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Eaton Vance Corp (EV) Q1 2019 Earnings Conference Call Transcript

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EV earnings call for the period ending January 31, 2019.

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Eaton Vance Corp  (EV)
Q1 2019 Earnings Conference Call
Feb. 26, 2019, 9:00 a.m. ET


Prepared Remarks:


Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Eaton Vance Corp. Fiscal First Quarter Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Mr. Eric Senay. Please go ahead.

Eric Senay -- Investor Relations

Thank you and good morning and welcome to our fiscal 2019 first quarter earnings call and webcast. With me this morning are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, our CFO. In today's call, we will first comment on the quarter and then take your questions. The full earnings release and charts we will refer to during the call are available on our website under the heading Investor Relations.

Today's presentation contains forward-looking statements about our business and financial results. The actual results may differ materially from those projected due to risks and uncertainties in our business, including but not limited to, those discussed in our SEC filings. These filings including our 2018 annual report and Form 10-K are available on our website or upon request at no charge.

I would now turn the call over to Tom.

Thomas E. Faust -- Chief Executive Officer

Good morning and thank you for joining us. Earlier today Eaton Vance reported adjusted earnings per diluted share of $0.73 for the first quarter of fiscal 2019, a decrease of 6% from the $0.78 of adjusted earnings per diluted share we reported for the first quarter of fiscal 2018 and a decline of 14% from the record $0.85 of adjusted earnings per diluted share we reported in the fourth quarter of fiscal 2018.

The market backdrop for the first two months of our fiscal first quarter was challenging in all respects. From the end of October until the close of trading on Christmas Eve, U.S. equity market as represented by the S&P 500 fell 13.4% as investors fled to safety amid concerns about overly hawkish U.S. monetary policy and rising trade tensions. In November and December, Eaton Vance lost approximately $15.4 billion in managed assets to market price declines.

During the first two months of the quarter, we also saw a sharp downward shift in our floating-rate bank loan fund flows, reflecting rising apprehension about the future course of the economy and tax-motivated selling as the end of the calendar year approached. Across our lineup of U.S. floating-rate loan and mutual funds, we moved from net inflows of approximately $500 million per month in the August to October time frame to net outflows of nearly $600 million in November and net outflows of $1.8 billion in December.

Flows of our Global Macro Absolute Return Mutual Funds, which hold long and short positions in currency and sovereign credit instruments in emerging and frontier market countries were similarly affected with net outflows accelerating from an average of just over $200 million per month in August to October to nearly $500 million in November and over $1.1 billion in December. Fortunately, January saw a big improvement in both market performance and our flow trends as investors responded to positive economic reports and Fed signaling of a more accommodated policy.

From the Christmas Eve market bottom, the S&P 500 rallied 14.9% through the end of January, driving market-related gains in our managed assets of $19.2 billion in the month of January, more than offsetting the November-December market-related AUM declines. January also saw a sharp abatement in our bank loan mutual fund outflows to just over $200 million and our recovery on our global macro mutual fund flows to just about breakeven.

On an overall basis, excluding exposure management, we improved to consolidated net inflows of nearly $3 billion in October -- excuse me -- we improved to consolidated net inflows of nearly $3 billion in January from net outflows of $1.3 billion in December and net inflows of $500 million in November. Despite the strong December headwinds, we closed the first quarter with consolidated net inflows of $1.5 billion or $2.2 billion excluding exposure management.

This is our 18th consecutive quarter of reporting positive net flows, demonstrating the benefits of offering investment strategies that span the risk spectrum. The quarter's net flows equate to 1% annualized growth in consolidated managed assets. Our internal growth in management fee revenue was minus 4% annualized in the first quarter of fiscal 2019, but improved as the quarter progressed from minus 7% annualized in November-December to plus 4% annualized in January.

As we have described previously, this measure of our underlying business growth subtracts management fees attributable to consolidated outflows from management fees attributable to consolidated inflows and then measures that difference as a percentage of beginning of period consolidated management fee revenue. We ended the first fiscal quarter with $444.7 billion of consolidated assets under management of 1% over the prior quarter end. For the quarter, individual separate account assets under management increased 5%, private fund assets increased 2%, institutional separate accounts grew 1%, closed-end funds fell 2% and open-end fund assets shrank by 3%.

Among investment-mandate reporting categories changes in consolidated assets under management during the first quarter ranged from growth of 6% for fixed income and 4% for portfolio implementation to declines of 9% for floating-rate bank loans and 18% for alternatives, a reporting category dominated by our global macro absolute return strategies. Fixed income quarterly net inflows of $3.2 billion benefited from strong investor demand for short and ultra-short duration and high quality income investments in what was primarily a risk-off environment.

With net inflows of over $1.6 billion during the quarter, the 5-star-rated Eaton Vance Short Duration Government Income Fund was by wide margin our top-selling fund on a net basis. Other flow leaders, among our fixed income funds, were the Eaton Vance short-duration municipal opportunities and floating-rate municipal income funds with over $250 million of combined net inflows. Fixed income net flows in the quarter also included $1.5 billion into municipal and corporate ladder bond individual separate accounts, and $600 million into high-yield bond institutional separately managed accounts. Portfolio implementation quarterly net inflows of $3.4 billion were dominated by Parametric Custom Core equity separate accounts.

Parametric remains the largest player in the rapidly growing market for custom indexing, sometimes also referred to as direct indexing. Custom indexing provides potential advantages over indexed funds and indexed ETFs that include greater tax efficiency and the tailoring of holdings to reflect client-specified responsible investment criteria and other client-directed portfolio tilts and exclusions. As this market continues to expand, we're committed to investing to support business growth, drive increased operating efficiencies and to further extend our service capabilities.

