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Executives

Daniel C. Cataldo – Vice President and Treasurer

Thomas E. Faust, Jr. – Chairman, Chief Executive Officer and President

Robert J. Whelan – Vice President, Treasurer, and Chief Financial Officer

Analysts

Kenneth B. Worthington – JPMorgan Chase & Co

Roger Freeman – Barclays Capital

James Howley – Sandler O'Neill & Partners, L.P.

Daniel Fannon – Jefferies & Company, Inc.

Craig Siegenthaler – Credit Suisse

Cynthia Mayer – Bank of America/Merrill Lynch

William R. Katz – Citigroup Inc.

Eaton Vance Corporation (EV) F1 2012 Earnings Call February 22, 2012 11:00 AM ET

Operator

Greetings, and welcome to the Eaton Vance First Quarter Fiscal Year 2012 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Dan Cataldo. Thank you Mr. Cataldo, you may begin.

Daniel C. Cataldo

Thanks [Ruth]. Welcome to the Eaton Vance first quarter fiscal 2012 earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO; 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 earnings release and the charts we will refer to during the call are available at our website, eatonvance.com under the heading Press Releases. Today's presentation contains forward-looking statements about our business and financial results. The actual results may differ materially from those projected due to risks and uncertainties in our operations and business, including but not limited to those discussed in our SEC filings. These filings including our 2011 Annual Report and Form 10-K are available on our website or on request to the company at no charge.

And now I'd now like to turn it over to Tom.

Thomas E. Faust, Jr.

Good morning and thank you for joining us. Our first fiscal quarter began much to like fiscal 2011 ended, the significant market volatility contributing to investor uncertainty, and net client withdrawals. For the first quarter as a whole we saw net outflows of $1.1 billion, our second consecutive quarter of negative net flows after 22 consecutive quarters of positive organic growth.

But since the time of the calendar year the market environment and our flow results have improved markedly. On the back of strong equity returns, we had $800 million of net inflows in the month of January and closed the fiscal quarter with $191.7 billion in managed assets, up 2% from the beginning of the quarter and unchanged from a year ago.

Although we are still early in our second fiscal quarter and things can change based on flows in the quarter to-date in visible pipeline through the end of January we now expect to return to positive internal growth in the current quarter. The favorable performance of the equity markets so far in February also positions us well for the second quarter asset growth.

We had a solid first quarter from an earnings perspective with $0.47 in adjusted earnings per diluted share. This compares to adjusted diluted EPS of $0.47 in the fourth quarter of 2011 and $0.45 in the year ago quarter.

As a reminder our adjusted earnings differ from GAAP earnings by excluding changes in the redemption value of non-controlling interest and our majority on subsidiary that we're required to reflect in our GAAP earnings. Bob will discuss our financial results in more detail in a moment.

As I comment on the first quarter, please refer the slides on our website for additional color. As I mentioned, we had $1.1 billion in net outflows for the quarter, an improvement from the $2.7 billion in net outflows in the fourth quarter, but still not where we want to be.

Net outflows from our large cap value franchise, which totaled $2.1 billion in the quarter continue to be the primary drag on our organic growth. With $23 billion in the strategy and one-year and three-year performance that [lagged] its peer group, we expect to see continued outflows until relative returns that are to improve. Doing everything we can improve the performance of EVMs large cap equity strategies and large value in particular remains a major priority for us.

As we evaluate our business prospect going forward, we think about opportunities to grow in the changing lights. (Inaudible) today is simply filling MorningStar’s style boxes. Increasingly financial advisers and their clients are focusing their efforts on meeting identified needs which sometimes called need-based or outcome oriented investing.

The primary focus on investor's investment program may for example be to generate income to pay for retirement or family members’ education. Total investing outside of corporate retirement plans may also have a particular need for after-tax income. Income investors may also seek opportunities to earn current yield without taking undue interest rate risk.

Absolute return investors may take investments that don't depend on the stock and bond markets to drive returns and which can lower the volatility of the overall portfolio. And investors looking for higher returns and increased diversification may seem to add exposure to the faster growing emerging economies around the world.

I'm pleased to observe that Eaton Vance has strong performing market-leading strategies to meet each of these growing demands and they're integral to our future.

Let me give you some examples. In municipal bond industry flow has steadily increased in the recent months as the default concerns of late 2010 have subsided an appetite for cash free income has risen. This is an area where we are very well positioned. As of the end of January our flagship national municipal income fund Class I is in the top desk all of its peer group for total return performance over 1 billion in 10 years and remains among the highest yielding investment grade Mini bond funds in the industry for the current distribution rate of just over 5%.

Our Tax-Advantage Bond Strategies intermediate and long-term funds ranks first in their respective categories for one-year returns in 2011. The excellent performance of the tax-managed funds is beginning to have a meaningful impact on our flow results, as all three strategies short-term, intermediate, and long-term had positive net flows in the quarter.

You may also recall that last quarter I talked about a new muni bond initiative with our tax group now offering laddered and muni separate accounts. Also early this product shows signs of being a significant success.

We raised over $ 100 million dollars in muni bond ladders in the quarter and momentum continues to build. Continuing with the income [scene] flows into our market-leading floating-rate bank loan franchise turned positive in the quarter and should be health going forward by our strong loaded performance and the continuing favorable fundamentals and technicals of the bank on asset class.

Our floating-rate fund was recently awarded a gold rating from MorningStar, one of only two bank owned funds to be still recognized. You may recall that retail demand for bank loan products turned sharply negative last August when the Fed announced its intention to keep interest rates low amid concerns of a softening in the U.S. economy.

