AGF Management Limited

Thank you, operator, and good morning, everyone. I’m Adrian Basaraba, Senior Vice President and Chief Financial Officer of AGF Management Limited.

Today, we’ll be discussing the financial results for the fourth quarter and fiscal 2018. Slides supporting today’s call and webcast can be found in the Investor Relations section of agf.com.

Also speaking on the call today will be Kevin McCreadie, Chief Executive Officer and Chief Investment Officer. For the question-and-answer period with investment analysts following the presentation, Judy Goldring, President and Chief Administration Officer, will also be available to address questions.

Turning to slide four. I’ll provide the agenda for today’s call.

We will discuss the highlights of the fourth quarter and fiscal 2018, provide an update on the key segments of our business, review our financial results, discuss our capital and liquidity position and finally close by outlining our focus for 2019. After the prepared remarks, we'll be happy to take questions.

With that, I will now turn the call over to Kevin.

Thank you, Adrian. First of all, I want to thank Blake for the transition to the role of Executive Chairman effective December 1.

In his new role, Blake will focus on our strategic growth opportunities for the firm, including furthering our key partnerships, deepening our strength within the alternative space and representing AGF on the Smith & Williamson board and AGF's various entity boards. It is Blake's personal believe that leadership renewal is a hallmark of great organizations, especially one that has a deep bench strength that AGF does.

Going forward, I have the pleasure of taking over for Blake and leading these calls. In my role as CEO, my focus will be on accelerating profitable growth.

Of particular importance will be maintaining the trajectory of improvement in retail and establishing institutional as a perennial growth engine. This will be achieved by ensuring our investment processes are continually optimized, our operations are efficient and sales and client services functions are best-in-class.

To accomplish these objectives Judy Goldring's new role as President and Chief Administrative Officer is critical. Since joining AGF in 1998, Judy has held progressive roles with increased responsibility, most recently as Executive Vice President and Chief Operating Officer.

Judy is an integral part and member of the Executive Management team which she assists in the development and execution of the AGF strategy. Judy's promotion to President and Chief Administration Officer is a natural next step for her career with AGF.

In this role, Judy will drive business and strategic planning and provide daily oversight of the execution of strategic priorities. Judy will be available for questions after the presentation.

Please join me in welcoming her to the call. Moving on to the business update.

During 2018, we continue to execute against our strategy and stated goals. And I'll begin with some highlights.

We achieved organic growth across all lines of business. In particular, both our mutual fund and institutional businesses finished the year in net sales and showed significant year-over-year improvements.

AGFiQ, our quantitative platform, continue to gain traction in both the retail and institutional space. We launched three new ETFs in Canada, including most recently AGFiQ's Enhanced Core Global Multi-Sector Bond ETF, which is the first ETF in Canada to use a multifactor approach to select fixed income securities.

We expanded our preferred pricing offer for our retail clients, allowing eligible investors to automatically benefit from the lowest fee option. We achieved final resolution of our transfer pricing case and received net refunds of $18 million from a transfer pricing provision.

We repurchased approximately $1 million Class B Non-Voting shares during the year total cash consideration of $6 million. We reported adjusted diluted earnings per share of $0.64 for the year, which is 21% higher than the prior year.

And recently the Board confirmed a quarterly dividend of $0.08 per share for the fourth quarter. From reviewing our press release, you have noticed that we are reducing our expense base by 4% in 2019 This is part of the process initiated in 2017 to reengineer processes and increase resource discipline with an aim to free capacity to invest in new areas of growth.

The expense program has included a number of specific efficiency initiatives as well as the use of automation and digital outreach to clients. We are always looking for ways to improve how we operate, to simplify our processes and structures, and to prudently manage expenses, while accelerating growth.

Adrian will provide details regarding how this will impact our expense guidance going forward. Starting on slide six, we'll provide update on our business performance.

On this slide, we break down our total AUM in the categories disclosed in our MD&A and show comparisons to the prior year. Total assets under management are up 1% year-over-year and despite net inflows of $136 million from the mutual funds for the year, AUM fell 2% year-over-year as a result of negative markets.

Institutional, sub-advisory, and ETF AUM increased 6% while alternatives AUM increased 12% due to some co-investments in 2018. January 11th 2019, we committed an additional $75 million to a closed end infrastructure fund managed by InstarAGF focused on mid-sized infrastructure assets in Canada and The United States.

