IGM Financial's (IGIFF) CEO Jeff Carney on Q3 2017 Results - Earnings Call Transcript
IGM Financial Inc. (OTCPK:IGIFF) Q3 2017 Earnings Conference Call November 3, 2017 10:00 AM ET
Paul Hancock - Investor Relations
Jeff Carney - Chief Executive Officer
Barry McInerney - President and CEO of Mackenzie Investments
Kevin Regan - Executive Vice President and CFO of IGM Financial
Gary Ho - Desjardins Bank Capital
Geoff Kwan - RBC Capital Markets
Paul Holden - CIBC
Graham Ryding - TD Securities
Scott Chan - Canaccord Genuity
Stephen Boland - GMP Securities
Good afternoon, and welcome to the IGM Financial Third Quarter 2017 Earnings Results Call for Friday, November 3, 2017. Your host for today will be Mr. Paul Hancock. Please go ahead, Mr. Hancock.
Good morning, everyone, and welcome to the IGM Financial's 2017 third quarter earnings call. Joining me today on the call are Jeff Carney, President and CEO of Investors Group; and President and CEO of IGM Financial; Barry McInerney, President and CEO of Mackenzie Investments; and Kevin Regan, Executive Vice President and CFO of IGM Financial.
Before we get started, I'd like to draw your attention to our cautions related to forward-looking statements on Page 3 of our presentation. Non-IFRS financial measures used in this material are summarized for your reference on Page 4, and finally on Page 5 we provide a list of documents that are available to the public on our website related to the third quarter results of IGM Financial.
And with that I'll turn it over to Jeff, who will discuss key IGM developments in the quarter starting on Slide 7.
Thanks, Paul. I just want to warn everybody that I'm battling a bit of a flu, so if I cough everyone's [Indiscernible] conference, I apologize. I'm pleased to report that IGM experienced the highest level of third quarter net investment sales in the company's history with sales up $1 billion to $779 million compared to the same period last year. Results were driven by a strong momentum at both Investors Group and Mackenzie, which we'll discuss in more detail shortly.
We continue to enhance our operations, focusing on strengthening our industry-leading position and providing superior financial advice and investment solutions for our clients. Our recent announcement to form a single global investment organization by combining the investment management functions of Investors Group and Mackenzie will enable us to offer the very best capabilities to all of our clients, and give us the scale to meet the opportunities in the future.
And at the end of August, we announced that Mackenzie had finalized its acquisition of 13.9% interest in China Asset Management. We believe China Asset Management is the premier asset management firm in China and that this acquisition will give us distribution and product capabilities in the second-largest economy in the world. Barry will share more details on the new [Indiscernible] Mackenzie is launching that is sub-advised by China AMC a little later in the presentation.
Turning to Slide 8, on October 19, we announced the investment management functions of Investors Group and Mackenzie would combine under Mackenzie to form a single global investment management organization. This combined entity will strengthen our ability to deliver the very best investment solutions to clients and advisors by leveraging Mackenzie's boutique structure and common platform adopting best of great qualities of both organizations and pursuing greater efficiencies across IGM Financial.
Both companies will continue to offer unique and diverse products, maintaining separate product shelves and distribution capabilities. Under this new structure, Investors Group clients and consultants will gain access to a broader array of solutions and investment expertise, and Mackenzie distribution channels will have access to talent previously exclusive to Investors Group's channel.
I expect the growth in IGM's non-commission expenses in 2018 to be 5% after the efficiencies associated with combining our investment teams, as well as other business reengineering initiatives we are taking in 2018. I look forward to providing further details on our 2018 outlook at our Investor Day on November 28. Hopefully all of you can join us.
As I said on our Q2 call, there is a transformational change underway at our organization as we reengineer our business processes and operations to better serve our clients and achieve overall efficiencies. These changes will take time and investment will put us on a path to achieving operational excellence and reaching our longer term target of 3% expense growth within the next three years.
Slide 9 provides additional details on the combination of the two investment organizations. Starting at the top row, you can see the composition of IGM's total AUM by operating company, and that portion which is managed in-house or sub-advised. In the middle row is the previous in-house investment team structure by AUM, number of professionals and number of boutiques in the case of Mackenzie. You can see collectively Investors Group and Mackenzie had 123 professionals managing $121 billion in-house. The new combined investment organization now consists of 13 boutiques and 106 investment professionals managing $121 billion of our clients' assets.
Turning to Slide 10, this shows Mackenzie's 13 boutiques structure after combining the two organizations. You can see the addition of three boutiques from Investors Group, the European and international equity; the Asian equity; and Portfolio Solutions. Mackenzie's all cap value boutique combined with Investors Group's North American equity portfolio management form a larger boutique with broad capabilities and significant scale. This global investment management organization under Tony Elavia's leadership will enable us to deliver the very best capabilities to all of our clients and give us scale to meet the opportunities of the future.
I'll now turn it over to [Kevin Regan] to review IGM's financial results before I discuss Investors Group's performance.
Thank you, Jeff. IGM's third quarter results are presented starting on Slide 11. Net earnings were $173.4 million, or $0.72 a share compared to $197.6 million or $0.82 a share for the same period last year. Two noteworthy items negatively impacted earnings this quarter; a negative fair value adjustment of $12.7 million as a result of interest rate increases in the period which decreased the value of mortgages held prior to funding via sale or securitization to third parties; and secondly, a $7 million reduction in earnings which is IGM's proportionate share of Great-West Lifeco's reinsurance loss of $175 million after tax resulting from claims associated with Hurricanes Harvey, Irma, and Maria, which they announced last week.
