Good afternoon, and welcome to the IGM Financial Q3 2018 Earnings Results Call for Friday, November 2, 2018. Your host for today will be Mr. Keith Potter. Please go ahead, Mr. Potter.
Thank you, Patrick. Good afternoon. I'm Keith Potter, Treasurer and Head of Investor Relations, and welcome everyone to IGM Financial's 2018 Q3 Earnings Call. Joining me on the call today are Jeff Carney, President, CEO of IG Wealth Management, and President and CEO of IGM Financial, Barry McInerney, President and CEO of Mackenzie Investments, and Luke Gould, Executive Vice President and CFO of IGM Financial. Before we get started, I'd like to draw your attention to our cautions concerning forward-looking statements on slide three of the presentation. Slide four summarizes non-IFRS financial measures that we use in this material. Finally, on slide five, we provide a list of documents that are available to the public on our website related to the Q3 results for IGM Financial. And with that, I'll turn it over to Jeff Carney, who will review IGM's Q3 results, starting on slide seven.
Thanks, Keith, and good afternoon, everyone. Turning to slide seven on the quarter, total ending AUM reached a record quarter end high of CAD 159.7 billion, up slightly from Q2. We continued to gain market share in Q3, which marks the eighth consecutive quarter of advice channel market share gains for IGM Financial, with investment fund net sales of CAD 137 million. We experienced expense growth for the quarter of 3% relative to Q3 2017, excluding restructuring provisions. As stated on prior calls, in the Q4, we will have higher expenses due to the IG Wealth Management brand launch and ramp-up of our back-office transformational activities.
We continue to guide to non-commission expense growth of no more than 5% for 2018, and 3% by 2020, and we are expecting expense growth of approximately 4% for 2019. IGM Financial's adjusted net EPS were CAD 0.92 for the quarter, up 28% from last year, and the highest quarterly adjusted EPS in the company's history. We took a pre-tax charge of CAD 22.7 million in the quarter, supporting transformational efforts focused on efficiency and to further streamline investment management and our product offering. We are continuing to transform the business to enhance our client and advisor proposition and focus on back-office efficiencies. Luke will speak more to financial results in his remarks.
Slide eight provides context on the broader industry operating environment, and since Q1 market volatility, we saw positive equity returns in Q2 and stability through the end of the Q3. However, the mutual fund industry ended the quarter with long-term fund net redemptions of CAD 2.7 billion, down CAD 7.3 billion from Q3 2017. Volatility has reentered into the market in October. With IGM's diverse asset mix, AUM is down 4.1% in the month, which has fared better than the overall global equity markets. Turning to slide nine, on the financial results for the Q3, adjusted net earnings of CAD 223 million exceeded CAD 173 million in Q3 of last year. As I mentioned, Q3 Adjusted EPS were CAD 0.92, up year-over-year at a record high for any quarter.
Investment fund net sales were CAD 137 million, down from CAD 829 million in Q3 2017, which reflects the challenging environment. We have just released our IGM's October investment fund net sales of CAD 143.8 million. On slide 10, we show the segmented results, and you can see growth in earnings coming from all three segments. Turning to IG Wealth Management quarterly highlights on slide 12, AUM reached a record quarter-end high, driven by positive investment returns for the quarter. IG Wealth Management continued to capture market share as we focus on high net worth solutions, which represents 48% of gross sales, up from 43% in Q3 2017. We continue to experience solid asset retention with long-term trailing twelve-month redemption rate that remains low at 8.8% and is up modestly year-over-year.
Finally, at the beginning of October, we relaunched the Investors Group brand as IG Wealth Management, which I'll speak to in just a moment. Turning to slide 13 on operating results, IG Wealth Management experienced net redemptions of CAD 64 million for the quarter and CAD 5.5 million in October. At the end of September, you can see the trailing 12-month net sales rate for IG Wealth Management of 1.1% resulted in market share gains. This is in the context of our new approach to recruiting. We are seeing the consultants growing by three times the previous hires, but it's offset by the one-time consultant restructurings over the last 2 years. We are now through that impact on our flows. Turning to slide 14, high net worth solutions now represents CAD 43.9 billion of our AUM and 48% of total sales.
Our unbundled fee structures, where the client pays the advice fee directly, now have CAD 25.6 billion in AUM and account for 75% of our high net worth sales. We also continue to make progress in delivering better data with our focus on managed solutions, which now represents 47% of our AUM and almost 80% of our gross sales. Slide 15 highlights our client rate of return and historical redemption rate experience. To the end of September, our clients have experienced positive returns over one, three, and five-year periods. IG Wealth Management's trailing 12-month long-term redemption rate of 8.8% remains well below the industry average of 16.9%. Finally, on Slide 16, we relaunched the Investors Group brand in October to better position the organization as a wealth management firm with enhanced focus on mass affluent and high net worth.
There's not always common definitions, but mass affluent includes households with 100,000 to 1 million, and high net worth is one million plus. As discussed in Investors Day, there is strong brand awareness, but not a good understanding of what our company does. The brand relaunch is designed to create a better understanding of what we do and contribute to client acquisition and loyalty. The IG value proposition is grounded in gamma, and the IG Living Plan brings it to life in a compelling and meaningful way. The IG Living Plan is trademarked and gives clients and consultants a clearly understood name for our personal financial planning that adapts with our clients as their goals and concerns change throughout their lives. The relaunch is broad-based through print, TV, social media, and complemented by a highly targeted campaign for IG Wealth Management's private wealth management.