This furthers our goals of building a $5 billion alternatives platform by 2022 This investment reflects the continuing diversification of AGF's businesses and demonstrates our progress in increasing scale of our alternatives platform which is the key strategic goal for the company. Instar's latest fund also raised considerable capital from institutional investors in Canada, United States, Europe, and Asia, which will increase our infrastructure assets under management in the first quarter of fiscal 2019 by approximately $900 million.

The fund will add more commitments later in the year and is expected to reach final close sometime in 2019. We're pleased with the progress in growth of AGF alternatives business.

The growth in infrastructure AUM reflect strong investor appetite for middle market energy, utilities, and several and infrastructure opportunities in North America. Turning to slide seven, I will provide some detail on the retail business.

Mutual fund industry has been significantly impacted by market volatility in recent months. During the quarter, long-term funds in industry recorded net redemptions of $8.2 billion compared to net sales of $6 billion in Q4 2017.

October and November 2018 was some of the worst months for industry outflows since the 2008 financial crisis. Despite these industry headwinds, AGF sales trajectory continue to improve.

Our mutual fund businesses achieved net sales of $100 million during Q4. This includes allocations of over $200 million from two strategic partners, which was disclosed on our previous call.

For fiscal 2018, while industry net sales declined 83% year-over-year, AGF improved from reported redemptions of $405 million last year to positive net sales of $136 million this year. The improvement in sales reflects our continued focus on clients.

Results from the 2018 Environics survey showed significant improvement in adviser perceptions of AGF, which is consistent with other third-party survey results we have seen. In addition, our brand refresh last year and also contributed to our sales success.

At the Canadian Marketing Association Award held in November, our Invested in Discipline campaign was recognized with an award in the Business Impact category. Since November 30th, industry conditions have remained challenging.

Long-term funds recorded net redemptions of $8.9 billion in December in the industry, which is the worst month on record since 2000. AGF's retail net flows were modest net redemptions in December.

We remain cautious about the upcoming, RRSP season, although markets are showing signs of recovery, the S&P 500 is up over 10% since the trough in late December, a sustained market downturn that impacts the entire industry could also impact our sales trajectory. Turning to slide eight and I'll provide some details on investment performance.

As I stated previously, our long-term target is to have 60% of our AUM above median over three years, and 50% of our AUM above median in any one year. As at December 31st, our AUM above median was 23% over the three-year period and 43% over the one year.

Our portfolio has a quality bias due to our disciplined risk management processes. On a three -year basis such investments have underperformed relative to securities with strong momentum characteristics.

We are comfortable with our positioning and believe the quality inherent in our portfolios is appropriate for investors over the long-term. We don't believe we’ll be prudent to chase momentum at this stage of the cycle.

AGFiQ our quantity platform manages $6.8 billion in AUM, including our ETFs in both Canada and The United States. As of December 31st, all seven of our Canadian ETFs with one-year track records are ranked above median with five of the seven ranked in the first quartile.

On the U.S. side, one of our funds was recognized by ETF.com as one of the top-performing ETFs of 2018.

This fund uses a long, short strategy to create market neutral stances as sales performed in the current environment. Our performance of our Canadian and U.S.

ETFs bodes well as we look to build traction for our ETF platform into 2019. Moving on to the institutional side of the business, not including retail sub-advisory and ETFs, we recorded net sales of $0.5 billion for fiscal 2018.

Gross sales double year-over-year as we onboarded new clients to invest in both our AGFiQ and fundamental active strategies. Now, as of November 30th, our committed pipeline stands at $1 billion, which is made up of $900 million in commitments to the alternatives fund and a $100 million win for AGFiQ.

This is partly offset by retail sub-advisory redemption notice of $800 million. As this is a retail sub-advisory relationship, the revenue impact is compared at $1.8 million per year.

Similarly institutional, sales for retail sub-advisory can be lumpy quarter-to-quarter. With that, I'll turn the call back over to Adrian.

Thank you, Kevin. We made a lot of progress in 2018 to position ourselves for profitable growth in coming years.

From business perspective, we stemmed our net redemptions, reporting organic growth across all lines of business in 2018. We performed favorably on SG&A guidance coming in $2 million lower.

We're also announcing a restructuring plan for 2019 that will further reduce our SG&A, which I'll discuss in more detail in a few minutes. We sold our transfer pricing matter and received net refunds of $18 million and we finalized our arrangements for the latest infrastructure fund with additional scale we will be able to recover our working capital and then start recording income from the manager for the first time in 2019.

