Q3 2021 IGM Financial Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the I G M financial third quarter 2021, the earnings results call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions to join the question queue. 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 zero.
I'd now like to turn the conference over to Keith Potter Senior Vice President Finance. Please go ahead.
Thank you very much and good morning, everyone and welcome to our GM Financial's 2021 third quarter earnings call. Joining me on the call today are Janesville, Sullivan, President and CEO of <unk> financial.
Murchison, President and CEO of <unk> wealth management.
Mcinerney, President and CEO of Mackenzie investments.
Cool executive Vice President and CFO about GM financial.
Before we get started I'd like to draw your attention to our cautions concerning forward looking statements on slide three.
Slide four summarizes non interest financial measures.
And on slide five we provide a list of documents that are available to the public on our website.
<unk> third quarter results provide GM financial.
That I will turn it over to James.
Well good morning, everyone I will.
I will start on slide seven highlights for Q3.
I would start by saying that our strong operating momentum is translating into strong earnings growth with contributions from all business segments are.
We achieved record high au M&A of $265.2 billion in the quarter.
Driven by strong net flows and more modest client investment returns this quarter.
We also experienced record high investment fund net flows of $1 7 billion and total net flows of 1.9 billion, which include record highs for both wealth and Mackenzie.
And following the second quarter's record high E. P. S. I'm pleased to report a new record high in the company's history of $1 13 for this quarter up 26% from adjusted EPS of 90 cents last year.
Finally, the IGN board declared a common share dividend of 56.25 cents per share.
Which provides an attractive dividend yield of four 5%.
<unk> will address our thinking around future dividend increases in more detail in his remarks.
Overall, I am focused on ensuring high G. M has an appropriate level of capital allocation flexibility.
And a clear path to sustained dividend increases.
Our earnings continue to grow.
Turning to slide eight on investment returns markets were a bit mixed in Q3.
We saw most equity markets declined slightly during the month of September.
Overall G M average client investment returns were positive 0.5% in the third quarter.
And seven 8% year to date September 32021.
We have since seen markets and average client investment returns for ice in October up 2% in the month, which is a good start for the fourth quarter.
Yes.
Turning to slide nine.
Third quarter long term mutual fund net sales were $24 $5 billion.
For the total industry and $9.9 billion for industry asset management peers.
Following a record Q1 and Q2 full year 2021 is shaping up to be the best fund industry net sale in Canadian history.
Turning to slide 10 on <unk> results for the third quarter.
Average AUM and a of 267 $4 billion increased $72.5 billion or 37% year over year, including approximately 30 billion related to the acquisition of G. L C and Green chip, which closed in December of last year.
As I mentioned Q3, 2021 EPS of $1 13 is an all time record high and is up 41% from last year and 26% on an adjusted basis.
As a reminder, adjustments to 'twenty 'twenty Q3 earnings included the gain on sale of personal capital.
Set by restructuring costs related to our technology transformation and the acquisition of G. L C.
Slide 11 highlights net earnings contributions from each of our segments.
I'm very pleased to see that <unk> year over year increase in net earnings has been driven by strong results across all of our business segments.
We're seeing strong earnings growth at our operating companies, including <unk> well.
I P C and Mackenzie.
And the same holds true across our strategic investments.
You'll hear more on the strong fundamentals of these businesses and remarks from Damon Berry and Luke.
Slide 12.
<unk> to the earnings growth story, we're seeing strong momentum and record net flows across all of our wealth management and asset management segments.
And with that I'll turn it over to Damon.
Okay.
Thank you James and good morning, everyone.
Turning to slide 14, and I do wealth management's third quarter highlights.
We ended the quarter with 114 billion.
It's an increase of one 6% during the quarter driven by record high treat Q3 net inflows of 1 billion in client investment returns of 7%.
We also experienced strong net sales into IGN products of $641 million.
Our strong momentum continued in October where we had another record month with net inflows of $312 million and net sales in the IGN managed products of $171 million.
This represented a 12 consecutive months of positive net sales into IGN products and the 13th consecutive month of positive net flows.
As I commented last quarter, we continue to see significant significant positive impacts from our business transformation efforts to enhance our advisor and client experience and we're certainly not done this quarter.
Partner with cap Intel to implement leading technology to help our advisors to execute on client investment plans, including client facing proposals delta and compliance support.
The partnership is designed to help it drive advisor efficiency improve our client experience and allow us to meet the new client focus reform requirements coming in January.
We're also proud to have announced the launch of our new <unk> climate action portfolios, we're doing our work on ESG and adding to our strong roster of managed solutions.
And finally <unk>.
Efforts to enhance the wealth management solutions are paying off with 47% of our AUM, either four or five star and 80% of our AUM rated three stars or better.
Turning to slide 15.
You can see the very strong results for the first 10 months of the year, including October's record net inflows of $312 million.
The 12 month trailing line chart on the right continues to demonstrate the clear and evident momentum in our total net flows and net sales into IGN products.
Turning to slide 16.
Turning to record high gross inflows were up nearly 50% year over year.
On the line chart Youll see our 12 month trailing net flows rate has now reached 3%.
And our client net inflows of $1 billion of broken down in more detail in the net flows table, where you can see significant improvement in net sales in the IGN products of $641 million.
Like I have in previous quarters I'll use slide 17, just speak to the mechanics of our OE growth net net flows by investment product category.
With the second column on the left you can see that our Q3 net inflows of $1 billion were primarily made up of $668 million of cash and short term savings and $339 million of third party <unk> transfers from other dealers.
Third column shows the significant outflow from these categories that resulted in net sales in the IGN managed solution and Mackenzie funds totaling $641 million.
We expect to see this clear momentum continue as we acquire new client relationships and we work with our existing clients on comprehensive financial planning and delivering high quality managed solution.
Turning to slide 18.
Similar to last quarter, you will see significant improvements in our advisor network productivity, a K a <unk> for us for both our new advisors and more experienced advisor practices.
CRA investments over the past several years paying off and we continue to highlight some of the initiatives, which are seen on the right.
