IGM Financial Inc

TSX:IGM

Earnings Call Transcript 2018-Q1

[Operator]

Please be advised that this conference call this is being recorded. Good afternoon, and welcome to the IGM Financial First Quarter 2018 Earnings Results Call for Friday, May 4, 2018. Your host for today will be Mr. Keith Potter. Please go ahead, sir.

[Keith Potter, Senior Vice President Finance & Treasurer]

Thank you, John. Good afternoon. I'm Keith Potter, the Treasurer and Head of Investor Relations, and welcome, everyone, to IGM Financial's 2018 First Quarter Earnings Call. Joining me today are Jeff Carney, President and CEO, Investors Group and President and CEO of IGM Financial; we have Barry McInerney, President and CEO of Mackenzie Investments; and Luke Gould, Executive Vice President and CFO of IGM Financial. Before we get started, I'd like to draw your attention to our cautions related to forward-looking statements on Slide 3 of the presentation. Non-IFRS financial measures that we have used in the material are summarized for your reference on Slide 4. And finally, on Page 5, we provide a list of documents that are available to the public on our website related to the first quarter results for IGM Financial. And with that, I'll turn it over to Jeff Carney, who will review IGM first quarter results starting with Slide 7.

[Jeffrey Robert Carney, President, CEO & Director]

Good afternoon, everyone. Net sales reached a record high of $1.4 billion during the quarter -- first quarter. We are pleased with the results and the market share gains given the backdrop of lower industry net sales relative to Q1 2017. We had total ending AUM, it was only down slightly from December 31, 2017, as a result of strong net sales partially offset by weaker financial markets. During the quarter, we continue to focus on expense management with the expense growth of 2.5% relative to Q1 2017 and continue to guide to non-commission expense growth of no more than 5% for 2018. IGM Financial has also adopted IFRS 15 in the quarter, which had a positive impact on our earnings per share of $0.02 for the quarter and Luke will speak more on this in his remarks. Before getting into the details of IGM's first quarter results, Slide 8 provides context on the broader industry. Volatility returned to the equity markets during the first quarter of 2018, which followed an extended period of steady financial markets. These market conditions appears to have influenced Q1 2018 industry flows with overall net sales declining by $4.7 billion or approximately 30% relative to Q1 2017. The deposit takers posted the largest year-over-year decline and the advice channel also experienced decline in net sales.Turning to Slide 9 on financial results for the quarter. Net earnings for the quarter were $185.5 million, exceeded $177.1 million in Q1 of last year. Q1 earnings per share were $0.77, up from Q1 2017. As I mentioned, 2018 results include the impact of IFRS 15, which Luke will speak to you on shortly. We had a strong first quarter with record high net sales of $1.5 billion, up approximately $200 million from Q1 2017 reported net sales.On Slide 10, we show you the segmented results. The EBIT increase in corporate and other is primarily driven by the inclusion of a full quarter of China Asset Management's earnings in 2018. You can also see our net sales are broad-based across Investors Group and Mackenzie.Turning to Investors Group's quarterly highlights on Slide 12. Investors Group experienced strong net sales of $784 million during the first quarter despite slower industry sales. We continue to focus on key things, including more emphasis on high net worth, managed solutions and improving the quality of advice and the consultant practice productivity. Investors Group's AUM ended the quarter, down 1% from December 2017, as positive net sales helped to offset negative investment returns. With the current period of volatility, our trailing 12-month's redemption rate remains low at 8.4%, a decrease from 8.8% as at Q1 2017.Turning to Slide 13 on our operating results. Investors Group's growth and net sales for the quarter were in line with our record year in 2017. We captured market share versus the advice channel peers and the overall industry as their net sales rate declined, while Investors Group's remained relatively stable at 2.2%. April 2018 net sales results were down relative to 2017 but remain above 2016 levels. We're not seeing anything specific other than April, historically, has been a softer month. And we anticipate that there is an overall slowdown in the industry and that volatility maybe being a big part in that.On Slide 14 you can see the sales to high net worth and managed solutions continue to be a key area of focus. Gross sales in the high net worth segment of $1.2 billion were up 11% versus Q1 2017 and represented 42% of our total sales for the period versus 37% in Q1 2017. This metric declined slightly quarter-over-quarter as we experienced a broader base of clients contributing to the RSP season. We continue to grow unbundled fee structures where the clients pay the advice directly. We now have 22 billion in unbundled fee structures representing 25% of Investors Group's AUM. This is up 94% from just 1 year ago. As I discussed in the past, we are working on having unbundled pricing available for new accounts at all asset levels in the second half of 2018. Slide 15 highlights our current client rate of return and historical redemption rate experience. It's been some time since we have seen this level of market volatility experienced in Q1 of this year, so I'd like to make a couple of points. Our median client account rate of return of over 5 years remains healthy, despite muted 1-year return. And during this past period of heightened volatility, we have seen industry redemption rates spike while Investors Group's redemption rates remained quite stable as consultants work with their clients in the context of a well-developed plan. I would now turn it over to Barry McInerney to take us through Mackenzie's results.

