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AGF Management Ltd
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Welcome to the Q1 2019 AGF Management Limited Earnings Conference Call. My name is Christine, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.I will now turn the call over to Adrian Basaraba, Chief Financial Officer. You may begin.
Thank you, operator, and good morning, everyone. I'm Adrian Basaraba, Senior Vice President, Chief Financial Officer of AGF Management Limited. Today, we'll be discussing the financial results for the first quarter of fiscal 2019. Slides supporting today's call and webcast can be found in the Investor Relations section of agf.com.Also speaking on the call today will be Kevin McCreadie, Chief Executive Officer and Chief Investment Officer. For the question-and-answer period with investment analysts following the presentation, Judy Goldring, President and Chief Administration Officer, will also be available to address questions. Turning to Slide 4. I'll provide the agenda for today's call. We will discuss the highlights for Q1 2019, provide an update on the key segments of our business, review our financial results, discuss our capital and liquidity position and finally close by outlining our focus for the remainder of 2019. After the prepared remarks, we'll be happy to take questions.And with that, I'll turn the call over to Kevin.
Thank you, Adrian, and thank you, everyone, for joining us on today's conference call. During Q1 of 2019, we continued to execute against our strategy and stated goals. I'll begin with some highlights. AUM in the quarter at $38.8 billion, up 5% versus the prior year. Despite challenging industry conditions, our mutual fund business reported modest net redemptions that were in line with the first quarter of last year. On a trailing 12-month basis, AGF is among the top 5 independents in mutual fund net new money.Our institutional business reported net sales of $76 million during the quarter. With the initial close of our third fund, our private alternatives platform reached $2 billion in AUM, which is solid progress toward our goal of reaching $5 billion by the year 2022. We completed a plan to realize the efficiency targets we announced on our last call and are on track to achieve the savings. As a result of this initiative, we recorded onetime restructuring charge of $14.4 million during the first quarter.In February, we welcomed Greg Valliere, a leading U.S. political strategist to AGF. With over 3 decades of experience analyzing politics and economic policy, Greg will provide insight and thought leadership to support our advisory committee and bolster our continued expansion into the U.S.We reported adjusted diluted earnings per share of $0.14, which is 27% higher than the prior year after adjusting for IFRS 15. The Board confirmed a quarterly dividend of $0.08 per share for the first quarter.Starting on Slide 6, we'll provide updates on our business performance. On this slide, we break down our total AUM in the categories disclosed in our MD&A and show comparisons to the prior year. Total assets under management are up 5% over the prior year. Institutional, sub-advisory and ETF AUM increased 4%, due to strong organic growth, particularly in the institutional space where we recorded net inflows of $900 million during the past 12 months. Private alternative AUM doubled due to our latest fund, which raised considerable capital from institutional investors in Canada, the United States, Europe and Asia. This fund will add more commitments later in the year and is expected to reach final close somewhere in 2019. We are pleased with the progress and growth of AGF's private alternatives business. The growth in infrastructure AUM reflects strong investor appetite from middle market energy, utilities and civil infrastructure opportunities in North America.Turning to Slide 7, I will provide some detail on retail business. Since April 2018, retail investors largely remained on the sidelines in anticipation of a severe market correction. In calendar year 2018, while $2.9 billion flowed out of long-term funds in the industry, $2.7 billion flowed into money market funds. Volatile markets continued to impact industry flows in Asia's latest fiscal quarter. The first month in our quarter was December, which was the worst month on record for industry outflows. Industry long-term funds recorded net redemptions of $4.4 billion during our first quarter compared to net sales of $12.7 billion in the prior year's Q1.The ETF industry saw similar trends with net creations down 50% year-over-year. Despite these challenging conditions, the AGF Mutual Fund business reported modest net redemptions of $104 million in the first quarter, which is in line with the first quarter of 2018. On a trailing 12-month basis, AGF's Mutual Fund business reported net sales of just shy of $100 million compared to net redemptions of $354 million for the same period in the prior year. We remain focused on executing our retail strategic priorities, which include supporting advisers in both the IIROC and MFDA channels. Third-party research has shown a significant improvement in adviser perceptions of AGF over the past few years, and we plan to continue this trajectory of improvement, developing