IGM Financial's (IGIFF) CEO Jeff Carney on Q2 2016 Results - Earnings Call Transcript

| About: IGM Financial (IGIFF)

IGM Financial Inc. (OTCPK:IGIFF) Q2 2016 Earnings Conference Call August 4, 2016 2:00 PM ET

Executives

Paul Hancock - Vice President, Finance and Investor Relations

Kevin Regan - Executive Vice President and Chief Financial Officer

Jeff Carney - President and Chief Executive Officer

Barry McInerney - President and Chief Executive Officer, Mackenzie Investments

Analysts

Gary Ho - Desjardins Capital Markets

Graham Ryding - TD Securities

Paul Holden - CIBC

Scott Chan - Canaccord Genuity

Stephen Boland - GMP Securities

Operator

Good afternoon and welcome to the IGM Financial Second Quarter 2016 Earnings Results Call for Thursday, August 4, 2016. Your host for today will be Mr. Paul Hancock. Please go ahead, Mr. Hancock.

Paul Hancock

Thank you, Wayne. Good afternoon, everyone. I am Paul Hancock, Vice President of Finance and Investor Relations. I am joined today by Kevin Regan, Executive Vice President and CFO of IGM Financial; Jeff Carney, President and CEO of Investors Group and President and CEO of IGM Financial; Barry McInerney, President and CEO of Mackenzie Investments.

Before we get started, I would like to draw your attention to our cautions related to forward-looking statements on Page 3 of our presentation. Non-IFRS financial measures that we have used in this presentation are summarized for your reference on Page 4. Finally, on Page 5 we provide a list of documents that are available to the public on our website related to the second quarter results for IGM Financial.

Kevin Regan will now take us through a summary of IGM Financial’s results and the industry environment starting on Page 7. Kevin?

Kevin Regan

Thank you very much, Paul. As Paul mentioned, if you turn to Page 7, a few highlights from this page which is our financial highlights for the second quarter, operating earnings were $172.9 million, which resulted in operating earnings per share of $0.72 per share. And earlier today, our Board declared a dividend of $0.5625, maintaining the level of our dividend from prior quarter. This reflects a yield of 6.16% based on yesterday’s close of $36.51. We continued to repurchase shares during the quarter, but at a relatively more moderated level than from quarter one.

And also in this quarter, we announced that we acquired a 10% interest for $50 million in Personal Capital, which is a leading digital wealth advisor in the United States. And this interest may rise to 15% in the next year, so we have an option with respect to that. And this really is a strategic investment for IGM. It allows us to participate in the emerging digital wealth management industry in North America. We have a board seat which gives us access and insight into key business decisions as well as opportunities to leverage Personal Capital’s technology in the IGM Canadian operations.

And finally for the quarter, we are quite pleased to be recognized as one of Canada’s best 50 corporate citizens by the Corporate Knights in this quarter. IGM was also only one of three Canadian companies to be accepted into the London based FTSE4Good Index Series on June 20, 2016. And just for some context, FTSE4Good Index Series is designed to measure the performance of companies demonstrating strong environmental, social and governance practices. And in total, only 25 Canadian companies have met the criteria to be included in this index, which is comprised of 824 companies globally.

If you turn to Page 8, a few comments on the operating environment. The S&P TSX Composite Index rose 4.2% in the quarter, attributed to the strong performance of basic material stocks. Major global equity indices experienced mixed performance in the quarter, which was compounded by the appreciation in the Canadian dollar. And market volatility, coupled with concerns over the Brexit vote in the UK has kept many investors on the sidelines. As a result, the bank channel experienced a 12.5% decline in gross sales compared to a 5.7% decline in the advice channel over the quarter. But both channels had a similar decline in net sales. And for the overall industry, within the advice channel, flows into the balanced income categories captured the majority of the net flows.

On Page 9, a few comments on the regulatory developments in this quarter. And there are two fairly important regulatory developments to comment on. The first is the CSA Consultation Paper 33-404, which was focused on enhancing the client and advisor relationship. It includes comments and proposals on the introduction of a best interest standard. So, there is an extensive list of targeted reforms within the material that accompanied the paper, with some disagreement still though among regulators with respect to the needs for this best interest standard.

Investors Group is well positioned with respect to this proposal as we focus on the same objectives as the proposals which is really a client orientation and a long-term comprehensive planning view. Mackenzie is also well positioned by virtue of their innovative approach to solutions for advisors to help them help their clients attain their financial goals. The other development was under CSA Notice 81-327, which is a consultation to occur in the fall on the option of discontinuing embedded commissions. Now, no regulatory decision has been made with respect to this at this point, but the regulators are seeking to understand the impact of such a change. And as we have done with many and all other regulatory impacts that are affecting our organizations, we will be participating in the comment process as these occur and as they are occurring.

