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Executives

Dan Cataldo – Manager of Financial Planning and Analysis

Tom Faust – Chairman and Chief Executive Officer

Bob Whelan – Chief Financial Officer

Laurie Hylton – Chief Accounting Officer

Analysts

Steven Truong – Barclays Capital

Michael Kim – Sandler O’Neill

Ken Worthington – JPMorgan

Marc Irizarry – Goldman Sachs

Bill Katz – Citigroup

Cynthia Mayer – Bank of America

Douglas Sipkin – Ticonderoga Securities

Eaton Vance Corp. (EV) F3Q 2011 Earnings Conference Call August 17, 2011 11:00 AM ET

Operator

Greetings, and welcome to the Eaton Vance quarter three fiscal year 2011 earnings release. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instruction)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Cataldo, Manager of Financial Planning and Analysis. Thank you. Mr. Cataldo, you may now begin.

Dan Cataldo – Manager of Financial Planning and Analysis

Good morning and welcome to our fiscal third quarter 2011 earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO of Eaton Vance; Bob Whelan, our CFO; and Laurie Hylton, our Chief Accounting Officer. Tom and Bob will comment on the quarter and then we will take your questions.

The full release and charts we will refer to during the call are available on our website, eatonvance.com under the heading Press Releases. P`lease be aware 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 2010 Annual Report and Form 10-K are available on our website or on request at no charge.

I would now like to turn it over to Tom.

Tom Faust - Chairman and Chief Executive Officer

Good morning, and thanks everyone for joining us. Eaton Vance earned $0.55 per diluted share in the third quarter of fiscal 2011, up 62% from last year’s third quarter. Even after backing out roughly $0.025 a share of investment gains recognized in the quarter, this was the highest quarterly EPS in the company’s history. We also set new record highs in terms of revenue, adjusted operating income, and net income surpassing the 2007, 2008 pre-bear market highs.

As Bob will discuss in more detail, we continue to maintain a strong balance sheet with over $500 million of cash and cash equivalents and nearly $285 million of investments on our books at quarter end. We believe Eaton Vance is exceptionally well positioned for the more challenging market environment that appears to be upon us.

As shown on slides two and three of the accompanying PowerPoint presentation, we finished the quarter with $199 billion in managed assets, up 15% from a year ago and down 2% from the $203 billion at the end of the second fiscal quarter. Rising stock and bond markets were a source of asset growth in the first half of the fiscal year, weaker markets were a drag on managed assets in the third quarter, more than offsetting growth from positive net flows.

Our exposure to loss of assets in a market decline is mitigated by the diversity of our business, which encompasses equities, fixed income, floating-rate income and alternative investment mandates. The breakdown of our current managed assets by mandate and delivery format is shown on slides four and five.

As shown on slide six, our $43.8 billion of gross inflows through the first nine months of the fiscal year puts us on pace to have our best sales year ever. The $13.7 billion of inflows in the third quarter were up about 1% from a year ago.

As shown on slides seven and eight, net inflows for the fiscal year-to-date were $6.6 billion or 5% annualized internal growth rate. The $1.9 billion of net inflows in the third quarter equates to a 4% internal growth rate, extending our streak of positive net flows to 22 consecutive quarters.

Consistent with fund industry trends, we did see a drop in our mutual fund sales in the quarter. As shown on slide nine, all four categories of Eaton Vance funds showed decline from second quarter sales levels. According to strategic insight, net flows into long-term funds in the U.S. fell from a positive $43.5 billion in April to positive $29.8 billion in May to $5.3 billion in June and into a negative $10 billion in July. Our sales have never been more diversified across investment categories and among major franchise funds than they are today.

Slide 10 shows our top selling funds for the quarter, which encompass all of our major asset categories and includes products managed by our Parametric and Atlanta Capital subsidiaries as well as Eaton Vance Management. The extensive lineup of new funds that we launched in fiscal 2010 continues to make meaningful contributions to fiscal 2011 quarter results.

The new Global Macro Absolute Return Advantage, Commodity Strategy, Richard Bernstein Multi-Market Equity Strategy and the repositioned Multi-Strategy Absolute Return Funds accounted for approximately 10% of our U.S. mutual fund sales in the third quarter. Based on their strong sales success, these funds have grown to over $2.5 billion in assets from just $300 million, 15 months ago.

The two Tax-Advantaged Bond Strategy funds launched earlier last year that have intermediate term and the Long-Term Muni Bond Funds have quickly established themselves as performance leaders in their respective categories. While not yet contributing meaningfully to flows, they should be position for significant growth as demand recovers for Muni Bond Funds.

Turning to fund performance; we continue to sponsor a broader array of funds with competitive track records. Please refer to slide 11 and 12 for listing of the 24 Eaton Vance fund with overall Morningstar ratings of four or five stars for at least one class of shares.

Addressing one of our largest and most visible investment offerings, I am happy to report that we have seen an important in the relative performance of our Large-Cap Value strategy in recent month. While our high quality large cap style usually underperforms more aggressive competitors in the early stages of a market recovery, we expect normally to outperform in more stable or declining market environments. This is in fact beginning to happen.

