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Required Disclosures
Conflicts Disclosures
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total
revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by
investment banking activities of the member companies of RBC Capital Markets and its affiliates.
RBC Capital Markets, LLC makes a market in the securities of Eaton Vance Corp. and may act as principal with regard to sales or
purchases of this security.
A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than
investment banking services from Eaton Vance Corp. during the past 12 months. During this time, a member company of RBC Capital
Markets or one of its affiliates provided non-securities services to Eaton Vance Corp..
RBC Capital Markets is currently providing Eaton Vance Corp. with non-securities services.
RBC Capital Markets has provided Eaton Vance Corp. with non-securities services in the past 12 months.
The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA.
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An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to
a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's
sector average.
Ratings
Top Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months with a
favorable risk-reward ratio.
Outperform (O): Expected to materially outperform sector average over 12 months.
Sector Perform (SP): Returns expected to be in line with sector average over 12 months.
Underperform (U): Returns expected to be materially below sector average over 12 months.
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significant cash flow/financing concerns over coming 12-24 months; fairly liquid.
Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; may
not be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float.
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because our ratings are determined on a relative basis (as described above).
Distribution of Ratings
RBC Capital Markets, Equity Research
Investment Banking
Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY[TP/O] 775 52.36 224 28.90
HOLD[SP] 638 43.11 152 23.82
SELL[U] 67 4.53 2 2.99
Eaton Vance Corp.July 24, 2012](https://image.slidesharecdn.com/97282641-3d08-45b5-b1b5-56e6c8d3e90a-160216044650/85/EV-Initiation-33-320.jpg)
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EV Initiation
- 1. INITIATION | COMMENT JULY24, 2012 Eaton Vance Corp. (NYSE: EV) All Ingredients there, but Eaton Vance is Not Quite There Yet Sector Perform Average Risk Price: 25.63 Shares O/S (MM): 115.5 Dividend: 0.75 Price Target: 28.00 Implied All-In Return: 12% Market Cap (MM): 2,960 Yield: 2.9% Priced at market close July 24, 2012 ET. Investment Conclusion Eaton Vance, one of the older asset managers in our coverage, has all the necessary ingredients that should appeal to investors. It has a broad customer base and a large product offering, ranging from tax-efficient equity funds to alternative asset classes. It is the third-largest domestic manager of closed-end funds and is a company focused on exploiting opportunities through novel product designs. Despite having all the right building blocks in place, we are initiating coverage with a Sector Perform rating. Our call is that the shares are fully valued and trade at a premium to its peers. We see a need for improvement on various fronts before we can become more constructive on the name: Expect further outflows due to weak equity fund performance: • With close to 60% of its assets under management in equities, Eaton Vance has built a reputation as an active manager. Yet recent results in equities have not been strong. Specifically, one- and three-year performances have lagged their peers on a risk-adjusted basis, contributing to outflows. • Recent positive flows into fixed-income funds were not sufficient to offset year-to-date outflows from equity funds. Lack of catalysts: • We are unconvinced that potential catalysts for growth will materialize. For instance, one of the products identified by management as a growth opportunity for 2012 were floating-rate bank loans. Sales this year have been weaker that anticipated, with net inflows decreasing significantly from 2011 levels. • The company's tax-managed funds could benefit as Bush-era tax cut extensions should come to an end this year. But we believe that the verdict is still outstanding on whether taxes will increase significantly next year given the state of the economy. • International strategies, an area of growth opportunity, are in their infancy. Eaton Vance is open to doing deals, but the firm is lagging its competitors, which have an established presence in international and global strategies. We value Eaton Vance by applying a 10% premium to the peer P/E multiple of 12.3x. We believe this is justified given the company's leadership position in niche sectors. Priced as of prior trading day's market close, EST (unless otherwise noted). 125 WEEKS 12MAR10 - 23JUL12 22.00 24.00 26.00 28.00 30.00 32.00 34.00 36.00 M A M J J A S O N 2010 D J F M A M J J A S O N 2011 D J F M A M J J 2012 HI-30APR10 36.08 HI/LO DIFF -44.37% CLOSE 26.04 LO-07OCT11 20.07 2000 4000 6000 8000 10000 12000 PEAK VOL. 14070.9 VOLUME 873.5 70.00 80.00 90.00 100.00 Rel. S&P 500 HI-30APR10 105.37 HI/LO DIFF -39.40% CLOSE 68.42 LO-18MAY12 63.86 RBC Capital Markets, LLC Bulent Ozcan, CFA (Associate Analyst) (212) 863-4818; bulent.ozcan@rbccm.com Eric N. Berg, CPA, CFA (Analyst) (212) 618-7593; eric.berg@rbccm.com Kenneth S. Lee (Associate) (212) 905-5995; kenneth.s.lee@rbccm.com FY Oct 2011A 2012E 2013E 2014E Adj EPS - FD 1.75 1.75 2.00 2.26 P/AEPS 14.6x 14.6x 12.8x 11.3x Net Flows (B) 3.9 (2.5) 4.0 5.8 AUM (B) 188.2 198.4 218.4 241.9 Adj EPS - FD Q1 Q2 Q3 Q4 2011 0.30A 0.50A 0.55A 0.40A 2012 0.40A 0.44A 0.45E 0.46E 2013 0.46E 0.48E 0.52E 0.53E 2014 0.53E 0.55E 0.60E 0.59E Net Flows (B) 2011 1.8A 2.9A 1.9A (2.7)A 2012 (1.1)A 0.6A (2.2)E 0.3E 2013 1.0E 1.0E 1.0E 1.1E 2014 1.4E 1.4E 1.5E 1.5E AUM (B) 2011 191.7A 202.6A 199.0A 188.2A 2012 191.7A 197.5A 193.0E 198.4E 2013 203.2E 208.2E 213.2E 218.4E 2014 224.1E 229.9E 235.8E 241.9E All values in USD unless otherwise noted. For Required Conflicts Disclosures, see Page 33.
- 2. 2 Investment Summary We areinitiating coverage of Eaton Vance with a Sector Perform, Average Risk rating, and a $28 price target. We view the following favourably: Eaton Vance has a broad product offering suited for various market cycles. It is a leader in tax-managed funds, a top-three provider of closed-end funds, and is known for its value investing. It provides equity strategies, income-investment strategies, and a range of alternative-investment strategies. These should bode well for any business cycle. Eaton Vance is an innovative company that has been among the early firms to introduce new products. It was one of the first firms to offer 1940 Act funds, tax-managed strategies, and is currently waiting for regulatory approval to introduce actively managed exchange-traded funds. If approved, this could be a catalyst for growth. With $23 billion in assets under management (AuM) (12% of total AuM), Eaton Vance is a leading provider of closed-end funds. We view this as strength since assets tend to remain with the managers, thus improving overall asset persistency. Having 60% of AuM in equity funds, Eaton Vance could benefit from an improving equity market—if we are wrong about our assumption that a sustainable recovery is still distant. If an equity market rally were to happen, then market performance could offset outflows, thereby driving AuM and earnings higher. However, there are some challenges that the company faces, which lead us to believe that the shares are fully priced at current levels: Equities are still in outflow mode. With close to 60% of its assets under management in equities, Eaton Vance is perceived by investors and clients to be an active manager. Recent results, however, have not been strong. Specifically, the one-year and three-year performances have been lagging their peers on a risk-adjusted basis. This, in our view, explains the outflows that the company has experienced over the past three quarter, and we do not see this abiding unless performance improves. Organic fixed-income growth rate lags the industry‘s experience. Certainly, positive flows into fixed- income funds have more than offset outflows from equity funds in the most recent quarter. While this is encouraging, Morningstar data show that the organic growth rate has not kept up with organic growth rate for the industry. Floating-rate bank loan sales are declining. One of the products identified by management as a growth opportunity for 2012, sales net flows have come down dramatically from 2011 levels. Credit risk is remains concern. We believe, International offerings need to be expanded. International and global strategies, currently an area of growth, are still in their infancy. While Eaton Vance announced a deal in June 2012 to acquire a 49% stake in Hexavest, which would expand its international and global fund offering, the firm is still lagging its peers. Writing off extension of tax cuts might be premature. While there is the belief that Bush-era tax cuts will not be extended, potentially leading to large inflows into tax-managed funds as high net-worth clients try to minimize the effect of higher taxes in 2013, we think that this is not a certainty. The economic recovery is fragile, and progress is slow. Recent data out of Europe and Asia are not encouraging, and the world appears to be looking for the US to lead it out of the recession. Thus, we think higher taxes are not a certainty, and we are not yet convinced that Eaton Vance will see large inflows into its tax- managed funds in 2013. Our view on Eaton Vance could shift more positive should some of the macro economic headwinds subside and equity fund performance starts to improve. For us, fund performance is the key driver of value creation because this is one of the few variables that the company has control over. Eaton Vance Corp.July 24, 2012
- 3. 3 Company Overview Eaton Vancewas founded in 1924 and is headquartered in Boston, Massachusetts. The company provides high net-worth individuals and institutions investment solutions including tax-managed equity, value equity, equity income, structured emerging market equity, floating-rate bank loan, municipal bond, investment- grade, global, and high-yield bond funds. It also serves clients who access investment management services on a direct basis. Exhibit 1: Eaton Vance Snapshot Eaton Vance Headquarters Boston, MA Total AUM $197.2 bn Major Brands Eaton Vance, Atlanta Capital, Parametric % retail funds AUM rated 4-5 stars by Morningstar 35% Signature Innovative manager known for its closed end and tax managed funds Source: Company reports, RBC Capital Markets Valuation The asset managers are currently trading at 12.3x calendar-year 2013 earnings. Over the past 10 years, Eaton Vance has historically traded at a 10% premium to its peers. We believe that the premium is justified given the company‘s leadership position in closed-end funds and tax-managed funds. We consider the company to be one of the more innovative asset managers in our coverage. We arrive at our price target using a price-to-earnings multiple of 13.5x, which represents a 10% premium to the company‘s peers and our 2013 calendar year earnings estimate of $2.05 per share. Our price target is $28. Exhibit 2: Eaton Vance’s Forward Looking P/E Relative to RBC Asset Managers Index 0.3x 0.5x 0.7x 0.9x 1.1x 1.3x 1.5x 1.7x 1.9x Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Note: RBC Asset Managers Index includes BLK, EV, IVZ, LM, TROW, WDR, BEN, JNS, AB, ART, AMG, CNS, CLMS, GBL, PZN Source: Bloomberg, RBC Capital Markets Eaton Vance Corp.July 24, 2012
