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Eaton Vance Corp (NYSE:EV)
Q1 2020 Earnings Call
Feb 26, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Vance Corp. First Fiscal Quarter Earnings Conference call and Webcast. [Operator Instructions]

I would now like to hand the conference over to Eric Senay, Director of Investor Relations. Thank you. Please go ahead.

Pierric G. Senay -- Treasurer and Director-Investor Relations

Thank you. Good morning, and welcome to our fiscal 2020 first quarter earnings call and webcast. With me this morning are Tom Faust, Chairman and CEO of Eaton Vance; as well as our CFO, Laurie Hylton. In today's call, we will first comment on the quarter and fiscal year, and then take your questions. As always, 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. And today's presentation contain 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 2019 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 Ewart Faust -- Chairman, President and Chief Executive Officer

Good morning, and thank you for joining us. Earlier today, we reported $0.86 of adjusted earnings per diluted share for the first quarter of fiscal 2020, which is up 18% from $0.73 per diluted share in the first quarter of fiscal 2019 and down 9% from $0.95 per diluted share in the fourth quarter of fiscal 2019. On a combined basis, seed capital and consolidated CLO entity investments contributed $0.03 to adjusted earnings per diluted share in the first quarter of fiscal 2020 and negative $0.02 in the first quarter of fiscal 2019 and $0.08 in the fourth quarter of fiscal 2019. Excluding these items, first quarter fiscal 2020 adjusted earnings per diluted share were up 11% year-over-year and down 5% sequentially. We ended the first quarter of fiscal 2020 with $518.2 billion of consolidated assets under management, which is up 17% from a year ago and up 4% from the previous quarter-end. First quarter consolidated net inflows were $6.1 billion or $5 billion excluding what we now call Parametric overlay services, what we formerly referred to as exposure management. This was our 22nd consecutive quarter of positive net flows, and a solid beginning to what we expect will be our 25th consecutive year of positive net flows. Our first quarter net inflows equate to 5% annualized internal growth in managed assets, as calculated both with and without Parametric overlay services. Looking at our flow results on a revenue basis. In the first quarter, we achieved 5% annualized internal growth in consolidated management fee revenue, which compares to minus 4% in the first quarter of fiscal 2019 and positive 2% in the fourth quarter of fiscal 2019. Although revenue-based internal growth rates are not widely reported by other public asset managers, we continue to believe that Eaton Vance ranks among the investment industry leaders by this key growth measure. As we assess the performance of our business in the first quarter, achieving mid-single-digit organic revenue growth is certainly among the highlights.

By this measure, the first quarter of fiscal 2020 was our best growth period since the third quarter of fiscal 2018. Last June, we announced an important strategic initiative involving our Parametric, Eaton Vance Management and Eaton Vance Distributors affiliates. As we described at that time, the initiative has three principal components: rebranding EVM's rules-based systematic investment-grade fixed-income strategies as Parametric and aligning internal reporting consistent with this revised rebranding; internally integrating under Eaton Vance Distributors the sales teams serving Parametric and EVM clients and business partners in the registered investment advisor and multifamily office market; and then third, combining under Parametric the technology and operating platforms supporting the individual separately managed account businesses of Parametric and EVM. I'm pleased to report that the internal change process supporting this initiative is substantially complete and that we are already starting to see real benefits to our business. Combining our systemic systematic equity and investment-grade fixed-income strategies within the same investment affiliate and consolidating our separate account technology and operating platforms positions Parametric and Eaton Vance to build upon our market-leading positions in custom indexing and laddered bond separate accounts as market demand for these strategies continues to surge. As you can see in our press release and accompanying call slides, we have made certain changes in how we categorize our managed assets and flows for reporting purposes. The new Parametric Custom Portfolios reporting category consists of individual and institutional separate accounts managed by Parametric for which customization is a primary feature. The new classification includes the Parametric equity and multi-asset strategies that formerly composed our old portfolio implementation reporting category, which are primarily Custom Core and centralized portfolio management as well as the laddered bond separate accounts that were formerly managed by Eaton Vance Management and previously categorized as fixed income for reporting purposes.

In the press release and call slides, the presentation of managed assets flows for all prior periods has been revised to reflect the new classifications. As noted earlier, we have already we have also changed the name of our former exposure management reporting category to Parametric overlay services. This reporting category consists primarily of futures-based overlay strategies and services offered to institutional clients to enable them to efficiently add or remove market exposure without affecting underlying portfolio holdings. While this is our lowest fee business with an average current fee rate of 4.9 basis points, it is also nicely profitable and growing. Since entering the business through the acquisition of the former Clifton Group in December 2012, our managed assets and overlay services have more than tripled, growing from $32 billion at acquisition to a record $97.5 billion at the end of January. Looking at our first quarter flows in more detail. We had positive net flows for all of our mandate reporting categories, except floating-rate income. Annualized internal growth in managed assets range from a high of 9% for Parametric Custom Portfolios to 7% for fixed income, 5% for equity and Parametric overlay services and 4% for alternatives. Although our floating-rate income business saw $1.4 billion in net outflows and minus 15% annualized internal growth in AUM in the first quarter, that's a significant improvement from $2.9 billion of net outflows and minus 26% annualized internal AUM growth in the first quarter of 2019 and $2.6 billion of net outflows and minus 27% annualized internal AUM growth in the fourth quarter of 2019. The abating of outflow pressures has been especially pronounced in our floating-rate U.S. mutual funds, where net outflows fell from $2.1 billion in last year's first quarter and $1.9 billion in last year's fourth quarter to approximately $450 million in the first quarter of fiscal 2020. Through Monday of this week, month-to-date outflows from our floating-rate mutual funds had slowed to barely a trickle.