For the four months ending in July, our Large-Cap Value composite outperformed its benchmark by approximately 90 basis points before expenses. We are hopeful that this is the beginning of the cyclical turn and relative performance that we have been expecting. While we did see an increase in net withdrawals from Eaton Vance Large-Cap Value funds and accounts in the third quarter, most clients continue to express confidence in the team and its strategy by maintaining their position.

Turning to our Institutional business; the third quarter’s gross inflows of $4.3 billion were offset by $2.5 billion of outflows for net inflows of $1.8 billion. New Institutional fundings during the quarter included the Large-Cap growth sub-advisory mandate won by Atlanta Capital, a large institutional overlay assignment for Parametric and continued net inflows into Parametric’s structured emerging market and the EVM’s bank on discipline. Net withdrawals from institutional separate accounts were primarily from our Large-Cap Value and Tax-Advantage Bond Strategies. The EV institutional pipeline remains robust with several hundred million dollars in mandates one, but not yet funded.

Our Atlanta Capital subsidiary continues to perform at a high level, both in terms of investment performance and business growth, with just small to mid cap offerings now either closed to new investors approaching capacity amendment, essentially shifted to their high performing growth team with demands of the Eaton Vance Atlanta Capital focused growth and Horizon Growth Fund, and serves a broader range of institutional clients with a high quality Large-Cap Growth oriented investment style.

We are optimistic that this team’s superior track record in the Large-Cap Growth space can enable Atlanta Capital to continue growing its business well above market rates for the foreseeable future. Given the recent macroeconomic turmoil and the result in market declines, the near-term outlook is less bright for Eaton Vance and other asset managers.

Market declines hurt our business in two ways; first, by lowering the value of the managed portfolios in which we earn asset-based fees, and second, by reducing demand for the investment services we offer, thereby adversely affecting our flows. Reflecting both these factors our managed assets declined over the first 10 days of August, but it recovered somewhat in the past week due to better market performance. Thanks to the diversity of our business and our strong financial condition, I believe we are positioned as well as any firm to weather this latest market storm.

Over the past several years, we have developed a strong lineup of Absolute Return Strategy, which include Global Macro Absolute Return, Global Macro Absolute Return Advantage, Multi-Strategy Absolute Return and the Parametric Option Absolute Return Strategy Fund. The current state of market losses and increased volatility are excellent reminders to investors of the important role absolute return strategies can play in a diversified portfolio. True to their name, our funds performance has held up relatively well in this period of turmoil.

Another strength of Eaton Vance, which should work to our favor given the recent market pullback, is our focus on generating high risk–adjusted return. This is the common thread across multiple Eaton Vance investment strategies, not just absolute return encompassing a range of equity, fixed income and floating rate discipline. We have long recognized the importance of protecting investor’s capital in difficult markets and have historically achieved some of our best lot of returns during market declines.

At our Annual Summer Sales Meeting here in Boston a couple of weeks ago, the theme was whether investors are bullish, bearish or bewildered, Eaton Vance has a solution for them. Getting that message to advisors and using the resources of Eaton Vance to help them navigate these uncertain times today is our main focus of our retail sales organization. While we prepare for what may have been extended period of less favorable market conditions, we continued to pursue new growth avenues. Currently under development and expected the launch before year end are three new mutual funds, one of which will add to Eaton Vance’s growing family of absolute return offerings and the other two addressing the growing demand for multi-asset class fund that can invest across the broad spectrum of investment categories. We believe these new funds have the potential to contribute meaningfully to our fund sales in 2012 and beyond.

Another area of near-term opportunity for Eaton Vance is managing laddered municipal bond portfolios held in individual separate accounts. For decades, financial advisors have built and maintained portfolios of municipal bonds with staggered maturities for their high network clients. Given the significant changes in recent years in the muni bond market and in the business model of many advisory firms, we believe there may be a large opportunity for municipal managers like Eaton Vance to assume the function of constructing and managing laddered municipal portfolios from individual advisors who may lack the resources and know-how to address an increasingly complex and risky municipal market. We are pursuing the laddered municipal opportunity aggressively across all the retail distribution channels we serve believing that it has the potential to become a major business for Eaton Vance.

Another exciting new product opportunity, I’d like to touch on is what we call exchange-traded managed funds or ETMF. You may recall that Eaton Vance acquired a small intellectual property company called Managed ETFs LLC in November 2010. We said at the time that we thought that patented NAV-based trading methodology could be the key to bring the cost performance and tax efficiency advantages of the exchange-traded fund structure to active mutual fund strategies while maintaining the confidentiality of portfolio of trading information. The idea is that if you base the trading prices of fund shares on end-of-day net asset values, you take away the requirement for full portfolio transparency to achieve efficient markets and shares. Although, ETMF will be exchange-traded transacting in an ETMF will be in many ways analogous of buying or selling a mutual fund.

Basing transaction prices on end-of-day values has, of course, been a mutual fund standard for decades. What we have been doing in the intervening month since we acquired the managed ETF patent is putting together a product structure and a business plan to develop ETMF as a hybrid between traditional actively managed mutual funds and exchange-traded funds, a strategy encompasses a two-pronged approach to commercial development, marketing an Eaton Vance-sponsored family of ETMFs as well as licensing the technology to other active managers.

