IGM Financial Inc

TSX:IGM

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to the IGM Financial Q2 2022 Analyst Call and Webcast. As a reminder all participants are in listen-only mode. [Operator Instructions]

I would now like to turn the conference over to Kyle Martens, Treasurer, and Head of Investor Relations. Please go ahead, sir.

[Kyle Martens, Treasurer and Head-Investor Relations]

Thank you, Karl. Good morning, everyone, and welcome to IGM Financial’s 2022 Second Quarter Earnings Call. Joining me on the call today is James O’Sullivan, President, and CEO of IGM Financial; Damon Murchison, President and CEO of IG Wealth Management; Luke Gould, President and CEO of Mackenzie Investments; and Keith Potter, Executive Vice President and CFO of IGM Financial.

Before we get started, I would like to draw your attention to our cautions concerning forward-looking statements on Slide 3 of the presentation. Slide 4 summarizes non-IFRS financial measures and other financial measures used in this material. And on Slide 5, we provide a list of documents that are available to the public on our website related to the second quarter results.

And with that, I’ll turn it over to James.

[James O’Sullivan, President and Chief Executive Officer]

Okay. Good morning, everyone. I’d like to turn to Slide 7 to start with a few highlights for the second quarter. First of all, earnings per share of $0.87 was the second best-adjusted Q2 on record and I think a strong result. We’re currently in a challenging macro environment that’s producing heightened financial market volatility. This dynamic was reflected in our assets under management and advisement in our three main operating companies, which together decreased 9.8% during the quarter. Mackenzie’s net sales have also been influenced by this environment, in line with the industry results for Q2.

That said, we continue to see very strong results at IG Wealth in terms of net flows, and both Northleaf and China AMC delivered excellent AUM growth during the second quarter. While we don’t include our AUM and flows from strategic investments in our reported numbers, we do believe it’s important for our shareholders to understand the very real progress being made here. Given the environment, we’re taking further action to manage our expenses this year, bringing our full-year expense growth guidance down to no more than 3%, down from our initial guidance of 5% in February and 3.5% in May. From a capital allocation perspective, we remained active on our share buyback in Q2 and repurchased 2.3 million shares for a total cost of $90 million.

Turning to Slide 8, where we show our client investment returns alongside major equity and fixed income indices. Other than China, which had a strong second quarter, returns were sharply negative across major markets. In stark contrast to the second quarter, July brought with it a strong rally across many equity and fixed income markets and IGM’s client returns rebounded 4.7%. Still, we remain cautious given the level of uncertainty and continued market volatility and are managing our businesses to position ourselves for a range of outcomes over the next 12 months to 24 months.

Turning to Slide 9 on the overall industry net sales. Well, in the second quarter of 2022, the industry experienced broad-based net redemptions across asset classes totaling $21.7 billion, unfortunately, the worst Q2 on record. Q2 long-term mutual fund net redemptions for industry asset management peers were $8.7 billion down $22.9 billion from the record positive results achieved last year. We believe it is environments such as these where the country’s top wealth and asset management firms and their advisers do their best work, engaging closely with their clients to navigate uncertainty.

Turning to Slide 10 on IGM’s results for the second quarter. Net earnings were $207 million. And I already mentioned that earnings per share of $0.87 was our second best Q2 on record. The top result was Q2 of last year.

Slide 11 highlights net earnings by business segment, which Keith will review in detail during his remarks towards the end of the call.

Turning to Slide 12. Assets under management and advisement declined 6% to 9% across IG Wealth Management, IPC and Mackenzie during the 12 months ending June 30, 2022. However, we are seeing continued growth at both China AMC and Northleaf with 8% and 26% year-over-year AUM growth, respectively.

Turning to Slide 13 on net flows. We saw strong net flows at IG Wealth, which remained in positive territory despite the market environment. This demonstrates the leading value proposition and momentum we have at IG right now. Mackenzie participated in the broader industry net redemptions in Q2. Northleaf continues to deliver strong fundraising with $1.1 billion of new commitments during the second quarter alone.

And with that, I’ll turn it over to Damon.

[Damon Murchison]

Thank you, James, and good morning, everyone. Turning to Slide 15 in IG Wealth Management’s second quarter highlights. We ended the quarter with AUA of $105.5 billion, a decrease of 9.3% during the quarter as a result of financial market decline. Q2 strong net flows of $389 million were down from $670 million last year. I note that Q2 gross inflows of $3.1 billion were the second best in our history, down slightly from 2021.

IT’s redemption rate over the last 12 months remained well below the industry and ended the quarter relatively unchanged at 8.6%, while the industry redemption rates increased to 14.6%. Positive net flow momentum continued into July, marking our 22nd consecutive month of positive net flows. We have continued our strong positive momentum in the high net worth and mass affluent market segments, where inflows from newly acquired clients over $500,000 to $447 million, which was in line with Q2 2021 and up 219% over the past five years. Lastly, I’m pleased to share that IG Wealth Management was top-rated amongst its peers in the 2022 Investment Executive Dealer Report Card.

Turning to Slide 16. As you can see, our Q2 2022 gross and net flow remained strong. And on a year-to-date basis, IG Wealth has achieved the highest growth in net flows in over 20 years at $7.1 billion and $1.9 billion, respectively. We’re also pleased with our strong growth and net flows in July, which clearly demonstrates the resiliency of this business model and the strong adviser and client value proposition we possess centered around the value of comprehensive financial planning.

Turning to Slide 17. As a reminder, this slide demonstrates the mechanics behind our net flows and how they can materialize into IGM investment solutions after first arriving as deposits, high-interest rate savings accounts, third-party funds, and securities. During Q2, we’re pleased to see strong client inflows, and given the heightened market volatility, only a modest shift in deterred deposits during the quarter. We continue to focus on long-term financial planning with our clients and expect to see strong net sales in the IGM investment solutions over time.

