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AGF Management Limited (NYSEARCA:AGF)

Q3 2008 Earnings Call

September 24, 2008 11:00 am ET

Executives

Blake Goldring – CEO

Greg Henderson – Sr. VP & CFO

Gareth Pearce – Chairman, Smith & Williamson

Randy Ambrosie – President, AGF Funds, Inc.

Rob Badun – President, AGF Asset Management Group

Mario Causarano – President & COO, AGF Trust Company

Martin Hubbes – Exec. VP & CIO, AGF Funds, Inc.

Analysts

John Vacaso - BMO Capital Markets

John Aiken – Dundee Capital Markets

Geoffrey Kwan – RBC Capital Markets

Gabriel Dechaine – Genuity Capital Markets

Doug Young – TD Newcrest

Stephen Boland – GMP Securities

[Lee Matheson – KJ Harrison]

Operator

Welcome to the AGF third quarter 2008 conference call. (Operator instructions) Your speaker for today is Greg Henderson, Senior Vice President and Chief Financial Officer of AGF Management Limited.

The forward-looking information is provided as of September 24, 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 events or results, and may include statements about AGF Management Limited, AGF, or the investment funds it manages, The Funds, 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.

Certain material factors or assumptions such as expected growth, results of operations, business prospects, performance and opportunities, are also applied in drawing a conclusion or making a forward-looking or projection as reflected in such forward-looking information. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to among other things, risk, uncertainties and assumptions about our operations, economic factors and the financial services industry generally.

While we consider these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Actual events and results from those expressed or implied by forward-looking statements made by us due to but not limited to important factors such as level of assets under our management, volume of sales and redemption of our investment products, performance of our investment funds, and of our investment managers and advisors, competitive fee levels for investment management products and administration and competitive dealer compensation levels, size and default experience on our loan portfolio, cost efficiency in our loan operations as well as interest in foreign exchange rates, taxation, changes in government regulations, unexpected judicial or regulatory proceedings and our ability to compete strategic transactions and integrate acquisitions.

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 and for the funds in each fund’s most recent prospectus and MRFP as applicable, all available on www.sedar.com.

And now I would like to turn the call over to Greg Henderson; you may begin.

Greg Henderson

Good morning everyone. It is a great pleasure to have you join us for the call this morning. I’d also like to advise that the slides supporting today’s call and webcast can be found in our Investor Relations section of www.agf.com.

Today, Blake Goldring, Chairman and CEO, and myself, CFO of AGF Management Limited, will discuss our operational and financial results for the third quarter of fiscal 2008. It is also my pleasure to welcome Gareth Pearce, Chairman of Smith & Williamson to our call today. Gareth will be providing an overview of Smith & Williamson’s UK operation.

Also joining us on the call and available to answer questions are Randy Ambrosie, President of AGF Funds, Inc.; Rob Badun, President of AGF Asset Management Group; Mario Causarano, President and Chief Operating Officer of AGF Trust; Martin Hubbes, Executive Vice President and Chief Investment Officer of AGF Funds, Inc.; and Jeff Windebank, CFO of Smith & Williamson.

I will now turn the call over to Blake.

Blake Goldring

Thank you, Greg. We’ve got quite the team here today and welcome everyone listening to today’s conference call. Now as I do every quarter, I’d like to provide a brief market update.

Equity continued to show a high degree of volatility as global markets experienced one of the worst crisis since the 1930’s. Last week we saw the announced bankruptcy of Lehman Brothers, while the imminent collapse of insurer AIG brought an unprecedented bail out to avoid catastrophe.

The impact of the US government’s plan to support the financial sector without the $700 billion in assistance is still unclear. However investors’ are generally thankful that the federal authorities are taking action to relieve banks of negative pressures.

Prior to the massive bail out from the US government we’ve been seeing interest rate spreads widen once again giving indication that market participants were cautious and reluctant to lend to one another. Investors were looking for safe assets while avoiding risky ones.

Fear and [price] quality pushed the three month T-Bill yields to near zero percent levels; yields not seen in over 60 years. We anticipate the market will struggle to find its footing over the short-term and we’ll likely see a slow-forming U-shaped economic recovery rather then a quick V-shaped recovery.

While the economy continues to show signs of struggling, we’re optimistic that some point in 2009 we’ll see improved results. The recent government announcement by the US gives encouragement that we are closer to getting through the turbulence but with a much different looking landscape going forward.

Today, I’d like to share with you what AGF has done and is doing to weather these very challenging market conditions. Over the 50 years that we’ve been in business, we’ve certainly been through some very tough times.

Some have been market related and others have been business related but the common thread is that AGF has emerged from these tough times stronger and better positioned to capitalize on the up cycles.

The most obvious reason that we have managed through these down cycles has been our ability to recognize that business cycles do and will occur and that to be successful you’ve got to take a balanced approach to the business.

Perhaps some deem us a little bit cautious, however as history has shown this approach generally represents the best value for our shareholders, clients and employees in the long-term. To that end, the AGF of 2008 is a well diversified investment management company participating in a meaningful way across a wealth spectrum in both Canadian and global markets.

Our journey to the AGF of 2008 has been marked by prudence and today AGF is well positioned. I’d like to list a few key points to really back this statement up.

Our debt levels as measured by our long-term debt to EBITDA, long-term debt to equity or any other measure are among the best in the industry.

Our history is rich with acquisitions all of which are bought and paid for. These acquisitions have helped to shape the AGF of today.

