Finding the delicate balance between a conservative investment approach and creative product development has allowed Eaton Vance to deliver on its investment promises and emerge as a competitor that is both formidable and admirable. Demonstrating its consistency, the firm has won top accolades that provided neat bookends for the past decade—for 1997 Barron’s recognized Eaton Vance as the No. 1 mutual fund family, and for 2007 Lipper ranked it the No. 1 fund family based on its total number of award-winning funds for the three, five and 10-year periods and the No. 2 overall fund family. The firm boasts dozens more honors as well recognizing its investment performance, shareholder servicing, sales support and product innovation. Given those, its exceptional stock performance over the last 30 years seems par for the course.

One of the keys to Eaton Vance’s success has been the stability of its leadership, so when a handful of executives recently retired, including chairman Jim Hawkes, who had spent 37 years at the firm and 11 years in the top spot, it kicked off a series of changes. The new chairman Tom Faust and members of his senior team recently spoke with Private Wealth about the firm’s management change, its distinct qualities and fast-growing suite of capabilities for sophisticated advisors and their wealthy clients.

Thomas E. Faust Jr., Chairman and Chief Executive Officer

HSG: Eaton Vance has gone through a recent management transition. What’s changed?

Faust: Very little. It was a generational change of leadership as inevitably takes place in the life of any company. But this is the same organization and our objectives are unchanged. We’ve worked hard to preserve what’s unique about Eaton Vance and have the experience be seamless for our clients and business partners.

HSG: On that note, what is it that makes your organization so unique?

Faust: I think it’s our heritage, our structure and our culture. The predecessor companies to Eaton Vance date back to the 1920s, the founding days of investment management in the United States, and that created a legacy of maintaining very high ethical standards and being a responsible fiduciary and trusted advisor. We are one of a relatively small number of independent, publicly traded companies that focus exclusively on asset management and have done this throughout our history. We are not a subsidiary of an insurance company or a global bank, and that lets us control our own destiny.

An equally important part of our success is an environment within Eaton Vance that embraces innovation and can evolve in response to new ideas and business opportunities. That culture has allowed us to stay on top of changes in market circumstances and devise solutions for a number of common problems facing high-net-worth investors.

HSG: Eaton Vance has remarkably low employee turnover. How is that achieved?

Faust: Everyone likes to be part of a winning team, which we have been, particularly when they can share in the reward, which we enable through broad stock ownership. This is a place where people choose to spend their careers. I joined Eaton Vance 23 years ago and there are many people around that I’ve worked with throughout that time. Even though we have grown and entered new businesses, there is still a feel to our organization that’s not all that different than it was when I first became an employee. Our day-to-day interaction is very congenial, team-oriented and professional. We try hard to be employee-friendly and employee-centric, a company that attracts smart, talented people who want to work collaboratively for the common good and that has given us a differentiated position within the Boston investment community. We really strive to be known as the best place to work in our business.

HSG: How has the stability of employees benefited the firm and its clients?

Faust: It’s a tremendous competitive advantage to be able to offer consistency of approach and continuity of people to our clients. Given the pace of change in our business, those are rare and valuable commodities.

HSG: Despite the awards and the recognition, Eaton Vance has maintained a pretty low profile. Was that a conscious decision?

Faust: Maybe it’s consistent with our Yankee roots, but we’ve been an organization that has preferred to let our results speak for themselves and haven’t felt the need to aggressively promote ourselves. It’s clear that knowledgeable financial professionals, the leading advisors and family office executives, know and respect us, and having that awareness is most important.

HSG: How does Eaton Vance participate in the ultra-high-net-worth market today?

Faust: A significant part of our business is conducted through the high-end financial professionals who use a broad range of our capabilities for their affluent clients. In support of that, we recently created a team of specialists to work exclusively with advisors on the complicated aspects of managing private wealth. (see below)
We also work directly with high-net-worth investors through two of our businesses. One of our subsidiaries, Parametric, has provided index-based, tax-efficient strategies to family offices for more than 15 years. They’re in the process of expanding their capabilities to provide simple, coherent solutions to help advisors and wealthy clients deal with pervasive concerns about taxes and risk. Eaton Vance Investment Counsel is the other way we work directly with high-net-worth clients. It’s a high-touch investment-driven service based in Boston and focused primarily on the East Coast. EVIC is an important part of our heritage and a significant business for us. We see growth opportunities as we add new counselors and expand services for wealthy individuals who want a comprehensive relationship spearheaded by a professional with oversight of their portfolio.

HSG: Can you share some of your major successes?

Faust: About four or five years ago, Eaton Vance was largely perceived as a niche company. We were clear leaders in somewhat esoteric asset classes—like tax-managed equities, bank loans, municipal bonds, emerging markets—but lacked significant strength in the traditional asset classes that capture big pools of money. So we set out to develop capabilities in the core investment strategies that would allow us to compete for 401(k), sub-advisory and institutional business, and expand outside the U.S. Since that time, we’ve had real success with our large-cap value offering—the strong investment performance there has helped us gather around $15 billion in assets and create a fast-growing, mainstream franchise with a lot of upside.

