AGF Management Limited (AGFB) Earnings Call Transcript & Summary

Thank you, and welcome back. I'm here with Kevin McCreadie, CEO and CIO of AGF Management, here in the final presentation of Scotiabank's financial services conference. Welcome, Kevin.

Phil, always good to be here and be here a little differently this year, but always good to have this conference.

Thank you. All right. So listen, so AGF's transformed to a much more diversified business than in the past, so can you talk about how that strategy has really better positioned AGF to navigate this uncertain environment and ultimately position for growth?

Yes. I mean I think if you went back 20 years ago and you asked people on the audience or folks around what AGF was, and the answer you get was a retail fund company. And today, I think we've successfully pivoted to a global asset management. If you think about our AUM of $37 billion, less than roughly half today is in retail funds. And so we think about that that's a build-out of the private client business that's about $6 billion in assets today. It's an institutional business around the world that's about $9 billion in assets. And it's an increasingly important but growing area of alternatives, which today will end up with about $3 billion from nothing a few years ago. And so when we think about the world we're going to, I think the ability to be more, and we can talk about this in a bit, more vehicle-agnostic. Instead of thinking of yourselves as selling someone a fund, an adviser, an institution may want to fund, they may want it in an ETF, may want it in a separately managed account. So again, I can get rid of the wrapper thing and say, if you were just a fund provider, you're in that one wrapper. So the ability to have, again, different business channels now, and be, again, almost wrapper-agnostic or moving to that, I think, will benefit in the world to come. I'd say the other thing about the recent environment is going to be the ability to have alternatives, and we can touch on what that means for the end investor in a bit.

All right. And as we think out over the next 12 to 24 months and maybe you can just lay out your key strategic priorities then.

Yes. So as you know, we've just completed the transaction with the sale of S&W, Smith & Williamson, a U.K. wealth manager, where after fees and taxes, will clear $270 million in cash on our balance sheet. So we've told people pretty quickly, we want to get that redeployed somewhere in the next 18 to 24 months. But in the near term, we'd pay down debt, which we're in the process of doing right now, and then think about a balanced approach to the debt pay, buying back some stock and then strategically growing. In terms of the growth platform, I think it's a couple of things. Strategy around alternatives has been successful. We think of alternatives as a spectrum today, so not just those where we started, which were private funds like infrastructure and credit, but now more increasingly important, the liquid alternatives, those daily valued things out over here. So think about ETFs that can hedge, things that can provide down-capture or prevent that down-capture in a market environment. And then things in the middle, which kind of are our hybrid experience to a long tail, maybe a credit fund over here, but you give an adviser some liquidity over periods of time throughout the year. So I think build-out alternatives will clearly be the biggest priority. I'd say bolt-ons for things maybe in our quant business. We've organically grown that, and we did an acquisition in 2015. And so in the quant area today, I think we have probably one of the deeper quant teams in Canada. So not a lot that we need there, but there'd be more bolt-ons. And so I'd say -- and then lastly, of the core businesses, I think it's continue to drive investment performance, which puts retail into net positive and start to move down this path of being more vehicle-agnostic about retail and be indifferent that if an adviser comes to us for an F Series fund, an ETF or a separately managed account. And I'd say probably the last piece would be the continued expense discipline we've been on.

Okay. Listen, you're a long-term industry veteran, so maybe kind of 2 industry-related questions for you. First, I mean, what do you see, if any, is the longer-term implications stemming from the pandemic for the wealth and asset management industries?

Yes. I mean I think we've all learned a lot, frankly. If I took a poll of this audience and told them even in February that we would be sitting here virtually, even in the beginning of March, I think we would all -- when we went home for the first time, we all would have taken a bet that said we'd be back to somewhat normal by now, right? So we've learned a lot. All this technology that we've used isn't going to go away. So we were lucky enough or possible enough to go down the digital path a few years ago. We started thinking about how we distribute more digitally. We brought in a lot of technology that allowed us to do, basically, think about when an adviser opens a document, we can drip on them things and we can tell if they've read it, printed it. If they're interested, and then we can follow it up with a phone call. So we've been taking an approach to retail that is driving a lot of productivity. They're pre-COVID. So we had those tools in place. We had a lot of digital analytics that we were using with advisory sales with portfolio modeling for downside risk. And now I'd say the last piece of it has been, think about an adviser. In the old world, or even you or I, we would create a meeting that would be blocked out 0.5 hour or an hour of time. Today, we can get somebody on a call like this and block out 10 minutes, bring an adviser to someone on a PM team, get them their information and their day is freed up, right? So they move on. So I think those are things that are going to stay with us. How do we think about distribution differently is going to have to change. And I'd say we're never going to travel the way we were, right? So all of our SG&A lines will look different for a lot of productivity that we just went through. But also because I don't think -- I can't see business travel coming back in the same lines. Probably lastly, we're all going to have to think about our real estate footprints differently. Do we have enough? If we have the social distancing spaced out, do we have too much if people really want to flex in and work from home? All of it has an SG&A connotation. I think that last piece on real estate will all have to be thoughtful and think through about what our workforce wants and where this goes.