- 4. 4 Ownership Exhibit 3: Top-10Holders Position Mkt Val Ultimate Holder ('000) (MM) % OS State Street Corp. 7,444 198 6.5 BlackRock, Inc. 6,521 174 5.7 Ameriprise Financial, Inc. 6,059 161 5.3 The Vanguard Group, Inc. 5,909 157 5.1 EARNEST Partners LLC 5,308 141 4.6 Wells Fargo & Co. 5,280 141 4.6 Fayez Sarofim & Co. 5,160 137 4.5 London Co. of Virginia 5,045 134 4.4 Prudential Financial, Inc. 4,193 112 3.6 Atlanta Life Financial Group 3,363 90 2.9 Source: FactSet Exhibit 4: Ownership by Region Position Mkt Val Global Region ('000) (MM) % OS North America 89,365 2,381 77.6 Europe 3,819 102 3.3 Asia 1,155 31 1.0 Pacific 26 1 0.0 Source: FactSet Eaton Vance Corp.July 24, 2012
- 5. 5 Investment Thesis &Analysis We consider Eaton Vance to be one of the more innovative asset managers in the industry. The company has a broad investor base, ranging from institutional clients to retail clients. It offers an array of products suited for various economic cycles; it is a leading provider of closed-end funds and has been one of the earlier asset managers to offer tax-managed funds. We believe that all the ingredients to become a great company are in place at Eaton Vance. Yet we initiate our coverage with a Sector Perform rating. In our opinion, there are various areas of improvement that management needs to address before we become more positive on the name. For the purpose of this initiation note, we focused on these areas of improvement instead of weighing the positive versus the negatives. We believe that investors are familiar with the Eaton Vance story, and as such, we wanted to focus on variables that we measure the company against. Further Outflows Expected Unless Fund Performance Improves Eaton Vance’s equity fund outflows have exceeded that of the industry due to weak fund performance. Using Morningstar, we have analysed performance tracking the top-10 mutual funds. Our verdict: Performance has to improve in order to attract new funds. While Eaton Vance offers a broad range of products, we and investors think of the company as an active manager with a concentration in equity funds. Although it does not have the same degree of equity market exposure as Waddell & Reed, close to 60% of Eaton Vance‘s AuM is allocated to equity strategies. The company‘s large-cap value strategy, with about $20 billion in AuM, is the largest fund offering at Eaton Vance, tracing its roots back to 1931. Thus, with equities the major revenue contributor, our main focus has been on the performance and flows of equity funds. Our finding is that there is room for improvement. Exhibit 5: Equity Funds Have Been Losing Assets Since 3Q11 ($ in million) $436 $1,120 $420 ($1,173) ($1,080)($1,368) ($1,500) ($1,000) ($500) $0 $500 $1,000 $1,500 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Source: Company reports, RBC Capital Markets Funds flow data show clearly that equities have been in a net redemption mode since August 2011. Our analysis into the performance of the company‘s top-10 funds, which we will discuss in greater detail in the section titled Performance leads us to the following conclusion: Eaton Vance is going through a period of challenges, with its core business—active management of equity funds—showing deterioration in performance over the past few years. We believe the performance of the company‘s Large Cap Value fund needs to improve to attract inflows. This strategy reported about $3.2 billion of outflows during the last quarter alone, and outflows could be even higher in the July quarter. We base this on our analysis of about $8.5 billion of the roughly $20 billion in this strategy that Morningstar tracks. Eaton Vance Corp.July 24, 2012
- 6. 6 Exhibit 6: Outflowsof Large Cap Value Fund Continue ($2,000) ($1,500) ($1,000) ($500) $0 $500 $1,000 $1,500 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Source: Morningstar While outflows improved dramatically in June over the $1.7 billion of outflows reported in May alone, we have not seen any meaningful improvement in the performance based on the one-year Morningstar ranking. Thus, we would expect further outflows and do not see an inflection point yet. With about 22% exposure to financial services, the fund is levered to an improving economy and performance could suffer if even tighter regulations for financial services companies are introduced. The bottom line is that we do not expect an immediate improvement in performance. Exhibit 7: One-Year Performance Ranking of Large Cap Value Fund 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Large Cap Value Top 50% Source: Morningstar, RBC Capital Markets Certainly, performance has been improving on a one-year measurement period. Yet, about half of its peers still outperform the Large Cap Value fund on a risk-adjusted basis. Good Bad Eaton Vance Corp.July 24, 2012
- 7. 7 Exhibit 8: Three-YearPerformance Ranking of Large Cap Value Fund 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Large Cap Value Top 50% Source: Morningstar, RBC Capital Markets On a three-year basis, the fund has not been able to keep up with its peers. Again, performance is improving. However, about 80% of its peers are outperforming the fund. Exhibit 9: Five-Year Performance Ranking of Large Cap Value Fund 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Large Cap Value Top 50% Source: Morningstar, RBC Capital Markets As for the five-year performance, over 50% of its peers are outperforming the fund. Our concern is that as the three-year performance rolls into the five-year period, the performance for this group will deteriorate as well. In order to get a broader understanding of performance at Eaton Vance, we decided to do the same analysis for the company‘s top-10 equity and fixed-income funds. Our conclusion is that Eaton Vance is going through a period of challenges. While fixed-income fund performance has improved, one could argue that this is not the company‘s core business - it comprises just over 20% of total AuM. Equity funds, on the other hand, make up over half the AuM and were strong performers historically. Over the past few years, however, performance has been deteriorating. The performance of the company‘s Large Cap Value Fund, which is one of the older funds in the nation dating back to 1931 and a major contributor to revenues, needs to improve in order for us to become more positive on the name. Good Bad Good Bad Eaton Vance Corp.July 24, 2012
- 8. 8 Using Morningstar Direct,we downloaded data for all funds offered and split the universe into two categories: Equity funds and fixed-income funds. We then eliminated ETFs, indexed funds, alternative funds, commodities funds, money market, and funds that invested in properties only. Our focus was on the core equity and fixed-income products. We decided to eliminate funds from our analysis that are part of an insurance product offering because the asset management company has little control over the ultimate cost structure of the variable annuity or the variable life product that is offered. We then weighted the ranking of the funds versus their peers using the individual rankings of the underlying share classes offered within the top-10 funds by their net asset value. Essentially, we weighted the rankings by the size of the share class within the subgroup of 10 funds. Exhibits 10 and 11 plot the ranking for the one-, three-, and five-year periods. While investors in general, and consultants and advisors in particular are focused on the three- and five-year performances, we deemed it necessary to look at the one-year performance because it can serve as an indication of where the three- and five-year performances will head. Exhibit 10: One-Year Performance for the Top-10 Funds 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 Equities Fixed Income Top 50% Source: Morningstar, RBC Capital Markets The key takeaway from our analysis of the one-year performance is two fold. First, fixed-income funds have exhibited a high degree of volatility with years of good performance followed by years of not so great performance. And, while equities were the strength of Eaton Vance for years, the company‘s well known Large Cap Value Fund has not weathered the financial crisis so well. Management attributed the underperformance to a quality bias, but one would have expected the fund to perform better than it did in recent months. Good Bad Eaton Vance Corp.July 24, 2012
- 9. 9 Exhibit 11: Three-YearPerformance for the Top-10 Funds 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 Equities Fixed Income Top 50% Source: Morningstar, RBC Capital Markets Ultimately, Eaton Vance‘s top-10 equity funds have underperformed more than 50% of its peers. And, while mutual fund outflows did not occur until 2010, which were offset by separate account inflows, we believe that the pressure on assets could intensify if Eaton Vance does not improve performance meaningfully. Exhibit 12: Five-Year Performance for the Top-10 Funds 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 Equities Fixed Income Top 50% Source: Morningstar, RBC Capital Markets As for the five-year performance, we see decent results from fixed-income funds and deteriorating performance out of equity funds. Improving performance is undoubtedly needed to make the offering more appealing, especially to retail clients. Good Bad Good Bad Eaton Vance Corp.July 24, 2012
- 10. 10 Furthermore, we analyzedthe organic growth of the equity funds by comparing them to other US domiciled funds. Our finding is that: Eaton Vance funds are experiencing redemption rates higher than the industry. Exhibit 13: Equity Funds Organic Growth – Eaton Vance vs. Industry (US Domiciled Funds) Source: Company reports, Morningstar, RBC Capital Markets We believe that it will take some time for flows into equity funds to improve, as performance needs to pickup. As for the company‘s other fund offerings, we analyzed the percentage of funds with a four or five star rating as assigned by Morningstar using a three-year measurement period. Data show that currently, only 35% of funds had four- or five-star ratings. As a comparison, over 50% of Eaton Vance funds had a four- or five-star rating in 2007 and 2008. Exhibit 14: Percentage of Retail Funds with Four- or Five-Star Morningstar Ratings Note: Represents percentage of retail open-end fund AuM with ratings that are four or five stars. Morningstar ratings were determined for a three-year period. The sample set is composed of retail open-end funds excluding ETFs and index funds for which there are ratings. Source: Morningstar, RBC Capital Markets 0.4% 1.0% 0.3% (1.0%) (1.3%) 0.1% 0.2% (1.1%) (1.1%) (0.9%) (0.6%) (1.0%) (1.5%) (1.0%) (0.5%) 0.0% 0.5% 1.0% 1.5% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 EV US Domiciled Equity Funds 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Eaton Vance Corp.July 24, 2012
