CI Financial Corp (CIXX) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time I would like to welcome everyone to the CI Financial 2016 first [quarter] results webcast.

All lines are in listen-only mode. After the speaker's remarks there will be a question and answer session. (Operator instructions.) Please take note of the cautionary language regarding forward-looking statements and non-IFRS measures on the second page of the presentation.

I would now like to turn the meeting over to Mr. Stephen MacPhail, CEO of CI Financial. Mr. MacPhail, you may begin.

Thank you, and welcome to CI's conference call for our 2016 first quarter results.

As you're aware, at the last quarterly results call I was excited to announce that Peter Anderson, a long time CI executive and key contributor to CI's success, would be succeeding me as CEO of CI. Peter's been actively involved in all aspects of CI's business since the end of February and the succession is well underway.

Peter's been doing an exceptional job, and I can say I'm very confident about the future of CI under his leadership. As such, Peter and I will be splitting responsibilities today, with me providing a recap of our business in the first quarter, and then Peter will address CI's plans going forward.

Doug Jamieson, CI's CFO, will provide the financial overview of the quarter. And Steve Donald, President of Assante Wealth Management, Neal Kerr, President of CI Institutional Investment Management, and Derek Green, President of CI Investments, will all be available to answer your questions.

At the end of the first quarter, CI's total fee-earning assets, including Assante Wealth Management, Stonegate Private Counsel, and First Asset Exchange Traded Funds, were CAD143.3 billion, down 1.7% from December 31st, 2015.

During the quarter, however, there was significant volatility caused by declining markets as well as the Canadian dollar increasing in value by 6.4%, negatively affecting the value of CI's non-Canadian investments. This resulted in CI's average assets down 3% for the quarter, even though we finished the quarter on a much more positive note.

In addition, during the quarter we undertook the significant restructuring of our Harbour Funds investment management team. That combined with retirement costs related to CEO succession resulted in CI taking a one-off charge of CAD10 million after tax, or CAD0.04 per share.

The effect of average assets down 3% in the first quarter, combined with the one-off charge, resulted in CI reporting earnings per share of CAD0.42 for Q1 2016. However, after netting out the one-time charge, CI earned CAD0.46 per share for the quarter.

Notwithstanding the sudden decline in markets, CI was successful in trimming its expense base by close to CAD3 million from Q4 to Q1, even after taking into consideration the fact that year-end raises and frontend loaded government payroll expense charges automatically raised our first quarter base cost by over CAD3 million. We expect these cost reductions and other initiatives that are in the works to benefit CI over the remainder of the year.

During the quarter, CI repurchased 2.2 million shares for a total of CAD63.3 million and paid out CAD0.33 per share in dividends. And as you saw in our press release, CI declared a dividend increase of 4.6% effective with the June 15th dividend payment, reflecting CI's strong cash flow, underlying EPS strength, and the long term outlook for our business. CI's annual dividend is now CAD1.38 per share.

During the quarter, the overall industry experienced a significant decline in gross sales, reflecting investor concern over difficult markets in Q1 following poor markets in Canada in 2015.

Industry net sales, as reported by IFIC, were down over CAD14 billion, or about 60%, year-over-year in the first quarter. CI was not immune to these market forces, and we saw our retail gross sales for the quarter decline 24% from the prior year to CAD2.8 billion. At the same time, retail redemptions increased by about 12%, leaving our retail business flat in the first quarter.

The reduction in gross sales was primarily in the IIROC and discount channel, where sales tend to be much more reactive to short term market conditions. In addition, CI experienced a large institutional redemption from the legacy KBSH institutional business.

The combination of the above factors resulted in flat net sales in the overall retail channel and net redemptions in the institutional channel, for overall net redemptions of CAD332 million.

Notwithstanding, CI continued to see significant strength with net sales in Assante, Sunlight, Credit Union, and Edward Jones channels. Of special significance was the Assante/Stonegate Private Counsel business under Steve Donald's leadership, which experienced substantial net inflows just below the record 2015 levels, and materially above industry experience of industry net sales down 57%.

From a product perspective, CI's managed solutions continue to be our fastest growing product line. In addition, CI's focus on growing its high net worth business continues to show success, as CI's high net worth assets increased by almost 4% from the prior quarter and 27% from just one year ago.

