Times are uncertain in the asset management industry. While the broader market has enjoyed a long bull run, asset managers are moving cautiously into the next decade. Global assets dropped 4% to $74 trillion in 2018, according to a study by Boston Consulting Group, while net inflows came in at $944 billion, well below the $2.15 trillion of 2017. Actively managed assets accounted for most of the declines last year as investors continued a gradual move toward lower-fee indexing and alternatives.
But on a more upbeat note, the BCG report discussed the power of technology to help firms revamp their business models, improve their efficiency, and serve clients better. This is right in Eaton Vance's (NYSE:EV) wheelhouse. The Boston-based asset management firm is investing in new technologies and restructuring to build on its competitive advantages in direct indexing, a trend that's gaining ground in the world of asset management.
Meet Eaton Vance
Eaton Vance is a Boston-based money management firm with five investment affiliates under its umbrella: Eaton Vance Management, Parametric Portfolio Associates, Atlanta Capital, Hexavest, and Calvert Research and Management. For the most part, each specializes in a different part of the market. The company has about $173 billion in mutual fund assets, $170 billion in institutional separate accounts, and around $146 billion in individual separate accounts.
Eaton Vance has been a steady performer through the market's ups and downs. This year will likely be the 24th in a row that the firm has had positive net flows into its investment portfolios. In the most recent quarter, Eaton Vance saw assets under management climb to almost $483 billion -- up 3% over the previous quarter and 7% over the same point the previous year. Further, earnings per share (EPS) were up 10% in the third quarter year over year and 1% from the second quarter. (historically, the annual EPS growth rate is about 8.3%). Its stock price is up about 35% year to date, which is well above its peers in the financial services sectors.
Looking ahead, EPS is expected to grow 5.8% this fiscal year, and it's expected to rise from about $3.40 per share in 2019 to $3.52 per share in 2020, according to analyst estimates.
Why the optimism? Read on.
Focus on Parametric
In June, Eaton Vance announced a plan to rebrand the company's individual separately managed account (SMA) business under the banner of Parametric Portfolio Associates. Parametric is a market leader in this space due to its proprietary Custom Core SMAs solution, which relies on direct indexing (or custom indexing).
Through style of investing, clients can essentially create their own indexes to fit their investment needs by combining existing indexes or benchmarks using Parametric's proprietary optimization technology. The portfolios are similar to ETFs and index funds in terms of tax efficiency and low fees, but with increased control over portfolio construction and management.
With this restructuring, Eaton Vance Management, the investment arm of Eaton Vance, will transfer its nearly $40 billion in individual SMA fixed income assets over to Parametric. Further, the operating platforms and technology of EVM will be incorporated into a single platform at Parametric. Once the transfer of assets is complete in 2020, Parametric will manage about $285 billion -- or 61% of the firm's total assets.
"This is a market we lead today and are committed to growing aggressively," CEO Thomas Faust said on the company's third-quarter earnings call. "By expanding Parametric's 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."
As mentioned at the outset, direct indexing is considered by some experts to be the next big thing in investment. As the current market leader, Eaton Vance is in a good spot, but the company is not standing still as it looks to increase its market share.
"As we consider our strategic position in the evolving asset management industry, we feel very good about where Eaton Vance sits," Faust said. "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."
With the custom indexing operation on a single platform, Eaton Vance plans to make additional investments in its technology to enhance scalability and achieve greater operating efficiency. But given that the investments will be made to one platform, the investments will actually be less than they would have been before with two platforms. The company also expects cost savings from the restructuring. Overall, the balance sheet is solid, with $4.2 billion in assets and $2.7 billion in liabilities with $528 million in cash and cash equivalents, so there is adequate liquidity to invest.
Also, the company hired Ranjit Kapila as chief technology officer and head of operations. In his former job as global head of portfolio management investment systems at BlackRock, he oversaw development for portfolio management applications across all asset classes. "Ranjit's experience with scaling large, complex technology systems across asset classes and management styles will be invaluable in leading our innovation initiatives, including the development of a single technology and operating platform," said Parametric CEO Brian Langstraat.
While uncertainty is expected over the next few years in the asset management business, Eaton Vance has positioned itself well to navigate the ups and downs. It's a company that should be on your radar over the next few years.