We’ve divested of non-core businesses in a manner that has increased shareholder value and we recognize that we have an ongoing obligation to assess which assets and which activities are core to our organization.

Our investment products, while innovative are based on prudent processes with a view to creating long-term value.

Our business model is based on a concept of diversification and synergies. We participate in a meaningful way in the investment management business across the [inaudible] continue and have a trust company that is of great benefit to our wealth management business.

Wholly-owned international operations in Dublin and Asia provide AGF with valuable local insight and a direct link to investment opportunities in these markets.

Finally our investment in Smith & Williamson gives us further insight into the UK market and is a meaningful contributor to our profitability and cash flow as Gareth is going to be describing a little bit later.

The next slide provides and overview of the quarter ended August 31, 2008 as compared to 2007. Greg is going to provide a more detailed analysis of our financial results.

The impact of market volatility continued during the quarter and reduced our overall AUM levels, assets under management levels, by 9.4% compared to August 31, 2007. However with $48.7 billion in AUM, we still have significant scale in the mutual fund, institutional and high net worth markets.

Looking at the retail side, investors have maintained a cautious stance and money markets funds continue to attract the lion share of gross sales. Year-to-date long-term funds sales for the industry are in negative territory and we along with many of our competitors have not been immune to this trend which resulted in total net redemptions of $572 million for AGF in the third quarter.

On the bright side, redemptions have remained relatively flat on a year-over-year basis. If we exclude the impact of institutional client rebalancing and repatriation of retail funds in the first nine months, the year-over-year comparison of redemptions is even more in line.

This is a clear indication that retail investors are taking a long-term view of the markets. On the institutional side of the business we are participating in a number of [RFPs] and to have recent success in the Asian US markets.

Our high net worth AUM at $3.8 billion has remained relatively stable down only 4.7% as compared to August 31, 2007. On the trust side of the business, we’re pleased to report continued significant growth.

You’ll see on the next slide, trust loan assets rose an impressive 31% year-over-year in the third quarter to $4.4 billion. Real estate loan assets were up 25.9% to $2 billion and investment loan assets were up 35.7% to $2.4 billion.

AGF Trust loan order originations although down continued to be strong. Originations were $362 million in the third quarter of 2008 compared to $564 million in the same period in 2007. Over the past four quarters AGF Trust has recorded total originations of more then $1.8 billion.

While we continue to monitor or loan portfolio given current market conditions, the credit quality of our portfolio has remained consistent. Impaired loans as a percentage of loans outstanding were 0.5% versus 0.7% at November 30, 2007.

Obviously one of the biggest issues we have in the trust business today is the security for our investment loans. As you are aware, our investment loan portfolio is secured by underlying investments in mutual funds. Market volatility causes this security to fluctuate on a daily basis.

However our clients represent good credit risk with beacon scores over 700. In an ongoing effort to increase disclosure we’ve opted to report our conventional mortgage loan to value ratio and our unsecured exposure on our investment loan portfolio starting this quarter.

As at August 31, 2008 the weighted average loan to value ratio of our conventional mortgage loan portfolio was 68% and we have approximately $174 million of unsecured exposures in our secured investment loan portfolio.

I am extremely pleased with AGF Trust’s contribution to the success of AGF by diversifying our earning stream and providing important synergies to our investment management business. Despite the net interest margin compression primarily related to the higher cost of GICs, our trust operation continues to grow and remains a valuable asset to shareholders.

Once again we have approved a quarterly dividend to our shareholders that represents a dividend of $1.00 per annum. It will be paid on October 21, 2008 to shareholders of record on October 10, 2008 and represents a dividend yield of over 4% based on our current share price.

Our strong record of dividend growth, 12 consecutive years, is very important to me, our Board of Directors, and our management team.

At this point it is with great pleasure that I turn the call over to Gareth Pearce, Chairman of Smith & Williamson, who will provide an update on the operations and results of our UK based investments.

Gareth Pearce

Thank you very much Blake, it’s a great pleasure to be able to participate in today’s call. Like our [inaudible] AGF we are extremely proud of the operations at Smith & Williamson. Our business consists of two principal operating divisions.

Firstly the investment management and private banking division with funds under management and advice at the end of our fiscal period ended April, 2008 was 9.3 billion pounds Sterling and secondly, a tax and business services division that encompasses tax advice for corporate and personal, assurance services, forensic services, restructure and recovery, corporate finance, and financial services.

These businesses including our investment management capabilities are complimentary and provide us with opportunities to service clients across multiple business lines. The slide illustrates the fruits of our labor with AGF recording 28% year-over-year growth on profit before taxes in the quarter.

Following our results through the financials of AGF you will have noted there is a high degree of seasonality with our business. This is in large part a function of the way we account for work in progress and the push we have to build [clients] in the tax and business services division at particular points of the year that yields AGF increased profits in their second and fourth quarters.

Profit is only one part of the story and the other is our dividend record which is detailed on the next slide. We are proud of our record and this slide shows that dividends and flow through to AGF in fiscal 2007 will increase the dividend paid to AGF to close to 20%.

Like our counterparts at AGF we believe that dividends are an extremely important use of cash and we’ve balanced the dividends paid to our shareholders with a need to maintain cash flow from operations to ensure continued expansion.

Over recent years we’ve expanded our operations with our most recent acquisition of the Oliver Freaney & Company, a Dublin based accounting firm in June of this year. In addition to acquisitions we looked to lever our expertise and grow the business organically.