With that, I am now going to turn over the comments to Jeff Carney for his review of Investors Group’s operations.

Jeff Carney

Thank you, Kevin and good afternoon everybody. Investors Group experienced another good quarter with continued growth across our businesses. We have continued to experience strong utilization of our insurance and mortgage products that support the financial planning efforts of our large consultant network. On the fund side, our Maestro portfolios, which were launched a year ago, have just crossed the $2 billion mark showing the power of this new product, but more importantly, it’s attracted $700 million in new net money over that period. Over the last three months I have been focused on immersing myself in the culture of Investors Group and taking a long look at the company across the geographies and I have been out traveling and learning what everybody’s concerns are and opportunities are. And it’s been a great first introduction for me into the field.

Through the travels I have met over 1,000 advisors and I have been across the country to really understand what they are working on and sharing with them how I think about things and it’s been a great collaboration across the country. I can tell you that I am energized by the team on their commitment to the clients and to the business and that we have a great group of people who really care about what they do everyday. It’s still early days for me to talk about strategies and changes or anything going on going forward, but I look forward to sharing that with you as I learned more about the business and do my own due diligence on the company and define where we go from here.

Turning to the next page on the consultant network, we experienced continued growth in our consultant network over the quarter, which now stands at 5,366. This represents the highest quarter and level in the history of the company and the number of consultants studying to be qualified as CFP or an FPI is up 27% from June 2015, which is fantastic to see.

If we turn to the next slide on Slide 13, despite the challenging sales environments, mutual fund gross sales were $1.78 billion representing the second best Q2 on record. And net redemptions of $168 million compared to net sales of $30 million in Q2, 2015.

Turning to Slide 14, our focus on the high net worth segment continues to show strength and tracking over $1 billion in gross sales year-to-date and 25% of our gross sales year-to-date has gone into the high net worth series versus 21% in 2015. And we continue to expand our unbundled fee structures which at the end of the quarter accounted for 7.6% of our mutual fund assets.

Turning to Slide 15, beyond mutual funds, we continue to experience growth in our products and services that supports clients’ financial planning needs. Our new mortgage business activity was $1.47 billion. That was in large part due to the all-in-one mortgage, an offering that we had in home equity line of credit solutions that we brought to the market and all that was introduced in 2015. We are up 26.5% in those capabilities. Mortgages outstanding rose 8.8% to $12.4 billion compared to the prior year period.

Turning to Slide 16, client account rate of return for up to 5 years now appears on the quarterly statement on the left you can see it and you can see the median client account rate of return was 1.3% during the second quarter and negative 0.1% over the last 12 months.

Turning to 17, we continue to focus on the investment performance. Portfolio Funds, which represents 34% of our total assets and accounted for 56% of our gross flows in the quarter continued to perform well and you can see that on the chart.

Turning to Slide 18, we had Q2 2016 average mutual funds, AUM which increased 3.1% compared to Q1 ‘16. A proportion of our mutual fund AUM in high net worth series increased to 38.3% in Q2 2016. I would also like to highlight the continued increase of our high net worth series that’s been building a momentum and continues to show well in our results. Management and administration fee rate was relatively unchanged compared to the prior quarter.

Turning to Slide 19, net investment income and other increased $4.4 million from Q2 ‘15 due to higher net interest income on securities loans and gains on sales of residential mortgages. On non-commission expenses, we had a 9% increase over Q2 2015 which was largely due to the expansion of our consultant network and investment in growth initiatives that we discussed in the past. Expense growth also included extraordinary items in the quarter related to leadership transition, primarily at Investors Group, of approximately $5 million. Consistent with our guidance last quarter, we expect the increase in expenses during 2016 to be about 8% excluding that $5 million extraordinary item.

Turning to Mackenzie on Slide 21, Mackenzie has continued to experience an improvement in investment performance during the second quarter as our industry ranking moved up to 5th position from 7th based on the proportion of assets in Morningstar’s rated four stars and five stars. We launched six active ETFs and four mutual funds in the quarter that are off to a good start with over $30 million of client activity to-date. Four active fixed income ETFs were launched in April, which we discussed with you on the last quarterly call and we just launched two smart beta equity ETFs and corresponding mutual funds in June that are sub-advised by our Paris based TOBAM investments. One mandate is Canadian and the other is U.S. TOBAM, a global award winning asset manager has a unique investment approach to maximizing diversification to achieve the full risk premium of an asset class. They have been serving some of the world’s largest pension plans to improve their risk return characteristics of their portfolios.