Although our conversations to-date with SEC staff have been encouraging, we are certainly not in a position today to predict the timing or likelihood of approval, but if we are successful in gaining regulatory approval, it could revise that ETMF have the potential to be game changing products for both Eaton Vance and the $7 trillion actively managed mutual fund market as a whole. We look forward to providing updates on this exciting opportunity on future calls.

With that, I’ll now turn the call over to Bob to provide more detail on the quarter’s financial results.

Bob Whelan – Chief Financial Officer

Thank you. Good morning, everyone. As Tom mentioned, we are reporting GAAP earnings for the quarter of $0.55 per diluted share compared to earnings in the third quarter of 2010 of $0.34 and compared to our second quarter GAAP earnings of $0.50. This is the highest quarterly earnings we’ve ever recorded. You may recall that our third quarter 2010 earnings will reduce by approximately $0.01 per share by cost associated with the raise of a closed-end fund offering. We also had two offsetting items this past quarter, a $0.02 charge related to non-controlling interest value adjustments and a gain on the sale of our minority stake in Lloyd George Management for approximately $0.03 per share.

We did have gains on investments this quarter including the sale of our investments, our equity investment in a CLO entity that added approximately $0.025 to EPS. As Tom mentioned, in addition to record EPS, we are reporting our highest quarterly adjusted operating earnings ever at $128 million for Q3 and adjusted operating margin of 39.2% continued steady to slightly improved revenue yields or effective fee rates and overall strong year-over-year operating leverage.

Some quick perspective on the recent market correction and what we are doing before delving into the specific financial results. In 2008 and 2009, we were able to withstand the financial shock, because we had a strong balance sheet, variable cost structure, and diversified mix of managed assets. In that crisis environment, we were conservative in our capital planning activities, limiting share repurchase activity and slowing the rate of dividend increases. We continued our business initiatives without interruption with no meaningful cuts in personnel or departures from our strategy. In fact, we made several key investments during the crisis that are helping us today.

In the current period of economic uncertainty and market turmoil, we benefit from that same financial strength, variable cost structure, and diversified business as we did in 2008 and 2009. We have over $500 million of cash, $579 million in equity, and $367 million in tangible equity capital. Our strong credit ratings and business fundamentals allow ready access to the capital market at historically attractive levels should the market for additional funding arise. The recent market correction and the related drop in our share price present us attractive capital planning opportunities. We were quite active in share repurchases in the first seven business days of August prior to our blackout period buying approximately 1 million shares in the open market.

We have increased our share repurchase activity steadily over the past year and we expect to continue to be aggressive in this type of market environment. We will continue to manage expenses prudently and apply our profitable growth disciplines to new and existing business priorities.

Now, back to the third quarter financial results. We began the third quarter with $203 billion in AUM. We generated $13.7 billion in gross sales, $1.9 billion in net flows. We are adversely impacted by $5.5 billion of market declines and finished with AUM of $199 billion. Average assets under management were $201.2 billion, our highest quarterly average ever.

Our third quarter year-over-year financial results reflect the strength of our business model. Revenues grew 20% from $273 million to $327 million on 18% growth in average AUM. Importantly, our largest revenue category, advisory and administrative fee revenues, increased 22% year-over-year. Our overall effective fee rate including all revenue categories increased from 64 to 64.8 basis points, while our advisory and administrative effective fee rate increased from 50.3 a year ago to 52.1 basis points this quarter.

Year-over-year, we experienced strong operating leverage, as total operating expenses increased 9% and net income attributable to Eaton Vance shareholders increased 63%. Our GAAP operating margin improved to 35.3% in the third quarter from 28.8% in the third fiscal quarter 2010. We have managed expenses prudently over the past year. Our third quarter compensation expense increased 10% to $94.7 million from $86.1 million a year ago, mostly driven by higher adjusted operating income based bonus accruals and a 5% increase in headcount.

Sequentially, revenues remained flat $327 million versus $325 million in Q2. You may remember that our second quarter revenues had an increase in other revenues related to net realized and unrealized gains on consolidated funds, which did not recur in this quarter.

Our advisory and administrative revenue increased $10 million sequentially to $262 million from $252 million reflecting the higher average AUM. Also, our advisory and administrative effective fee rate increased slightly in the quarter to 52.1 basis points from 51 basis points in Q2.

Operating expenses increased slightly in the third quarter versus the second in this fiscal year from $209 million to $212 million, an increase of 1%. Our compensation expense was down sequentially as our sales incentive declined in line with the sequential sales decline. This was offset by higher adjusted operating income based bonus accruals reflecting the strength in the quarter. We finished the quarter with 1,176 employees, up 4.8% or 54 employees versus the second quarter, of which half are temporary employees in our summer-intern program.

We saw an increase in fund expenses in the quarter with the growth of in some of our sub-advised products and a step-up in sub-advisory fee expense related to the Eaton Vance funds managed by Lloyd George Management. Reflecting new sub-advisory agreements with Lloyd George, we now gross up to management and sub-advisory fees meaning we record 100% of the management fee in revenue and then offsetting sub-advisory fee expense paid to Lloyd George.