new strategic relationships and capitalizing on our existing relationships. We experienced 2 significant allocations last quarter and we'll work to do more business with our largest partners, including banks, credit unions and insurance companies providing innovative products and solutions around specific needs. As was recently announced, if approved by unitholders, we will be repositioning 2 of our existing funds to launch the AGF Global Real Asset Fund and class in April of 2019. We also plan to leverage AGFiQ's track record with long-short strategies to do more in the liquid alt space.Looking ahead, we remain optimistic about our sales trajectory, assuming markets remain stable. Although the S&P 500 has increased roughly 20% since the trough in late December, there is risk of further volatility, which would influence industry sales levels.Turning to Slide 8, and I'll provide some details on investment performance. And as I've stated previously, our long-term target is to have 60% of our AUM above median over 3 years and 50% of our AUM above median in any 1 year. As of February 28, our AUM above median was 16% over 3 years and 20% over 1 year.Our portfolio has a quality bias due to our disciplined risk management processes. For most of 2018, such investments underperformed relative to securities with strong momentum characteristics, this negatively impacted our relative performance over the 1 and 3 years. We are comfortable with our positioning and believe the quality inherent in our portfolios is appropriate for investors over the long term.We continue to see success in individual-specific strategies. During the quarter, the AGF Global Convertible Bond Fund earned a FundGrade A+ Award, which is given annually to investment funds and their managers who have shown consistent outstanding risk-adjusted performance throughout the year. The AGF Global Select Fund, Series F, was the best-performing fund in its category on a 3-year basis and the AGF Total Return Bond Fund was upgraded to 5 stars by Morningstar. One of our U.S. funds was recognized by ETF.com as one of the top-performing ETFs of 2018.Moving on to the institutional side of the business, not including retail sub-advisory and ETFs, we recorded net sales of $76 million during the first quarter. AGFiQ, our quantitative platform, won another institutional mandate in the U.S. This is also a continuation of the success we saw last year with AGFiQ, which has onboard almost $700 million of new institutional mandates during the past 12 months. As a stance, we don't have significant commitments for the institutional pipeline for the second quarter, which is not out of the norm as institutional sales can be lumpy quarter-to-quarter and we have several near-term prospects in the funnel.In March, AGF was one of five institutional investment managers appointed to a multi-provider sustainable equity framework by a U.K.-based superannuation fund. The framework will allow all 9 administrating authorities in U.K.'s Local Government Pension Schemes Central Investment Pool -- and this will be able to all 9, I should say. And while the immediate allocation to AGF is not defined, we are optimistic that this will result in additional flows.Finally, we are also seeing increased interest in our emerging market strategy. Under Regina Chi's leadership, since joining the firm 18 months ago, the AGF Emerging Markets Fund has improved to first quartile in the recent period and the 3-year performance number has started to improve as well, which is key for the institutional channel.And with that, I will turn the call back over to Adrian.
Thank you, Kevin. Slide 9 reflects a summary of our financial results for the current quarter with sequential quarter and year-over-year comparisons. Starting December 1, we adopted IFRS 15, which had 2 key impacts. Certain fee waivers and reimbursements made to the fund are now netted against revenue, rather than recorded in SG&A and DSC commissions are now expensed, rather than capitalized and amortized. The inclusion of DSC commissions in EBITDA introduces variability and causes EBITDA to be lower in periods of growing sales and higher in periods of declining sales. So to eliminate this impact, going forward, we'll focus on EBITDA before commissions, which, as implies, excludes the expensed DSC commissions. Please note, EBITDA before commissions is comparable to our historical reported EBITDA before the adoption of IFRS 15.During the first quarter of 2019, we recorded a $14.4 million onetime restructuring charge. For ease of comparison, we've included adjusted numbers and have also restated prior results for IFRS 15 throughout the remainder of this presentation.We've recorded total revenue of $105 million in Q1 2019. Because of our November year-end, our Q1 is unique, in that it includes the market decline in December, which lowered our average AUM for the quarter, impacting the level of management fees relative to Q4 2018. This was more than offset by higher fair value adjustments in other income. Income from fair value incorporates a number of items. It includes income related to mutual fund seed investments as well as items from Stream and Essential Infrastructure Fund, including cash distributions for monetization of assets, ongoing cash