30 BARRON’S October 19, 2020
FUNDS
Morgan Stanley’s acquisitionof Eaton Vance is
likely to prompt fund mergers and closures, which
can cause headaches for fund investors.
Morgan Stanley and
Eaton Vance Look
Poised to Prune Funds
F
inancial conglomerates
aren’t known for their
patience with under-
performing fund man-
agers. This can be
especially so after an
acquisition, as cost-
cutting becomes a priority.
The news on Oct. 8 thatMorgan
Stanley(ticker: MS), which has an
asset-management division overseeing
$665 billion, agreed to acquireEaton
Vance(EV), which manages $507
billion, will probably prompt fund
mergers and closures. That can cause
headaches for fund investors.
“Mutual funds consolidating
through mergers or liquidation is a
benefit to the asset manager,” says
Todd Rosenbluth, CFRA’s head of
exchange-traded and mutual fund
research. “But it’s usually not a good
thing for fund investors. An investor
typically chooses a fund in part based
on its track record but also on its in-
vestment strategy. And when consoli-
dation happens, the strategy changes.
So, investors will end up with some-
thing different.”
How many funds merge or liquidate
depends on overlap. In Morgan Stan-
ley’s news release for the deal, Dan
Simkowitz, head of the company’s in-
vestment management subsidiary, said,
“These two businesses have limited
overlap and are combining from posi-
tions of strength to create one of the
leading asset managers in the world.”
Such shareholder/employee-calm-
ing statements are commonplace when
deals are announced. Last October,
Invesco(IVZ) CEO Marty Flanagan
said, regarding his company’s 2019
acquisition of OppenheimerFunds:
“There will be some fund mergers, no
doubt, but they will be around the
edges.” Ultimately, mergers and liqui-
dations affected 38 mutual funds and
42 ETFs, including some from the
2018 purchase of Guggenheim Invest-
ments’ ETF business. Invesco still has
135 mutual funds and 233 ETFs.
Rosenbluth says he doesn’t expect
as much in the way of fund mergers
and closures in the Morgan Stanley/
Eaton Vance deal, pointing out that
Morgan’s two largest funds are quite
different. The $19.4 billionMorgan
Stanley Ultra-Short Income
(MULSX) and $15.9 billionMorgan
Stanley Growth(MSEGX) specialize
in high-quality short-term fixed
income and large U.S. growth stocks.
Eaton’s claim to fame is municipal
bonds, high-yield bonds, and ESG-
oriented funds via its subsidiary
Calvert, which it bought in 2016.
Although unable to discuss any
such moves before the merger, Mor-
gan Stanley representative Lauren
Bellmare sent the following statement:
“Eaton Vance fills several product
gaps for [Morgan Stanley], including
across our traditional mutual fund
offering as the No. 1 provider of indi-
vidual separate accounts. In addition,
it gives us scale in our broader [fixed
income] platform. Given the largely
complementary nature of [Morgan’s]
and Eaton Vance’s businesses, there is
limited overlap in investment strate-
gies. While it would be premature for
us to evaluate the combined offering,
we expect changes to be minimal.”
Overlap in assets and overlap in
products are two different things.
There are 22 Morningstar fund catego-
ries in which Morgan Stanley and
Eaton Vance/Calvert have overlapping
funds. Excluding duplicate share
classes and variable-annuity products,
they collectively run more than 170
U.S.-based funds ripe for consolida-
tion, especially laggards and small fry.
The combined fund families would
have 12 large-growth U.S. stock funds,
the largest of which is Morgan Stanley
Growth, while the $5 billionCalvert
Equity(CSIEX) is Eaton’s largest.
Both are probably safe. Morgan’s fund
is a top performer while Calvert’s,
though a laggard, is ESG-oriented, a
blank spot in Morgan’s fund suite and
an investment style in demand.
But what can be said of the $361
millionEaton Vance Growth
(EALCX), or the $891 millionEaton
Vance Atlanta Capital Select Equity
(ESEAX), both of which have trailed
their fund category peers in the past
five years? Or the suite of three, largely
identical, tax-managed large-growth
fundsEaton Vance Tax-Managed
Growth 1.0(CAPEX),1.1(ETTGX),
and 1.2 (EITGX). All three, which
range from $900 million to $1.8 billion
in assets, have significantly trailed
more than 75% of their peers in the
past decade, and have suffered out-
flows almost every year in that period,
according to Morningstar Direct.
“The demand for tax-managed
active strategies has diminished over
time, given the growing adoption of
ETFs,” notes Rosenbluth. ETFs, be-
cause of their unique structure, are
inherently more tax efficient.
A gem in the Eaton deal is its Para-
metric Custom Core business, which
creates bespoke index-fund-like sepa-
rate accounts for clients that can be
highly tax efficient. Parametric is a
leader in direct indexing, which some
experts believe is the wave of the fu-
ture. So why keep old tax-managed
mutual funds? “[Parametric] indi-
cates Morgan Stanley is looking to
move toward the next wave with di-
rect indexing and skipping the ETF
world,” Rosenbluth says. Neither firm
has significant ETF exposure, with
Eaton Vance’s activeStock Next-
Shares(EVSTC) a notable failure,
with just $7 million in assets.
Most problematic for Eaton share-
holders may be funds with out-of-fa-
vor strategies. Subsidiary Atlanta
Capital, which runs Eaton Vance At-
lanta Capital Select Equity and the $11
billionEaton Vance Atlanta Capital
SMID-Cap(EISMX), has a high-qual-
ity growth style that has fallen behind
in today’s go-go tech market. Notably,
it has trailed the more aggressive $3.6
billionMorgan Stanley Discovery
(MPEGX), which has beaten 98% of
its peers in the past decade. Yet given
their strategic differences, a merger
would be a shame.
Other Morningstar categories with
significant overlap are Emerging Mar-
kets, Foreign Large Blend, and World
Large Stock. Keep an eye on them
when the dust settles.B
By Lewis Braham
Lining Up the Leaders
The two shops’ largest funds are quite different, but dozens of smaller funds could be merged or shuttered.
Total 1-Yr Total Total Return %
Fund / Ticker Morningstar Category Assets (bil) Return Rank in Category
Morgan Stanley Ultra-Short Ultrashort Bond $19.4 1.0% 84
Income / MULSX
Morgan Stanley Growth / MSEQX Large Growth 15.9 114.6 2
Eaton Vance Atlanta Capital Mid-Cap Growth 11.0 0.9 99
SMID-Cap / EISMX
Eaton Vance Short Duration Short Government 8.1 2.3 76
Government Income / EALDX
Morgan Stanley Insight / CPODX Large Growth 6.8 122.7 1
Eaton Vance Income Fund of High Yield Bond 6.3 3.1 60
Boston / EVIBX
Note: Returns as of Oct. 13 Source: Morningstar Direct