The quarterly increase for each item is approximately $1.5 million. The impact of this on our effective fee rates is de minimis. In our other expense category, we saw an increase in technology expense largely due to data service expense and a modest increase in professional services expense.

Let me spend a minute explaining how the treatment of gains and losses of our seed capital investments impacted our income statement this quarter, as the results are reflected in several different line items. Last quarter, the other revenue category included $7.3 million in gains associated with our investments in mutual funds that we are required to consolidate because we own more than 50% of the fund. These gains were largely offset by hedge losses associated with those investment gains and the minority interest shareholders’ share of those gains. The net earnings impact from seed investment gains and losses were de minimis in the second quarter. This quarter we had approximately $0.5 million of investment losses in other revenue.

In the third quarter, we recognized $6.3 million of net investment gains in the other income expense line including $1.9 million of gains related to the sale of our equity investment in a CLO entity. We also saw a charge in net income attributable to non-controlling interest of approximately $900,000. These items combined for an overall gain on investments of approximately $4.8 million or $2.05 per share. We have included a slide in the PowerPoint presentation, which breaks out the major components of the net income or loss attributable to non-controlling interest which should help you understand the net earnings impact of investment gains in other large items that roll into this line item.

On a year-over-year basis, net income attributable to Eaton Vance Corp shareholders increased 63% from $42 million to $68 million on a sequential basis from $62 million to $68 million or 9%. Our effective tax rate for the third quarter was 38.7% versus 39.9% in the same quarter last year.

Let me turn quickly to our adjusted operating income metrics, which we view as the best look at our core operating results. As a reminder, adjusted operating income is defined as operating income, excluding the results of consolidated funds and adding that closed-end fund structuring fees, stock-based compensation, write-off of intangible assets, and other items we consider non-operating in nature.

Our adjusted operating income increased to $128 million in Q3, 2011 from $95 million in third quarter 2010, an increase of 36% and sequentially increased from $120 million in Q2 or 7%. Our adjusted operating margin increased to 39.2% in the third quarter from 34.7% in last year’s third quarter and from 36.8% in this year’s second quarter.

As mentioned, our balance sheet and financial position continued to be strong allowing us to invest in and grow our business. In addition to a robust cash position and strong equity levels, we have approximately $284 million in investments, of which $260 million represents the capital investments. We continue to maintain our strong investment grade credit ratings and our $500 million of debt does not come due until 2017.

Lastly, as we enter the fourth fiscal quarter some perspective in the first nine months of 2011. If you look at our nine-month results relative to 2010 and exclude or add back the non-controlling interest value adjustments related to our controlled subsidiaries, we have recorded $1.52 of EPS in the first nine months this year relative to $1.08 last year, an increase of 41%. At the same time, our adjusted operating earnings have grown from approximately $286 million to $363 million, an increase of 27%. We are on track for a record full year financial results.

Now, we will open the call for questions.

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting question-and-answer session. (Operator Instructions) Thank you. Our first question is from the line of Roger Freeman with Barclays Capital. Please state your question.

Steven Truong – Barclays Capital

Good morning. It’s Steven Truong here for Roger. I was wondering if you can talk a little bit more about the institutional channel and some of the trends we are seeing here. You mentioned backlog looks pretty good, what is your sense in terms of the timing of the funding of this backlog? Thank you.

Tom Faust

We’ve got visibility, I guess, I would say pretty good through the end of September. And over that timeframe, we’ve got – I guess on a, I’d say, on a gross basis something like $650 million or so of the inflows maybe half that on a net basis. As we stated on the call, these are awarded, but not funded mandates. So, on a net basis, it’s about $300 million through the end of next month, and let’s see, how is that broken down. I guess, the biggest pieces of that, again, I think as we mentioned, are our bank loans, structured emerging markets and some small cap core.

Steven Truong – Barclays Capital

Okay, thank you. And my follow-up has to do with the new fund launches, you mentioned three. And where are you in terms of the distributor and putting those funds on some of the platforms? Thank you.

Tom Faust

So, these are funds that are not yet launched. And I think one of them we expect to launch around the end of October, the other two at the end of September. So, clearly, we are not in a position today to get these on platform, so it will be a while. I would expect that we want to have them up and running on platforms, I’d say, ambitiously, by the end of the calendar year.

Steven Truong – Barclays Capital

Okay, thank you.

Operator

Our next question is from the line of Michael Kim with Sandler O’Neill. Please state your question.

Michael Kim – Sandler O’Neill

Hey, guys. Good afternoon. First, can you maybe just talk a little bit about the outlook for bank loan funds in the context of persistently low rates and maybe some incremental pressure on NAVs, just given some rising credit risk? And then any color into how flows are maybe tracking thus far in August?

Tom Faust

Yeah, we’ve seen certainly a bit of a downtrend. We’ve been in a, I guess I’d say modest outflow mode the last few weeks. If you track the performance of bank loans were down I think maybe 3% or 4% on a NAV on a price basis from the peak, which would have been maybe sometime middle of last month, I am not quite sure of the timing of that, but I think it’s about 4% down from there.