Mackenzie has an exclusive distribution arrangement with TOBAM in Canada and is excited about this partnership. We view these mandates as core holdings within investors’ portfolios and expect there will be a lot of demand for this capability in the market. We also launched the Mackenzie Ivy International Equity Fund and the Mackenzie Global Low Vol Fund which is sub-advised by Irish Life. These innovative products will provide advisors and their clients with new solutions to help achieve their personal financial goals.

Our institutional business was awarded a $580 million European mandate which funded this quarter. Employee engagement is one of our key performance drivers and I am pleased to announce our 2016 employee survey results were significantly improved over 2015 in both the engagement score and the participation rate. And finally, as most of you know, Barry McInerney was appointed as CEO of Mackenzie in May and started work on July 11. And I will ask Barry to say a few words at the end of the presentation.

Turning to Slide 22, we had mutual fund gross sales during the second quarter were $1.49 billion, that’s down 12.8%. Mutual fund net redemptions were $375 million. Within the retail channel, Mackenzie maintained its gross share in the quarter relative to Q1 2015 and increased share on a year-to-date basis. And as you know, retail businesses have been a very important focus for Mackenzie. Mackenzie’s redemption rate on long-term mutual funds was 14.8% which is below our peer average.

Turning to Slide 23, gross sales in the balanced category were $655 million and excluding Symmetry, were up 10.5%. Our four star and five star rated balanced fund mandates attracted significant flows of $163 million this quarter, up 70% over last year. The weakness we have seen in Symmetry balanced funds has been related to lower level of activity in the bank branch channel, consistent with industry trends. Foreign equity gross sales remained strong at $441 million. Also, new products we launched in 2015 continued to attract flows. For example, our Diversified Alternatives Fund is up to $61 million in assets and our private pools have attracted $43 million in gross sales so far.

Turning to Slide 24, in terms of net sales the balanced category was impacted by lower net sales of Symmetry as we discussed. However, flows into balanced funds excluding Symmetry showed a $51 million in net sales. Institutional net sales were positive in Q2 due to the 580 million mandate that I mentioned from a prominent European pension funds, but we also mentioned on the last call this was offset somewhat by a $500 million redemption related to Cundill from MD Management. We are very pleased with the progress we have seen in developing our institutional awareness and interest for our capabilities during the last year and look forward to future updates to the analysts.

Turning to Slide 25, as you can see we enjoyed very strong performance in our Ivy Global Equity Income and Growth Oriented teams. The products managed by our Ivy team continue to attract net flows in the quarter. Turning to Slide 26, as of June 30, 2016, Mackenzie’s overall mutual fund core asset [ph] performance improved in the majority of periods compared to last quarter. 37% of our Mackenzie Mutual Fund assets are in four star and five star funds which was unchanged from last quarter, but up 31% at December 31, 2015. As I mentioned earlier Mackenzie’s ranking now is fifth place.

Turning to Slide 27, net revenue reflects all line items that are primarily driven by AUM levels including all fee revenues less all commission expenses. Our net revenue rate is expressed as a function of average total AUM and was 76.8 basis points during Q2 2016. This rate fluctuates with the changes to mix of our assets under management including asset class and client mix such as institutional high net worth. Relative to Q1 2016, the slightly higher proportion of AUM in mutual funds accounted for the increase in the net revenue rate.

Turning to Slide 28, higher average total assets and slightly higher net revenues rates resulted in Mackenzie’s net revenue increasing 2.6% relative to the prior quarter. Non-commission expenses increased 4.2% compared to Q2 of 2015. And as guided last quarter, we expect non-commission expenses to increase by about 6% in 2016 which includes the annualization of new investments made within the last year and our ETF launches.

I am now going to turn it over to Barry, so he can introduce himself a little bit and then – we will then turn it over to the operator for questions.

Barry McInerney

Thank you, Jeff. It’s really exciting to be here and this is just week number four for me, so it’s early days and I am certainly in learning mode and listening mode in terms of understanding the business and all aspects thereof and the strategy and spending a lot of time meeting the teams across the investment teams, the operations, the distribution teams and marketing and product. Early observations, the strategy is spot on. The key fundamental components of it are what we will be executing on, continue to execute on going forward. We want to deliver strong, risk adjusted performance for our investors. We want to have innovative and relevance in high quality products and the products have been launched the last couple of years have really positioned us well to meet those changing needs of our investors going forward from Smart Beta to Diversified Alternative Fund to High Income and High Yielding Funds to our ETFs, so all very exciting.

