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Boston-based Eaton Vance (NYSE: EV) is one of the nation's oldest asset management shops. The company manages over 150 mutual funds, as well as a variety of closed-end funds and institutional accounts. As of April 2007, the firm boasted nearly $145 billion in assets under management. Eaton Vance is perhaps best known for its closed-end fund offerings. In each of the past four years, no other firm has issued more closed-end funds than EV. Additionally, the company also has a core competency in custom-managed accounts targeting wealthier investors. Competitive Advantages Eaton Vance garners a competitive advantage by targeting two key niche markets: closed-end funds and tax-advantaged investments. To the first point, closed-end funds offer several advantages over traditional mutual funds. Specifically, investors in open-end mutual funds can choose to redeem their investments at any time. Fund managers must often liquidate some of their holdings in order to raise the cash needed to meet these redemptions. Sometimes this forced selling occurs at inopportune times, such as near important market lows. This activity also adds to trading expenses and can harm performance. However, with closed-end funds, there is a fixed pool of investable assets -- investors can't redeem their shares, they simply sell them to another investor on the open market. This eliminates the redemption problem and its associated costs. While the market for closed-end funds is smaller than for traditional mutual funds, Eaton Vance offers the widest array of products targeting different investors and strategies. The ability to reach a wider audience gives EV an advantage when it comes to attracting assets. Secondly, Eaton Vance has a significant asset management business aimed at wealthy clients looking to reduce their tax burden. For example, a widening range of investors are now subject to the Alternative Minimum Tax (AMT). AMT was originally designed to limit the deductions available to the wealthiest handful of Americans, but the law has never been adjusted for inflation -- it's now trapping more and more taxpayers each year. EV has developed funds specifically designed to limit tax liability for customers subject to the AMT. In addition, the company also offers a range of tax-efficient stock funds, as well as highly customized separate accounts to help institutional and high net worth investors maximize their after-tax returns. Few competitors have targeted this attractive niche as effectively as Eaton Vance. Growth Drivers Many of Eaton Vance's closed-end funds target income-oriented investments, such as bonds, preferred stocks, and dividend-paying common stocks. Income-oriented investments have been rapidly gaining popularity in recent years, as have funds focused on such investments. The simple reason for this is demographics. Investors approaching or currently in retirement often prefer the safety and stability of investments that throw off consistent and high income. With traditional income-oriented investments such as CDs and Treasury bonds throwing out near-record low yields, investors have been forced to look elsewhere for income. Eaton Vance's wide range of innovative offerings and strong competitive position in this fast-growing niche has helped the firm attract customers and take assets away from competitors. Valuation and Outlook EV trades at around 20 times its forward earnings estimates. However, that multiple seems reasonable given the firm's solid long-term earnings growth forecasts of +15% per year. We also like the stickiness of Eaton Vance's wealthier managed accounts clients. Once the firm attracts a customer for its managed accounts, that customer typically remains a client for many years. Therefore, the company doesn't need to spend as much time trying to attract new investors. There's plenty of opportunity to cross-sell new products and services to its existing loyal base. Good investing!
Paul Tracy founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators. Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S. Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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