Dan Cataldo - Treasurer
Tom Faust - Chairman and Chief Executive Officer
Laurie Hylton - Chief Financial Officer
Dan Fannon - Jefferies
Michael Kim - Sandler O'Neill
Ken Worthington - JPMorgan
Adam Beatty - Bank of America Merrill Lynch
Jeff Hopson - Stifel Nicolaus
Robert Lee - Keefe, Bruyette & Woods
Eaton Vance Corp. (EV) F3Q12 Earnings Call August 22, 2012 11:00 AM ET
Greetings, and welcome to the Eaton Vance Third Quarter Fiscal Year 2012 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 Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Cataldo, Treasurer. Thank you. Mr. Cataldo, you may begin.
Good morning and welcome to our third quarter earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, our CFO. We will first comment on the quarter and then we will take your questions.
The full earnings release and charts we will refer to during the call are available on our website, eatonvance.com under the heading Press Releases. Today’s presentation contains forward-looking statements about our business and 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 the Eaton Vance SEC filings. These filings including our 2011 Annual Report and Form 10-K are available on our website or on request at no charge.
I’d now like to turn the call over to Tom.
Good morning. Following positive net flows in the second quarter, the third quarter of fiscal 2012 for Eaton Vance fall into net outflows and $3.8 billion of withdrawals from our large cap value strategy, more than offset $2.4 billion of net flows into other strategies. The quarter’s net outflows coupled with $3.2 billion of price decline in managed assets, caused our assets under management to fall 2% during the third quarter from $197.5 billion to $192.9 billion.
Reflecting lower average managed assets, our revenues declined 2% and our operating income declined 4% from second quarter levels. The quarter’s $0.43 per share of adjusted earnings were also down $0.04 from the $0.45 of adjusted earnings per diluted share we reported for the second quarter. A highlight of our quarter was the June 18 announcement of our intent to acquire a 49% interest in Hexavest Inc., a Montreal based manager of equity and tactical asset allocation strategies for institutional clients.
As of the close of the transaction on August 6, Hexavest managed $11 billion in client assets, invested permanently in global and global ex-U.S. equity mandates, and employing a predominantly top down investment style. Post-transaction employees and shareholders of Hexavest continue to control the company through their remaining 51% ownership. Eaton Vance assumes primary responsibility for Hexavest new business development in all markets outside of Canada and will over the next few weeks be launching the mutual funds in the U.S. and offshore markets to be sub-advised by Hexavest.
As previously disclosed, under the terms of the transaction, Eaton Vance will have an option to acquire an additional 26% interest in Hexavest following the fifth anniversary of the closing. We view the Hexavest transaction as a winner for Hexavest and its clients and a winner for Eaton Vance. Partnering with Eaton Vance enables Hexavest to better realize its business growth objectives while remaining a small, tightly knit organization focused on investment performance and client service. Expanding our global and international investment capabilities has long been a strategic priority for Eaton Vance and our partnership with Hexavest goes a long way towards achieving that goal.
Hexavest gives Eaton Vance access to a top performing global equity manager whose sales efforts have heretofore been restricted to the institutional market and focused on a handful of geographic regions. By applying Eaton Vance's powerful distribution capabilities, we believe we can accelerate Hexavest's growth and elevate the revenues and profits relatively quickly. Although we expect the Hexavest transaction to be accretive to Eaton Vance earnings from day one, what has us most excited is the potential for Hexavest profit contribution to grow meaningfully as their business scales up from its current size. We look forward to reporting on the progress of the Eaton Vance/Hexavest partnership in future calls.
Returning to the operating results of our third fiscal quarter, a continuing bright spot was the performance of our Parametric affiliate. This structured emerging market discipline continues to be one of the real success stories of the year, generating almost $700 million in net flows for the quarter and $2.8 billion for the first nine months of the fiscal year. While pursuing the continued build out of Parametric structure emerging markets business, we are also working to translate its marketing success to Parametric's newer structure of active strategies, which includes global and international equity, global small cap, commodities, currency and absolute return, all of which are in the process of building performance track records and a critical mass of managed assets.
At just under $50 billion in assets under management, Seattle based Parametric represents about 25% of Eaton Vance's consolidated AUM. Parametric has been a consistent growth engine inside Eaton Vance from when we acquired a controlling interest in September 2003. At that time, Parametric managed just over $5 billion in client assets focusing on tax efficient core equity portfolios managed for family offices and high net worth individuals. Over the past nine years, Parametric has grown its business nearly ten-fold, expanding its investment and capabilities to include a complement structured active, structured tracking centralized portfolios management and equity option strategies.
In conjunction with Eaton Vance, Parametric has also expanded its distribution footprint to include retail institutional markets in the U.S. and offshore. Although Eaton Vance is often categorized as a traditional fundamentally based asset manager, the large and growing position of Parametric inside the Eaton Vance blurs that characterization.