As in past quarters, we have included in the slides accompanying this presentation, a chart showing the managed assets and flows of what we referred to as our Custom Beta businesses, which are individual separately managed accounts offered to retail and high-net worth investors that are invested in Parametric Custom Core equity or EVM ladder bond strategies. These high-value offerings combine the benefits of passive investing with the ability to customize portfolios to meet individual preferences and needs.

As shown in slide 12, our Custom Beta managed assets increased 6% from $84.3 billion at the end of fiscal 2018 to $90 billion at the end of our first fiscal quarter. The $3.9 billion of first quarter Custom Beta net inflows equates to annualized internal growth in managed assets of 19%. While these businesses are attracting increased competition, we continue to believe they offer vast growth opportunities. Our Calvert responsible investment subsidiary was also a significant driver of growth this quarter.

Total Calvert managed assets including amounts sub-advised by other Eaton Vance affiliates increased by approximately $700 million to $15.4 billion at the end of the first quarter. Calvert $600 million of net inflows for the quarter equates to 17% annualized internal growth in managed assets, ranking as the best growth quarter since we acquired the Calvert business just over two years ago. Our Calvert offerings span a wide range of equity income and multi-asset strategies, managed in accordance with responsible investment principles.

In support of building our leadership and responsible investing, we continued to invest in Calvert to expand their ESG research and corporate engagement capabilities. We are also investing to build greater connectivity across our investment organization to support the integrated consideration of responsible investing criteria into the fundamental research processes of Eaton Vance Management in Atlanta Capital capitalizing on the proprietary ESG research that Calvert provides.

We are also working to expand Calvert's presence and influence in the growing dialogue around responsible investing. Earlier this month, Calvert collaborated with Barron for the second year in a row to provide the research supporting the annual Barron's cover story identifying and ranking the 100 most sustainable of the 1000 largest public companies headquartered in the U.S. based on measures of how each of these companies treat shareholders, employees, customers, their communities, and the planet.

Away from Calvert, our first quarter equity flows were mixed. We saw net inflows of $800 million into Parametric defensive equity mandates and over $600 million into Eaton Vance Investment Counsel's private wealth management business offset by $700 million of outflows from Parametric emerging market equities.

Across all our affiliates, we realized approximately $750 million of consolidated net inflows into equity mandates in the quarter. As mentioned previously, we saw net investor outflows from our floating-rate loan mutual funds offered in the U.S. totaling $2.6 billion in the quarter with net withdrawals concentrated in December.

Across the balance of our floating-rate business, net outflows were a more modest $300 million as institutional withdrawals were partially offset by higher borrowing balances and leveraged loan funds.

Within our floating-rate loan business, we announced yesterday the promotion of our longtime Director of Loan Trading and Capital Markets, Andrew Sveen to become Co-Director of the Loan Group effective March 1st. In that role, Andrew will serve alongside Craig Russ and replace Scott Page who becomes Senior Adviser to the group.

Andrew's promotion reflect his outstanding contributions to Eaton Vance over his 20 years with the firm and our confidence in his leadership abilities. Scott's movement into a Senior Advisory role closes his remarkable leadership with the bank loan group dating back to 1996, a time when Eaton Vance's bank loan business and the asset class as a whole were just beginning to emerge. We are fortunate that Scott will remain closely involved with the loan group of senior advisor and that Andrew is ready to take the step in his career advancement.

Turning to our alternatives reporting category, the quarter's net outflows of $2.2 billion were driven by $1.6 billion of net withdrawals from our global macro absolute return and Global Macro Absolute Advantage U.S. mutual funds.

As previously mentioned, like our floating-rate, mutual fund withdrawals, global macro net outflows were concentrated primarily in December and substantially abated in January.

In exposure management, we saw $700 million of first quarter net outflows as net reductions and existing client positions more than offset assets gained in the net addition of three new client relationships during the quarter.

While changes in client positions can move exposure management assets up or down from period-to-period, the underlying growth in this business is measured by the number of active client relationships remains in place.

Close readers of our financial statements will notice that we modified our reporting of assets and flows this quarter to combine the previously separate retail managed account and high-net worth separate account reporting categories into a single individual separate account reporting category. This change recognizes the narrow distinctions between the previous reporting categories and better highlights our large and growing business of managing separate accounts for individuals and families.

Led by the Parametric Custom Core equity and EVM laddered bond offerings that we group under our Custom Beta label, this business continues to expand at a rapid clip. Today, we are among the market leaders in individual separately managed accounts with managed assets of $126.7 billion and some 80,000 in-house managed customized individual accounts.

As we scale this business, we recognized the need for ever-increasing operating efficiency and continue to invest in technology to advance that objective. You may have seen the press release issued last week announcing that Eaton Vance has filed a exemptive application with the SEC seeking permission to offer ETFs that would employ a novel method of supporting efficient secondary market trading of their shares which we called the Clearhedge Method because disclosure of current holdings would not be necessary and ETF's portfolio trading activity could remain confidential.

In addition to facilitating the introduction across fund asset classes of ETFs employing proprietary active investment strategies, the Clearhedge Method could also be used by existing ETFs holding foreign or less liquid investments to enhance their secondary market trading performance. Aspects of the Clearhedge Method are subject to issued and pending U.S. patents held by Eaton Vance.