With the economy now showing clear signs of improvement, the strong credit fundamentals, high current yields and minimal interest rate risk of floating-rate bank loans should command renewed attention from investors. In fact, floating-rate bank loans are today among our, again among our best selling products.

High yield bonds is another area of strong industry flows where Eaton Vance has favorable performance and a growing competitive position. Like floating-rate bank loans, the fundamentals of high yield credit remains solid and current distribution rates are attractive in the range of 7.5% for our funds Class V shares.

Income fund of Boston, our flagship high yield fund offering is currently our fourth best drawing fund and we have made high yield an area of increased focus for our institutional marketing organization. We are optimistic that we will see significant growth in high yield strategies over the balance of the fiscal year.

An investment category that is attracting lot of attraction of late is absolute return. This alternative to traditional stock and bond investing is quickly becoming a mainstream category for retail investors. In the absolute return category, we offer five distinct funds and have a 28% market share of [Lepper] category assets. And tracked by [Lepper], 77% of our asset return assets were in the top quintile of the peer group over one year, and 98% in the top two quintiles as of the end of January.

Our growth in asset return asset managed with [Meteoric] in fiscal 2010 that turned negative last year after we closed our flagship Global Macro Absolute Return fund to new investors in October. Thanks to investments in our global income team supporting infrastructure and the further development of the markets in which [GMR] invests, we were able to reopen the fund in October of last year.

Reflecting this change, the net growth of our asset return funds were simply flat for the first quarter, improving as the quarter progressed and more than 400 million better than the prior quarter. If you believe asset return is a retail asset class that's here to stay, and we do, this should be an important part of our growth story going forward.

In emerging markets, we have both the equity and income sized covered, Parametric Structured Emerging Market strategy continues to be a solid performer and has gained a lot of traction in the institutional and registered investment adviser market. The strategy raised over $600 million in net flows in the first quarter and we expect even better flows in the second quarter at awarded institutional mandates are funded.

On the income side our emerging market local income fund gives investors access to locally denominated emerging market economies through investments and at currencies and interest rates of developing countries. And the distribution rate at 7.9% for Class I shares is the highest of any mutual fund we offer. Both our equity and income EM strategies also participation in some of the world's most dynamics and fastest-growing economies and meaningful diversification away from the dollar and other established market currencies.

Our focus on income alternatives and emerging market strategies in the discussion does not mean that we're neglecting our traditional equity discipline, that's anything but the case. Fundamental active equity has been and will continue to be an important part of our fabric and identity, where we have performance we can and will grow these franchises.

In the first quarter this was best evidenced by Atlantic Capital which had over $400 million in net flows into equity strategies. Our new product pipeline remains robust, whereas in 2010 and 2011 we launched a number of new mutual funds in U.S. This year our primary focus has been offshore and institutional bonds as well as non-traditional products.

January saw a successful closing of our first eUnits offering in which we raised $26 million. Although barely moving the needle on our overall sales results, this was a notable event nonetheless given the potential for follow-on products. eUnits are totally new type of exchange traded structured investment designed to help risk emerged investors with assets stuck on the sidelines transition back into the market.

For January eUnits offering is fixed to provide returns on initial net asset value based on the performance of the S&P 500 over the two year term of the trust. If the S&P appreciates the trust fixes the mass index return to the capital 17.85%. If the S&P declines by 15% or less the trust fix to return the initial net asset. And if the S&P declines more than 15%, the trust fix to outperform the index price decline by 15%.

The trust is structured as a close-end investment company, invest primarily in term (inaudible) U.S. Treasury, and gains exposure to the index price performer through single paid contracts entered into with multiple dealers rated investment grades. Counter parties risk is limited to the in the money value of the contract position and mitigated by the posting of collateral.

Although structured notes, unlike structured notes that may offer similar target return profiles, eUnits are not exposed to concentrated issuers or credit risk. eUnits are fully transparent, exchange traded and seek to mitigate the emergence of significant secondary market trading discounts using an innovative methodology that is a subject of a pending U.S. patent.

More than a $100 billion of structured notes were issued in the United States in the peak year of 2007, and issuance remains substantial today despite heightened concern about the concentrated issue of credit risk that is an inherent feature of structured notes. By addressing this concern head-on and providing a level of transparency and liquidity unmatched by most structured note offerings we think eUnits have the potential to be formidable competitors in the structured product marketplace.

We look forward to updating out progress in future calls. Also on the new products front, we've just launched a laddered corporate bond retail managed account program to complement the community bonds lateral products that I mentioned earlier. We have a new initiative with a major Canadian fund sponsor whereby we will offer natural resources mutual funds here in the U.S. (Inaudible) by them and they'll offer a floating-rate bank loan fund in Canada [favored] by us. We expect growth funds to be in the market sometime in the spring.

In Australia we are in the process of rolling out an institutional floating-rate bank loan fund. We are also working to develop a tax-managed over lay and core of separate accounts business for Parametric in Australia focused on the large superannuation fund market and private banks serving high [net worth] Australian taxpayers.

This is the first significant business development opportunity for Parametric's industry-leading tax management capability that we have pursued outside the United States and we are very exited about the potential for this in Australia. And while taxes have not been at the forefront of investor thinking in the U.S. the recent years, thanks to low rates and modest equity returns the likelihood that this will change in 2013 and beyond seems to be very high.

You could be confident that Eaton Vance and Parametric as leaders in tax-managed investing will be ready to help investors as needs for more tax efficient investment solutions arise.

