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AGF Management Limited (NYSEARCA:AGF)

F1Q08 Earnings Call

March 26, 2008 11:00 am ET

Executives

Blake C. Goldring – Chairman and Chief Executive Officer

Greg J. Henderson – Senior Vice President & Chief Financial Officer

Rob Badun – President of AGF Asset Management Group

Mario Causarano– President and Chief Operating Officer of AGF Trust

Analysts

John Vacaso - BMO Capital Markets

Jeff Kwan – RBC Capital Markets

Gabriel Dechaine – Genuity Capital Markets

John Partridge - VGlobe and Vale

James Slung – McCasey Maximum

Doug Young – TD Newcrest

Stephen Boland – GMP Securities

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the AGF First Quarter Earnings Release Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator instructions) Your speakers for today are Greg Henderson and Blake Goldring.

The forward-looking information is provided as of March 26, 2008. Certain information presented in these remarks and in this presentation that is not historical factual information may constitute forward-looking information within the meaning of securities laws. Actual results could differ materially from a conclusion, forecast, or projection contained in such forward-looking information.

Forward-looking information may relate to our future outlook and anticipated EBIDT or results, and may include statements about AGF Management Limited, or the investment funds it manages, including business, operations, strategy, and expected financial performance and conditions.

Forward-looking statements include statements that are predictive in nature, depend upon, or refer to future events or conditions, or include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” or negative versions thereof, and similar expressions. In addition, any statement that may be made concerning future financial performance, including revenues, earnings, or growth rates, ongoing business strategies or prospects, and possible future action on our part, is also a forward-looking statement; or immaterial factors or assumptions were also applied in drawing a conclusion or making a forecast or projection as reflected in such forward-looking information.

While we consider these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecasts or projections in the forward-looking information, details regarding the material factors or assumptions that were applied in drawing such conclusions or making such forecasts or projections; and more exhaustive information on the risk and uncertainties can be found in AGF’s most recent financial statements and MD&A for the funds and each fund’s most recent prospectus and MRFP as applicable, all available on www.sedar.com.

I would now like to turn the conference over to Greg Henderson. Please go ahead, Sir.

Greg J. Henderson

Thank you, Tasha, and good morning everyone. It is a pleasure to have you join us for this call this morning. Please note the slides supporting today’s call and webcast can be found on any Investor Relations section of AGF.com. Today, Blake Goldring, Chairman and CEO, and myself, CFO of AGF Management Limited, will discuss our overall financial progress during the first quarter of fiscal 2008. Joining Blake and myself today and available to answer questions are: Rob Badun – President of AGF Asset Management Group, and Mario Causarano– President and Chief Operating Officer of AGF Trust. I will now turn the call over to Blake.

Blake C. Goldring

Thank you, Greg, and a warm welcome to everybody who’s listening to today’s conference call. As we do with every quarter, I’m going to start with a very brief overview of our market environment, just given the fact that companies like ours are so much skewed to how the overall market performs. I’m not announcing anything too special by noting that market turbulence continues as spreads remain wide, which really indicates that market participants continue to be cautious and are reluctant to lend.

While the U.S. economy continues to slow, we don’t foresee any disastrous economic scenario. Housing will remain challenged for awhile in the United States, but other parts of the economy, including exports, in part due to lower U.S. dollar, will continue to show resilience. We believe economic news will continue to be negative for some time to come, if financial institutions continue to clean up their balance sheets. We suspect that

second- or third-quarter results will continue to be challenging the markets. We’re still concerned about potential write-downs that are probably significantly higher than what has already been announced in the $200 billion range; however, it should be noted that earnings remain reasonable for the S&P, if you take that as an example, backing out the financial sector. Furthermore, growth in the emerging markets continues to surprise on the upside, which leads us to believe that this is going to attenuate the downturn in the U.S. economy.

On the positive side, we believe that central banks appreciate the potential severity of a credit crisis and have acted, and are acting, accordingly to avoid one. Continued aggressive re-cuts, as well as other extensive central bank and government intervention, will eventually lead to a resolution to the credit problem. Accordingly, we continue to believe that markets have a good chance of recovering in the latter part of 2008 in anticipation of economic recovery in 2009 as a result of concerted Global Central Bank intervention.

So with that, I will begin by reviewing our financial highlights, which, if you please look at Slide Number 4. In spite of the ongoing economic and market turmoil that we’ve seen in our industry, our 2008 first quarter financial results were strong. Revenue in the first quarter of 2008, compared to 2007, increased 9.8% on a consolidated basis, while evidently continuing operations rose 11.3%. Our net income from continuing operations increased 64.6% due in part to improved operating results and the impact of future Canadian Federal tax reductions. These results were driven by higher average assets, both in investment management and AGF Trusts, and our ability to ensure that expenses grew at a slower rate than revenues.

As we look forward, continued market uncertainty will be challenging for the industry. However, and I do point out that AGF has diversified in our sources of revenue and our sources of growth, and now the company has multiple sources of revenue. So while we will be impacted, undoubtedly because all firms in the industry accordingly with the markets, we’re a more diverse company and much better positioned to go through a period of market downturn than we were, say ten years ago.

