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AGF Management Ltd
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Good morning, and welcome to the Q1 2020 AGF Management Limited Earnings Conference Call. My name is Anara, and I'll be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Adrian Basaraba. Mr. Basaraba, you may begin.
Thank you for joining, and good morning, everyone. I'm Adrian Basaraba, Senior Vice President and Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results for the first quarter of fiscal 2020. Slides supporting today's webcast can be found in the Investor Relations section of agf.com. Also speaking today will be Kevin McCreadie, Chief Executive Officer and Chief Investment Officer. For the live Q&A session and answer period with investment analysts, 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 address the impact of COVID-19, discuss highlights of Q1 2020, 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 2020. After the recorded remarks, we will take questions. And with that, I'll turn the call over to Kevin.
Thank you, Adrian, and thank you, everyone, for joining us. Before I discuss the highlights of Q1 2020, I wanted to address the impact of COVID-19, which has introduced unprecedented uncertainty and volatility in global markets and economies. AGF has a comprehensive pandemic and business continuity plan that ensures its readiness to appropriately address and mitigate any business risks and impacts to clients and employees. We made a considered effort over the past 2 years to move our office environment to the cloud to prepare us for times like these. Over this past week, more than 2/3 of our employees are working and signing on remotely with minimal issues. As of Monday evening, we have implemented a full work-from-home program, except for certain employees working at our BCP site, business continuity planning site that is. In these volatile markets, we are focused on delivering the best possible stewardship of the investments that clients have entrusted to our care. We actively manage for and stress test all of our investment portfolios on a regular basis under various market conditions to effectively control for our liquidity management needs across our suite of investment solutions. We will continue to monitor the situation closely and follow the latest guidance from local, provincial and federal health authorities to ensure our practices are aligned with the latest recommendations. Starting on Slide 5, we will discuss highlights of the first quarter of 2020. During the first quarter, we continue to execute against our strategy and stated goals. I'll begin with some highlights. Despite the recent market volatility, our mutual fund business reported gross sales of $562 million in the quarter, 9% higher than the first quarter of last year. Our private alternative AUM reached $2.7 billion, up 27% from a year ago. And as of February 29, our key strategies, including fixed income, global select, global sustainable growth equity and emerging markets equity strategies are all performing above benchmark on a 1-, 2- and 3-year basis. In January, the AGF Global Convertible Bond Fund, AGF Global Select Fund and AGFiQ Global Income ETF Portfolio earned FundGrade A+ Awards, which are given annually to investment funds and their managers who have shown consistent, outstanding, risk-adjusted performance throughout the year. On the U.S. side, one of our funds is a finalist for the 2019 ETF of the Year award by ETF.com. The fund uses a long-short strategy to create a market-neutral stance that has provided a positive return for investors in the current negative market environment. On March 2, Damion Hendrickson joined AGF to lead our U.S. business and drive growth in key institutional segments. Damion was most recently Head of Americas for HSBC. We remain on track to meet our SG&A guidance of $180 million, and the Board unanimously 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. AUM ended the quarter at $37.4 billion. Mutual fund AUM decreased by 3%. I'll provide more color on our mutual fund business in a moment. Institutional, sub-advisory and ETF AUM decreased compared to prior year, mainly due to the redemptions that we addressed in previous quarters. In the past several weeks, we received redemption notices from 2 clients with $760 million expected to transact in Q2 and $560 million expected to transact in Q3. The annualized revenue impact is approximately $2.3 million. The Q2 redemption is a sub-advisory relationship with an ETF provider that will have minimal financial impact. The Q3 redemption is due to a client internalizing their investment management capability. For our ETF