AGF Management's (AGFMF) CEO Blake Goldring on Q1 2016 Results - Earnings Call Transcript

| About: AGF Management (AGFMF)

AGF Management Ltd. (OTC:AGFMF) Q1 2016 Earnings Conference Call March 23, 2016 11:00 AM ET

Executives

Robert Bogart - Executive Vice President and Chief Financial Officer

Blake Goldring - Chairman and Chief Executive Officer

Kevin McCreadie - President and Chief Investment Officer

Analysts

Gary Ho - Desjardins Securities Inc.

Graham Ryding - TD Securities

Geoffrey Kwan - RBC Capital Markets

Paul Holden - CIBC World Markets

Tom MacKinnon - BMO Capital Markets

Graham Ryding - TD Newcrest Securities

Stephen Boland - GMP Securities Ltd.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to AGF Management Limited First Quarter 2016 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Wednesday, March 23, 2016.

Your speakers for today are Mr. Blake C. Goldring, Chairman and Chief Executive Officer of AGF Management Limited; Mr. Kevin McCreadie, President and Chief Investment Officer of AGF Management Limited; and Mr. Robert J. Bogart, Executive Vice President and Chief Financial Officer of AGF Management Limited.

Today’s call and accompanying presentation may include forward-looking statements. Such forward-looking statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in the formulation of such statements and actual results could differ materially. For the additional information regarding such forward-looking statements, factors and assumptions, AGF directs you to caution regarding forward-looking statements which is contained on page two of the presentation, AGF’s MD&A for the quarter ending February 29, 2016, and AGF’s most recent annual information form.

I will now turn the call over to Mr. Bogart. Please go ahead, Mr. Bogart.

Robert Bogart

Thank you, operator, and good morning, everyone. I’m Bob Bogart, CFO of AGF Management Limited. Thank you for joining us today for a discussion of our Q1 2016 financial results. Please note that the slides supporting today’s call and webcast can be found in the Investor Relations section of agf.com. Also speaking on the call today will be Blake Goldring, Chairman and CEO; and Kevin McCreadie, President and Chief Investment Officer.

Turning to Slide 4, I’ll provide the agenda for today’s call. We’ll discuss the highlights of the Q1 2016 results, provide an update on the key segments of our business, will review the financial results, discuss our capital and liquidity position, and then finally close out by outlining our focus for the remainder of 2016. After the prepared remarks, we’ll be happy to take questions.

So with that, I’ll turn the call over now to Blake.

Blake Goldring

Thank you, Bob, and thank you, everyone, for joining us on today’s conference call. During Q1 2016, we continue to make progress towards our stated goals. I’ll begin with a few highlights. We reported earnings per share of $0.13, our AUM above median over one, three-year stands at 46% and 47%. This compares to 34% and 51% a year ago.

During Q1 2016, our retail fund net redemptions improved by 37% compared to the same period a year ago. On March 2, just after quarter end, we announced the first close of the InstarAGF Essential Infrastructure Fund. The fund has $372 million in firm capital commitments from a diverse investor base from around the world. We’re targeting $750 million in total commitments once we reach final close, which we expect by the end of the fiscal year.

Our global institutional products continued to perform well in the face of market volatility. We have one nearly $400 million in new global mandates over the past two quarter, and we’re actively working to convert our first robust early stage RFP opportunity set, a robust [indiscernible].

Turning to Slide 6. We’ll provide updates on our business performance. I’ll start with the retail. The volatile markets have influenced mutual fund net sales in Canada. February industry net sales of long-term assets were $6.6 billion compared to $10.9 billion reported a year ago.

Year-to-date, sales for the key RSP season decreased by 63% for a year ago. Despite this volatility, AGF sales improvement continued. The 37% retail fund net redemptions improvement I mentioned represents our lowest net redemptions in RSP season since 2009. Our gross sales have also been more resilient than the market. They’ve been relatively flat just off 3%, when the industry was off 12%. This is due to two factors.

One, our investment performance has improved the key categories, such as global equity and global balance, which has resulted an improved flows.

Two, risk management is an integral part of our investment process. So we expect to perform well during volatile markets. We’ve had a few products that look specifically to protect against market downdrafts, namely AGF U.S. Sector Class and AGF Flex Asset Allocation Fund.