[Barry Sean McInerney, President & CEO]

Thank you, Jeff. Turning to Slide 17. Mackenzie experienced another strong quarter. The investment fund AUM reached an all-time record quarter end high and total AUM of $65.2 billion is up 1% year-to-date. Momentum continued across our business with contributions from mutual funds, ETFs and institutional. And of particular note, Mackenzie's retail mutual fund net sales increased despite lower industry net flows. Mackenzie continues to execute on a strategy of execution. Earlier this week, we announced the launch of a Multi-Strategy Absolute Return Fund, making Mackenzie the first to bring the innovation of an absolute return fund to Canadian retail investors based on the regulator's alternative framework proposal for conventional mutual funds. We also announced the simplification of retail pricing across our fee-based offering and private wealth bundled pricing options. And I'll speak more on these enhancements in a few minutes.Slide 18 highlights Mackenzie's operating results for the first quarter of 2018. Mutual fund gross sales of over $2.6 billion were up 3.2% year-over-year. Total net sales of just under $1 billion were up from last year and included $472 million from Investors Group and Counsel mutual funds. Net sales, excluding Investors Group and Counsel, were relatively stable year-over-year. Mackenzie continues to capture market share versus peers. Long-term mutual fund net sales rate of 2.3% exceeded both the advice channel and overall industry. And including both ETFs and long-term mutual funds, Mackenzie delivered an organic net sales rate of 4.6%. Mackenzie's $229 million institutional net sales included a new mandate won by Mackenzie to advise an IPC mutual fund that was previously managed by a third party. And as Jeff mentioned, April investment fund net sales were positive $196 million with contributions from mutual fund and ETFs. And we believe these results are quite strong as we anticipate a slower April for the industry.Slide 19 provides detail on our mutual fund sales. Gross to net sales remain strong across many asset classes. Overall, mutual fund net sales were $286 million, down $95 million relative to Q1 2017. Breaking this number down further, Mackenzie's retail mutual fund net sales increased by $95 million despite declining industry net sales. And this is before considering the retail net creations in our ETF business. I believe this demonstrates the retail strategy is working, and working well. The quality of our people, the strength of our brand and our highly relevant product offering, as Canadian advisers look into McKenzie, perhaps, now more than ever, to help address their clients' complex financial need.Turning to Slide 20. I'm pleased to report that Mackenzie's ETF business has now exceeded $2 billion in assets under management. This makes Mackenzie the eighth largest ETF provider in Canada out of approximately 30 players. Mackenzie's Q1 ETF net creations were the third highest in industry at $715 million, and second in the active and strategic beta category. Our ETF business has rapidly grown into a broad product offering with a diverse client set, including approximately half being held within retail channels. Our ETF products are also being used in a variety of ways within Mackenzie. Investors Group and Counsel mutual funds to effectively execute their investment strategy.Slide 21 covers product innovation which continues to be a key catalyst for Mackenzie net sales. Over the past 5 years, innovative product launches have delivered a total of 400 -- sorry. $4.6 billion in net sales, including approximately $950 million in Q1 2018 alone. Our unconstrained fixed income and floating rate income funds have each garnered over $0.5 billion of net sales since launch, and the Mackenzie Diversified Alternatives Fund launch in 2015 is on track to break through the $0.5 billion mark this year. Earlier this week, we announced Mackenzie's latest innovative product, the first-ever absolute return product to be made broadly available to Canadian retail advisers and clients, based on the regulator’s alternative framework proposal for conventional mutual funds. The Mackenzie Multi-Strategy Absolute Return Fund combined several alternative strategies, including credit absolute return, long/short equity, market neutral and global macro into one solution. Until now, most alternative investments in the Canadian market were limited to a high net worth and institutional investors through select advisers. As of 81-102 -- as the 81-102 regulated fund, Mackenzie solution is transparent, highly liquid and broadly available for IIROC advisers and their clients. Investors can increase portfolio stability by adding component to their portfolio that is not correlated with the markets. This launch combined decades of robust experience, managing institutional turn of strategies, including Mackenzie's asset allocation, fixed income and Systematic Strategies teams. Mackenzie is proud to be a true pioneer in this space, delivering the strategy to mainstream investors and helping them achieve their financial objectives. We expect this product to be particularly relevant in the current market environment where uncorrelated asset class and strategies play a critical role in the portfolio construction for all Canadian.Turning to Slide 22, I'll talk about the recently announced pricing changes. A key component of which relates to fee-based accounts and our F Series mutual funds. Within the full service brokerage channel, fee-based AUA has grown rapidly and discretionary accounts now represent over half of this category. Discretionary accounts typically involve model portfolios that are designed and rebalanced by the dealer and includes a range of mutual fund ETFs and other securities. In this world, product complexities such as fee rebates and multiple series of eligibility criteria that differ by fund manufacture causes real issues for these advisers and dealers. Mackenzie's recent pricing changes are, first and foremost, focused on addressing these issues that are intended to make it easier for all advisers to do business with Mackenzie by providing simplified access to products within minimal fund codes, streamlining the management of client portfolios or advisers including ongoing rebalancing, especially for discretionary accounts with bulk rebalancing processes, and providing competitive pricing. The most significant change is to move towards a simplified single series for fee-based accounts. Simplified fee structure will result in an annualized fee reduction of approximately $12 million starting on June 1. This corresponds to approximately 2 basis points decrease to the fee rate of Mackenzie's total mutual fund assets of $55.6 billion. These changes position Mackenzie very well given the industry trend and evolving adviser preferences. We are comfortable with our product and pricing structures going forward and do not anticipate any additional fee changes at this time.On Slide 23, Mackenzie's long-term investment performance remain solid with 73% of mutual fund assets in the first or second quartile over the 10-year period. Overall, 39% of Mackenzie's AUM is in the 4- or 5-star rated funds, and we continue to demonstrate strength in the balanced fund category. As an investment solutions provider, the balanced fund category incorporates a complete reflection of our best ideas across asset classes and investment styles, as well strategic asset allocation decisions.In Slide 24, we continue to benefit from strong investment performance and net sales across a range of asset classes investment styles and teams. On the equity side, the growth-oriented teams and global equity income team are delivering strong performance and positive net flows. Similar to past quarters, strength here has been partially offset by a slowdown of Ivy and value mandates as value-oriented strategies continue to be at a favor with global equity growth markets at performing value by a wide margin. The fixed income team and our Symmetry managed solutions, run by the asset allocation team, continues to perform well and attract net inflows. These results demonstrate the benefit of our investment boutique structure. I'd now like to turn over to Luke Gould who will walk you through the detailed financial results.

