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Eaton Vance Corp (EV) Q2 2019 Earnings Call Transcript

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EV earnings call for the period ending April 30, 2019.

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Eaton Vance Corp (EV)
Q2 2019 Earnings Call
May 21, 2019, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Eaton Vance Corp. Second Fiscal 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) As a reminder, please limit yourself to one question and one follow-up.

Thank you. Mr. Eric Senay, you may begin your conference.

Pierric G. Senay -- Director of Investor Relations

Thank you, and good morning. And welcome to our fiscal 2019 second 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.

And 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 will now turn the call over to Tom.

Thomas E. Faust -- Chairman and Chief Executive Officer

Good morning and thank you for joining us. Earlier today, Eaton Vance reported $0.89 of adjusted earnings per diluted share for the second quarter of fiscal 2019, an increase of 16% from the $0.77 of adjusted earnings per diluted share we reported for the second quarter of fiscal 2018 and up 22% from the $0.73 of adjusted earnings per diluted share we reported for the first quarter of fiscal 2019. Our adjusted earnings per diluted share this quarter included a $0.03 contribution from seed capital investments and a $0.07 contribution from investments in consolidated collateralized loan obligation or CLO entities. By comparison, seed capital and consolidated CLO entity investments reduced adjusted earnings per diluted share by $0.02 in the first quarter of fiscal 2019 and contributed $0.01 to adjusted earnings per diluted share in the second quarter of last year.

We ended the second quarter of fiscal 2019 with a record $469.9 billion of consolidated assets under management, up 6% over the prior quarter, we ended up 7% from 12 months earlier. In the second quarter of fiscal 2019 we had $4.6 billion of consolidated net inflows or $2.6 billion excluding exposure management. This represents our 19th consecutive quarter of positive net flows. Appreciation in the market value of managed assets contributed $20.7 billion to growth in consolidated assets under management this quarter reflecting continued recovery from the sell-off in stocks and other risk assets in late 2018. Our second quarter net flows represent 4% annualized internal growth in consolidated managed assets or 3% excluding exposure management mandates.

As you can see on Slide 11, we reported 1% annualized internal growth in consolidated management fees for the second quarter. To calculate this measure of our internal growth, we subtract management fees attributable to consolidated outflows for the period from management fees attributable to consolidated inflows and then measure the difference as a percentage of beginning of period consolidated management fee revenue, taking into account the fee rate applicable to each dollar in and out.

The quarter's 1% annualized internal growth in management fee revenue represents a sharp bounce back from the minus 4% result for the prior quarter. Among our investment mandate reporting categories, changes in consolidated assets under management during the second quarter range from growth of 9% for portfolio implementation, 8% for equity and 5% for fixed income and exposure management to declines of 6% for alternatives and 3% for floating rate bank loans.

Growth in our portfolio implementation reporting category was driven by higher managed assets in Parametric Custom Core equity separate accounts. Custom core net inflows of $1.7 billion this quarter were partially offset by approximately $0.5 billion of net outflows from centralized portfolio management mandates, primarily related to the termination of a single turnkey asset management program during the quarter. The quarter's $480 million of equity net inflows reflect positive net flows in the Parametric defensive equity and covered call writing strategies, EVM large cap growth and Calvert emerging market and responsible index strategies and net outflows from Parametric emerging markets and the Atlanta Capital SMID-Cap strategy, which is close to new investors. Appreciation in asset values contributed $8.2 billion to growth in the equity managed assets for the quarter.

Our fixed income quarterly net inflows of $2.9 billion benefited from continuing investor demand for tax exempt municipal bond strategies in a range of taxable bond strategies that we offer, including US corporate core bond short and ultra-short duration and emerging market debt strategies. Among our fixed income mutual funds, the quarter's flow leaders were Eaton Vance's short duration government income fund with nearly $600 million of net inflows. Eaton Vance's municipal -- national municipal income fund with over $200 million of net inflows and Calvert bond fund and Eaton Vance core plus bond fund with over $300 million of combined net inflows. Net inflows of more than $150 million into our emerging market debt strategies pushed managed assets past the $1 billion mark in these strategies as of April 30, 2019.

Measured by assets under management, our largest taxable fixed income business is high-yield bonds, with just over $11 billion in managed assets. Last week we announced the two veterans of the EVM High Yield Group, Steve Concannon and Jeff Mueller, will assume leadership of the team at year-end, replacing Mike Weilheimer. Mike retires after a very distinguished 29-year career with EVM, including 24 years as Director of High Yield Investments. While Mike's leadership will be missed, we are fortunate to have high yield investors of Steve's and Jeff's caliber to lead the group going forward.

