock-based compensation were driven primarily by 7% increase in average headcount. While the increased in operating income based incentives reflects the increase in pre-bonus operating income year-over-year. The decrease in sales based incentives reflects the decrease in compensation eligible retail sale.

Sequentially, we saw 4% decline in compensation expenses primarily driven by decreases in base salaries and benefits due to the fewer number of payroll days in the quarter as well as decrease in severance and sales-based incentive. Headcount growth is limited to less than 2% sequentially and the decrease in sales-based incentive reflects the decrease in compensation eligible retail sales in the second quarter compared to the first.

Distribution and service fee expense decreased both year-over-year and sequentially, consistent with the downward trend in distribution and service fee revenue. As we noted in the release, the decrease in distribution expense year-over-year also reflects the non-recurrence of $2.7 million of closed-end fund structuring fees paid in the second quarter of fiscal 2013, offset by an increase in intermediary marketing support payments consistent with increase in average fund assets under management.

Fund related expenses were up 5% year-over-year primarily reflecting an increase in sub-advisory expenses driven by growth in sponsored funds managed by unaffiliated sub-advisors. Other operating expenses were up 5% year-over-year primarily reflecting increases in travel, recruiting and information technology spend.

Other expenses were down 2% sequentially, primarily reflecting decreases in information technology consulting cost and a seasonal decrease in charitable giving. The decrease in information technology consulting cost reflects the completion of budgeted IT projects and the conversion where appropriate, of outside contractors to support the new technology.

Net income and gains on seed capital investments contributed roughly a $0.01 to earnings in each of the quarters presented. Quantifying the impact of our seed capital investments on earnings each quarter, we take into consideration our pro rata share of the gain, losses and other investments income earned on investments and sponsored products, whether accounted for as consolidated fund, separate accounts or equity method investments as well as the gains and losses recognized on derivatives used to hedge these investments.

We then report the per share impact net of non-controlling interest expense and income taxes. Equity net income of affiliates increased to $5.2 million in the second quarter from $3.3 million in the first quarter and $3.4 million in the second quarter of fiscal 2013, primarily reflecting an increase in net income in gains recognized on sponsored products accounted for under the equity method.

Our 49% interest in Hexavest, which is reported net of tax in the amortization of intangibles and equity and net income affiliates contributed approximately $0.02 per diluted share for all periods presented. Excluding the effect of CLO end of the earnings and losses in both periods, our effective tax rate for the second quarter of fiscal 2014 was 38.1% compared to 37.7% in first quarter of fiscal 2014. We currently anticipate that our effective tax rate adjusted for CLO earnings and losses will be approximately 38% for the remainder of the fiscal year.

In terms of capital management as Tom mentioned, we repurchased 2.4 million shares of nonvoting common stock for approximately $92 million this quarter, which brought our average diluted share count down by 1% sequentially, and our ending share count down by 1.6% sequentially.

Even with the significant increases in share repurchases, we finished the quarter holding just over $500 million of cash and short-term debt securities and approximately $260 million in seed capital investment. Our outstanding debt consists of $250 million of 6.5% senior notes due in 2017 and $325 million of 3.625% senior notes due in 2023. We have a $300 million line of credit, which is currently undrawn.

Given our strong cash flow, liquidity and overall financial condition, we believe we’re well positioned to continue to return capital to shareholders through dividends and share repurchases. And we expect to continue to be active repurchasers as we move into the third quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Kim from Sandler O’Neill. Your line is open.

Michael Kim - Sandler O’Neill

Hey guys. Good morning. First, just in terms of the bank loan business, curious if there were any sort of lumpy redemptions that may have skewed the flows during the quarter. And then any updates on the capacity constraints as you look across the funds that sounded like last quarter you felt pretty good about capacity. So just wondering if there has been any meaningful change there more recently?

Tom Faust

No. There is certainly no change in how we think about capacity if anything. The pressures there are reduced because the inflows are down pretty substantially from what we were seeing during 2013. The bank loan market continues to grow so that our share of outstanding loans is in a stable range.

We’re not having trouble putting investments to work. The tone of the business in terms of flows has moderated pretty significantly. There have recently been days and weeks when we’ve been in net outflows, particularly on the retail side. As I covered in my comments, that’s been offset by continuing strong demand on the institutional side.

There were no -- addressing your first question, there were no particular large outflows that we can attribute certainly not to any single investor. And as far as I know, there were no -- nothing out of the ordinary in terms of outflows, just the change in the tone of the retail market as reflected in retail flows into bank loan funds.