Good news and bad news in that, the good news is that spreads which have gotten quite tight where people were saying, look, I’ve got a LIBOR based income stream and a relatively tight spread, while that spread has now come out a little bit as prices have come down. So, there is more opportunity to earn income, to provide income at these modestly lower prices. And of course the other side of that is people have incurred capital losses as the prices have adjusted for what seems to be a pretty rapidly cooling expectation for economic growth going forward both here and abroad.

I think from a fundamental perspective, I think you have to say that the corporate sector and issuers of bank loans are really in quite a strong position if we are about to enter into a significant period of economic weakness. Certainly, there has been great repair to corporate balance sheet since the 2008 market downturn, that’s no news to anybody that’s been following the markets closely. So, we feel like the underpinnings of the bank loan market in terms of the quality of the credit is quite good at the moment. We also believe it was amply demonstrated in the last downturn that bank loans can perform very well from a credit perspective given their senior status in the capital structure of the issuers and given the associated collateral that investors can approach the asset class with confident that what people expect is a period of modest or even moderately severe economic weakness. But we're in a bit of I guess recalibration phase in terms of expectations for market growth that’s has affected bank loan prices in the short run, how that sells outs I think will be determined really by how the economy performs and unless it's a severe recession, I think bank loans will prove be a good buy from current level.

Michael Kim – Sandler O’Neill

Okay and then maybe just follow-up on expenses. Are there any areas where you think you can maybe tap on the breaks so to speak just assuming the markets continue to be under pressure, maybe it's new hiring or other cost, any color there would be helpful?

Tom Faust

I think we're in pretty good shape there. We don’t have any, what I would call major spending initiative that we're in the midst of the hiring that we've done. As Bob suggested a lot of that is just short-term summer hiring in connection with an intern program. One of the nice things about our income statement is that we've got pretty significant percentage of our cost that are effectively built in stabilizers that as to say.

We've got our bonus pools are primarily based on operating income levels. So, when pre-bonus operating income comes in, so does that component of our compensation. Similarly when sales go down, sales force compensation and incentive compensation, the sales people goes down and then finally the distribution payments we make either as service fees or as what we call revenue sharing payments, those typically are mostly focused on asset levels and to some degree also on sales.

So, we’ve got these built-in stabilizers, but beyond that we don’t really have plans to change direction. Maybe there’ll be some incremental hiring, where the timing of that gets slow down a little bit, but certainly beyond that we’re not looking at any changes in how we're approaching our business.

Michael Kim – Sandler O'Neill

Okay. Thanks for taking my questions.

Operator

Thank you. Our question is from the line of Ken Worthington of JPMorgan. Please state your question.

Ken Worthington – JPMorgan

Hi good morning. So Eaton Vance has been extremely good at getting the sales force behind one or two products, it was large-cap value, then global macro, then the floating-rate products. As you look forward, you mentioned a whole host of products, but is there one or two that you think can be kind of the next global macro fund for Eaton Vance? Like one or two that you just have more confidence in, given the market conditions and market environment?

Or is this going to be kind of a changing environment where you mentioned kind of you've got the products for the bullish, the bearish, and the uncertain is it going to be a different dynamic, where you see maybe a number of different products maybe all do okay in generating sales, but no big dominant force? And I guess Parametric seems like it's doing quite well. And Atlanta Capital seems like it's crushing it, so maybe one of those is the area. Thank you.

Tom Faust

Yes, it's little hard to call. I think as you suggest it depends a little bit on how the market goes. We touched the market bottom and we go roaring up from here, and equity is the place to be. As you suggest I think Atlanta Capital equity and particularly their Focused Growth and Horizon Growth Fund, both of which are relatively small funds, $100 million or less I believe currently, which have long track records, outstanding track records, and really prime for outstanding growth.

I think in that kind of market environment those could become very significant products for us. If it’s a market environment, where people are maybe more bewildered than bullish, I think the range of absolute return strategies that we have Multi-Strategy Absolute Return, Global Macro Advantage, I might suggest that that we’ll have a new absolute return strategy coming out in the fourth quarter. I think those could become a growing part of our business.

If we're more of a defensive mode, there are number of fixed income areas that I think are potentially poised for growth. Our Strategic Income Fund is a fund with a long track record going back to the early 90s with high risk adjusted returns that has been a relatively strong performer, particularly in down market environment. I guess I would also point to our muni franchise.

People seem to forgotten the turmoil that the muni market within six months ago or nine months ago with the Meredith Whitney call on 60 minutes, but munis for those who have been following have been performing quite well in the current environment, certainly the near-term concerns about the state of municipal finance have diminished considerably and we think that business, both the Eaton Vance more income oriented offerings as well as the TABS after-tax total return offering, we think both of those could certainly become significant growth products for us again.

So my forecast would be that it's going to be more mix that we’re not going to have one product dominate our sales like bank loans did earlier this year, like Global Macro did last year, like Large-Cap Value did the year before. Certainly our preference is to have a broad-based business and I think that's the most likely outcome. But if the market and our sales team really wants to get behind a particular product and views that is best for the current environment. I think we’ve got lots of different possibilities, but what that might be is a little hard to say at the moment.