On our previous call, I discussed our intention to put in place the new tax loss consolidation structure with the Power Corporation group to replace the arrangements with Power Financial that terminated during the second quarter. The new arrangement which is expected to provide an annual benefit of approximately $14 million and result in a tax rate of approximately 22% to 22.5% was put in place in October, not in Q3 as was previously signaled on the last call. Finally, yesterday the board declared a dividend of $0.5625 per share, maintaining the level of the dividend. This reflects a dividend yield of 5% based on yesterday's close of $44.94.
Turning to Slide 12, as Jeff mentioned, we experienced another quarter of strong momentum in our business. Average investment fund AUM rose 7.3% to $141.9 billion compared to the third quarter of 2016. Mutual fund gross sales of $4.1 billion were up 17.8% compared to the same period last year. This compares to an industry growth sales which were unchanged from last year. Total investment fund net sales of $780 million were up $1 billion compared to the same period last year, marking the all-time best Q3 results for IGM. This compared to a net sales decline for the industry relative to last year. Both Investors Group and Mackenzie delivered strong results in the quarter which Jeff and Barry will discuss shortly.
Slide 13 provides a brief review of the operating environment during the quarter. Industry net sales were down slightly from $6.2 billion in the third quarter of 2016 to $5.6 billion in the current quarter. Within the advice channel, net sales were up $1.1 billion relative to last year with the majority of the flows going to the income-producing category. Both Investors Group and Mackenzie significantly out-performed industry peers on both the gross and net sales bases in the quarter. Gross sales in the advice channel rose 2.2% excluding IGM, while IGM was up 17.8%. Net sales in the advice channel increased from $550 million last year to $1.6 billion this year, and 90% of this net sales improvement went to IGM.
So with that, I'll turn it over to Jeff to review the Investors Group results.
So please turn to Slide 15. Investors Group delivered another quarter of strong sales and business momentum, continuing the trend we set in the first half of last year. Mutual fund AUM increased to $85.2 billion, up 8% compared to Q3 2016. We delivered record-high Q3 gross sales of $2.1 billion, which was up 29% from Q3 2016. Mutual fund net sales of $287 million was the best Q3 since 2007, in addition to the strong sales momentum we are experiencing and strong asset retention with the noticeably lower redemption rates compared to the same period last year is helping our net story.
Also we continued to experience strong growth in our high net worth solutions with gross sales up 106%, driven by our managed solutions products which accounted for almost 70% of our long-term gross sales in the quarter.
Turning to the next slide, in my ongoing dialogue with our consultants, they are very engaged and excited about their future, and this heightened level of confidence is what's driving a lot of momentum in our business that you've seen. I've had a chance to get out in the field and visit a number of our offices and the passion and excitement in this company right now is unbelievable.
Gross sales reached an all-time high in the quarter and were up 29% compared to last year, outperforming the industry which was only up by 0.7%. Net sales of $287 million was the best Q3 result since 2007 and were up almost $500 million compared to last year.
Finally, we achieved these strong results with increasing asset retention as measured by our quarterly annualized redemption rate on long-term funds which declined to 7.9% from 8.5%.
On Slide 17, you could see the composition of our consultant network. We took further actions in the quarter to enhance the quality of our network by accelerating the departure of unproductive consultants in that 1 to 4 year band. We are focused on building strong consultant packages supported by teams of professionals, and we'll provide more details on our initiatives in this area at our upcoming Investor Day.
Turn to Slide 18. We continue to experience strong growth in our high net worth solutions with assets up 25% compared to Q3 2016 levels. Our broad and competitive product offering combined with superior financial advice has enabled us to grow this segment to almost half our total mutual fund AUM.
The next slide provides the sales view of our high net worth solutions. On the chart on the left, you can see that our gross sales into high net worth solutions have doubled over the last year and have been a significant contributor to the strong overall sales growth we're experiencing. I would also note in the chart at the bottom over 66% of our high net worth sales are in unbundled series with clients paying directly for advice outside of their MER. This is a strong testament to the competitiveness of our fees and our value proposition as this is our most fee-sensitive segment for this choosing and unbundled fee option.
Turning to Slide 20, from a product perspective we continued to experience strong growth in our management solutions products. These products captured over 70% of our long-term fund growth sales in the quarter, compared to 62% in Q3 2016 enabling our clients to get their very best professional advice and investment skills underneath this great outcome.
Turning to the next slide, key highlights of our insurance and mortgage businesses are presented here. Individual insurance sales decreased 41.5% compared to Q3 2016 which experienced an unusually high sales activity driven by tax rule changes previously. Our mortgage business volumes increased by 7% with a greater emphasis on our Solutions Banked All-in-One offer.
Turning to the next slide, Investors Group management and administration fee rate declined in the quarter, primarily due to a greater share of high net worth products as a component of our asset-base. The proportion of mutual fund AUM and high net worth series increased to 45% from 43% last quarter as we attracted assets from new and existing clients.
Finally, on Slide 23, you can see Investors Group's EBIT for the quarter of 180.9 million. The total revenue was down 1.1% compared to Q3 2016 due to the negative fair value adjustment in our mortgage operation which we discussed earlier. Non-commission expenses were up 8.6% relative to the third quarter of 2016. For the full year of 2017, I expect the increase in non-commission expenses at Investors Group to be below 6.5% which is unchanged from the guidance I provided last quarter.
For IGM overall, I continue to expect non-commission growth of approximately 7% for the full year of 2017. I expect the growth in IGM's non-commission expenses in 2018 to be closer to 5% after the efficiencies associated with combining our investment teams as well as other business reengineering initiatives we are taking. I look forward to providing further detail on our 2018 look at our Investor Day on November 28th.
As I said on our Q2 call, there is a transformational change underway at our organization and as we reengineer our business processes and operations to better serve our clients and achieve overall efficiencies. These changes will take time. Some of them are easier to do, and some of them are longer and more complicated to do, and that's going to take time to get all this achieved, but that's what we're going to share with you at the Investor Day, but this will give us a path to achieving operational excellence and reaching our longer-term target of 3% expense growth.
