IGM Financial Inc

TSX:IGM

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, and welcome to the IGM Financial Third Quarter 2018 Earnings Results Call for Friday, November 2, 2018. Your host for today will be Mr. Keith Potter. Please go ahead, Mr. Potter.

[Keith Potter, Senior Vice President Finance & Treasurer]

Thank you, Patrick. Good afternoon. I'm Keith Potter, Treasurer and Head of Investor Relations, and welcome, everyone, to IGM Financial's 2018 Third Quarter Earnings Call. Joining me on the call today are Jeff Carney, President, CEO of IGM Wealth Management and President and CEO of IGM Financial; 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 concerning forward-looking statements on Slide 3 of the presentation. Slide 4 summarized the non-IFRS financial measures that we used in this material, and finally on Slide 5, we provide a list of documents that are available to the public on our website related to the third quarter results for IGM Financial. And with that, I'll turn it over the Jeff Carney, who will review IGM's third quarter results starting on Slide 7.

[Jeffrey Robert Carney, President, CEO & Director]

Thanks, Keith, and good afternoon, everyone. Turning to Slide 7, on the quarter. Total lending AUM reached a record quarter end high of $159.7 billion, up slightly from Q2. We continue to gain market share in Q3, which marks the eighth consecutive quarter of advice channel market share gains for IGM Financial, with investment fund net sales of $137 million. We experienced expense growth for the quarter of 3% relative to Q3 2017, excluding restructuring provisions. As stated on prior calls, in the fourth quarter, we will have higher expenses due to the IG Wealth Management brand launch and the ramp-up of our back office transformational activity. We continue to guide to noncommission expense growth of no more than 5% for 2018 and 3% by 2020, and we are expecting expense growth of approximately 4% for 2019. IGM Financial's adjusted net earnings per share were $0.92 for the quarter, up 28% from last year, and the highest quarterly adjusted EPS in the company's history. We took a pretax charge of $22.7 million in the quarter, supporting transformational efforts focused on efficiency and to further streamline investment management and our products offering. We are continuing to transform the business to enhance our client and adviser proposition and focus on back office efficiencies. Luke will speak more to financial results in his remarks. Slide 8 provides context on the broader industry operating environment, and since Q1 market volatility, we saw positive equity returns in Q2 and stability through the end of the third quarter. However, the mutual funds industry ended the quarter with long-term fund net redemptions of $2.7 billion, down $7.3 billion from Q3 2017. Volatility has reentered the market in October. With IGM's diverse asset mix, AUM is down 4.1% in the month, which has fared better than the overall global equity markets. Turning to Slide 9, on the financial results for the third quarter. Adjusted net earnings of $223 million exceeded $173 million in Q3 of last year. As I mentioned, Q3 adjusted earnings per share were $0.92, up year-over-year at a record high for any quarter. Investment fund net sales were $137 million, down from $829 million in Q3 2017, which reflects the challenging environment. We have just released our IGM's October investment fund net sales of $143.8 million. On Slide 10, we show the segment results, and you can see growth in earnings coming from all 3 segments. Turning to IG Wealth Management quarterly highlights on Slide 12. AUM reached a record quarter end high driven by positive investment returns for the quarter. IG Wealth Management continued to capture market share as we focus on high-net-worth solutions, which represents 38% of gross sales, up from 43% in Q3 '17. We continue to experience solid asset retention with long-term trailing 12 months redemption rate that remains low at 8.8% and is up modestly year-over-year. Finally, at the beginning of October, we relaunched the Investors Group brand as IG Wealth Management, which I'll speak to in just a moment. Turning to Slide 13, on operating results. IG Wealth Management experienced net redemptions of $64 million for the quarter and $5.5 million in October. At the end of September, you can see the trailing 12 month net sales rate for IG Wealth Management of 1.1% resulted in market share gains. This is in the context of our new approach to recruiting, where we're seeing the Consultants growing by 3x the previous hires but is offset by the onetime Consultant restructurings over the last 2 years. We are now through that impact on our flows. Turning to Slide 14. High-net-worth solutions now represents $43.9 billion of our AUM and 48% of total sales. Our unbundled fee structures, where the clients pay the advice fee directly, now have $25.6 billion at AUM and accounts for 75% of our high net worth sales. We also continue to make progress in delivering better beta with our focus on managed solutions, which now represents 47% of our AUM and almost 80% of our gross sales. Slide 15 highlights our client rate of return and historical redemption rate experience. Through the end of September, our clients have experienced positive returns over 1-, 3- and 5-year periods. IG Wealth Management's trailing 12 months long-tern redemption rate of 8.8% remains well below the industry average of 16.9%. Finally on Slide 16, we relaunched the Investors Group brand in October to better position the organization as a wealth management firm with enhanced focus on mass affluent and high net worth. There's not always common definitions, but mass affluent includes households with $100,000 to $1 million, and high net worth is $1 million plus. As discussed in Investor's Day, there is strong brand awareness but not a good understanding of what our company does. The brand relaunch is designed to create a better understanding of what we do and contribute to client acquisition and loyalty. The IG value proposition is grounded in gamma, and the IG Living Plan brings it to life in a compelling and meaningful way. The IG Living Plan is trademarked and gives clients and Consultants a clearly understood name for our personal financial planning that adapts with our clients as their goals and concerns change throughout their life. The relaunch is broad-based through print, TV, social media and complemented by highly targeted campaigns for IG Wealth Management's -- Private Wealth Management. We expect this brand investment will contribute to future growth for the company. And I would now turn it over to Barry McInerney to take us through McKenzie's results.

