AGF Management Ltd

TSX:AGF.B

Earnings Call Transcript 2020-Q2

[Operator]

Good morning and welcome to the Second Quarter 2020 AGF Management Limited Earnings Conference. My name is Brandon, and I'll be your operator for today. [Operator Instructions]Please note, this conference is being recorded. And I will now turn it over to Adrian Basaraba. You may begin, sir.

[Adrian Basaraba, Senior VP & CFO]

Thank you, operator, 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 second quarter of fiscal 2020. The slides supporting today's call and 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 question-and-answer period with investment analysts following the presentation, Judy Goldring, President and Head of Global Distribution, will also be available to address questions.Turning to Slide 4, I'll provide the agenda for today's call. We will provide an update on the Smith & Williamson transaction and discuss the highlights of Q2 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 prepared remarks, we will be happy to take questions.And with that, I'll turn the call over to Kevin.

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Thank you, Adrian, and thank you, everyone, for joining us today.As was announced earlier this month, significant progress was made on the proposed merger between Smith & Williamson and Tilney. The two firms have agreed to a revised transaction structure that includes a material new equity investment from funds advised by Warburg Pincus LLC and a lower level of leverage for the combined entity. Under the revised terms, AGF expects to receive total cash proceeds of approximately $300 million, including dividends and distributions of $47 million, and this is approximately 2x the current book value.The return on our investment gives us the flexibility to redeploy capital in a number of ways, including servicing debt repayment, funding future share buybacks and continuing to invest in new areas of growth. Revised transaction structure will require approval by the relevant regulators, antitrust authorities and Smith & Williamson shareholders. Allowing for the process of receiving these approvals in the current environment, the transaction is anticipated to close in the second half of the year.Moving on to Slide 5, we will discuss highlights of Q2 2020. During the second quarter of 2020, we continued to execute against our strategy and stated goals. I'll begin with some highlights. Given the COVID-19 situation, nearly all of our global staff worked from home this quarter. We experienced no interruptions to our business operations, and in some cases, we are performing at a higher efficiency level than pre-COVID. We have also increased our lines of communications with our strategic partners, clients and prospects globally, delivering timely market updates and information about our products through a variety of digital channels, including agf.com weekly conference calls webcasts and direct to client e-mails. Our private alternatives business reached another milestone with the final closing of the InstarAGF Essential Infrastructure Fund II, which raised approximately USD 1.2 billion in aggregate equity commitments.AGF is a finalist at the Wealth Professional Awards in 4 categories this year; Fund Provider of the Year, Employer of Choice, CEO of the Year and ETF Champion of the Year. Winners will be announced in September.We remain on track to meet our SG&A guidance of $180 million with the potential for further savings due to the impact of COVID-19. The Board unanimously confirmed a quarterly dividend of $0.08 per share for the second 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 $36.3 billion. Mutual fund AUM decreased by 2%. I will provide more color on our fund business in a moment. Institutional, sub-advisory and ETF AUM decreased compared to prior year, mainly due to the redemptions we addressed in previous quarters.While COVID-19 has caused a modest slowdown in RFP activity, we continue to see strong interest in our global sustainable growth equity and emerging markets equity strategies. Performance for our global sustainable growth equity strategy has been stellar, exceeding the benchmark by well over 200 basis points on a 1-, 3- and 5-year basis. Under Regina Chi's leadership, performance of our emerging market equity strategy has also improved and will approach the 3-year mark this fall, which is key for the institutional channel. For our ETF business, our suite of liquid alternatives continues to attract interest. During the recent market downturn, investors saw firsthand the benefit of diversifying their portfolios with our liquid alternative products. At the peak of the downturn, while the S&P was down roughly 30%, our market-neutral anti-beta strategy performed as expected and produced positive returns in the mid-teens.Our global infrastructure ETF, which is available in both Canada and the U.S., has also attracted positive press coverage. We anticipate strong demand for these products over the long run. We view alternatives as a spectrum ranging from liquid alternatives at one end to private alternatives at the other. Our alternatives business, including liquid solutions, totals over $3.3 billion in AUM to date. Our private alternatives AUM reached $2.9 billion this quarter due to our latest fund, which raised considerable capital from institutional investors in Canada, United States, Europe and the Middle East and Asia.Fund II achieved an 80% participation rate from existing investors, reflecting the team's focus on building long-term relationships with its limited partners and has already deployed approximately 35% of its capital due high-quality investments in the United States and Canada.Turning to Slide 7. I'll provide some detail on the mutual fund business. As indicated on our previous earnings call, COVID-19 has introduced unprecedented uncertainty and volatility to global markets. And surprisingly, the Canadian fund industry reported net redemptions of $15 billion in our latest fiscal quarter compared to net sales of $0.5 billion positive for the same period last year. In this challenging environment, our retail fund business reported net redemptions of $93 million compared to net redemptions of $169 million in Q2 of last year.As we disclosed on our previous earnings call, we had net redemptions of $65 million up to March 24. For the remainder of the quarter, we had net redemptions of $28 million. We are also seeing days of positive net sales in June. Despite working from home for most of the quarter, our retail team remained very active conducting over 80 client events and reaching out to thousands of advisers. In May, we held a virtual event to help advisers navigate the rapidly evolving world of digital client engagement. This event was attended by close to 1,400 advisers. Overall, our level of client interactions is up 15% versus normal run rate. Our investment management team has also been heavily involved in supporting our clients by providing expert insights and thought leadership. Our weekly market update calls, which started the week of March 15, consistently attracted over 750 attendees across retail and institutional channels with participants from Canada, the U.S., Europe and Australia.Before I turn the call back to Adrian, I want to give a quick update on performance. AGF measures mutual fund performance by comparing gross returns before fees relative to peers within the same category with the first percentile being the best possible performance. This is a slight modification from last quarter, where 100 percentile was used for the best possible performance. We target an average percentile ranking versus peers of 50% over 1 year and 40% over 3 years. As of May 31, 2020, our average percentile ranking over the past 1 year was 49%. And our average percentile ranking over the past 3 years was 56%. With respect to our ETFs, 80% of our Canadian listed ETFs have outperformed their peers year-to-date, and 67% of our U.S.-listed ETFs have outperformed their peers year-to-date. With that, I will turn the call back to Adrian.

