Eaton Vance Corp. F3Q08 (Qtr. End 06/30/08) Earnings Conference Call Transcript

| About: Eaton Vance (EV)

Eaton Vance Corp. (NYSE:EV)

Q3 FY08 Earnings Call

August 20, 2008, 11:00 AM ET


Daniel C. Cataldo - VP of Financial Planning and Analysis

Thomas E. Faust Jr. - Chairman, President and CEO

Robert J. Whelan - CFO


Dan Fannon - Jefferies & Company

Cynthia Mayer - Merrill Lynch

Jeff Hopson - Stifel Nicolaus

Robert Lee - Keefe

William Katz - Buckingham Research


Greetings, and welcome to the Eaton Vance Third Quarter Fiscal Year 2008 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, Vice President of Financial Planning and Analysis for Eaton Vance. Thank you, Mr. Cataldo, you may begin.

Daniel C. Cataldo - Vice President of Financial Planning and Analysis

Good morning, and welcome to our third quarter fiscal 2008 earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO, Bob Whelan, CFO and Laurie Hylton our Chief Accounting Officer.

Tom and Bob will make... comment on the quarter and then we will address your questions. The full earnings release and charts we will be referring to during the call are available on our website, under the heading Press Releases.

We need to begin with a reminder that today's presentation contains forward-looking statements about our business and financial results. The actual results may differ materially from those projected due to risks and uncertainties in our operations and business, including but not limited, to those discussed in our SEC filings. These filings including our 2007 annual report in Form 10-K are available on our website on request without charge.

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

Good morning, and thank you for joining us. This is Tom Faust. I am happy to report that we had a solid third quarter with strong net flows and growing business momentum in the midst of challenging market conditions.

Our 15% annualized internal growth rate for the quarter was among the strongest the company has experienced in recent years, an acceleration from the 9% growth rate in the first fiscal quarter and the 13% internal growth rate in the second quarter.

Looking back over the first nine months of fiscal 2008, we delivered a 12% annualized internal growth rate. In the quarter, we maintained a solid profitability despite pressure on revenues from equity and credit market decline. The quarter's earnings were adversely affected by several one time items and investments we made to support the long term growth of our business, which Bob will elaborate on in a few minutes.

A strong internal growth for the quarter and year-to-date offset much of the decline in managed assets caused by poorly performing equity and credit market. Assets under management at the end of our third quarter were $155.8 billion, a decline of only 2% from the beginning of the quarter and just 4% since the start of fiscal year. This compares to a decline in the S&P 500 of 9% for the quarter and 18% since the beginning of the fiscal year.

Gross sales and other inflows of $10.8 billion for the quarter and $35 billion for the first nine months keep us right on pace with net last year's record sales results. An accomplishment few would've considered possible at the beginning of the year, given the shutting of the closed-end fund offering window and market pressures in some of our prized out in the period.

Net inflows were $5.8 billion in the quarter, our best net flow quarter ever, excluding closed-end funds and $14.4 billion year-to-date. These net flow numbers when annualized, and then divided by the beginning AUM for the relevant period yielded strong internal growth rate that I quoted earlier.

Redemptions and other outflows declined for the second quarter in a row to $5.9 billion. This equates to a 15% annual redemption rate, quite respectable given the turmoil we're seeing in the current market.

Please refer to the PowerPoint slides one through six for more about our assets under management, gross and net flows, asset mix and growth rates.

I will now give you bit more color on specific lines of business, investment performance and distribution development. Starting with our core fund business, Gross Open-end fund sales this quarter were our best ever. This can be seen on slide 7, which shows that we sold over $6 billion in the quarter, or roughly $2 billion a month.

Our strong growth and net sales of Open-end funds were allowing us to gain market share in the fund business, as it's evident in the Strategic Insight rankings for July shown on slides 8 and 9. Slide 8 is the calendar year ranking of net inflows into long-term funds in the non-proprietary distribution channel. As you can see, even without any new closed fund flow we continue to remain near the top of the list.

Slide 9 shows our ranking among all fund managers in terms of long-term fund assets under management. I am pleased to point out that we move up from 14th to 13th in July, continuing the steady upward movement in ranking we've seen in recent years. Much of our recent sale success has been the result of strong inflows to our large cap value funds as shown on slide 10.

While we are proud of this success and see lots more growth potential here, we understand the importance of maintaining a diversified base of business and are encouraging and incentivizing our sales teams, to include some of our strong performing products in their conversations with advisors, gatekeepers and consultants.

You'll note on slide 10 that the two best performing... best selling funds after large cap value are our Dividend Builder and national muni funds. We believe that both these products are positioned for significant growth. The Dividend Builder Fund along with other strong equity income products, played nicely into the retiring baby boomers need for both current income and capital growth overtime.