Attributed to the increased productivity.
On slide 19, we demonstrate.
Another strong quarter in acquiring new clients over 500000.
Similar to Q2, we had $443 million in gross and net inflows from newly acquired clients over 500000, which represents a 67% increase year over year and nearly a 500% increase over the past five years.
On the right hand chart, you can see our increased focus on the mass affluent and high net worth segments.
Along with a reduced focus on the mass market as a result, it at a trailing 12 month flows of over $1 6 billion.
Turning to slide 20.
This highlights our new suite of climate action portfolios.
<unk> clients with the opportunity to both support and take advantage of the global transition to net zero emissions.
Our new portfolios are aligned with the goal to reach net zero emissions by 2050.
Our portfolio is we will invest in both equity and fixed income securities offering our clients a suite of single solutions addressing different investment outcomes from protecting capital to providing income to focus on long term investment growth.
Portfolios will allocate investments to one or more climate related approaches which include best in class companies with leading climate practices thematic allocations to green solutions.
Sure.
Lower emitters of ghd emissions and the employment of stewardship practices to prioritize climate policies and outcomes.
With these portfolios are quite can feel confident that their investments will strive to positively impact the world around them, while taking advantage of emerging investment opportunities in the sustainability space.
Before I turn the call over to Barry I'll quickly touch on the positive impact of our ongoing efforts to further enhance our investment products and managed solutions on slide 21.
I mentioned on our prior call. Our recent expansion I profile to include new private market investments, which is one of the many actions we've taken to evolve our investment product offering.
Which we believe is now industry leading.
It is now being recognized as both the strength internally by our own measures.
And by third party through the third Party dealer report report card survey conducted annually by the investment executive.
I'd also like to highlight our strong investment performance as measured by Morningstar.
At September 30, we had 47% of our assets rated four or five star and 80% rated three stars or better.
Given where we started the year with 17% of our assets rated four or five star. We're pleased with our trajectory is it ranks us among the top firms in the industry.
Lastly.
We created and filled a new all of chief investment strategist for wealth management with the hiring of Philip Peterson.
This important new role reports directly to myself and will lead our thought leadership both.
Internally in the organization with our advisors and high net worth points and externally with the media and to all Canadians.
As an ideal complement to our comprehensive financial planning approach.
The IGN the IGT edge stems from our ability to build long term stable relationships with our clients and our expertise in building monitoring and executing personal financial plan that leverage well constructed managed solutions. Our managed solutions are built around a leading global asset managers that focus.
On both public and private asset classes and all of this is supported by valuable insights on the capital markets and global economy.
We are excited about what we're able to bring to the table today and how it's allowing us to compete.
And we even more planned for next year, so stay tuned.
With that I'll turn it over to Barry Mcinerney.
Thank you very much Steven and good morning, everyone.
I will take us to slide 23 to review Mckenzie as Q3 results.
AUM reached a record quarter end high of $203 3 billion at September 30th up <unk>, 8% during the quarter with slightly positive capital market returns and continued strong net sales.
Q3 marked our 20 <unk> consecutive quarter of positive retail investment fund net sales and total net sales were $782 million a record high third quarter Mackenzie.
Mckenzie as momentum continues to be supported by both mutual funds and Etfs and is diversified across all major asset classes and categories.
We continue to gain market share from competitors in the Canadian retail channel.
And we received the 2021 Environics advisor perception study results, which also highlighted Mckenzie is leading market position across all dimensions importance of Canadian financial advisors, including another year over year increase in advisor sales penetration.
During the quarter. We also launched a number of new products targeting the retail segment along the five themes are growth catalysts, we identified previously.
Finally, we were thrilled to announce earlier this week that Mackenzie has joined the net zero asset managers initiative building on our existing strong commitment to climate.
I'll speak more to these last two points on the coming slide.
Turning to slide 24.
The strong net sales we reported on our last call has continued into the third and fourth quarter with our investment fund net sales remaining at nearly 7 billion on a 12 month trailing basis.
Given the very strong Q4 results last year, the comparative period for October and the remainder of the fourth quarter of 2021 will be a very high bar. We were pleased though with October investment fund net sales of $282 million reported earlier this week.
I should also mention as you review October sales that total net sales were impacted by no flow of about $350 million from a single institutional account.
Slide 25 summarizes Mckenzie as Q3 2021 operating results.
Retail mutual fund gross sales increased 24% year over year Mackenzie continues to gain market share as demonstrated by our 10% long term investment fund net sales rate as of September 30th.
And 51% and Mackenzie AUM rated by Morningstar, four or five star funds and 17 of our top 20 funds were rated four or five stars for series F.
Slide 26 shows our retail mutual fund investment.
Performance and net sales across our investment boutiques.
We continue to see strong overall performance and our growth oriented boutiques, while our global quantitative and multi asset teams have delivered strong outperformance over the past six months.
Our strong retail net sales are coming from a wide variety of boutiques, including equity fixed income and multi asset teams and our third party managers category, which includes China. AMC has also attracted strong inflows.
And finally slide 27 highlights the growth catalysts, we've identified at Mackenzie that that are reshaping the global asset management industry.
This quarter I'll provide a few highlights across three of these themes sustainable investing alternatives in China.
Our momentum continues in sustainable investing with $3 8 billion in AUM as of September 30th.
On our last call I mentioned that we had launched our new better world investment boutique and we followed that with four new product launches in this space.
The first two launches bring the better worlds team teams' deep sustainable investing expertise to Mackenzie distribution for the first time in both Canadian equities and global equities.
We also launched the Mackenzie global sustainable Bond ETF and the Mackenzie Global Green Bond Mutual fund both managed by Mackenzie fixed income team.
As I mentioned earlier Mckenzie is now a signatory to the global net zero asset managers initiative, which builds on our existing commitments, including being a founding signatory to climate engagement, Canada and signatory to the responsible investment associations or R. I a statement on climate change.
Moving to alternatives and private investments.
Before getting into this quarter's achievements I'd like to take a moment to comment on the breadth of Mackenzie capabilities and products in this rapidly growing area.
