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Edited Transcript of IGM.TO earnings conference call or presentation 1-Aug-19 5:30pm GMT

Q2 2019 IGM Financial Inc Earnings Call

WINNIPEG Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of IGM Financial Inc earnings conference call or presentation Thursday, August 1, 2019 at 5:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry Sean McInerney

Mackenzie Financial Corporation - President & CEO

* Jeffrey Robert Carney

IGM Financial Inc. - President, CEO & Director

* Keith Potter

IGM Financial Inc. - SVP Finance & Treasurer

* Luke Gould

IGM Financial Inc. - Executive VP of Finance & CFO

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Conference Call Participants

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* Gary Ho

Desjardins Securities Inc., Research Division - Analyst

* Geoffrey Kwan

RBC Capital Markets, LLC, Research Division - Analyst

* Graham Ryding

TD Securities Equity Research - Research Analyst of Financial Services

* Paul David Holden

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Scott Chan

Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst

* Tom MacKinnon

BMO Capital Markets Equity Research - MD & Analyst

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Presentation

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Operator [1]

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Please stand by. Your meeting is ready to begin. Please be advised that this conference call is being recorded.

Good afternoon and welcome to the IGM Financial's Second Quarter 2019 Earnings Results Call for Thursday, August 1, 2019. Your host for today will be Mr. Keith Potter.

Please go ahead, Mr. Potter.

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Keith Potter, IGM Financial Inc. - SVP Finance & Treasurer [2]

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Thank you, Patrick. Good afternoon. I'm Treasurer and Head of Investor Relations, and welcome everyone to IGM Financial's 2019 Second Quarter Earnings Call. Joining me on the call today are Jeff Carney, President and CEO of IG Wealth Management and President and CEO of IGM Financial; there's 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 the cautions concerning forward-looking statements on Slide 3 of the presentation. Slide 4 summarizes non-IFRS financial measures that are used in this material. On Slide 5, we've provided a list of documents that are available to the public on our website related to the second quarter results for IGM Financial.

And with that, I'll turn it over to Jeff Carney, who will review IGM's 2019 second quarter results starting on Slide 7.

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [3]

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Good afternoon, everybody. We reached another record high quarter end, AUM level, with IGM's total assets reaching $162.3 billion at June 30, 2019. That's up 1.2% during the second quarter.

Our clients earned significant investment returns during the first half of the year, driving IGM's AUM up 8.9% relative to December 1 of last year. Investment fund net redemptions were $364 million in the quarter or 0.9% of average AUM on an annualized basis.

IGM continued to gain market share relative to the industry [advice] channel, which experienced net redemptions rate of 1.5% during the second quarter.

Adjusted net earnings per share were $0.81 for Q2 2019. Reported EPS of $0.77 includes an $8 million after-tax relating to Great-West Life sale of its U.S. individual life insurance and annuity business.

We executed on non-commission expense control during the quarter and are maintaining our 4% growth guidance for full year 2019.

We repurchased 2.5 million shares during the quarter at a cost of $91 million, bringing our year-to-date repurchases to $100 million. And as a reminder, IGM received proceeds of $80 million during the quarter from our participation in Great-West Lifeco's [substantial issuer] bid.

Slide 8 highlights the performance of major equity and fixed-income indices. Since December 31 of last year, our clients have earned significant investment returns of 9%, including 1.3% during the second quarter.

Turning to Slide 9. Investors' confidence remained low as we entered the second quarter. The industry advice channel experienced long-term mutual fund net redemptions of $2.8 billion during Q2. That said, we began to see improvements in the industry flows during the month of June, which supports a more positive outlook for the remainder of 2019.

Turning to Slide 10, on our results for the second quarter. Average AUM increased to $161.8 billion, up 2.7% year-over-year. Investment fund net redemption is up $364 million compared to net sales of $171 million in Q2 2018.

IGM's adjusted net earnings were $193 million for the quarter, and adjusted net earnings per share were $0.81, up 15.7% from Q1 2019. We would note that our adjusted net earnings for Q2 2019 includes personal capital losses of $4.6 million and lower Great-West Life earnings due to true-up of approximately $3.8 million. Excluding these items, adjusted earnings were relatively in line with the second quarter of last year.

As I mentioned earlier, IGM's reported net earnings included an after-tax loss of $8 million or $0.04 per share.

Slide 11 contains the breakdown of IGM's quarterly results across all of our segments. You can see that the Corporate and Other is a key driver for the change in earnings versus last year, which is the result of lower proportionate share of associates earnings from Great-West Life and the inclusion of personal capital losses starting this year.