On a different note, we continue to dominate the closed-end fund business. We’ve been the leading seller of new closed-ends for the past five years straight. Our risk-managed diversified equity income fund just won an award for innovation, and a global variation of that strategy brought to market in February 2007 was the single largest closed-end offering in history. And we’re building on that success using equity options to manage risk and enhance after-tax returns in both open-end and separate account formats now.

HSG: Your business results have been incredible, but are they sustainable?

Faust: When I think about my job leading Eaton Vance, it’s critical to make sure the special elements of our culture remain in place as we grow. It’s also important that we continue to be open and adaptable to change and seize opportunities to grow our business as they present themselves.

But at the end of the day, our success as a company will be driven mostly by the performance of our investment teams and the operations and service professionals that support them. If we can add value versus the benchmarks and peer groups we are being evaluated against and demonstrate our investment expertise, then everything else we do gets a lot easier. If not, this is a tough business.

HSG: Fast-forward three to five years. What would you like to have accomplished?

Faust: If we can continue to deliver strong investment performance and value-added products for clients and maintain the supportive, collaborative and effective culture that allows us to attract and retain the best people, we will succeed as a company. My priority is to keep that going.

HSG: I think everyone will be happy if you did.

Faust: Probably not our competitors, but everyone else.

Duncan W. Richardson, Executive Vice President and Chief Equity Investment Officer

HSG: Eaton Vance’s investment results have been strong, consistent, award-winning. Can you discuss the approach used to deliver long-term performance?

Richardson: A significant contributor to our strong performance, and strong risk-adjusted performance, through a full cycle of market conditions is our continuous focus on risk management. The first and primary way we control risk is through our research effort. Understanding what you own is a key differentiator, as is how those stocks are used in a portfolio so it will not take unnecessary risk.

The key to our consistent performance has been our ability to attract and keep experienced analysts and portfolio managers. You need a lot of data to differentiate between luck and skill. We believe that an experienced investment team, making well-informed judgments on stocks, is the best way to reliably get performance.

We also structure portfolios to minimize single stock, sector and tax risks. By lowering those risks, we are able to lower the overall volatility of a portfolio. In our stock selection and trading, we also try to capture performance from the inefficiencies of the markets. Case in point, market and stock volatility can be amplified by the current mood or the latest news. In those cases, we try to take a longer-term view and use that short-term volatility to our advantage.

HSG: What is the structure of your investment teams and why?

Richardson: I think of each team as a constellation. It’s not the one-star system or management-by-committee structures you see at a lot of asset management firms, but a team of people, each with an assigned role and mutual respect for one another. Our analysts support multiple portfolios and, on average, have more than a dozen years of experience in their industry or sector. For the most part, analysts are responsible for identifying the investments we want to own, and the job of the manager is to properly weight them in the portfolios and get out of the securities that no longer meet our criteria. The strong sell disciplines we have in place contribute to the buoyancy of our portfolios, as does the way our analysts manage the risk of their picks. The collaborative, team-based structure really works for us. It’s important to have people that enjoy working together towards a common cause and to build on that spirit of teamwork.

HSG: Do you prefer hiring experienced investment professionals or developing them internally?

Richardson: We don’t have a whole lot of turnover among the investment staff, but when we do hire we tend to look for more experienced people who can bring new ideas to the organization. We don’t know the perfect way to pick a stock in every industry, so we use every opportunity to learn from others and refine our approach. It’s one of the reasons we don’t have a particular training routine for our associates. Instead, we spend our time finding the right professionals for each role and keeping the best ones here.

HSG: Historically, Eaton Vance has been recognized for its fixed-income products. Is that an accurate assessment of your capabilities and AUM?

Richardson: There’s no question that we’ve got lots of world-class, traditional fixed-income products and a great bank loan operation. We’ve also been able to create a really wonderful and diverse set of income-generating products within asset classes that have delivered solid long-term performance. But over the past ten years, our asset mix has shifted from roughly two-thirds in fixed income and one-third in equity to the exact opposite. Now the majority of our assets under management are in equity strategies.

HSG: Was that a conscious effort to diversify or simply a sign of the times?

Richardson: We certainly want to have a balanced product line, since some asset classes are more attractive in certain market environments than others, and to be a premier investment organization we need to have a full suite of capabilities. Fortunately, we were able to build on our strong reputation for fixed income to expand the investment platform to include a wide range of strategies and vehicles enabling us to offer investors some excellent options across style boxes.