[Barry Sean McInerney, President & CEO]

Thank you very much, Jeff, and good afternoon, everyone. On Slide 18, I'll provide an overview of McKenzie's third quarter results. Investment fund AUM reached another quarter-end record high up 1.4% from June 30, 2018. We continue to gain market share with adjusted investments fund net sales of $523 million during the third quarter. McKenzie's Q3 ETF net creations of $377 million ranked fourth in the industry. In a mutual fund industry that experienced long-term fund net redemptions of $2.7 billion, as mentioned by Jeff, Mackenzie had another strong quarter retail mutual fund net sales of $363 million up from 2017. Offsetting strength in this area was net reduction in the institutional channels. Turning to third quarter. Environics published the 2018 annual Industry Advisor Perception Study, and we're extremely pleased that Mackenzie ranked third in both the mutual fund and ETF studies and continue to gain ground on our goal to be #1. Slide 19 highlights Mackenzie's operating results for the third quarter of 2018. We had our best ever Q3 mutual fund gross sales of $2.2 billion, up 21% year-over-year. These figures are adjusted to exclude the impact of fund allocation changes during the period. Total adjusted net sales of $128 million compares to $612 million last year, and a majority of institutional SMA net redemptions were attributable to one institutional client. Mackenzie continues to capture market share versus peers. Our long-term mutual fund net sales rate of 0.9% exceeded both the advice channel and the overall industry, and if you include both ETF and long-term mutual funds, Mackenzie delivered in organic net sales rate of 3.7%, and we're pleased to announce that our October investment fund net sales were $166 million. Slide 20 provides detail on our mutual fund sales. Gross sales improved across a number of categories relative to last year. Positive net sales in income oriented and balanced categories more than offset net redemptions in Canadian equities. Overall, adjusted mutual fund net sales were $208 million, down from $305 million during Q3 of 2017. As I've touched on earlier, Mackenzie's retail mutual fund net sales gained strength in the quarter to $363 million, up $164 million from 2017. These retail net sales are broad-based across asset classes and fund types that are driving our market share gains. We will still see upside of having a gross sales capture rate of only 7.5%, up from 5.5% in 2017, and institutional sales experienced softness in the period with this business line continuing to mirror the overall industry. Turning to Slide 21, Mackenzie's ETM -- ETF AUM, rather, grew to $3 billion, driven by Q3 net creations of $377 million, ranking fourth in the industry amongst the now 30 ETF providers in Canada and third for year-to-date net creations. Growth in our ETF business was primarily driven by our active and Smart Beta offerings, and Q3 2018 was the best quarter in our history for retail ETF flows of $264 million. On Slide 22, Mackenzie's long-term investments performance remains solid, with 64% of mutual fund assets in the first or second quartile over the 10-year period. Overall, 38% of Mackenzie's AUM is in the 4- or 5-star rated funds. And looking at Series F, where Mackenzie has some significant opportunity to grow AUM within the IIROC channel, 17 of our 20 largest funds are rated 4 or 5 star by Morningstar. 6 of these funds are rated 5 star. On Slide 23, we continued to benefit from solid investments performance and net sales across a range of investment styles and teams. On the equity side, the growth-oriented teams and global equity and income team continue to deliver strong performance and positive net flows. We have also experienced another strong quarter performance and flows from our fixed income offering. We've entered a time of significant volatility in October, as we all know, and we believe the Mackenzie's multi-boutique structure is well positioned to perform in a spectrum of market environments. For example, we have certain boutiques that have historically outperformed in volatile markets, such as Ivy, which had a strong October. We offer specific strategies that deliver access to nontraditional asset classes and benchmark-agnostic strategies that can provide risk-return profiles with lower correlations with the broader market. And finally, we also offer a variety of multi-asset solutions designed to deliver smoother ride for investors. Finally on Slide 24, which highlights results of our 2018 -- of the 2018, rather, Environics Advisor Perception Study. We're very pleased that Mackenzie is the only company to rank top 3 at both mutual funds and ETFs. With respect to mutual funds, Mackenzie ranks number 3 overall and number 2 in brand recognition. While our ranking did not change, our scores closed the gap on our target to be #1. We're also very pleased with the leap from #10 to #3 in ETFs. Our wholesaling teams have -- continue to excel and was recognized as being amongst the best in the country, tied for -- with one other firm for the first position. This progress had led to increased penetration within both the MFDA and IIROC channels, and these results demonstrate the exciting opportunity Mackenzie has to continue to increase sales and gain share. I'll now turn the over to Luke.

[Luke Gould, Executive VP of Finance & CFO]