Mckenzie as investment organization has a long rich history of bringing private market investments to <unk> wealth management's clientele in the form of private real estate and private mortgages.
Kenzie managed a $6 4 billion in these categories as of September 30th.
As a reminder, back in 2018 Mackenzie made history, bringing in Kansas first ever liquid alternative strategies to the retail market based on the Regulators' alternative framework proposal for conventional mutual funds.
Today, Mackenzie managers over $4 billion and liquid alternative strategies and asset classes.
And last fall Mackenzie entered into a strategic relationship with a leading global private market's manager Norfleet capital partners within the first six months of the partnership we collaborate to bring northeast private credit investing capabilities to Canadian retail advisors and clients and a new way.
Last month, we launched Mackenzie Norfleet private infrastructure fund.
Our plans to bring all three of them roughly as private markets programs to reach out with private equity up next.
Normally if itself had another very strong quarter of fundraising with 1.1 billion completed during Q3 growing their total AUM to $18 6 billion.
Finally, we launched two new mutual funds to further help Canadians seeking to gain investment exposure to the Chinese capital markets.
These two products will be sub advised by China, AMC and they join our highly successful Mackenzie, China AMC, All China equity fund to create a suite of products addressing the investment opportunities in the second largest economy and second largest capital markets in the world.
Overall, we continue to innovate as advisors look for new ideas and solutions for their clients and over the past three years Mackenzie has generated $5 5 billion of gross inflows from new products launched during that period and $3 2 billion year to date 2021.
I'll now turn the call over to Luke.
Great. Thanks, Barry good morning, everybody.
So I'll turn to page 29, and all of us to see on the slide I just highlighted the chart on the left there was a very strong quarter with average au M&A up four 7% in Q3 relative to Q2 I'd also note that we published October results on Wednesday, and assets as you can see at the bottom left were up two 2% to $271 1 billion from September.
And if you eyeball the chart.
Whereas if youre trending so far you'll see we're on track to see continued growth in average assets in Q4 as net flows continue to be very strong in financial markets and favorable in October and into November.
Three and page 30, I just highlight the business are behaving the way you would expect to.
On the right you can see with the dark blue box that the net revenue rate of 87 basis points was very stable relative to Q1 and Q2.
On the bottom right you can see unit costs have declined based upon degree of scale and based on seasonality of expenses and in the middle you can see the result is that EBIT margin as basis points of <unk> has increased to 48 basis points.
I'd also remind as you look at this chart on the right that the acquisition of the GLC occurred January 1st of this year and that's the reason for the change in rates in Q1 'twenty one.
Going to page 31, you can see our consolidated income statement and as mentioned our EPS of $1 13, that's a record high and is up 26% from last year and 14% from the second quarter.
The only point I'd call out on the P&L and you can see highlighted this 0.1 of the REIT is business development expenses of $71 2 million in the quarter and you'll see this is up slightly from last year and down 8 million from Q2.
Note that we do have an element of discretionary expense in this line and as you can see in the pullet box on the right. We produced our full year guidance on this line by $13 5 million.
And you'll see the full details on slide 43 in the appendix. This is worth about <unk> <unk> per share after tax.
I'd also remind you in thinking about the future. There is some seasonality in this line. So we would expect it to be a bit higher in Q4 relative to Q3.
On page 32, you can see on the right <unk> revenue and expenses is basis points there relative driver.
The one thing I might highlight on this slide the advisory fee rate and a top rate of 102.6 basis points down one six basis points in the quarter, you'll remember that our advisory fee rates, our schedules that vary based upon the level of weighing quite accounts and we actually crew at the client level every single day versus the.
Based upon the asset level in their account.
With the ongoing change in composition of our clientele towards high net worth we guided to a decline of close to <unk> seven basis points in the quarter I would remind during Q3, there was a meaningful increase in client count values with average pay up almost 5% from Q2.
These higher account values are or what led to this 1.6 basis point reduction in the quarter and we view. This type of a price reduction is obviously very healthy given as based upon the significant growth in client account balances.
Turning to page 33, you can see <unk> statement of earnings.
Our $140 9 million in earnings in the third quarter of 2021 is a record high and were up 20% from last year and 8% from Q2.
The only line I'd highlight again is business development and you can see in this other business development like we have a call out box on the right.
That most of the decline in full year expense guidance for IGN is coming from my view wealth and we've reduced our guidance here by $12 million in this other business development line item.
I'd remind you we have discretion in this line on sales and promotional activities.
And the business and new client acquisition as you've seen are performing very well when you're thinking about our spend here. We'd guide you to consider all of these four advisory business development like together and would highlight our people are very motivated and very resource to serve their clients well and to acquire new ones.
On page 34, all turned to Mckinsey <unk> results.
And then the chart on the right you can see our net management fee rates.
If you look at that yellow line Youll see the weighted average fee rates of third parties has continued to increase up to $54 seven basis points and this is the result of strength in our retail and strength in equity and balanced offerings, which tend to have higher fees.
And if you look at page 35, you have seen this chart before it theres a lot of detail on it and we do seek to use this slide to let you know how business development expenses will travel based upon the volumes that are being put on at Mackenzie.
If you look at the chart on the left you'll see the Mackenzie continues to put on very strong sales results and FERC expense guidance, we bankers at $4 1 billion in retail mutual fund net sales for the full year on that chart in the left Youll see that the light Blue line and Youll see it is trending towards $4 1 billion, which would be about $800 million in mutual funds.
During the fourth quarter.
As you can extrapolate from the four borrowers way over on the on the right hand side of the chart.
And you look at that third row from the bottom business development expense, where we've guided to about $4 1 billion would result in a full year expense of about $92 million.
And that is a reduction expense guidance of about $4 million from that from what we published in the second quarter.
Going to page 36, you can see Mackenzie statement of earnings at the bottom you can see that Q3 results of $71 million is a record high and it was up 47% from last year and 26% from Q2 and I would remind you. There's a lot of operating leverage in the Kansas business and net selling very well so we would.
Strong earnings growth to continue.