That covers my comments. And I’ll now turn the call over to Bob to review the financial results in more detail.

Robert J. Whelan

Thank you and good morning. Our financial condition continues to be strong as reflected in our balance sheet, cash generating ability, credit ratings and consistency of financial results. We saw sequential improvement this quarter in our growth and net flows and ended the quarter at higher managed asset levels than the quarterly average.

We continue to manage for profitable growth with a keen eye on the profitability of new assets raised and new products and a continuous focus on the cost of sales and expenses generally.

As such we're looking at all spending categories and managing staff additions closely. As Tom mentioned we are well-positioned for growth going forward and at the staffing and infrastructure in place to support that growth. We are reporting adjusted earnings of $0.47 per diluted share for the first quarter of 2012 versus $0.45 in the first quarter of fiscal 2011 and $0.47 in this past fourth fiscal quarter.

As a reminder, adjusted earnings per diluted share reflects the add-back of adjustments in connection with charges in the estimated redemption value of non-controlling interest in our various affiliates, as well as other items deemed to be non-operating. This quarter, our GAAP earnings included an $8.1 million charge reflecting the estimated growth in value of non-controlling interest in Parametric Portfolio Associates over the past year.

Please refer to the two tables in the slide that details the history of this charge as well as the other components of non-controlling and other beneficial interest. In an effort to simplify our financial reporting and provide greater transparency into our earnings from operations, we have reclassified income earned in realized and unrealized gains and losses on investments in consolidated funds from the other revenue line item to below operating income.

These two items are now included in the other income section in the interest income and net gains and losses on investments categories. As expected, this quarter's comparative results were impacted by a sequential increase in compensation expense as we normalized our bonus approvals up from the fourth quarter's reduced levels and saw the typical seasonal increase in stock-based compensation and base salaries.

As a reminder, stock-based compensation in our first quarter of each fiscal year is higher, because stock option grants to retirement eligible employees must be expensed immediately rather than over the five-year vesting period.

We would expect stock-based compensations to be exactly $3 million lower next quarter as a result of this accounting treatment. We benefited this quarter from realized and unrealized gains and losses on investments of approximately $0.04 per diluted share. Included in this number is a gain of $2.4 million or just over $0.01 per diluted share related to last year’s sale of our equity interest in Lloyd George Management, for which an additional payment was received during the quarter. The balance represents net realized and unrealized gains on our seed capital investments.

As a reminder, last quarter's earnings were adversely impacted by losses on investments of approximately $0.02 per diluted share, and we benefited by approximately $0.04 per diluted share from lower bonus accrual rates going into fiscal year end.

Our comparison this quarter to last year's first quarter and the sequential comparisons are fairly straightforward, as our average asset levels are essentially flat across all three periods. As such, we are reporting adjusted net income attributable to Eaton Vance shareholders of $54.4 million this first fiscal quarter and $55.7 million a year ago and in the fourth fiscal quarter 2011.

Ending assets under management of $191.7 billion were unchanged from ending assets as of the year earlier, and we’re down 2%, higher than last quarter's ending in average assets of $188.2 billion. Investment advisory fees were down 1% from last year’s first quarter, $239.5 million versus $242.7 million in line with the decline year-over-year in the effective advisory and administrative fee rate from 51.9 basis points to 51.1 basis points this quarter.

Distribution revenues continue to be impacted by shifting our fund business away from share classes with higher distribution fees to those with lower or no distribution fees. We saw a decline year-over-year of 18%, from $27 million $23 million.

Service fee revenue declined year-over-year, in line with the decline in unit assets that pay these fees.

Total operating expenses declined 3% year-over-year from $209.3 million to $202.8 million. Compensation expense was largely unchanged year-over-year as increases in base benefits and stock-based compensation in line with slightly higher overall headcount were offset by declines in incentive-based compensation.

Year-over-year we did see a decrease in amortization of deferred sales commissions and service fees, reflecting the changing mix of share class distribution structures. Fund expenses increased approximately 46% due to higher sub-advisory expense as a result of growth in funds for which we use sub-advisors and higher fund subsidies.

Year-over-year our GAAP margins declined slightly to 31.4% this quarter versus 32.2% last year. On a sequential or linked quarter basis, average assets under management remained steady at $187.4 billion versus $188.2 billion in the fourth quarter of 2011.

Revenues sequentially were also steady at $295.6 million versus $297.3 million in Q4, in line with our unchanged 62.8 basis point total effective fee rate and our effective advisory and administrative fee rate up slightly to 51.1 basis points in the quarter.

Operating expenses increased 5.2% sequentially from $192.7 million to $202.8 million, driven largely by an increase in compensation expense from $81 million to $96.7 million. As discussed earlier, this reflects bonus accruals reverting back to normalized levels and the previously mentioned seasonal increase in stock-based as well as base compensation.

This quarter also included $1.5 million in other compensation

Partially offsetting the sequential increase in compensation, we saw declines in a number of our discretionary expense categories, including information technology and various professional services, as well as in various fund expense categories.

Worth noting is that we continue to manage our other expense category carefully, and are seeing a level trend in these expenses over time. Reflecting the outsized increase in compensation expense recognized this quarter as compared to the fourth quarter, our GAAP operating margin declined sequentially from 35.2% to 31.4%.

Our ending headcount was 1160 employees for the first quarter, as compared to 1159 employees last quarter and 1107 in last year’s first quarter. Our effective tax rate was 35.7% for the first quarter, 45.5% last quarter and 37.3% in the first quarter of 2011. Our tax rate this quarter was impacted by the consolidation of a CLO entity. Excluding that would result in a tax rate of approximately 39%, which is what we expect our tax rate will approximate over the balance of the year.