We believe there is real opportunity for us here to build an equity income franchise, much the way we have established our large-cap value franchise. With respect to our muni business, we believe there is a strong likelihood that tax rates are headed up no matter who wins the ride out [ph] in November. We feel investor demands for tax free income, not to mention tax efficiency in general is sure to increase.

Although stretching out our muni spreads to historically wide levels have caused our municipal funds routed performance to suffer of late, they have nonetheless been able to generate continued net inflows and have quite optimistic disposable seller rate when spreads return to more normalized levels and our routed performance improves.

Regarding our important bank loan franchise, I'm happy to report that net flows into our bank loan funds turned positive after four quarters of net outflows with positive inflows into both retail and institutional funds during the quarter. While bank loan department Ag [ph] rates will likely rise as the economy continues to weaken, we believe that loans are inexpensive at today's prices and represent a good long-term investment opportunity.

I commented on some of our strong fund performance, if you refer to slides 11, 12, and 13, you'll see a list of our equity and income funds that are currently rated four or five stars by Morning Star for least one type of [ph] shares. It is a broad group of funds, 45 in total, that covers a diverse of investment discipline, a big reason why we have been able to continue to raise assets in the tough market environment.

We've also shown on slide 14 the percentage of our fund assets that are in funds that have beaten their liquid peer group averages over the past three, five and ten years. We certainly understand that job one for investment management organization is to deliver competitive long-term performance and we are very pleased with the fact that nearly 80% of our fund assets have beaten peer averages over the past five years and nearly 90% over the past ten years.

In our Closed-end fund business, market trading discounts for the common shares have widened since the end of the last quarter and we are now less optimistic that we will see any meaningful Closed-end fund launches in 2008. If not, however, I'll comment that Closed-end fund organs will be back, we just do not know when.

As many of you know, much of our attention in the closed-end fund area has been devoted to restoring liquidity to holders of our fund's auction preferred shares. We felt from the very start of the auction-rate liquidity crisis back in February that fund sponsors had a major role to play in finding solutions to the crisis, and have extended a significant amount of time and energy since then, doing just that.

Please refer to slide 15 which shows the progress we have made to-date. Of the $64 billion of Closed-end fund auction-rate securities that were outstanding at the time the crisis cropped our funds represented just close to 8%. To-date our funds have accounted for 17% of the $22.5 billion of closed-end funds APS redemptions that have been announced.

Our funds announce redemption rate of 76% is almost 2.5 times higher than that of all other funds combined. Our fund family was the first to redeem all of its equity fund APS, the first to begin redeeming taxable income fund APS and the first to restart redeeming Municipal income fund APS. Replacement financing for the fund's APS has been provided by bank and commercial paper facility borrowing and through creation of tender option bond at certain Municipal funds.

We're aggressively working on solutions to redeem the $1.2 billion balance of our fund's APS. As discussed on the last quarter's call, we have developed a new type of security fruitions [ph] by a Closed end fund, that we call liquidity protected deferred shares or LPP shares. Like APS, LPP shares are quoting rate preferred stock instruments used by closed end funds that restores the financial leverage.

LPP shares differ from APS however, in that they are supported by the unconditional purchase obligation of the designated liquidity provider and is eligible for purchase by money market bonds. We are currently marketing an initial $100 million LPP offering that we hope will provide a model for future issuances that can be used to retire our remaining APS.

Before moving on to other topics, I would like to address recent articles in the press that have suggested it may have been a wiser course for Closed end fund sponsors to sit on their hands during this crisis, rather than responding proactively as we have. This comes up in light of recent decisions in many other brokerage firms that sold APS to buy out their clients and that hold the APS on the balance sheet.

The premise of this article seems to be that providing liquidities to APS holders have somehow come at a cost to common shareholders. Maybe that is true in some places; but it's not been the case here. With each APS refunding we have done, we carefully analyze the expected long term cost of the alternative funding source and in each case determine that refinancing the APF was not only the best interest of preferred shareholders but also the funds common shareholders.

All of the refinancing solutions we've instituted to date have provided either comparable or better economics for common shareholders. If they didn't, we wouldn't have done them. None of the funds have been required to reduce financial leverage in connection with APS redemptions and importantly the cost of the replacement financing is expected overtime, even lower than the total cost of APS based on the maximum rate to deploy the unsuccessful auction.

In fact, our actions to date to replace APS with less expensive alternative financing, have already resulted in more than $8.5 million in cost savings for our fund's common shareholders.

We've said publicly, with that we don't believe any prudent fund sponsor would knowingly enter into a financing arrangement on the terms that apply to fill APS.

Let me explain why. When an auction fails, the APS pays a default distribution rate that is defined by the terms of security, that is the prescribed payment amount [ph] for short term interest rate benchmark.

In most cases, the fail rate is calculated as the greater of the defined premium to the benchmark at a 125 basis points, or defined multiple of the benchmark, for example 1.25 times. The multiplier feature of the fail rate calculation means that APS becomes prohibitively expensive as short-term interest rates increase, negating the advantage of managing... employing fund leverage. Whereas in a low interest rate environment, sale APS may not look for bank as a source of fund leverage. They quickly change as the rate move above threshold levels that we have often seen in the past.