[Adrian Basaraba, Senior VP & CFO]

Thank you, Kevin. Slide 8 reflects a summary of our financial results for the second 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 the presentation. We have also included a section of the table showing results, excluding Smith & Williamson.As Kevin discussed earlier, Smith & Williamson and Tilney have agreed to a revised transaction structure. Please recall, for accounting purposes, Smith & Williamson is now classified as held-for-sale and equity accounting ceased mid-September last year. This means only dividends received will be recognized as income. As a result, we recorded no income from Smith & Williamson in the current quarter. This compares to $6.5 million of equity income in Q2 2019 and $4.5 million of dividend income in Q1 2020. Excluding Smith & Williamson from prior period results, diluted EPS was flat to Q2 2019 and down $0.01 compared to Q1 2020.Looking ahead, we anticipate receiving a dividend of $9 million in June and a special distribution of $33.7 million immediately before closing. Both items will be recorded in dividend income and a special distribution of $33.7 million will be treated as a onetime item. Excluding Smith & Williamson from prior period results, EBITDA for the current quarter is $4.5 million lower in Q1 2020 and $2.7 million lower than Q2 2019. When you consider management fees, trailers and SG&A, even if for our wealth management business held up relatively well. Lower EBITDA in the quarter is partly attributable to income from our investments in private alternative funds, which I will address in a moment. At the beginning of the year, we issued SG&A guidance of $180 million for 2020. This represents a reduction of approximately $15 million over the last 3 years. Our achievement and efficiency has come at a time when we were also investing a significant amount of resources to new and emerging growth areas, including private alternatives, global and quantitative investing in ETFs, all of which are being funded from our existing operating capital.With COVID-19 impacting many aspects of our daily routines, we anticipate we will have a further savings of up to $5 million due to the reduction of activities, including travel, meals and entertainment.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 average AUM in the current quarter as well as a trailing 12-month view. Note that AUM and related results from Smith & Williamson, the private alternatives business, onetime items and other income are excluded. The Q2 revenue yield is 108 basis points, which is 1 basis point lower than the trailing 12 months. The decline is mainly due to a shift to lower fee products. Q2 SG&A as a percentage of AUM was 49 basis points, which is 2 basis points favorable compared to the trailing 12 months. This resulted in an EBITDA yield of 25 basis points, which is flat to the trailing 12 months.Turning to Slide 10, I will discuss free cash flow and capital uses. This slide represents the last 5 quarters of consolidated free cash flow on a trailing 12-month basis, as shown by the orange bars on the chart. The black line represents a percentage of free cash flow that was paid out as a dividend. Our trailing 12-month free cash flow was $49 million and our dividend payout ratio was 51%. We have committed both operating and balance sheet capital to alternatives. As Kevin mentioned, we view alternatives as a spectrum. Our liquid alternative AUM is now almost $0.5 billion, and our private alternatives AUM is close to $3 billion. Our total remaining capital commitment to the private alternatives business is $61 million. The original objective of our private alternatives business, which started back in 2014, was to generate recurring income, most importantly, management fee profits through a variety of funds and managers. At the same time, we are positioning the business for future growth. We have succeeded in growing AUM and earning LP income. We have recorded LP income of $49 million since inception. Also since inception, we've earned GP income of $3.3 million and received dividends of $2.6 million. GP earnings have been muted by the fact that potential profit has been reinvested to accommodate future growth.In addition, accounting has limited our ability to record GP income. IFRS requires we accrue carry expenses in each GP, even though they are noncash, and we don't record the corresponding revenue until carry is actually realized. If you look at it on a cash basis, total operating cash flow at the GP level is targeted at approximately $3 million per year, and this amount should grow as the various GPs scale. GP dividend payouts will be in a similar quantum, but maybe more lumpy.Income from our investments in private LP funds were slightly lower this quarter. The current quarter was impacted by COVID-19 pandemic and the corresponding market uncertainty and volatility. Since inception, our private alternatives funds have produced gross IRRs above our target of 12%. We've also had successful monetizations. For example, when Stream Asset Financial LP monetized its seed asset, it resulted in a 65% IRR on this investment.We are committed to growing within the alternative space. We believe market dynamics will continue to drive assets into differentiated products that provide negative correlation, enhanced returns and increase income levels. The recent market downturn, if anything, may accelerate this trend. Alternative assets have delivered good relative returns through previous market downturns, and we believe it will do so again. Smith & Williamson transaction will provide resources to help accelerate this growth. We expect to receive net cash proceeds of approximately $275 million. In the short term, assuming we don't have an immediate use, we intend to repay debt, which currently stands at $201 million, leaving the remaining cash on our balance sheet. We would also relever if we uncover compelling opportunities to grow. We think 1x debt-to-EBITDA is a good target. We're comfortable increasing our net debt-to-EBITDA up to 2x temporarily. In addition to managing our debt and growth, we would also consider return of capital to shareholders and expect to be active on our share buyback program. To determine the amount of share buybacks, we will consider a number of items, including timing of cash receipts from Smith & Williamson, our share price and free cash flow levels.Turning to Slide 11, I will turn it to Kevin to wrap up today's call.

