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Eaton Vance Corp (NYSE:EV)
Q3 2019 Earnings Call
Aug 27, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Eaton Vance Corp. Third Fiscal Quarter Earnings Conference Call. 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]

Thank you. Eric Senay, Treasurer and Director of Investor Relations, you may begin your conference.

Eric Senay -- Vice President, Treasurer

Thank you, Julianne. And good morning and welcome to our fiscal 2019 third quarter earnings call and webcast. With me today, 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, eatonvance.com under the heading Investor Relations. I will remind you that today's presentation contains forward-looking statements about our business and financial results.

The actual results may differ materially from those projected due to risks and uncertainties in our 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 of the Board, President, Chief Executive Officer

Good morning, and thank you for joining us. Earlier today, we reported $0.90 of adjusted earnings per diluted share for the third quarter of fiscal 2019, an increase of 10% from $0.82 in the third quarter of fiscal 2018 and up 1% from $0.89 in the second quarter of fiscal 2019.

Our adjusted earnings per diluted share this quarter include $0.04 of combined contribution from seed capital and consolidated CLO entity investments. By comparison, seed capital and consolidated CLO entity investments contributed a combined $0.10 to adjusted earnings per diluted share in the second quarter of fiscal 2019 and had negligible impact in the third quarter of last year. We ended the third quarter of fiscal 2019 with a record $482.8 billion of consolidated assets under management, up 3% over the prior quarter end, up 7% from 12 months earlier, and up 10% for the fiscal year-to-date.

By mandate reporting category, changes in consolidated assets under management versus the prior quarter end ranged from growth of 5% for fixed income, 4% for exposure management, 3% for portfolio implementation, and 2% for equities to declines of 4% for alternatives and floating rate bank loans. In the third quarter of fiscal 2019, we had $8 billion of consolidated net inflows or $5.3 billion excluding exposure management mandates, which have lower average fee rates and more variable flows than our other reporting categories.

This represents our 20th consecutive quarter of positive net flows. For the first nine months of fiscal 2019, we had $14.1 billion of consolidated net inflows or $10.1 billion excluding exposure management. Barring unforeseen fourth quarter reversals, we are poised for fiscal 2019 to become our 24th consecutive year of positive net flows. The consistency of our organic growth over the long term speaks to the diversity of our leading investment strategies, the strength of our distribution organization, the performance excellence our investment teams have delivered, and the compelling value proposition offered by the distinctive wealth strategies and services we provide.

Our third quarter net flows represent 7% internal growth in consolidated managed assets on an annualized basis or 5% excluding exposure management. Annualized internal growth in consolidated management fee revenue was 2% in the third quarter, which compares to 5% in the third quarter of last year and 1% in the prior quarter. To calculate this measure of 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 percent of beginning of period consolidated management fee revenue, taking into account the free rate applicable to each dollar in and out. This quarter's $1.6 billion of equity net inflows were led by $1.2 billion into parametric volatility risk management mandates, which include defensive equity, covered call writing, dynamic hedged equity and other strategies incorporating equity options.

Calvert Emerging Markets, large cap growth and responsible index strategies, EVM large cap growth and Atlanta Capital Large Cap Core and Growth Strategies also contributed to the quarter's positive equity flows, offsetting net outflows from parametric emerging markets and the Atlanta capital's SMID-Cap and small cap strategies, which are closed to new investors. Across a broad range of investment categories, active equity strategies managed by EVM, Calvert and Atlanta Capital have delivered strong return versus benchmarks and peers over recent periods.

As of July 31st, actively managed mutual funds as iShares total returns ranked in the top quintile of the Morningstar category over each of the year-to-date, one year and three year periods included the Eaton Vance large cap value, balanced tax managed equity allocation, global income builder and Atlanta Capital focused growth funds, as well as the Calvert Equity mid-cap, small cap, international equity and balanced funds.

In fixed income, approximately half of the $3.4 billion of net inflows in the third quarter of fiscal 2019 were attributable to laddered corporate and municipal bonds, separate accounts, which had $1.7 billion of net flows. Among our taxable fixed income funds, the quarter's flow leaders included Eaton Vance short-duration government income fund, with more than $400 million of net inflows. Core Plus Bond with $200 million of net inflows and emerging markets local income with nearly $200 million of combined net inflows into the US mutual fund and offshore versions of the strategy.

Having recently surpassed $1 billion in net assets, our top performing emerging markets local income strategy is an increasing focus of our institutional sales efforts, particularly in offshore markets. Across our family of municipal income mutual funds, net flows totaled just over $500 million, led by the Eaton Vance national municipal income, short-duration muni opportunities, muni opportunities and high yield muni income funds.

As of July 31st, we offered 24 municipal income funds with one or more share classes currently rated four or five stars by Morningstar, including 11 five star rated municipal income funds. Our floating rate bank loan strategies had net outflows of $1.2 billion in the third quarter, improving from $1.6 billion of net outflows in the second quarter, and $2.9 billion of net outflows in the first quarter of fiscal 2019.

Third quarter net outflows reflect approximately $800 million of net redemptions from US retail bank loan funds, $500 million of institutional separate account withdrawals, and a $200 million reduction in bank loan fund leverage amounts, offset in part by $400 million of new collateralized loan obligation assets under management, added during the quarter. Although positioning floating rate investments for sale success during periods of falling interest rates can be a challenge, we continue to be pleased with the resilience of our bank loan business, particularly in the US Retail.

As the bank loan mutual fund category has experienced unprecedented net outflows this year, our managed assets' inflows have held up better than most competitors, enabling us to expand our industry leading market share. Although we can't predict when the market's appetite for high yielding floating rate investments will improve, we know that it will. With distribution rates now in the 6% range for the iShares classes of each of the three Eaton Vance bank owned mutual funds we offer, not a lot of change in sentiment may be required for each retail investor -- interest in bank owned investing to pick up.