Right. Well, listen, maybe also kind of on the same theme of revisiting conventional thinking and, obviously, the active versus passive has always been a debate and certainly probably more so now than ever. But when faced with an active-versus-passive debate, I think many across the industry would have been fully anticipating that a turbulent market with significant uncertainties and downside risk really would have set the stage for a dramatic rotation into active. And then you look at the Canadian flows, and quite frankly, the opposite seems to have occurred. What's your take on that dynamic?

Yes. I mean we saw a lot of -- we saw balanced funds in Canada. Canadian balance funds get redeemed. And now this has been a story for the last few years, right? And I would argue that they probably bailed too quick, right, with the recovery in gold and mining this year. But there's been -- this has been a shift that's been going on for 5 years to our more globally tilted portfolios, inched away from the bias. And part of that is the makeup of the Canadian index, right? You got on 38% in financials, and you've got energy and materials. And then the growth sectors of the world don't make that much. Tech, health care less, they're single-digit percentages. So it's no surprise investors will shift away from that allocation. I'd say on the index issue, we, 5 years ago, basically said, let's get out of the middle of the portfolio of the core. Let's do fewer and fewer things that people can either do themselves or index away from you. And we reduced our shelf, we reduced our teams, and we really pivoted back to things that are harder to index, so global EM-concentrated strategies, liquid alternatives, to get out of the way of that effect. I think that the active-versus-index thing is going to play out in this next leg. You've seen these cap-weighted indexes being driven by fewer and fewer names. So if you just use the U.S. example, the S&P 500, 5 or 6 stocks make up 25% of the cap. And so you may see the market on a headline index basis flatten out. But the underlying stocks start to do well as the economy start to gain traction post the vaccine, et cetera. So I do think active managers in that environment will do much better. It will look a little bit probably like coming out of 2000 in the tech breaks. Really equal-weighted, if you took an index in equal-weighted, it did much better. So I think that's the opportunity for active managers. Those who can be concentrated take real bets. And you don't have to own those same pod names from here.

Right. All right. Well, listen, again, back on the top again of retesting conventional thinking and this type line, is there a case for AGF to actually expand more into the wealth management and advisory side of the business at this point of the cycle?

Yes. I mean we had 3 great experiences with that, right? So we've got about $6 billion in the private client side today, have different brands. So if you're out in Vancouver, it's Cypress. If you're in Ottawa, it's Doherty. Down in the London and Toronto area, it's Highstreet. And we've been looking at different things there. We bolted on a financial planning arm to our auto-based strategies probably 2 years ago. So I'd say there are more bolt-on things that we would do there. But we like that business. It's organically done pretty well. We probably look more organically because I think valuations in that part of the market seem a bit stretched, particularly outside of Canada. If you look at the U.S., people have framed pretty good multiples for those businesses. And especially in the U.K., where we just sold the stake in ours because I don't think the world is going to get a lot better there in terms of what people are paying for. So we like what we have today and probably bolt-on things. I wouldn't say anything transformational.

Okay. Despite a challenging environment, I think AGF's retail flows showed some encouraging trends, right, I think more recently showed some year-over-year improvements. So maybe kind of talk a bit about your top priorities really to capture more market share and again, position the firm really to generate consistently positive flows as conditions continue to improve.

