AGF Management Limited

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Thank you for standing by and welcome to the Q4 2022 AGS Management Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference. Ms. Quinn, you may begin.

Thank you, Operator, and good morning, everyone. I'm Jenny Quinn, Vice President and Interim Chief Financial Officer of AGS Management Limited. Today, we will be discussing the financial results of the fourth quarter in fiscal 2022. Slides supporting today's call and webcast can be found in the investor relations section of agf.com. Also speaking on the call today will be Kevin McCready, Chief Executive Officer and Chief Investment Officer. For the question and answer period with investment analysts following the presentation, Judy Goldgren, President and Head of Global Distribution, will also be available to address questions. Turning to slide four, I'll provide the agenda for today's call. We will discuss the highlights of the fourth quarter in fiscal 2022, provide an update on the key segments of our business, review our financial results, discuss our capital and liquidity position, and finally, close by outlining our focus for 2023. After the prepared remarks, we will be happy to take questions. With that, I will now turn the call over to Kevin.

Thank you, Jenny, and thank you everyone for joining us today. Fiscal year 2022 saw continued market volatility. Despite the challenging macro backdrop, we had another solid year. I'll begin with some highlights. We reported AUM and fee earning assets of $41.8 billion at the end of Q4, down just 2% from 2021 despite the market volatility. Our mutual fund business reported net sales of $251 million in the quarter. marking the ninth consecutive quarter of positive mutual fund net sales. For the year, we achieved mutual fund net sales of $765 million, despite the industry being in net redemptions of $41 billion. Supporting our positive mutual fund flows was our strong investment performance. As you know, AGF measures mutual fund performance by comparing gross returns before fees relative to peers within the same category, with the first percentile being the best possible performance. We target an average percentile ranking versus peers of 50% over any one year and 40% over three years. At the end of Q4, the average percentile ranking was 41% over the past one year and 30% over the past three years, with a number of our top-selling funds remaining in the top quartile. In recognition of our fund performance, AGF Global Select Fund won the Lipper Fund Award for the three-, five-, and ten-year performance in the global category. Our strong performance was attributable to our disciplined investment and risk management processes, the cautious tone we had about the market since the fall of 2021, and our tactical approach in the cash level and the use of liquid alternative assets in our funds. Looking at the past three years, the market has experienced a drawdown with COVID, the subsequent recovery, and a drawdown from the current monetary tightening. In the midst of that market volatility, we continued to deliver strong investment performance, and our product lineup remained resilient. Turning to our financials, we reported diluted EPS of 32 cents for the quarter. On a full year basis, we reported diluted EPS of 96 cents. During the quarter, we completed a substantial issuer bid where we took up 3.5 million shares for a cost of $24 million. We ended the quarter with $59 million in cash, $220 million in short and long-term investments, and $22 million in long-term debt. Our capital position remains strong, and we are well-positioned to continue to weather the macro uncertainties and have capital available to return to shareholders and strategically invest to generate recurring earnings. Finally, we paid a quarterly dividend of 10 cents per share for the fourth quarter. Starting on slide six, we will provide updates on our business performance. On this slide, we break down our total AUM and fee earning assets in the categories disclosed in our MD&A and show comparisons to the prior year. Usual fund AUM was essentially flat year over year. I'll provide some more color on our fund business in a moment. Institutional sub-advisory and ETF AUM decreased compared to prior years, mainly due to markets. We continued our strategy to expand the U.S. SMA business. We have onboarded a number of our strategies onto three leading turnkey asset management platforms, Bestmark, SmartX Advisory Solutions LLC, and EvestNet, as well as other leading wealth management platforms. Our U.S. SMA relationships continue to generate positive flows and AUM is expected to grow gradually over time. Our liquid alternative products continue to attract interest from investors who are looking for a strategic or tactical hedge for their portfolios. Managed by our quantitative team in the U.S., our market-neutral anti-beta strategy is designed to generate positive returns in volatile markets and preserve capital in a downturn. At the end of last week, the AUM for this strategy had doubled to over $900 million from just over a year ago. Finally, we continue to see interest from institutional investors across multiple strategies and jurisdictions, which bodes well for future sales. Our private wealth businesses continue to demonstrate resiliency, with AUM only decreasing 1% year over year. Our private capital AUM and fee-earning assets were $2.1 billion. It is our goal to grow and diversify our private markets business and to be one of Canada's emerging leaders in private market investing. We're focused on expanding our existing relationships and continue to explore other unique opportunities to grow our private capital business and product offerings. Turning to slide seven, I'll provide some detail on the mutual fund business. The mutual fund industry continued to experience net outflows, worsening to net redemptions of $28 billion for the quarter ended November 2022. Despite the industry trend, our mutual fund businesses remained positive and recorded $251 million of net sales in the quarter. This includes the win of $230 million allocation from a strategic partner that we disclosed last quarter. Excluding the net inflows from institutional clients invested in our mutual funds, retail mutual funds were in net sales of $76 million for the quarter. AGF's outperformance to the industry is attributable to our strong investment performance, our strong brand, the diversity of our sales channels, and our team's continued efforts to build key relationships with our clients and partners. With that, I'll turn the call back over to Jenny.