Our funds in separate accounts classified as alternative had net outflows of approximately $650 million in the third quarter, a deterioration from approximately $475 million of net outflows in the quarter ended April, but a sharp improvement from $2.2 billion in net outflows in the quarter ended January. Managed assets and flows in this category are dominated by our two global macro absolute return mutual funds are from the US, which ended the quarter with a combined $7.1 billion under management.

Flows into these funds tend to rise and fall with their returns. When returns of our global macro funds are well in excess of US risk free rates as they have been this year, net inflows normally follow. While not inflated from a event risk, our global macro funds offer the potential for attractive levels of absolute returns that are substantially uncorrelated to US equity and bond market returns, which can be especially appealing in environment of low bond yields and high economic uncertainty.

In our portfolio implementation reporting category, third quarter net inflows of $2.1 billion reflect $2.5 billion of net contributions to Parametric Custom Core equity individual separate accounts, $250 million of net contributions to custom core institutional accounts, and $650 million of net withdrawals from centralized portfolio management mandates.

As mentioned previously, our municipal and corporate laddered bond individual separate accounts contributed $1.7 billion to net inflows in the third quarter, when combined with the 2.5 billion of that inflows into custom core equity individual separate accounts, inflows into our industry leading suite of Custom Beta strategies offered as individual separate accounts, totaled approximately $4.2 billion in the third quarter. As shown on slide 12 of our presentation, our Custom Beta individual separate accounts crossed $100 billion AUM mark this quarter, with nearly $105 billion of managed assets as of July 31.

For the fiscal year-to-date, net inflows into our Custom Beta individual separate accounts have totaled approximately $12 billion, representing annualized internal growth of 19%. In late June, we announced a key strategic initiative involving our Parametric and Eaton Vance Management Investment affiliates. The initiative has three principal components. Rebranding EVM's roles based systematic investment grade fixed income strategies as Parametric and aligning internal reporting consistent with this revised branding.

Second, combining the technology and operating platforms, supporting the individual separately managed account businesses of Parametric and EVM. And third, integrating the distribution teams, serving Parametric and EVM clients and business partners and a registered investment advisor and multifamily office markets.

As announced in June, the initiative will bring to Parametric, industry leading expertise and systematically managed investment grade, municipal taxable and crossover tax free taxable fixed income strategies. Based on assets under management as of July 31st, approximately $42.5 billion of systematically managed fixed income assets will transfer from EVM to Parametric, representing approximately 9% of Eaton Vance's consolidated assets under management.

Longer driver of Eaton Vance's above industry growth trajectory, Parametric becomes even more of a differentiator going forward. As a result of this strategic initiative, Parametric's custom core benchmark based separate account offerings will expand to encompass fixed income securities and maturity based and liability driven portfolio benchmarks, customized benchmarks, separate accounts, which are sometimes referred to as custom indexing, compete against index ETFs and index mutual funds on the basis of enhanced tax efficiency, increased client control over portfolio construction and management, and the avoidance of pass through fund operating and trading costs.

Industry observers have identified custom indexing as one of the most promising trends in investment management. This is a market we lead today and are committed to growing aggressively. By expanding Parametric solutions set and customized benchmark based separate accounts, and investing in technology to enhance client service and realize operating efficiencies and scale economies, our goal is to further solidify Parametric's position as market leader and position this business for accelerated growth. In late June, we announced that Ranjit Kapila will join Parametric as Chief Technology Officer and Head of our Operations, and the promotion of Desmond Gallagher to become Chief Technology Officer of Eaton Vance Management and Calvert.

Ranjit formerly served as Global Head of Portfolio Management Investment Systems for BlackRock, where he was responsible for leading strategy and development for portfolio management applications across equity, fixed income and multi asset portfolios for BlackRock and Aladdin clients. Des joined Eaton Vance in 2014 and served most recently as EVM's Division Head of Investment Technology. These appointments support the Parametric strategic initiative, will continue to advance the technologies underpinning the EVM Fundamental Active and Calvert Responsible Investment Offerings and related services. Although Ranjit does not arrive at Parametric until next month, the change process supporting our strategic initiative is now well under way.

Dedicated teams have been established to execute on each of the major components targeting go live dates, principally in the first quarter of our fiscal 2020. While we anticipate a period of elevated investment to support the newly combined SMA platform, spending will be less than if we had continued to maintain separate platforms for Parametric and EVM. We expect these investments to be offset -- offset by increased revenue growth and cost savings realized from greater operating efficiencies. As we consider our strategic position in the evolving asset management industry, we feel very good about where Eaton Vance sits. Through the expanded Parametric, we are the leader across asset classes and customized benchmark based separate accounts, a market with strong current momentum and limitless growth potential.

In Calvert, we hold one of the foremost brands and deepest research and engagement capabilities in responsible investing, with a track record of significant sales success over the two and two-thirds years Calvert has been part of Eaton Vance. Eaton Vance Management is a market leader across a range of specialty income investment areas, bank loans, high yield bonds, mortgage-backed securities, emerging market debt and municipal bonds where active strategies continue to compete effectively against passive alternatives.

EVM equities focused primarily on distinctive growing niches focused on risk control and after tax income and returns. The Atlanta Capital now offers an array of exceptionally well performing active equity strategies. They're poised for accelerated growth. The strength of our investment offerings is supported by one of the top sales and marketing organizations in the business, a culture of innovation and excellence in client service and a capital structure in leadership team we believe are supportive of long-term success.

While these continue to be challenging times for the asset management industry, we remain optimistic about the future of Eaton Vance, both near-term and long-term. That concludes my prepared remarks. I'll now turn the call over to Laurie.