The brand is growing and enhancing very nicely. We measure that on a regular basis and the distribution team is out there and doing a solid job and gaining momentum and this being 2016, a bit of a challenging year for us. So look forward to reporting back and leading the – thank you, Jeff for taking care of Q2. And I will lead for Q3 for Mackenzie.

Jeff Carney

So operator, we can open it up to Q&A.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Gary Ho from Desjardins Capital Markets. Please go ahead.

Gary Ho

Good afternoon. Jeff, I just wanted to visit the topic of fees, we have seen some pressure over the past few quarters across the industry, I am thinking I think Mackenzie did a broader fee cutback in 2014, just wondering how Mackenzie’s fees stack up against peers, are you comfortable where they are currently and if you were to adjust fees, are you inclined to do a broader based fee cut or more selective and if you can touch on the IG side as well, that would be great?

Jeff Carney

Sure. So on Mackenzie, 2 plus years ago we did a $50 million cut on our administration fees, so they were higher than the market. And we benchmarked at that time to – we didn’t want to be the price leader, but we wanted to be competitive. And so that’s what we targeted was to be competitive. And we have monitored that position every quarter to see how the markets moved and where it’s gone. I think you have seen some tangible changes more in the banking channel than you have in the rest of the independent side of the marketplace. And I think they have been pretty aggressive in that front. So we are going to be competitive on fees and we don’t want to have these things get to the point where it’s a tangible impact on your P&L when you decide to make the prices changes, so we continue to monitor it. We will be competitive and we will have pricing be the reason that we don’t grow. And then on Investors Group, I would say the same thing. That I am still doing my own homework on that and it’s early days. So I would look forward to sharing my insights on Investors Group’s value proposition and where I would like to take it, but I need to do my homework first to do all those things. And obviously work with our Board to decide where we go, but anything that’s going to accelerate our growth and enable us to continue to grow this great franchise at Investors Group, I am going to advocate for it.

Gary Ho

Okay. And then the second question is on the ETF launches, can you give us an update where assets stand right now, kind of thoughts on launching new ETFs over the next 12 to 18 months? And are you seeing any cannibalization in the kind of these mutual fund sales at all?

Jeff Carney

So, on the amount, it’s around $30 million of client purchases. And we are excited about that. And there has already been some early contributions into the TOBAM products we just launched, but fixed income has really been the big driver of that and the fixed income launch. And it’s been a big building it from scratch inside a company that’s going through a lot of change has been a good challenge for all of us. And Michael Cook who has led this has done a fantastic job, but we have had a great response from the market. They really like the fixed income strategies coming out of the gate. And then this TOBAM story, which we are going to tell in the bigger way in the fall, but is very unique in the marketplace and is uniquely positioned to help advisors work with our clients to give better risk adjusted returns over time through a very unique capability that TOBAM brings.

Gary Ho

Okay, great. And then just lastly, Jeff, you also mentioned you visited a good number of IG consultants and I know it’s still early days, but can you share with us what are some of the positives and perhaps some of the negatives and what are you thinking there?

Jeff Carney

Yes. I mean, I think the positives are we have 1,600 CFPs. And I think as CRM2 evolves and educating people on – we have 1,600 with another 800 about to achieve that CFP goal. And so I think whoever meets the needs of the investor the best is going to be the one, the winner. And I think Investors Group is uniquely positioned for a few reasons. One is the breadth of our reach is we have 5,300 advisors in every nook and cranny of this country. And they have got entrepreneurship built into them. They are driven and we resource them with the skills and tools to be successful. And they all believe in planning at the core. We are working to get everybody else into their CFP so that we have a broader offering in that kind of capability, but it’s very encouraging to see that already here. So, I would say if you ask for advantages, it’s the CFP breadth in our company which should be as high as anybody in the country.

And then I think second would be the passion of the entrepreneurship of the teams and that – going across the country, I mean these are very passionate people. They care deeply about their clients and they care deeply about growing their business. And so I have got an entrepreneurial group out there that wants to do more, which is good for us in our revenue line over time and it’s freeing them up. And then we have an incredible specialist team that supports all of the CFPs and that is sophisticated tax planning through to asset allocation in all sorts of skill sets. And so, I don’t think there is a team as good as ours in the market that has done so many, understands insurance deeply and how issue new insurance as part of your financial wellbeing. So, I really feel like we are out in front on that. And the breadth of our product lineup, we go all the way from core deposit accounts to the sophisticated tools and products in diversified portfolios. And so the reach and the breadth and then the entrepreneurship and all that combined with a brand that’s very well-known and one of the top ranked financial services brands in the country, that’s a great asset to start from. And then I think there is a lot more we can do to improve from here. So, I am very optimistic about our future.