- 11. 11 Eaton Vance’s Fixed-incomeInflows Below Competitors While higher fee equity outflows are being offset by lower fee fixed-income inflows, organic growth for Eaton Vance’s fixed-income funds has been below the industry’s average. According to Morningstar, while there was a positive flow into Eaton Vance‘s fixed-income funds, the growth rate generated was below the industry-wide experience. Exhibit 15: Fixed-income Funds Organic Growth – Eaton Vance vs. Industry (Taxable & Municipal Bonds) (2.0%) (1.5%) 0.4% (0.3%) 0.4% 3.0% (0.9%) 1.7% 1.7% 0.6% 2.5% 3.2% (3.0%) (2.0%) (1.0%) 0.0% 1.0% 2.0% 3.0% 4.0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 EV Industry Source: Company reports, Morningstar, RBC Capital Markets Exhibit 15 demonstrates numerically why we do not think of Eaton Vance as a fixed-income manager. Eaton Vance‘s fixed-income funds generated below industry-average organic growth in each of the six quarters that we analyzed. While fixed-income funds represent less than 25% of total AuM and a growth opportunity, we expect Eaton Vance to grow these assets only opportunistically versus making fixed- income offerings a part of its core competencies. Eaton Vance Corp.July 24, 2012
- 12. 12 Lack of Catalysts Weare unconvinced that Eaton Vance will be able to grow assets under management at a rate higher than its competitors. We don’t see catalysts that could result in large inflows. Floating-Rate Bank Loan Sales, a 2012 Catalyst for Growth, are Down Given the current uncertainty in respect to the global economy, we believe that floating-rate bank loan fund sales will remain below management’s 2011 expectation until the economy shows signs of recovery. After generating over $9 billion in sales and over $4 billion in inflows in fiscal year 2011, sales of floating- rate bank loans have declined in 2012. This is important since management had identified this offering as an area of growth for 2012 during the company‘s fourth-quarter 2011 earnings call. The decline in floating- rate bank loan sales was partly a function of the Fed announcing its intention of keeping interest rates low and partly driven by investors becoming more hesitant to take on credit risk. These funds typically invest in senior floating-rate loans with below investment-grade quality and use leverage. Funds can also invest in secured and unsecured subordinated loans, second lien loans, subordinated bridge loans, and other floating-rate debt securities. With greater uncertainty about the direction of the economy and the ability of issuers of the securities to pay interest and principal, demand for floating-rate bank loan funds has declined. Exhibit 16: Floating-Rate Bank Loan Net Flows ($ in million) ($1,000) ($500) $0 $500 $1,000 $1,500 $2,000 $2,500 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Source: Company reports Given the current uncertainty as to the recovery in the global economy, we believe that investors will be hesitant to invest heavily in floating-rate bank loan funds. These funds invest in foreign instruments and are exposed to credit ratings of foreign issuers. The exhibit below demonstrates why we do not expect large inflows into floating-rate bank loan funds. Eaton Vance Corp.July 24, 2012
- 13. 13 Exhibit 17: Performanceof Eaton Vance’s Floating Rate Fund 0.8% 5.1% 2.7% 3.6% 5.5% 0.9% (31.0%) 8.4% 1.4% 45.2% (40%) (30%) (20%) (10%) 0% 10% 20% 30% 40% 50% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Company reports Recent performance has declined. More importantly, as Exhibit 17 clearly shows, performance of floating- rate bank loan funds can deteriorate sharply during economic downturns as was the case in 2008. We believe that sales will remain at levels seen over the past two quarters due to prevailing economic conditions. Expectations of Large Inflows into Tax Management Funds may not Materialize We think steep increases in taxes in 2013 are unlikely given the state of the economy. We are doubtful that Eaton Vance will experience strong flows into its tax-managed funds. There have been a number of articles in the news suggesting that taxes will increase significantly in 2013. There is a talk about a “fiscal cliff” that would result in $4 trillion in tax hikes as Democrats and Republicans see little common ground to come to an agreement. An increase in taxes is thought to benefit Eaton Vance, which has been carving out a niche by offering tax- managed funds. These funds aim to maximize total returns on an after-tax basis. It began building its offerings in 1996 with the introduction of the Eaton Vance Tax-Managed Growth Fund. Today, Eaton Vance offers its tax efficient funds in various equity styles and market-caps. We, too, believe that tax- managed funds could benefit from an increase in customer demand, yet we are not certain that there will be a ‗fiscal cliff‘. Absent of an agreement, an increase in taxes could have serious consequences for the fragile recovery. It could have global implications. We would assign a low probability to a scenario in which taxes increase dramatically due to both parties not reaching some sort of agreement. This view is supported by our visit to Washington DC in March 2012. We concluded that it was unlikely that anything would happen between March and the election day in November. Congress post-election day will effectively be a ‗lame duck‘. Our takeaway was that there will be an extension of the Bush-era tax cuts for another year until the new Congress finds a permanent solution in 2013. We believe that one likely scenario could be a short-term extension of all tax cuts. PriceWaterhouseCoopers has provided an example of what the implications of not extending Bush-era tax cuts could be. An analysis by PriceWaterhouseCoopers suggests that a hypothetical family with two children and household income of $50,000 in 2013 would see their taxes increase to roughly $2,650 from roughly $450. This could happen if the current tax rate, marriage penalty relief, and child credit expire at the end of 2012. In our view, such a broad-based tax increase could affect the economic recovery significantly by decreasing the amount of discretionary household income. Eaton Vance Corp.July 24, 2012
- 14. 14 Another scenario couldbe a short-term extension for middle income and the wealthy. Reuters reports that in a pre-election show vote, the Republican-controlled House of Representatives will pass a short-term extension. The Senate, which is comprised of 51 Democrats, 47 Republicans, and two independents, has then to vote on the extension. What could help the Republican‘s cause is that 33 Senators are up for re-elections (10 Republicans, 21 Democrats, and two for independents). One possibility is that some Democrats up for re-election could vote in favor of the bill. This could lead to a compromise where the extension will include families with house hold income of up to $1,000,000. Our bottom line is that we think a scenario in which steep tax increases leading to large inflows into tax- managed funds is unlikely. International Offerings Still in Infancy Eaton Vance will not benefit to the same degree as competitors from the influx of assets into global and international strategies, in our opinion. Until the recently announced acquisition of Hexavest, Eaton Vance‘s clients had few options if they wanted to gain international exposure. For instance, they could use Parametric‘s Structured Emerging Markets funds (equities) or the Emerging Markets Local Income Fund (fixed income). The company had also little presence in international markets. Still nascent, Parametric‘s tax-managed investing and portfolio overlay capabilities, focused on the large superannuation fund market and private banks serving high net-worth Australian investors, is the first significant business opportunity for Parametric‘s tax management capability outside of the US. Based on Morningstar data, which capture the company‘s mutual fund offerings, we estimate about 12% of AuM seek to invest in global, international, or emerging markets. This is important because funds with an international focus are getting the flows these days. Exhibit 18 shows flows into domestic and world equity funds. Exhibit 18: US Investors have Increased Exposure to World Markets since 2009 ($ in billion) $(35) $(30) $(25) $(20) $(15) $(10) $(5) $- $5 $10 $15 $20 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Domestic Equity Foreign Equity Source: Investment Company Institute While the acquisition of a 49% stake in Hexavest should help expand Eaton Vance‘s offering, we would like to see a number of similar acquisitions. Eaton Vance management chose to do this deal because 60% of the $9.9 billion in total assets under management at Hexavest are in global equities. International mandates make up another 20%. Yet the deal was structured differently than previous deals, with Eaton Vance not taking a controlling stake in the target. Were Eaton Vance to consolidate the target‘s assets, we estimate that international funds would comprise just over 20% of total assets under management at Eaton Vance. Eaton Vance Corp.July 24, 2012
- 15. 15 Until the companydecides whether it wants to execute the option to purchase an additional 26% stake in five years, Eaton Vance will look to grow its international exposure organically, which we think could be a slow process. We expect global and international equities to remain a gap in Eaton Vance‘s investment capabilities in the foreseeable future. Under the deal agreement, Eaton Vance can add to its own asset base any cash that it raises for Hexavest‘s funds. While we think that Eaton Vance is taking the right steps by expanding its international and global investment capabilities, we would like to see more acquisitions to help the company capitalize on growth opportunities that global and international funds offer. Eaton Vance Corp.July 24, 2012
- 16. 16 Financial Analysis Recent Results Aftertwo quarters in which it suffered outflows, Eaton Vance returned to positive-flow status in its second fiscal quarter—the three months ended April 30. Those positive flows totalled $567 million. What is happening, in a nutshell, is that we believe disappointing investment performance in some of the company‘s value products, especially in its flagship Eaton Vance Large-Cap Value Fund, continues to generate outflows. But these outflows, in turn, are being more than offset by inflows into Eaton Vance‘s income-oriented strategies as well as flows into Parametric, which is Eaton Vance‘s quantitative manager that is based in Seattle. Exhibit 19: Annualized Internal Growth Rate 11% 3% 12% 15% 8% 13% 10% 7% 4% 6% 4% -6% -2% 1% -10% -5% 0% 5% 10% 15% 20% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Source: Company reports More specifically, the value group of products at Eaton Vance have seen its assets under management drop to $20 billion in the current quarter from a peak of $33 billion. Outflows of $3.2 billion in the April quarter accelerated from the $2.1 billion in net redemptions reported in the January quarter. More than $1 billion of the $3.2 billion in quarterly outflows was suffered by the Large-Cap Value Fund, which, despite its quality orientation, has not participated fully in the market rally since the financial crisis. While performance of Large-Cap Value Fund has been on the upswing, with one-year numbers in the top half of the fund‘s Lipper group, the fund‘s three-year performance continues to lag. We think that explains why money continues to leave Large-Cap Value. Eaton Vance‘s management has said that it expects the outflows to continue. With the three-year performance of the A and I class shares beating only 11% and 14% of its peers, respectively, we see asset flows in equities being negatively affected for the foreseeable future. And despite one-year performance improving, data from Morningstar would suggest that the flagship Large-Cap Value Fund is still being beaten by more than half of its peers. Fortunately, we believe there appears to be enough inflows taking place elsewhere in Eaton Vance to offset the softness in flows on the value side of the firm. The Eaton Vance income disciplines, for example, generated $1.5 billion of in-flows in the April quarter. This category would include Eaton Vance‘s municipal-bond funds, which are managed in Boston and by its Acquired Tax Advantaged Bond Strategies (TABS) subsidiary in New York; Eaton Vance‘s high-yield effort, managed out of the firm‘s Boston office; and Eaton Vance‘s floating-rate-bank loan products, also managed out of Boston. Other areas of strength in the quarter included Parametric, the company‘s Seattle-based manager that uses an approach called ‗structured, active investing.‘ It is a model-driven approach that also has an important element of fundamental analysis to it. Parametric‘s flagship offering is an emerging-markets product, which is offered in both mutual funds and institutional separate accounts. In that discipline, Eaton Vance raised $1.5 billion in the quarter. Eaton Vance Corp.July 24, 2012