.Great. Thanks, Barry. Let me turn to Page 26, and I'd first highlight the non-IFRS adjustments [ referenced in Slide 1 ]. So first, we had restructuring charge of $22.7 million pretax relating to the reengineering of our North American equity offering at IG and the related personnel changes. And I'd also add, these changes provide annual savings of about $7 million annually and are in our expense guidance. I'd also highlight the premium $10.7 million pretax associated with the early redemption of $375 million of debentures in August, and again, I'd highlight this redemption, along with the 30-year debenture issuance we did in July, provides us with annual interest savings of about $17 million per year, and we started to experience that during the quarter. And at the bottom, I reemphasize that our adjusted EPS of $0.92 is an all-time record, quarterly high for the company. And while adjusted earnings are up 28%, I'd also highlight in the bottom point, we did implemented IFRS 15, January 1 of this year, and we started accounting for sales commissions paid on bundled products by [ expenses incurring ]. And I'd note for everybody, the 2017 results would have been largely unchanged if we had applied this retrospectively, and on this basis, earnings are still up 24%. Turning to Page 27, a few comments on Q3 and the month of October. First, I'd highlight in the circled items you can see in the table on the right that we had an investment fund net sales rate of 0.4% in Q3 that as Jeff said, did very well relative to competitors, and we also generated investment returns for our clients at 0.5% in the quarter. In the chart in the left, you can see and that you saw on our results for October released yesterday, AUM was down 4% in October to $153 billion as a result of October's equity market decline. I'd note that we also released investment fund net sales of $144 million, which we believe will show very well in the industry context, and I'd also highlight that this was a record high gross sales for both IG and Mackenzie for the month of October. And as highlighted by Jeff and Barry, we're working to serve our clients well in this volatile period, and this that type of market where we build relationships. Moving to Page 28. This is a new slide, and it's got our consolidated EBIT and EBIT margin. The only comment I'd make is, on the right, you can see that our EBIT margin of 64 basis points in Q3 of '18 was up from 61 basis points a year earlier, and you can also see that net revenue rates were unchanged. And so the increase in margin was as a result of unit cost improvements from 64 basis points to 61, and as you know, we are very focused on operating leverage while at the same time enhancing our advisor and client experience. I'd change now to Page 29, and I would highlight that there's a lot of data there, but I'm going to make one point, and the point I have is on the noncommission expense line. So as mentioned by Jeff, you can see year-over-year our noncommission expenses, which are just in the middle of the page, we're up 3% from last year. We are committed to meeting or exceeding our full year expense growth guidance of 5%, meaning our growth will be 5% or less, and we're continuing this guidance. I'd also note, as mentioned by Jeff, some of the Q3 expense will reflect the timing, where we've got certain activities, like the brand relaunch at IG as well as some of our transformation program investments occurring in Q4, and I'd also reaffirm our guidance of no more than 4% increase during 2019. Lastly, I'd remind that while we have discretionary expenses, we are committed to serving our clients and capitalizing upon the market opportunity we have in front of us. Since with the recent market volatility, we would not expect our guidance to change in any way at this time. So we'll hit the 4% growth target for next year. And while there's discretion, the recent volatility doesn't do anything to change where we're focusing our efforts and capitalizing on our opportunity. Moving to Page 30. Let's turn to IG Wealth Management, and I'd make 2 comments in this page. First, on the left, you can see our revenue rate of 201.7 basis points is very much in line with Q2. It changed a little bit as a result of continued migration towards high net worth clientele, and you can see this in the row at the very bottom of the table. Second, if you look at the chart on the left, you can see that our asset base compensation rate of 48.5 basis points was down slightly from Q2 and also that our commission rate, in the chart on the right, of 1.7% was down very slightly from Q2. So I'd note that we've made some changes to our field management in the second quarter, where we reduced the number of regional directors we had and we reassigned, certain of their responsibilities, as a result, our commission expense was around $3 million lower in Q3 relative to prior quarters. And I give you guidance that about half of this expense decline is temporary and will be eliminated as we complete reassignment of activities, and the remainder, we view as enduring. I'd also remind you that we reviewed with you in Q1 that there our sales-based compensation rate will be declining by around 40 basis points starting January 1, 2019, as we continue the transition away from DSE that we started 2 years ago. And so you can expect that 1.7% rate to be closer to 1.3% as we enter 2019. And we'll continue to see some upward pressure on the asset-based compensation rate just from the ongoing maturating of DSE units, but that will be quite slight. I turn now to Page 31, where I start by highlighting that IG's EBIT of $213.5 million is up 18% from last year and up 8% from last quarter. I'd remind you that if you look at the net investment income and other line, which is the fifth row from the top, but we did have some negative fair value adjustments in our mortgage business in net investment income last year. And with the adoption of IFRS 9 this year, our mortgage earnings are much more stable. I'd also make a comment on the sales-based commission line, which you can see as the sixth or seventh row down there, and I note that in the quarter we had $24.7 million in commission expenses, down from $27.9 million in Q2. And I remind you that we're commissioning -- we're expensing commissions paid on sales of bundled products as we incur them. And as reviewed by Jeff, the share per products sold in the unbundled solution continued to increase. So that's what drove a majority of this decline in the commission expense from Q2. It's just the fact that we're selling a greater proportion of unbundled products and less bundled products, and the bundled ones are the commissions that we incur -- expenses incurred. I'd also highlight the operating leverage we have at IG, with noncommission expenses up 2.8% from last year. And again, we'd remind you that we have brand relaunch cost coming in at Q4. Now turning to Mackenzie on Page 32. The key comment I have on this slide is to direct you to our net revenue rate, which you can see in the chart on the left, and it's 80.9 basis points. This was down from 83.6 basis points in Q2. I'd remind that we implemented our retail pricing changes June 1 of this year. So Q3 is the first period that had the full quarter impact of these changes. I'd remind you, these changes were worth around $50 million per year on an annualized basis at time of announcement. I'd also want to remind you of what these changes were. We aligned that -- our fees on fee-based products at the same level for all households irrespective of the level of assets. This revised structure is very well suited to both discretionary and nondiscretionary fee-based accounts, and it's been very well received in the marketplace. And then lastly, on Page 33, I'd highlight in the third column at the bottom Mackenzie's EBIT of $52.7 million is up 16% year-over-year. As you heard from Barry, the business is doing very well and sales momentum is accelerating in a challenging environment. And I would remind you that this business has what it needs to compete, and there's a lot of operating leverage in this P&L. And that concludes my comments. I'll turn it back to Patrick, the operator.

[Operator]

[Operator Instructions] The first question is from Geoff Kwan with RBC Capital Markets.