Ken Worthington – JPMorgan

Okay, great. And then just on the Atlanta Capital, I think the fourth quarter is when you mark the earn outs on the P&L. Given where market conditions are right now and the growth in earnings at Atlanta Capital, what would the impact be if market levels stay where they are today through the end of the next quarter? Can you give us any guidance on how big that number, the impacts on the P&L could be from that?

Dan Cataldo

Hey Ken, this is Dan. We don’t have that number on hand as of yet. I mean you can certainly look back and see what it was fourth quarter of last year. We do anticipate that there will be a charge because they have been having a good year. We just don’t have a number to give you.

Ken Worthington – JPMorgan

Okay, worth a shot. Thanks very much.

Operator

Thank you. Our next question is from the line of Marc Irizarry with Goldman Sachs. Please state your question.

Marc Irizarry – Goldman Sachs

Great, thanks. I might have missed this, but can you just talk about the comp in terms of how much of the comp bucket is variable versus maybe more fixed and then within that how much of it is maybe related to sales-based comp versus more discretionary bonus focus?

Bob Whelan

Sure. It's Bob Whelan. Thanks for your question, Marc. I’d say of the compensation, at least well over half is variable. And that component relates to the bonus accrual, which relates to how well we're doing in terms of earnings. And then there is, obviously, a sales incentive component related to our sales that also includes our affiliates. So, that's the majority of it. I think if you look at our trends in compensation year-over-year, you'll see that we tempt our based component, which is again the minority piece in line with the increase in average headcount, and again the other components varying with strong sales and with our strong earnings.

Tom Faust

I guess I would add that the stock-based component also we view as variable that was recognized on a GAAP basis over, I guess, the five-year period. In terms of what we grant every year obviously that's somewhat depended as well on the performance of the company.

Marc Irizarry – Goldman Sachs

Okay. And then, Tom, you mentioned the absolute return strategies and multi-asset class strategies as potential drivers of flows in 2012 and beyond as you rollout some new products there. Could you give just maybe a little more color on how those products will differ from what you already are out there with? Would these be funds on the at multi-asset class side that would maybe use your own funds? How should we think about those new products relative to what you have in the market with?

Tom Faust

Well, there are three strategies that as I've talked about, one of them is a Parametric strategy that Parametric offers a variety of what they term structured equity and now structured commodity strategies and the idea was just new fund would be to combined those various strategies together with offsetting hedges so that you are pulling alpha out of multiple strategies and combining those. The nature of their strategies is such that you can do what we believe are reliable back test on the strategies. Certainly, it's been very encouraging from the back test results we’ve seen. Of course, we can’t use those back test results in marketing the fund, but potentially there might be opportunities to take that same strategy to other markets; for example, institutional, where they can get comfortable with the back test results and potentially jumpstart the assets into the strategy.

The other two new funds are in different ways extensions or companion products to current offerings. We today, I think people are aware, offer an equity fund sub-advised by Richard Bernstein, who many people will recognize as the long-term Merrill Lynch strategist. That fund has been in the market since, I believe, the end of October of last year and did have roughly $500 million in assets before the market declined.

The second fund to be managed or sub-advised by Rich and his team would be an all asset product. So,, the first one is potentially Global Multi-Market Equity Strategy; this is a Global or Multi-Market All Asset Strategies to investing in stock bonds and potentially other assets around the world using his top-down model.

And then the third new product is what we call Multi-Strategy All Market, which is an extension of our Multi-Strategy Absolute Return Fund run by our Custom Solutions Group here in Boston, investing in a variety of underlying Eaton Vance portfolios. The existing product, the absolute return product has a target volatility range of I think at something like 2.5% to 6%. This new fund would have a meaningfully higher target volatility range, and therefore it would be normally taking on data exposures to stock environment markets depending on what their modes show as offering the best risk-adjusted returns possibilities.

Again, there is some ability to do back testing of that and we're comfortable with that that’s the strategy that can perform well in a variety of market environment. But it's taking advantage of an exiting team that has had, I’d say considerable success both in an investment sense and in a business building success with the sense with the current product, the Multi-Strategy Absolute Return product and this is taking it out the risk spectrum a little bit, willing to take Prudent Bear Fund exposure to stock and bond market betas, when the risk reward seems attractive.

Marc Irizarry – Goldman Sachs

Great. And then if we just take a look at the fee rate for a second, it's moving up. How should we think about the new products coming in, maybe the large cap value assets on the institutional side rolling off? What's the outlook for the fee rate here? It seems to be coming in a little bit stronger than we might have expected at first?

Bob Whelan

The fee rate, if you go back in time, it’s held pretty steady, steady to up actually year-over-year and a little bit up sequentially. If you look at the mix of business, the mix of business really hasn’t changed, and then I'm looking at just equity percentage of total AUM last year versus this year is essentially 60%.

We’ve seen some change in the mix because of a move towards floating rate from fixed income, but that's very slight. I think going forward, a whole bunch of factors come into play, whether it be new funds with attractive economics or some lower fee products maybe a Parametric. So, it's a little bit difficult to predict, but I think the past year has been a good indicator of us being able to maintain a pretty steady effective fee rate.

