Analysis: How will ‘New Calvert’ fit with its new parent Eaton Vance?

Looking ahead as NYSE-listed asset management firm buys SRI specialist

As the dust settles on a major ‘mainstream’ asset management house – New York Stock Exchange-listed Eaton Vance – buying SRI house Calvert Investments, a picture of how “New Calvert” will fit with its new parent is starting to emerge.

A filing on the Friday evening following the announcement was the first document to put a little flesh on the bones of the purchase.

No material changes to the funds’ investment objectives would be made and ‘New Calvert’ would “pursue a substantially similar [responsible] investment approach for each fund.” The filing also announced that management fees would be reduced for almost every fund.

While there was little surprise among leading SRI industry figures that the Calvert funds were being acquired by a “mainstream” house, there were some concerns expressed.

One industry source contacted by RI feared the funds would merely “survive as a large suite of branded products” at Eaton Vance, resulting in a loss of staff, engagement work and policy influence — although announcements from both Calvert and Eaton Vance would seem to indicate otherwise.

“A lot of sustainable investment firms are finding it very challenging in an era of growing competition,” said another source. “Calvert was the only game in town for 20 years, but it has been paring back on the research and advocacy team for several years with layoffs and resignations.”

A third source, commenting on potential job cuts, said: “I would guess that most of the cuts would be in distribution and operations staff with those responsibilities moving to Eaton Vance in Boston.”

The filing would seem to confirm this, saying that “investment professionals affiliated with Eaton Vance will also serve as employees of New Calvert and provide investment advisory services to the funds”.

Nothing was said about existing Calvert employees, but in an interview with RI, Calvert CEO John Streur said that there will be no reductions in the research and advocacy team, and that they are “likely to add resources”. As RI has reported there have been layoffs among Calvert staff.

Streur attributed these to turnover and change, natural wastage rather than job cuts. At the same time, the fund has been shifting investments from active funds to passive funds, but Streur and Stu Dalheim, VP of Shareholder Advocacy, said that the partial shift to passive was enabled because of the incorporation of quantitative ESG research into investment decision-making that allowed the firm to set up SRI indices and create funds from them.

Retention of the Calvert Sustainability Research Department (CSRD) staff was confirmed by an Eaton Vance spokesperson, who said its research and analytics are “critical inputs to the Calvert approach to responsible investing.”

And the portfolio teams for many funds are “each expected to include members from the Eaton Vance Management, Eaton Vance Management International and Calvert organizations.” Portfolio implementation of the passive funds would be provided by professionals from Parametric, Eaton Vance’s portfolio solutions arm. Incidentally Parametric is one of several affiliates under the EV umbrella, the others being Montreal-based Hexavest and Atlanta Capital. Eaton Vance, for its part, traces its roots back to 1924 and all told it and its affiliates manage $343bn.

The only external fund manager that will be retained by Calvert is Hermes. All other contracts with subadvisors were terminated, except for those with Eaton Vance or its subsidiaries, and for some Ameritas’ (Calvert’s former owner) non-SRI funds that Calvert will continue to manage.

Asked whether investors would now re-consider their Calvert investments, one source replied: “A lot of mutual fund money is quite sticky, so investors are not going to take their money out of the fund, they will just leave it there and trust that Calvert is doing the right thing. But this acquisition should allow them to leverage the new growth market.”That message of growth and synergies was echoed by another senior SRI figure: “Strategically it makes a lot of sense, and it seems like another merger in a string of them lately. Eaton Vance can also use it to bolster its reputation in this field. Calvert’s advocacy has always been thoughtful and well-constructed, with requests that make sense to the companies where they engage, so a lot of their resolutions are withdrawn.”

In fact, according to data from ISS Voting Analytics, of the 171 shareholder resolutions submitted by Calvert between 2010 and 2016, fully 110 were withdrawn: an impressive record which speaks to its success in engaging companies.

“But it’s almost as if Calvert,” the senior figure continued, “is a victim of its own success, as the large mutuals move into your space because they can see the value, the smaller firms disappear.”

Natasha Lamb of Arjuna Capital said that while the acquisition of smaller SRI firms by larger mutuals seemed inevitable, this one also seemed to have been actively sought by Calvert management and/or its board: “It appears Calvert has been priming its balance sheet for sale. It doesn’t surprise me that Eaton Vance sees the value in the SRI manager.”

She added: “The mainstream firms have woken up to the value in sustainable and impact investing, but they don’t have the capability. Smaller firms have been doing this for 30 years and have developed a boutique skillset. More and more, the mainstream will move into this area as they realize that millennials and women, in particular, wish to invest with their values and employ a broader intellectual understanding of how the world works.

“Calvert is a high quality, authentic offering. I would expect there is the potential for a glut of synergies. Perhaps the quality of Eaton Vance’s own financial investing will improve by incorporating extra-financial analysis into their broader investments offerings.”

Another head of an activist SRI investor reckoned that part of the impetus was Calvert’s recent $3.9m fine by the SEC.

Industry sources repeatedly raised the issue of whether the acquisition was ‘window dressing’ for Eaton Vance or a genuine attempt to integrate ESG.

Comments during a post-announcement webcast by Eaton Vance CEO Tom Faust do suggest the latter, making reference to bringing Calvert’s strategies into the Eaton Vance pipeline and “integrating EV management with Calvert’s SRI capabilities to provide best in class management of responsible funds”. He went on to say that by “applying our management and distribution resources and oversight, we believe Eaton Vance can help Calvert become a meaningfully larger and better and more impactful company”.

While Calvert’s SRI record is well-known, it its now Eaton Vance’s that will come under scrutiny. Tim Smith of Walden Asset Management said: “When a company like Eaton Vance buys a respected leader in the SRI field like Calvert, investors and the market will inevitably turn attention to Eaton Vance’s own CSR record.” There would be questions like diversity in the company’s workforce and top management, sensitivity to environmental issues and about its proxy voting record. “And they will be held accountable to higher standards by clients – even more so because they are also a PRI signatory [as of March 2015].”

Smith continued: “According to Ceres’ figures, their voting record on climate resolutions is much better than Vanguard and BlackRock who are at the bottom of the ladder, but there will be increased scrutiny now. Will they be updating their proxy voting policies and improving their voting record, for example?”

According to our analysis of voting records based on data provided by Fund Votes, Calvert’s record of supporting ESG resolutions averages about 89%, and would have been higher but for its abstentions on Holy Land Principles resolutions. Eaton Vance’s on the other hand, while not of the Vanguard and BlackRock variety, is much lower, and much more variable. In 2013 and 2015, it supported 38% of ESG resolutions, while in 2014 it supported 50% and 45% in 2016.

So, there’s enough to work with there — and it will be fascinating to watch how EV integrates ESG going forward.

Responsible Investor will run an interview with Calvert’s John Streur and Stu Dalheim shortly.

With reporting by Sophie Robinson-Tillett.