business, our suite of Canadian and U.S. exchange-listed funds continues to experience growth. In the current volatile market environment, our liquid alternative products are uniquely positioned to meet investor demand for income and for risk management. Our market-neutral anti-beta strategy, which trades under the ticker QBTL in Canada, is designed to provide a hedge to the equity markets, providing protection during drawdowns while maintaining upside participation. During the recent market downturn, the strategy performed as intended. While the S&P 500 was down over 20%, our market-neutral anti-beta strategy produced positive returns. Our U.S. long-short dividend strategy, which trades under the ticker symbol QUDV in Canada, which is also offered as a mutual fund is designed to provide income through equity dividends with a bond life profile. Both strategies are available as U.S.-listed ETFs and have seen record flows in recent months. Our private client business continues to demonstrate consistent and steady growth with AUM increasing 5% year-over-year. Our private alternatives AUM reached $2.7 billion this quarter due to our latest fund, which raised considerable capital from institutional investors in Canada, United States, Europe, the Middle East and Asia. The fund has exceeded its $1 billion target size and is expected to achieve final close later this year. Turning to Slide 7, I'll provide some detail on the mutual fund business. For the past 12 months, ending February, the Canadian mutual fund industry reported net sales of $23.9 billion compared to net redemptions of $9.7 billion for the prior 12 months. Despite the improvement, starting the second half of February, North American markets were significantly impacted by the COVID-19 outbreak. In this challenging environment, our mutual fund business reported net redemptions of $344 million. This includes a redemption of approximately $200 million from a client invested in the institutional series, which we disclosed on the previous call. Excluding net flows from institutional clients invested in mutual funds, net redemptions were $141 million for the quarter compared to $104 million in Q1 of last year. And now we usually provide guidance on when we expect AGF to return to positive net flows, it is difficult to offer a meaningful outlook when the precise impact and length of COVID-19 pandemic remains unknown. I can tell you that in speaking with our retail and institutional distribution teams that business is still being done, but done differently. With COVID-19 impacting all of our daily routines, meeting with clients and prospects have become a far more virtual transaction. Our call center has seen no material change in volume or types of calls and transactions. March 2020 numbers remain similar to March 2019 activity.On the retail side, our wholesalers are in constant contact with advisers, leveraging digital outreach tools and sharing portfolio stress testing with the capability we launched last year. At the same time, we are providing expert insights and thought leadership to support clients in navigating this rapidly changing and uncertain environment. We are also actively using a behavioral profiling model that incorporates all our touch points with users across our global client channels. We have an agile approach, which allows us to adapt as we test and learn. This allows us to arm our sales team with new insights as the model learns.Before I turn the call back to Adrian, I want to give a quick update on performance. AGF has historically reported percentage of AUM above median, which involved comparing our trailered mutual funds to the population of competing funds. With the proliferation of nontrailered versions of mutual funds and ETFs and their inclusion in the above median data set, the metric was no longer relevant as we have previously discussed. Starting this quarter, we will begin reporting performance of our mutual fund strategies using gross returns, removing the impact of significant fee structure differences within the data set. As of February 29, 2020, our average mutual fund percentile ranking over the past 1 year was 40%. Our average mutual fund percentile ranking over the past 3 years was 46%. Since February 29, our performance has held up well. To put it into context, as of last Thursday, the MSCI All Countries World Index is down 21% since the end of our fiscal Q1. In comparison, our AUM, excluding private alternatives, is down 14% over the same time period. Keep in mind, roughly 1/4 of our AUM is in fixed income. Year-to-date through Friday, 56% of our mutual funds performed better than the median. With that, I will turn the call back over to Adrian.