On that, I will turn it over to Barry to review Mackenzie's results.
Thank you, Jeff, and good morning, everyone. Turning to Slide 25, Mackenzie had another excellent quarter delivering significant sales and business momentum. Our investment fund net sales of 538 million represent our best third quarter results since 1999, an improvement of 583 million compared to last year. Mutual fund gross sales of 1.8 billion represent the best Q3 result in our history and were up 11% from Q3 2016. Mutual fund net sales of 304 million were up 374 million compared to a year ago, and our combined net sales rose to 876 million which included 338 million of institutional SME business in the quarter.
I'm very pleased to report Mackenzie's ranking in the 2017 Environics Advisor Perception Study moved up two places to third, further closing the gap on our target of being the number one ranked investments solution provider in Canada. This is a key metric for us given its correlation to future sales activity.
Our ETF business continued to experience strong growth in the quarter with AUM of approximately 910 million and has now surpassed 1 billion early in the fourth quarter. At the end of October, we're pleased to announce our AUM for ETF business is at 1.1 billion. ETF net creations during the third quarter were 286 million. In terms of product innovation, we recently announced the launch of three new products; the Mackenzie Global Sustainability & Impact Balanced Fund; the Mackenzie Global Leadership Impact Fund; and Mackenzie All China Equity Fund revised by China AMC. $526 million is Mackenzie's quarterly investment fund flow as along with historical trend of investment fund net sales and redemptions.
Mutual fund gross sales were up 11.4% relative to last year, with strong sales across a broad range of asset classes that by our core balance mandates. This was a very strong result given industry gross sales in the advice channel were up only 2.2% excluding IGM Financial. Total investment fund net sales were $538 million in the quarter, up $600 million compared to Q3 2016, and included mutual fund net sales of $304 million, an improvement of $374 million; ETF net creations of $286 million, including $52 million of investments by Mackenzie Mutual Funds.
The chart on our lower left illustrates the strong momentum of our investment fund net sales. September marked the fourth consecutive quarter of positive investment fund net sales with 12-months trailing approaching $2 million. We expect this momentum to continue given the high level of engagement and focus of the entire Mackenzie team. And finally, Mackenzie's adjusted redemption rate on long-term mutual funds declined to 13.8% compared to 14.3% in the prior quarter, and remained below peers'.
Slide 27 provides a breakdown of total mutual fund gross sales for the quarter. As you can see in the table, the 11% growth in gross sales was driven by broad-based strength in a variety of asset classes. We continue to capture share in the important balance fund category as our balance fund had gross sales in the quarter of almost $900 million with our core balance funds up 53%. In six of our eight core balance funds with assets over $500 million, are rated five star by Morningstar based on their F-class series, and these funds are driving our overall gross and net sales improvement.
Slide 28 provides the detail on Mackenzie's total net sales by category, and our overall net sales were $876 million in the quarter which is an improvement of $821 million compared to last year. Our mutual fund sales were up almost $400 million compared to Q3 2016, and were driven by the continued momentum in sales of our balance funds. In particular, core balance funds saw $189 million sales improvement -- net sales improvement compared to Q3 2016, and ETF net creations saw $286 million as previously mentioned which included $52 million invested by Mackenzie Mutual Funds during the third quarter.
And the institutional business had net sales of $338 million in the quarter. A momentum has continued into the fourth quarter with the recent announcement by National Bank that Mackenzie was awarded a $1 billion mandate for the National Bank fee and equity growth fund.
Turning to Slide 29, the annual Environics Advisor Perception Study results were released in the quarter which is a survey of approximately 300 -- sorry, 3,000 advisors across the country on industry trends and company performance. Mackenzie's score in 2017 was our highest on record, placing us in the top three firms in Canada compared to 11th when we embarked on our transformational journey in 2014. Our third place ranking puts us just on high fidelity and edge point. In the key categories of brand equity and sales penetration, we continue to enjoy number two ranking in brand equity, and our ranking in overall sales penetration moved up to second from third in 2016.
We set a goal early on to be the top three ranked firm in Canada based on the EPS ranking by 2019, and achieved our goal two years ahead of our schedule. I'm very, very proud of the commitment and hard work of our entire Mackenzie team of employees that transform our organization to put us where we are today. I want to thank them from the bottom of my heart. Our differentiated value proposition is clearly resonating with advisors and the clients. We continue to work hard to be the number one global investment solutions provider in Canada.
The next slide highlights three new innovative products that we recently launched early in Q4, two socially responsible mutual funds, Mackenzie Global Sustainability and Impact Balanced Fund which will focus -- which, sorry, will follow an approach to investing focusing on sustainable and responsible issuers; and Mackenzie Global Leadership Impact Fund which will invest in equity securities of companies that promote gender diversity and women leadership anywhere in the world. These products build upon our commitment to offering responsible products as a signatory of the United Nations Principles of Responsible Investing. The third fund we launched was a mutual fund offered in Canada that will allow advisors and their clients to access China AMC's investment capabilities. Mackenzie All China Equity Fund is a very unique fund allowing investors to have a very broad exposure into the Chinese economy and stock market with A shares in Shanghai direct Asia exposure in Shanghai and Shenzhen; A shares in Hong Kong; and ADRs. We're excited about these cross-distribution opportunities with China AMC and are working on opportunities for Mackenzie to distribute in China making very good progress and I'll update you as things develop further. And I did recently return from China where I attended my first China AMC board meeting, and I must say that China AMC is very excited to be working with Mackenzie and IGM and Power. They're executing on their multi-channel distribution strategy and executing on it very well. And the board approved an annual dividend of which our proportionate share will be roughly CAD 10 million.