Turning to page 37, just a few quick remarks on China and northeast.
On the left you can see our Q3 'twenty one earnings of $17 million from China, AMC are up 62% from last year and 15% from Q2.
As you know China sees a consistent leader in the Chinese domestic asset management industry, and it's been maintaining share and maintaining market position within a very high growth market.
You'll remember that half of the global net flows into the asset management industry in the next decade or expected to come from China, and while there certainly will be volatility for us along the way. We're very excited about the future trying I'm seeing very excited about our business relationship with them.
On the right you can see the year to date growth in North we see you in June.
Q3 was another quarter of fund raising in excess of $1 billion, bringing year to date fundraise in the $4 3 billion and driving AUM growth to 27%.
Late for you that revenue growth in these fundraising comes out at the time the business has committed but it comes at the time that the money is invested and put to work. So we do have a good line of sight into revenue and earnings growth over the coming quarters. As a result of this fund raising activity.
Turning to page 38.
This slide.
Intended to highlight our strategic investment and to demonstrate that these investments are conservatively worth $4 6 billion at September 30th and I'm going to highlight some of the metrics on the next page.
Turning to page 39, you can see the sum of the parts view to our underlying businesses.
First highlight that everything on this slide is anchored to 2021 expected earnings and we Havent repositioned to 2022.
I'd make two quick comments.
The first on China, which you can see is the fifth column from the right.
Approached valuation from a standpoint of our entry multiple when we did the acquisition four years ago up $17 five times next 12 month journey.
And we've applied this multiple to analyst consensus for 2021 and this consensus obviously was before before you have any other information on the Q3 results we posted today.
I'd also note that we did do our acquisition on the basis of $17. Five times next 12 months earnings. So this we view as a very conservative view of the adult use Chinese to actually apply that multiple to 2021 expected.
And in the bottom left as we typically do we've taken our $49 share price. When we went to press, we deducted off concern.
The value of each of our strategic investments from the market cap and we've done this to arrive at an implied <unk> multiple for IGN Mackenzie relative to their peers.
You'll see this approach would suggest that there's room for multiple expansion. These businesses have significant momentum and are posted solid earnings growth that we're very excited about.
And then turning to page 40.
This significant growth we've seen earnings we didn't want to give some context on the dividend, which you'll see we've maintained at $56 two five this quarter.
On the top left we remind that traditionally we've considered increases at a payout rate of around 60% 65% of earnings.
You can see here on the bottom left table that we've introduced a new measure cash earnings profile of the earnings distributable.
There's currently about a $150 million difference between reported earnings and cash earnings and this reflects two things.
First the difference between the sales commissions, we pay and our commission amortization and with rising rising sales activity. This delta between the commission amortization and commissions paid has risen.
And second the difference between our proportionate share in the earnings of Great West China against the northeast and the dividends that we receive from them.
You'll see in the third point on the top left we highlight that we would consider.
Recommending a dividend increase at a payout rate closer to 60% of cash earnings and you can see in the table at the bottom. We're currently running at 71%.
On the right in the top we've given a bit of context on our on our on our choice.
And I'd point out a few things first as you all know and you can see in the chart on the radar payout rate is unconventionally high relative to other Canadian financial service firms and global it asset and wealth managers.
And most important 0.3, we see many alternative productive use for capital deployment. This includes reinvesting in the business includes M&A and includes share repurchases. So theres a lot of a lot of room for us to deploy this capital and to create shareholder value and that is a big considered ration for us in addressing the dividend.
On closing I would highlight and reinforce we're very committed to growing earnings and we're very committed to growing our dividends over time, and we're feeling confident about the future.
That concludes my comments area little luxury it over for questions.
Thank you we will.
I'll now begin the question and answer session.
To join the question queue. Please press Star then one on your telephone keypad, you will hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw. Your question. Please press Star then two we will pause for a moment as callers join the queue.
Our first question comes from Nik Priebe of CIBC capital markets. Please go ahead.
Okay. Thanks.
Wanted to start with a question on the.
The accelerating growth of the earnings contribution from China AMC in the quarter.
Is there any additional color or granularity that you can provide on the performance of that business.
Maybe with respect to the net flows rate as a percentage of AUM you know how that compares to the industry.
Anything notable on investment performance, there's clearly a lot of momentum there just trying to get a better read on what some of the key drivers have been.
Thanks, Nick as Luke and I, I'll, probably turn it over to Barry as well.
I'd highlight would be seen in the last the last five or six quarters have been very strong.
In terms of net flows into the Chinese asset management industry. So long term funds, we've seen our net sales rate of 30% per year and trying to see as mentioned has been maintaining market share and maintaining market ranked during a rapidly growing environment.
In the third quarter in spite of that volatility. We did continue to see a very strong contribution from net flows and that's led to continual consistent asset growth in long term funds during the period and as you also know there is offering leverage in this business and that is leading leading to these strong earnings growth results that we're seeing put on they altered.
Barry.
Thanks, Luke just add great question that I had a couple of points.
It is important to recognize what China AMC is while they have a very strong.
Business strategy and model, we think well positioned for today and the future growth just as we will see as we saw the industry North America evolve.
What I am talking about is that they are multichannel so.
Luke's point of the very strong retail flows continue for China, AMC, but theyre also strong institutional and there are also strong in online. So they haven't really three main channels that all they're doing very well. They also actually there are actually a little bit like mckenzie to their multi vehicle. So clearly.
The mutual fund is doing very well.
As we report and measure on an ongoing basis.
The institutional separately managed accounts SMA is obviously continue to grow very well and they are actually we tend to forget about this the number one number one ETF provider in China, China had a very strong growing industry Etfs as we know how strong that is growing globally. So there are number one in China onshore and offshore.
And then finally they are just they just have just a terrific culture well resource over 200 investment professionals investment led organization. So theyre really research oriented on the ground fundamental focus and actually we share in that research with them on a regular basis, which is very helpful for us.
So just a 20 year firm that's.
Really has us.
Our business model, and a framework and a structure and a culture that.
