Q2 2020 IGM Financial Inc Earnings Call
[music].
Thank you for standing by this is the conference operator, welcome to the I GM financial second quarter 2020 earnings results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
Sure the presentation, there will be an opportunity to ask questions.
To join the question to you May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I'd now like to turn the conference over to Keith Potter Treasurer, and head of Investor Relations. Please go ahead.
Thank you and good afternoon, and welcome to like International 2020, <unk> second quarter earnings call. Joining me on the call today, our job Carney President and CEO abide you wealth management, and President and CEO by Jim Financial we have very mcinerney, President and CEO of Mckenzie investment and look cool exactly.
President and CFO will abide yet financial <unk>.
Well, we get started lucky draw your attention to our cautions concerning forward looking statements on slide three of the presentation.
On slide four summarizes not for us financial measures used in a material and on slide five we provide a list of documents that are available to the public on our website related to the second quarter results for <unk> financial and with that I'll turn over to Jeff Party.
Thank you Keith and thank you everyone for joining us today, we're still living an interesting times and I hope all of you are saying well.
Hi, Jim financial we continue to keep our employees advisors clients and communities at the center as we navigate these unprecedented times Ur Cobot 19 has impacted so many.
We continue to implement the initiatives we spoke about on our last call to support and connect with these groups and are responding as the environment evolves.
In the financial markets over the last four months, we've witnessed recovery. It was almost a swift and extreme that's a sell off that took place in February and March.
Meanwhile, the covert 19 pandemic continues to impact of ice Canadians everyday and we continue to focus on ways. We can help.
Turning to slide seven on trend on Q2 2020 highlights for RG I'm.
Total anyway, and anyway were both up approximately 12% during the quarter.
Reflecting strong net sales in client investment returns.
Investment fund net sales of 864 million are up significantly.
<unk> net redemptions at 364 million last year and overall total net sales were 3.4 billion, including strong flows in the institutional business at Mckenzie.
Hi, James Q2, 2020 earnings per share were 77 cents up 13% relative to the first quarter driven by strong expense management and higher earnings from associates.
Luke will speak to the non commission expense guidance in his remarks.
Late in the second quarter, we announced our Jamel sell its equity interest in personal capital to empower retirement for 239 point sixmillion with upside through an earn out of up to 33.4 million.
Mpower as a subsidiary of our sister company aggressive great West life call and is the second largest retirement service provider in United States.
We've been very pleased with the growth of the company and our contributions to its strategic development through our engagement over the last four years.
Our economic gain.
Based on the cost of our investment will be approximately 50.5 million.
To an additional 333.4 million from an earn out.
These amounts are subject to currency fluctuations.
Personal capital remaining rent the power group of companies as a great result.
Power is the right home given the significant synergy potential.
Try to check the transaction is expected to close in the second half 2020.
We're also excited about the most recent announcement to acquire GLC asset management.
Which will add to Mckenzie scale and expand our distribution reach.
Barry will speak to this in his comments.
Slide eight highlights the performance of our major equity and fixed income indices.
Q2, 2020 saw strong equity markets increases and majored in indices with lower volatility.
Fixed income also posted strong positive returns.
Hi, Jim clients benefited from this with an average client investment return at 9.7% during the second quarter.
The month of July added further positive return of 3.2% with clients on average for the recovering the Q1 2020 declines as of July 31st.
[laughter].
Turning to slide nine the industry experienced long term mutual fund net sales of 6.8 billion. During Q2 2020, an improvement from 1 billion net redemptions last year.
The industry. It advice channel net sales were 2.4 billion during the quarter.
Turning to slide 10 on our results for the second quarter average age <unk> of 159.2 billion decreased 1.6% year over year.
Investment fund net sales of 864 million during Q2 2020.
We're a strong improvement over net redemptions at 364 million last year.
As I mentioned, our Gms Q2, 2020 reported earnings per share of 77 cents, we're up strongly compared to the first quarter.
Slide 11 contains the breakdown of our Ijames quarterly results across our segments will discuss the AG wealth management and Mckenzie segments in detail on the coming slides.
Turning to actually wealth management's Q2, 2020 highlights on slide 13.
Anyway at the end of June was 93.6 billion up 9% during the quarter.
Has that July 31st are you a is now 96.9 billion up 3.5% during the month.
Hi, GE is Q2 net client flows were negative 62 million.
As a reminder, Q2 is a seasonally weak in the terms of net flows.
In the quarter Canadians, who are less likely to change financial service trips riders the consequences that gross sales and redemptions are both down noticeably, but our net flows are up over 400 million relative to last year.
We continue to build our financial planning capabilities in the quarter with the completion of our advisor portal roll out.
We've also partnered with conquest planning to deliver enhanced financial planning software capabilities, which are expected to be rolled out starting later this year.
Finally during May we launched a new program to support Canadian small and medium sized businesses and their communities as they navigate the covert 19 crisis. This campaign includes no obligation consult stations to business owners and matching dollar programs available to our consultants for support provided.
And communities across Canada.
Slide 14 highlights clients flows and anyway. These metrics incorporate our internal funds and third party investments such as high interest savings accounts cash third party funds and stocks and bonds.
Gross client inflows to Archie wealth management were 1.9 billion in the quarter.
Annualized a redemption rate for the second quarter of 2020 was 8.7% down noticeably from 11.5% in 2019, reflecting strong client and asset retention at RG wealth management.
As I mentioned earlier net flows improved by over 400 million year over year, driven by lower redemption activity.
Slide 15 shows RG wealth management's last 12 month trailing anyway redemption rate at 10.2%, which improved through the second quarter.
Slide 16 includes some additional perspectives on Q2 2020 gross sales.