Turning to Slide 18. As I mentioned, in Q2, we achieved the second-best gross inflows in our history with $3.1 billion, and our net inflows continue to remain strong. We firmly believe we are winning market share through new client acquisition and greater share of wallet from our existing clients with our trailing 12-month net flows rate of 3.4% to end the quarter.

On Slide 19, we highlight how IG Wealth clients tend to stay the course and remain committed to their financial plans throughout periods of market volatility. IG’s Wealth’s last 12-month redemption rate was 8.6%, which remained low and stable. This year, we reached our lowest 12-month trailing redemption rate since 2008. While the overall industry redemption rate for long-term funds, on the other hand, has experienced a sharp increase during the second quarter, reaching 4.6% as at the end of June.

Turning to Slide 20. This highlights our momentum in the high net worth and mass affluent client acquisition, which continued to be a significant contributor to our overall gross and net flows at IG Wealth. We’re very pleased with our results here and in Q2 2022, with gross flows from newly acquired clients over $500,000 remaining well above levels we’ve seen back in the second quarter in 2018 and 2019 and in line with Q2 2021.

We are clearly proving that our path in new client acquisition is strong regardless of whatever market cycle that we’re in. Today, our advisers are spending more and more time with our existing clients while still acquiring new clients in this volatile market. We believe this demonstrates the leading value proposition IG Wealth offers to our advisers and to high-net-worth Canadians.

Turning to Slide 21. We show our strong productivity by adviser experience. Both our newer advisers and more experienced advisors’ practices are continuing to deliver strong productivity numbers as measured here by gross inflows per adviser. We believe the key initiatives undertaken on the right-hand side of this slide will continue to drive strong productivity results.

Lastly, let’s turn to Slide 22. I’m very pleased to share that IG Wealth was top-rated among full-service mutual fund dealers in the 2022 Investment Executive Dealer Report Card and that our adviser Net Promoter Score was higher than each and every one of the full-service brokerage arm of the big five banks. These are encouraging results at a time when we are seeing the tangible payback for several years of investment in our business. IG scores increased significantly in several key areas, including technology and tools and adviser desktop, firm’s responsiveness to adviser feedback and receptivity to adviser feedback, products, and support for high net worth clients, support for dealing with changes in the regulatory environment, and the firm’s corporate culture. We also led all firms in financial planning support, which is a core part of our value proposition.

These leading results all point to the many initiatives we’ve completed over the last several years, such as enhancing our technology to help our advisers meet the requirements of the client focus reforms, expanding our focus on the client and adviser experience, and launching products that meet the evolving needs of mass affluent and high net worth Canadians.

I’ll now turn the call over to Luke Gould to discuss Mackenzie’s results.

[Luke Gould]

Great. Thanks, Damon. Good morning, everyone. I’ll take to Slide 24 to review Mackenzie. First, James spoke to the industry environment, and we’ve seen the impacts for our business during the second quarter. Point one, total AUM of $184.7 billion as of June 30, 2022, was down 10% in the quarter as a result of financial market declines. Investment fund net redemptions at $819 million were in line with industry outflows with Mackenzie’s net redemption rate in line with industry peers. Point three, on our previously announced distribution agreement with Primerica, we reached a major milestone in June 30th with the launch of a suite of 25 funds designed to address Primerica advisors and their clients. Sales into these funds began on July 6 are nearly progress is very encouraging and we’ll review this more detail in a couple of slides.

China AMC delivered another strong quarter of asset growth with long-term fund AUM increasing 13.1%. This reflected a combination of strong net sales activity, as well as investment returns for financial markets. And Northleaf continues to see strong fundraising with $1.1 billion of new commitments during the second quarter.

Turning to Slide 25. You can see the trend in history of began in net flows. We’re just over halfway through 2022, and we’ve clearly seen a very different year so far in terms of industry flows relative to the record-setting 2021. As mentioned, during Q2, we maintained market share versus peers as well as gross sales capture. The year is far from being over, and we see opportunities to take advantage of our strong positioning to win market share and deliver strong near and long-term growth in the coming quarters.

Looking at July, we’re encouraged by the notable improvement in investment fund net sales relative to June, and we continue to believe Mackenzie is well positioned with its boutique structure, leading access to distribution and a lot of strong products to emphasize and lean into in the back half of the year.

Turning to Slide 26. You can see the summary of Q2 2022 operating results. Retail and institutional investment fund net redemptions reflect the industry outflows. Our last 12-month trailing long-term investment fund net sales rate was 2.3% at the end of June, remaining slightly above industry peers. To supplement James’ comments on industry flows from earlier, I’d highlight that a large destination for client monies out of mutual funds in the industry with deposits and safety with term deposits, in particular, capturing significant flows during the second quarter. And in the bottom right, I’d highlight 42% of Mackenzie’s AUM rated by Morningstar were in the 4-star and 5-star funds, and 17 of our top 20 mutual funds were rated 4 stars or 5 stars in Series F.

Move to Slide 27, you can see our retail mutual fund AUM, investment performance and net sales across our investment boutiques. We continue to believe our boutique investment structure offers diversification and choice as our solutions remain relevant through market cycles because of the diversity of boutiques. Year-to-date 2022, we continue to see value strategies generally outperforming growth strategies, and you can see this in the lift in Cundill short-term performance, while growth-oriented boutiques generally saw a performance impact in the near term.

When you look at the asset-weighted performance and percental across boutiques, you can see we have a lot of strength within a lot of relevant product categories. I’d highlight Canadian equities and resources where we have real strength in top decile performance across several boutiques. Ivy and Cundill have performed very well with their focus on quality and value, respectively. Greenchip, one of our sustainable boutiques continues to have exceptional performance across every time horizon. Our global equity and income and fixed income teams have considerable strength across multiple mandates and also highlight we have an exceptional roster of income offerings across boutiques.