- 17. 17 Another discipline, whichdid well, was the tax-managed overlay at Parametric. This strategy involves providing tax-related investing for aggregators such as SEI. That amounted to $500 million in the quarter. All told, Parametric‘s flows were $2.9 billion to the positive, including $1.5 billion in emerging markets. The institutional pipeline is looking good, as Eaton Vance told investors in its most recent earnings call. It continues to see interest in structured emerging markets, bank loans, and in large-cap growth. It is also seeing institutional interest in the Global Macro Total Return strategy being carried out by Parametric. It recently launched a Global Macro Private Fund that is more like a hedge fund than a so called 1940 Act fund in that the new fund uses leverage to achieve its investment objectives. Eaton Vance is experiencing strength in its business of providing investment management to life insurance companies as part of these carriers‘ variable annuity programs. Exhibit 20: While Fixed-income Flows Recovered, Equity Asset Net Flows Have Been Soft ($ in million) $436 $1,120 $420 ($1,173) ($1,368) ($1,080) ($919) ($624) $181 ($130) $174 $1,350 ($2,000) ($1,500) ($1,000) ($500) $0 $500 $1,000 $1,500 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Equity Funds Fixed Income Funds Source: Company reports, RBC Capital Markets Financial Projections We are expecting Eaton Vance to increase its total AuM at year end from $188.2 billion in 2011 to $198.4 billion in 2012, $218.4 billion in 2013, and $241.9 billion in 2014. This increase should be driven mainly by market performance and inflows into fixed-income asset classes. We expect client interest in the fixed- income asset class to continue, with AuM increasing from $43.7 billion in 2011 to $50.5 billion in 2012, to $58.7 billion in 2013, and to $65.5 billion by 2014. We expect equity AuM to increase from $108.9 billion in 2011 to $110.5 billion in 2012, to $118.7 billion in 2013, and to $131.0 billion in 2014. We expect continued outflows out of equity funds of $6.7 billion in 2012 and $0.9 billion in 2013. We project positive flows of $2.5 billion in 2014. Eaton Vance Corp.July 24, 2012
- 18. 18 Exhibit 21: AuMRoll Forward AuM Roll Forward ($ in billion) 2011A 2012E 2013E 2014E Fiscal year ending Oct-11 Oct-12 Oct-13 Oct-14 Long-term assets Beginning of period long-term assets $184.1 $187.5 $198.1 $218.1 Sales/inflows 54.9 48.3 52.3 55.3 Redemptions/outflows (51.0) (50.8) (48.2) (49.5) Net sales (redemptions) $3.9 ($2.5) $4.0 $5.8 Assets acquired 0.4 - - - Exchanges (0.2) (0.0) - - Market value change (0.6) 13.1 16.0 17.7 End of period long-term assets $187.5 $198.1 $218.1 $241.5 Money market assets Cash management fund assets - beginning of period 1.1 0.7 0.3 0.3 Market value change & other (0.5) (0.3) - - Cash management fund assets - end of period $0.7 $0.3 $0.3 $0.3 End of period total AuM $188.2 $198.4 $218.4 $241.9 Source: RBC Capital Markets estimates Despite our expectation for increased AuM in the next few years, we forecast net revenues to be largely unchanged, going from $1.1 billon in 2011 to $1.1 billion in 2012 and 2013, and increasing in 2014 to $1.3 billion. We model flat net revenues mainly due to declining average investment advisory fees driven by a change in AuM. We model for equity funds to constitute 54% of total assets in 2014 versus 58% at the end of fiscal year 2011. We believe net operating margins will decline from the 38.8% seen in 2011 to 36.8% in 2012, 37.4% in 2013, and 37.3% in 2014 as the mix of AuM shifts away from the higher-margin equity asset class. We project 60 basis points margin expansion for 2013 as AuM are projected to increase with Eaton Vance realizing economies of scale. Consequently, we expect Eaton Vance to generate $396.3 million in pre-tax operating income in 2012, $426.2 million in 2013, and $469.6 million in 2014 compared to operating income of $436.7 million in 2011. Our diluted EPS estimates for 2012, 2013, and 2014 are $1.75, $2.00, and $2.26 per share, respectively. This compares to diluted EPS of $1.75 in 2011. The improvement in EPS in 2012 and 2013 EPS is mainly due to expectations for better market performance for equities and higher AuM. Eaton Vance Corp.July 24, 2012
- 19. 19 Valuation Exhibits 22–24 showhow Eaton Vance has traded: On an absolute P/E basis, on a basis of Eaton Vance‘s P/E relative to that of the S&P 500, and on a basis that looks at Eaton Vance‘s P/E relative to that of a broad valuation index we constructed for asset managers in general. On an absolute P/E basis, Eaton Vance‘s share has traded at a discount to historical levels over the past five and a half years. Exhibit 22: Eaton Vance’s Forward Looking P/E multiples 0x 5x 10x 15x 20x 25x 30x 35x 40x Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source: Bloomberg, RBC Capital Markets On a relative basis, Eaton Vance has been trading at a premium to the S&P 500. Exhibit 23: Eaton Vance’s Forward Looking P/E Relative to S&P 500 Index 0.5x 0.7x 0.9x 1.1x 1.3x 1.5x 1.7x 1.9x 2.1x 2.3x Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source: Bloomberg, RBC Capital Markets Relative to its peers, Eaton Vance has been trading at a premium. Eaton Vance Corp.July 24, 2012
- 20. 20 Exhibit 24: EatonVance’s Forward Looking P/E Relative to RBC Asset Managers Index 0.3x 0.5x 0.7x 0.9x 1.1x 1.3x 1.5x 1.7x 1.9x Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Note: RBC Asset Managers Index includes BLK, EV, IVZ, LM, TROW, WDR, BEN, JNS, AB, ART, AMG, CNS, CLMS, GBL, PZN Source: Bloomberg, RBC Capital Markets The asset managers are currently trading at 12.3x calendar-year 2013 earnings. Over the past 10 years, Eaton Vance has been trading at a 10% premium to peers. We believe that the premium is justified given the company‘s leadership position in closed-end funds and tax-managed funds. We consider the company to be one of the more innovative asset managers in our coverage. We arrive at our price target using a price-to-earnings multiple of 13.5x, which represents a 10% premium to the company‘s peers and our 2013 calendar year earnings estimate of $2.05 per share. Our price target is $28. Market Sensitivity Analysis Our EPS sensitivity analysis to equity market movements starts with our published estimates as the base case. Our base case assumes uniform market appreciation, with equity markets appreciating 2% sequentially and fixed-income markets appreciating 1% sequentially, starting in the calendar fourth quarter of 2012 or the December quarter. For simplification, we assume the alternative asset classes appreciate at the same rate as the equity markets and thus assign an appreciation rate of 2% sequentially. We believe these assumptions are in line with long-term historical average returns. For the bull case scenario, we assume equity markets and alternative asset classes appreciate 4% sequentially, with fixed-income appreciation unchanged from the base case scenario. For the bear case, we assume zero appreciation within the equity markets and alternative asset classes. We apply these assumed appreciation rates uniformly starting in the first quarter of 2013. Exhibit 25: EPS Sensitivity to Equity Market Movements Scenario 2013 P/E 2013 Peer P/E (Discount) /Premium 2013 EPS PT Base Case 13.5x 12.3x 10% $2.05 $28 Bear Case 13.5x 12.3x 10% $1.96 $27 Bull Case 13.5x 12.3x 10% $2.14 $29 Source: RBC Capital Markets estimate Eaton Vance Corp.July 24, 2012
- 21. 21 Exhibit 26: ValuationMatrix Market Current 52-week Div. Enterprise YTD YTD Company Ticker Cap ($m) Price High Low Yield Value ($m) 2012E 2013E 2012E 2013E 2011A 2012E 2013E EV/AuM P/AuM Price Perf. Total Return Traditional Asset Managers BlackRock BLK $24,213 $173.31 $209.37 $137.00 3.46% $33,397.86 $13.08 $14.59 13.2x 11.9x 9.2x 9.1x 8.2x 0.009x 0.007x (2.8%) (1.1%) T.Rowe Price TROW 15,681 61.47 $66.00 $44.68 2.21% $15,111.57 3.27 3.76 18.8x 16.3x 11.6x 10.4x 9.2x 0.027x 0.028x 7.9% 9.1% INVESCO IVZ 9,655 21.54 $26.94 $14.52 3.20% $10,680.89 1.82 2.10 11.9x 10.2x 9.2x 9.0x 8.0x 0.016x 0.014x 7.2% 8.6% Legg Mason LM 3,616 25.61 $32.58 $22.36 1.72% $3,499.53 1.67 2.27 15.4x 11.3x 7.3x 6.7x 6.1x 0.005x 0.006x 6.5% 7.2% Franklin Resources BEN 23,746 110.35 $135.21 $87.71 0.98% $19,075.69 8.92 9.74 12.4x 11.3x 6.7x 6.7x 6.2x 0.026x 0.033x 14.9% 15.4% Waddell & Reed WDR 2,457 28.46 $38.73 $22.85 3.51% $2,023.61 2.21 2.44 12.9x 11.6x 6.5x 6.2x 5.6x 0.022x 0.026x 14.9% 16.8% Janus Capital Group Inc. JNS 1,361 7.22 $9.70 $5.36 3.32% $1,401.99 0.57 0.68 12.7x 10.6x 4.0x 5.0x 4.6x 0.009x 0.008x 14.4% 16.1% Eaton Vance Corp. EV 3,054 26.43 $29.64 $20.07 2.88% $3,642.09 1.83 2.04 14.4x 13.0x 8.0x 8.7x 8.3x 0.018x 0.015x 11.8% 13.4% Federated Investors, Inc. FII 2,158 20.71 $23.89 $14.36 4.64% $2,115.35 1.64 1.76 12.6x 11.8x 7.7x 7.1x 6.7x 0.006x 0.006x 36.7% 40.0% AllianceBernstein AB 1,260 11.98 $18.76 $11.55 8.68% $1,220.60 1.04 1.17 11.5x 10.3x 2.5x 2.6x 2.5x 0.003x 0.003x (8.4%) (5.9%) Artio Global Investors ART 187 3.14 $11.22 $2.83 2.55% $164.13 0.16 0.04 19.8x n/m 1.2x 10.0x n/m 0.006x 0.007x (35.7%) (34.4%) Affiliated Manager Group AMG 5,528 107.63 $115.66 $70.27 0.00% $7,276.03 7.28 8.58 14.8x 12.5x 14.9x 13.3x 11.3x 0.020x 0.015x 12.2% 12.2% Cohen & Steers CNS 1,377 31.91 $40.93 $23.79 2.26% $1,242.58 1.63 1.93 19.5x 16.5x 15.3x 10.9x 9.5x 0.028x 0.031x 10.4% 11.7% Calamos CLMS 221 10.85 $14.66 $9.40 3.50% $113.22 0.92 0.89 11.9x 12.3x 0.7x 0.9x 0.8x 0.003x 0.006x (13.3%) (11.9%) GAMCO GBL 1,214 45.57 $52.98 $35.81 0.35% $1,169.06 3.13 3.30 14.6x 13.8x 9.2x 8.4x 7.8x 0.032x 0.033x 4.8% 5.6% Pzena Investment Mgmt PZN 266 4.11 $7.39 $3.18 2.92% $268.93 0.33 0.39 12.3x 10.5x 6.2x 6.8x 6.5x 0.018x 0.018x (5.1%) (1.3%) Mean 2.89% 14.3x 12.3x 7.5x 7.6x 6.7x 0.016x 0.016x 4.8% 6.3% Median 2.90% 13.1x 