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Executives

Robert J. Bogart - Chief Financial Officer, Executive Vice-President and Member of Executive Committee

Blake Charles Goldring - Chairman and Chief Executive Officer

Analysts

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division

Stephen Boland - GMP Securities L.P., Research Division

Scott Chan - Canaccord Genuity, Research Division

Paul Holden - CIBC World Markets Inc., Research Division

John Reucassel - BMO Capital Markets Canada

Doug Young - TD Securities Equity Research

John Aiken - Barclays Capital, Research Division

AGF Management Limited (AGF.B) Q3 2012 Earnings Call September 26, 2012 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to AGF's Third Quarter 2012 Financial Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded Wednesday, September 26, 2012. Your speakers for today are Mr. Blake C. Goldring, Chairman and Chief Executive Officer of AGF Management Limited; and Mr. Robert J. Bogart, Executive Vice President and Chief Financial Officer of AGF Management Limited.

Today's call and the accompanying presentation may include forward-looking statements. Such forward-looking statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in the formulation of such statements and actual results could differ materially. For additional information regarding such forward-looking statements, factors and assumptions, AGF directs you to caution regarding forward-looking statements which is contained on Page 2 of the presentation, AGF's MD&A for the 3 and 9 months ended August 31, 2012, and AGF's most recent annual information form.

I would now like to turn the conference over to Mr. Bogart. Please go ahead, Mr. Bogart.

Robert J. Bogart

Thank you, operator. Good morning, everyone. I'm Bob Bogart, CFO of AGF Management Limited. Thank you for joining us today for a discussion of our third quarter financial and operating results. Please note that the slides supporting today's call and webcast can be found in the Investor Relations section of agf.com. Today, Blake Goldring, Chairman and CEO, and I will discuss our third quarter 2012 results. And with that, turning to Slide 4, I'll turn the call over to Blake.

Blake Charles Goldring

Thank you, Bob, and thank you for joining us on today's call. Before I walk through the key activities of the quarter, let me first address the quarterly results.

Post the disposition of Trust, there's been a lot of noise in the quarter that has resulted in a reported loss of $13 million for the third quarter. Two significant one-time noncash expenses resulted in AGF reporting a quarterly loss. These expenses are detailed in the financial statements and the MD&A. Bob will walk through the results in greater detail later in the call.

While the significant one-time noncash expenses have had a dragging effect on our results, we've been active in resetting the business, a process that will take several quarters. The recently completed sale of the Trust business, which closed on August 1, strengthened our balance sheet and provides a singular focus. The company has over $400 million of available cash on hand to reward shareholders, weather market volatility and fund future growth in our global investment management business.

Since our Q2 call, we've already deployed a portion of the proceeds for the sale of AGF Trust -- from the sale. We purchased $44 million worth of AGF stock over the quarter. This represents over 3.8 million shares and approximately 4% of our outstanding shares as of the end of Q2. We are undertaking a cost restructuring program to reduce our SG&A by $10 million. The go-forward SG&A will better reflect the capacity required for our continuing operations.

I indicated in our Q2 call that a priority for the investment management organization was to rebuild the global team under Steve Way. I am pleased to announce that we have hired 4 very talented team members to the global team and emerging markets group. This puts the teams back to full strength ahead of schedule. It's our expectation that these strategies will be a key driver of growth over the next several years.

We are pleased with the improvement in our investment management performance, and we continue to see short-term performance results that are above the 1- and 3-year numbers. That's a positive leading indicator. I also want to confirm that the board has approved a dividend of $0.27 per share for the quarter.

Turning to Slide 5, we'll discuss in more detail some of the key takeaways of our retail operations during the quarter. It's our view that uncertainty will weigh and continue to weigh on global markets for the foreseeable future. We see this in the United States as the coming election brings the challenged American economy to the forefront, in China with its economic slowdown and the ongoing European debt crisis.

In this environment, its little wonder Canadian investors are hesitant to return to global and domestic equities and continue to flock to fixed income products. However, we continue to believe an investor portfolio needs a large equity component, including significant global exposure.

