IGM Financial Inc. (IGIFF) CEO Jeff Carney on Q1 2019 Results - Earnings Call Transcript

About: IGM Financial Inc. (IGIFF)
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Earning Call Audio

IGM Financial Inc. (OTCPK:IGIFF) Q1 2019 Earnings Conference Call May 3, 2019 2:30 PM ET

Company Participants

Keith Potter - Treasurer and Head of Investor Relations

Jeff Carney - President and Chief Executive Officer

Barry McInerney - President and CEO, Mackenzie Investments

Luke Gould - EVP and CFO, IGM Financial

Conference Call Participants

Geoff Kwan - RBC Capital Markets

Paul Holden - CIBC

Graham Ryding - TD Securities

Tom Mackinnon - BMO Capital

Scott Chan - Canaccord Genuity


Please stand by. Your meeting is ready to begin. Please be advised that this conference call is being recorded. Good afternoon, and welcome to the IGM Financial First Quarter 2019 Earnings Result Call for Friday, May 3, 2019. Your host for today will be Mr. Keith Potter. Please go hard, Mr. Potter.

Keith Potter

Thank you, Patrick. Good afternoon. I am Keith Potter, Treasurer and Head of Investor Relations. And welcome, everyone, to IGM Financial's 2019 First Quarter Earnings Call. Joining me today are Jeff Carney, President and CEO of IG Wealth Management and President and CEO of IGM Financial; we have Barry McInerney, President and CEO of Mackenzie Investments; and Luke Gould, Executive Vice President and CFO of IGM Financial.

Before we get started, I'd like to draw your attention to our cautions concerning forward-looking statements on Slide 3 of the presentation. Slide 4 summarizes non-IFRS financial measures used in this material. On Slide 5, we provide a list of documents that are available to the public on our website related to the first quarter results for IGM Financial.

And with that, I'll turn it over to Jeff Carney, who will review IGM's 2019 first quarter results starting on Slide 7.

Jeff Carney

Thank you, Keith. We finished the first quarter with record quarter and total AUM of $160.5 billion. This 7.6% increase during the quarter was driven by significant investment returns earned by our clients. Assets grew an additional 1.9% during April to $163.5 billion. In an environment where investors' confidence and industry sales continue to be weak following Q4 '18 volatility, IGM Financial posted investment fund net sales of $260 million.

IGM Financial's earnings per share was $0.70 for Q1 2019. I would remind you that Q1 is seasonally a higher quarter for non-commission expenses. I would also highlight that we had some increased expenses this quarter associated with technology initiatives and IG Wealth Management's brand re-launch. We remain committed to investing in the organic growth strategies of our operating companies while controlling our non-commission expense growth to just 4% for full year 2019.

Consistent with our approach to capital allocation, we've executed a number of capital transactions and investments this year. In January 2019, we made an additional investment of $50 million into Personal Capital and now have 25% equity interest in the company. We are quite excited about the prospects for this company, and I will highlight some new information on coming slides.

Luke will go through the capital management initiative in his remarks. Slide 8 highlights the performance of various indices and currencies. Since Q4, our clients have earned significant investment returns of 7.5% for Q1 and 9.8% year-to-date as all major equity markets experienced strong gains. To the end of April, the Q4 of 2018 market declines have totally recovered and pushed through last year's all-time high.

Turning to Slide 9. Despite strong markets in Q1, investors' confidence remained low. The mutual fund industry ended the quarter with long-term fund net sales of $4.7 billion, down $7.3 billion from Q1 2018. For 12 months ending March 31, long-term mutual funds were in net redemptions, and we're seeing significant flows into term deposits.

We're working with our clients and Canadians to ensure that they are focused on their financial plans and continue to invest accordingly during these periods of market volatility. With improved equity market and investor confidence, we expect net sales rates will return to approximately 2% to 3% in line with historical experience and long-term saving rates.

Industry ETF net creations were also down year-over-year. Turning to Slide 10 of our results. Investment fund net sales of $260 million are down from net sales of $1.4 billion in Q1 2018 driven by a slower RSP season. Net earnings of $168 million were below 160 -- $186 million for Q1 of last year. And as I mentioned, Q1 earnings per share were $0.70. On Slide 11, we show the segmented results for your reference.

I would like to take a few minutes to discuss Personal Capital, a key component of IGM's fintech investments, which also includes Portag3 and WealthSimple. Personal Capital is a market-leading digital wealth adviser platform in the U.S. that offers investors financial planning and fee-based wealth management services.

In January, because of the confidence we have in the long-term growth prospects for Personal Capital, we increased our voting and equity interest to 22.7% and 25.2%, respectively, by investing another $50 million into the company. We are the largest shareholder. The company was founded by Bill Harris, former CEO of Intuit and PayPal, and has a unique business model.

