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Morningstar | Weaker Organic Growth Damps Eaton Vance's 3Q Results; No Change to Our $60 FVE

There was little in wide-moat Eaton Vance's fiscal third-quarter results that would alter our long-term view of the firm. We are maintaining our $60 fair value estimate. The company closed the July quarter with $453.2 billion in assets under management, up 3.0% sequentially and 11.7% year over year. Net inflows of $3.7 billion were better than our expectations but still off the $5.0 billion quarterly run rate we saw in the two years prior to the fiscal third quarter. Eaton Vance's exposure management platform, which provides option overlay strategies (which can lead to heavier sales and redemptions) to institutional clients looking to customize their risk and return profiles, was the biggest detractor with $3.7 billion in outflows during the period. Assuming that organic growth and market movements continue to track our expectations for the remainder of fiscal 2018, Eaton Vance should finish the year with $455 billion-$475 billion in managed assets.

While average AUM rose 12.9% year over year to $446.0 billion during the third quarter, a decline in the company's overall effective fee rate from 34.4 basis points to 33.6 basis points, due to ongoing fee compression and shifting product mix, left management fees up just 10.2% year over year. With distribution and service fees flat to up slightly year over year, the firm reported a 9.4% increase in total revenue during the third quarter. For the first nine months of fiscal 2018, Eaton Vance's top line increased 12.7% compared with the year-ago period, in line with our forecast for high-single- to low-double-digit revenue growth for the full year. Year-to-date operating margins of 32.4% were 180 basis points higher year over year and in line with our fiscal 2018 forecast for operating margins of 31%-33% (compared with 31.6% in fiscal 2017).