The leadership of AGF Management Ltd. is working to bolster the Toronto firm’s reputation for solid investments and banking products. Although its fund assets and share price are down, chairman and CEO Blake Goldring says the company is taking steps to weather the storm and build for the future.
Things would be worse, Goldring says, if not for AGF’s strong relationship with its advisors. Those connections have been a major company focus since 2003, when the loss of a high-profile U.S.-based money manager prompted the firm to place more emphasis on its relationship with advisors.
Still, AGF’s share price has dropped precipitously during the recent market turmoil. It closed at $8.79 on Feb. 9, down 78% from its April 2007 high of about $40. But, Goldring says, the sell-off is unwarranted.
One of the biggest reasons investors are shunning the stock is the widespread perception that the company’s trust arm, AGF Trust Co., is overleveraged after several years of rapid growth and that it is set to post large loan losses.
Goldring insists that this is not the case. Although AGF Trust has been criticized for being overleveraged, Goldring says, its standards and procedures are typical of the industry and are similar to other lenders.
He also says AGF Trust’s losses shouldn’t be excessive, as many of the loans were destined for investments and RRSPs that are part of long-term financial plans developed with financial advisors. AGF Trust has, however, scaled back on making new loans for RRSP investments.
The trust company, under the leadership of president and CEO Mario Causarano, has also taken steps to weather losses arising from the downturn, Goldring says. Provisions for loan losses were increased in the fiscal year ended Nov. 30, 2008, to $30.4 million from $11 million the previous year. With $20.5 million of those provisions in the fourth quarter, AGF Trust posted a loss of $4.7 million before taxes and non-segmented items. However, AGF Trust has a solid capitalization, with a Tier 1 ratio of 10%.
In addition, business areas that were experiencing profit declines have been ended or reduced, including home-equity loans, most RRSP loans and mortgages in certain geographical areas.
Nor is AGF Trust having problems raising funds to lend, Goldring says. AGF Trust sells AGF-sponsored guaranteed investment certificates through a variety of financial institutions, including the big banks.
But these points are proving to be a hard sell in fragile equities markets reeling from the global credit crisis. When large and well-established financial services companies cannot attract investors, smaller ones, such as AGF, struggle even more. Skittish investors take the position that lending by AGF Trust is outside the proven expertise of the parent company’s core business of mutual funds. As a result, investors are avoiding AGF’s stock.
AGF’s core mutual fund business is not causing concern, Goldring says. Despite the sharp drop in equities markets and relatively poor performance by AGF funds in 2008 — only 26.2% of long-term assets under management were in funds with first- or second-quartile performance for the year ended Dec. 31 — there have not been huge redemptions.
Mutual fund sales at AGF are, of course, way down. But that is typical of the sector. If that trend was accompanied by soaring redemptions, the company would be in serious trouble. But average monthly redemptions in the five months ended Jan. 31, 2009, which featured big declines in equities markets in September and October, were less than in 2006 and 2007. Even with somewhat higher redemptions in the first eight months of 2008, levels for calendar 2008 were only 10.3% higher than in 2007 and 14.5% higher than in 2006.
Goldring says that this performance is a result of AGF’s relationship with financial advisors, who have been successful in reassuring their clients about the long-term prospects for AGF funds. This support, he adds, is part of the reason that AGF will emerge from the current period “stronger and better than ever.”
But, like everyone else, Goldring doesn’t know when that will happen. In the meantime, AGF is reducing costs in a variety of areas. It is not, however, making cuts in investment management and sales resources.
There was a 7.7% drop in costs relating to sales, general and administrative expenses in fiscal 2008. Goldring is predicting a further 10%-15% drop in the 2009 fiscal year. The cost-cutting includes reducing overhead in support services, including amalgamating departments such as human resources.
@page_break@But AGF is not hunkering down. It is looking for new opportunities and planning to take advantage of them as they arise. For example, AGF plans to open an institutional sales office in Boston by June. Goldring hopes to pick up some of the business of pension plan managers who may be disenchanted with their recent investments and are on the lookout for new managers.
In response to advisor requests, AGF has also introduced new mutual funds: a dollar-cost averaging fund and corporate-class funds for the three-year old AGF Elements Portfolios, which allow unitholders to move assets within the Elements family of funds without triggering capital gains. The DCA strategy, by moving funds into investments gradually over 12 months to lessen the impact of market swings, is a good way to get investors back into equities, Goldring says.
And with depressed market values, AGF is looking for acquisitions that would enhance its earnings. It has already made a number of acquisitions aimed at building its high net-worth business and is always interested in adding new investment-management expertise. AGF has the money to do this — for the fiscal year ended Nov. 30, it had $584.2 million in cash on hand.
In fiscal 2008, AGF reported net income of $128.6 million, down from $178.7 million in fiscal 2007. Earnings before interest, taxes, depreciation and amortization was $313.7 million, vs $357.2 million. Revenue was $725.6 million in fiscal 2008 vs $780.3 million in 2007. Cash flow after deferred selling commissions and change in non-cash working balances was $264.6 million in 2008, vs $244.6 million in 2007.
Total balance-sheet assets were $6.5 billion as of Nov. 30, vs $5.9 billion a year earlier; long-term debt was $123.7 million, vs $184.5 million the previous year; and shareholders’ equity was $1.11 billion, vs $1.07 billion.
Here’s a look at AGF’s main businesses in more detail:
> Mutual Funds. This is the company’s core business and it has been hit hard by the plunge in equities markets that began last fall. Assets under management fell by $5.9 billion in September and October and by another $1.5 billion from November through January, leaving AUM at $18.9 billion as of Jan. 31, vs $26.4 billion as of Aug. 31, 2008.
