This is the first in a seven-part series profiling Good CEOs. To read more about TheStreet.com's Good CEO Portfolio, click here.
On November 1996, newly installed CEO and President Jim Hawkes assembled the entire
staff and posed a question: "Will the real Eaton Vance please stand up?"
Hawkes said that the sleepy, niche-oriented Boston money manager -- muni bonds constituted 51% of managed assets -- hadn't lived up to its potential and needed to establish a bigger presence in the booming equity market, then 21% of assets under management, if it wanted to thrive.
Six years later, the "real Eaton Vance" has more than stood up, it's soared: Once-choppy annual sales surged from $181.4 million in 1996 to $519.5 million for the 12 months through July, while earnings climbed from $37.4 million to $128.7 million. And the company's stock has surged 441% since his speech, compared with the
19% gain. Most importantly, the company's assets in the equities market have surged to 60%.
Now, Eaton Vance faces a new set of challenges -- a weakened stock market, increasing competition for wealthy clients, a stock that some on Wall Street perceive as pricey, and criticism of its "exchange funds" that offer a tax break exclusively for the rich.
But Hawkes believes the staff at Eaton Vance, now one of the best-diversified asset managers, is positioned to stand up again.
Neither Rocket Science Nor Revolution
When Hawkes says the transition "wasn't exactly rocket science," it's more than just his characteristic modesty: Hawkes began his professional life as an aerospace engineer.
But his career took a turn in 1970, when he joined Eaton Vance as an analyst, steadily climbing the ladder to become president and CEO in 1996, and chairman a year later. One might assume a lifer like Hawkes would opt for the tradition-bound route, eschewing grand designs or tampering with the formula. But Hawkes defies that assumption -- as well as the popular notion of the past decade that companies must look externally for great leaders.
"Jim Hawkes is a fascinating character," says Raymond James analyst Steven D. Schwartz, who covers Eaton Vance. "You'd think a guy who spent his entire life at the company would keep the status quo. But he totally shook up the company."
For his part, Hawkes doesn't see the big push into equities as a revolution. "There was no turnover in the executive suite, no internal shake-up," Hawkes says. "It was obvious to everyone that Eaton Vance was missing a great opportunity in equities. What was missing were clear goals and clear leadership to achieve those goals."
After taking care of some low-hanging fruit -- such as housing its equity, fixed-income and marketing teams in one Boston office rather than three -- he challenged his staff to roll out quickly new equity products. The key to managing fast growth, in Hawkes' opinion: building brand identity in a fragmented asset-management market, where giants like Vanguard and Fidelity command substantially less than 10% of market share.
"In a world where you have 650 mutual fund advisers and thousands of asset managers, you need to stand for something," Hawkes said. Eaton Vance, which has long been associated with protecting the assets of its wealthy clientele, staked its claim in the tax-managed mutual funds -- touting itself as "the fund company for people who pay taxes." It manages more than $24 billion in tax-managed assets, both equity and fixed income, as of March 2002.
The firm, in part through acquisitions, also has made solid inroads into other areas geared toward high net-worth investors, including charitable-gift funds and the lucrative but competitive "managed accounts" -- essentially a customized basket of stock and bond portfolios for individuals with at least $200,000 to invest.
And, of course, Eaton Vance is "still known as a stodgy bond house," Hawkes says -- meaning it was well-positioned for the recent push into fixed-income offerings.
Some Wall Street analysts raise concern that these accounts will eat into Eaton Vance's mutual fund business. But Hawkes says the move was "a no-brainer. We knew the managed-accounts business would cannibalize the mutual fund world. We either cannibalize our own assets or let somebody else do it. In fact, we hope to eat into other firms' assets."
For People Who Really Don't Want to Pay Taxes
Eaton Vance has come under fire in recent months for its formerly little-known "exchange funds," which offer a tax advantage only to the wealthy. Essentially, executives or wealthy investors contribute at least $1 million of their stock in one company into a fund composed of other one-stock contributions (the stocks must be approved by Eaton Vance).
In return for their stock, individuals get shares in the exchange fund, giving them instant diversification. When they take money out of the funds, after a minimum of seven years, they get a variety of stocks, not their original shares -- and they owe no taxes on the profits of their original shares. Exchange funds have gotten some unflattering press, including a September
New York Times
article, and some lawmakers say the funds should be illegal.
For its part, Eaton Vance -- which along with
dominates the exchange-fund market -- has a problem with exchange funds as well. "They should be legal for everyone," Hawkes says. "Back in the 1960s, they were open to all investors. The evolution of the tax laws is to blame for them being only for the rich." Hawkes doesn't anticipate any significant change in the law, but hopes that a change would make them available for all investors -- rather than outlawing them altogether, which would pinch its bottom line a bit.
Speaking of the Bottom Line
The biggest threat to the company's bottom line in the near term is the market. "We think Eaton Vance is overvalued here," said Merrill Lynch's Bill Katz, who lowered his rating on the stock to sell from hold in October. Katz, who based the move primarily on valuation but also raised concerns about organic growth and margin pressure, says the stock trades at a 10% premium to its peers. He expects Eaton Vance shares to fall 5% to 8% over the next year.
Raymond James' Schwarz, who has a market perform rating on the stock, doesn't believe Eaton Vance is overvalued, "it's just not a value at current price."
But the long-term picture for Eaton Vance, Schwarz says, is the same: "Americans have to save for retirement. At the end of the day, the money has to be there, and Eaton Vance is well-positioned relative to his peers," Schwarz says. "Hawkes -- as well as CFO Bill Steul -- inspires confidence in me."
Wall Street expects Eaton Vance to post earnings for the fiscal fourth quarter of 40 cents a share -- putting earnings for the year ended Oct. 31 at $1.77 a share, up a hair from $1.76 a share in 2001, according to Thomson Financial/First Call. For 2003, analysts expect the company to earn $1.82 a share.
The company's stock, at $29.75, is 27% off its 52-week high of $41. The shares sport a price-to-earnings multiple of 16.5, below the industry's 17.6. Eaton Vance has notched a five-year annual earnings growth of 35% and revenue growth of 22% during the same period. But with growth looking suspect, does Hawkes think continued heady gains are in store?
"The truth is I don't have a clue what we're going to do in the next five years," said Hawkes, who doesn't comment on the earnings projections. "Our business is so dependent on the underlying trends of the market. We're going to focus on what we can control -- are we gaining market share?"
Hawkes, himself a former analyst, says he doesn't pay much mind when an analyst cuts the rating on Eaton Vance's stock because he doesn't worry about short-term price movements. "I actually like it when analysts say clients should sell Eaton Vance," he says, laughing, "because our goal is to make them look foolish."
Does that sound sleepy to you?