We expect this brand investment will contribute to future growth of the company, and I will now turn it over to Barry McInerney to take us through Mackenzie's results.
Thank you very much, Jeff, and good afternoon, everyone. On slide 18, I'll provide an overview of Mackenzie's Q3 results. Investment Fund AUM reached another quarter-end record high, up 1.4% from June 30, 2018. We continue to gain market share with adjusted investment fund net sales of CAD 523 million during the Q3. Mackenzie's Q3 ETF net creations of CAD 377 million ranked fourth in the industry. In a mutual fund industry that experienced long-term fund net redemptions of CAD 2.7 billion, as mentioned by Jeff, Mackenzie had another strong quarter of retail mutual fund net sales of CAD 363 million, up from 2017. Offsetting strength in this area was net redemption in the institutional channels.
During the Q3, Environics published the 2018 Annual Industry Advisor Perception Studies, and we're extremely pleased that Mackenzie ranked third in both the mutual fund and ETF studies, and continued to gain ground on our goal to be number one. Slide 19 highlights Mackenzie's operating results for the Q3 of 2018. We had our best ever Q3 mutual fund gross sales of CAD 2.2 billion, up 21% year-over-year. These figures are adjusted to exclude the impact of fund allocation changes during the period. Total adjusted net sales of CAD 128 million compares to CAD 612 million last year, and the majority of institutional SMA net redemptions were attributable to one institutional client. Mackenzie continues to capture market share versus peers.
Our long-term mutual fund net sales rate of 0.9% exceeded both the advice channel and the overall industry. And if you include both ETF and long-term mutual funds, Mackenzie delivered an organic net sales rate of 3.7%. And we're pleased to announce that our October investment fund net sales were CAD 166 million. Slide 20 provides detail on our mutual fund sales. Gross sales improved across a number of categories relative to last year. Positive net sales in the income-oriented and balanced categories more than offset net redemptions in Canadian equities. Overall, adjusted mutual fund net sales were CAD 208 million, down from CAD 305 million during Q3 of 2017.
As I've touched on earlier, Mackenzie's retail mutual fund net sales gained strength in the quarter at CAD 363 million, up CAD 164 million from 2017. These retail net sales are broad-based across asset classes and fund types and are driving our market share gains. We will still see upside with having a gross sales capture rate of only 7.5%, up from 5.5% in 2017, and institutional sales experienced softness in the period, with this business line continuing to mirror the overall industry. Turning to slide 21, Mackenzie's ETF AUM rather grew to CAD 3 billion, driven by Q3 net creations of CAD 377 million, ranking fourth in the industry amongst the now 30 ETF providers in Canada and third for year-to-date net creations.
Growth in our ETF business was primarily driven by our active and smart beta offerings, and Q3 2018 was the best quarter in our history for retail ETF flows of CAD 264 million. On slide 22, Mackenzie's long-term investment performance remains solid, with 64% of mutual fund assets in first or second quartile over the 10-year period. Overall, 38% of Mackenzie's AUM is in the four or five star rated funds. Looking at Series F, where Mackenzie has a significant opportunity to grow AUM within the IIROC channel, 17 of our 20 largest funds are rated four or five star by Morningstar. Six of these funds are rated 5-star. On slide 23, we continue to benefit from solid investment performance and net sales across a range of investment styles and teams.
On the equity side, the growth-oriented teams and global equity and income team continue to deliver strong performance and positive net flows. We have also experienced another strong quarter of performance and flows from our fixed income offering. We've entered a time of significant volatility in October, as we all know, and we believe Mackenzie's multi-boutique structure is well positioned to perform in a spectrum of market environments. Boutiques that have historically outperformed in volatile markets, such as Ivy, which had a strong October. We offer specific strategies that deliver access to non-traditional asset classes and benchmark agnostic strategies that can provide risk-return profiles with lower correlations with the broader market. And finally, we also offer a variety of multi-asset solutions designed to deliver a smoother ride for investors. Finally, on slide 24, which highlights results of our 2018, of the 2018, rather, Environics Advisor Perception Studies.
We're very pleased that Mackenzie is the only company to rank top three in both mutual funds and ETFs. With respect to mutual funds, Mackenzie ranked number three overall and number two in brand recognition. While our ranking did not change, our scores closed the gap on our target to be number 1. We're also very pleased with the leap from number 10 to number three in ETFs. Our wholesaling team has continued to excel and was recognized as being among the best in the country, tied for with one other firm for the first position. This progress has led to increased penetration within both the MFDA and IROC channels, and these results demonstrate the exciting opportunity Mackenzie has to continue to increase sales and gain share. I'll now turn over to Luke.
Great. Thanks, Barry. I'm going to turn to page 26, and I'd first highlight the non-IFRS adjustments referenced in point one. So first, we had a restructuring charge of CAD 22.7 million pre-tax, relating to the reengineering of our North American equity offering at IG and related personnel changes. And I'd also add, these changes provide annual savings of about CAD 7 million annually and are in our expense guidance. I'd also highlight the premium of CAD 10.7 million pre-tax associated with our early redemption of the CAD 375 million debentures in August. And, again, I'd highlight, this redemption, along with the 30-year debenture issuance we did in July, provides us with annual interest savings of about CAD 17 million per year, and we started to experience that during the quarter.
