AGF Management Ltd. (TSX:AGF.B) reported a 30% decline in fourth quarter profit as the value of its portfolio shrank over stock market uncertainty, a trend it doesn’t expect to stabilize any time soon.
The Toronto-based mutual fund company’s shares sank 5.5% or 93 cents to $15.96 Wednesday on the Toronto Stock Exchange after it said higher expenses and lower investment returns hit the bottom line.
“It will continue to be a challenging market, but we’re not going to make any excuses for our performance, we can and will do better,” Blake Goldring, chairman and CEO of AGF said on a conference call with investors Wednesday.
AGF reported net income for the three months ended Nov. 30 dropped to $21.9 million from $30.9 million, or 23 cents per share compared to 34 cents per share a year earlier.
Earnings per share missed analysts estimates by about seven cents.
“Volatility in the second half of 2011 shook investor confidence and investors pulled money from equity funds and moved into money markets and cash, onto the sidelines,” Goldring said.
The downward trend in the stock market not only hurts the value of AGF’s investments, but when investors pull their money out, it reduces revenue earned on fees that would be paid by its clients.
A lower interest rate and lower loan balances also hit the company’s net interest income, which fell about 11% from the quarter a year before.
AGF’s overall revenue grew to $157.8 million from $155.9 million.
But it also booked one-time costs associated with the integration of Acuity Funds Ltd. acquired last year and saw an increase in net redemptions in its retail business.
Goldring said global financial challenges, such as debt crises in Europe and the United States, continue to rock stock markets but added that he is seeing signs of a recovery on North American markets as risk tolerance improves along with a rosier employment picture and housing outlook.
However, he added that he expects the 2012 RRSP season to be challenging and doesn’t expect to see investors return to equity markets until the volatility is contained and confidence returns.
Goldring pointed out there was one less trading day in the quarter this year, but also noted that the company has expected revenue growth to be slower as its institutional business picks up and the retail side contracts.
” We’ve been fairly consistent that over time we’d expect the revenue rate in basis points to decline as the institutional business grows at a faster clip than retail,” he said.
The company’s financial report revealed that its two main operations had considerably different trends during the quarter.
The main investment management operations saw revenue increase but the rate was surpassed by the growth of expenses. Its trust operation went in the other direction, with lower revenue but also lower expenses.
AGF’s investment management operations generated $136.1 million of the revenue, up 2.8% from $132.4 million a year earlier. Expenses at that part of AGF’s business rose 7.6% to $81.9 million.
Revenue at the trust operations dropped 11.8% to $20.1 million from $22.8 million but its expenses fell proportionately, to $12 million from $13.7 million.
John Aiken of Barclays Capital said in a note that the consensus estimate was for AGF to earn 30 cents per share and, even excluding a higher tax rate and some one-time charges, the company’s core earnings still missed the mark.
“We had been hoping for better revenue performance and greater cost controls,” Aiken said in a note to investors.
“We believe that the fourth-quarter earnings will likely reset expectations on the firm’s outlook.”