To this end we opened an investment management office in Birmingham, on August 26th. Once this office is established we look to expand the range of Smith & Williamson services that are offered there.

And finally let me conclude with a topic that I hope you were waiting to hear about, which is the potential IPO of Smith & Williamson. With the backing of our shareholders and Board, we have unanimously agreed to postpone our market listing until markets stabilize and we can extract the best possible value for our shares.

Accordingly at this time we have no definitive deadline as to a public offering and we will view the situation periodically with our Board to ensure that the timing of such a transaction is appropriate.

With that I will hand the call over to Greg who will be pleased to answer any further questions at the conclusion of the call.

Greg Henderson

Thank you Gareth. Our profits are driven from AUM and loan assets, so I’ll start by discussing AUM and the impacts on our financial statements.

As a result of market volatility and slower gross sales, total AUM were down 9.4% in the third quarter of 2008 over the same period in 2007. Average mutual fund AUM were down 11.9%.

In the third quarter of the year market volatility caused our mutual fund AUMs to decline by $1.7 billion. As outlined on slide 11 at the end of the third quarter of 2008 we had $48.7 billion in AUM, this is down from the $53.8 billion at the end of the same quarter last year and is comprised of $26.4 billion in mutual fund AUM, $18.6 billion in institutional AUM, $3.8 billion in high net worth AUM, and while much of the decline in the mutual fund AUM in high net worth AUM was market performance driven, both retail and institutional AUM were also impacted by client rebalancing and redemptions which were non-performance related.

As shown in the next slide and as Blake mentioned earlier, loan assets at AGF Trust continued to experience substantial quality growth increasing 31% on a year-over-year basis.

Our strong loan asset growth is directly related to continued solid loan originations. While down somewhat on a year-over-year basis, we’re not troubled as the general economic situation is one in which we’d expect to see some softening of originations.

Real estate secured loan assets are up 25.9% and investment loans are up 35.7% over the same quarter in the prior year. As of August 31, 2008 AGF Trust has securitized loans totaling $186.7 million. These loans are not included in the figures on this slide.

Slide 13 shows overall revenue and EBITDA on a consolidated basis quarter-over-quarter and also as Blake indicated for the first time we have disclosed our exposure with respect to collateral on the investment loan portfolio. As at August 31, collateral value declines have resulted in $174 million in unsecured exposures on this loan portfolio.

Expressed another way, at August 31, 2008 approximately 90% of the investment loan portfolio was secured.

In addition to this security we have recourse on the personal assets of the individuals behind the loans. Our weighted average loan to value ratio on our conventional mortgage loan portfolio was unchanged from prior quarters at 16%.

The next slide shows the revenue and EBITDA from continuing operations. Revenue on a consolidated basis declined $14.5 million or 7.3% on a year-over-year basis. EBITDA was down $9.8 million or 10.7%.

The decline in revenue from $199.2 million for the quarter ended August 31, 2007 to $184.7 million for the quarter ended August 31, 2008 is primarily due to lower average asset levels in the investment management operations.

They are offset by higher loan asset levels a AGF Trust. EBITDA of $81.5 million in the third quarter of 2008 was lower then the $91.3 million in the comparable period a year earlier as a result of the decline in AUM.

From my perspective the key accomplishment is that on a consolidated basis expenses are down 4.4% in the quarter compared to the third quarter of 2007 with a 7.9% reduction in expenses realized in our investment management businesses on a year-over-year basis.

Our consolidated EBITDA margin of 44.1% is slightly lower then the 45.8% we reported in the third quarter of last year. Slide 14 addresses the investment management operations specifically. In the investment management segment, lower average AUM led to 11.9% decline in management and advisory fees from $166.6 million in the third quarter of 2007 to $146.8 million in the third quarter of 2008.

EBITDA margins declined to 42.5% as a result of revenues declining at a rate in excess of the expense reductions. On the expense side we have kept our costs down with overall expenses decreasing 7.9% in the third quarter of 2008 compared to 2007.

SG&A was $44.8 million or 9.5% lower primarily as a result of lower compensation costs and expense controls in other areas. This was somewhat offset by slight increases in absorption. Trailing commissions declined 6.9% on a year-over-year basis while investment advisory fees increased 2.8% as the AGF dividend income fund had been managed internally for part of 2007.

Our focus continues to be on margin and EBITDA improvement. However we do caution that our ability to achieve this is impacted by revenue fluctuations. The [end turn] are driven by the markets in general and the performance of our investment management teams relative to these markets.

On the next slide, AGF Trust continued its growth trend into the third quarter and is a key contributor to the financial results of our company. Advisors see real value in our loan products and we are able to extract valuable synergies between our major business segments.

Net interest income increased 25.5% compared to the third quarter of 2007 due to loan balances being 31% higher. EBITDA rose $14.4 million, up 9.9% from the third quarter of 2007. The compression of the net interest margins results primarily from an increase in the cost of borrowing through GICs.

At the same time our ability to pass on these increases to our clients primarily on the investment and HELOC loan side of the business has been hampered by the prime interest rate levels. We will continue to focus on high margin products.

The next slide shows basically where we’ve used our cash. I am very pleased to report in the third quarter of 2008 we paid dividends of $21.5 million to our shareholders and we reduced our bank loan by $24.2 million.

These items as well as deferred sales commission were paid for out of cash flow generated by the operations. During the third quarter of 2008 we extended our $60 million loan credit facility to the end of December, 2008 which will be used for our share repurchase program. As of yet we have not triggered our share buyback program and have focused on repaying debt.