Three, we’re successfully developing new strategic distribution relationships and reinvigorating our existing relationships. In particular, we’re seeing strong sales from our strategic partners in our managed funds products, AGF Elements, thanks to strong performance.

We expect continued gross sales improvement will be driven by focusing on the priorities we have previously mentioned. One, continuing to enhance our investment performance. Our one-year investment performance is now stabilized near our 50% target. We expect our three-year performance to approach the target of 60%.

Two, we’ll capitalize on those specific funds, which are in categories we’re selling. AGF Elements is a good example of this. Nearly 90% of Elements AUM is above median over three years, and that in turn has driven strong growth and net sales as a result.

Three, we’ll provide innovative products and solutions around specific investor needs. As previously mentioned, we have positioned our products for volatile markets. Over the past two years, we have invested significantly in our quantimental [ph] capabilities of Highstreet and have developed some very interesting low volatile strategies in the global space, which we intend to introduce to the market later this year.

Four, we will continue to work closely with strategic business partners to facilitate distribution and continue the strong momentum we’ve experienced to-date.

Before we leave retail, I’ll provide an update on industry regulation. On March 10, the OSC released its Draft Statement of Priorities for the coming year. A key part of their action plan is to publish and conduct consultations on proposed regulatory provisions to create a best inter-standard.

The OSC has been investing the pros and cons of implementing a best inter-standard since 2011. By 2017, they intend to finalize all of the necessary consultations required for implementation. We have stated repeatedly that this was the direction that the regulator planned on moving.

We further believe that any debate around fiduciary standards will essentially lead to questions about open architecture similar to what has happened other jurisdictions such as the United States. This would be a benefit we believe to truly independent managers, such as AGF. The OSC also pledged that they intend to divide a policy direction on embedded compensation and other types of compensation arrangements before March 2017.

We continue to believe that this embedding trailing commissions could have negative consequences for some Canadian investors. However, regardless of the regulatory outcome, we have positioned our business for any particular result. In fact, earlier this month, we announced a fee reduction across 23 of our funds, including 14 of our fee-based series F Class. We planned further development in the way we structure our product set to help advisors transition to fee-based over time.

We have diversified our business across multiple channels. In addition to our retail business, we have over $10 billion in institutional and sub-advisory AUM and over $4 billion in our high network channel. The last two channels already operate on a fully disclosed basis. That means that over half of our AUM is fees closed. So we feel very good about not having all of our eggs in one basket and we’re looking for the growth in each of our distribution channels.

With that, I’d now like to pass the presentation to Kevin.

Kevin McCreadie

Thank you, Blake. Our AUM above median over one and three-year stand at 46% and 47%, respectively. Performance in key fund is particularly strong and our AUM above median compares favorably versus many of our competitors.

As I had stated on previous calls, we target having 60% of our AUM above median over three years and 50% of our AUM above median in a one-year. The three-year target is particularly important, a success on this measure has been shown to drive gross sales.

We’re within the range of our one-year target, which has total redemptions and expect to achieve our three-year target in late 2016, as we continue to drive consistent returns in our portfolios. We expect this to drive an accelerated growth in our retail platforms. Many of our institutional and retail clients continue to be concerned about risk on the ways we’re addressing this need is through our recent acquisition of FFCM.

FFCM has asset management expertise and rules base, factor driven alternative, and traditional investment strategies. It has a capability to manage U.S. 40 Act registered products in separately managed accounts. It is the advisor to the Quant shares family of ETFs that provide exposure to well-known equity factor specifically momentum, value, beta, and size. In addition, FFCM manages the suite of tactical risk managed ETF strategies. Through its SEC exempt relief, FFCM has the ability to create ETF that can hedge against market volatility.

And we’re one of the first firms to offer factor-based ETFs in the U.S. For example, our Anti-Beta ETF, whose ticker symbol is BTAL, is a long short ETF that goes long on low-beta stocks and short on high-beta stocks. This strategy has returned 600 basis points above the S&P 500 year-to-date and represents a good option that advisors can use as a tool to hedge within stock portfolios.

The combination of FFCM with our quantimental capabilities at Highstreet will allow us to deliver innovative risk aware solutions into the retail institutional and sub-advisory marketplace in the future, in both Canada and the U.S. at a lower cost than the traditional mutual fund product set.