The change in our organization is extremely important in understanding the value that AGF offers both existing and potential shareholders. Despite the market turmoil in the quarter, I’m encouraged by the strong financial results that we achieved, which Greg will speak to further. The impact of the market volatility, if you’ll please look at the next slide, the impact of the market volatility in the quarter served not only to reduce our overall AUM level by 4.7%, compared to the first quarter of 2007, but we also saw investors sit by the sidelines for the most part, with most of the new money being invested into Money Market Funds. In spite of the market volatility, our financial results improved as average AUM on a mutual side of the business was up 2%.

In addition, we saw a number of bright spots. The Trust business continues to grow with loan assets rising 47.3% year-over-year. Smith & Williamson’s net income was up 41.3% on a year-over-year basis and, again, prospects look very encouraging for this firm. At the end of February 2008, Smith & Williamson managed 8.6 billion pounds sterling, compared to 8.1 billion pounds sterling as of February 28, 2007. We also launched three new quantitative funds, which were managed by Highstreet. Now these were launched into a very tough market, but we’re confident that, as markets turn, this is going to be a very, these will be excellent performers and a great compliment to our lineup. The diversity of our business model will prove to be one of our greatest assets.

Please look at Slide Number 6. AGF is a much different company today than it was at the end of fiscal 1996. Our Mutual Fund product lineup is stronger than ever, with many great funds for investors to choose from. Our institutional business has gone from basically ground zero four years ago to $17.9 billion in AUM today, and we’re confident, with the depths of our investment teams around the world, we’ll continue to grow this business. We have a solid base of high network clients, a segment where AGF was not even a participant in 1996.

Our Trust business has grown significantly and is now a major contributor to our earnings, representing 22% of our consolidated net income before income taxes in the first quarter of 2008. Our investment in Smith & Williamson continues to perform handsomely and represents a substantial cash flow to AGF, with annual dividends received of $5.5 million in 2007. Future prospects for the UK-based company look bright. As we’ve indicated in the past, Smith & Williamson had planned to do an IPO sometime in 2008. In light of the current market conditions, the Board of Directors of Smith & Williamson has decided to defer further consideration of an IPO until market conditions stabilize.

When I look at the size of our business at the end of 1996 and today, there’s no comparison; AGF is a stronger entity. In this business, I’ve learned that over the years that, unfortunately, markets go up and they go down. What is important is that, as AGF emerges from these down periods, that we do so, on an upward trajectory. Our business and product lineup has never been stronger, so I thought it might be useful to comment specifically on the Trust business in light of what is happening in the U.S. subprime market.

Slide 7 shows AGF Trust loan originations continue to be very strong. Originations were $525 million in Q1- 2008, compared to $561 million in Q1-2007. Over the past four quarters, AGF Trust has recorded total originations of more than $2.2 billion. So you can see from that amount of business that AGF Trust, as recorded, is truly substantial. As I mentioned earlier, we continually look for ways to sustain and further enhance this momentum. Housing markets remain strong in Canada, and we believe our current loan value, combined with the fact that approximately 42% of our mortgages are insured, offers adequate protection.

On the investments and side of the business, we offer investors the chance to be long-term thinkers when using leverage. While the market downturn has had impact on the value of the security we hold, 90-day arrears have historically been running about 12 base points, and we have not seen any material change to this. In fact, total arrears on the portfolio are lower than they were a year ago at this time, and there have been no significant increases in write-offs. We’ve experienced a similar result in previous periods of depressed equity markets. These are very good quality borrowers with an average beacon score of 725 and substantial net worth. Falling interest rates will, in fact, make the serviceability of these loans more affordable, and we do not foresee any significant losses on our portfolio.

Finally, I wan to talk about the increase in our dividend to $1.00 per share per annum. Our first-quarter payment of this amount will take place on April 21, 2008, to shareholders of record on April 10, 2008. This represents a 25% increase and brings the current dividend yield on AGF stock over 5.1% based on our current share price. It’s probably, I understand, I haven’t seen the screen recently, being in Board meetings, but I think the stock price has moved, so certainly very strong dividends yield. This dividend increase is based on management’s confidence in our business model and our ability to generate free cash flow, as well as satisfying our objective of creating shareholder value.

Our strong record of dividend growth 12 consecutive years is very important to me, our Board of Directors, and our Management Team. In fiscal 2007, between dividends and share buy-backs, we returned close to 73% of our free cash flow to shareholders. The current economic situation, while challenging, presents many opportunities, and AGF is well positioned to take advantage of these opportunities.

Greg will comment more fully on financial results. Afterwards, I’ll provide some further comments and insights on 2008. Greg, over to you.

Greg J. Henderson

Thanks, Blake. As we’ve indicated before, our profits are driven off our AUM and loan assets, so I’ll start by discussing AUM and the effects that they have had on our financial result. As a result of the market volatility and slower sales, total AUM was down 4.7 in the first quarter of 2008 over the same period in 2007, while average mutual funds AUM was up 2% and contributed to the increasing revenue.

As you can see on Slide 9, at the end of Q1-2008, we had $49.3 billion in AUM, which is down from the $51.7 billion at the end of the same quarter last year, and it’s comprised of $27.7 billion in mutual fund AUM; $17.9 billion in institutional AUM; $3.7 billion in high net worth AUM. While much of the decline in the mutual fund AUM and high net worth AUM was attributable to the market performance, institutional AUM was also impacted by client rebalancing and redemptions, which were non-performance related. In fact, if you’ll look at the clients that we lost over that 12-month period, the AUM would have been flat on a quarter-over-quarter basis. Loan assets at AGF Trust continue to grow at a substantial rate, increasing 47.3% on a year-over-year basis.