You see now what we have seen US forever you years and years now, but it's just probably becoming more.
Our focus for you all because of.
They're increasingly meaningful impact for earnings so really remain very excited by China, AMC and our investment in the future of that of that firm in the industry in China.
Understood. Okay. That's helpful and then.
On the domestic front.
Net flows have remained consistently positive not only on a quarterly basis, but month to month as well.
We've seen industry sales remain elevated I think thats benefited to some extent from higher consumer savings and improvement in household balance sheets as a result of the pandemic.
I just wanted to get your read on the sustainability of that trend at a macro level or do you see that momentum extending beyond the RSP season next year or is it is it a bit too early to say.
Again, great question, I'll start and Mike have others chime in this is a very important topic for us obviously at IGN.
But you're spot on we have seen us in Canada and in other developed countries where savings rates are much higher obviously because of the pandemic and spending is down obviously to your point, which is strengthen personal balance sheets, but that spending also has also resulted in.
Quite a reduction in industry redemption rates.
So a higher flows and lower redemption rates, obviously results in much higher net flows and so off cross-eyed, Jim operating companies are seeing obviously very nice gross flow increases year over year, but you may have noticed our net flows or even proportionately higher than the gross.
The higher gross and lower redemptions.
We're thinking this could be sustainable if I'm not sure at the at the levels that they are right now obviously as the economy continues to recover global synchronization of opening up the economies and getting back to some normalcy in terms of expenditures and consumer consumption.
We think though that there's going to be an increased focus on retirement and savings in Canada, and maybe other countries as well. So therefore, that's savings rate. We think can continue to be higher than it was pre pandemic not sure where its in Atlanta, but we think it's going to be higher.
And the redemption rates, we'll see if they come up a little bit but again.
Because of the potential increase focus on savings and by the way.
Just the enormous amount of cash on the sidelines for liquidity that can come into the investment funds industry, which we think it will we.
We think should bode well well into 2022 and beyond so we cant predict on the the the levels record levels that we're seeing in the industry today, continuing at that level, but we think they will continue at a higher level for many years to come.
Okay, that's very very good.
And Barry it's Luke I would add to that Nick as Barry said, the the money like you mentioned in your question on on savings rate. The money that went to the demand deposits. In 2020 was profound it was about $250 billion and that movement into demand deposits or that contribution to amend deposits by Canadians. It just continued consistently through every.
Single months of 2021 so theres a lot of fuel to keep its fair going all of those demand deposits, earning nothing and earning less than money nothing when inflation is included and across organizations. We're working hard with Canadians to put that money to work and so theres a lot more fuel there are two words to keep to keep a strong investment flows that going.
Okay. Thanks for taking my questions I'll pass the line.
Our next question comes from Geoff Kwan of RBC capital markets. Please go ahead.
Hi, good morning.
My first question was just on on Slide 19.
Just kind of taking a look at the hardware cycle gross flows from less than 100000 dollar accounts had been declining for a number of years, but.
Been still a decent amount and has been actually increasing lately.
Just want to focus on the high net worth part of the market just curious around whether those dynamics driving.
Growth from <unk>.
Some of the less affluent customers.
Yes.
Sure.
Yeah.
Generally yes.
Sure.
Thank you Dennis.
Sure.
But if someone does.
And and you kind of naturally.
We're going to ship to those segments. So we're talking about doctors lawyers other professionals and part of our strategy is certainly to connect with those those individuals early on in their careers.
And it does mean that early on they will have.
Lower portfolios in terms of dollar amounts, but the opportunity long term is.
So a lot of that growth would be because we are doing a good job of really finding people that we want to focus on but early on and then working with them on their plans as they start their careers and start a family and buy a house and do all the things that you would normally do.
Okay, Perfect and then just more broadly in terms of the <unk>.
Progress that you've made on the gross sales side for.
For each of the high net worth and then also just the overall business when you take a look at where you are today.
If we kind of use the baseball analogy what inning do you think you are in versus what you would view as being kind of full productivity of the consultant base.
Yes, I would say that we are in the second or third inning.
And here's the rationale first of all we are still in the fourth year of a five year trend transformation with the 50 year being next year. So there's still a lot of things that we need to do to continue to improve our advisor and client experience continue to connect our systems continue to make sure that we make sure that our advisors or no.
Are the most efficient in the industry, so we free up capacity.
And with that we're just going to get better at doing what we do when you take a look at our results.
What is the most encouraging theyre broad based so we're doing a good job in terms of acquiring new clients, particularly in the mass affluent and high net worth space. As you just mentioned, we're doing a very good job working with our existing clients and share of wallet a lot of Canadians diversify their advisors and right now we are finding that.
Quite frankly, a lot of the competition is not stepping up and if our clients have one or two other advisors theyre consolidating with US which is great. We're also doing a great job in recruiting experienced advisors for a lot of advisors. They see the benefits now, particularly with the claim focus reforms and everything that's taking place with regulation in partnering with a firm that can add value to their business.
Help them help them compete in their market, particularly against the competition with tends to be fierce in this country and then because we're doing such a good job with our clients our retention rates are dropping so.
We're doing a good job and certainly we're losing less clients that we have in the past. So we feel quite comfortable about where we are our ability to compete and how we're positioned right now.
Maybe asking another way is from a sale.
Sales.
As a percentage of AUM.
Where do you think that you can get to again, if youre, having full productivity out of the network.
Right. So if the forecasted that.
Savings rates, where the country is around 3% and it's forecasted to continue to be around 3%.
And there'll be ebbs and flows in that.
Right now you can see that we're at that number or we feel quite confident in our ability to punch above their weight and 3% plus that's what this business is built to do ultimately we are building a business that we want to be stable and resilient that performs over.
Various different market cycles, and is going to gain share and particularly gained share in the mass affluent and high net worth market. So punching above a 3% net sales as a percentage of AUM is something that.
It is our focus.
Okay, and just if I can sneak in one last question is high net worth tends to be stickier assets.
Do you expect then the redemption rate to decline over time versus historically, what we've seen it.
Wealth.
