DBRS Confirms Ratings on IGM Financial Inc. at A (high) and Pfd-2 (high), Stable

DBRS has today confirmed the Issuer Rating and Unsecured Debentures rating of IGM Financial Inc.’s (IGM or the Company) at A (high) and its First Preferred Shares at Pfd-2 (high). All trends are Stable.

IGM is a consistently profitable financial services company in Canada, which reflects its leading market position in the mutual fund manufacturing and distribution market through the operations of both Investors Group Inc. (IG) and Mackenzie Financial Corporation (Mackenzie). The ratings are primarily based on the profitability, operating cash flow and business strengths of the Company’s IG subsidiary, while recognizing the complementary positive contribution of diverse products, brands and distribution channels offered through Mackenzie and Investment Planning Counsel Inc. (IPC).

While IGM is in a strong position, mutual fund manufacturers such as IG and Mackenzie face the challenge of ensuring that their product offerings and service quality evolve to meet the needs of advisors and their customers. IGM is in a competitive business that is being pressured by banks, insurance companies and lower cost investment options, such as exchange-traded funds, all of which are trying to take advantage of the aging demographics of savers and retirees. At the same time, meeting increasing regulatory requirements remains a challenge and a source of incremental costs in the financial advisory business.

The nature of IGM’s business exposes it to market volatility through management fees, which are calculated based on the market value of assets under management (AUM). Although this dynamic has been helpful in the past year, it can also quickly create negative trends in income and cash flow. DBRS sees IGM as well positioned to withstand significant changes in capital markets.

With the help of its unique exclusive consultant network, IG has recorded positive net sales each year since the financial crisis with the exception of 2012, which saw modest net redemptions. The IG distribution model – which relies on close communication between consultants and customers – yields a lower redemption rate than that of the industry average.

By contrast, the Mackenzie business model, which caters to third-party distribution, is more vulnerable to underlying fund performance and investor sentiment, which is reflected in a redemption rate which is closer to the industry average. Net sales are positive for the first six months of 2014 (6M 2014) after five years of net redemptions. With investor sentiment toward equities stabilizing, Mackenzie funds should fare well versus those of its peers.

Selling and distribution expenses are somewhat variable, with certain distribution expenses also tied to the level of gross sales and AUM. This has the benefit of maintaining margins in a business downturn. The Company has demonstrated good administrative expense management, benefiting from good economies of scale, efficient work processes and shared service arrangements with its sister companies.

In addition to strong profitability, the Company’s credit rating also benefits from strong cash flows (which easily cover the upfront distribution costs of mutual fund sales), strong liquidity and a conservative financial profile. Debt plus preferred shares-to-EBITDA was just over one times in 2013 and for 6M 2014, which is conservative. The Company’s ratio of debt plus preferred shares-to-total capitalization remains appropriate for the rating at just under 25%.

As a member of the Power Financial Corporation (Power) group of companies, IGM benefits from the additional financial flexibility of having a strategic shareholder and the associated strong governance and risk avoidance management model that is typical of Power subsidiaries.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Asset Management Companies, which can be found on DBRS’s website at www.dbrs.com under Methodologies.