Analysis

Eaton Vance: A Deeper Look at the Performance

Analysis

In the past, we've written about issues related to a typical active manager who acts like a wolf in sheep's clothing. While portraying themselves as novel stockpickers, in fact too many of these stock jockeys turn out to be little more than closet indexers. The situation became so acute that regulators in New York felt compelled to forge a 2018 agreement with 13 fund companies to provide data on how closely active managers were hugging their benchmarks.

One of those large industry players was Eaton Vance, which was formed in 1979 by the merger of two investment firms tracing their origins back to before the Great Depression. The venerable Boston-based asset manager had $423.1 billion in assets under management entering 2019. Its specialities include open-end active tax-managed funds and is ranked by Morningstar as the third-largest issuer of closed-end funds, a relatively niche market in which managers commonly leverage their portfolios and frequently use other hedge fund-like techniques to juice returns.   

The bulk of assets are run through Eaton Vance Management. This unit includes managing active equity, income and alternative strategies. Another major contributor is Parametric Portfolio Associates, which is known for "engineered alpha strategies" as well as related "portfolio implementation services" for institutional investors, according to Morningstar.

The fund company has grown over the years in-part by acquiring other investment shops. In 2016, Eaton Vance bought Calvert Investment Management, a fund company focused on socially responsible funds. That came four years after its Parametric arm acquired the Clifton Group, a provider of futures- and options-based overlay strategies.

Given such growth in buying market active management, we've decided to put Eaton Vance's mutual funds under our microscope as part of IFA's ongoing series breaking down how active managers are doing compared to their respective indexes. One universal conclusion from our research: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. 

Controlling for Survivorship Bias

It's important for investors to understand the idea of survivorship bias. While there are 88 active mutual funds with five or more years of performance-related data currently offered by Eaton Vance, it doesn't necessarily mean that these are the only strategies that this company has ever managed. In fact, there are 66 funds that no longer exist. This can be for a variety of reasons including poor performance or the fact that they were merged with another fund. We will show what their aggregate performance looks like shortly.

Fees & Expenses

Let's first examine the costs associated with Eaton Vance's surviving 88 strategies. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, front end (A), deferred (B) and level (C) loads, as well as 12b-1 fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds.

Commissions and market impact costs are real expenses associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers.