It's important to recognize that this successful growing of our high net worth business also means lower gross management fees, as we provide preferred pricing for high net worth investors. But, to be clear, the growth in high net worth is a positive event, as growing this category is critical to the long term growth of the firm.

From an investment perspective, short term performance of a number of our large money management groups continues to be challenged as a result of defensive positioning and a value style approach to their money management. Long term fund performance, however, remained strong, with 62% of CI's assets under management in the first or second quartile over 10 years.

You will recall that we took significant steps in 2015 to enhance CI's signature funds team under CIO Eric Bushell. In 2016, under Neal Kerr's leadership, we continued our focus on investment management and completed the restructuring of the Harbour Funds investment management team.

Ryan Fitzgerald has joined Roger Mortimer and Paul Sandhu as the key portfolio managers of the Harbour Funds. And we now believe we have a world-class investment management team well positioned to generate long term growth, and we are seeing it reflected in their investment results.

Our investment team build outs are now largely complete, with our focus to continue to be on strong, risk-adjusted, long term performance for our clients.

And lastly, in the first quarter we hired a Senior Vice President of Institutional reporting to Neal Kerr, to focus expressly on building our institutional business; again an example of investing in our business for the long term.

And with that, I'm going to turn it over to Doug Jamieson, CI's CFO. Doug?

Thank you, Steve. Taking a quick look at year-over-year highlights, average assets under management were up 1% from CAD106.5 billion in last year's first quarter to CAD107.3 billion.

As Steve mentioned, reported net income was CAD116.6 million, and that was down 19% from CAD144.5 million last year, and on a per share basis was CAD0.42, down from CAD0.51 last year.

Adjusted for all the provisions mentioned at the bottom of the slide, earnings were down 11% to CAD126.1 million, and down 8% on a per share basis to CAD0.46. And EBITDA per share was down CAD0.07 to CAD0.77.

The drop in earnings was greater than the drop in average AUM over the past year, primarily because of the change in CI's average management fee rate as we continue to see a higher percentage of assets in high net worth programs.

Dividends paid were up 5%, as CI paid out CAD0.315 per share in the first quarter last year and CAD0.33 in the first quarter this year.

Now looking at consecutive quarters, average assets under management were down 1% from the fourth quarter, from CAD108.9 billion to CAD107.3 billion. Reported net income was down 8% from CAD127.2 million last quarter and, on a per share basis, was down CAD0.04 from CAD0.46 last quarter.

Adjusted earnings were also down 8% from CAD137 million and CAD0.50 per share. EBITDA per share was down CAD0.06.

Similarly here, on a quarter-over-quarter basis the larger decline in earnings relative to average AUM was due to the drop in the average management fee rate.

Net debt ended the quarter at CAD493 million, up from CAD433 million at the end of the year. And while this was a result of an increase -- sorry, and this was a result of an increase in CI's working capital and from returning cash to shareholders that was CAD11 million higher than free cash flow.

CI's net debt to EBITDA ratio sits at just under 0.6 to 1 as reported. But, net of the deposit at CRA, the ratio is 0.4 to 1.

This changing mix of products from Class A into Class F and high net worth, as well as the inclusion of First Asset for the quarter, has pushed our gross management fee line down from 184 basis points in 2009 to 159 basis points in this quarter.

For the net fee line, we take the trailer fees paid and the amortization of DSC from gross fees, and that has held much more stable over the years. And here the impact of more high net worth assets and First Asset is a little more visible over the past two quarters.

The asset management margin measures how much we retain out of management fees after paying trailers, SG&A, and DSC on a trailing 12 month basis within the asset management segment. We see that we are left with CAD42.20 of every hundred dollars in management fees earned compared to CAD42.30 one year ago, and we're still up significantly from the first quarters of two and three years ago.

CI's SG&A net of First Asset was 35.7 basis points. CI's average assets under management without First Asset declined by 2.8% from last quarter, and at the same time SG&A spend dropped by 2.9%. So, the basis points only increased here because of one less day in the quarter.

And the reduction in SG&A dollars, as Steve pointed out, was during this first quarter where we typically face the headwinds of annual increases to base compensation and payroll taxes being paid in February on year-end incentive compensation. Otherwise, the drop in SG&A spend would have been larger.