With investments in areas of future growth and leaner expense base AGF is position to take advantage of operating leverage in a scenario of market recovery for continued organic growth. Moving on, Slide Nine reflects a summary of our financial results for the current quarter with sequential quarter and annual year-over-year comparisons 2017 and 2018 results includes onetime gains of $8.7 million and $21.8 million respectively.

For ease of comparison, we've included adjusted numbers which I will refer to in my remarks. Q4, EBITDA from containing operations was $27.2 million which is $5 million lower than Q3.

This is mainly due to lower average AUM, driven by market declines, expansion of our preferred pricing offering in August and timing of income recognized from investments in alternative LPs. For full year 2018, EBITDA from continuing operations was $110.2 million $3.8 million higher than the prior year mainly due to cost control.

Turning to Slide 10, I'll walk you through the yield on our business in terms of basis points. This slide shows our revenue, operating expenses and EBITDA including fund operations as a percentage of average AUM of the current quarter as well as trailing 12 months view.

Note that AUM and related results from Smith & Williamson, the alternatives platform and onetime items and other income are excluded. Revenue yield in Q4, 2018 was 108 basis points.

The 6 basis point decrease compared to the trailing 12-month view is related to management fee reductions which came into effect in April. Fund mergers and expansion of fee series as well as growth of our institutional business which earns comparably lower fees.

Q4 SG&A is 54 basis points 4 basis points lower compared to the trailing 12 months. This is probably due to increased AUM and efforts by the Executive Management team to control costs.

This resulted in an EBITDA yield of 22 basis points which is flat to fiscal 2017 and 2018. Before I leave this slide, I'll address our SG&A guidance.

In 2017, our SG&A was $211 million. This was the first year after we absorb the full cost of integrating our transfer agency business.

In 2018 at a time when many asset managers were recording significant expense increases, we reduced our expense base to $208 million. Today we're now seeing targeted 4% further decrease in expenses resulting in SG&A guidance of $200 million for 2019.

We're also introducing some direction on where we see expenses settling in 2020. We believe with some additional improvements in efficiency, we can be in $190 million range for SG&A in fiscal 2020.

As a result of these initiatives, we're anticipating a onetime structuring charges in Q1, 2019. Since the beginning of 2017, we entered the ETF market in Canada.

We achieved final calls on the infrastructure fund and committed another $75 million to position that platform for future growth. And we have invested in our capabilities and global investing and AGFiQ.

So our achievements and efficiency have come at a time when we are also investing a significant amount of resources to a new and emerging growth areas. Before I leave this I'll remind you that our SG&A guidance does not include any severance related restructuring and assumes performance at its current trajectory.

Significant improvements in sales or investment performance could result in higher variable compensation expenses. Finally the numbers I have provided here are pre-IFRS 15, which I'll address in a moment.

Turning to slide 11, I'll discuss free cash flow and capital uses. This slide represents the last five quarters of consolidated free cash flow, adjusted for one-time items, as shown by the orange bars on the chart.

The black line represents the percentage of free cash flow that was paid out as a divided. Free cash flow was $16.1 million in Q4 2018, which is $3.3 million higher than Q3 2018.

And the increase is mainly due to the timing of Smith & Williamson dividend. Excluding one-time items our trailing 12-month free cash flow was $45 million and our dividend payout ratio was 55%.

Taking into consideration both Stream and the Essential Infrastructure Fund, as well as our additional $75 million commitment to the alternatives platform announced in January 2019, our total remaining capital commitment to the alternative platform is approximately $110 million. The latest fund which will grow our infrastructure assets under management by approximately $900 million will provide the scale required to recover our working capital and begin to record more significant profits from our interest in the manager.

As Kevin mentioned, a final close expected sometime in 2019 will add additional commitments. Total long-term debt now stands at $190 million.

This is up from $170 million at the end of Q3. This is due to timing.

We made a temporary seed capital investment in Q4 that will be reimbursed during Q1. Our operating line provides credit to maximum amount of $320 million.

Turning to slide 12. I'm going to discuss the impact of adopting IFRS 15 before I pass the call back to Kevin.

So starting fiscal 2019, AGF will be adopting IFRS 15 revenue from contract to customers. Slide 12 illustrates what our 2018 income statement would have looked like with IFRS 15.