distributions, noncash increases or decreases in the value of fund units and accruals for payment of carry. In regards to our alternatives business as they gain scale, carry accruals and income from cash distributions and monetizations will become a recurring theme and contribute to variability in this line item.Moving on to SG&A. During the quarter, executive management team completed a comprehensive review and finalized plans to achieve the SG&A reductions announced last quarter. Adjusting for IFRS 15, our expense guidance for 2019 is $190 million. Q1 SG&A was $48 million, which is in line with this guidance. Over the coming quarters, there may be some variability in our expenses as we work the amounts down to target levels for 2019 and look forward to 2020. For 2020, we anticipate further reductions and see expenses settling closer to the $180 million range. Although we have defined the path to our SG&A guidance, we will continue to be proactive, thoughtful and disciplined in managing expenses to ensure resources are focused against our stated strategic imperatives.Turning to Slide 10, I'll walk you through the yield on our business in terms of basis points. This slide shows our revenue, operating expenses and EBITDA before commissions as a percentage of average AUM in the current quarter as well as trailing 12-month view. Note that AUM related to results from Smith & Williamson, the alternatives platform, onetime items and other income are all excluded. Revenue yield in Q1 2019 is 4 basis points lower than the trailing 12 months and comparable to Q4 2018. Please recall that Q4 2018 was the first quarter that fully reflected the fee reductions in April 2018 as well as the expansion of preferred pricing in August 2018. But going forward, we expect net revenue to decline by approximately 2 basis points per year on total AUM, simply because our sales going into funds with lower fees is compared to our redemptions, which tend to be in funds with relatively higher fees.Over the near term, our net revenue rate reduction might accelerate if growth in ETF and AGFiQ institutional mandates gain more traction. EBITDA before commissions yield was 17 basis points, which is 4 basis points lower compared to the trailing 12 months. Some of the compression in our EBITDA yield relates to the market correction in December, which caused average AUM to be lower than the trailing 12 months. As we exit Q1 2019, our ending mutual fund AUM is 7% higher than the Q1 average daily AUM. So we have the opportunity to enhance our EBITDA yield going forward with a higher starting point. This will be especially true if we can maintain relative performance of our retail business and take advantage of opportunities for growth in institutional and ETFs. Full implementation of our efficiency initiatives would also bolster our EBITDA yield going forward.Turning to Slide 11, I'll discuss free cash flow and capital uses. This slide represents the last 5 quarters of consolidated free cash flow, adjusting for onetime items as shown by the orange bars on the chart. The black line represents the percentage of free cash flow that was paid out as dividend. Free cash flow was $16.6 million in Q1 2019, which is comparable to Q4 2018. Excluding onetime items, our trailing 12 months free cash flow was $51 million and our dividend payout ratio was 49%. Taking into consideration both Stream and Essential Infrastructure Fund as well as our additional $75 million commitment to the alternatives platform announced in January, our total remaining capital commitment to the alternatives platform is approximately $88 million.Capital commitments may be funded from excess free cash flow, but keep in mind there will also be further recycling of capital as monetizations occur, which will help to fund future commitments. We also have our credit facility available, which provides credit to a maximum of $320 million. We repaid $20 million of this debt in the quarter and the total amount drawn now stands at $170 million.So turning to Slide 12, I will turn it over to Kevin to wrap up today's call.
Thank you, Adrian. Q1 was a solid quarter. We continue to make progress against our stated objectives. They are, despite challenging industry conditions, our mutual fund business recorded modest net redemptions that were in line with Q1 2018. Our institutional business is seeing success both with our fundamental active and AGFiQ quantitative strategies. Our private alternatives AUM reached $2 billion, furthering our goal of reaching scale on this platform. Along those lines, I'd like to reiterate our primary goals for the remainder of 2019: First, continue to target above median investment performance as well maintain the trajectory of improvement in retail and institutional flows; continue to leverage the AGFiQ platform to establish this unique capability in the areas of quantitative investing, ETFs and liquid alternatives. In addition, we want to position the firm to reach $5 billion in private alternative assets by 2022. And finally, to meet our SG&A guidance for 2019.I want to thank everyone on the AGF team for all of their hard work. I'm proud of the results we have achieved in the first quarter of 2019, and I'm excited to accomplish more throughout the year.And we'll now take your questions.