At the bottom, I reemphasize that our Adjusted EPS of CAD 0.92 is an all-time record quarterly high for the company. And while adjusted earnings are up 28%, I'd also highlight in the bottom point, we did implement IFRS 15, January 1, 2018, and we started accounting for sales commissions paid on bundled products by expenses incurring. And I'd note for everybody that 2017 results would have been largely unchanged if we'd applied this retrospectively, and on this basis, earnings are still up 24%. Turning to page 27, a few comments on Q3 and the month of October. First, I'd highlight in the circled items, you can see in the table on the right, that we had an investment fund net sales rate of 0.4% in Q3.
That is, as Jeff said, did very well relative to competitors. And we also generated investment returns for our clients of 0.5% in the quarter. In the chart on the left, you can see, and as you saw in our results for October, released yesterday, AUM was down 4% in October to CAD 153 billion as a result of October's equity market declines. I'd note that we also released investment fund net sales of CAD 144 million, which we believe will show very well in the industry context. And I'd also highlight that this was a record high gross sales for both IG and Mackenzie for the month of October.
As highlighted by Jeff and Barry, we're working to serve our clients well in this volatile period, and this is the type of market where we build relationships. Moving to page 28. This is a new slide, and it's got our consolidated EBIT and EBIT margin. The only comment I'd make is, on the right, you can see that our EBIT margin of 64 basis points in Q3 of 2018 was up from 61 basis points, a year earlier. You can also see that net revenue rates were unchanged. So the increase in margin was as a result of, of unit cost improvements from 64 basis points to 61. As you know, we are very focused on operating leverage, while at the same time enhancing our advisor and client experience.
I'd change now to page 29, and I would highlight that there's a lot of data there, but I'm going to make one point, and the point I have is on the non-interest expense line. So as mentioned by Jeff, you can see year-over-year, our non-interest expenses, which are just in the middle of the page, were up 3% from last year. We are committed to meeting or exceeding our full-year expense growth guidance of 5%, meaning our growth will be 5% or less, and we're continuing this guidance. I'd also note, as mentioned by Jeff, some of the Q3 expense load reflected timing, where we've got certain activities like the brand relaunch at IG, as well as some of our transformation program investments occurring in Q4.
And I'd also reaffirm our guidance of no more than 4% increase during 2019. Lastly, I'd remind that while we have discretion on our expenses, we are committed to serving our clients and capitalizing upon the market opportunity we have in front of us. And so with recent market volatility, we would not expect our guidance to change in any way in this time. So we'll hit the 4% growth target for next year. And while there's discretion, you know, the recent volatility doesn't do anything to change where we're focusing our efforts and capitalizing our opportunity. Moving to page 30. Let's turn to IG Wealth Management, and I'd make two comments on this page.
First, on the left, you can see our revenue rate of 201.7 basis points is very much in line with Q2. It changed a little bit as a result of continued migration towards High Net Worth clientele, and you can see this in the row at the very bottom of the table. Second, if you look at the chart on the left, you can see that our asset-based compensation rate of 48.5 basis points was down slightly from Q2, and also that our commission rate, in the chart on the right, of 1.7, was down very slightly from Q2.
So I'd note that we made some changes to our field management in the Q2, where we reduced the number of regional directors we had, and we reassigned certain of their responsibilities. As a result, our commission expense was around CAD 3 million lower in Q3 relative to prior quarters. And I give you guidance that about half of this expense decline is temporary and will be eliminated as we complete reassignment of activities, and the remainder we view as enduring. I'd also remind you that we reviewed with you in Q1, that our sales-based compensation rate will be declining by around 40 basis points starting January 1, 2019, as we continue the transition away from DSC that we started two years ago.
So you can expect that 1.7% rate to be closer to 1.3% as we enter 2019. And we'll continue to see some upward pressure on the asset-based compensation rate just from the ongoing maturing of DSC units, but that will be quite slight. I turn now to page 31, where I'd start by highlighting that IG's EBIT of CAD 213.5 million is up 18% from last year and up 8% from last quarter.
I'd remind you that if you look in the net investment income and other line, which is the fifth row from the top, that we did have some negative fair value adjustments in our mortgage business in net investment income last year, and that with the adoption of IFRS 9 this year, our mortgage earnings are much more stable. I'd also make a comment on the sales-based commission line, which you can see is the sixth or seventh row down there. I note in the quarter, we had CAD 24.7 million in commission expenses, down from CAD 27.9 million in Q2. I remind you that we're expensing commissions paid on sale of bundled products as we incur them. As reviewed by Jeff, the share of our products sold into unbundled solution continued to increase.
So that's what drove a majority of this decline in the commission expense from Q2, is just the fact that we're selling a greater proportion of unbundled products and less bundled products, and the bundled ones are the commissions that we incur, expenses incurred. I'd also highlight the operating leverage we have at IG with non-commission expenses up 2.8% from last year, and, and again, would remind you that we have brand launch costs coming in Q4. Now turning to Mackenzie on page 32. The key comment I have on this slide is to direct you to our net revenue rate, which you can see in the chart on the left, and it's 80.9 basis points. This is down from 83.6 basis points in Q2.
I'd remind you that we implemented our retail pricing changes June 1, 2018, so Q2 through Q3 is the first period that had the full quarter impact of these changes. I'd remind you these changes were worth around CAD 50 million per year on an annualized basis at time of announcement. I'd also remind you of what these changes were. We aligned our fees on fee-based products at the same level for all households, irrespective of the level of assets. This revised structure is very well suited to both discretionary and non-discretionary fee-based accounts, and it's been very well received in the marketplace. And then lastly, on page 33, I'd highlight in the third column at the bottom, Mackenzie's EBIT of CAD 52.7 million is up 16% year-over-year.