Turning to Slide 8, I’ll talk more about our institutional business. During Q1, we experienced higher net redemptions than we had reported in our Q4 pipeline. This was due to an unforeseen redemption from an emerging market sub-advisory acquired during the quarter. We mentioned previously that redemptions in EM could mirror our market volatility. We carried forward $210 million global core commitment from the Q4 pipeline into the Q1 pipeline, which we expect to fund at the first week of April.

Also included in a pipeline are redemption notifications totaling $250 million. This is primarily attributable to the carry-forward of the internalization of an option overlay strategy we previously announced in Q4. We expect this redemption to transact next week.

On March 2, we announced the first close of the Essential Infrastructure Fund with $372 million in committed capital. This represents about half of our targeted side of $750 million on final close. Our cornerstone investors include high-quality institutions from Canada, Europe, the UK and the U.S. The support of these investors validates InstarAGF’s distinctive value proposition and approach to infrastructure investment and management and is also a strong endorsement of the quality of our team.

The fund focuses on the North American middle market investment, which aligns well with where infrastructure needs are greatest at the municipal level. Middle market also tends to be less competitive, which provides a more attractive return profile. InstarAGF has deep and and long-established relationships within the infrastructure middle market and has access to the proprietary deal flow and innovative opportunities.

In combined, in combination with Stream Asset Financial, our midstream energy fund, we have over $0.5 billion in AUM now in alternatives, which is good progress for an initiative we started in 2014. Our sales team have accomplished a great deal over the past few quarters, looking forward to the remainder of 2016, we will be repositioning our sales efforts to distribute our global strategies.

Performance in our global strategies remains solid, especially our global core product, which is performed very well during the recent market volatility. We continue to see demand from investors and expect to see strong inflows over the year. With our global team and infrastructure fund, our capabilities line up very well with consultant searches and the demand we are seeing in the marketplace. We are optimistic about growth in the institutional business.

With that, I’ll turn the call back over to Bob.

Robert Bogart

Thanks, Kevin. Slide 9, reflects a summary of our financial results for the current quarter as compared to the previous quarter and from Q1 2015. EBITDA for the quarter was $27.3 million, up slightly from the previous quarter’s $25.5 million. EPS for the quarter came in at $0.13 per share compared to a $0.11 per share in Q4 2015. On an adjusted basis, EPS was $0.13 per share compared to $0.12 per share in prior quarter, when adjusting for the one-time restructuring expenses.

Turning to Slide 10, I’ll walk through the yield on our business in terms of basis points. This slide shows our investment management revenue, operating expenses, and EBITDA as a percentage of average AUM on the current quarter as well as the trailing 12-month view. Note that the results reflect our core investment management business, excluding one-time items and other income.

With respect to revenue, the operations reflect a decrease in revenue yield to a mix shift in favor of sub-advisory assets, one which we earned a lower revenue rate. Additionally, the acquisition of FFCM and its lower revenue rate has had some impact on our overall rate. The recently announced management fee reductions will be effective April 1, 2016, the changes of impact approximately $1 billion in AUM, and an amount to a decrease of 1 basis point on our total average assets.

SG&A increased to 58 basis points compared to trailing 12-month view of 55 basis points. This increase is primarily driven by lower AUM, reflecting the market volatility that was experienced in January and February. Expenses for the quarter came in at $45.3 million. This includes a full quarter of cost related to the FFCM operation, which we acquired in November. The additional expenses for FFCM also explained a slight increase in expenses for Q1 relative to Q4, when viewed on an adjusted basis, net of restructuring costs.

Looking forward, our expense guidance for the investment management business should be in a $180 million range, including the FFCM operation. Note that this guidance does not take into consideration the fund operations expense associated with the in-sourcing of the transfer agency and customer service operations that were previously outsourced to the Citigroup. We expect that the incremental revenue funded by the expense reimbursements from the mutual funds that we manage will offset the incremental operational expense.

Beginning in Q2 2016, which represents the first full quarter of the internalized fund operations, there will be a new segment disclosure in our financial statements in MD&A related to fund operations. This new disclosure will provide discrete financial information that is separate from our core investment management business. EBITDA basis points decreased to 26 in Q1 2016 from 30 basis points on a trailing 12-month view, primarily driven by revenue.