Turning to IG Wealth Management's Q2 highlights on Slide 13. AUM reached a record quarter end high at $90.2 billion, up 8.5% year-to-date, driven by strong investment returns for our clients. Net redemptions were $537 million during the second quarter, excluding $62 million of net flows into high-interest savings accounts. This is in the context of a low investor confidence as the industry remains [in net] redemptions. IG Wealth Management's gross sales stabilized during Q2, and the sales per consultant were up 10% year-over-year. The net sales trend also stabilized and is looking more favorable heading into the third quarter.

The improvement in gross sales is supported by success in the high net worth and mass affluent segments, which experienced a 15.6% increase in sales into our high net worth solutions. I'm also excited to share that the National Service Centre we launched in 2018 focusing on our mass market clients is now serving over -- servicing over 150,000 clients, representing over $1 billion in assets. This servicing center is resourced with a team of salaried, licensed financial representatives that help [then to] ensure we are providing our very best consistent service [level] to all households. This helps free up Consultants' time to acquire more high net worth and mass affluent clients, and servicing [exists] on households in this segment.

Turning to Slide 14 on operating results. You can see that IG's gross sales stabilized in Q2 and is in line with 2018. This is an important improvement from the trend last quarter. I'd also note that Q2 is typically a seasonally slower sales period for IG due to the expensive Consultant-focused events we hold during that quarter. As I mentioned, our reported net sales did not include flows into the high interest rate savings [and] accounts. We intend to expand our disclosures to include a view of total dealer assets administration and flows in 2020, corresponding to the introduction of the unbundled pricing for all where an advisory fee is charged on the AUA. We're optimistic investor sentiment is coming back, and we look forward to improving industry net flows in June. We're seeing signs of similar improvements at IG Wealth Management during the month of July.

Slide 15 highlights IG Wealth Management's long-term trailing 12 months redemption rate of 9.9%, which remains well below the industry average of 17.2%.

Turning to Slide 16. We continue to make progress in delivering better [beta] with our focus on managed solutions, which now represents 54% of our long-term AUM and 80% of our long-term gross sales.

High net worth solutions represented $46.7 billion in assets under management and 52% of total sales. As I mentioned, IG's gross sales into high net worth solutions increased 15.6% year-over-year. A key component of this increase is coming from the acquisition of new client households. Specifically, gross sales from the acquisition of new households with more than 500,000 increased to 14% relative to last year. As a result -- that result demonstrates our strategy in showing early signs of progress.

With that, I'll now turn it over to Barry to discuss the Mackenzie results.

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Barry Sean McInerney, Mackenzie Financial Corporation - President & CEO [4]

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Thank you, Jeff, and good afternoon, everyone. If you could please turn to Slide 18.

Mackenzie reached another record high level of investment fund AUM at the end of the second quarter of 2019, $61.4 billion, completing the first half of the year with a 10.6% increase relative to the end of 2018.

During Q2, Mackenzie also continued to gain market share versus peers in the advice channel, with total investment fund net sales of $284 million. Our retail investment fund net sales were once again strong at $392 million. This was our 11th consecutive quarter of positive retail mutual fund net sales and our 13th consecutive quarter of positive retail ETF net creations.

Mackenzie continues to deliver a solid investment performance, with 46% of our mutual fund AUM in 4- or 5-star rated funds as at June 30 of this year.

Slide 19 highlights Mackenzie's operating results for the second quarter of 2019. Mutual fund gross sales of $2.5 billion was an all-time record high Q2 results for us after adjusting prior periods to remove fund allocation changes. Total investment fund net sales were $284 million. Mackenzie continues to capture market share versus peers in advice channels as mentioned. Our long-term investment funds, which includes both ETFs and long-term mutual funds, had an organic net sales rate of 1.3% during the 12 months ending June 30. Our strong momentum at Mackenzie continued in the summer months, and IGM will report Mackenzie's July investment fund net sales results tomorrow.

We experienced $534 million net redemptions within institutional, sub-advisory and other line during Q2. This included the impact of recent sub-advisory changes at IPC and also includes approximately $200 million out of $1.3 billion of sub-advisory assets that are being internalized this year by one of our partners. The remaining $1.1 billion of low-fee funds is expected to redeem during the third quarter. The annual revenue impact is marginal at approximately $1.5 million.

On the positive side, Mackenzie has a number of institutional wins, totaling approximately $650 million across 3 strategies and 3 client geographies, mainly here in Canada, the U.S. and Europe. $150 million of these wins are already funded during Q2, and the remaining $500 million is expected to fund in the third and fourth quarters.