Investor diversification is important and we do see the potential for inflation once the U.S. economy rebalanced and Europe stabilizes, which may highlight the over-allocation to yield products by investors. The equity market headwinds continue to create challenges for our industry and, of course, for AGF. Through August, the industry recorded equity outflows of $8 billion, which represents a 100% increase as compared to 2011. These equity outflows have found their way to the fixed income category, which has seen year-to-date inflows of $13 billion versus only $3 billion a year ago.

This typical move is an impediment to our gross flow. AGF gross sales in our retail segment are down 37% relative to the third quarter of 2011. As I previously mentioned, our performance continues to improve relative to the beginning of the year and remains a focus for us. Over this fiscal year, we've increased resources in our North American research team that supports our Canadian, U.S. and resource strategies. We have reallocated strategies to managers who have demonstrated the best investment management capability. We have freed up time for Martin Hubbes, AGF's CIO, to work more directly with our investment professionals on investment process and portfolio construction. Finally, our compensation plans have been reworked to reward superior long-term performance for investment management professionals.

If you move to Slide 6, we can discuss the institutional segment. Last quarter, we showed you a negative pipeline with anticipated outflows of $144 million. That amount represented the committed redemptions for EM that we were aware of at that time. During the third quarter, several large accounts were redeemed. However, these redemptions were not emerging market for global mandates but were rather related to our quant strategy managed by Highstreet. There was also a large growth-style mandate that was redeemed in Q3.

These redemptions, in addition to the expected emerging market redemptions forecast in our Q2 call, amounted to a net outflow of $1.7 billion. It's worth noting that these quant and growth mandates were generating revenue that was well below our average institutional pricing.

Looking to the Q4 pipeline, we're forecasting additional outflows from the channel of $1.5 billion. This is a result of 2 Highstreet mandates and a growth mandate managed by AGF. These redemptions are attributable to reasons that were not performance-related. Two were an internalization of the investment management by the client, and the other was a periodic manager rotation.

With respect to Highstreet, we remain very committed to the firm, and I've been actively involved, along with the business leadership, to make the required changes. We have installed new leadership, invested in the improvement of the quant models and have invested in several senior hires in the research team to improve the performance and outcomes. Finally, Highstreet has launched an established EP product in the institutional channel that has already met with early success.

Finally, before we close off on the institutional update, it bears mentioning that AGF is very proud to be one of the 13 firms worldwide to be selected to manage money for the NCSSF, the Chinese sovereign pension fund. This affirmation by a leading global sovereign fund is a testament to the quality of AGF's investment management and the global operation capability that we have in place as well as the distribution footprint to sell and service that expertise.

Turning to Slide 7. I wanted to take some time to update you on the Global and Emerging Markets team. We are pleased to report that the Global and Emerging Markets mandates have continued to outperform their respective benchmarks. The Global products continue to be best in class. Our ability to manage through this event and retain the vast majority of the assets under management has been a reflection of the highly unique and proven investment process, a leadership displayed by its chief architect Steve Way and the depth of our global investment management platform.

The level of institutional outflows has been modest in the context of the situation. Where we did see some impact in the Institutional business is in the activity pipeline. The typical process for institutional investors is one where if a change occurs with a manager or ownership, a mandate immediately goes into a new review process and is put on hold, usually for 6 to 12 months. We saw a brief spike in redemptions on the retail side of our business, which quickly returned to more normalized levels. This is nothing unusual after our PM departure.

The rebuild of the team has gone very smoothly. Over the past 6 months, we've been very active in replacing and upgrading the talent, and I'm happy to announce we've hired the 4 talented individual professionals to join the Global Equity and Emerging Markets teams. Through this process, we had the chance to see some very strong talent across North America and Europe, and we found a great group to complement and add value to the existing team members. Our professionals, investment professionals have been actively meeting with existing clients to assure that the process for investing remains intact, and this is being very well received by our investors.

With that, I'll hand the call over to Bob to review our quarterly results.