So, looking at the spend in dollar terms, CI's spend on SG&A in the fourth quarter net of First Asset was CAD95.7 million, and this declined to CAD92.9 million in the first quarter. And again, it would have been lower if not for those typical first quarter costs.

The SG&A efficiency margin looks at an available pool of management fees less trailer fees and DSC, and how much of that pool remains after deducting SG&A spend. In the past 12 months, CI has retained 70.6% of that available pool.

In the first quarter alone, the impact of First Asset was a 1% decline in this margin, given their higher proportion of SG&A to management fee revenue. And we expect this to improve as we continue to find synergies and as First Asset achieves greater scale.

CI's quarterly free cash flow remains strong, and the CAD144 million this quarter is consistent with the level of a year ago, and is also significantly above the level of the first quarters of two and three years ago.

Looking at the return to shareholders, we start with operating cash flow and adjust for the after-tax provisions taken in the past two quarters and the deferred sales commissions paid to get to free cash flow. CI has paid out all of that free cash in the form of dividends and share buybacks over the past 12 months at CAD624 million.

We are very comfortable with returning all free cash flow, and in particular the new level of dividend payout that we target to average 60% to 65% of free cash flow.

And here on the leverage chart, the shaded area highlights our target leverage of 50% to 75% of EBITDA to be maintained over time. While CI is in the range of its target leverage ratio based on reported net debt, when considering the CAD172 million on deposit with CRA it remains well below its target leverage, as shown by the dashed line in the chart.

CI continues to operate with a strong balance sheet and has financial flexibility with respect to share buybacks and acquisition opportunities.

I will now turn it over to Peter.

Thanks, Doug.

Since returning to CI two months ago, I've been spending a lot of my time getting reintroduced to the Company. Although I left only three years ago, I realize that CI today is a very different company from when I -- than when I left. I'm incredibly excited to return to the firm and to continue building CI from where we are today.

I would be the first to admit that we have a lot of work ahead of us. We have regulatory and industry headwinds. In some of our funds, our short term performance is soft. And finally, our sales reflect the changes in the industry and fund performance. Fortunately, we have an excellent Company and a history of adapting to change.

As always, we are not standing still. The status quo has never been an option at CI. We will be announcing very shortly additions to our sales and marketing teams, both nationally and regionally. We currently have a large and talented wholesaling team, and we're making it stronger.

We've already significantly enhanced our portfolio management groups, most recently with the rebuild of the Harbour team, and we plan to make additional changes throughout the Company over the next few months. All of these are intended to make CI stronger and more competitive.

I do want to briefly talk on a few opportunities I see at the Company today. Firstly, I want to highlight the success of Assante and Stonegate Private Counsel.

Under the leadership of Steve Donald and his team, Assante's assets continue to grow well above the industry average. When net sales for the industry in Q1 of this year declined dramatically versus the same period last year, Assante's sales were basically in line with 2015's levels.

Assante's focus on higher net worth families is also gaining traction. CAD16 billion of its assets are with families investing more than CAD1 million with Assante or Stonegate advisors. We see significant growth opportunities over the next few years.

The acquisition of First Asset late last year has provided CI with a new and strong distribution platform. We continue to see new ways for First Asset to enhance the offerings of CI Investments and Assante, and vice versa. The management team, led by Barry Gordon, sees tremendous opportunities with our new partnership.

We've also made an investment to build out our institutional group. We have new leadership and an increased focus on the business. This part of our -- this is part of our ongoing long term strategy to grow the relative importance of the group.

Management and the Board of CI remain extremely confident with the Company. We expressed this by increasing our dividend. As Doug pointed out, we have strong free cash flow and will be using it to continue buying back shares opportunistically and to increase CI's dividend.

In summary, we're making important changes throughout CI. As always, we continue to focus on being the most efficient company as possible, but also continue investing in our business wherever we see opportunities.

The transition between Steve and I is going very smoothly, and I look forward to discussing more of our strategic plans at CI's annual meeting this June.

This concludes our formal presentation. Operator, I'd now like to open it up for questions.

Thank you. (Operator instructions.) Gary Ho, Desjardins Capital Markets.

Thanks. Good afternoon. Just from your comments on the institutional redemption, I take it that's roughly CAD300 million to CAD400 million, so correct me if I'm wrong. And then, what was the reason behind the client redeeming the funds? And how does the institutional pipeline look today?