As shown on the slide, there are two impacts to our P&L. IFRS 15 requires us to net certain fee waivers and reimbursements made to the funds that are currently recorded in SG&A against management, advisory and administration fees.

As a result, under IFRS 15 both 2018 revenue and SG&A would have been $12 million lower with no impact to EBITDA. Please note, the previous SG&A guidance that I mentioned exclude the impact of IFRS 15.

If we take into account IFRS 15, our 2019 SG&A guidance is $188 million, which is the $200 million less the $12 million. And our direction on 2020 SG&A would be approximately $178 million, which is $190 million less the $12 million.

IFRS 15 also requires us to spend DSC payments as they occur rather than capitalizing and amortizing them. In 2018, our DSC paid was $49 million, while our DSC amortization was $35 million.

Under IFRS 15 our EBITDA is $40 million lower, net income is $4 million lower and EPS is $0.05 lower. As you can see net income declines under IFRS 15, but this is actually due to our retail sales success.

Our adjusted retail growth sales are up 20% in 2018. As a result, even though DSC sales as a percentage of growth sales is declining, DSC paid in absolute dollars is increasing.

IFRS 15 has the perverse effect of lowering net income for firms with growing sales, even if there proportion of DSC sales is declining. Lastly, we have to keep in mind that regardless of the accounting methods chosen, any accounting change will only impact the timing of the recognition of profit, there's no impact to the underlying cash flows or economics.

Turning to slide 13, and I'll turn it over to Kevin to wrap-up today's call.

Thanks, Adrian. At the beginning of the year, we outlined a number of goals for 2019 and today I'm proud with the progress we've made against these goals.

We achieved organic growth in both retail and institutional We've committed an additional $75 million to our alternatives platform furthering our goal of reaching scale on this platform. AGFiQ which includes our ETFs in both Canada and the US is gaining momentum in the marketplace.

And finally, we've demonstrated expense discipline coming $2 million falls below our guidance. Heading into 2019, the AGF is positioned well strategically.

We have strength and capabilities in areas where strong growth is anticipated such as global alternatives, effective base investing, and ETFs. With the heavy lifting of building these capabilities and platforms are now behind us, we are laser-focused on execution and building on the progress made in the last several years.

At the same time, we are cognizant of the industry headwinds and the impact of continued market volatility on industry AUM and net flows. So in this context, our primary goals for 2019 are; to continue target above the median investment performance; maintain the trajectory of improvement in retail and institutional; continue to leverage the AGFiQ platform to service in a capability in areas of quantitative investing and ETFs.

And lastly positioned the firm to reach five billion alternative assets by 2022 and meet our expense guidance of $188 million I want to thank everyone on the AGF team for all of their hard work I'm proud of the results we have achieved for 2018 and I'm excited to accomplish more in 2019 We'll now take your questions.

Hey, good morning. Adrian just going back to the SG&A guidance, maybe can you give us a sense where the benefits are coming from?

Is this kind of more back office admin expenses? And perhaps can you quantify the restructuring charge that you're looking at for Q1?

Yes, thanks Gary. I mean really if you think about the expense initiatives, they started back a few years ago and it really is focused on efficiencies looking at areas of discretionary spending and trying to reduce our expense base as we get natural amount of attrition in our workforce.

And as far as the one-time charge that will occur in Q1, we don't have an estimate for the size of that, but we will update you in March when we report our Q1 earnings.

Okay. And then perhaps as this kind of level of expense that you're guiding to dependent on some AUM assumption that we should model against?

No, I don't think it's necessarily dependent on AUM level. I mean I did mention in my prepared remarks that expenses could increase if we had a increase in the trajectory of growth.

But essentially those expense guidance numbers that we’re presenting today are based on the current trajectory.

Okay. So you are expecting some improvement in AUM that's also built into your guidance then?

Yeah, the current trajectory of improvement is the assumption for our updated expense guidance.

Gary, it's Kevin. Maybe Adrian mentioned on the call, earlier on the call was that, obviously, we have outsized performance those are variable fees related to success, obviously, right somewhere PMs and the top quartile is going to increase variable comp, but for our fixed cost base, it's not related to AUM growth, we're pretty comfortable with what we can drive significant amount of growth without having to increase that base.

Got it. That's helpful.

And Kevin just on the market net flows as you mentioned in your prepared remarks and covering the last couple of months. Just wondering when you look out to 2019, how do you see that unfold maybe both on the retail and institutional side?