Details of our continued retail sales momentum are presented on Slide 20. Mackenzie's retail sales represented a 7.4% advice channel long-term mutual fund gross sales during Q2 versus 6.8% last year. Our retail gross sales capture rate improved across several categories, with a substantial increase in the foreign equity gross sales capture rate of 11.2% relative to 5.7% in Q2 of last year. And as I mentioned earlier, the second quarter of 2019 marked the 11th consecutive quarter of positive retail investment fund net sales. Both mutual funds and ETFs are attracting positive net flows.

Turning to Slide 21. Mackenzie's ETF AUM was $3.5 billion at the end of June. Our ETF assets continue to be diversified across strategy and client type, and retail makes up more than 50% of Mackenzie's ETF AUM. Traditional beta and active ETFs benefit from positive net creations, whereas our strategic beta products were impacted by advisory fee balance in the portfolios during the quarter.

On Slide 22, we take a look at the liquid alternative's landscape. While there's been many recent developments in the alternative investments based in Canada, most of the product solutions have been commonplace in the U.S. for quite some time now. In fact, the U.S. has experienced a 16% compound annual growth rate over the past decade, reaching approximately USD 700 billion in liquid alternatives this year. We're getting a lot of questions with liquid alternatives, and I wanted to draw your attention to our view that we see there being 2 distinct and notable subcategories: one, being liquid alternative asset classes; and the second, being liquid alternative strategies. Both these categories have an important characteristic in common, that is sources of return that have low correlations to traditional asset classes.

However, in Canada, it was only 15 months ago that Mackenzie broke new ground when it launched the first -- Canada's first liquid alternative strategies product to Canadian retail investors based on the regulators' alternative framework for conventional mutual funds. We now have a total of $1.1 billion of AUM across our liquid alternative products, and we foresee a significant long-lasting upside for liquid alternatives in our country.

On Slide 23, Mackenzie's long-term investment performance remained strong, further improving quarter-over-quarter on all the metrics highlighted on the page. Mackenzie's percentage of assets in the first or second quartile advanced quarter-over-quarter in each of the 1-, 3-, 5- and 10-year time periods. At the end of the quarter, we had more than 50% of our mutual fund assets above medium in the 1-, 3-, 5- and 10-year periods. And 46% of Mackenzie's AUM is in 4-, 5-star rated funds, the fifth highest in the industry.

And finally, on Slide 24. For Mackenzie, value-oriented strategies remained out of favor and continually remained out of favor during the second quarter. Mackenzie's growth-oriented boutiques continued to have a majority of their assets rated 4, 5 stars, and they're attracting significant net sales in the retail channel. Our global equity and income team and fixed income team are also performing very well.

With that, I'll turn it over to Luke to review IGM's financial results.

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Luke Gould, IGM Financial Inc. - Executive VP of Finance & CFO [5]

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Yes. Thanks, Barry. Hi, everybody. Over to Page 26. And on this slide, you can see our consolidated assets under management. I just remind that, as Jeff said, we had all-time record high asset levels, driven by continued investment returns of 1.4% in the quarter for our clients and 9% year-to-date. And that's informed our earnings result.

I'll turn to Page 27. We can see our consolidated EBIT and margins as a percent of AUM. Starting on the left, I just highlight, our EBIT of $276.4 million was up 15% from Q1. It was driven by higher asset levels, with average assets up 4%. It's also driven by lower expenses, which were down $15 million from Q1. As mentioned earlier, there are some timing-related [items to the] expenses as we focused on initiatives. And I'd also reinforce that our full year guidance of no more than a 4% increase for IGM and our major subsidiaries is staying at -- it's staying in place.

On the right, you can see our net management fee rate of 1.22% was stable, and EBIT margin of 57 basis points was up meaningfully due to the expense of the clients.

I'd also say, at the onset, during that -- we did introduce our previously announced high net worth fee reductions at IG during the first quarter, it was actually March 1 of 2019. And I think [somebody's been expecting] lower management fees than [we] reported. So we did announce that there'll be a 3-basis point reduction on IG's fee rate upon these changes. But I'd also highlight 1/3 of it was felt in Q1 and the remaining 2/3 felt in Q2. So I think people are expecting slightly lower management fees, but this is our current run rate that you're seeing here.

I'd also highlight that in the case of Mackenzie, we are seeing strength in retail and strength in equities, which is putting upward pressure on the weighted average [free] rate.