Robert J. Bogart

Thank you, Blake. If you've had a chance to look at our published financials and MD&A, you'll notice that our presentation has been divided into continuing operations and discontinued operations, which is identified as a single line item just below the income from continuing ops.

Discontinued ops in our Q3 results reflect 2 months of Trust operations, as well as the gain on the sale of a company which closed on August 1. On Slide 8, we provided a summary of our financial results for Q3 2012 versus Q3 2011. This reflects continuing operations except where noted.

Revenue was down 20.9%, driven by the reduction in AUM, largely due to redemptions in market volatility in the Institutional business and continued weakness in the retail channel for equity products. EBITDA decreased to $36.3 million for Q3 2012, a reduction of 41% relative to Q3 2011. Net income for the quarter reflects a loss of $13.3 million, which resulted in a loss on earnings of $0.14 per share. As Blake noted in his opening remarks, the quarter includes several large one-time items. When adjusted for one-time expenses, EBITDA came in at $42.2 million, diluted EPS from continuing operations of $0.11 per share.

Turning to Slide 9, I'll walk through the one-time items that have made this quarter challenging to relate to previous quarters. We incurred a restructuring charge to reduce our cost structure going forward. This charge encompassed severance and lease termination costs and totaled $3.8 million. Smith & Williamson, of which AGF owns a 31% interest, took a charge for goodwill impairment on the Irish businesses. The effect of that write-down was a charge of $2.1 million in our quarterly results and was netted against revenue. In total, these adjustments were approximately $6 million to arrive at adjusted EBITDA of $42.2 million.

Additional adjustments to earnings included a $20 million write-down of our Highstreet investment. IFRS requires a write-down of the carrying value of the asset to the extent it exceeds the fair market value. With the recent redemption activity, we determined there wasn't an impairment from an accounting perspective and have taken a large noncash charge to reflect the reduction in value. Both of these adjustments are reflected on the chart net of income tax effect.

Finally, AGF recognized an $8 million deferred tax charge. This relates to the elimination of a future tax rate reduction in Ontario by the provincial government. On a normal earnings basis -- normalized earnings basis, our continuing operations net income was $10.7 million.

Turning to Slide 10. This is a slide you've seen in previous quarters. It lets you see our segment performance on a longer trended basis and smoothing out some of the impacts of market volatility. It shows our investment management segment revenue, operating expenses and EBITDA as a percentage of average AUM on the current quarter, a trailing 12-month basis and the prior year's quarter. Note the quarters have been annualized and exclude the impact of one-time costs.

Revenue was down quarter-over-quarter, driven by a change in mix as well as lower revenue rate. The mix change is driven by an increase in the relative percentage of institutional and high net worth AUM. Additionally, retail revenue rate has decreased slightly, representative of our fixed income funds having experienced relative growth to allow higher fee equity mandates.

As Blake mentioned at the opening, as a result of the sale of AGF Trust and the prolonged market volatility, it's an opportunity to trim our cost. We are reducing our expectations on SG&A and are targeting $10 million of reductions to be phased in over the next 2 to 3 quarters. We expect to see SG&A decrease lower on an absolute level beginning Q4 and continue in the quarters following until all the cost restructuring is completed.

Moving on to Slide 11. Let's review the investment management trading segment -- trending segment, excuse me. On an adjusted basis, excluding one-time costs, EBITDA margins decreased from a year ago due to the decrease in revenue from lower AUM. The asset management operating model had significant operating leverage. It works for us in a good market and creates a headwind in down markets. In positive markets, such as the recent 4% September move in the TSX and the S&P, the equity torque in our AUM is a welcome tailwind, a trend we certainly hope to see in a longer, more consistent basis.

Our view of run rate SG&A for the next 12 months is $170 million to $175 million going forward. However, we will continue to monitor the top line impact to the market as well as the redemption activity and make further adjustments where necessary.

Turning to Slide 12. I'll walk you through our free cash flow and thoughts on our approach to managing shareholder capital. We've shown the free cash flow which represents the continued investment management operations of AGF. Free cash flow reported for the quarter was $17.6 million. This reflects lower operating results as compared to Q2, but also includes the one-time items that we've just discussed.