Laurie Greenwald Hylton -- Chief Financial Officer

Thank you and good morning. As Tom described, we're reporting adjusted earnings per diluted share of $0.90 for the third quarter fiscal 2019, up 10% from the $0.83 in the third quarter fiscal 2018 and up 1% from $0.89 in the second quarter of fiscal 2019. As you can see in attachment 2 to our press release, adjusted earnings per diluted share in the third and second quarters of fiscal 2019 equaled earnings per diluted share under US GAAP, with no material adjustments. GAAP earnings exceeded adjusted earnings by a $0.01 per diluted share in the third quarter of fiscal 2018, reflecting the reversal of $1.3 million of net excess tax benefits related to stock-based compensation awards.

In the third quarter fiscal 2019, operating income decreased by 4% year-over-year, reflecting a 2% increase in management fees, a 7% decline in non-management fee revenue and 3% growth in operating expenses. Operating income was up 8% sequentially, reflecting a 5% increase in management fees, 6% growth in non-management fee revenue and 3% higher operating expenses compared to the prior quarter.

Our operating margin was 31.8% in the third quarter of fiscal 2019, 33.2% in the third quarter of fiscal 2018, and 30.9% in the second quarter of fiscal 2019. Ending consolidated managed assets reached a new record high of $482.8 billion at July 31st, up 7% year-over-year and 3% sequentially, driven by strong net flows and positive market returns. Average managed assets this quarter were up 6% from the same period last year. Management fee revenue growth -- trailed growth in average managed assets year-over-year, primarily due to decline in our average annualized management fee rate from 33 basis points in the third quarter fiscal 2018 to 31.8 basis points in the third quarter of fiscal 2019. Versus the prior quarter, average managed assets were up 3%. On a sequential basis, management fee revenue growth exceeded growth in average managed assets, primarily due to the impact of three more fee days in the third quarter. This quarter's average annualized management fee rate of 31.8 basis points was flat in comparison to the second quarter of fiscal 2019.

Changes in our average annualized management fee rates over the comparative periods primarily reflect shifts in our business mix and variations in fund subsidies. Included in management fees as a contra revenue item, fund subsidies were down $1.8 million year-over-year and $3.2 million sequentially, primarily due to a reduction in fund custody expenses, resulting from the renegotiation of a service provider contract. Performance based fees, which are excluded from the calculation of our average management fee rate, were a positive $0.1 million in the third quarter of fiscal 2019, a negative $0.4 million in the third quarter of fiscal 2018 and a positive $1.8 million in the second quarter of fiscal 2019.

In the third quarter of fiscal 2019, our annualized internal growth and management fee revenue of 2%, trailed annualized internal growth in managed assets of 7%, primarily due to a mix of higher fee and lower fee strategies within our inflows and outflows during the quarter. This compares to 5% annualized internal growth in management fee revenue and 3% annualized internal growth in managed assets in the third quarter of fiscal 2018 and 1% annualized internal growth in management fee revenue and 4% annualized internal growth in managed assets in the second quarter of fiscal 2019.

Turning to expenses, compensation costs increased 4% year-over-year, primarily driven by higher salaries and benefits associated with increases in headcount and higher stock-based compensation, partially offset by lower operating income based bonus approvals and lower sales based incentive compensation. Sequentially, compensation expense increased 3%, primarily reflecting higher salaries, driven by increases in headcount and the impact of three more payroll days in the third fiscal quarter, higher stock based compensation, higher operating income based bonus accruals and higher sales based incentive compensation, all partially offset by decreases in payroll taxes, benefits and performance based bonus approvals.

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

Sequentially, non-compensation distribution related costs increased 6%, primarily reflecting higher marketing and promotion costs and an increase in class A and private fund service fee expenses, driven by higher average managed assets in class A mutual fund shares and private funds. Fund related expenses increased 5% year-over-year, reflecting higher subadvisory fees, due to an increase in average managed assets and sub-advised funds. Sequentially, fund related expenses decreased 2%, reflecting a decline in other fund expenses paid for by the company, partially offset by an increase in subadvisory fees due to higher average managed assets and sub-advised funds. Other operating expenses increased 6% from the third quarter fiscal 2018, primarily reflecting higher information technology, facilities and travel expenses, partially offset by a decrease in amortization expense related to certain intangible assets, that were fully amortized during the first quarter of fiscal 2019.

Other operating expenses were flat sequentially, reflecting increases in information technology, facilities and travel expenses, offset by a decrease in professional services expenses. 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 contributed $0.06 to earnings per diluted share in the third quarter fiscal 2019, a $0.01 to earnings per diluted share in the third quarter fiscal 2018 and $0.03 to earnings per diluted share in the second quarter 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 and sponsored strategies, where they are 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 impacts, net of income taxes and net income attributable to non-controlling interest.

We continue to hedge the market exposures of our seed capital portfolio to the extent practicable to minimize the associated earnings volatility. Although we are hedged on majority of our seed capital portfolio, gains on the unhedged portion drove the positive contribution to earnings this quarter.

Non-operating income expense includes net expenses from consolidated CLO entities $3.5 million in the third quarter fiscal 2019. This compares to net expenses of $1.2 million in the third quarter fiscal 2018 and net income of $11 million in the second quarter fiscal 2019. Other income and expense amounts related to consolidated CLO entities reduced earnings per diluted share by $0.02 in the current quarter, a $0.01 in the third quarter of last year and contributed $0.07 per diluted share in our second fiscal quarter of 2019.

Other income and expense amounts related to consolidated CLOs reflect changes in our economic interests in these entities, including the fair market value of our investments, distributions received and management fees earned. Our strategy for CLO equity remains to commit prudent amounts of EV capital to support growth in this business, taking advantage of opportunities to recycle equity in existing CLOs to help fund new CLOs in the future.