On Slide 10, our significant loan asset growth is directly related to the continued strong loan originations that Blake touched upon earlier. Real estate secured loan assets are up 54.6%, and investment loans are up 41.6% over the same quarter in the prior year. As of February 29, 2008, the balance of all secure type loans was $246.3 million. These loans are not included in the figures on this slide.

The above loan growth, combined with higher average assets quarter-over-quarter, resulted in strong financial results shown on Slide Number 11. This slide shows that on a consolidated basis revenue in EBIDTA has increased year-over-year because average AUM and trust loan assets have increased. The quarter-over-quarter revenue increase of $17.3 million from $177 million to $194.3 million is primarily driven by higher average asset levels in both Trust and the investment management operations. EBIDTA of $89.5 million in Q1-2008 was higher than a comparable period in the prior year because we were successful in containing the rate of expense of growth below the revenue growth. As highlighted earlier, EBIDTA increased 11.3% quarter-over-quarter, and I think what’s of note is the fact that in Q1 of 2008, our EBIDTA was up compared to Q4-2007, very slightly.

Slide 12 addresses the investment management segment specifically. In the investment management segment, higher average AUM led to higher management fees and administration fees, while increased redemptions led to a higher deferred sales charge revenue in Q1-2008, compared to Q1-2007. EBIDTA margin remains stable in the current quarter, compared to the prior year; and that’s, again, something that we’re working very hard to ensure that we stabilize or grow that margin. On the expense side, overall expenses were up 5.7% in the first quarter of 2008, compared to 2007, with trailing commissions increasing 8.9% on a year-over-year basis, while SG&A was $44.6 million, or only 3.5% higher than 2007. We have not lost sight of our goal to work towards a target of 50% EBIDTA margin by 2009, but we do caution that our ability to achieve this will be directly correlated to the markets and in general, the performance of our investment management teams relative to the market.

AGF Trust continues to be an important part of our company. Advisors see real value in our loan products, and we were able to extract synergies between the major business segments. AGF Trust EBIDTA was up 59.3% in Q1-2008, compared to the same quarter in 2007. This includes recognition of both $1.7 million gain in income related to the hedge in effectiveness that we had related to interest rates. So interest rates went down, and we were able to capitalize on some of the slots that we held. This business continues to grow at a high rate relative to existing loan assets and upfront costs of growth, including loan provisions set up and commissions related to high-level originations. However, we are not seeing the base of loan assets that can support these originations; so again, our loan assets are at the point where the upfront costs don’t have as big an impact on the profitability. We will continue to remain focused on being financially responsible and increasing the efficiency of our operations.

Slide Number 14 shows where we’ve used cash. In Q1-2008 versus Q1-2007, we used our free cash flow to fund this cash flow from operations, less deferred sales commissions of $55 million to fund the following: We invested $35 million in trust and, as we’ve said, this will probably represent the total amount of our investment in trusts for the current fiscal year. We paid dividends of $17.8 million; we paid the second installment related to the Highstreet acquisition of $20.8 million; and we purchased property plant and equipment at $1.5 million. The fact that these expenditures exceeded our free cash flow generated, resulted in our bank loan increasing by $99.2 million. That’s similar to the increase in the bank loan in the prior year. The first quarter is a high use of cash quarter. A prudent use of leverage from our perspective will result in benefits to our shareholders. In the first quarter of fiscal 2007, bank debt increased by approximately $74 million and as we have in the past, in future quarters in fiscal 2008, we’ll pay down bank debt. In the quarter investments in AGF Trust and Highstreet accounted for over $55 million of our cash usage and represent investments that were made to incur future returns for shareholders. Dividends, purchases of property, plant and equipment, as well as deferred sales commissions, were paid out of cash generated by the operations. During the quarter we also received approval from TSX for renewal of our normal course issuer debt, for which will allow us to continue to repurchase AGF shares. On that note, I’ll hand it back to Blake.

Blake C. Goldring

Thank you, Greg. Well, you’ve heard about our financial results, and I have to say that I’m really pleased, given the current market environment, by what we’ve been able to achieve in Q1. I’d like you to now have a look, please, at Slide 15, which demonstrates AGF’s track record of performance for our shareholders as of February 29, 2007. We’ve outperformed TSX over ten years and delivered a 15% total return on an annualized basis, compared to the TSX at 10%, since becoming a publicly-traded company in 1968. These return figures include dividends and, including the current 25% increase to our quarterly dividend, we have increased our dividend for 12 consecutive years, resulting at 12-dividend comp and annual growth of 24%. AGF has delivered, over the past 50 years, and given the strong foundation that we’ve built over this time, I’m confident that we’ll continue to deliver well into the future.

I know that some of you are concerned about the impact of the current market volatility to our business and, in fact, to the whole industry; but, Id like to emphasize the long-term focus that our team has, and the long-term resiliency of the capital markets and, frankly, exciting opportunities that we see in the years ahead. We’ve been through tough times in the past, and when the current market situation clears up, there will undoubtedly be other challenges that will face AGF and other burbs* in the industry. However, we have a proven track record of coming out of such situations stronger, and our team’s commitment to our shareholders is that we will be focused on achieving our long-term strategic goals and working to enhance shareholder value. We’ll not let periodic noise stray us from our long-term vision and the commitment to our operating models. This concludes my comments; and I’ll turn it back to the operator since we’re ready to take some questions.