Yes. I still think it comes back to a couple of things. One is performance, right? And going through a downturn like we went through, you have to have really good, strong performance. You can't do worse than the index, right, whatever everybody's benchmarking against. We've known that in history, right? The guys who blow up and tag on even worse return on top of a downmarket tend to get redemptions in a pretty large manner. So going through it, I think you had to have strong performance and differentiated products. So we came through it pretty well. I would love to take credit for the fact that we were positioned defensively across the firm. More of that was because we thought in the fall of last year, midsummer last year, that we were getting in this late-cycle thinking. So our balanced accounts were defensively postured. We were carrying more cash at every fund level. And we started using some of the liquid alternatives that gave us the ability to have an anti-correlation to the market, so an anti-beta position. So something, for instance, that we rolled out into the liquid alt space, where when the market was down 30%, it was up high teens, positive. So the ability to have brought that to the adviser community and then on top of that, the long-only products that we had did extremely well. So we came through it and did not -- not only didn't we harm people, we really helped them through it. And I think that's opened up a conversation about other things we can do, which I think will certainly set us up well for the flows in the future. If you look at the industry in March at the bottom, investors redeemed on average, across banks, independents in Canada, 1.5% to 2% of the conflict, redeemed as a percentage of their AUM, not market, correction, percentage of their AUM. We lost about half of 1%. So I do think that, again, those firms that did well going through that are going to be beneficiaries, hopefully, of flat-to-positive flows as we go through it.

Right. Well, listen, again, the economic and I think financial market outlook has changed dramatically in the past 12 months and has been fairly dynamic. How also do you think AGF's retail shelf is for this new kind of evolving environment? And are there any holes that you might potentially be looking to fill at this point?

Yes. I mean on the retail side, as I said, we've done a lot of that work probably now 5 years ago in terms of consolidating the platform, bringing it down, getting away from those core things that are going to get indexed away. We've spent a lot of time on risk management and had to think about down-capture and up-capture to optimize those 2. So when you go through like we did in March, we're not leaving our investors with a worse outcome than the market's given them already. And I think we've been pivoted also to the products that are going to be relevant in the future. So think concentrated global strategies. ESG is very large. We may not see it in Canada yet, but it's big in Europe. It's coming to Canada in a big way. Those flows, emerging markets, things which are harder for an adviser to do, I think, are going to be the relevant ways to think about the future. And then I'd say, look at the environment around us, every central bank that we operate within, whether it's Europe, Canada or the U.S., has told you that they're going to be at this for a long time, that rates are going to remain really low for a long time. So the ability to bring yield to clients differently because they're not going to get it traditionally in the same way, the ability to bring risk-managed products like market-neutral or hedged strategies in an ETF, that's priced as attractively as an F Series fund, it gives you that down-capture. Those are going to be the things on the shelf that you're going to need for the adviser of the future. So I think we don't need to do a lot. We have to enhance what we have. And we have to start moving to what I said at the beginning, this vehicle-agnostic view, which is an adviser may want to buy it, and we shouldn't care about the wrappers. So they may want to come to us for a fund, an ETF or an SMA, and we start to really become indifferent. And I think that's where -- those are the ways that we have to evolve. I don't think it's a product wholesale overall. It's best been done.

Okay. And I think we brought -- we -- I think we started the discussion with some talk on the alternatives platform and investing for growth. So I want to turn the focus back into that segment. As you invest in growth, are there any new asset classes within that alternatives platform that you really like to expand into?

Yes. So we've -- on the private side, we were up to about $3 billion in AUM from nothing a few years back. That's been 4 funds. 2 of them, infrastructure, we just closed on our second infrastructure fund, which was about $1.2 billion raised. And then on the private credit side, back to the conversation about the retail investor, all investors are going to need yield differently. We know the banks typically coming out of this with loan losses, picking back up, are -- tend to be shy on giving away credit. So there'll be an opportunity, there will be a need that needs to be met, that you can probably generate pretty attractive returns for investors in the private credit side. When we look at investor demand infrastructure from people that we talk to and surveys we've seen, north of 20% increase in allocations. And on the private credit side, it's probably mid-teens from where we are. But I think we're in the right spaces there. But I think, again, the backdrop is people are going to need to have different correlations, and they are going to have to drive yield differently. You're going to see, I think, not just large institutional investors up their allocations to alternatives, but the retail investor is going to have to figure out a way how to play that as well. And then on the other side of the spectrum for retail is how do we package that stuff in things that are going to be more daily value nontraditional. Think about maybe even a publicly traded infrastructure ETF that we've had. People will start to look at infrastructures having correlations different. They don't need to be as private infrastructure. So I think it's -- the -- we've only just begun on the alternative side. We've said we want to be at $5 billion by 2022, nothing a few years ago, and we're well on the way to that. But it's going to be now a mix. I start to think of it as a spectrum. I mean really liquid over here, really locked up over there, and then that sweet spot in the middle, where you can maybe deliver a little bit of liquidity a few times a year and give someone maybe a hybrid experience of both of those.