Hi, Gary. It's Neal Kerr here. Thanks for your questions.

So, yes, your math's approximately correct. As I've said before, our institutional sales flows are lumpy. And the activity often comes without much lead time and it's difficult to predict in advance.

That certainly was true last year when we brought in a bunch of new institutional business with a couple fairly large wins. And it's also proving to be true so far this year as well, where we have had a couple of relatively large clients redeem.

With respect to the transactions, I'd say that they're outside of our normal business flows. Each situation is unique. However, they're both examples where clients have repatriated assets to in-house investment solutions effectively at CI's expense.

So, as I look at it, I'd say that neither of the redemptions are a result of our investment performance or our servicing capabilities. But, the net result is they are outflows, one in Q1, one in Q2. And these two transactions have basically offset the new institutional business that we gained last year.

The impact, though, is partially offset by the fact that we have picked up a number of new clients so far this year. However, the new assets are smaller in size than what left.

In terms of pipeline, as I've said before, we don't disclose the details of what we're potentially in line for. What I can say, though, is that our pipeline for short term opportunities is strong. Long list opportunities is also looking good.

We obviously -- we need to close on the business, and I don't want to get ahead of myself on that. And we haven't made a habit of forecasting what we expect to get because we just don't have enough certainty to be comfortable doing that. Even in a short list presentation, your odds of picking up the business are somewhere between typically 25% and a third.

Yes. Can you remind me of the institutional AUM as it stands today, roughly?

Yes, it's about CAD16 billion.

CAD16 billion, okay. And then my next question, I guess you've had April stats come in now. And this is towards the retail side. And then we've seen a nice rebound in equity markets as well. So, have you seen a pick up in investor sentiment for being more invested, or is the sentiment still pretty sluggish? Just want to see what the outlook is for the balance of the year.

Gary, It's Derek. I would say -- the first thing I would say, since the global financial crisis, it doesn't take much to spook investors. And I would say April, you would -- sales are still softer than I would like them to be. Part of that may be the soft performance, though.

So, hopeful that things firm up, but it's -- I think when you look around the world there are a lot of challenges. You look at Europe, you look at Japan, you look at the news that come out of Australia, you look at Brexit, the weaker economy data coming out of the States, there are a lot of people that are defensively positioned and they're nervous. And we had two significant pullbacks in the summer. We had a 10% pullback, and then we had a really tough start to the year as well.

Yes, okay. And then --.

One point I would make, that if you -- there was some data that came out earlier this week. There's really only one fund company that was in net sales in Q1, and it's a big American company. I won't be specific.

But, if you look at the five big banks in Canada, numbers were down between 50% and 89% for the first quarter. So, that gives you an idea of just how challenging things have been.

Sure. Thanks. And then my last question is just on the corporate class funds. Now, I know the announcements came out a few weeks back now. Any changes in sales you have seen? I think the industry has been pushing for a December implementation date. Any success with that?

The industry has been pushing for us to push this out. I wouldn't limit it just to December. But, I think they would like to see some relief from finance.

It's hard to discern whether the slower sales are because of the news on corporate class or it's because of the sluggish markets and the soft performance. So, that's a tough call.

I would say there is a division. There are some people that still see significant value in corporate class, and then there's other people that think it's over. And we still continue to evaluate what it means. There are benefits. I'm not sure exactly how this shakes out.

It has definitely affected us more than most people in that, out of the CAD135 billion in corporate class structures, we have approximately a third of those assets. So, we -- but, in my mind, there is still some benefit.

Okay, perfect. That's it for me. And Steve, best of luck in your retirement.

Oh, thank you.

Paul Holden, CIBC.

Thank you. Good afternoon. The first question is with respect to other income. So, it was down both Q-over-Q and year-over-year even after stripping out the fair value adjustment, so just wondering if there has been some kind of permanent decline in that revenue item.

Hey, Paul. It's Doug. No, I wouldn't say there's a permanent decline other than slightly lower equity pick up from our Altrinsic business in the US.

Otherwise, we had a fairly significant fluctuation in the currency. And that's almost CAD1.5 million quarter-over-quarter. And last quarter we had more distribution income on our seed capital.