Although net inflows into our alternative strategy were less than $100 million in the first quarter, here, too, we have experienced substantially improved flow trends compared to fiscal 2019 when we saw net outflows of $2.2 billion in the first quarter and approximately $550 million in the fourth quarter. Our managed assets and flows in the alternative category are dominated by the two Global Macro Absolute Return mutual funds we offer in the U.S. As a reminder, these funds hold long and short positions in currency and short-duration sovereign debt instruments of emerging and frontier market countries. After a disappointing performance in 2018, our global macro funds roared back to strong performance in 2019, no doubt contributing to the improved flow results and flows outlook for the category. February month-to-date flows remain modestly positive for both our global macro mutual funds and the alternative category as a whole. As mentioned earlier, annualized internal growth in our equity mandates was 5% in the first quarter. Calvert, EVM and Atlanta Capital each made significant contributions to the quarter's $1.6 billion of equity net inflows. Calvert equity strategies contributed nearly $900 million, with the Calvert Emerging Markets and Calvert Equity U.S. mutual funds each generating over $250 million of net inflows. EVM equity strategies contributed approximately $850 million to first quarter net inflows driven primarily by privately offered funds in the U.S. On top of the more than $250 million net inflows into the Atlanta Capital sub-advised Calvert Equity Fund, Atlanta Capital contributed approximately $450 million of equity net inflows in core and growth mandates. In the first quarter, our fixed-income strategies had $1.1 billion of net inflows, which equates to 7% annualized internal growth in managed assets.

On a combined basis, EVM and Parametric municipal bond strategies contributed over $700 million to quarterly net inflows, and EVM, Calvert and Atlanta Capital taxable bond strategies contributed approximately $400 million. Flow leaders across our fixed-income mutual fund lineup included Eaton Vance Emerging Markets Local Income Fund with nearly $200 million of net inflows and Calvert Short Duration Income Fund, Eaton Vance Core Plus Bond Fund and Eaton Vance National Municipal Income Fund, each with over $100 million of net inflows in the quarter. The newly constituted, Parametric Custom Portfolios reporting category had net inflows of $3.5 billion in the first quarter, generating 9% annualized internal growth in managed assets. This reflects net contributions of $2.7 billion to Custom Core equity separate accounts and $1.4 billion into laddered bond separate accounts across municipal and corporate mandates, partially offset by approximately $575 million of net withdrawals from centralized portfolio management mandates. Sorted by client type, Parametric Custom individual separate accounts had $43 billion of net inflows, and Parametric Custom institutional separate accounts had $800 million of net outflows. Focusing on Custom Core equity and laddered bond individual separate accounts, the quarter's $4.3 billion of net inflows equates to 15% annualized internal growth in managed assets. As shown on slide 12, Parametric Custom Portfolios reached a record $175 billion in managed assets as of January 31, 2020. This is a high-growth, highly differentiated investment management business in which Parametric is far and away the market leader across all key segments. We are investing to grow this business by expanding our product offerings, extending our service capability and achieving greater operating efficiencies to drive down costs.

We continue to believe that Parametric Custom Portfolios business is only scratching the surface of its long-term potential. Turning to Calvert. We continue to be very pleased with the business results and investment success we are achieving. In the recently completed first quarter, Calvert generated net inflows of $1.3 billion, which equates to 26% annualized internal growth in managed assets. Including the Calvert Equity Fund sub-advised by Atlanta Capital, Calvert's managed assets reached a new high of $21.8 billion at the end of the first quarter, with continued strong investment performance across Calvert's diversified lineup of equity income and multi-asset strategies. As of the end of January, 21 Calvert U.S. mutual funds were rated four or five stars from Morningstar for at least one class of shares, including seven 5-star rated funds. We continue to see strong demand for Calvert's distinctive lineup of investment strategies that combine a record of investment excellence and a deep, multi-decade-long commitment to the principles of responsible investing. As the investment management industry as a whole continues to struggle to grow revenues net of market effects, Eaton Vance's ability to deliver internally sourced top line growth sets us apart. The strength of our high-growth franchises and customized individual separate accounts, responsible investing and wealth management strategies and services, the range of active strategies that with top-tier performance that we offer across investment asset classes and the prospects for continued recovery in our floating-rate income and alternatives category flows combine to give us confidence that we can continue to grow our business at rates well above the overall asset management industry average. While market action over recent days reminds us that unforeseen forces can upset even the best-laid plans, we approach the balance of 2020 and our long-term future with optimism for continued growth and success. That concludes my prepared remarks.

I will now turn the call over to Laurie.

Laurie G. Hylton -- Chief Financial Officer and Vice President

Thank you, and good morning. As Tom described, we reported adjusted earnings per diluted share of $0.86 for the first quarter fiscal 2020, up 18% from $0.73 in the first quarter of fiscal 2019 and down 9% from $0.95 in the fourth quarter of fiscal 2019. Our adjusted earnings per diluted share this quarter includes $0.03 of combined contribution from seed capital and consolidated CLO entity investments compared to a negative $0.02 contribution in the first quarter of last year and an $0.08 contribution in the fourth quarter of fiscal 2019. As you can see in Attachment two to our press release, earnings under U.S. GAAP exceeded adjusted earnings by $0.05 per diluted share in the first quarter of fiscal 2020, $0.02 per diluted share in the first quarter of fiscal 2019 and $0.01 per diluted share in the fourth quarter of fiscal 2019, reflecting the reversal of net excess tax benefits related to stock-based compensation awards during those periods of $4.9 million, $2.9 million and $1.5 million, respectively. Operating income increased by 11% in the first quarter of fiscal 2020 from the same period a year ago, reflecting an 11% increase in both revenue and operating expenses. Operating income was down 1% sequentially, reflecting a 4% increase in revenue and a 7% growth in operating expenses. Our operating margin was 29.8% in both the first quarters of fiscal 2020 and 2019 and 31.2% in the fourth quarter of fiscal 2019. As Tom noted, ending consolidated managed assets reached a new quarter-end high of $518.2 billion at January 31, 2020, up 17% year-over-year and 4% sequentially, driven by strong net flows and positive market returns. Average managed assets this quarter were up 17% from the same period last year, driving management fee revenue growth of 13%. Management fee 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 basis points in the first quarter of fiscal 2019 to 30.8 basis points in the first quarter of fiscal 2020.