Managed solutions continue to represent 80% of our long term growth sales over the last 12 months.
Sales into our high net worth solutions were point 9 billion or.
The change relative to 2019 was in line with a total gross sales.
With fewer Canadians changing financial institutions during the locked down we've been very pleased as our teams continue to deliver on our promise to existing clients and demonstrated an ability to acquire new high network clients in this environment.
Turning to slide 17, as we discussed on prior calls.
And attracting a higher portion of experienced advisors have included this group, but then the consulting practices category, which increased to 1800 and 43 this quarter.
As I mentioned these consulting practice has continued to have success during the 10 dynamic with Q2 productivity up relative to last year.
I'm pleased to see this result, considering the change in our consultants operating environment and the impacts of the pandemic and there is having on our clients and our prospects.
Turning to slide 18, starting in Q4, 2020, Fiveg will be introducing a new financial planning collaboration to all created by conquest planning that will further enhance archive could capabilities.
We're taking something that is more time consuming today, and making a digital streamlined and more engaging.
The software allows clients and advisors to make real time updates.
She plans and the easy interface will make it simple for our clients and consultants to collaborate remotely.
Advisor portal launched in Q4 2019, and the rollout is now complete.
As a reminder, the advisor portal is the new customer relationship management platform powered by says Salesforce that enables our consultants to be better.
Manage their clients relationships and boost prospecting.
Improve efficiency through digitize workflows and access data driven reporting to help better run their practices.
Turning to slide 19 during the quarter I'd, you wealth management launched answering the call a new program to support Canadian small and medium sized business owners and their communities as they navigate the financial challenges presented by the covert 19 crisis.
As part of this initiative, we're bringing our greatest strengths as our financial planning experts to serve business owners. During this ongoing crisis with free one on one consultant patients and webcast.
Answering the call initiative was inspired by the Fantastic work RG consultants have been doing in their own communities since the crisis began.
I will now I'll turn it over to Barry to cover Mackenzie update.
Thank you very much Jeff and good afternoon, everyone.
If I could turn your attention to slide 21.
Earlier this week, we announced an agreement whereby Mckenzie will acquire GLC asset management group from kind of like.
$175 million in cash consideration.
This transaction further solidifies Mckenzie position as one of China's program that investment managers with 172 billion in the U.M., which includes the existing 67 billion in assets of advice <unk> wealth and an additional 36 billion of GLC assets.
I can't say will become the core investment advisor to kinda like individual and group product offerings that will be a top trigger wider.
Is your services in the fast growing group channel, which is made up of defined contribution plans another group retirement offerings.
Further out.
Sure investment capabilities, including a brand new obtained equity boutique.
Expected GLC acquisitions to add annualized run rate earnings before tax of approximately $20 million.
As part of the arrangement Mckenzie will sell but on contracts ratings show the private label Quadras group of funds to a candlelight subsidiary the $30 million in cash consideration.
The Congress funds currently have 7 billion assets I wish Mckenzie advisors to approximately a two and a half billion today.
Mackenzie, but continue to provide administrative services to the on family and will be position as course of advisor to platform.
Kind of like will assume funk oversight responsibilities.
The purchase price was established having regard to lost oversight fee revenue.
Ken Zener, approximately 10 basis points per year on the enforced block requires that you EM.
The transaction is expected to close by the end of 2020, there will be accretive to 2021 earnings.
I'll begin my comments on Mckenzie is Q2 2020 results on page 22.
The Q2 financial market increases that Jeff spoke to earlier combined with strong net sales drove mckenzie its toll.
Up 16% to 73.2 billion on.
On a year to date basis total AUM is up 4.3%.
We saw Mckenzie increase so are there a 3.6% certain them off the July.
Positive investment returns and strong net sales.
We continue to gain market share with strength in retail and notable traction in the strategic alliance and institutional channels.
The second quarter of 2020 saw record high net sales of 3.6 billion on Mckenzie.
Investment fund that sales were 1.1 billion, excluding investments made by hygiene <unk> mutual funds into Mckenzie yeah.
Our retail investment fund net sales were positive 439 million in the quarter remark, the 15 and 17th consecutive quarter a positive retail net flows for mutual funds and each yes, respectively.
And these investment performance relative to peers remains strong in the second quarter with 55% Mutual fund you add in four or five star funds as rate by Morningstar.
Slide 23 highlights Mckenzie is operating results total mutual fund gross sales were relatively unchanged year over year at two and a half billion. However, we didn't see a slowdown in retail gross sales consistent with industry trends, Jeff spoke to earlier.
Record high total net sales of 3.6 billion included positive contributions from our retail strategic alliances and institutional channels.
I can't these long term investment funds net sales rate was 4.2% during the 12 months ending June 30 up to 2020.
Investment fund outflows of 226 million in July.
So very solid doesn't mean that some continues.
Mckenzie said attritional that sales of two and a half billion reflected by number of wins over an extended period that all happened to onboard in Q2 2020.
These wins included global equity U.S. equity fixed income and currency overlay strategies.
That's not our may call approximately half of the two and half billion related to the currency overlays Traci, where investment advisory fees are typically lower.
Alright additional pipeline continues to be strong with additional wins expect the fun during the second half of year.
Our retail results are highlighted on slide 24 as mentioned in both mutual fund any she has attracted positive retail net flows during the second quarter.
Retail flows remained strong across most asset classes and 47 million increase relative to last year was largely driven by higher flows into income oriented mutual funds and each yes.
Turning to slide 25 positive net creations drove Mckenzie <unk>, you up 26.4% during the quarter to 6.6 billion and we surpassed 7 billion. During July net creations included 221 million in retail distribution, which is the strongest result for the past here it was driven.