Thanks, Kevin. Slide 8 reflects a summary of our financial results in the fourth quarter, with sequential quarter and year-over-year comparisons. EBITDA before commissions for the current quarter was $30.2 million, $3 million lower than Q3 2022. EBITDA this quarter included higher income from private capital, which was offset by higher expense levels. Net revenue for the quarter was $70.5 million, comparable to Q3. SG&A for the quarter was 51.5 million. Excluding severance, SG&A for the quarter was 49 million, which is 2.8 million higher than Q3 due to timing of activities and higher performance-based compensation. AGS private capital contributed EBITDA of 8.5 million in the quarter, which is 1.9 million higher than Q3. EBITDA from private capital managers this quarter included $1.2 million of carried interest revenue, recognizing strong performance in one of our long-term private capital investments managed by SAS. EBITDA for private capital LP funds was $7.1 million, which is $1.2 million higher than Q3. AJF participates as an investor in the unit of private capital LP funds, benefiting from valuation increases and distributions from the funds, which can vary. On a long-term basis, we expect returns of 8% to 10% from investing in private capital LPs. On a full-year basis, EBITDA before commissions was $138.6 million, $11 million higher than prior year. Net revenue for the year was comparable to prior year. SG&A for the year was $194.6 million, which includes $4.4 million in severance. Excluding severance, SG&A in 2022 was $190.2 million. which is in line with our guidance provided on the Q3 call, and $2.4 million lower than prior year, mainly due to lower performance and stock-based compensation. EBITDA from private capital was $28 million, $9.2 million higher compared to prior year, mainly due to higher contributions from our long-term investments. Standard EPS was $0.96 for the year, which is 75% higher than prior year. Our net income and EPS were bolstered by the elimination of the deferred selling commission purchase option, which came into effect June 1, 2022. The elimination of the DSC will provide a temporary lift to our net income and free cash flow. However, this lift will reverse over time. Turning to slide 9, I will walk you through the yield on our business in terms of basis points. This slide shows the net revenue, operating expenses, and EBITDA before commissions as a percentage of average AUM for the fourth quarter with sequential quarter and year-over-year comparisons. To provide a more normalized view of the yield that we earn, we have excluded AUM and related results from the private capital business, as well as other income, DSC revenue, severance, and corporate development costs. The key for net revenue yield is 75 basis points. which is one basis point lower compared to prior quarter, and flat compared to prior year on a four-year basis. As a reminder, net revenue basis points will fluctuate depending on the percentage of mutual fund assets and the product and series mix within those assets. T4 SG&A is a percentage of AUM with 52 basis points, three basis points higher compared to the prior quarter. As previously mentioned, Expenses were higher this quarter due to timing and higher performance-based compensation. On a full-year basis, SG&E was 49 basis points, one basis point lower than prior year. This resulted in EBITDA yields of 23 basis points in the quarter compared to 26 basis points in the prior quarter. Full-year EBITDA yields was 27 basis points, one basis point higher than prior year. Turning to slide 10, I will discuss free cash flow and capital abuses. This slide represents the last five quarters of consolidated free cash flow on a trailing 12-month basis, as shown by the orange bars on the chart. The black line represents the percentage of free cash flow that was paid out to the dividend. Our trailing 12-month free cash flow was $70.3 million, and our dividend payout ratio was 37%. In the same period, we have returned $72 million to shareholders. That includes dividends, share repurchases under our NCIB, and the $24 million substantial issuer of it completed in November 2022. Since the monetization of our investment in S&W in the fall of 2020, we have returned $150 million to our shareholders. Our cash balance at the end of November was $59 million, and we have $220 million in short and long-term investment. We have $128 million remaining on our credit facility, which provides credit to a maximum of $150 million. We are comfortable increasing our net debt to EBITDA up to 1.5 times, so the right opportunities arise. Our remaining capital commitment to our private market business is 43 million. Not included in this is our anticipated commitment of 50 million U.S. dollars to an upcoming third fund managed by INSTAR. Capital commitments may be funded from excess free cash flow, but keep in mind there will also be further recycling of capital as monetizations occur. which will help define future commitments. Taking all of that into account, we currently have excess capital available. Redeploying that excess capital to generate recurring earnings is a key strategic priority. We will have further updates on this in coming quarters. Turning to slide 11, I will turn it back over to Kevin to wrap up today's call.