[Luke Gould, Executive VP of Finance & CFO]

Great. Thanks very much, Barry. Good afternoon, everybody. I'm going to turn to Page 26, and I believe everyone would have seen our press release yesterday and for the disclosure around the adoption of IFRS 15 revenue from contracts with customers. I'd like to give a bit of background on Page 26 as to what the context of standard is and how it relates to IGM. And I point first to the notion that the key element of IFRS 15 that's interesting to us is, obviously, that it specifies the accounting for incremental cost in client acquisition. And for an investment manager like us, that means -- that this remains to mutual fund sales commission. And as you know, we've been running at about $200 million a year in sales commissions paid, so this is actually quite an important standard for our results. In the middle section of this slide, you can see one of the key elements of IFRS 15 is that it deals with who the customer is in determining the approach taken to accounting or sales commission. In point A, you can see that if the customer is best defined as being the investment fund as opposed to the end investor, then the commissions are best considered cost of fulfilling an existing fund management contract and appropriately expensed as incurred. In point B, you can see that this differs from a situation where the customers best defined as being the end client. And in these cases, the commission would be considered a client acquisition cost and would be capitalized and amortized over the useful life. You can see in the column on the right that we have our conclusions and our conclusions are in line with others in the industry who reported to date. And so the conclusion on bundled products where we're actually facing the fund through a fund management contract and earn all of our revenue in the form of management fees, that our best determination is that the client is best characterized as the mutual fund itself. And as a result, this is going to be a change in how we account for mutual fund commissions paid for bundled product. In so far as we use to, obviously, capitalized and amortized all these commissions over a period not exceeding 7 years, and we're now going to be expensing these commissions as incurred. This differs from something that's a bit unique to Investors Group's environment, where being an integrated fund manager distributor, we also pay commissions on sales of unbundled product arrangements where Investors Group earns its revenue for financial advice from an advisory fee paid directly by the client to Investors Group over time. And as a consequence of the nature of these arrangements, under IFRS 15, we'll be capitalizing and amortizing commissions paid on the sale of unbundled products. On these unbundled product arrangements, we're going to continue to capitalized and amortized commissions over the useful life. And as a result, there's no change in the accounting for this arrangement. Moving to Page 27. I wanted to build on guidance that we gave you starting last quarter about compensation changes that we made effective at January 1 of this year, and have actually announced for 2018 and 2019. So the chart on the left is an illustration of total compensation paid to the Investors Group consultant network in millions of dollars, its actual results until 2017 and we have provided 2 years of projection to illustrate changes. And then the chart beside it is the actual compensation rates that pertained to sales-based compensation on investment products and asset-based compensation on investment products. If you follow on the left, I point out a couple of features. The first is when you look at that big blue space being the second stack, which is asset-based compensation, you can see that it's rising as a proportion over time. And indeed, when you look at the compensation rates in the middle chart, asset-based compensation rises from 46 basis points in 2017 to 50 basis points in 2018 and 52 basis points in 2019. There's 2 factors driving this. The first is the changes that we announced last quarter where we've aligned asset-based compensation rates effective January 1, 2018, and this rate actually reflects those changes we made. The second factor is the maturing of ongoing DSC units. And you'll remember that while units are subject to its deferred sales commission, they actually pay us a base compensation at a lower rate. And then when they are no longer subject to such a redemption fee, the asset-based compensation increases. So over the 7 years following a discontinued DSC, we are going to see some gradual -- or very small increases in asset-based compensation from this phenomenon. The second point you can see is that the byproduct of this, we've actually been lowering sales-based compensation rates. And so we've announced 2 years in the field -- and you can see how we had very stable rates before 2017, but starting in 2018, we expect to have sales-based compensation of 1.9% of sales, where it was running at 2.4%, and then we're going to see a decline in 2019, again, to 1.5%. I'd note that these rates for the calendar years will be consistent throughout the year. So you can think of the rate being about 1.9% for all 4 quarters of 2018 and then declining to about 1.5% thereafter. When you look back at the chart on the left, what this has meant is that sales-based compensation or sales commission has been about 33% of our compensation, traditionally, and this has declined to 26% in 2018 and 22% in 2019. More interestingly, what this also means is that even though we're expecting continued strong sales from our field, in dollar terms, the commissions that we're paying are going to decline from $238 million in 2017, down to a $188 million in 2018 and $163 million in 2019. So again, overall compensation remains very competitive and attractive, but there's just a lower component in that sales based. And as a result, commissions are expected to decline. The second observation I'd make on how the business is evolving is the chart on the right. And as mentioned earlier by Jeff, we've been evolving on our high net worth offering to unbundled. And now a large majority of our unbundled -- or of our high net worth sales are actually going to unbundled products. So 70% of sales to high net worth investors are going into unbundled arrangements. And you can see on this chart, that represents 28% of our total sales for Investors Group. As Jeff also mentioned, at the end of this year, we're going to be making unbundled series available to all clients, irrespective of their savings level with us. And as a consequence of that, you can see how in 2019, we're expecting that unbundled product sales will be 39% of our total sales. And as we mentioned at Investors Day, we not only announced that we're making unbundled available for all, but we are going to be migrating all of our business to unbundled in the 24 months following that launch. So you can think of these 39% going up to 100% over the years 2020, 2021. I'd now take you to Page 28, where we brought forward the commissions for Investors Group in terms of cash paid on Slide 27. And we've added to it the commissions paid by Mackenzie and IPC. And you can see this all on the left-hand chart. In the middle, we've shown what the commission expense would be when we're continuing our old approach and amortizing all of our commission payments over 7 years. And you can see that as a result of this long amortization period, the numbers are quite stable but would have declined to $229 million in 2018 and $224 million in 2019. The chart on the right shows with IFRS 15 what it means to keep unbundled commission amortized over 7 years, as we traditionally have, but to start expensing bundled commissions as incurred. And you can see that the impact is noticeable and it reduces our commission expense from $229 million to $176 million in 2018, and from $224 million to $149 million in 2019. And those type of impacts will continue in the 3 years that follow as well. So you can see we've highlighted in red, right atop those bars in the chart on the right, that the expected pretax impact on 2018's results is $53 million and the pretax impact on 2019 result is $75 million.Moving to Slide 29. I wanted to outline the impact on the first quarter's results. And before reviewing the slide, I'd note that we've thought to provide rich enhancements to our disclosures to help you navigate among all of these changes. So I'd guide you to the supplemental information as well as our MD&A for further information. The top-left table shows the impact on a statement