As you can see in Items 1, 2 and 3 on the slide, the company provides online account tracking software along with analytical tools and financial planning software to investors for free. The tracking software consolidates the clients' information across all financial institutions they deal with for a complete view of their financial affairs.

Personal Capital already has 2.1 million registered users and tracks account values that exceed $700 billion. In Step 4, Personal Capital then segments users and offers a fee-based investment management products and services. This includes digital access to financial advisers who provide a wide range of advice depending on the needs and investment assets of the clients. The company currently has $9.2 billion in assets under management with new client account sizes averaging $450,000.

Turning to Slide 13. IGM made its first investment in May of 2016 and has seen tremendous growth of Personal Capital's AUM, which experienced a 54% compound annual growth rate since December 2016 and 18% in Q1 '18 alone. This story is similar on the tracked account values with a 43% compound annual growth rate since December of 2016.

For IGM, we see this as a long-term U.S. growth opportunity in wealth management. We will continue to monitor the performance of the business, support strategic directions direct to our board seats, and we'll continue to assess the potential for additional future investments. Luke will speak to the financial impacts in his remarks.

Turning to IG Wealth Management Q1 highlights on Slide 15. IG saw the highest quarter end AUM on record of $89.4 billion, up 75 -- 7.5% from Q4 2018. This was driven largely by strong investment returns for our clients.

IG Wealth Management maintained market share during the first quarter. As we talk with our consultants and clients, investor confidence was very weak in Q1. And during this time, we have seen money being put on the sidelines into deposit products across the industry.

At IG, we gathered approximately $100 million into high interest savings accounts, which do not appear in our AUM or our net sales figures. March client statements have been sent out, and we are optimistic that investment confidence will improve. We continue to experience strong asset retention as our long-term trailing 12-month redemption remains well below industry peers.

Turning to Slide 16 on operating results. IG Wealth Management experienced net redemptions of $14 million for the quarter due to a slower RSP season in 2019. As I just mentioned, this figure does not include the $101 million that flowed into high interest savings accounts during Q1. We are seeking to expand our disclosures to include our view of total dealer assets under administration and flows in 2020.

Corresponding to the introduction of the unbundled pricing for all where an advisory fee is charged on AUA. Assets under administration of $93 billion at March 31, 2019, of which, 96% is in IG funds. On trailing 12-month basis, you can see that the net sales rate for IG Wealth Management remains above the advice channel. April net redemptions were $237 million and were reported yesterday.

Turning to Slide 17. High net worth solutions represented $45.4 billion of AUM and 46% of total sales. We also continued to make progress in delivering better data with our focus on managed solutions, which now represents 52% of AUM and 77% of gross sales.

Our unbundled fee structures where the client pays the advice fee directly now have $29 billion in AUM and account for 76% of our high net worth sales. As discussed on prior calls, we will be making our unbundled pricing structure available to substantially all accounts in the second half of 2019, and we'll be transitioning accounts in mid-2020.

Slide 18 highlights our client rate of return and historical redemption rates experience. Q1 2019 median client returns were 7.5%. IG Wealth Management's long-term trailing 12 months redemption rate of 9.5% remains well below the industry average of 17.1%.

I'll now turn the call over to Barry to discuss Mackenzie's results.

Barry McInerney

Thank you, Jeff. Turning to Slide 20. The first quarter of 2019 saw Mackenzie's investment fund AUM reach a new record high of $60.1 billion, up 8.3% from December 31, 2018. Mackenzie continued to gain market share versus advice channel peers in Q1 2019 with total investment fund net sales of $376 million.

We recorded our 10th consecutive quarter of positive retail net sales of Mackenzie with positive $361 million net sales during Q1 2019. Our strength in retail net sales was coming from a combination of investor interest in new innovative products and strong investment performance. 45% of Mackenzie mutual fund AUM is in 4 or 5-star rated funds as of March 31, 2019.

Slide 21 highlights Mackenzie's operating results for the first quarter of 2019. Q1 mutual fund gross sales were $2.5 billion. Investment fund net sales of $376 million compared to net sales of $768 million last year. Mackenzie continues to capture market share versus advice channel peers including both ETF and long-term mutual funds.

Mackenzie delivered an organic net sales rate of 1.8% over the 12 months ending March 31, 2019. Mackenzie had another month of strong positive retail net sales during April. This strength was offset by net redemptions among our non-retail relationships consistent with recent industry trends. Overall, April investment fund net sales were slightly negative at $3 million.

Slide 22 provides details of our Q1 retail sales results. Mackenzie retail captured 6.9% of advice channel long-term mutual fund gross sales during the quarter, and our retail gross sales capture rate improved in the four largest categories. As I mentioned previously, Mackenzie recorded its 10th consecutive quarter of positive retail investment fund net sales totaling $361 million.