11.8x 7.5x 7.8x 6.7x 0.017x 0.015x 7.6% 8.9% Min 0.00% 11.5x 10.2x 0.7x 0.9x 0.8x 0.003x 0.003x (35.7%) (34.4%) Max 8.68% 19.8x 16.5x 15.3x 13.3x 11.3x 0.032x 0.033x 36.7% 40.0% Alternative Asset Managers Och-Ziff OZM $2,920 $7.05 $13.23 $6.56 5.67% $2,493.47 $0.48 $1.15 6.2x 5.4x 8.9x 3.6x 3.3x 0.083x 0.097x (16.2%) (14.8%) Apollo Global Manager APO 1,696 13.41 $17.94 $8.85 7.46% $7,415.10 (0.86) 2.22 6.0x 4.6x -24.3x 7.8x 6.1x 0.086x 0.020x 8.1% 14.9% Blackstone BX 6,727 13.15 $17.78 $10.51 3.04% $23,469.76 (0.57) 1.47 9.0x 6.4x 46.7x 38.3x 28.3x 0.123x 0.035x (6.1%) (4.0%) KKR KKR 3,253 14.00 $16.10 $8.95 4.29% $43,312.58 0.73 2.06 6.8x 6.4x 73.7x 156.8x 102.3x 0.695x 0.052x 9.1% 12.7% Fortress Investment Group FIG 1,950 3.79 $4.79 $2.67 5.28% $2,518.22 0.46 0.41 9.2x 6.9x 11.0x 10.4x 7.6x 0.054x 0.042x 12.1% 15.3% Mean 5.15% 7.4x 5.9x 23.2x 43.4x 29.5x 0.208x 0.049x 1.4% 4.8% Median 5.28% 6.8x 6.4x 11.0x 10.4x 7.6x 0.086x 0.042x 8.1% 12.7% Min 3.04% 6.0x 4.6x -24.3x 3.6x 3.3x 0.054x 0.020x (16.2%) (14.8%) Max 7.46% 9.2x 6.9x 73.7x 156.8x 102.3x 0.695x 0.097x 12.1% 15.3% S&P 500 SP50 $12,316,922 $1,362.66 $1,422.38 $1,074.77 2.21% $96.42 $104.26 14.1x 13.1x 8.4% 8.4% S&P 500 / Asset Mgmt & Custody Banks SPT30 134,632 120 138.27 94.63 2.53% 9.84 10.32 12.7x 12.1x 5.3% 5.3% S&P Comp. 1500 / Asset Mgmt & Custody Banks SPT29 154,759 131 149.00 102.23 2.59% 10.56 11.04 12.8x 12.3x 6.3% 6.3% S&P Mid Cap 400 / Asset Mgmt & Custody Banks SPT31 16,977 225 245.14 168.41 2.50% 16.40 16.85 14.0x 13.6x 14.7% 14.7% S&P 500 / Financials SP621 1,737,330 $193.42 215.37 151.85 2.07% 14.57 17.63 13.5x 11.2x 10.4% 10.4% CurrentP/EConsensus CY EPS EV/EBITDA Consensus Asset Management Research Source: FactSet (Priced as of market close July 20, 2012 ET); RBC Capital Markets Eaton Vance Corp.July 24, 2012
- 22. 22 Company Description Founded in1924 and headquartered in Boston, Massachusetts, Eaton Vance Corp. (NYSE:EV) is one of the older asset management firms in the US. The company manages investment funds, provides investment management, and counselling services. The company manages investments for retail, high net-worth individuals and institutional clients. Eaton Vance markets and distributes its products to retail clients through financial intermediaries in the advice channel. Its distribution partners include independent financial advisors, brokers, dealers, banks, and insurance companies. At the end of October 2011, the company had a dedicated sales team of 130 to manage this channel for the US and the international markets. The company directly handles and services its institutional and high net-worth clients, which include corporations, foundations, endowments, family offices, and retirement plans for public and private employees. Eaton Vance has specialized in a number of investment areas, including tax-managed equity, value equity, equity income, structured emerging market equity, floating-rate bank loan, municipal bond, investment grade, global, and high-yield bond investing. At the end of fiscal 2011, Eaton Vance managed 100 open-end funds and 37 closed-end funds. Most of these funds are domiciled in the US; however, more recently, the company launched a number of Ireland and Cayman Island-domiciled open-ended funds. As of October 31, 2011, managed assets in funds sold outside the US totaled only US$3 billion or 2% of the total AuM. The company‘s roots can be traced back to two Boston-based investment managers: Eaton & Howard, formed in 1924, and Vance, Sanders & Company, organized in 1934. Eaton & Howard, Vance Sanders, Inc. was formed upon the acquisition of Eaton & Howard Inc. by Vance, Sanders & Company Inc. on April 30, 1979. Eaton Vance Corp was eventually incorporated in its present structure in Maryland in 1990. Eaton Vance‘s growth has been propelled by both organic and inorganic methods, and it has done a series of acquisitions to expand management of investment portfolios. Through a number of acquisitions from 2004 to 2006 and the acquisition of management contracts from Pelican Investment Management, Eaton Vance expanded its high net-worth client base. In October 2011, Eaton announced the formation of its subsidiary, Navigate Fund LLC. The subsidiary focuses on commercialization of NAV-based trading of ETFs and development of exchange-traded managed funds. Exchange-traded managed funds are Eaton Vance‘s term for active ETFs, which is a hybrid approach. This structure has lower costs than traditional mutual funds but is actively managed. Eaton Vance acquired a number of patents in 2010 related to NAV-based pricing, a methodology that would facilitate the introduction of non-transparent ETFs. Non-transparent ETFs are required to disclose their holdings less frequently than plain vanilla ETFs in order to avoid ‗front running‘ by traders who examine fund holdings with the goal of identifying when a manager is moving in or out of a position. While the company has done a number of acquisitions, its biggest acquisition has been that of Atlanta Capital Management and Fox Asset management in 2001. Eaton Vance Corp.July 24, 2012
- 23. 23 Milestones: The table belowsummarizes the company‘s history 1924 Eaton & Howard was established in Boston. 1934 Vance, Sanders & Company was established in Boston. 1979 Vance, Sanders & Co. acquired Eaton & Howard to form Eaton & Howard, Vance Sanders Inc. 1984 Eaton & Howard, Vance Sanders Inc. was renamed Eaton Vance Management Inc. 1990 Eaton Vance Corp. was incorporated in Maryland. 2001 Acquired Atlanta Capital Management and Fox Asset Management, investment management firms focusing, respectively, on growth and value equity investment styles. 2003 Acquired Parametric Portfolio Associates, a leader in structured portfolio management. 2004 Acquired management contracts of Deutsche Bank’s private investment counsel group in Boston. 2005 Acquired management contracts of Weston Asset Management. 2006 Acquired management contracts of Voyageur Asset Management. 2007 Parametric Portfolio Associates merged Parametric Risk Advisors with Managed Risk Advisors LLC. The merger extended Parametric Portfolio Associates’ structured portfolio management offerings to include investment programs utilizing equity, equity index options, and other derivatives. 2008 Acquired TABS. Focus is on investing in municipal bond and US government securities to achieve high after-tax returns for investors. 2010 Acquired assets of Managed ETFs LLC, an intellectual property company holding issued and pending patents relating to a method for trading ETFs based on a reference future NAV of the fund. 2011 Acquired management contracts from Pelican Investment Management. 2011 Formed a wholly owned subsidiary, Navigate Fund Solutions LLC, to commercialize NAV-based trading of ETFs and develop exchange-traded managed funds (ETMFs are actively managed exchange-traded funds utilizing NAV based-trading). Source: Company reports Organizational Structure Eaton Vance Corp. operates through six affiliates and three consolidated subsidiaries. Eaton Vance refers to funds as subsidiaries when its ownership of these funds is between 20–50%. All affiliates and subsidiaries in which Eaton Vance‘s ownership exceeds 50% or where the company has control are fully consolidated (see table below). All other affiliates and subsidiaries are accounted for under the equity method of accounting. Affiliates Consolidated Subsidiaries Eaton Vance Management (EVM) Atlanta Capital Management Company, LLC Boston Management and Research (BMR) Parametric Portfolio Associates Eaton Vance Investment Counsel (EVIC) Parametric Risk Advisors LLC Eaton Vance (Ireland) Limited (EVAI) Eaton Vance Trust Company (EVTC) Fox Asset Management LLC (Fox Asset Management) Source: Company reports In addition to the above mentioned entities, other subsidiaries are responsible for distribution of the company‘s products. Namely, Eaton Vance Distributors Inc. (EVD) is a broker-dealer, which markets and sells Eaton Vance funds and its retail managed accounts domestically. EVD sells fund shares through a network of financial intermediaries such as national and regional broker-dealers, banks, registered investment advisors, insurance companies, and financial planning firms. Eaton Vance‘s financial services subsidiary, Eaton Vance Management (International) Limited (EVMI), markets and sells the company products through certain dealer firms in the United Kingdom and also caters to Europe and certain other international markets. Asia Pacific is served by Eaton Vance Management International (Asia) Private Limited (EVS), which is Eaton Vance‘s wholly owned financial services company, registered in Singapore. Eaton Vance Corp.July 24, 2012
- 24. 24 Eaton Vance Management(EVM) and Boston Management and Research (BMR) are investment advisers to all but one of the Eaton Vance-sponsored funds. Eaton Vance has contractual arrangements with third parties to provide certain fund-related services, including sub-advisory and distribution-related services. Eaton partners with five independent investment organizations with specialized expertise that advice or sub-advice Eaton Vance-sponsored mutual funds. These affiliates are: Armored Wolf: Headquartered in Orange County, California, the firm is an investment manager that specializes in pursuing a global macro strategy based on real and emerging market assets. The fund focuses on commodities, inflation linked bonds, liquid emerging market bonds, equities, and currencies. Eagle Global Advisors: This employee-owned investment management company is located in Houston, Texas and had US$3.2 billion AuM as of December 31, 2011. The focus is on international equities. Lloyd George Management: The firm is a mid-size asset manager that, prior to being acquired by BMO Financial Group in 2011, operated as an independent, majority, employee-owned company. The focus is on Asia/ and Pacific equities. OrbiMed Advisors: The firm is the world‘s largest investment manager dedicated to health care with AuM of US$5 billion. OrbiMed has a team of 40 professionals who manage venture capital funds and public equity investment funds. The focus is equities in the healthcare sector. Richard Bernstein Advisors: Founded in 2009 and headquartered in New York, the firm is an independent investment advisor focused on long-term investment strategies based on a top-down macroeconomic approach and quantitatively driven portfolio construction. The fund invests equities, commodities, and other assets across the globe. Strategy With 58 % of its assets invested in equities, Eaton Vance has always been perceived to be an active manager. Its executive team says that active investment management is where Eaton Vance wants to be situated. It says it has no interest in competing against the leaders in passive investing such as BlackRock and Invesco. Eaton Vance believes that the best way it can grow as a company is to be successful at developing new franchises. It defines a new franchise as an investment capability in which it holds a leading position and in which the assets under management are meaningful from Eaton Vance‘s perspective. Eaton Vance has developed new franchises in multiple areas, including in its global macro absolute return product, its single- state municipal bond franchise, its business in tax-managed funds, and its numerous funds offering floating-rate income. Eaton Vance management says that it also wants to be innovative, which would be a different idea from being a franchise player. If being a franchise player means being a leader in a narrow line of business, being innovative means being the first to market with a new product or concept, in our opinion. Here, too, Eaton Vance has been successful. It was one of the earlier funds-management organizations, for example, to offer exchange funds—funds that in effect swap a customer‘s highly concentrated position in a single stock into a diversified position in a mutual fund. It has been innovative, in our view, in the area of closed-end funds, as evidenced by the fact that between 2002 and 2007, it raised close to $30 billion in closed-end funds. That happened because many of the ideas that Eaton Vance was introducing with these closed-end funds were new ideas, including closed-end funds focused on generating tax-efficient income. Eaton Vance was one of the earlier organizations—not the first but certainly early—to offer tax-managed equity funds to retail investors. And funds investing in floating-rated bank loans, while not originally Eaton Vance‘s idea, have become very important at Eaton Vance, representing 13% of AuM at April 30. These income-oriented vehicles have been promoted heavily by Eaton Vance‘s marketing department. Eaton Vance also has one of the stronger cultures in money management, having grown its business almost entirely organically and operating its business from, relative to some peers, a small number of offices. Eaton Vance Corp.July 24, 2012
