Fiera Capital Corp

TSX:FSZ

Earnings Call Transcript 2020-Q2

[Operator]

Good morning. My name is Takan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiera Capital's earnings call to discuss financial results for the second quarter of 2020. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] Thank you. I will now turn over the conference to Ms. Mariem Elsayed, Director of Investor Relations and Public Affairs. Ms. Elsayed, you may begin your conference.

[Mariem Elsayed, Director of Investor Relations & Public Affairs]

Thank you, Takan. [Foreign Language] Good morning. [Foreign Language] Welcome to the Fiera Capital conference call to discuss our financial results for the second quarter of 2020. Before we begin, I invite you to download a copy of today's presentation, which can be found in the Investor Relations section of our website at fiera.com. Note that comments made on today's call, including replies to certain questions, may deal with forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ from expectations. I would ask you to take a moment to read the forward-looking statements on Page 2 of the presentation. On the call with me today are Jean-Guy Desjardins, Lead Portfolio Manager, Global Tactical Asset Allocation, Chairman of the Board and Chief Executive Officer; Jean-Philippe Lemay, Global President and Chief Operating Officer; and Lucas Pontillo, Executive Vice President and Global Chief Financial Officer. We have also invited our employees to listen in on today's call. Welcome to those of you currently logged on. Turning to Slide 4. I will provide the agenda for today's call. We will begin by providing highlights from the second quarter, followed by a discussion on AUM and flows and the review of second quarter financial results. This will be followed by a strategic update, and we will then conclude the call by sharing our market outlook before opening the line for questions. With that, I will now turn the call over to Jean-Philippe Lemay.

[Jean-Philippe Lemay]

Good morning, everyone, and thank you for joining us today. I'm very pleased to be joined by Jean-Guy Desjardins and Lucas Pontillo to discuss what was a strong second quarter despite the ongoing effects of the COVID-19 pandemic. But first, I want to again thank our employees for their continued dedication and professionalism during these times. They have proved exceptionally resilient and proactive over the course of the last few months.I'm on Slide 5. Fiera Capital's second quarter was strong on many fronts. We recorded positive organic net flows across each of our institutional, private wealth and retail markets, totaling $1.1 billion during the second quarter, higher than the originally expected $600 million of net inflows reported at the time we announced our preliminary June 30 AUM. The difference stems from a $450 million AUM reclassification from market appreciation to new clients in institutional markets and does not impact total firm-wide AUM of $171 billion.Financial performance was strong as well. We generated adjusted EPS of $0.38 per share and adjusted EBITDA of $51.9 million, with a corresponding margin of 31.1%. During the second quarter, given the quality tilt of our main large-cap equity strategies, performance in equities was challenged, though it remained strong year-to-date. Fixed income strategies overall performed well in both Q2 and H1 2020. Longer-term investment performance has been truly exceptional. On a trailing 3-year basis, 92% of our equity AUM and 84% of our fixed income AUM outperformed their benchmarks. I'm very pleased with our investment team's performance. Finally, in June, as part of the ongoing execution of our 2022 strategic plan, we announced a new global operating model designed to strengthen our position as a trusted investment adviser to our clients globally and accelerate the company's landing into the ranks of the top 100 asset managers in the world. This new model better aligns the focus of our public and private markets as well as our private wealth business and further supports the evolution of our global distribution initiatives.On to Slide 6 to discuss our AUM inflows during the second quarter. After having decreased by 6.8% during the first 3 months of 2020 against the backdrop of extreme market volatility, the company's AUM increased by 8.2% during the second quarter. This is significantly more tempered V-shape than that of the general capital markets, reflecting the lower volatility embedded in the company's consolidated AUM portfolio, and thus, revenues. To that effect, I'm pleased to report that June 30 AUM of $171 billion has effectively reverted back to pre-pandemic levels. This represents a $12.9 billion increase compared to March 31 AUM of $158.1 billion. On an FX-adjusted basis, general financial markets appreciation accounted for $13 billion of the increase.In private market strategies, AUM as of June 30 totaled $13.4 billion, excluding our current $1.3 billion in undeployed committed capital. During the first 6 months of 2020 alone, we raised $600 million in new subscriptions from investors across various channels. Total private markets AUM was relatively unchanged from the end of March as new capital deployed was partly offset by updated valuations and foreign currency fluctuations. The breadth and high-quality active risk premiums across public and private markets constituting our investment platform is core to strengthening and stabilizing our revenue base. Just 5 years ago, less than 4% of our AUM was composed of private market strategies. Now that percentage has grown to 7.8%.On to Slide 7, I'll provide further details on our second quarter flows. We experienced strong gross inflows of $4.2 billion during the second quarter. Net, we recorded $1.1 billion of inflows. What's more, of that $1.1 billion in net flows, $860 million was anticipated attrition in the institutional market in relation to previous acquisitions. Excluding these, outflows net organic sales for the second quarter would have amounted to $1.9 billion. In our institutional business, we continued to win specialized and multi-asset mandates across public and private market strategies with significant wins in the U.S. and Canada. Gross new flows of $2.2 billion carried an average fee rate of over 50 basis points, significantly higher than the fee rate associated with lost mandates. Year-to-date, we are experiencing improved client retention in the Canadian institutional market segment with levels above our 4-year average, and this in times of a global pandemic. In private wealth, gross new flows of $800 million were largely the result of new mandates won in the U.S. tax-efficient fixed income strategies. Including redemptions, net new inflows in private wealth totaled $450 million during the second quarter, the highest level of inflows recorded over the last 2 years. What's more? Over the last 4 years, our private wealth channel has seen organic positive net new flows in almost every quarter. In retail, we won $1 billion in gross new mandates, where half of that coming from various equity and liquid alternative mandates in the U.S. and Europe. We also won $450 million of sub-advisory mandates entrusted to us by Canoe following the closing of the Fiera Investments transaction. We optimized capital in that transaction by winning back over 1/3 of the AUM sold. By staying on as a sub-advisor to many of the funds sold, we are adding to our existing sub-advisory mandate and enhancing our long-standing partnership with Canoe. I will now turn it over to Lucas for a review of our financial performance.