Turning to Slide 31, you can see the strong organic growth our ETF business has delivered over the past year. AUM reached approximately $910 million at the end of the third quarter. In Q3 Mackenzie was ranked second in net creations of active Smart Beta ETFs in Canada. As I mentioned earlier, we now are over the $1 billion mark and just touched $1.1 billion at the end of October. It really was only a year ago that we officially launched Mackenzie ETF business with our cross country advisor road show. So the response since then has been very, very overwhelming for both advisors and clients and we look forward to more exciting announcements on innovative products and structures that will continue to differentiate Mackenzie's ETF offering in the marketplace.
Slide 32 shows Mackenzie's mutual fund quartile and Morningstar rakings at the end of the quarter. Mackenzie continued to deliver investment performance in Q3 with 59% of our assets ranked above median in the one year period and 72% in the 10-year period.
Turning to Slide 33, the flows in investment performance of our 10 internal investment teams along with the third party managers are shown on the slide. The color bars in the top chart represent Morningstar rankings with green representing the proportion of assts in each team with a Morningstar rating of four or five stars. You can see that we have a strong performance across all the teams. And the bottom chart will illustrate the net sales momentum in each of the teams over the past year. I'd like to point out that Cundill's redemption rate on the far left continues to decline in large part due to the great work that Cundill team has done in educating advisors on investment process and improving performance over last year to 8th percentile.
Slide 34 shows our net revenue rate expressed as a function of average total AUM. This rate fluctuates with changes in the mix of our assets under management including asset class and client composition which is amplified due to the decline of the U.S. dollar in the late Q2 and into Q3. We had a large client come in towards the end of Q2, a $2 billion mandate awarded to us by IG which we previously had announced, and a continued growth of our high net worth business which were in total the primary drivers of the decline in 2017 of this metric.
And finally turning to Slide 35, you can see Mackenzie's earnings before interest and tax is $45.3 million was relatively in line with Q2 in the prior year. Earnings were up 3.4% from last year excluding net investment income, which consists of the return on C capital. Net revenue was up 3.5% relative to last year and I reviewed the change in net revenue rate changes in the [indiscernible] business, the last slide [indiscernible], and non-commission expenses in the quarter increased 3.6% compared to the third quarter of last year.
On our Q2 earnings call I discussed the impact of higher incentive-based compensation on our non-commission expenses. I continue to anticipate higher sales bonuses could add 2 to 3 percentage points to our non-commission expense guidance this year as our net sales are tracking well above expectation and will likely end the year over $2 billion. Consistent with my guidance from the last quarter, 2017 non-commission expenses will be approximately 8% higher compared to 2016.
And we added new silo on Slide 36 to give you more perspective on the impact of performance-based bonuses and providing more detail on the drivers of our non-commission expense. This chart characterizes the non-commission expenses in the variable component such as incentive compensation and some advisory fees, and each of those that tend to be more fixed in nature such as base compensation and non-compensation related items.
You can see that the variable components of our expense base, primarily performance-based incentive compensation are up 20% this year compared to the same period of 2016. This is due again to Mackenzie' investment fund net sales significantly exceeding expectations. The chart also illustrates we have been managing our core cost base prudently as expense growth is up just over 1% -- 1 percentage point in the base compensation and non-compensation categories year-to-date compared to last year.
Now I'll turn it back to Paul who have a few words about our upcoming Investor Day.
Thank you, Barry. On Slide 37 we had just a reminder that IGM Financial will be holding an Investor Day on November 28th. Invitations were sent out this week, so please RSVP no later than November 10th using the link provided in the invitation. If you haven't received an imitation, please go to igmfinancial.com where you'll be able to click on a link and request an invitation.
And with that I'll now turn the call back over to the operator to start the Q&A session. Operator?
[Operator Instructions] The first question is from Gary Ho from Desjardins Bank Capital.
Thanks for the additional color on the non-commission expense guidance. That's really helpful. Maybe we can dig into that further. So where do you see the biggest opportunity and what are the risks of not achieving this 5% target with equity much higher sales rate in 2018 push this target higher or whatnot?
Hi Gary, it's a good question. So again we set our targets every year and based on trajectory of where we think things are going to occur for the current year based on last year. So obviously again we have projected for 2017 a strong momentum in our sales, which we have started to experience toward the latter part of 2016, but again we far exceeded those expectations and therefore the incentive payouts were higher. And we do pay those upfront, we do not capitalize those. So for next year we'll recalibrate for 2018, we'll recalibrate our targets and obviously it will be higher because the trajectory is very steep, we're very pleased about. So we'll have to recognize the fact that higher targets for next year will mean that you won't have this incident of higher incentive payouts if we hit the higher target, but we will if we exceed that higher target. And so that's how we look at it each and every year. So I wouldn't really call it a risk per se. I mean if we set a higher target next year and we hit the target, then of course our expenses won't be as high, but if we exceed that higher target, I think we'll all be very pleased once again pay out this higher incentive payments to our terrific sales force.
And we'll disclose it to make sure there's clarity through the audience that's interested in this, so.
Yes. Thank you.
Yes, no, that's what I'm trying to get at, like the 5% of what are you assuming in your sales targets so we can gauge when that might tick up or tick down?
You mean -- well, we haven't said next year, so you mean this year or..
No, the 5% that you guys talked about for 2018 for non-commission expense, I'm assuming that assumes certain sales level?
Yes, like what would that be so we can kind of gauge when that might go up to 6% or whatnot?
Well, the specific number, but it's obviously a continuation of our growth trend. So again we're going to be over 2 billion looks like in terms of net sales this year, but the 2017, much higher than what we expected and much, much higher than 2016. So we're going to project that continuation of that trend, that's what we normally do to take the trend, push into 2018 and we'll set our target.
And then just going back to what you're guiding for 2017, Barry, there are 8%, but I'm seeing 5.7% growth year-to-date, so I suggest a pretty material jump in Q4, am I reading that correctly?
You are reading it correctly. We do have some back-end expenses coming through in Q4, so we're still comfortable with our forecast of 8% for annual year-over-year expense growth.