Our first priority with the use of funds is to pay dividends and ensuring we manage our balance sheet in a prudent manner that ensures long-term success.

At this time I will pass the call back to Blake for further comments.

Blake Goldring

Thank you Greg, while we’ve had a full discussion here of our third quarter results, the ongoing growth at AGF Trust and the success of our investment in Smith & Williamson, slide 17 is one which I’d like to show because it demonstrates that AGF’s track record over the long-term performance for our shareholders and is taken as of August 31, 2008.

Since becoming a publically traded company in 1968 we’ve outperformed the TSX and delivered on 15% annualized total return for shareholders compared to TSX at 10%. These return figures include dividends and including this year’s 25% increase in our quarterly dividend, we’ve increased our dividend an incredible 12 consecutive years; an achievement that many companies strive for.

This has resulted in a 12-year dividend compound annual growth rate of 24%. It is still our intention to repurchase up to [$60] million in Class B shares when conditions are suitable and we’re not going to be—we’re going to be very cautious about this given the current market environment that we’re in.

We believe that AGF remains a superior investment and provides value to our shareholders and at the current trading price is undervalued. Just consider the strong business fundamentals that we, as a management team, have put in place here to grow our company.

We’ve built a diverse investment management platform that anticipates and serves the needs of both retail and institutional clients. Second, we’re being rewarded through institutional mandates and believe our retail line up will continue to serve the needs of our clients once investor confidence returns to the markets.

Third, we have a trust business that generates significant profits, has a quality loan portfolio, and effectively compliments our fund management business. We have been able to successfully and efficiency leverage synergies in both segments of our business.

Fourth our interest in Smith & Williamson continues to increase in value. Smith & Williamson now has over 9.3 billion pounds Sterling of assets under management. It generate annual profits before tax in excess of 30 million pounds Sterling and provide us with cash dividend of $5.5 million in fiscal 20070

I know some of you are concerned about the impact of current market volatility. I’d like to emphasize our teams’ long-term focus, our disciplined business strategy and the long-term resiliency of the capital markets as well as the exciting opportunities that we see in the years ahead.

We’ve been through tough times in the past and when the current market situation stabilizes, there will undoubtedly be other challenges facing us and the industry as a whole. But there are opportunities and at AGF we are ready to seize them.

But with over 50 years in business we have a proven track record of coming out of such situations even stronger. Our teams’ commitment to our shareholders is to continue to focus on achieving our long-term strategic goals and enhancing shareholder value.

We’re not going to let periodic noise stray us from our vision and the commitment to our operating models. AGF has consistently delivered over the past 50 years and given the strong foundation that we have built despite these current challenging times, I am confident that we will continue to deliver in the years to come.

This concludes my comments and now we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Vacaso - BMO Capital Markets

John Vacaso - BMO Capital Markets

Just a question on the trailer fees, it looks like we’re running around 60 basis points annually. Could you just confirm that and a little surprised just given the shift to money market funds, is this kind of the element program coming through here, is that what we’re seeing?

Greg Henderson

I think it’s a number of things coming through. Elements obviously has some impact because on the frontend basis we’re paying a slightly higher trailer there. I think what you’re seeing too is some of it is the DSC that’s coming off the schedule, the 10% for each year. That causes it to go up but its up about three basis points and that’s kind of what we expect to see as slightly increasing trailers as we go through the next while.

John Vacaso - BMO Capital Markets

It seems like that is hard to completely offset is it, with the—on the SG&A side or do you think you can do that?

Greg Henderson

Well again I think it’s a function of a whole bunch of things in the sense the asset mix that you’re selling, the series that it’s going on, so certainly again I think its part and parcel of the overall margin calculation and we need to be cognizant of that and make sure that we control that and drive towards the higher margins.

John Vacaso - BMO Capital Markets

And the target margin is still, what 48% 50% assuming you can get the asset growth?

Greg Henderson

Yes.

John Vacaso - BMO Capital Markets

To this $174 million of collateral value declines, just so I understand this, this means on the $1.7 billion of investment loans, there’s only $1.5 or something of secured, the underlying funds have declined by $174 million below the par value of the loan, is that right?

Greg Henderson

Yes and let’s just walk through how we do that calculation. So for example, if you have a $25,000 loan and you have security of $35,000, obviously we don’t count that extra $10,000 as security so again, its kind of capped out at the amount of the loan. However if you’ve got a $25,000 loan and $20,000 of security, that’s what goes into that number.

As you recall basically this program allows you to take out a loan and secure it with mutual fund assets and its something that we haven’t disclosed in the past but there seemed to be a lot of noise around it. We’re not too concerned with the fluctuation of the used amounts from the perspective, they’re very good clients, high beacon scores, we haven’t seen a huge amount of credit defaults and we believe that people will keep paying their loans.

Mario Causarano

That’s right, if you look at the quality of these borrowers, they’re considered to be prime borrowers, as Greg said, high beacons. The portfolio is being extremely good in terms of performance. What we’re getting here is obviously fluctuations in the market and our view of the portfolio is that its not the fluctuations in the market that will do it on its own because its not—first off there’s an advisor in there helping the client to deal with those fluctuations and the real issue then is not crystallizing losses but can I afford the loan? So affordability on the loan and debt service ability is important. And we’re in an interest rate environment where it continues to be below.