Thanks, Jenny. In 2022, AGF celebrated its 65th anniversary. The firm's longevity is a testament to our history of innovation, disciplined investment approach, and an unwavering commitment to our clients. This year was another solid year for us despite the challenges facing the markets and the industry. In such environments, our AUM and fee-earning assets remained resilient. We continued to outperform the industry and recorded the ninth consecutive quarter of positive mutual fund net flows. This is the longest streak of mutual fund net sales we've seen in the past 20 years. We delivered strong investment performance through our disciplined processes and focus on risk management. Delivered EPS for the year was 96 cents. Our SMA business gained momentum in 2022, and we have onboarded a number of our strategies onto several leading US SMA platforms. Ash Lawrence joined us as head of private capital to lead the growth of our private markets businesses. We welcomed employees to our new head office at CIBC Square, which marked the official start of our hybrid work approach. The space provides our employees with a flexible workspace, enhanced collaboration, and greater communication, while continuing to advance the reduction of the firm's office footprint by approximately 22%. As we navigate the uncertainties in the market, we remain focused on building on the momentum from the past few years, managing the risks and our results, and creating value for our shareholders over the long term. As we look ahead to 2023, we are announcing SG&A guidance of $202 million, Our SG&A guidance does not include costs related to corporate development and excludes severance. At AGF, the most important asset is our people, as they play an integral role in the firm's success. AGF is committed to being an employer of choice, which means looking at responsible practices and initiatives to attract, develop, and reward employees. We continue to be thoughtful and disciplined in our approach to expenses, while also investing for growth, especially into our private capital business. SG&A for 2023 reflects these investments as well as the inflationary market environment. As a reminder, our SG&A includes variable compensation. A significant improvement in sales or investment performance could result in higher variable compensation expenses. We have a strong balance sheet to strategically invest and redeploy excess capital to generate recurring earnings and return capital to shareholders. We continue to evaluate our pipeline of capital deployment opportunities. However, with the current market environment, conditions to complete a transaction continue to be challenging. As we head into fiscal 2023, we remain focused on our strategic priorities, which are to deliver consistent and repeatable investment performance, maintain sales momentum and generate net inflows, build a diversified private markets business, meet our expense guidance and continue to invest in key growth areas, and enhance our corporate sustainability programs. Finally, I want to thank everyone on the AGF team for all their hard work.

We will now take the questions.

Kevin, can you talk a bit about how you're achieving your three-year fund performance percentile? It's been a choppy market in the last few months, so how have you maneuvered for that? And can you also expand on your outlook for 2030? Yeah. Thank you, Chi.