And then maybe more of a kind of reporting question, after this merging of the investment function, how will the expenses -- would move from IG to Mackenzie or how should I model that out?
Yes, we're still working on all the sort of basic details on that. The principle is [indiscernible] between and then IGM level obviously on that, but we will provide some perspective on that as we kind of nail down the way we're going to be showing the cost.
And then maybe just lastly for Barry again, can you talk about the drop in China AMC's AUM and what caused that and can you give us an update on your near-term outlook there?
Yes. Yes, no problem at all. So we did want to first resolve that an AUM figure in June 2016 did drop a little bit because the work with China AMC and their parent companies, so the securities, just terrific partners by the way, but for competitive reasons they've requested that we don't disclose their subsidiary AUM, so just want to indicate why there was a drop when we previously disclosed in June of 2016. Now their AUM June of 2017 was down compared to year-over-year, and I'm not sure we mentioned this a couple of quarters ago, but there was a significant outflow in money market assets in the entire Chinese industry the last quarter of 2016, which leaked into 2017.
There was a change in interest rate structure, a very dramatic change in interest rate structure where investors obviously could get -- garner a higher rate of [Indiscernible] money market [Indiscernible] within, and so that results in considerable outflows and CMC experienced that themselves.
And so probably a little bit more on average because they had a large number of institutional clients, which actually is good because that creates more a foundational client-base for them versus the retail side, but they have a healthy blend between institutional and retail. So that was the main reason why the AUM was down. Also they had a really strong last year in creating -- in garnering new institutional mandates, that was just a unbelievable year, so that slowed down a little bit this year. There's been a little bit China of watching capital outflows and focusing on deleveraging, and as you know also the National Party Congress just finished their meeting, they meet every five years, so there's a little bit of uncertainty, but that's over with and they confirmed all their economic policies are continuing as planned in terms of moving towards an open-market system.
So what you'll see is -- I think we mentioned before is the high growth industry in China, but you're getting some volatility sometimes quarter-to-quarter, sometimes even year-to-year, so this year was a little soft for the industry in CMC. Having said that, they have -- having said that, their AUM is just picking up nicely towards the last part of 2017, so we'll share that with you in the year, so we're very pleased with their executing on strategy, the long-term mutual funds are growing, the money market actually which had a big decline has started to come back again this quarter and into Q4. So you're just going to see that volatility going up and down, but more than you're probably used to as a Canadian or U.S. manager.
And the dividend payment, is that coming in Q4, is that Q1?
That will be in Q4, yes.
The next question is from Geoff Kwan from RBC Capital Markets.
My first question was for Jeff. You talked about on prior calls and talked about again this call about the target for getting to 3% expense growth, and I just wanted to confirm when you talk about some of the potential additional changes as you take a kind of maybe a closer look at the organization across board, but obviously now with your role as the sole head of IGM as well IG, those potential changes that we may see coming down the road, that's factored into 3% or if you do these additional things that could actually impact that 3% further?
No, that would be in the 3% target, and the biggest and what's going to take the longest to sort of execute is the reengineering of our operation and that's really with the Mike Dibden who is our COO, so if you ask me that's -- that structural change and it's investing in technology to take longer to get there, so we're obviously -- it's a step change in all of our operations, but [Indiscernible] that's going to take the longest, it's going to be with Mr. Dibden. We'll go through that story on Investor Day.
And then just the other question I had was I know you mentioned you'll give us some insight later in terms of the allocation on the impact of merging the investment teams and how you allocate those expenses, but just more from a -- more of a consolidated perspective on the non-commission expense at your business and also take into effect the merging of the investment teams, like what is that rough split between let's call it your asset management part of your business which will include I guess the distribution side at IG versus a non-asset management stuff like the insurance distribution and whatnot?
Yes, we have $150 billion, we outsource about $20 billion, so then we've got about $130 billion of managed assets in the organization, and there's actually not that -- they're almost the same, really they started -- not that it changed, they started -- played out that way, but -- so the assets on both sides of the organization are almost similar, and again we will share more of this at the Investor Day, but we're working through how we're going to allocate it, but we probably are going to be making more of a expense allocation started in the way they were going to approach it and the P&L should not change dramatically as a result of that.
I guess maybe if I ask another way is if I take a look year-to-date, you've got about $730 million in non-commission expense that you booked, like how much of that would you notionally allocate to the asset management part of your business, is it -- because it would clearly be the biggest part of the expense-base, like is it a number north of 80% or?
Yes, the vast majority is -- it's sure hard to say, well, how many dollars are in insurance, how many dollars in mortgages in terms of non-commission expense, there's relatively few there strictly focused on those aspects of the business and we view those businesses obviously complementary to the asset management business, so I think I know where you're kind of going on this, but we don't kind of manage those goals distinctly and separately, I don't think the mortgage businesses is other than managing the revenues, we have people to administer, they have other jobs, they're deeply integrated in the asset management side, so we actually don't bifurcate the expenses the way you're kind of going in our -- way you run the place, but the vast majority would be asset management-oriented with a really thin sliver being distinct to those other lines.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead, thank you.
So with Mackenzie managing more of the product for Investors Group now, would you anticipate any changes in the MERs for impacted funds? And I'm not talking about the management fee, more the ER itself.
No, we're comfortable with our pricing and we're competitive with marketplace, we monitor all the developments on an ongoing basis, but we do then go where we are.
And in terms of the growth and net sales that you're seeing Investors Group which is very impressive considering the delta in the number of consultants year-over-year, would you say you're getting most of this new money from existing clients or is it coming from new clients?