Its those kind of things in combination that need to come together. Obviously as markets get volatile and that unsecured portion grows, there’s somewhat more exposure. Like even in a scenario whereby if you had normal arrears and normal losses, you get a little bit of increase in your loss write-offs and that’s what we’re seeing. We’re seeing nothing unusual with respect to the portfolio in spite of we’ve had some significant drops in the market.

John Vacaso - BMO Capital Markets

So take the extreme case here is if they sold the fund today, in theory you’d be $175 million short on that security, does then that $175 million now an unsecured loan or do you have to take an impairment charge on that?

Mario Causarano

Its an unsecured loan and then what we would do is we would actually go after the rest of their assets. So when we actually make the adjudication on the loan, not only do we look at—we look at the quality of the borrower from a number of perspectives, one their ability to pay their credit history in terms of beacon and also their net worth. Like what other assets can we go after if they’re defaulting? And so we go after those other assets.

And the other thing to keep in mind here is we do have some other levers that are in our pocket that we haven’t pulled and we’re not pulling unless we got into a real panic situation because these are all demand loans. In actual fact we can go up and demand them and start collecting on our security but it sends the wrong message to the distribution network and that’s also the kinds of things that we could do.

We could work with these clients to start making principal and interest payments.

John Vacaso - BMO Capital Markets

What has happened since the end of August, I assume that’s gotten wider?

Mario Causarano

Well it hit about—last week it hit a little bit, but nothing significant.

John Vacaso - BMO Capital Markets

And so this is just like a margin loan so in theory you could be calling the margin, is that--?

Mario Causarano

It’s a non-margin loan but the loan is a demand loan so we could actually call the whole loan if we needed to.

John Vacaso - BMO Capital Markets

And when would you classify it—what are the rules on classifying this as impaired?

Mario Causarano

Well they’re the same rules with respect to—if they’re 90 days in arrears then we consider them impaired.

John Vacaso - BMO Capital Markets

And these are mainly floating rate or fixed rate loans?

Mario Causarano

These are floating rate loans.

Greg Henderson

Which we’ve hedged.

John Vacaso - BMO Capital Markets

And so as—are they asking to put some more capital in or what’s any developments there?

Mario Causarano

If you look at, I said the way the portfolio is performing; our write-offs even as they’ve ticked up a little bit, nothing unusual, are about six basis points. We allow on an annual basis about 25 basis points of provision so that’s just in the normal course of our review of the performance of that portfolio. The regulator in fact you look at what’s happened under [Basil 2] the regulator deems those because they’re secured by mutual funds to be less risky then what they were under the old regime.

Greg Henderson

And part of the reason for disclosing this is over the course of the last several weeks, I’ve had a number of questions people wanting to understand it and know what the number is, so again I think we try and be as transparent as possible and we started to disclose that so you’ll see that number each quarter and you’ll be able to assess how the portfolio is doing.

Operator

Your next question comes from the line of John Aiken – Dundee Capital Markets

John Aiken – Dundee Capital Markets

I wanted to talk about the provisioning that the trust operations took this quarter, it looks like the bulk of it actually went through to specifics this quarter as opposed to an increase in the generals and wanted to know where these specifics were headed in terms of which area in the portfolio was this the RSP loans or was this on the conventional mortgage loans?

Mario Causarano

No its in the RSP portfolio. That’s where we’re seeing the bulk of it and that portfolio has always been—as you know the RSPs are not—you can’t pledge an RSP and because they’re in the RSP what we do is we actually, the client gives us direction to take it out of the RSP and so we’re able to take some of it but then you lose a portion of it to tax and so forth and so there’s a fair bit more write-offs. Most of those write-offs actually come in the way of bankruptcies. So where clients are declaring bankruptcy and if you look at what’s happening with the bankruptcy numbers, they’re up ticking generally in Canada and so that’s the uptick that you’re seeing there.

In actual fact, our losses are tracking according to plan in that portfolio because we called it up a bit, but there’s definitely a trend in that direction.

John Aiken – Dundee Capital Markets

You are comfortable with the level of your general reserves at this stage of the game given the fact that we saw slower loan growth this quarter, sorry sequentially?

Mario Causarano

Yes, and I think there are different issues I can speak to both of them. On the general allowance we have been I would say over providing for a number of years. In fact we’ve had this debate with PWC our auditors, in terms of the fact that we have actually been over—their view is in the past we’ve been over providing. I guess we’ll have a different conversation this year given the environment we’re in, but up until this point we’ve taken a lot of general, a lot of provision.

What you’re seeing with respect to the volume decreases are really from two elements. On the mortgage portfolio we’ve purposely contracted our new business. We’re cutting down in markets that we’re not comfortable with at this point and we’re moving up the—there’s three ways to do it to basically contract your business. You can either—you can change your loan to values, you can adjust your prices, and you can affect your credit policies and you can do that in any specific market or area and then type of business basically by adjusting those and then lose your [volumes].

So those are the things we’re doing and we’ve been restructuring our home mortgage division to increase the service levels we have there. So this was a good time for us in terms of bringing that down. On the ILP side, the volume decrease you’re seeing, is its really market driven. These are unleveraged investment programs to get into the market and depending on your view as a leverage investor, with markets down its probably the best time to get in, but those are harder conversations for advisors so there’s a natural decline as the equity markets come up.

Greg Henderson

On the provision, we always look at the provision that we had to go through a full business cycle so again, I think to Mario’s point, we believe we are adequately provided and that we provided for the entire business cycle; the good side and the bad side. As we go through the next several months the proof will be in the pudding as to whether we were right in our call.