of earnings. And as you follow through the lines, you can see that we have removed amortization for prior period commissions paid on bundled products from our amortization line, and you can see the impact of this was a reduction of $55 million amortization. In the line below, you can see us adding the commissions paid on these bundled product sales, which is $46 million, for a net impact of $9 million reduction in commission expense in the period. If you follow this down through the column you'll see that, after-tax, this was an impact of $7 million or $0.02 per share. In the bottom left, I'd like to take you to some new disclosures that we've added in the first quarter to help navigate the results. And so we've got an EBITDA before sales commission measure and an EBITDA after sales commission measure. And we've added both of these to understand comparability with prior periods as well as peers. So the top one, EBITDA before sales commissions, you can see is unaffected by the change, and I would note is consistent with the EBITDA we have always reported in the past. The supplemental measure we've added, EBITDA after sales commission, deducts not just those sales commissions, which are actually being expensed as incurred, it actually deducts the sales based compensation arrangement on all of our commissions even though they're being amortized. So it's more akin to a free cash flow measure and we'd also view as more akin to the EBITDA that many of our peers will be reporting.On both earnings and this EBITDA after-sales commission measure -- I'd like to make one observation, which is when it comes to sales commission, the matching principle is now gone in many ways. And I'll just remind you from that earlier slide that Jeff presented, when we actually sell a mutual fund unit, our redemption rate has been about 8%. Meaning, that the unit stays with us for both 12 years. So what I'd remind the group is that if our earnings or our EBITDA is depressed in period because we're paying a lot of sales commissions and expensing it, a lot of care is required to make sure that they understand -- you understand the nature of our results. And obviously, if we're selling a lot, it's just a good thing and we are going to earn fee revenue over a 12-year period, and that needs to be considered. Before leaving this slide, I'd also highlight the top right. We've shown the impact on the balance sheet so you can see in the capitalized sales commission line, we have derecognized $704 million of capitalized sales commissions related to bundled product sales. We have also removed the associated deferred income tax liability of $189 million, and that's been reflected as a reduction of retained earnings of about $515 million. So switching away from IFRS 15 and on to the results. On Slide 30, I'd make one comment, which is as obliged by Jeff, there was market volatility during the quarter. However, we ended at very close to stable with ending assets of $155.8 billion in relation to where we started at $156.5 billion. So it's just a 0.5% reduction as a result of the strong net sales that we put on during the period of $1.4 billion. I'd also note that we released April's results 2 days ago in terms of assets and flows. And we actually had an increase of 0.4% in April, resulting in an asset level that's very much at the same level we started the year with.On Page 31, I'm going to turn to the Investors Group segment. And we've amended these disclosures slightly to address IFRS 15 and make it easier to understand the results. The chart on the left is unchanged from last period, and you can see that the fee rate declined from 203.7 basis points to 202.7. And that slight decline related to having a greater share of our assets in a high net worth solutions, and you can see that in the row at the very bottom. I'd also highlight that we have provided this disclosure on our asset base compensation rate, and you can see the increase that I reviewed on an earlier slide to 50.3 basis points, and that should continue at a quite stable level throughout the 2018 before increasing gradually over time as we see these units maturing. In the chart on the right -- or in the middle, you can see our sales commission rates. And again, I'd remind you, as reviewed earlier, it's been very, very stable until we've introduced these new rates in 2018. So you can see the decline from 2.4% to 1.8%. That rate is going to be very stable for the rest of 2018 and then it's going to decline, once again, for all of 2019 at a level closer to 1.5%. And last, you can see our noncommissioned expenses at $144.7 million. That's down 2% from last year as a result of investment management consolidation as well as a lot of the operational effectiveness measures that were announced during the fourth quarter. And I'd note, we're down 2% for Investors Group, we're up 2.5% from last year for IGM Financial and we are holding that firm to our guidance that, for the full year, IGM's noncommissioned expenses will go up by no more than 5%.Moving to Page 32 where we have Investor Group's statement of their earnings. I'd make 3 comments. You can see earnings before interest and taxes, $183 million in the quarter, up 2% from last year. Two lines I would comment on. First, net investment income and other, $10.3 million during the quarter. That is down from last year, up noticeably from Q4. But I would highlight, in those results with fair value adjustments of about $4 million, there was adjustments -- there was an unfavorable fair value adjustment. Excluding this, we would have had $14 million in this line. This is related to a fair value of some of our securitization arrangements on the mortgage business, and this is timing. So we do have the effective hedges, but we did have some timing mismatch on that item. And I would guide you that, going forward, not only with IFRS 9 adoption but with how we're matching these programs, we do not expect this type of volatility in the results. And I guide you in the coming quarters to look to about $14 million to $15 million as being what you could expect from this line. The second line I would comment on is distribution fees. You can see at $43.3 million, we're down very slightly from the fourth quarter and down 24% from Q1 of 2017. I'd remind you that a majority of this line is actually revenue from the sale of insurance products. Q1 of last year did have extraordinary sales as a result of some tax changes that affected certain insurance products. And I would remind that a lot of these revenues paid out in adviser compensation. So this line should be considered in conjunction with the other commission expense line, and you can see a similar reduction in this line. And as a percent of distribution revenue, that other commission expense is actually quite stable.Moving to Page 33. Here's a few measures of Mackenzie's drivers of profitability. On the left, you can see the normal net revenue rate that we've been presenting for quite a few quarters now. And I'd highlight that we've seen a decline from 88.1 basis points to 85.5. That decline relates to some sales success we had on the institutional business in the fourth quarter, which Barry reviewed with you. You could see depicted here with the sub-advisory institutional and other stack of this chart increasing. And that, combined with a greater share of our assets being an ETF solutions which happens to be fixed income, has resulted in this fee decline in this period. I'd highlight in the middle chart, we're at -- it has no disclosure to provide the same sort of information on the sales-based compensation, given that this is now expenses incurred and you can see that, that sales commission rate is now relatively stable for Mackenzie. And I'd also -- in the chart on the right, comment on noninterest expenses which you could see increased by 10% for Mackenzie during the period relative to Q1 of last year. I'd note that we're staying consistent with our guidance that full year will be up by no more than 5%. And I'd also note that the 10% year-over-year increases is a result of timing. And then, lastly, on Page 34. I just highlighted that Mackenzie's earnings before interest and taxes were $41.6 million. That's relatively unchanged from last year. But when you go up 5 rows to total net revenue, you'll see we did have an improvement of about 4%. And I would remind you that the noncommissioned expense increase of 10% was really as a result of timing. We are looking to a normalized level that's closer to 5% year-over-year increase. That concludes my comments. I'll turn it over to John to see if there's any questions.