And also too on another dynamic.
With with boomers retiring in and kind of maybe spending a little bit more and therefore, the savings are going to be less and therefore have higher redemptions like how do you think net net.
Factors or any others that you see kind of impact the redemption rate versus what we've seen historically.
Well I think if you're building your business properly.
I think mass affluent and high net worth.
Our focus is on making sure that our retention our retention rate is obviously is as solid as possible <unk> has always had a history of having a retention rate that had been lower than the industry and I think everyone knows that.
These levels, obviously right now we're in a different different circumstance, but we believe that and feel confident that we can continue to do a great job now as it relates to the aging population and de accumulation.
This is the key here so as long as you have.
Our sales force that is diversified.
And you have a salesforce, where youre, bringing on new talent.
And you can continue to do that we feel quite comfortable that we'll have a nice mix of clients.
First question you asked I talked about bringing on young professionals. That's a prime example of what the future looks like we're going to have obviously, a significant amount of money in the industry passed one from generation to generation in our organization has proven over decades that we are leaders in really working with multi generational family.
And not only having the grandparents, but having the parents, having the kids, having the grandparents that puts us in a great position to capitalize on the movement of these assets through generation to generation.
Okay, Thank you and Jeff and Jeff It's Luke on the just on the quantitative side that.
You can see our gross outflow rate our redemption rate overall is trending at 9% and trending down Youll remember that about five 5% of that redemption rate is really structural it's fulfillment of the product. It's people who stayed with us for a long for me, which may include retirement, so we view that obviously as a floor.
Five five to five 5%.
Everything above that you can think of as being competitive on sub front and so I would guide that even with baby boomers retiring.
Our rate of 8% is truly achievable for us overall and that is where we trended in the best of times and we think that potential is available for us now.
Okay, great. Thank you.
Our next question comes from Gary Ho of day Chardan capital markets. Please go ahead.
Great. Thanks. Good morning first question just on the expense guidance update.
It looks like the biggest decline is within.
Hygiene Biz Dev expense line.
Maybe can you comment on kind of what drove that in particular I think Luke you mentioned some discretionary spend.
Where these costs pushed out and just wanted to see what changes were made relative to the budget at the beginning of the year and as it related question can we also expect this 2% to 3% overall expense growth as we look out to fiscal 'twenty two.
Great question, Gary I'll start with the last part on the on 2022 and beyond.
Now we would guide to that territory like three 3% is probably a good starting point to think of 2022 and in on our February call. We will have finished our planning for the year and we'll get we'll get much more robust guidance into 2022 and beyond on Iag's other business development expenses.
I've mentioned it as you know the things that are in that particular line. It includes sales marketing promotion are around our facilities for our financial planners training technology, all the things that support on the ground business development and in serving survey of clientele and I'd I'd note that that is one of four lines.
That concerns what we've called advisor in business development. The other lines are things like sales commissions asset based comp another product commissions.
$12 million reduction in guidance that you see you can do that is reflecting mostly distress generic sales and promotional activities, but it's quite a small amount in the context of the broader spend that we have an advisory business development.
I'd also note Q4 the guidance, we've given does have healthy spend in Q4. So I would guide you that you can take.
Guidance reduction, we've given you to the bank.
But I wouldn't know what their seasonality coming in Q4, and you'll see when you do the math the guidance for Q4, it's quite a healthy level of spend in this particular line and I would also highlight as we've considered our activities and what we're spending on the business is doing really really well and we think we're spending at a at a high enough level and doing the right things and we didn't have to go on.
Further in this period.
Great. Thanks, and then maybe moving on to Slide 40, where you laid out the roadmap for common dividend increase Luke when you do the math on maybe at <unk> annualized number as opposed to LTE M.
You would get to a number that's closer to 60% payout just wanted just wanted to be clear that you are looking at it when you decide it is on an LTM basis.
And then maybe on the same slide maybe for James.
Side between.
Dividend increases versus buyback or some of the other.
Sure.
On that page.
Yeah.
Started in the ultra to James said Gary.
You are quite right on the on our guidance and the N and M D.
Spell of note, where we consider recommending a dividend increase that we would be encouraged to last 12 months not too not in quarter annualized and that removes the impact of seasonality and that's that's what you should consider is last 12 months and I will turn at some James.
Yeah, Gary we as we've said before we believe we're in for a you know an active M&A environment, given confidence 11 levels given given the macro environment generally.
And so yeah, we are thinking actively about deploying capital in M&A and.
As we've discussed before from a from a wealth management perspective, we view that industry organized around the world, It's organized kinda nationally or regionally so our aspirations on wealth management.
It would be very much focused in Canada.
Typically in high net worth and ultra high net worth segments.
And then on the asset management side for Mackenzie of course, it. It's it's a statement of the obvious but Mackenzie very clearly participates in a global industry and is competing in Canada against global Giants. So.
You know.
Mackenzie, we were prepared to look more broadly geographically if we can if we can enhance its capabilities.
You know that could be it could be in Canada or outside Canada. So M&A is something we're certainly thinking about a.
Buybacks too are are are going to be a part of it part of the toolkit.
But I would say at this point are more focused on M&A opportunities fund buybacks.
Great and then maybe just a follow on to that James just on the M&A side for Mackenzie, that's mostly in Canada, or you're looking at global as well.
And then a related part that I'm, obviously very strong on the retail side and the institutional side any interest in buying institutional managers.
Yeah, I'll start and I'll, let Barry I'll, let Barry add.
But.
Mackenzie very clearly participates and competes in what is truly a global industry.
And we need to be mindful of that it's not a Canadian industry, it's truly a global industry.
And so when we think about kind of positioning Mackenzie three to five years out we think about how do we make it a stronger competitor and what is today.
Global industry.
And so yeah for for Mackenzie.
We'll be looking more broadly than just to Canada geographically for opportunities to both enhance its investment management capabilities and perhaps some distribution.
Will will come with it and I'll, let Barry add to that answer.
Great James you got it spot on and thanks for the question Jeff.