[Geoffrey Kwan, Analyst]

My first question is on the noncommission expense growth. So this year, you've got guidance of 5%. When you take I look at what you reported in Q3, it almost kind of seems to imply at Investors Group that the noncommission expense needs to go from $146-ish million in Q3 to almost kind of $20 million higher quarter-over-quarter, which I get. You talked about rebranding and all and some of these other transformational stuff that you're doing, but it seems like a big jump. And so I just wanted to know whether or not that's accurate. And the reason I ask that was when I take a look at how you guys are guiding last year on noncommission expense growth of 7% and you reiterated at Investor Day, which is right at the end of November, yet when you reported the Q4 results, which would have been a month later of actual operations, you came in at 6%, which is a big delta considering it could have only happened in Q4. So I just don't know if it's managing expectations, which is fine, but I just want to get a better sense as to how you're looking at the Q4 noncommission expense.

[Luke Gould, Executive VP of Finance & CFO]

Got it. It's a good question, Geoff, and it's one on our mind. So first, we are going to meet or do better than the guidance we gave. Second, we did have a very light quarter on expenses and, actually, quite well. But your real question is like, what are you spending all this additional money on fourth quarter? So the single biggest item is the brand relaunch, and I hope you felt the presence of the campaign in the market. And as Jeff mentioned earlier as well, we do have a lot of transformation program expenses that we're work hard on. And again, those activities produce, as you know, long-term savings as we're working to automate and really impact our client experience. And there was some timing of expenditures on those programs that reduced Q3 but will increase Q4. So we are staying firm to our guidance. We would like to do better, but we will have more expense in the fourth quarter.

[Geoffrey Kwan, Analyst]

Okay. And then Jeff, on the high net worth roll out in terms of targeting the households greater than $1 million, are you at a point where the Consultant -- like all the Consultants are kind of fully trained and prepared to be able to go and actively target these sorts of clients? Or is there still some transitioning that needs to happen? And then how do you think about the timing of when you kind of see it show up in the sales numbers more visibly in the monthly numbers?

[Jeffrey Robert Carney, President, CEO & Director]

Yes, I mean, one of the powerful things about our model is that we have Consultants today that are serving the high net worth clients. And then we have -- and then we are a culture of sharing. And so a lot of the training that's going on is really peer-to-peer across the organization. And then we're showing different models of different practices around the country, and we're sharing those with the management team, and then they're training that into their organization. So it's still early days of that execution. And then other part of it is, the higher you go up in the market, so if you're going up over $1 million and up, your competition is going to be higher, and your value proposition has to be even better. And so we win there on the fact that we have the technical skills. We now have a brand that's got more support behind it, so that gives confidence to our clients. And then we've got a series of programs, as you know, that are launching that are going to make it even better. So I think the story there is that we have momentum, and we're going to have investments coming that we're going to continue to evolve that momentum going forward. But part of it is in training the Consultants themselves to feel confident in serving those clients.

[Geoffrey Kwan, Analyst]

So do you think it's like in 6 months we'll start to see it more meaningfully in the net sales numbers? Or is it more like 12 months or another time line?

[Jeffrey Robert Carney, President, CEO & Director]

I'd say 6 to 12 months is a good length.

[Geoffrey Kwan, Analyst]

Okay. And if I can sneak in one last question. Barry, just the liquid alts product, on Slide 20, what category would that fit into? And I'm assuming on Slide 23, it would be grouped in the managed products category?

[Barry Sean McInerney, President & CEO]

I'm just shifting over here, Slide 20. Good question, Geoff. Let's double check what category that's in. Yes, that's in the sector other category. So that's where it's in. There's not a separate category now that it's like liquid alts, but we put that in the sector other category.

[Geoffrey Kwan, Analyst]

Okay. And then within the managed products on Slide 23?

[Barry Sean McInerney, President & CEO]

23, that is -- yes, that's correct. Yes, very good.

[Geoffrey Kwan, Analyst]

Are you able to say like what the net sales in the quarter would have been on that product?

[Barry Sean McInerney, President & CEO]

Yes, we don't think we have that by -- it's actually -- so if I can just comment in general, we're very pleased with it, by the way, and particularly, the fact that we're -- market has been choppy. It's exactly designed to help investors late in market cycles, and of course, it's performing well in that it's uncorrelated to both stocks and bonds. So that, we're pleased with. A lot education to go out to the platforms and the advisers, who are really receptive to it, but obviously, we're talking a product that is akin to what is happening in the U.S., but new to Canada, we're using leveraging and shorting, so there's an educational component to it. So we're getting close. It's early days. We're using it ourselves internally within our multi-asset strategies. So what the exact number, I'll get to you back later, but it's not -- it's early days. Flows are coming in, but it's still early days in terms of the educational cycle required for these types of products.

[Operator]

The next question is from Gary Ho from Desjardins Capital Markets.

[Gary Ho, Analyst]

Let me just follow-up on Geoff's earlier question on noncommission expense, specifically the stuff that, I guess, Mike Dibden's been working on. Can you give us an update on that? I imagine that it's more of a 2019 event. Should we see perhaps another round of restructuring cost and expense saves in 2019? And is that baked into your 2019 4% growth estimate?