Turning to Slide 11, I’ll now discuss the free cash flow and capital uses. This slide represents the last five quarters of free cash flow shown by the blue bars on the chart. The cash flow represented is consolidated free cash flow. Free cash flow was $11 million in Q1 and the dividend payout ratio was 57%.

A volatility of the markets and timing of distributions from our equity investment in Smith and Williamson will influence the level of free cash flow generated by the business each quarter. The first close of the Essential Infrastructure Fund is now complete and we’ve received about $75 million in cash, subsequent to quarter end, bringing our investment in the fund down to our proportionate share of total commitments. We have approximately $61 million remaining as part of our commitment, which we expect to deploy over the next three years. Of our original $50 million commitment to Stream Asset Financial LP, only $12 million remains, which will be deployed by year-end 2016.

As we’ve explained on prior calls, we’ll generate returns from our infrastructure platform in two ways. Our LP investments will have a total return profile of approximately 12% and generated a cash yield in the 6% to 7% range. Management fees will emerge as the platform generate scale, but for the next few years, we expect most of our management fee revenue will be reinvested to grow the platform. During the current quarter, we recognized earnings of $2.8 million from the LP investments.

Moving to other capital considerations during Q1, we repurchased 1 million shares for a total consideration of approximately 5.1 million.

Turning to Slide 12, I’ll turn it back over to Blake to wrap up today’s call.

Blake Goldring

Thanks, Bob. AGF continues to make progress against our stated objectives. Along those lines, I’d like to share our primary goals for the remainder of 2016. One, sustaining the improvement in our investment performance and processes. Two, drive gross sales through retail product development and strategic partnerships. Three, take advantage of the capabilities of Highstreet and FFCM and plan a launch of products into the ETF and liquid alternatives markets. And finally, continue the development of our infrastructure platform.

I want to thank everyone on the AGF team for their hard work, and I’m proud of the results we’ve achieved in the first quarter of 2016, and I’m excited to accomplish more throughout the balance of the year.

We’ll now take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gary Ho from Desjardins. Please go ahead.

Gary Ho

Thanks. First question is for Kevin. Just on the institutional front, net redemptions $93 million in Q1 and the pipeline is $40 million. I think you gave some reasons for that if I’m excluding the alternatives. So in the early part of 2015, it appeared that the institutional side had stabilized. Is it really primarily the EM side that’s driving the outflows here? I just want to get a sense on your outlook on the institutional side. And are you doing anything to kind of boost the sales front there?

Blake Goldring

Yes, thanks, Gary. A couple of things as we talked about on the last call, actually last couple of quarters that EM volatility was going to probably have more to do with the industry’s redemption rate, right, you saw in the current quarter. I think number for EM redemptions continued, I think it was close to $15 billion for the industry. We aren’t going to be immune to that and it’s about clients’ desire to derisk rather than about investment performance. In that those redemption that we did see in the quarter that we had not forecast was EM sub-advisory client in the U.S.

I do think our remaining EM base on the institutional side is fairly stable. And I think when I look forward to this year, we do see some pretty significant pipeline opportunities on some of our global capabilities around Global Core, for instance, right now. So I’ve got pretty good confidence in the pipeline. And the fact is this is the first time we’ve got a full complement of sales folks in the U.S., we hired two guys this year; one for the West Coast, one for the sub advice that I think we go into the year probably a full complement of talent, that also gives me a little bit of confidence that we – as we move to the back end of the year get to these numbers.

Having said that, I mean, this is a lumpy business as you know. We had forecast a win that just hasn’t funded yet, it will fund in the beginning of April. So I think there’s some lumpiness to it and timing, but I don’t think it’s an EM issue for us as much of an industry issue, I think for us it’s pretty I think stable from here.

Gary Ho

And can you remind me how much EM assets you guys still have on the institutional side?

Blake Goldring

I think we’re probably on pure institutional roughly around $1 billion, Gary, right now. So I think that’s why it feels pretty stable given I know who those clients are.

Gary Ho

Yes, okay. And then next question is for Bob. I just want to get an update on the CRA file. So it sounds like there is a new proposal letter received in the quarter. Just wanted to clarify that, the wording is a little bit cloudy there. To implicate, I mean, what’s the implication of this? And does it increase your tax exposure? Can you remind me the maximum tax exposure. What I’m trying to get at is the maximum amount in terms of exposure less how much you guys paid. I believe the last update I got was roughly $30 million, does that number still stand?