Returning to our second quarter fixed income net flows, they included $2.1 billion into municipal and corporate bond laddered individual separate accounts. When combined with the $1.7 billion of net inflows into Parametric Custom Core equity individual separate accounts, inflows into our industry-leading suite of Custom Beta strategies offered as individual separately managed accounts totaled $3.8 billion in the second quarter, which equates to an annualized internal growth in managed assets of 17%.

As shown on Slide 12 of our presentation, our Custom Beta strategies offered as individual separate accounts now totaled $99.1 billion of managed assets reflecting continued strong customer demand for these high value offerings that combine the benefits of passive investing with the ability to customize portfolios to meet individual preferences and needs. We continue to commit significant resources to expanding our leadership position in this growing market. In both our alternatives and floating rate Income reporting categories, we saw net outflows in the second quarter, though it significantly reduced the levels versus the prior quarter.

Net outflows in the alternative category declined to approximately $475 million from $2.2 billion in the prior quarter with outflows driven primarily by withdrawals from our global macro absolute return mutual fund and institutional sub-advisory mandates. Floating rate net -- floating rate income now -- net outflows of $1.6 billion this quarter were considerably improved from the $2.9 billion of net outflows reported for the prior quarter, reflecting better flow results across both retail and institutional mandates. We continue to believe that floating rate bank loans offer an attractive risk return proposition in the current environment with high current yields, favorable credit market conditions and little or no exposure to interest rate risk.

In exposure management, we returned to positive net flows this quarter, with changes in existing client positions and the net amount of assets managed for clients gained or lost in the quarter, each contributing to the positive flow results.

Looking at the different categories of investment vehicles we offer, our industry leading position in individual separate accounts, continue to be a primary driver of growth in the second quarter. The $3.7 billion of net inflows in the individual separate accounts we manage, represent a 12% annualized organic growth rate. A key strategic objective for Eaton Vance over the past several years has been to expand our position in responsible investing. At the center of our ESG efforts is our Calvert affiliate, which this quarter experienced the strongest growth since we acquired Calvert just over two years ago.

Calvert's investment strategies including those sub-advised by other EV affiliates realized $860 million of net inflows in the second quarter, which equates to annualized internal growth in managed assets of 22%. As of April 30th, Calvert's assets under management totaled $17.1 billion , representing a $2.5 billion increase since the beginning of the fiscal year and a $5.2 billion or 44% increase since we acquired Calvert 28 months ago.

The success of Calvert has been driven by strong investment performance as evidenced by the number of four and five star rated funds in the Calvert fund family and the leading reputation of Calvert within responsible investing. In early April, Calvert President and CEO, John Streur, was the sole industry representative to testify before the Senate Committee and Banking, Housing and Urban Affairs on the subject of the application of environmental social and governance principles in investing and the role of asset managers, proxy advisors and other intermediaries. John Senate testimony provided a forum for him to address how ESG investment strategies have evolved in recent years and to discuss public policy and regulatory matters relevant to the investment industry and investors.

Last week, we announced the hiring of John K.S. Wilson as Director of Corporate Engagement to lead Calvert's expanding corporate engagement activities. In this role, John will manage a growing team of engagement specialists, who monitor issuers for engagement opportunities, develop a business case for change and participate in industry coalitions. As other investment manager struggle to gain credibility in responsible investing, Calvert continues to build strength on strength.

That concludes my prepared remarks. I'll now turn the call over to Laurie.

Laurie Greenwald Hylton -- Vice President and Chief Financial Officer

Thank you, and good morning. As Tom mentioned, we're reporting adjusted earnings per diluted share of $0.89 for the second quarter of fiscal 2019, an increase of 16% from $0.77 of adjusted earnings per diluted share in the second quarter of fiscal 2018. And an increase of 22% from the $0.73 of adjusted earnings per diluted share reported in the first quarter of fiscal 2019. As you can see an attachment to our press release, GAAP earnings equaled adjusted earnings per diluted share in the second quarter of fiscal 2019. GAAP earnings exceeded adjusted earnings by $0.01 per diluted share in the second quarter of fiscal 2018 and by $0.02 per diluted share in the first quarter of fiscal 2019, reflecting the reversal of net excess tax benefits related to stock-based awards of $1.9 million and $2.9 million, respectively.