[Jeffrey Robert Carney, President, CEO & Director]

No, we don't. We're managing our resources efficiently so we don't always have to take a charge on severance and all of those types of things. So we find -- people leave the company, and then we don't replace them, and we find other ways to deal with this. So I don't think you always have to think we have a charge in the way we manage that is how I think about it. And then just -- Mike Dibden is starting to get some traction so we're launching a new leading fund accounting service, which we were going to -- that's the one that we try to build ourselves, and now it's up and running, and so we're off to the races on that. And then we're starting to get into some digital forms and make it easier for our clients, so we've got electronic signatures coming and other things that are going to make it more streamlined for our clients and for our Consultants. And so it's going to see Mike -- he hired his team. We've got -- they got a great culture going. We've got a lot of talent in the company, and they're starting to execute. And so you will hear more and more from us on that. But it's still early days, but we're certainly making progress.

[Luke Gould, Executive VP of Finance & CFO]

And I'd add, as Jeff said, when we -- when Mike spoke at Investor Day and we mentioned he'll be spending $100 million over 5 years to generate annualized savings of $60 million a year, that $100 million is inclusive of a lot of severance and other cost that is embedded in the run. And on your other point, are we realizing benefits and when will we start to be? We're 40% in on the kind of annualized run rate, and we'll continue to chip away during 2019. But again, what's offsetting that is a lot of spend that was required to get those savings.

[Gary Ho, Analyst]

Okay, that's helpful. And Luke, while I have you, I just want to get back onto that Slide 30 and specifically on the asset base rate and the sales commission rate, and I'm comparing it to the slide that I think you provided some guidance back in the Q1 call. So I think you said 1.3% forward sales commission rate for 2019, but on the asset base side, you had a guidance of, I think, 50 basis points for 2018 and 52 basis points for 2019. But you're trending below that. Can you provide some guidance on that slide?

[Luke Gould, Executive VP of Finance & CFO]

Yes, I can. And so especially anchoring to this quarter where we did see a 1 basis point decline, part of that, as I mentioned, it is change we made to field management. And so we did reduce our regional director complement by about 17% in the second quarter, and we are seeing the impact of that in our Q3 results. A part of that is going to be offset in the coming quarters as we've reassigned some of the activity. Some of that is going to be permanent savings. So when you look at the $48.5 million, you can think of that ramping up a little bit over time. But again, the biggest feature of that is going to be DSC maturing over the next couple of years as we discontinue in 2016. And so as it matures as we go through that 7-year cycle, we're going to see some upward pressure gradually over the whole time. But of course, that is offset by the sales commission rate coming down in that period -- sorry, I guess, to answer you in other way, on the guidance that was provided earlier on both the sales commission rate and the asset base comp rate from Q1, we are going to be a tiny bit south of that as a result of these changes that I announced today.

[Gary Ho, Analyst]

Got it, okay, that's helpful. And just lastly, Jeff, we've seen kind of more activity on the M&A side, and definitely, valuation has come down across the sector. Are you seeing more inbounds in terms of M&A opportunities? And are you interested at all? And if so, kind of what segment kind of interests you at this time?

[Jeffrey Robert Carney, President, CEO & Director]

I mean, we feel really good like with our boutique model. We've got a great cross-section of capabilities that will now enable us to launch incredible products that are differentiated in the marketplace. So we feel very good about that. And then if we need to find something else to add to our capabilities. There's a lineup that want to help us. So recently, we have been using some new providers from the U.S. and bringing in some more capabilities there. And so we'll continue to evolve that. But we also are -- there's conversations going on in the industry about knowing your products, and we want to make sure we have enough products but not too many because you can't understand every product if you have so much to cover. And so we're cognizant of that. And we really want our teams to use the solutions-based solution -- products and they are. And so it's more complementary in using third-party products or using Mackenzie's products as well, and we constantly look at that to make sure that we have enough diversification to serve our clients.

[Operator]

The next question is from Paul Holden from CIBC.

[Paul David Holden]

I just wanted to ask a few more questions related to potential ongoing market volatility. I know, Barry, you talked to this already a bit in terms of how it might impact on specific mandates, but I wanted to get a better sense from the firm overall how you would view the net impact of market volatility. Is it something that's disruptive to your business? Do you think you can be a relative winner? Do you think it changes the balance of flows between passive and active and, therefore, is a benefit to your firm and maybe also as well how it might impact the proportion of Mackenzie assets that first or second quartile overall? Do you come out as net winner?

[Barry Sean McInerney, President & CEO]

Well, I'll start on Mackenzie, and Jeff, if you want to chime on IG. So we feel that we're well positioned competitively in any environment. So -- but I'll specifically allude to a more volatile market where we're getting towards the end of a cycle. Can't call it when it is going to end but towards the end of a cycle. So by design -- and Jeff mentioned as well, by design, we've got -- we have 14 boutiques at Mackenzie, and that's by design. And they have a variety -- and this differs from a lot of other models out there. It's not the only one, only model, but our model is the boutiques on the equity side, for instance, cover growth, value, downside, risk capture, different asset classes, obviously, Canada, the U.S., North American and global, developed, emerging. It also covers quant and fundamental. So on in our fixed income side, we've got a really terrific fixed income team that has -- their performance is approaching, if not there, on most categories, 5 star. And their capability is there, not just your core or core plus, but they have high yield, they have global unconstrained, they have floating rate. So what we see is -- you can see our sales are strong, and they can vary where it comes from depending on, quite frankly, where we are in a cycle. So for instance, right now, the last year or so we've been -- the sales have been really robust with our growth managers, our fixed income and, obviously, our multi-asset class. It's been weaker, as you know, with the Cundills, who are value oriented, and this has been almost a historic growth environment. And it's been weaker with Ivy, which is adopting a risk-protective posture. And so therefore, they're protecting the capital for clients, and that means also with the larger cash holdings. So -- and then, lo and behold, what happens? Well, first of all, I told you see the IVY performance come back, because they are positioned for [ down series ] protection. How we will see -- we will see growth rotate back to value. We never know when. When it rotates back, Cundill is like a coiled string. And then we've launched, as you know, the alternative. These are all-weather portfolios that are really -- are good, we think, irrespective of the market cycle but are particularly good during the end of the market cycle because they offer unconstrained returns. So -- and then we've also seen a tick up in our fixed income flows quite a bit so, particularly in, no surprise, floating rate and unconstrained because, again, rates are starting to rise. So it's really a nice combination of almost -- we, ourselves and Mackenzie, are almost a diversified portfolio with 14 boutiques. And so, we will see flows coming and going depending on what -- where we are in a cycle and what's of particular interest with advisers. And then overall, probably, the -- our momentum has been broad-based across every asset class. It has been led by multi-asset class. Now -- and so we -- and that means that our multi-asset balanced teams have at their disposal all these variety of component parts that they put together to make them these balanced multi-asset perform well, again, what we call, all weather, irrespective of what the environment is. But that make sense, and we're really -- we like different environments because we don't have one philosophy that's permeating across our organization, where some might have they believe in growth all across the organization, or some might be [indiscernible] we do everything. And so therefore, it's -- the diversified portfolio is, we think, a competitive strength.