Tom Faust

It is really quite mixed. I talked about the laddered muni opportunity, which we think has potential, big growth potential, but that's likely to be a significantly below average fee. We’re not going to get 50 basis points for managing laddered muni portfolios. As Bob mentioned, some of Parametric’s business, particularly their overlay business, where we did see some growth in the quarter, is at substantially lower than average fee. On the other hand, these absolute return products and Multi-Strategy products tend to be well above average fee and today the balance has been, some products are above average fee, some are below average fee, but the average hasn’t changed materially. We certainly don’t see that trend adjusting meaningfully anytime soon.

Marc Irizarry – Goldman Sachs

Okay, great. And if I could just ask one more, where are we in the institutional cycle of redemptions from large cap value? You mentioned that there has been an improvement in performance in recent months, so maybe some of the wheels have been set in motion in terms of replacement activity there. Can you give some sense of where we are in terms of the institutional redemptions from large cap value?

Tom Faust

Yeah, I gave just a quick look at our institutional pipeline through the end of next month and that would include large value as well as everything else. So, there is nothing imminent in terms of big departures from large value that we are aware of. And I think people are pretty well understand what the strategy is and how it works and the kind of market environment in which it should perform relatively well and when it should do perhaps less well. And I think we have done a good job of telling people that this is what we do. And without apologies saying that we believe it works over market cycles, but that doesn’t necessarily mean that it works at every given point in the market cycle. People understand that the market seems to reach the bit of an inflection point over the last couple of months.

Clearly, both logic and in actual numbers would – so, this is a time when if we’re doing what we’re setting out to do that we will – we should outperform here and that’s what we are doing. So, I am hopeful, maybe naïvely so, but hopeful that the flow trend for large value will improve from here, that’s not to say that it’s performance turns down or there are still some significant investments held either in sub-advisory relationships or institutional relationships, or in various types of route platforms, where somebody says, sorry, time is up and make a decision almost irrespective of where we are in the market, but I can’t comment that, that won’t happen, but I think we are encouraged that the fourth quarter flows at least relative to the market could be better than where we were in the third quarter.

If there is a big quite out of equities, I can’t comment that we won’t – that we will be immune from that, but I think generally we feel like that the performance trends takes the pressure off and buys us some time and that in the time that we’ve bought, given the market environment that we see, the more choppy market environment, we ought to shine and ultimately we don’t shine, we’re going to lose even more assets, but we’re confident that that’s certainly not the likely case.

Marc Irizarry – Goldman Sachs

Thanks.

Operator

Thank you. Our next question is from the line of Bill Katz of Citigroup. Please state your question.

Bill Katz – Citigroup

Okay, thanks. Just want to come back to the large cap value discussion for a moment, you mentioned that the last four months, I guess, you are outperforming on a gross basis. So, the question is how is that performance on a net basis? And more of a – how does that fund marketed into the channel? Is it on a net basis or a gross basis?

Tom Faust

Well, just to be clear, what I was quoting was the performance over the last four months of our master composite, which I believe encompasses both funds and separate accounts and that those numbers are typically reported on a gross basis, that is, before fees. So, if it’s 90 basis points outperformance, which is what we quoted over four months, and let’s say, you’ve got a fee of, I don’t know, depending on where you are investing in, but if it’s a mutual fund, it would be – I shared, it would be, I don’t know, I don’t have the number handy, but let’s say it’s 80 basis points something like that, maybe 70 basis points. If you take a third of that away over a four-month period that will give you an indication of what the net performance would have been over the period. Again, that’s not precisely the number for the mutual fund though it wouldn’t be very far off from that. But there wouldn’t be over a four-month period, logically, there is not going to be a huge difference between gross and net, but obviously that difference will depend on the specific fee structure of whatever the individual account you are talking about is.

Bill Katz – Citigroup

Okay. And then a question in terms of capital, you made some prepared remarks about contrasting 2007 and ‘08, what you did then and what you are doing now, so, a little confused. So, you stepped up the buyback into the quarter, I appreciate that. From here, are you suggesting that you guys are pretty more conservative, given the choppiness of the market or more aggressive on buyback? I am just trying to better understand the strategic direction of capital?

Bob Whelan

Bill, well Tom, its Bob. We see that as a great opportunity for us with the share price where it is, but the multiple having contracted. We think the stock is cheap, so we’ve been active in the market. We bought about 1 million shares. I think this year we’ve been – our share repurchases have increased. They have increased year-over-year. Our projection is that we will continue to be pretty aggressive in this market environment. I think we have $118 million worth of shares repurchased year-to-date and we can see that going over a good bit more.

Tom Faust

I guess, we would contrast, where we are today versus the last time our stock was – our earnings were at a similar level. We hit new record earnings of $0.55 on a share, I think the previous peak was maybe $0.52 or something on a…

Bob Whelan

$0.52 on an adjusted basis.

Tom Faust

$0.52 on an adjusted basis, at that time, our stock price was in the 40s and touched 50 on one day and at the end of October 2007. Lately, our stock price has been in the low 20s. We’ve got as we talked about a lot of money on our balance sheet. We have got strong cash flows and no obvious need to use that cash to support the growth of our business. We think it makes sense to return that money to shareholders and we think buying the stock in the low to mid 20s is the very attractive way for us to do that.