Sales into active fixed income each yes.
To still channel also contributed 460 million to Mckenzie outflows during the quarter, which includes approximately 390 million generated from the two Sri products launched in partnership with wells simple during the month of Joe.
On slide 26, we cover a few key suggest sticks, demonstrating mckenzie strong investment performance.
To date 2020, Mackenzie had 80% of its mutual fund assets in the first or second quarter child for all series types and 89% for series Huh.
Turning to the medium and long term metrics presented on the slide at the end of June 78% Mackenzie is mutual fund assets were above media for all series over the past 12 months.
57% of assets for the first or second quarter over the three year period, and 67% over the five and 10 year periods.
Looking at Morningstar ratings, Mckenzie has 55% of fund assets and four or five star rated funds and out of our 20 largest find the 17 are in four or five stars for series F.
Seven of those ARIA five star.
Turning to slide 27, you can see the strong morningstar ratings across a number of our investment teams, including the growth Blue water resources global equity income and fixed income boutiques. These teams and others delivered strong short term performance noted by six month and one your asset way to percentiles, the IB team global quantitative Echo.
The team and the multi asset strategies team all had strong year to date performance.
Switching gears a bit like 20, a highly favorable trends, we're seeing in the Chinese asset manager industry or China AMC operates.
At GM and Mckenzie, we've been following the asset management industry in China for a very long time.
As many of you will recall, we acquired 18.9% equity interest in China AMC in 2017 alongside Powercore.
Collectively the power group of companies owns 27.8% and Citic securities on 62% I'm trying to AMC.
This decision to take a strong minority interest in a leading Chinese asset manager and to find a strong local partner like Citic Securities followed careful consideration of the best way to participate in the secular trends set to drive this indices rapid growth.
Three years later, we believe the Chinese mutual fund industry has reached a notable inflection point.
Well money market funds have experienced growth for sometime now industry watchers I've been waiting for signs a meaningful growth in the long term fun categories. The Chinese capital markets continued to strengthen.
Industry, a around now stands at 9.3 trillion Mb, but money market funds are excluded.
A staggering 55% during the last 12 months and doubling in under four years.
For some perspective on how China AMC fits into the industry landscape. Our recent report from the intelligence provider has that been advisors range trying to AMC in a top too in terms of market share and the company has the maintaining their leading market position as the industry grows.
Turning to slide 29, China, Mcs and U M and earnings growth is consistent with these positive industry trends, but June thirtyth AUM up 36% year over year in Q2, 2020, net earnings increasing 29% relative to last year.
Really look forward to providing updates on trying to AMC are they coming years as our thesis on this important strategic investment continues to play out.
I'll now turn it over to look.
Thanks, Greg good afternoon, everybody.
I'll turn to page 31, I think very injected a good job highlighting the components of the 12% growth that we had in the U.M. in second quarter on this slide I'd highlight two things on the left first you can see that due the timing of the significant recovery in financial markets that are average assets in the period was actually down 4% from Q1 and 2% from Q2 19.
We've highlighted the further improvement in our asset levels. So far it during Q3, increasing by 3.5% in July two 170.7 billion and I'd just remind everybody should remain at these levels or average balance in Q3, 2020 will be a record high and we will be an increase of 7% from the average balance in Q2 2020.
On page three too.
I'd highlight that while our average assets were down relative to Q1 earnings were up 13%.
I can see here with the 258.9 million in.
Adjusted earnings before interest and taxes.
That a large part of the growth over Q1 was the expense management with our non commission expenses being reduced about $60 million relative to Q1 I'd also highlight the second stack from the top at 58.6 million and is that investment income and share of associates earnings I'd, just highlight and remind that this this line.
Flex our proportionate share of where it was like earnings.
Fortunate sure China, AMC earnings, which Barry just spoke to Andrew proportionate share personal capital all of which are up.
On the right the only comment I'd make on the net fee revenue margin is that you can see its 116 basis points down from 119 basis points in Q1, and a large part of this is the award of 2.5 billion in institutional mandates at the beginning of April that very reference earlier in our view this in more detail in the Mckenzie section.
Turning to page three three a few comments on our consolidated income statement, where you can see your earnings were up 13% from Q1 in spite of lower average asset levels.
1.2, which we've highlighted the right you can see the strong contribution to earnings from our proportionate share in associates, which you can see here was 43.3 million in the quarter and I'd remind that that's an after tax number as up 23 million from Q1.
You can see on this table most of that was great West life cool and the announced earnings yesterday.
It also echo earlier comments library on the growth of trying to AMC and you'll sooner disclosures average assets revenues and earnings roll up 30% from last year for trying to asset management in the quarter.
I'd also note looking at personal capital this will be or last quarter recording our share of personal capital earnings as we have reclassified. This is held for sale effective June thirtyth.
Lastly, Highland 0.3 that our noninterest expenses are down 60 million from Q1.
I remember last quarter that we highlighted $50 million expense reductions for the full year 2020 in relation to our original guidance for the year. This what's your expense declined by 2.2% in 2020 relative to 2019.
I know today, we're sticking this guidance with the exception of a few volume related items that have been impacted by the significant recovery in financial markets as well as a strong selectivity in Mckenzie. This includes things like sub advisory fees, which were up as well as sales commissions to where Mckenzie wholesaling teams as result of the sales growth experienced in the second quarter.
Our field <unk> full year guidance remains relatively unchanged and will now be 1.03 billion.
This is the 1.02 billion signal last quarter.
Three page 34, I don't have many comments here you can see at the bottom of the left chart that high net worth continues to reflect an increasing share every OEM and the weighted average fee rate is down in line with expectations. As this key segment continues to grow for us.