Question-and-Answer Session

Operator

Thank you, Ladies and gentlemen. (Operator instructions) One moment, please, for the first question.

Our first question comes from the line of John [Vacaso] - with BMO Capital Markets.

John Vacaso - BMO Capital Markets

Thank you. Good morning. Blake, just a question: Could you update us on what the net sales or net flows look like here in March in the fund business, and where your AUM stands as of yesterday or a few days ago?

Blake C. Goldring

Sure, John. We started out the month quite strongly, and then two things happened: first the little incident with Bear Sterns and some great market uncertainty, as well as the slowdown that typically comes after the early March rush. So we’ve had good days and then we had some not-so-good days. I’d say that we’re coming out pretty flat for the month right now; it won’t be enough to see how we’re seeing on the sales front. The asset front, I would say, is certainly quite encouraging because we’re just a little bit under $28 billion in assets as of last night.

John Vacaso - BMO Capital Markets

Okay, thank you. Then just a question for Greg: The average AUM in this quarter versus Q4 is down about 4.6%, but the trailer fees are down 7%. That seemed to be a big swing. Can you explain to me what happened there? I would have thought with more elements and more frontend, you would have seen your trailer fees rise. So do I have those numbers right, or am I looking at it wrong?

Greg J. Henderson

No, trailer fees are a function of the assets that are coming on and off whether they’re on a frontend basis, a DFC basis, so certainly what we’re seeing is a shift in that mix and, as you mentioned, some of the products such as elements in a slightly higher trailer, but that doesn’t have a huge, huge impact.

John Vacaso - BMO Capital Markets

Is there a reason why maybe the average AUM is down 4.5 and the trailers are down 7? Are you aware of why that would happen sequentially?

Greg J. Henderson

Yeah, John, it’s just a function of the mix of our assets between the frontend and the dfc basis. Again, I think if you look at it, some of our redemptions are coming off the frontend at 100 basis points on the dfc basis and held up a little bit stronger in the quarter, so you’ll always get some of that fluctuation.

John Vacaso - BMO Capital Markets

Just shifting to the trust business: The loan, I guess, Mario, if you’re there, I’m just, if you could educate me on Page 37 of your Report to Shareholders, it talks about almost $37 millions in loans that are past due, but are not impaired. Could you just, that seems like a, if it’s some 90 days past due, I would see that as impaired, but maybe you could tell me why that’s just not classified as impaired, as opposed to... Could you help me out there?

Greg J. Henderson

I’m looking it up on the page as we speak.

John Vacaso - BMO Capital Markets

It’s on page 37, footnote 7, part B: Past due loans, but not impaired.

Greg J. Henderson

Right and your question is?

John Vacaso - BMO Capital Markets

What’s the difference between some of that 60 to 90 days past due, and not being impaired. I guess I’m trying to understand that distinction.

Blake C. Goldring

We only classify impaired loans as being in the 90 range. So anything beyond that are past due, but we don’t classify them as impaired. I think the 90 plus goes into the impaired bucket.

John Vacaso - BMO Capital Markets

Okay, so this number is roughly flat versus last year, I’m sorry, from Q4, but, I guess I’m just trying to understand...

Blake C. Goldring

I’ll give you a general perspective on our arrears and our mortgage portfolio. It has been running over the last couple of months, it had been trending up a little bit, but over the last couple of months has stabilized, and so we’re not seeing any impairment from that perspective. I think the thing to keep in mind is what’s actually happening with losses in that portfolio, because there are two things that happen: 1) On the arrears side, we’re seeing some movement now in terms of properties just starting to turn over, and it was taking us some time to turn some of those, so that lengthens out the time for the collection period, and we’re starting to see movement now in some of the houses that we’ve taken back in being able to sell them. But the real question is: Is there any movement in our write-ups? We’re tracking about 25 to 26 basis points, which is what we had in the plan and historically what we kind of run at. We actually have a pretty large provision on that portfolio. We run that around 96 plus basis points on that conventional portfolio, which is conservative in nature and our historical losses on that portfolio have been very, very low.

John Vacaso - BMO Capital Markets

So that 96 basis points excludes the mortgages, or includes the mortgages?

Blake C. Goldring

It includes the mortgages; it is just on the conventional mortgage portfolio, not on the insured component of that portfolio.

Greg J. Henderson

Yeah, John, and it’s great here. I think this is new disclosure, obviously, but I think it’s good disclosure because I think it shows you a couple of things. In that 61- to 90-day bucket, the amounts have actually improved. I think that goes to the heart of what the Trust Team is trying to do, is get ahead of loan balances prior to getting into that bucket so, obviously, the older a loan gets, the harder it is to collect. So in light of the growth that they’ve seen, I think they’ve done a very good job in ensuring that that bucket comes down, because obviously the time it flips into the next bucket, the 90-day-plus, it’s even harder to collect.