[Operator]

[Operator Instructions] The first question is from Gary Ho from Desjardins Capital Markets.

[Gary Ho, Analyst]

Maybe just to start off with a question on the noncommissioned expense. It was 2.5% this quarter, but you reiterated your 5% target for the year. Pretty big delta. Just wondering how we should think about that line item for the remainder of 2018. If it's lumpy, if you can kind of give us some color like which quarter it might come through. And also, maybe give us an update on how you've been able to kind of contain costs better, at least the bigger pieces, please.

[Jeffrey Robert Carney, President, CEO & Director]

So -- yes, the timing was a little off this time as far as where the expenses were spent quarter-after-quarter-after-quarter through the year. And so we want to guide you back to the 5% that we had said we would achieve this year. And hopefully, we can try to be. But that's what you should be thinking about in your models. And the lumpiness is just the result of how fast we're spending our money and investing our money. And so some of these things take a little bit longer. We do plan a brand relaunch for Investors Group, so we'll be spending some money on that. And so there's some one-timers that are driving a little bit higher. But otherwise, it's a normalized year.

[Gary Ho, Analyst]

So we should think about pretty evenly for the rest of the 3 quarters to get to that 5%?

[Jeffrey Robert Carney, President, CEO & Director]

Yes. I'd say yes. It's probably the third quarter review where we start the advertising side of it, so you might see that where you'd see the jump.

[Luke Gould, Executive VP of Finance & CFO]

That's right. Q2 has traditionally been our high expense quarter for Investors Group. And Jeff's right, you probably can expect it to be a bit less seasonal than normal given the timing of some of our expenses.

[Gary Ho, Analyst]

Got it. And then just the other question. Thanks for providing the additional color on IFRS 15, and I think you were talking about IFRS 9 was the impact on the IG slide. Can you just go through that again? So it's a $4 million reduction in this quarter. When will that come back? And should I -- we could use that $14 million that you guided to going forward, Luke?

[Luke Gould, Executive VP of Finance & CFO]

I'd say the $14 million, $15 million guidance is the best guidance to work with. With IFRS 9, 2 important things that happen. One, we're no longer fair valuing our warehouse loans, which created a lot of volatility for us in the past, and we are employing a hedge accounting on the hedges of our warehouse loans. So there's stability in those lines. We continue that fair value adjustments on December securitization arrangements. And we do believe we've been managing for economics, but we think we can manage this type of accounting volatility as well going forward on the securitization arrangements. So I'd expect this line to be quite stable going forward. And right now our earnings, as you can see, we defer the adjustment. We are running at close to $14 million or $15 million.

[Gary Ho, Analyst]

And then the same goes with the distribution fee line that you mentioned, is this quarter a good number to use for run rate?

[Luke Gould, Executive VP of Finance & CFO]

It is. And I'd note that -- one thing, redemption fees are, obviously, in there and we provide separate disclosure. And they've, obviously, been quite low as a result of good asset retention and as a result of us discontinuing DSC. But on the insurance side, Q4 is actually our peak quarter for insurance typically. But absent that, you can think of this line being quite stable for Investors Group. We do provide in a supplemental disclosure there is an element to this line that is driven directly by AUM, and so you can model that. But on the insurance piece, I think you should expect some stability until we get to Q4.

[Gary Ho, Analyst]

Okay. And then just very last question, just on the net flows outlook. You mentioned a few times the slowdown in industry flows recently. Just wondering what you're seeing through your various distribution channels and outlook for the balance of the year, please?

[Jeffrey Robert Carney, President, CEO & Director]

Yes. I mean, for -- I can go first and then Barry can comment. But we're very optimistic about our growth and our advisers are doing what they do, and they're continuing having conversations with the clients and staying in touch with them. And obviously, when you have volatility in the market, it's important that communication is there so that they understand that they're in it for the long term and to stay true to the plan and the execution, ultimately. And so it might bounce around a little bit through this volatility, but we can't time the markets. It's going to do what it's going to do. All we can do is continue to build a great company and have a great buyer proposition for our clients, and that's what we're focused on.