In conjunction with filing an exemptive application, Eaton Vance has formed a new subsidiary Advanced Fund Solutions to manage the development and commercialization of ETFs utilizing the Clearhedge Method and other fund-related intellectual property.

Our NextShares Solutions subsidiary becomes part of Advanced Fund Solutions and Stephen Clarke, President of NextShares Solutions is assuming the same role at Advanced Fund Solutions.

We don't know how or when the SEC will respond to the Clearhedge Method application or other proposals to offer proprietary active ETFs. We do believe there is a compelling case supporting our proposed approach. Positive action could set the stage for a broad range of proprietary active strategies becoming available to ETF investors for the first time.

Negative action could cement NextShares' position as the only exchange-traded product structure that is compatible with proprietary active management. Either outcome could provide a significant opportunity for Eaton Vance.

In closing, let me say that these are busy active times at Eaton Vance as we continue to advance multiple growth initiatives and work to position our business for continued success in the evolving asset management industry.

That concludes my prepared remarks. And I will now turn the call over to Laurie.

Laurie Hylton -- Chief Financial Officer

Thank you and good morning. As Tom mentioned, we reported adjusted earnings per diluted share of $0.73 for the first quarter of fiscal 2019, a decrease of 6% from $0.78 of adjusted earnings per diluted share in the first quarter of fiscal 2018 and a decrease of 14% from $0.85 of adjusted earnings per diluted share reported in the fourth quarter of fiscal 2018.

As you can see in Attachment 2 to our press release, GAAP earnings exceeded adjusted earnings by $0.02 per diluted share in the first quarter of fiscal 2019 to reflect the reversal of $2.9 million of net excess tax benefits recognized during the period related to stock-based awards.

In the first quarter of fiscal 2018, adjusted earnings exceeded GAAP earnings by $0.15 per diluted share, reflecting the add-back of $24.7 million of income tax expense recognized in relation to the non-recurring impact of the tax law changes and a $6.5 million charge recognized upon the expiration of the company's option to acquire an additional 26% ownership interest in our 49% owned affiliate Hexavest, partially offset by the reversal of $11.9 million of net excess tax benefits related to stock-based awards.

In the fourth quarter fiscal 2018, GAAP earnings exceeded adjusted earnings by $0.02 per diluted share to reflect the reversal of $2.4 million of net excess tax benefits related to stock-based awards.

As Tom mentioned, the market backdrop for the quarter, particularly for the first two months, was particularly challenging. Operating income decreased by 11% year-over-year and 16% sequentially, primarily driven by the decrease in management fee revenue this quarter.

Our operating margin was 29.8% in the first quarter of fiscal 2019 versus 32.3% in the first quarter of fiscal 2018 and 33.5% in the fourth quarter of fiscal 2018. Having exited our fiscal year 2018 reporting new highs in terms of both quarterly and annual earnings, it was disappointing to take a market-driven step back in operating income this quarter.

Ending consolidated managed assets of $444.7 billion at January 31st, 2019, we're down 1% year-over-year as positive net flows over the past 12 months were more than offset by market price decline. Versus the end of our fiscal 2018, consolidated managed assets were up 1% reflecting modestly positive market returns and net flows during the quarter.

Although average managed assets were up 1% from the same period last year, management fee revenue was down 3%, reflecting a 4% decrease in our average annualized management fee revenue rate from 33.3 basis points in the first quarter of fiscal 2018 to 32 basis points in the first quarter of fiscal 2019.

Average managed assets in the first quarter of fiscal 2019 were down 4% sequentially, driving a 6% decrease in management fee revenue. A decline in management fee revenue exceeded the decline in average managed assets, primarily due to a 2% decrease in our average annualized management fee revenue rate, from 32.7 basis points in the fourth quarter of fiscal 2018 to 32 basis points in the first quarter of fiscal 2019.

The decline in our average annualized management fee rate over the comparative periods was driven primarily by shifts in our business mix from higher fee to lower fee mandates. In the first quarter of fiscal 2019, annualized internal growth in management fee revenue of negative 4% trailed annualized internal growth in managed assets of 1%, primarily due to the mix of higher fee and lower fee strategies within our outflows and inflows during the quarter.

This compares to 4% annualized internal growth in management fee revenue on 7% annualized internal growth in managed assets in the first quarter of fiscal 2018 and 1% annualized internal growth in management fees on 2% annualized internal growth in managed assets in the fourth quarter of fiscal 2018.

Turning to expenses. Compensation decreased by 1% from the first quarter of fiscal 2018 primarily driven by lower operating income based bonus accruals and a decrease in stock-based compensation, partially offset by higher salaries and benefits associated with increases in headcount and year-end merit adjustments.

Sequentially, compensation expense increased by 4% from the fourth quarter of fiscal 2018, primarily reflecting an increase in stock-based compensation related to the annual award granted to employees in November, higher salaries and benefits driven by increases in headcount and seasonal compensation factors including payroll tax clock resets, 401(k) funding and fiscal year-end merit increases, all partially offset by lower operating income-based bonus accruals.

Non-compensation distribution-related costs, including distribution and service fee expenses and the amortization of deferred sales commissions, decreased 6% from the same quarter a year ago and 7% sequentially, primarily reflecting lower distribution and service fee expenses, driven by a decrease in average managed assets and share classes that are subject to these fees and lower marketing and promotion costs, partially offset by higher commission amortization for certain private funds.