It is really a combination of the fact that we we like to continue where we think we have gaps. We don't think we have a gaps right now, but we're always looking for strong global investment capabilities to bring to Canada.
Normally if obviously is based in Canada.
<unk> global.
Green ship the same as you know we lifted out a team in Boston, a wonderful institutional quality quant team. They are doing very well up to $5 billion AUM last three years, we've got a team in Dublin the team in Hong Kong from legacy egg them and Theyre just terrific mostly compete the institutional world.
So we're always looking for investment talent capabilities as James mentioned anywhere around the world. So that's irrespective of borders and then we can bring it into our obviously robust Canadian retail business, but also as James mentioned.
Institutional business, where we love our business and it's.
It really provides diversified sources of revenue we do it in a very targeted and limited.
And in terms of a handful of capabilities that we think are of interest to global institutional investors in Canada, United States Europe and Asia. So we continue along that journey.
So yes, if there's anything that could help us speed it up a little bit we'd certainly be open for consideration.
Okay, Great and then just my last question.
I know Theres some talk about.
These retail flows I'm, just wondering the impact of higher rates or rates trending higher.
If the rate environment.
Persist now we know the story on the household debt what clients see.
Sabre paying down debt versus increasing the savings rate is that a risk to elevated flows.
That's a question for Damien.
Barry.
I'll start and everyone likes to jump into those ones, Jeff but.
Just I'll just speak from Mckenzie as perspective.
Probably it might be different wealth side, but on the asset management side again, we.
First of all we have as you know our multi boutique model with really a variety of building blocks.
And so.
I've been saying personally and Mackenzie St personally is to help advisors.
Start the journey of a more future oriented portfolio for their clients and that's why we've been bringing alternatives to the marketplace not just liquid caught up now private alternatives and obviously you know even if an inflation not transitory we've got a lot of.
Of building blocks to put a strategic allocation portfolio to help to them and is some of the potential long term effects of inflation such as mountain infrastructure of course, we've got tips. We've kept commodities we've got <unk>.
So you've got a whole.
Plethora. So that's just one thing on I wanted to mention on the Mackenzie side, we actually prefer.
<unk> fairly well irrespective of the economic environments. In fact, as we told last March of 2020, we probably perform our best when markets are choppy or downwards, because we have a lot of our protective downside in terms of impact on flows I'm not sure.
Sure I'm not sure if I would what Jeff had an impact on our thesis that savings rates will be sustainably higher than pre COVID-19, albeit maybe not as high as today.
Again with that focus on that.
That focus on savings and retirement for all Canadians more so going forward should be irrespective of the economic environment and I'll put it a little bit of plug as you know I always do these transitory inflation.
Trends are we're.
Were getting through them, if theyre going to take a little while right well into 2022 and they hurt some segments of the population. So we got to be mindful of that.
But long term long term secular trends in developed countries like Canada is actually for our low rates and low inflation going forward for demographic technology.
Productivity improvement prisons so.
Probably something just to continue to think through long long term, obviously short and mid term might be different so I'll turn it over anybody else wants to comment but thank you.
Okay.
Yes, it's David I'll jump in and then I will tell you that.
This is why we're in business questions. Like this is all about financial planning.
And how we work with our clients and we're involved in helping our clients make the right decision as it relates to paying down debt or investing or delay though.
The good news is as you direct your efforts towards high net worth.
High net worth individuals generally understand that and understand how to use that.
Positively so for US we have not seen any.
Any issues with loans, nor do we anticipate any issues with loans, obviously, when you're talking about higher rates. It has more to do with market and in the environment and how do people feel as though the investing but we feel quite confident.
That is not going to get in the way in terms of future flows.
Okay, Great. That's it for me thank you.
Our next question comes from Tom Mackinnon of BMO capital markets. Please go ahead.
Yeah. Thanks, very much good morning, just a quick one here look I think you said in terms of looking for business development expenses for 2022 that a 3% increase.
2021 would be appropriate yeah, how should we be looking at operations and support.
Or are you well.
That's a good question so I'm sorry, so what my guidance would be on 3% would be overall, the overall ops and support in particular.
Business development will obviously be variable there there is some variability with mckinsey wholesaling commissions in particular, but that 3% is meant to be an overall and in particular in ops and support and so it's a very good question and and and you know I clarify for everybody on 3%.
Focus first lien four mostly on ops and support expenses.
And Tom as Ed mentioned earlier too in the in February you can expect us to give much clearer guidance once we finalize our plans.
By line item.
And that business develops.
The business development expense would be a function too though of our.
There's some variable element as well so the gross sales continued to be strong would we expect that.
It makes sense portion of that overall could be actually higher than the three.
Yeah, Yeah for sure Tom and the key elements of variability. So there's there's one key variable item in that line, which is Mckenzie Wholesaling Commission and we'd expect to continue like we've done on page 35 to give you guidance on how it's working and you heard very early in the year.
When we launched this guidance and enhances disclosure remind that we reset the bar every year and the bar the bar rises and so will it will help you understand.
How 2022 will behave based upon different sales levels and so there's that element that is variable and there is some discretionary advertising and other promotional stuff in there and we'll be finalizing that in giving guidance and then a bunch of the stuff in that line is more is more fixed and we would.
We would give the same type of guidance as we have on ops and support so that that's the one item that we will we will help you understand is the variability Mackenzie wholesale and commission.
And we would remind we do reset the bar every year on that one.
Okay. Thanks.
Our next question comes from Graham Ryding with TD Securities. Please go ahead.
Hi, good morning.
Perhaps James I'll take this one.
For you, but I'm just thinking about I P. C. Can you talk about the business model, there and how it.
Compares to <unk>.
Is there any thought towards potentially bringing IPC.
<unk> is there a value creation opportunity there perhaps.
Yeah. It's a good question, but I, but I think the answer is no. The it is a very different business model.
These are.
With with very different.
You know you have you have advisors, who.
I have a different contractual relationship of course with IPC, then I T wealth advisers would have with.
With with <unk>, you have a very very different grid.