As Tom mentioned, we’ve had particular success with our strong large-cap value capabilities, but our ability to generate income from equity, something that’s particularly relevant to the ultra-affluent investor, is less well known. We’ve been a market leader in getting both dividend income and option premium income from equities, and enhancing returns by focusing on those things.

HSG: Eaton Vance has a controlling stake in other asset management firms. Can you explain those relationships and what they bring to the table?

Richardson: Part of the motivation to acquire new asset management capabilities was to build a truly comprehensive platform that will meet the majority of investor needs and preferences—offering more than one approach to growth or value investing and a blend of actively managed and quantitatively driven strategies, for instance. We always planned to have each organization remain independent and keep its distinct identity in the marketplace, and that structure has allowed us to share best practices and enter new channels without curtailing the existing momentum of the individual firms. Today we have three investment affiliates—Parametric, Atlanta Capital Management and Fox Asset Management.

HSG: What is it about your investment approach that appeals to higher-net-worth individuals?

Richardson: More sophisticated and wealthy investors understand that achieving higher returns often requires taking more risk, but they place real importance on capital preservation. We understand that and focus on managing the trade-off between risk and reward.

We’re also very conscious of tax implications. We have perhaps the largest family of tax-managed mutual funds in the industry, many of which didn’t distribute any capital gains last year—a feat that is important to our shareholders and even more impressive when you consider the environment. In 2007, mutual funds paid about $415 billion in capital gains, the largest distribution in the industry’s history.

Beyond that, we’ve committed to the ongoing innovation needed to deliver the products and solutions that address specific high-net-worth requirements and objectives. In doing so, have established ourselves as a responsive and valuable partner to the affluent and their advisors.

Matthew J. Witkos, President of Eaton Vance Distributors

HSG: Under your leadership, how does Eaton Vance partner with its advisory clients?

Witkos: I believe that our clients want to interact with someone that understands their challenges and needs in much the same way high-net-worth and ultra-high-net-worth clients want that degree of empathy and experience from their advisors. So I think about the kinds of things our clients are facing and try to organize our resources to help them tackle those issues. Having the right products and services is only part of the answer. We have to give equal focus to how those products and services are delivered. So, basically, we took a traditional distribution organization and customized it to be more client-centric. We have groups that focus on distinct types of clients, like defined contribution plans and advisors, and most recently created a team to focus exclusively on the complex needs of the affluent investor—the Wealth Management Solutions group. (see below) We have to talk the talk and walk the walk to be credible and effective with our clients.

HSG: How has the combination of volatile markets and low consumer confidence affected your distribution efforts?

Witkos: I actually think it’s been very beneficial for us, we’re having a great year. In these climates people are more open to new ideas and actively looking for new and different ways of doing business. We have a lot of innovative capabilities that can solve some of the thornier issues, like concentrated wealth, that are facing the high-net-worth market, and we’ve really just begun to explore the full extent and application of these services with our clients.

HSG: That said, how does Eaton Vance help wealthy investors achieve the desired diversification?

Witkos: We have a long history in this discipline, but we also recognize that each client situation is unique so we haven’t limited ourselves to a single technique. Eaton Vance has for years been a leader in offering specialized equity funds that provide tax-efficient diversification for investors holding concentrated stock positions. Through our subsidiary Parametric we offer strategies that assist in the staged unwinding of concentrated positions over time. We also offer programs using covered call writing and other options strategies to enhance the return and manage the risk of similar situations. Our challenge, and our opportunity, is finding the best way to help advisors understand and evaluate these strategies within the context of their clients’ needs.

HSG: Doing so can be the difference between being known as a product provider or a consultative partner. How will Eaton Vance distinguish itself in that regard?

Witkos: We have to connect with our clients and their clients to really understand and manage the dynamics at play. Successfully diversifying $100 million in stock, as an example, requires knowledge and sensitivity and patience from everyone involved. One client might be the third or fourth generation to own a particular stock; another remembers when the family business went public and still holds the original certificates, or maybe it’s a senior executive concerned about the message a stock sale will send to other shareholders—these kinds of situations call for an emotional maturity that can trump sentiment and dispel fear. An advisor has to have a tremendous amount of trust in our professionalism and expertise to put us in front of his or her client, and we have to earn that trust by consistently delivering the specialized experience needed in these types of scenarios. We have to put our strongest people and our best resources up against these opportunities and become an essential partner to advisors and their biggest clients.

HSG: What else is the firm doing to help advisors work more effectively with ultra-affluent clients?

Witkos: As you know, taxes are a major concern for people with a certain level of assets. If you look back to the inception of our predecessor organizations in the early part of last century, the investment approach was conservative and tax-sensitive. The same is true today and readily accessible through many of our products. We have some additional tax management resources at our disposal through Parametric. They have emerged as a leader in overlay management, a technique that can play a pivotal role in managing the range of asset classes and vehicles and associated tax issues in a single portfolio. That inclusive perspective of a client’s holdings can also help consolidate and simplify statements that have gotten unwieldy, which can be another key benefit for both advisors and clients.