Different from the rest of Eaton Vance, Parametric's portfolio managers are not engaged in making predictive judgments about directions of the market or the route of merits of different securities. Instead their structured rule based strategies seek to provide diversified market exposures often coupled with value added tax management, risk management and volatility captured trading. And because Parametric’s strategies are generally offered at lower price points than competing traditional asset managers, the relentless fee pressures seen across our industry affect Parametric differently, sometimes working to their advantage.
Earlier this month, Parametric achieved a significant milestone with the initial funding of a large centralized portfolio management or CPM mandate in the Australian superannuation fund market. Similar to Parametric's retail managed accounts, overlay business here in the U.S. and CPM, Parametric assumes responsibility for implementing the investment decisions of the client’s third-party manager in a coordinated cost effective and tax efficient manner.
Among its many growth opportunity Parametric sees the Australian super fund CPM opportunity as particularly promising. Both the structure of the super fund market tax law in Australia support the potential for large CPM opportunities to emerge and Parametric is poised to become the market leader. Although relatively low fee business, we believe Australian CPM can scale to be become a meaningful profit contributor for Parametric.
Our Atlantic Capital subsidiary also saw positive flows in the third quarter driven by over $400 million of inflows into the five-star rated Eaton Vance Atlantic Capital Midcap Fund. That strategy and the broader efforts of Atlantic Capital's core equity team continue to be shining stars in the Eaton Vance firmament. I mentioned at the beginning of my remarks that the third quarter saw an acceleration of net outflows from our large cap value strategy. The $3.8 billion in the third quarter from $3.2 billion in the second quarter and $2.1 billion in the first quarter of the current fiscal year, assets in the strategies stood at just over $16 billion at the end of July, down from the peak of more than $33 billion in April of last year. So we were down about $17 billion in 15 months.
We know the asset decline over the next 15 months has to improve since we only have $16 billion left to [value]. That math aside, we are quite encouraged that flow trends will get better from here for large cap value. As our clients are noticing investment performances significantly improve, among large value funds, as classified by Morningstar, Eaton Vance large cap value Class A shares ranked in the 22nd percentile of year-to-date returns as of the end of July, 153 basis points ahead of the peer group average.
Our strategy favoring large cap franchise companies trading at discount valuations is no longer encountering the strong headwinds that hurt our relative returns in the first part of the market rally coming out the bottom in 2009. And the investments we've made in our equity research team and the enhancements we've made to our equity research process appear to be paying off in improved stock selection. While I am certain we will see some continued withdrawals for large cap value, I do feel we're approaching the point where the outflows began to abate. When that happens, our overall growth rate becomes driven not by large values but by the range of other strategies for which we are seeing positive flows.
Across our fixed and floating rate income and alternative strategies, we saw $1.6 billion of net inflows in the third quarter substantially unchanged from the second quarter but up from $1.4 billion in the third quarter of last year. Whole leaders among our income and alternative strategies in this year's third quarter were floating rate bank loans, high yield bonds, tax advantage bond strategies, and municipal income.
Our newly launched muni bond laddered separate accounts continued to gain momentum in the third quarter. We developed muni ladders about a year ago to meet the demand for institutionally supervised municipal bond separate accounts for higher net worth investors moving from traditional brokerage relationship to fee-based advisory relationships. Although fees here are relatively low in the mid-to-upper teens of basis points per annum, we believe muni ladders will prove to be sticky assets with well below average redemption rates. And the market opportunity here is clearly very large. We continue to have high expectations for this product.
We also expect alternatives to be a growing area for us, driven forward by expansion of our offerings for institutional clients. In the third quarter, we saw $350 million of flows into the Global Macro Absolute Return sub-advisory mandate, and we were originally awarded a second new Global Macro sub-advisory mandate for which we expect initial funding of more than $1.5 billion to hit in the current quarter.
Before turning the call over to Laurie, I'd like to make a few comments about our business outlook. Like most diversified asset managers, we face regular cross currents and occasional direct headwinds. The shrinkage of our large cap value franchise over the last five quarters is among the strongest headwinds Eaton Vance has encountered in my 27 years with the company. Although the large cap value storm isn't over, the winds will abate and I believe we have seen the worst of it.
On other fronts, Eaton Vance continues to grow and prosper. I've talked about large mandates expected to fund in the fourth quarter for Parametric in Australia and for Eaton Vance in Global Macro sub-advisory. Unless these and other new mandates are delayed or downsized, or offset by greater than anticipated withdrawals in other areas, we expect the company as a whole to finish fiscal 2012 with strong net flows for the fourth quarter and positive net flows for the fiscal year as a whole.
Beyond the current fiscal year, my vision for the future of Eaton Vance continues to be bright. I am convinced we have all the ingredients for long-term success, a dedicated employee team and winning culture, deep financial resources, powerful distribution and leading capabilities across a diverse range of investment areas. In Parametric, our income and alternative strategies and now with Hexavest we have a broad range of near term growth engine. As outflows from our large-cap value strategy abate as they are poised to do, I expect Eaton Vance to return to its customary position as one of the growth leaders in our business.
I'd now like to turn the call over to Laurie who will discuss our third quarter financial results in more detail.