[Operator Instructions] Our first question is from Gary Ho of Desjardins Capital Market.
Kevin, maybe just to start off with a question on the fund performance. So when you communicate that quality over momentum bias to advisers, what are some of their feedbacks? And any pushback on that front through recent conversations?
Yes. Thanks, Gary. The investment performance issue is one that we've talked about in terms of some of the factors that were prevalent in the market last year, particularly evident in second quarter when you had a pretty strong tilt toward momentum growth at really at extended levels. And actually what we're experiencing is the embeddedness of the second quarter last year as we rolled off pretty good quarters. And so we're probably at the trough of this right now because as we look back at the recent quarters, just the last 6 months or even 9 months, most of our assets are 40-odd percent, high-40s are in the top 2 quartile. So what we're experiencing is this roll-off effect, as we just -- even if we just stay kind of neutral here, we roll off this second quarter last year coming up, you should start to see this improve back to the target. As far as advisers, this is not a scenario where people were blown up because we took out [Audio Gap] risk. This is where I think if you look at just the flow data, there is a fair amount of nervousness in investor sentiment right now. So I think people appreciate the fact that we're not tilted toward an aggressive stance and the fact that we would probably reserve capital at the expense of trying to grab the last set of returns here. So we're not getting a lot of pushback. Obviously, if this were to be sustained and we ran into this underperformance for a different reason, I'd say that I'd be little bit more cautious on things, but I think the environment around us would support the fact the way we're positioned.
Okay. Got it. Sorry, just to clarify, so if I look at it on a 6- to 9-month basis, those numbers would be on a kind of 40%?
Yes, high 40s [ is yet ]. So it tells us where -- as we anniversary the second quarter, it should start to normalize, on our 1-year.
Got it. Okay, that's helpful. And then couple of questions maybe for Judy and Adrian. Just on the restructuring charge and cost containment initiative, can you provide more details on kind of what that relates to? And then, I guess, for Adrian specifically, the $14.4 million, is this amount needed to achieve the 4% reduction for fiscal '19? Or does that include the provision for the cost savings for fiscal '20 as well?
Yes, maybe I'll deal with the more simple part of that question. The answer, Gary, is yes. The $14.4 million relates to the full cost-savings initiative, which will be implemented over the course of '19 and '20. So it's for both, for the entire cost-savings initiative. And I'll let Judy answer the other part.
Yes. So I guess, in -- the context of the expense program itself, it's really part of the series of activities and actions we've been looking at since couple of years ago, 2017. What we have done is the effort really includes upgrading our technology systems, which have helped create some capacity. We've leveraged systems across common platforms. We've looked at our back office support efforts for the client experience and enhanced that from an automated and digital perspective. We are actually eliminating our reliance on our offshore resources as it relates to our transfer agency business. And there is also, of course, focus on expenses through more disciplined vendor management, managing our discretionary spend, it's just a whole series of activities and actions that we're taking that we believe gives us confidence to support the guidance we've indicated.
And then my last question, Kevin, we're seeing more M&A activity in the space more recently. Maybe can you give us an update on your view on M&A? And have you seen more activity and maybe kind of comment on valuation, if you can?
Yes. I mean -- Gary, I think we've talked about this broadly as a firm. I mean, there are people who in this changing environment and in -- I think you haven't structured yourself either for some of the vehicles that you're going to need to have in the future, some of the capabilities and the build-out of either diversifying your business away from one thing, you're going to have some challenges, right, which is going to lead people to have to consolidate. You know, regulatory reform, if you haven't prepared for it and again haven't moved to do some of the things that you needed to do to prepare for that, probably going to accelerate that. So yes, I'd see you're going to see a pace of it out there if you haven't done what you needed to do. On a valuation standpoint, valuations, you can look at some of the transactions out there. Each of them have been a little bit different in terms of traditional buyers marrying what would be a traditional asset class, whether it be a fund -- mutual fund and you wanted to get bigger in fund space versus the recent one last week, which was probably not as traditional, are going to come with different valuations. So I'd say that, I think, it depends on what you have to offer to the buyer is going to dictate the terms, but valuations feel not cheap to me, but I think you're going to see the pace of this. So if you look at some of the firms and say what are their core capabilities and are they ready for the environment in front of us, they may be forced to do things that others wouldn't.