Turning to Slide 23. Mackenzie's ETF AUM reached $3.3 billion in the first quarter of 2019. ETF retail net creations of $142 million contributed to our overall strong retail flows results. Q1 2019 net creations came from both traditional beta and active ETFs.

Slide 24 highlights how product innovation has contributed to Mackenzie's net sales and AUM growth. Most of our recent product launches have focused on the six key global industry trends and complement Mackenzie's diversified product offering. In January of this year, we launched a new multi-asset solution in Mackenzie Global Growth Balanced Fund managed by the award-winning Mackenzie Bluewater team and Mackenzie fixed income team. This product has already attracted adviser attention with approximately $20 million of net flows by March 31.

With the launch of three new alternative strategy products in February, our suite of alternative investment solutions now includes five mutual funds. These alternative solutions can be used to help clients solve investment challenges by providing amplified returns -- sources of return, mitigating volatility and improving portfolio stability over the long term. I'm very pleased to report that our AUM in alternatives surpassed the $1 billion mark during the first quarter.

On Slide 25, Mackenzie's long-term investment performance remains solid. Over 50% of our mutual fund assets are in first or second quartile over 1-, 5- and 10-year periods. 45% of Mackenzie's AUM is in 4 or 5-star rated funds, the 5th highest in the industry.

Slide 26. Mackenzie's growth-oriented boutiques as well as the global equity and income team and fixed income team continued to have a large percentage of their AUM in 4 or 5-star rated funds. Positive retail net sales are spread across our growth, Bluewater, fixed income and managed solutions boutiques, while value-oriented strategies remain out of favor. Ivy's investment performance was strong over the last year, and net sales in the products managed by this team improved year-over-year.

With that, I'll turn it over to Luke to review IGM's financial results.

Luke Gould

Great. Thanks, Barry. Good afternoon, everybody. So I'm on Page 28 and start by highlighting at the top that EPS was $0.70, and that included adjusted earnings result with non-commission expenses that were a bit higher than was anticipated by most analysts. I'd reaffirm what Jeff said that we're maintaining our full year guidance of an increase of no more than 4% from 2018.

I'd also remind just that the decreased spending in Q1 was timing and related to some continued brand re-launch activities at IG Wealth as well as timing on spend in technology designed to enrich our client and adviser experience and to create a more automated environment over long term. I'd also highlight that this does include spending on the migration of our clientele to our new nominee dealer platform, which facilitates the move to unbundled series and unbundled pricing for all.

Just below that, we have a highlight of Personal Capital, which we're really excited about. This was the first deal at quarter of equity accounting, and we did record our share of losses of $3.4 million on net income, and this was consistent with the guidance we gave of about $15 million for the full year 2019 expectation.

On the second point, we've highlighted some capital management activities in the quarter. First, we had a successful 31-year debenture issue of $250 million. And the second point related to this, part of the proceeds were used to retire $150 million preferred shares series in April. And I'd remind everybody, this will provide net after-tax savings of about $4 million per year.

Below this, you can see we tendered proportionately in support of Great-West Lifeco's substantive issuer bid, and our 4% ownership in them is unchanged. And we received $80 million in proceeds with no tax consequence as a result of the structure that was made available as part of the bid.

And then last point under 2, we did commence a normal course issuer bid for up to 4 million common shares at the end of March. We repurchased through the middle in March, but we have been active in April. And we repurchased about $60 million so far what we're seeing today. And then the last point on Personal Capital. We did invest an additional CAD 67 million.

You'll see in our disclosures our stake's valued at $217 million of its basis. We have introduced supplemental information at this time to provide some key business metrics and the guidance on earnings. We also will be disclosing revenue annually, and revenue rate has been very stable at about 75 basis points, so people understand how that's trending, and it's trending very much in line with the charts that Jeff reviewed with you earlier.

Also at this time, I mentioned some other disclosure enhancements we made in the period to help you understand the results. So first in our supplemental info, we've highlighted carrying value in WealthSimple and Portag3, which is worth about $230 million right now. And we also provided some info on IFRS 16 on leases, which was effective January 1, 2019.

So you'll see in the supplemental info and our disclosures that our assets and liabilities increased by just under $100 million as we brought these leases on balance sheet. And while there's negligible impact on income from this IFRS 16 adoption, some line items were affected. And so we've given disclosure on the impact of $5.7 million on amortization in the quarter and interest expense of $1 million to help people understand those changes in the different lines.

And I will use this moment to highlight one more point of interest in our financial in the quarter, which is our cash flow statement. And there is quite a bit of seasonality and timing in a number of the cash flow lines, so I'd just highlight there was a true-up of tax installments of $50 million in the period. And so I'd guide you to our normal tax expense, which is running at $45 million as indicative of where this line will be running at.