Robert Bogart

We’ll provide a little context first, Gary, the 2010 to 2016 tax years were originally meant to be covered under the bilateral advanced pricing arrangement that AGF entered into in 2011. Now one of the benefits for the tax payer of that program is obviously certainty around the transfer pricing. But also while you’re going through the process, it would suppress any tax assessment as that process plays out. But due to the delay within the CRA process, 2010 was under a threat to be statute barred. So the CRA issued in assessment with respect to that tax year. And we expect to make a roughly $6 million payment in Q2 when the assessment letter is finally delivered. We’ve just got a proposed assessment at this point.

So we expect that BAPA process will come to a completion in late 2016, or early 2017. So we won’t be required to make any additional tax assessments until a final resolution has been reached. So to-date, we’ve paid approximately $55 million over the 2005 through the 2009 tax periods, and we’ve accrued $60 million as of Q1 2016. And so we’ll make this additional payment, so we’ll actually be slightly receivable position by the end of the second quarter.

Gary Ho

And then in terms of the maximum exposure, like worse case scenario, has that number changed?

Robert Bogart

No, it has not.

Gary Ho

So the $30 million is still relevant?

Robert Bogart

That’s correct.

Gary Ho

Okay. So with – I just want to be crystal clear. So with this new letter that you got, the exposure didn’t change whatsoever?

Robert Bogart

No, the issue hasn’t – yes, right, the issue hasn’t been resolved. They’re just including another year in assessment letter, which then will require the tax period to put down some tax payment in order to object to the assessment, which is what we intend to do.

Gary Ho

Okay. And did I hear you right, you think at the end of this year, maybe early 2017, you guys are hopeful that you will get some resolution in this matter?

Blake Goldring

From your lips to God’s ears, yes.

Gary Ho

Perfect. That is it for me. Thank you very much.

Operator

Thank you. Our next question comes from Graham Ryding from TD Securities. Please go ahead.

Graham Ryding

Yes, it may be just on the infrastructure side. Can I get a little bit of a feel for your outlook for redeploying the capital that you received from – in early March of the $74 million? What sort of timing are you targeting or expecting to sort of redeploy over the next couple years?

Blake Goldring

Yes. So, thanks Graham, it’s Blake. Just to say that we’re very pleased to receive the successful completion of the very first close. And as you know, it’s been a challenging market. But to have such a great group of international partners and Canadian partners with us it’s truly, I think a real proud moment for our organization. So our very first seed asset was, of course, the Billy Bishop Toronto City Airport, which is, again, I’m going to call the marquee asset.

As you know, that regional airports that are close to a central business area are in great demand. And I guess evidence of that would be the recent purchase of the London City Airport for more than £2 billion, by a consortium led by OTPP. I have to say too, I don’t know if you saw, Graham. But the recent expansion of the U.S. customs preclearance program is going to be a further enhancement to the attractiveness of Billy Bishop, because what that really does is, it opens up many different other American cities that might otherwise not be available to be opened, because they don’t have customs clearance facilities.

So it also allows us to open a possibility of regional carriers flying into the airport into the future. So that is sort of the first and I’d say the very important seed asset for the fund. Second has been a two wind farms in British Columbia that is – deal has been done as well. We have a long list of very interesting North American-based investments that we are going through at this time. And we would expect that possible towards the end of this year to close on a third and possibly even a fourth investment over the course of the year. But remember, this is going to be deployed over a three-year period, that’s the expectation.

Graham Ryding

Okay. Okay, that’s helpful. There has been some activity in the industry around fee cuts. It seems to be a bit more active than perhaps previous years. Perhaps I could get your view on whether you agree with that, that there seems to be more activity on fee front. And then how are you feeling about your fees? You’ve done a couple of adjustments now. Should we expect you to be – continue to be surgical going forward, or do you feel like your fees are largely in place right now?

Operator

Parties, please standby, once again. Parties, please standby. Pardon me, please proceed. You are now online.

Blake Goldring

Hello Graham, it’s Blake over here and sorry about the…

Operator

Pardon me, please proceed Adam.

Blake Goldring

Yes, hello it’s Blake Goldring and sorry about that call cutting again, cutting out again. And the way we think about price reductions in the industry is that certainly there has been more evidence of that in last couple of years and for several reasons. However, what we have done is making sure that we have a very much of rifle shot approach as opposed to across-the-board sort of reductions.