Different allocation of expenses, so I do view the businesses as being the businesses as being a quite a bit different in many respects in many respects wealth is a unique and I think a uniquely successful.
Model within the industry, but I think what you should anticipate with with IPC and look it's it's it's it's executing well here as you can see from the results are.
But there's a big push honestly speak to to purchase to purchase practices.
Convert books, where it makes sense to more of a salary plus bonus model as opposed to the current.
Quite high grid Ah payouts.
And you know, they're also exploring indeed more than exploring starting to execute on an icy P. M model.
Where our money is being managed on a discretionary basis. So as I've as I've said earlier I like IPC because I think this industry is in for a lot of change over the next several years is.
The generation of advisors, who helped build this industry in the eighties and nineties approach retirement and think about succession on what theyre going to do with their books.
I think new industry architecture, new economic models are going to emerge and we very much view I P C as our opportunity to to experiment and participate.
And those new models, but.
To go back to the core of your question as we sit here today I do I do view the the two models is as quite a bit Oh.
It is quite a bit different each has their own strategy and each we think can achieve a you know a very significant growth in years to come.
Okay. Thanks for that David jumped to you.
You are showing.
Good sales growth momentum and give us some advisor productivity numbers, there, which shows some increases we're still seeing some attrition in the number of your advisors sort of particularly at the greater than four years' experience level can you just provide a little bit of color on what we're seeing there is just a reflection of natural attrition not being replaced with.
Rogers that you're recruiting into <unk>.
Yeah.
First off I would say that it's important that everyone understands where we're focused on quality not quantity in our kpis are all around productivity and not.
The size of our sales force, but the numbers you are seeing it's just natural attrition.
We continue to work with our existing advisors and make sure that we are.
We're focused in.
Make sure that they.
They have everything they need to to really attack the mass affluent and high net worth segment.
Of the marketplace and and we like the fact that we're leaner quite frankly.
Then we have been in the past, let's say over the last three or four years, because it's really allowed us to focus our efforts at the same time, we've done a very very good job recruiting.
And we're really attracting experienced advisers that really want to focus on planning and really want to enable their business and their teams and their clients to have an elevated experience.
So we feel quite confident and excited about what the future of our sales force looks like.
And Greg one thing I would add if you look at the supplemental disclosure we've got the line with the consultant practices and you can think of that as being that the practice owner. We've got another line called associates and those who are employees of the practice and they are all licensed professionals or financial planners. They are serving clients. So we'd guide you as well to look at those two lines together as far as the.
Force or people, who are serving the clientele, there and so you'll see that the consulting practice. So the consultant owners has declined by 7% I believe this quarter while at the same time your associates has risen by 12.
So when you look at the actual for serving clients. It has been growing slightly.
Okay Fair point.
My last question would just be north of the fundraising this quarter could you give us some color about how much that I think it was $1 1 billion how much it's third party versus commitments from great Western LNG.
Yeah.
Very pleased to say that we are where we're actually seeing good.
Good and you've seen the price can be brought to market really good supportive norfleet across the group of companies.
And we're on plan there, but in spite of that sort.
Abstention all of this fund raising as promotes side the group and in it and it is well diversified across private equity private credit and infrastructure and I'd say one of the bright lights that were seeing as well that the norfleet team is excited about is we're starting to see more for our clientele.
Within the numbers are traditionally it normally has been that there are investments have been global but their clientele has been primarily Canadian.
So that's one change that we've seen in 2021 Thats very healthy is they're executing well on their on their vision of having a lot more clientele outside of Canada.
Great. So it can be thank you.
Once again, if you have a question. Please press Star then one our next question comes from Scott Chan of Canaccord Genuity. Please go ahead.
Hi, Good morning, maybe just going back to north sleep on.
Asset growth has been impressive and almost 25% since you acquired it.
What proportion of those commitments I guess year to date would be within versus kind of external and I'm just trying to get a sense on looking forward.
In terms of the North sea and a lot of your solutions.
Kind of the stability and growth within that.
Yeah, all of the $4 3 billion you can think of the group, having furnish to around 500 $600 million of that so substantially all of that that new business has come from third parties and we see that growth continuing and we're going to obviously support norfleet with all we've got and you can see us actively putting north leap into our managed.
Elution launching products at Mackenzie and Great West life is also supporting them wherever they can but the bigger opportunity is obviously with third party business and and the team at Norfolk is very focused on growing their clientele and as I mentioned bring their clientele outside of Canada, which is a huge opportunity for them.
On the earnings out normally it seemed that part of the five year. Your original guidance or is there like an updated guidance that we should think about for 2022 odd because it seems like the assets, probably we're tracking a bit better than you expected in my view.
Yes, it's great. We've got very good line of sight on the revenues from this business and so when you see the fundraising as Olympians through seven those are new commitments that the revenue comes on when you might put to work and invested and so we have these treatments in hand, and the revenues are going to grow and the earnings are going to grow as the as the money invested so right now our original guidance for.
For 2021 was it was $10 million contribution from northeast and I'd Guide you for 2022, you can probably expect about double that so what so about $20 million and and that is a function of all the business activity. That's been put on this year.
That's super helpful and just went back to the SG&A question for 2022, I just wanted to make sure.
And I know you are going to refine it next quarter, but are you talking about.
So, 3%, including business development and operations and support acknowledging that business development has that variability.
Yeah. That's right. So you can think of it as being 3% overall with the qualifier on business development and the fact that Mackenzie wholesale and commissions are in there.
Okay, and just lastly, James just on the capital you talked about NCI D or share repurchases being a bit lower as a priority.
When do you expect to renew your in CIB or initiate why did he say it looks like there's one right now.
Yeah, No you're correct. There is not one right now, but Oh look, let's let's see how the next several months unfold in terms of in terms of capital deployment.
But that's certainly something we're thinking about for some time in 2022.
Alright, Thank you very much.
This concludes the question and answer session I would like to turn the conference back over to Mr. Potter for any closing remarks.
Thank you Ariel and thanks to all of you who joined the call today, we wish.
You're a great upcoming weekend and aerial lift that will we'll close out the call.
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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