Changes in our average annualized management fee rates over the comparative period primarily reflects shifts in business mix. Sequentially, growth in average managed assets of 4% matched growth in management fee revenue as our average annualized management fee rate of 30.8 basis points was unchanged. Performance-based fees, which are excluded from the calculation of our average management fee rates, contributed $0.2 million to revenue in the first quarter of fiscal 2020 versus negative $0.3 million in the first quarter of fiscal 2019 and positive $0.1 million in the fourth quarter of fiscal 2019. Turning to expenses. Compensation costs increased 12% year-over-year, reflecting higher salaries and benefits associated with increases in headcount and year-end merit adjustments, higher stock-based compensation and higher performance-based and operating income-based bonus accruals, partially offset by lower sales-based incentive compensation. Stock-based compensation in the first quarter of fiscal 2020 included approximately $5.5 million of accelerated expense recognized in connection with employee retirements. Sequentially, compensation expense increased 7%, reflecting higher salaries and benefits driven by increases in headcount, seasonal compensation effects, higher stock-based compensation driven by employee retirements and higher operating income-based bonus accruals, all partially offset by a decrease in severance costs. First quarter seasonal compensation pressures traditionally include the impact of payroll tax clock resets, the timing of our 401(k) funding and year-end base salary increases. The majority of these seasonal compensation pressures will continue into the second fiscal quarter before we see relief in the third. That said, we would not expect to see a recurrence of the roughly $5.5 million of stock-based compensation associated with first quarter retirement in the second quarter.

In addition, we would anticipate seeing an incremental $1 million to $1.5 million decrease in stock-based compensation in the second quarter as the impact of divesting of stock-based compensation under our phantom equity plan for outside directors and the recognition of expense associated with our employee stock purchase plan tend to be heavily weighted to the first quarter of each fiscal year. Non-compensation distribution-related costs, including distribution and service fee expenses and the amortization of deferred sales commissions, increased 10% year-over-year and 4% sequentially, primarily reflecting higher marketing and promotion costs; higher upfront sales commissions due to increased sales of closed-end funds, private funds and Class A mutual fund shares; and higher service fee expenses for Class A and private funds driven by higher average managed assets in those funds. The year-over-year increase further reflects higher private fund commission amortization, partially offset by lower Class C distribution and service fee expenses. Fund-related expenses increased 15% year-over-year, reflecting higher sub-advisory fees due to an increase in average managed assets of sub-advised funds. Fund-related expenses were flat sequentially, reflecting an increase in sub-advisory fees paid, offset by a decrease in fund expenses borne by the company. Other operating expenses increased 11% from the first quarter of fiscal 2019, primarily reflecting increases in information technology spending, market data services, professional services 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 increased by 9% from the fourth quarter of fiscal 2019, primarily reflecting increases in information technology spending, market data services, professional services, travel expenses and charitable contributions.

The increase in other expenses reflects investments we are making to support our strategic initiatives as well as the overall growth of our business. We continue to focus on expense management and identifying ways to gain greater operating leverage. Net gains and other investment income related to seed capital investments contributed $0.04 to earnings per diluted share in the first quarter of fiscal 2020, were negligible in the first quarter of fiscal 2019 and contributed $0.04 to earnings per diluted share in the fourth quarter of fiscal 2019. When quantifying the impact of our seed capital investments on earnings, 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 noncontrolling interests. We continue to hedge the market exposures of our seed capital portfolio to the extent practicable to minimize the associated earnings volatility. Nonoperating income and expense also includes net expenses from consolidated CLO entities of $1.8 million in the first quarter of fiscal 2020. This compares to net expenses from consolidated CLO entities of $2.9 million in the first quarter of fiscal 2019 and net income from consolidated CLO entities of $6.3 million in the fourth quarter of fiscal 2019. The sequential decrease in contribution from consolidated CLO entities primarily reflects the sale of our subordinated interest in a CLO entity during the first quarter of fiscal 2020, which resulted in the deconsolidation of that entity. Other income and expense amounts related to consolidated CLO entities reduced earnings per diluted share by $0.01 in the current quarter and $0.02 in the first quarter of last year and contributed $0.04 per diluted share in the fourth quarter of fiscal 2019.