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Thanks, Adrian. Q2 was a solid quarter. Despite the challenges posed by COVID-19, we continue to make progress against our stated objectives. Our retail and institutional distribution teams remain highly engaged and focused on driving the organization to sustainable net inflows despite difficult market conditions. We expect to receive total cash proceeds of approximately $300 million from the merger of Smith & Williamson and Tilney later this year. Our latest infrastructure fund achieved final close with approximately USD 1.2 billion in aggregate equity commitments, and we remain on track to meet our 2020 SG&A guidance with the potential for further savings due to the impact of COVID-19.The pandemic has introduced uncertainty and volatility to global markets and economies and has resulted in material disruptions to businesses globally. While many governments have applied monetary and fiscal interventions to stabilize the economy, the impact of these measures as well as the length and severity of the pandemic remains unknown. In this environment, we would like to reiterate that 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.At AGF, we remain focused on our strategic priorities, which are to deliver consistent and repeatable investment performance and drive the organization to sustainable net inflows, position the firm to receive $5 billion in alternative assets by 2020 and meet our expense guidance while continuing to invest in key growth areas.I want to thank everyone on the AGF team for all of their hard work in these challenging times. We will now take your questions.

[Operator]

[Operator Instructions] From Desjardins Capital, we have Gary Ho.

[Gary Ho, Analyst]

Just first question, just on the S&W transaction. Can you provide any further updates on the approval since your early June announcement? And how are those progressing? And any comments on when the deal could close?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Yes. Thanks, Gary, it's Kevin. Let me take that one. Yes. So let's just remind everybody where we are. So we announced transaction, revised transaction structure at the end of May, which is essentially to give us an all-cash transaction of roughly at the time $300 million when you consider various cash flows, special dividend and then what would be the final proceeds. Time line is as follows. As you recall, the first transaction was held back by the FCA with some concern around the capital structure that was going to be used in the merger. That has been alleviated, we think, given the fact it's a large equity infusion with a new partner, Warburg Pincus, who will come alongside Permira to help take us out of our stake. So the FCA, we understand, has that new application, and we'll be reviewing it sometime in the coming months. As soon as that is approved, we'll take that to shareholders, where we expect, again, a very similar transaction for them, so we don't expect any issue there. And then finally, it will be -- have to run through the EU and a few other jurisdictions' antitrust approval.But given that the combined entity doesn't do any real business outside the EU, we don't expect there to be a hurdle there as well, which puts time line still back into the early fall, early mid-fall.