- 25. 25 As part ofthis culture, for example, all Eaton Vance employees, including entry-level employees, get restricted stock after a year. The company makes liberal use of stock and options to pay its employees. Eaton Vance says it has not been caught up in regulatory inquires, was not involved in the mutual fund‘s market-timing imbroglio, has had no issues around the backdating of or repricing of stock-option grants, and describes itself as ‗very clean‘ from a regulatory standpoint. One long-time Eaton Vance executive told us that, ―While we will from time to time lose money, we will not blow people up. We will not take outsized risks with our clients‘ money.‖ We think it should come as no surprise, then, that employee turnover at Eaton Vance is extremely low. Turnover among officers and other senior executives is at 5%. For the entire Eaton Vance organization, turnover runs in the 8% area. And by its own acknowledgement, one of the reasons that Eaton Vance has completed just a small number of acquisitions over the years is that it is reluctant to terminate employees. We think that this probably has had the effect of creating a positive work environment, one in which it is common to find people working in the Boston home office of Eaton Vance who have been with the company for two decades or longer. Revenue and Fee Structure In fiscal 2011, Eaton Vance‘s total revenues increased by 12% year over year to reach US$1,260 million from US$1,121 for the 12 months ended October 31, 2010. The increase was primarily driven by strong growth in investment advisory and administration fees. Investment advisory and administrative fees accounted for about 93% of the total revenue increase in fiscal 2011. For the first quarter ended January 31, F2012, Eaton reported revenue of US$295.6 million, which was a 4% year-over-year decline attributable to a 1% decline in investment advisory and administration fees, an 18% decline in distribution and underwriter fees, and a 14% decline in service fee revenue. The company earns fees and revenue based on the following services: Investment advisory and administration fees Services are rendered to Eaton Vance sponsored funds and separate accounts (high net-worth separate accounts, institutional separate accounts, and retail managed accounts). These services are provided across a wide range of investment mandates (equity, fixed and floating-rate income, and alternative mandates). The fee is determined by contractual agreement and is calculated as a percentage of the market value of assets under management. Investment advisory and administration services revenues stood at US$996.2 million in fiscal 2011 and US$239.5 million in the first quarter of F2012. Distribution and underwriter services fees: Services are rendered to Eaton Vance sponsored funds. The distribution plan payments are calculated as a percentage of average AuM and fluctuate with the value of funds and also the mix of funds. EVD currently sells Eaton Vance open-end mutual funds under five primary pricing structures: front-end load commission (Class A), spread-load commission (Class B), level-load commission (Class C), institutional no-load (Class I), and retirement plan no-load (Class R). Underwriter commissions are earned on the sale of shares of the sponsored mutual fund, on which investors pay a sales charge at the time of purchase. Distribution and underwriter services revenues stood at US$103.0 million in F2011. Eaton Vance Corp.July 24, 2012
- 26. 26 Exhibit 27: RevenueBreakdown Oct 31, 2011 Distribution and Underwriter Fees 8% Investment Adv. & Admin Fees 80% Service Fees 11% Other Revenue 1% Jan31, 2012 Investment Adv. & Admin Fees 81% Distribution and Underwriter Fees 8% Service Fees 11% Other Revenue 0% Source: Company reports Service fees Services are rendered pursuant to distribution or service plans adopted by sponsored mutual funds. The fee is calculated as a percent of average assets under management in specific share classes of the funds (principally Classes A, B, C and R). This fee is paid to EVD as principal underwriter or placement agent to the funds for service and/or the maintenance of shareholder accounts. Certain private funds also make service fees payments to EVD. Service fees stood at US$144.5 million in F2011 and at US$32.3 million for the quarter ended January 31, 2012. Other revenue Other revenue is made up primarily of miscellaneous dealer income, custody fees, shareholder service fees, sublease income and investment income earned by consolidated funds. Other revenue stood at US$16.3 million in F2011 and at US$1.3 million for the first quarter of F2012. Eaton Vance Corp.July 24, 2012
- 27. 27 Assets Under Management Asof January 31, 2012, Eaton Vance had total AuM of US$191.7 billion compared to US$188.2 billion as of October 31, 2011, which is an increase of 2% from the fiscal fourth quarter. Exhibit 28: Assets under Management ($ in billion) 56 75 94 109 129 162 123 155 185 188 192 0 50 100 150 200 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jan-12 Source: Company reports Total assets under management remained flat at US$192 billion when compared to the same period in the last fiscal year and improved marginally from US$188 million at the end of the fourth quarter of F2011. Eaton Vance experienced a net outflow of US$1.1 billion from long-term funds and separate accounts in the first quarter of F2012, which was less than the US$2.7 billion outflow in the previous quarter and of US$1.8 billion in January 2011. Exhibit 29: Assets under Management by Asset Class 108 115 123 117 109 111 46 43 43 44 44 46 20 22 24 26 24 24 10 11 12 12 11 10 0 50 100 150 200 250 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 $ billions Equity Fixed income Floating-rate income Alternative Cash management 185 192 199 188 192 203 Source: Company reports AuM by Product Category Funds include open-end funds, closed-end funds, and private funds; whereas, separate accounts include high net-worth accounts, institutional accounts, and retail managed accounts. Open-end funds held US$72.2 billion AuM (38% of AuM on January 31, 2012). Eaton Vance managed 100 open-end funds including 10 tax-managed equity funds, 30 non tax-managed equity funds, 32 state and national municipal income funds, 14 taxable fixed-income and cash management funds, five floating-rate bank loan funds, and nine alternative funds. Eaton Vance Corp.July 24, 2012
- 28. 28 Closed-end funds heldUS$23.1 billion AuM. Eaton Vance managed 37 closed-end funds including 21 municipal bond funds, 11 domestic and global equity income funds, three bank loan funds, and two multi-sector income funds. Private funds held US$17.9 billion AuM. The private-fund category includes privately offered equity funds designed to meet the diversification and tax-management needs of qualifying high net-worth investors and equity, floating-rate bank loan and fixed-income funds offered to institutional investors. Exhibit 30: Assets under Management by Product Category (Jan 31, 2012) Open-end funds 38% Closed-end funds 12% Private funds 9% Institutional accounts 20% High-net- worth accounts 7% Retail managed accounts 14% Source: Company reports Separate Account assets: Institutional accounts held US$38.7 billion (20% of AuM on January 31, 2012). High net-worth accounts held US$13.3 billion AuM. Eaton Vance offers high net-worth clients and family offices personalized investment counselling services through Eaton Vance Investment Counsel (EVIC) and Parametric Portfolio Associates. Retail managed accounts (RMA) held US$26.5 billion AuM. Eaton Vance has developed its RMA business by capitalizing on the management capabilities of EVM, Atlanta Capital Management, Fox Asset Management, Parametric Portfolio Associates, TABS, and certain strategic partners, and leveraging the strengths of its retail marketing organization and relationships with major distributors. AuM by Investment Mandate Eaton Vance provides its services across a broad range of investment mandates including equity, fixed and floating-rate income, and alternative using fund or separate account investment strategies. Equity strategies encompass a diversity of investment objectives, risk profiles, income levels, and geographic representation. AuM for the equity mandate was US$108.9 billion on October 31, 2011 and US$110.8 billion at the end of January 2012. Income-investment strategies cover a broad duration and credit-quality range, and encompass both taxable and tax-free investments. Fixed-income mandates held US$45.5 billion AuM and floating-rate income mandates held US$24.4 billion AuM at the end of the first quarter of F2012 in January. Alternative-investment strategies include commodity-based investments and a spectrum of absolute-return strategies. Alternative strategies exhibit a low correlation to stock and bond market performance. Alternative mandates held US$10.5 billion AuM in the first quarter of F2012. Eaton Vance Corp.July 24, 2012
- 29. 29 Exhibit 31: Assetsunder Management by Investment Mandate Equity 58% Fixed income 24% Floating- rate income 13% Alternative 5% Cash management 0% Source: Company reports Exhibit 32: AuM Breakdown by Investor Type (FY 2011) Institu- tional 43% Retail/ High-Net- Worth 57% Note: Within the Institutional category, we include assets managed in: Class I open-ended funds, private funds, and institutional separate accounts. Source: Company reports, RBC Capital Markets Exhibit 33: AuM Breakdown by Client Domicile (FY 2011) US 95% Non-US 5% Note: Approximate proportions; company does not provide exact figures. Source: RBC Capital Markets estimates Eaton Vance Corp.July 24, 2012