Turning to taxes, our effective tax rate was 25.5% in the third quarter fiscal 2019, 26.2% in the third quarter fiscal 2018, and 25.1% in the second quarter fiscal 2019. The Company's income tax provision for the third and second quarters of fiscal 2019 includes $1.1 million and $0.7 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 $0.6 million in the third quarter fiscal 2019, $1.3 million in the third quarter fiscal 2018, and $0.3 in the second quarter fiscal 2019. As shown in the attachment 2 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 25.9% in the third quarter fiscal 2019, 27.1% in the third quarter fiscal 2018 and 25.3% in the second quarter fiscal 2019. 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 third quarter fiscal 2019, we used $38.6 million of corporate cash to pay the $0.35 per share quarterly dividend declared at the end of our previous quarter. And repurchased 1.5 million shares of non-voting common stock for approximately $61.3 million.

Our weighted average diluted shares outstanding were $113.5 million in the third quarter fiscal 2019, down 8% year-over-year, 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. Sequentially, weighted average diluted shares outstanding were down 1%. We finished our third fiscal quarter holding $777.8 million of cash, cash equivalents and short term debt securities and approximately $368.6 million in seed capital investments. We continue to place high priority on using the Company's cash flow to benefit shareholders.

Fiscal discipline around discretionary spending remains top of mind, as we contemplate both volatile markets and significant corporate initiatives. As Tom noted, the strategic initiative we announced in June will include investments in technology to support a consolidated individual separate account platform geared toward enhancing scalability and achieving higher levels of operating efficiency. We do not currently anticipate that there will be significant adds to staff associated with these investments, but can provide additional color on related headcount and spending when we report our earnings for the fiscal year.

Based on our strong liquidity and overall financial condition, we believe we are well-positioned to continue to invest in our business to support long term growth, while returning capital to shareholders. This concludes our prepared comments, and at this point we'd like to take any questions you may have.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Patrick Davitt from Autonomous Research. Your line is open.

Patrick Davitt -- Autonomous Research -- Analyst

Hi. Good morning. Thank you. I might be splitting hairs here, but I feel like when you announced the repositioning in June, you kind of pushed back on the view that it could drive more incremental efficiency on the cost side. But Tom's comments this morning highlighted cost savings and efficiency. I'm just curious if you've maybe identified a bigger operating leverage opportunity on the cost side, as you've gone through the process just over the last couple of months?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Yeah, I'd put it -- I maybe would agree with your assessment that it's maybe splitting hairs here. I don't -- I don't think we're far enough into this to have a really very different view on kind of what the spend levels will be and what the resulting impact on operating efficiencies and scale economies would be. We're working on it, we've put a lot of effort into this. We've made some real progress. As I noted, Ranjit, who will be joining Parametric, toward the end of next month, isn't here yet. So we can lay a little bit of this uncertainty on the fact that the person that's going to be driving this isn't here yet. It's not like we haven't done anything. In fact, we've done quite a bit to prepare for the launch of this new platform. But in terms of quantifying the margin impact of how this is -- how this is going to impact our overall business or even impact the profitability of that particular part of our business, I think it's quite premature to say that.

I will say that this is a business where continuous investment in technology are just par for the course. We've scaled this thing up to something like 80,000 separate accounts and we're looking for ways to continue growing that business to a multiple of its current size. We know if we do this right, there will be significant scale economies. It does not take twice as many people to run 160,000 accounts, as it does 80,000 accounts, particularly if we invest in technology in the right way. So a little bit vague in the answer. Sorry, I can't be more helpful. Directionally, we know we're going be spending a bit more money in the near-term, but we're highly confident that's going to pay off with operating efficiencies and scale economies down the road, as we grow that business.

Patrick Davitt -- Autonomous Research -- Analyst

Thank you. And as a follow-up, you know, there's been some chatter about some larger asset management properties in Europe becoming available as we think about M&A as a piece of the capital return story. Could you update us your thinking on around your appetite for deals like that? And within that, any detail on what kind of asset classes wrappers or distribution pipes would be most attractive to you?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Certainly, I can't comment on anything specific. We're not aware of -- there aren't major opportunities that we're looking at in Europe that we're at a point where we could comment on them, not that we would. I would say areas of interest to us really primarily to surrounding out our business in ways that are -- that we view as complementary to what we're doing now. I would put on that list, extending our credit capabilities into private assets, we've also looked at things recently expanding our small wealth management business to leverage our capabilities in wealth management solutions. Beyond that, I would say we're opportunistic, we'd like to grow in responsible investing and we have a -- we think, very strong platform, really a couple of platforms there with Calvert and what Parametric does in customized separate account solutions with responsible investing being one of the key value adds there. Those are probably the areas I would highlight for us where our business continues to be approximately 95% in the US and 5% outside. We've stated our long-term goal to become more diversified internationally, but we're only going to do an acquisition that we think makes sense to us and we're highly confident it's going to bring value to our shareholders.

Patrick Davitt -- Autonomous Research -- Analyst

Thank you.

Operator

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

Melinda Roy -- Deutsche Bank -- Analyst

Hi, this is actually Melinda Roy filling in for Brian Bedell. Maybe just a couple more on the retail SMA business. Can you talk about what portion of the business is concentrated in Parametric strategies and where you see most growth coming from an intermediate term? And then on the combination of the EVM and Parametric platforms, how specifically do you think that could improve organic growth once the combination is kind of complete?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Yeah. So I think I scaled the business at about $105 billion of what we call Custom Beta. So that's the Parametric custom core business as well as the municipal and corporate bond laddered -- laddered products offered as individual separate accounts. We have additional individual separate account businesses. There are actively managed muni pieces, there are actively managed equity businesses as well. What do you have for total there? But the biggest growth opportunities we see are in what we call Custom Beta, which is I believe slide 12 of the handout had the growth trajectory, we've been on there year-to-date, 19% annualized internal growth. We think we're positioned to see -- we hope with that, we don't know this, but we hope an acceleration of that growth as we move the muni and corporate capabilities there under Parametric.