Other income and expense amounts related to consolidated CLOs reflect changes in our economic interest in these entities, including the fair market value of our investment, distributions received and management fees earned. Our strategy for CLO equity remains to commit prudent amounts of EV capital to support growth of this business, then taking advantage of opportunities to exit our CLO position as market conditions allow, generating cash to help fund new CLOs for other or for other corporate purposes. Turning to taxes. Our U.S. GAAP effective tax rate was 22.8% in the first quarter of fiscal 2020, 23.4% in the first quarter of fiscal 2019 and 22.7% in the fourth quarter of fiscal 2019. The company's income tax rate was reduced by net excess tax benefits related to stock-based compensation awards totaling 3.4% in the first quarter of fiscal 2020, 2.5% in the first quarter of fiscal 2019 and 1% in the fourth 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 compensation awards. On this basis, our adjusted effective tax rate was 26.2% in the first quarter of fiscal 2020, 25.9% in the first quarter of fiscal 2019 and 23.7% in the fourth quarter of fiscal 2019. On the same adjusted basis, we estimate that our quarterly effective tax rate for the balance of fiscal 2020 and for the fiscal year as a whole will range between 26.5% and 27%. During the first quarter of fiscal 2020, we used $45.5 million of corporate cash to pay the $0.375 per share quarterly dividend we declared at the end of our previous quarter and repurchased 1.4 million shares of our nonvoting common stock for approximately $66.6 million.

Our weighted average diluted shares outstanding were 114.7 million in the first quarter of fiscal 2020, down 1% year-over-year, reflecting share repurchases and excess of new shares issued upon vesting of restricted stock awards and exercise of employee stock option, partially offset by an increase in the dilutive effect of in-the-money options and unvested restricted stock awards. Sequentially, weighted average diluted shares outstanding were up 1%. We finished our first fiscal quarter holding $824.7 million of cash, cash equivalents and short-term debt securities and approximately $315.9 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. 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. At this point, we'd like to take any questions you may have.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Dan Fannon with Jefferies. Your line is open.

Dan Fannon -- Jefferies -- Analyst

Thank. Yes, can you clarify? I think you Tom, you discussed some of the quarter-to-date flows for certain segments but left out, I think, fixed income and equities and some of the other metrics. So maybe, just given that you did mention bank loans and alternatives, I guess give us a kind of a broader update on the rest of the business.

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

Yes. Just to clarify, the only thing I talked about was our mutual fund flows for the period, just continuing the context of improvement. I'm not really prepared to talk about our overall flow trends for the quarter-to-date as that may or may not be a good indicator of what the quarter as a whole will be. I will say generally that in the same way that we had strong flows across the across our businesses in the fourth quarter, we've had good flows for the month-to-date. But it's we're only a little over three weeks into the quarter, so I don't want to talk too specifically about anything other than those couple of exceptions I made in my remarks.

Dan Fannon -- Jefferies -- Analyst

Okay. And then just a follow-up on kind of expenses and margins. I guess if we think about the last 12 months in the growth of both the beta in the market as well as your flows and essentially margins are flat year-over-year, so can you talk about an environment where you actually could see margin expansion? And then on the contrary, given what's happened more recently with market, how we should think about flexibility if that market tailwind is no longer there for a sustained period.

Laurie G. Hylton -- Chief Financial Officer and Vice President

It's Laurie. I think we've talked a little bit about the pressures that we obviously see in the first quarter. It's difficult when we start the new fiscal year because we've got these seasonal pressures that we see each first quarter. And most of them relate specifically to compensation. We did our best to call those out. I would say, as we're moving into the second quarter, I did call out specifically on stock-based compensation that we would anticipate seeing some level of relief, recognizing that we had some material first quarter retirements that forced us to recognize about $5.5 million of incremental stock-based compensation expense, and we've got some seasonal stuff that happens relating to our employee stock purchase plan and our directors plan that probably will provide us some relief as we move into the second quarter to the tune of about $1 million to $1.5 million. In terms of other operating expenses and the way we're thinking about the year, I think we had been telegraphing fairly clearly that we anticipate we're going to be continuing to make some significant investments in technology. I think that there was some a little bit of first quarter noise associated with normal first quarter events and operations associated primarily with things like charitable giving, which tend to be front-end loaded for us, the way that we actually interact with United Way.

But we would anticipate that if we see a decrease in the charitable giving in the second quarter, we are seeing a modest ramp-up in our technology spend. So overall, we're we'd like to see margin expansion. We do think that there is opportunity for that. Obviously, the volatility of the last several days has got all of us a little bit cautious about how we're thinking about the next quarter, but we would anticipate that there is opportunity. That said, we are taking advantage of the initiatives that we've announced to start to really invest in some of our technology platforms to provide for future long-term growth, and we're committed to that. If we anticipate we have to start making some changes because there's something very disruptive that happens, I'm sure we will address that in the coming quarters. But I think that we all recognize in our business that we are getting pressed from above and pressed from below there. But obviously, pressures in terms of fee rates, we've talked about those in on numerous calls, but there's also pressure in terms of the overall cost structure. And we recognize that things like technology and market data are going to be significant components of our overall cost structure, and we're going to have to continue to invest in both. So good markets. I think there is opportunity for market I mean, margin expansion. Just if we get a lift from market, that's a that goes straight to the top line. But we also recognize we've got to continue to invest to actually grow the company.

Operator

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

Ken Worthington -- JPMorgan -- Analyst

Hi, good morning. On the custom portfolios, Tom, you indicated that you're only scratching the surface. So maybe, where are those large opportunities that you alluded to, say, over like the medium term? And what is the strategy here to tap them?

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

Okay. Pretty open ended. So just maybe just to take a second to talk about what custom portfolios are. What's in that? Three broad categories of things. One is equity portfolios that are managed on a basis that broadly replicates a stock market index but with customization to achieve enhanced tax efficiency, so funded in kind to at least in part in kind to minimize upfront tax realization; incorporating tax loss harvesting and gain deferral as part of the strategy; and also customization for ESG and other client-specified characteristics. So one piece is what we used to call Custom Core or still it's what we call Custom Core equity under Parametric. So that's one big piece. A second piece is laddered fixed-income separate accounts. This is the business that recently moved over from Eaton Vance Management, Parametric. And then the third piece is a Parametric business called centralized portfolio management. That is where Parametric is engaged by a platform that does multi-manager strategies where those strategies or where the model where each of the underlying manager's fee is a model for Parametric for implementation on a centralized basis, typically with ongoing tax management as a key part of that. So those are the three key pieces. There's a couple of small odds and ends in addition to that. But when talking about generally where we are with each of those in terms of the comment I made about we think we've just scratched the surface of this, first, talking about what we like to call custom indexing or what the market seems to be calling primarily direct indexing, so that's instead of investing in an index mutual fund or index ETF to achieve an index-like exposure, own a significant representative fraction of the underlying stocks in a separate account with the benefits of customization.