Michael Kim - Sandler O’Neill

Okay. And then stepping back, you guys have been pretty proactive on the product development front. So just curious about how you’re thinking about potentially bringing to market new products and solutions in the sort of environment. Sounds like you’re planning, maybe other Richard Bernstein products, but just -- any other products or how you are thinking about that just going forward?

Tom Faust

Certainly, as I mentioned ETMF initiative is a big part of our new product focus We continue to believe that this is a structure that applies broadly to whole range of asset classes, essentially all range of asset classes. And then it has the potential to become a higher performing, lower cost and more tax efficient alternative to mutual fund. We’re making that available, not only through Eaton Vance and representing Eaton Vance strategies but licensing that technology to other fund companies. So they can make their strategies also available in an ETMF format.

That’s very much are, I would say, our biggest focus in terms of new product development. You were correct, we did -- I did mention the possibility of additional product with RBA advisors that Rich Bernstein would be managing. So I think you would -- you should not be surprised to see additional product ideas there. There are a few other things that certainly that we’re looking at. You are right that new products seem to be a part of our DNA and there are always new ideas percolating.

I would say that what I tried to highlight in my remarks is that some of the ideas that were in development in 2010, ‘11, ‘12 and in some cases 2013 are really starting to contribute in a major way. We like new ideas but we particularly like new ideas that turn into real businesses. And it’s quite gratifying to see those four relatively new businesses turning into potential franchises for us, in a way that we think is now having and will have increasingly significant impact on our flows in coming quarters.

Michael Kim - Sandler O’Neill

Okay. Great. Thanks for taking my questions.

Operator

We have time for one question and one follow-up question from each participant. Your next question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is open.

Craig Siegenthaler - Credit Suisse

Thanks. First upon on capital management, can you hear me okay? It sounds like there is an echo?

Laurie Hylton

We can hear you.

Tom Faust

So far so good, Craig.

Craig Siegenthaler - Credit Suisse

Awesome. So first, on capital management, should we expect $300 million as sort of the low watermark for your cash balances? Especially because I think you have about $200 million of debt maturing in the next 24 months. I just want to kind of cross that with your comments that you’re going to be aggressive on the buy back into the third quarter?

Laurie Hylton

Craig, I can -- that’s Laurie. I think that we don’t necessarily set a watermark on our cash. I think that we’ve always talked about our capital management in terms of the priority in which we deploy it. I think we’re very conscious of what our debt maturities are and we’ll certainly manage our cash accordingly. But at the end of the day, to the extent that we see, that we’ve got, either opportunities for organic growth. And it makes sense for us to deploy our capital that way or potential acquisitions, we would certainly look to do so.

I think we’re comfortable that we’re generating substantial cash flow in terms of our ongoing operating -- cash flows from operation. And I don’t see that we have any future constraints on our capital that would put us in a position where we’re concerned about it.

Tom Faust

And just to clarify, we have no debt due until 2017. So we’re good for -- what month is that? October 2017, that’s right. So we’ve got -- by my math, we’ve got three and half year give or take till we have any debt due.

Craig Siegenthaler - Credit Suisse

Got it.

Tom Faust

I was going to say, I don’t know that we used the word aggressive, but we certainly continue to be -- but continue to be active in share repurchases in the third quarter.

Craig Siegenthaler - Credit Suisse

Then just a quick follow-up. I don’t know if Stephen Clarke’s in the room, but on the non-transparent ETF front, what is the next approval or comment period event that we should be waiting for from the SEC? Because I know a lot of cases, it’s like a 90-day window from when you kind of submit your most recent submission?

Tom Faust

So there are two tracks of regulatory approval at the SEC. There is the approval of the consideration and we help approval of the exemptive application, which we originally filed back in, I believe, March of last year. I mean, where we’ve continued to amend that with the most recent amendment was submitted in January. The other track is the -- and there is no particular timeframe for that. The other track is the proposal rule change by NASDAQ to permit that the listing and trading of ETMFs that was submitted in February -- February 26th I think is what I said. So there is a statutory requirement for when the SEC must approve that. I’m not exactly clear on the dates on that, but there is a requirement that over a timeframe that specified that they need to either approve or disapprove. And I believe that positions them for action before the end of the year at least on that side of the application.

Craig Siegenthaler - Credit Suisse

Thank you, Tom.