Page 28, I'll make a few additional comments on the consolidated income statements. First, as Jeff highlighted, if you look at the proportionate share of associates' earnings, you can see we had $28.2 million in this line. This is largely our share of Great-West Lifeco's income, our [folks that] share. And I will remind that each quarter's results reflect analysts' estimates of Great-West Life's earnings and the true-up from the actual of the previous quarter. And in this period, we did have $4 million of negative adjustment, and excluding that, the result would have been $32 million.

If you go all the way to the bottom, I'd also remind that we did do some financing activities in Q1, and we did retire our preferred share issue of $150 million. You can see perpetual preferred share dividends has declined from $2.2 million a quarter to 0. And I note that the impact of that refinancing was a $6 million annual benefit, and we're starting to see that in Q2.

And I'd also remind, in the second row from the bottom, we did buy back $100 million worth of the common shares. And the impact on our average shares outstanding was to reduce that balance by 1% in the quarter.

Moving to Page 29. I don't have many comments on the fee and the compensation rates for IG. I would just remind that at the top left, you can see the weighted average management admin fee rate. It's 199.3 basis points. This is down 2 basis points from last period. And again, we signaled that the high net worth pricing adjustments would have a 3-basis point impact, 1 basis point of that was felt in Q1, with the remaining 2 basis points felt in Q2.

Moving to Page 30. You can see IG Wealth Management's income statement. I commented on management admin fees on the last slide. I would highlight IG's earnings were up 19% from Q1, driven by higher asset levels and lower expenses. I think there's noteworthy items in distribution fee.

You can see we earned $44.6 million, up about $4 million from last quarter and $4 million from last year. That is as a result of higher insurance sales, which we think is favorable. And I'd also remind that a large part of that is paid out in compensation expenses. And you can find that in asset-based comp [and] other. I'd also highlight that in point 1 on this slide, you can see sales-based commission expenses which [will now] expenses incurred for large part of our sales commissions. It's down from last quarter due to a lower sales level, primarily due to seasonality.

And then lastly, non-commission expenses, $152.9 million, was up 4% from last year. And this is consistent with our guidance for the full year.

Page 31. Moving there, you can see Mackenzie's fee rates and asset levels. I just remind that at the top left, net revenues were 79.6 basis points, up slightly from last quarter. We did highlight last quarter that we paid a quarter of the asset-based comp in Q1, in spite of earning 90 over 365 on the revenue line. So that does impact the rate. The other, I think, impact that Barry mentioned was real strength in retail and also strong investment returns on the equity component in Mackenzie's AUM.

Moving to Page 32. You can see earnings before interest and taxes from Mackenzie were up 24.8% relative to Q1 due to higher asset levels and lower expenses. I would remind, if you look at the net investment income and other line, that Mackenzie did enjoy really good investment returns on its fee capital in Q1, and we experienced a lower return during the second quarter.

I'd also highlight non-commission expenses of $84.8 million were stable from Q2 of 2018. However, there is some timing there, and we do expect that full year, Mackenzie will be up 4% from 2018's level.

And then turning to Page 33. We've added a new slide to walk you through some of the activities in the quarter and our strategic investments. The first point I'd highlight is we did invest $11 million in Portag and $18 million in WealthSimple in the quarter. You can see that [aggregate] to $29 million in the top left. So as [we are closing] the quarter, Wealthsimple that -- we did have a funding round of $100 million, which we participated in and did include a third-party being Allianz. We marked up, you can see in point 2, the value of our investments by $24 million, and that reflects the subscription price in this funding round. And importantly, you can see we are carrying these investments at a fair value of $285 million. And I'd also remark Wealthsimple continues to do very well. I hope all of you have seen their advertisement in the marketplace. They now have over $5 billion in assets, which is an increase of over 90% in last year. And they have 150,000 client relationships and growing. So the investment's been going very well.

I'd make a few remarks on Personal Capital and China AMC. First, that we -- that reflected the strength in the Canadian dollar, and we've highlighted that in points 3 and 4. And I'd also remind that we got our annual dividend from China AMC of $8 million during the quarter. And you can see on the right, these investments are worth $200 million and just under $700 million, respectively. So it is a significant amount of value we have in these investments.

And then lastly, as it relates to our investment in -- our 4% [staking grade] with Lifeco. We did tender proportionately to their substantial issuer bid. You can see the proceeds received of $80 million. And I'd remind 2 things. One, we used the proceeds to repurchase $100 million of IGM common shares in the period. And I'd also remind us that this investment is worth $1.1 billion on IGM's balance sheet. And if you look through our balance sheet, you'll see additional excess capital that is [viable].