Blake C. Goldring

Yeah exactly, John, and so what we do is, to Greg’s point, we actually monitor roll rates because, if you don’t get to it early enough, then it all runs into that 90-day impaired bucket and it becomes, it just takes longer to liquidate the properties and to sell them. The other aspect of that that I think is important for you to understand is, if you actually look at our loan to value on the portfolio, it’s running around 68%, so we’ve got lots of equity in those properties. It’s just a question of time to be able to liquidate them.

John Vacaso - BMO Capital Markets

Okay, I think I understand that. So you would not, if I were to look at this, I’d say there’s not necessarily an indication of future credit problems; there’s not a prospective view of future credit problems.

Blake C. Goldring

No, not at all; I think you’ve got to look at the quality of the portfolio. If you look at our book of mortgages, 42% of the book is insured. The balance is uninsured, but as I mentioned to you, the loan to value on that book is 68%.

John Vacaso - BMO Capital Markets

Does that include the helox* the 60% loan to value?

Male Speaker

No, that is just on what we call the, it depends on the nomenclature, but the alternate prime book.

John Vacaso - BMO Capital Markets

On your home equity lines of credit, do you have an LTV for that or?

Mario Causarano

It’s 72%. Now it is a different quality of a book. It’s a prime book and the beacon scores in that book are in the 720 range that we’ve had virtually no losses on the portfolio, and arrears are insignificant. So it is a different performing book. In fact, if you want to start analyzing it from a real estate lending perspective, that book, that mix between the A and the B actually brings up the whole quality of the overall portfolio. Overlaying that, then the geographical dispersions against the book, it further enhances the overall credit quality of the portfolio. So we can continually monitor all of those different variables to the book, but even if you isolate the near-prime conventional uninsured book, we’re doing well in terms of what those loan to values look like.

John Vacaso - BMO Capital Markets

Last for Blake: Is there any bigger reason, I know we discussed the yearend results about six or eight weeks ago, but you haven’t been buying back stock recently; have there just been blackout periods?

Blake C. Goldring

That first part of the year, John, we’re really stuck in a long period of blackout because we’ve got, our management meets to approve year plan, and as you know, we have an annual year plan where we look out five years, and that’s presented very early December, so we’re basically in blackout until we actually come forward with our annual results, which takes us to the end of January. Then next thing with reporting is a very small window because when we report at the end of February, or the month end, so we literally have just a couple of weeks to do anything.

Greg J. Henderson

Yeah, and I would say, John, it’s also a little bit of a cash management issue because, as I say, the first quarter is our highest use of cash quarter, we pay dividends, all kinds of things, so we want to give ourselves ample room so, again, you’ll see us coming to the market.

John Vacaso - BMO Capital Markets

And, Greg, $35 million in cash went into the Trust in this quarter, is that right?

Greg J. Henderson

Yep.

John Vacaso - BMO Capital Markets

Okay, thank you.

Blake C. Goldring

Thank you, John.

Operator

Our next question comes from the line of Jeff Kwan with RBC Capital Markets.

Jeff Kwan – RBC Capital Markets

Two questions; the first one for Greg: If we assume that on the retail side, assets don’t change through the end of the year and net sales are generally okay, the SG&A that you had in Q1, would it be relatively fair to use that as a run rate? The second question I had was for Mario. If you can kind of talk about on the expense side, I know that you’re trying to hire some more people to do some infrastructures spend, if you can kind of talk about where you were there, if you’re still looking to add some more people throughout the year. Then, also, if you can talk about on the competitive side in trends and net interest margins since quarter end.

Mario Causarano

So why don’t I take the SG&A question, and I’ll focus my attention more on the investment side of the business, and then Mario can talk to his plans for hiring and that. I would say to say, Jeff, that if you look at our SG&A, this would be more or less the run rate we’ll see. Now in saying that, there’ll always be maybe the odd uptick for some sales efforts and that because, as you’ll note in the report, the actual sales and marketing spend was down this quarter a little bit, but that’s not going to be significant, so this would be more or less the run rate we would see, except if the following happens: The markets take off, sales take off, and everything just goes totally, totally positive, then obviously because of our bonus plans and that, you would see an increase in comp expense.

Jeff Kwan – RBC Capital Markets

(Inaudible) Mario.

Mario Causarano

Jeff, let me start with the expenses then in the building of the infrastructure. I talked about this I think at the shareholder’s meeting. There was a question even on previous calls. We’ve had substantial growth in the organization and so we continue to put more resources back into managing it, and we’re going to continue to do that as we grow the business. This is a particularly challenging time because of where the economic situation is in the markets and I think to your follow-up question, which is where our net interest margin’s going, so that’ll put some pressure on some of the net investment income that we’re earning. We understand that, and so we’re constantly managing and monitoring our efficiency ratio. We’ve got a target for it this year in the, pretty close to where it was, slightly under what it was last year. Our first quarter’s always much higher from an efficiency ratio anyway because we’re frontend loaded on the RSP program, and we have to stick a lot of resources into that program, but if we’ll, it’ll come back. So to answer your question that when we’re looking at places where we can get more efficiency, we’ve instituted a new system this year that will help us from a business processing perspective, and so we do have some costs going into that, but we should be able to get something back over the long-term from that fund, and we will continue to monitor the amount of spending that we put in.

From the net interest margin perspective, they need to look at if from two levels: 1) is what’s happening in the investment loan program and that different from what’s happening in the mortgage program. In the investment loan program, we’re seeing spread compression because those are prime-based loans and what’s happening is that the cost of funds is going up for those loans, but we’re not being able to pass that on just like the rest of the banks and not being able to pass that on in float rate pricing to consumers. So we’re getting some pricing compression there.