Thank you, and good morning. In our press release this morning we reported adjusted earnings per diluted share of $0.43 for the quarter, compared to $0.45 in the second quarter and $0.55 in the third quarter of fiscal 2011. Investment gains on our seed portfolio did not make a meaningful contribution to earnings in either this quarter or the second quarter, but did contribute $0.03 per share in the third quarter of fiscal 2011.
As we noted in the release, the adjusted earnings we report differs from GAAP earnings and it backs out changes in the estimated redemption value of non-controlling interest in our affiliates that are redeemable at other than fair value. As you can see in attachment two to our press release, which reconciles our GAAP earnings to adjusted earnings, there were no significant non-controlling interest value adjustments in either the third quarter of fiscal 2012 or 2011.
Operating income was $95 million in the third quarter, down 4% from $98.8 million in the prior quarter and down 18% from a $115.4 million in the third quarter of last year, largely driven by a decrease in revenue. Our operating margin was 32% in both the third quarter and the prior fiscal quarter, down from 35% in the third quarter of last year. We currently anticipate that margins will hold steady in the 32% range for the remainder of the fiscal year.
Revenue decreased 2% to $298.8 million in the third quarter from $304.8 million in the second quarter, reflecting 1% decrease in average assets under management and four-tenths of a basis point decrease in our total effective fee rate, from 62.1 basis points to 61.7 basis points. Year-over-year revenue decreased 9%, reflecting a 4% decrease in average assets under management and a decrease in our total effective fee rate from 64.8 basis points to 61.7.
Breaking down the decrease in revenue a little bit further, the decline we saw in our total effective fee rate was largely the result of the 3% sequential and 17% year-over-year decline in distribution and service fee related revenue, which reflects lower managed assets in some share classes that are subject to those fee. Although this share class trend has an adverse effect on revenue, the profit impact is much smaller due to offsetting declines in distribution, service and deferred sales commission amortization expense.
Net distribution of service fee revenue, defined as distribution and service fee revenue less distribution service and deferred sales commission and amortization expense, contributed $400,000 to operating income in the third quarter of fiscal 2012, down from $900,000 in the second quarter and $3.2 million in the third quarter of last year.
Changes in investment advisory and administrative fee revenue were largely consistent with changes in average managed assets with effective investment advisory and administrative fee rates stable at 51 basis points for the third and second quarters of fiscal 2012, down marginally from 52 basis points from the third quarter of last year. Changes in our business mix continue to put modest pressure on our effective investment advisory and administrative fee rate as net inflows into fixed and floating rate income strategies contracted to net outflows from equities as can be seen in table two of our press release.
Equity assets, which represented 59% of our total assets under management a year ago, dropped to 56% of total assets under management at July 31, 2012, largely as a result of the net outflows experienced in our large cap value franchise. We've also seen a shift in recent quarters from long-term fund assets to lower revenue yielding separate accounts, but long-term fund assets dropping from 60% of total assets under management a year ago to 57% of total assets under management at July 31, 2012.
Given the breakout of flows we see in the pipeline for the fourth quarter, we anticipate that our effective investment advisory and administrative fee rate will remain in the 50 to 51 basis point range for the near future. Operating expenses of $203.8 million in the third quarter were down 1% from $206 million in the second quarter and down 4% from $211.6 million in the third quarter of last year. Compensation expense was down 3% to $94.7 million in the third quarter from $97.6 million in the second quarter, primarily reflecting decreases in sales and operating income-based incentives and lower severance expense.
Gross long-term sales and other inflows, which drive sales based incentives, were down 17% in the third quarter compared to the second, while pre-bonus adjusted operating income which drives operating income-based incentives, was down 4% for the same period. Compensation expense was substantially unchanged in the third quarter of fiscal 2012 compared to the third quarter of last year, with increases in base, benefits and severance largely offset by decreases in sales and operating income based incentives. The increase in base and benefits year-over-year can be largely attributed to a 4% increase in headcount, reflecting extended coverage in our retail distribution channel and additional new hires to support product management and administrative functions here in Boston and at Parametric in Seattle. At this point, we do not anticipate any significant adds to staff in the fourth quarter.
Distribution expense decreased both sequentially and year-over-year reflecting a decrease in intermediary marketing support payments, driven by a decrease in sales and managed assets subject to those arrangements, partly offset by an increase in discretionary marketing and promotional expenses. The decrease in service fees year-over-year is consistent with the decrease in service fee income I noted earlier reflecting the ongoing shift to low or no service fee share classes. The impact of the shift is also seen in the decrease in the amortization of deferred sales commission, which declined 17% sequentially and 46% year-over-year.
Fund expenses increased to $7.2 million in the third quarter of fiscal 2012 from $6.6 million in the second quarter, primarily reflecting increases in subsidies provided to start-up funds and non-advisory expenses borne by the company on funds for which we have paid an all in fee, net of a decrease in sub-advisory expenses. The decrease in sub-advisory expenses year-over-year primarily reflects the decrease in assets in sub-advised funds. Other expenses were up 3% sequentially and 6% year-over-year reflecting an increase in travel and entertainment as well as ongoing investments in systems and legal expenses related to various corporate initiatives.