The blue bar to the right represents a pro forma free cash flow for the quarter, excluding the after-tax effects of one-time cash items. The dividend as a percentage of free cash flow was 108% pro forma. This reflects the reduced dividend commitment as a result of our share purchases on the NCIB over the quarter. In Q3, we've repurchased $44 million of AGF shares, and for every share we repurchase, we save $1.08 of dividend cash. This will reduce our dividend cash payable in October by $4.1 million.

As a reminder, we haven't lost the free cash flow with AGF Trust. We've simply monetized the cash flow into a large cash position on our balance sheet. As we continue to repurchase shares and reduce our costs over the next 4 to 6 quarters, we expect to fully offset the reduction in annual free cash flow that was previously generated by Trust. Just as important, we'll have both growth capital to deploy if warranted and cash reserves to weather the market volatility.

Moving to Slide 13, we can discuss our direction with respect to future uses of capital. In terms of capital uses going forward, our approach remains consistent with our guidance as part of the Q2 call. Our priorities are threefold. First, we indicated that we'd be active in buying back shares. As we discussed, we are executing against that objective.

Second, we are making thoughtful investments back into the investment management organization. Although we plan to reduce overall costs in the organization, we're committed to building out the investment management platform. Our #1 priority is to continue our recent performance improvement, which will drive success over the long term.

Third, to foster growth, we are conducting a thoughtful review of product and capability gaps within our platform. From this review, we'll target certain asset categories that display good asset growth potential, are economically viable and fit culturally within the firm. We will then assess whether to build a new capability or acquire it. We believe our acquisitions will complement our existing product suite but will not fully substitute our organic growth plans. That said, any acquisition strategy will be thoughtful and disciplined, and as such, will take time to execute.

Finally, we have excess cash on hand. Cash has never been a bad thing to have in, especially in these highly volatile environments. It provides the company optionality on a relatively low cost.

With that, turning to Slide 14, Blake will wrap up today's presentation.

Blake Charles Goldring

Thanks, Bob. 90 days ago, on our second quarter call, we committed to a number of milestones: First, we said we'd close on the sale of AGF Trust, which we did on August 1; second, we executed against our normal course issuer bid and bought and canceled 3.8 million shares over the quarter; third, we said that we'd address our SG&A and we started to make preemptive reductions to reflect the post-Trust organization; and fourth, we commit to maintain our dividend and recognize its importance to our shareholders, and with that, our board reconfirmed that we'll be paying a regular dividend of $0.27 per share this quarter.

Over the course of next 90 days, here's what you can expect. We're going to be executing against the new commitment of reducing our SG&A by $10 million. We'll complete our NCIB and be in a position to renew the program in January, and we'll advance our product review work and be able to discuss our 2013 new product initiatives.

Our investment management operation has been recognized by large global investors as a quality institution. And coupled with our domestic and global presence, we display the ability to generate significant assets under management. Although resetting the business will take a few quarters, we've always exercised a long-term approach. AGF is a well-capitalized company that is more than able to weather the current volatility and has a plan for return to growth.

I want to thank everyone on the AGF team for their hard work over the quarter and our shareholders for their continued support. Thank you very much, and with that, we'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Geoff Kwan, RBC Capital Markets.

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division

Just had a question on when you were talking about the reductions in SG&A. So I think previously, you've been talking about SG&A for this year coming in around $180 million. So is that talking about SG&A next year coming in more around $170 million?

Blake Charles Goldring

That's right, Geoff.

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division

Okay. And with respect to Highstreet, you mentioned, obviously, there's been some redemptions in that product. Can you talk about where the AUM is left in Highstreet today on a total basis and of that, how much of it would be on the institutional side?

Robert J. Bogart

There's roughly $2 billion of asset under management at Highstreet and roughly 50% of that's in the institutional space.