Our next question is from Graham Ryding of TD Securities.
Can I start on the institutional business? If you include the retail sub-advisory mandates, what were the level of redemptions in the quarter? Looks like there were some.
Yes, we put that -- we had told you on the last call, Graham, that we had anticipate there will be about $800 million coming up over the course of the year. And again, just to remind everybody, that was a large strat partner who has basically changed their philosophy, gone to very -- a much more core mandates and then -- and going to be hiring around some specialty things. So in that case, very good performing long-term asset class with us as being part of that shift. So not performance driven. In the quarter, it's roughly a couple of hundred million that came out, I don't know the exact, but it's in the 200-ish frame, Graham, and I believe we're probably going to see another 200-ish of that coming up in second quarter. Actually I think the first quarter might have been higher than 200, maybe closer to 400. But probably think second quarter maybe another 200 with the rest of it maybe coming up either second or third. Rest of the institutional business, we had net positive flows, it's lumpy, as you know, the pipeline looks okay. As I referenced the platform win in the U.K. could be a fairly -- we don't know what the flows will look like there, but they're going to put to work GBP 1 billion across 5 managers at some level over the course of the next year. So we'd hope to pick up something there. But yes, pipeline on the traditional institutional business looks okay.
Okay. Great. And then what -- any color on the ETFs in the quarter, the flows on that side?
Yes, flows continue to look pretty good. Our ETF business now in Canada is roughly north of $800 million and the combo between U.S. and Canada is roughly $1.5 billion now. So we're pacing pretty well. As I referenced in my remarks, some of our U.S. ETFs, which we've had a long-standing ability to short or do market neutral strategies there inside of an ETF have picked up pretty good traction given the pretty stellar performance that those things would have in a market like last fall. So we anticipate as we bring those forward in Canada in our liquid alts framework this year, you'll probably see the ETF side of the house pick up pretty dramatically, or hopefully.
Okay. Got it. When I think about your institutional mix of -- across your different fund carries, if I strip out your high net worth assets, which I think are around just over $5 billion, so the $12 billion, how does that look across your different sort of emerging markets, global equity, AGFiQ, those sort of strategies, could you give us some color there?
Yes. So it's not as simple as that AGFiQ would have a mix of -- so AGFiQ, for instance, is about $6 billion in itself. That's a mix of our ETF business, it's a mix of strat account stuff in there, it's a couple of funds stuff, so it's not as simple to strip it that way. Of the $12 billion, I'd say, roughly -- and we can give you the hard number on this. I mean, it's probably closing in on 8-ish is strat partners or 7-ish, and 4 to 5 is traditional global core EM of large institutional mandates. But we can get back to you with specific breakdown. That's -- think about roughly those are kind of ways to split.
So when you say strat, you're talking about like retail, strategic advisory mandates, is that what you're saying?
Large platforms, yes.
Okay. And then just my last question, management fees. Can you just remind me, Adrian, year-over-year, it looks like your management fee is down about 15 basis points and there is a few different things going on there. IFRS 15 is a component and then you've got some fee reductions in there and then you've got an evolving AUM mix. Can you give us an idea of what the sort of mix across those different buckets look like?
Yes. I don't have that -- those exact figures, Graham, but you're right. A portion of that decline is related to the fact that we're now recording absorption as an offset to revenue rather than having it in our SG&A. But another significant portion of that is our fee cut that we did last year as well as the large ticket pricing adjustment that we made. So I guess, we were looking at is that more on a go-forward basis, again, a couple of basis points a year is what you'll see in fee reduction or degradation going forward, simply because of the recycling of older products into newer products.
Okay. So when I'm looking into the past year like a third, a third, a third, would that be off by much versus IFRS is 5 basis points, fee reduction is 5 basis points, and then evolving AUM mix the remainder. Am I going to be that, like -- that far off?
I would think that your IFRS impact's probably a little bit less than that, it's more so the fee action and the lowest fee series is the majority of the difference.
Our next question is from Aria Samarzadeh of Barclays.
So I have a question on the decline in management fees caused by the adoption of IFRS 15 as well. So the last answer you just gave kind of clarified my understanding that part of that decline in management fee rate was caused by the portion of certain expenses that were previously included in SG&A and are now just a reduction in management fee revenue. So do these expenses that are no longer showing up in SG&A, are they going to impact your guidance on SG&A for 2019 of $188 million and for 2020 of $178 million?