As you heard from Barry, the business is doing very well, and sales momentum is accelerating in a challenging environment. And I would remind you that this business has what it needs to compete, and there's a lot of operating leverage in this P&L. And that concludes my comments. I'll turn it back to Patrick, the operator.
Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please mute your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel the question, you may press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Geoff Kwan from RBC Capital Markets. Please go ahead.
Hi, good afternoon. My first question is on the non-commission expense growth. So you this year, you've got guidance of 5%. When I take a look at what you reported in Q3, it almost kind of seems to imply at Investors Group, that the non-commission expense needs to go from CAD 146 million in Q3 to almost kind of CAD 20 million higher quarter-over-quarter. Which I get, you know, you talk about the rebranding and all on some of these other, transformational stuff that you're doing, but it seems like a big jump. And so I just wanted to know whether or not that's accurate.
And the reason I ask that was when I take a look at how you guys were guiding last year on non-commission expense growth, it was 7%, and you reiterated at Investor Day, which was right at the end of November. Yet when you reported the Q4 results, which would have been a month later of actual operations, you came in at 6%, which is a big delta considering it could have only happened in Q4. So I just don't know if it's managing expectations, which is fine, but I just want to get a better sense as to how you're looking at the Q4 non-commission expense.
Yeah, it's a good question, Geoff, and it's, it's one that's on my mind too. So first, we are going to meet or, or do better than the guidance we gave. Second, we did have a very light quarter on expenses and, and managed it quite well. But your real question is like, what are you spending all this additional money on the Q4? So the single biggest item is the brand relaunch, and I hope you've, you've felt the presence of the campaign in the market. And as Jeff mentioned earlier as well, we do have a lot of transformation program expenses that we're working hard on. And again, those activities produce, you know, long-term savings as we're working to automate and really impact our client experience.
There was some timing of expenditures on those programs that reduced Q3 but will increase Q4. So we are staying firm to our guidance. We would like to do better, but we will have more expense in the Q4.
Okay. And then, Jeff, on the high-net-worth rollout in terms of targeting the households greater than CAD 1 million, a re you at a point where the consultant, like all the consultants, are kind of fully trained and prepared to be able to go out and actively, you know, target these sorts of clients? Or is there still some transitioning that needs to happen? And then how do you think about the timing of when you kind of see it show up in the sales numbers more visibly in the monthly numbers?
Yeah, I mean, one of the powerful things about our model is that we have consultants today that are serving the high net worth clients, and then we have. So, and then we are a culture of sharing, and so a lot of the training that's going on is really peer-to-peer across the organization. And then we're showing different models of different practices around the country, and we're sharing those with the management team, and then they're training that into their organization. So it's still early days of that execution. And then the other part of it is, you know, the higher you go up in the market, so if you're going up over CAD 1 million and up, your competition is going to be higher and your value proposition has to be even better.
And so we win there on the fact that we have the technical skills. We now have a brand that's got more support behind it, so that gives confidence to our clients. And then we've got a series of programs, as you know, that are launching, that are going to make it even better. So I think the story there is that we have momentum, and we're going to have investments coming that are going to continue to evolve that momentum going forward. But part of it is training the consultants themselves to feel confident in serving those clients.
Do you think it's like, in six months we'll start to see it more meaningfully in the net sales numbers, or is it more like 12 months or another timeline?
I'd say six to 12 months is a good length.
Okay. And if I can sneak in one last question. Barry, just, the liquid alts product, on slide 20, what category would that fit into? And I'm assuming on slide 23, it would be grouped in the managed products category.
I'm just flipping over right now. Slide 20. So, good question, Geoff. Let me just double-check what category that's in. Yeah, that's in the sector other category. So, that's where it's in. There's not a separate category now that is like liquid alts, but we put that in the sector other category.
Okay, and it was in the managed products on slide 23?
23. That is, yeah, yep, that's correct. Yes, very good.
Are you able to say, like, what the net sales in the quarter would have been on that product?
Yeah, we don't think we have that. It's, it's actually. So, like, just comment in general, we're very pleased with it, by the way, and particularly the fact that, you know, markets have been choppy. It's exactly designed to help investors late in market cycles, and of course, is performing, is performing well in that it's uncorrelated to both stocks and bonds. So that we're pleased with. A lot of education to go out to the platforms and the advisors who are really receptive to it. But obviously, we're talking a product that is akin to what is happening in the US, but new to Canada, we're using leveraging and shorting, so there's an educational component to it. So we're getting flows. You know, it's early days. We're using it ourselves internally within our multi-asset strategies.
But the exact number, I'll have to get you back later, but it's not, it's early days. Flows are coming in, but it's still early days in terms of the educational cycle required for these types of, these types of products.
Okay, great. Thank you.
Thank you. The next question is from Gary Ho from Desjardins Capital Markets. Please go ahead.
Thanks. Good afternoon. Let me just follow up on Geoff's earlier question on non-commission expense, specifically the stuff that I guess Mike Dibden's been working on. Can you give us an update on that? I imagine, you know, that it's more of a 2019 event. Should we see perhaps another round of restructuring costs and expense saves in 2019? And is that baked into your 2019 4% growth estimate?