[Gary Ho, Analyst]

Okay. That's helpful. And then maybe just further, assuming the deal closes and you guys sound pretty confident, you've said before the balanced approach, and you guys just outlined that buybacks, debt repayment and investment for growth. And then just on the buyback piece, Kevin, stock had bounced since the news. How do you think about the share price today? And how aggressive might you be with the buyback?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Yes. We -- we've been in a blackout because of the transaction for quite some time. We had a narrow window that opened in the spring, where we were active when we went up our employee benefit trust, where we bought 750,000 shares. I think the average price was somewhere below $3.5. We still think the stock looks attractive here. You can also note that while that window opened, a large number of senior management purchased shares in the open market at that time, which should tell you something what we think about the valuation as well. So as we go forward, obviously, we will be looking to add more or take down more purchases of that. But we're also cognizant of market volatility and cash flows right now until we get through the S&W transaction. So again, nothing has changed there, but given obviously, price sensitivity, we would agree it's an attractive level. Obviously, initial proceeds will be used to pay down debt immediately. So think of us being net cash after the transaction. And then some -- again, some balanced approach toward the buyback over the longer-term as well as how do we invest for future growth around some of our initiatives. So that's sort of the balance that we look at and kind of the sequence.

[Gary Ho, Analyst]

And are you guys in the blackout until the deal closes? Is that how we should think about it?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

No. We'll be out of the blackout come tomorrow.

[Gary Ho, Analyst]

Got it. Okay. And then just last question. I think, Kevin, you provided some color on performance. Wondering if you can give us some details on the net flows outlook kind of for the back half of this year, both on the retail and institutional side?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Yes. Maybe I'll take the front half of that and maybe give it to Judy on some of the other issues. But yes, market volatility has -- if you think about it, what we saw in March was unprecedented, I hate using that word right now. But in terms of the size and speed of that decline, and then what we saw in terms of adviser activity, we know adviser are still sitting on a fair amount of cash, when you look at that sizable redemption we saw in Canada in March, which is about $15 billion. And we looked at what went into money market funds and not just in Canada and around the world. And a lot of it's sitting on bank balance sheets, and it's hard to see that a lot of it's gone back. So advised retail, and I'm going to use that word advised retail has been fairly, I think, conservative here. This market has really screened back to a new high in the midst of probably one of the greatest depression quarters we're about to see come Q2. So pretty big disconnect between what markets are anticipating for recovery and then vis-à-vis what the economies will do. And so I think that there is a lot of cash still on the side. You've seen some headlines in press in the U.S. about, what I would call, do-it-yourself investors in retail, so not with advisers who have been using some of these free trading platforms like Robinhood, Schwab, Ameritrade, et cetera, and that activity. So I would differentiate maybe that investor is frothy. But our advised retail investors seem to be more conservative. And I think we'll look to put cash back once we see that the economy starts to probably get to some firmer footing. But I don't know, Judy, if you've got any other color or comments on what we saw in the last couple of months.

[Judith Gail Goldring]

Just in terms of flows, when we had talked about -- we first met, I guess, last met, it was the bottom of the market. And we have reported at the end of -- by the end of March, it was about minus 75 out. What we were pleased to see is in April and May was effectively flat. So ended the quarter at $93 million out as against the $169 million in the prior year. So we are pleased with the performance, I think, through to the end of Q2. As we look forward into June, we're sort of sitting currently at modest net redemptions better than last year at the same time period. And as we look forward with continued high volatility, summer months coming and with so much money on the sidelines, we are starting to see some cash come back in the marketplace, and we're very confident about our product lineup, which has seen some products that have stellar performance we expect to be on the receiving end of -- when that money comes back into motion. In terms of institutional, we're seeing, again, more uptick in terms of RFP and RFI activity going into the next quarter. And again, we have products that we believe will be well situated to be on the receiving end of that money in motion.

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Gary, you also talked about performance, and then let me just throw that in where we're at. I mean performance held in really well, as you know, in that downturn. We did very, very well. And we've been very conservatively positioned going into that. And we also held up pretty well coming out of it. So I think we navigated both sides of that, both the slide and the rally pretty well, which I think sets us up okay on the retail side as we move forward.