[Jeffrey Robert Carney, President, CEO & Director]

And the only thing I'd add on that from Investors Group's side is, for us, it's a great opportunity because volatility and the stress in markets creates opportunities for winning new clients away from our competitors. And so we will be doing that throughout this process and make sure that they're energized to bring in and hustle.

[Paul David Holden]

And my follow-up question for Barry would be, Mackenzie has executed on pretty much everything it has targeted except for relative fund performance. That doesn't sound like market volatility or downdraft in the market is going to be the catalyst to change that. So maybe you can refresh us on kind of what the targets are for fund performance and the plan to get to the target.

[Barry Sean McInerney, President & CEO]

Okay. Well, we focus on a number of measures that are -- metrics, rather, to measure that performance. So we focus -- and has been some slides here, we're focus on percentage of AUM for 5-star Morningstar funds. And I believe we now are probably a tick under 40% on that number. So as explained, that number actually is fine for us because it's strong where it needs to be, like our balanced multi-asset is very strong. What's in favor right now, or what's being rewarded in the marketplace growth, our Bluewater mid-cap growth U.S. boutique is doing exceedingly well, obviously, because their style is in favor. So that's a good thing. What you'll find with that percentage though, the percentage for us will never get too high because we have boutiques that are doing exactly what they should be doing and doing it well. But their style is out of favor, for instance Cundill, their stars are below 4 and 5, as are Ivy mostly because their style's out of favor. And there's no, particularly, universe in Canada, like we have in the U.S., that drills down to style-specific [ managed ] universes or process-specific universes. We just have one universe in Canada. So the 40% we are fine with, we actually think that's going to drive upwards as the market changes because, you'll see, we do have a lot of assets in some of the boutiques like an Ivy and Cundill. But the style's out of favor. Once the style comes back in to favor, that will drive that number probably up higher. And what's clearly important to us as well is, and I think we've have it in the slide, we talked about 17 of our largest 20 mutual funds in the F series are 4 or 5 stars. So we have -- we -- our wholesalers. Mackenzie will tell us, Jeff and I, that we have too much to sell. It's actually a good problem to have because we can meet the need of advisers irrespective of market conditions. We have strong funds in ETFs across the asset classes and styles. So we're very pleased with our performance. It's just that sometimes we've got a headline number that looks perhaps low-ish without the proper context, but it does represent the abundance of styles and boutiques and mutual funds and ETFs that are performing well. And one more point, obviously, we focus on net sales as you can see the momentum we have in the retail sector quarter after quarter. Growth is still important because, for us, since we have a variety of boutiques, and some boutiques will be out of favor at times their style, then we get to outgross that, right? We just outgross that with the boutiques in style. So we monitor both the gross and net sales, which is part and parcel an indication of performance. And yes, we're happy where we are in that.

[Paul David Holden]

And final question of maybe an update on China AMC. It seems like there's a number of moving parts there. The largest money market fund, I guess, has been forced to kind of share some of that AUM with competitors. Wondering if you benefited from that. And also, maybe an update given market fall in Asia this year and how that's impacted AUM, if at all.

[Barry Sean McInerney, President & CEO]

Yes, we're -- I'll start off, then maybe Jeff can chime in. We were -- but first of all, I'm very pleased with how CAMC is performing. It's been about a year since IGM closed the transaction in September of 2017, and they've retained their #1 position in long-term mutual funds plus institutional assets, #1 position in ETFs, a strong brand. They're multichannel. They're being innovative. They've had a number of really strong product launches in Q1 before the markets started the downturn, although the confidence got back the industry, obviously, with the markets the last 6 months or so. But they're innovating, launching the first robo-adviser in China, launching the first [ fund of funds ]. The third pillar has been publicly announced in China. It's now in place in a pilot project this year. It will be formally in place in the spring of 2019. The 3-pillar retirement system like we have in Canada with the social security system and the corporate system and then the individual, private system, RSPs here Canada. And that's the third pillar that they have just launched. CAMC, one of the few firms selected to participate in the pilot. So it's just so well positioned being a preeminent top 3 local domestic asset management firm. So when you -- when we look at their performance, well, last year, it's -- they're just holding their own despite the fact that the Chinese equity market's from their peak this year, down over 30%. I think for the year, they're over 20% down. So while you've got that going on, they're doing just fine. What we also like about them is that, in addition to what I've mentioned earlier, they're focused on risk-adjusted returns. So there's been a lot of chatter in money market in China. They continue to grow strongly in China. Over half the mutual fund AUM for the industry in China are money market. And the money market funds are growing for CAMC, but they're lagging the -- some of their bigger competitors, and that's by design because they're not reaching for yields. They're being conservative. The regulators are monitoring the money market funds. They want to make sure no one is overstretching themselves. They would prefer ultimately that, that industry mirrors more like Canada or the U.S. where it becomes more long-term focused, more institutionalized when there's not money going in and out of money market funds, albeit the interest rates are still higher in China than North America so there's attractive yield there. So I would say, all in all, our -- the business case for us to get into originally is absolutely on point, if not strengthened. We're very pleased with their performance. They are holding all of their industry-leading positions, and that's despite, as you suggest, that there's been market volatility there. And ultimately, that will become more sustainably upwards, if and when -- we'd hope the -- some of the trade issues and others gets resolved between China and the U.S.