We announced that there were 23 reductions in different products, but these are the ones that are really selling. What we do is that, take a look at where there is a broad customer demand and make sure that we are well positioned against our competitive set. We’re very mindful of the CRM2 and we want to make sure that any time that one of our advisors, one of our partners in business, when they’re talking with their clients that there was never going to be a difficult moment and we are very comfortable with the way our product line is that setup.

Operator

Thank you. Our next question comes from Geoff Kwan from RBC Capital Markets. Please go ahead.

Geoffrey Kwan

Hi, good morning. My first question was just around the government move announced yesterday on the corporate class fund and the taxation around that? Can you talk about how much in AUM you have in the corporate class? And then just broadly speaking, I know this is very recent news, but just your thoughts on the impact to both AGF as well as quite frankly for the industry?

Robert Bogart

Yes, Geoff it’s Bob. Yes, I’ll take that one. We’re – as you mentioned we’re working through the budget and location. But our initial read is neutral. Most firms are competing on a very similar basis. There is not a distinct competitive advantage in one corp. structure versus another. And as you know corp. structures offer three primary benefits, first the tax deferred switching. Second, reduced taxable distributions in the current year, potential to shelter those and then the shared use of capital or noncapital losses across all the share classes that exist within the structure. So the proposed budget eliminates the first of those benefits, so the other two are still available to the unit holder.

Geoffrey Kwan

And then – yes.

Robert Bogart

Yes, so and additionally the – the actual amount of switches that we find within our corporate class structures much less than you would think it, we see an awful lot of buy and hold. And so within the corp. structured AGF, the ability to defer distribution income is a more present benefit for our share – our shareholders as fund expenses and noncapital losses to be shared across the classes within the corporate structure. So there is still quite a benefit there. Now that circumstance may not exist for all corporate class structures as some firms may not have available that noncapital operating losses and are actually making taxable distributions to the shareholders.

With respect to your specific question, we have roughly 22% of our AUM is in the corporate class. And on a year-to-date basis, it’s roughly 19% of our gross sales are in the corporate class structure.

Geoffrey Kwan

And sorry, just to be clear, the 22% in the semi is just off of your like the retail AUM, that kind of $17 billion, correct?

Robert Bogart

Yes.

Geoffrey Kwan

Okay. And just my second question is now that we are out of RSPCs and just any kind of color on what you are seeing in terms of the net sales activity. If there has been any market changes in terms of funds that are selling, which ones aren’t, that sort of thing?

Blake Goldring

No, Geoff, it’s Blake. Just to say that we’ve seen from the earlier start of the year, as I mentioned in my comments that that’s continued through March certainly, our trend anyhow. We still see great interest in international global type of product.

And frankly, an area where we see a lot of interest now is in the whole SRI area as well, and we see that will probably be an area of ongoing growth. Low vol type products and consumers are still and investors are still very concerned about the volatility of the marketplace. So, again, these are the type of areas that are a focus. I could maybe ask Kevin to maybe opine as well share his thoughts.

Kevin McCreadie

Yes, I think market volatility has had an impact on investor sentiment in the retail space earlier in the year. But again to Blake’s point, I think the type of products that we have been building and incubating at Highstreet, our acquisition of FFCM allows us to probably bring later in the year forward some of those more low vol and risk-managed solutions, which I think we talked to investors today these three things that you hear. One is about volatility and the concern around that; and the second is about being more globally focused; and probably third is a balanced view.

So I think look for us to bring some strategies forward, because I think those are the type of products or solutions that retail investors are certainly going to want and institutional investors as well as we move forward. But I think at this point volatility has had an impact on some of the flows out there for sure.

Geoffrey Kwan

Okay, perfect. Thank you.

Operator

Thank you. Our next question comes from Paul Holden from CIBC. Please go ahead.

Paul Holden

Thank you. Good morning. First question is with respect to your share of earnings in Smith and Williamson. I believe on the last call you suggested a run rate of roughly $2.5 million a quarter. This quarter came in around $4 million. So wonder if there’s any change to the outlook, or if there’s just something abnormal with the Q1 result?

Blake Goldring

Just something abnormal Paul, a little bit of a catch-up from the previous quarter that we’re making estimates for the last month of the quarter. So there’s a bit of a true up. So $2.5 million to $3 million on a quarterly basis is the target.