[Lucas Pontillo, Executive VP & Global CFO]

Thank you, Jean-Philippe, and good morning, everyone. Let me take you to Slide 8 where I'm very pleased to report the second quarter revenues of $166.9 million, which were up $5.2 million or 3.2% compared to Q1 2020. What's more? June's 2020 base management fees have returned to pre-pandemic levels. And on a last 12 months basis, we've realized an average of 37.2 basis points on base management fees, an increase of 0.5 basis point compared to a year ago and a further increase of 2.8 basis points when compared to the last 12-month period ending June 30, 2018. The events of the last few months continue to demonstrate the resilience of our business model. Through a market correction that saw the VIX skyrocket, oil prices plummet, North American interest rates dropped by over 100 basis points and the S&P 500 fall by over 25% in a span of a few weeks, we were able to offer our clients a diverse range of investment solutions to meet their needs through these uncertain times and as a result maintained our growth and different streams of revenue throughout the pandemic. Compared to Q2 of last year, revenues increased $17 million or 11.3% on higher average AUM of $20.8 billion, thanks to the addition of new investment strategies via our acquisitions over the course of 2019, organic growth from institutional markets and higher fee investment strategies and continued growth in Bel Air. Breaking this down further, base management fees increased $20.4 million year-over-year or 15%. From a client segment perspective, institutional base management fees increased $16.9 million or 25%. Base management fees from private wealth increased $1.9 million or 5%, and base management fees in the retail segment increased $1.7 million or 5%.Performance fees were also higher, coming in at $2 million in Q2 compared to $1.6 million in Q2 of last year. We also recorded $2.2 million in share of earnings and joint ventures in Q2 2020 that stemmed mainly from the incremental revenue from our Palmer joint venture projects. Other revenues of $6.8 million were $6 million lower compared to Q2 of last year. The decrease was mainly as a result of $2.5 million in lower revenues associated with transaction and commitment fees in our private alternative strategies as well as gains recorded in the previous quarter of $1.1 million are related to foreign exchange contracts when we had none to report in the current quarter.When you take a step back and look at the revenue on an LTM basis, you can see that we managed to increase LTM revenues of over $106 million or 18% compared to the same period last year. Turning to Slide 9. Selling, general and administrative expenses, including external managers, were $122.5 million during the quarter of 2020. While up $11.7 million or 11% for the second quarter of last year, this compares favorably to an increase in base management fees of 15% for the comparable period. Note that in the second quarter of 2020, SG&A to base management fees was 79%, down from 82% in the second quarter of last year. The continued improvement in relative SG&A was attributable to cost containment efforts in place in response to the market pressures from the COVID-19 economic impact. We had additional benefit from a $2.9 million wage subsidy program during the quarter, which did reduce SG&A. This was, however, more than offset by $3.2 million in accelerated vesting of share-based compensation for certain employees which were affected by our new global management reorganization which we announced. And in addition, we had some adjustments to variable compensation of roughly $2 million which impacted the quarter.Jean-Philippe will be elaborating on our new global operating model, but I will add that by moving away from the regional structure and globalizing key functions such as distribution and private wealth, we expect to realize synergies leading to positive EBITDA, net of redeployed investments, in the $5 million to $10 million range starting in fiscal 2021. We also continue to strengthen and globalize our technology and operations platform, which have served us well in the remote operating environment that we have all become accustomed to in the last few months and to continue to reduce operating costs in that regard. Our disciplined approach to managing our cost structure also helps ensure that we continue to focus on increasing our operating leverage with the intent of reducing our financial leverage. Turning to Slide 10. We generated a net loss attributable to company shareholders of $14.7 million or $0.14 per share during the second quarter of 2020 compared to a net loss of $5.5 million or $0.06 per share in the second quarter of last year. It's important to note that this metric was impacted by $25 million in restructuring, integration and other costs, of which $20.9 million relates to the execution of our global management structure and operating model design that will further drive the company's growth going forward. Adjusting for restructuring, integration and other costs as well as noncash items, we generated an adjusted net earnings of $38.7 million in Q2 compared to $32.5 million in the year ago period, an increase of $6.2 million or 19%. This translates to an adjusted EPS of $0.38 per share in Q2 2020 compared to $0.33 per share in Q2 of 2019. I am now on Slide 11. Adjusted EBITDA was $51.9 million in the current quarter, an increase of $6.1 million or 13% from $45.8 million in the second quarter of 2019. Adjusted EBITDA margin for the quarter was 31.1% compared to 30.6% in Q2 of last year. On a last 12-month basis, adjusted EBITDA continues to trend upwards. And I'm pleased to report that we achieved a new milestone by exceeding the $200 million mark in LTM adjusted EBITDA and coming in at over $203.7 million. We are very pleased with our results for the quarter and encouraged by the improved market performance experienced in Q2. On Slide 12. As a result of our prudent approach to capital allocation and expense management, supported by the profitable operating activities, our balance sheet remains well capitalized. We ended the second quarter with $56.3 million of cash and cash equivalents after making 2 dividend payments totaling $42 million during the quarter. Net cash generated by operating activities was $52.4 million during the second quarter compared to $42 million in the second quarter of 2019, a 25% year-over-year increase. On an LTM basis, net cash generated by operating activities was $138.4 million, an increase of nearly $39 million compared to the 96 -- $99.6 million generated in the corresponding prior period. On that note, I'm also pleased to announce that the Board has once again approved a quarterly dividend of $0.21 per share, unchanged from the previous quarter and payable on September 23. Moving to Slide 13. With regards to our credit facility, we continue to monitor and manage our leverage prudently during these uncertain times. As of June 30, 2020, our funded debt-to-EBITDA ratio was down below 3x at 2.97x compared to 3.1x in March of the first quarter of this year as we paid down $18 million on our credit facility during the quarter.I will now turn the call back to Jean-Philippe for a review of our investment performance and strategic update.