No, we don't. We're managing our resources efficiently, so we don't want to always have to take a charge on severance and all of those types of things. So we find, you know, people leave the company, and then we don't replace them, and we find other ways to do this. So I don't think you always have to think we're going to have a charge, in the way we manage that, is how I think about it. And then, you know, just to, you know, Mike Dibden's starting to get some traction, so we're launching a new leading fund accounting service, which that's the one that we tried to build ourselves, and now it's up and running, and so we're off to the races on that.
And then, we're starting to get into some digital forms and make it easier for our clients. So we've got electronic signatures coming and other things that are going to make it more streamlined for our clients and for our consultants. And so it's good to see Mike, he's hired a team. They've got a great culture going. They've got a lot of talent in the company, and they're starting to execute. And so you'll hear more and more from us on that. But it's still, it's still early days, but we're certainly making progress.
Yeah, and I'd add to that, Jeff, back when Mike spoke at Investor Day, and we, we mentioned he'll be spending CAD 100 million over five years to generate annualized savings of CAD 50 million a year, you know, that hundred is inclusive of a, a lot of severance and other, and other costs, and that is embedded in the run. And, and on your other point, are we realizing benefits, and when will they start to be? You know, we're 40% in on the, on the kind of annualized run rate, and we're continuing to chip away during 2019. But again, what's offsetting that is all the spend that was required to get those savings.
Okay, that's, that's helpful. And, and Luke, while I have you, just want to get back onto that slide 30, and specifically on the asset base rate and the sales commission rate. And I'm comparing it to the slide that I think you provided some guidance back in the Q1 call.
Yep.
So I think, you know, you said 1.3% for sales commission rate for 2019. But on the asset base side, you had a guidance of, I think, 50 basis points for 2018 and 52 basis points for 2019. But you're trending below that. Can you provide some guidance on that side?
Yeah, I can. And so especially anchoring to this quarter, where we did see a basis point decline. Part of that, as I mentioned, it is changed. We made the field management, and so we did reduce our regional director complement by about 17% in the Q2, and we are seeing the impact of that in our Q2 results. Part of that is going to be offset in the coming quarters as we've reassigned some of the activities they're responsible for, but some of that is going to be permanent savings. So when you look at the 48.5, you can think of that ramping up a little bit over time.
But again, the biggest feature of that is going to be DSC maturing over the next couple of years as we just continue in 2016. And so as it matures, as we go through that seven-year cycle, we're going to see some upward pressure gradually over the whole time. But of course, that is offset by the sales, commission rate coming down in that period. So, so I guess, to, to answer you another way, on the guidance that was provided earlier on, on both the sales commission rate and the asset-based comp rate from Q1, we are going to be a tiny bit south of that as a result of these changes that, that I have today.
Got it. Okay, that's, that's helpful. And then just lastly, Jeff, we've seen kind of more activity on the M&A side, and definitely valuation has come down across the sector. Now, are you seeing more inbounds in terms of M&A opportunities? And are you interested at all? And if so, kind of what segment kind of interests you at this time?
I mean, we feel really good, you know, with our boutique model. You know, we've got a great cross-section of capabilities that will now enable us to launch incredible products that are differentiated in the marketplace. So feel really good about that. And then, if, you know, we need to find something else to add to our capabilities, you know, there's a lineup that want to help us. So recently we've been using some new providers from the US and bringing in some more capabilities there, and so we'll continue to evolve that.
But, we also are, you know, there's conversations going on in the industry about know your products, and, you know, we want to make sure we have enough products, but not too many, because you can't, you know, understand every product if you have so much to cover. And so we're cognizant of that, and we really want our teams to use the solutions-based solution products, and they are. And so it's more complementary in using third-party products or using Mackenzie's products as well. And we constantly look at that and make sure that we have enough diversification to serve our clients.
Okay, that's helpful. That's it for me. Thank you.
Thank you. The next question is from Paul Holden, from CIBC. Please go ahead.
Thank you. Good afternoon. Just want to ask a few more questions related to potential ongoing market volatility. I know, Barry, you talked to this already a bit in terms of how it might impact some specific mandates, but want to get a better sense from the firm overall, how you would view the net impact of market volatility. Is this something that's disruptive to your business? Do you think you can be, a relative winner? Do you think it changes the, the balance of flows between passive and active, and therefore is a, is a benefit to your firm? And maybe also as well, how it might, impact the proportion of Mackenzie assets that are first or second quartile. Overall, do you think you come out as a net winner?
Well, I'll start on Mackenzie, and Jeff, you want to chime in on, on HE. So we, you know, feel that we're well positioned competitively in any environment. So, but I'll specifically allude to a more volatile market, where we're getting towards the, you know, the end of a cycle. Can't call it when it is going to end, but towards the end of a cycle. So, you know, by design, and Jeff mentioned as well, by design, we have 14 boutiques at Mackenzie, and that's by design. And they have a variety, and this differs from a lot of other models out there.
It's not the only one, only model, but our model is the boutiques on the equity side, for instance, cover growth, value, downside, risk capture, different asset classes, obviously, Canada, US, North American, Global, Developed, Emerging, and also covers quant and fundamental. So and then on fixed income side, we've got a really terrific fixed income team that has their performance is approaching, if not there, on most categories of Five Star. And their capabilities there are not just your core and core plus, but they have high yield, they have global unconstrained, they have floating rate. So what we see is, you see our sales are strong, and it can vary where it comes from, depending on, you know, quite frankly, where we are in a cycle.