Right. And can you talk to aspects or areas within the alternative platform where you feel EGF, these are real and particularly -- it's particularly differentiated from its peers, and how you intend to leverage that?

Yes. I think one of the things is we've got, as I said, when we did our first infrastructure fund, right, that was a $750 million raise. It was one of the larger first-time funds done in Canada. We did that on the back of 12 institutional investors around the world. Most of them -- the majority of them, non-North American. So we know we've got great institutional, large capability distribution. Fund II is a lot of those re-ups on the infrastructure side. Our private credit funds had a pretty good swath of investors, which were small institutions, high net worth, family offices, and I think our retail distribution will now come into play as well. As we start to think about what I described is on that spectrum, that part in the middle where IIROC advisers may want to have a little bit of private credit fund that's got a 5-year term bolted on to a liquid ETF that gives them liquidity ins and outs. So I think the differentiator may not be just the products we bring because we've been in 2 of the places that are going to be in favor for a while, credit and infrastructure. I'd say it's going to the ability to have a built-in distribution channel, both on the institutional side, family office side and retail.

Right. So I just want to turn the focus to the institutional business. And the institutional market, I mean, it's large, it's global in nature. Can you talk about how the expansion of this platform is tracking relative to expectations and some of the growth initiatives AGF is likely to be executing or putting in place over the next 12 to 36 months?

Yes. And what we saw coming out of COVID different than the retail adviser. The retail advisers went home pretty well. They started working at home. They had people, clients calling them, hands to hold, right? This was a tough event for people to go through. In the institutional world, the consultant kind of community stepped back. They were worried about the managers they had. How are they going through it? So we saw search activity kind of dry up pretty meaningfully around every region. We saw in Canada very few managers get allocations to anything. So the consultant and the driver of those businesses were really worried about what they have. What we're seeing as we're coming through the summer, like we would have expected as we've gotten towards the end of the summer, a lot more activity as people looked at what they've got, looking for other things. And so we're seeing a broadening out of not just a number of RFPs, but the number of mandates by product. And so the strategy is really around the things that people, when you look at the institutional demand, they're not going to come to you for a core large CapEx portfolio. So they're going to increasingly concentrated EM, EM. As I said, in Europe, ESG is an enormous driver right now of flows. So those are the focuses for us, really global EM, ESG and some of our fund products in the alternative space, liquid alts. That's going to be the focus and framework, right? We're not going to go try and compete in places that I said, at the start of the conversation, where things have been indexed away. And then probably lastly, I'd say the opportunity for us is, in the U.S., it's going to be more in the institutional space. We've overhauled that business. We brought a new head of that business in, in February. So he was unfortunately onboard for about a month before COVID hit. But he's already been virtually building out a new team. We've got a new product focus here that's going to be pretty narrowly defined around the areas I just talked about, very channel-specific. So I feel pretty good that, that business, again, even though it kind of stalled because the world stalled a little bit, will pick back up. And I think we have the right focus there in terms of products and people now.

All right. Well, listen, Kevin, it has been a great discussion. We've run down the clock a bit. And maybe a last-minute message for investors in terms of what you think you're kind of missing with the AGF story at this point?

Yes. I don't know. I think we talk about it all the time internally. It's now about execution. The S&W transaction for us is an ability to unlock some value and drive our growth. It's an ability to help our investors see some capital return to them. It's about deleveraging in a world I think is going to be choppy. We'll come through this with, as I said, in a couple of days, we'll hope to be sitting on an awful lot of cash on our balance sheet after paying down the debt. In an environment where I think players are going to be stressed, it's going to give us a pretty good advantage to drive our strategic side of this thing faster, but in a disciplined way. So I'm all about the execution of this. So I look forward to what we'll do in the next 2 years over this.

Excellent. Well, listen, on behalf of Scotiabank Global Banking and Markets, I'd like to thank you, Kevin and the team at AGF Management, for your participation in this year's event. This concludes Scotia's Financials Summit. I'd like to thank all the corporate leaders that presented at the conference, along with investors and our clients, that participated and provided support. Also, I'd like to thank logistics teams for all their help in making this event possible. Thank you.