Now some comments on our balance sheet and capital planning. Our financial condition continues to be sound in terms of balance sheet strength, cash flow generation, credit availability, liquidity, and access to the capital markets. We have the financial flexibility to pursue various growth opportunities. We have a cash position of $475 million, a $200 million untapped line of credit, no debt due until 2017, single A range credit ratings, and importantly, ready access to the capital markets.

In the quarter, we purchased approximately 1.4 million shares for approximately $35 million for an average of $24.38. So remember, we increased our share repurchase activity this past fourth fiscal quarter with approximately $80 million or $3.5 million shares of repurchases at $23.06 per share on average.

In this quarter, we had net seed funding activity of approximately $20 million, reflecting seed investments of $37 million and redemptions of approximately $17 million from strategies that have begun attracting outside investors.

We anticipate to further strengthen our cash flow generating ability over the course of 2012. We will continually evaluate various capital spending activities and maintain financial flexibility for various growth opportunities as they may arise.

Now we’d like to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Ken Worthington with JPMorgan Chase. Please proceed with your question.

Kenneth B. Worthington – JPMorgan Chase & Co

Hi, good morning, or good afternoon. I wanted to just do some [calls] on the eUnits. I guess maybe how are you marketing the eUnits and do they require seed capital, how are they sold, is there a load associated with them, and then what are the fee rates associated with them and the expense ratio. So I guess that one question was like ten parts.

Robert J. Whelan

Okay, what I’ll say is, addressing the first deal we did in January, though it would be a template that we would expect to follow in future deals.

So, the eUnits were offered in approximately a month-long offering period. I mentioned that these are, from a regulatory standpoint structured as closed-end investment company. Then they are marketed not unlike a closed-end fund, also like a structured note would be offered. We had offering period of probably three to four weeks.

We offer them both with and without a sales charge. For commissionable accounts there is a 2% sales charge and for fee-based accounts the investor has the ability to invest at net asset value. So you can either, depending on what type of client it is, it's a 2% load or no-load. And remember, that's for a two-year term offering. If we did it with a different term, perhaps the pricing would be different.

So it's a 2% or 0% depending on whether it's load or no-load client. One of the things that is significant about that is that the structure potentially gives us the ability to market to fee-based accounts in a way that structured notes are not. I'm not an expert on structured notes, but I understand that the commission is effectively built into the product in a way that you can't apply it to some clients and not apply to others.

So it’s a dual pricing, so that it can appeal to both potential markets with a particular focus on opening up an opportunity for fee-based business that hasn't before been participating in structured notes.

I guess the other part of the question as I remember it is the fee, what's in this potentially for Eaton Vance. The fund or the trust has a structure of 75 basis points of embedded [OAN] expenses based on the initial net assets.

So from the 75 basis points we pay all the funds expenses, custody, transfer agent, we also built offering cost. So, what we net from that, 75 basis points a year for two years, so 150 basis points cumulative over those two years on the initial net assets.

From that as I mentioned we'll be paying all the cost. How we make money is clearly a function of size that $26 million this is not a particularly lucrative offering but it is, there are very few moving parts, there is quite limited active management. We buy a portfolio of treasuries when the things start. We enter into some single paid review contracts at inception and it's pretty much auto pilot from that point forward through the life of the trust.

As I mentioned there is secondary market liquidity. The initial trust, the symbol ETUA trade done NYSE Amex and is, has not been trading at high volume, but at least as of a couple of days ago was trading at a modest premium to net asset value.

As I mentioned in my prepared remarks we have a mechanism in place that is designed to really prevent or mitigate the occurrence of the big secondary market discount that sometimes emerge for traditional closing fund. That's based on several things, one is it's based on the fact that this is a fixed fully transparent portfolio and the fund has a, the trust has a limited life. So anyone that wanted to arbitrage this that had some expertise in option and capability and access to a professional options desk could very simply and quite completely arbitrage this thing and earn a risk-free profit or very close to that if the eUnits were to trade at a discount. It's a methodology as I mentioned that we've applied for a U.S. patent on. We think this is quite novel and is a significant part of the appeal potentially of eUnits.

Where we go from here, as I mentioned our hope is to do more and to do perhaps different structures, but importantly to gain access for broader distribution universe. The initial offering, we only had two distribution partners working with us. We certainly look to add to that a lot of firms, some active in the structured note market, some not have expect to measure us but they've have what the other person done and what’s the other trade in the aftermarket.

And so we're encouraged that we will see broader participation when we do follow on offerings. We recently filed a series of I believe five offerings, substantially identical to the first one that we hope to offer some time later in the year.

Kenneth B. Worthington – JPMorgan Chase & Co

Great. Well, thank you. That was very complete.

Robert J. Whelan

Thank you.

Operator

Our next question comes from the line of Roger Freeman from Barclays Capital. Please proceed with your question. Mr. Freeman, you’re now on the line.

Roger Freeman – Barclays Capital

Hi, can you hear me?

Robert J. Whelan

Yes.

Roger Freeman - Barclays Capital

That’s not working. I’ll process with you on speaker. I just wanted to ask, in terms of the Macro fund reopening, clearly there seems to be some additional traction coming through. Can you just talk maybe anecdotally at least what kind of reception you're getting from the third-party distributors [warehouse] just in terms of them marketing that product again because I think you've talked last quarter about sort of the challenges in kind of getting that backlog in the radar screen?