The decision to buy many brokerage firms to buy off their APS clients is a welcome development. But we don't believe it alleviates the long-term need to find an alternative to replace the remaining APS.

It is our goal to provide liquidity to all our APS shareholders and in the process replace the uncertain leverage cost of the build APS structure with alternatives that will provide more certainty over the long-term. We will continue to pursue redemption of our remaining APS because we believe that it is the right thing to do for APS holders to fund common shareholders and the long-term success of the Eaton Vance.

With respect to our separate account business, you will note that we had a very solid quarter perhaps our best our in terms overall contribution from the institutional and high net worth and retail separate account businesses combined.

Momentum in retail managed account business continued with $2.7 billion in gross sales and $1.6 billion in net sales. Our sales in this channel are well diversified with large cap value, tax managed core, international equity, overlay and muni bond investment disciplines accounting for the bulk of sales.

You may recall that in beginning of fiscal 2008 we gave our fund wholesalers' responsibility to retail managed account products and illuminate the form of standalone RMA sales force. The results we've to-date will suggest that the change has had a positive impact on sales results.

The growth we've experienced in retail managed account sales in assets is shown in slide 16 and 17. Our institutional and high net worth businesses combined for gross inflows of $2.1 billion and net inflows of nearly $1.2 billion in the quarter with positive net flow contributions from Eaton Vance, Parametric, in Atlanta and Fox at breakeven.

Investment performance in the disciplines we offer in institutional channel remains very strong with large cap value, structured emerging markets, small cap core, large cap growth, high yield, bank loans and LDI generating high levels of interest from consultants and investors.

The investment performance at Fox and Atlanta also continues to excel with enhanced reserve prospects for renewed growth. Slide 18 and 19 break down our institutional assets under management a company major investment discipline.

Finally, on the distribution front, everything we've seen today leads us to believe that the initiatives put in place by Matt Whitkos beginning last year are yielding positive results. Our relationships with the intermediaries that we work with are stronger than they've ever been and Open end fund and retail managed account sales are better than they've ever been, and keep in mind that these results have been achieved in markets that have created head winds for a number of our key products.

Under Matt's leadership, we have eliminated the separate retail managed account sales force and formed a wealth management solutions group to support the marketing of the company's products and services prior to the high network market price.

We have passed into market data services that allow us to better focus our sales efforts. We've re-written the incentive compensation system to better align the focus of our sales force with overall corporate goal.

We hired an experienced DCIO sub-advisory sales manager to capitalize on opportunities in the defined contribution and sub-advisory market and we have recently hired a Chief Marketing Officer to better established the Eaton Vance brand in the market place and to upgrade our marketing and communications efforts.

With these initiatives come added costs in a period where we lose significant assets to market decline, that can have a negative short term impact on our margins. However we've never been a company that curtails investment that we fell are instrumental for long term success, as a result of short term gyrations in the market.

Will we watch expensive? Yes, and we will because we're all shareholders. But we'll also invest in distribution when it tends to increase market share, we'll invest in systems and infrastructure needed to adequately service our clients. We'll hire good people when we have the opportunity to get them. I have every confidence that what we're doing today, will yield positively results for the company as markets stabilize.

I would now like to turn the call over Bob Whelan, our Chief Financial Officer, to review the financial highlights of the quarter in more detail.

Robert J. Whelan - Chief Financial Officer

Thank you, Tom and good morning everyone. As Tom indicated, we've experienced very strong organic growth despite some very significant market challenges.

For the first nine months of 2008, we've sold approximately $35 billion of products, essentially the equivalent of all of 2007, if you exclude Closed-end fund from the mix. We realized over $14 billion of net sales year-to-date.

As you all know the extreme swings in the equity and credit markets have also impacted in our business, as we have seen our assets under management adversely impacted by market action alone of just over $20 billion, most notably a drop in the first quarter of over $12 billion and in this quarter of almost $9 billion.

Despite those swings and because our net sales have been so strong, our strategy has been to continue to grow and invest in our business, while many of our competitors have retrenched.

We saw a slight drop in our operating margin this quarter due in part to specific longer term growth initiative, such as our pending 2009 office relocation, as well as expenses related to stronger sales in the period.

With that backdrop let me comment on our financial results. We are reporting earnings of $0.40 per diluted share in the third quarter 2008 versus $0.41 in the third quarter of 2007 and $0.43 in the second quarter of 2008. As a reminder, third quarter of fiscal 2007 earnings, were reduced by approximately $0.07 per diluted share due to the close end fund related expenses.