Yes. So it did impact our guidance. And as I said during my remarks, maybe I'll clarify now, the guidance is -- for 2019 is $190 million. And we -- part of the reason why it's $190 million is that $2 million of the savings effectively was found in the absorption expenses, which -- it's an offset against revenue. So that's why we sort of adjusted that target to $190 million. So yes, you picked up on the right thing there.
And then for 2020, still going to be $178 million?
Well, so we didn't really give guidance, if you read the script carefully. We're trying to give some transparency into where we see 2020 expenses settling. And as I said in my remarks, we think they're going to be -- they're going to settle closer to that $180 million range. But the same math as I just went through, and that you've identified, apply to the 2020 direction we've given. We are not really calling it guidance at this point because it's kind of far off.
Aria, this is Kevin. I would sort of just that x out the just that one piece we talked about, our thinking is exactly the same as it was prior quarter in terms of what our targeting on those 2 years is.
Yes.
Our next question is from Geoff Kwan of RBC.
And maybe just I want to -- since we're talking about the management fees, maybe if I can ask it this way is when I take a look at the Q1 management fee number and if I'm thinking about management fees as a percentage of average AUM, with the change in IFRS and all the other stuff, was it then -- would you say it was a clean quarter? There was no kind of noise that might make looking at future quarters that we need to make other adjustments?
Yes, that's a good way to think about it, Geoff. Q1 is a clean quarter. It incorporates the IFRS adjustment. It incorporates all the fee reductions we did last year. It incorporates a lowest fee series. And so if you're modeling it out, I think, it's probably a reasonable thing to start with that Q1 rate and then apply that a couple of basis points per year over the course of the year in terms of the go forward. So that's the way we think about it.
Got it. Okay. And then on -- just keeping on with the modeling question, just with the fair value and the distribution income, I mean, it can be lumpy depending on what goes on there. Do you have any sort of thoughts as to how we should be thinking about it, granted it's hard to predict timing and how the fair values might change, but how it might look on a year-in, year-out type of business? Or should we just be -- it's going to happen and hopefully, we're going to be in the ballpark for whatever you report in a given quarter?
No, that's a great question, Geoff, and it's an important question as well. Yes, what I would do is I would look at the amount that we have invested in our LP units, and over longer periods of time, I think, we're around $110 million at this point. We've said in the past we expect 10% to 12% in terms of that fair value pick up, just because over time those units increase in value, assuming they meet their return targets. And then that is sort of over longer periods of time. Unfortunately, it is lumpy quarter-to-quarter because if you think about it, the value of the units don't go up in a straight line, we're incorporating both fair value increases as well as cash distributions from Stream and the Essential Infrastructure Fund. And we're also recording adjustments to carry through that line. And that kind of accounts for the variability. But I guess, stepping back, if you look at our alternatives business, the characteristics of the income we're receiving are changing over time. Just a few years back, really we were getting most of the earnings derived from being an early seed or LP investor. So as the business matures, as the fund matures, you're going to see more in terms of running yields, you'll see more regular fair value increases as well as these monetizations that occur from time to time. And then expanding from that, as the platform gains scale, as you know, we've got about $2 billion of AUM in the private alternatives business, you're going to start to see more profits coming from fee income as well. And so I would say that looking at the Q4, you'll start to see some meaningful management fees coming through that platform and that will coincide with the final close of the most recent fund. So we're very positive on the fact that we're going to get all these various sources of income from this platform, but the reality of it is that, and as you mentioned, it is going to be variable quarter-to-quarter.
And Geoff, it's Kevin, the thing about that is as we constantly went down the path to diversify the business and build-out the alts business, the extent it's come in and growing off a smaller base and it's going to get bigger, it's going to, obviously, make your question more relevant about how to model that because it's going to be, again, lumpy, but probably more frequent.
And Adrian, I just want to clarify, when you're talking about the lift that you'll get as the new management fees come online, is that the part of the income statement where right now as I think it runs slightly marginally positive in terms of income. That -- is it that item that's going to go up? Or is it different part that it's going to get allocated or where it gets classified?