Operating income decreased by 4% year-over-year, primarily driven by higher compensation costs related to increases in headcount and approximately $1.6 million of one-time costs associated with employee terminations in the second quarter of fiscal 2019. Operating income was up 5% sequentially, primarily driven by an increase in management fee revenue, which is up 1% even with three fewer days in the second quarter.

Performance based fees were positive $1.8 million in the second quarter of fiscal 2019 versus a negative $0.5 million in the second quarter of fiscal 2018 and a negative $0.3 million in the first quarter of fiscal 2019. Our operating margin was 30.9% in the second quarter of fiscal 2019%, 32.2% in the second quarter of fiscal 2018 and 29.8% in the first quarter of fiscal 2019. Ending consolidated managed assets at April 30th reached a new record high of $469.9 billion , that's an increase of 7% year-over-year and 6%, sequentially, driven by strong market returns and net flows.

Average managed assets in the second quarter of fiscal 2019 were up 4% from the same period last year, driving an increase in management fee revenue of 1%. Revenue growth trailed growth in average managed assets year-over-year primarily due to a decline in our average annualized management fee rate from 32.8 basis points in the second quarter of fiscal 2018 to 31.8 basis points in the second quarter of fiscal 2019. Average managed assets were up 4% sequentially, driving an increase in management fee revenue of 2%. Revenue growth trailed growth in average managed assets sequentially primarily due to the impact of three fewer fee days in the second quarter and a modest decline in our average annualized management fee rate from 32 basis points in the first quarter of fiscal 2019 to 31.8 basis points in the second. The decline in our average annualized management fee rate over the comparative periods was driven primarily by shifts in business mix.

In the second quarter of fiscal 2019, our annualized internal growth in management fee revenue of 1% trailed annualized internal growth in managed assets of 4%, primarily due to the mix of higher fee and lower fee strategies within our inflows and outflows during the quarter. This compares to 6% annualized internal growth in management fee revenue on 4% annualized internal growth in managed assets in the second quarter of fiscal 2018 and shows a sharp improvement from the negative 4% annualized internal growth in management fee revenue on 1% annualized internal growth in managed assets in the first quarter of fiscal 2019.

Turning to expenses. Compensation increased by 4% from the second quarter of fiscal 2018, primarily driven by higher salaries and benefits associated with increases in headcount, higher stock-based compensation and the impact of certain one-time costs associated with employee terminations, partially offset by lower sales based incentive compensation and lower operating income-based bonus accruals.

As previously mentioned, compensation expense in the second quarter of fiscal 2019 included approximately $1.6 million of costs associated with employee termination. Sequentially, compensation expense slightly decreased, reflecting lower salaries and stock-based compensation, driven by fewer payroll days in the second fiscal quarter and lower sales-based incentive compensation, offset by higher performance and operating income-based bonus accruals, and the impact of the employee termination costs recognized during the second quarter.

Non-compensation distribution related costs, including distribution and service fee expenses and the amortization of deferred sales commissions decreased 5% from the same quarter a year ago and 2%, sequentially, primarily reflecting lower Class C distribution and service fee expenses, driven by a decrease in average managed assets of Class C mutual fund shares. This decrease was partially offset by higher service fee expense and commission amortization for private funds, driven by higher average managed assets in private fund strategies.

Fund related expenses increased 6% year-over-year and 3%, sequentially, reflecting higher average managed assets and sub-advised funds. Other operating expenses increased 3% from the second quarter of fiscal 2018 and were up 1% from the first quarter of fiscal 2019. The increased both year-over-year and sequentially primarily reflects higher information technology spending, attributable mainly to expenditures associated with the consolidation of our trading platforms, enhancements to Calvert's research system and ongoing system maintenance costs, as well as higher corporate consulting costs related to new product launches. These increases were partially offset by a decrease in amortization expense related to certain intangible assets that were fully amortized during the first quarter of fiscal 2019. We continue to focus on overall expense management and identifying ways to gain operational leverage.

We also continue to invest in our business through our seed capital program. Net gains and other investment income on seed capital investments contributed $0.03 to earnings per diluted share in the second quarter of fiscal 2019, a $0.01 to earnings per diluted share in the second quarter of fiscal 2018 and were negligible in the first quarter of fiscal 2019. 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 sponsored strategies, 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. Although, we had a majority of our seed capital portfolio, gains on the unhedged portion drove the positive contribution to earnings this quarter.