We can estimate the costs associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in one year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities, such as short- and long-term capital gains distributions, than those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 88 surviving active funds offered by Eaton Vance that have at least five years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also, remember that this is what is considered an in-sample test; the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Deferred Load Max Front Load Global Category
Eaton Vance AMT-Free Municipal Income I EVMBX 18 0.8 -- -- -- US Municipal Fixed Income
Eaton Vance Atlanta Capital Focused Gr I EILGX 14 0.8 -- -- -- US Equity Large Cap Growth
Eaton Vance Atlanta Capital Sel Eq I ESEIX 3 0.8 -- -- -- US Equity Large Cap Growth
Eaton Vance Atlanta Capital SMID-Cap I EISMX 5 0.91 -- -- -- US Equity Mid Cap
Eaton Vance AZ Municipal Income A ETAZX 8 0.71 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance Balanced A EVIFX 7 0.98 0.25 -- 5.75 Moderate Allocation
Eaton Vance CA Municipal Opportunities A EACAX 293 0.84 0.25 -- 4.75 US Municipal Fixed Income
Eaton Vance Core Bond I EIGIX 65 0.49 -- -- -- US Fixed Income
Eaton Vance Core Plus Bond I EIBAX 43 0.49 -- -- -- US Fixed Income
Eaton Vance CT Municipal Income A ETCTX 10 0.73 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance Diversified Currency Inc A EAIIX 23 1.11 0.3 -- 4.75 Currency
Eaton Vance Dividend Builder A EVTMX 41 1.02 0.25 -- 5.75 US Equity Large Cap Blend
Eaton Vance Emerg & Frntr Countrs Eq I EICOX 39 1.4 -- -- -- Global Emerging Markets Equity
Eaton Vance Emerging Markets Dbt Opps R6 EELDX 80 0.85 -- -- -- Emerging Markets Fixed Income
Eaton Vance Emerging Markets Local Inc A EEIAX 52 1.22 0.3 -- 4.75 Emerging Markets Fixed Income
Eaton Vance Floating Rate I EIBLX 30 0.77 -- -- -- US Fixed Income
Eaton Vance Floating-Rate & Hi Inc C ECFHX 12 1.76 1 1 -- US Fixed Income
Eaton Vance Floating-Rate Advantage B EBFAX 29 1.75 0.6 3 -- US Fixed Income
Eaton Vance Floating-Rate Muni Inc A EXFLX 78 0.6 0.15 -- 2.25 US Municipal Fixed Income
Eaton Vance Focused Global Opps I EFGIX 82 0.95 -- -- -- Global Equity Large Cap
Eaton Vance Focused Growth Opps I EIFGX 80 0.8 -- -- -- US Equity Large Cap Growth
Eaton Vance Focused Value Opps I EIFVX 99 0.8 -- -- -- US Equity Large Cap Value
Eaton Vance GA Municipal Income A ETGAX 7 0.7 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance Glbl Macr Absolute Return I EIGMX 78 0.78 -- -- -- Fixed Income Miscellaneous
Eaton Vance Glbl Macro Abs Ret Advtg I EGRIX 75 1.12 -- -- -- Fixed Income Miscellaneous
Eaton Vance Global Income Builder A EDIAX 143 1.28 0.25 -- 5.75 Moderate Allocation
Eaton Vance Global Small-Cap Equity A ESVAX 41 1.35 0.25 -- 5.75 Global Equity Mid/Small Cap
Eaton Vance Government Opportunities A EVGOX 62 1.17 0.25 -- 4.75 US Fixed Income
Eaton Vance Greater China Growth A EVCGX 12 1.82 0.3 -- 5.75 Greater China Equity
Eaton Vance Greater India A ETGIX 29 1.68 0.3 -- 5.75 India Equity
Eaton Vance Growth A EALCX 28 1.05 0.25 -- 5.75 US Equity Large Cap Growth
Eaton Vance Hedged Stock I EROIX 131 0.9 -- -- -- Long/Short Equity
Eaton Vance Hexavest Global Equity I EHGIX 95 0.91 -- -- -- Global Equity Large Cap
Eaton Vance Hexavest International Eq I EHIIX 98 0.91 -- -- -- Global Equity Large Cap
Eaton Vance High Income Opportunities B EVHIX 39 1.63 1 5 -- US Fixed Income
Eaton Vance High-Yield Municipal Inc A ETHYX 21 0.92 0.25 -- 4.75 US Municipal Fixed Income
Eaton Vance Income Fund of Boston A EVIBX 39 0.99 0.25 -- 4.75 US Fixed Income
Eaton Vance International Small-Cap I EILIX 65 1.15 -- -- -- Global Equity Mid/Small Cap
Eaton Vance Large-Cap Value A EHSTX 48 1.06 0.25 -- 5.75 US Equity Large Cap Value
Eaton Vance MA Municipal Income I EIMAX 41 0.57 -- -- -- US Municipal Fixed Income