That’s not the case on the mortgage side of the business. In fact, what you see in the mortgage side of the business is just the opposite. The spreads are starting to widen, not compress, and the reason is that that same pricing differential is being passed on and is less transparent in the marketplace, and the banks are just holding what their price is and it’s being passed on to the consumer and they’re making up the difference. We’re no different, so we’ve been able to, in that portfolio, to maintain our spreads, in fact, even to get some spread pickup. So that’s where the net interest margin thing comes in. On the investment loan side, we don’t know how long it will be. It doesn’t look like it’s going to adjust necessarily in the short-term so we’re looking at: What is the mix of our business? Where do we put our resources? Can we get more mortgage business instead of, and come up a little bit on the investment loan business to make up some of the differences? So that’s how we’re trying to manage both of those two things.

Jeff Kwan – RBC Capital Markets

All right. Thank you.

Operator

Our next question comes from the line Gabriel Dechaine with Genuity Capital Markets.

Gabriel Dechaine – Genuity Capital Markets

In terms of the originations for AGF Trust, how much of that was going into AGF Funds, on the investment loan side?

Mario Causarano

Well, in the… We’re tracking somewhere around 54% of every dollar going into AFG Funds. That includes the RSP program and what we just came off of in our RSP program, and it’s particularly skewed to AGF. On the investment loan program, it’s probably outside of some particular channels that use us, we’re probably about a third going into AGF.

Gabriel Dechaine – Genuity Capital Markets

Okay, and how is that trending in terms of now versus a year or two ago?

Mario Causarano

Well, in actual fact, a year or two ago, it was much less and over the last year, it took a significant jump and it continues to stay about that level. So there’s no change over the last year. There’s a positive change over two years ago.

Gabriel Dechaine – Genuity Capital Markets

Can you give me a sense of the funding costs on the GIC, from GIC, how that’s been trending? Because we can see an improvement in spreads, I guess, on the prime to BA, and that’ll help, but from the GIC side, how competitive is it?

Mario Causarano

Well, it’s definitely competitive, there’s no question about that. We’re seeing spread compression of around 50 basis points from what we were raising funds at, say back in August, and the whole marketplace is out there just looking for money, and as a result, everybody’s had to increase their price. That’s the number that we’re experiencing right now.

Gabriel Dechaine – Genuity Capital Markets

I guess back to the FG&E and the investment management side, that was the fund absorption with your estimate, you said in MG&A that it would be pretty much in line with 2007. Can you remind me what that number was?

Blake C. Goldring

Yeah, it was about 15.7 million, 16 million, in that range.

Gabriel Dechaine – Genuity Capital Markets

On the institutional side, the redemption, I know it was talked about during the stakeholder day, but I can’t recall what the quantum was there, and then if you can comment also on the pipeline for new institutional mandates. You mentioned one in Japan for 36 million, if there’s any more of that nature, or give me a magnitude of what could be coming.

Mario Causarano

Gabriel, I’m going to have to pass that to Rob Badun who oversees that area.

Rob Badun

Yeah, Gabriel, let me… The redemption that I spoke to at the stakeholder day, it was in the order of about $700 million. In terms of the… On the flip side we have the one, probably close to $500 million of mandates, that have not been funded yet, that will fund, hopefully within the next, it’s obviously client dependent, but over the next couple of months. The pipeline, in terms of activity on the RFP front and so on, is very, very positive, both in, particularly in Canada and in the U.S., lots of activity. The downturns of volatility in the market has certainly caused plan sponsors and institutional investors to revisit their asset mix decision, and revisit their manager selection, so lots of activity. We’re very hopeful that we will be on the winning end of more than our share of those RFPs.

Gabriel Dechaine – Genuity Capital Markets

What’s giving you more traction, I guess, at this time? Is it the quant stuff or some of the international fund management expertise?

Rob Badun

The three products that we’re leading with right now, and I don’t think I can pick a favorite at this point, they all seem to be getting a similar amount of traction, the international being one of them. The quant on a U.S. front is being viewed very positively. Then the third one, which you did not mention is emerging markets with the emerging markets team here in Toronto has a very, very good investment process, investment product that is getting a lot of traction in the market.

Gabriel Dechaine – Genuity Capital Markets

Then lastly, just on the buyback front, you haven’t been active because of the blackout and all that. Is it your intent to maybe get a bit more aggressive with your share price? It’s up today but it’s still off quite a bit from the start of the year. What’s your appetite?

Rob Badun

Yeah, listen, AGF is a great company, and the yield that we have and our prospects and just how we’re positioned, I think it’s a very good buy. I mean not to say I’m entirely biased, you understand that, but just taking a look at the Company, I think you could expect reasonably that we will be more active this way.

Gabriel Dechaine - Genuity Capital Markets

And no change in the funding requirements, I guess, for AGF Trust because that was seen as kind of freeing up some cash there.

Rob Badun

As I said, Gabriel, we put $35 million into the trust to, in our view, capitalize it adequately. Mario and myself discuss this regularly, and I think based on the volumes and that that we’re seeing now, we believe they’re adequately capitalized for the remainder of the year, and again, I say, should something dramatically turn and their volumes increase substantially over what we’ve seen in the past, then that might be another issue. Do I think that’s going to happen? Probably not.