Our monthly income portfolios are top decile across time horizons, and we have very strong floating rate products across product structures, including ETFs as well as our recently launched private credit offerings with Northleaf, and we are leading into all of these offerings.

Turning to Slide 28. I want to spend a moment highlighting Mackenzie’s multiyear product and service and distribution agreement with Primerica. As mentioned, we launched officially this exclusive product suite for them on June 30th. We profiled here on this slide, this Mackenzie future path series of funds, which offers 25 unique funds covering all major CIFSC categories with style choices for equities and a number of asset allocation solutions.

I’d note that we’re very proud of this product offering that we’ve established, and we’re also proud of the sales support we stood up as well as the marketing support for Primerica. We’ve been doing road shows with them across July and into August, and we’re very pleased with the reception. And I’d remind that going forward, Mackenzie’s one of two exclusive fund providers available to PFSL’s network of 7,000 advisers across the country who distribute about $20 billion and have seen significant growth over the last few years. Sales of these new solutions began on July 6th and the overall relationship is off to a very promising start.

Turning to Slide 29. We feature here our five growth levers at Mackenzie, which are driving our product emphasis. In Q2 2022, I highlighted that we launched the Mackenzie Northleaf Global Private Equity Fund, which allows retail investors to gain exposure to private equity. This marks our fourth fund launch and partnership with Northleaf helping to democratize alternate investments in Canada. We now offer the full spectrum of Northleaf capabilities, private equity, private credit, and infrastructure across Mackenzie’s solutions. We’re very excited about this partnership with Northleaf. We believe alternatives are an important asset class for Canadians, and you’ll hear us say many times, this is the missing middle that retail Canadians have been missing for their portfolios.

Continuing to Slide 30. Here, you can see the overall Chinese Mutual Fund Industries AUM, up 6.3% in the quarter, driven by positive investment returns in the Chinese equity markets. And as you can see in the bottom left, continuing positive net sales. Long-term fund AUM was up 7.4% in Q2, reaching new record highs, and both long-term funds and money market funds continue to attract positive net flows. And you can see that on the bottom left, the industry annualized net sales rate on long-term funds remains over 10%, which is incredibly healthy. On the right, you can see that China AMC continues to rank second overall in terms of long-term mutual fund assets under management in China and our market share is increasing within a rapidly growing market, up to 4.6% of the industry relative to 4.3% last quarter.

On Page 31, you can see China AMCs growth in AUM has continued to be strong and reached an all-time high of RMB 1.74 trillion in Q2 2022. I’d remind that what’s particularly important here is the growth in long-term fund assets, which you can see at the bottom stack, which were up 13% in the quarter and 24% year-over-year. And this strong growth in Q2 was split roughly evenly between investment returns and net sales.

Moving to Slide 32. We’ve highlighted here Northleaf Capital Partners $22 [ph] billion in AUM and the strong growth across private equity, private credit, and infrastructure asset classes. The year-to-date growth is up 13%, driven by the strong fundraising you can see here of $2.2 billion and year-over-year growth of 29% in 2021 last year due to strong fund raising. We’re on track for that exact same growth in 2022 at close to 30%.

I’ll now turn the call over to Keith.

[Keith Potter]

Great. Thanks, Luke, and good morning. On Page 34, you can see our AUM&A. The chart on the left shows assets were down 9.8% during the quarter due to negative market returns. You can also see we started Q3 at a low point with June ending assets at around the average balance in Q1 of 2021. The good news is that July was a good month in the markets with IGM assets up 4.5% to $252.9 billion, so an encouraging start for Q3.

On Page 35, the slide shows quarterly EBIT and millions of dollars on the left and as a percentage of AUM&A on the right. So, I have a few comments here. First, on the left, you can see net wealth and asset management fee revenue of $534.5 million is down relative to $557.1 million in Q1. Lower average assets is clearly one item explaining the drop, but there are a few other items that influence the change. One, we had a softer quarter in the mortgage business due to rising rates, and that resulted in about a $6 million decline relative to Q1. But there were two offsets supporting Q2 revenue versus Q1, including higher advisory fee rates at IG and net asset management fees at Mackenzie, and we do have one extra day in Q2 decline revenue.

With respect to expenses, as we started to open up for COVID, we have reintroduced in-person conferences for our advisers and Q2 seasonally is a busy quarter for these events, and it explains the increase in the business development expenses that you can see in the green from Q1 2022 to Q2 2022. On the right, you see our margins. And if you normalize for the mortgage business, EBITDA margins would be flat in Q2 relative to Q1 and not adjusting for the seasonality of the conferences. In the items, I just described plus the impact of lower net investment income due to seed capital losses in the quarter would have a similar impact to Q2 of 2021.

Turning to Slide 36, where you can see our consolidated earnings for IGM. At the bottom, adjusted EPS, as James mentioned earlier, second highest Q2 EPS on a record of $0.87, so a strong result. And building on my comments from the last slide, you can see we’ve highlighted in point on that seed capital losses of $4.6 million as a result of financial market declines. Now overall, net investment income was only negative $600,000. It was offset primarily from interest income.

Point two, operations and support and business development expenses combined increased 4.1% year-over-year, and this includes the in-person conferences that I commented on in the prior slide. And excluding this, expenses would have been up 2.5%. We do remain focused on managing expenses for the year. And as James mentioned, reducing full-year 2022 expense guidance to no more than 3% growth from 3.5% we communicated last quarter. And we’re going to do this through a disciplined hiring and managing our discretionary spend. And the last point three, our dividend payout rate on a 12-month basis is 67% of cash earnings.