[Operator]

[Operator Instructions] The next question is from Graham Ryding from TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Maybe I can start at IG. The drop in Consultants quarter-to-quarter was, I guess, 4-years-plus experience. Was that in part a reflection of a -- you said you made some field management changes in your Consultant network. Is that baked into that number there? Or maybe some color around the quarter-over-quarter drop.

[Barry Sean McInerney, President & CEO]

The goal -- that wasn't as a result of those changes. Most of those people -- it was very slight. Well, [ it's like on about ] 16%, 17% is not a lot of people. The bigger part of this change were just normal retirements and the timing of people graduating into that category relative to just the normal flow people exiting the business.

[Jeffrey Robert Carney, President, CEO & Director]

And we did reduce the breadth of our leadership, so there was something in there too.

[Barry Sean McInerney, President & CEO]

Yes, definitely, that is -- it's small. So think 15, 16 people.

[Graham Ryding, Research Analyst of Financial Services]

Okay. So you're comfortable with your sort of ability to retain your productive Consultants and attract the people that you want to attract. There's nothing to read into the continued attrition of your Consultant network?

[Jeffrey Robert Carney, President, CEO & Director]

No. And the new recruits that are coming, like I said, are closing in on 400% higher than our previous recruits. So quarter out, we're going to continue to accelerate that. If we can keep finding talent like that, we'll keep hiring them.

[Graham Ryding, Research Analyst of Financial Services]

400% higher, is that, absent growth net sales? What is that metric?

[Jeffrey Robert Carney, President, CEO & Director]

Yes, so it's -- when we put in the new process, we're measuring from that date, and so we're looking at -- historically, we would hire -- our screening wasn't as defined as it is now, and now, we're putting a much bigger screen on it, so we want to make sure that the success rate of our Consultants is very high. So we've centralized recruiting. We've put professional team in place to manage all of it. And we're managing LinkedIn much better so we get access to talent, and we just professionalized the whole thing and decentralized it. And so it's got great management on it, and it's exciting. So if we can continue to see that kind of momentum, we'll continue to hire.

[Luke Gould, Executive VP of Finance & CFO]

And in the metric, in the supplemental info, you'll find the number of Consultants broken down as you said. When you look at the same-store sales or the sales -- gross sales per Consultant, year-to-date, gross sales are down 5%. When you look at the same-store sales though, we're up 17% because we've got a fewer of them. And you parse that out, as Jeff was saying, between the new recruits and the experienced, the experienced are up 3% to 5%, but those who are brand new with us because we're recruiting so much more selectively, that's where they're up multiple in gross sales relative to the past. So we're seeing very good performance with the new recruits.

[Graham Ryding, Research Analyst of Financial Services]

Okay, got it. Maybe I could follow up on the color that you gave around commissions expense, how's that evolving. It sounds like in 2019 your asset retention expense is going to move higher but not as much as the drop in sales commission expense. Was that the message?

[Luke Gould, Executive VP of Finance & CFO]

Yes. So it's just that DSC is becoming a smaller, smaller part of the business as it's maturing naturally. So you'll remember that the guidance -- we gave annual guidance that 2018 was going to be about 50 basis points and 2019 was going to increase to 52 just as a result of that maturing of the DSC book. And offsetting that is the transitional measures that we put in place on sales commissions. And so my guidance was that where sales commission rate guidance would be 1.9% for this year and it's actually running at 1.7% now, the earlier guidance we gave for 2019 was 1.5%, and you can think of that as running something closer to 1.3%. And similarly, on asset base, where we gave guidance 52 to the extent that we are a bit better as a result of some of our changes, you can think of that being closer to the 51 vicinity. And of course, that ebbs and flows based upon the dimensions of like who's selling the product and who's advising on it because there's different rates for our network. But these weighted averages, I think, those are our best -- very good guidance to work with. And the key point I had and want to convey on this quarter is that there is about $3 million there that were related to these changes that we made in field management. And part of it will go away as we reassign the activities. But that part of it will endure, so I want to get that out there that the ongoing rates are going to be a little bit lower.

[Graham Ryding, Research Analyst of Financial Services]

Okay. That's helpful. And then how about the timing? As you transition away from selling bundled products, what is the timing around that? And is that baked into your guidance at all here? Or is that a 2020 event?

[Luke Gould, Executive VP of Finance & CFO]

I think you'll remember from Investor Day, Todd Asman gave guidance that we're launching unbundled for all. So right now, it's only available on our high net worth solutions, and that's something that is coming to effect in 2019. And as part of that, we are migrating our entire business there during 2019, and we are expecting that to be substantially complete during 2019. So there will be no more bundled products in our offering at all. All unbundled.