I'd also highlight that in the other changes to other operating assets and liabilities, we had a net outflow of $66 million. This is again timing over the last 12 months. You will see that this line sums to 0, and it is truly just the accrual of items over the year and typically of compensation and other seasonal payments in Q1. So that impacted our cash as well.

I'd move now to Page 29, which is our assets under management. And I would just remind, as Jeff said, we published April 30 yesterday. And we did close April at $163.5 billion. This is an increase of 2% in April, 10% year-to-date. And it is also an increase of 5% over the Q1 average asset balance as we move into Q2.

On Page 30, we've been including this slide show under consolidated EBIT and consolidated EBIT margin. I would highlight that growth in net revenue margins are relatively stable, but I use this opportunity to remind everyone about what I'm going to define as the February effect, and I'm going to refer to it on two other slides.

And what I mean by that is we take our fee revenues on a daily basis based on every calendar day. February only has 28 days, and so we get 28 days' worth of revenue. When it comes to our compensation note to dealers and to our financial advisers, they earn 1/12 of an annualized rate of compensation in the month of February.

And so what this means is you have 1/4 being applied to an annualized rate in respect of the asset-based comp line while we only have 90 days of 365 when it comes to our revenue. So whenever you see the asset-based comp, just keep that in mind, is we pay a full 1/4 of an annualized rate out in relation to revenues where it took 90 days. And it does have a noticeable impact on some of these lines.

Moving to Page 31 on the consolidated statement of income. I'd make three quick points. You can see them highlight on the right. Number 1, we did have net investment income up $7 million from last quarter. This did include approximately $5 million in returns on seed capital primarily at Mackenzie. It was offset partially by some fair value adjustments on our mortgage hedging activities.

And that's just accounting mismatches in relation to interest rate declining, but noteworthy seed capital returns for us during the period. On point 2, I'd remind again that we did have our first quarter of equity accounting for Personal Capital. And point 3, I'd remind that because of timing, non-interest expenses were up 8% year-over-year. But over the full year, our guidance is that we're going to be 4% or lower.

Moving to Page 32. We think these are helpful slides to understand IG Wealth Management's results. You can see on the left, our gross revenue rate is stable at 201 basis points. And I would remind, as we've highlighted in point one on the right, we have now introduced or enhanced segmented pricing for households with over $1 million, and I'd remind that the impact will be a 3-basis point decline as a onetime in Q2. And after that, the trend will likely reflect the composition of the clientele. I'd also highlight again the February effect on the asset-based compensation line, and I'd reaffirm our guidance that this line will be about 51 basis points over the period, but it's seasonally high obviously in the first quarter. And then on the right, you can see our gross commission rate line is at 1.5%, consistent with earlier guidance and will stay at that 1.5% level throughout the year.

Going to Page 33. Not many comments on IG's P&L. One I would highlight to just help you understand again some of the seasonality in our business, you can see distribution fees was $41.1 million, and that's down $4 million from Q4. Q4 is our seasonally high period for insurance product sales. And I would point you way down to the other number one there in other commission expense. And you can see offsetting the decline in revenue is the compensation paid in relation to insurance sales. So it's about a $1 million impact on earnings before tax, and it is seasonal in nature.

I would, like on earlier slides, confirm most of the additional spending is on IG's brand re-launch and IG technology initiatives. And where you can see year-over-year it's up 12.6%, I would reaffirm our guidance for no more than 4% increase year-over-year for that full year.

Then Page 34, some slides to help understand Mackenzie's results. On the top left, you can see the net revenue rate is 79.2 basis points. Like IG and IGM, Mackenzie is subject to what's called the February effect. And so part of what you see in this rate is just the fact that we paid 1/4 of an annualized rate in respect to trailing commissions but we've only received 90 days out of 365 applied to an annualized rate in respect of our revenues.

And then on Page 35, Mackenzie's income statement. The only item I'd highlight is point 3, where you can see in the second row from the bottom that we did get $4 million of return on seed. Our seed is about $40 million. It is predominantly equities, and so we have very healthy returns of 10% during the period.

And that concludes our comments. I'll turn it back to Patrick to open the line up for questions.

Question-and-Answer Session


[Operator Instructions] We'll take our first question from Geoff Kwan with RBC Capital Markets.

Geoff Kwan

Jeff, my first question was for you. When you took over as the CEO, you've made a bunch of changes over that time. And you've got obviously the Investors Group and the Mackenzie, IPC and your other investments. But you can maybe take a look at another lens of this is you've got kind of a wealth business with the Investors Group side, kind of IPC and then Personal Capital. And then you've got an asset management side with Mackenzie, China AMC. Just wondering what your thoughts on that are. And then if it is something that makes sense, is it something you might consider providing kind of segmentation of financials kind of in those categories which you haven't really done before?