Paul Holden

Okay, good. And then a couple questions with respect to FFCM. So when you are discussing integration as part of the key execution points for 2016. From an operational standpoint, given the size of FFCM, is there much to integrate operationally, or is this more about integrating sales and product?

Blake Goldring

It’s a little bit – even though it’s a small organization and just I would say, just outside the startup category. There’s a significant amount of integration, because we’re trying to leverage the administration and shared services support back into the AGF environment. So including facilities and moving an IT infrastructure et cetera, but all of that work is internally on track and it will be completed by the end of 2016, but the significant progress will be made by the summer months.

More importantly is, as you mentioned, working jointly with Highstreet and its capability in the quantitative space, we’re enhancing the product to research capabilities and refining the investment process to address the institutional market in U.S. and more importantly the retail market in Canada. And as Kevin mentioned in his remarks, we expect to launch some low volatility and factor-based products in 2016.

Paul Holden

Okay. And then with respect to the ability to sell FFCM mandates into the institutional market, when do you think you will be ready to move on that?

Blake Goldring

Well, we’re having conversations currently with large U.S. platforms that are institutional in nature, and so that’s currently ongoing. We will sell into the market in two ways, one the underlying ETFs, the factor based ETFs that we’ve – we have – are the manager of under the brand name QuantShares.

In addition to the ETF managed strategies, which may utilize some of those ETFs in the underlying, but as well they would use third-party ETFs. We have seen some excellent growth in the ETF space. We’re now at $165 million and that’s roughly 200% increase over the past five months in the – with the ETFs, and we’re at $1.3 billion in total AUM with FFCM including the asset managed strategies.

Blake, is there anything that you wanted to add?

Blake Goldring

No, I think you’ve heard with, Bob, thanks.

Paul Holden

And then just one final question with respect to product development, do you have any kind of targets in terms of the number of fund roughly speaking, you would like to be able to launch this year?

Blake Goldring

Kevin, maybe you could answer that.

Kevin McCreadie

Yes, Paul, I don’t get so hung up on the number of funds. I think it’s more important to bring our things at relevant and trying to meet an investor needs. So I mean – yes, I don’t see as – I don’t think the drivers going to be numbers of new things, I think it’s more about relevant things that the investor needs to find a solution to a problem.

So to Bob’s point, this can take many flavors that could be standalone potential ETFs, it could be a managed solution with the ETFs or funds in it that have low – components reach to it. So there could be a lot of extensions for something that we will allow. So it’s not – we don’t target really a number, but really think about is our need there for the product.

Paul Holden

Okay. So let me rephrase the question one more time. So last year, I believe you launched two new funds, a year before or somewhere in the same ballpark, one or two new funds. Should we be looking for a significant increase in that number?

Kevin McCreadie

I would say one to two, one to three a year is probably the right pacing. I don’t see us bringing out as some others do 10 to 15 a year. I think we really want to strive for relevant to rather than just a large number. So I think two to three a year is my thinking on it.

Paul Holden

Okay, that’s great. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Tom MacKinnon from BMO Capital. Please go ahead.

Tom MacKinnon

Yes, thanks very much. Good morning. Question is just on success you’re having with AGF at the AGF Elements product. In your opinion, what’s kind of driving the success you’re having here? And if you could comment perhaps on some of the economics associated with this product? In particular, are the trailers a little higher for this product than they are for the rest of your mutual funds? Thanks.

Blake Goldring

Yes, Tom, it’s Blake here. I’ll answer the first part and then I’ll turn it to Bob. Listen, it is a terrific performance, I mean you’re looking at 90% above median and it is right across the board. We got net sales in each of the underlying elements portfolio. So when you get that type of performance going clearly it turns out.

Tom MacKinnon

Absolutely.

Robert Bogart

Yes, with respect to the economics, there is a slightly – in the mutual fund series, there is a slightly higher or higher trailer than our normal at 110 [ph] basis points. But a lot of the success has been two strategic partners where there is either – you’re selling it on an institutional class basis where we don’t pay trail. But with respect to the volume – the level of volume that we see in Elements, it’s the profitable product for our certain.

Tom MacKinnon

Okay. Thanks for the color.

Operator

Thank you. Our next question comes from Graham Ryding from TD Securities. Please go ahead.