[Operator]

From RBC Capital Markets, we have Geoff Kwan.

[Geoffrey Kwan, Analyst]

Just wanted to go back on the Smith & Williamson deal Kevin is, how would you describe your level of confidence that the deal will close in its current form? And how would that level of confidence in terms of getting the required approvals differed, if at all, versus how you would have felt when the original deal was announced?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Yes, Geoff, good question. I mean I think in the beginning, on the original deal, there was always a concern about the amount of leverage from our part. That's why if you look at the structuring originally, we had opted to take most of the cash in that transaction. We also know that given that the FCA has been on side, most of the way as we brought along a new equity partner that, that hurdle, I think, that was really the issue there. The central issue has been mitigated. So I'd say that's part 1 of that. Part 2 of that is that the terms to the employee, shareholders, remember this, we own about 1/3, employees own about 1/3, and retirees roughly 1/3, just to make my math easy. The terms of the transaction and the revised transaction did not change much in terms of overall value to the employees. So I don't anticipate an issue with the employee or the shareholder vote as we go forward. So I think 2 of the 3. And as I said, we've already had antitrust approval from the EU in the prior transaction that was granted in the fall. This doesn't materially change anything there. So it doesn't really, I say, present any further hurdles there. So I'd say higher level of confidence this time around. I thought it was low that it wasn't going to pass the last time. So I think it's -- you never say never, but it's pretty high.

[Geoffrey Kwan, Analyst]

Got it. And then just expanding on the question Gary had around redeployment of capital. So you talked about, okay, pay down the leverage. But I think you've also talked about before, it's just eventually getting back to, let's call it, a normal or reasonable level of leverage would imply quite a bit of money that you'd have to redeploy. And in terms of where you do that, like, for example, in your alternative strategy, can you talk about are there provisions where you can increase your quant investment? And how much could you add there? Thinking about acquisition opportunities, what might be of interest? Is it more bolt-ons or something maybe a little bit bigger? And then finally, is it unreasonable to think that there could be some sort of substantial capital return over the near-term, say, over the next year in the form of a special dividend and/or substantial issuer bid?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Yes. So let's take them all in a couple of pieces there, Geoff. On the first one, which is the proceeds, so think about it this way. We'll net out around $275 million of this. Debt is down to $200 million today. So we have some working capital cash on our balance sheet already. So think you start out life with $75 million to $100 million. We've got commitments already to probably another $60 million or so to our existing alternative funds that we have out there. But think about replacing the S&W earnings stream, right? If you can find assets over time that have a 12% kind of return profile, you can relever up our current EBITDA at 1, 1.5x and replace that earnings stream. And so then the question -- second question that you've asked, which is where. It's not transformational, nothing big. I think we have done a lot of heavy lifting internally to reposition the firm for growth, whether it be build-out of our Quant platform, our ETF strategies. And we start to think about alternatives now as a spectrum, right, which is private alternative to think of infrastructure, credit, et cetera, on one end, which are longer-term funds. At the other end, our liquid alternatives, which have really done pretty well in a short period of time between our U.S. liquid and Canadian liquid ETFs, liquid alternative ETFs, we're already approaching $0.5 billion in a short period of time. So at the other end of the spectrum that's attractive. And so we think of that whole spectrum, whether it's daily liquid or longer-term private or some hybrid in the middle as really a place where we can grow. And think about feeding other partnerships, other joint ventures, other things, over time to help us get there. So don't think of something large and transformational. Think about something that is really centered around that spectrum of alternatives in different ways to help us what we see as a pretty good growth part of the investment business. And then lastly, yes, there might be some tuck-ins. As you know, we did FFCM to get the capabilities that we have today to be able to do some of the market neutral strategies within those -- in those ETFs. So I'd say those will be more bolt-on things that we'd see us do, but nothing large scale.

[Geoffrey Kwan, Analyst]

Okay. And then just on some sort of special dividend, substantial issuer bid potential?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Yes. I mean I think it's -- as I said, it will be a balanced approach. I think the Board obviously looks at all alternatives for this. It's hard to see a special dividend. I wouldn't rule anything out, but that's not something we're talking about. We'd rather take that money and use it to grow the company organically in the future. Everything else, obviously, would be stock price dependent.

[Geoffrey Kwan, Analyst]

Got it. And then just my final question was for Adrian. With respect to the $180 million in SG&A and flagging that both in the quarter and maybe perhaps going forward, given COVID-19 some reduced expenses, can you -- like do you have a ballpark of what that might look like through the second half of 2020? And then on an annualized basis, would any of that be kind of thought as being permanent? Or is it really more of a temporary reduction of expenses?