Operator

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

Ken Worthington - JPMorgan

Hi, good morning. On implementation services, you mentioned the increase in clients and revenue over the last year. It does seem like sales have really slowed over the last two quarters, and I know you called that out as being less important. But how revenue and the number of clients trended over those quarters in the period of weakened sales? And then the follow-up will just be, why do you think sales have weakened so much over the last two quarters? Thanks.

Tom Faust

So I will just go back and repeat some of the things I tried to highlight in my comments. I guess first to say the sales activity that is acquisition of new clients and the size of those new clients continues to be very strong for the Clifton implementation services business. I think what you’re referring to is the net flows, which have been fairly volatile. The challenge with that business from a flow reporting standpoint is that you may have a client that is probably happy with Clifton service and is growing in their use of Clifton services but in a particular period, because their cash levels are down or for other reasons where they have less need for Clifton overlay, that shows up a net as an outflow offsetting inflows.

So we’re relatively new at this still. Clifton has been a part of Eaton Vance for -- I guess we’ve been reporting this is the 5th or 6th quarter and we’re trying to better understand that dynamic. But from what we understand, it’s hard to predict exactly what kinds will do. It’s driven mostly by other changes they’re making in their investment positioning. I would say that the Clifton exposure tends to be a derivative of other things that they’re doing, but in terms of the client acquisition activity and overall growth in revenue, just to repeat a couple numbers. Second quarter this year versus second quarter last year, we’re up about 17% in terms of revenue in that business and in terms of client serve, it’s up about 27%. The pipeline is robust. We are absolutely delighted with the continued growth and progress of that business. And from our standpoint, there have been no slowdown. What might show up is the slowdown reflects client activity as opposed to success in gaining new clients.

Ken Worthington - JPMorgan

Okay. And thank you for that. But the sales were particularly strong three and four quarters ago and your comparisons you gave us are year-over-year. I was just hoping to see how those comparisons looked over the last two quarters, the period of time when the sales for example had really decelerated. Do you know those metrics by any chance?

Tom Faust

So you’re looking in terms of where you’re thinking about revenues, the revenues by quarter?

Ken Worthington - JPMorgan

Well, the metrics you’re giving is clients in revenue. So they’ve grown a lot year-over-year, have they also grown a lot over the last two quarters, the period when the sales decelerated so meaningfully? Like in other words, all the clients coming in a year ago and have they slowed down or not?

Tom Faust

I think we might have to get back to you on that detail. Your calling is sales, I think it’s what we would report as net flows, is that right?

Ken Worthington - JPMorgan

Net flows, yes, sorry.

Tom Faust

Okay. Yes, net flows have decelerated not because of a slowdown in new business acquisitions but because of the actions per clients and we can follow up with you for with more detail.

Ken Worthington - JPMorgan

Yes. I will take it offline. Thank you very much.

Tom Faust

Thank you.

Operator

Your next question comes from the line of Dan Fannon from Jefferies & Company. Your line is open.

Dan Fannon - Jefferies & Company

Thanks. And I guess just to follow up on that, the way you talk about the implementation services and revenues, I would assume the profitability despite the movement in and out of maybe some of those clients is also growing at similar rates as opposed to just revenues?

Tom Faust

I think that’s a safe assumption. I don’t know that we have numbers that hand there. I don’t know that we -- Clifton breaks out profits by segment in a way that would allow us to answer that with real precision. But there is nothing that I know of that suggest that the profitability of their businesses is trending down in terms of margins on revenues. I would suspect it’s actually trending up as the business scales up, but we don’t have granular detail within Clifton on their profitability by product, that at least not close at hand.

Dan Fannon - Jefferies & Company

Okay. And then you highlighted a handful of positives in terms of backlog in demand on the either I guess regular way product, like mutual fund or retail, as well as institutional. I guess just thinking about it in an aggregate, are there any other offsets outside of the normal outflows that have been there in some of the retail products? But on the institutional front, you know of going into the next couple months or next couple quarters, given your interaction with clients?

Tom Faust

Sure. There are -- that’s the nature of our business that we have both inflows and outflows. If you look at our pipeline on a net basis and we don’t tend to highlight individual client losses that we expect, though I think we should see that there are some -- certainly our pipeline on a net basis is quite positive for both May and June. We don’t have a whole lot of visibility as yet for July, but no particular areas of concern to note. I described how in large-cap value, we’ve seen that outflows the last couple of quarters that has been somewhat on the institutional side, somewhat of that has been retail. We are hopeful that this management change with Mike Mach retiree and Eddie coming in, Eddie Perkin coming in not only as CIO but also head of Value will give us a positive story to help to tell that we hope help stem the tide of redemptions there, though that’s certainly not something that we can absolutely promise.