If you look at the size of the index ETF business and the index mutual fund business, certainly in the trillions of dollars just in the U.S., and you compare that to our business, which is about I think, about $110 billion across both institutional and individual separate accounts, the bulk of that being individual, we're the biggest player where a tiny fraction of the percent of the overall market has invested in index strategies through funds. To me, for a taxable investor or someone who's motivated significantly by their own personal values, the ability to achieve better results by owning the underlying holdings approach is being self-evident. It this is a relatively easy case to make, that in applications where after-tax returns matter, where responsible investing matters, where particularly if you're funding that in kind or in part in kind for investors in higher tax brackets, we don't know this for a fact, but our strong supposition is that there are trillions of dollars invested in mutual index mutual funds and index ETFs that would be ideal candidates for achieving a very similar market exposure in what we think of as a better vehicle. So number one is thinking about direct indexing as an opportunity. Number two, switching over to the fixed-income side. That business, which is on the order of, for us, I think, about $40 billion in this category, maybe, I think, between $35 million and $40 million, this traditionally developed as financial advisors who had used the laddered separate accounts for their clients increasingly saw the benefit of using a third-party manager that brings ongoing credit oversight, that brings institutional-quality trade execution and the other things we offer in that strategy. That business, we think, has significant growth opportunities as well, but we also see the potential for these two businesses to converge, that is for direct indexing to move from being what is today an equity concept to being a concept that's embraced not only by equity investors but also by fixed-income investors, and also the potential to combine equity and fixed income together in multi-asset solutions.

So you can imagine a multi-asset target date or multi-asset target risk kinds of portfolios or custom LDI, lots of different ways you can think about putting equity and income strategies together in customized individual separate accounts that are demonstrably value added versus either fund products that are available in the marketplace or perhaps more fully bespoke, that is nonautomated approaches that are that may be used by financial advisors today to achieve similar underlying exposures. No doubt there will be growing competition in this market. No doubt in places we'll see price competition. But we see strong momentum across these markets. As I mentioned, if you isolate the laddered bond individual separate accounts and the Custom Core equity individual separate accounts, the quarter's organic growth rate was about 15%. So we're still growing pretty nicely in that business off of a relatively large base. The third piece of this business, which has been kind of stagnant of late, what we referred to as centralized portfolio management, I also think has significant long-term growth potential. That's about a $30 billion business within, I think, roughly $175 billion of our Parametric Custom Portfolio business. Again, this is Parametric implementing multi-manager separate accounts on a consolidated basis, where we act essentially as the implementation specialist for that manager. Growth opportunities here also are not hard to imagine as efficiency of execution, as the ability to tilt portfolios to achieve better tax results and as the ability to tilt portfolios to achieve desired ESG exposures, those are not concepts that only apply to passive portfolios, and you can certainly imagine a world where that business also sees accelerated growth. Today, we're not really growing much in that business. But we think it has potential also to be a driver for us within this category of Parametric Custom Portfolios. So I hope that's helpful, Ken?

Ken Worthington -- JPMorgan -- Analyst

Yes. That was pretty comprehensive. I appreciate it. Thank you.

Operator

Your next question is from Mike Carrier with Bank of America Merrill Lynch. Your line is open.

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

Good morning. And thanks for taking the questions. So overall, another quarter, strong, diversified flows. It looks like just the one area a little lighter was on the institutional side. So just more curious, what drove it, if there was any rebalancing? And any color in terms of the pipeline?

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

The institutional pipeline overall is quite good. We've had we have, I guess, three multimillion dollar multi-hundred million dollar pieces of institutional business that we're expecting in the second quarter that gives us certainly confidence in and general momentum in our institutional business. And I'm separating out the exposure management business, which is in our institutional flows, but we show those separately. So in think about my comments in institutional separate from exposure management. One of the things that has been working against us and worked against us in this quarter, we have a large institutional client in bank loans, I think, which, over the last several quarters, has been drawing down their position over time. This was a this was and is a multibillion dollar client. So there will be some pressure there. We're most of the way through that drawdown. But this is a long-term allocation that over the last maybe four or five quarters has seen a fairly significant drag on both our bank loan business, looking at it from a mandate point of view, but also from our institutional separate account business. Not to double-count those, but we report both of those things. So we're we think we're getting near the end of that on a more broadly, we expect good flows in institutional. Some of the thing places where we're achieving institutional success, one is our emerging market local income strategy, which is a big quite a big asset class outside the United States where we are seeing some success growing that with institutional clients. Also, under the Calvert banner, we recently landed a significant institutional fixed income, core fixed-income mandate.

And also in the offing is a large high-yield bond individual institutional separate account offering that we expect to fund in the current quarter. So I would say overall, maybe a mixed bag with one fairly significant negative. That's this bank loan client that's been pulling down over time their exposure to us and other managers that they've hired in this category, offset by pretty broad strength in other things. Maybe on the equity side, just a comment. You probably have noticed that Atlanta Capital has had a quite strong performance over recent years, very strong 2019 numbers. And they also have seen a pickup in their institutional business. And that's what you can think of as traditional large-cap U.S. business, which has been, as everyone knows, a very tough place to grow institutionally. But their the distinctiveness of their performance record and their investment approach has allowed them to grow over the last few quarters and have a decent growth pipeline, even in an industry environment where very few people are growing actively managed large-cap U.S. equity mandates.