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division

Okay. And then the last question I had was on the NCIB, you've talked about being active with that, and your NCIB, I believe, comes up at the end of January. Given the amount of cash you've got there, is it fair to assume that you're probably going to max out both this year and even potentially next year on the NCIB?

Robert J. Bogart

That's the plan. As it stands today, certainly, we fully expect to utilize the NCIB, the current NCIB to its fullest, and then as part of the year plan and obviously, our capital plan, which has to go to the board and get approved, that's something that we'll be recommending.

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division

Okay. Sorry, actually, if I can ask one more question. Just with the new hires that you've had to the global team, has there been kind of any initial responses back from -- on the institutional side to the new hires that you had on the team?

Blake Charles Goldring

Absolutely. We've been very active, Geoff, in meeting our existing clients and very, very favorably received.

Operator

Your next question comes from the line of Stephen Boland, GMP Securities.

Stephen Boland - GMP Securities L.P., Research Division

Just a few quick questions. I guess the $3 million took in restructuring this quarter, it sounds like with the ongoing savings anticipation, should we expect further restructuring costs in subsequent quarters?

Robert J. Bogart

As it stands today, Steve, no. That $3.8 million that we've highlighted would produce the $10 million save through the next 4 quarters. If there were further restructuring, then we would have to take it up at that time.

Stephen Boland - GMP Securities L.P., Research Division

Okay. And I think you mentioned that out of the institutional pipeline, the majority of that $1.5 billion that is expected to come out, a lot of that, I think, is coming from Highstreet. So will there be another goodwill adjustment?

Robert J. Bogart

No, no, that was taken into consideration as part of this accounting write-down.

Stephen Boland - GMP Securities L.P., Research Division

And I guess when I look at your debt-to-EBITDA, the numbers have gone quite -- it's kind of doubled over the last year. I'm not really familiar with your covenants on your debt, hasn't really been an issue before. Should we be concerned about that? And will that impact your ability to buy back stock?

Robert J. Bogart

No, it won't. It will not, Steve. We'll have -- we have plenty of coverage under all of our debt covenants, and you've got to take -- make sure that you're looking at it on an adjusted EBITDA figure as opposed to the EBITDA we reported for the quarter.

Stephen Boland - GMP Securities L.P., Research Division

Do you disclose what those covenants are, Bob?

Robert J. Bogart

I don't believe we do.

Stephen Boland - GMP Securities L.P., Research Division

Would you like to disclose it now?

Robert J. Bogart

I don't believe I will.

Operator

Your next question comes from the line of Scott Chan, Canaccord.

Scott Chan - Canaccord Genuity, Research Division

Sorry, I didn't realize I was in the queue, so now I just had a bunch of questions written down. I just -- first of all, one question, I guess, to start. Just on the Harmony product, just looking at kind of the IFIC data in terms of the funds -- on the fund basis. We see a lot of redemptions weighted towards that as a percentage of the assets. Can you just give me an update on that fund-to-fund product that's catered to the high net worth and I guess where the redemptions are coming from?

Blake Charles Goldring

Yes. Scott, we've made a number of changes in the actual managers that we've put in there. And there's been some minor work on some pricing as well with that particular product. And it's constantly being refreshed, if you will, to deal with that higher net worth clients.

Scott Chan - Canaccord Genuity, Research Division

And just going back to Geoff's question on the SG&A, I'm just a bit confused because last quarter, you talked about $175 million to $180 million and I thought that was over the next 12 months. Was that fiscal 2012 and now your most recent update...

Robert J. Bogart

No, I think, Scott, we said $180 million, $185 million on the call, and so we'll be at $170 million, $175 million range going forward in the next 4 quarters.

Operator

Your next question comes from the line of Paul Holden, CIBC.

Paul Holden - CIBC World Markets Inc., Research Division

You talk about improving investment performance and some of the measures you've taken to execute on that. Last quarter, you provided a nice chart showing the percentage of funds that are first and second quartile. Do you have an update on that number as of the end of August?