Eaton Vance MD Municipal Income A ETMDX 24 0.77 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance MN Municipal Income A ETMNX 20 0.69 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance MO Municipal Income A ETMOX 35 0.7 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance Multi-Asset Credit I EIAMX 113 0.75 -- -- -- US Fixed Income
Eaton Vance Multisector Income I EVBIX 7 0.7 -- -- -- US Fixed Income
Eaton Vance Municipal Opportunities I EMOIX 30 0.7 -- -- -- US Municipal Fixed Income
Eaton Vance National Ltd Mat Muni Inc C EZNAX 13 1.42 0.9 1 -- US Municipal Fixed Income
Eaton Vance National Municipal Income B EVHMX 67 1.63 1 5 -- US Municipal Fixed Income
Eaton Vance NC Municipal Income A ETNCX 16 0.8 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance NJ Municipal Income A ETNJX 13 0.73 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance NY Municipal Income A ETNYX 75 0.79 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance NY Municipal Opps C EZNYX 66 1.5 0.9 1 -- US Municipal Fixed Income
Eaton Vance OH Municipal Income A ETOHX 13 0.85 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance OR Municipal Income A ETORX 23 0.82 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance PA Municipal Income A ETPAX 9 0.8 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance Real Estate I EIREX 35 1 -- -- -- Real Estate Sector Equity
Eaton Vance Rich Bern All Asst Strat I EIRAX 44 1.07 -- -- -- Moderate Allocation
Eaton Vance Richard Bernstein Eq Strat I ERBIX 43 1.03 -- -- -- Global Equity Large Cap
Eaton Vance SC Municipal Income A EASCX 4 0.81 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance Short Dur Infl-Prot Inc I EIRRX 51 0.62 -- -- -- US Fixed Income
Eaton Vance Short Duration Gov Inc A EALDX 42 0.85 0.25 -- 2.25 US Fixed Income
Eaton Vance Short Duration High Income I ESHIX 52 0.66 -- -- -- US Fixed Income
Eaton Vance Short Duration Muni Opps C EZMAX 55 1.45 0.9 1 -- US Municipal Fixed Income
Eaton Vance Short Duration Strat Inc B EVSGX 15 1.88 1 5 -- Fixed Income Miscellaneous
Eaton Vance Small-Cap A ETEGX 44 1.21 0.25 -- 5.75 US Equity Small Cap
Eaton Vance Special Equities A EVSEX 41 1.35 0.25 -- 5.75 US Equity Mid Cap
Eaton Vance Stock A EAERX 90 0.98 0.25 -- 5.75 US Equity Large Cap Blend
Eaton Vance TABS 10to20 Yr Ldrd Mn Bd I EITTX 53 0.4 -- -- -- US Municipal Fixed Income
Eaton Vance TABS 1to10 Year Ldrd Mn Bd I EILBX 19 0.4 -- -- -- US Municipal Fixed Income
Eaton Vance TABS 5 to15 Yr Lad Muni Bd I EILTX 35 0.4 -- -- -- US Municipal Fixed Income
Eaton Vance TABS Interm-Term Muni Bd I ETIIX 62 0.65 -- -- -- US Municipal Fixed Income
Eaton Vance TABS Short-Term Muni Bd I EIBSX 54 0.65 -- -- -- US Municipal Fixed Income
Eaton Vance Tax-Managed Eq Aset Allc A EAEAX 6 1.32 0.25 -- 5.75 Aggressive Allocation
Eaton Vance Tax-Managed Global Div Inc A EADIX 136 1.18 0.25 -- 5.75 Global Equity Large Cap
Eaton Vance Tax-Managed Multi-Cap Gr A EACPX 18 1.31 0.25 -- 5.75 US Equity Large Cap Growth
Eaton Vance Tx-Mgd Growth 1.0 CAPEX 1 -- -- -- -- US Equity Large Cap Blend
Eaton Vance Tx-Mgd Growth 1.1 A ETTGX 1 0.79 0.25 -- 5.75 US Equity Large Cap Growth
Eaton Vance Tx-Mgd Growth 1.2 I EITGX 1 0.7 -- -- -- US Equity Large Cap Growth
Eaton Vance Tx-Mgd Small-Cap A ETMGX 51 1.17 0.25 -- 5.75 US Equity Small Cap
Eaton Vance Tx-Mgd Value A EATVX 10 1.17 0.25 -- 5.75 US Equity Large Cap Value
Eaton Vance VA Municipal Income A ETVAX 8 0.81 0.2 -- 4.75 US Municipal Fixed Income
Eaton Vance Worldwide Health Sci A ETHSX 37 1 0.25 -- 5.75 Healthcare Sector Equity
Parametric Commodity Strategy Instl EIPCX 0 0.65 -- -- -- Commodities Broad Basket
Parametric Dividend Income Investor EAPDX 30 0.65 0.25 -- -- US Equity Large Cap Value
Parametric Emerging Markets Instl EIEMX 3 1.12 -- -- -- Global Emerging Markets Equity
Parametric International Equity Instl EIISX 36 0.5 -- -- -- Global Equity Large Cap
Parametric Tax-Managed Emerg Mkt Instl EITEX 6 0.95 -- -- -- Global Emerging Markets Equity
Parametric Tax-Managed Intl Eq Inv ETIGX 30 1.05 0.25 -- -- Global Equity Large Cap