Robert J. Whelan

Yeah, certainly both the commentary and the flow numbers, the guess we're making significant progress and getting that back up and front of financial advisors. The timing is, this was a blow out product in really throughout 2010 until we closed it in October. We saw some continuing positive flows through, I’d say the end of 2010, end of the calendar year, and that's started to turn negative during the course of 2011, since that we had a big base of investors and literally no new flows.

So it was not surprising that we turned down. When we reopened it in October, it took us a while I’d say to get the word out, to get back [front] of mind with financial advisors. And again not surprisingly its taken up a little time, but we've seen a pretty good built, we're not blaming it to back to where we were the heyday of 2010, but we've seen a good built month-by-month in global macro flows. January was substantially better than December, February is looking better than January. Returns year-to-date have been I think in the range of 3%, 2.5% to 3%, 2.55% as of yesterday for the [GMR] Class A I believe, which was better. The strategy lost a little bit, I think we were down about 30 basis points or so in terms of total return for 2011. But returns backed positive with investors increasingly embracing asset rate return that this thing is certainly among the biggest and most visible asset rate return products in the retail advisory channel.

We're certainly optimistic that if and the other four asset return products we have will be pretty good contributors for us over the balance of the fiscal year.

Roger Freeman – Barclays Capital

Okay, thanks. And then on the value product, you mentioned you're very focused obviously on the returns improving. Last quarter, I think you talked about some staff changes you had made. What else are you doing? How much of this gets resolved by less, [quarterly] to market that we're seeing now?

Robert J. Whelan

Yeah, that's always the challenge in these things. You don't want to fix things that are not broken, but you do have to fix the things that are broken. As you referenced, we have made some changes in our analyst staff. We've really analyzed the problems with market rate performance quite thoroughly and come to the conclusion that, I think quite clear from the numbers, which is really two things, one is that over the last three years we’ve had a significant style headwind, large cap has underperformed, mid cap and small value has underperformed core and gross, high quality has underperformed, low quality and high beta, all of those things. Large cap value, high quality are the (inaudible) of our strategy and we don't intend to change those.

So that's one of the issues we face. But the other one equally clearly is that we’ve had some poor stock picking in certain sectors and we’ve tried to address that by adding resources to our analyst team and in a few cases as you mentioned we’ve made some changes there. I think we’re in a pretty good spot where it's a hard thing to analyze. You run an investment portfolio for long-term results, it's hard to tell from those results in the short term whether you’re addressing the underlying problems.

The challenge we have is mostly the fact that our three-year numbers are in the bottom best sell of the peer group. That reflects the coming out of the market bottom just about three-years ago we were relatively conservatively positioned and underperformed pretty significantly in the early stages of the market rally and have not been able to recover that ground.

The one-year numbers, the one-year performance numbers this is for our A shares as of yesterday, in the 69 percentile all of our peer group, not parable but also not where we want to be and also not good enough to turnaround the longer-term, the three-year numbers. The five and the 10-year numbers still continue to be competitive. The challenges we face here particularly is that our peak year for raising, years for raising assets were 2007, 2008, 2009 and those of us that came on then, they heard about the period when we performed spectacularly well versus our peer group, unfortunately I didn’t experience that.

So, we're doing all the handholding with client. Ours is a steady consistent style. We have a very developed ingrained philosophy about the kinds of companies we’re looking for. As your questions suggested that this has been a pretty lousy market environment for those types of stock generally, but we're working hard doing everything we can to buy better stock picking, overcome the dollar headwinds that we’ve been facing.

Roger Freeman – Barclays Capital

All right. Thanks a lot.

Operator

Our next question comes from the line of Michael Kim from Sandler O'Neill. Please proceed with your question

James Howley – Sandler O'Neill & Partners, L.P.

Hi, good morning, this is actually Jim Howley filling in for Michael. I just want to circle back quickly to new products. Obviously you guys talked about the [ENS], but if you can give just a more broad overview, and then more specifically if you have any update on the pipeline for incremental closed-ends outside of the U.S.?

Thomas E. Faust, Jr.

Not a lot is happening at Eaton Vance regarding closed-end bonds. We continue to monitor the market, as you may know if you follow the market closely. Issuance in the closed-end market is down fairly significantly. The range of strategies that have proven successful over the last couple of years has been pretty limited. There have been several funds invested in master limited partnerships that have had pretty good raise ups, but other than that the fixed assets have been few and far between.

Our view is that the closed-end fund market needs some structural innovation. The pricing structure of, everyone pays an embedded 4.5% upfront sales charge is a, I would say a significant and a growing impediment to investor interest for a pretty broad range of investors, so fee based accounts, high network investors, institutional investors. Clearly, paying that level of the front-end sale charge is not something that they would readily do.

The other structural issue obviously relates to the persistency of discounts in the secondary market.

As I mentioned, eUnits, though not a traditional closed-end fund, does have some elements that we are hopeful can be applied to more traditional closed-end funds, specifically the ability to offer it on a reduced load basis and specifically to include mechanisms that may help address and mitigate the development of discounts.

Robert J. Whelan

So closed-end funds were a big part of the growth story at Eaton Vance from 2003 to 2007 for each of those five years. We led the market in new issuance. But we haven't had lot to show forth since then. I think we’ve done two offerings in total since 2007, raising roughly $400 million.

So it is an important part of our history. We are close to that marketplace. When the time is right, and when the product is right have demonstrated an ability to be successful in both raising assets and managing the assets effectively. But unfortunately, we haven't seen those opportunities over the last couple of years, and frankly we don't have a lot of much pipeline focused on closed-end funds at the moment, but are certainly eager to work with distribution partners to look at ways that we might enhance the structure of the product to make it more broadly appealing.