In the third quarter, there were several items that reduced EPS approximately $0.05 to $0.06 relative to consensus estimates. Those items include $0.02 of cost related to the increase in our quarterly tax-rate; $0.01 related to losses in our investment portfolios; $0.01 related to rent increases, given our facilities relocation in 2009; $0.01 related to the severance expenses and lastly our outstanding shares were up as a result of higher average price for the quarter, which impacts the fully diluted share calculation.

Let me comment on the non-core operating items first. The company's effective tax rates increased to 40.5% this quarter, compared to 37.4% in the second quarter of fiscal 2008, the higher rate translating into $0.02 per share impact to Vance's EPS. The current quarter's effective tax rate is higher than the year-to-date rate of 39% due to higher than previously forecasted state tax expenses.

Also the second quarter effective tax rate of 37.4% was lower when compared to the current year-to-date tax rate, due to an increase in minority interest during the second quarter. We anticipate ending the fiscal year with a tax rate in the range of 39% to 39.25%.

We also realized over $2 million or $0.01 per share of losses in the quarter, related to our seed capital and investment portfolios. Because of the required accounting treatment of the investment, 1.2 million of the loss is reported above our operating income in the other revenue category and $900,000 is reported below the line in the Lawson investment line item.

As you know we have a long history of product innovation and critical to this innovation is seeding new product ideas which we do on an ongoing basis. Not surprisingly, we did realize some losses in our portfolio as a result of the significant drop in the equity market.

Now turning to our results from operations; as mentioned, assets under management increased to $155.8 billion, from $152.3 billion in the third quarter of 2007, an increase of 2.3% or $3.5 billion. Average assets under management increased 4% from $152.6 billion in Q3 2007 to $158.8 billion in the third quarter 2008. We saw a slight drop in revenue to $282.8 million in Q3 2008 versus $286.9 million in the third quarter of 2007 as our higher average assets were offset by a slight decline in our overall effective fee rate.

On a sequential basis revenues increased 3%, largely the result of higher average assets of 4%, a slightly higher effective management fee rate, offset by lower distribution fees and the loss in investment as previously noted.

Operating expenses declined 4% to $190.7 million from $198.1 million in the third quarter of 2007, largely due to the one-time expenses related to closed-end structuring payments in Q3 2007. Excluding those one-time distribution expenses, operating expenses increased by 4% in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. Sequentially, operating expenses increased 7.6%.

Compensation expense declined slightly to $79.5 million year-over-year from $79.9 million in the same quarter 2007. We saw increase in days and benefits, reflecting an increase in headcount which was offset by a drop in overall incentive compensation as a result of lower sales base incentives and operating income base bonus accruals.

On a sequential basis, compensation expense increased 5.6% from $75.2 million to $79.5 million, due primarily to an increase in average headcount, two additional payroll days in the quarter and an increase in severance related expenses of almost $2 million.

Fund expenses increased 19% year-over-year and 10% sequentially. The year-over-year increase is the result of growth in assets of funds for which we employ a subadvisor as well as growth in institutional funds for which we receive a holding [ph] management fee and are responsible for the operating expenses of the fund. The sequential quarter increase is largely the result of growth in the institutional funds.

Other expenses grew 31% year-over-year and 23% sequentially. The year-over-year and sequential quarter increases were driven by higher rent, travel, IT and legal costs, all related to our strong growth. It's worth going into some detail on the increase in rent and facilities as those expenses increased approximately $2 million over the second quarter.

We are moving our headquarters and old Boston based personnel to a new location in 2009. While we do not currently occupy the space and will not begin paying rent until the spring of 2009, accounting rules require that we begin recognizing rent expense when we receive access to the space.

We then began recording rent expense this quarter as we now have access to the building to begin the tenant improvement. This doubling up of rent will impact us... will affect us until the second quarter of 2009 when our current lease expires.

Having spoken to the major revenue and expense categories, let me briefly provide prospective on our adjusted operating margin. We comment on our adjusted operating income and margins as the most appropriate measure of operating results as it provides the run-rate of earnings momentum.

As a quick reminder that figure factors operating income as reported and for core items which include closed-end structure and fees, payments to terminate closed-end fund trails, stock-based compensation and accelerated amortization or impairment.

In the first nine months of 2007 our adjusted operating margin was 37%. In that period we experienced $20.7 billion of net inflows and $4.7 billion of market depreciation, an AUM increase of over $25 billion.

Year-to-date 2008, our adjusted operating margin is 38%. We achieved that in an environment where we have experience $14 billion of net flows, but over $20 billion in market depreciation, a net decline in AUM of $6 billion. For our challenge is not in endangering expenses, [ph] we are.

That said we will continue to seek initiatives to help us achieve greater efficiency in operations and carefully manage headcount additions on a go forward basis. Our opportunities to capitalize in market opportunities in the face of difficult markets, and we're doing just that is evidenced by our strong investment performance and distribution results.