I'd also make a very quick comment on the asset based compensation rate of 56.9, and I know that well. This will increase very marginally overtime as as legacy business units mature there was a bit of noise in the second quarter of 2020 as a result of timing related items concerning Q1 that 2020 net sales activity. So it was a bit.
Higher increase that we would expect it I just wanted to call it called that out for you.
On page 35.
The only comment I'd make an IDE you will set profitability is to emphasize and point to that there was good expense management side you. During the period I'd also remark on the fourth row net investment income another which you can see was 9 million the quarter and which you know reflects our mortgage business and I'd just highlight that there were some very temporary movements during April.
Some key interest rates, specifically as it does that commercial paper yields as well to spread between flame rates and CMB yields and that reduce the income from this line by about $5 million below its run rate again, those interest rate movements were isolated to a few short weeks, but there was about $5 million of reduced earnings in this line from where is that.
Actually running.
On page 36.
I'd highlight Mckenzie is net revenue rate of 74.1 basis points.
And as mentioned earlier, we've done we footnoted that most of the Cline and the rate in the quarter relative to Q1 was the result of the funding of the $2.5 billion in institutional business, which occurred during the early April excluding this the rate was around 77 basis points and was down from Q1 as a result of a higher waiting a fixed income products with the equity market decline.
Lines.
As as well as the her winning the jeffs.
And then on page 37, nothing to comment on on Mckinsey is profitability, which was really clean I would just point out in the net investment income and other line that we did have 2.9 million in return on capital as a result of these strong financial markets during the period.
Treated page 38, lastly, I want to preview with you right now that is part of the announcement of the GLC acquisition.
Earlier in the week, we're now able to launch our enhanced Sigma disclosures for our Jim.
Procedurally, we're going to be issuing a press release and eight quarters of retroactive restatement of I Jim's results towards the end of September World will be hosting a webcast to walk you through the specific changes.
In the top left you can see on this slide we've made a point that we've developed a sub advisory fee transfer pricing framework. That's the foundation of our relationship with Canada life as part of the GLC acquisition and this framework is also the foundation of the relationship between like you Welton Mckenzie.
Transfer pricing framework is anchored off of posted fee rates by mandate for investment only services within the investment database. The rates that we've arrived at also take into account the scale and the nature of relationships that Mckenzie enjoys with each of the Ige and kind of life and these rates are reflected in tend to reflect market and so if anybody out there as a seven.
Billion or $50 billion block of business.
We'd be happy to talk.
You can see help me get these business evolving in the chart on the left and going forward I. GE importantly is going to be presented as a client to mckenzie paying market rates for sub advisory services versus our prior cost share arrangement, which has served us over the last three years.
As a consequence I would highlight now around $50 million per year in pre tax earnings will be reallocated from the cygnet to Mckenzie as Igene LPG market rates for these services as opposed to a cost share.
On the right you can see or new segments, which really showcase the distinct features and drivers of or wealth management business versus or asset management business.
Importantly, a majority of I'd use revenues are now advisory fees, which are earned on all of ITC ways as opposed to you. When you can see we've highlighted here the primary drivers as well as primary measures for each of the segments and we've also highlight some secondary disclosures will have like a U M. In the case of or wealth managers, which still is important and do you can.
Expected to continue to get insight into those measures.
We also think this will help the health market, obviously understand the at the value of the different segments and the and the drivers of the success.
So with that I'll turn it back over to other steels you'd have to get questions and I think very much.
Thank you we will now begin the question answer session to join the question Q You May Press Star then one on your telephone keypad.
We'll hear a tone acknowledging your request if you are using a speakerphone. Please pick up your handset before pressing any Keith.
To withdraw your question. Please press Star then too.
Well, we'll pause for a moment as colors join the queue.
Our first question comes from Gary Ho with Desjardins Capital markets. Please go ahead.
Thanks. Good good afternoon, maybe first question quick project you monetize the personal personal capital of $240 million ish I thought I'd put some of that to work with GLC.
Plus you still have some six 640 million up cash how should we think about your uses of capital today thoughts on buybacks here or dividend increases or can you perhaps increase your stake in China AMC I think outside of you power and the Citigroup, there's still kind of 10% that's owned by a non strategic.
Yeah, you know we're fortunate to have a lot of options on that second question and where capital is going.
And so we've been.
Looking at that I'd, probably ask loop to give you some more I'm I'm not a question.
Yes, Thanks, Jeff and Gary I think you hit the nail the head Weve.
Having been opened on where strip strategies focused and the things that we'd be interested in from an acquisition standpoint. We're pleased to brings you will see the market as it's a isn't hester capabilities will expand he distribution reach and and also bolstering Mckenzie scale and you hit the nail the head on some of the other things we'd be interested in and would consider a China.
M.C. as highlighted by Barry is certainly something that we're interested in and a in would be something that we'd consider also on the menu of possibilities you know anything to bolster our presence in key segments, where were reps and that could include product capabilities that are lacking or distribution channels, where we think we should have a.
More presence I'd guide you that we are actively looking on it at a few opportunities in those spaces and as far as dividend policy and share buybacks.
Right now, we we won't be signally any significant share buyback activity that is something that if we if we did have excess capital that we would that we would certainly consider but at this time were.
We're really looking at things to help builder business, because we see a very rich market opportunity across all four segments.
I'd also reinforce our dividend policy.
As we approach, 65% payout rate, we would it be expecting to to improve our dividends and that's our commitment to you as we're focused on growing or earnings and focused on growing or dividends over time.
Okay perfect. Thanks, Thanks for that look and Barry just on the GLC acquisition mentioned 20 million EBIT.
Thanks, that's just kind of GLC standalone kind of if you kind of look out 12 to 24 months post closing what are the potential revenue and cost synergies with GLC or candidate life and any related restructuring costs, we should open.