Thank you, Kevin. Slide 8 reflects a summary of our financial results for the first quarter with sequential quarter and year-over-year comparisons. For ease of comparison, we have included adjusted numbers and restated prior period results for IFRS 16 throughout the remainder of this presentation. EBITDA for the current quarter is $30.2 million, which is $5.6 million lower than Q4 2019. This is mainly due to the lower Smith & Williamson income and timing of SG&A. Due to the classification as held for sale for Smith & Williamson, in Q4 we recorded $7.8 million of equity and dividend income. In Q1 2020, we recorded only $4.5 million of dividend income. Turning to Slide 9. 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 AUM in the current quarter as well as the trailing 12 months' view. Note that AUM and the related results from Smith & Williamson, the private alternatives business, onetime items and other income are excluded. The Q1 revenue yield is 110 basis points, which is consistent with the trailing 12 months. Looking forward, all else being equal, we anticipate our revenue rate may increase slightly due to the committed redemptions that Kevin indicated earlier, which were a lower revenue rate.Q1 SG&A as a percentage of AUM was 51 bps, flat to the trailing 12 months. This resulted in an EBITDA yield of 25 basis points, which is 1 basis point higher than the trailing 12 months. Turning to Slide 10. I'll address free cash flow, capital uses. This slide represents the last 5 quarters of consolidated free cash flow on a trailing 12-month basis, adjusted 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 a dividend. Our trailing 12-month free cash flow was $51 million, and our dividend payout ratio was 49%. Our total remaining capital commitment to the private alternatives business is $61 million. Given the recent market volatility, I'll address what this means for AGF's capital position and profitability. Like other asset managers, a persistent market downturn negatively impacts our profitability and cash flow as a significant portion of our revenue is driven by market-sensitive AUM.In general, for every $1 million reduction in average AUM, not including private alternatives, net revenue would decline by approximately $7.4 million. Keep in mind the sensitivity of our AUM to equity markets is buffered by fixed income and can also be bolstered by a weak Canadian dollar since much of our AUM is global. Depending on the length and severity of any downturn, we can adapt by adjusting our SG&A to reflect market conditions. Our priority is to preserve financial flexibility and positively influence the sustainability of the dividend.Please keep in mind with COVID-19, its impact to our daily routines, we will have savings due to reduced or revised projects and activities, including travel and meals and entertainment. For now, we're reiterating our $180 million expense guidance for 2020. At $180 million, we will have removed close to $15 million of expenses, part of an expense management program that began 3 years ago. This program positions us better to deal with the current market disruption. In a worst-case scenario, there may be some concern about our leverage ratio or staying within financial covenants. Although we don't disclose our covenants and nor do we provide forward guidance on this, keep in mind, we do have options to manage this. For example, working with our credit providers, which have always been very supportive. SG&A could be further reduced. Previous work here has improved our position, as I mentioned. If necessary, we'd consider monetizing items on our balance sheet that are not strategic. We have investments in alternatives, LPs and seed capital, which totaled $166 million and that compares to our long-term debt of $218 million. And all of this is before considering monetization of Smith & Williamson, which we have disclosed, could provide additional cash of approximately $280 million. Turning to Slide 11, I will turn it to Kevin to wrap up today's call.
Thanks, Adrian. Q1 was solid quarter. We continue to make progress against our stated objectives. Mutual fund gross sales were 9% higher than Q1 of last year. Our mutual funds and ETFs continue to receive industry recognition. Our private alternatives AUM reached $2.7 billion, furthering our goal of reaching scale on this platform. Our balance sheet remains strong with $166 million of marketable securities. Our transaction to monetize S&W, while delayed, pending the approval of the FCA, remains active and is expected to close later in the year. We anticipate receiving total cash of $280 million upon closing. We believe that a pullback in economic activity will result in a recession with central banks and governments around the world are now flooding the markets with liquidity that is crucial to minimizing the current crisis. And once the pandemic is under control, we should experience a swift recovery led by a rebound in global stock prices. In this challenging environment caution, nonpanic should be everyone's mindset. It's not if, but when we recover from the economic fallout of the COVID-19 pandemic, and we believe the best course of action for investors remains a broadly diversified portfolio that includes stocks, bonds and alternative asset classes and strategies. I want to thank everyone on the AGF team for all of their hard work in these challenging times. This concludes the event and we look forward to your live questions.
[Operator Instructions] Our first question comes from Gary Ho from Desjardins.