Now turning to other income and expense categories; interest income decreased to $2.4 million from $2.7 million in Q3 2007, a decrease of 11% due to lower effective interest rate earned on our cash and short-term investment balances. We realized an increase in interest expense from essentially no expense in Q3 2007 to approximately $8.4 million in Q3 2008 reflecting our $500 million, 6.5 coupon; 10 year senior note offering, which we completed in September.

Net income decreased to $49.6 million in the third quarter compared to $55.8 million in the same quarter last year.

I'll comment now on our capital management efforts. We continued our somewhat cautious approach in the capital management in the third quarter given the continued equity and credit market turmoil and the affect these difficult markets have had on our assets under management. This approach reflects our goal to maximize financial flexibility at a time when credit is scarce, to maintain our strong investment grade ratings and to have sufficient capital and cash to exploit various market opportunities.

In the third quarter we purchased approximately 300,000 shares or $12 million in repurchases at an average price of $35.80. We've approximately 116 million shares outstanding. Cash, cash equivalents and short-term investments increased to $318.5 million on July 30th 2008 from $350.7 million on April 30th 2008.

All of our short-term investments are in conservative and highly liquid instruments; currently there is no outstanding balance on our $200 million corporate line of credit facility. Our ending equity at July 31st was $227 million, that compares to ending equity of $184 million at April 30 2008. And as we have historically done, we continue to return capital to shareholders through our quarterly dividend of approximately $17 million in the third quarter.

So, our balance sheet is sound; we continue to generate strong cash flows from operations and our financial conditions have never been better. Now we would like to open up the call to questions.

Question And Answer


[Operator Instructions]. Our first question is from Mr. Dan Fannon with Jefferies & Company. Please proceed with your question.

Dan Fannon - Jefferies & Company

Good morning guys and thanks for taking my questions. Bob, first off in terms of expenses, from a run rate perspective; I'm just trying to look at how we should look at the other expense line item. Is it safe to assume that once the duplicative rank [ph] goes away that we should see $2 million reduction in operating expenses some time next year?

Robert J. Whelan - Chief Financial Officer

The rent expense is approximately $3 million in the quarter but we started incurring those rent expenses after the first month. And once we occupy that space we'll obviously... the rent... the lease statements for this building drop off. So yes.

Dan Fannon - Jefferies & Company

And the difference between the two rents then is what?

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

Is 3 million. You may see extra per quarter. The incremental rent for quarters were as a result of the new stage is $3 million.

Dan Fannon - Jefferies & Company

Okay. And then the additional expense we saw actually [ph] that can be... in the other line item is really just contributed to growth, in terms of travel and things like that?

Robert J. Whelan - Chief Financial Officer

Yeah. We started a number of categories in the quarter and the other expenses line item picked up. There was definitely some increased travel given our strong sales. We have a number of IT initiatives that are going on; there was some additional consultant costs, some additional legal costs which we think will update overtime on a go forward basis.

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

And there is one bit of an oddity in the other expense line and that is sales incentive paid on our international fund sales that are actually paid to consultant of the company, not employee. So, to the extent the international distribution is strong which it has been that's going to put pressure; a notable pressure on that account as well.

Dan Fannon - Jefferies & Company

Okay, that's helpful. And then in terms of the closed end fund market you said the outlook for new funds or issuances is likely not going to come back till 2009, are closed for the rest of 08. So, from a historical perspective, typically how long has this market shutdown before. I know that this isn't the first time... what gives you sense that 09 will be any different? Or we'll see a different... a better appetite for this product?

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

Yes. I think we can say that, say confidently that there won't be audit activity in 2008. I don't think I've said that we expect great things in 2009. I think it really remains to be seen. I wouldn't want to put out a number for expectations for particular level of closed-end fund activity in 2009.

The issue is primarily one of getting to it, two things behind the industry. One is that I think it's obvious that the whole auction-rate securities issue which has been a major distraction for everyone involved with closed-end funds, even those even those funds that don't employ leverage.

And the second issue is that relating to discounts in aftermarket trading and closed-end-funds. And really until we get some broader resolution of the auction preferred issue and until we see a tightening up of aftermarket trading discounts, I don't think we're going to have a robust closed-end-fund market. That may happen in 2009, it may frankly be after that.

There have been times in the past when the market has gone a couple of years without any significant closed-end-fund activity. This is a market that where the window of opportunity opens and shut and it wouldn't be without precedent for that window to be closed for a period bit longer than a year and its really been I guess already its been just about a year of the last major closed-end fund launch with our own back in July of last year. So we've been a year... frankly it wouldn't shock me if we go several more quarters before things to open up. But it's hard to be precise with that.

Dan Fannon - Jefferies & Company

Okay, great. That's helpful. Thank you.


Thank you. Our next question is from Mr. Ken Worthington with JPMorgan. Please proceed with your question.

Unidentified Analyst

Hi, good morning. This is Tim Shaves [ph] calling in for Ken. The first question that we have is, I know you touched on some of the muni bond trend performance earlier. We're just wondering what strategies these funds are employing, given the market conditions?