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

Okay. Thanks a lot.

Operator

Your next question comes from Robert Lee with Keefe, Bruyette & Woods. Your line is open.

Jeff Drezner -- Keefe, Bruyette & Woods -- Analyst

Hi. Good morning. This is Jeff Drezner on for Rob Lee. Just a quick question. I know you touched on the compensation line. I just wanted to circle back to that for a second just to make sure I caught everything. So there was a $5.5 million expense and then a decrease of about $1 million to $1.5 million that we should not expect to occur again in fiscal Q2, is that correct? Is it was there anything else there that I had that I missed? I just want to make sure.

Laurie G. Hylton -- Chief Financial Officer and Vice President

No. I think it's Laurie again. No. Actually, what I said was that there was $5.5 million of stock-based compensation expense this quarter associated with retirements that would not recur in the second quarter. And then there was approximately $1 million to $1.5 million of incremental stock-based compensation expense that is in the first quarter that will not repeat in the second quarter. So I would just say I think what we're saying is effectively, that stock-based compensation expense is likely to go down between $6 million and $6.5 million in the second quarter.

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

Yes. So just to add the two numbers up add the two numbers up, not to subtract one from the other to get the expectation for second quarter versus first quarter.

Laurie G. Hylton -- Chief Financial Officer and Vice President

Correct.

Jeff Drezner -- Keefe, Bruyette & Woods -- Analyst

Got it. Yes. I appreciate that. And then a quick question on institutional business. And if you can get give some color around some ESG strategies at Calvert and how you see that playing out.

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

So Calvert's the we acquired Calvert at the end of 2016. At that time, very close to 100% of their business was U.S. mutual funds, and we've grown that business. We've just about doubled Calvert business. We're not quite there, but just about doubled Calvert's business from, I think, $11.9 billion at the end of 2016 when we acquired Calvert. So that business to date the business growth has, to date, still been primarily mutual funds, mutual funds in the U.S. But our ambitions for Calvert and Calvert strategies and the Calvert brand are certainly much broader than U.S. mutual funds. We're implementing a variety of Calvert strategies as institutional separate accounts in conjunction with Parametric as an offering under our Parametric Custom Portfolios banner. So these are both Calvert indexes as implemented by Parametric, also the opportunity to offer Calvert active strategies as implemented by a Parametric. Institutionally, as I mentioned, we recently had a significant win with a U.S. pension plan that is that was attracted to Calvert based on both the strength of their investment performance capability but also on the strength of their commitment and support of responsible investing. There are many, many, many mission-driven organizations around the U.S. and internationally that we think there's an excellent potential fit between their desire to achieve both strong investment returns but also alignment of their portfolio holdings with the mission of that organization. So think about all kinds of mission-driven nonprofits as well as pension funds and broader organization endowments where responsible investing is a key initiative and a key focus of those organizations.

So not to overplay the term, but, again, we think we're just watching the surface in terms of our ability to take the Calvert brand from heritage as a U.S. mutual fund provider to making that broadly known and broadly represented not only in mutual funds in the U.S. but also funds outside the United States and individual separate accounts and institutional separate accounts in the U.S. and internationally. Clearly, this is a time when Calvert is, in many respects, ideally positioned to grow with surging interest in the market, in the general category of responsible investing. A lot of confusion about what that is and what that means that Calvert, based on its long history there, can help educate the market on, and all that backed by really quite an exceptional investment performance record across a wide range of strategies. So I mentioned that Calvert had 26% organic growth rate in the first quarter. We're certainly optimistic that we can continue to grow Calvert at a well-above-average rate, not only drawing upon mutual fund clients but increasingly separate account clients in both institutional and individual markets.

Jeff Drezner -- Keefe, Bruyette & Woods -- Analyst

Great. I appreciate the color on that. If I could just get one quick follow-up just on custom beta products. And just any competition you're seeing there? And maybe competition on price or whatnot?

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

So when in Parametric Custom Portfolios, there is competition. We will and growing competition. There's also a growing opportunity. And so we'll see how that plays out. We think there is a much bigger market opportunity for us and other competitors. It's not surprising, given the growth profile of this business, that there are other people that are trying this. We think there are significant advantages of scale, significant advantages of experience that we have that new market entrants do not have. But we don't expect this to be a one-player market. There are a handful of other significant players and a few around the edges that are maybe dabbling with this. I don't think there's room for a lot of dabblers to achieve success, but there will be likely a handful of market leaders in this business, of which we would expect Parametric to continue to be the largest among those market leaders as we are today. Price is and always has been one element of the competition in the customized individual separate account business. Mostly, it's been about features and service and, to some degree also, access. Can you get in front of the financial advisor? Can you get access to that advisor? Can you articulate the advantages of a customized individual separate account better than the other guys? Can you demonstrate that you're achieving those advantages better than the other guys? And also importantly, can you service that relationship better than the competition? And service here is both as-needed high-touch service but also ideally an element of an increasing element of low-touch service that is using technology to drive enhanced service, which we think is going to be critical to maintaining profitability in this business if prices on average continue to fall, which we expect, by and large, they will over time in this business. In the on the fixed-income side, it's a bit of a different story.