Jeff Carney

I think that would -- if that helps you to understand our story, then we're comfortable in giving that information. Luke, do you want to comment?

Luke Gould

Yes, yes. For sure, Jeff. You're familiar, Geoff Kwan, and I tried to put out there to many, we have a major event coming at IG, which is we are migrating all of our clients to unbundled pricing. And with that, we think that's a really nice moment to reflect on our disclosures and to really help present IG as a wealth manager to help people understand our business where a majority of our revenues will be coming from advisory fees.

Geoff Kwan

Okay. And then I just had two other questions, was on the April net sales data on the Investors Group side, the net redemptions, I guess, were a little bit higher than what I would have expected. And really, the redemptions were higher than what I would have expected. Just wondering if you have any color or commentary, I guess it's probably a bit early to -- if you have any insights as to what it meant relative to the industry flows.

Jeff Carney

Yes. I mean, April net sales, has historically been negative following the RSP season, so that would be one part. The lack of confidence in the marketplace for investors would be another piece of it. And so I don't think we're going to look out of norm with the rest of the industry that's really going through the same experiences that we have.

That said, we're focused on having our teams out there working hard and bringing in new clients and focusing on our growth, and we expect that to be an important facet of our value proposition as we go forward. And we feel very confident. We've invested a lot in infrastructure, and we're starting to get some traction with some of those investments. And so I'm very optimistic about our future.

Geoff Kwan

Okay. And just one last question, oh, sure, go ahead...

Luke Gould

Look, yes, I'd also add, Geoff, two other comments in April. One, we did see gross sales stabilize, and so that's a very good thing for the advice channel industry and for IG. We did see year-over-year declines in Q1 of about 18%. And so to see year-over-year at only down 2% in April was very good. And I would remind, to Jeff's comments, we highlighted the high interest savings account. And again, some Canadians still wanting safety in spite of the really robust financial markets we find ourselves in. So that is part of IG's story as well.

Geoff Kwan

Okay. And then that actually was my last question there, was I just want to confirm, the $101 million you referenced with respect to the high interest savings account, it sounded like it came out of fund redemptions as opposed to new money that was coming in but was getting parked in the high interest savings account. Is that correct?

Jeff Carney

No, that's not correct.

Geoff Kwan

Okay. So this was net new money that came in but just in high interest savings account?

Jeff Carney

Net new money to the firm.


[Operator Instructions] We'll take our next question from Paul Holden with CIBC.

Paul Holden

So a couple of questions on the IG side of the business to start. So obviously, Jeff, you've done a lot to work towards the rebrand and re-launch of IG Wealth, and it's not a 1-quarter or 1 -- 2-quarter type thing that we should look at. But given the market noise, like how should we be thinking about tracking progress on key success of the launch, whether there's anything you can point to in this particular quarter or whether there's things you can point to that we might see in the future quarters?

Jeff Carney

We -- customers need data from tracking, and it was really positive, significantly positive. Again, moved us up and then soared ahead of us. So it's a good start. We're committed to building our brand in the communities but also through advertising. And so you'll see us doing this more often going forward as well. So, it did -- the digital investment was a great investment, and we'll be investing in some real work on our brand for sure.

Paul Holden

Okay. And then second question, as look I look at your slide with the IG median client return and I kind of look at the 5-year number of 3.4%, how do you think about that and what it means in terms of growing your business and if there's any levers you think you can pull to kind of move that number to a higher destination?

Jeff Carney

I mean the most important thing is to make sure that they don't do what just happened, which is to panic in volatility. And so the most important thing we can do is make sure that we're coaching our clients on staying in the marketplace and let the products that they're invested in do their job. And that's something that we're very focused on and reinforced with our teams.

But that's the best thing we can do for our clients. It's [indiscernible] it all goes into deposits, and you don't earn very much. And then you don't -- you can't mark it on your way back into what you had before. So it's hard. And with -- our consultants have to continually coach our clients, but it's hard because it's emotional, and people are stressed out, and so it's something we always have to work on.

Paul Holden

Yes. So I mean one of the reasons I asked the question too is just because where we're set at with bond yields so we may not expect a lot of return out of bonds over the next five years. Some people argue that maybe equity market return expectations should be lower over the next five. Are there portfolio construction actions you think you can take to help enhance returns going forward? Like are there things you're doing with your managed solutions that are different than what you would have been doing over the last few years?

Jeff Carney

I think an example of that is the products that Mackenzie launched, where it's a unique new product that gives you diversification in a new way. And so the more we can innovate and create products like those for financial consumers, the better it is. So I think you'll see how we at IG over time, but Barry will be continuing to look at opportunities as well. There's more tools that we'll have to work with, with clients through diversification.


[Operator Instructions] We'll take our next question from Graham Ryding with TD Securities.