Yeah. Thank you so on the cost synergy side, we think we're done with that in terms of going forward. So we're very comfortable with a top coming over and it really expands our capabilities and as I've mentioned in my opening remarks, we also are Oh, developing a brand new.
Hey equity focused boutique.
We think it's going which is quite large actually and we think that can really.
Drive growth for our channels as well continue to drive growth or their channel. So we're more focus going forward on revenue synergies synergies in growth and what that's allowed US now that combined entity to first of all the the core provider for catalyse well channel. So just as we do the same now fried GE wealth.
And really plays but [laughter] with those flows and we grow as they grow to be able to have that now it's almost like a second Oh you know.
Supercharged anchor client.
And so it's a real competitive ads for us and you may have heard from cannulation their signaling and how they intend to have their wealth business for the real strategic focus for that now and going forward. So we think well nicely as they devote more resources to grow their wealth channels will naturally as there.
Core provider, well matched and grow with them. So that's that's another really nice big channel for US and then of course as we mentioned in the press release, a the group retirement marketplace in Canada, I would be an area that Mckenzie, that's historically had very little up no presence and.
I've mentioned some select.
Targeting institutional wins of that we've we've received them.
In the U.S. in Europe, and here and there have to but I think retire markets a defined contribution group RSP is another plans. This is really a game changer Fort Mckenzie now because TLC as a top three provider.
In terms of assets in that area not only does that allow us to provide kind of life and life cope with continued strong performance and innovation further end of May have innovation for them to gain market share on their retirement platform that allows us Mackenzie to now Fortunately participate in the entire grew over time.
Industry in Canada, and obviously from an investment only perspective, a direct to the consultants answer the plan sponsors and another third party retirement platforms. So we're we're really we look at best go Wow like the Abbott distribution or.
It's actually quite unique I think for chain asset management company to have these two huge welfare anchor clients.
Now direct access top three into a group retirement and of course, you've seen the really sustainable growth that we've we've incurred Bret Mckenzie m., the retail channel, which we're quite proud of with our mutual funds in each yes. So so look going forward and we'll continue to give you updates obvious in APAC regular.
Basis look going forward Thats being our growth story revenue synergies, a expanded distribution and I will port back on that so Uh huh.
So obviously, we have to just wait for the approval of the transaction, which again, we expect to be done by the end up here and a 2020.
Perfect perfect. Thanks, Thanks for that and then just my last question.
Just on the new segmented disclosure here.
Any ballpark like in terms of split between your wealth management segment, and our asset management in terms of EBITDA or EBIT like how that might look like yeah, absolutely Gary So right now the rule of thumb simply take 2019 or or run today in 2020, and reallocate $50 million a year from from my GE to Mckenzie.
And that's the only change what this really does do though is it positions the drivers better and if you look at that slide that we that we posted slight 38. You can also see we've made some changes not just on the revenues to make it easier understand the drivers in her business works, but also the expense side to really clarify what's asset driven sales driven what relates to.
Advisory business development as opposed to something like sub advisory fees, we've never given sub advisory fee disclosure before so I think this provides a lot of great transparency to how the business works and really does emphasize that the wealth business has evolved in a very every different way and the character of its revenues as really changed and and we'll be providing.
Some some really rich disclosure help people understand.
And so he looked that 50 million on topline.
Well actually the way it will play out 50 million is the incremental advisory fees that I'd, you'll be paying mckenzie relative to the current costs. You're arrangement that has so you can think of Mckenzie having call. It an extra 100 million of revenue and then extra 50 million of expense and they are being a transfer of $50 million pre tax profit between the two segments.
Got it okay.
That's helpful. Okay. That's it for me thank you.
Our next question comes from Jeff Kwan with RBC capital markets. Please go ahead.
Hi, good afternoon.
Maybe just expanding on on Gary's question with respect to like the GLC in acquisitions.
We've seen obviously from some of the power complex a number of different transactions, whether it's been surfacing value.
Signing to structure and but with respect to high GM.
Theres the county, MCC being held at power and there's also the one that's all bank.
Another shareholder that's not citic.
Okay does it make sense to you to have.
Hi specifics Jake.
I think that the Chinese see stake.
That tower owns how does with an eye GM or are there the assets like the cigar tons that might make sense.
Can you about assets within the power complex as opposed to.
Third party acquisitions.
Oh look I'll start maybe the can jump and are energized. Thanks Jeffery question. The first of all on the CAMC. So.
Again, you are probably tower remain very excited by that investment Biogen Mckenzie in that space and in collaboration with power and I just want to emphasize as as you well know whenever we won't know although it is very important for us that strong minority stake because that allows us to do is to let them be the best I can be as a preeminent China.
<unk> company, obviously restriction laws and regulations are opening up in China that a lot of global asset management companies are going into China to build buildup Jerome plant so to speak.
We believe there's a huge competitive vanish for years to calm for local so we want to retain the minority.
And and Jeff touched on capital if the opportunity arose either for the power steak and or the additional 10%. That's that's held by an external.
That's right side acidic acid about power then we wouldn't be open opening consider that yes.
Yeah very to I'd add on to it I mentioned earlier, we're considering it and we'd certainly be interested as as you know Jeff. We we love this investment for US a secular investment we love the relationship that we have with it we're trying to MCN with Citic securities. So it so as far as your broader question of were all the pieces belong you for Fry Jim were.
Only open to considering it and certainly interested in consulting in the investment or inc., otherwise, increasing or investment with various qualification, we really like being a strong minority shareholder within this within this company's ecosystem.
Okay and then just done my other question was on the achieve well side, obviously, there's been to net sales, but there's also the client flows but just wondering if there's anything you're seeing.