Turning to Slide 67 [ph]. You can see a summary of IG Wealth’s AUA and key revenue and expense margins. On the top right, our advisory fee rate was 103.1 basis points in the quarter. That’s an increase of 1.2 basis points, which primarily relates to lower assets and as a result, the mix shift of our client wealth bands and the various pricing tiers. In absence of market declines and typical market returns, we would continue to expect to see a slight downward pressure on advisory fee rates of about 0.5 basis points per quarter as we continue to make progress in the high net worth market.

I’d also highlight that our asset-based compensation rate was 49.8 basis points in the quarter. And you can see that this was up 0.6 basis points not from Q1, a large part is due to the maturing DSC units as well as a mix shift in adviser compensation rates. And as we look forward, a 0.5 basis point per quarter increase in this rate is a reasonable expectation for the remainder of 2022. I would also remind everyone that the DSC as mature or as they mature, asset-based compensation rates do double. And I’d also remind that we discontinued the sale of these products in 2016. So this trend will come to an end in Q4 of 2023 at which time DSE note will have all mature. And this is also a reason that you’re seeing redemption fees decline each quarter.

On Slide 38, I’ll make three points. First, as I mentioned on the last slide, redemption fees continued to decline, and that will be gone by 2024. And point one on the slide, other financial planning revenues declined by about $8 million to $9 million quarter-over-quarter and relative to Q2 2021. And this is primarily due to lower mortgage and banking income, which was impacted by rising rates. And then 2022 lower prepayments relative to 2021. I do expect the mortgage banking income to be a bit soft in Q3 as we work through remaining commitments and do expect lower prepayments relative to last year. On the second point, business development expense increased 9.5%, and this highlights the seasonality of conferences. And if you exclude this from the business development expense line, growth would have been closer to 1%.

Moving to Slide 39. You can see Mackenzie AUM by client and product type as well as our net revenue rates. I just have two comments on this slide. First, on the right, focusing on the blue line, you can see the net management fee rate for third-party clients, excluding Canada Life of 80.5 basis points. The increase of 1.5 basis points quarter-over-quarter was mostly driven by lower deferred selling commission expenses, which are netted within this line as well as the Q1 seasonal impact on how asset-based compensation is paid to the dealers.

I will highlight that Mackenzie’s stop selling DSC and low-load options on June 1st in accordance with regulatory change, and this is a small part of Mackenzie’s business. But for some context, the free rate would have been just over one basis point higher if DSC sales commissions were not paid in Q2. Other than this, we’d expect fee rates to be fairly stable going forward subject to major mix changes in retail institutional and other asset class ships.

On Slide 40, the item I’ll highlight here is the increase in operations and support business development expense of 4.1% year-over-year. Business development expenses are down primarily due to lower variable costs related to sales-linked compensation items. I guide that there’s still potential for some variability in this line item depending on sales outcomes though based on where we’re at in the current industry, we do expect this line to be managed within the overall expense growth guidance of no more than 3%. The higher operations and support expenses are driven by a couple of notable items. One, we do have – did have some strategic hires in the onboarding of our Better World boutique in September of 2021 and also the lead up to the launch of the Primerica fund relationship that Luke spoke to.

On Slide 41, you can see China AMC’s results. On the left, total AUM of RMB 1.74 trillion is up 8% from last year and a record high. And at the bottom, you can see long-term funds were up 24% from last year in the dark blue stack. I’d also point out that average AUM was relatively flat quarter-over-quarter with the CSI 300 rising strongly in June, up 8%, and that’s really what drove ending AUM upwards. On the right, you can see IGM’s share of China AMC’s earnings of $14.8 million, and this is really quite in line with Q2 2021 and Q2 2022 where average assets in those periods were very similar.

On Page 42, you can see Wealthsimple’s quarterly metrics. On the left-hand side, Wealthsimple AUA increased 14% year-over-year, down 13% in Q2 as market volatility intensified. And in the middle column, we’re very pleased to see Wealthsimple continuing to build a strong franchise and year-over-year growth in the number of clients, which is up 39%.

Moving on to Slide 43. In the top right, I’ll remind that we do record our 24% fully diluted stake in Wealthsimple at fair value through other comprehensive income. And in this quarter, we did adjust our valuation downwards by 47% and this reflects a continued decline in what we saw in public peer valuations during the quarter. Wealthsimple’s focus on its core business, including a revised revenue forecast for the company. And with this valuation change, I would point out that we still have an estimated IRR that’s well over 40% on the investment to date, and this includes the $300 million in proceeds we did realize from our participation in the secondary equity offering last year.

And as Luke covered, Northleaf continues to grow rapidly. And I’d note that our earnings pickup for Q2 included about $2 million in a favorable onetime nonrecurring item. And so you can think about $2.5 million to $3 million per quarter after noncontrolling interest is a reasonable run rate in the coming quarters.

And in the table at the bottom, we have reflected the upcoming purchase of an additional 13.9% stake in China AMC for $1.15 billion. And along with the transaction, the sale of part of our Great-West Lifeco stake, and we do expect this transaction to close in 2022.

And lastly, on Slide 44, you can see our typical disclosure around sum of the parts at July 29, the closing price of $37.18, the implied multiple for IG, Wealth, and Mackenzie based upon expected 2022 earnings is 6.9 times. I’d also highlight the second column from the right. Our unallocated capital, you can see is $729 million, and it’s $154 million pro forma the China AMC transaction close.

So that concludes my remarks, and I’ll turn it over for questions.

[Operator]

Thank you. [Operator Instructions] The first question comes from Geoff Kwan from RBC Capital Markets. Please go ahead.

[Geoff Kwan, RBC Capital Markets]

Good morning. Just wanted to get an update in terms of M&A in the market just in terms of – has there been much in the way of change in the number of assets potentially for sale and also any sort of potential dislocations persisting in terms of the bid to ask prices?

