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February 2, 2007 4:34 pm

Eaton Vance goes mainstream

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James Hawkes’s days as the head of Eaton Vance may be numbered, but he is not letting that slow him down.

In October, when he hits the firm’s mandatory retirement age, Hawkes will retire as president and chief executive.

In the meantime, he is working on a bold plan that will take the Boston-based fund management firm from a speciality investment shop mostly catering to high net worth individuals to a mainstream asset management powerhouse.

“We’re a much bigger, broader company today than we used to be and so we want to move out of the niche segment,” he says in a muted southern accent from his native Georgia. “We are now essentially saying that we are a big league player that can compete with a Franklin or a Fidelity.”

The company is well on its way. Eaton Vance manages more than $130bn in total assets and has more than $83bn in long-term funds, making it the 15th biggest fund manager in the industry, according to recent
figures.

Gross sales and inflows were $27bn in the past fiscal year, and the company boasts 49 funds that have earned either four or five stars – top grades – from Morningstar, the fund-ranking group.

“We’ve got a lot to work with,” says Hawkes, who will be succeeded by Thomas Faust, chief investment officer. “And we’ve got an enormous head of steam.” But it wasn’t always this way.

Hawkes joined the firm in 1970 as a research analyst after receiving his MBA from Harvard and was named chief executive in 1996. Back then, the company had more than 80 per cent of its assets in fixed income and was known as nothing more than a stodgy bond shop.

His primary goal was to build the company’s equity business. In his previous role as chief investment officer, Hawkes was active in the firm’s product development. He introduced the company’s first municipal bond fund in 1985 and the first bank loan fund in 1989.

But starting an equity business almost from scratch and getting it – as he says – “going and growing” was a monumental task. “In 1996, we did not have significant equity investments because we did not have very good investment performance,” he explains. “If you don’t have eye-popping equity performance to sell, you need to figure out what you can create that works. That was the goal.”

The company already had a solid record managing the investment portfolios of ultra-high net worth individuals. So Hawkes made a strategic decision to focus on one of their key concerns: taxes. He reasoned that he could differentiate Eaton Vance from competitors by staking out tax-managed equity funds.

“If you focus on taxes, you inherently attract clients who care about taxes. And who are in the higher tax brackets? Wealthy people with money,” he says. “Municipal bond funds and tax-managed funds: the two are quite complementary. They tend to be products that the ‘corner office broker’ needs for older, wealthier clients.”

Over the years, Hawkes has rolled out dozens of tax-managed products. He has also launched numerous funds geared toward equity income, as well as 36 other equity mutual funds, which now have a total of $19.7bn in assets. In 1996, the year he became chief executive, Eaton Vance’s total assets under management were $17.3bn.

As one analyst noted, Hawkes seems to have an uncanny ability to react to changes in the investment environment and come up with products to meet those changes ahead of rivals.

“We’re quite attuned to changes in tax laws, or changes in laws that provide opportunities,” says Hawkes, adding that his background as a portfolio manager and his training as an engineer also helped him in this area. “I like to tinker and develop things and put pieces together. A lot of product development is putting asset classes together,” he says.

In November, for instance, the firm staged a public offering for the common shares of a closed-end tax-managed equity income fund. The initial public offering – the largest for a closed end fund on the New York Stock Exchange – generated gross proceeds
of $2.6bn.

Eaton Vance plans to launch a similar fund in February that focuses on international stocks, according to a filing with the Securities and Exchange Commission.

Today Eaton Vance has about 63 per cent of its assets in equities and 37 per cent in income, including its bank loan funds. Since 1996, the company’s total assets under management have grown at a compound annual rate of 22 per cent.

“We’re much better balanced now,” Hawkes says. “We want to have a product line that we can work with in any environment, we want to have fixed income funds, we want to have bank loan funds but we really want to have equity funds because that’s the basic core asset, the heart of the business.”

It is not only the company’s budding equity business that has inspired Hawkes to expand Eaton Vance’s horizons. He says now is an “ideal time” for the company to go mainstream in light of all the changes in the fund management industry.

Last year alone saw mergers between the asset management divisions of Citigroup and Legg Mason and Blackrock and Merrill Lynch. In addition, two-storeyed Boston-based fund managers, MFS and Putnam, were put on the auction block last autumn, with Putnam being sold to Canada’s Power Financial this week.

“Organisational change and uncertainty are not a positive in the asset management world,” he says. “While those firms are preoccupied, we see an opportunity to sprint ahead and step into the shoes of some of those mainstream companies. We want to take advantage of these changes and uncertainties while they’re there because they won’t be there forever.”

The plan to take Eaton Vance into the mainstream is known internally as Project Catapult. Over the past three years, Eaton Vance has expanded its sales force by 13 per cent. The company has also recently boosted its marketing efforts and addressed performance issues – it hired a new manager for its small-cap funds and hired a sub-adviser, Eagle Global Advisors out of Houston, for its international funds.

“We want to be a mainstream firm where if you’re an adviser with a client who needs a large-cap growth fund, Eaton Vance has a large-cap growth fund,” Hawkes says. “If you’re looking for large-cap value or large-cap core, Eaton Vance has that too.”

This does not mean Eaton Vance is abandoning its high net worth investors. On the contrary. “It’s an interesting tension,” says Hawkes. “To the degree that you broaden your brand image, you have the challenge of losing the particular focus you’ve had. Our goal is to broaden our sales base while still maintaining our focus on the wealthier investor and corner office broker.”

Hawkes is not daunted by going up against the bigger guns. In fact, he believes Eaton Vance’s comparatively small size works in its favour. “Compared with Franklin or American Funds or Fidelity, we’re still a small company; we don’t have the complexities that other companies have that manage a $1,000bn,” he says.

“Our investment team is here in Boston, in one building. We’re doing the same things we’ve always done the same way. We’re a bigger Eaton Vance, but we’re not a different Eaton Vance.”

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