Gabriel Dechaine - Genuity Capital Markets

Thank you very much.

Rob Badun

Thank you.

Operator

Your next question comes from Stephen Boland with GMP Securities.

Stephen Boland – GMP Securities

Just two quick questions: The first on – when I look at sort of the cash outside of the trust operation, your short-term investment, that number popped up pretty substantially this quarter. Is that just a timing issue or?

Rob Badun

No, Steve, actually, I mean I’ll answer that, that was a trust actually parked about $115 million into some long-term bank notes and those are actively traded, so it was a way of them managing their cash flow. So it’s not a strategic investment of AGF, it’s basically near cash.

Stephen Boland – GMP Securities

So I guess I’m just trying to separate the two then because I sort of look at the cash outside of the trust. So it’s $115 million of that $212 million, I guess it was or?

Rob Badun

No, I think if you go to the Statement of Changes on Page 32, the cash outside of the trust business is $68 million, and everything else is Trust cash, and they’ll utilize that for their business.

Mario Causarano

So when we talked about the liquidity crisis, Steve it’s Mario, we’ve talked about the liquidity crisis and so we project out what we’re going to need from a cash perspective and we’re sitting on a fair bit of cash in anticipation of what our needs are going to be, and the fact that it’s a pretty tight market. So as Greg said, we had an opportunity to pick up a little bit of yield on some of the investments that we made, but still maintain the liquidity that we need on the investment, and so we exercise that.

Stephen Boland – GMP Securities

So those are just, sorry to be clear that the trust, what kind of notes are they that you’re investing in?

Mario Causarano

Long-term bank notes, so they’ll have maturities out beyond one year.

Stephen Boland – GMP Securities

The second question I guess is for Blake and Randy, I guess. I look at your top ten funds right now, the Morningstar ratings, the Quartile returns, you addressed some of that. In terms of when your portfolio managers talked on investor day, and the performances is probably a little bit under water right now compared to the peer group, and the ratings as well, is that having an impact on the sales in the short-term or are you finding the feedback from brokers that they realize that a lot of this money is managed by value managers, they’re long-term focus? I’m just trying to get an idea when we pull up the (inaudible) data, the Morningstar ratings, if that’s having a short-term impact.

Blake C. Goldring

Well, you don’t see, in fact, if you look at say it’s a three-year period, we’d be smack in right with the peers. I mean there’s no big issue there and I think that in a one-year period, again, at 54% of our funds but me, it’s down from where it was, where traditionally we’re up in the 70’s and better. But I think that clearly with what was happening with value investing with Europe right now, that has certainly come off, but I just want to make a comment that the Dublin based team has proven and added terrific value to portfolios over a longer period of time. So from a short period down performance, it has an impact but we take a look at, again, long-term, you can’t look at things in a short period of time. Rob Badun, you were just over there, and had a look at some of the performance, and did (inaudible)…?

Rob Badun

The one comment that I would add, Steve, is that in this environment, I think one of the things that we are doing, and are spending a lot of time on is talking to advisors, and helping them help their clients. Whether it has to do with our international managed funds or whether it has to do with other parts of our lineup, I think we are being very proactive in trying to address some of the questions and concerns, not just about the funds that you’ve kind of referenced but also about the broader market. That is certainly helping and allowing us to continue to build on the great relationships and the great rankings that we do have from advisors.

Stephen Boland – GMP Securities

Thank you very much.

Operator

Our next question comes from the line of Doug Young with TD Newcrest

Doug Young – TD Newcrest

Most of my questions have been asked, but the one is just to clarify, the short-term investments that are available for sale of $144.2, that was up pretty big significantly. Greg, was that related to that cash investment of the trust side?

Greg J. Henderson

Yeah. So $115 million of that is really Trust cash.

Doug Young – TD Newcrest

So the difference between $144 million and the $115 million plus the $60 million, that’s what’s outside in terms of cash short-term investments outside the trust? The $144 million minus the $115 million, then if I also want to add in, there is $68 million of cash that was outside of the trust, those are the two, those are short-term investments.

Greg J. Henderson

So basically 26 and 68.

Doug Young – TD Newcrest

Perfect. The other thing, Mario, just generally speaking, I think you’ve talked previously about just some of the challenges, some of your competitors have had in the mortgage side, is that continuing? Are you able to pick up market share in that business right now or is it just generally too tough a market at this point?

Mario Causarano

Well no, I wouldn’t characterize it as too tough a market, I mean where most of the competitors have, in some cases, exited the business have been in the true, I want to distinguish this, Canadian subprime because it’s much different from the U.S. subprime. But even that is substantially different than the business that we’re in because we’re really in the near-prime or Alt-prime. So if you look at the margins of that business, what it will mean is: Where we were in a really competitive environment and you saw institutions that were in that, say call it that true Canadian subprime, starting to come down into the near-prime area, then it just gets more competitive. Well that space, that crossover or overlap, is definitely going away, but we’re not going to all of a sudden start moving into the higher levels of Canadian subprime because the players that are out there and they’re a number of them who have had to exit the business. The reason they’ve had to exit the business is because they don’t raise deposits the way we do, they use securitization vehicles to fund their balance sheet and that funding mechanism has disappeared so they’re not able to fund in new loans or new mortgages any more.