Yes. So if you look at our income statement, you've got fair value adjustments and other income and that's where we record the earnings related to the LPs we invest in. And then we have the share of profit of associates in joint ventures. That line right now is primarily Smith & Williamson, but as the alternatives platform gains scale and we start to include our earnings, we'll record them on an equity basis through that line. So it'll come through the share of profit of associates in joint ventures.
Okay. Okay. The other question I had was on the retail side of the business. I mean, before the sell-offs in the markets in Q4, look like you guys were kind of at or slightly into the positive territory on the quarterly retail net sales. Obviously, market sold off, it was a weak RSP season for the industry, and obviously you guys were impacted. How comfortable do you feel about being at or kind of in that positive net sales territory? Or has what's been going on in the markets, maybe slightly stalled a little bit of that positive momentum you've been getting?
Yes. Geoff, it's Kevin. Just to give real context of this, 2018 December was the worst month in retail flows on record. February of '19, again, both of these are in our quarter, was the worst February since 2009. And if you think of December, Jan, February together as 1 quarterly bucket, worst on record. And so when we look at it, that if we were to sustain to have this kind of market volatility, it probably puts the whole industry to have a little bit of caution about flow right now. We would be no different. Having said that, January was soft; February, we were positive and March, we're tracking to flat in that backdrop. So nothing would change, but I would say, yes, everybody is probably little cautious in the industry, we'd be no different about that if this volatility continues.
Okay. And if I can ask one last question. The Smith & Williamson IPO, I think, the messaging before was hopefully something in the second half of this year. Is that still the messaging? Or is there a change?
Yes. Geoff, we had talked about this on the last call, just to remind everybody, S&W had come out and given some of the headwinds around Brexit, some of the regulatory headwinds over there right now in terms of getting ready to go public, they have moved that time line back to 2020, which, again, they're still plowing to that date, but it could slip a little bit because of -- there are some real issues going on over there and trying to go public in the middle of that, it's probably prudent to take a longer timeline on that, so think probably 2020 at some point.
[Operator Instructions] Our next question is from Paul Holden of CIBC.
So just want to return to the average management fee discussion. So the way I'm going to look at it is Q-over-Q. So it dropped from 108 to 104 according to your calcs. I figure the IFRS change is roughly 1 basis point. You're seeing probably a little bit -- and then so -- and that's 3 basis point impact and I'm trying to figure out what that's related from? Is that related to the preferred pricing, more AUM sliding into pricing there? Or is there some kind of repricing with product from strategic partners? Or what's the explanation on a Q-over-Q basis?
So you're looking at Q1 versus Q1?
I'm looking at Q1 versus Q4.
Okay.
We should normalize.
Yes, so that -- what we are picking up there, Paul, is actually mix. If you look at our mutual fund AUM on its own, I think, we're -- I think it might be down about a basis point. But, again, from quarter-to-quarter there's mix between institutional assets, retail assets and that kind of thing. So I think what you're picking up there, particularly when the market goes down in December, our mutual fund AUM is priced on average daily. So you sort of -- again, many of the things we're talking about today on a quarter-to-quarter basis, it's very difficult to model. But when we talk with a couple of basis points a year decline, it's over sort of longer period of time. The quarter-to-quarter, there can be noise.
Yes. Paul, it's Kevin. I'd echo Adrian's point. We've talked about the big drop of high net worth pricing that we put in. I still stand by, and I think that was the main issue, we still say we're thinking still 1 or 2 basis points a year on kind of a normal basis from here.
Okay. So again, there is no particular noise in the quarter though that would suggest it should go back up above the normalized rate -- run rate in the next quarter or 2?
No, there is not, Paul. I mean, again, mix can affect it from quarter-to-quarter, but the underlying trend in terms of line of business by line of business is a couple basis points a year.
Okay. And then just to close the loop on the fair value adjustments and distributions on the alternative investments. What was the catalyst or exact nature of the $7 million this quarter?
Yes, so as I've mentioned, basically there's a lot of things that go through that line, Paul. And there was obviously monetization in the quarter, but we also record increases in fair value, cash distributions and carry goes through that line as well. So it's really a lot of things that kind of go through there, but the main catalyst was the monetization in one of the private LPs that we invest in.