But it’s a fairly lumpy business where we can’t say for sure we won’t have some outflows, but I would say that maybe just last comment Atlanta Capital was a source of I think $1.2 billion of net outflow in the quarter. We have no reason to believe that that will recur in this quarter. We think that was largely a one-off, certainly half of that or more was a complete withdrawal by long-term clients. And as I mentioned that’s converting into passive management. We don’t see that is necessarily a harbinger of other redemptions. But I can promise that we will have both inflows and outflows, but from where we sit the net -- the pipeline in terms of positive and negative is significantly to the positive side.

Dan Fannon - Jefferies & Company

Great, thank you.

Operator

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

Andrew Donnantuono - KBW

Hi, guys, this is actually Andrew Donnantuono filling in for Rob. Thanks for taking our questions. I wanted to just quickly focus in on the decline, less so on net flows, but more so the decreased gross sales within the alternatives business. Just wanted to see if that was primarily related to kind of your global macro products or any other alternative products in there? And as kind of a follow-up to that, if you are taking any specific initiatives, or what steps are being taken to maybe generate a bit more interest with an alternative bucket and bumps gross sales back up to where they have been in the prior quarters?

Tom Faust

I think your instincts are right. The biggest contributor to that decline because it’s the biggest factor within that alternatives category is our global macro absolute return strategies. We had a year last year where returns on the strategy were modestly negative. I think they were on the iShares something like minus 24 basis points total return for the year. That disappointed people in a year when US equities were returning 30%. People were disappointed by that performance. As I mentioned, performance has bounced back. We are positive for the year today. The pace of redemptions has certainly slowed, but I think it’s also fair to observe that we’re certainly not seeing the inflows there that we did let’s say in the first half of last year.

As of area of focused attention and I would say global macro absolute return is fewer of our sales people are spending a big parts of their time on that. Certainly the emerging franchises that I highlighted, the bond fund, the good performance we have across munis, the new muni ladders product, the Bernstein strategies. Those tend to be the first things that our sales team brings up in conversations with advisors during periods when global macro was doing better. Global macro too well have been first or second thing that our sales people would talk about. We don’t or least I don’t focus terribly on flows that we needed to take great measures that every product needs to have a steady growth path. What we try and do is have a suite of capabilities in a portfolio of products and strategies that we can respond to the needs of the marketplace.

Sometimes the market is interested in global macro absolute return strategies and sometimes not. Sometimes market demand will change based on I think specific to our strategy like relative performance, but other times it will change for reasons that have little or nothing to do with our strategy like sentiment towards the equity market or sentiment towards other market factors. So having a broad portfolio and having a sales team that’s focused on positioning, the best most timely opportunities in front clients is generally how we think about trying to manage sales as opposed to on a product by product progress.

Andrew Donnantuono - KBW

Okay, great. No, thank you for that color, much appreciated. And just quickly shifting back, I know you’ve commented a couple times here, but just was hoping to maybe dig a tiny bit deeper into the reception that you’ve seen thus far with respect to Michael retiring and Eddie kind of taking over duties alongside John Crowley on the Value team. I know Eddie’s only been with the firm for about a month now, but -- and like you said, it remains to be seen kind of the long-term flow impact, and very much dependent upon performance. But what kind of commentary have you seen from your institutional clients, your existing clients on Eddie and what he’s bringing to the table, how it differs from Michael?

Tom Faust

We are on the, I guess, 28 hours or so after the announcement of Mike’s planned retirement and the plan for Eddie to become head of the Value team. I don’t think either of those based on the reaction was that we heard came as a surprise to people. Mike is 66, I believe he will be 67 by the end of June. Mike has had a terrific career. But he’s also -- we struggled a bit in recent years in terms of performance and seen shrinkage in the size of that business.

When we hired Eddie, we telegraphed that he is a value guy and a hands on investor with deep experience running value portfolios. His reputation in the market is quite strong. He does not have because of where it came from, it does not have a composite that we can point to his individual record and say here’s what this person has done. But we know both through the interview process and also in comments since Eddie joined us that he is very widely respected as a leading value investor.

And the response that we’ve gotten today, at least, on a preliminary basis has been uniformly positive that people recognize the perhaps inevitability of a change in leadership of that strategy and are pleased with the approach we’re taking. We’re reemphasizing that while the philosophy of what kind of stocks we like to look at and while the research process that we use to identify those stocks and the portfolio construction process we used to build. Our portfolios are unchanged. We’re looking to get better in terms of the implementation of that. And that’s a message that’s based on everything we see or is being very well received in the marketplace.