Funds related expenses were up 5% year-over-year, reflecting higher average managed assets and sub-advised funds versus the year-ago quarter and were down 2% sequentially, reflecting lower average managed assets and sub-advised funds versus the prior quarter.

Other operating expenses increased 13% in the first quarter of fiscal 2018 and decreased 2% from the fourth quarter of fiscal 2018. The year-over-year increase primarily reflects higher information technology spending, attributable mainly to expenditures associated with the consolidation of our trading platforms and enhancements to Calvert's research system and higher facilities expense related to expansion of rental space and higher depreciation of leasehold improvement.

The sequential quarterly decrease primarily reflects lower professional services expenses, due to a decrease in corporate consulting and external legal costs, partially offset by an increase in charitable contributions. We continue to focus on overall expense management and identifying ways to gain operational leverage.

Net gains and other investment income on seed capital investments were negligible in the first quarter of fiscal 2019 and fiscal 2018 and contributed $0.01 to earnings per diluted share in the fourth quarter of fiscal 2018.

When quantifying the impact of our seed capital investments on earnings each quarter, we take into consideration our pro rata share of the gains losses and other investment income earned on investments in response to strategy, whether accounted for as consolidated funds, separate accounts or equity investments, as well as the gains and losses recognized on derivatives used to hedge these investments.

We then report the per-share impact net of income taxes and net income attributable to non-controlling interests. We continued to hedge the market exposures of our seed capital portfolio to the extent practicable to minimize the associated earnings volatility.

Net gains and other investment income in the first quarter of fiscal 2018 included a $6.5 million charge related to the expiration of the company's option to acquire an additional interest in Hexavest. We excluded this one-time charge from our calculation of adjusted net income and adjusted earnings per diluted share for the first quarter of fiscal 2018.

Non-operating income expense included $2.9 million of net expense allocation from consolidated CLO entities in the first quarter of fiscal 2019 and net income contribution of $1.6 million and $0.4 million from consolidated CLO entities in the first quarter of fiscal 2018 and the fourth quarter of fiscal 2018 respectively.

The year-over-year and sequential decreases in income contribution from consolidated CLO entities primarily relates to a decline in fair value of the company's beneficial interest in these entities resulting from a downturn in the loan market during the first quarter of fiscal 2019.

Turning to taxes. Our effective tax rate was 23.4% for the first quarter of fiscal 2019, 36.3% in the first quarter of fiscal 2018 and 26.4% in the fourth quarter of fiscal 2018. The company's income tax provision for the first quarter of fiscal 2019 includes $0.6 million of charges associated with certain provisions of the 2017 Tax Act, relating to limitations on the deductibility of executive compensation that began taking effect for the company in fiscal 2019.

The company's income tax provision was reduced by net excess tax benefits related to stock-based awards totaling $2.9 million in the first quarter of fiscal 2019, $11.9 million in the first quarter of fiscal 2018 and $2.4 million in the fourth quarter of fiscal 2018.

The company's income tax provision for the first quarter of fiscal 2018 also included a non-recurring charge of $24.7 million, to reflect the estimated effects of the U.S. federal tax law changes that were enacted in the first quarter of fiscal 2018.

As shown in attachment two to our press release, our calculations of adjusted net income and adjusted earnings per diluted share removed the net excess tax benefits related to stock-based awards in the non-recurring impact of the tax law changes.

On this basis, our adjusted effective tax rate was 25.9% in the first quarter of fiscal 2019, 26.7% in the first quarter of fiscal 2018 and 28.6% in the fourth quarter of fiscal 2018. On the same adjusted basis, we estimate that our quarterly effective tax rate for the balance of fiscal 2019 and for the fiscal year as a whole will range between 25.9% and 26.4%.

During the first quarter of fiscal 2019, we used $43.2 million of corporate cash to pay the $0.35 per share quarterly dividend declared at the end of our previous quarter and repurchased 3.1 million shares of non-voting common stock for approximately $115 million.

Our weighted-average diluted shares outstanding were 115.5 million in the first quarter of fiscal 2019, down 7% year-over-year and 5% sequentially, reflecting share repurchases in excess of new shares issued upon vesting of restricted stock awards and exercised employee stock options and a decrease in the dilutive effect of in-the-money options and unvested restricted stock awards.

We finished our first fiscal quarter, holding $690.6 million of cash, cash equivalents and short-term debt securities and approximately $337.4 million in seed capital investments. These amounts compare to outstanding debt obligations of $625 million. We continue to place high priority on using the company's cash flow to benefit shareholders.

Given revenue weakness in growth and fixed expenses, fiscal discipline around discretionary spending remains top of mind in fiscal 2019. Based on our strong liquidity and overall financial condition, we believe we are well-positioned to continue managing our business for long-term growth through the current weakness, while also continuing to return capital to shareholders through dividends and share repurchases.

This concludes our prepared comments. And at this point we'd like to take any questions you may have.

Questions and Answers:


(Operator Instructions) Your first question today comes from the line of Daniel Fannon of Jefferies. Your line is open.

Gerry O'Hara -- Jefferies -- Analyst

Great. Thanks. Actually Gerry O'Hara sitting in for Dan this morning. I appreciate the color around the bank loan flows for intra-quarter, but perhaps you could maybe elaborate a little bit on the outlook for those products with a flat to even potentially declining interest rate environment going forward?

Thomas E. Faust -- Chief Executive Officer

Yeah. So there were a couple of things that occurred in the quarter that adversely affected the flows. One, relating to a changing view on where short-term interest rates might be going. Second, elating to where it looked like the economy might be going, is the potential there for credit losses in below investment-grade assets like floating-rate loans? And the third was year-end tax loss selling.