There are several competitors in the laddered bond space. It doesn't feel like that the price competition there is intensified. We worry a bit about equal market access in that market relative to broker-dealers offering in-house strategies that can compete against third-party strategies. Also, as I mentioned in my earlier comments in response to Ken's question, we do think there's a significant emerging opportunity for fixed income, direct indexing best solutions that we think we're in a far better position to offer those today than literally anyone else in the marketplace based on the development work we've done on those kinds of strategies, which we're pretty excited about the potential for long term to expand how people think about this category. It's not just replicating or roughly replicating an equity index. It's taking that, combining it with fixed income and over time developing solutions that move well beyond replication or tracking of a benchmark to helping clients and financial advisors meet their financial needs more broadly, including concepts of target risk and target date and custom LDI.

Jeff Drezner -- Keefe, Bruyette & Woods -- Analyst

Great. Thanks so much.

Operator

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

Bill Katz -- Citi -- Analyst

Okay. Thank you very much. Appreciate all the color. Maybe just two questions. Tom, maybe start with you. Just big picture down, there's been a fair amount of M&A in the landscape, both on the sort of manufacturing side as well as on the distribution side and in varying forms. What, if any, impact do you think that has in your business?

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

Okay. Well, I guess I'll start with time will tell. We don't know most of the acquisitions that have been announced have haven't been completed. So the ones that I think we feel most comfortable we know the answer to are consolidation within the asset management industry. And that how that usually plays out may not play out in the case of the recently announced transaction, but how it usually plays out is that during a fairly prolonged transition period, there's some amount of migration of assets from the two companies that are merging, two competitors. Strategies get put on hold, there are changes, disruptions to investment teams. Those are the kinds of things that the firms that are merging are trying to minimize, and those are the things that their competitors are trying to take advantage of, and those are the things that their customers and gatekeepers are watching for and very concerned that there may be negative fallout of this transaction from the point of view of them and their clients. So there's always some opportunity. How big that is, is always very hard to gauge. But in general, consolidation among competitors in the short run creates opportunity for those competitors just because of the disruption associated with the merger. Longer term, once the thing happens, it's it very much depends on their ability to execute and lots of things that are very hard to foresee during the period when acquisitions are being announced. In terms of the more distribution oriented or ones affecting wealth management more than asset management, so this would be the Schwab, TD Ameritrade or E TRADE, Morgan Stanley, that's, just to be clear, what I'm talking about, those are a little hard to judge. What is important to us is that we continue to maintain market access. And that is obviously critical to our business success. What we have to do to maintain that is demonstrate that we're worth that, that we provide value added relative to what they can do themselves.

That's always been true. That continues to be true in our business. With limited exceptions, we sell to financial intermediaries, where build versus buy is a decision that they always have. Any one of these firms could decide if they're going to do asset management in-house. How they get there? Who knows. But and the record generally of these firms has not been good. These are very different businesses, asset management versus wealth management, and few companies are able to do both well. As I think about industry change, I take comfort in the fact that Eaton Vance, while we're, I guess, a meaningful company in many respects with about $0.5 trillion of assets under management, we are, in the grand scheme of the asset management business, a pretty small pimple with a tiny market share in the range of 1% or 2%. As you think about the addressable wealth management marketplace and where our $0.5 trillion stands versus the size of that market, I continue to believe that, that size is a big is a significant advantage for us, allowing us to grow if we execute effectively on our plan, if we're nimble, if we're smart, if we're innovative, if we can deliver for our clients, even as things happen around us that might be viewed as adverse to our overall industry's prospects. If we can be better than most of the rest of the other guys, we can continue to be very successful as a firm. We're not slavishly limited in our growth by the growth prospects of our industry.

Bill Katz -- Citi -- Analyst

Okay. That's very helpful. And Laurie, just one for you, a little bit of a nasty question, so I apologize in advance. Can you break down a little bit on where you're sort of spending the technology? What kind of time line you talk about here? Is this a multiyear effort? And then just as I think about the ins and outs of flows versus fee rates, it sounds like a very good flow story. But also, I hear nothing about the competition in lower-fee products. So how do you sort of see the dynamic between organic growth versus revenue growth, notwithstanding this was a very good quarter of itself?

Laurie G. Hylton -- Chief Financial Officer and Vice President

Yes. Maybe on just the technology question first. I think as we think about technology spend, I'm starting to think about this in terms of new normal. I don't think we're necessarily talking about a onetime big bang, we're going to replace a big system and then all of a sudden we're going to be able to stop spending on technology. I don't think that's what we're talking about. What we are talking about is a slightly more consistent incremental spend on technology, recognizing that a lot of this is in relation to the initiatives that we've recently announced associated with Parametric and Eaton Vance, that we're combining technology platforms, we are looking to invest in technology to ultimately increase our efficiency, increase our effectiveness, bring down the cost of what it actually takes to manage separate accounts on an account-by-account basis. So our goal is to continue to make those investments, and we will see an increase in our technology spend over a longer-term period. But our goal is to ultimately then be able to leverage that to reduce our overall operating expenses in the future. So this is, from our perspective, very much a long-term play and a long-term investment. In terms of revenue, I think as we're looking at our effective fee rates and I think if you look at Attachment 10 in our press release, you can see that they're really on a category-by-category basis. We are not seeing a diminution in our effective fee rate by equity, fixed-income, alternatives, etc. What we are seeing is just shifts in mix quarter-over-quarter that ultimately impacts the average effective fee rate for the period. So I know there's a lot of talk about decreases in effective fee rates.