Yeah, I think on the retail side, obviously, it’s a place where if you attend the retail investor’s conference and we saw a couple of years ago during RRSP season, it was at the end of 2015, 2016. And you got off to a tough start.

So I think the fact that the markets bounced a bit here, I think the fact that you have some of the headwinds coming up maybe this side doesn’t tighten as much it goes on pause. If you get an agreement with China on-trade in the U.S., a lot of that headwind probably turns into a more benign market from a volatility standpoint, which should benefit retail investors.

But I would say that is probably the big thing I would say to keep an eye for the industry is continued volatility that will impact everyone's close. On the institutional side, goes by don't really get impacted by the sentiment issues if you will.

They may move asset classes around where things are getting cheap versus expensive we're underperforming. So I'd say the issue really stems around retail investor sentiment.

Okay. That's helpful.

And then my last question, Judy, we've seen some going back and forth on the regulatory side with the DSC. Maybe can you just provide us an update on where things stand with that?

And are there other regulatory issues investors should be focused on looking out in 2019?

Thanks, Gary. Thank you for the question.

Yeah, we remain very close to many of the regulatory proposals that have been presented and are out there and so maybe created degree of uncertainty within the entire industry. As we continue to provide input to further consultations and we remain close to it, I think what we’re expecting is to see the regular come out sometime in 2019 with some direction on the various proposals.

We remain responsive to any of the directions that they do take. And regardless I think we’re positioning ourselves to being responsive to clients and provide any sort of response.

I think at the end of the day, we do expect to take about a two-year transition period when they do resolve the direction they're taking. And again we're just available to make sure we have choice for all of our clients.

Okay. That’s helpful.

That’s it for me. Thank you.

Hi, good morning. Maybe I'll start with the institutional flows.

It looks like in December there was some outflows, is that correct? And if so could you quantify?

Yes. Just slightly.

We were roughly flat in December. We had -- again, light month on way in.

We did reference the $800 million which is the sub-advisory flow and that was related to basically a strategic partner that has done a lot of changing and thinking around their business model. We had two mandates which were noncore.

They wanted to move toward a very core approach in terms of the model they were building. And so it had nothing to do with our performance.

As I mentioned, it was pretty low margin stuff; roughly, the impact will be about $98 million in revenue on that.

It was not performance related at all. One of fund was actually tough quartile in all the time periods.

Okay. But that was -- that $800 million come out in December or it's still…

Half of that came out in December, yes…

Yeah, okay. And the timing on the rest, is it Q1?

Yes, Q1.

And then again just to make sure timing right or your expectation on the infrastructure side, so it looks like you've got a $105 million on your balance sheet right now in your infrastructure investments. Is there still sort of another $45 million to come from your sort of original commitments from your existing funds in 2019?

And then on top of that you start to commit the -- or you start to fund the $75 million, is that how to think about your co-investments?

Graham, it's Adrian. You're pretty close.

I think it's about $35 million less to go. And then you add the $75 million on to that, if you're talking about our position as of the end of Q4.

Okay, good. And the timing for the $75 million is that likely something that plays out more into fiscal 2020 or is this a fiscal 2019 funding process?

I think the way to look at it is likely invested over -- evenly over the period of three years, starting now. But obviously they can be lumpy depending on the deal flow when we actually execute on deals.

And Graham, this is Kevin. You'll get some offsets along the way there too, when things get monetized in the earlier funds.

Got it. Okay.

And that $900 million does that, I think you said it's funding in Q1, 2019 does that mean you earn fees on it right away or do the fees come through as you actually invest those commitments?

Yes. So the way the business works is you earn fees from the date of the first close of any given fund generally.

And even up to the point of the last close, the final closures pay fees up to do the date of the first close, generally in the infrastructure business. So we will be earning fees on whatever the final close number is from today essentially.

Got it. Okay.

And that's a $1 billion is what you're targeting in total?

Yes, $1 billion U.S.. And as I mentioned in my remarks Graham, we have been -- to-date, we have been taking the management fees from the infrastructure platform and kind of reinvesting it in the capability itself.

But as that platform gains more scale, we are going to be able to recognize management fees into our income statement in 2019.

Got it. Okay.

That's helpful. And that's - just to be clear in currency, that $900 million that you're expecting in Q1 is that Canadian or US dollars?