[Adrian Basaraba, Senior VP & CFO]

Yes. Thanks for the question, Geoff. Yes, as I said in my remarks, we've worked our expense base down to $180 million, and that's our guidance for the year, that's a $15 million reduction over the course of the last couple of years. And if you look at the expenses in the quarter, around $40 million, that's $5 million favorable to the guidance. But what I will say about that is some of that's timing, some of it is related to stock-based compensation, which will reverse. And so we've always said that SG&A can vary quarter-to-quarter. So we try to point people to the annual numbers. And so we're reiterating our $180 million expense guidance for 2020. We don't change it kind of midyear or we tend not to. But we think that expenses will likely come in a little bit lower. We think it's trending towards $175 million for 2020. So I would look at that $175 million for 2020, and you can impute what the remaining quarters are. But again, quarter-to-quarter, they don't always come in perfectly divisible. And if you look at the reason for the savings that I just mentioned, there's just some natural reduction from COVID-19, things like meals and entertainment, hiring is a little bit harder to do in this environment. And then we're just being very prudent with expenses because we're in an uncertain time.

[Geoffrey Kwan, Analyst]

Okay. So essentially, it sounds like the reduction of expenses in a normal period, if that's what 2021 looks like, these reductions are more temporary than anything to be permanent?

[Adrian Basaraba, Senior VP & CFO]

Well, I would say that $5 million of them are kind of -- are permanent insofar as they get to the $175 million. But the timing is more so like Q2 versus Q3 or 4. And then as far as next year, we'll deal with that at the end of the year. We don't start giving guidance for next year until Q4.

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Geoff, it's Kevin. The other thing I'd add is even if we got a vaccine tomorrow and everything came back to normal, I still think there's some secular change to every industry, including ours about what we've learned through this that will have a natural reduction to that SG&A line that we all don't have a handle on yet. So I wouldn't classify it all as temporary. Some of it may be structural in nature as we go forward. But it certainly has helped us take the $15 million out the last couple of years when we got into this that we didn't have to do anything drastic. And in fact, we can actually start to think about the future in a more disruptive, positive fashion for our expense base.

[Operator]

From BMO Capital, we have Tom MacKinnon.

[Tom MacKinnon, MD & Analyst]

A couple of questions, 1 on flows and 1 on tax rate. Page 13 of the MD&A mentions mutual fund net outflows of $498 million, but you mentioned there are $93 million if you exclude some nonrecurring institutional flows. The gross sales that's comparable to the $498 million net outflows is $560 million. How should we adjust the gross sales for mutual funds to reflect the nonrecurring institutional flows?

[Judith Gail Goldring]

Thanks, Tom. So I think the $498 million you're looking at is last year's.

[Tom MacKinnon, MD & Analyst]

Yes. What's -- the $93 million was adjusted to something -- was adjusted from something, wasn't it?

[Judith Gail Goldring]

No, I don't think so. We -- where we do have institutional or subadvisory retail, yes, $93 million is unadjusted, but where we reduced see...

[Tom MacKinnon, MD & Analyst]

Pardon me. Okay. Maybe -- yes, sorry. I'm sorry about that question. So the -- yes, I was just looking at the wrong one. Okay, I'm fine with that. And the gross sales then, they're all clean then, right? The $509 million, then that was all clean. There's no -- we don't -- if no adjustments made to that gross sales.

[Judith Gail Goldring]

Yes.

[Tom MacKinnon, MD & Analyst]

Maybe -- sorry, and then the question would be then, is there any track -- where do you see the traction that you're getting on those gross sales in the quarter?

[Judith Gail Goldring]

Yes. I mean again, really -- well, first of all, we've commented that a lot of investors are sitting on the sidelines. But to the extent that we are looking to people coming into it, it's interesting. They've been really focused on global mandates. We have a FundGrade A award winner of AGF Global Select, which has stellar performance. It's been attracting a lot of flows. We're seeing a lot going into our fixed income, again, I think, driven a lot by its good performance in the AGF total return bonds on a class. Liquid alts have been doing very well. We do from a retail perspective look at not just the mutual fund side, but also the ETF flows, and we're seeing positive flows into particularly the couple of the products anti-beta strategies that we started last year, and we've seen assets flow in there in quite in short order. I mean, it's been quite impressive on our side. And then finally, the GSG space. We've been really, again, very good numbers on that mandate, and it's an area that's of great appeal to investors right now. And so we're seeing some flows into that.