We are not necessarily seeing that by mandate, but we are seeing a decrease year-over-year in our average effective fee rate at the top of the house, recognizing that, that is being driven by mix. But I think what is positive from my perspective is that as you look at the this quarter ending January the quarter ending January 31 versus the quarter ending October 31, we saw no decrease in our overall average effective fee rate. So we feel very, very positive that we have got some level of stability at the mandate level and that we've got every opportunity to see our average our organic growth in assets, if you will, to actually see our organic growth in revenue mirror our organic growth in assets going forward if we are able to continue to advance the ball on our active equity strategies where there are higher fees while growing our somewhat more passive strategies where the fees are lower. So I think that we demonstrated this quarter that we could effectively do that by producing 5% organic growth in assets and 5% organic growth in revenue.

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

And maybe I can just jump in with a couple of comments. If you look at our charts accompanying the slides accompanying the call, you can see that over the course of fiscal 2019, there was a bit of a disconnect from our in our ability to grow to achieve organic growth in assets versus our ability to achieve organic revenue growth. So that's comparing slides nine and 11. If you look at the slides, I guess it's slides 10 and 11. 10 looks at annualized internal growth in consolidated managed assets on a percentage basis, and then 11 looks at that same those same numbers just converted into revenues. The real difference the driver of the differences in 2019 was primarily the fact that we saw over the course of that year, we saw, I think, roughly $14 billion of net no, I think 12 sorry, $12 billion of net outflows over the year in two relatively high-fee categories: floating-rate income and global macro strategies that dominate our alternative strategies. The best thing that can happen for us in terms of our ability to achieve organic revenue growth in the same range as our organic asset growth is to stop the outflows in those two strategies. We came we got there in alternatives in the first quarter. We think we're getting very close to that happening in bank loans. Our expectation is for the balance of the year, subject to markets, is that you'll see a much closer alignment between our ability to grow assets and our ability to grow revenues tied to those assets simply because we don't expect that negative, which drove that disconnect last year, to continue into this year.

Bill Katz -- Citi -- Analyst

Its all very helpful. Thank you for the detail.

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

Maybe its time for one more question.

Operator

Our last question comes from Glenn Schorr with Evercore. Your line is open.

Glenn Schorr -- Evercore -- Analyst

Hi thanks. Two quick follow-ups on sustainable investing, if I could, the conversation. One is I'm curious to get your thoughts on the client interest that you noted and are clearly seeing in terms of dedicated product versus just part of the process of ongoing product. And two is how you think passive plays a role ESG investing. It's counterintuitive, but there are products, they are getting flows. So curious on how you think passive impacts pricing and flows, yes, and sustainable...

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

Yes. So we're Calvert has a broad-based menu of strategies in the responsible investing space, including both active and passive. We have we are growing in active. We're growing in passive. We have good performance in active. We had good performance in passive. That's on the equity side. Fixed income, we really had it's an all-active strategy business. I think there's an element of responsible investing that doesn't really cut quite neatly between active and passive, and that's the aspect of engagement. So what are you doing to help drive value creation and help improve performance of the companies in which you invest? And you do that through how you vote your proxies, how you participate, if at all, and shareholder resolutions and the conversations that you engage either individually or as part of groups with the management to try to get them to achieve better results. Those kinds of activities, to some degree, can cut across both active and passive strategies. As it's as this business is developing, there's still lot of this is a pretty fast-moving turf. Lots of confusing terms that out there, things that I use one term, you use another. What I the term I use might mean something different to me than it does to you. It's going to take a while for that to sort out. But one of the things that I think is clear is that the role of engagement is becoming more and more important in differentiating strategy A from strategy B or manager A from manager B. How do they vote their proxies? How do they participate in shareholder resolutions? How do they, if at all, engage with management? So that's a second level of performance beyond the normal way that we measure return. The other things that's, I think I'd say, we're in the early innings of is measuring performance not only in terms of financial results but also in terms of non-financial results. That is, how does my portfolio compare to an index or some other competitor in terms of tons of ESG, tons of carbon omitted or tons of carbon shaved. Lots of different metrics.

And again it's pretty early days. The information is not great. But I think over time, as this information develops, we're going to see more and more and better and better reporting on this so that there's going to be multiple dimensions to how you think about different categories of responsibly invested strategies. Lots of other I was just on a ICI call on this topic yesterday, but lots of efforts ongoing to try and bring some clarity to the categorization of different funds, what do these words mean. But if it was and is and likely will be for the near term pretty fluid in terms of the terminology, and we certainly support industry efforts to bring a little more consistency to that terminology. But what's driving our growth, we think, is pretty clear. It's the combination of strong performance plus very credible thought leadership, discipline and performance in terms of the ESG efforts that back our investment teams. It's research, it's engagement, it's impact measurement, and all that backed by having done this under the Calvert brand since the early '80s. So credibility as a manager, depth of resources as an ESG manager and the tie to strong-performing teams. We think that's the that's a key to success. Active versus passive, we'll see how that plays out. We tend to think that this is a place where there's greater opportunity for active managers to add value. But as you point out, there are also flows going into passive products in this category.

Glenn Schorr -- Evercore -- Analyst

All right. Thanks so much.

Pierric G. Senay -- Treasurer and Director-Investor Relations

All right. Well, thank you very much for those of you who participated in today's call, and we'll speak with you when we have our next webcast for the second fiscal quarter. Thank you very much, and have a good day.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Pierric G. Senay -- Treasurer and Director-Investor Relations

Thomas Ewart Faust -- Chairman, President and Chief Executive Officer

Laurie G. Hylton -- Chief Financial Officer and Vice President

Dan Fannon -- Jefferies -- Analyst

Ken Worthington -- JPMorgan -- Analyst

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

Jeff Drezner -- Keefe, Bruyette & Woods -- Analyst

Bill Katz -- Citi -- Analyst

Glenn Schorr -- Evercore -- Analyst

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