HSG: What other changes and opportunities do you foresee in private wealth management? And how will they impact your business?

Witkos: The trends are very positive for our business. The credit crisis is driving people back to local banking relationships, and these smaller institutions, along with certain family offices and trust departments, will need to adopt a more holistic approach. Most of them have been managing significant client assets using a core strategy, but don’t have the resources or the technology to incorporate niche and specialty capabilities in the most efficient way. Overlay management can be a scalable solution for a company like that, and will definitely become more important as unified managed accounts grow in popularity.

I also expect to see a bigger percentage of first-generation affluent choosing to retire earlier, at least from their first career and the one that created their wealth. At the same time, successive generations of wealthy families make the day-to-day administration of assets and trusts more complex. Both scenarios will need better tools to produce and manage income from multiple sources.

And the upcoming presidential election will probably prompt people to pay closer attention to taxes and seek products and strategies that will help them minimize their tax obligations. We have the depth and breadth to address a lot of the critical issues that are confronting affluent investors today.

HSG: Where do you expect to achieve future growth?

Witkos: Leveraging the sophisticated thinking of our investment professionals to stay on top of the changing needs of the high-net-worth market, and delivering those solutions through our established advisory relationships and the channels where we haven’t focused historically – bank trust departments, family offices, registered investment advisors. We’re adding staff to help us deepen those relationships and make sure the result is something that is effective and efficient for both the affluent client and the financial advisor.

James R. Durocher, Senior Vice President of the Wealth Management Solutions Group

HSG: Both Tom and Matt touched on the creation of your team as a dedicated resource for private wealth advisors. What was the thinking behind this initiative?

Durocher:: Our distribution clients are segmenting their advisors by the wealth of the individuals they serve, and adapting their business models with private banking and family office units to better serve the unique needs of the ultra-high-net-worth market. Our conclusion was that we needed to do the same to be a more effective partner.

Ultimately, this will allow us to tailor our products, resources and services in a way that will help advisors do a better job serving their wealthy clients.

HSG: Can you explain the structure and the resources of the group?

Durocher:: In my view, the high-end advisor and the ultra-affluent client are very demanding and desirable segments of the market. You have to be at the top of your game and continually adding value to earn their business, and this group was created to do just that. We have three chief assets: people, products and resources. Today, we have five professionals dedicated to the effort. Each person has more than 20 years of industry experience, so it’s a mature and knowledgeable team that understands the complexities that can come with personal wealth. We’re committed to helping the team build its competencies in specialized areas—things like asset location, executive comp and tax planning—that will increase our effectiveness in the field. In fact, the entire team will be pursuing certification as chartered private wealth advisors later this year.

As for products, we’ve developed a lot of unique capabilities over the years to address some specific wealth-related issues, and those are now consolidated in the Wealth Management Solutions group. Our team supports strategies that facilitate goals such as lifetime income planning, generational wealth transfer, and the funding of philanthropic gifts.
And lastly, we’re working with the Eaton Vance Advisor Institute to develop a suite of value-added resources for our partners to help them support and grow their high-net-worth relationships. The topics range from technical training on concentrated wealth to guidelines for running a productive family meeting to an overview of charitable structures. The needs of the market are fairly broad and our materials need to reflect that.

HSG: At what asset level will your team’s services be best utilized?

Durocher:: Broadly speaking, our solutions are most appropriate for clients with $10 million or more in investable assets. Advisors with these types of clients tend to be more comfortable with the sophisticated and complex transactions that can be required.

HSG: How will your group and the Eaton Vance wholesalers coordinate their efforts with clients?

Durocher:: The group will be a resource for our field wholesalers, providing support to the long-term relationships most of them have from long careers spent in a single territory. But I’d also like to see the team members developing their own relationships and actively partnering with advisors to solve problems and win business. If we can strike the right balance it will be good for everyone.

HSG: What kind of response have you been getting from your distribution partners?

Durocher:: We are still in the early stages of communicating our vision and discussing the team’s structure and resources, but I would say our clients are very receptive and excited about the potential. The need for advanced planning among wealthy individuals is big, and even the firms that have similar in-house resources can barely keep up with the demand. Being able to access this caliber of expertise through a third party is appealing and much needed.

HSG: What are your goals for 2008?

Durocher:: As you know, the term high-net-worth can mean a lot of things depending on your vantage point. We need to sit down with each of our clients to identify the areas of their business where we can add value – and then we’ll focus on expanding our product offering, developing our professionals and building our educational programs to do just that.

HSG: And your long-term plans for the group?

Durocher:: Our goal is to have a service and support model for our client that is better than anything available from our competitors. Looking forward, we want to be known among our clients and target markets as the best private wealth consultants in the business.