Okay, that's helpful. Thanks for that. And then, want to go back to the discussion on expense management. So, you've discussed the CAD3 million cost reduction that would have happened Q-over-Q if not for some seasonal items, and then also mentioned other initiatives that are now ongoing. So, maybe you can help us out in terms of let's just say over the year AUM is flat like it was over the last year. Should we see a different trajectory in SG&A, like i.e., should it be flat or are we still going to see growth?

Well, first, Paul, we reported, net of First Asset, a drop of CAD3 million, and we could have had another CAD3 million if it wasn't the first quarter. So, we're potentially looking at up to CAD6 million drop in SG&A quarter-over-quarter.

Again, our intention is that that would continue through the year, that if our assets were flat we would keep SG&A growth well below that.

Okay. So, that sort of CAD6 million of annual -- I assume that's the annual run rate savings we should see flow through next quarter?

Well, we're looking at more like CAD12 million annualized.

Okay, got it. And then in terms of the high net worth assets, which are showing fantastic growth, understand the top line fees on them are lower. How should we think about the margins on that product? Are they also significantly lower?

They are lower than the Class A retail, approximately 20% to 30% lower on a net margin.

Okay, that's helpful. And then I'll just ask one more question. You mentioned soft performance several times already on the call, so just wondering how you'd characterize that soft performance so maybe we have a better understanding of what may help that turn into strong performance.

Okay, Paul, it's Neal here. As you probably know, we use a lot of different investment teams in our lineup. We want diversity of team by investment style and asset class. That said, we would have a higher skew to value style investment management over, say, growth or momentum.

And going back several years now, value has been underperforming as a style or a factor really going back to 2008. Quantitative easing has not really been kind of value managers. So, if you look at that style factor, that we are -- and say we're overweight, that would be a reason.

Another factor would be some of our larger funds, I would classify them as diversified income mandates. And as a result of the income requirement from the strategy, the funds tend to be overweight from a fixed income standpoint credit, so investment grade and high yield bonds over, say, government bonds. And so, over the last year or so, high yield has not been the best performing asset class, as you're probably aware.

And then the last two factors, actually, are most of our portfolio managers employ some form of currency hedging in their products, so they're hedging foreign exposure back to Canadian. And until very recently, Canadian dollars have been depreciating, in particular against the US dollar, really from 2015 -- sorry, 2012 to 2015 quite substantially. And so, that hedging, which is meant to reduce volatility and risk, has mitigated some of the returns.

And last factor would be as we get later in this bull market, it's been over seven years in the US of a bull market in the S&P 500, a number of our investment teams are increasingly becoming cautious and they're holding a lot of cash in the funds. And cash yields are at all-time lows. And in a market that has generally risen over the last several years, that has mitigated some of the performance as well.

So, those are the primary factors. That said, you can go through all the major asset classes of mutual funds available to Canadians, and you will find at the top or near the top of the asset class one or more, in some cases two or three, CI funds that are screening very well on a one year basis. However, those funds are just not the largest funds that we have in our lineup. But, they are there, and we have -- so, we have a number of products that are very well positioned.

Okay, that's helpful. Thank you.

Graham Ryding, TD Securities.

Good afternoon. So, a few of my questions have been asked, so maybe I could just touch on the regulatory front. The CSA recently brought out some proposals around a best interest standard and that theme. So, on the targeted proposals, there was some emphasis there on disclosing conflicts of interest and dealers selling proprietary products. I'm just wondering if -- broadly speaking if you feel like this is going to have a potentially material impact on your business, or potentially even your costs.

Hi, Graham. It's Steve Donald. Let me take a shot at your questions with regard to some of the changes that are being proposed.

Certainly, the disclosures around conflicts I think will have less of an impact both on our manufacturing and distribution businesses. In fact, it may be positive on our manufacturing business as it relates to restricted organizations or proprietary organizations. For those that are mixed or nonproprietary, I think conflicts disclosure won't really have a meaningful impact.

I think where we're focusing our attention is on some of the other targeted reforms, know your client, know your product. And certainly our view is that there is a misplaced understanding of the market in suggesting that our clients, our advisors at Assante, Stonegate, and other third party channels, will have to understand and consider the structure, the strategy, all of the different attributes of every available fund, not only on their shelf but in the marketplace.

And we think that's just unworkable. One of the thoughts that we have is we are still waiting for guidance from the CSA on mutual fund fees. That's expected by the end of June. Could this be sort of an offset where there is some pretty onerous requirements that are being suggested through this 33-404 proposal? Could this just be setting us up for some other changes that may take place through the mutual fund fee review?