John Aiken – Dundee Capital Markets

In terms of the contingent DSC that you disclosed in terms of the value that you received to fall back end load funds were redeemed, I know that this level ticked up a quarter or two ago but can you explain why in an environment where we have higher front end load fund sales this value is actually up above where it was a year ago?

Greg Henderson

Generally we’re seeing—we’re continuing to see about half of our sales go onto the DSC program.

Randy Ambrosie

The actually split is about—half is front end and then on the DSC side about 70% is traditional DSC and the other is the short-term DSC schedule so that’s about the break down.

Operator

Your next question comes from the line of Geoffrey Kwan – RBC Capital Markets

Geoffrey Kwan – RBC Capital Markets

Do you have a breakout on what the net sales are looking so far in September?

Greg Henderson

No we haven’t disclosed that and with the market volatility and that, our sales results are two days after month-end I think we’ll just get back on that cycle.

Geoffrey Kwan – RBC Capital Markets

Do you have an idea approximately how much of the consumer loan portfolio would have the underlying funds invested in AGF mutual funds and then if you can talk about on the mortgage side any changes that you’ve seen in the past few months or what we’re seeing right now in terms of competition spreads in credit?

Mario Causarano

On the investment portfolio, typically if you take it out of the RSP program and go to the ILP program, the investment loan program, we’re somewhere between $0.25 and $0.30 on the dollar that goes into AGF, that actually ramps up in the RSP program with the particular distributor we have that uses our program quite significantly and that can drive up in that program as high as $0.70 on the dollar.

In the mortgage world, let’s start with the market, yes we are seeing softening in the Canadian market but its nothing like what’s happening in the US where there’s whole meltdowns. We track pretty closely the work that’s coming out of the big banks and the economic departments of the big banks and we track real estate markets nationally and what we’re seeing is, even in places like Alberta and Saskatchewan and BC, where you had big appreciations, there call and forecast for going into 2009 is that there’ll still be some very moderate growth.

Nothing compared to the double-digit 23% 25% increases that we’ve seen in the past. So from that perspective we’re quite comfortable with the housing market in Canada. In fact, if you want to talk about demand, let’s bring it back to earlier on, our portfolio we purposely have brought it back and constricted it but if you look at our competitors in actual fact they have been getting into some of those markets so there’s lots of room.

We will adjust according to where we’re comfortable with around some of those markets.

Geoffrey Kwan – RBC Capital Markets

On the investment loan portfolio can you talk about what’s the broad range of terms of the loans as well as what might be a ballpark in terms of the average?

Mario Causarano

On the investment loans, these are 20-year loans but they’re demand loans so we can actually—we can go out and demand the loan at any particular time. If the borrower stops to either stops paying or we’re uncomfortable. But there is no margin—they don’t typically work the way margin loans have worked in the past where you normally have a—when you hit a certain loan to value you either are acquired to put in more assets or put in more cash into the program. This is not a margin program, it’s a no-margin loan and the reason lots of advisors take it is of this exact reason when you’re in volatile markets that you don’t get a margin [call].

Geoffrey Kwan – RBC Capital Markets

And you said 20-years?

Mario Causarano

Two-zero, they’re 20-year loans.

Operator

Your next question comes from the line of Gabriel Dechaine – Genuity Capital Markets

Gabriel Dechaine – Genuity Capital Markets

On the investment management side, the fund absorption, could you quantify the absolute level, is it around $4 or $5 million a quarter?

Greg Henderson

Well I think if you recall last year, it was around $15 million so its tracking a little bit ahead of that level this year. I would expect it would come in around $18 million. Again that’s a function of the average assets under management.

Gabriel Dechaine – Genuity Capital Markets

They’re the chart you put out on your 2007 Investor Day. The other aspect of your cost, the salary or compensation related, can you put some of that into perspective as to how much your bonuses have been cut back because of the sales?

Greg Henderson

I think if you look at comp, there’s two pieces to it; there’s headcount so we’ve done an extremely good job of controlling the number of bums in the seat and I think the other part is bonuses generally across the company, its not just reflective of any one group. So again, every group has a performance based budget and in these times with EBITDA being down, markets being down, sales being down, everybody will see their bonus levels come down.

Gabriel Dechaine – Genuity Capital Markets

Just to focus on your bonus, your gross sales in some months are down somewhere around 50%, would that be the magnitude of decline you would expect in your bonus pool?

Greg Henderson

Bonuses are based on a number of factors so the individuals that we have in our sales forces not only sell they service existing client arrangements so their compensation plans are based on sales, they are based on redemptions, they’re based on service to the client so I think there’s a number of factors so I don’t think you can draw the conclusion that its linear with respect to that. In fact I don’t think there’s too many companies where any one piece would be a linear calculation with that.

Randy Ambrosie

I think everybody in the organization from investment managers to operation staff, sales people and everyone across the board understands it’s a tougher year and we’re obviously working hard to build our long-term business but I think they all understand its going to probably be a year where the bonuses are going to be lower, but our bonus plans are good because they make it very clear what they’re paid for. They all understand what the drivers of our business are and they continue to work hard to do their level best to contribute to our success.

So I think there’s an overall understanding that the bonus pool will be smaller this year but still people are very focused and very motivated and obviously that’s the challenge that we all face is to provide the right motivation but while being fiscally prudent.

Greg Henderson

And when I look at our competitors I’m sure they’re in the same boat.

Gabriel Dechaine – Genuity Capital Markets

Moving back to the trust, I’m trying to find—Mario’s comment that the historical write-offs have been around the six bps versus 25 bps of provisioning, is that specific to the investment loan book?