Non-operating income expense included net income from consolidated CLO entities of $11 million and $0.8 million in the second quarters of fiscal 2019 and fiscal 2018, respectively, and net expenses of $2.9 million in the first quarter of fiscal 2018. On an earnings per diluted share basis, net income from consolidated CLOs contributed $0.07 in the current quarter, were negligible in the second quarter of last year and reduced earnings by $0.02 in our first fiscal quarter of 2019. The year-over-year and sequential increases in income contribution from consolidated CLO entities, primarily relates to an increase in the fair market value of the company's beneficial interest in these entities resulting from the rebound in the loan market during the second quarter of fiscal 2019. Our strategy for CLO equity remains to commit prudent amounts of EV capital to support growth of this business, taking advantage of new opportunities to recycle equity in existing CLOs to help fund new CLOs in the future.

Turning to taxes. Our effective tax rate was 25.1% for the second quarter of fiscal 2019, 26.7% in the second quarter of fiscal 2018 and 23.4% in the first quarter of fiscal 2019. The company's income tax provision for the second and first quarters of fiscal 2019 include $0.7 million and $0.6 million, respectively, 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 $0.3 million in the second quarter of fiscal 2019, $1.9 million in the second quarter of fiscal 2018 and $2.9 million in the first quarter of fiscal 2019.

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 and the non-recurring impact of the tax law changes. On this basis, our adjusted effective tax rate was 25.3% in the second quarter of fiscal 2019, 28.2% in the second quarter of fiscal 2018 and 25.9% in the first quarter of fiscal 2019. On the same adjusted basis, we estimate that our quarterly effective tax rate for the balance of fiscal 2019, for the fiscal year as a whole will range between 25.9% and 26.4%.

During the second quarter of fiscal 2019 we used $39.3 million of corporate cash to pay the $0.35 per share quarterly dividend declared at the end of our previous quarter and repurchased 1.7 million shares of non-voting common stock for approximately $68.5 million. Our weighted average diluted shares outstanding were 114.2 million in the second quarter of fiscal 2019, down 8% year-over-year, reflecting share repurchases in excess of new shares issued upon it 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.

Sequentially, weighted average diluted shares outstanding were down 1%. We finished our second fiscal quarter holding $728.3 million of cash, cash equivalents and short-term debt securities, and approximately $336.4 million in seed capital investments. We continue to place high priority and using the company's cash flow to benefit shareholders. Fiscal discipline around discretionary spending remains top of mind in fiscal 2019. Based on our strong liquidity and overall financial condition, we believe we're well-positioned to continue to invest in our business to support long-term growth, while returning 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 comes from the line of Dan Fannon from Jefferies. Your line is open.

Gerry O'Hara -- Jefferies -- Analyst

Great. Thanks. It's actually Gerry O'Hara sitting in for Dan this morning. Tom, you mentioned that Calvert experience from its strongest growth quarters since acquisition, perhaps, you could elaborate a little bit on what some of the drivers beyond just performance but, perhaps, new distribution channels that have been driving this? Or perhaps some sight lines on future distribution opportunities, new clients, channels, segments, et cetera, that would be helpful?

Thomas E. Faust -- Chairman and Chief Executive Officer

Yeah. Thanks, Gerry. So a couple of things I mentioned. One is, we have quite strong performance across the Board in Calvert strategies. The particular strategies that are leading the growth today include our -- on the equity side there is an emerging market equity fund that's one of our larger funds. The single largest Calvert fund is called Calvert Equity Fund, which is managed by our affiliate Atlanta Capital. And this had quite exceptionally strong performance over the last year and good performance over the long time. And that's -- that has turned around the full picture for that fund quite meaningfully. Calvert also sponsors a range of index-based equity strategies, which have been in positive flows and also has a range of fixed income strategies, again also in positive flows. So, really it's across the Board strength in the Calvert lineup of mutual funds.

In terms of product structures, Calvert, when we acquired them in -- at the end of 2016 was essentially a mutual fund company, with limited institutional business, limited business and individual separate accounts, no business to speak of outside the US and no ETF presence. We are certainly looking to expand Calvert's positioning in the marketplace beyond that historical base in mutual funds, looking for ways to grow in institutional investing, individual separate accounts and also potentially also in an ETF structure.