We think there will be new product strategies that will emerge out of that that will give us the potential to do things that we don't do today. We think the investments that we're making in technology to enhance service levels and drive scale economies will position us more attractively versus competitors, where our goal would be to gain market share over time. We think there is a -- there is room in this market for multiple competitors, but we intend to maintain our position as the market leader.

Melinda Roy -- Deutsche Bank -- Analyst

All right, thank you.

Operator

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

Mike Carrier -- Bank of America -- Analyst

Hi, good morning and thanks for taking the question. Maybe first, just on the operating leverage, so Laurie, you guys had positive operating leverage quarter-over-quarter. Some of that's, you know, the days in the markets. But it sounds like you guys are, you know, focused on that you know, in some of the expense discipline. You also mentioned just some of the investments, you know, with the Parametric initiatives. So just wanted to get your thoughts on how we should be thinking about expenses, maybe operating leverage, particularly just given the strength that you guys are seeing, you know on the flow side?

Laurie Greenwald Hylton -- Chief Financial Officer

Yeah we're not prepared to provide any guidance at this point. But in terms the way that we're thinking about it, we've recognized that we've got a significant investment that we are looking to make in this project. And I think what we are very much aware of is that, we are going to have to stay very, very tight on all of our other spending in order to ensure that we can focus our attention and our resources on this initiative and be as efficient as we can in terms of deployment of capital. And recognizing that when you're talking about technology projects, obviously there are going to be, there's a portion of this that will be operating, a portion this will be capital. And as we finalize our thoughts around our longer term strategic vision for the platform, we're going to figure those components out. And we certainly will hope to be able to provide more guidance as we move into the fourth quarter. But I would say that overall, we are looking to really keep our spend tight, as we're moving into the fourth quarter on all of our other -- sort of general corporate spending, recognizing that we want to be able to put as much as we can into this project. And because we do believe that there's tremendous long term leverage to be gained by building a scalable platform that's going to be highly efficient and is going to have a solid operational foundation for us to do the types of product initiatives that Tom mentioned earlier.

Mike Carrier -- Bank of America -- Analyst

Okay, that's helpful. And then Tom maybe just on the overall investment performance inflows, you know, things have been very strong particularly relative to the industry. The shorter term performance is probably a little bit weaker, you know, than we've seen. Just any color on maybe what's driving that? Any concerns, you know, the 3, 5, 10 is still very solid, but just any concerns on the shorter term side?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

I guess it depends where you're looking. We've got a pretty broad business. If you look at our equity performance just starting there, we're really having a quite strong year, where Calvert strategies, Eaton Vance managed equities and particularly the Atlanta Capital strategies, which in many ways are our purest compete on performance equity mandates, really exceptional high performance there. That group, as you may know, also runs the Calvert Equity Fund, which also has had strong performance. So we're seeing flows into -- positive flows into active equity strategies that you never know completely. But we would assume are being driven largely by that, the strong performance numbers that we've been putting up over the last, let's say, year and three year periods.

On the income side, I think generally a good story, because our bank owned assets are a fairly large percentage of our total. We have seen a, maybe somewhat of a falling off in performance there. Nothing that we're worried about. But we had a significant boost to performance last year that came as some loans that we had held through our restructuring process paid off in a major way, to us as equity holders, as they came through restructuring. We haven't had that same effect this year. So our bank loan performance has been more muted.

Across fixed income, the primary driver of relative performance year-to-date, and particularly over the last three months has been duration exposure. So if you're a long relative to your peers, you've had the wind at your back, if you're shorter duration relative to peers, you've had the wind a bit in your face. We have an array of short duration income strategies, the biggest being our short duration government income fund, which really had a exceptional performance run, has been facing a bit of a performance headwind this year, primarily because relative to its peers, it is shorter duration than its peers and in the government category, duration is going to be a primary driver of short term periods, particularly during months like we've seen recently, when we've had short movements -- short movements in this case down in Treasury yields.

So there's really nothing that from a competitive point of view, we're fighting against. We continue to see good flows into that short duration government income fund, despite a fall off in relative performance versus other funds in that government category. Same with bank loans. A relative performance versus peers over the year-to-date period has fallen a bit. The longer-term track record there is exceptional and as I mentioned, our market share there based on the numbers we see continues to grow. So there is certainly, we don't see a performance problem for Eaton Vance overall or for any of our major strategies. In fact, I would would point to performance of our active equity strategies Calvert branded and Atlanta Capital managed in particular is creating opportunities for us to sell places that we wouldn't if we had more pedestrian returns.

Mike Carrier -- Bank of America -- Analyst

Okay. that's helpful. Thanks.

Operator

Your next question comes from Ken Worthington from J.P. Morgan. Your line is open.

Kenneth Worthington -- J.P. Morgan -- Analyst

Hi, good morning. First on the leveraged loan market, we've seen some leverage loan deals slip in recent weeks. Talk about the CLO market, the floating rate market more broadly. Any implications for Eaton Vance, including any balance sheet exposure you might have here?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

So we have a relatively small CLO business. I think there are four, five active CLOs that we manage. It is a pretty small balance sheet exposure. Overall, bank loans are important business for us. We have been in net outflows there. As described, there's nothing systemic there that we're particularly worried about. We believe the outflows have been primarily driven by the fact that these are floating rate assets and people are expecting short-term rates to come down. That's a strong market consensus probably, we will prove right. But we don't see significant issues on the credit side. Nothing is showing up in our portfolios to date. We're very aware that these are below investment grade loans and that these are subject to credit risk.