Non-operating income for the quarter reflects net investment gains and other investment income of $1.9 million compared to $2.8 million in the second quarter of fiscal 2012 and $7.6 million in the third quarter of last year. As seen in attachment three to our press release, $800,000, $1.2 million and $1 million of net investment income was allocated to non-controlling interest holders in our consolidated funds in the third quarter of fiscal 2012, the second quarter of 2012 and the third quarter of fiscal 2011, respectively.
As I noted earlier, investment gains in our seed portfolio, net of gains attributed to non-controlling interest holders and our consolidated funds did not make a meaningful contribution to earnings neither this quarter or the second quarter, but did contribute $0.03 per share in the third quarter of fiscal 2011. Non-operating income also includes other income associated with the company's consolidated CLO entity, the majority of which is attributed to other beneficial interest holders in the structure.
The residual contribution to earnings of approximately $1 million each period for the consolidated CLO entity combines the company's management fee and the net returns on our $2 million investment in CLO entity. The residual contribution to earnings can be calculated by subtracting the non-controlling interest attributed to other CLO beneficial interest holders provided in attachment three of our press release, from the total non-operating income contributions during the period.
As seen in attachment three to our press release, fluctuations in non-controlling interests have been largely driven by the performance of our consolidated CLO entity and the non-controlling interest value adjustments related to our subsidiaries whose non-controlling interests are redeemable at other than fair value. There were no significant non-controlling interest value adjustments in either the third quarter of fiscal 2012 or 2011.
Our effective tax rate was 35.5% in the third quarter of fiscal 2012, substantially unchanged from the 35.9% reported in the second quarter and down from the 38.7% reported in the third quarter of last year. Excluding the effect of consolidated CLO entity earnings and losses, which are substantially allocated to other beneficial interest holders and therefore not subject to tax and the calculation of our provision, our effective tax rate for the third and second quarters of fiscal 2012 was 38.2% and 37.3% respectively. We currently anticipate that our effective tax rate adjusted for CLO earnings and losses will hold steady between 37% and 38% for the remainder of the fiscal year.
At this point, I'd like to turn the call over to Dan to provide some color and commentary on our balance sheet and liquidity.
Thanks, Laurie. I'll be brief. We finished the quarter with a record $600 million of cash and equivalents on our balance sheet as we prepared to fund the Hexavest transaction. As we mentioned the transaction closed on August 6 and we reduced our cash by approximately $190 million related to that. Total investments on our balance sheet at July 31 were $286 million.
Excluding $54 million of non-Eaton Vance investment associated with consolidated funds and other long-term investments, our seed capital portfolio [held] approximately $210 million. This is down from $240 million at the end of the prior quarter as withdrawals from funds reaching critical mass more than offset new seed investments. We would expect a moderate increase in the seed portfolio over the course of the fourth quarter as we launch and seed the new Hexavest fund.
During the third quarter we used $25 million of cash to repurchase 946,000 shares of Eaton Vance stock at an average price of $26.32. We do expect to be in the market in the fourth quarter as market conditions and competing demands on our corporate cash warrant. Our investment grade credit ratings remained stable at A minus and A3. We have an untapped $300 million credit facility and generate significant cash flow from operations. We have the financial strength and resources to take advantage of opportunities if and when they arrive.
That concludes our prepared comments. We now would like to take your questions.
(Operator Instructions) Our first question comes from Daniel Fannon with Jefferies. Please proceed with your question.
Dan Fannon - Jefferies
I guess, Tom, first just to clarify, you mentioned the $1.5 billion sub-advised mandates within the Global Macro fund. Did you quantify the Parametric’s mandate? I might have missed that?
I did, we actually expect the Global Macro mandate to come in somewhere in the range of $1.5 billion to close to $2 billion. The $1.5 billion we think is a conservative number that hasn't been finalized. The size of the Parametric is slightly bigger than that. Part of that has funded and part of that is expected to fund towards the end of the quarter. So think one of them between $1.5 billion and $2 billion and the other between $2 billion and $2.5 billion, I think is the range we're expecting for that. But part of that has fund and the other part is expected to fund towards the end of October that may possibly slow it, but that's the expected timing on that.
Dan Fannon - Jefferies
Okay. And can you talk about the fee rate differential between what the Global Macro product is being sold retail, you're launching the institutional version now this appears to be the sub-advised. Can you give us a sense of the fee rate differential amongst those?
Yeah, so we offer Global Macro in two different flavors. There is the initial version, which we think of it being one time levered and that there is no -- you can think of that as a risk leverage as opposed to, there is no underlying borrowings because there are lot of derivatives involved in the strategy. And then there is what we call the Global Macro advantage, which is approximately two times the risk profile and volatility of the initial strategy and similar the fees on those scale up proportionally. The retail fund I believe the base management fee on the advantage version is about 100 basis points and the initial or Global Macro asset return is about half of that.