[Jean-Philippe Lemay]

Thank you, Lucas. On to Slide 14. I'm very pleased to report that the relative performance of most of our strategies remained strong during the first half of 2020, delivering as expected and preserving capital. Let me share some highlights. In equities, our global and Canadian equity strategies gave back some of the value-add from Q1 as capital markets in general have rotated out of growth and into value. Nonetheless, both of these strategies apply quality tilts, which drove investment performance during the first half of 2020 and protected client capital in volatile markets. The Canadian equity team, which has been with Fiera Capital since 2016, has proven to be a strong addition and continues to build on its impressive performance track record and is seeing increased interest from potential clients. What's more? Both strategies continue to outperform on the longer-term horizon, scoring first quartile rankings on both rolling 3-and 5-year terms. In fixed income, our active CORE and strategic CORE strategies beat their benchmarks by 1.2% and 1.1%, respectively, during the first half of the year. In an environment of extreme interest rate volatility, the team behind these strategies was able to generate alpha as interest rates fell and rose, demonstrating their strength in active interest rate curve management. Since onboarding this team in late 2017, the team has delivered annualized value-add of 52 and 75 basis points in its active and strategic strategies, respectively, which both ranked first quartile on a 1-year horizon. Our credit-oriented strategy, which employs an active approach to credit, generated added value of 81 basis points in the second quarter, effectively reversing challenged Q1 investment results that have been fully expected in the context of an economic downturn and bringing the year-to-date value-add in positive territory. Longer term, this strategy ranks first quartile on a 3- and 5-year horizon. And in the U.S., our tax-efficient strategy outperformed its benchmark by 47 basis points on a year-to-date basis. Turning to Page 15 for a review of select private market strategies. Real estate strategies continued to deliver strong return since inception and held up well relative to peers in the recent environment. Some real estate strategies have experienced temporary market value depreciation due to more challenged rent collections, but continue to generate positive income. Fortunately, our allocation to the more challenged sectors in real estate, such as retail, is minimal. Of note, our small-cap industrial fund generated a return of 12.7% since inception in 2014 and delivered strong results in this last pandemic quarter where the sector was supported by increased usage of online shopping. Despite real estate and private debt being more challenged from a short-term performance perspective, our real asset investment strategies continue to prove resilient. Accordingly, our teams are proactively managing invested assets and exercising diligent risk and liquidity management.Our Asian credit platform is also delivering strong investment performance. The lending opportunities fund has delivered IRR of 12.1% since inception in 2017. Furthermore, Asian credit in general is seeing increased interest from institutional capital allocators in the U.S. I'm extremely pleased with the hands-on work of our private platform teams during what has been an unusual year-to-date, to say the least. We are proud to be an innovator and an early adopter in the private market space. We are continuing our focus in scaling and building a globally diversified private market platform with agile capital deployment capabilities and unique and sustainable risk return attributes for the benefit of our investors. I'm now on Slide 16. As an asset manager, our #1 goal will always be to create value for our clients. Our active approach to portfolio management in both public and private markets, the diversity of our asset classes and regional footprint, our rigorous approach to strategic and tactical asset allocation and the expertise of our employees make up the firm's competitive advantage. Our unwavering commitment to excellence as stewards of capital enables us to be a trusted investment adviser to our clients.With regards to our client interaction model, we've made terrific progress from a structural standpoint in Canada. As we gear towards fully deploying our firm's expansive investment capabilities, we will continue to focus on distributing our broad platform outside of Canada directly and through partnerships, such as Natixis. The alignment we have established in Canada will become the foundation from which we carry out our distribution approach globally. By deepening our focus on investor needs and objectives, this is how we will become a global player, recognized for the quality and depth of its interactions with investors. Delivering value to our shareholders will always be a priority. So you will see us continuing to focus on improving Fiera Capital's long-term business and financial performance and strengthening adjusted EBITDA margin. We remain committed to creating value for our shareholders alongside our clients. To that effect, prudent and optimized capital allocation will remain a core priority for us.Finally, our new global operating model. This new model will allow us to increase corporate agility and effectiveness. Firstly, our global model supports our objective of unlocking operating leverage opportunities through a well architected and integrated global operational backbone. Secondly, continuing to build global investment platforms across public and private markets is at the core of our ambition of being a high-quality, multi-asset active management firm with a global footprint. I will elaborate a bit more on Slide 17. On June 17, we announced our new global management structure. This new structure aims to drive increased collaboration and partnership between our investment and distribution teams in order to fully deploy our extensive suite of capabilities. Concurrently, it provides the global leadership team with better line of sight on key business opportunities and challenges, allowing them to scale solution on a global basis, to improve effectiveness by further enabling agility across the organization and to increase focus on investment excellence and client interactions.Our business activities are organized across 3 operating groups: public markets, private markets and the global private wealth group. The creation of the global private wealth group is designed to leverage existing best practices on a global basis. Today, we have reached critical AUM mass with our private wealth platforms. Firstly, integrating these platforms to achieve greater scale will be key to further growth in this important line of business. As such, we will be streamlining our multiple private wealth back-office systems into one, an initiative similar to our successful consolidation of custodians in Canada and CRMs globally. Secondly, our goal is to create a unique global wealth platform for our client that leverages Fiera Capital's unique and differentiated investment offering, bringing the pension and endowment investing model to high net worth individuals. It will operate under one unified private wealth brand globally and operate under a common model. I will now turn the call over to Jean-Guy Desjardins to discuss our market outlook.

[Jean-Guy Desjardins]