[Barry Sean McInerney, President & CEO]

And I would think, Jeff, I would say the -- our experience with the external advisers, again, we're Mackenzie, we're feeling pretty good. We -- are flows are broad based, continue to be broad based, which is a good thing. Multi-asset, it's not just a balance which has done very well, the market share gains on balance have been quite strong probably 2 years in a row. But we get the ETF portfolios, which is a multi-asset, we launched that in January. Our Symmetry, actually, is -- actually, quite a bit up year-over-year in the third-party channels, so that's good. And 8 of our top 10 selling products, which are fund products, in the first quarter were global. So -- and Canadians continue to diversify a way and build more diversified portfolios -- get to launch of the new multi-strategy. So innovation continues, we got some broad-based sales going on that's in the -- strong across every region in Canada. But we are hearing some concern, the volatility is there. A little bit of cash being built up conservatively by some pockets of the adviser community. So that is just, and we can't control that. We're focused on delivering great results for the advisers and gaining market share, and we'll see how those plays out. But right now, we're well positioned, we believe.

[Operator]

The next question is from Geoff Kwan from RBC Capital Markets.

[Geoffrey Kwan, Analyst]

First question I had was for you, Barry, on the unified pricing that you're doing on the F class. Have you done any work to kind of suggest, with this change, that you should see some maybe near-term pickup on the sales side? Or is this more of a, okay, this is kind of how -- recognizing how the landscape is changing, this is what we think is the right thing to do and it should just generally put us in better position to be able to get stuff, even if it may not happen in the next few quarters.

[Barry Sean McInerney, President & CEO]

Well, I think we like to say both. I mean, clearly, on the latter side of it, when you look at the -- our asset mix between bundled, unbundled and our sales month to month between the 2, clearly, we continue to get more and more sales, proportionally speaking, into the F Series versus the A Series. We still have -- more than half of our assets are in the A Series. But sales are approaching half and half between bundled and unbundled. That's a nice balance to have, by the way. So that's good. So -- and we -- a lot of the product launches last 2, 3 years have been focused, and ETFs as well. We really focused on introduce -- having more broad conversations with advisers. IIROC was -- MFDA is very important to us. IIROC has always been a growth focus for us about 3, 4 years, and it just started and we've continued that. So the conversation has been good and a lot of innovation that take light. We have got a positive response, in fact, from our proposed price simplification effective June 1., so it's nice to see. We got the response back from the marketplace saying, yes, we like simplified, we like competitiveness. And so we always are looking and making sure we're monitoring our competitiveness. We'll always do that without making -- you don't want to lose on price. You want to win on performance and service. But we also, more importantly, or equally important than the price reductions was simplification. We actually -- also, you probably know, announced 15 fund mergers at the same time, and we did 10 last year. So about 25 fund mergers and closures the last 18 months. We got to keep our platform easy to navigate and -- for the adviser. So overall, good feedback. So yes, it is really our strategic focus on being competitive in multichannels and seeing where the industry is flowing, but some of the short-term response from the marketplaces have been quite positive.

[Geoffrey Kwan, Analyst]

Okay. And just the other question I had is, I know Barry talked about the noncommissioned expense set on IG. Just on the Mackenzie side, should we kind of see normalization be relatively steady throughout the year to get to that 5%? Or is it going to, maybe, be 1 or 2 quarters that maybe more of a change than usual?

[Barry Sean McInerney, President & CEO]

It would be pretty steady. Yes, so still focusing on the 5%. Obviously, Q1 over Q1 was higher than that, but it would be pretty much spread. I mean, for instance, we're making some -- we think, great investments. The new Boston team, the emerging market team that we've lifted out, and they are all up and running and ready to go. First client's in and we expect a lot coming in, in the future. They weren't there last January or Q1 '17. They are here now, obviously. So just an example of the timing that you probably -- that was one reason why you saw a little couple of dip. But they've -- that seemed to -- started to come in midway through last year, so that's why -- one of the reasons why you saw the Q1-over-Q1 being 10%. But no, it'll be focused on the 5% for the year and it'll be pretty much a gradual spread out.

[Jeffrey Robert Carney, President, CEO & Director]

Yes. So that's a good feature for both the Investors Group and Mackenzie Q2, 3 and 4 are more steady in terms of our outlook than they have been traditionally.

[Operator]

The following question is from Paul Holden from CIBC.

[Paul David Holden]

Another question on expense management but a little bit of a different angle here. Wondering if there's any update on the works that Michael Dibden is doing on digitalization of finding operating efficiencies, not with the lens of bringing down 2018 operating expenses, but maybe accelerating the pace of the slowdown in 2019 and beyond.

[Jeffrey Robert Carney, President, CEO & Director]

Yes. So he -- I mean, since we last talked, he has built his team out, which he needed to do. So we've now got a number of new associates in our company working for his operations who've done this before and have that experience. And we have regular meetings throughout the year on tracking our progress and which projects go first and all of those things. And so that's all been detailed, and I will keep you updated as we make progress. But we've put the infrastructure in place and skills in place to start this journey, and we're working with outside third parties as well to help us scale this. And all of that is in place. So he has done a really good job of galvanizing this opportunity and starting to put people to work.

[Paul David Holden]

Okay. So early days still. And just a point of clarification on the Multi-Strat Absolute Return Fund, that's now live into the market. Is that right? You're able to market that fund and take orders?

[Barry Sean McInerney, President & CEO]

Yes. I think we're -- I think it's a couple of weeks when it's fully operationalized. But we're already -- so we're starting to -- so we're allowed to announce it. We have announced it. We're going to have conversations. I believe it's fully operationalized in about 2 weeks. But -- and it's -- yes, it's very exciting. We're very pleased.

[Paul David Holden]

Okay. And I know that gives you great first mover advantage there. So the follow-up question on that point then would be, are you launching that product or do you have intentions to launch similar product into the IG channel?

[Jeffrey Robert Carney, President, CEO & Director]

Yes. I mean, we are obviously looking at all of the products that Mackenzie's team has built. And Todd Asman has a great relationship with Michael Schnitman so they're, obviously, ongoing conversations as well. But you will us using a number of these things, yes.