[Tom MacKinnon, MD & Analyst]

All right. And if we were to adjust the gross sales from last year for any of those nonrecurring items, how should we look at that?

[Judith Gail Goldring]

I might have to get back to you on that off the top, I'm not sure.

[Tom MacKinnon, MD & Analyst]

Yes. We're just looking for the trend in gross sales here. So I think there were some adjustments made to the second quarter of 2019. So yes, just trying to -- down 9% year-over-year just as printed in the MD&A. Is that -- should we be looking at something like that? Or was the change in the gross sales more?

[Judith Gail Goldring]

I'm not sure I'm understanding the question. I mean, I don't think -- what I can do is get back to you on the gross sales numbers. As I said, if there were any adjustments, I'm not aware of it off the top. But if you can just bear with us, we'll get back to you on that.

[Tom MacKinnon, MD & Analyst]

Yes. I think what you said in the second quarter of '19, the net outflows were $498 million. But excluding some nonrecurring items, the net outflows were $169 million. So I'm just wondering how should we adjust the second quarter of last year's gross sales, just so we get a handle as to how gross sales are trending.

[Judith Gail Goldring]

Yes. So our gross sales are clean. I mean growth is growth. We don't do anything. What we will sometimes do on redemptions, if we're looking at pure mutual funds, we may take out sort of an institutional -- large institutional price Series O large redemption, and sometimes that occurs on the redemption side. But if you have a particular quarter you want us to compare or if it's an annualized number, I would have to get back to you on that. But gross is clean.

[Tom MacKinnon, MD & Analyst]

Okay. The gross seems to be clean. Okay. That's good. The second is with respect to the tax rate. Maybe, Adrian, what should we be thinking about in terms of the tax rate? I think it was in the area of mid-20s in the quarter, but it was 19% last year in this quarter, how should we be thinking about the tax rate?

[Adrian Basaraba, Senior VP & CFO]

Yes. I think going forward, 22% is a good number to use. And then part of the reason that our tax rate is lower than our statutory rate is because of the Smith & Williamson earnings, which we get on a tax preferential manner. And of course, the 22% is excluding the effect of the special dividend. But then after we no longer receive those -- that income from Smith & Williamson, you'll see our tax rate next year go closer to our statutory rate.

[Tom MacKinnon, MD & Analyst]

Okay. And then finally, is there -- what's the feedback really just from advisers in this environment? Are you finding that they are actually more or less productive like maybe any sort of commentary with respect to that?

[Judith Gail Goldring]

Yes. If you don't mind, I can start on that. It's been interesting. We found an amazing high level of activity. Our retail activity in terms of webinars, phone calls, interactions has gone up by 15% just in the short time period of the last couple of months. In the initial phases, I think advisers were looking to have engagement and looking for information. We do obviously leave with a lot of thought leadership pieces, and that has been really well taken up. We have weekly calls, et cetera. And so the interactions were quite high. There may be, now as we're getting closer towards summertime, a bit more fatigue settling in. I think people get a bit zoomed out, if you will, on these webexs, et cetera. But at the same time, the opportunities that really is providing solutions to advisers, giving them thought leadership and giving them indications of where the market is going, and then continue those interactions. And so we're still seeing a high level of activity and engagement and much shorter but potential kind of interactions, which are really effective, I think. So I don't know, Kevin, do you have any other comment?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Yes. I think, listen, we're all adapting, right? We're sitting here almost -- I guess we're heading to work from home almost 4 months in, right, to being work from home. So we're all making tweaks and adjustments to it. The retail world won't be any different, Tom, right? There are going to be some advisers who will obviously pursue a flex world on the way back in, right? Again, unless we actually get to a true therapy and a vaccine, it's hard to see anything more than 20% of the downtown core of any major city coming back into a building. And so I think a lot of the behavioral change we're going to see is going to be here for a bit. I think the ability to have the use of digital tools and digital marketing, which a lot of spend that we did the last couple of years has been a big advantage in this. And so I think to Judy's point, I think everyone's behavior has changed a bit, but our activity level stayed -- it not only stayed the same, it's picked up. And I think advisers are going to want to have to engage they may be exhausted from Zoom, but they're going to resume a normal lives, level of activity just may be different.

[Operator]

[Operator Instructions] And from TD Securities, we have Graham Ryding.