Bill Katz – Citigroup

Just one last one, thanks for taking all my questions, a little bit of a modeling question, but I noticed that the deferred sales commission amortization continues to drop. Maybe just a little bit of an outlook there. And just to quantify what you said on the fund side, the $8 million plus, is that a better run rate, all else being equal, absent a big change in volumes?

Bob Whelan

Bill, I think that trend you are seeing in the amortization will continue. At some point we’ll get – the decline will slow, but we are selling virtually no B share product, less C share product, and no exchange funds. Those are the three contributing products to that amortization number. So, it’s likely that you’re going to continue to see declines. It’s just at some point, given a stable – assuming we have some stable level of C share sales you would expect that to bottom at that rate.

Bill Katz – Citigroup

Okay. And then the fund expense, the $8 million plus, is that a good run rate?

Bob Whelan

The fund expense?

Bill Katz – Citigroup

Yes.

Bob Whelan

That will depend on really the growth of the funds, which that relate to. A large piece of the fund expense is sub-advisory fees. So, to the extent, we have growth in funds that are sub-advised. And when I say that, I mean, the Bernstein products, our commodities product, the Lloyd George products, to the extent you see continued growth in those, that line item will grow. The other component in there which is also fund asset based, our fund expenses related to institutional funds that basically we collect it all in management fee. So, as those – to the extent those fund flow, you would expect that component to grow as well. So, really, it’s based on business growth, primarily specific fund asset growth.

Bill Katz – Citigroup

Great, that’s helpful. Thanks for taking all my questions, everyone.

Operator

Thank you. Our next question is from the line of Cynthia Mayer with Bank of America. Please state your question.

Cynthia Mayer – Bank of America

Hi, good morning. Maybe just couple of follow-up modeling questions, I don’t know who is in the release, but could you give us the ending share count number?

Bob Whelan

It may just take us a minute to dig that up.

Cynthia Mayer – Bank of America

Okay. Do you want me to ask number two?

Bob Whelan

Yes, go ahead.

Cynthia Mayer – Bank of America

Okay. So, then the second question is just on comp. Again, I am wondering – I was just looking back at 4Q ‘08 and it looked like – obviously things were much worse than, but it looked like that quarter, you actually reversed some comp. And I am wondering if assets were to stay a bit lower, whether it’s possible that in the first three quarters of your fiscal year, you’ve over-accrued and you would want to reverse or is comp so sensitive that it basically is fine for where you are at this point?

Bob Whelan

I think in the fourth quarter of 2008, there was such a drastic drop in the market in our last fiscal – the last month of our fiscal year October that we made a decision to bring cost down to set an expectation going into the next year thinking that the year would be okay, because 11 of 12 months were done, but we’d be starting off at such a difficult level. I think this time around we are obviously keeping an eye in the markets and one of our levers on compensation is to change what we accrue and the percentage that we pay out and we’ll obviously have those discussions. We are not sure that this market correction is of the same magnitude as the last one to warm that, but that’s definitely a lever that we have.

Tom Faust

Cynthia, the outstanding share count at the end of the quarter was just over 117 million shares.

Cynthia Mayer – Bank of America

Okay, great. Thanks a lot.

Tom Faust

Thank you.

Operator

Thank you. Our final question is from the line of Douglas Sipkin with Ticonderoga Securities. Please state your question.

Douglas Sipkin – Ticonderoga Securities

Yes, thank you and good afternoon, officially. Just wanted to drill down into the institutional flows a little bit more. Can you maybe just provide a little bit of color around how much was sort of the Atlanta Capital strength versus how much was bank loan strength?

Bob Whelan

Yes, we just have to flip to some pages here. But Atlanta Capital as we talked about at the last call won a big sub-advisory mandate, that’s funded in May and they actually from an institutional standpoint across all categories raised almost $1 billion. So, they had a lot of success there. In terms of the Eaton Vance bank loan discipline, I am just scrolling down the numbers now, but it wasn’t – that’s probably $200 million in net flows in the sub-advisory channel in bank loans.

Douglas Sipkin – Ticonderoga Securities

Okay, great. Well, that’s helpful. That’s good color. And then just to follow-up on the large cap value, more specifically, just equity flows. I guess, I mean, given what you guys have sort of been saying and been saying all along, so how should we be thinking about the outflows this quarter? Is it really more a function of just the markets than more than anything else or was there actually some guys saying, hey, okay, the underperformance has gone too long for me, I’m going to look to move elsewhere?

Tom Faust

We attributed mostly to the markets. Of course, you never know, people don’t generally tell us why it is they are redeeming or buying either way, but the timing of the increased outflow has been coincident with market declines. And as I think I hinted in my comments, very oftentimes of relative outperformance for Eaton Vance are when markets are weak. So, we think it’s pretty likely that accelerated net outflows are moving to net outflows we have seen those in recent weeks is almost entirely a function of the markets and that’s backed up by industry flow data.

Douglas Sipkin – Ticonderoga Securities

Okay, great. Thanks for taking my questions.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Bob Whelan – Chief Financial Officer

Well, thank you for joining us this morning. If you have follow-up questions, please don’t hesitate to call and we’ll look forward to speaking with you in November to report on our full fiscal year end results. Thank you.

Operator

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

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