We maintain broadly diversified portfolios to date. We have not had issues with liquidity or -- so we generally feel that things are OK. On balance, we think that the stimulative moves that are starting to happen in the US and other Western economies are broadly supportive of good credit performance in bank loans. So on the one hand, shorter rates make -- can make floating rate assets less appealing from yield perspective. They also have the effect generally of reducing economic risk of significant credit losses, but we're mindful that we're at -- we're long into the current economic cycle. We're mindful of the fact that flat or inverted yield curves are sometimes viewed and have been markers of coming periods of economic weakness. But today we're not seeing that in our bank loan portfolios.

Kenneth Worthington -- J.P. Morgan -- Analyst

Okay. Thank you. In terms of the $42.5 billion transferred to Parametric, do your clients need to affirm the transfers in any way or there are new contracts that result with this transfer? Trying to get a sense if there's any risk to either the fee arrangements that you have or even the assets, is there any chance that assets may slip here?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

No. The key is that it is not deemed an assignment for purposes of the contracts, and we've -- we have a legal opinion to that effect, which we are making available to our business partners, primarily, this is the simply managed account business, where there isn't potentially an issue. But we've gotten, I'd say, no pushback from clients or intermediaries about the change. There is no change in control, we control these businesses through Eaton Vance Management today. We will control them in the future through Parametric, which is a controlled subsidiary. The same people will be running the strategies, the same investment style, it's a change in branding and an ultimately organizational reporting responsibility, but nothing that we think clients should be concerned about and nothing that we think based on evidence that clients are concerned about. Performance records will carry over, no change from a client's point of view other than a different name associated with the brand.

Kenneth Worthington -- J.P. Morgan -- Analyst

Okay, great. Thank you.

Operator

Your next question comes from Bill Katz from Citi. Your line is open.

Ben Herbert -- Citi -- Analyst

Hi, good morning. It's Ben Herbert on for Bill. Thanks for taking the question. Just wanted to follow-up on Mike's question regarding operating leverage and Laurie, last quarter you mentioned the comp ratio should trend down going forward. And then recently you said the -- today you said no headcount change with the strategic initiatives announced at the end of June. So can we still think that that comp ratio should kind of move down over time here into 2020?

Laurie Greenwald Hylton -- Chief Financial Officer

Into what?

Ben Herbert -- Citi -- Analyst

2020.

Laurie Greenwald Hylton -- Chief Financial Officer

Yeah. I wouldn't be making any prognostications at this point about 2020. I would anticipate that the comp ratio in the fourth quarter, probably that can look dramatically different from the comp ratio in the third quarter. So I think that's probably a fair assessment, but I wouldn't be making any prognostications beyond that.

Ben Herbert -- Citi -- Analyst

Okay. And then a follow up would just be on the [indecipherable] fee rate. There was a significant tick up quarter-over-quarter and I just wanted to understand kind of the underlying dynamics behind that.

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Yeah. We talked about how we benefited during the quarter of a renegotiation of a custody fee agreement where because the custody fees are highest for emerging markets, non-US markets, which are -- where those assets tend to be concentrated in alternative strategies. The impact of that on our effective fee rates was positive during the quarter, which reflects the fact that a fair bit of the subsidy activity that we've then had in our funds is connected to those strategies and where the relief in terms of lower custody fees fell in part to the benefit of the fund and also fell in part to us to the extent we're providing subsidies to keep the fund fee levels at a flat level.

Ben Herbert -- Citi -- Analyst

Thank you.

Operator

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

Robert Lee -- KBW -- Analyst

Great. Thanks. Thanks for taking my questions. Could you maybe just talk a little bit, Tom, you had mentioned early on seeing some pretty good success in what I'd call more defensive equity strategy. So can you maybe break that down a little bit kind of how that compares in a retail versus institutional and then maybe any color you may have on any institutional pipelines, whether it's through those strategies, you know, Calvert or otherwise?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Yeah. We don't have much of a pipeline in active equity institutional accounts. Most of the sales success we're seeing for active equity is retail either funds or in some cases individual separate accounts. Most of that active business is through model programs. But the places where we're seeing sales success are primarily high performing equity strategies, branded Calvert. Sorry. So it's the it's the one-two punch of strong performance, which is a distinctive factor and also the strong brand of Calvert and responsible investing. So we're benefiting I would say across the board, almost without exception, across Calvert active strategies from strong performance and this win at the back in terms of marketing, because although there are a lot of players that have come into their responsible investing space, few of them have the credibility and reputation that Calvert has. You marry that with strong performance and we've been able to grow Calvert's business in active equities pretty meaningfully.

The other brand and manager I would point to is our Atlanta Capital affiliates, which although Atlanta Capital in total has been a net redemption last couple of quarters, primarily because there are the strategies which are the SMID-cap and small cap strategies are at capacity, they've had very strong across the board performance, small caps, SMID-cap, large cap in their active equities, and line of capitals. Mantra is high quality investing, which they have practiced for decades. We're in a market cycle where high quality is performing very well. They have not just top quartile but top decile performance across most of their equity strategies. And they're staying, seeing growing interest in that, as you would expect. This is a group of funds and separate accounts that are staying distinguished, not only by strong performance over time, but also a consistent investment approach, low turnover, investing in high quality companies that resonates with a lot of investors that are looking at alternatives to passive investing.

So beyond that, I would say, a small cap generally is a place where we're seeing positive flows, both branded Calvert and branded Eaton Vance, both US and international. So you don't think about active equities as a place where there's a lot of growth opportunity, but we're seeing some potential for our business to grow there, based on performance and based on the distinctiveness of the Calvert brand.