That concludes my remarks, and I'll turn it back over to Keith.

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Keith Potter, IGM Financial Inc. - SVP Finance & Treasurer [6]

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Patrick, I think we're ready to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Gary Ho with Desjardins Capital Markets.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [2]

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Just wanted to start off and get a bit more color on the commission expense line. Maybe help us think through kind of the change from Q1 to Q2 [to a drop that we saw] . Kind of what items drove that and will those reappear in the back half of 2019?

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Luke Gould, IGM Financial Inc. - Executive VP of Finance & CFO [3]

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Yes. Thanks, Gary. It's Luke. So your question was on noninterest expenses. Yes. As indicated last year, we had some technology initiative expenses that drove it up in Q1. So it's about, what, timing. Those expenses fell off as well as some of the quarterly or seasonal brands and marketing cost in Q1. So those are the 2 biggest components. And we also disclosed that one of the initiatives in particular that drove expenses was what we're calling our advisor portal at IG Wealth. And so that is actually the launch of Salesforce, and we're on track on how that rolled out during 2019. I'd also reinforce as far as full year spend, we are sticking to our guidance of being up no more than 4% year-over-year. And there may be -- it's hard to predict Q3 versus Q4, but full year, we're very confident with that guidance.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [4]

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Okay. That's helpful. Maybe second question, just switching gears a bit. Want to get some perspective on the management fee rate. It does feel like the magnitude of fee cuts from the industry have slowed in the first half of this year versus 2017 and 2018. I guess firstly, is that a correct observation? And second, how's the competitive environment out there? Have there been players that's been more aggressive on prices, et cetera?

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Barry Sean McInerney, Mackenzie Financial Corporation - President & CEO [5]

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It's Barry. Great question. So we're constantly monitoring our pricing at Mackenzie, and Jeff will speak to IG. At Mackenzie, being competitive. We feel pretty good, still. Made some moves, as you know, a few times last 3, 4 years. We're always -- I think going forward for the next little while, probably pretty much as, maybe a little about housekeeping and tweaking here and there, but we're always monitoring it. So have we seen a slowdown a bit, there probably was -- sometimes there's price reductions across the industry, and sometimes it's not as active. But we're just monitoring, and we're feeling good. And we're competitive. So that's about it for us in terms of long-term trends. We'll just keep watching it and make -- ensuring we're competitive for -- lead on performance and being competitive in price.

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [6]

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And as you know, we've made some pricing decisions earlier. And so very good in where we are for high net worth, which is what we're really trying to grow in. And we're as competitive as anybody in the industry when it comes to that.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [7]

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Okay. And then just my last question. You talked about the $80 million investment in Wealthsimple in the quarter. Can we get an update on that platform as well, kind of maybe relate that to the discussions around kind of use of the capital? Appears you've slowed down your buybacks considerably after spending $90 million in the quarter. If it's not buybacks, what is management considering?

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [8]

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Well, we've got a number of options based on Personal Capital and Wealthsimple's development and continue to monitor their success. And as you can see, they're growing -- both of them growing significantly. And so we're just monitoring those developments. And as we see opportunities, we'll put the capital where it's most effective for our shareholders.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [9]

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And what do you think about the current dividend level at this point?

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Luke Gould, IGM Financial Inc. - Executive VP of Finance & CFO [10]

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We're comfortable with where we are. We obviously -- overall, everything we're doing is to being able to increase our dividend over time. But we've got these great opportunities right now, and we want to make sure that we continue to develop them.

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [11]

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Yes. I think, Gary, in the past, we've given that clear guidance. We're here to grow earnings and we're here to grow our dividends. And we've been targeting a dividend payout rate of 65%. And when we've reached that level you can expect that increases.

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Operator [12]

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(Operator Instructions) We'll take our next question from Geoff Kwan with RBC Capital Markets.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Jeff, just maybe to start, and I just want to make sure I understand your comments around the net sales environment. So with the industry sales, look like they may be getting better. You were kind of talking about the improved sales of the Consultants and also, obviously, the push in the high net worth side. So kind of putting that all together, does it feel like, [based] on your crystal ball, that we should see, after we just had seasonality, some improvements in that net sales performance line in the coming months?