On average, an investor who utilized a surviving active equity mutual fund strategy from Eaton Vance experienced a 1.05% expense ratio. Similarly, an investor who utilized a bond strategy from Eaton Vance experienced a 0.90% expense ratio.

These expenses can have a substantial impact on an investor's overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for equity and bond strategies from Eaton Vance were 40.94% and 43.70%, respectively. This implies an average holding period of about 27.46 to 29.31 months.

In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long-term. Again, turnover is a cost that is not itemized to the investor but is definitely embedded in the overall performance.

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Eaton Vance's implementation of active management. We compare each of its 88 strategies, which includes both current funds and funds no longer in existence, against current Morningstar assigned benchmarks to see just how well each has delivered on any perceived value proposition.

We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

  • 81.82% (126 of 154 funds) have underperformed their respective benchmarks or did not survive the period since inception.

  • 18.18% (28 of 154 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha.

Here's the real kicker, however:

  • 0.65% (1 of 154 funds) have outperformed their respective benchmarks consistently enough since inception to provide 97.5% confidence that such outperformance will persist as opposed to being based on random outcomes.

As a result, this study shows that a majority of funds offered by Eaton Vance have not outperformed Morningstar-assigned benchmarks. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely versus random-chance outcomes.

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indices assigned by Morningstar, then we may form a false conclusion that Eaton Vance has the "secret sauce" as active managers.

Since Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (betas) of expected return in the U.S. (i.e., market, size, relative price, etc.).

For example, if we were to look at all of the U.S.-based strategies from Eaton Vance that have been around for the past 10 years, we could run multiple regressions to see what their alpha looks like once we control for the multiple betas that we know are being systematically priced into the overall market.

The chart below displays the average alpha and standard deviation of that alpha for the past 10 years through 2018. Screening criteria includes funds with holdings of 90% or greater in U.S. equities and uses the oldest available share classes.

Signifiance of Alpah of Eaton Vance

As shown above, although four mutual funds had a positive excess return over the stated benchmarks, none of the equity funds reviewed produced a statistically significant level of alpha, based on a t-stat of 2.0 or greater. (For a review of how to calculate a fund's t-stat, see the section of this study that follows the individual Eaton Vance alpha charts.)

Why is this important? It means that if we wanted to simply replicate the factor risk exposures to these Eaton Vance funds with indexes of the factors, we could blend the indexes and capture similar returns. 

To get similar risks and returns in a mutual fund would require the additional fees of those passively managed funds. That would alter such an analysis, but not by much because of the relatively low fees of the passively managed funds compared to the actively managed funds.

Given the lower costs associated with index funds, we could have more confidence that we will experience a more desirable result compared to more expensive actively managed funds.

Conclusion

Like many of the other largest financial institutions, a deep analysis into the performance of Eaton Vance has yielded a not so surprising result: Active management is likely to fail many investors. We believe this is due to market efficiency, costs and increased competition in the financial services sector.

As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold and rebalance a globally diversified portfolio of index funds.

Below are the individual alpha charts for the existing Eaton Vance actively managed mutual funds that have five years or more of a track record.


Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.
The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.