James Howley – Sandler O'Neill & Partners, L.P.

Okay, great. And then just in terms of seeding investing, should we kind of expect the [exemptions] to seed investment this year and if that is the case, how would you think about using that capital going forward, and more broadly how would you think about deploying excess capital? And if could just give the average AUM number again?

Robert J. Whelan

Average AUM for the quarter was 188.2.

James Howley – Sandler O'Neill & Partners, L.P.

Okay, the same as last quarter.

Robert J. Whelan

Yes.

Thomas E. Faust, Jr.

The seed capital, I think at this point we're not expecting significant changes. We’ll have some products we're going to put to, see capital into, others we'll be pulling out of. I would expect probably modest net growth in these capital commitments. So it's, that may change if we have some strategies. We’ve got a lot of money sitting in the bank. How much?

James Howley – Sandler O'Neill & Partners, L.P.

$475 million.

Robert J. Whelan

$475 million sitting in the bank, earning not very much if we can find better uses for that, either in seed capital investments or share repurchases or other capital funding opportunities, we’re open to do that. That money is not sitting there because we think the returns that we’re earning from the bank are attractive. That money is sitting there waiting for an opportunity to be applied in a better way.

So we’re open to acquisitions. We’ve talked in the past about acquisitions as being an element of our growth strategy. We did significant acquisitions in 2001, 2003, 2008 and are certainly open to that possibility in 2012 as well. But we think about capital uses, we pay dividends, we repurchase stock, we invest in seed capital and we opportunistically pursue acquisitions. Those are kind of the uses of capital that we have.

We’re fortunate to be in a cash generating business and we view our ability to invest that cash strategically as a very important, very significant asset for Eaton Vance.

James Howley – Sandler O'Neill & Partners, L.P.

Okay, great. Thanks for taking my question.

Operator

Our next question comes from the line of Dan Fannon from Jefferies & Company. Please proceed with your question.

Daniel Fannon – Jefferies & Company, Inc.

Thank you. I guess I want to talk a little more about the return to positive organic growth as you think about this quarter. I mean is this a function of just kind of building on what was going on in January? And maybe give some context around the gross sales versus redemption’s in terms of the trend there?

Robert J. Whelan

Two reasons for optimism that the second quarter will be a positive. One is, as I mentioned, forward results to-date over the first three plus weeks of the quarter has been positive. And secondly we have a pretty good pipeline of primarily institutional business that we fully expect to fund during the current quarter.

We’ve got visible outflows, we’ve got visible inflows but the balance for the remainder of the quarter looks to be north of $1 billion to the [good]. So things look pretty good.

The challenges we face are mostly related to our share value, where we do expect that there will be some level of continued outflows, we hope at a measured pace and we hope that we can turn that around as the performer improves.

I mentioned the muni ladders as a new product that is starting to build momentum. We had over $100 million in inflows in the first quarter branded products though gross inflows and net inflows are essentially the same, building momentum there. And just to remind you what that opportunity is, traditionally many financial advisors met their clients to actually [income] these by assembling and, I guess you’d say overseeing portfolios of muni bonds, the ladders, we use the term ladder to note the fact that different maturities and we'll turn it over that portfolio periodically given the, the rising concerns about credit in the municipal space given increase in transparency of cost and to be trading costs in the bond world including muni’s there is increased appetite on the part of financial advisors and their clients. So, I hope to a more managed solution and the tabs group has developed a, what we think of highly competitive product in terms of the features and in terms of its pricing that we're optimistic that will continue to answer those flow.

eUnit is another, we touch about that at some length, but we're hopeful that we will have another eUnits offering closing in the second fiscal quarter. How big that is, hard to say, which was a hoping for more than $26 million we raised in January, but has the potential to be incrementally significant. Other growth initiatives include some of the things going on in Parametric they are growing their structure active product area for structured emerging markets, structured emerging markets core and a growing capability in other areas.

I mentioned some opportunities in Australia that we’re pursuing both in the bank loan fund and tax-managed investment in Parametric. And some of those things will happen beyond the timeframe of the second quarter. But, we feel like we've got a nice basket of opportunities that driven in some cases by a traditional [in band] strength by muni’s or bank loans like high-yield, like dividend income that are not in a nice place in terms of both market development as well as our relative competitive position there in terms of performance in all [the other] factors that matter. So nice to have a little bit of a tailwind, tailwind of arising market, it's nice to have a number of our strategy in a position where we can compete from an erotic performance perspective. And that's where we are today. So we're encouraged that's the second quarter and we hope to balance of the year, we'll see it get back into the positive territory with our organic growth.

Daniel Fannon – Jefferies & Company, Inc.

Okay, great. That's helpful. And I guess just on expenses, I think you’ve mentioned about $3 million low in stock-based comp for next quarter, I guess anything else as you think about you this quarter that was more one-time in nature, as we think about looking ahead outside of maybe just on an ongoing basis with the extra $3 million is that a good run rate to think about starting into next quarter, its my question for the full-year kind of the outlook?