Both. I mean, we're seeing tremendous growth in new clients. The confidence level as they said is gone up and the tools that we provided to new products and new operations that we've been able to bring in more money, it's exciting to see. I mean, the amount of third party assets that are coming in is -- we'll share it on Investor Day, but it's almost unbelievable how much we're bringing in, in our new IROC platform and obviously that's an opportunity for us to convert that into longer term stabilized products that we have that will expose clients to probably better outcomes over time. So it's really a combination of things that have been built in the last couple of years to enable all of this, and then the work that the distribution leadership team has done in training our people and getting them ready for being able to sell these more sophisticated clients' needs, but that -- it's really confidence that's driving a lot of the change and confidence in the advisors and they just -- I think the DSC was holding them back and by eliminating that DSC, we've seen that they've found that they can actually go out there and find very large clients and also retain them because of the value proposition we have now and the products that we have and our high net worth pricing and their new solutions and everything else that we've built. And we've got more coming and now with this integration with Mackenzie, this really was done to help make sure that all of our clients, our million clients that Investors Group get the very best investment capabilities and with Mackenzie's transition that's happened over the last 4 years, we are as competitive and as skilled as anybody in the industry and it's all enabling us to -- for our long term goal which is I said right from the day I got here is that we have to beat the banks and we're seeing that we're growing faster than the banks right now in certain areas of our assets, and so that's really encouraging and long term we need to take share from the banks for us to achieve the size of the company we want to be.
And that shoots right to my next question. So would you say that these high net worth clients that you're gaining today in the past would have been more suited say for the bank channel and when I say bank channel I mean more like the branch channel, or do you think they would have been going more to the full service broker channel, like where are you gaining share?
Well, I mean if they go -- already plan to go to the bank channel, they would have gone to the bank channel. They chose us because of our value proposition. We have been as consistent on that value proposition, so we hired a lot of advisors, and as you know we've changed our model now to quality over quantity, and -- but the quality that we have is -- and these are people that have been doing this for a decade or longer, 20 years, are serving those clients. We just didn't have the consistency of that over everybody. So now we've made the [Technical Difficulty]. We've reduced thousands of consultants and raised the bar by making sure that everybody has the skill set to deliver to our clients which has been extremely well received by the teams. So -- and then again a lot of this is leadership too and Mark Kinzel and his team have just done an outstanding job right from the day we announced the DSC change. There's been other things that we've been doing internally that we can share with you in the Investor Day that have driven this. But it's the skill sets going up and our craft is going up, and then we're -- as we said CFP is mandatory which is great, but we've actually -- you're building an education layer above the CFP because we think that our core value proposition and competitive advantage is we have the best advisors and they're the best at tax, they're the best at small business, they're the best at complex situations for families and what they're trying to achieve and we've been doing that for probably lower asset clients and now we're doing it now for very high-level clients, so are sophisticated and they're looking for our skills to navigate the changing world at tax and estate planning and all those things get -- are very complex, wills, all of those things that we're good at, are what the market needs, and that's why high net worth is such a great place for us because we have all those skills, we just didn't have the confidence to go after it and now we do.
And then maybe a question or two for Barry, when you think about the improvement in your sales, both gross and net at Mackenzie, is there any kind of color you can provide by where that's coming from in terms of distribution channel, whether that's full service broker, MFDA planners or maybe affiliated companies?
Yes, what we're very encouraged by is it's just so broad-based and that's important because it's not one channel or it's one or two products, it's really broad-based. Just a high level comment, again like a combination of just a very strong sales team. Productivity is improving because we had a younger team with the transformation, and so they've obviously spent the last 18-24 months learning the products and solutions and learn their territories, so the productivity gains you can see coming through. It is broad-based by again the asset classes which we're really pleased with, we have our alternative funds doing well, USFD funds doing well, principally still driven by the balance which is the deepest pool, so we're happy about that.
And it's IROC and FDA, both are F-series mutual funds have really grown I think about almost approaching half our sales now in the F-series, so we know that we're doing better in that area. MFDA has always been a very, very strong area for Mackenzie, continues to be a very important segment for us. It's National Tobacco is just incredibly strong for us right now. It has been a softer province for us in the past. And I guess what we really take an EPS study at heart because basically that's asking across the country 3,000 how we're doing, and they give us marks on 10 categories from inside sales to external wholesalers to brand to client service to investment performance, everything. And so we take that to heart, we study it and as we would say, we are proving something coming in each and every year and we're top three right now. So that's a validation of the fact that our strategy is working. Damon Murchison on the -- Head of our Retail Sales, unbelievable; Chris Well on the institutional side; we've got amazing leaders. We are tracking the best talent in the country and we're just very pleased, but we're head down, we're head down, working hard and trying to do the best work we can each and every day for our investors, advisors and clients.
And then on the institutional side also seeing a swing in direction there with some new winds coming recently, is that more due to maybe the improvement in fund performance or is it the distribution efforts you made or quite simply maybe the combination of the two?
Yes, probably a combination of the two. I mean, the intuitional retail growths, you do have to approach them differently at times, and so I think we've done a lot of good work. We've been obviously very strong retail side Mackenzie, you see that with the numbers coming through. Institutional, that's part of my background as well, institutional. It's something we've worked on for the last couple of years, and so I think we're understanding the market better, we're understanding a better way to articulate our value proposition and the strategies that prepare the -- by certain number of strategies I think would be of high interest to institutional role, both advisory as well as direct to institutional investors. So that's been a driving force to it. And also again our ETF business, we go to the marketplace now with a very solutions orientation, we've got great capabilities, how you want to access them, bundles on bundles, mutual funds, ETFs. We're starting to see market share gains each institutional, yes, because again we launched it, we want it to be business, we want to make sure it's operational, working well, we launched very differentiated products, the smart beta and active and it's really taking off.