[Graham Ryding, Research Analyst of Financial Services]

My first question is just on the private alt side. It's -- I think you said 35% of the EIF II Fund has been deployed. So how should we just think about what's coming next for that platform? Is there a period of time here where you deploy the rest of those funds before you start launching the third fund? Or are you already looking at launching a third fund?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Yes. Obviously, we have to get that deployed. This is actually a good opportunity to get that deployed, though, we think about assets being where they are around the world today. Infrastructure assets, though, especially the ones that we tend to invest in, tend to have differentiating capabilities, differentiated business models. They tend to withstand these type of events better than certain other asset classes. So the opportunity set is probably to be able to invest in an environment, I think, is pretty good. But obviously, that's going to take a period of time.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Understood. And the capital that you've committed or invested, I think, is $207 million behind that platform. How should we think about as you move towards that $5 billion target, what's the total amount of capital that you would be -- that you think you would need to sort of co-invest or commit behind that?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

Yes. So maybe I'll take a quick shot at that. And so the way I think about that is if you -- you're always getting some assets recycled back as funds mature. And so like look at today, we have probably $60 million, I think that's probably right about what we have left on the current funds that we are in, committed. And so as you commit to a new fund, other funds are starting to mature, my guess is, and Adrian and I have done some modeling on this, at any given time, that number could be upwards of, I don't know, north of $200 million, but it's not significantly north of that because, again, you're always getting some flow of funds back through it. Maybe, Adrian, do you have a different view on that?

[Adrian Basaraba, Senior VP & CFO]

No, not at all. I mean, precisely to your point, Kevin, we get -- we've already had a couple of significant monetizations, plus you have to also account for the fact that when you make the investments in these private alt LP, there's a lot of cash flow coming back to you just in the form of recurring distributions from the LPs. So if you look at the total amount that we commit, we'll never get to that number invested. And maybe just to add the point that the earnings from the LP investments are great, and we also enjoy the cash flow from them, but the primary purpose of the platform is to earn recurring management fees, right? So the reason that we make these seed investments or support the launch of these things is to mature our earned recurring management fees. So that's really what we're focused on.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Yes. I was just trying to connect it back to the proceeds that you got to with Smith & Williamson. How much is going to be essentially excess versus what you may need to further deploy behind that?

[Adrian Basaraba, Senior VP & CFO]

Yes. I think maybe the point you can take from that is that we can grow across the spectrum of alternatives just by kind of continually redeploying stuff as it matures or monetizes without significantly increasing the total amount that we've got invested in seed at any given time. And I think Kevin gave some good guardrails as far as what we see over the coming years.

[Graham Ryding, Research Analyst of Financial Services]

Okay. I think I understand that. And then there was some commentary around just your revised performance targets. Did you lower your 3-year mutual fund performance target from 60% to above medium to 40%?

[Kevin Andrew McCreadie, CEO, Chief Investment Officer & Director]

What happened there, Graham, is we've got some feedback from everybody. Because remember, we were struggling last year, and we suspended it for a while to figure out a better methodology. And so if you think of it, it's just flipped, right? So what we're saying is we want to have our complex to be 40% -- in the top 40% of assets. In other words, think of it as if median is the middle, 60 is the third quartile, 40 is the second quartile, we're saying over 3 years, we'd like to have the bulk of our assets in the second quartile or better. Literally, just to flip and that was based on some feedback we got from folks.

[Operator]

And we have a follow-up from the Desjardins Capital from Gary Ho.

[Gary Ho, Analyst]

Just a quick one. Just a fair value adjustment and other income line. It was a little bit lower this quarter. Adrian, can you kind of give us some color, like looking out, should we revert back to kind of the normal level? And how long would that take?

[Adrian Basaraba, Senior VP & CFO]

Yes. Thanks, Gary. Yes. When you look at the private alternatives business, the income that comes off of it when you think about it from a longer period of time, it's pretty stable. The income that we earned from those LPs in the quarter was affected just by COVID-19 and some of the market disruption. But we feel pretty good about the value on our balance sheet as of today, especially because of the recovery of commodity prices and the increased economic activity. And so the thesis for alternatives is intact. And I would expect that over the coming quarters, we would revert back to the normal expected earnings. If you look at it over a longer period of time, at the AGF management level in terms of alternatives when we seed stuff, we target 12% and all of the investments we've made have met that target. So we're very pleased with that.

[Operator]

And we have no further questions at this time. Adrian, we'll turn it back to you for closing remarks.

[Adrian Basaraba, Senior VP & CFO]

All right. Thank you very much for joining us today. Our next earnings call will take place on September 23 when we will review our results for Q3 2020. Details of the call will be posted on our website. Finally, an archive of the audio webcast of today's Q&A., the supporting materials will be available in the Investor Relations section of our website. Good day, everyone.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.