Robert J. Whelan

Yeah, I think that's obviously had generations in compensation over the last couple of quarters. We think that's a pretty good number. We also mentioned that we have ending assets about $4 billion higher than the average for the quarter. So if you take that $4 billion that's puts about $20 million on revenue for the full-year $5 billion for the quarter. So if you think about the margin where it is right now, those two items are loan obviously we’ll help a little bit. Expense management we’ve talked a little bit about that on the call, we’re focused on it, we're focused on comparable growth that constant it's pretty ingrained, purity advance so that's when we look at new products where focused on the economics of that any funds we launched obviously where, it's focused on the effective fee rate and then on the extent side the cost of sales is obviously important just what we pay to put assets on the book, so managing the incentive that we pay off, our field force, managing our relationships with the intermediaries and getting the most value out of our sales support is important. And then obviously we’ve had a major revamp in terms of marketing, and those three components would play into it. So managing that is important going forward, and that’s what we’re focused on.

If you can think about the big extent, that when you take a step back it’s really compensation. Last year for the full year, compensation was $375 million of the $822 million or 45%. So managing compensation keeping [as the] staff only where necessary is important. But we feel like we’re fully built our – looking on the horizon, there aren’t major initiatives that we’ve had in the past in terms of building out the institutional or international or marketing. We have most of those disciplines built out pretty well. So that’s the quick update on expenses and profitability.

Daniel Fannon – Jefferies & Company, Inc.

Yeah. I guess the only thing I would add is that remember in our cost structure, we have a significant item of cost that rise or fall with assets, significant elements of cost that rise or fall with sales and significant elements of debt rise or fall with profitability. So other things that we kind of think of is, it’s naturally shrinking or growing as our business shrinks and grow either in terms of assets or sales and profit.

So just keep that mind as you’re doing remodeling. It’s not like everything goes just steady as you go. Those are sort of things beyond what Bob talked about that will implement our spending, but all responding generally in a positive way. That is when our business’ success is greater, the expense – those expenses go up, and when our business success is less, so the expenses go down. Certainly in a market environment like we had in 2008, we benefitted significantly from having those built-in variable elements of our cost structure to the extent that some of our hopes for this year are better realized in terms of revenues and asset growth and sales and in operating income the ability to take that to the bottom line and we’ll be somewhat mitigated by those same factors?

Unidentified Company Representative

Okay. Let me just make one more comment on your, while we’re talking models, remember that the second quarter does have a fewer number of days. This year is a leap year so it’s only two fewer days but that's a factor into a number of the income statement line items which I know a lot of you are familiar with.

Daniel Fannon – Jefferies & Company, Inc.

Great. Thanks for taking my questions.

Operator

Our next question comes from the line of great section about from Craig Siegenthaler from Credit Suisse. Please proceed with your question.

Craig Siegenthaler – Credit Suisse

Hi guys, its Craig Siegenthalen from Credit Suisse.

Robert J. Whelan

Got it.

Craig Siegenthaler – Credit Suisse

First, just starting on the positive net flow commentary that you provided for the second quarter, can you talk about which two assets classes are the largest drivers of sequential improvement when you think about this guidance if there is any areas we should think about which will significantly improve on a quarter-over-quarter?

Thomas E. Faust, Jr.

I may give you more than two, one will be emerging market equities and the other would be muni’s occurred with the asset rate of returns. A fourth would be what I’ll call leverage credit including bank loans and high yields. Those would be the ones that I would walk to. Anything else Dan or Bob that you would…?

Daniel C. Cataldo

No, I think those are, in terms of existing products, that’s where we’re seeing the most momentum right now.

Craig Siegenthaler – Credit Suisse

Got it. And then just a follow-up, if you look at the [NCII] adjustment for 2Q of 2011, it was negative $2.9 million related to just to put back. I was wondering if you could walk us through kind of year-over-year on the math on may be how that would have changed because A1 levels (inaudible) but any other factors we should think about that could effect either year-over-year change in that level?

Thomas E. Faust, Jr.

You’re saying about the non-controlling interest value adjustment?

Craig Siegenthaler – Credit Suisse

Yeah, if I look at your presentation on slide 16, and I look at non-controlling interests value adjustment, yeah 2Q 2011, 2.9.

Daniel C. Cataldo

Craig, that's related to Parametric Risk Advisors, the Q2 2011 adjustment. And that’s based on the annual revaluation of the minority interests of Parametric Risk Advisors. When we did evaluation last year we actually owned I believe 49% of the company, we now own 60% of the company. So in terms of the amount that we’re valuing it will be of minority interest. It’ll actually be a smaller percentage amount. Now as their business grows, that could cause the adjustment to go up. And their business has been growing, they stop (Inaudible) the eUnits product and they’ve had some pretty good success in some of the other auction products. So that's what to think in the Q2 Mark.

Craig Siegenthaler – Credit Suisse

And Dan, that was 49% to 69% or is that 49% to 60%, I missed that number?

Daniel C. Cataldo

It's actually 50% to 60% is our ownership now.

Craig Siegenthaler – Credit Suisse

Got it. Guys, thanks for taking the questions.

Daniel C. Cataldo

You're welcome.

Operator

Our next question comes from the line of Cynthia Mayer from Bank of America. Please proceed with your question.

Cynthia Mayer – Bank of America/Merrill Lynch

Hi, good morning. Looking at the flows, it looks like the high network flows improved quite a bit and so did the retail managed accounts. So I'm wondering how much of that is seasonal, how much of that was in January and anything particular driving those? Thanks.

Daniel C. Cataldo

On the high network side of the business, we had a couple of nice wins. One was a Parametric Risk Advisors options products and the other was a Parametric tax-managed core overlay product. I don't think there's anything that's fairly seasonal about that, but there were two significant wins that comes up the business.

Thomas E. Faust, Jr.