Beyond the performance, we think another contributing factor to Calvert's success has been their recognition as one of the true thought leaders and responsible investing. I highlighted John Streur's testimony before the Senate, some of the other things that we do that provide us with strong visibility as Calvert's sponsorship of the Barron's 100 list of the most responsibly run companies in corporate America. But I would say, in a time when there's been a lot of attention on responsible investing, driven primarily by underlying investor demand, but with significant interest in terms of major intermediaries, most of whom have some kind of initiative around responsible investing, what sets Calvert apart and has allowed Calvert to succeed in the time when others have in many cases struggle to really gain traction here. One is the performance I mentioned. Two would be bringing the Eaton Vance distribution to bear on responsible investing.

And then I'd say probably most important is just been the credibility of the Calvert brand. There is a heightened sensitivity what -- sometimes referred to as green washing, that is firms that talk about responsible investing, but can't really back it up in terms of actions and capabilities. Because of Calvert's leadership in this space that goes back into the 1980s, they have an unusual credibility that combined with good investment performance and good distribution strength has allowed us to take a leading role in translating broad market interest and responsible investing into growth in managed assets for that part of our business.

Gerry O'Hara -- Jefferies -- Analyst

Great, that's helpful color. And then perhaps one follow up. Laurie, in your prepared remarks, you mentioned a little bit of operating expense pressure or lift, I suppose related to new product offerings earliest I guess consulting fees related to that. Could you perhaps either time yourself, maybe elaborate or add a little color as to what new product offerings we might expect in the pipeline?

Thomas E. Faust -- Chairman and Chief Executive Officer

I would say that there's maybe nothing in particular that we want to highlight at this point, but there's an ongoing effort across a range of strategies, US, international funds and separate accounts. But no one thing that we would point to as being a particular focus of things we want to highlight today.

Gerry O'Hara -- Jefferies -- Analyst

Okay, fair enough. Thanks for taking our questions today.


Your next question comes from the line of Ken Worthington from JPMorgan. Your line is open.

Ken Worthington -- JPMorgan -- Analyst

Hi, good morning. Maybe just to try to follow up on that. So Eaton Vance is a legacy of innovation in the industry, I think is less so with an SEC that seems more willing to allow for innovation. Are there areas where you see opportunity to leverage maybe a more asset friendly SEC?

Thomas E. Faust -- Chairman and Chief Executive Officer

Yes, Ken, well, the most -- maybe the most obvious is our Clearhedge method approach to less transparent active ETFs. I'm sure probably most people on the call are aware that a competitive approach that are preceding got approval I think just yesterday on their approach to a less transparent active ETF. Where we want to be part of that conversation? I think as people are aware, we were a pioneer in introducing NextShares exchange-traded managed funds, which were approved initially back in 2014 and then launched in 2016, I believe. The market seems to have moved in the direction of less transparent active ETFs as opposed to exchange-traded managed bonds for some distribution related reasons that we've talked about.

But we are certainly of the view that the introduction of less transparent active ETFs, could be a quite meaningful development for the industry. Our position in that is we're a relatively recent filant, we filed our exemptive application there back in February, different from some of the other competitors in that space, not only for Citi and, but some of the other ones where approval maybe close, what separates us, we believe is two things. One, we think that the method that we are proposing, which we're calling Clearhedge offers the most assured trading -- most assured high trading performance that is trading of shares close to underlying net asset values. That's number one.

And number two is the application across all asset classes. So, that's really our focus in terms of innovation that requires something new from the SEC. They've shown up given preceding the green light which we think is also likely to lead to other approvals in this space and we want to be a part of that. Other things we're doing, don't require the cooperation necessarily of the SEC. We continue to build out and are quite proud of our position as the leader in individual separate accounts, which is a big growing industry for us and a big growth area for the industry that is playing into investors' desires for more a customized, personalized approach to investing. And we deliver that both through our custom core equities' platform offered by our Parametric subsidiary, but also our lineup of muni and corporate ladders offered through our EVM subsidiary.

Ken Worthington -- JPMorgan -- Analyst

Right. Great, great, thank you. And for a follow-up, just the equity market experienced much volatility in the December quarter, we've seen a nice rebound this year. Can you help us understand to what extent if any of these market moves have seem to influence interest or concern in Parametric's various businesses. Maybe where were the ebbs and flows and any lessons learned there from the sell-off for the rebound that you'd be willing to share?

Thomas E. Faust -- Chairman and Chief Executive Officer

Sure. So the biggest piece of Calvert -- sorry, Parametic's business, our broad market exposure vehicles. So, the custom core equity, give us a benchmark, and we will perform similar to that benchmark and would expect to outperform on an after tax basis, that's the primary value proposition. Also they have large business and what we call exposure management which is derivatives based securitization approaches. So, instead of having 4% residual cash in your portfolio, you can put that to work in the market using primarily futures. Neither of those, I would say is particularly sensitive to market levels in terms of flows, because we get paid generally in terms of assets under management when the market goes up or market goes down, we are more or less in revenues.