Ben Herbert -- Citi -- Analyst

Great and maybe as a follow up, can you maybe talk a little bit about the competitive environment within Custom Beta and ladders and specifically, I mean, look, anytime I guess you have a good growth opportunities, people try to come into the markets, you know, often try to compete on price. Can you talk a little bit about what you're seeing? And to what extent do you feel like you have, there's maybe a barrier to entry, so to speak, given that it is a technology heavy kind of business? I mean, kind of talk about how you see that?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Yeah, this is a lot harder business than managing funds. 80,000 separate accounts gives us a scale that's hard for anyone to come close to -- we think, we are based on industry data, the largest player in this market. We compete on service more than anything. When I say we, this is both Parametric and what are today Eaton Vance management branded strategies that would be in some cases moving over to Parametric. We have over the last I'd say two years seen a number of new competitors come into the market, both in terms of laddered bond separate accounts, but also on the custom core equities. So competing against us on both the income side as well as the equity side. You've seen our numbers. We continue to grow that business, 19% organic growth for the year-to-date on a combined basis.

We will see no doubt more competitors into this other people. We think we'll be attracted to the same opportunity to grow in the space. But we think we have today, a differentiated position based on our reputation for service. And so far we've been able to hold off competitors and keep that business growing. Some of our competitors have not surprisingly, tried to compete largely on the basis of price. For the most part, we've held on, on price, but have the flexibility to be competitive when necessary. This is a value proposition. If we can deliver value relative to cost, which we think we can, we think this business will continue to grow.

For the most part, our competition here is more about competing against on the equity side, index funds and ETFs as opposed to other managers of customized individual separate accounts. And in the case of munis and taxable bond portfolios, it's primarily competing against unmanaged portfolios. So yes, there are more competitors into the space, but at $100 billion, we're by far the largest player in this business. But tiny compared to the size of the addressable market, which we view as consisting of most of the index ETF and index mutual fund market held outside of qualified retirement plans and maybe away from institutions that are using ETFs as a short term market exposure vehicles. But we think this is, you sketch it out, these are potentially trillion dollar plus markets. You look at the number of municipal bonds, the value of municipal bonds that are owned by individuals. How much of that is managed versus how much is unmanaged? We think there is a huge potential for that market to convert to from unmanaged to managed. You look at the growth of index investing, how much of that is held through funds where there's not the advantages of customization, not the advantages of pass through, tax -- pass through treatment of realized tax losses that you can achieve with customized separate accounts. We think there's enormous growth potential here.

Our objective is to grow our market share over time as this market continues to grow. Maybe that's a challenge because we'll see new entrants into this market. But there aren't many people that are in a position like we are to make the kinds of investments in technology to drive service levels that other people, I think are going to look at this and say, I don't want to do that. That looks really hard. I don't think I can compete with Parametric and Eaton Vance on the basis of service excellence. I think I'll do something else.

Ben Herbert -- Citi -- Analyst

Great, that was helpful. Thank you.

Eric Senay -- Vice President, Treasurer

I think we have time for two more participants before we wrap up the call today.

Operator

Your next question comes from Dan Fannon from Jefferies. Your line is open.

Daniel Fannon -- Jefferies -- Analyst

Thanks. My question is on fee rate. If we look kind of year-over-year, you've seen compression across the longer term categories. I guess as you think about the mix of business today and where you're seeing strength and the ins and outs, do you see that stabilizing, improving or kind of continuing, you know, kind of the rate of decline we've seen?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

I don't see any improvement. Well, last I checked, the rates aren't going up across any parts of asset management that we participate in. Our primary driver of those fee rates, though, continues to be mixed even both across categories and inside categories. The biggest change in average fee rate has been within fixed income. That really reflects the growth of this business that we call Custom Beta, the muni and corporate ladder business, which is fundamentally quite different than managing higher bond portfolios or mortgage-backed securities portfolios.

We now are seeing some price competition, some level of fee concessions in existing businesses. I don't think it's accelerating. It feels like it's a more on a steady, modest decline in average fee rates across most of our businesses. If you look at true apples-to-apples comparison, we think we can manage through that. I've been in the investment business well over 30 years and there's never been a time, when fee rates have been going up. How you grow and how you achieve attractive margins in this business, tends to be based on scale. The ability to offset reductions in fee rates tied to per dollar of assets by growing the base of assets you manage and leveraging the spending and support of that asset management. So no real change in our business mix. We expect continued modest declines in our average fee rates.

Daniel Fannon -- Jefferies -- Analyst

Okay. And then as a follow up, you know, the Global Macro products, you know, improved performance you mentioned, you know, historically that's dovetailed with your -- correlated with improved flows. Can you talk about just the positioning of the fund and kind of, you know, historically it's had a fair amount of currency exposures and other things to it. But any kind of near-term dynamics in terms of shift, in terms of flow outlook for the -- that segment as well would be helpful?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Yeah. So these strategies are a little hard to pigeonhole in terms of what -- where are their position relative to broad market trends. We describe ourselves as country pickers, investing both long and short in emerging and frontier markets, using primarily currency and short duration sovereign credit instruments. We -- returns, you can look this up, I think are like 6% or so in the range of 6% year-to-date through yesterday, through the -- for the iShares to these funds. So we think that's pretty good. Some years 6% returns are nothing to get too excited about. Now that you are -- if you can deliver something like that in a way that is less volatile than long duration fixed income or less volatile than most equity strategies, that can be quite appealing, particularly given the very low correlation of the performance of these strategies to the major asset classes that most US investors are heavily weighted in, namely developed market equities and US duration assets. There have been some upsets in the world recently, maybe putting that modestly. So far we're weathering the storm quite well and those performance numbers are -- are current numbers for the year-to-date.

Daniel Fannon -- Jefferies -- Analyst

Okay. Thank you.