Gary Ho

Okay, great. Thanks so much.

Operator

Thank you. [Operator Instructions] The following question is from Graham Ryding from TD Securities. Please go ahead.

Graham Ryding

Good afternoon. Just wondering if I could maybe touch on the regulatory front, the CSA’s consideration of banning trailer fees, do you see any potential here for this to be an overhang on, if it’s adopted, on industry sales or just add to the fee pressure within the industry at all?

Jeff Carney

Well, I mean, I think what’s most important is it’s going to happen to everybody. So, it’s not like we are uniquely positioned against anybody else when they do this. And we have already got people who are sort of going to different models and working around those things. But I feel very confident in our value proposition. I think that’s the most important thing that’s going to defend any changes that are going on in the regulatory world. And as long as you have got a great value proposition for your clients, your model is going to survive and you are going to get paid for it. And it might be structurally different, but at the end of the day, we need to be compensated for the value we bring and our advisors need to be paid for what they do and we expect that will continue ongoing.

Graham Ryding

Okay. And then when you sort of consider the best interest standard and then also this CSA review of mutual fund fees, does either regulatory sort of consideration, is it more disruptive than the other one or how are you sort of viewing the potential impact of either of these paths?

Jeff Carney

It’s – I am not sure you can compare the two and say one versus the other. I think the industry is concerned about all of it. And it’s not that it’s a concern because it’s change. And so if you can embrace the change and manage through it better than your competitors, then I think you have an advantage. And again, I think the best way to defend against all of this is to do a great job for your clients and give them peace of mind on their retirements and their college savings and looking after their family and their legacy and that’s what we can control. We can’t control what the regulators decide to do and I feel very confident that our value proposition can survive any change.

Graham Ryding

Okay, helpful. You are making a push it seems to sort of a lot of your consultants at the Investors Group level are getting their CFPs, have their CFPs or also they are getting their CFPs. Is this direction coming from the top down from management? Is it coming from the bottom up from the consultants or is it in response at all to sort of the CRM2 and regulatory change?

Jeff Carney

No, I mean I think it’s been both for a long time. I think they have been encouraged to do it in the past. But also lot of them just went out and did it on their own. And so it wasn’t a mandate necessarily. I am advocating for it as I have been traveling, because I think it gives them a competitive advantage over their competition. But you can’t force it on somebody, because I think they won’t do it very well. It’s like I have been in this business long time, if you force a financial plan on a client, because the head office said to do it and the client doesn’t want it, you are going to end up frustrating the client. Because at the end of the day, the relationship has to be between the advisor and the client and we have to trust that the advisor knows what the client is trying to achieve and they help them achieve it. Am I saying to the sales teams and the advisors across the country that I want them to offer financial planning? Absolutely. But I have also said to them, if the client says no, they get to vote. They get to make that decision and then we just support them as best we can with the tools that we have.

Graham Ryding

Got it. And then just lastly, you mentioned…

Jeff Carney

And I wouldn’t say, by the way – I am doing that, because I think it will drive our economics over the long-term. I think it’s great for the client, but it also means – like if you have got a full financial plan with a client and you are looking after their insurance and their banking and their investments, they are not moving. That’s like moving your life. And so the more reach into the clients we have the better and then obviously we would rather have their banking here than having them have it at a bank that’s trying to penetrate our relationships. And so we think we are better positioned than the banks as far as the circle of the relationship that we have with our clients and the breadth of the reach that we have with insurance and everything else all in one place, whereas at the bank, that’s a harder experience for clients to get.

Graham Ryding

Got it. Appreciate the color. And then just maybe lastly a quick one, just TOBAM you mentioned some unique capabilities, can you elaborate that a little bit?

Jeff Carney

Yes. I mean, basically it’s a first based firm and it’s an entrepreneurial company that has figured out a different way to invest. And basically what they have done is we have all grown up with market caps and so we define diversification as the S&P 500 and then you get exposed to all of these different equities and that’s going to give you diversification, but who says that that’s the true definition of diversification? And so what this team has done is they have invented their own quantitative models that assign a diversification value to every individual security. And then they have got an algorithm that maximizes that diversification. And so what it does is through that it’s looking – it’s algorithms are looking for where to allocate your scarce resources across the spectrum of opportunities in the equity spectrum or in the fixed income spectrum, whatever the product is. And by doing that you get a better risk adjusted returns over time. And they have attracted some of the largest pension funds in the world to their platform and we have entered into a partnership for Canada with that firm. It’s a core holding and it’s something that every portfolio in this country should have really. And it’s unique. And it ties into what Barry was saying about some of our recent launches. I think we are – I said that we had an innovative agenda when I got here and we have been pushing that agenda as far as we can. We are starting to see some of those things early on with what we did and more recently with some of the latest launches and products. But I would think, I haven’t looked at it recently, but we would probably have one of the most diverse product line ups now in the market. That compliments all of our existing teams and their great work as well.