Maybe just to start off, sure it's been topical. Are you able to provide some color on where your AUM stands currently? And how has net flows been in March so far? Any commentary on outlook outflows would be helpful.
Sure, Gary. This is Judy Goldring. Thanks for the question. Our AUM as of end of day yesterday sat at $33 billion, including private alternatives. That was down about 12% off of the Feb 29 state. We -- if you exclude the private alternatives, then we are at $30.3 billion, and that's down about 13%. And as we know, the market is being off closer to 17% to 25% in that range, I think we're holding up very well on that. When we're looking at net outflows as well, I think it's helpful to be fairly transparent at this time. So we have seen, of course, a flight to safety for investors. Obviously, they're very nervous. Gross sales are down about 5% for us with growth redemptions up about 17%, and we're seeing net outflows for the months of March from -- sorry, from March 1 to yesterday of $65 million, and that's -- versus the $22 million number last year. So we are seeing some movement for sure. Kevin, you can speak to the outlook on where we see this market going.
Yes. I think you have to put it in perspective, there's been a pretty good run from equities for the retail investor around the world right now. And as you think about that, they redeem out of an equity fund. They sit in cash on a typically a sweep fund for whatever broker dealer, et cetera. So you're going to see a gap between gross and the redeemed side right now. In terms of outlook, your second part of the question, Gary, I mean if this thing -- and we anticipate this is not months and years, this is, I should say, not quarters or years, it's probably a month, months maybe that we're in this. And to the extent you get economic activity started, and you get these markets to stabilize, we think you probably bring back some of those flows back into equities. But clearly, there's some volatility ahead in the markets. But I think the longer it goes, I'd say, the more psychological damage you may do. If it's a shorter event, as I suspect, then I think you do get some type of recovery in markets later in the year and therefore, flows.
Great. And yes, those numbers are very, very helpful. Maybe second one, just on the S&W. We've gotten the update last quarter, but it doesn't sound like the language has changed much in your MD&A. Are you able to provide any color on where the deal stands today? Any repricing risk from your end?
Yes, there really is no update. I mean as you know, the discussion with the FCA are actually ongoing. Management of both Tilney and Smith & Williamson remain committed to the transaction. So it's really in the hands of the FCA, which, as you can imagine, right now, has got a few of the things they're dealing with. But there's no -- nothing either positive or negative to update on vis-à-vis where we were last quarter on this. We still anticipate, as we said in our comments, that this transaction closes sometime this year.
And remind me, have they refiled? I don't know with the first one, you said there were some struggles with it, but have the Tilney and S&W refiled to the FCA already?
Yes. So the application is Tilney's because they're the acquirer. So we're not provided the exact application process. But I understand that there have been -- we know that there have been obviously dialogue with the FCA about what is needed to remedy whatever their concerns were.
Okay. Got it. And then just lastly, maybe a numbers question for Adrian. The GP income this quarter, $0.1 million, was quite a bit lower than what kind of I have in my model. And I think you've guided to in the past $2 million to $4 million annualized. Can you help us think through this? And what should we model on a run-rate basis?
Yes. Thanks for that, Gary. I think that estimate is probably a decent one for the underlying earnings, but you probably noticed, as disclosed in our financial statements, we began to accrue carry, and carry is an expense that basically increases the accumulated losses. So that's going to defer the recognition of the income on our income statement. But again, keep in mind that the accrual is noncash. We don't recognize the other side of that, which is the fact that when we actually earn carry, it will be a benefit to us, obviously. So the other thing to keep in mind, Gary, is, again, in Note 5, we disclosed, when you receive a dividend from our alternatives platform during the quarter, that might be a better way to sort of assess the profitability of the platform going forward.
Our next question comes from Paul Holden from CIBC.
So just want a point of clarification on the last answer, Adrian, if you don't mind. So I think the explanation I hear is on, let's call it, base fees and base operating costs, the GPs are running roughly breakeven, but the profitability is assumed to come from carried interest. Is that correct?