But there's no out of market sensitivity to that business in terms of flows. One thing I would highlight within Parametric's business that is perhaps sensitive to market levels is their options business. They have a decent size business in covered call writing program where selling covered costs can be -- we think a nice additive strategy in down markets in flat markets and modestly up markets. But in a strongly rising market often investors get what sometimes we refer to as call writing fatigue from the fact that when stocks are going up, the nature of writing covered calls is that you cap the upside and so you realize less in return then you would have had you not written those call. So small part of their business but it is an element of their business that has some bit of market sensitivity that we see.

Ken Worthington -- JPMorgan -- Analyst

Great. Thank you very much.

Thomas E. Faust -- Chairman and Chief Executive Officer

Thank you.


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

Brian Bedell -- Deutsche Bank -- Analyst

Great, thanks, good morning folks. I maybe just go back on the non-transparent ETF through or best transparent ETF offerings. Tom, I guess your -- just your view on the industry for these products in general? Obviously, you have your application, there is a couple other ones. Do you feel it is better for the industry to have multiple different structures in place or would you think it would -- this could be really handled by the Clearhedge and the Precidian structure.

Thomas E. Faust -- Chairman and Chief Executive Officer

I think the way that's I would expect this to play out that there will be multiple different structures approved. At the end of the day, I don't think all of those structures necessarily will find a broad audience. I think the market will naturally identify the one or two or whatever that seem to work the best and we'll probably focus on those, I don't -- it's just a gas, but that would be my expectation. The, as I mentioned, we think Clearhedge offers the -- of the things that are in the public domain that is for which there have been SEC filings. We certainly have the greatest confidence in the ability of ETF using the Clearhedge method. To trade the best that is the tightest NAV and for that advantage to carry over to asset classes outside of US equities, which is where the Precidian and I believe all of the other ones are focused at least initially.

So I think that has the potential to be a major development. I would caution people that it may not happen overnight, there's still a number of regulatory steps that are required. I'll just remind people that when we -- we got our approval to -- we got exemptive application approval and our 19b-4 application approval for NextShares in early November of 2014 and it was, I think it was about 16 months 15 or 16 months later, that we launched products. So I wouldn't expect this timeframe to be much different. It could be, but we don't expect that. So there is a -- there's an additional regulatory process and this will not happen overnight. I also think that while this could be up a quite significant development in the whole active versus passive debate because I do think that for many applications ETFs offer clear advantages in terms of convenience and tax efficiency and performance over traditional mutual fund structure.

I think it will take a little bit of time there will be some distribution challenges for these strategies, not in terms of the mechanics of distribution, but more in terms of the economics of distribution that will have to be worked out with key intermediaries. So we think this is a major development. We want to be a part of this over time. We would expect active ETFs to be a meaningful part of the actively managed business. There is a reason that most managers of traditional active strategies have heretofore been reluctant to offer their strategies as ETFs because you can't really maintain a strategy as proprietary if you're disclosing your holdings every day.

So with yesterday's approval of the Precidian model won't happen tomorrow, but it certainly offers the prospect in a traditional ETF structure as opposed to exchange-traded managed fund is what I mean by that. But then in an ETF structure having the ability to offer a proprietary active strategy in an ETF form we view as a quite significant market development that we want to be very much a part of.

Brian Bedell -- Deutsche Bank -- Analyst

Great, great perspective. Maybe just switching over to back to the individual separate accounts and really strong organic growth that is 12% for the category. Maybe if you could just comment on the two or three major drivers of that? I would suspect that's bond letters and portfolio implementation, but maybe just also comment on, to what degree CLOs in floating rate individual separate account products are contributing? Is that coming mostly through the broker dealer channel ?

Thomas E. Faust -- Chairman and Chief Executive Officer

No. So that number I reported this for what we call individual separate accounts. And so there are no floating-rate loans in there, no CLOs in there. That comment -- that category is very much nominated by what we call custom beta. So that's the Parametric Custom Core and the muni and corporate ladders. And the drivers of that business, I would say, remains the same, which is the -- maybe starting on the equity side, the broad embrace of passive investing generally that has led to the growth of index ETFs and index mutual funds. That's number one. We're playing on that trend. And then second, really driving home the advantages of owning equity securities through a separate account as opposed to a fund and those advantages are generally in two categories. And one is the ability to customize portfolios, so that you can, for example, take into consideration your own individual responsible investments criteria what it is you really care about that might be different than what is reflected in a particular fund.