In sub-advisory generally, I would say fee rates are approximately half of what they are in retail funds. That's consistent with our experience both where we bring in outside sub-advisors for our funds as well as when we sub-advise mandates for third parties. The strategy we're looking at here is a Global Macro advantage type strategy, so think about something in the range of a little more than half that retail advisory fee rates. So I think it's in a 50 to 60 basis points range. So a pretty healthy fee.
Dan Fannon - Jefferies
Okay. And then just one final question on the comment around margins and fee rates basically I think being flat quarter-over-quarter. Does that assume the market movement we had thus far in August, or is that just -- I guess I want to get some of the factors that are being incorporated into those comments?
In terms of the fourth quarter (inaudible)
Yeah. That is primarily based on where we finish the third quarter, so July 31. And we had to chase the market too quickly up and down on the forecast given the volatility.
So I think that we have not updated that margin forecast for recent up ticks in the equity markets.
Our next question comes from Michael Kim with Sandler O'Neill. Please proceed with your question.
Michael Kim - Sandler O'Neill
Just a couple of quick questions. First, can you give us any color on the distribution footprint of the large-cap value fund in terms of the fund's presence on platforms or within model portfolios? And then any visibility into any further redemptions that may be coming in the near-term?
Yeah. So I mentioned that assets peaked at about $33 billion in April of last year and at that point the distribution profile was, I want to say about $20 billion of that was in the retail mutual funds or couple of different flavors of that, and the balance split between sub-advisory, traditional institutional and retail managed accounts. So all of those businesses have scaled back, I wouldn't say proportionately, but they've all scaled back somewhat over the last five quarters. Where we've seen the stickiest assets have been in retail managed accounts which has grown as a proportion of the overall business and our sub-advisory business has pulled away mostly due to performance issues and the same with the retail fund. So, the mix has gone somewhat heavier towards retail managed accounts but we still have very substantial business in traditional institutional we've got continuing sub-advisory relationships in some of the fund, the key funds while not as big as they were, continue to be big products for us.
What's happened over the last, I guess, really two quarters is that we've seen decisions that were made to terminate or reduce exposure to the strategy that were made that might have been made in the first quarter, that might have been made early in the second quarter, but essentially looking at investment results mostly through 12/31/2011. Those have been hitting us really continuing to this day. Decisions made certainly well before the upturn in the performance that started in a major way in the second quarter. So we had a very good second quarter. August has also been a good period for us, but we are seeing the impact today of investment decisions generally made prior to that uptick.
But certainly, as I mentioned in my prepared comments, we're certainly hopeful that we are getting, we're near to the end of the redemption process or the accelerated redemption rate. Performance has been better, there is some visibility on some of the institutional and sub-advisory type redemptions. That's not all behind us but we think most of it is to the extent we have visibility. Clearly if performance were to turn it down again this is quite competitive category. Money is flowing out of U.S. equity generally. Money is flowing out of large cap, value, asset managers, all those things are working against us.
I must say even with those factors we have been a bit dismayed at the pace of redemptions for a strategy that from a long term perspective we think continues to offer significant appeal, where the long-term performance of the manager continues to look very good versus the peer group and benchmark. During a three year basis we've certainly lagged the peer group and the benchmark although those numbers are getting better as we put up good numbers in the recent months but also at least as important as we move out on a three year basis of the difficult comparisons of the second and third quarter of 2009.
Michael Kim - Sandler O'Neill
Okay. That’s helpful. And then maybe a question of Laurie. Just given the turn in flows, at least this quarter maybe a less favorable blended fee rate going forward like you talked about and just ongoing market volatility. Are you starting to maybe look at scaling back on investment spending to any degree just given kind of a tougher revenue environment?
I think we're certainly looking at that, and I think we're really entering our budget season as we speak. And I think we are already having conversations and trying to make sure that we are making very judicious spend decisions and looking at our opportunities in terms of new initiatives for next year and ensuring that the things that we are doing are contributing meaningfully either to revenue or reducing expense. So, I think we're certainly looking at that in relation to what we've seen in terms of margin pressure this year.
(Operator Instructions) Our next question comes with Ken Worthington with JPMorgan. Please proceed with your question.
Ken Worthington - JPMorgan
I wanted to dive a little bit more into the product development. I think you announced in the prepared remarks, you're really launching new products kind of all over the place. So, maybe firstly, which products do you have the greatest hope for or the greatest expectations for? And then I'll jump right into the follow-up. Election season is coming up, tax changes are set to expire. How do you position products for post 12/31 and are there iterations of elections that are better or worse for you from a product development perspective? I think I squeezed three in there, but hopefully that's okay.
Yeah, we'll count that as 2.5 and we'll take that. I guess what I would characterize as areas of new product focus, there are a couple of them. Hexavest is certainly one. We have filed for four new funds in the U.S. and expect to launch those at the end of this month or shortly thereafter, and also expect to launch four new funds, and also market (inaudible) fund, I think in September. Some of those may see a quick market uptake. We're hopeful that particularly outside the United States that where the institutional records tend to be more meaningful in terms of impacting fund flows and it's often the case here in the U.S. that we're hopeful that we'll see fairly quick uptake for Hexavest managed funds going forward.