Thank you, Jean-Philippe. Good morning, everybody. Just to -- as a general introduction, I'd like to mention that my tactical asset allocation group, we made the decision late June to increase the equity exposure of our high net worth clients to balance portfolios as well as the institutional balance portfolios and multi-asset portfolios where we assume a tactical asset allocation decision. And we decided to overweight the equity position of those portfolios by a factor of 10%. And the reason I mentioned that is because it will have a significant impact in the next year on the relative competitiveness of those strategies in those market segments as a consequence of that tactical asset allocation decision.Now the background to that decision had a lot to do with where a year from now we will end up being as a result of developments on the medical front. It's pretty obvious and clear. And I think everybody understands that today that market performance and behavior over the next 12 months will be highly correlated and dependent on progress on the medical front, whether we will have a vaccine and some therapeutic development that will either with a vaccine protect us against the risk of having the disease and giving us the opportunity to go back to, as much as possible, a normal life. And if there's progress on the therapeutic side, at least that will minimize the magnitude of the disease and reduce the risk of death to -- for people who will catch it. So a positive development on either one of those fronts or both of them will have a significant impact on the outlook for the global economy, U.S. and Canadian economy and market. Now obviously, it's either one or the other. We will have progress or not. Our highest probability outcome and the assumption that we made and are willing to live with is that there will be progress on the medical front. That by March next year, there will be a vaccine or a number of vaccines available, and some meaningful development on the therapeutic side will also have been proven. So that assumption, we will -- we're looking at global economic environment where, by the end of this year, the global economy will be experiencing an output gap, which will be -- and the output gap issue is very significant and important here. We will have an output gap globally, which will be around 7%. In the U.S., probably 5%, 6%, and the same in Canada. Could be a little bit less, a little bit more. But what's important to catch and understand is by the end of this year, following a very strong third quarter and an okay fourth quarter, by the end of this year, we will be experimenting a significant output gap. And if the assumption about the developments on the medical side that we make is realized, we will be looking going into 2021 at an environment where with an output gap of 6% in the U.S. and in Canada, unemployment around 9%, 10%, we will be looking at an environment where very stimulative monetary and fiscal policies will be in place in order to put those people back to work and close the output gap. Now that's -- what's very significant for us in our decision is not only what we're likely to experience in 2021 where the Canadian and U.S. economy will be growing at a rate which will be significantly above its long-term trend. Canadian long-term potential is 1.5%. U.S. is 2%, 2.5%. Globally, it's 3.5%. All those measures will be outperformed by an economic environment that will be growing at a rate which will be -- which will aim at closing that output gap and put people back to work. And to close an output gap, which will be around 6%, knowing that the U.S. and Canadian economy potential growth at, let's say, 1.5% in Canada, 2.5% in the U.S., the output gap of 6% that has to be closed also needs to deal with the fact that the potential goes up as well. So in order to close that output gap and the growth in potential, the U.S. and Canadian and global economy will have to grow above potential for the following 3 years. We see statements coming from central banks. The latest one from the U.K. Central Bank saying that it's going to be late in 2021 before we go back to the level of economic activity that we had at the end of 2019. Well, by the time we get there, which is third quarter -- general consensus is third quarter of '22, in fact, if we get there by then -- 2021, I'm sorry. If we get there by then, which is back to where we were at the end of 2019, it means that we still have at that point in time an output gap which will be in the order of at least 2%, 2.5% because the potential will grow. Going back to the end of 2019, we'll not take into account the growth in potential of 2020 and 2021. So with an output gap by the third quarter of '21, if we have an output gap which is still 3%, 4%, it will take at least another 12 to 18 months to close it and at least another 12 to 18 months to go back to a full employment environment in the most optimistic scenario. So that takes us well into 2022. So our view is that we have ahead of us -- given progress on the medical front in that scenario, we have ahead of us 3 years of economic growth globally, of economic growth which will be above potential with sustained low interest rates, with sustained central bank and fiscal policy stimulus and inflation, assuming that potentially inflation will be above 2%, the degree of tolerance by central banks live and accept a rate of inflation which is above 2%, which has been clearly stated and identified by central banks around the world. So inflation will not be an issue if it was to move above 2%. And that's 3 years of an economic and financial environment that will be very, very supportive for equity markets. So our view is that, over the next 12 to 18 months, equity markets will outperform other asset classes, and we could have a period of 2, 3 years where it's an ideal environment for investors in equity markets. So that's the foundation and the basis that led us to increase the equity position in our client portfolio.Now the probability that we have on that environment, which is, like I said at the beginning, highly dependent on progress on the medical front, we have a 65% probability that that's what will occur. Now the other scenario under the medical development perspectives, if the other scenario happens, which is one where there's no medical progress, well, I'm sure you don't need me to elaborate what the consequences of that would be in financial markets over the next 12 months. So we live with the scenario analysis. We live with the probability judgments on the outlook for the next 12 to 18 months. And our judgment is that by March next year, maybe before the end of this year or by March next year, we will have confirmed breakthroughs on the medical aspects of life. And if that happens, this scenario conducive to a relative -- attractive relative performance from equity markets. Thank you. Back to you, JP.

[Jean-Philippe Lemay]

Yes. Go ahead.

[Operator]

[Operator Instructions] Your first question comes from the line of Gary Ho of Desjardins Capital Markets.

[Gary Ho, Analyst]

Just maybe first question for JP. You highlighted a renewed focus on distribution and alluded to looking at it from an integrated distribution team approach and holistic solutions. Can you maybe elaborate a bit on that? What's the benefit that you see? And perhaps kind of time line in building that out.

[Jean-Philippe Lemay]

Sure. Thank you, Gary, for your question. So the way we are going about developing and expanding our distribution efforts outside of Canada is really building on what we've set out in Canada over the past 12 to 18 months and really is -- given the diversity of strategies that we have, we are increasing focus of our distribution groups. We are increasing as well sophistication and knowledge and specialization. So we are expecting to continue to add specialized investment professionals focused on interacting with clients across asset classes, namely in the private markets and also in the public markets. But at a very high level, Gary, the approach is really to make sure that we have a dedicated, sophisticated and specialized resources interacting with clients and prospective clients to really maximize the opportunities for our strategies to be distributed outside of Canada.

[Gary Ho, Analyst]

Okay. Got it. Second question maybe for Lucas. I just want to dig into the SG&A side a bit. A lot of moving pieces. I think you highlighted some of that. There's the variable comp. There's share-based comp. And then there's the cost containment efforts and then the reduced salaries and the government subsidies. If you can maybe talk about these 4 moving pieces, which one should we think about as recurring, which ones are more onetime? How should we think about that looking out?