Graham Ryding

Barry, I'll ask you this question. Just looking at Mackenzie's ETF flows, it seems like your ETFs with TOBAM have been, I guess, continuing to decline as for the portion of your net creations. What's behind that? Are you deliberately emphasizing your other ETFs? Or why is TOBAM declining?

Barry McInerney

Thank you. It's a good question. We have a -- obviously, we have a broader array of ETFs that we're offering and more to come. So when we launched TOBAM, it was really them with the Smart Beta offering. And then we had our fixed income, which we've also expanded. So a combination of there's more to be sold by the wholesalers. As you know, the wholesaling team goes out there to the marketplace, and they speak to advisers equally between mutual funds and ETFs, which we think is a neat way to holistically sell and always using a portfolio construction framework.

So I would say there's just -- there's more variety. Also, the TOBAM, I think it's just a fantastic boutique, the way that they manage money, very, very distinct. The quant space has been a little challenged on performance particularly last year. So they weren't immune to that. So the performance is climbing back nicely this year. But obviously, investors and advisers and attracting the sort of particular strategy or vehicle and success of such does depend on this performance, so the performance has come off a bit.

Again, that's like all quant managers. So we think they're great. They're pushing about $1 billion with us right now. That's pretty good success in that it's a quite a unique way that they approach the marketplace with maximum risk diversification, and we won't get on to the end of the detail on the phone on that one. And we view them in overall portfolio, they could really help with enhancing risk-adjusted return.

But you can see that our overall ETFs are growing. We had a nice -- again, nice -- first of all, the first quarter, as you can see, the industry ETFs were half this year versus last year. So we had a nice quarter, but we were probably about half we were the prior year. So that was in the retail channel. So that wasn't a surprise to us. So we continue to gain market share, move up the ranks. We're #7 now on the lead table.

And it's a really important component of our business strategy, and we're going to push it hard. So have great faith in TOBAM, have great faith in all of our boutiques that are either now or will in the future start to increase some adviser ETFs, which again, aside from TOBAM, was a great third-party partner. We have capabilities in-house that we can keep the economics within Mackenzie as we launch new ETFs that are manufactured by our in-house boutiques.

Graham Ryding

And that was sort of going to be the second part of my question. When you look at your different ETFs, you've got your traditional beta, your TOBAM, which is like a sort of beta, I believe, and then your active ETFs. How should we think about the sort of net margins or the P&L impact of those three ETFs to you?

Barry McInerney

Yes. So the -- if you look at the active ETFs first of all versus our active mutual funds, the margins are fairly comparable. The pricing is usually 20 basis points lower on ETFs versus the -- we call it the cousin mutual fund. There's no admin fees in ETF wrapper, 15 basis points of differential there. And a number of our active ETFs are -- have a little narrow opportunity set than our active mutual funds for -- because of the unique way that you need to look a little bit at liquidity when you have a strategy wrapped in an ETF.

So the pricing is really comparable except for the difference mostly of insight. So you can think of the fact that again we have a sort of platform in terms of operations and distribution and manufacturing. And it's been the same platform being used for mutual funds and ETFs. So ultimately, when ETFs create -- become or scaled up, really days for us, our mutual funds are well scaled and beyond, then the margins would be fairly comparable. Smart Beta, quantitative Smart Beta, usually the pricing average is a little lower, but you make it up on volume.

And then our traditional beta, we call it our passive, we launched those a year ago. They're just building blocks for us because most are used in-house because our teams are multi-asset teams for years, like other multi-asset PMs in Canada. They're putting together active and Smart Beta, a little bit of passive exposure and a wrapper. And so we felt we'd like to obviously capture that economics and provide that in-house versus relying on external managers. So that's not a driver much at all on our profits. It's more the active ETFs and Smart Beta are the ones that are comparably priced. And when they're both comparably scaled, they have comparable margins.

Graham Ryding

Okay. Good insight. The -- my last question for you, Barry, would just be the alternative funds that you've launched. I think you said you have a $1 billion in AUM. Would you be able to break that out for us with respect to the new funds that you launched I guess since the middle of last year and perhaps the more -- the older funds, many I think they're 2015?

Barry McInerney

Yes. Thank you. Yes, love to. So when you -- again, we at Mackenzie are trying to provide investors and advisers with access to alternatives like the large institutional investors. We think it's important to have a retail investor have access to these. And there's two broad categories when you look at even the institutional space. One is alternative asset classes. So infrastructure, real estate, private equity, commodities, et cetera.

So that's the one we launched about four years ago called MDAF, Mackenzie Diversified Alternatives Fund. And that comprises over 20 investment strategies and one mutual fund, and it's meant to, okay, client, take a personal balance on it, let me put a 5% to 10% slug in there, so you're getting exposure like the institutional investors do.