No. So here, let me clarify. The underlying earnings that we have guided on are -- I'm saying there's no update to that. But the recognition of those underlying earnings are going to be deferred because just for accounting purposes, we have to start to effectively accrue carry or account for carry, even though it's a noncash expense and you don't recognize the other side of that entry, which is that eventually, if carry is paid, we will be the recipient of it. So it's really a difference between the underlying earnings, which you can't see. That gets basically buffered by or we're limited in terms of recognizing it because we have to accrue expenses such as carry. And it's just an accounting phenomenon. Is that clarified?
Okay. I think I understand. Yes. So question related to Smith & Williamson. Do you have an estimate or do you know if there's break fees associated with that deal, if it doesn't happen to go through?
Yes. Paul, this is Kevin. We haven't disclosed those terms. But just for the call, there are no break fees in this transaction.
Sorry, there are break fees on the transaction?
No, there are no break fees in this transaction.
No break fees. Okay. Got it. Okay. Maybe an update on the private alternatives or thoughts really around implications from COVID and maybe even more importantly, what's happening in the energy space, given where oil prices are?
Yes. Thanks, Paul. It's...
Yes. Adrian, do you want to start on that one?
Yes, sure. So as far as the -- our investments in the alternative LPs and the business in general, you got to keep in mind that a lot of the stuff is not correlated. And a good reason for that is that the investments that are made are longer dated, they tend to have contracted cash flows. And including any of the investments that are exposed to what's happening in the oil sector, we're pretty comfortable with how the portfolio is positioned.
Okay. And then last question, you talked about balance sheet flexibility. Do you have appetite and capacity to buy back stock opportunistically here?
Paul, it's Adrian, again. So we are in blackout because of the Smith & Williamson deal, so we would be restricted from doing that. But absolutely, it's something that we would consider in the context of our capital plan.
Paul, this is Kevin. As we've said in the past too, when Smith & Williamson does transact, we will take a balanced approach to this, which is paying down debt obviously, but also -- some amount of a buyback, but also reinvesting in the future. So that has not changed.
Our next question comes from Geoff Kwan from RBC.
My first question was for Judy. I appreciate the transparency on the AUM and the net sales performance. Just wondering if you can comment in terms of how that -- either as a daily or weekly, like how that trend has been? Has it been -- as the markets have sold off, that's actually been picking up or has it been relatively steady?
Well, I can talk about sort of certainly our processing flows have been consistent from a back office perspective. We've obviously seen some spike of movement into money market. But there's sort of a consistent trend of behavior that we're going to see with these investors as they respond to the market. There definitely is a nervousness for sure, and we're seeing that.
Yes. Geoff, it's Kevin. I would say that in the beginning, when this thing started, obviously you saw a large -- a gapping in the redemptions. They've seem to, in the last couple of days now, at a more stable pace. So I'm not -- it doesn't feel like -- it feels like the panic selling is somewhat behind us. I still think there's a lot of nervousness out there.
Okay. So it might be more of a gross sales issue than necessarily redemption. Is that a fair characterization?
Yes, at this point. I think people are sitting on the sidelines for sure until they see where they settled out.
Okay. And then, Adrian, you were talking about with the -- some of the investments like in the energy space. And it sounds like with what you've got to invest over the nature of -- the types of investments you've got that there isn't as much of a kind of a potential hit on the mark-to-market for those investments. But I also wanted to ask about -- you talked about it's possible looking to monetize certain investments if you want to increase your liquidity position. Just wondering how you balance that in the context of asset values, broadly speaking, have come off and then also having other investors in those assets that may also have different considerations as to whether or not to monetize certain investments?
Yes. Thanks, Goeff. So I'm just really talking about that in the context of a worst-case scenario. We don't have any intention to already need to monetize or liquidate anything. It was really just more so to help you feel comfortable around the strength of our balance sheet.