Okay, that's helpful. And then on the best interest standard, it looks like some provinces are supporting the idea. Others are not. If this were something that were to come through, would it have to have unanimous support across all the provinces, or can this get implemented at a provincial level? And if so, then how do you respond to that?

I think it is possible that it gets introduced at an individual provincial level. I think that would be incredibly unfortunate for the efficient operating -- or operations of our capital markets.

I think the fact that there is so much uncertainty and dissention amongst the CSA members give it a lower likelihood that a best interest standard would see the light of day. There's tremendous fragmentation among the CSA, which I think it very disappointing as we think about the potential benefits of a national securities regulator.

Yes, I would agree. It sounds very inefficient. Okay, thank you. Appreciate that.

(Operator instructions.) Tom MacKinnon, BMO Capital.

Yes, thanks very much. I got on the call late, so I apologize if my question's been asked. The question has to do with the arrangement with Sun Life with respect to seg funds. And I believe there's probably like about a CAD12 billion or CAD13 billion AUM associated with that. And I think it's probably been in net redemptions for some time. But, with the end of that arrangement, do we actually see the entire gross redemptions now become net redemptions? And what has that pace sort of been like?

Tom, it's Derek Green. If you look at the relationship with Sun, segregated funds, there are some contracts that are soft capped. They're not hard capped. There are some of the products that are hard capped, meaning if a unit holder wants to make a new contribution they're free to do that. But, the contracts are not open right now.

You're right, there's CAD12 billion to CAD13 billion in segregated funds, and it historically has been pretty sticky money. But, if it's a GMWB product where people are using the product for income, so not a lot of new money going in and withdrawals are coming out as income, yes, the asset class as a whole is in redemptions for sure.

Did you have another question on that as well?

No, but I guess you may have seen these as -- I mean, there was probably sales and then redemptions before, but now you don't have any sales coming into the thing. So, we're just going to look at --.

Well, there is some sales. Like I said, some of the products are soft capped, not hard capped.

Okay, sorry.

So, there would be -- it's just that there isn't the same level of sales. One of the things that we're working on is another seg fund product to bring to market.

And what percentage of the gross sales that you would have had would have been from the soft capped?

Beg your pardon?

How should we look at the gross sales that went into the seg fund product? What percentage of those would have been from soft capped stuff in -- say before this arrangement ended?

It's a relatively small number. When you look at the business with Sun Life overall, mutual funds and seg funds, we still continue to be in net sales with Sun.

And is there -- most of the stuff that was sold 10 years ago, was it generally a GMWB product and sort of -- so we would just have a trickle down impact?

I'd say GMW came into effect just about 10 years ago. So, we moved away from the 10 year maturity and moved to really the income product. So, the GMWB product would be about 10 years old when we first started selling it.

Okay. So, to the extent that -- if everybody switched over to GMWB products or started buying GMWB products 10 years ago versus before them having just a 10 year maturity product, we would probably anticipate to see some -- does that change the course of redemptions associated with these products?

No, I think the -- you're going to continue to see redemptions. The one thing that -- when you have volatile equity markets and you have zero interest rates, the features and benefits, the insurance companies just couldn't afford to offer them. And that's why we are where we are.

But, we continue to look for a partner to offer a new seg fund. And I'm pretty hopeful that we'll -- I'm hopeful that we'll have a product. It won't necessarily be an income product, but it'll be a seg fund product. And there are big benefits to having segs from probate and estate. But, we do have a guaranteed product in the G520, which is not a seg fund.

Okay. Thanks, Derek.

You're welcome.

Scott Chan, Canaccord Genuity.

Good afternoon. Just going back to the ETFs and the First Asset acquisition, you talk about it enhancing the Assante platform. Can you just give us a bit of color on some of the ideas that you're thinking about to incorporate ETFs on there?

Hi, Scott. It's Peter. Yes, sure. I mean, not only does Assante and Stonegate have AUM with CI, but they also have AUA with other providers. There are ways that we can use First Asset to help develop more product that make complement the Assante advisor. And so, it would -- we see there are opportunities for us to switch AUA over to AUM through First Asset.