[Lucas Pontillo, Executive VP & Global CFO]

Sure. Thanks for the question, Gary. And I think if you look at sort of -- I'll categorize as sort of nonrecurring for the quarter, if you will. I guess starting with -- in the share-based compensation, we did have $3.2 million of that, which related to just accelerated share-based comp with regards to our announced project at the end of June. So you wouldn't expect to see that going forward. In addition, in our variable compensation line, there was an adjustment for about $2 million for the quarter, really just relative to some true-ups as a result of the volatility from Q1 and some sort of reinvestment in some of the investment teams as we spoke about as well. And so again, I think that's just more of a timing thing there that you shouldn't expect that $2 million to recur. As we spoke about, there is $2.9 million in wage subsidies. I'd like to highlight, other than the offsetting expense amounts, there also needs to be a recognition that, effectively, we were down revenue for the quarter as a result of being eligible to be able to achieve that subsidy. So the test for that subsidy was, effectively, you had to demonstrate that you were down revenue about 15% either year-over-year for the month of March or relative to your average performance for January and February for your March month. And so in our case, we certainly exceeded the 15% threshold. And the revenue impact for us was close to about $7 million. So if you -- even if you want to take some overhead and cost charges, variable compensation charges against that $7 million of lost revenue, I think that you would agree that even the subsidy that we received wouldn't be enough to offset that. So I think those are sort of the key items I would think about in terms of how to normalize for the quarter. Certainly, there was -- I come back to there are the initiatives that we have ongoing in terms of managing our expenses prudently, specifically as it relates to things like marketing and travel. And the logical question is going to be sort of how long can that recur or not recur going forward. And I think the answer is just going to be, it depends. We continue to monitor the situation. As we say, it's -- while we're very encouraged by the way equity markets are responding, we recognize that we may not be out of the woods yet, so we're prudently managing our expenses on that side. And it's too early to determine still what's going to be a normalized run rate there in terms of some of those savings that we're currently garnering. So I'll pause there if you have a follow-up, Gary.

[Gary Ho, Analyst]

Yes. Maybe just on that. So you guys -- the SG&A line, roughly $121 million, so I should back out the $3.2 million for share-based comp, $2 million for variable comp and then offsetting that, the $2.9 million for the government subsidies, like to get to a run rate, if I'm looking at -- assuming the AUM stays roughly the same.

[Lucas Pontillo, Executive VP & Global CFO]

Correct. That's fair.

[Gary Ho, Analyst]

And does the government subsidies continue into Q3? Or is there any more -- I'm assuming,most of that has been...

[Lucas Pontillo, Executive VP & Global CFO]

Not based on how we're currently performing. So again, it was obviously the significant impact for the month of March and the early part of April that we qualified. Obviously, things have turned around and markets have been in our favor. So I don't expect us to be able to qualify going forward at this point.

[Gary Ho, Analyst]

Okay. Great. And then my last question maybe for Jean-Guy. You really have -- usually have him on the call, but thanks for the capital markets outlook. So given your fixed income mix, roughly kind of half of your book, it sounds like you're pretty bullish on the equities market. Should we see the equities mix trend higher over the coming quarters? Is that how we should read into that?

[Jean-Guy Desjardins]

Like I said, we already increased our position in equity markets across the range, the whole global, the Canadian equity. In fact, we've weighted our Canadian equity position relative to U.S. and [ EC ]. But we did that at the end of June, early July. And we increased our current portfolio to 10%. So all of our clients where we have a tactical asset allocation responsibility would right now be at the midpoint of the range for -- by how much they can overweight. So we still have room. On a benchmark basis, we still have room to raise equity positions by another 10%, which would be, like I said, halfway relative to the overweight range. But we're not at the point right now where we would be willing to go that far. The key -- like I said, the key driver will be developments on the medical front. And obviously, we stay very close to what goes on in that world. And if -- as soon as positive and higher probability developments occur on that front at some point, and I would say that that's likely to occur, if it occurs, it's probably late fall this year, we then would be moving to another -- we would be moving another step in overweighting the equity exposure of our client portfolio because, at that point in time, that scenario would be more or less confirmed as those developments occur on the medical front. And then we're heading into a 3-year and, honestly, I would go as far as saying we would be heading into a 5-year growth cycle of unchallenged economic expansion. And when that happens, when you have that much visibility on the outlook for the global economy, U.S. and Canada, obviously, stock markets outperform on their asset classes. And that's the position we would be taking at that point in time.

[Gary Ho, Analyst]

And as a follow-up. Can you disclose how much of your AUM are in this tactical allocation? And would that move the needle in your management fee?

[Jean-Guy Desjardins]

For the -- I don't know the exact number. It's interesting. But listen, I would say, let me -- my guess would be probably $20 billion, $30 billion would fall in that segment, most of the high net worth clients -- pretty much all of the high net worth clients and a number of institutional clients.

[Gary Ho, Analyst]

And that would have a management fee impact, your average -- your bps, like assuming the equities component you would charge a hire?

[Jean-Guy Desjardins]

Well, unfortunately, we don't have a fee associated to the value-added that we generate from the tactical asset allocation part of the portfolio. But if we make good tactical asset allocation decisions, it has an impact -- a meaningful impact, as you know, on the total value of the portfolio. And obviously, it contributes to higher fees. The higher the return on the portfolio, the higher the fee generation we receive from that portfolio. So if our tactical asset allocation decision adds 1% to the total return of the portfolio, it's obviously a favorable fee-generating activity for the firm.

[Operator]

Your next question comes from Geoff Kwan of RBC Capital Markets.

[Geoffrey Kwan, Analyst]

You've obviously been able to bring in new sales during the pandemic, but just curious how has COVID-19 impacted, I guess, the overall ability to bring in gross sales in each of your segments. So for example, within institutional, has there been a change in the pace of new RFP activity? But also for in progress RFPs, are those time lines taking longer?

[Jean-Philippe Lemay]

Thank you, Geoff. This is JP. I'll try to give you some color on that. I would say that on the institutional side, the early stage of the pandemic has definitely slowed down some of the investment committees and finalist presentation organization. But I would say over the past 2 months, there's been a reorganization of our institutional client. And the process have been coming back to close to a normal pace. I would say, this year, year-to-date, we've had only -- only in Canada, 36 new RFPS, and a very chunk of that has been going on in Q2. And we've been winning. The AUM is one thing, but the number of new relationships, as we disclosed in the -- in our early release late July, the number of opportunities will still be ongoing. So on the institutional front, I think it's going well. Although in some cases, especially on the private side, on-site due diligence have obviously been delayed. So there's probably a pent-up interest or pent-up demand there that is going to be released as we loosen the constraints there.Private wealth, I would say, potentially for new client acquisition has probably slowed a bit down given the nature of the relationship that needs to be built there as we are looking after new clients. But -- and then retail inflows have been very strong. If I just compare what happened with Canoe over the past quarter, there was the acquisition-related increase in AUM, but there was also a very strong organic inflow over that relationship over the past quarter given they're focused on the defensive strategies of our platform.