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [14]

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Absolutely. We've got -- a lot of our initiatives are starting to come to fruition, and they're all to make it easier for our Consultants to do their best every day. And so there's number that we've done products are doing really well. We've got some new capabilities that we've brought in, new manufacturers globally that we're using. And I think our organization and our Consultants feel like they never had more tools than they have right now. And we still have a lot of work to do to go forward, as you know, in our overall implementation. So we got momentum, and we're going to continue to build on it.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Okay. And just my other question was for Barry. So I missed all the numbers you were talking about, when you're talking about kind of the institutional and other line on the net sales. Was -- did the announcement from IG on the MD management's changes that they made, was that the $200 million that you were referencing? I'm just trying to get a sense as to the puts and takes on the net sales in the pipeline and ultimately your comments on the revenue impact.

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Luke Gould, IGM Financial Inc. - Executive VP of Finance & CFO [16]

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Actually, it's Luke. I'll take that one, Jeff. So I think Barry identified that, as it was previously announced, there was a change at MD. So Mackenzie is losing -- or has lost now in July, $1.2 billion. The revenue impact is de minimis, and think $1 million a year, given the nature of the mandates and what that business was. And Barry also highlighted that $500 million in wins in the institutional business that have been won and we'll be funding over the coming months. And I think Barry, you identified there's 3 clients in 3 geographies and a couple of our boutiques [who won it].

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Barry Sean McInerney, Mackenzie Financial Corporation - President & CEO [17]

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Yes. Yes. It's actually pretty exciting. We're taking a very focused approach in selling our institutional products here in Canada and U.S. and Europe. And so we picked up a win in each country and different mandates, too [across] our boutiques. So yes, that will nicely offset any reduction from the MD redemption, which was expected.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [18]

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Okay. So I just want to make sure I've got that, and I guess I had the wrong number. So July's numbers will see the $1.2 billion outflow, but it's only $1 million a year in revenues but you're picking up $500 million wins some time in the coming months. And then from a fee perspective, were those -- [what] types of mandates should see a bit of a nice tick-up on the management fee line?

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [19]

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You got it right, Geoff. Yes, the average fees on the new wins are higher than the assets that we lost. Yes.

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Operator [20]

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We'll take our next question from Graham Ryding with TD Securities.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [21]

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Maybe I could start with IG. Just an update, you know that the expanding initiatives, just an update maybe on where you're at with some of those key projects and what's coming through.

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [22]

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Yes. We're coming through. It's been great projects. So we've got digital capture, that's already happened. We've got a number of initiatives coming out shortly. We're working very closely on our Salesforce launch, which will give our Consultants a digital experience for them. And it's going to create -- drive great productivity. So those are all [in-flight] and will start having impacts in this couple -- next quarters.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [23]

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Okay. Got it. And then sticking with IG. It looks like the gross sales are actually sort of matching last year's level, which is probably not that bad, given the volatility we saw come out the end of last year. But it's actually more of a redemption. So I was just wondering if you could give any color on why gross sales are holding in, but why redemptions are picking up at IG.

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [24]

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We just went through the volatility that everybody else did. It hit us a little bit harder, but we're back where we were, so it was just a little bit of a blip. But we're in good shape. And we've got a number -- we have more Consultants having programs in their own areas that we've never seen before. So there's a lot of activity in the field. They're very energized, they've got new tools to work with, and they're feeling good. So I expect that we'll continue to see significant growth. And then see the 14% increase in sales for high net worth, I think it's starting to show that segment that we really wanted to win in [the] long [term], is starting to have its fruition, and we can't wait to see that grow going forward. And that's without all the other capabilities that we're going to be bringing to them. So lots of good momentum, lots of energy in the field. They're feeling good.

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Luke Gould, IGM Financial Inc. - Executive VP of Finance & CFO [25]

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I think -- so we saw the improving investor confidence in the industry in June, and that's continued in July. So the sales story is good. It's been stable. And Consultant productivity is actually up by 10% from last year in Q2. So we've seen them enter the field. But now redemptions, we saw that stabilized in June, for IG, and we saw it stabilized for the industry. And we highlight for July, that's continued and has been more favorable. We do have positive net sales in July for IG and are announcing that, too. So we're seeing the trajectory turn the other way.

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Operator [26]

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We'll take our next question from Tom MacKinnon with BMO Capital Markets.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD & Analyst [27]

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Question for Barry. On Slide 21, when you outlined these ETF net creations, generally, we've never seen anything below the line here, and now we've got some of that in the second quarter. Do you think this is becoming a trend now? People just recycling through ETFs rather than just kind of always adding to them? Or is it -- or is this some -- is this just sort of a blip that happened this quarter? Just trying to think what's your -- what you see going forward with respect to the strategy on the second quarter.