And we focused principally interestingly on the IROC channel, but what we're seeing, we're seeing closed now even of the ETFs across the board both retail and institutional. So very, very pleased in that party we've built from scratch and to give for Jeff and the team full credit for deciding, okay, build or buy, we're building it and we built it, and it's just -- we're just so excited by it. You'll see a lot more for ETF business going forward. But again it's important to note that it's ETF mutual funds together, it's investment funds, we hit the market place with the solutions orientation and that seems to resonate with advisors and institutional investors.
The next question is from Graham Ryding from TD Securities.
Maybe, Barry, I'll just start with you with a couple of questions. Just can you elaborate, you've made some reference to institutional wins, but I didn't catch it all, could you just provide some detail on what those wins are?
Yes, so again it was -- National Bank announced themselves a few weeks ago that they've awarded us $1 billion dollar mandate to some advice to their Canadian equity growth fund. So those assets are coming through the funds as we speak, so that was a nice large win. We classify institutional as sub-advisory and then obviously we'd like to be sub-advisory of mandates of our platforms, mostly essential institutions. So we're seeing a lot of estimated growth in terms of some advisory, which would be constitutional, the National Bank you just saw awarded.
As you know we're managing more and more money for IG, and before the announcement of the combining of the investment teams of IG and Mackenzie, IG worked as a large -- managed a $2 billion mandate end of June that we're managing for them. And so -- and the pipeline is strong, so it's really even that is quite broad-based because the SMA channels for us across Canada are doing fine. The direct institutional we're getting some traction with one large European pension plan mandate last year. We won one in U.S. last quarter, international small cap mandate which was a prominent U.S. public pension plan. That was good. And the work we're going to be doing now we're trying to AMC, we would probably classify that as more institutional because of the sub-advising for their funds that they don't distribute on our behalf as well as the introduction it's already making into their large 400-plus institutional clientele across China where we have been having initial discussions with some of them to see if there's some advisory work that we can do.
So what you'll see going forward, institutionally you'll see again the traditional intuitional would be to continually focus on Canada, we're selectively though looking for opportunities in U.S. and Europe, now we're going to have China that would be principally focused in part through China AMC although we have registered with regulatory authorities in China open up our own representative office Mackenzie, Beijing, and that will approved soon and we're going to be hiring a terrific representative for us in China for Mackenzie again working partially of China AMC. So you'll see more geographic expansion of institutional business, but the -- they're critical AUM scale for us, which has been strong this year, institutional has been the sub-advisory on the financial institutions in the banks across Canada.
The integration of the investment management teams with Investors Group, does that mean that Mackenzie products are going to become more accessible to Investors Group consultants or should we think of the products with Investors Group remaining relatively unchanged?
No, I mean a big piece of why we did this was to get access to Mackenzie boutiques to bring more products to Investors Group and we also wanted to bring exclusive products to Investors Group. That's a big part of their competitive advantage in the marketplace and Barry's team will be instructing those products for us.
And then you mentioned third-party assets Investors Group are increasing. Is that a number that you break out or you'd be willing to break out?
Yes, we don't give the detail necessary, but a big part of what's been changing as well is the value profile, one of our bigger products has a number of sub-advisors, which you could redevelop in the public domain. You've seen a pretty substantial increase in the utilization of that and so you're seeing a bit of that drying up.
But that is captured within your Investors Group AUM?
Yes, it is.
And then just lastly, Investors Group, your consultant network continues to decline somewhat. Any color on where you see that settling or is it a still fluid situation?
Yes, we're continuing to monitor it, but it's -- we're still sort of cleaning up the past a little bit, and I can tell you that the new recruits that we brought in, so we are recruiting, that the growth rate of the new recruits is so large increased over past -- you don't believe it, but it's probably like 250% to 300% higher than our previous recruits. And so this whole idea of quality over quantity is playing out nicely. It's early days for these folks. So -- but it's great to see that they're off to such a strong start, and we're giving them more resources when they come in and they're giving better training when they come in and so by not having so many to train and we can really focus in on making sure these folks that come in get a great start and get the right ground in learning the education that they need to be successful.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead, thank you.
Start with Jeff just on the Investors Group side, so you talked about the combined entity managing $130 billion out of $150 billion, and third party at $20 billion. If I look at medium term, do you see that proportion staying the same, or do you expect more third party to get access to maybe unaccessible products that you guys manufacture right now like alternatives and differentiated ETFs?
I mean, we have -- we're in an ecosystem what's being part of Power, so we obviously partner with them until we've got everything from Irish Life to partner them to Great-West and others, and so we always look at our capabilities and then we look at what our Power capabilities are and then obviously look outside. If we see something where we have a gap in building portfolio construction and diversify portfolios to our clients, then we're going to go find it. And we're always looking and Todd Asman, Head of Products does a great job on that. So I think you'll see it's continued to look outside as well, but it's great to have obviously the resources now from Mackenzie easier to access for Investors Group and certainly we'll take advantage of that.
I know it's early, but any big [indiscernible] you see right now in terms of potential products that you want on there?
I mean, alternatives are an exchange base and so we've -- Mackenzie is starting to go down that path, so we'll certainty look at what they've built already. And then we will monitor the marketplace and I could say Todd Asman is always doing due diligence with his team on new areas we can go into. So I think you'll see us bring in some new capabilities. I think we need in its good break for the advisors, it's good to have brands because consumers will know the names of some of the bigger players. So we usually look for big brands out there and then obviously capabilities where we don't have that skill set. And so that would be another lens we would look through. So I do think you'll see us continue to look at that and use third party, and it's a good -- it's a great story for I think two things that are really important for our field is that exclusivity, so giving them exclusive products for Mackenzie and then sort of outsourcing with great brands and great capabilities and give that money really wisely because it is expensive to outsource and so we have to watch that as well, but if it's a great capability that's going to help our clients, we're going to go after it.
And maybe just switching gears just on the mortgage growth that Investors Group goes up year-over-year, can you quantify or give any early indications of what each one is just in terms of some of the new standards could impact the growth from that platform in 2018?