Mario Causarano

Yes, that‘s correct.

Gabriel Dechaine – Genuity Capital Markets

And then you discussed looking for alternative sources of funding to offset the rising costs of GICs in Canada, have you made any progress there?

Mario Causarano

The major source of that funding option is securitization which is being difficult obviously; one to be able to execute it and two from a price perspective. Some of the other things we’re looking at are can we arrange a line? We continue to look at whole loan sales but all of these things are obviously much more difficult in the environment that we’re in today.

Gabriel Dechaine – Genuity Capital Markets

I thought there was maybe some plans to introduce a new savings products as an alternative deposit source?

Mario Causarano

Yes, so as an alternative deposit source we’re looking at that. What you’ll find though typically with those savings accounts, there’s two issues, there’s the cost of funds on that account won’t really change given the environment and what the interest rate that will need to go up with it. What it potentially does is gather assets and funds for you as an alternate source of liquidity and we’ve had a project in place to look at bringing that to market.

And we may or may not launch that in 2009. It will depend on where we’re at and what’s happening in the market and so our decision will be are we ready to take that to advisors or not going into 2009.

Gabriel Dechaine – Genuity Capital Markets

On the buyback, last quarter that was kind of the big news items, was the plans for a $60 million buyback and you’ve pushed back the date for the credit facility and there has been no buyback activity during the quarter, can you comment on why not?

Greg Henderson

I would say its just prudent capital management. Again we put that facility in place so that its segregated from our operating facility. As we go through tough times we don’t want to be over levered, at the same time we do believe our shares are a bargain and so if the opportunities arise that we can get significant blocks of shares we will. But again I think as we go through the planning process in that we just want to make sure that we’re being prudent and that we don’t over extend ourselves because the biggest thing in this period is making sure that you come out the other side and with our debt to EBITDA ratio and that, I think we’re one of the best in the industry.

So again I think we’ve got lots of financial flexibility and want to keep paying our dividends and doing lots of other things so its available to us and we’ll act upon it when we see fit.

Operator

Your next question comes from the line of Doug Young – TD Newcrest

Doug Young – TD Newcrest

On the HELOC side, how much is—what’s the percentage of that portfolio that’s first mortgages and is the average loan to value 68%, is that relevant for the HELOCs as well?

Mario Causarano

Its all first mortgages and the average loan to value is around 72%. The beacon though and the quality of the portfolio is much higher. Its in the 720 range so it is a prime portfolio compared to let’s say the average beacon on our more conventional mortgage portfolio today is around 625.

Doug Young – TD Newcrest

I saw in your trust business income statement there was a negative $1.8 million for other interest expense, is that due to the hedge ineffectiveness and can you quantify that?

Greg Henderson

I don’t have that statement in front of me but certainly from a hedging perspective it might be on that particular line on the statements that they file, but it’s a net nothing when you look at it from an AGF perspective and how its netted together. I’ll look into that and tell you exactly what’s in that line.

Doug Young – TD Newcrest

On the SG&A on the trust side, I think there was movement of office space, was that a material one-time impact on earnings? Can you quantify?

Mario Causarano

In actual fact, our costs are going down and so we moved offices. We actually moved out of the core. We’ve always kind of been downtown here in the core and we’ve moved off so in fact our overhead costs in relation to rent will decrease.

Greg Henderson

The move was done this quarter so there were some costs for the physical move and that kind of stuff; one-time costs.

Doug Young – TD Newcrest

How much was it? Was it a significant figure?

Greg Henderson

Well you move 400-500 employees so we’re talking it would be probably $50-$60,000.

Operator

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

Stephen Boland – GMP Securities

The analogy always goes its easier to lend money out are you comfortable with your infrastructure in terms of collections, are you comfortable with the level of back office support that you have going into this environment or have you been beefing that up in the last six months or so?

Mario Causarano

We have, we’re very happy with where its at. We’ve been putting a lot of resources into our collections over the last, well over a year now and we’ve got some very experienced people in there who have come out of both the finance business and out of the banking business and we continue to get better at that. In fact, we’re introducing systems to get us more efficient even in our collection practices and policies. So that’s working very well for us and its been a focus that obviously we need to continue to concentrate on in the future.

Greg Henderson

That’s part of the physical move because we moved basically from First Canadian Place over to One Toronto Street so that gives us a physical ability to ramp up staff and that as the business grows.

Stephen Boland – GMP Securities

You mentioned that when you haven’t seen a large uptick in the impairments even though the collateral has declined, have you executed actions against some of these people that have been-o or maybe just give me the timeline if they go two days overdue in terms of paying their loan, is it a phone call, five days a phone call, a letter after 20, legal action after 30, can you just give me a timeline for that?

Mario Causarano

It really varies depending on the quality of the borrower and the type of the portfolio and whether we think they’re going into bankruptcy or not. The thing to keep in mind here is we’ve got an advisor in between the client and us and so we’re cognizant of that all the time and so we start off by working with the advisor in terms of getting to the collection and so depending on where we are in the environment that we’re in, we’ll either be more aggressive or less aggressive against that.

And what we’re doing in this environment is we’re becoming more aggressive. And so we’re moving up our timelines in terms of when we start getting a little harder on the collection. In the ILP portfolio quite frankly we’ve never had to do it because we just haven’t had any arrears and we haven’t had any losses to speak of. Its just starting to move a little. What we’re really talking about is there the potential for it to change given the nature of the unsecured book and in spite of all those things that we talked about; we don’t think its going to happen.