If you think about the last three years, we've had, as I mentioned in my remarks in the call, the drawdown from COVID, massive recovery in the same year, and then a pretty strong year in 21, followed by the drawdown in 22 on the idea of central bank tightening. Navigating that on all sides is what I look at, and I think it's a testament to, frankly, that we've got a disciplined view of things. In the market last year was one where you had to be more tactical and probably more defensive. So that positioning helped. And so, you know, I look at December, which was also equally a tough month. If you remember, we gave everything we got back in the end of November back in the market in December. And we continue to improve on those track records. So I feel pretty good about performance because that sets us up, obviously, now for the next couple of years of sales. And probably more importantly, we didn't have any what I call blowups. So You know, the cardinal sin in this industry is where you, in a negative market like last year, you have performance that's even worse than the market. And then you're on defense. And so we have obviously none of that to deal with. So we can really play offense and talk about how we've helped investors through this. As far as where we go in 2023, obviously we have some more volatility ahead. But obviously the worst of the monetary tightening is behind us. And what we know about our industry is that our – Companies, the asset management industry goes down first with the market, because obviously that's where we're sensitive to, and we all move in the recovery while you're in a recession. So I think it's going to be a volatile year, but a very different year. Obviously, the tone of the market will set the tone of the investor sentiment around investing this year, but I think obviously we're through most of the worst of it. So I think volatile year, but probably one that sets up toward a better back half.

Thank you. My second question is on the float side. So, you know, continue to see some decent momentum to start a year here. What are you hearing from your distribution partners as we head into the important RSB season and what products they are most interested in?

Oh, thanks, Judy. This is Judy Goldring. You know, we continue to see strong flows going into our global equity and fixed income has picked up significantly as well. And so we are expected to see sort of across the broad portion of our offering sort of interest across the different channels. And I think we remain certainly optimistic, cautiously optimistic around the upcoming next couple quarters. And Kevin, did you want to add something on market?

Yeah, no, I think, you know, as I said, if we stay with a lot of volatility, obviously that will impact flows. But to the extent that, again, the industry loss here in Canada is something that looks close to $50 billion last year in outflow. That's sitting in cash and GICs. As the market firms or at least start to flatten out, some of that will come back. Obviously, the big month for us all is February for the RFP season. And so to the extent that investors feel like the worst is behind, we could see some better year on that front. So I'd say, and then probably the second thing is that related to product specific, global has been a place for people. We expect those flows to continue. Most of our suite is more globally oriented. And I'd say that the other place will be fixed income. We're really well positioned as well as investors probably won't have the repeat of three negative quarters of fixed income returns last year. You can really get yield now. And so I think that suite of products will do well in this environment as we move forward.

Thank you. And just my last question on the private oats. Can you elaborate on the fair value adjustment this quarter? It seems like Also seems like the private old amount on your balance sheet has creeped up sequentially. So maybe provide a bit more color there. And lastly, maybe just some timing and thoughts on the $5 billion mark. Thank you.

Thanks, Jay. It's Jenny Queen. So our investments and our long-term investments increased from $176 million at Q3 to the year at $199 million. So three things factoring in there. We had a $23 million increase, which was $17.6 million in capital calls for the quarter. And then we also recognized a $2.1 million adjustment in fair value. And then finally, we had a reclassification of ROC to distribution income of $3.5 million. So those are the three pieces that are increasing it from the $176 to the $199. So a small piece of that was the fair value. Most of it was distribution income.

Yeah, it's Kevin. Let me touch on the $5 billion. And we still are committed to And that target, obviously, as we said, toward the later part of last year with the environment around us getting transactions done, it was difficult. It continues to be difficult. But we still feel pretty comfortable we'll get there this year in 2023. And, you know, the environment being one where, again, things we're looking at, sellers want yesterday's multiple and we want to pay today's multiple. That takes a while to thaw. But the pipeline of things we're looking at is very robust. So we feel pretty comfortable in that market.

Thank you. I'll pop the line.

Thank you. And as a reminder, if you would like to ask a question, press star 1-1 on your telephone. Our next question comes from Graham Riding with TD Securities. Your line is open.