Okay. But you would have to kind of figure out the balancing out there because it's not just assets you own entirely yourself. You have other investors that you'd also need to take into consideration, is that the right way to be thinking about?
No, not necessarily, Geoff. So if you think about the private alternatives market generally, there is a secondary market for LP units. So I don't think that there's any sort of coordination that would be needed. But again, I want to stress that, really what I'm talking about is the strength of our balance sheet. And we don't have any intention or any need to liquidate anything at this point in time.
Okay. And just the last question I had for Kevin. Can you describe, I guess if it's -- there is some sort of general way you can describe how the funds were positioned before the market started to sell off? And has that positioning changed even a little bit given where we are today?
Yes, Geoff, thanks. So I think many of you guys know, we've spent time talking over the last year. We've been somewhat in the camp that things where we were moving to new highs on things. We had played a little more defense last year, which are relatively as the markets at 30-plus years -- 30-plus percent years. That meant our balance accounts had more cash. We used in our balance accounts to hedge one of our liquid alt ETFs, which is an anti-beta ETFs, so impact in the quarter at its best here with the market down near 30%, it was up plus 18%. So that's a pretty dramatic spread. So having a couple of percent in all of our balanced products, a big chunk of it in our sector class has really boxed some pretty good shape with that thinking. We have started to leg some of those tools out and leg back in to the markets, but I think we're going to be in some chop from here. But performance relatively, and I don't have through last night, but I think probably 60% of our assets right now or more are in those top 2 quartiles. And most funds, I think almost all funds or I'd say, the majority are well ahead of their benchmarks right now. So that defensive posturing has clearly helped. And I think as we go back to advisers, after this settles down, I think that's going to be a pretty good story to tell.
Our next question comes from Graham Ryding from TD Securities.
Kevin, if I could just follow-up on that, the anti-beta performance, is that the market-neutral ETF that you are referencing? Or is that a different product?
Yes. No, that is -- we launched that in the U.S. We've had it there for since 2011. So we've had a pretty good track record there, know how it acts in these kinds of times. It was kind of built after the thinking of '08. And what it does is short the highest bid of names in the market and goes along an equal basket of low-beta names. So if you think about beta and an up market, high-beta names. If the market's up 10, maybe they were up 12. The same thing doesn't happen. There's an asymmetry to beta. So when the market is down 10, those names tend to be down 17. So the ability to short that bucket of things gives you a negative or a down market. Your shorts work a lot harder for you. And since you're alone, the low-vol piece of it, those hold up better. So you put them together, even while it's market neutral, you actually have a negatively correlated asset. So what you're hoping for is in a really down tape that you're actually generating a positive return, all rules based. So you're not worried about the scale of the manager.
Okay. So bottom line, the product is performing as expected through this volatile period.
Exactly as it should have.
Great. And the performance that you talked about, 60% of your assets in top 2 quartiles, is that through March or quarter-to-date? Or what's the time period for that?
Yes, that's year-to-date.
Year-to-date. Okay.
And March has been similarly strong. And I should understand that the U.S. version we launched back in -- as I said, in '11, we launched the Canadian version of that anti-beta market-neutral ETF here in the fall. So it was timely to be able to use that within our Canadian products and with advisers doing this.
Got it. Can you talk about the flows on the liquid alt ETF side? Like I'm not sure we can actually break it out of your institutional AUM line item.
Yes, they're going to -- again, people are using these tactically. So it's a spot in time at its peak. In other words, think about it this way. Some advisers as market risk was picking up, we're adding to it. As markets have bottomed, they've have taken some off, so they use it more of the lever back and forth. But at its peak between the 2 shelves, U.S. and Canada, we were probably north of $0.5 billion from virtually not a lot last year at all if you think about the Canadian shelf, just launched in the fall.
Got it. Okay. The -- Adrian, I'll jump to you. The SG&A guidance, $180 million. Is that including the IFRS 16 impact?