And the second to the extent you have either concentrations in other parts of your portfolio and in individual companies or individual sectors, you can index around those on a customized basis using a separate account. The other advantages of separate account, which for many people is the bigger one is the better tax treatment that is, if you own securities in a separate account when those securities, some of those inevitably will go down in price, you can sell those, take a loss and use that loss currently to offset gains in other parts of your portfolio if you own them as separate account. Whereas if you own those same securities in the fund that loss is in fact trapped inside the fund vehicle and not available for use currently.

So that's -- those are the primary drivers on the equity side.

On the fixed income side, this is a rules based passive approach to investing like benchmark based, equity investment that offers the benefits of low cost. Our primary driver on for this part of our business has been the continuing migration in the broker dealer channel of assets from traditional brokerage accounts to fee based accounts. Here in particular, we've been helping to drive and benefiting from a movement of individual advisor overseen bond ladders to the notion of using a third party manager that has expertise and focus on ladder construction and ladder oversight, multi-year and now probably got approaching a decade long trend, assets moving away from.

But I think you could fairly say is lightly overseen bond ladders to professionally managed bond ladders. And we are the market leader in that business. And I would say in terms of these two pieces, the Parametric Custom Core and the muni and corporate bond ladders, we've been increasingly looking for opportunities to cross-sell those and to offer those in conjunction with each other. Because they're really quite similar strategies in their underlying philosophy in investment construction.

Brian Bedell -- Deutsche Bank -- Analyst

Great overview. Thank you very much.


Your next question comes from the line of Glenn Schorr from Evercore. Your line is open.

Glenn Schorr -- Evercore -- Analyst

Hey, thanks very much. A follow-up on the custom beta conversation. You had great growth innovator in the product, but you still I think are primarily a single stock selection process and now I think some cheaper ETF all ETF versions exists. I'm curious if that's in the progress -- in the process, is that a version of the product that you can manufacture or to manufacture, is it a competitive threat? Can you offer both. I'm just curious on your thoughts on that ?

Thomas E. Faust -- Chairman and Chief Executive Officer

Yeah. If I'm following your right, the strategies that we offer today this is Parametric Custom Core own underlying individual securities in almost OK. So in some asset classes that may make sense to own ETFs as a proxy for individual securities. You mentioned that there are potential competitive approaches that would own ETFs as an alternative to underlying securities, which is certainly true. There are a couple of disadvantages of that approach. The first and maybe the most obvious is that to the extent those ETFs have underlying fees, those fees get passed through and so it's inherently more expensive to own ETFs than it is to own the underlying securities directly.

So that's one difference that would normally argue in favor of individual securities. Second one is the cross-sectional volatility and performance that allows you to harvest tax losses will always be greater at the individual security level than will be in pools of securities like exist inside of an ETF. So I'll else being equal, you'll have both lower expenses for a direct security separate account as opposed to ETF separate account and you also have better tax loss harvesting opportunities by only individual securities. The advantages of using ETFs do exist however. One is the potential to offer maybe similar strategies with lower minimums were you own fewer individual securities, it may seem more convenient to have only 15 or 20 ETFs representative in your portfolio than a couple of hundred stocks. So it's simpler and that may make it easier to operate at lower account minimums. The bigger advantage is probably and just in terms of the range of asset classes that can be represented by ETFs versus equities, which can be interesting because in non-equity asset classes, particularly ones that have a meaningful amount of volatility, so things like high-yield bonds, you may have much better opportunity to own those in a tax managed portfolio through ETFs than the underlying securities.

But in terms of our capabilities at Parametric, we do offer ETF based portfolios and have done a fair bit of research on that. It's a quite small part of our business currently, but it is something that we have the capability to do and can provide upon customer demand. But for most people really what they want is the underlying securities because you get both the lower cost and the more the higher level and in fact in this, in terms of tax loss harvesting potential.

Glenn Schorr -- Evercore -- Analyst

Awesome. I appreciate that. One quick follow-up on the floating rate discussion. You still have $40 billion great performance, great strategy. But definitely comes and goes sometimes with market fears and right now fears are -- rates are going to be low and curves going to be flat forever. So you mentioned all the different areas you're getting inflows in fixed income. Is there a specific process in place that tries to get in front of some of the floating rate outflows and move them into some of your other fixed income products like how you do that in the channel? Because clearly fixed income is working. I just don't know if there is an actual cross-sell process that's happening. Thank you.