As we look at the outlook from here, we're not in a position where we're going to see year-end tax-loss selling, at least not anytime soon. From our read of the economy, there's not a substantial chance of a recession or a dramatic weakness occurring over the next few quarters anyway for what's visible.

In terms of where rates are going, I think we're in a position where investors could see long-term rates frankly move either way, and also where there is some potential albeit diminished for continuing upward movement in short-term rates.

What people need to understand about bank loans is that you don't need increases in short-term rates for this to be a favorable investment. If you look at yields on the funds today based on where rates are today, and the potential for recovery over time of some of the old ground that was lost on valuations in the December declines, we think we're positioned for high single digit type annualized returns in the asset class even in the absence of upward movement in short-term rates, which we believe many investors will find attractive.

Gerry O'Hara -- Jefferies -- Analyst

That's helpful. And perhaps one for Laurie. It looks like there's an accounting change in early November. Could you perhaps help us unpack this a little maybe, which line items in the revenue or even expense side of the P&L were impacted?

Laurie Hylton -- Chief Financial Officer

Yeah. The most significant impact is the new accounting pronouncement related to the reclassification of fund subsidies. So previously under the old accounting guidance, we recorded fund subsidies as a component of fund expenses. And under the new guidance we need to actually bring that up to the top line and actually report that as a counter revenue amount against management fees.

So you'll see that we adopted the new accounting pronouncement using a full retrospective application. So the numbers that you're seeing are full apples-to-apples comparison going back for all periods presented. But just to give you the numbers that are really moving the numbers around a little bit on the revenue side, the subsidies that we moved from expense up to a contra management fee representation were a total for this quarter we're $9.2 million. For the previous quarter, so Q4 of 2018 were $8.7 million. And then for the first quarter of 2018 were about $5.7 million.

So those are the numbers that are now being netted against management fees and are affecting not only the obviously the absolute dollar amount of management fees presented, but also impacting our effective fee rates and all the calculation. So again we did the full retrospective application. All prior periods have been changed to reflect those -- that movement including our effective fee calculations by mandate category.

Gerry O'Hara -- Jefferies -- Analyst

So the net impact to that is that the revenues go down and reported expenses also go down, so margins go up. There was also a second aspect of that change although smaller had the opposite effect on margins. You wanted to talk about that Laurie?

Laurie Hylton -- Chief Financial Officer

Yeah, the -- at the end of the day and just to be clear operating income didn't change at all this is all just movement around categories. But on the distribution side there was a modest reclass between distribution expense and distribution income. And by quarter, it was somewhere in the neighborhood of $3.5 million to $4.5 million. So that was far less impactful, because obviously one of the biggest drivers in the business right now is looking at our effective fee rates in terms of our management fees. So that had far less impact, but it muted the impact on margin of the management fee change.

Gerry O'Hara -- Jefferies -- Analyst

Okay. That's helpful. Thanks for taking our questions.


Your next question today comes from the line of Ari Ghosh of Credit Suisse. Your line is open.

Ari Ghosh -- Credit Suisse -- Analyst

Hey, good morning, everyone. Maybe the first one for Laurie back on expenses. I know that the restatement impacted the distribution services lines this quarter, but can you help us think about the comp and other expense line for 2019? Is the 36% still a reasonable comp margin range for fiscal 2019? And then on the other expenses, should we expect the $53 million per quarter to drift lower a little bit just given that you've done some of your platform integration projects?

Laurie Hylton -- Chief Financial Officer

Yeah. I think we're still continuing to invest. So I wouldn't make any assumptions about our longer term investments on the technology side. I think that we've guided and Tom identified in his comments earlier, we're continuing to invest both in Calvert and also on our platforming around separate accounts and we'll be thinking more about that as the year progresses.

From a comp perspective, I think that the comp range is reasonable. I think that obviously in periods like we saw this quarter where you had a significant downturn -- downtick in the management fees the mix between variable and fix is going to shift a little bit. But we would not anticipate seeing anything significantly change in terms of our overall comp ratios.

Ari Ghosh -- Credit Suisse -- Analyst

Got it. And then just on the fee rates, can you talk about the core trends that drove the lower fee rate this quarter? Was it more like mix shift driven by product to channel within these asset classes? Any additional color here would be helpful.

And then you mentioned the improvement in the organic revenue growth in January and throughout the quarter. Are you seeing that in Feb as well? Can you just give us an update on how that's tracking quarter-to-date?

Thomas E. Faust -- Chief Executive Officer

Yeah. So Ari I'll start with the organic revenue growth. We don't calculate -- it's a fairly involved calculation so we don't do a daily updated organic revenue growth. This was actually the first time we've broken it out on a monthly basis intra-quarter. So we now have a sense of exactly where we are in February. But it feels like the tone of the business remains positive. We do see daily flow data. We can approximate what that looks like from a organic revenue growth perspective. So generally the positive tone of January continues with solid net inflows for the month to date in February.

In terms of drivers of our declining average fee rate the -- it's two things. It is mix of business that is both across categories and within reporting categories. Generally we're adding business or adding more business at lower fee rates. And in some cases we're losing higher fee assets.

There was also some I would say as a secondary effect. But also there is some rep-ricing of existing mandates particularly in the first quarter. I highlighted in my comments, the net outflows from our bank loan mutual funds and our global macro mutual funds, both of which happened to be among our higher-fee strategies. So in this particular case it was really the outflows from those plus the fact that our inflows are in things like custom beta that are lower fees. That really accounts for the continuing movement downward. But we view this as a long-term secular trend and expect to manage our business accordingly.