[James O’Sullivan, President and Chief Executive Officer]

Yes. Thanks, Geoff. It’s James. I would say there are opportunities out there to be sure, again, both in the wealth space and in the asset management space. But I’d also say this market is not unlike others, where in the face of market dislocations, the first thing that happens is that the volume of transactions dropped significantly. And then there’s a period of time where – a period of time where either the buyers reset their values or the sellers reset their expectations. And that can take a little bit of time to play out. But as we sit here today, we’re expecting an active M&A market as we move into the fall period, and we’re preparing for it.

[Geoff Kwan, RBC Capital Markets]

Okay. Thanks. Luke, I wanted to ask you on the Primerica relationship. I mean, what to you would define success with that relationship, if we’re having a chat a year from now, but also maybe like three years from now?

[Luke Gould]

I think, Geoff, for us, it’s all about share. We’ve been so fortunate to have this opportunity and culpa this relationship with Primerica. So for us, success looks like having 50% of their other AUA over some reasonable period in, call it, four to five years. So as we report quarter-by-quarter, we’ll be telling you the progress that we have on that. And we’ll be reporting on both how Primerica is doing in developing their business here. And as mentioned, has been developing very nicely. They’ve got a very strong franchise here in Canada, and we’ll be talking about our share.

And you’ll remember when we got exclusivity of the Laurentian Bank channel, it took us about 3.5 years to ramp up to steady-state share. And there, we went from 0% to 95% of their AUA, and that’s where we sit now. So in the case of Primerica, we view success as getting to our proper share of 50% given that that’s the opportunity that’s been afforded to us. And if we do really well serving Primerica and their advisers, then maybe the share goes north at 50%, and we’re just going to be pushing so hard to help Primerica be successful in this market.

[Geoff Kwan, RBC Capital Markets]

And sorry, I apologize, if you mentioned before, what’s the current market share of that AUA?

[Luke Gould]

Well, right now, the largest piece of that AUA is with IGM, who’s had a preferred relationship over time, and they’re close to, call it, 40%, 50% of Primerica’s AUA in Canada. Right now, Mackenzie has had the – we’ve actually participated as a product provider along with everybody else. So you can think of our share being about 5% right now. And really, this new exclusive suite of funds that we’ve launched this 25 fund family as being this new relationship with Primerica and starting at close to 0%. So I think about 0% to 5% right now, and we’re going to be pushing with all we got to get to somewhere like 50% or beyond over some reasonable period.

[Geoff Kwan, RBC Capital Markets]

Got it. And if I could just sneak in one last question, Luke. You talked about on the last earnings call some of the things you wanted to focus on. I know it’s technically, I guess, only been a little over a month now, but just wanted to get your initial takeaways from the transition over to Mackenzie, both conversations internally as well as with Mackenzie’s clients.

[Luke Gould]

Right now, I’d say – this is great, Jeff. I got to present my first 30-day summary with the Board of Directors yesterday. Right now, it’s been a – validation for me coming in. And the one thing I’m so happy about is the talent here. We’ve got talents across our boutiques, talents across our functions. And so I’m just excited to be leaning in as we head into Q3 and Q4. And again, my story as mentioned last quarter, it’s one that’s kind of strategic momentum and continuing growth. And so no surprises to me. Really just encouraged with the team I’ve got and the capabilities we have.

[Geoff Kwan, RBC Capital Markets]

Okay, thank you.

[Operator]

The next question comes from Nik Priebe of CIBC Capital Markets. Please go ahead.

[Nik Priebe, CIBC Capital Markets]

Hi, good morning. So as you pointed out in your prepared remarks, the flows at IG seem to be relatively resilient when compared to the industry. And I wanted to drill into why redemption rates and asset retention has been better there. When an IG client makes a tactical call to reduce equity or credit market exposure in their portfolios, are they typically rotated into money market products such that the headline flows aren’t impacted in the same way they might be for say, Mackenzie? Has that been a partial explanation or a tailwind for flows at IG in periods of market stress because you’re able to keep that money managed in-house?

[Damon Murchison]

Yes. Hi Nick. It’s Damon. So, when you look at our redemption rate and what’s taking place, and this is really not a surprise. When you take a look at when there’s been volatile markets in the past, IG has always shown that we do a great job of holding our clients’ hands. And because our whole focus is on financial planning, our clients tend to stay the course because they tend to understand how the markets operate in the long-term. And as long as they have a long-term time horizon, and they have a financial plan, and they understand kind of the if and the what, when there’s volatile markets. So we really do a good job of making sure that they stay the course. Now, there are opportunities – when there’s opportunities in the market and when clients need to look at short term, then we will make some changes there. But on the whole, our client base tends to really, really be sticky as it relates to their plan.

And the things that have changed relative to the past, I’d point to two things. Number one, from a performance perspective. Our products are doing very, very well. So ultimately, as Canadians and as investors, you want absolute performance when the markets drop and everyone gets that. But from a relative standpoint, our performance is quite strong. And then number two, with our advisers and the education they have around financial planning and now the tools that they have at their fingertips, they can do a much better job than in the past at really showing the clients the impact of the markets on their long-term financial plan. And when you have a client that is prepared for these types of situations, a lot of times, they’re like, "Yes, you talked to me about this. You talked about this." So I kind of understand what’s going to happen. So it’s something that I fully expect to continue. And we’re excited about the opportunities to continue to have a lower redemption rate, but at the same time, really drive some really strong net sales and net flow growth.