Andrew Donnantuono - KBW

Okay, great. Thanks for taking our questions. Appreciate it.

Operator

Your next question comes from the line of Eric Berg from RBC Capital Market. Your line is open.

Eric Berg - RBC Capital Market

Thanks very much and good morning. Tom, at the outset of your prepared remarks, you essentially provided an inventory of the affiliates or products that had outflows. You basically gave us a breakdown. And to a certain extent, you’ve touched on the answer to my question, but I’m hoping you can build on your answer. As you consider each of the areas that you discussed that experienced outflows, which of them would you consider to be anomalous and which of them would you consider to be open to further outflows?

Tom Faust

So just to recap, so there were -- I highlighted three areas as contributing since more than all of the net outflows for the quarter. $1.3 billion of that was large-cap value run by the team here. And that is the strategy run by Mike Mach as we just talked about. $1.2 billion to of that was Atlanta Capital, both growth strategies and fixed income strategies. And then 800 million of global income and alternative strategies were the biggest contributor to that would be global macro absolute return.

The one that seems most anomalous in terms of the past anyway is the Atlanta Capital that Atlanta Capital as a whole has been a source of net inflows in. I would say not only most recent quarter, but a fairly significant source of inflows in recent years. We know that $600 million of that $1.2 billion is completely anomalous and that it was a single client decision and that client has now withdrawn all of its assets. I think I’ll call that on anomalous. So that one feels pretty anomalous to me.

The global income, we were in net redemption. The prior quarter significantly more in net redemption in the first quarter than the second so maybe that’s less anomalous. I expect there will be an improving trend, I can’t guarantee that, but I expect based on flows over the third quarter to-date that will see a continuation of improvement there. I don’t think that’s going to bounce back to multiple billions of net inflows in the next couple of quarters.

But we think it will likely moderate in terms of net outflows. The one that is a little hard to call is large-cap value. We have been in steady net outflows for quite a few quarters. We’ve seen that franchise loose roughly 2/3 of its assets from the peak in 2011. But we have new leadership and we have a new story and we think there is a good chance that story will be well received in the marketplace and that we’ll see no further net outflows from that strategy. But that maybe an optimistic view, we’ll have to see how that plays out. Mike, first of all, is even more cloudy than usual on that particular one.

Eric Berg - RBC Capital Markets

That’s extremely helpful. One quick follow-up. In your slides you -- and again, you may have touched on this. I apologize if I missed it, but you differentiate between your total net flows, and your net flows, excluding the impact of implementation services. Realizing that you’re providing a service there as opposed to necessarily managing the assets, oftentimes others are managing the assets and you’re providing some sort of overlay, you’re still getting fees. Why is it right to think about the assets that Eaton Vance is reporting out, excluding the implementation services? Why is that a good way, or one way appropriate to think about things?

Tom Faust

Sorry, why is it appropriate to excluded or not….

Eric Berg - RBC Capital Markets

Yes, I’m referencing specifically, in your slide 13, you show the net flows, both -- no, I’m sorry, not slide 13, slide 12, pardon me -- or that’s actually, both on slide 11 and slide 12, you show the flows, including the implementation, excluding -- both including and excluding. And by doing this, I think you’re telling us that it’s helpful to know what’s going on, excluding Clifton. That’s my question. Why is it helpful to know what’s going on within it?

Tom Faust

Because there are two things. Those flows are volatile and may not reflect their success in client acquisition activity or lack thereof, that’s one. So they’re volatile and they’re also quite low fee. So imagine that we had this great quarter where we reported $6 billion of net inflows and all that was Clifton Implementation Services. If I were an analyst, which I use to be, it would be material for me to know that $6 billion of net inflows was from low fee volatile business as opposed to more normal fee and perhaps more normal longevity business. That’s the thinking.

Eric Berg - RBC Capital Markets

Great. I’ll bet you were a great analyst. And I thank you very much.

Tom Faust

Well, maybe not. I remember the good ones but I think there are some bad ones too.

Eric Berg - RBC Capital Markets

Thank you so much.

Operator

We have time for one more question from Cynthia Mayer from Bank of America Merrill Lynch. Your line is open.