Canadian.

Okay. Thank you.

And then Judy my last question if I could, just the emphasis towards your overall business in terms of three, five years out strategy-wise, is there an equal emphasis on balance between your institutional business and retail? Or is there more weighing towards driving your institutional business?

Yes. I mean I think what you're seeing is, we're investing in areas of growth where we see the opportunity.

So the alternatives space, the ETF space, our U.S. business are all very significant areas of growth for us.

And we expect that it will play out over time in terms of AGFiQ platform, et cetera. So we are looking at every avenue there from a strategic perspective.

Great. That’s good for me.

Thank you.

Hi. Good morning.

First question I had was just going back to the 4% SG&A guidance in terms of the decline for 2019. I'm assuming that that would fully reflect like the impact of the markets that we've seen come down, as well as the impacts that would be in terms of compensation, in terms of discretionary spending.

Because I'm just trying to understand, if the market hadn't come down by what it had been, like, what it is, still been a 4% decline or would have been some other numbers that you'd be giving us?

Thanks for the question, Jeff. It's Adrian.

Yes. As I mentioned in my remarks, the efficiency review that we've done started a couple of years ago.

It's not a reaction to anything. This is essentially changing the way we do business to better aligned to what our clients expect and using technology and digital reach.

So again this is a continuation of a program that we started years ago.

And so the impact of the markets coming down really had no impact in terms of compensation or discretionary spending, if I'm understanding your comments correct?

I know. We don't really look at it that way, Geoff.

Okay. Kevin, you mentioned the kind of the net sales on the retail side for December.

Do you have any kind of commentary of what you've seen in January? Have things directionally improved?

Are you on the right side of zero? Any color you have there?

Yes. January is a little soft, like -- interestingly enough, last January started soft for us too and we're probably just getting on the cusp of where the retiring season gets going.

So probably not enough to look at in terms of how the quarter will shape up with this volatility that we've had in December. So it looks a little bit last year, which got off to a slow start.

Okay. So it sounds like maybe slight net redemption so far in January, is that a fair characterization?

Yes. It's a good way to look at it, slight

Okay. And very last question, Adrian, on tax rate for 2019, any thoughts on where you may wind up for the full year?

Yes. So on the tax rate, Geoff, thanks for the question, fiscal year 2018 where we're right about 19.2%.

I don’t want to give like a specific number to give you a false sense of accuracy, but one of the things that I mentioned during my remarks is that, we're going to be expanding into the alternative space. We'll have more money invested in those LPs.

And one of the things I'll remind you that the income that we earned from the alternatives LPs comes to us essentially tax free, or in a tax reduce basis. Because effectively, we're investing in units that represent ownership in companies that pay tax at the company level.

So there's no double tax when we record that income on our income statement. So I'll tell you that our tax rate will be directionally down next year.

Okay. Thank you.

Thank you. Good morning.

So, first question is related to AGFiQ. And just want to get a better sense of what the growth drivers of the business have been.

So, you mentioned $2 billion of incremental AUM in fiscal 2018. Maybe just at a high-level, how much of that came from Canada versus U.S.

and how much retail versus institutional?

Yes, hi Paul, it's Kevin. So, think of it this way of that $2 billion 600-ish was U S -based institutional very bespoke factor-based customized solutions.

And say couple of hundreds or so were both U.S., Canada, couple hundred or more in ETFs and then probably the remainder slug was multifactor Canadian dividend product. So, it's a real balance and the split again I'd say is two-thirds kind of retail-ish between -- if I think about the ETFs in the retail bucket, one-third institutional.

Okay, that's helpful. Thank you.

And maybe kind of an update on those U.S. 40 Act Funds, specifically I think you launched some last year, kind of, where they stand, how the growth looks?

And what your expectations are over the next year or two?

Yes, when we put them out there, the issuers first of all was -- no new funds -- particularly in the U.S., you can't really clean the track records. So, we knew there will always be a 3-year ramp on those funds.

We -- trust company that services our ETFs in the U.S., so there wasn't a new build out there if you think of it that way. So, we had some optionality to put those two funds out there.

In the way that U.S. market is moving, it's becoming vehicle agnostic.

They want your model, they want your ETFs, they want your fund, they want a separate account potentially. So, we trialed it with two funds, specifically.

It's been as we predicted would be a slow start. The real ramp time probably comes after year three, so -- and we build nothing into our forecast for those after the first three years.