[Nik Priebe, CIBC Capital Markets]

Okay. Thanks for that. Just one other question for me. Just pretty substantial markdown recognized with Wealthsimple in the quarter. In the last fundraising round, if I recall correctly, you took money off the table with the benefit of hindsight with the right decision. Given that the capital raising environment has become more difficult for higher-growth fintech companies like Wealthsimple, I’m just – I’m wondering how your stance towards that investment may have changed and whether you might consider participating in future fundraising round if third-party capital is more difficult to source? Or is it too early to make that determination?

[Damon Murchison]

I think it’s too early. I don’t think our stance has changed. Our stance is, I would describe as sort of long-term support of Wealthsimple. And of course, we have an important product partnership with them. But we are mindful. We are the largest shareholder, and we’re proud of that. And I would point out, as Keith said, that even at the current mark, our IRR on this investment is approaching 45%.

And when I look at their business, the two things that we disclose quarterly, I think are two things that Wealthsimple should be deeply proud of 1.7 million clients. That’s a big number in Canada. When you think about the structure of this industry in Canada for someone to acquire 1.7 million clients is – that’s just a giant foundation stone for the future, in my view. And equally, alongside that $17 billion in assets, another great foundation stone. So look, our posture is one of support. We will continue to support them. The future will unfold, and it’s just very, very difficult for us to say what that future might look like.

[Nik Priebe, CIBC Capital Markets]

Yes, okay. All right fair enough. Thanks very much for taking my question.

[Operator]

The next question comes from Scott Chan of Canaccord Genuity. Please go ahead.

[Scott Chan, Canaccord Genuity]

Good morning. Maybe, Damon, just a follow-up question on IG. When I look at the net flows, the other dealer flows, the incline transfers, would that be most new clients coming in?

[Damon Murchison]

Scott, yes. Well, the answer to, the simple answer that is yes. We’re doing a very, very good job around bringing in new clients, and we’re on strategy as it relates to mass affluent and high net worth. This is an organization that not only has momentum, and it’s got growing confidence we’re closing more large deals in the high net worth space than we ever have in our history. And right now, when you’re closing them, given the market environment, when you’re bringing in cash or bringing third-party investments, you do not just repurpose that money right away.

Cash, you tend to dollar comps average into the market over a six to a 12-month period. And in-kind transfers, you need to take a look at them in the context of the overall financial plan that we’ve written for our clients. And where there’s opportunities to make changes, you certainly do. A lot of those generally come towards the end of the year when it comes to tax planning time.

But you’ve got to be very cognizant of the markets that we’re in and the way that people feel about their investments. We feel very, very good about our ability to continue to attract new clients and continue to bring in new dealer flows. And we’ve proven over time, particularly when you come to a normalized market environment, that our product shelf is an extremely competitive product shelf. And more times than not, when clients come in here, they want access to our product. So we feel good about the prospects of being able to sell IGM investment solutions over the long term.

[Scott Chan, Canaccord Genuity]

Okay. Thanks and Luke, just on the Primerica side, can you remind me how much AUA they have right now?

[Luke Gould]

Yes, they got about $16 billion in mutual funds and $4 billion in seg funds.

[Scott Chan, Canaccord Genuity]

Okay. And then the other providers, I guess, currently, including yourselves, let’s say, the other 45%. Is that opportunity to switch into the two providers? Or like how do those assets play out over time? Like, do those funds or legacy funds exist still? Or do they transfer into these new fund trucks? And I’m just trying to see the other 45% in terms of how that could be allocated over time? What does it stay there?

[Luke Gould]

Yes. The best way to think of it is very similar to what Damon described for IG. So think of the shelf being essentially closed going forward. And there being two exclusive fund families that one being ours and the others being AGFs and think of these financial planners working with their clients on proper asset allocation over time and creating great portfolios. But I would expect naturally that there’s going to be a migration as advisers work with their clients towards these two exclusive fund families.

[Scott Chan, Canaccord Genuity]

And last question. I missed the Northleaf. You said there was a $2 million benefit on nonbenefit. What was that again?

[Damon Murchison]

I’ll take that one. I know Keith had mentioned it, there was – within the financial results for the quarter, there was $2 million favorable non-recurring item.

[Scott Chan, Canaccord Genuity]

So what was that, like a gain on something or?

[Damon Murchison]

It was actually fees paid on redemption of a client.

[Scott Chan, Canaccord Genuity]

Okay, great. Thank you very much.

[Damon Murchison]

You’re welcome.

[Operator]

The next question comes from Graham Ryding of TD Securities. Please go ahead.

[Graham Ryding, TD Securities]

Sorry, just to follow up on that. So the run rate at Northleaf is closer to $4 million right now, about $6 million per quarter?

[Keith Potter]

Yes, actually, Graham, it’s Keith here. I’d say it’s – you can think quarterly $2.5 million to $3 million per quarter would be our share.

[Graham Ryding, TD Securities]

After no control, just got it. Okay. So my one question would just be, I guess, for Luke, would be my first one. Just flows of momentum. Obviously, the industry has been a headwind here for everybody. So just broadly speaking, what do you think is needed to get flows momentum back at Mackenzie? Is it more the industry backdrop has to improve? Or is there any need here to improve fund performance in any particular areas to sort of outperform your peers?

[Luke Gould]

Right now, actually two things. So one on the future experience, this I characterize it as industry backdrop as you put it, a lot of mine to safety in the context of a very challenging environment in the first and second quarters and Mackenzie participating in that as kind of – I call it, a maintained market share experience. As far as do we need anything else, one we are seeing a bit better Q3 and in terms of the environment backdrop, but we are participating in that environment competitively, we’re feeling very good both the capabilities across a number of boutiques and a number of product categories.

So we don’t think we need anything different. We’re going to be leaning in, and we’ve got a lot of very relevant product categories to be leading into in Q3 and Q4. And so if you make no mistake like we are expecting to gain market share irrespective of the market environment going forward.