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Barry Sean McInerney, Mackenzie Financial Corporation - President & CEO [28]

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Yes. No, it's a good question, Tom. It's the latter, so blip. So we -- you see we've had good flows if you just look at this year, we got good flows in Q1 and Q2. Actually, the flows were fine, but we -- now we're getting to a certain size that we -- sometimes, the advisors are rebalancing, just from an allocation perspective. And so that might rebalance out of an ETF we have and into an asset class where we don't have an ETF. So that was -- it probably goes with getting -- to be getting bigger and have more and more clients. So you'll -- not a trend at all. And you'll see the July numbers, obviously, everything just reversed back very, very strongly. So we're very keen on ETF. The industry is growing, we're gaining market share. We started to launch a new one. Now we want to take a little bit of a breather and build up more scale in our existing ETFs that we launched in our emerging market last week, with hedge, and we have more coming rest of the year. So we're really excited and getting some more flows. Obviously, retail is doing well for us. We're getting some institutional wins that you'll be hearing over the next coming months. But that's a fair question. Thank you.

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Operator [29]

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(Operator Instructions) We'll take our next question from Scott Chan with Canaccord Genuity.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [30]

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You talked about capabilities a couple of times. And maybe can you just kind of expand on that? And you talked about new mandates and kind of what's going on and some of the progression that you've kind of made year-to-date on that and maybe what to expect over the next several quarters.

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [31]

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Can't hear that very well. Could you repeat that?

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [32]

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So you talked about IG's new capabilities a few times. And I was just wondering if you could expand on that. You also talked about new mandates. Obviously, lots going on, probably internally that we don't see. And perhaps just an update what's going on recently, and perhaps over the next several quarters, what to expect.

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [33]

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Yes. I mean we've been doing a lot on the product side, as I mentioned, working with some new partners to build out and give their clients more breadth of opportunities and help Consultants with some really talented capabilities. So we've been working with large organizations and as they're now into the products and that they are available to the Consultants. And so we'll see that grow as we go forward and make sure that they are armed with the best possible skills and talents in the world. And so we work with the global firms and obviously with Mackenzie and others. But we've got a shelf that's becoming very competitive and it's really energizing the Consultants.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [34]

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Okay. Great. And just Barry, just on liquid alternatives. I kind of looked at the U.S. stat that you guys kind of cited. Obviously, it's grown to $700 billion. You guys were at $1.1 billion. Do you know how big the industry is in Canada? I know it's relatively new. And just trying to get a perspective on kind of where Mackenzie sits relative to the industry right now, if you have that...

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Barry Sean McInerney, Mackenzie Financial Corporation - President & CEO [35]

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Yes. And it's interesting, if I can just make a comment on the U.S. and I'll get back to Canada in a moment. We need to -- we want to parse out the data ourselves [via] the Slide 22 on the left, between the 2 types of liquid alternative offerings. And so the liquid alternative strategies are what everyone's launching effective first of this year because the regulators [are allowing a number of shorting] within the mutual funds. So those are alternative strategies. Last time, we looked at -- it's growing industry-wise, quite well. I think it's -- I don't think the numbers are precise, maybe $4 billion or $5 billion or so, maybe, in terms of that industry, that part of it. There's -- we probably [effectively] as an industry need to measure like they have in the U.S. [And] Canada, the other types of liquid alternatives listed infrastructure, REITS, commodities, et cetera. So [they're not launch register]. Shorting is more of the replicating in illicit fashion real assets that allow the ultra-high net worth and the large institutional investors. So we don't have precise numbers on that. So -- but we did want to highlight those 2 categories. As you can see how they've grown considerably last 10 years in the U.S. And I was there when it was happening. And there are just really good diversified sources of return for the retail investors. And they're obviously liquid and daily valued -- not the direct investments, but these are again liquid alternatives. So probably good for us as an industry in Canada to track both types. But the type that we're most talking about are the new ones, [jan first] regulatory allowance of liquid alternative strategies. And we've seen some numbers, probably $4 billion or so already. There's a number of experts that felt that liquid alternatives could grow to $100 billion in Canada, in short, or roughly 10% of where the U.S. is. And that would be good for the industry, good for the asset management industry. They're healthy fees, and most importantly, they're good for Canadians because they really do offer nice diversified returns for portfolios.

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Operator [36]

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We'll take our next question from Paul Holden with CIBC.

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Paul David Holden, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [37]

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So maybe to just continue the discussion on liquid [hold] and including both types to start with. What extent are you using these products in your managed solutions? And I guess both for Mackenzie and for IG product as well.