So for instance, right now, the last year or so, we've been... The sales have been really robust with our growth managers, our fixed income, and obviously, our multi-asset class. It's been weaker, as you know, with the Cundill, who are value-oriented, and this has been an almost historic growth environment. And it's been weaker with Ivy, which is a downside risk protective posture, and so therefore, they're protecting the capital for the clients, and that means also with larger cash holdings. So, and then lo and behold, what happens? Well, first of all, October, you see the Ivy performance come back because they're positioned for downside risk protection. We will see, we will see growth rotate back to value.
Never know when growth, when it rotates back, Cundill is like a coiled spring. Then we've launched, as you know, the alternatives. These are all weather portfolios that are really good, we think, irrespective of the market cycle, but they're particularly good during the end of a market cycle because they offer uncorrelated returns. So, and then we've also seen a tick up in our fixed income flows quite a bit, so, particularly, and no surprise, floating rates, not constrained, because again, rates are starting to rise. So it's really a nice combination of almost we ourselves, at Mackenzie, are almost a diversified portfolio, 14 boutiques. And so we will see flows coming and going, depending on, you know, where we are in a cycle and what's of particular interest with advisors.
Overall, probably our momentum has been broad-based across every asset class. It has been led by multi-asset class balance. That means that our multi-asset balance teams have at their disposal all these variety of component parts that they put together to make these balanced multi-asset perform well. Again, I like to call all weather, depending, irrespective of what the environment is. If that makes sense, we're really we like different environments because we don't have one philosophy that's permeating across our organization, where some might have, they believe in growth, that's all across our organization, or some might be garpy. We've got everything, and so therefore, it's that diversified portfolio is we think is competitive strength.
And the only thing I'd add on that from an Investors Group side is, for us, it's a great opportunity because volatility and stress in markets creates opportunities for winning new clients away from our competitors. And so we will be doing that throughout this process and make sure that they're energized to bring in new households.
Okay. Then my follow-up question for Barry would be, Mackenzie has executed on pretty much everything it has targeted except for relative fund performance. That doesn't sound like market volatility or downdraft in the market is going to be the catalyst to change that. So maybe you can refresh us on what the targets are for fund performance and the plan to get to the target.
Okay. Well, what we focus on a number of measures that are metrics, rather, to measure best performance. So we focus, and they're in some of the slides here, we focus on percentage of AUM four and five star Morningstar funds. And I believe we now are probably a tick under 40% on that number. So as to explain that number, that number actually is fine for us because it's strong where it needs to be, like our balanced multi-asset is very strong. What's in favor right now or what's being rewarded in the marketplace, growth, our Bluewater mid-cap growth, US boutiques, for instance, are doing exceedingly well, obviously, because their style's in favor. So, you know, that's a good thing.
What you'll find with that percentage, though, the percentage for us will never get too high because we have boutiques that are doing exactly what they should be doing and doing it well, but their style is out of favor. For instance, Cundill, you know, their stars are below four and five, as are Ivy, mostly, because their style's out of favor. And there's no particular universe in Canada, like we have in the US, that drills down to style-specific managed universes or, or process-specific universes. We just have one universe in Canada. So, the 40% we're fine with, we actually think it's going to drive upwards, as the market changes, because you'll see, we do have a lot of assets in some boutiques, like in Ivy and Cundill, that are styles out of favor.
Once the style comes back into favor, that will drive that number probably up higher. And what's particularly important to us as well is, and I think we have it in the slide, we talk about 17 of our largest 20 mutual funds in the S series are four and five stars. So our wholesalers at Mackenzie will tell us, Jeff and I, that we have too much to sell. It's actually a good problem to have because we can meet the needs of advisors, irrespective of market conditions. We have strong funds in ETFs. It's across the asset classes and styles. So we're very pleased with our performance.
It's just that sometimes look at the headline number, it looks perhaps, you know, lowish, without the proper context, but it does represent an abundance of styles and boutiques and mutual funds, and ETFs that are performing well. And one more point, obviously, we focus on net sales. You can see the momentum we have in the retail sector, you know, quarter after quarter. Gross is still important because, for us, since we have a variety of boutiques, and some boutiques will be out of favor at times, their style, then we just outgross that, right? We just outgross that with the boutiques in the style. So, you know, we monitor both the gross and net sales, which is part and parcel indication performance. And again, that is, we're happy where we are.
And final question is maybe an update on China AMC. Seems like there's a number of moving parts there. The largest money market fund, I guess, has been forced to kind of share some of its AUM with competitors. Wondering if you benefited from that? And also maybe an update, given market fall in in Asia this year, and how that's impacted AUM, if at all?
Yeah, we're. I'll start, and then Luke and Jeff can chime in. We're, first of all, very pleased with how CIMC is performing. It's been about a year since IGM closed the transaction in September 2017, and they've retained their number one position in long-term mutual funds, plus institutional assets. Number one position in ETFs, a strong brand. They're multi-channel. They're being innovative. They've had a number of really strong product launches in Q1 before the market started to downturn, a little bit of confidence step back for the industry, obviously, with the markets last six months or so. But they're innovating, launched the first robo-advisor in China, and launched their first couple funds.