[Paul David Holden]

Okay. Okay. That's good. And then final question is regarding free cash flow. So you've provided some sort of, I guess, alternative metrics to free cash flow. But given the changes in accounting for DSC, is free cash flow a metric you plan on disclosing in the future so much as some of your public comps?

[Luke Gould, Executive VP of Finance & CFO]

I think, Paul, it's -- we traditionally provide operating cash flow. It doesn't change. Unlike others, we've always included there commissions as part of operating cash flow. There's no reclass. So I'd guide you that operating cash flow is a pretty good measure, and we'll help guide you to understand what's in there. One of the items that is noteworthy is the difference between the proportionate share of earnings. We have, on Great-West Lifeco, common stock we hold, and China AMC in relation to the dividends we received from them. So that's one thing from an evaluation standpoint. You'd hate to take a multiple on that 8 or something when you know it's just the dividend that's included, as opposed to the earnings, and we can -- there's a market value for what those shares are worth. But the operating cash flow measure is a pretty good one to rely on. The only other item that's in there that I'd say normalizes over a year but has some quarterly volatility is we do have mortgage collections that find themselves in that line and created a little bit of volatility in a quarter-by-quarter basis. Meaning, we collect principal and interest on mortgages and then we remit it to the parties who own those mortgages through a securitization or sales arrangement. So that's one item that we could help get disclosure on. But again, that does normalize out to 0 over time and the operating cash flows is a pretty good line to understand free cash flow.

[Paul David Holden]

Okay. Maybe additional disclosure there might be helpful.

[Operator]

Next question is from Graham Ryding from TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Yes. Maybe -- I like the slide where you showed your rate of return at Investors Group. Is that number net of cost to your clients or is that a gross number?

[Jeffrey Robert Carney, President, CEO & Director]

That's a net number.

[Graham Ryding, Research Analyst of Financial Services]

And do you guys actually do any analysis or do you look at any benchmarks in the industry to see how your -- and I understand that you're focused on financial plan, not just investment performance strictly, but do you look at how that stacks up relative to maybe any industry benchmarks?

[Jeffrey Robert Carney, President, CEO & Director]

I mean, what we've been really focused on is, traditionally, a lot of our advisers would pick their own mutual funds and try to build a diversified portfolio. And so what we've been doing, and you've seen some of these solutions that we've been building, you're seeing most of our sales and growth is going into these very diverse unique capabilities that we have. And with the combination of Mackenzie and our existing advisers -- investors here, we've got a lot of skills in that type of space. So you're going to see us doing more and more of those types of structures either internally with Mackenzie or with external partners as well. But our goal is to get most of that beta exposure through talented investors globally.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Got it. I was like asking you about this. But you've got your investments in FinTech and some robo-advisor platforms or whatnot. Are you any further along in sort of thinking about how you might incorporate that into your Investors Group platform?

[Jeffrey Robert Carney, President, CEO & Director]

Well, I'd start off just by saying that they're doing very well. So we're really pleased by that. So as simple as a -- it's a significant success and continues to grow very fast and it's really hit an acceleration point. It has 80% of the market, so they're in a very good place and they've got scale coming in and their cost of acquisition is getting better. So there's a lot a really good things going on in them. And then with personal capital, they're now at $6.1 billion in AUM. And that one is growing very fast. It grew 75% the last year. And so we're really pleased with both those investments and continue to spend time with them and learn from them, but also track how they're doing and see where we go from here from additional capital standpoint on these opportunities.

[Graham Ryding, Research Analyst of Financial Services]

Okay. So is it fair to say that, right now, you're learning from them and you're looking at them more as actual investments as opposed to anything that you can integrate or incorporate into your existing operation?

[Jeffrey Robert Carney, President, CEO & Director]

I think it's a combination of being able to internalize capabilities that they have built and learn from them, for sure. But we also are very excited about these models and we've got a good foothold into ownership for both of them. And ultimately, we'll have to make a decision at some point on how that all plays out. But right now, we're just -- they're still in the early days of this very significant growth. And so we're very excited about it and we'll continue to monitor that and make decisions about where our capital goes in the future when we're ready.

[Graham Ryding, Research Analyst of Financial Services]

Great. And can you remind what is your ownership stake and personal capital on a percentage basis?

[Jeffrey Robert Carney, President, CEO & Director]

Just under 20%.

[Operator]

The following question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

Barry, just on Slide 24. I always appreciate the disclosure between your investment groups in terms of flows. And then just on the Ivy franchise, I noticed that it's down a lot year-over-year in terms of net outflows. Can you just maybe talk about Ivy and perhaps just why it was down? Was it more fund performance, asset class, anything that would help those?

[Barry Sean McInerney, President & CEO]

Yes. Sure. No problem. It's a good question. So as you know, Ivy has always employed a defensive posture in terms of their portfolio positioning. And now the performance, obviously, has picked up a bit year-to-date this year with the volatility. But we've had a relentless stock market's upward trend for a number of years. And so their defensive lowball approach, which is constructed to work in that environment, doesn't work as well when markets are mostly up, again, aside from this year. So -- but the clients that hold Ivy are tried and true to them. I guess if you flip that, that has a strong role in the overall portfolio, right. So in a core holding, it's an overall portfolio. If you've got defensive here, you've got value there, you've got core, you've got lowball, you've got high beta. So putting it all together, it has a role. The redemptions have ticked up. The net -- if we look at the net, that ticked up because the gross is down. So the gross sales is just not selling as well, that's all. But it's not like everyone is redeeming. It's simply a gross sales. So that, pretty typically, you see where a very tried-and-true style advisers hold it, they believe in it, it has a role in the portfolio. But in -- with the performance, obviously, relative in terms of the percentile ranking, not as robust as it would be in prolonged down markets, the gross sale starts to tail off. And it has tailed off.