Hi. Good morning. Just maybe start on the SG&A guidance. Is that up slightly? I think you said $202 million for the year. Is that up slightly from the preliminary guidance provided last quarter?

Hey, Graham, it's Kevin. Yeah, I mean, you know, we've looked at going through our budget cycle. And obviously, when we've had strong investment performance, strong sales performance, you know, and I think of us as being an industry leader, we have great talent. And to keep that talent is we want to be pretty certain around that in terms of securing where we're going with it. And I think at the same time, we look around, we have a lot of inflation, as we all know. And so we've tried to be really competitive around that to take care of our employees. So that is probably the biggest chunk of it. And second to that, I'd say, is the build out of the private capital businesses. is also in there. So there's a slight tweak to where we were on this year's guidance from where we were a couple of quarters ago.

Okay, perfect. Helpful. Primerica, just maybe looking for an update there on what the fund sales look like in terms of what classes are funds, because I know you have a bespoke, I think, F-class type fund that you've created for them. Is that what's driving the sales, or are they going into A-class funds? Just maybe some color there.

Great, and it's Judy. We launched a specific comprehensive suite of 19 funds exclusively for Primerica, so their flows go directly into those funds, and it's, as you know, a principal-distributed relationship, and we're seeing, in terms of the flows, they're going in across the various offerings that we have on that platform, and so we're supporting that business, and we're seeing some good momentum in that channel.

Yeah, and Grandma says, Kevin, you know, we don't Talk about specific clients, but I would tell you I know there's – we can't tell how well that would be doing without the backdrop of this market behind us, right, which we know is hanging over that. But having said that, we're very pleased with where we are with that relationship and that launch. So, again, if this cloud of the market clears, we'll get a better look on that.

Okay. And just to be clear, Judy, are those funds like an F-class type structure with no trailer fee associates? Okay, and I guess building on that, any implication then for what you're sort of expecting over time as sales move into that class of fund? Is that going to have an impact on your overall management fee rate and your trailer fee rate in terms of basis points? How should we be thinking about how that evolves?

Yeah, so there's no transferring of the funds from historical or legacy PFS assets. This is purely net new assets. going into this comprehensive suite of funds that we have. So as PFS evolves their business, they are successfully transitioning out of the DSE model structure that was in place previously and moving into this new principal distributor relationship. And they've been doing it quite successfully.

Yeah, so over time, Graham, what you'll see is we still think that it's a basis point or two a year in terms of our basis points on revenue. As obviously these funds, the legacy funds stay in place, the new funds will come on at a lower rate because of that model. But that will shift over time. So I think one or two basis points a year.

Okay. And the trailer fees, should we expect those to be moving down as well over time? Because I know there's kind of puts and takes there. As BFC falls off, they pick up. But then if you're putting on new funds that have no trailer... then that's going to have an impact as well. So any color on how we should be thinking about that?

Hey, Graham, it's Jenny. So, again, just think that it really comes down to the mix of the assets. So as, you know, we will get assets coming off schedule, which will bump up that trailer rate, but then as we scale across the board of AUM, it'll offset that. So we would expect it to increase slightly over time. So, you know, you might want to save one basis point a year over time.

Okay, that's helpful. Judy, you're on, I think, three SMA platforms now in the U.S. Can you just quantify what that was in fiscal 22 in terms of net new assets from those platforms?

Yeah, we have very much focus in the U.S. on the SMA opportunity. We see that as a great opportunity. So we're on three platforms. And then as Kevin mentioned in his opening remarks, we're on the TAMP platforms as well. And across the board on the SMA specifically, in Canada and the U.S., we've seen growth of those assets over time, and we're now at about $500 million. So we've seen great progress, and I think we're seeing continued success. The $500 million I should specify is U.S. and Canada. We're seeing some additional flows in the SMA platform as we focus on that channel up here as well.

And, Graham, the SMA platforms in the U.S. are actually ahead of where we are in Canada, but we'd expect platforms here to pick up as well. as people get more vehicle agnostic, right? Meaning it could be a fund, could be an ETF, could be an SMA, but obviously the platforms in the U.S. are well ahead of where we are in Canada.