In the U.S., it will be likely a slower build because these are new funds and people, although the track record of Hexavest as a manager in the same strategy is there, these are new vehicles and generally in the U.S. market gatekeepers are more conservative on how they apply for existing [gits] compliant track records to new funds. So, the one category of new product offerings is Hexavest.
A second category was the Parametric. And I would focus, I guess they're on two primary things. One is we're following up the success that we have had with structured emerging markets were growing out of a quite broad range of structured active strategies applied to different asset classes. Most of those have already been launched typically with the Eaton Vance seed capital, to varying degrees we have attracted outside capital. The oldest in one of those in terms of live dollars is structured international equity, which I believe just recently passed its third year anniversary and I think is approaching its four year anniversary. So, we are clearly well along in getting a track record built. Still pretty early in terms of building assets for those strategies.
I also talked about the Australian superannuation fund market as a significant opportunity for Parametric. That derives from a couple things. One is the unusually large and concentrated nature of the Australian institutional business where that, as you probably know, this superannuation funds there control very significant assets in a relatively contained market. But importantly, different from in the U.S., those retirement vehicles are subject to current tax or I should say returns on those vehicles are subject to current tax. And Parametric’s specialty in tax management we believe translates quite effectively to the Australian superannuation fund market. So a very interesting opportunity. Still early days there. One quite large mandate has been funded in part and we expect the second part of that to fund later this quarter as I talked about. But we see significant potential for growth there.
Relating to the election and potential changes in the tax law, for those maybe not familiar with this, what Ken is referring to is that for many years both Parametric on the more passive side and Eaton Vance on the active side, have had significant asset exposures to tax managed investments both equities and in the case of Eaton Vance and our TABS subsidiary, TABS division in New York, tax advantage municipal income strategy. Generally speaking, as tax rates go up, the sensitivity of investors to paying tax, in particular capital gain taxes, goes up.
Certainly we saw back in the period of the late 1990s when tax rates were significantly higher than they are today, a real boom in growth of that business both at Eaton Vance, and then although not part of Eaton Vance at that time, Parametric. It is certainly possible that if tax rates go up and particularly if we get into an environment of continued equity appreciation, that interest in tax managed investment gets rekindled. As to how the election goes and how that impacts Eaton Vance, I think it's fair to say that certainly that portion of our business would benefit from higher capital gains tax rates and generally higher individual tax rates. I think we're also mindful that Eaton Vance pays as an organization, pays a lot of corporate tax and to the extent there are proposals out there to lower corporate income taxes, that would benefit us in a different way.
So they are cross currents. If taxes go up that’s potentially benefits our business from a fundamental perspective in terms of the flow outlook for our various types of tax sensitive businesses. If business taxes go down, which is certainly one of the things being considered, that would benefit our bottom line in terms of a lower tax burden. So it kind of cuts both ways, but from a business perspective generally we're in the camp of benefiting from higher tax rates.
Our next question comes from Cynthia Mayer with Bank of America Merrill Lynch. Please proceed with your question.
Adam Beatty - Bank of America Merrill Lynch
This is actually Adam Beatty in for Cynthia. First maybe a follow up to Ken's question on product, in terms of closed-end funds. You've obviously been active in several other areas including the [heed] and trust, but wanted to get your thoughts and outlook on launching additional closed-end funds?
Yeah. As some background between 2003 and 2007, Eaton Vance was a quite large participant in the closed-end fund market. In each of those five years we led the market in new issuance. Since that time we've done, I think a total of two closed-end funds raising about $400 million. So this has gone from being a very big part of our growth story to almost nonexistent over the last couple of years.
As your question suggests, there has been some renewed activity in the closed-end fund market off late. Many of the types of strategies that are now starting to attract investor interest are things that fit with investment capabilities that Eaton Vance has. So you might imagine that we are starting to take a look at this again. We do not have any closed end fund offerings on file but we are certainly looking at the opportunity and if there were a chance to restart that business at Eaton Vance in terms of some new growth, we would certainly quite willingly embrace that. These tend to be long life sticky assets and it's a business that we know very well both in terms of a offering perspective and in terms of management.
Adam Beatty - Bank of America Merrill Lynch
And then turning to gross sales, if you could give maybe some color on what's driving that? Obviously large cap value was pretty big in the net flows, so maybe with gross sales as well. And also maybe about the monthly trend within the quarter and even the (inaudible)?
I’d just say, Adam, to get a sense of what we're selling from a gross sales standpoint, I refer you to slide ten which has our top selling municipal funds. We talked about the interest on the institutional side and I would elaborate by saying institutional it’s basically pursuing the emerging market, global macro, bank loan. So largely mirroring what you see the retail interest currently as outlined in slide ten.
Yeah, I think I would say, maybe as a global comment that investors continue to despite rampant pessimism, despite what's now a pretty good three-year trend of equity returns and flows for the business have been challenging for lots of participants. We struggle to identify the kind of single growth driver that was a big part of our story in several points in our history, certainly 2010. Our Global Macro strategy really drove our growth in 2008 and 2009, it was large cap value in 2003 to 2007 period, it was a range of dividend income and option income strategies generally and closed end funds formula in the form of closed-end funds.