In terms of improvements and.
When you see the timing of the improvement that's getting back into the positive net sales territory.
That's actually well site.
Yeah I when they were really close we feel really good we've got a lot of or the projects that we've been working on for the last two and three years.
Become great company with the modern experience for our clients in our consultants and.
We landed salesforce for all of our consultants we.
Have done a relationship with.
New provider that in the marketplace on.
Hi to build a financial plan really simply and interact actively and so we've got some differentiated capabilities as a result to that and that starts on that versus our competitors and so we're really focused on.
Clients and making sure we have all the tools and the mix and capabilities that and to make our consultants luck rate when they're in front of their clients and.
We've come a long way there too and I.
No. It's been a it's kind of a lot of work for everybody in our company owned.
And it's great to see these new crop in the projects that have been going on for quite awhile landing and Oh, we had a great Board meeting this weekend.
Really excited about sharing all of that.
Progress that we've made and and you know where we are in our company and so I expect positive flows going forward.
Her to 2020 and lots of growth.
Onwards.
And maybe Jeff I'd add to that just for Jeff on the and speaks to say mid to slow to change as well. So year to date June were positive net flows of about $300 million. We reported positive net flows again in July I to anchor again.
We generated vies refuse known as generating over Oliver.
Assets and so net flows are prayer measure. It also highlight as a as we buy Jeff or net flows were up by just under half a billion dollars year over year in Q2 2020 versus Q2 <unk> 2019, So that's significant improvement during a pandemic.
When do you also the other trends that there was in the slides gross sales are down a lot as sort redemptions and Jeff mentioned it has to do with Canadians not being is likely to change financial institutions at the distributor level during during the pandemic. So so I would what I would highlight two two to the market into into his drink junior.
In February we did see very significant.
The improvement in new client acquisition, particularly in the high net worth segment a lot of that new Clint acquisition has that has slowed during it during the pandemic in spite of that our net flows are improving significantly.
And we don't feel as things as things continue improve that momentum that we have on new client acquisition is going to is going to slow down. So there was a bit of an interruption on client relationships being a bit stickier independent dynamic, but but we see the business being much healthier than it was a year ago and a lot of momentum there and I would remind you for us the measure is net flows right now.
Now that is driving the bulk of our revenue and we are positive year to date.
Great. Thank you.
Our next question comes from Scott Chen with Canaccord Genuity. Please go ahead.
Good afternoon.
Luke just going back to new disclosure coming in Q3, and you talked about retroactive restatement is this something that you're going to provide to us before Q3, our earnings in terms of the retroactive.
I was at least what so our plan is to have been in either through third week of September 4th We September will be issued a press release, you can expect to receive a package of much like yourself mental disclosure package right now of eight quarters of all of our metrics going out retroactively and that should provide everybody was about five or six weeks to it to understand the.
Changes and end to anticipate or Q3 results before they come out in the first that we can November.
Okay, and we will be hosting a webcast it to walk away through through it in late September.
Okay, Great and Barry just on the GLC side with the assets that are coming over.
Is there like a heavy skewed towards certain assets I just haven't looked at it too closely.
Yeah. So the reason it it's such a nice fit to it and probably if I may be giving up changes if you more thoughts on those are good thing. It's important as you know we employ a multi boutique while Mckenzie said I've always allows for these types of combining of team to be very efficient. So we have.
Bolstered up Oh several of our.
Existing Mckenzie boutiques with additional got some personnel from GLC number as as previously mentioned, we're going to create a standalone one.
I think it was a nice mix within a treatment that we've been Mckenzie Dunn.
As you know kind of significant.
Assets in the fourth quarter, California, Global equities, whereas GLC now they've been more focus and not getting any fixed income and came equity. So looking at our abroad mix their assets are mostly Canadian equities fixed income and so again that's.
Why we had the opportunity to.
Build out a brand new Canadian equity focused only team.
Based on combining two or three other existing chains. So I look upon them as a.
But they they look they were managing U.S., there are managing international they're managing semester, either managing some olds Bob.
Heavy heavy waiting for them on the team side.
That's helpful.
Just bunch on AMC appreciate the you updated disclosure on it.
If I look at slide 28, and look at the you when split like there's a good portion on money market and then I think Thats. There was the same before when you announced it forces.
Long term fun is that a similar proportion when you look you're kind of appears on the right hand chart or is this something that that is you know just more China AMC specific in terms of that split.
In fact, Oh, yes, the show in the right Scott So it's only long term.
All lines of Oh, the but just in terms of the ranges in terms of the peers that are highlighted there like all that is their asset mix like haven't been proportion on money market too or is it just like Tony MC specific.
Yes, the Ludwig they can jump in here as well so when you look at the top 10 20 Herms a in China.
There are a handful that have significant.
A portion disproportionate weightings towards money market and CMC, it's not as not one of them CMC has a fulsome allocation to money market, but they're multi channel multi asset class a balance a fixed income equities. So they would not standout.
Then over the number off hand, but they are there either average or below average in terms of the proportion of a total at you I'm in money market and if I can elaborate on this Mike has a very important one and that could help me out here.
You know.
We've been starting this for years and we you know we saw this North America right 25 years ago, we had heavy skewing at that point in time.
It's money market and I'm not that migration over to rotation of migration over the long long term happened and cabin U.S.. So we always expect that to happen in China, what what I precluded from starting was a interest rates.
Being.
Robots nicely very high and relatively speaking and trying to many years that's come down the they've done their insights are really normalizing I mean, I think when we put investment I joined Mckenzie.
Interest rates probably or.