[Geoffrey Kwan, Analyst]

Okay. And then kind of notwithstanding that there were some few puts and takes in the quarter and some of the adjustments that Lucas was talking about earlier. But are you comfortable that when you adjust for that, the adjusted EBITDA margin that would have been seen in Q2 is kind of sustainable and expected to increase in the upcoming quarters?

[Lucas Pontillo, Executive VP & Global CFO]

So maybe I'll break your question down into 2 parts. The first part, it is, given the puts and takes, absolutely reflective of sort of the economic value of the quarter, if you will. So very comfortable with that. The question on a go-forward, I mean, obviously, the huge caveat there is markets supporting and markets continuing to do what they're doing. So I think all else being equal, as long as we don't deal with any type of a correction in a go-forward environment, that we are indeed at a good run rate at this point.

[Geoffrey Kwan, Analyst]

Okay. And then maybe if I could just -- a slight add-on to that question that I had there. Are there other expense items that you haven't kind of talked about that you think as things normalize, will kind of pick up and how to think about that? So I'm thinking stuff like travel, entertainment, those sorts of things.

[Lucas Pontillo, Executive VP & Global CFO]

Yes. So that is what I alluded to in my earlier response with regards to why we are managing those expense items, marketing and travel in particular, as you mentioned. There is a recognition that we need to get back to business in some regards in those areas. As I say, it's -- we're being prudent. We're trying to look at where are the best opportunities to do that, trying to evaluate where we are in the midst of all of this still. And that's -- just to give you a flavor for that number. That's probably about a $3 million number in terms of benefits that we're generating right now on a quarter-over-quarter basis, which could change. Absolutely. And this is why we talk about the fact that kind of -- we're looking at this and we'll sort of adjust accordingly based on what the reality for the second half of the year is. There was some additional charges in the quarter as well, which I'll qualify again as sort of onetime costs to deal with the pandemic or consultants or that sort of thing. That was in the neighborhood of maybe, call it, $1 million for the quarter, which wouldn't recur. So you do have these puts and takes. And as I say, a lot of it is still just related to the situation that we find ourselves in.

[Operator]

Your next question comes from Scott Chan of Canaccord Genuity.

[Scott Chan]

When you kind of talked about the -- your new global operating model and private wealth and unifying, I guess, your private wealth segments, would that include Bel Air that operates with an open architect structure?

[Jean-Philippe Lemay]

So at this point, we are more focused on integrating our private wealth operation that we have ex Bel Air, and that's the key focus on bringing everything together at this point, Scott.

[Scott Chan]

Okay. And then the private wealth net flow traction has been fantastic. And I guess for the quarter, did Bel Air contribute a lot to it? Or was there other kind of segments within private wealth that helped contribute?

[Jean-Philippe Lemay]

Yes. The main factor contributing to the positive flows in the channel this quarter was our New York fixed income operation, where the flow came in through that with interest on the tax-efficient fixed income strategy there.

[Scott Chan]

Okay. And last quarter, you gave us an update and, I guess, post quarter. And I was wondering if you can offer us an AUM update, I guess, in July, and if positive net flows persisted so far.

[Jean-Philippe Lemay]

We'll take that demand and we take good note of your demand.

[Operator]

Your next question comes from Cihan Tuncay of Stifel.

[Cihan Tuncay, Director]

I'm just trying to get a little bit more clarity on some of the back-office integration efforts that you guys have been working on and executing on. Anything you can point to? Any successes on that front that were achieved over the quarter, and -- be it quantitatively as well as qualitatively? And what others you have in the pipeline for the rest of the year? And has the pandemic, just from a procedural perspective, impacted the timing of any of these -- integrating your custodian or CRM systems or anything like that?

[Jean-Philippe Lemay]

Sure. Thank you for the question. We are definitely continuing to be focused on that. The whole team is really focused on that. I guess our main recent improvements was really in the consolidation of our client relationship management tools, from 7 down to 1 globally, and globally integrated with the proper data backbone to really extract most -- a lot of value out of the implementation. I would say the next key thing on the road map is really the integration and consolidation of our different private wealth operating backbone. So that's a key thing. In the past few months, I've been really negotiating and selecting and planning the architecture and the way we're going to organize ourselves to consolidate that, so the choice of the vendor and all the organization around that. So that implementation and that transition will happen over the next 2, 3 quarters. And that's the next big important focus as well as continuing to improve our posture from a cybersecurity risk standpoint across the firm. So these are the 2 key things that we are working on right now. But overall, if I take a step back, as a management team, we're still very convinced that we have operating leverage opportunities and continuing to improve on that on the backbone and consolidate that globally. And it's something that we're still committed to execute over the next few years.

[Cihan Tuncay, Director]

And maybe just expanding on to that. If I heard correctly in Lucas' comments, there was -- you're expecting a $5 million to $10 million boost to EBITDA next year with some synergies both on the distribution capabilities as well as cost-saving initiatives. Within the $5 million to $10 million, is it possible to kind of break down how much -- like what your assumptions are with that? Are you including potential pickup in travel and entertainment expenses? And how much of that savings or that boost to EBITDA is distribution synergy versus back-office cost savings? If there's any more color on that.

[Jean-Philippe Lemay]

Yes. Thanks for the question. Absolutely. So I mean the reason for the range is effectively that we feel very comfortable in the $5 million number as it relates to sort of net run rate savings on the expense side. So when I say net -- because we talk about the fact that we are going to be redeploying in other areas and investing in other areas. But on a net basis, we do expect a $5 million run rate save on expenses. The reason for the range going up to $10 million is that additional $5 million refers back to exactly what you just mentioned, which is sort of upside on the realignment of distribution and expectations on revenue growth that could come from some of this. So hence, the range. So the $5 million is fairly baked and the $10 million is sort of what we hope to get with the combination of top line growth as a result of this.