Operator

Thank you. The following question is from Paul Holden from CIBC. Please go ahead.

Paul Holden

Thank you. Good afternoon. So Jeff, you just made a comment I guess about the product lineup at Mackenzie, it sounds like you are overall pretty happy of where it stands, so what’s kind of the next step or what do you think is necessary next to improve the gross sales and net sales relative to the industry, so sort of ignoring the industry headwinds as much as possible today?

Jeff Carney

Well, we made a big decision on Cundill and we talked about that in the last meeting, making the changes we made there. And I am really pleased with how that’s played out. Our redemption rates have dropped dramatically in that product as a result of that change and we have got a great team now running that product and they are off to a really good start. They have been across the country meeting with advisors and their story is getting a lot of traction in the marketplace. So that tends to put a lot of pressure on our redemptions over the last few years and when that turns around with the new team, that’s going to have a big impact. Ivy is doing phenomenally well. Our global equity income team is doing well. It’s probably the best performance since I have been here that we probably have had. And then as Barry said, I told Barry that he has to make it even better. So a lot of his focus beyond accelerating everything else that we were doing at Mackenzie is to continue to drive our performance higher. And we want to get in the top three consistently and then number one. And we now rank fifth asset weighted and that’s a pretty good position to be in. But I like our breadth. I like the diversification of our teams. And I think we have unique advantages in all of them. And I discussed this at Investor Day and Tony Elavia presented, but we have been working hard on implementing that ideal investment process that we talked about. So we are putting better implementation discipline on our investors so that they don’t make unintended bets that create mistakes or detract from returns. And that’s playing out now and that’s I think driving some of this improved performance. And it’s letting them retain the returns that they generate on their good ideas and then mitigate the disasters or things that you get exposed to that you didn’t really want to. And so I think that’s helping smooth it out and giving us this chance to continually improve our performance over time.

Paul Holden

Okay. And then maybe I could ask you about your net sales expectations for Mackenzie through the rest of the year in the context of what you said at the Investor Day in terms of expecting positive net sales, has that changed, is that kind of timeframe being pushed out a bit just because of what’s happening across the industry?

Jeff Carney

I think there is – I would say on retail I think there is continued momentum there. We talked about a lot of on-boarding of new wholesalers and getting traction and that they have to get to know the clients. And there is still more to play out there. But that’s we are working through that. And then they have got more products to sell and so that should start to really play out as well more which should help. And then at the same time, we are still going through some things with Cundill a little bit that we have to work through. But I would expect that you will see continued, particularly in retail, you will see continued gain of gross capture rates there. We have had – it hasn’t been explosive gains, but it’s been consistent gains. And we want to see it get to more explosive I guess as we go. But I would expect that that would continue to accelerate. And then as we launch these new products, we expect them to garner a lot of assets. And so it takes time to get products into the market and for people to trust them. But once they get going and they really become popular and we are starting to see that with the multi-alt product and some of the other new ones that we have launched recently. So it’s – we are always actively managing our product lineup and looking for ways to reduce what didn’t work and have more that does. And so I think you will see us continually managing it carefully and driving it. And then on the penetration rates of wholesalers, in Brian Gooding’s presentation that you saw, they really are doing a great job. So our penetration rates are going up, our breadth is going up and particularly in IROC where we need to grow and I am encouraged by that. On the strategic alliances side, we are really running into some structural things there, so that’s more reliant on what’s going on inside of our key partners. And we have some very important ones that you know about. And so as they slow down, recently that’s obviously impacted our strategic alliances sales. Those are at lower fees, but they still matter. And so we work closely with our partners to help them through these types of moments in their models and we know they will come back in the long-term. But that’s been a bit of a drag on our overall net sales.

Paul Holden

Okay. So if I can try and summarize your message, it sounds like everything is trending in the right direction, but maybe a little bit slower than you would have expected previously, so you re on the path to breakeven, but maybe it takes a little bit longer, is that fair?

Jeff Carney

That’s fair.

Paul Holden

Okay, alright, great. And then in terms of the conversations you had with the IG consultants, how much time did you spend talking to them about CRM2 preparedness?