567, 8% as a healthy return might be and so thats normal that's normalized downstream more like two or 3% Oh baby Theres been some rule changes in regulations that used to be some regulations that actually quite advantaged money markets.
More so than even short term no money market investments and those have been changed in China overtime, and it's really just the maturation of the industry right 20 year old industry, you can see the numbers on the left a if you look at 16.8, bill trillion, but rather renminbi insight in total about double the size of.
The Canadian Mitch on industry already and it's still young and even if you look at just the 9.3, Trillium, which which we literature, which as long term.
That in itself is is the same or slightly bigger just by itself than the entire oximeter administrative so lot of potential here, but we did one so we thought was good I am to let you know that we've been studying this industry experts agree with us that that's rotation and won't be straight line, but its rotation that was happening so not only are.
The long term funds growing just from a natural horses, <unk> Hearts population, hi savings rate right and a strong conviction by the government for a three pillars retirement system, just like we haven't cabinet here at U.S., but.
But also we believe the long term funds will now accelerating growth and cover the rotation for short term. The long terms. That's just takes it takes time some some catalyst like interest rate normalization like some regulations on just the continuous continued evolution maturation of the industry in China.
That is that's a great play and then maybe just lastly on China name see I recall, they were pretty picky tee off player in China does that still the case.
They are number one market share yeah. They have approximately approximately every given number for about 30, plus 30% marketshare any shifts and that's been growing very well also in China.
It's a younger industry than Canada.
But.
It's it's growing fast and there are number one market share.
Okay. Its call if it if it help if it helps you or anybody else. We can we can send the up the industry breakdown for money market funds as well, China. If she's got 3% share 10, Hong is the leader and they're almost exclusively money market fund and and they've got 1.4 trillion in money market fund. So that's the only conspicuous difference you will see.
In relation to page 20, but we condemn consents everybody knows.
The rankings, including money market fund if it's helpful.
Great. Okay. Thanks, a lot guys.
No from Scott.
Our next question comes from Tom Mackinnon with BMO capital. Please go ahead.
Yeah. Thanks, very much good afternoon, just a question with respect to the GLC acquisition, Oh, I am trying to get to the accretion that we would expect in 20.
21, so on slide 21, it mentions a run rate of 20 million EBIT, but thats, a sort of before purchase price amortization and financing costs. So.
Trying to wonder what some of those would be and then the loss can be.
Or the Quadras deal if we apply that to 7 billion to the 7 billion of assets and are there any other expenses that would've been related to that just sort of help me walk through the earnings accretion.
So she with that.
That was actually really good Tom you got all the you all the pieces, yes, so we've got to book.
I just over $20 million of incremental earnings at current asset levels coming over from really releasing the GLC acquisition and that's that's obviously pretax we will have a component of the purchase price amortization you can think of that being you know.
Colin if five five mode or range, we haven't finalized yet, but we will will be soon in publishing it some very slight financing cost in the deal and and but the biggest when you highlighted its the oversight fees on on the quadruple funds. So we've highlighted a 10 basis points and you can think of that being enforced block that that would have been declining over time, so think of that.
About $5 million pre tax in 2021, and and declining beyond that so I think you've got the right the rate components, but it but I would qualify all of that that's accretive and it's all at current asset levels.
We expect further growth not just from a from assets rising add but but also from continuing to build the business. So so but you've got three pieces and I guess the headline is you know we're in the $10 million vicinity pretax. It's a it's very small in relation to $1 billion a pre tax earnings here.
Okay, and then as a follow up or just with respect that China AMC investment what other kind of see news synergies do you get from China AMC. I mean is obviously, you're you've got to slide here to show that's a good investment.
Strategic investment that you've made a you know you could have got some bank stocks and those are pretty good yeah. They they would have shown some nice slides as well but.
Do you get other than just a nice share with our there of their earnings do you learned anything about that the industry from them, how does that translate into a a your earnings excluding a China AMC.
Yeah, I'll I'll start with that one.
The so let's put it in two buckets.
Well Threeg us versus what you mentioned that the fact that obviously we have.
Moving investment them. So they grow we grow our our portion of the earnings.
The other way, we working with them from day, one is cross selling of our own investment capabilities their capabilities into Canada, and our capabilities in the China, and that's going to get larger and larger it is taking some time to get some traction but for instance, or their capabilities into Canada, we have.
<unk>.
Mackenzie, China equity mutual fund, it's up to $75 million, that's all fresh money coming in from third party retail.
And you know that will only accelerate as investors and we're doing a lot of education around this people industry. While it was great [laughter], but they do a lot of education, a fact that this as a China equities is too big to ignore you have now allocated in your portfolio separate out separate allocation even from mature rest of course the case.
So starting to see some traction because every day I suppose comment so look for that should grow we have opportunities. Obviously, that's a corporate time to do the same thing on their fixed income capabilities, so that will grow nicely over time.
We.
Our as Mckenzie, obviously, you can match part of our institutional sales strategy in Canada and outside of Canada is to selective across the Chinese where institutional planned sponsors will high risk for mandates in China, we are selling into China Mckenzie.
And CMC is also we matched number one market share and any shifts there number one or two and in the institutional marketplace and so they're great partners and looking out looking for referrals, a French traditional Chinese investors in China looking for.
Global equity or fixed income allocations so.
The pipeline is growing having good discussion with there. So that's an opportunity and then see even see also has or central but obviously centric in Beijing and across China mainland China, but they also have a big business centered in Hong Kong withdrawal mutual fund any platform in Hong Kong selling into Hong Kong and then for the mutual fund recognition program.
Those funds being sold into northward into mainland China, We last year. So I started with your sub advised one.
Fund for them in that area, so you're going to start to see.
