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The Boston Globe OnlineBoston.com Boston Globe Online / Business / Globe 100

People don't say 'Eaton who?' anymore

Once a stodgy bond house, firm now tops The Globe 100

By Beth Healy, Globe Staff, 5/16/2000

AMES HAWKES DID something that no one else at Eaton Vance Corp. had ever done during his 26-year career there.

Eaton Vance had an identity crisis when James Hawkes took over as chief executivwe in 1996. No longer. Today, it's numberone on the Globe 100. (Globe Staff Photo / Pam Berry)

Top 10 Companies

1. Eaton Vance Corp.
2. Analog Devices
3. RSA Security Inc.
4. EMC Corp.
5. Brooktrout Inc.
6. Biogen Inc.
7. Staples Inc.
8. Affiliated Managers
9. Millipore Corp.
10. State Street Corp.

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The 2000 Globe 100

In November 1996, Hawkes, the newly appointed chief executive, invited every employee of the Boston mutual fund company to a meeting. And it wasn't for tea and crumpets. His speech, ''Will the Real Eaton Vance Please Stand Up,'' reflected the shake-up to come.

Hawkes laid out the cold, hard facts for the executives, fund managers, analysts, and support staff:

Either the 75-year-old company was a stodgy bond house, too small to compete with bigger rivals - as its critics charged - or it was a diamond in the rough, a place filled with talent and growth potential, but with a stock that needed CPR.

As late as the mid-1990s, Eaton Vance was sitting on the sidelines of the stock-fund boom. ''We had a great bull market, and we weren't participating,'' said Hawkes, 59.

That changed, thanks to an overhaul of the top ranks, a strategy shift, and the creation of an equity team that earned some fund returns to brag about.

Now, Eaton Vance is standing tall. It's the number one company on The Globe 100 list for 1999, with the best combined revenue, change in profit margin and revenue, and return on equity of the state's publicly traded companies.

Eaton Vance grew its revenue by nearly 40 percent last year and delivered a 72 percent jump in operating earnings for its fiscal year, which ended Oct. 31. Revenue hit $349 million, while operating earnings (before an accounting change) rose to $52.4 million, or $1.41 per share.

For the company's four quarters analyzed for The Globe 100, ending Jan. 31, Eaton Vance had revenue of $375.7 million.

The company, which currently manages $44 billion in 65 funds, had the second-highest return on equity of Globe 100 companies.

Its shares surged 82 percent in 1999 - providing the kind of return more typical of Internet companies than investment firms - in a lackluster year for most financial stocks. That return helped the company vault from the number 96 spot on The Globe 100 list for 1998.

The assets Eaton Vance oversees in funds and private accounts rose 44 percent in 1999, to $40.9 billion, and not just on the coattails of a rising stock market. Net sales of its funds, which are all sold through brokers, jumped 61 percent, to $9 billion.

This is a turnaround tale that rests not only on a few hotshot stock-pickers, but on two unsual niche plays. This company, which grew out of two investment firms that got their start as mutual funds were being invented in Boston in the 1920s, has taken a different path than many of its rivals.

Eaton Vance, either by luck or wisdom, seized on two sectors that have grown with surprising vigor in recent years, observers say. One category is bank loan funds, conservative fixed-income vehicles that provide a way to profit from rising interest rates. The other is tax-managed funds, stock portfolios run with an eye to minimizing the yearly taxes that investors must pay on capital-gains distributions from funds.

''They've nailed two very good areas,'' said Steve Cummings, an analyst at Financial Research Corp. in Boston. Eaton Vance has a 25 percent market share in tax-managed funds, he noted, and a host of other firms have recently launched similar funds.

The naysayers have done so grudgingly, Hawkes said, and ''We just think they're nuts.'' He said the tax-managed fund niche has given the firm a leading position it never had.

''People don't say `Eaton who?' anymore,'' he said.

Cummings said the firm still needs to expand its fund roster. Eaton Vance has the 12th-biggest broker-sold fund group in the nation, and the 28th-largest overall, according to Financial Research. But its best-selling fund this year is one of its loan funds, the Senior Floating Rate fund. Such funds might not appeal to investors if the economy turns down, Cummings suggested.

One of the firm's founders, Henry Vance, once wrote, ''I have always been wary of spectacular success - the bold stroke and the rich reward - especially with respect to managing investments.'' And true to its roots, Eaton Vance has been no champion of the dot-com craze, nor of the day-trading mentality.

''I'd love to see the tax return of an active day trader,'' Hawkes said.

Employees say it was thanks to Hawkes's vision that the company managed to apply its antitax mantra to a stock-fund focus. For years, the company was best known for municipal bond funds, an unsexy sector that fell off investors' radar screens during the last decade.

Today, Eaton Vance can point to several stock funds with strong rankings.

Duncan Richardson's Information Age fund has returned 54.7 percent over the past 12 months. Judy Saryan's Utilities fund is one of the best in the group, and Jack Smiley's Tax-Managed Emerging Growth fund is holding up in the face of Nasdaq's recent slide.

The Worldwide Health Sciences fund, run by outside manager Sam Isaly, is the firm's top-performing fund so far this year. All told, equity assets managed at the firm have risen sixfold in three years, to $18 billion.

Looking ahead, the firm wants to help its clients distribute the wealth they've created. Eaton Vance plans to launch a charitable gift trust, not unlike a giant Fidelity Investments fund that permits investors to set aside investments for their favorite charities.

The goal, Hawkes said, is to help people control their money even in death: ''Most people would rather have it go to their church than to the Big Dig.''

Hawkes, perhaps mindful of

history and the firm's forefathers, declines to take full credit for Eaton Vance's awakening over the past three years. The players who led the company before him, including former top executives Landon Clay and M. Dozier Gardner, set the stage, he said. The company worked to boost its distribution through brokers, hired new talent, and began to exit noncore businesses, including gold mining and real estate.

''What I inherited when I became CEO was a great group of people who just needed some focus and some energy and some management,'' said Hawkes. A Georgia native, he started as an analyst and portfolio manager in the 1970s.

One of the mysteries of Eaton Vance is its ownership structure. Holders of the company's common stock have no voting rights, due to an odd arrangement dreamed up by the lawyers when Eaton Vance's predecessor company, Vance, Sanders & Co., went public in 1959.

The voting shares do not trade and are held in a voting trust. They are owned by 10 men who are senior executives of the company. Hawkes has taken the opportunity to bring new blood into the voting trust, including Richardson, the fund manager.

''It's a way of transferring the responsibility for managing the company, and ensuring the company is well-managed, to a new generation of management,'' Hawkes said. It's a message he wanted to send to the rank and file, to combat frequent rumors that the company was for sale.

Last year, Eaton Vance moved to new waterfront offices on State Street, after years of being tucked into an ancient building in Post Office Square and having employees spread out at three locations.

''There is a different atmosphere here,'' Hawkes said. ''We've gone from being one of the pack to a company that is doing exciting things, making real progress.''

This story ran on page C07 of the Boston Globe on 5/16/2000.
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