As with other fund companies, AGF’s fund sales have been affected, with inflows to long-term funds averaging $190.9 million for the five months ended Jan. 31, down from $307 million in the eight months ended Aug. 30, 2008. Inflows were $566.8 million for calendar 2007 and $390.5 million in 2006.
But the good news is that this was not accompanied by soaring redemptions. Indeed, redemptions have averaged $318.2 million a month in the five months ended Jan. 31, down from $433.7 million a month in the first eight months of 2008. Average monthly redemptions for calendar 2008 were $403.7 million, vs average monthly redemptions of $366 million in calendar 2007 and $354.1 million in 2006.
This is particularly impressive, given the AGF funds’ poor performance when compared with the funds of other Canadian mutual fund companies in 2008. AGF had only about one-quarter of its long-term AUM in funds with above-average performance in 2008,
As noted previously, Goldring believes the low redemptions reflect AGF’s strong relationship with advisors and indicates their willingness to ride out the downturn. AGF has had strong performance in its long-term funds over the past few years. It had 59.3% of its long-term assets in funds with above-average performance in 2007, 85.8% in 2006, 62.2% in 2005 and 49.6% in 2004.
Martin Hubbes, AGF’s chief investment officer, notes that two of AGF’s biggest funds — AGF Canadian Stock Fund ($1.6 billion in AUM as of Dec. 31) and AGF Canadian Large Cap Dividend Fund ($2.3 billion in AUM) — were barely in the third quartile in 2008. Both funds are in the Canadian equity-focused category, which had a median decline in return of 30.45%. AGF Stock Fund had a drop of 31% and Canadian Large Cap Dividend Fund was down only slightly more, at 31.6%.
Hubbes notes that AGF has a policy of being fully invested — “We are not paid for holding cash,” he says — and was at a disadvantage in 2008, compared with funds that move into cash at times. As Hubbes notes, there are times when cash is preferable.
AGF reviews each fund manager and mandate quarterly, and there have been no issues with funds deviating from their investment mandates, says Hubbes, who is optimistic that performance “will swing back our way.”
> Institutional Money Management. Institutional AUM was $12.8 billion at fiscal yearend, the latest period for which this data is provided. That’s down by 31.1% from $18.6 billion as of Aug. 31, 2008, and by 35.4% from $19.8 billion for fiscal 2007.
There’s a lot of potential in the institutional market, Goldring says, given the size of pension assets. But the margins are lower than for mutual funds and the risks are higher. “Pension money can come in fast,” he says, “but it can also leave suddenly.”
But Goldring thinks AGF should still be in this line of business. With the investment expertise developed from managing retail mutual fund assets, he adds, there isn’t a lot of additional cost in managing large institutional mandates.
The institutional business took off in 2004, when potential clients realized that AGF European Fund, managed by AGF International Investors Inc. in Dublin, was second-best over three years, and fourth-best over five years, among a wide range of European funds.
AGF also added to its institutional money-management expertise when it acquired 79.9% of London Ont.-based Highstreet Partners Ltd. in December 2006. Its wholly-owned subsidiary, Highstreet Asset Management Inc., uses an investment style based on mathematical formulas and computer models.
AGF’s new Boston institutional sales office will offer nine mandates. Seven will be managed by AGF: U.S. growth equity, global core equity, global value equity, international value equity, European value equity, emerging markets equity and global government bond. The other two will be overseen by Highstreet: U.S. core equity and U.S. small-cap core equity.
> High Net-Worth. Private-client assets tend to be more loyal than institutional assets and, as a result, AUM in this sector has fallen significantly less — by 20.9% to $3 billion as of the fiscal yearend from $3.8 billion at the end of the third quarter and 22.6% from $3.9 billion in fiscal 2007.
This business has been built mainly through acquisition. Ottawa-based P.J. Doherty & Associates Co. Ltd. brought $2.5 billion in AUM when it was acquired in January 2004. Vancouver-based Cypress Capital Management Inc. added $2 billion in AUM when it was acquired in June 2004. Highstreet’s $4.8 billion in AUM also included some private-client business.
> AGF Trust Co. AGF Trust has been around since the late 1980s but didn’t take off until 2002, a year after Goldring decided to expand into investment and RRSP loans and to market the mortgage business more aggressively. Assets are now $4.4 billion, compared with $200 million in 2001.
Analysts and investors alike are worried by the drop in the collateral for investment loans to $1.2 billion as of Nov. 30, down from $1.8 billion when the loans were made. Another worry is that RRSPs cannot be used for collateral. Total investment and RRSP loans were $2.4 billion as of Nov. 30. There was another $2 billion in mortgage loans.
Causarano says these worries have been overblown. The investment and RRSP loans were made to clients of advisors that AGF knows; they are part of financial plans. The loans are carefully scrutinized and the borrowers are creditworthy, he says. About 75%, for example, own their homes.
“Our business and lending practices are consistent with [industry practices],” Causarano emphasizes. “We are managed in the same way, and there’s nothing on our shelf that isn’t offered by competitors.”
Goldring says lending is a good business, but he views AGF Trust the same way he views the institutional and private-client businesses — that is, as complementary to AGF’s core mutual fund business. He describes AGF Trust as a “nice alternative to the banks” that is provided to help advisors build and retain their client bases.
AGF Trust’s strong growth, Goldring adds, shows how much advisors appreciate AGF’s products and services. IE
AGF looking to move past tough times
While concerns about its subsidiary’s lending have battered the share price, CEO Goldring is upbeat
- By: Catherine Harris
- February 25, 2009 February 25, 2009
- 09:22