Yes. It does include that, Graham.
Okay. Can you help us quantify was it roughly $1.2 million in the quarter?
Yes. It's about $1 million, yes, of interest and depreciation. And there's an offset as far as the savings on ramp, yes.
Okay. That's fine. That helps. And then just lastly, I think you said you don't disclose the covenant on debt to EBITDA. Is that correct?
That's right.
Okay. How about just your comfort level on leverage, if there are some reason, Smith & Williamson is delayed or markets stay volatile here for a while? Like what is your comfort level before you have to start looking at SG&A or potentially worst-case monetizing?
Maybe, I'll take this one first, and maybe you can add in. Yes, I think, Graham, we have been very, I'd say, cautious about our thinking about this. As you saw, we took $15 million out of expense the last couple of years, not because we've been thinking about where markets are. So in the worst-case scenario, we also assume we have to be here another year down this level and take it even further down. There's a lot of things we can do. And so I'd say that I'm not concerned about it. But the things we listed out in the call commentary earlier, were really to show you that there are things we can do in those worst-case scenarios, but I don't think we're there. But we obviously will have planning around that. So a fair amount of comfort in our balance sheet right now. Adrian, anything you want to add there?
No, I think over the coming weeks and months, we're going to continue to monitor AUM revenue expense levels and adjustment as needed.
Our next question comes from Tom Mackinnon from BMO Capital.
A question about the fee rate, 108 bps in the first quarter this year versus like 102 in the first quarter of last year. What's driving that? Is there any kind of shift in mix here? Or is there anything else happening? And is it sustainable?
Tom, it's Adrian. Thanks for the question. Yes, that's a good one. It really is mix, and it's effectively a larger proportion of our AUM is retail. And so when we give our guidance that a couple of basis points a year decline, that's sort of what always a fixed asset mix. But obviously, quarter-to-quarter, year-to-year, the mix can change. So the direction of fees by line of business is probably flat to down. But when you look at it overall, I think you've pointed out correctly that mix can have a very large effect on it.
Okay. And with some of those institutional redemptions coming out, is that while the denominator shrinks is the impact on the numerator is a little bit less just because there's more retail?
Yes, that's correct, Tom.
Okay. And then I just want to go back into these kind of worst-case scenario talks you've talked about here in terms of monetizing. I mean we've heard you say, well, that would be a worst-case scenario, and this would be a worst-case scenario. What is this worst-case scenario? Is it how much more of a decline in markets? Or is it -- we don't get Smith & Williamson? And what -- I was wondering if you can share any color in terms of what -- you mentioned you did do some stress testing, but if you could share with us what your worst-case scenario here is when you start monetizing things?
Yes. So Tom, it's Kevin. So let's assume, we fully expect that S&W is going to monetize. If it weren't to monetize, that's not going to be any kind of a trigger for us. S&W is a well-performing asset, has provided a good dividend, and the business continues to do well. So what we think about is a market that goes from here, another 20 to 25 down, and we're there for a couple of years, right? That would be in my mind where we'd have to start thinking about how do we just optimize our business for the future as all firms in our industry will on all sides of it, right? I don't think that scenario is likely. That's why we're saying it's probably a worst case. But it doesn't really center around S&W. Obviously, if S&W transacts, it will be -- think about it having cash in this environment would be actually a pretty -- be a lot of optionality for us to do things. But worst case is not really around S&W at all because we like that business at the end of the day, if it doesn't transact, it's performing well. It's really around a market that stays here and that is a duration that is just way out into the future.
We have no further questions at this time. I would like to turn the call back over to Mr. Basaraba for closing remarks.
Thank you very much for joining us on today's call. Our next earnings call will take place on June 24, 2020, when we will review results for Q2, and details will be posted on our website, and an archive of today's call will also be available. And the AGF team wishes all of you good health, and good day, everyone.
Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.