Those connections being made early days, but we're really excited by those additional two way up selling opportunities that Pfizer and bucket yeah. Yeah, just knowledge transfer we've been out that that for four years now with them.
Before I do you have mckenzie and longer for power and.
You know, obviously creep that might be able to come over all the time to can Doug.
Educate that we want to make them better and we when we see leading trend, but I'm pretty sure. Yes gene. So now they are the first Chinese asking for a company to find the United Nations vessels was also investing and surprisingly SGS claim great strong now in China. So there were helping them in that area alone will not modest right now in China I don't comment so we're helping.
What the do in that space.
So lot of knowledge beltway.
Another way there there are quite ahead on AI as all the channels and so how do you.
Hey, I into investment processes as well as distribution data.
And our technology and I think we mentioned on prior calls they are not beholden to legacy investments systems, and we're working very hard as Jim a transformational projects to leapfrog ourselves into a more modern technology platform, but they're already there. So if you know the first pockets the strongest fresh for sure Tom as you know because the.
That industry, China's going to represent half of all the global flows for the next couple of decades, but we're really pleased early days about cross selling of investment capabilities as well the knowledge exchange.
Thanks, very much further color.
You're welcome.
Our next question comes from Graham writing with TD Securities. Please go ahead.
Good afternoon, just with GE ill see.
You know the revenue synergy side that you're talking about can you give us some context on you know what are the distribution opportunities opportunities that you see now that you own GLC as equal or assuming the deal closes as opposed to before when you.
They were still a sister entity under the under our corporate umbrella I assume there would have been some opportunities elsewhere.
So just have mission opportunity.
But it's very good we actually think it's very timely too, but I was very good why because as you know we're all we're all sister company in other power and we've been working Mckenzie with Chelsea.
Kind of life overall for years there they were prior to the transaction not significant client for Mckenzie.
Very well so by the way it. Another reason why we think this transaction will go very smoothly customer just.
Hopefully no each other already and we're all part of the with exactly but the timing of.
From a hi, Jim Mckenzie perspective, it's just absolutely perfect right, because and I guess I'd want to speak on behalf of Cadillac.
That they've been messaging, how they are now going to put.
More resources towards their wealth their wealth business and so.
We think we Mckenzie about at with the GLC professionals, we think we're in a very good position.
To help them you know really get those modern.
So to some quality portfolios I have that their wealth clients as we've been partnering with hygiene well for several years now in the area so risk budgeting.
China M.D. active passive smart beta liquid alts, all those things that we do.
Now that will be at their disposal to get through their wealth channels, which again, they expect to more resources. They already starting back in that process and then we're very excited by the go over time as I mentioned and I just do want to emphasize the fact that we want to continue to be a core.
Oh provider for them on a light at Cowen kind of life's retirement platform.
Now allows us we believed to have the pedigree to go talk to of the institutional consultants and platforms and planned sponsors and the group retirement space outside Oh, we kind of like ecosystem also to gain traction. So we've got we've been studying that we've been looking at those for almost a year now and putting together our acetate.
So when a multi channel right and targets, we'd like to him and.
Well, obviously report back on our progress, but yeah, it's huh.
Good time, I think we've proven asset question too. It's a you know tommy's under perfect and you know why now, but we think it's actually the timing of couldn't be better right now for US to go ahead with emerging out base of these two of them two teams.
Yes.
Understood and then Jeff question, Peter just the new campaign that you mentioned other investors group.
How is that different of unique for what you're consultants are doing previously in terms of business development is this campaign, a you know more sensitive and focus towards.
You know the cold at 19 uncertainty.
No it's right, it's really focused on.
Just mass affluent and high network clients and focusing on that just like a specific segment and we are getting more traction now as we've been moving up.
Mark had and.
With these new tools, it's much easier experience for them to.
Give to their clients as well because they can engage in this as well.
He is using a software and so we really think it's a game changer and this was that affirm that had been in this space for the last three years and they are really the.
The founders and software for this space and so we're really excited to have I mentioned, when a bag and it's in our home town and we know all the people there and.
It's a it's a great software. So it's it's going to be a game changer project for sure and then.
You know who will keep keep looking for other capabilities as we go forward.
Great Graham Your question was not conquest software it was on the answering the call campaign for small businesses.
Correct.
Answering but oh.
Oh, that's that's working really well yeah. Just my question was just how does that different than.
You know the existing sort of business development approach that Angie.
Well, we this was a engines.
The results of the what's been is going on in our earn lifes for all of us and we wanted to.
Do something to help the society and so we asked our consultants if they wanted to do to support this and they did and so we're trying to help.
Canadians across the country.
Especially in small business and give them free.
Consulting.
To manage their businesses, well, they're going through a pandemic and or coaching them on that as they had do this on an ongoing basis. I mean, so just trying to help Oh, you know as a charity donation almost to help society.
Congrats Graham you can imagine with our financial planners as well as the support from or events financial planning human specialist were bit. We believe were better situated than anyone in the country to help small businesses navigate through the pandemic and suggested this is something that we want to do to make sure. We're helping society and it ranges from you know, helping with these financial plans to making sure people can.
Can appreciate all the government programs that are available to them and how the best restructure their affairs as they navigate you know a lot of the stress that's happening to somebody small businesses. During this during these times. So as we're really proud of what the team put together and we're pleased to have this rolled out in early may but in advance of that it's what are people are doing naturally in their communities to make sure there.
We're answering the call.
Great.
Specifically thank you.
This concludes the question and answer session I would like to turn the conference back over to Jeff Carney for any closing remarks.
Well thanks, everybody for your time today I really appreciate the questions, obviously, a great conversation.
For the last 60 to 90 minutes. So we've been on the call and we I wish you all this summer and we'll see you in the fall.
Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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