Jeff Carney

It was the first question at every event, because they are reading the papers the way you are and they are seeing everything that’s out there. And so I actually brought it up before they brought it up, because I knew that it was on their mind. And we would just talk about why we felt confident in our future and why we are well positioned to manage through this. And we have already got rate of returns for our clients so they know exactly what they would be getting and we are ahead of the game on most of the implementation parts. And so I think our people are well prepared. And they understand what the facts are and we are going to continually educate them and make them understand what’s going on here. But the most important thing all they can do is control is their relationship with the client and doing a great job.

Paul Holden

Alright. And would you say that they are confident that their clients are fee aware or they are getting them there ahead of implementation in 2017?

Jeff Carney

We have actively worked with our advisors to educate them on that. And I checked on that on the tour. And it’s not going to be 100%, because we are dealing with humans. But I know that the teams worked very hard to educate their clients.

Paul Holden

Okay, good. And one final question. So with the actions you have taken at Mackenzie to invest in the business and then your response to a question earlier on the call regarding potential fee action, it suggests that your priority is investing in the business for long-term competitiveness and growth, which I think is the right direction, but then you also have to balance that off against margin, so I am wondering how you are thinking about balancing those two factors, i.e., how far are you willing or how deep are you willing to go in terms of sacrificing short-term margin for long-term potential gain?

Jeff Carney

I think we are very fortunate to be a part of Power Financial and we have a very long-term view on the world and we have a very sophisticated Board that understands that we are in different parts of the cycle and markets and evolution. We believe we have an amazing asset here that we want to invest in on an ongoing basis and that’s what we will do. And I think we are unique in that opportunity. So if I go to the Board and say that I need more of this and that because of these reasons, I am sure that they would ask lots of great questions, but ultimately would probably support it. And that’s what they have done with me at Mackenzie and so far in our conversations with me at Investors Group it feels the same. So we are going to invest for the long-term and make sure that we have value propositions that can sustain themselves for decades to come. And if you try and take shortcuts, then it’s harder to get it back. You got to work twice as hard. And so we will be continuing to invest. And you know well that we have been running higher than normal expenses because of that both at Mackenzie and at Investors Group and we have been pretty clear on our expectations on that this year.

Paul Holden

Okay, thank you.

Operator

Thank you. There are no further questions registered. At this time, I would like to return the meeting – actually we do have a new question from Scott Chan from Canaccord Genuity. Please go ahead.

Scott Chan

Hi, good afternoon, guys. Jeff, just with Q2 on the institutional side, at Mackenzie there was I guess two large flows, one in, one out, can you give us any visibility on the institutional pipeline today?

Jeff Carney

It’s probably the best it’s been since I have been here. So I think the team has done a great job. We went through a sort of review of the business model and when I first got here and really sort of narrowed the focus of where we should travel and what types of mandates we have that are scalable in that space. The team sort of went through a restructuring and really worked hard to do that. And so to land the quality of that client that we landed in Europe is an indication of all our hard work. So I was really pleased with that. I wish the 500 on the other side wasn’t coming out at the same time, but we knew that when we made the Cundill decision to change that there would be ramifications. But we have to do what’s right for the long-term and that’s what we did. So I feel more confident I guess about our opportunities in the institutional space going forward than I have since the day I got here. We still have work to do and that’s – Barry is going to be great. He comes from the institutional side of the business and he will take that to a whole new level I am sure and I can’t wait to see what the results will be. He will share those with you in future calls. But it’s an important part of our value proposition for sure.

Scott Chan

Okay. And just going back to the retail side, I don’t know if I missed it Jeff, but the income oriented category was down 48% in terms of gross sales year-over-year, is that more because of the asset class category or is there something more involved that drives that large…?

Jeff Carney

It was one particular mandate which was our floating rate. And that’s been a tough category I think as you know, for people. And so it comes down to whether you were hedged or not hedged and some other things in there. But it wasn’t a performance blowup or anything, it was more our currency.

Scott Chan

Got it. And just lastly, just on the TOBAM, do you know how much assets they manage globally?

Jeff Carney

They keep growing so fast, roughly €8.5 billion, so $12 billion. And then it would be – you would know every company that’s used them, I can’t say who it is, but it would be some of the largest pension funds in the world that are using it.

Scott Chan

Okay, that’s great. Thanks.

Jeff Carney

Thank you.

Operator

Thank you. We have another question from Stephen Boland from GMP Securities. Please go ahead.

Stephen Boland

Sorry for chiming in late. Maybe the first question is actually for Barry if you don’t mind, Jeff. Just in terms of his background, coming out of a bank, probably a successful bank, and growing its asset management business and obviously at a time where the banks are squeezing the independents Barry, what gives you confidence that seeing that side of the world and now being on the independent side, that you can compete against the banks for business in the asset management space?