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

I can speak generally. I mean I think that our approach has always been one combining, looking to add to value from really three sources; one is research and credit analysis, the second is portfolio oversight, the third is efficient trading, and look for opportunistic ways to add value through to trading.

In terms of a specific strategy I don't know if I'm going to be a lot more specific we have tended to be over time focused on income maintenances, as we see that's an important objective of our clients; they invest in municipal funds because they want to have high and stable levels of tax advantaged income. We've tended to focus on maintaining high levels of call protection to preserve our distribution rate.

Sometimes, including now, that translates into duration for our portfolios that is longer than that of some competitors in the category. Often we have hedged that duration exposure... that longer duration exposure by using a variety of instruments including swaps and short divisions in futures.

Unfortunately the most of the available tools in that regard are either directly or indirectly linked to the performance of taxable as opposed to municipal bonds, and if you have a period such as we've gone through over the several quarters where municipals are underperforming treasuries and the spread of yield from treasuries versus municipals is moving away from its historical relationship as we've seen consistently, that was as in for in recent quarters.

Funds that require strategies like ours in terms of duration and how we manage that duration don't perform very well. We think it is highly, highly likely given our tax outlook that the muni taxable ratio moves back towards a more normal historic range; and a range that is more in the line with after tax yields on those respective investments.

That hasn't happened yet, and when it does we think both muni's as a category will outperform sharply and given our positioning which hasn't changed substantially, we will think our relative performance generally speaking in the muni category should also improve at that time.

Unidentified Analyst

Thank you that is very helpful.


Thank you. Our next question is from Ms. Cynthia Mayer with Merrill lynch. Please proceed with your questions.

Cynthia Mayer - Merrill Lynch

Hi, good morning. Just doubling back to expenses briefly I think you mentioned about $2 million in severance and I'm wondering, if you back that out it looks like comp was still up slightly, I guess you had a higher headcount. And I'm wonder if the full impact of the additional hiring is now in the comp rate and if you back out the severance, whether that's a good run rate or do you expect to keep hiring?

Robert J. Whelan - Chief Financial Officer

Compensation numbers in that 79-80 is a pretty good run rate. We will see the full quarter impact of the higher than Q3 and Q4 and that will be offset by hopefully non-recurring severance happening. So we've looked at that category quite a bit in anticipation of this precedent and we think that probably the range you will see and that's a pretty, pretty good range.

Cynthia Mayer - Merrill Lynch

Okay and then in terms of balance sheet, you mentioned running a more conservative balance sheet may be moving back, on share repurchases to preserve flexibility and cost efficient capital opportunity. For opportunity term, just wondering what opportunities and particularly speaking of and what kind of flexibility are you... what you need to remain flexible for?

Robert J. Whelan - Chief Financial Officer

We've probably been too conservative in terms of our cash balances, we are in pretty good financial shape right now. We've paused obviously after the first quarter when we lost the $12 billion and try to restore tangible equity and equity in general and this quarter will develop the volatility.

The intent is actually going in was to have more share repurchases and we actually paused towards the end to the month with all of that volatility. I think you know there is a lot of M&A activity and that's it where that active in terms of that. But we are seeing a lot of different situations and we think it makes sense to continue to look at those situations.

And we have been more active in terms of seed capital as I think you know. And as is I reflected in the numbers this quarter. So the combination of more M&A activity, more seed capital activity and volatile market has caused us to take the position we have.

Cynthia Mayer - Merrill Lynch

Okay. And since you bring it up, what is your total in seed capital right now?

Robert J. Whelan - Chief Financial Officer

Total in seed capital is approximately... probably around $30 million of seed capital and more of that is for the next quarter

Cynthia Mayer - Merrill Lynch

Okay. And then just on the mechanics of the share count... share count growth. How much of that was due to just change in average price of EV versus new share coming in from comp?

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

It's just the bulk of it. This year it was a result of the average share price being higher in the quarter, and the impact of that hastened [ph] the... to the diluted share account. I mean there was kind of the... you would have seen the typical action, exercise, impact but there was nothing outside the ordinary course there with respect to the share account.

Cynthia Mayer - Merrill Lynch

Okay. And one last planning type [ph] question on. When can you remind us again when you going to finished your move?

Robert J. Whelan - Chief Financial Officer

I believe May of 2009.

Cynthia Mayer - Merrill Lynch


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

I'm sorry, the lease here expires May 1, 2009. So we will be out of here by then. I think the plan is for mostly was to move I believe during the month of March and I think in the April.

Cynthia Mayer - Merrill Lynch


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

But March, April 2009.

Cynthia Mayer - Merrill Lynch

Okay and then, just one flow question, how much of the... may be you broke it out and I didn't see it, but how much of the current metric flows were to tax overlay as opposed to the core equity or the other high fee products?

Robert J. Whelan - Chief Financial Officer

You know, Cynthia that's not something we have in front of us, but both continue to bring assets in.