[Graham Ryding, TD Securities]

Okay. Understood. And on Slide 27, I appreciate the disclosure you provide for your sort of asset-weighted percentages across the different strategies. Do you also provide an overall what is your sort of percentile or your performance relative to media?

[Luke Gould]

Yes. That’s right on the previous slide where we talked about 42% of assets being in four or five star funds. And you remember, for us, our target is 60%. And with our boutique approach, given the way categories are constructed in Canada, where you have apples, oranges, and bananas in the same category, for example, on a global equity category, you’ve got growth managers, value managers, et cetera, in the same category. 60% for us is our target and to be with a 40% and 60% of assets in four and five-store funds is what we believe we need to be consistent top three in the marketplace over time. So we’re right in that zone currently. We did have one of our large funds that downgrade for four starts to three starts during the period.

But these funds, it was a byproduct of growth being out of favor, and we feel great about our capabilities across the roster that you see on Page 27. The other overlay that I highlighted that’s important is when you look at certain teams like Canadian equity or floating rate or categories that are relevant, it doesn’t pop on Page 27, but we have such strength in a lot of these product themes across boutiques.

And so Canadian equity, we’ve got a mandate managed by the North American equity team that’s top fifth percentile across the one year, the three or the five years on the 10-year. We have great Canadian equity exposure within Ivy. So there’s a lot of very relevant product categories where Mackenzie is really uniquely positioned to lean in, floating rate and income on other categories were well positioned across categories and boutiques and also across product structures.

[Graham Ryding, TD Securities]

Okay. All right. That’s helpful. It would be interesting to see what your sort of percentile ranking is overall.

[Luke Gould]

I’ll send it to you right after. If you want to see – so you’re looking for the dollar-weighted average percentile?

[Graham Ryding, TD Securities]

Yes. For Mackenzie overall would be also an interesting number to sort of see how you’re...

[Luke Gould]

You’re looking for the one to three to five to 10 overall? Absolutely. That’s certainly readily available.

[Graham Ryding, TD Securities]

Great. And then Northleaf, $1.1 billion of new commitments in the quarter, what mandates were those into what’s resonating?

[Luke Gould]

That was like the previous quarters, it was actually a good weighting of private equity, private credit, and infrastructure. And like the previous quarters as well, we’re very encouraged that more and more of the mandates are being sourced by clientele outside of Canada. So Northleaf is really chugging along on its strategic goals of growing all of these categories and importantly, growing its clientele. And I think it’s an important theme in spite of all the support being given by IGM and Great-West Lifeco, we’re still a very small part of the fundraising of Northleaf. The company is doing very well.

[Graham Ryding, TD Securities]

Okay. Good. And then my last question, if I could, just the China AMC deal with Power Corp. I think the closing has been pushed back if I’m reading that correctly? And what’s the delay here? Any concern?

[James O’Sullivan, President and Chief Executive Officer]

Yes, it’s James. Look, the process to close is very much ongoing. We expect the transaction to close either late in Q3 or Q4, and we’re working diligently on it.

[Graham Ryding, TD Securities]

Okay, that’s it for me. Thank you.

[Operator]

The next question comes from Geoff Kwan of RBC Capital Markets. Please go ahead

[Geoff Kwan, RBC Capital Markets]

Hi, I just had a couple of questions for Damon. So you made the comment earlier in the call about just with the consultants and spending more time with existing clients to address the concerns to getting the market downturn, minimize higher redemptions, that sort of thing. So how would you describe what that dynamic is kind of like today versus normal in terms of how much time they’re kind of spending with existing clients versus trying to get new clients? So as an example, like what percent of the time would you say they normally spend with existing client communications versus trying to win new clients? And how is that different versus what’s going on today?

[Damon Murchison]

Yes, Geoff. So I would think that traditionally, when you look at our advisers and how they spend their time, it’s generally going to be two-thirds of their existing clients, one-third with acquiring new clients. I would say to you that because of technology that it’s allowed us to maintain that same ratio because what is happening right now is that because of technology and our ability to reach out and talk to our clients virtually, what you’d find is the allotment of timing for the allotment of time for each meeting is much shorter than it has been in the past. Generally speaking, when you meet clients face-to-face, you’d be looking at an hour or two hours.

Now you’re doing meetings 15, 20, 30 minutes. So you can meet more people in a day than you have in the past. And that’s why a lot of our advisers really love the technology that we’ve provided to them and they’ve really taken it to heart and it’s been the biggest driver of, quite frankly, our increased client engagement by any measure.

And the last call, I shared with you the Gallup survey and how our clients are talking about our organization and which is great. And it’s been a huge driver of our new client acquisition because we’re able to reach out and talk to new clients in more ways and more frequently than we have in the past. We’re quite excited about our ability to continue to prospect in volatile markets because, quite frankly, this is the best time to be out there talking to clients that are not IG Wealth clients right now. And you’ve heard me say this in the past when COVID started, Canadians really had the time – first time in the history, they really start thinking long term about their lives.

And what has happened during this environment, not only has that continued, but they’re really, really focusing on their lives outside of just their investment portfolio. And they’ve done a lot of serious questions and the serious people answer those questions. And that’s what we did. We saw tough financial problems and questions; we answer those questions for Canadian. So right now, you’re seeing the intersection between demand in the marketplace and our capabilities. And you can see it in the numbers.

[Geoff Kwan, RBC Capital Markets]

Okay. And then just my other question I had was, looking at the overall the fund performance for the funds at IG, they’ve significantly improved over the past number of quarters. Historically, it seemed like the investment performance at IG’s funds didn’t necessarily correlate well with kind of consultant growth and that sort of thing. I’m just wondering like how you see that dynamic today as to whether or not the fund performance of the IG funds can have a greater impact on net sales performance, whether or not it’s pivoting more to the high net worth part of the market? Or just what would you think about that dynamic today?