[Graham Ryding, Research Analyst of Financial Services]

Okay, got it. And then just my last question would be -- I guess, this is for Jeff. Sort of net sales in Mackenzie are flat year-over-year if you adjust for that asset allocations...

[Jeffrey Robert Carney, President, CEO & Director]

You mean for the Investors Group?

[Graham Ryding, Research Analyst of Financial Services]

No. Well, that was in Mackenzie, I think. Year-to-date, your sales were flat year-over-year if you adjust for the asset allocation outflow this quarter. But then at Investors Group, net flows are down. So I guess, what's driving the differential between your 2 divisions? It looks like the Investors Group is sort of moving a little bit more in line with the industry and Mackenzie is outperforming. Maybe some color around how you're viewing the difference in net flows this year in the 2 businesses.

[Jeffrey Robert Carney, President, CEO & Director]

I think we could've done better than where we are. We're excited about what the next 12 months are going to look like, and you'll be the judge of our success there. But I think it's a combination of a lot of change in leadership and all those things and bringing in all the new talent we've brought in, and they are now up to speed, and they're starting to deliver value for us. And so you'll see that momentum as we go, but I'm very confident in our ability to grow this company going forward. And the volatility, we're outperforming most of them, the competitors on it, but [it's sliced] and it's not like we're significantly ahead of everybody else. But we're holding our own. So -- but it's -- we know we could do better, and that's what we're going to be doing.

[Barry Sean McInerney, President & CEO]

I think Mackenzie -- it's a good question, actually, because you probably seen we're giving you more and more disclosure and guidance on how Mackenzie is doing in retail channels versus institutional channels because they're quite different businesses. And retail is, by far, our biggest and is higher margin and higher pricing. So I think we've heard back from analysts would like to know a little more specificity to them. So our retail channel here for Mackenzie in 2018 is doing very well, way above last year, both gross and net, and accelerating. And so we're very pleased with that. The institutional Mackenzie is lumpy. It was much better last year than this year. So that's why part of like the total funds at Mackenzie and see -- we don't see that breakout. I mean, we're breaking out strongly in retail, and we have -- actually, a very strong institutional last year. We knew it's going to be softer this year. It's become more pronounced, the softness, because of the [ it's called the industry of flows to the ] financial solutions, which is very weak. And so again, some of those, like a good chunk of those industry flows emanate from our partners or institutions. So we're not concerned at all, actually. But I think the institutional is down as we expect, a little more because of the industry malaise, and the retail, as intended, is accelerating. So I hope that's okay. Look, and we'll continue to show you more guidance going forward in both channels irrespective of which one's doing better. We'd like them both to do well, but right now, retail is leading the way for us this year.

[Luke Gould, Executive VP of Finance & CFO]

Yes. And I'd also comment on the difference of the distribution models and the business where IG is a distributor. And when you look at its net flows, it is actually gaining new client relationships and penetrating existing clients. And so as Jeff mentioned at the onset, IG did gain share when you look at the mutual fund industry net redemption rate. But Barry's model, the Mackenzie model, is very different that there's a lot of we call money in motion. There's a lot of gross sales going on as people rebalance within the clients' account, and Mackenzie is capturing all that share right now and is accelerating, as Barry mentioned, in retail. So they're very different business models, and Mackenzie does have that leverage.

[Operator]

The next question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

Barry, just on that institutional comment. You talked about you knew that it would be a bit slower this year because a lot of it's like with partnerships. But in your opening remarks, you also said the industry was a bit soft too. So is some of it the industry as well? And maybe you can just elaborate on that and maybe the pipeline going forward.

[Barry Sean McInerney, President & CEO]

I'm sorry, just to repeat, what else is soft as well? I kind of misheard it.

[Scott Chan]

Oh, the industry.

[Barry Sean McInerney, President & CEO]

Yes, yes. Well, I guess, we can't predict the industry. I don't think -- we didn't actually predict the industry to be soft this year. It just happened and just -- we just react to it. We had thought our institution sales would be lower this year, the fact that we had a breakout year last year. We had record sales with some of our platform partners, and we just were conservative to say that can't continue in 2018. So that's what I meant. It's a good question, actually. So I meant that we had forecast this slowdown in institutional in 2018, simply because some of our partners did -- had record years. So they were -- we had record years. I mean, we just think that was unsustainable. But it's been -- the slowdown has just been -- as I mentioned, has been stronger -- been more pronounced, rather, because the industry, which we can't predict, has been really soft. I mean, across IGM, we're gaining market share relative to the industry. Sometimes, it's difficult to see our maybe more modest net flows did and the exuberant -- we're very exuberant across IGM and [ generally speaking ] IG, that's just because -- what we can control is market share. We want to gain market share across the board, and right now, that's happening ]. So does that answer your question? It's been a while. But I think you're right. We can't predict the industry. Our prediction for Mackenzie institutional to be slower this year, again, was the fact that we had such a strong year last year. We want to be -- smoothen that out over the long-term forecast. We had to expect it to be slower this year.

[Scott Chan]

Yes. No, that's good. And then Barry, just on Slide 24, on that Environics Advisor Perception Study. Does that rankings just include independent companies? Or does include that include banks and life co as well.

[Barry Sean McInerney, President & CEO]

It includes all manufacturers, banks insurance and [indiscernible], yes.

[Operator]

There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Potter.

[Keith Potter, Senior Vice President Finance & Treasurer]

Thank you, Patrick, and that will conclude our call for the day. And just thank you, everyone, for participating, and have a great weekend.

[Operator]

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