We're doing a liquid form though. No leveraging or shorting. It's all long only, but liquid infrastructure. It's public/private equity. It's REITs. It's commodities, micro caps. So all these strategies that are accessible by the large institutional investors, we bring in one wrapper to the retail investor, and it's a nice run for us. That's $650 million roughly in AUM for that one fund.

So the other category, which as you know, we're just recently allowed to do in Canada effective January 1 although we've got exemptive relief to do it in May, 9 months earlier, mirroring what the U.S. has been able to do for years. In Canada, mutual fund now, you're permitted to do leveraging and shorting. So we call that access to a alternative investment strategy an absolute return strategy in liquid form. So it's not just long only. There's a lot of long, short and leveraging components to that. That's what we call MSARF, Mackenzie Absolute Return Fund.

And then we launched in February, three components of that multi-strategy. So that's about $350 million in aggregate on that side. So we are excited by both because we think they -- what they do for both is again they democratize alternatives for the retail space and you put them into your portfolio, and they really can help. As Jeff was saying in the prior question, really can help investors with enhanced, broad opportunity set, enhanced return opportunities and a nice risk diversification, so that's how you break out the $1 billion, $650 million in one and $350 million in the other.

Graham Ryding

Perfect. And then just, Luke, my last question, if I could get greedy here the expense growth of 4% was maintained for your non-commissions. But how should we think about the timing of getting towards that? Is it a big drop in Q2? Or is it something that sort of gradually you would -- your expense growth is going to move down over the course of the year?

Luke Gould

Yes. I've got the best I could in 2017 seasonality. So there's a bit because of the initiatives we're working on right now in Q1. But you should look at Q3 being a seasonally late-spend quarter, and then starting to see go back up a bit in Q4. So I guess to answer your question, we're getting to the 4% paper to the back part of the year with a bit more spending going on in the front half.


We'll take our next question from Tom MacKinnon with BMO Capital.

Tom MacKinnon

Just following up on that expense target reiteration, I was wondering if you can give us maybe the dollar amount associated with seasonality or some of the technology spends or the brand re-launch? Because by starting off the year up 8% year-over-year, you're going to have to be kind of 2% at maximum going forward. So if we -- we could probably have a little bit more conviction in your ability to get at that if we kind of knew what was the dollar amount that was pushing it up just specifically in the first quarter.

Luke Gould

I think if you look backwards pre-2018, you can get a sense for Q4 and Q1's normal just seasonal increase. Q4 of 2018 was unique for us that we had the brand re-launch and a lot of spend there. Some of that continued into Q1 of this year. But the other big driver we have, it is technology spend. So you can think of it as being discretionary, just layered on. It's project-related. And some of the things that we are spending on would include again migration to a dealer platform.

Another big one that we didn't call out, it is our adviser portal we've called it at IG. And it's really the implementation of salesforce and our CRM tool. And that's been rolled out at the end of the second quarter. And so again, these are projects and because of the nature of them, that's why you would see the expenses falling off when complete. Does that make sense?

Tom MacKinnon

Yes. I mean as long as we knew the dollar amount then -- of the elevated spends that are happening right now, that would certainly give us confidence in -- I assume you have confidence in your ability to hit the floor, we're just -- I'm just looking for what the dollar amounts were that push it up right now to give us confidence in it.

Luke Gould

Well, I guess if you look at the incremental spend relative to last year, there's about $15 million incremental in technology spend, if that helps you size it in relation to Q1 of last year. So that's incremental spending we have on projects in the technology area. And so would -- and that would obviously lead to our confidence that as that spending subsides, we'll be able to meet our guidance.

Tom MacKinnon

Okay. And that includes the kind of change in the way the accounting works now with IFRS 16 for the leases too, right? You're including the depreciation expense with that non-commission expense in terms of the 4% increase?

Luke Gould

Yes, that's right. Yes, so the non-interest expense line.

Tom MacKinnon

Okay. That's great. A question really as you move more to unbundled, should we then expect all the asset-based comp -- or no, pardon me, the sales-based commissions, those are paid as expense -- or expenses paid. When do we expect those things then just to kind of, especially for IG, to move to 0?

Luke Gould

You shouldn't expect that. And so I'd say it's really important to understand what we're selling and how we compensate our people, its two completely different things and so we walked through in the past with the discontinuation of DSC and just with the evolution of the strategy that's been led by Jeff. We made a number of changes to it, to field compensation and incentive.

So having some upfront compensation, that is going to continue to be a part of our environment. We have compensation that's tied to net flows, and that's going to continue to be part of our environment as well. We've got client engagement-driven compensation. But you shouldn't have a belief or an expectation that we're going to move to 100% asset-based compensation at this firm because that's not the right incentives that we believe work for our field.

Tom MacKinnon

Okay. So even though the bundled, it's -- you'll still -- even though as you move to unbundled, you'll still have stuff that will be paying up -- commissions upfront because -- is that correct?