[Damon Murchison]

Yes. Okay. So I mean, first off, I think we all know the performance from a wealth management perspective, it’s not going to be as crucial as it is on an asset management perspective. But it is certainly important. And one of the biggest decisions we made a number of years ago was to get out of the investment management game because that’s not our forte. So our strategy of really employing the best sub-advisers in the world and looking at the global landscape has really done wonders for this business. First of all, number one, it’s improve the confidence of our advisers, and it’s allowed them to really focus on what they do back and say, hey, listen, to the clients, we outsource this. And we bring in the best of the best. And it makes our clients feel much better, number one.

Number two, you can see the result of that confidence coming out in our redemption rate, where I think that’s the place where it clearly shows. And the next place would be our ability to acquire new clients because new clients, obviously, it’s not that you need to make rich people rich twice. But people like to make money. We need to be able to make money for our clients and they pay us fees because they want to make money and they want us to solve complex problems, and we want to focus on that. And we’ve proven that it does make a difference there. And then the last one is in the recruitment of experienced advisers to this firm. When you’re talking to an experienced adviser that’s working for another dealer, they want to know that you have a product shelf that is competitive, that is going to allow them to do what’s in the best interest of their clients.

So I think that and I don’t think, I know that our new strategy that we’re employing right now is working, and we’re going to continue to invest in it. We’re going to continue to hire the best managers no matter where they are and make sure that we provide the top quality product for our clients and for our advisers.

[Geoff Kwan, RBC Capital Markets]

Perfect. Thank you.

[Operator]

The next question comes from Jaeme Gloyn of National Bank Financial. Please go ahead.

[Jaeme Gloyn, National Bank Financial]

Yes. Thanks. Good morning. I was just curious on the Northleaf redemption. Was there anything in that redemption that surprised you? Maybe anything on the rationale, that you can share? And is there anything from the perspective of, let’s say, lessons learned for the rest of the business or anything unique about that redemption?

[Keith Potter]

Yes, Jaeme, it’s Keith here. There’s nothing material about it, and the business continues to chug along, track clients and doing very, very well. So I’d just say it was just a one-off and really a non-material event at all.

[Jaeme Gloyn, National Bank Financial]

Okay. And is the fee income earned on a redemption? Is that typical of a normal redemption transaction? Or was there something really different about this transaction that generated a larger fee?

[Keith Potter]

Hi, Jaeme [indiscernible] I just characterize this BAU, it really was. And Northleaf trajectory is one of a very strong growth. Like right now, the net contribution rate and the net fundraising rate, it’s almost 30% per year.

[Jaeme Gloyn, National Bank Financial]

Yes. Okay. Thanks on that. And then just thinking about, the Mackenzie net flow profile. Obviously, a lot of market backdrop driven. But what perhaps are your business development personnel saying in their conversations with financial planners with decision makers? What’s the sense from those boots on the ground right now around maybe a potential bottoming and inflection?

[Keith Potter]

I’d say into Q1, Q2 volatility, July, more volatility. July is feeling quite a bit more confident. We are still getting numbers for Q2 in terms of the flows into things like GICs. We have the April and May data. It was a lot of money. And so right now, I know as we’re on the ground with advisers, we’re trying to be relevant and they give them all the support they need as they pivot their clients’ portfolios and reaction to this new environment and make decisions going forward. But I’d say there is increasing confidence from the boost in the ground. And again, for most of our clientele we serve, these are financial advisers working with their clients. They tend to focus on long-term financial planning, dollar cost averaging, all of these themes.

So there was a real reaction, particularly away from duration fixed income products in favor of safety in the period. But as we’re in July and now entering August, I’d say there’s more confidence that resolutely those boots on the ground are focused on financial planning and working with their clients to have great solutions to perform well over time.

[Jaeme Gloyn, National Bank Financial]

Okay, thank you.

[Operator]

The next question comes from James Shanahan of Edward Jones. Please go ahead.

[James Shanahan, Edward Jones]

Thank you. Good morning, I have a question about IGM’s share of China AMC earnings. It looks like in the fourth quarter; the company disclosed a $4 million unfavorable tax adjustment. And in the second quarter – I’m sorry; the first quarter of 2022, there was a $2.3 million after-tax loss on seed capital. And so if you adjust for that, it looks like there’s a pretty significant still sequential quarter decline in earnings for China AMC or at least some weakness there. Perhaps you could just explain how we should be thinking about earnings on a go-forward basis and perhaps income expressed as a percentage of assets under management and Canadian dollars perhaps? Just some guidance there would be helpful. Thanks.

[Keith Potter]

Hi, James, it’s Keith here. Yes, when you look at Q1 2022 relative to Q2 2022, there’s call it, a $2.3 million after-tax loss on in Q1. I would say Q1 2022, Q2 2022, average assets were pretty much on par and earnings were pretty much on par. You’ll see some volatility with the margins from quarter-to-quarter, but I would say there was no surprises there. I’d say the prior periods, at the end of the year, there are other types of revenue sources such as performance fees that you’re going to get in Q4. And so you get some volatility typically near the end of the year. But I would say it’s pretty much on par with average assets. So if you look to the left-hand side of Slide 41, Q1 2021, Q1 2022 and if you normalize for Q2 2022, average assets in all those periods were pretty much the same and so our earnings.

[James Shanahan, Edward Jones]

Okay, that’s helpful. Thank you, Keith.

[Keith Potter]

Thank you. You bet.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Kyle Martens for any closing remarks.

[Kyle Martens, Treasurer and Head-Investor Relations]

Great. Thank you, Karl and thank you, everyone for joining the call this morning. And I hope you all have a great weekend. Karl, with that, we’ll close out today’s conference call.

[Operator]

Thank you, sir. This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.