Cynthia Mayer - Merrill Lynch

Okay so, it's no special trends there, I think it was about half-half last quarter, but it's not as though the tax overlay is really coming down are they?

Robert J. Whelan - Chief Financial Officer

No it's not; particularly not in the managed account side of the business.

Cynthia Mayer - Merrill Lynch

Great, thanks a lot.


Thank you our next question is from Mr. Jeff Hopson with Stifel Nicolaus. You may proceed with your question.

Jeff Hopson - Stifel Nicolaus

Okay, thank you, good morning. You may have mentioned this but, on the institutional flows, was there a skewing towards a large cap value and then in terms of the outlook for bank loan, is there been a building interest on the institutional side, I could notice that, fair number of hedge funds and private equity funds have raised a fair amount of capital or dedicated a fair amount of capital toward bank loans and I am wondering if you seeing the same type of interest.

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

I think in terms of institutional flows generally I think its fair to say that if you compare it to our retail flow then... and specifically the chart that we had which shows a quite significant dominance by large-cap value, on the institutional side our business is much more diversified currently with significant flows not only for large-cap value, but particularly both structured emerging markets and bank loans.

And just your second part of your question about bank loans, just to confirm; yes we're seeing significant interest in bank loans. I don't know that I would say it's a dramatic acceleration; obviously there are people that have been attracted to the asset platform term because of the risk return characteristics that now find it even more attractive because of the current pricing, bank loans I think currently are selling at a price range of $0.89-$0.90 on the dollar.

And, you're right there have been some opportunity type plans that have been raised to invest in bank loans. So I'd characterize the interest here as more steady than accelerating. The big change in our bank loan flow, is really been the significant decline that we've seen in retail fund outflows. So those funds that we've ever talked about which were in a fairly significant outflows on the retail part over the last four preceding quarters, move to a positive in the current... in the most recent quarter.

Jeff Hopson - Stifel Nicolaus

Okay. And if I could follow-up on the headcount increases, is this... is there any skewing towards marketing, sales or investment or is it pretty well spread out and in past times of challenge I know you've done some powering investment teams left out and whatever else. Any thoughts on if you would be active this time and what areas you might focus on?

Robert J. Whelan - Chief Financial Officer

Hiring is really been pretty broad taste across the board. Tom mentioned the number of folks that we're hired into marketing distribution area but across the board in terms of investment distribution and administration it's pretty even.

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

And I would say we don't have any plans to do the brand, do investments teams at this point but as your question suggested certainly something that we're open to dealing until like that one of the reasons we maintain a strong financial position and strong balance sheet is to deal out profitability during times like this to take advantage of what we see a significant opportunity that may not be there, during first time. But there is nothing specific that we can really point there.

As Bob said, there is a lot of acquisitions activity but there is certainly a lot of... there's a lot of name on the street in terms of properties that are for sale whether there can be a match between billing the asset, I think is another question we but certainly take up a look at those things. I should say we're not looking to do any transforming acquisition, that's not our style, that's not something that we're seriously considering.

But we certainly look at properties that we feel like that are complementary to our existing skills and where we think we can help grow those businesses and help our overall franchise by billions of dollars [ph].


Thank you. Our next question is from Robert Lee with KBW. Please proceed with your question.

Robert Lee - Keefe

Thanks. Good morning everyone. Its possible can you give a little bit of color as to the pattern of sales and flows over the course of the quarter and the extent you can comment on that how that kind of transition to their early part of summer or well by the end of summer?

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

I think it's fair to say that flows were healthy during the period, I think generally we had a little better sales that does result in May and June that we did in July, which isn't surprising given the normal seasonal pattern. So far August has been a pretty good month and we're not breaking any record, but it's a solid month, there's certainly been no sign of a major slowdown in our net flow trend, in recent weeks.

Robert J. Whelan - Chief Financial Officer

I would agree with that, Rob, I mean we did see a price downtick in July but not meaningful and June was actually the best month of the quarter. What you did see in July was this great up tick in redemptions as well and not surprisingly was the volatility that we saw in the market. So, all in all, it was pretty consistent throughout the quarter.

Robert Lee - Keefe

Okay, great. And I'm just curious I've never notice that for the second largest selling fund is something called Emerald value which actually doesn't appear on your website as Open end mutual fund?

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

Yes. Emerald is the name of our Dublin domiciled usage fund family sold in Europe and other places outside the United States. So I am glad [ph] to say that is the offshore analog to our large cap value funds here in the U.S.

Robert Lee - Keefe

I guess obviously sales of that really accelerated I guess?

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

Correct,that's kind of quite meaningful product for us. It's... as recently as probably four years ago it was maybe $50 million fund and as you can see it's become one of our largest selling products and its really the flag ship product you when refer Eaton Vance in Europe.