Luke Gould

Yes, that's correct.

Tom MacKinnon

Okay. And then finally, with respect to the admin fees, these are -- these have been coming down as well. And how does this movement to unbundled impacted those admin fees?

Luke Gould

It's a great question. It was similar to the one by Geoff Kwan on just what's the future for disclosures for IG? And so we're working through the year to re-launch disclosures for Jan 1, 2020 with the move to unbundle them. What you've seen in the last five years but certainly in the last two years as we've had more and more business going unbundled is some of the stuff that was in admin fees is now being recorded within management fees.

So it's been better to view those two lines together, and that's the way we've presented them to these webcast discussions. But we will be recasting our disclosures to move more towards advisory fees as opposed to product fees, and I think that's a better characterization. So I guided that we've had some noise between management fee and admin fee for the coming quarters, and we're hoping to remove that type of noise with our future disclosures.

Tom MacKinnon

And these advisory fees that you note, are they in these management fees?

Luke Gould

Yes. Right now, we've got -- all the advisory fees charged in unbundled solutions are being captured in the management fee line. And so that's in the end disclosure, we'd be looking to bring Q1 of next year is really to isolate advisory fees, which is for our gamma from the true management and admin fees that are for our product.


We will take our next question from Scott Chan with Canaccord Genuity.

Scott Chan

Just on -- looking at the distribution fees which also dropped sequentially in the quarter, how much is that line or in that quarter attributed to the discontinuation of DSC commissions? Is that a material amount of that sequential decrease?

Luke Gould

No. And you'll see in the supplemental info, we actually disaggregate that distribution fee line to its component parts, those related to mutual funds and those not. And you'll see that the change in the line is non-mutual fund. And in that category is primarily insurance but also banking and security service revenues. So the sequential decline you saw is insurance-related. It is in relation to Q4. We actually are on our plan and slightly better than Q1 of last year on that line. But it is just the seasonality of the insurance revenues, and there's an offsetting decline in the compensation line that you'll see.

Scott Chan

Okay. Okay. And when you talk about your [indiscernible] did you say that you bought 60 million shares in the month of April?

Luke Gould

Yes. 60 million. And actually, that's the last week of March and the four weeks of April.

Scott Chan

Last week of March, four weeks of April, okay. And so typically, IGM has never bought back stock. How do we think about this current buyback program I guess in the face of what you did in April going forward? Is this something that you'll tactically use or continuously use kind of?

Luke Gould

That's a good question. So this one for us was, say, opportunistic. We obviously were very confident in our outlook, and we definitely think that our shares are undervalued. We've -- homework to us is to maintain financial flexibility, and that's what we work to have in any market environment. What we had in this period is we had an opportunity with our sister company and invest the company for us having a substantive issuer bid and recognizing that we want to support their bid while maintaining a proportionate ownership but could actually use that opportunity to channel money back to our shareholders through a share buyback. We thought that was a very good thing to do to, to a, be in the market to get our stock to what we viewed as attractive prices while also supporting our sister company.

Scott Chan

Okay. Makes sense. And just last question. Just for Barry. I love Slide 22. You talked about like the four main categories where you're gaining gross sales capture year-over-year. I know it's a smaller segment, but the sector/specialty was down a lot in terms of the gross sales versus last year. Is there anything to highlight within that categories that might have impacted it?

Barry McInerney

Yes. So that one -- so we're very pleased with the largest quarter we had gained. That one we think is just temporary. That -- the prior question on our Mackenzie Diversified Alternatives Fund, it really has had really nice strong sales. It was off a little bit in sales the last couple of quarters, and so that's in the specialty line. So that was the main attribute of the year-over-year decline.

So -- and you'd probably see with all the volatility that happened the last couple of quarters of 2018, there was -- probably thinking about alternatives wasn't top of mind for investors and advisers so -- but those sales are coming back actually this quarter. I think also, we spent a lot of time and effort and rightly so. We're very excited about the MSARF, the new alt -- liquid alt fund that we launched. So we spend a lot of time with the sales team to get them educated and get them out to educate advisers. It is an educational sale, doing well early days.

So probably took a little bit of the attention away from MDARF, and so what we've done starting this quarter is we've now -- I think we feel good about MSARF teams educate, kind of good rhythm in terms of selling into the channels. And so they're now equally splitting their alternative time to both equally between the MSARF and MDARF. The MDARF was the main source of the decline in the market share in this specialty sector.


It appears there are no further questions at this time. Mr. Potter, I'd like to turn the conference back to you for any additional or closing remarks.

Keith Potter

Yes. Thank you, Patrick, and thanks for everyone joining the call today. That will conclude the call, and wishing everyone a great weekend. Thank you.


This concludes today's call. Thank you for your participation. You may now disconnect.