But you know what? You need to be prepared for these things so we’re looking at our operations to the point around your question around collections and saying are we ready if we needed to? What are the levers we could pull? What are the things that we could do? How quickly, how efficient will we be in terms of getting judgment against other assets? All of those things that say well if its going to happen then we’d better be prepared operationally so we don’t lose anything there in the process.

We’re able to speed it up; we’re able to have a quality operation in terms of getting towards those assets. So its more from that perspective as a contingency planning.

Operator

Your final question comes from the line of [Lee Matheson – KJ Harrison]

[Lee Matheson – KJ Harrison]

On the Smith & Williamson on this slide that we’re looking at which is slide nine of the pre-tax income, that’s three-quarters year-to-date in 2008 pre-tax income for Smith & Williamson?

Greg Henderson

Yes, that’s three-quarters year-to-date for this year compared to three-quarters year-to-date for last year.

[Lee Matheson – KJ Harrison]

So if I look at that and say $7.7 million pre-tax in three quarters if we—there’s obviously some seasonality in that? I’m trying to back into it. You own about a third on the balance sheet for $102 million which implies an equity—its equity accounted so an equity value of say $310 million, why is the business with $18 billion in AUM doing potentially $10 or $12 million run rate in pre-tax income per year? Why is it not substantially higher then that?

Greg Henderson

In our numbers we have some amortization related to the purchase price equation. So when you go from Smith & Williamson’s 30 million pounds Sterling or whatever their last fiscal profit was to ours, we pick up some additional expense related to the acquisition equation.

[Lee Matheson – KJ Harrison]

So the $7.7 million is your—that’s pre-tax income to you from Smith & Williamson?

Greg Henderson

Yes, that’s our--

[Lee Matheson – KJ Harrison]

So can we talk about the Smith & Williamson’s underlying profitability at its level? They don’t file quarterly correct?

Gareth Pearce

No we don’t.

[Lee Matheson – KJ Harrison]

Can you just walk through it? If we look at the 9.3 billion pounds, can you give us a sense of what sort of EBITDA per dollar of AUM that generates?

Gareth Pearce

Let me just give you the overall position. We have a fiscal year ended April 30 and our profits before tax for the year ended 30th of April, 2008, were 31.2 million Sterling, after tax 21.3 million Sterling. Of that about two-thirds is generated by our investment management banking business and one-third by our tax and business services business. Now as far as investment banking services, its important to understand that our banking is essentially a cash management function.

We have a cash component in the portfolios we manage for clients and we blend that into bank rather then to other customers as to about 99% of it. We have a very small loan portfolio, some 10 million pounds which is lent to customers secured on their portfolios.

Now the makeup of income on the investment management banking side is in three components. We have investment management fees. We have the margin we make on [inaudible] cash and we have commissions. And the balance from those three tends to vary depending on the market. So as you look at what’s happening in current volatile conditions, our fees are suffering because they’re related to the value of assets under management but we are benefiting quite significantly on the margins on the cash we hold and also on commission levels.

Overall taking those three together we last year got a return on funds around 80 basis points. That’s the order of magnitude, that’s not a precise number.

[Lee Matheson – KJ Harrison]

On the AFS securities line on the consolidated balance sheet how much of that is at trust versus parent?

Greg Henderson

Trust has about $140 million of that in basically government bonds and the rest of it is more or less items that AGF, the majority of which are invested in our own funds, [seed] capital, that kind of thing.

[Lee Matheson – KJ Harrison]

And looking at the OFSI report on the trust from July 31, it looks like the bulk of what you put as cash on the balance sheet; the OFSI qualifies as other debt securities. I’m just wondering on that book is there anything non-sovereign or anything that we should be worried about?

Greg Henderson

When you look at our statement of changes, we show the cash related to the trust company so if you look to—its right on the cash flow statement and right at the bottom we show the breakdown so there’s about $43 million--$43.8 million, that’s related to the funds business. The majority of that cash is in our foreign operations. But I can tell you its basically in short-term government securities and then on the trust side, Mario has his cash invested in--

Mario Causarano

We’ve got a lot of it into the big banks, the Royal, TD, Bank of Nova Scotia, and a little bit in some of the provinces.

[Lee Matheson – KJ Harrison]

I’m looking at your call report and its showing, on the trust company, $210 million in deposits with banks, $25 million in Canadian provincials and then its just showing other debt securities as $699 million, is that--?

Mario Causarano

That’s about right. That would be in a different period—basically into the banks fundamentally.

[Lee Matheson – KJ Harrison]

But is that mostly government--?

Mario Causarano

We’re raising funds from a liquidity perspective. We’re taking a portion of it and putting it into floating rate deposit notes to see if we can’t increase our spread a little bit. We’re keeping it there because at the end of the day we want to make sure we can get at from a liquidity perspective and we’ve raised a lot of cash to kind of make sure during this liquidity crunch that we have enough liquidity.

[Lee Matheson – KJ Harrison]

I just want to make sure that its not in anything terribly exotic? Its all pretty much government securities, the $699 of other debt at the trust company?

Mario Causarano

Most of it is all in government and banks.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Greg Henderson

Thank you for joining us on the call and I’d just like to say our next call will be our year end results which are scheduled for late in January, 2009 which will go over fiscal 2008 results. Again that you for joining us for the call.

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Source: AGF Management Limited F3Q08 (Qtr End 08/31/08) Earnings Call Transcript
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