Morgan Stanley’s $7 billion deal for asset manager Eaton Vance would on the surface double the size of its investment platform to over $1 trillion in AUM, diversifying and enhancing revenue streams overnight.
But beneath the surface, the benefit to Morgan Stanley’s 15,000 advisors lies in Eaton Vance’s ability to deliver highly customizable SMAs for its clients, analysts said.
In addition, the move will strengthen Morgan Stanley’s investment options by adding Eaton Vance’s industry-leading fixed income teams for bank loan, high-yield and municipal securities.
“This deal suggests a reversal in the relationship between manufacturers and distributors, driving better WM flows into low-cost, highly customizable SMA products where EV has a clear competitive edge,” wrote UBS analyst Brennan Hawken. “SMAs are the strongest flowing products in the broker-sold channel and recent pricing innovation has driven a great deal of attention and NNA into them.”
According to a presentation Morgan Stanley provided announcing the merger, Eaton Vance’s Parametric unit has grown from $195 billion in AUM in 2016 to $311 billion in AUM today. According to EV’s website, $154 billion, or about half of those assets, are concentrated in Parametric’ scustomized SMA strategies that appeal to wealth clients due to their capacities for tax harvesting and capital preservation.
“Parametric is a leading provider of overlay portfolio management, an instrumental capability in the construction of unified managed accounts (UMAs) and will be a major asset for Morgan Stanley advisors for that alone,” said Alois Pirker, an analyst with Aite Group.
Gabriel Denis, an asset management analyst at Morningstar who focuses on fixed income strategies, said Parametric offers more customized direct indexing capabilities that take traditional broker modeling one step further. Parametric's modeling would enable investors to hold equities or bonds for individual companies in their SMAs. These assets can then be unloaded and replaced depending on what is needed to manage the investor's tax strategies. Securities holdings related to charitable contributions can also be managed in the same tax-efficient manner, he added.
According to William Blair analyst Chris Shutler’s merger report that includes his deep dive into prevailing asset management industry trends, Eaton Vance fills “product gaps including bank loans and municipal bonds” for Morgan Stanley. Denis said Eaton Vance specifically features “venerated” investment teams for the corporate, high yield and municipal bond sectors. Any or all of them could be rebranded under the Morgan Stanley Investment Management operation.
What remains to be seen is just how Morgan Stanley will manage the closer ties between Eaton Vance/Parametric and its advisors. Morgan Stanley is the largest distributor of Eaton Vance’s strategies in the United States.
"The fit is there, we know Eaton Vance's products, but there is more we can do," Morgan Stanley CFO Jonathan Pruzan told CNBC.
While the wirehouse’s financial advisors are not currently offered incentives to market Eaton Vance’s products on its platform, they will have to be able to "maintain independence when it comes to product selection," Aite's Pirker said.
“It is still prudent to question how exactly the businesses will be organized and managed to eliminate potential conflicts of interest and ultimately how this might impact EV’s flows,” wrote UBS’s Hawken. Until Morgan Stanley clarifies its intentions, he noted, “we expect other SMA providers could benefit from the disruption/uncertainty in the near term.”
But Pirker said Morgan Stanley’s financial advisors clearly stand to benefit.
“Morgan Stanley will be able to respond faster to changing market conditions and develop investment solutions in a more agile fashion,” he said.