- 30. 30 Management Team The tablebelow summarizes the management team‘s experience. Name Title Background Thomas E. Faust Chairman, President & CEO Mr. Faust has served as Chairman of the Board and Chief Executive Officer since November 1, 2007. Mr. Faust was elected President of the company in January 2006 and served as Chief Investment Officer from November 2001 until October 31, 2007. He was Executive Vice President of the company from January 2000 through January 2006 and a Vice President of the company from December 1987 to January 2000. He has been a director of the company since January 2002. Mr. Faust serves as a member of the Executive and Management Committees established by the company‘s Board of Directors. Laurie G. Hylton Chief Financial & Accounting Officer Ms. Hylton has been a Vice President of the company since June 1994 and Chief Accounting Officer since October 1997. She was promoted to the role of Chief Financial Officer in March 2012. She was the Internal Auditor of the company from June 1994 to October 1997. Ms. Hylton was an auditor at Deloitte & Touche before joining Eaton Vance. Daniel C. Cataldo Treasurer Mr. Cataldo has served as Treasurer of Eaton Vance Corp. since March 2012. Mr. Cataldo has served as Director of Financial Planning and Analysis at the company since 2000. He was formerly head of Mutual Fund Operations, Internal Auditor and Chief Accountant in a career with the company that began in 1984. Jeffrey P. Beale Chief Administrative Officer Mr. Beale has been a Vice President of the company since June 1998 and the Chief Administrative Officer of the company since November 1999. Mr. Beale is a member of the company‘s Management Committee. Duncan W. Richardson Chief Equity Investment Officer Mr. Duncan Richardson is Chief Investment Officer of Eaton Vance Management. He is also chairman of the Equity Strategy Committee. Mr. Richardson joined Eaton Vance in 1987 and was formerly associated with Booz-Allen & Hamilton. He also served in the US Navy Submarine Service for five years. Scott P. Ruddick Head – Institutional Business Development Mr. Scott P. Ruddick is Head-Institutional Business Development at Eaton Vance Corp. He is responsible for business development, consultant relations and client services. Mr. Ruddick was previously employed as a Managing Director-North American Sales by Mellon Capital Management Corp. Mr. Ruddick joined Eaton Vance in 2010. Source: Company reports Eaton Vance Corp.July 24, 2012
- 31. 31 Investment Risks andPrice Target Impediments Decline in security markets could affect Eaton Vance’s earnings. Growth of assets under management is driven by inflows and market performance. A decline in security markets would result in lower AuM, potentially offsetting any new money into the various funds. The value of investments could be driven by macro economic events over which the company has no control. A reduction in asset levels could lead to lower earnings as management fees would be applied to lower assets under management. Eaton Vance derives almost all revenues from investment advisory and administration fees. Our price target would likely have to be revised downward if AuM were to decrease A reduction in risk appetite could lead to lower earnings A potential adverse effect of a decline in financial markets or further deterioration of the economy could be an increase in risk aversion. A political, economic, or business crisis could lead to an increase in redemptions and lower AuM as investors would convert their assets into cash. We do not model out a scenario like this because it is difficult to determine extreme events. As such, we would have to revise our earnings forecast and reduce our price target if such an event were to occur. Weak fund performance could lead to outflows and lower earnings Eaton Vance‘s ability to attract assets and grow earnings is dependent on the performance it generates. Poor investment performance could increase redemptions and lower inflows of new money. This could negatively affect our revenue and earnings forecast as higher investment advisory fees are earned with equity products. Our price target would have to be revised downwardly if performance deteriorated further. Regulatory changes could adversely affect Eaton Vance’s business. Changes in regulations (legal, regulatory, accounting, tax, and compliance) can negatively affect operations, revenues, and earnings by increasing expenses and/or reducing investor interest in investment products. We would have to revise our forecasts based on the regulatory changes, which could negatively affect our price target. Changes in tax policy could affect earnings. Eaton Vance is affected by changes in the US tax policy more than its competitors because its core offering includes tax-managed funds. An increase in overall tax rates could have a positive effect on its municipal income and tax-managed equity business. We would likely have to increase our earnings estimate if tax rates should increase. This could have a positive effect on our price target. Competition could pressure margins The asset management business is very competitive. There is a trend toward lower fees in some segments of the investment management business. New rules adopted by the SEC to improve mutual fund corporate governance could put further downward pressure on fees. Margins could decline as a result. This could negatively affect our price target. Likewise, Eaton Vance competes with stock brokers, mutual funds, investment banking firms, insurance companies, banks, and other financial institutions. These competitors could have larger resources than Eaton Vance, broader product offerings, or provide services at lower rates. Consequently, the company could lose clients to competitors. If AuM should decline, we would have to revise our earnings estimate and our price target. Eaton Vance Corp.July 24, 2012
- 32. 32 Source: Company filings;RBC Capital Market Estimates ($ in '000) 1QA 2QA 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 2011A 2012E 2013E 2014E Fiscal year ending Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Oct-11 Oct-12 Oct-13 Oct-14 Investment advisory and administration fees $239,452 $248,888 $249,859 $245,544 $247,168 $255,987 $265,108 $271,591 $272,375 $282,519 $293,006 $300,582 $996,222 $983,743 $1,039,854 $1,148,482 Distribution and underwriting fees 22,515 22,551 23,026 23,081 23,234 24,063 24,920 25,530 25,603 26,557 27,543 28,255 102,979 91,173 97,746 107,957 Service fees 32,299 32,065 32,335 32,412 32,626 33,790 34,994 35,850 35,953 37,292 38,677 39,677 144,530 129,110 137,261 151,600 Other revenues 1,340 1,266 1,266 1,266 1,266 1,266 1,266 1,266 1,266 1,266 1,266 1,266 15,347 5,138 5,064 5,064 Total revenues $295,606 $304,770 $306,486 $302,303 $304,293 $315,106 $326,289 $334,236 $335,197 $347,634 $360,492 $369,780 $1,259,078 $1,209,165 $1,279,925 $1,413,103 Total net revenues $263,278 $271,810 $273,661 $269,400 $270,679 $280,804 $290,764 $297,843 $298,699 $309,776 $321,229 $329,502 $1,126,414 $1,078,149 $1,140,090 $1,259,206 Compensation of officers and employees $96,683 $97,566 $98,075 $90,691 $97,374 $97,683 $101,150 $101,942 $110,615 $111,243 $115,357 $119,069 $369,927 $383,015 $398,148 $456,284 Distribution expense 32,328 32,960 32,825 32,903 33,615 34,302 35,525 36,393 36,498 37,857 39,263 40,278 132,664 131,016 139,835 153,897 Service fee expense 28,673 28,088 28,415 28,483 30,154 31,230 32,343 33,134 33,230 34,467 35,747 36,671 124,517 113,659 126,862 140,115 Amortization of deferred sales commission 5,820 5,533 5,343 5,268 5,665 5,805 5,949 6,098 5,986 6,139 6,296 6,457 35,773 21,963 23,517 24,879 Fund expenses 6,651 6,590 6,859 6,875 6,921 7,168 7,423 7,605 7,626 7,911 8,204 8,416 25,295 26,975 29,116 32,157 Other expenses 32,631 35,222 34,360 33,994 32,632 35,223 34,361 33,995 32,633 35,224 34,362 33,996 134,198 136,207 136,211 136,215 Total expenses $202,786 $205,959 $205,877 $198,214 $206,361 $211,411 $216,751 $219,166 $226,589 $232,841 $239,229 $244,888 $822,374 $812,836 $853,689 $943,547 Operating income $92,820 $98,811 $100,609 $104,089 $97,933 $103,695 $109,538 $115,070 $108,609 $114,793 $121,262 $124,892 $436,704 $396,329 $426,235 $469,556 Interest and other income $1,737 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 3,905 $1,737 $0 $0 Net gains (losses) on investments and derivatives 6,430 - - - - - - - - - - - 5,057 6,430 - - Net foreign currency gains 10 - - - - - - - - - - - (26) 10 - - Gains (losses) and other investment income, net 8,177 $2,796 $4,477 $146 $4,314 $2,510 $4,611 ($810) $4,604 $2,524 $5,478 ($887) 8,936 15,596 10,626 11,719 Interest expense (8,413) (8,412) (8,412) (8,412) (8,412) (8,412) (8,412) (8,412) (8,412) (8,412) (8,412) (8,412) (33,652) (33,649) (33,648) (33,648) Other income (expense) of conlidated CLO entity - - - - - - - - - - - - - - - - Interest income 5,544 - - - - - - - - - - - - - - - Net gains (losses) on bank loans, other investments and note obligations 4,736 - - - - - - - - - - - - - - - Gains (losses) and other investment income, net 10,280 8,895 8,895 8,895 8,895 8,895 8,895 8,895 8,895 8,895 8,895 8,895 (17,037) 36,965 35,580 35,580 Interest expense (4,311) (4,134) (4,134) (4,134) (4,134) (4,134) (4,134) (4,134) (4,134) (4,134) (4,134) (4,134) (13,575) (16,713) (16,536) (16,536) Income before taxes, equity in net income of affilates $98,553 $97,956 $101,435 $100,584 $98,596 $102,554 $110,499 $110,609 $109,561 $113,666 $123,090 $120,353 $381,376 $398,528 $422,257 $466,671 Income taxes ($35,187) ($35,164) ($37,531) ($37,216) ($36,480) ($37,945) ($40,884) ($40,925) ($40,538) ($42,056) ($45,543) ($44,531) (156,844) (145,098) (156,235) (172,668) Equity in net income of affiliates, net of tax 1,504 (22) 14 1,460 2,880 2,504 2,314 2,860 2,926 2,550 2,360 2,906 3,042 2,956 10,558 10,742 Net income $64,870 $62,770 $63,918 $64,828 $64,995 $67,113 $71,928 $72,544 $71,949 $74,160 $79,906 $78,729 $227,574 $256,386 $276,580 $304,744 Net income attributable to non-controlling interest (17,599) (9,900) (9,900) (9,900) (9,900) (9,900) (9,900) (9,900) (9,900) (9,900) (9,900) (9,900) (12,672) (47,299) (39,600) (39,600) Net income attributable to EV Corp Shareholders $47,271 $52,870 $54,018 $54,928 $55,095 $57,213 $62,028 $62,644 $62,049 $64,260 $70,006 $68,829 $214,902 $209,087 $236,980 $265,144 Sequential growth rate 1.0% 11.8% 2.2% 1.7% 0.3% 3.8% 8.4% 1.0% (0.9%) 3.6% 8.9% (1.7%) 23.3% (2.7%) 13.3% 11.9% Less: Participating restricted shares $1,371 $2,000 $2,043 $2,078 $1,763 $1,831 $1,985 $2,005 $2,110 $2,185 $2,380 $2,340 $4,597 $7,492 $7,583 $9,015 Earnings per share - basic $0.41 $0.45 $0.46 $0.47 $0.48 $0.50 $0.54 $0.55 $0.54 $0.56 $0.62 $0.61 $1.82 $1.80 $2.07 $2.33 Earnings per share - diluted $0.40 $0.44 $0.45 $0.46 $0.46 $0.48 $0.52 $0.53 $0.53 $0.55 $0.60 $0.59 $1.75 $1.75 $2.00 $2.26 Annual growth rate 32.8% (12.3%) (18.6%) 15.5% 16.1% 10.0% 16.7% 15.9% 13.6% 13.3% 13.9% 10.9% 25.3% (0.4%) 14.7% 12.9% Adj: Increases in redemption value of non-controlling interests $0.07 $0.01 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.25 $0.20 $0.24 $0.25 Adjusted earnings per share - diluted $0.47 $0.45 $0.51 $0.52 $0.52 $0.54 $0.59 $0.59 $0.59 $0.61 $0.66 $0.65 $2.00 $1.95 $2.25 $2.51 Non-controlling interest value adjustment ($8,102) ($1,097) ($7,000) ($7,000) ($7,000) ($7,000) ($7,000) ($7,000) ($7,000) ($7,000) ($7,000) ($7,000) ($30,216) ($23,199) ($28,000) ($28,000) Dividends per share $0.19 $0.19 $0.19 $0.21 $0.21 $0.21 $0.21 $0.23 $0.23 $0.23 $0.23 $0.25 $0.73 $0.78 $0.86 $0.94 Weighted average share count - basic 112,768 112,418 112,118 111,824 111,516 111,215 110,919 110,629 110,310 109,996 109,689 109,388 115,326 112,282 111,070 109,846 Incremental common shares 2,133 3,463 3,463 3,463 3,463 3,463 3,463 3,463 3,463 3,463 3,463 3,463 4,649 3,131 3,463 3,463 Weighted average share count - diluted 114,901 115,881 115,581 115,287 114,979 114,678 114,382 114,092 113,773 113,459 113,152 112,851 119,975 115,412 114,533 113,309 Share buybacks (shares in '000) 300 294 308 302 296 290 320 313 307 301 0 - - - Share repurchase Assumed share price $25.00 $25.50 $26.01 $26.53 $27.06 $27.60 $28.15 $28.72 $29.29 $29.88 0 $25.25 $26.80 $29.01 Quarterly increase in Federated's share price 0% 2% 2% 2% 2% 2% 2% 2% 2% 2% 0 2.0% 8.0% 8.0% Funds allocated to repurchases ($ '000) $7,500 $7,500 $8,000 $8,000 $8,000 $8,000 $9,000 $9,000 $9,000 $9,000 $0 $15,000 $32,000 $36,000 Shares repurchased in the period ( in '000) 300 294 308 302 296 290 320 313 307 301 - 594 1,195 1,242 Assets under management ($ in million) 1QA 2QA 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 2011A 2012E 2013E 2014E Equity fund assets $110,834 $114,903 $107,779 $110,473 $112,462 $114,486 $116,547 $118,645 $121,611 $124,651 $127,768 $130,962 $108,859 $110,473 $118,645 130,962 Fixed-income fund assets 45,514 46,891 48,673 50,522 52,442 54,435 56,504 58,651 60,293 61,981 63,717 65,501 43,708 50,522 58,651 65,501 Floating-rate income fund assets 24,376 24,847 25,543 26,258 26,993 27,749 28,526 29,325 30,146 30,990 31,858 32,750 24,322 26,258 29,325 32,750 Alternative fund assets 10,449 10,506 10,664 10,824 10,986 11,151 11,318 11,488 11,694 11,905 12,119 12,337 10,646 10,824 11,488 12,337 Long-term assets 191,173 197,147 192,658 198,077 202,883 207,821 212,895 218,108 223,744 229,527 235,461 241,549 187,535 198,077 218,108 241,549 Separate accounts assets n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Cash management fund assets n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Total AuM $191,173 $197,147 $192,658 $198,077 $202,883 $207,821 $212,895 $218,108 $223,744 $229,527 $235,461 $241,549 $187,535 $198,077 $218,108 $241,549 Average AuM 189,354 194,160 194,903 195,368 200,480 205,352 210,358 215,501 220,926 226,636 232,494 238,505 191,387 192,806 208,093 229,829 Net flows ($1,120) $567 ($2,237) $272 $953 $990 $1,029 $1,069 $1,389 $1,425 $1,462 $1,500 $3,888 ($2,518) $4,040 $5,777 Equity fund assets 58.0% 58.3% 55.9% 55.8% 55.4% 55.1% 54.7% 54.4% 54.4% 54.3% 54.3% 54.2% 58.0% 55.8% 54.4% 54.2% Fixed-income fund assets 23.8% 23.8% 25.3% 25.5% 25.8% 26.2% 26.5% 26.9% 26.9% 27.0% 27.1% 27.1% 23.3% 25.5% 26.9% 27.1% Floating-rate income fund assets 12.8% 12.6% 13.3% 13.3% 13.3% 13.4% 13.4% 13.4% 13.5% 13.5% 13.5% 13.6% 13.0% 13.3% 13.4% 13.6% Alternative fund assets 5.5% 5.3% 5.5% 5.5% 5.4% 5.4% 5.3% 5.3% 5.2% 5.2% 5.1% 5.1% 5.7% 5.5% 5.3% 5.1% Long-term assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Separate accounts assets n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Cash management fund assets n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Performance Operating income margins - gross 31.4% 32.4% 32.8% 34.4% 32.2% 32.9% 33.6% 34.4% 32.4% 33.0% 33.6% 33.8% 34.7% 32.8% 33.3% 33.2% Pre-tax margins - gross 33.3% 32.1% 33.1% 33.3% 32.4% 32.5% 33.9% 33.1% 32.7% 32.7% 34.1% 32.5% 30.3% 33.0% 33.0% 33.0% After-tax margins - gross 21.9% 20.6% 20.9% 21.4% 21.4% 21.3% 22.0% 21.7% 21.5% 21.3% 22.2% 21.3% 18.1% 21.2% 21.6% 21.6% Operating income margins - net 35.3% 36.4% 36.8% 38.6% 36.2% 36.9% 37.7% 38.6% 36.4% 37.1% 37.7% 37.9% 38.8% 36.8% 37.4% 37.3% Pre-tax margins - net 37.4% 36.0% 37.1% 37.3% 36.4% 36.5% 38.0% 37.1% 36.7% 36.7% 38.3% 36.5% 33.9% 37.0% 37.0% 37.1% After-tax margins - net 24.6% 23.1% 23.4% 24.1% 24.0% 23.9% 24.7% 24.4% 24.1% 23.9% 24.9% 23.9% 20.2% 23.8% 24.3% 24.2% Compensation expense ratio 32.7% 32.0% 32.0% 30.0% 32.0% 31.0% 31.0% 30.5% 33.0% 32.0% 32.0% 32.2% 29.4% 31.7% 31.1% 32.3% Non-compensation expense ratio 35.9% 35.6% 35.2% 35.6% 35.8% 36.1% 35.4% 35.1% 34.6% 35.0% 34.4% 34.0% 35.9% 35.5% 35.6% 34.5% Expense ratio 68.6% 67.6% 67.2% 65.6% 67.8% 67.1% 66.4% 65.6% 67.6% 67.0% 66.4% 66.2% 65.3% 67.2% 66.7% 66.8% Growth rate - year over year Investment advisory and administration fees (1.4%) (1.1%) (4.7%) 2.4% 3.2% 2.9% 6.1% 10.6% 10.2% 10.4% 10.5% 10.7% 14.8% (1.3%) 5.7% 10.4% Distribution and underwriting fees (17.6%) (13.7%) (12.9%) 0.0% 3.2% 6.7% 8.2% 10.6% 10.2% 10.4% 10.5% 10.7% (1.0%) (11.5%) 7.2% 10.4% Service fees (13.5%) (12.1%) (13.6%) (2.6%) 1.0% 5.4% 8.2% 10.6% 10.2% 10.4% 10.5% 10.7% 3.4% (10.7%) 6.3% 10.4% Other revenues 10.9% (89.0%) (8.1%) 4.5% (5.5%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 49.8% (66.5%) (1.4%) 0.0% Total revenues (4.2%) (6.5%) (6.4%) 1.7% 2.9% 3.4% 6.5% 10.6% 10.2% 10.3% 10.5% 10.6% 12.3% (4.0%) 5.9% 10.4% Total net revenues (4.6%) (7.0%) (6.8%) 1.8% 2.8% 3.3% 6.2% 10.6% 10.4% 10.3% 10.5% 10.6% 13.1% (4.3%) 5.7% 10.4% Compensation of officers and employees (0.4%) 0.4% 3.6% 12.0% 0.7% 0.1% 3.1% 12.4% 13.6% 13.9% 14.0% 16.8% 6.0% 3.5% 4.0% 14.6% Distribution expense (1.1%) (2.1%) (2.7%) 1.0% 4.0% 4.1% 8.2% 10.6% 8.6% 10.4% 10.5% 10.7% 5.2% (1.2%) 6.7% 10.1% Service fee expense (8.5%) (8.7%) (11.8%) (5.6%) 5.2% 11.2% 13.8% 16.3% 10.2% 10.4% 10.5% 10.7% 6.5% (8.7%) 11.6% 10.4% Amortization of deferred sales commission (43.8%) (42.6%) (37.2%) (27.6%) (2.7%) 4.9% 11.4% 15.8% 5.7% 5.8% 5.8% 5.9% 0.7% (38.6%) 7.1% 5.8% Fund expenses 46.4% 31.4% (15.3%) (10.0%) 4.1% 8.8% 8.2% 10.6% 10.2% 10.4% 10.5% 10.7% 23.7% 6.6% 7.9% 10.4% Other expenses (2.0%) 8.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 11.3% 1.5% 0.0% 0.0% Total expenses (3.1%) (1.4%) (2.7%) 2.9% 1.8% 2.6% 5.3% 10.6% 9.8% 10.1% 10.4% 11.7% 7.0% (1.2%) 5.0% 10.5% Operating income (3.1%) (1.4%) (2.7%) 2.9% 1.8% 2.6% 5.3% 10.6% 9.8% 10.1% 10.4% 11.7% 23.6% (9.2%) 7.5% 10.2% Income before taxes, equity in net income of affilates 6.5% 4.3% (9.5%) 21.4% 0.0% 4.7% 8.9% 10.0% 11.1% 10.8% 11.4% 8.8% 23.3% (2.7%) 13.3% 11.9% Net income 9.4% 16.7% (7.3%) 42.2% 0.2% 6.9% 12.5% 11.9% 10.7% 10.5% 11.1% 8.5% 13.1% 12.7% 7.9% 10.2% Net income attributable to EV Corp Shareholders 25.9% (15.4%) (20.6%) 17.3% 16.6% 8.2% 14.8% 14.0% 12.6% 12.3% 12.9% 9.9% 23.3% (2.7%) 13.3% 11.9% 2013 2014 2012E 2013E 2014E 2012 Eaton Vance Corp.July 24, 2012
- 33. 33 Required Disclosures Conflicts Disclosures Theanalyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. RBC Capital Markets, LLC makes a market in the securities of Eaton Vance Corp. and may act as principal with regard to sales or purchases of this security. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from Eaton Vance Corp. during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-securities services to Eaton Vance Corp.. RBC Capital Markets is currently providing Eaton Vance Corp. with non-securities services. RBC Capital Markets has provided Eaton Vance Corp. with non-securities services in the past 12 months. The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA. Explanation of RBC Capital Markets Equity Rating System An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector average. Ratings Top Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Qualifiers (any of the following criteria may be present): Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; no significant cash flow/financing concerns over coming 12-24 months; fairly liquid. Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; may not be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float. Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted. Distribution of Ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above). Distribution of Ratings RBC Capital Markets, Equity Research Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY[TP/O] 775 52.36 224 28.90 HOLD[SP] 638 43.11 152 23.82 SELL[U] 67 4.53 2 2.99 Eaton Vance Corp.July 24, 2012
- 34. 34 Q2 Q3 Q1Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 15 20 25 30 35 40 2010 2011 2012 Rating and Price Target History for: Eaton Vance Corp. as of 07-23-2012 (in USD) Legend: TP: Top Pick; O: Outperform; SP: Sector Perform; U: Underperform; I: Initiation of Research Coverage; D: Discontinuation of Research Coverage; NR: Not Rated; NA: Not Available; RL: Recommended List - RL: On: Refers to date a security was placed on a recommended list, while RL Off: Refers to date a security was removed from a recommended list. Created by BlueMatrix References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by a business unit of the Wealth Management Division of RBC Capital Markets, LLC. These Recommended Lists include a former list called the Prime Opportunity List (RL 3), the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Large Cap (RL 7), Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: Midcap 111 (RL9), and the Guided Portfolio: ADR (RL 10). The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off' means the date a security was removed from a Recommended List. Conflicts Policy RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to https://www.rbccm.com/global/file-414164.pdf or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time. Dissemination of Research and Short-Term Trade Ideas RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets' research is posted to our proprietary websites to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via third-party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research. RBC Capital Markets also provides eligible clients with access to SPARC on its proprietary INSIGHT website. SPARC contains market color and commentary, and may also contain Short-Term Trade Ideas regarding the securities of subject companies discussed in this or other research reports. SPARC may be accessed via the following hyperlink: https://www.rbcinsight.com. A Short-Term Trade Idea reflects the research analyst's directional view regarding the price of the security of a subject company in the coming days or weeks, based on market and trading events. A Short-Term Trade Idea may differ from the price targets and/or recommendations in our published research reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons, methodologies and/or other factors. Thus, it is possible that the security of a subject company that is considered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buying opportunity as a result of temporary selling pressure in the market; conversely, the security of a subject company that is rated a long-term 'Outperform' could be considered susceptible to a short-term downward price correction. Short-Term Trade Ideas are not ratings, nor are they part of any ratings system, and RBC Capital Markets generally does not intend, nor undertakes any obligation, to maintain or update Short-Term Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and investors should make their own independent decisions regarding any Short-Term Trade Ideas discussed therein. Analyst Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Eaton Vance Corp.July 24, 2012
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Copyright © RBC Capital Markets, LLC 2012 - Member SIPC Copyright © RBC Dominion Securities Inc. 2012 - Member CIPF Copyright © RBC Europe Limited 2012 Copyright © Royal Bank of Canada 2012 All rights reserved Eaton Vance Corp.July 24, 2012