Cynthia Mayer - Bank of America Merrill Lynch

Hi, thanks for fitting me in. So just circling back to floating rate and the recent move into outflows from floating rate funds. I hear you that the declining interest rates might cause an interruption in inflows. But I’m also wondering, if you step back and look at the long-term view on this asset class, I think there have been something like five straight years of inflows, including something like $66 billion or so last year, nearly $10 billion of that to you.

Is it just possible that investors have by now anticipated higher rates for so long that they have all the floating product they want or need or that, given so much of it arrived last year, I think the asset class, something nearly doubled. Is it possible that some of that is just hot money that will go out as rates rise? How do you think about how this asset class, how the market opportunity is for an asset class that has been selling so well for five years? And how do you think about how it will react as rates actually do rise? Thanks.

Tom Faust

Yeah. A good question, what we -- in hindsight, what we saw last year was a pretty significant increase in allocation by financial advisors or self-directed investors to floating rate bank loans, largely in anticipation of rising interest rates. And this was the way where you can fill up your income bucket within your portfolio allocation but to do in a way that that does not expose to significant interest rate risk.

And lots of money was attracted to the asset class on that basis and to some degree continues to be. But what’s happened since then, certainly since last -- earlier last summer is that rates have not gone up as everyone thought they would. Rates have defied expectations and come down. And there is I think increased complacency about risk in portfolios of rising interest rates.

And after margin, people are not allocating increasingly to bank loans. I think that’s what’s going on right now. And that shouldn’t be a big surprise that after as you point out, huge inflows into the asset class. As part of investors preparing for a world of rising interest rates, I think that was good. I think it was healthy. I think investors did themselves a favor by reducing their exposure to interest rate risk and using a bank loan is one way to do that.

How this plays out, if and when interest rates do in fact start going up. And I know a lot of people are of the view that the current low -- I’m thinking really treasury rates, 10-year treasury rate, is the largely a function of Fed policy and a less accommodated Fed will likely result in rising interest rates. And that investors and advisors need to prepare themselves for an environment of rising interest rates.

We’re not seeing it right now. We haven’t seen it for the last nine months but I know it’s a widely held view that in a less Fed engineered bond market, the rates will be higher. And I don’t see it following that, if rate start to move up. They we’ll see a decline in interest in floating rate strategies. I think if anything we will likely see a pickup in interest in floating rate and floating rate bank loans in particular as that happens.

But that doesn’t seem to be on the horizon for now. It’s not top on the worry list. People may feel that they’ve already taken steps. They need to make to protect their portfolios from that by increasing allocations to bank loans. But there -- somehow the relationship between the performance of bank loans and upward movement in interest rates, I don’t think, anything has happened that breaks that relationship.

But when interest rates move up, bank loans floating rate assets will outperform fixed rate assets. That’s the math, it will happen again. And I think as that happens, we will likely see more flows into bank loans. And from where we sit today, people aren’t too worried about it. And they’ve got lot of floating rate. So at the margin on retail flows are modestly negative.

To some degree, there’s not a lot we can do about that. People have lots of bank loan exposure at the moment. Eaton Vance is a big player in that market. We want to advise people across their portfolio and provide multiple solutions. We have to sell them bank loans and have Eaton Vance bank loans represented widely in their portfolio. But if at the end of the day, they feel like they have enough bank loan exposure, we want to make sure that they’ve got other Eaton Vance strategies that they think also makes sense for them.

Cynthia Mayer - Bank of America Merrill Lynch

Okay. And maybe if I could just slip in a quick expense question Laurie, I think you mentioned in the press release mentioned cutting back on discretionary marketing expenses. So I’m just wondering if you could size that and maybe talk about why you would cut back on marketing expenses right now?

Laurie Hylton

I actually don’t think that we said that on the call, Cynthia.

Tom Faust

It’s in the press release.

Cynthia Mayer - Bank of America Merrill Lynch

It’s in the press release.

Tom Faust

What it was, the discretionary marketing expenses did go down. That was really more of a function of accruing in our first quarter for, I believe, our semiannual sales meetings. So it was more of a function of accrued expenses in the given period, not a change in strategy towards discretionary marketing spend.

Cynthia Mayer - Bank of America Merrill Lynch

Got it. Great. Thanks a lot.

Tom Faust

Thank you, Cynthia.

Operator

There are no further questions. I turn the call back over to Dan Cataldo.

Dan Cataldo

That was close. Thanks for trying. Thank you for joining us this morning. And we hope you all enjoy the long Memorial Day weekend coming up and unofficial start to summer. And we look forward to reporting back to you in August. Thanks.

Operator

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

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