Graham Ryding

Hi, I just wanted to confirm, is there was any of the expenses that you highlighted this quarter from FFCM and the transfer business – were any of those expenses one time in nature or with those just flagged as fully incorporated and expected to be recurring?

Blake Goldring

It’s the latter, Graham. There were really no onetime expenses with respect to either two of those operations.

Graham Ryding

Okay, great. And then just to confirm the $180 million SG&A that you guided towards that does not include any of the expenses associated with the transfer business? Is that correct?

Blake Goldring

That’s correct. The revenue – and you’ll see this next quarter in the disclosure that revenue will cover off those additional expenses.

Graham Ryding

Okay. Thank you.

Blake Goldring

Okay.

Operator

Thank you. Our next question comes from Stephen Boland from GMP Securities. Please go ahead.

Stephen Boland

Yes, I just want to revisit the corporate class discussion. I guess, I’m having some difficulty deciding if this is a material event not just for you, but for the industry. But certainly with your existing AUM and the ability of whether it impacts sales or redemptions. So, I guess, the first question is, your fees are I think are the same on corporate class versus your F series or your mutual fund series, is that correct? I mean, people are not paying…

Robert Bogart

I think there are some that are slightly higher management fees.

Stephen Boland

Okay. So essentially advisors or clients are paying for that tax deferral…

Robert Bogart

That’s correct.

Stephen Boland

Okay. So without that tax deferral, I guess would be the first thing. But is there enough – you mentioned that losses, sharing losses is also very important…

Robert Bogart

Yes.

Stephen Boland

…to advisors and clients. Is that enough to keep advisors and clients in the funds first off, and whether that impacts your ability to sell those products without that tax deferral?

Robert Bogart

Yes, there’s a – there certainly is the question, an outstanding question on the – on new flows coming into the funds. And it is whether or not these will be as attractive going forward as they have been in the past. But I think just based on our – again, based on our experience there hasn’t been a lot of switching. There has been a lot of buying and holding. Now you’ve always have the option to switch into another corporate class, and I presume that’s worth something.

But really the reduced taxable distributions in the current year and the shared use of the capital and non-capital losses can be quite a retention motivation for a unitholder. Now mind you, if they want to exit the corporate class, they will incur a tax liability. And so, if they are happy with the investment and they’re getting tax shelter currently, why would they want to unnecessarily do that.

Stephen Boland

Okay.

Kevin McCreadie

And, Stephen, you’re thinking more broadly how dramatic is this to the industry. I mean, our view is ultimately it’s unfortunate for investors, this was I think a very positive product for them. At the same time really it will put on even footing with sales of and purchases of just regular stocks. So it’s not going to disadvantage, if you will, our products versus competitor product.

Stephen Boland

Without that tax deferral feature, do you think you would have to reduce your fees on those funds just to retain some sort of gross sales momentum? Like is the rule of a tax deferral enough that advisors say, it’s just not worth, it’s just to gain access to the losses for you to [multiple speakers]?

Kevin McCreadie

Yes, I mean I think it’s a question that’s going to play out over time, and we’re going to be monitoring obviously the gross flows as well as any pickup in redemption rates. But I think for the in-place book, there still should be a retention feature that is of benefit to unitholders.

Stephen Boland

And sorry, just one last question, Bob, just on that. Is the age of the client, I mean, I would say your corporate class book is probably pretty young. So maybe clients don’t have as much capital gain within their funds, do you think age of your client or how long they’ve been in the fund is a factor as well?

Robert Bogart

I mean, it could be, but we don’t believe that we had any disproportionate demographics within the corporate class versus our total book, it’s…

Stephen Boland

Okay.

Robert Bogart

It’s all – money has accumulated over time. So to the extent, you have significant AUM in a corporate class you’re probably in your earning years of 40 to 50.

Stephen Boland

Okay. Thanks very much.

Robert Bogart

Thank you.

Operator

Thank you. I will now turn the call back over to Mr. Bogart for closing comments.

Robert Bogart

Thank you very much everyone for joining us on today’s call. Our next earnings call will takes place on June 29 when we will review our results for the second quarter of 2016, details of the call will be posted on our website. Finally, an archive of the audio webcast of today’s call with supporting materials will be available on the Investor Relations section of our website. Good day, everybody.

Operator

Thank you, and thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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