I guess the other thing I would point to is that the retail managed account business we have is increasingly dominated by the muni’s and particularly our tab muni’s strategies and to the extent that muni performance has been improved and many flaws have been improved, that's a big enough factor within that [RMA] category to help the drive the improvement in the category as a whole.

Daniel C. Cataldo

And actually interestingly enough in the managed account business in this past quarter we had a sizable large cap value win. So you had help from both muni’s and that large cap value and on the retail managed account side of the business.

Cynthia Mayer – Bank of America/Merrill Lynch

Great. Well maybe since you bring it up, could you give us the asset breakdown in those channels just roughly I mean how much of that is muni’s is now in retail managed account? Maybe how much is equity versus non-equity?

Robert J. Whelan

So actually haven't broken down by company. Eaton Vance is $13.4 billion of the total, and it looks like municipal are about $7.5 billion of that. The balance would be equities. The remainder of the assets really would be largely in equities through Atlanta or Parametric. Of course Parametrics business is partially overlay as well.

Cynthia Mayer – Bank of America/Merrill Lynch

Okay. Great and let's see, maybe I'm reading between the lines too much, but it sounded like you might be making a change to sales force compensation. It sounded like you said it was important to manage that. Is that a change you're making, and how should we think about the impact of that on comp? Would that be something that would shift as the comps to revenues ratio or be a set function or…

Thomas E. Faust, Jr.

No, don't read into that, that there is a change. We typically adjust the sales force compensation or put in new compensation programs at the beginning of the calendar year, and we've done that. But there haven't been significant changes. The primary driver of sales force compensation year-over-year will be sales success. Any contribution one way or the other from changes in how we pay people is, I would say pretty incidental relative to the total level of sales success year-over-year.

Cynthia Mayer – Bank of America/Merrill Lynch

Okay. So we should just continue to think about the gross sales as the driver?

Thomas E. Faust, Jr.

Yes, that's right.

Robert J. Whelan

Yeah. Mix is also important, but total sales, mix of sales as opposed to changes in compensation for any particular type of business.

Cynthia Mayer – Bank of America/Merrill Lynch

Any particular products you're exercising now in terms of the mix?

Robert J. Whelan

Well, most of the things we've highlighted, I think you could consider to focus products. Certainly our compensation tends to be higher on a range of newer strategies that we're trying to get up to some critical mass. So newer strategies, things that we've made as focused products areas over the last couple of years, those tend to be higher levels of compensation, more established franchises, for example like bank loans that tend to have relatively rapid ins and outs tend to be lower compensation and other things, and that's part of retail.

Cynthia Mayer – Bank of America/Merrill Lynch

All right, great. Thank you.

Operator

Our last question comes from the line of Bill Katz from Citigroup. Please proceed with your question.

William R. Katz – Citigroup Inc.

Okay, just a couple of qualifiers in my (inaudible) question. You mentioned 75 basis points as a gross fee on the eUnits. What's the net fees in that?

Robert J. Whelan

Well, 75 basis points is the expense ratio of the fund, so we bear all of the cost out of that. I don't know what that number is for the initial offering. It's either negative or small after we eat all of the expenses. So in a big offering, it can be pretty meaningful relative to that 75 basis points. In a small offering like we just did its round to zero.

William R. Katz – Citigroup Inc.

And then on the $1 billion pipeline you have the institutional (inaudible) good. Is that embedded in your commentary of bank loans, emerging markets, et cetera?

Thomas E. Faust, Jr.

Correct, Yeah.

William R. Katz – Citigroup Inc.

Okay, so a bigger question is, if you look at your business today, it's about flat year-on-year, a recognized market impact if you well. Your margins are down about 150 basis points or less. On a go-forward basis, just given the dynamics between these large cap funds struggling with the [versions] in these newer, faster growth initiatives, how would you think about your overall margin, flat up or down the next 12 months?

Robert J. Whelan

Reported margin right?

William R. Katz – Citigroup Inc.

Operating margin, right.

Robert J. Whelan

We’ve talked about a range historically on a GAAP basis between 30 and 35 and on the adjusted between 35 and 40. And right now we're in the lower end of that. That's not to suggest we can go higher. I think there's some items as I mentioned earlier, in the earlier question where we’re going to get some relief on comp. Our assets are at higher starting levels and we don't have any major build out.

So moving back towards the range where we've been, back to that 35 on a GAAP where we were in the last couple of quarters and back to, I think we’re at 39 on adjusted I don't think is a stretch.

Thomas E. Faust, Jr.

The way I think about it Bill is that we and our competitors have significant pressures on margins that are ongoing, both pressures on fees, pressures to reduce fees, pressures to introduce new products at lower price points and existing products, certainly a range of cost pressures, both internal mostly compensation-related as well as external, which is the rising cost of distribution.

The way we think about this is that how we overcome that and potentially achieve higher margins is by growth. There are significant economy to scale on our business to the extent we can have those work to our favor. We can overcome those forces that are pushing margins down and probably higher margin overall as the company, but that's not easy. And certainly, if we’re in the same range of organic growth that we've been this quarter, and last its can be hard for our, [true] profitability to increase relative to the scale of our business. If we can grow faster, I think we have a good shot at improving the profitability of our business.

William R. Katz – Citigroup Inc.

Okay. Thanks to taking my questions.

Robert J. Whelan

Thanks, Bill.

Operator

There are no further questions at this time. I would like to turn the call back over to Mr. Cataldo for closing comments.

Daniel C. Cataldo

Thank you for joining us this morning, and we look forward to speaking with you at May on the close of our second fiscal quarter. Goodbye.

Operator

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

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