Ari Ghosh -- Credit Suisse -- Analyst

Very helpful. I'll get back in the queue.


Your next question comes from the line of Patrick Davitt of Autonomous Research. Your line is open.

Patrick Davitt -- Autonomous Research -- Analyst

Thank you, good morning. From the exposure on the Parametric side and Custom Beta stuff you've always highlighted how high touch that can be. As a part of the investment process working toward ways to maybe automate that business a bit more in order to eke out a bit more operating leverage?

Thomas E. Faust -- Chief Executive Officer

Well, so we managed across Parametric I think it's something on the order of 40,000 individual separate accounts. So it has to be highly automated for that to work, particularly given average fee rates across that business in the 20-basis-point range let's say. So we think we're already pretty good at serving customized individual separate account investors on a cost-effective basis.

We expect over time to get even better to continue investing in technology and improving our operating efficiency to drive down service costs. And those costs are primarily reflective of the number of accounts. So it's -- although our fees tend to be AUM based or MI RAUM based, our cost in that business are primarily account based.

So the margin is sensitive to average account size and also to our cost per account. And we very much focus on trying to drive those down as much as possible, because we expect and we hope that as our business grows, we will expand the range of assets and investors that we serve that will likely have the effect of driving down average account sizes. So we need to drive upper operating efficiency so that we can drive down our per unit operating cost, so that we can maintain profitability levels as we bring down average account sizes.

Patrick Davitt -- Autonomous Research -- Analyst

Helpful. Thank you. And then I think you just mentioned the repricing of some existing mandates. Could you expand on that a bit? And is it something that you think was fairly idiosyncratic to the quarter or a trend developing with a certain core client base or something?

Thomas E. Faust -- Chief Executive Officer

No. There were no material individual repricings during the quarter, certainly, nothing to call out. I was just commenting on the general trend in our business that fees are moving lower. Sometimes that's in response to agreements with individual clients or intermediaries or fund trustees. But frankly, more often, it's driven by competitive forces where our sales teams or marketing organization generally recommends that we lower prices in a particular asset class, because we think that will make our strategies more salable.

Patrick Davitt -- Autonomous Research -- Analyst

Thank you.


Your next question comes from the line of Brian Bedell of Deutsche Bank. Your line is open.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thanks. Good morning. Maybe just following on that question on the pricing pressure obviously mixed shift as you alluded to it as a major driver of that. But within the two buckets where we saw the biggest compress in the equity area and the alternative area, I guess, maybe Tom if you could comment to what extent that was caused by the repricing versus just simply mixed shift within those categories? And if it's mixed shift, should we expect that fee rate to bump back up in the next quarter given the positive trends we've seen in January, February?

Thomas E. Faust -- Chief Executive Officer

Yes, Brian. In both of those categories, it would certainly be overwhelmingly mixed shift. I can't promise that it's going to reverse in future quarters. If you look at the alternatives category, the Global Macro Absolute Return Advantage Fund, which has embedded a leverage in it and therefore has a higher return potential commands a higher fee. We saw an increase in the average fee rate within that category a year ago -- over the early quarters of fiscal 2018 as the global macro advantage version grew relative to the category as a whole.

With the outflows from the global macro strategies including global macro advantage in the fourth quarter that reverse within equities. I would say that the primary driver there has been new business gained at relatively low fee rates that includes a large investment counsel client, that includes our Parametric defensive equity mandates, which are at lower than average equity fee rates.

Also, some of the inflows at Calvert are in index-based strategies including their largest index-based fund, which is at a 19 basis point expense ratio for the institutional share class. So it's really very much in those two places in particular very much driven by mixed shift.

Laurie Hylton -- Chief Financial Officer

The Parametric emerging market.

Thomas E. Faust -- Chief Executive Officer

Yes -- thanks, Laurie. We're going the other direction, Parametric emerging markets where we had I think about $700 million of net outflows in the quarter is in above average fee rate. So it's gaining assets and lower fee strategies and losing assets in higher fee strategies. Unfortunately, that's the way the world these days in asset management.

Brian Bedell -- Deutsche Bank -- Analyst

Yeah. No, it's very clear. Thank you. And then just a follow-up. And maybe Tom if you could talk a little bit about the Clearhedge application, how you think that's differentiated from the I think it's probably closest to sort of a TRO type of application as opposed to Precidian. But maybe how you see that differentiated. And you mentioned also if there's negative action no action on it, do you have to think that will become a catalyst for the ETMF? And maybe if you could give a sense of timing on that I guess if it's possible?

Thomas E. Faust -- Chief Executive Officer

Sure. So the Clearhedge is one of now a series of half dozen or so exemptive applications before the SEC relating primarily to the ability to offer ETFs that don't disclose their full holdings on a current daily basis. Most of those, the proposition is that the fund will disclose on a daily basis using different technology -- different terminology, but I'll call them a reference portfolio, something that looks like, smells like, behaves like the fund's actual portfolio, but does not include all the current holdings, where the delta is designed to preserve the confidentiality of current trading.

The concern has been a proxy portfolio, I'll call it. While on clear days may perform adequately particularly in asset classes like U.S. equities that in harder asset classes, like international securities or less liquid securities or across all asset classes during periods of significant market volatility that that won't be good enough. And that the reference portfolio and the actually portfolio will be subject to what's called basis risk, which market makers will deal with in a very clear way, which is during those times and for those types of funds, they'll deal it by widening their bid/ask spreads and causing investor trading costs to go up.