[Cihan Tuncay, Director]

Maybe just one final question for Jean-Guy while we have him on the line. Jean-Guy, just wondering, what's your outlook on the M&A pipeline today. I mean I know -- it sounds like you're -- from a leverage perspective, you've come back down to below 3x funded debt to EBITDA. And you're seeing some flows out of lower-margin assets into higher-margin assets. I'm just wondering how you think about potentially exiting, if at all, some of the lower-margin business and as well as utilizing some extra room you have on your -- on the credit side. Any potential change in M&A outlook at all for some higher-margin acquisitions, be it in alternative or the equity side of things?

[Jean-Guy Desjardins]

Well, I -- if I try to summarize this as succinctly as possible, for the first 15 years, 16 years, we adopted a strategic development position which aimed primarily at expanding our investment management capabilities. Every single acquisition that we've made was driven by the desire to acquire investment management talent and new investment strategies in order to diversify our offer into a highly diversified, multi-asset organization. And today -- and that applies initially in the public markets. And in the last few years, very focused on the private market side. And when we look at our situation today, we are -- we have in excess of 100 different strategies available within the organization for our clients to take advantage of. There's always another or a new strategy, and there's always new talent that we could acquire. But our focus right now is not to aggressively and, on a priority basis, expand further our investment management talent pool through acquisition strategies. We will expand, in fact, our talent pool but -- by hiring teams, identifying leadership, investment management leaders that are open to a change and grow organically around the talents that we may be able to attract on the investment management side of things. So our organizational priority and strategic priorities right now have been well explained by Jean-Philippe and by Lucas. And our focus is to maximize the opportunity, the distribution opportunities and the efficiency of all that investment management talent that we have built over the last 16 years. So one thing that we missed -- or not that we missed, but there's so much you can do and there's so much money you have to work with, we spent, on a priority basis, our money on acquiring investment management talent. But along the way, we haven't invested sufficiently in our distribution capability. So we find ourselves today in a situation where we have a number of very, very competitive investment strategies that would have a significant opportunity to gain market share and where we do not have sufficient distribution power to maximize our opportunity on the list and the range of competitive investment strategies that we have. So our focus, and I think JP highlighted that to a large extent, our focus and one of our big corporate priorities right now is to invest in our disposition capability globally in order to maximize our opportunities on those highly competitive strategies that we have as well as from the operations side. We're focusing on the technology side of our business. We're investing quite a bit of money in improving our technological platform on a global basis, integrating it all globally. So our focus and our money is much more on organic growth, distribution, operations than just pure strict third-party acquisitions like we did in the first 16 years of our life.

[Operator]

Your next question comes from Jaeme Gloyn of National Bank Financial.

[Jaeme Gloyn, Analyst]

I did want to dig into the expense story a little bit as well. And I'm looking at the disclosure about the -- around the quarter-over-quarter movement. So in particular, we've kind of -- you've gone through a few of them, but one that hasn't been sort of talked about is these lower employee benefit costs. Am I correct to assume that this $6.4 million that you talked about in salaries and benefits, if you take the $2.9 million CEWS benefit out of there, that would have been what's attributable to lower employee benefit costs? And would we expect that to tick back up as utilization increases?

[Lucas Pontillo, Executive VP & Global CFO]

Yes. You're bang on, Jaeme. That's the exact number. Where you can expect it to tick back up again is in Q1 of next year. So that's -- it's usually a front-ended number by virtue, in particular, of our U.S. operations where a large amount of the benefits are paid at the beginning of the year. So it's a seasonal expense, if you will, which is why we say it doesn't recur in Q2 and won't for the rest of the year, but it is sort of a seasonal kickup in the first quarter of every year.

[Jaeme Gloyn, Analyst]

Got you. And then on the $5 million decrease in SG&A costs. Can you break out what would be attributable to successful execution of cost containment measures versus a response to market pressures and the effects of COVID-19?

[Lucas Pontillo, Executive VP & Global CFO]

Well, I mean I'm not sure you -- I'm not even sure you can break those out conceptually from the perspective of saying we recognize the situation when it came in. I think I was pretty clear on the first quarter call that while we weren't going to knee-jerk react, we're also going to take the appropriate measures to deal with the situation. And so as a result, it is a compounding of both prudent management actions in the face of what we were dealing with at the time. And so I think it is a combination of the 2. If where you're trying to get with your question is sort of how does that impact go-forward quarters when we get to a more back-to-normal type of environment or scenario, I will say that it's probably a split between, call it, $3 million of that $5 million. As I mentioned earlier, it's kind of that amount that's kind of being held back right now as a result of marketing, travel that's just unseasonal and uncharacteristic for where we're at. But then nonetheless, it's not a binary outcome where we'll just flip the switch and get back to a $3 million expense run rate on that in Q3 or Q4. We continue to monitor it. And each of the business units are being very judicious about how they manage that. So...

[Jaeme Gloyn, Analyst]

Okay. Great. On the restructuring charges, it was $25 million-ish in the quarter, $21 million related to the global mandate. What was the other $4 million related to? And how should we think about restructuring charges over the next couple of quarters?

[Lucas Pontillo, Executive VP & Global CFO]

The majority of it was -- of that balance was really just lingering cleanup of some of the acquisition work that we had done as well as the divestitures -- the divestiture that we had of the Fiera Investments LP. So I mean on a go-forward basis, again, prompting any additional action we may or may not take, I think that most of that is behind us at this stage.

[Jaeme Gloyn, Analyst]

Okay. Great. The -- just to clarify, the funded debt ratio that you're disclosing in the presentation and you're providing a track record, that's the covenant ratio that we've previously just talked about on the conference calls? I just wanted to clarify that point.

[Lucas Pontillo, Executive VP & Global CFO]

Correct, correct. So you see both. There's the covenant ratio. And then in the total ratio, that factors in diverts and converts as well, but the covenant ratio is the 2.97.