Going forward, I'd like to think we can grow and grow at rates similar to that 2003 to 2010 period, but do it without one or two strategies dominating our flows to the extent that was the case then. We see what Parametric emerging as a much bigger part of Eaton Vance, as they are now about a quarter of our assets and a bigger part of our flows that that should continue to be a source of growth that in many case is relatively independent of the larger Eaton Vance sales efforts. Certainly, Hexavest, we are hopeful and optimistic will meaningfully contribute to our growth in fiscal 2013. The transaction closed earlier this months and we are in the process now of getting our sales organizations trained on the capabilities and their story. And I think it's fair to say there is a lot of optimism in our sales ranks about what they can do in telling the Parametric story over the next year.
So, it's a little hard to tell where the growth comes from. A lot of that will be driven by the direction of the market going forward, whether it's income products or alternatives or equities. One of the things about the Eaton Vance story that I think we're most proud of is the diversity of our capabilities and the ability in all types of market environments for us to have leading strategies that our sales teams can offer really regardless of the market outlook.
Our next question comes from Jeff Hopson with Stifel Nicolaus. Please proceed with your question.
Jeff Hopson - Stifel Nicolaus
First, Global Macro flows in the last month at least on the mutual funds side have been a little weaker. Can you comment on that? And a little surprise that on the muni side, flows, at least from what we see, haven't been stronger. Industry flows have been a little bit better, your performance has improved considerably. Any comments on that as well?
A couple of things. One, in global macro, we did see a fairly large platform reallocation away from that strategy. I think we understand that it went from alternatives into equities perhaps reflecting a better market view. That platform continues to be significantly invested in Global Macro and it was described to us as a onetime reallocation change. And that I think is just one of the facts of life in our business as it operates today, that when a key decision maker or a key platform puts money in, you can see assets move up in a hurry and when they choose to allocate away from your strategy either in favor of other managers that do similar things or in this case to reallocate away to a different asset class, you can see effects in short term flows beyond what you would have expected to see five or ten years ago when fund flows were much more and decision making reflecting fund flows were much more dispersed. The other part of your question, remind me again, Jeff?
Jeff Hopson - Stifel Nicolaus
Munis, right. As you point out, our muni flow numbers have been positive though perhaps not as strong as overall industry flows. We frankly view that as an opportunity we feel like we have got in both our tax group in New York and our Boston muni income group. We see here a full range of capabilities, strong suite of products backed by performance, differentiated approach in the marketplace. Eaton Vance approach from Boston in traditional and more income oriented. The approach from the tax group in New York is more total return. I did mention that our laddered muni separate account business, which I don't think would show up in the flow numbers that you've seen, has been an area of focus for us and we have seen significant growth there. We've probably seen better muni business growth on a total basis including separate accounts than would show up in our fund business.
But you probably know that we went through a period of underperformance for our, particularly for our flagship national muni fund and that was concentrated in the fourth quarter of 2008. As those numbers have rolled out of our three year numbers we look much better on a relative performance basis. But I think there is still probably some carryover negative impact from that affecting our flows. The ten-year numbers of the strategy are very good, the one and three-year numbers are excellent, but the five-year numbers which do include that time period are still below our category averages. So it will take a while for that to work out at the five-year numbers and at that point it probably gets diluted fully and it's lost to history. But I think to some degree we are being held back still by that period of underperformance really during the worst of the financial crisis.
Our next question comes from Bill Katz with Citigroup. Please proceed with your question.
Bill Katz - Citigroup
Just coming back to the pipeline, if you look beyond the Parametric wins and also the optimistic outlook for Hexavest post the acquisition, where else are you seeing pipeline activity?
Well, we mentioned Global Macro as being an area where we're seeing -- we've had, this would be the second sub-advisory win over the last couple of quarters, the bigger one is expected to fund this quarter. Emerging market equities, that's managed by Parametric has been a big growth area for us this year and that continues to look quite encouraging. They have a -- this is a strategy where they've got a track record going back more than ten years and really quite outstanding returns over the long haul. It's a differentiated approach in the emerging market equity space. It fits very well with registered investment advisors, it fits very well with a range of institution, but has been a challenge for, usually our wholesalers use the more traditional fundamentally based active approaches. And we're trying to break down those barriers and as that happens we think there's potential for growth there.
Credit on the fixed income side, both floating rate bank loans and high-yield bonds, we've seen continued inflows there. We feel that we've established ourselves as the premier manager in broadly diversified, conservatively managed bank loan mandates and think that there are -- even though the asset class is now well over 20 years old, we are still relatively early in the development of that as a separate institutional category and are hopeful that it will continue to break down those barriers over the next couple of years. We see the risk return profile of bank loans has validated over the last couple of decades that we've been involved in this business, as very compelling and think that we'll see more interest there over the next couple years.