We've historically run our mortgage business relatively conservatively would be how I would describe it. Many of the changes that are going on in the industry, and I'll generalize the items to make consumers little more vary as they bring on debt requirements in terms of sort of the style of mortgage you put in place, refinances versus new business, the insurance sort of aspect, all the various regulatory and structural changes that are occurring, I don't necessarily see those negatively affecting our approach to mortgages. When you're in -- when you're a financial planning organization, you've got to get your hands on the biggest asset and the biggest liability of your consumer. That's their house on the asset side and the mortgage that's related to it. You want to make sure you have an understanding of that, and we want to be able to offer products that suits people. But through our partnership with National Bank, through our ability on our own balance sheet through temporary financing while we grant the permanent structures, none of that really changes. It's a little tougher than it was in the past for sure, but we're not about to abandon this dimension of the business. So it would be my general summarization.
And then maybe just one question for Barry. When I think about the ETF platform, you've got strong organic growth here, you're launching new products, you've got 11 right now. If I think about medium term, like how scalable do you want this, like does an acquisition make sense in that space? You've -- we've kind of seen a bit in the last little while and how aggressive do you get on new ETF like internal launches? Do we expect more over the next couple of years?
Yes, no, first of all, yes, we're going to continue to launch a lot more ETFs in the future, all going to be organic, and we've made that decision, we're very comfortable with it. The model compares with other models, but when you look at the fact that first of all it's organic play, second of all, we have a broad array even now a broader array of investment capabilities now with the combination of IG Mackenzie. So we have in-house manufacturing, we don't have to outsource manufacturing. So that allows us to capture the economics there.
We leverage our existing distribution into the marketplace both retail and institutional although we have a cadre of ETF specialists that are pulled in to ensure that the advisors institutional investors are understanding of the specifics nuances of ETFs. We've leveraged the operational platform already having [indiscernible]. So it's all really in place and so we're just going to just keep building it organically, but that's a good starting point because again if you don't have the in-house manufacturing and for the in-house distribution obviously the 50-year history of knowing Canada very well, you are starting from a disadvantage and so we think we have a competitive advantage in doing so organically. And for the name of the game, you'll see a lot more ETFs launched obviously just like we're going to be doing for our own channel Mackenzie, we now at Mackenzie are here to provide IG whatever exclusive solutions or products they need. So we'll do that for them. And that allows us to create scale quicker, and we'll just move on from there. So it's barely over a year, so early days, but very good early days, but you're going to see in Canada like you saw in the U.S., like you'll see continued growth in mutual funds and you'll see probably a faster growth in ETF, and you also start to see them being used in combination, it's all building blocks, and that's how we view it. These are building blocks solutions for all of our channels, but more coming, all organic and we're leveraging the existing capability at Mackenzie and IGM broadly.
So acquisition probably not in the near term, just organic focus?
[Operator Instructions] The next question is from Stephen Boland from GMP Securities. Please go ahead.
Jeff, will you just quickly talk about that 10 million of savings? I know a number of investment professionals and [indiscernible], is that the bulk of the 10 million is salaries and benefits or is there other things that's included in that $10 million like custodial transfer agency?
That would be the bulk of it, yes.
And again not to put you on the spot because I mean I know you came in, in 2013, but I guess for those of us who marketed over the years to both locations, I mean why now and maybe why hasn't this been done earlier?
Well, it's funny you say that because when we announced it to our advisors across the country, they said what took you so long, it's the same thing, but we had a short services model, we had two CEOs. Sometimes you get sort of set in your model it just feels like it's normal course, and so I went to Jeff and said it's probably time that we do something different area and Barry had arrived and he's got all these great skills that he brings from his U.S. experience and his long tenure in this industry. And so it was just obvious that this was the right thing to do for IGM, and this is history lends that I've been talking about for the last nine months that we're looking to everything we're doing here through IGM, and this was just a great example of that. This is a win for the shareholders, it's a win for our clients, it's a win for our advisors, it's a win for our company and we will continue to look for everything we can within IGM to scale.
So I guess it begs the question when I look at your Slide 22 in terms of your basis point decline in 1 year, it's 4 basis points, not material on a 200 basis point average rate, but if that's the rate that you continue to see and I know some of its offset by commission, where else can you find $10 million buckets of expense savings?
So back to -- thanks for that question, that's back to Investor Day and walking through it, but I don't think in terms of that it's going to be coming out of the operation and digitization and reengineering our back office which will take longer, right, some of these things like this, you just make the decision, you work with your board and you make the call and you execute. This one is faster, but there'll be ones that will take one to three to five years to get done, to get you where we want to be in our end-state. And -- but there is a lot of opportunities in there.
Is that talking just for IG or combining other entity -- other parts of your business?
Unidentified Company Representative
I think if I could add also our investment platform, now the combined platform, it's large, it's scaled, no capacity constraints at all. We have a lot room for growth. So again, as you put more and more [Indiscernible] IGM is growing very nicely. So the more assets you put onto that platform and not require anymore investments because 106 professionals and we're really feeling good about 13 boutiques, and of course that's another margin accretive exercise.
Unidentified Company Representative
Yes, we have lots of operating leverage.
There are no further questions registered at this time. So I would now like to turn the meeting over to Mr. Hancock.
I'm going to close out the meeting today and I want to thank everybody participating in this call. I want you to know that Barry and I truly believe that our best is yet to come, that there's a lot of future announcements that we'll be making that will continue to transform our company, and that we're playing offense, not defense, that we're out to compete and we have the resources to do it. We have a board that's backing us. They've built confidence in our ability to execute because of some of the things that have been going on, and we're dominating the advice channel and we're competing directly with the banks and we're winning. And we haven't even finished what we started. So we look forward to sharing more of those things as we move forward and we really appreciate your questions today and your time. Thank you very much.
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.
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