[Jaeme Gloyn, Analyst]

Great. And where is the comfort level? I know Jean-Guy talked about tweaking it up and down between sort of 2 and 3x depending on outlook for markets and, I guess, the company in general. Are we -- is 3x really the max right now? Like would you prefer to have that down around 2x right now just given some of the uncertainties around probabilities and outcomes of second wave and things like that?

[Lucas Pontillo, Executive VP & Global CFO]

No, absolutely. And I think, again, we took measures in Q2 to preserve cash and manage cash. To that extent, we then, in turn, reduced the line of credit, as I mentioned, by over $17 million. So we remain very cognizant and very focused on reducing that ratio. We'd like to target sort of a 2.8 by the end of the year, again, coming back to my earlier caveat about a lot of it is going to be dependent on what the markets do. But if markets hold, we'd like to see ourselves get to 2.8 by the end of the year.

[Jaeme Gloyn, Analyst]

Okay. Okay. And similarly, as I'm thinking about the new global mandates and distribution model and some of the potential savings that you're going to generate out of that as well as the likely enhanced growth on the AUM and revenue side, is there a particular margin level that you're thinking about? If I go back to -- historically speaking, we were kind of looking for the 35% margin level. But is it really just sort of, okay, over time, pick it up higher incrementally? Or is there a particular level that you're looking to achieve ultimately with this new strategy?

[Lucas Pontillo, Executive VP & Global CFO]

I mean I think the strategy has a host of benefits. I guess I think the first is just to make sure that we're addressing our client needs in a more holistic way. I think in terms of the P&L benefit or the economic benefit to the firm after the fact -- obviously, there will be some increased operating leverage. We talked about the fact. But I think when it comes back to -- the original talk was always around that 30% margin. And even that 30% margin was on the back of a discussion about best-in-class asset managers operating between the 30% to 35% range. So again, we remain committed to improving the overall operating leverage and operating efficiency of the firm, and we're already in that range at this point. So...

[Jaeme Gloyn, Analyst]

Okay. And last one, just around the equity performance in the quarter, a little bit negative in one quarter. And granted, it is only one quarter at this time, but are there -- or is there anything that you can share from a client perspective in terms of feedback around that performance? Has there been anything at this point? Or is that something that you haven't quite encountered at this point?

[Jean-Philippe Lemay]

No. Thank you for the question. No, at this point, I mean the equity performance is consistent with the investment process and the start that we have from an active standpoint, and we haven't had any particular client issue at this point for the quarter.

[Operator]

Your next question comes from Graham Ryding of TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Maybe I could follow up the theme of just -- you made reference in investing more on the distribution side. Does that imply hiring people largely? Or is there more to it than that? And I guess just broadly speaking, like how should we think about the main difference between how you're going to go to market going forward versus how you go to market today and perhaps keep it more to sort of your public and private assets and not the private wealth side?

[Jean-Philippe Lemay]

Thanks for the question, Graham. So let me -- there's multiple facets to your questions. I'll try to address them. So when we are talking about allocating more capital towards distribution, it's sure that the first line item there is hiring of talent, so bringing on more people. But it's just not about increasing the number of people that we have, but it's also how we are structuring the teams and the type of talent we want to attract and continue to deploy. And like I mentioned earlier on, it's a question of sophistication, of focus and specialization across the different strategies that we have to be able to really maximize the opportunity and I would say, mostly outside of Canada, for many strategies that are -- we believe -- strongly believe that are relevant for a client -- for institutional and private wealth clients outside of Canada. So that's the main focus. But there's different ways as well as we -- that we go about it. We put the proper segmentation of the clients that we are engaging with is an important part of the strategy and how we go about that and the focus as well from a client segment and types of clients is an important one and also leveraging the different partnerships that we have outside of Canada, namely the Natixis one is a good example where we are making strides with them in terms of leveraging their own distribution channel. When I'm thinking about the wholesale operation that they have in the U.S. with [ 4IAs ] or other types of channels, access that they have in Europe and Asia. And that's something that we are also very focused on from an initiative standpoint. That doesn't necessarily require capital, but it's a question of focus of the organization.

[Graham Ryding, Research Analyst of Financial Services]

Okay. That's helpful. And then when I think about -- Lucas, this would be for you. But you've had $5 million to $10 million of gains or upside in EBITDA related to the sort of restructuring efforts, but that's not kicking in till next year. What is it this year that's preventing those -- that EBITDA lift from happening right away? Or like what are you investing in this year that, I guess, you won't be investing in next year?

[Lucas Pontillo, Executive VP & Global CFO]

Well, I think it's a question of sort of we're coming back to there's -- as JP mentioned, some additional investments on the distribution side as we look to reinvest in some of our investment strategies as well. So there's some components there which just are going to cause a bit more drag for the remaining 2 quarters as you have some additional upfront costs, and then kind of normalize to that net $5 million benefit on the expense side. I want to reiterate that, that sort of additional stretch between $5 million to $10 million, that's sort of the anticipated benefit that we think that after the investments that we'll be making this year. We should be in a position to generate additional revenues, which would translate into about, call it, again, the 6 to -- a delta between the $6 million to $10 million of incremental EBITDA.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Understood. And then my last question, if I could. The share of joint earnings, I think, that comes from Palmer Capital. Can you remind us, like is that revenue going to be very lumpy and difficult to predict? Or do you have any visibility there?

[Lucas Pontillo, Executive VP & Global CFO]

It is going to be lumpy. And I mean I think we talked about that the first quarter that we introduced Palmer to the sort of the P&L. And then it was a new line item that we created. It is really related to their value-add projects in terms of real estate development activities. So sort of depending on where they are in terms of the process, the delivery, the queue and all of that, so it -- again, it's hard to predict, and it is lumpy, and certainly, even in the environment where we find ourselves today.

[Operator]

There are no further questions at this time. Ms. Elsayed, I turn the call back over to you.

[Mariem Elsayed, Director of Investor Relations & Public Affairs]

Thank you for joining us today. That concludes today's call. Operator, back to you.

[Operator]

Thank you, ladies and gentlemen. That concludes today's conference call. Thank you for participating. You may now disconnect.