The third pillar has been publicly announced in China, that is now in place in a pilot project this year, and it'll be formally in place in spring of 2019. That's a three-pillar retirement system like we have in Canada, with the Social Security system and the corporate system, and then the individual private system, RSPs here in Canada, and they'll say that's the third pillar that they have just launched. CIMC, one of the few firms selected to participate in the pilot. So they're just so well positioned, being a preeminent top three local domestic asset management firm. So when you, when you look at their performance last year, it's, you know, they're just holding their own, despite the fact that the Chinese equity markets from their peak this year, down over 30%.
I think for the year, they're over 20% down. So you've got that going on. They're doing just fine. What we also like about them is that, in addition to what I mentioned, they're focused on risk-adjusted returns. So there's been a lot of chatter, money market in China. It continues to grow strongly, in China. Over half the mutual fund AUM for the industry in China are money markets. And the money market funds are growing for CIMC, but they're lagging the money funds of some of the bigger competitors, and that's by design, because they're not reaching for yield. They're being conservative. The regulators are monitoring the money market funds. They wanna make sure no one is overstretching themselves.
They would prefer ultimately that the industry mirrors more like Canada or the US, where it becomes more long-term focused, more institutionalized, and there's not money going in and out of money market funds, albeit again, interest rates are still higher in China than North America, so there's still attractive yield there. So obviously all in all our business case for us to get into it originally is absolutely on point, if not strengthened. We're very pleased with their performance. They are holding all of their industry-leading positions, and that's despite, as you suggest, that there's been market volatility there. And ultimately, that will become more sustainably upwards once, if and when we hope that some of the trade issues and others to get resolved between China and the US.
Great. No more questions from me. Thank you for your time.
Thank you. As a reminder, you may press star one if you have a question. The next question is from Graham Ryding from TD Securities. Please go ahead.
Thanks. Maybe I could start at IG. The drop in consultants quarter-over-quarter with, I guess, four years plus experience, was that in part a reflection of you said you meant you made some field management changes in your consultant network? Is it, is that baked into that number there, or maybe some color around the quarter-over-quarter drop?
Yeah, I think, look, I'll say that wasn't as a result of those changes. Most of those people, that was very slight. Well, when I talk about 16%, 17%, it's not a lot of people. The bigger part of the changes were just normal retirements and the timing of people graduating into that category, relative to just the normal flow of people exiting the business.
And we did reduce the breadth of our leadership, so there was something in there, too.
Yeah, that's what I said. It's, it's small, so you think 15, 16 people.
Yeah. Okay, so you're, you're comfortable with your sort of ability to retain, you know, your productive consultants and attract the people that you wanna attract. There's, there's nothing to read into the, the continued attrition, attrition of, your consultant network?
No, the new recruits that are coming in, like I said, are closing in on 400% higher than our previous recruits. So we're, you know, gonna continue to accelerate that. If we can keep signing talent like that, we'll keep hiring them.
400% higher, is that asset growth, net sales? What is that metric?
Yes. So it's, so when we put in the new process, we're measuring from that date, and so we're looking at. Historically, we would hire, you know, our screening wasn't as defined as it is now, and now we're putting a much bigger screen on it, so we wanna make sure that the success rate of that consultant is very high. And so we've centralized recruiting. We've put a professional team in place to manage all of it, and we're managing LinkedIn much better, so we can get access to talent. And we just professionalized the whole thing and institutionalized it. And so it's got great management on it, and it's exciting. So if we can continue to see that kind of momentum, we'll continue to hire.
Yeah, and then the metric, in the supplemental info, you'll find the, the number of consultants broken down, as you said. When you look at the same store sales, so the sales, the growth sales per consultant, year-to-date growth sales are down 5%. When you look at the same store sales, though, we're up 17% because we've got fewer of them. And when you parse that out, as Jeff was saying, between the new recruits and the experienced, the experienced are up 3%-5%. But those who are brand new with us, because we're recruiting so much more selectively, that's where they're up multiples in growth sales relative to the past. So we're seeing very good performance of the new recruits.
Okay, got it. Thank you. Luke, maybe I could follow up on the color that you gave around the commissions expense, how that's evolving. It sounds like in 2019, your asset retention expense is going to move higher, but not as much as the drop in sales commission expense. Is that the message?
Yeah, so just that DSC is becoming a smaller and smaller part of the business as it's maturing naturally. So you remember that the guidance, we gave annual guidance that 2018 was going to be about 50 basis points, and 2019 was going to increase to 52, just as a result of that maturing of the, of the DSC book. And offsetting that is the transitional measures that we put in place on, on sales commissions. And so my guidance was that where our sales commission rate guidance had been 1.9% for this year, and it's actually running at 1.7% now, the earlier guidance we gave for 2019 was 1.5%, and you can think of that as running something closer to 1.3.
And similarly, on asset base, where we gave guidance at 52, to the extent that we're a bit better as a result of some of our changes, you could think of that being closer to 51 to 70. And of course, that essence flows based upon the dimensions of, like, who's selling the product and who's advising on it, because there's different rates through our network. But these weighted averages, I think those are, that's very good guidance to work with. And the key point I had wanted to convey in this quarter is that there is about CAD 3 million there that were related to these changes that we made in field management. And, you know, part of it will go away as we reassign that activities, but part of it will endure.
So I want to get that out there, that the ongoing rates are going to be a little bit lower.
Okay. That's helpful. And then how about the timing? As you transition away from selling bundled products, what is the timing around that, and is that baked into your guidance at all here, or is that a 2020 event?