Barry McInerney

Well, it’s a good question. I mean yes, I spent 7 years, my prior 7 years was with BMO and I was co-CEO of their global asset management business, running day-to-day U.S., Europe and Asia Pacific, but obviously a strong line of sight into Canada because of it being home country for BMO and having the co-CEO role. Our intention obviously with the strategy that Jeff and team have put together is to capture market share and that means that we want to compete against the banks and the non-banks. We feel that the innovative product suite, speed to market is going to be very important for us to gain market share and attract and retain top talent. I mean I would say those are two, three very obvious competitive advantages that we believe we have and will continue to need to compete against all competitors in Canada. But the innovation and speed to market is probably something that we want to continue to focus on because obviously we have formidable competitors here in Canada.

Stephen Boland

Maybe if I can just follow-up and Jeff, certainly if you can chime in as well, Jeff you spent 3 years, 2.5 years, 3 years I guess Mackenzie rebuilding the leadership team, should we be concerned that there is another round of leadership changes and certainly nobody on the call wants to hear that, but that people are going to bring in their own support and things of that sort, but what would you say the mandate is for Barry in terms of what his real catalysts are to do with the exiting team?

Jeff Carney

Yes, when I did the search for the role, I had a certain visual of what I was looking for in mind and I found it, which was I wanted someone that would complement me and my skills. And I have been more retail than I have been institutional. And so I mean I have been around investments my whole life, but I grew up more on the retail side of that trade. And so having Barry growing up on the institutional side, I think we complement each other incredibly well. And we both have U.S. and global experiences in different models and all sorts of things. So, I don’t think there is a team out there that has as much breadth of experience as the two of us have. And so we are going to utilize that together and combine our skills to come up with the best things we can do. And Barry can help me on the retail side and what I am trying to do with IG and I can try to help him as well. And so I think we have a competitive advantage in our leadership and it’s a partnership. And so when I was looking for the person, I was looking for that skill set and that’s what I found and I am thrilled that Barry is here. I will let you….

Barry McInerney

Well, it’s just early days, again, week four, but I am very impressed with my management team I have inherited from Jeff. They are world class. And when Jeff put them in place, again, he cast the net out wide to bring the top talent in here and he casted that globally to ensure we got the best talent here and he was successful doing so. So, very impressive leaders and we are ready to just execute the strategy and continue to build momentum. It’s all in place. The ingredients are all there.

Stephen Boland

Okay. And maybe just one more for Jeff, certainly Murray talked about building the dealer network, I know it’s planned for the second half here of 2016 and getting more presence for your consultants in the IROC product suite. Is that still a priority? And I know it’s early days for you on the IG side, but do you have a different view that this is a must launch for the consultant network?

Jeff Carney

Yes. I mean, obviously we want to make sure that our people have the tools to do their job. And I am a huge believer in Gallup and so is Barry, but when you are measuring employee engagement and your employee satisfaction, one of the most important things is the foundation. And so if you don’t have the infrastructure to do your role and do it successfully which means the money to spend on whatever you are trying to grow or the team to be able to deliver it or whatever that is. And so it’s something that we have a huge focus on is making sure that our people are resourced with what they need. And then it’s a question of prioritization. And we have been doing that for the last 3 years as carefully as we can. You learn as you go, too. But there is lots of things we can do. Like obviously pricing is something we have to think about and so what do we do there. And then what do we do with investing in our infrastructure and there is always opportunities there and every company has these things. And I think it comes down to who is the most thoughtful about the order of the execution and the complementary nature of what you execute. And so that’s what we are working on is continuing to look at those ways of driving more scale into the organization and driving more effective tools into the organization, so that our people can be efficient as possible. There is so much you can do now with iPads and all of our wholesalers have iPads now, so that they are running around and they are doing videos and they are showing Paul [indiscernible] talking about what’s going on in Spain or something. And so we have got more work to do there probably in Investors Group to get some more skills on that front, but there is a ton of opportunity to leverage this model and invest in our future, but it’s going to be done thoughtfully and in the right order that’s going to give us the best return at that time.

Stephen Boland

Okay. Thanks, gentlemen.

Operator

Thank you. [Operator Instructions] There are no further questions registered at this time. I would like to return the meeting to Mr. Hancock.

Paul Hancock

Thank you, Wayne. At this point we will end the call and we thank you for joining us and wish you a good weekend. Thank you, everyone.

Operator

Thank you. That concludes today’s conference call. Please disconnect your lines at this time and we thank you for your participation.

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