[Scott Chan]

Okay. And Barry, if I look at your institutional and sub-advisors, you talked about, I guess, small win, I guess, on IPC in that platform. But kind of looking at big picture and the outlook at that segment, which has been positive, what are the kind of the drivers or what are kind of the demand products that you see that could drive that platform in 2018?

[Barry Sean McInerney, President & CEO]

Well, it's good question. I mean, again, we're multichannel. And so we have reached out, by far, our biggest business, and that's going very well as numbers have indicated. And that's driven by a combination of, again, really relevant product, strong performance brand and a really, really experienced distribution team. We have a lot of strategic alliances and those are really important to us as well. Those that are related to us, who gave us life family and those that are non-related. So again, they themselves -- and we're, obviously, introducing innovation for them and their always looking for strong performing products and solutions, and they're very open to our innovation as well. So what we've launched is something with the unconstrained bond and the floating rates and the diversified alternative fund and this new fund we're launching and our ETF, which are great kind of plug-and-play building blocks. Again, great conversation with them and we're selling well. And then the sub-advisory that we -- as you know, we picked up a large win we announced, early last year, with National Bank. And sub-advisers are important to us as well. Getting a lot more attention there every passing quarter. And then traditional institutional. I mean, that's -- we like to have space, too, because the retail institutional businesses, at times, are a good offset for one another. And you're pushed by institutional investors that sometimes make you better on the retail side. So I remember picking up some modest wins there in Canada. And then with the Investors Group team -- Investors management team merging into Mackenzie team, we picked up some really terrific new boutiques. They have a -- our double-based team from the IG, now Mackenzie. They are just very strong for a small-cap European equity. We are selling them institutionally. We picked up 3 or 4 good sized mandates in the U.S. from them. And then as I previously mentioned, the Boston team is just terrific, and you'll hear a lot more from them going forward. They're up and running -- models are up and running, structures up and running. The first client's in and the pipeline is building strongly. So it's, institutionally, it's really multichannel, right. But our bread-and-butter is [indiscernible] and we focus a lot of attention on that, and it's gone well for us. You know some of the stats we've had 6 strong positive quarters in a row now of net flows, positive net flow retail. We've had 6 strong market share quarters in a row in retail. But we are equally excited by the institutional space and it's broad based. And we've got one manufacturing engine, with 14 boutiques, and they power the multichannels. And so we're seeing more and more a new innovative idea gets high interest in all the channels, and that's just good for us. That's leverageable scale model that we deploy.

[Operator]

The next question is from Tom MacKinnon from BMO Capital Markets.

[Tom MacKinnon, Managing Director]

One for Luke and maybe a follow-up for Jeff. Luke, you mentioned some of this mortgage collection noise that worked its way into free cash flow. Do you know what that was? Was that -- I assume that was negative in the quarter and do you know what that ballpark would that may have been in a quarter?

[Luke Gould, Executive VP of Finance & CFO]

It's by -- that one ebbs and flows, Tom. So yes, it doesn't hit the P&L. It is literally just us collecting principal interest and remitting it. And you can think of it as kind of being a plus or minus $10 million to $20 million kind of quarter by quarter rhythm. So this quarter, I don't have it off the top of my head. It's not something we disclose, but we will consider giving that type of disclosure because it is pertinent.

[Tom MacKinnon, Managing Director]

Okay. Great. And as we start getting into these different disclosures that you've given -- and maybe this is a question for the whole team, but -- now we have net income, we have EBITDA before sales commissions, we have EBITDA after sales commissions, we have an EBIT, looking at your proxy circular, it seems like your performance share units are awarded as a function of net income. How should we be looking at, in your opinion, valuation? Should it be on an earnings basis? Should it be on free cash flow basis? And how does that dovetail into your metric and your proxy of awarding share units on net income?

[Luke Gould, Executive VP of Finance & CFO]

I'll take 2 things, Tom. First, you can think of the proxy circular and compensation that's tied to net income. Any of the net income measure that we have for 2018 has been adjusted, so our whole plan has been adjusted for the impact IFRS 15. So that's a start, but we are compensated on net income as a measure. On your second question on what's most appropriate. One of our clear objectives is, first and foremost, to make sure you have the disclosure that you need to adopt whatever approach you see best. And so we have enhanced our disclosures to allow you to do that. The only thing I'd say is when it comes to free cash flow, when it comes to EBITDA, including commissions, I want to be really clear, we do continue to have upfront sales compensation. And when you're paying sales commissions, it's a good thing. And as I mentioned with the Investors Group, our units demonstrably stayed with us for 12 years. And over that entire period, we generate fee revenue. So the matching principle is not there on free cash flow, on EBITDA less cash commissions, and indeed on earnings in this cases where we do, expenses incurred. And so we would like to ensure that we give you sufficient disclosure, understand what's going on at the business and to make whatever adjustments are deemed necessary to ensure there's a good performance metric to describe value. The other thing I would say is we will, over time, be considering other measures like embedded value and the like, which may actually get to some of those points about matching, where you do actually have upfront payments that are made and results in earnings or revenues over time, and may provide a different lens into value and the value that's created during a period.

[Tom MacKinnon, Managing Director]

Okay. That's great. Well, as long as we can -- just in terms of that -- some of that mortgage collection noise that you mentioned, some sort of adjusted free cash flow. Just to add to the other various metrics we look at, that would be a good one as well.

[Jeffrey Robert Carney, President, CEO & Director]

Yes. Thanks, Tom.

[Operator]

Thank you. And there are no further questions registered. I'll turn the meeting back over to Mr. Keith Potter. Please go ahead.

[Keith Potter, Senior Vice President Finance & Treasurer]

Thank you, John. At this point, we'll conclude the call. Thank you for your participation, and enjoy your weekend.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.