So I'd highlight, you mentioned Hexavest, you mentioned the Australia opportunity. I think Parametric structured emerging markets is an area of growth. Global macro, particularly sub-advisory at the moment. Bank loans, high yields. We have a range of multi-strategy opportunities. We have an arrangement with Richard Bernstein who sub-advises -- the former Merrill Lynch strategist who sub-advises a couple of our funds. We have a team here, our custom solutions group that does multi-strategy funds. We think that over time as those strategies achieve critical mass, they can also be growth drivers for Eaton Vance.
And I would only add to that, we think that Atlanta Capital could provide positive flows throughout the quarter as well.
Bill Katz - Citigroup
And then the second question is, it seems like one of the sub themes down here from you is just the low fee sub-advisory nature of a lot of these wins, while some of the core businesses where the large cap value or munis continues to struggle and continuing to see (inaudible) or not? As you look beyond fiscal fourth quarter, how are you thinking about the dynamic between volume, it seems to be very good versus margins. I mean, is 32 sort of the new run rate or are you still sort of in that band of the upper 30s? What are your thoughts there?
Just to maybe clarify one thing about the sub-advisory business. The sub-advisory opportunity that we expect to fund this month for Global Macro is actually above corporate average advisory fee rate, so that will have a positive impact not a negative. Beyond that I think the thrust of your question is, it is probably right on in that many of the growth opportunities that we're seeing whether it's TABS ladders, whether it's Parametric in Australia, some of their structured active strategies, a lot of the things that we're doing at our growth areas are lower than average fee rates for us. And I think we can boldly predict that unless something changes that we're headed down a path of continuing declines in lower average fee realizations for our business. I don't think we're unique in that regard.
If you go back half dozen or dozen years, we had a significant amount of net distribution revenue that we realized through selling A shares, B shares, C shares, mutual funds, that's pretty much gone away, it's going away quickly. And will drop perhaps to zero at some point if we stop selling C shares in any volume and that's a small part of our business. And if current trends and retail distribution continue, that goes away. But even beyond that in terms of investment advisory fee rate, we also expect a generally declining trend there to continue not as a precipitous right but I would say at a steady rate.
The challenge is, as you point out, it’s how you maintain margins if your fee rates are going down, you have to be pretty efficient. You have to be smart. You need scale to do that. If I compare the margins of Parametric to the rest of the company, they are about the same. They are not a lot different even through Parametric operates at significantly lower fee rates. So it depends on the nature of the business. It depends on how you are structured and organized and it depends on scale. But I would say there is nothing inherently less profitable about lower fee business. Sure, if you have a same strategy and you get 100 basis points for that strategy versus 50 basis points, that 100 basis point mandate will be more profitable. But there are managers in our business, including Parametric, that have figured out how to organize the business in such a way that they can operate at quite attractive levels of profitability even at lower levels of fee rates that are significantly lower than most asset managers have historically have.
We have come to the end of the allotted time for our Q&A session today so our last question will be from Robert Lee with KBW. Please proceed with your question.
Robert Lee - Keefe, Bruyette & Woods
Most of my questions have been asked. Just a quick one, if I look at some of the expense lines, was there anything meaningful and whether it's other operating expenses or whatnot, that are related to the Hexavest transaction that we could expect to go away in the coming quarters?
This is Laurie. There really wasn't anything in the third quarter that we would call out specifically. It was actually a very clean quarter from an expense perspective. There was some legal. Roughly, $700,000 in the third quarter relating to costs associated with Hexavest. We had already accrued a good portion of the expenses that we anticipated recognizing in the second quarter. So, you might see a little bit of drop off associated with that, but the rest of the quarter was a pretty clean quarter and we didn't have anything to really call out or trying to add back to earnings to give you any sense of what we might be doing in the fourth quarter.
Robert Lee - Keefe, Bruyette & Woods
And maybe a follow-up, and this probably sounds like a broken record, but a little bit on Parametric and fee rates. I guess the first part would be about large Australian mandate. You mentioned that some of that's funded. I'm assuming you referred to a piece of that having funded in fiscal Q3 and I don't know if you could kind of size that at all. And then, I guess the second part of that is generally the super -- that market in Australia tends to have a pretty low fee structure even for actively managed products given the scale of mandates. So, given that this is an overlay mandate we'd be off base kind of thinking that that type of business is probably going to be somewhere in the single-digit fee rate, or is that really just too low? Is it going to be more akin to the normal overlay kind of fee rates of say 2010?
Yeah, just to clarify the timing. It was actually earlier this month. So it was in the fourth quarter not the third quarter. So, there was no – everything -- all of that, that whole mandate will hit in the fourth quarter not the third. I think your instincts on fees are probably about right. We'd like to think that over time we can get very low double-digit fees on that. I don't want to comment specifically about this particular mandate, but this is, I think overlay in general for Parametric is like 15, 18 basis point fee rate. We would not expect to get that given the large size of the many of the clients over there. So, if we get 10 to 12, we think that would be reasonable. We may, if we can do better than that, I think we like to do better than that, but I think that's a realistic expectation for what this business can be.
I would like to turn the call back over to management for closing comments at this time.
Thanks for joining us this morning and we look forward to talking to you in November which will mark the close of our fiscal year. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.