It's really given us optionality about the future if we want to do other things there.

Got it, make sense. Okay.

I wanted to ask couple of accounting questions. So, first one is on DSC paid -- if that's going to pay -- play a little bit of a role on the income statement.

So, how should we think about your mix of business going forward in terms of growth sales from DSC versus no-load?

Yes, so -- thanks for the question, Paul, it's Adrian. I think, again, as I mentioned in my remarks, we've had -- we've seen an increase in the absolute amount of growth sales, but it decreased over time in the proportion of those coming from DSC.

So, even though we're selling less DSC and we expect to sell less as a percentage of our total gross sales, it's just because our growth sales have been increasing as such a higher rate, the amount of DSC has gone up. So, I hope that helps give you color, but essentially, if our growth sales were to stay the same, you would see less DSC paid simply because the percentage is going down.

But if I--

What do you think? So, I guess more specifically, I guess, what I'm getting at, let's assume gross sales as flat, so it’s a good example.

Give me a range of what you think how much DSC might come down in that scenario?

Yes, I would say a couple 100 basis points as a percentage of our gross sales a year over the next couple of years.

That's helpful. Thank you.

And then as I think about the average management fee or even if you want to talk about net revenue capture rates less trailer fees like, how should we be thinking about that on an annual basis? Is that something that should be declining roughly two bps a year or is that more like four?

Where do you think that number shakes out?

Yeah. So I think what I probably do Paul is point you to Q4, because in 2018 there was quite a bit of price as far as things we were doing on the product side.

We made some fee concessions on some of our funds. We introduced the lowest fee theories, which essentially gave our investors an automatic lower rates when they had over $100,000 invested in our funds.

But Q4 is the first quarter that all these things are now incorporated into it. And I think we’re probably back to the guidance that we've given in past years, which is one or two basis points on total AUM for revenue decline.

Thank you. And then last question is, I just want to make sure that $800 million of sub-advisory AUM that you're losing in Q1 that's going to come out of the retail flows correct?

No, those will come out of -- we can't throws in the -- for reporting in the institutional, even though they are retail related.

Okay. That’s it for me then.

Thank you.

Yeah, thanks very much. Just a couple of follow-up questions.

Adrian, with respect to the fees we’re talking about here. I notice that they were significantly lower than what we saw in the third quarter of this year.

So 98.3 versus 104.7, obviously, some stood at decline in the market, but if I look them as a percentage of the AUM here, it's down about 500 bps quarter-over-quarter. When you talk about the 100 bps to 200 bps going forward, should we be running that more -- is this more indicative of all the fee cuts that you put into place?

Is the fourth quarter probably more indicative of a true run rate then?

Yeah. So absolutely Tom.

That's a good point. So as I mentioned, if you just take the Q4 rate and apply the one to two basis points per year on total AUM, it's probably good way to look at it.

Because again I'll reiterate that during 2018 there was a lot of noise in terms of some product changes that we made. Those happen throughout the year in Q4, which was really the first quarter where we saw the full impact of those.

Okay. That's great.

And secondly with respect to the tax rate, I think directionally you said think of it being lower than what was at the 22% for the year, but it was 15.9% in the quarter. So how should we be thinking about this tax rate just as a result of expansion in your alternative space, probably in the area of 21-ish percent or any help there?

Yeah. So for fiscal 2018, the tax rate was 19.2%.

And then Q4 can be kind of a funny quarter for a lot of things because you essentially get to chew everything up. But I'd start with the 19.2% and then again because of the fact that the earnings from the LPs we are investing in, probably increases the proportion of our total income.

It will be directionally down from the 19.2.

Okay. And then finally, I think you talked about Smith & Williamson coming in about $20 million annually.

We are $6 million in the quarter and I think we're higher than that in the third quarter. So how should we be thinking about Smith & William contribution?

Yes, I still think the guidance we've given in the past quarters of around $20 million for the year, approximately $5 million of EBITDA contribution per quarter and around $10 million in dividend, I think is a good estimate. So I wouldn't change that at this point in time.

Okay. That’s great.

Thanks very much.

Thank you.

Thank you very much for joining us today. Our next Earnings Conference Call will take place on March 27, 2019 when we review our results for Q1, 2019.

Details of the call will be posted on our website. Finally an archive of the audio webcast of today's call with supporting materials will be available in Investor Relations section of our website.

Good day everyone.