Thomas E. Faust -- Chairman and Chief Executive Officer

We certainly try the way advisors use funds is no one really views themselves as the captive to Eaton Vance, if someone is selling out of an Eaton Vance loan fund then often not directly actually looking to replace that with another Eaton Vance strategy would be nice if that's how the world work. But that's not really the way the business works today. We certainly feature a number of low duration, fixed income strategies both this quarter and the preceding quarter. Our quarter ending January, our largest selling mutual fund in terms of net flows was the Eaton Vance short duration Government Income Fund, which in some ways is similar to bank loans and that is short duration, low exposure to interest rate risk, but quite different in that the credit profile of these are government-backed mortgages that we're investing in primarily. So it's, I would say that over the last -- it's probably now five or six years we have sponsored and offered a suite of short duration. So we have short duration government income, short duration high income, short duration strategic income, short duration inflation-protected income. I think it is those were all introduced as complementary strategies to bank loans, recognizing that if people are investing with Eaton Vance in floating rate assets and that there may not always be times when their credit outlook is such that they want to take investment risk like it's reflected in the below-investment grade bank loans that we offer.

The idea with having that suite of strategies is to give our customers in the uses for bank loans, also the ability to invest in other strategies that have a similar duration profile that is low duration, but don't have the same credit risk exposure. I think it works reasonably well in the fourth quarter or in the, I'll say, the end of calendar 2018, when money was pouring out of our bank loan funds which it was over the last four, five weeks of the year. Money was also pouring into our short duration government income strategy, largely for the same reason unfortunately during that time period. The net of the two we were losing more in bank loans than we were gaining in short duration government income and that carried over into the new year as well.

But I think it makes sense for us to do what you suggest, which is to offer complementary strategies. So that when people are redeeming out of bank loans, because for whatever reason it's out of sync with what they're trying to do with their clients portfolios, we offer a complementary or replacement strategy. So I'll pass that on -- that suggestion onto our sales and marketing people.

Glenn Schorr -- Evercore -- Analyst

Thank you.


(Operator Instructions) Your next question comes from the line of Michael Carrier from Bank of America. Your line is open.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Good morning, thanks for taking the question. Two cleanups Laurie. Given some of the termination costs you mentioned in comp, can you provide an outlook on comp for the ratio ahead. And then second, just given some of the spending in support of the business growth in the healthy flows that you're seeing, how are you thinking about maybe the margin going forward?

Laurie Greenwald Hylton -- Vice President and Chief Financial Officer

Yes. From a comp perspective, I don't think we see any structural changes in our comp structure going forward for the remainder of the fiscal year. I think that we're kind of in that. I think first quarter was a little bit rough obviously because as a percentage of revenue in a period where revenue was down due to market. It was a little bit higher than we would have anticipated, it was closer to 37.9%. This quarter, we're close to 37.3%, I would anticipate we're going to be closer to that range and potentially trending down a little bit. As we move forward, we've got obvious levers that we can pull in the course of the year and we refine our expectations about our operating income based bonus accruals as we move into the third and fourth quarter. But again, I would not anticipate seeing anything really structurally change in terms of our compensation and the way we think about it for fiscal '19.

In terms of -- and the second question, margins. Yes. Again, 2019 for us because we're incorporating November and December into our first quarter. We obviously took a little bit of a hit in the first quarter and we're going to be digging our way out. We did see some improvement this quarter. We'd like to think that there's leverage in our business and we're hoping we'll be able to continue to see a little bit of an uptick as we move, but again, I don't see anything structurally changing in either our compensation, or discretionary spending profile for the remainder of the year. So I wouldn't look for any real significant changes.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Okay, thanks a lot.


There are no further question at this time. Eric, I will turn the call back over to yourself.

Pierric G. Senay -- Director of Investor Relations

Thank you very much and we look forward to speaking with you next quarter. Thank you, everybody.


This concludes today's conference call. You may now disconnect.

Duration: 52 minutes

Call participants:

Pierric G. Senay -- Director of Investor Relations

Thomas E. Faust -- Chairman and Chief Executive Officer

Laurie Greenwald Hylton -- Vice President and Chief Financial Officer

Gerry O'Hara -- Jefferies -- Analyst

Ken Worthington -- JPMorgan -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Glenn Schorr -- Evercore -- Analyst

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

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