Okay. And what about on the retail side? Is there an opportunity to put it into, say, Alfred Lam's group of managed solutions as well?

Absolutely. I mean, there are -- there could be sleeves that we -- of investments or asset classes that we don't have today that we would -- we couldn't -- we would have to go out and get sub-advisors to fill, or we could use First Asset to do it instead. And we would expect it to be cheaper to do it that way.

I mean, with the growth like in ETFs, I guess specifically in the US and even in Canada, do you guys have like an internal target, say, for the next three to five years of what you can kind of grow this segment to -- product segment into?

I mean, yes, sure. I mean, we have high hopes of -- and we're putting an awful lot of effort into growing the business. So, is it -- it's currently a little over CAD2 billion. Could you see that business going to CAD10 billion and higher? Sure, I think so. I mean, the First Asset guys have -- team have very high targets for themselves and are working towards them today.

Okay, that's great. Thanks a lot.

Thanks, Scott.

Paul Holden, CIBC.

Thank you. Just have to ask on the dividend increase since no one else asked. And obviously CI has a long track record of increasing the dividend, but that typically comes at the same time of AUM growth and earnings growth. So, it's a little bit different this time around, so wondering what kind of drove the decision to increase the dividend.

Hey, Paul, it's Doug. We generally are looking to increase the dividend when we have an opportunity to. And our institutional shareholders certainly like to get -- see regular increases in the dividend. It'd been a year since we had bumped it up, and we certainly have the free cash flow to do so.

Okay. Thank you then.

Graham Ryding, TD Securities.

Just on the average management fee rate, I was just wondering if you could quantify the decline that we saw either quarter-over-quarter or year-over-year. How much of that came from change in product mix versus integrated First Asset?

Yes, the majority of it is the change in product mix, that quarter-over-quarter our management fees were down CAD20 million. And the change in mix was about CAD7 million.

Okay, that's helpful. And then when I think of your AUM and gross sales, could you break out how much of that is within high net worth or fee-based funds maybe versus one year ago?

I'm going to have to get back to you on that. But, if you look at our -- Graham, it's Derek. If you look at the high net worth, we've been making a big push -- and not in the last year, I mean in the last three or four years -- helping advisors transition their business to really prepare for CRM2 and what we believe will be the ultimate ban on embedded compensation.

It's not doing away with trailer fees. It's really moving to a model where it's a negotiated fee. So, if we look at the number, we continue to see a bigger portion of the business go to the higher net worth or to the mass affluent product.

We're actually -- the project that we're working on now, and it will -- margin compression is a fact of life. It has been a fact of life for the 20-odd years I've worked at CI and it'll continue to be that. But, what we're working on now, we live in an environment where the regulators are pressuring all players to ensure that investors get the lowest fee that they qualify.

So, I can't tell you when we'll offer the product, but our emphasis is to really become class agnostic. So, whether a client owns a Class A fund, a Class F fund, a Class E fund, or a Class O or an I, if they have -- if they qualify for a discount, they're going to get the discount automatically.

Will that have an affect on our average fee collected? It will. It'll be margin compression. But, what's setting this up is to make it easier for clients, advisors to deal with us, and to ensure that they get the lowest available price that they qualify for.

So, it's a roundabout way of answering your question, but not exactly.

Okay, that's helpful. And then, how is it set up now then? Does the advisor have to prompt the client to move from one class to another to get a lower fee product?

Exactly. So, if you move from Class A, if the DSC is off the fund, the client has to sign off on this and there has to be a negotiated fee, not our fee, but the advisor fee need to be negotiated.

So, it is somewhat cumbersome. We've been extremely successful at transitioning our business from Class A to Class O or Class E. But, it is cumbersome, and what will happen is we will help out with the heavy lifting.

It hasn't been a deemed disposition if you've moved from a corp to a corp or a trust to a trust and maintained that same mandate. But, it is cumbersome and it does take some time to do. This just gets rid of a lot of the busywork that really advisors don't get paid to do, in an era where the margins for advisors and for manufacturers is actually coming down.

Perfect. Thank you.

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

I'd just like to say thank you for everyone participating today. As you know, this is Steve MacPhail here. This is my last conference call with you. So, thank you much for participating with me over the many years that I've been involved, and I look forward to listening in to Peter and his team on the next conference call itself. So, thank you very much. Bye now.

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