Okay. Great. One more, if I could get a little greedy here. I noticed that you said Ash Lawrence presented to the board a strategic plan for the private assets platform. Is there anything incremental there that we should be aware of, or any update?

Yeah, no, I mean, one of the things Ash will bring to the table is obviously when we get through a deal here, we've recognized that that part of the business gets bigger. We'll have to get better and more complete disclosure on some of that. So look for Ash to be present on these calls as we move into time as well. But really, no change to where we had set out with the board in mid-year. I think it's really about executing them.

Okay. That's it for me. Thank you.

Thank you. And our next question comes from, one moment, Nick Preby from CIBC. Your line is open.

Okay, thanks. Good morning. Just back to the mutual fund flows. I think you'd alluded to certain products that were experiencing pretty healthy demand environment. Just wondering if you can help us understand the breakdown of those mutual fund flows in the quarter by asset class, or maybe the split between long-term and money market. I'd just like to drill down a bit and try to understand the composition of those flows a little better.

Yeah, and if we have very little money market, so most people come to us for a long term, so I would say money market's been kind of a non-issue for us. Whereas you're seeing some of the other players, the banks are seeing money come out of funds into money market or GICs, that won't be an issue for us. But it's been broad-based. It has been across, again, we're more global than most, so that has been a better place to play. And performance has been broad-based and broadly strong. So flows are probably more global equity driven, but picking up on the fixed income side as well. So I'd say it's not a specific fund or category that I would point to. I'd say it's been pretty solid across the board, but definitely don't think about it as money market. That's not the driver.

Okay, good. And then I think just a point of clarification, I think you'd highlighted that quarter to date mutual fund sales were still positive. Are there any chunky allocations that were won in the I series supporting that quarter-to-date result or is that a pretty clean number?

I know there's sometimes some confusion. We do adjust our mutual fund sales just for non-recurring institutional net sales or redemptions that are in excess of $5 million that have been invested into our mutual funds. We did announce the $230 million win, which is positive flows from a strategic partner in November. As well, there was a smaller redemption of about $56 million that came out during the quarter, and so as a result, our net sales number that is true flows in retail is $76 million.

Got it. And I was just thinking more along the lines of subsequent to quarter end. I think you had suggested that the quarter-to-date sales were positive. I was just wondering if that would have been adjusted for I-Series as well.

Yeah, no, and just to clarify, that's December 1 to January 20. We saw $62 million in sales, and that's not been adjusted. There is no adjustment.

Got it. Okay. Okay. No, very good. Okay, that's it for me. I'll pass the line. Thank you.

Thank you. Again, if you would like to ask a question, press star 1-1 on your touchtone telephone. Our next question comes from Jeff Kwan with RBC. Your line is open.

Hi, good morning. Just first question was on the 2023 SG&E expense guidance. I know you mentioned it excludes stuff like severance and corporate development. On the corporate development thing, is that just things that might be things around M&A and those sorts of things, or are there other things that you would classify in corporate development that would be outside of that scope?

Yeah, no, it's just transaction related things. We're going to transact on something this year. So you're right, Jeff, it's real M&A type stuff.

Okay. And just my other question was just on the institutional side of the business. Can you share what the net flow number was for Q4? What you're seeing, like in terms of the committed pipeline, in terms of either new sales or potential redemptions and just in general, the outlook, as you can see it over the next few quarters?

Sure, it's Judy. So, you know, if we look back over the last sort of six quarters, we've seen strong flows of about $500 million from a variety of different clients, institutional clients and our SMA platform. When we're looking forward, we're continuing to see strong RFP activity. At this point, there's no committed sales pipeline at this juncture and very nominal small committed redemptions of about $85 million in the next quarter. But we are seeing a significant pickup in the RFP activity, largely in the global equity and U.S. growth space, along with our sustainable mandates.

Great. Thank you.

Thank you, and I'm not showing any further questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGS next earnings call will take place on March 22, 2023. You may now disconnect. The conference will begin shortly.

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