Our proposed approach called Clearhedge, builds on that approach, but not only disclosing a reference portfolio, but also by incorporating a swap facility whereby a market maker or other arbitrageur, could enter into transactions with the fund to in effect lay off the relative performance risk between the known hedge portfolio and the unknown underlying portfolio, so providing a much more reliable basis for ensuring that the funds can be arbitrage effectively across all market environments and across all fund asset classes.

And as mentioned in my comments, we were issued a patent on this approach back in October and it's on that basis that we're looking to not only get approval for the exemptive application, but also potentially to license that technology across the fund business. We don't claimed to be unbiased, but we certainly think that relative to the other applications, our proposed approach stacks up very well in terms of broad applicability and the most assured level of strong secondary market trading performance.

In terms of the impact of this on NextShares, we continue to support our NextShares initiative. We still face the issue that we have very limited distribution access. As we've talked about in previous quarters, one of the biggest challenges perhaps the biggest challenge with NextShares has been the competition against the idea that the SEC is about to approve something else that isn't ETF not something like a NextShares exchange-traded managed fund that requires more of an education process to the advisor and to the underlying investor as to what this is.

What the Clearhedge Method exemptive application does for us, is essentially puts us with a significant leg in both camps. That is if the SEC were to act to approve some or all of these exemptive applications for ETFs that don't disclose their holdings on a daily basis. We think we have an idea that stacks up very well against the competition and would hope that would translate into approval for our idea and potentially broad market application. If things go the other way and the SEC somehow puts a nail on the coffin on the idea that these things will become approved that opens up we believe a much greater opportunity to introduce NextShares across a broader range of distribution.

As it stands now, the NextShares effort is largely on hold in terms of adding new distribution relationships pending what many perceives as -- many perceived as maybe a near-term resolution of this issue at the SEC. Many people are saying, we don't know if this is true or not that 2019 will decide one way or another whether some of these or all of these concepts get approved.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. Very good. Great. Thanks for that. And COGS for this year now are relatively immaterial, I guess, since you're stopping the distribution on the ETMF?

Thomas E. Faust -- Chief Executive Officer

Relatively immaterial, yes.

Brian Bedell -- Deutsche Bank -- Analyst

Yeah. Yeah. Okay, great. Thank you.

Thomas E. Faust -- Chief Executive Officer

And we don't expect the same kind of cost to be incurred in connection with launching Clearhedge if we're still lucky to have that opportunity. Our expenses for NextShares if you look back on it were principally related to training of advisors, educating the market and developing technology at the broker-dealer level to accommodate the special way in which NextShares trade. ETFs involving the Clearhedge Method will still be ETFs and will trade in exactly the same way as other ETFs and don't require significant investor education.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thank you so much.

Thomas E. Faust -- Chief Executive Officer

Thank you.


Your next question comes from the line of Robert Lee of KBW. Your line is open.

Robert Lee -- KBW -- Analyst

Thanks. Good morning, everyone. Could you maybe just follow up a little bit on some of the investment priorities? I mean, obviously, Tom you called out continued investment in scaling the separate account business and investing Calvert and ESG. But can you maybe talk a little bit about some other initiatives and I guess maybe particularly you built out London a few years ago kind of your thoughts about on progress there as well as maybe more globally?

Thomas E. Faust -- Chief Executive Officer

Yes. Thanks. So I will just tick off. You hit most of our list of strategic priorities for the year, so building out our specialty solutions for high-net worth investors led by the Custom Beta offerings responsible investing. What you didn't mention, but which I'll just highlight is, floating rate and short-duration strategies, building on our historical base as a market leader in bank loans to encompass a broader range of short ultra-short duration strategies. Some of them connected to Calvert, some not, some primarily are fund vehicles, some offered a separate account. But broadening our portfolio of businesses is relating to short-duration floating-rate type assets.

The fourth priority the one you're asking about specifically is growing our business internationally. We seemed to be in a holding pattern with about 95% of our assets managed for clients in the U.S. and that's despite many years of trying to grow our business outside the United States. You mentioned an effort that we undertook about 3.5 years ago to put in place an equity investment team in London. That team continues to operate there. We are at a point where our lead strategies managed by that team recently gained three-year track records. And in some cases those are quite attractive three-year track records particularly in small-cap global and international equities.

We see an opportunity to gain significant business in 2019. Driven by the strength of that three-year track record, the reputation of the team that precedes their coming to Eaton Vance and also just the fact that small cap is an area of the market where good managers tend to go up with capacity and so there tends to be more demand for, let's call it, new managers. And also there is maybe a broader belief that active managers can add value and small-cap then larger-cap asset classes. So I would point to first, what we hope will be expanding business in small cap there.

Another angle that we're pursuing to growing our international business relates to Calvert and specifically to the integration of Calvert-sourced ESG research into our menu of internationally offered both equity and income strategies, particularly in Europe having a demonstrated integration of responsible investing criteria into your research process is a must have, not a want to have. And having Calvert as part of Eaton Vance and the work we've done over the last couple of years to integrate their research into our investment offerings. And when I say our, I mean, things branded Eaton Vance's management as well as things branded Calvert. We hope will begin to pay dividends in the market in 2019.

Very strong demand in the market for responsibly invested solutions, very strong respect in the market for what Calvert stands for in that market and the capabilities of its research team. The challenge and the opportunity for us are to marry those two things and to bring out a range of strategies that incorporate that research inside Eaton Vance's managed equity and income strategies, particularly focused on the European market.