Robert J. Bogart

The performance on the retail funds as a percentage of AUM over median is about 35%, which is just a slight downtick from the end of July as it -- there's one large -- one particularly large fund that we have, large cap dividend, which is vacillating between Q2 and Q3. But from the beginning of the year, we were at 19%. We're pretty pleased with the progress we've made to date.

Paul Holden - CIBC World Markets Inc., Research Division

Okay. And then as I think about the Highstreet institutional AUM, there's approximately $1 billion today, and then given the pipe of negative $1.5 billion, does that imply effectively pretty much all of the institutional AUMs coming out?

Robert J. Bogart

No, that's after the pipeline.

Paul Holden - CIBC World Markets Inc., Research Division

Okay, got it. And then last question would be on your acquisition framework. We talked a little bit about it last call. Just wondering if you have any updates on it, if it's been fine-tuned a little bit more.

Blake Charles Goldring

Yes. We're still working on our GAAP analysis right now, and it's a work in progress. As Bob said, the way we're really approaching the acquisition side, it includes everything from clearly looking at an organization to looking at individuals to looking at acquiring or renting new talent. So it's not necessarily in a more conventional straight acquisition, Paul. And I think that we're making good progress on that front, but we don't have any to discuss today.

Paul Holden - CIBC World Markets Inc., Research Division

Okay. And then you sort of talked about your objectives for Q4, and that you provide an update on product on the Q4 call. Do you think you'll have an update for us on the Q4 call with respect to the acquisition framework?

Blake Charles Goldring

I expect we'll update every time we talk.

Operator

Your next question comes from the line of John Reucassel, BMO Capital Markets.

John Reucassel - BMO Capital Markets Canada

Just Bob, could you just clarify the expenses, the adjusted expenses, I should take $5.9 million out of the adjusted expenses -- sorry, out of expenses to get the adjusted SG&A expenses, is that correct?

Robert J. Bogart

No. The $2.1 million of goodwill write-down flowing through from Smith & Williamson, John, actually is netted against the revenue line, and so the adjusted expenses ought to be just under $4 million.

John Reucassel - BMO Capital Markets Canada

Got you, okay. That's helpful. And so if I look at AGF, and let's assume nothing changes and you'd have the SG&A, is $0.13 per share a pretty reasonable estimate of the profitability in this quarter net of the new SG&A numbers, reductions?

Robert J. Bogart

Yes.

John Reucassel - BMO Capital Markets Canada

$0.11 plus $0.02? Okay.

Robert J. Bogart

I think that's in the ballpark, yes.

John Reucassel - BMO Capital Markets Canada

Yes. Okay. Was it -- I just noticed this, but you moved the DSC fees paid or the commissions paid from investing to operating. Looks like you might have done that earlier in the year. Is there -- what was the rationale behind that, Bob or Blake?

Robert J. Bogart

It's mandated by the adoption of IFRS, John.

John Reucassel - BMO Capital Markets Canada

Got you. So that's in IFRS?

Robert J. Bogart

That's correct.

John Reucassel - BMO Capital Markets Canada

Okay, I didn't know that, okay. And then the -- if you could help quantify for me what getting the NCSSF mandate means to AGF? I know it's a big win internally, but what does it mean dollar-wise and potential? I'm just trying to understand, kind of get some context on the numbers.

Blake Charles Goldring

Yes. John, we don't talk about -- we have been funded and it's a significant initial award, and I guess we're 1 of 2 global resource managers worldwide to receive a mandate. But just, we don't talk about actual amounts. But again, as I've – as you appreciate building in something with an organization like that takes a lot of effort, lot of time, and it's really getting a foot in the door is really quite key.

John Reucassel - BMO Capital Markets Canada

Okay. And then just one last question. On the Institutional business that's related to the emerging markets, and I know -- as I understand the process, and correct me if I'm wrong, is you tend to go on a watch list when there's a new manager and then you can stay there for 3 to 6 months. Are you saying that those watch lists have expired and you're now off those watch lists? Or are you still on those watch lists? And do I have the process right?