So it’s a good news story from that perspective, I mean the overall I think, Blake alluded to this in his comments, the Canadian housing market is not the same as the U.S., it’s coming off a bit, and there are pockets regionally that are starting to get a little bit more affected than others but generally speaking, we’re not talking about a meltdown here in the Canadian marketplace, we’re talking about some price adjustments from where they been over the last number of years. There are still lots of opportunities to do business in this segment. So I don’t see any problem with us continuing to do mortgage business the way that we’ve been doing it.

Doug Young – TD Newcrest

Greg, just lastly, you mentioned in the notes, the increase in absorption expense related to programming costs, and I know it’s a small amount, but I’m just curious as to what that was?

Greg J. Henderson

Sorry, I mean absorption has nothing to do specifically with programming costs.

Doug Young – TD Newcrest

But in the way you described the increase and decrease in your SG&A and the investment management side, one of the things you stated: the increase year-over-year was a result of, and the absorption side was related to programming costs? I can follow-up afterwards with you.

Greg J. Henderson

No, included in that amount are some charges from Citi related to programming costs and that so again, I apologize, there are two components to it, but I would characterize the increase again, as a little bit related to programming costs and then more just the timing or our accrual as opposed to anything on an annual basis. If the funds stay where they’re at, our absorption will be about the same because our funds are down on an average asset basis and that’s what really drives the cost, but with lower GST and we’ve switched our custodial relationship to Citi, we get some savings there. So net/net, if our funds stay around where we are on an annual basis, we’re going to be about the same, so again on the quarter, there’s a little bit of a timing issue but overall on an annual basis, we’ll be approximately the same.

Doug Young – TD Newcrest

Great, thank you.

Operator

Our next question comes from the line James Slung with [McCasey Maximum.]

James Slung – McCasey Maximum

Good morning gentlemen. My only question is regarding the balance sheet and there is one item, Other Assets, the 36.8 which was up quite a bit from the end of the year. Can you sort of put some color on that?

Mario Causarano

Sorry, I just need to…

James Slung – McCasey Maximum

The balance sheet under assets.

Mario Causarano

That’s just our swaps.

James Slung – McCasey Maximum

So what you’re saying is that they sort of increased in value over the last three months.

Mario Causarano

Yeah.

James Slung – McCasey Maximum

Thanks.

Operator

Our next question comes from the line of John [Partridge] with [VGlobe and Vale.]

John Partridge – VGlobe and Vale

I just have a couple of quick questions if you don’t mind. Can you just clarify for me, absolutely, that the dividend increased today, that you’ve announced today, is in fact the same one that you mentioned in your yearend results?

Greg J. Henderson

Yeah, normally what we do is in January, we let people know what our expected dividend is; so again this is the first quarter that that dividend has actually been declared and paid.

John Partridge – VGlobe and Vale

Okay. Secondly, I was wondering where Mr. Ambrosi is today, and why he’s not on the call?

Blake C. Goldring

He’s on the road, pounding the pavement, driving in sales, and that’s his highest and best use, frankly.

Greg J. Henderson

Yeah, I think if you’ll recall last quarter, Rob wasn’t on the call. I mean as we do these calls, obviously, business is the utmost importance to us, and so other than Blake and myself, you’ll see Mario, Rob, and Randy, and Martin, I mean there goes the call.

Mario Causarano

Actually, the other thing is to introduce other, we’ve got a very rich and deep bench of really good, great players here, and I think it’s good for you to meet them and get to know them over time.

John Partridge – VGlobe and Vale

The very last one, if I might: What else do you think you folks can do, independent, if one can say that, independent of market conditions to get the share price up?

Mario Causarano

Well I mean, firstly, I’d have to point out, that the share price, I take a look at firms like, we benchmark and look at obviously the industry, but also the United States where the likes of AllianceBernstein is off almost 30%. You’ve got Franklin Group, a great firm, off around 30%, somewhere where we are, so this is not an AGF issue. It’s an industry issue for a start, John.

Second, clearly, in a business like ours, we have to say that we have created values you can see in that Chart 15, over the long-term, so if you take that long-term perspective, you will be rewarded, and people looking for the short-term fix, it’s not our style. It’s not how we’ve ever operated this business, and it’s not how we’re going to start operating the business. We have to just execute a strategy and work and develop and create value over the long-term. That’s what we’ve done, and so I can’t give you any sort of, we’re not going to be able to do something counter to the market or whatever because that’s just not our style. As I say, I think that we are well positioned to really, strongly rebound once things do stabilize and markets start to improve again.

John Partridge – VGlobe and Vale

Thank you very much.

Rob Badun

I was just going to add, I think if you look at where we’ve come from and where we are today; our expenses are a lot more predictable. Our operations are a lot more buttoned down so again, I think we’re in much better shape and diverse by revenue sources so.

John Partridge – VGlobe and Vale

Thank you.

Rob Badun

Okay John, thank you.

Operator

Mr. Henderson, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Greg J. Henderson

Yeah, I just want to thank everybody for joining us on the call today, and again, anybody who’s got any specific questions or anything they’d like to talk to me about, I’m more than happy to take questions this afternoon. Thank you.

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Source: AGF Management Limited F1Q08 (Qtr End 2/29/08) Earnings Call Transcript
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