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Barry Sean McInerney, Mackenzie Financial Corporation - President & CEO [38]

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Yes. So it's a good question. So our current offering, I'll start with the liquid alternative asset classes. For Mackenzie, that's just our MDAF, Mackenzie Diversified Alternatives Fund. It was launched it 4 years or so ago. It's up to $650 million or pushing $700 million. It's growing very, very nicely for us. That's really mostly a -- just a completely external sale as opposed to being used in-house because we have yet to develop component parts, and that's something that we're looking at to see if we have component parts of that. Then in the Mackenzie PMs, we can use the components parts for exposure that they need. Now on the liquid alternative strategies, our main offering there is MSARF, we have a lot of acronyms here, that's the Mackenzie Strategic Alternatives Return Fund, MSARF. That we also have launched earlier this year, some of the sleeves of it. And so that is being used internally mostly by our multi-asset teams and is being sold externally, too. So we could get you the breakdown, but I just wanted to your point, the alternative

(technical difficulty)

[

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Paul David Holden, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [39]

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]would benefit from 5% to 10% allocation to incur related assets such as alternative strategy. So it seems like it's an easy win-win for the company and for investors. So...

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [40]

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I can comment on that, and it's Jeff Carney. I was actually -- when we launched the absolute return funds there and it was early days. We'll be looking at these products as well. It's just how we use solutions. And so we complement with other products and it's just demand and it's really timing.

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Paul David Holden, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [41]

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Okay. Got it. Other line of questioning. One Of the sources of institutional sales from Mackenzie was in Europe. So I think that's maybe one of the first times I've heard about European sales for Mackenzie. So maybe any kind of color you can give us on the size of that business today, whether it's significant or not, and if that's maybe somewhere where you push harder to grow in the future.

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Barry Sean McInerney, Mackenzie Financial Corporation - President & CEO [42]

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Yes. So it's our second major win. It has been a couple of years since we won a large mandate for a pension plan here. This one is more of a investment outsourcing platform, a global platform, where the client, the [PM] overseeing that particular strategy for this client, is located in London. So it's the [strategy's] emerging market equities. So it's nice margins to it. And what happens in a lot of these platforms, as you're probably familiar, once they get comfortable with one of your strategies so we're having dialogues now with them for other of our strategies because they like to have multiple strategies per asset manager as they get to know us. So we're trying to be very selective because we identify those strategies that we have on the retail side run by our 14 boutiques in Mackenzie that are of institutional quality -- [are of enough] interest [to our] institutional investors. So a handful of them -- they vary, by the way, by regions. So those that we -- vary from the U.S. and vary from Europe. But we're getting pipelines growing, we're getting [finals] and we picked up 3 wins. So yes, so you'll hear more wins in each of the geographies. But surprisingly, the wins have been -- that we have are spread out between the 3 geographies. So right now, we're -- that win -- the recent win, puts us at about $800 million in institutional AUM in Europe, so. And then we've got growing presence in U.S. and here in Canada.

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Paul David Holden, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [43]

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Got it. That's helpful. Last question is regarding non-commission expenses. So 2019 is supposed to be -- expected to be the last year, let's call it, of above long-term run rate expense growth. So expectation is down to 3%, I think long term. So I just want to confirm that that's on track in terms of you completing all of the additional project spend you expect in 2019. And then also, any kind of progress update that you can give us on the work Mike Dibden's team has been doing to help [find expense efficiencies.]

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Jeffrey Robert Carney, IGM Financial Inc. - President, CEO & Director [44]

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Yes. It's been a long journey. Hard work to get to this place where we're at. We are absolutely committed to the 3% in 2020, and we'll see where we go from there. We got a lot of work that Mike Dibden's been working on, and he's busy doing that. And we're starting to see the fruit of his work. And that will start having an impact on our value proposition, and that will drive our -- increase revenue as we go forward. So we're -- we feel like we're in a very good place. And the most important thing is our Consultants are really excited about all these new tools that are coming to them. And they're starting to see it, and they're feeling positive in that direction.

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Operator [45]

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That concludes today's question-and-answer session. Mr. Potter, at this time, I will turn the conference back to you for your closing remarks.

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Keith Potter, IGM Financial Inc. - SVP Finance & Treasurer [46]

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Yes. Thank you, Patrick, and thank you for those attending the call. I hope you enjoy the upcoming long weekend. And with that, we'll end the call.

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Operator [47]

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The conference has now ended. Thank you for your participation. You may now disconnect.