Robert J. Bogart

Yes, it could take anywhere from 6 to 12 months, possibly longer. So our expectation is I think as we alluded to in the Q2 call, we'd be out -- that we're out active now selling it, but that the take-up will get some traction in the middle of next year.

John Reucassel - BMO Capital Markets Canada

Okay. And the existing mandates, that could last up to 12 months?

Robert J. Bogart

Correct. A hold and a review, that's correct.

John Reucassel - BMO Capital Markets Canada

Hold and review, okay. And historically, does this stuff get in the -- I guess, from a consultant perspective, does the people that are most concerned about this, do they tend to redeem earlier or is there no real line to say that? I guess I'm trying to figure out how far we are through this review process. Has the risk of redemption diminished or are we kind of still in the high-risk zone? I'm just trying to understand, Bob.

Robert J. Bogart

Well, I guess, I would just say along a timeline, as the time expires, the risk is being reduced. To your earlier point, consultants would and did redeem the mandate through -- via their clients upon the change of manager.

Operator

[Operator Instructions] Your next question comes from the line of Doug Young, TD Securities.

Doug Young - TD Securities Equity Research

I guess a lot of stuff has been addressed. Just a few quick clarifications, Steve. The Chinese mandate, Blake, I think you mentioned. Is that fully funded or is there future funding? I'm just trying to get a sense of, is that already baked in to Slide 6's numbers?

Blake Charles Goldring

Yes, that'd be fully funded so it'd be baked in the slide.

Doug Young - TD Securities Equity Research

Okay, so that will be fully funded. Tax rate, Bob. What's the expectation going forward?

Robert J. Bogart

32%, Scott -- Doug.

Doug Young - TD Securities Equity Research

32%, okay. And Blake, Smith & Williamson, I think there's been off and on kind of discussions maybe around what to do with that investment. Is there any updates in terms of what your thought process is with that investment?

Blake Charles Goldring

Yes. We really do consider the noncore investment holding is a nice -- it could give us a real view on what's happening in Europe. And of course, they are distributing one of our managed products today and so it's been very good from that perspective. But as I said before, it's a noncore holding for us.

Operator

Your next question comes from the line of John Aiken, Barclays.

John Aiken - Barclays Capital, Research Division

Bob, in terms of the SG&A reductions, I was hoping you might be able to give us a little bit of color in terms of where you expect that to come from. But more importantly, what are the fund absorption costs that you're assuming that's baked into that $10 million reduction?

Robert J. Bogart

There are no absorption costs baked into that, John. So with respect to the first part of your question, costs have come out of all the value chain of activities within the firm. There is no specific function or area that we would point to. And it's a combination of obviously compensation as well as other non-compensation costs that one might expect in an asset management business.

Operator

We have a follow-up question from the line of Mr. Stephen Boland, GMP Securities.

Stephen Boland - GMP Securities L.P., Research Division

I guess I'll ask the question on the dividend. Obviously not covering it this quarter with earnings. Your free cash flow, it doesn't seem to be covering it either. So Blake, I guess I just want to clarify that you're very committed to maintaining the dividend at this level.

Blake Charles Goldring

Yes, Steve. We're -- Bob had a slide, I think, where it showed sort of the cash that we have on hand, and we're very confident as we work through this bit of a speed bump that we had, and as we sort of reset that we've got adequate resources to meet and pay our dividend. Is of course, we always -- and all boards review dividend each quarter. That's just matter of course. But we certainly have ample resources. And Bob, you do want to...

Robert J. Bogart

Yes just, Steve, you look at the shortfall in the cash flow kind of on an annualized basis, you're talking $8 million of dividend support on the current reality.

Operator

Ladies and gentlemen, that does conclude the Q&A portion of our event. I'd now like to turn the presentation back over to Mr. Bogart. Please proceed, sir.

Robert J. Bogart

Well, thanks to everyone for joining us today. Our next earnings call will take place in early 2013 when we will review our fourth quarter results for fiscal 2012. Details of that call will be posted on our website. Finally, an archive of the audio webcast of today's call with supporting materials will be available in the Investor Relations section of our website. Good day, everyone.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.

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