Robert Lee -- KBW -- Analyst

Maybe the -- thank you. Maybe the kind of corollary or follow-up to that. I mean if you look at it historically the firm has been reasonably inquisitive in looking at whether it was Calvert or Parametric many years ago along the way in acquiring new capabilities. So, when you think of the industry landscape, can you maybe help if it's possible kind of think about it how are you thinking about incremental inorganic opportunities? Are there specific? Whether it is regions or distribution channels or asset classes that you would be most interested in if there was an inorganic opportunity that came along?

Thomas E. Faust -- Chief Executive Officer

Yes. We certainly subscribed to the view that the industry needs to consolidate and it's likely ripe for consolidation. There have been some challenges to that and that the rising equity markets of let's say 2017 -- 2016/2017 covered a lot of sense for companies that while they were experiencing organic declines in their business we're seeing topline growth driven by rising prices.

With the declines in the marketplace last year, particularly the acceleration of those in the fourth quarter I think more companies are aware of the fact that on the active side. And unless you have scale also in the passive side, it's a pretty tough business and that there can be significant advantages by combining to gain market strength and potentially also to realize some cost synergies.

We have not done what we would consider consolidation type acquisitions for the right kind of target we would certainly be interested. They would have to be a cultural complementarity, they would have to be clear potential to save costs, but probably most importantly we would have to have a clear path to understanding that revenues were going to be sustained post transaction. Always in these things the risk is that you lose more in revenues than you save in costs.

But we're looking at this. Laurie and I spent a fair bit of time chasing down different potential opportunities. In most cases, we prove to be too price-sensitive to be the winners. As things come to an auction where it's outside of an auction situation where people are more focused on a supportive owner and supportive investment culture. We tend to do pretty well in those conversations.

Objectives that we have in considering acquisitions I'd say first and foremost adding to the value of our firm. That's number one. That's a function of if we buy something what does that do potentially for our earnings? And what does that do potentially to the multiple that the market applies to those earnings? Recognizing that if we were to merge with a lower growth company, we might get back more in multiple than we gained in terms of earnings accretion.

If you go down a bit say what strategic objectives what we like to perhaps advance by growing inorganically? Certainly, making our business more global would be one objective. There are certain asset classes that perhaps we would be interested in growing. We don't have a fundamental emerging market equity capability within our company at least not of size.

We have been interested in expanding in leveraged credit perhaps into private markets. That probably covers the landscape we're interested in growing the Parametric business. If there are complementary businesses that perhaps we could acquire that fit in with their systematic rules-based approach to investing that would perhaps either add scale or add complementary features or perhaps help us gain new geographies. But we kicked the tires on a fair bit of things and so far haven't come up -- haven't emerged victorious in anything since the Calvert transaction two years ago.

Robert Lee -- KBW -- Analyst

Great, very helpful. Thank you for taking my questions.

Thomas E. Faust -- Chief Executive Officer

Thank you.


Our next question today comes from the line of Mike Carrier of Bank of America. Your line is open.

Mike Carrier -- Bank of America -- Analyst

All right. Thanks, good morning. Just one for me. Just given some of the mixed shift trends that we've seen and then some of the strength that you're seeing in the individual separate accounts, I just wanted to get maybe some color on how we should think about or how you guys are thinking about like the fee rate trends. But then probably -- more importantly the incremental margins in that channel and the business overall. Laurie, I think you mentioned just given like the market dynamics and expense discipline and then some of the investments that try to drive down like improving efficiency over time, so just any color on what you guys are working on or what can be done to get some of the fee rate in the trends in the industry?

Laurie Hylton -- Chief Financial Officer

That's a pretty broad question. I think that we're very mindful as Tom mentioned that when we start entering and continue to scale the separate account business that the margin profile is a little bit different, because it is far less about the variable costs as is about that fixed cost base that you have to deal with because it really is an account-driven business.

So I think we're really being very thoughtful about that business right now, because we do recognize that going forward if we want to scale way beyond the roughly 80,000 separate accounts across the complex that we're currently managing and we certainly have every intent and desire to do so, we're going to have to make some investments to make sure that we can remain as efficient as possible and ensure that our platforms are scalable as possible.

So I would anticipate that we will see incremental investment there. I don't think we have anything that we're quantifying at this point, but we will be making incremental investment. But to that end if we're able to make those investments, we would hope that we would become on an account-by-account basis effectively more we'll be able to leverage the business in a more efficient way.

So we continue to think that both sides of business, our traditional active as well as the direct indexing and other separate account parts of our businesses are equally attractive to us and are certainly capable of generating significant operating leverage, but we need to be really thoughtful as we continue to grow these businesses going forward.

Mike Carrier -- Bank of America -- Analyst

Okay. Thanks a lot.

Eric Senay -- Investor Relations

Okay, very good. I think we are out of time for today. So at this point we want to thank everybody for your participation and we look forward to speaking with you soon.


And this concludes today's conference call. You may now disconnect.

Duration: 63 minutes

Call participants:

Eric Senay -- Investor Relations

Thomas E. Faust -- Chief Executive Officer

Laurie Hylton -- Chief Financial Officer

Gerry O'Hara -- Jefferies -- Analyst

Ari Ghosh -- Credit Suisse -- Analyst

Patrick Davitt -- Autonomous Research -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Robert Lee -- KBW -- Analyst

Mike Carrier -- Bank of America -- Analyst

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