Robert Lee - Keefe

Okay. And you may have mentioned before, some of that has the unitary fee structure so the as distribution expense was, or have distribution revenue for investment fee that falls through distribution expense, am I correct?

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

Sorry, Rob. I didn't understand the question.

Robert Lee - Keefe

Oh I guess I am sorry, you don't [indiscernible] have told me, once fees and what not so as sales of that increase, you will see an increase in distribution expense?

Robert J. Whelan - Chief Financial Officer

That's correct. And the other related expense item, which I touched on before is that, as I mentioned, much of this product is sold by consultants to company in Europe and they are compensated... that's the compensation paid to those and it will show up in the other expense line. So, in this case there are some distribution costs related to the international business that show up.

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

Yeah, just all additional clarification, like domestic fund, the offshore funds are sold in a variety of share prices some of what you do have trail payment are to be it [ph] shares here on the U.S. I think it's fair to say that the vast majority of the assets there as you would expect, are either A share or the equivalent of what we will call I share that is the no low [ph] version. And just for a little scale, that plant as of the end of July was about $2.2 billion in assets. So it's a nice sized fund as I said the flag ship of our European sales efforts.


Thank you. Our next question is from Mr. William Katz with Buckingham Research. Please proceed with your questions.

William Katz - Buckingham Research

Okay. Thank you and good morning everyone. I just want to follow one question, all the other questions that's already been asked. In terms of NA environment, just a little curious, it sounds like you are a bit more receptive to what type of [indiscernible] in times past. Just sort of curios given the very strong organic growth cost backs in terms of... what areas are of keenest interest?

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

We're right. We've not been terribly active historically in acquisitions. We evolved approximately land and our network controlling interest and the bottom line in 2001, and then controlling interest impairment [ph] in 2003. We acquired the former Boston Investment Counsel Business are better in 2004.

And really, hadn't done anything of any significant size since then. I wouldn't say that we're looking at any big ramp up in our acquisition effort. I think that the comment was more that...there are a lot more deals on the street. Our focus of our strategy, the focus of our marketing team is very much based on the assumption that we will not be doing acquisition.

We do have people in, mostly in the finance area, and I doubt, that are evaluating things as they become available, a lot of them frankly are not very interesting to us for a variety of reasons, some of them being may be were value investors at heart, we think perhaps our interest in now because of prices in most those that are clearly substantially lower to date than they would have been a couple of years ago.

In terms of specific areas interests I think the things that we talked about previously remain interesting, not that we have anything really going on in these areas but one of them certainly is international equity management which we would've liked to one way or another become stronger in our ability to invest in international equities.

Again there is nothing that we're currently looking at in that area, but it is a long-term focus, it's our expectation that we build our capability internally, but certainly if the right kind of property became available at the right price, we would take a hard look at that.

Other things that we have looked and think might be strategic for us in the fixed income business, we have a variety of fixed income businesses that are relatively small in terms of our core fixed income business and would certainly consider something that gave us the scale in core fixed income to compliment the strong positions we have somewhere around with [indiscernible] with bank loans, with higher bonds, with the specialized expertise in mortgages, we have specialty expertise in emerging markets, fixed income but we'd like to compliment that with a core fixed income, but again nothing currently under discussion in that area either.

William Katz - Buckingham Research

That's helpful and then just unrelated to that, just in terms of headcount you had given some discussion on that. Where do you think you are in terms of investment spending cycle per se. Is it just that there isn't a lot of opportunity to add scale given all the dislocation in market or you're still sort of in a build-out mode for the next several quarters?

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

I think it is fair to say that we think that pressures there should be abating. One of the areas as we've talked about is on retail distribution, where Matt Whitkos joined us in May of last year, we announced the restructuring of that group last October, I think it was, and certainly some of the hiring we've seen to date has been related to that.

We've also been hiring in other areas, technology operations to support our growing business and if you look at the flows we've had in recent quarters we certainly have a broader and bigger business than we had, current market conditions notwithstanding and that requires investments and infrastructure to support it. We also all along have been investing in our investment team.

I mentioned in answer to your last question, the desire to strengthen our capability and investing in international equity. We are pursuing that in part, by incrementally adding to our investment team. But I think if you look at where we are in terms of hiring and you look at the environment that we are in, I think we are cognizant of the fact that revenues are being adversely impacted by market decline and that we want to be especially prudent about hiring decisions, from this point forward.

So we are not... there is no hiring increase here, there is no plan for any cut backs, but I do expect that the pressure on hiring and at the growth rate in headcount will moderate.


Thank you. That is all the time we have for questions. I would like to turn the floor back over to management for closing comments.

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

Thank you. I appreciate all of you joining us this morning. We hope that certainly that all will agree that it was a solid quarter especially under that circumstances that prevail and that the company is positioned for strong operating performance as markets stabilize going forward and we will look forward to reporting on further progress to you in another three months. So have a good day.


This concludes today's tele-conference. You may disconnect your line at this time. Thank you for your participation.

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