Well, I think you remember from Investor Day, Todd Asman gave guidance that we're launching unbundled for all. So right now, it's only available in our high net worth solutions, and that's something that is coming into effect in 2019. And as part of that, we are migrating our entire business there during 2019, and we are expecting that to be substantially complete during 2019. So there will be no more bundled products in our offering at all.
Got it.
All unbundled.
Okay. Got it. And then just my last question would be, you know, I guess this is for Jeff. So net sales at Mackenzie are flat year-over-year, if you adjust for that, asset allocation.
You mean for Investors Group?
Yeah, well, that was in Mackenzie, I think. Your, you know, year to date, your sales are flat year over year, if you adjust for the asset allocation outflow this quarter. But then at Investors Group, net flows are down. So, I guess, what's driving the differential between, you know, your two divisions? It looks like Investors Group is sort of moving a little bit more in line with the industry, and Mackenzie is outperforming. You know, maybe some color around how you're viewing the difference in net flows this year in the two businesses.
Yeah, I think we could have done better as to where we are. We're excited about, you know, what the next 12 months are going to look like. You'll be the judge of our success there. But I think it's a combination of a lot of change in leadership and all of those things, and bringing in all the new talent we've brought in, and they are now up to speed, and they're starting to deliver value for us. So you'll see that momentum as we go. But I'm very confident in our ability to grow this company going forward. And it's, you know, the volatility, we're outperforming most of them, the competitors, on it.
But obviously it's slight, and it's not like we're significantly ahead of everybody else, but we're holding our own. So but it's we know we could do better, and that's, that's what we're going to be doing.
I think Mackenzie. It's a good question, actually, because you've probably seen we're giving you more and more disclosure and guidance on how Mackenzie is doing, retail channels versus institutional channels, because they're quite different businesses. And retail by far our biggest and has a higher margin and higher pricing. So I think we, we've heard back from the analysts, like to know a little more specificity between the two of them. So our retail channel here for Mackenzie in 2018 is doing very well, way above last year, both gross and net, and accelerating. And so you know, very pleased with that. The institutional to Mackenzie, not be it, it was much better last year than this year.
So that's why you probably look at the total funds, Mackenzie, and see, you know, you don't see that breakout. We're breaking out in a strong way, retail. And we had actually a very strong institutional year last year. We knew it was going to be softer this year. It's become more pronounced, the softness, because of the industry flows, particularly the financial institutions, which is very weak. And so again, some of those, a good chunk of those institutional flows emanate from our partners, financial institutions. So we're not concerned at all, actually. I think institutional is down as we expected, a little more because the industry malaise and the retail, as intended, is accelerating. So I hope that's okay. But we'll.
We'll continue to show more guidance going forward in both channels, irrespective of which one is doing better. We plan for them both to do well, but right now, retail is leading the way for us this year.
Yeah, I'd also comment on the difference in the distribution models and the business models, where IG is a distributor, and when you look at its net flows, it is, it is actually gaining new client relationships and, and penetrating existing clients. And so, as Jeff mentioned at the onset, IG did gain share when you look at the, at the, at the mutual fund industry net redemption rate. But Barry's model, and Mackenzie model is, is very different, that, there's a lot of, we call it the money in motion. There's a lot of growth sales going on as people rebalance within a client account, and Mackenzie is capturing all that share right now, and it's accelerating, as Barry mentioned, in retail. So they're very different business models, and Mackenzie does have that leverage.
Okay, that's helpful. Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good afternoon. Barry, just on that institutional comment, you, you talked about you knew that it would be a bit slower this year because a lot of it's like with partnerships. But during your in your opening remarks, you also said the industry was a bit soft, too. So is some of it the industry as well? And maybe you can just elaborate on that and maybe the pipeline going forward.
I'm sorry, just to repeat, what else is soft as well? I, I'm sorry.
Oh, the industry.
Yeah.
Yeah. Well, I guess, you know.
We can't predict the industry. I don't think we didn't actually predict the industry to be soft this year. It just happened. So, and it just we just react to it. We had thought our institutional sales would be lower this year because, quite frankly, we had a breakout year last year.
Yeah.
We had record sales on some of our platform partners, and we just were concerned to say that just can't continue in 2018. So that's what I meant. Good question, actually. So I meant that we had forecasted a slowdown institutional in 2018, simply because some of our partners did had record years. And so there we had record years, and we just think that wasn't unsustainable. But it's been the slowdown was is the, as I mentioned, has been stronger, been more pronounced, rather, because the industry, which we can't predict, has been really soft this year. I mean, we're, y ou know, across IGM, we're gaining market share relative to the industry. Sometimes it's difficult to see our maybe more modest net flows and be exuberant.
We're very exuberant across IGM and Mack IG, but what we can control is market share. We want to gain market share across the board, and that's happening. So does that answer your question? It's a good one, but I think you're right. We can't predict the industry. Our prediction for Mackenzie institutional to be slower this year, again, was the fact that we had such a strong year last year. We wanted to be, you know, smooth that out over a more long-term forecast, and we had expected to be slower this year.
Yeah, no, that's good. And then, Barry, just on slide 24, on that Environics Advisor Perception Study, does that rankings just include independent companies, or does that include banks and LifeCos as well?
It includes all manufacturers, bank, insurance, and independents, yeah.
Okay. Thank you very much.
Thank you. No other further questions registered at this time. I would like to turn the meeting back over to Mr. Potter.
Thank you, Patrick. That will conclude our call for the day, and just thank you to everyone for participating, and have a great weekend.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.