Operator

Your last question comes from Craig Siegenthaler from Credit Suisse. Your line is open.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thanks. Good morning, everyone. I just have a follow-up to Rob's last question on the competitive landscape in Custom Beta. I wanted to see if you saw a pickup in product launches, SMA wins, fund registrations from some of your competitors, just given the success of Parametric?

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

There have been -- so let me answer the question in two parts. One is on the equity side, which is the Parametric business and the other is the -- is on the fixed-income side, which is the Eaton Vance Management business that is going to become part of Parametric. So on the equity side, the traditional player in this market that we've competed with is a firm focused on this business called Aperio that I think continues to grow in our business, but is an established competitor. No particular change that I'm aware of in the Parametric versus Aperio competitive dynamics. There are other players who have been in this market and have put more of a focus on that. Goldman Sachs has an investment offering here. Natixis has a subsidiary that has an offering here.

The competitive landscape is first about getting access to platform. So are you offered at major broker-dealers or are you available through a particular registered investment advisor and what kind of strategies are you offered though? So is it tied to a single index, is it across a range of indexes? What's the expectation in terms of product features? Are you -- what kind -- what approach are you taking to tax loss harvesting? What kind of your business is funding -- funded in kind? Do you do after tax performance reporting? Is that performance reporting appropriately tranched by the age of the account? These are all things that that differentiate players in this market. It is a very customized business. If your level of customization is not as good as the next guys, you're going to struggle to be successful here. An element of customization is that service is often challenging. So what kind of turnaround is there for whatever customization that a particular advisor or client is looking for. So far we've been able to withstand the competitive challenge and continue to grow that business, despite no secret that this is a growing market. People look at the success we've achieved and said, yes, that doesn't look all that hard. But one of the things we're trying to do with this strategic initiative is to make it less attractive and make it harder for other asset managers to try and get into this space by doing a better job for clients.

On the fixed-income side, the story is probably similar. The names are different. Aperio, I don't believe has a fixed-income offering. Names here are Nuveen, Lord Abbett. I think BlackRock has an offering in this market. There might be a couple of other players there. By and large, we've -- we continue to be successful in that market. One of the things that's notable about our competitive offering is that earlier this year, we launched a systematic year-round tax loss harvesting service as part of our core offering, no upcharge in price, something we make available. We've been in the process of rolling that out, getting approval at various platforms to offer that for clients. We view that as a bit of a raising of the bar to differentiate us from competitors, not everyone. Most people don't offer something similar.

Again, beyond the service, beyond the features that we offer, a lot of this comes down to service. How good are we responding to requests to evaluate a particular hypothetical transaction? What's our turnaround relative to somebody else's? What kind of service do we provide to advisors? In general, fee rate differentials in this market are small and that these are not viewed as commodity products because of the intensity of the service experience and the high-level of satisfaction we deliver on the service side has allowed us to, in many cases when business we're not a low-cost provider, but we're at or near the top end of the fee range for people bidding on the business.

But we think it's a business that has the potential to grow to accommodate a number of competitors. We expect fairly soon the competitive landscape to shake out where this won't be a competitive market -- this won't be an interesting market for new people to get into simply because we and perhaps some others will set such a high bar in terms of scale in technology and service levels that people look at this and say, I don't think I can be successful here.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thanks, Tom, very comprehensive. I just had one follow-up on your retail SMA strategy, which I know you're in the process of upgrading here. What do you see as the key qualities of asset managers that have succeeded in the RIA market? Because this has been a very challenging segment for traditionals to crack.

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Sorry. So you said, RIA market?

Craig Siegenthaler -- Credit Suisse -- Analyst

Yes. So I believe most of your strategic positioning that you are going through now is a big chunk of that is targeting the RIA channel. So I wanted to see what qualities you think will make Eaton Vance successful? And maybe what are some qualities that you've seen at peers that have been successful in those channel, because very few happen.

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Yes, I got it. So, one of this -- you're referring to the strategic -- part of the strategic initiative is that we're combining our sales organization covering the RIA channel heretofore. Parametric has had a dedicated sales team covering an array of their strategies, but primarily custom core in that channel and then Eaton Vance's separately offered mutual funds and separate account offering there. And as you've said, like most asset managers, it's been a bit of a struggle for us from the Eaton Vance side to be successful there, whereas by contrast Parametric has built quite a business with dominant market share in that custom core product offered into the RIA channel.

What we're hoping to do is not surprisingly leverage the success that Parametric has achieved there across a broader array of asset classes. And so if we're the leader today in custom equity index separate accounts, we want to be the leader in custom bond separate accounts, both indexed and laddered and otherwise. But it's really leveraging the strength of the Parametric brand, the relationships that they built up over the last 25 years to allow us to successfully introduce fixed income strategies into that channel beyond the small success that we've had to date there. I think as your question implied, most of the assets that we have today on the fixed-income side are in the wirehouse and independent side. Through this reorganization and rebranding and changing in this -- in the sales coverage for the RIA channel, it is very much our objective to extend that success into RIA for fixed-income separate accounts.

Craig Siegenthaler -- Credit Suisse -- Analyst

Got it. Thank you, Tom.

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Thanks, Craig.

Eric Senay -- Vice President, Treasurer

All right. I think this concludes our call. Thank you very much for everybody participating into this call. And we'll speak with you in fourth quarter earnings webcast. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 71 minutes

Call participants:

Eric Senay -- Vice President, Treasurer

Thomas E. Faust -- Chairman of the Board, President, Chief Executive Officer

Laurie Greenwald Hylton -- Chief Financial Officer

Patrick Davitt -- Autonomous Research -- Analyst

Melinda Roy -- Deutsche Bank -- Analyst

Mike Carrier -- Bank of America -- Analyst

Kenneth Worthington -- J.P. Morgan -- Analyst

Ben Herbert -- Citi -- Analyst

Robert Lee -- KBW -- Analyst

Daniel Fannon -- Jefferies -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

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