Okay. That's exactly what I was looking for, so that's helpful. And then final question and it's just a question related to the way you've decided to report EBITDA. So some of your public comps have been expensing DSC for a little over a year now, and they elected to put it above the EBITDA line, the DSC expense. You've elected to put it below the EBITDA line. So just maybe you can talk us through your rationale for taking the approach you did?
Yes. So the rationale is simply that the way we look at it, we're trying to share with you sort of how we look at the business. If we have a situation where our net income falls to 0 because we have a massive sales year, which is what could occur when you've got the sort of new business stream situation of expensing DSC, we would not look at that metric and say that's a bad thing. So we want to look -- the management of this company wants to look at the underlying trend of profitability, and we feel so EBITDA before commissions is a very good stable way to do that and it eliminates anomalies from year-to-year sales.
Our next question is from Tom MacKinnon of BMO Capital.
When I was looking at some of the selling commissions here, they seem to be a higher percentage of the gross sales than what we've normally seen. They are running over 2%. It's generally been about maybe 1.5%. How should we be looking at this going forward? And I've got a couple of follow-ups.
Hey, Tom, it's Adrian. Yes, that's a good question. That's correct. In the quarter what that relates to is, again, it's a mix thing. We're selling more stand-alone funds relative to fund-to-fund type products. And the stand-alone funds tend to have a higher proportion of DSC sales. So again, that is an occurrence that happened this quarter. It could continue or our sales could shift back to more fund-to-fund type products. But that's what you're seeing in the quarter.
Okay. What percentage of your retail sales would be DSC?
I mean, I think you can calculate that by looking at the DSC paid in our gross sales. But if you look at DSC as a total of our sales, you're in the roughly-a-third range.
And how -- we've heard talk about banning DSC sales. How do you feel about that? What's the likelihood of that? And it is a significant portion of your business. So what's been some of the dialogue you've had internally and with advisers with respect to that?
Yes. So I guess I'll take the first part and I'll -- second part -- then I'll ask -- Judy will give some more context. But the DSC in terms of it being a larger portion of our sales, really the DSC, what it is, is it's a methodology to provide compensation to advisers that deal with probably the smaller books and smaller clients. And so it's very effective in doing that, and it's really a dealer issue as far as what would happen in the situation where if the DSC were eliminated, they would have to replace that with an internally managed compensation methodology. And so effectively our sales would go on and we have the same relationships with our dealers and we would assist them or work with them to sort of ensuring those compensation arrangements are in place, much like you've seen with companies that have eliminated DSC on their own, they've replaced that compensation methodology with another one. So that would happen across the industry if DSC was eliminated.
Yes. And I guess, I can just add that our stance, generally, is that we're obviously working with the regulator, understanding where they're directionally going to take their various proposals. I think there is a huge amount of uncertainty right now in the industry given the way the Ontario government has stepped in to ensure that -- you know, there does seem to be a desire to remain -- providing investors continued choice. And I think we actually conducted a survey last year, I think it was Gandalf, right, it was Gandalf, and 62% of the respondents in that indicated that DSC really are an acceptable way to compensate financial advisers and that we believe that it is something that should be permitted from a choice perspective, but, of course, we're going to support the regulator whichever way it goes. And as Adrian says, I think we've got a variety of product offerings and we'll just do what's right in the client's best interest.
Yes. And Tom, know we're in an unprecedented situation in Ontario with how this has come out, but as we've talked about in the last several years, and to the point that both Adrian and Judy have made, we've sort of structured the strategy and business to be somewhat indifferent to the outcome. So whether an adviser wants to buy an F series, wants to buy something through DSC, or wants to buy an ETF, it doesn't -- I mean the capabilities are there, let them choose how. And so whatever comes out, and I think people do -- should have choice, but from a business model standpoint we're somewhat now becoming indifferent.
So your suggestion is as long as you keep selling DSC at this kind of level, the metric to use to look at you is EBITDA before commissions?
That's the one that we're looking at as far as when we look at the performance of our business. So we certainly encourage you to consider as well.
We have no further questions. I will now turn the call back over to Mr. Basaraba for closing remarks.
Thank you very much for joining us today. Our next call will take place on June 26, 2019, when we will review our results for Q2 2019. Details of this call we posted on our website. Finally, an archive of the audio webcast of today's call with supportive materials will be available in the Investor Relations section of our website. Good day, everyone.
Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.