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Morningstar | More Volatile Equity Markets and Rising Costs Leave IGM Financial With Higher Hurdles in 2019

There was little in narrow-moat IGM Financial's fourth-quarter results that would alter our long-term view of the firm. We've left our CAD 35 per share fair value estimate in place. IGM Financial closed out 2018 with CAD 149.1 billion in managed assets, down 6.7% sequentially and 4.8% on a year-over-year basis. Investors Group, which accounted for 56% of the firm's AUM at the end of the fourth quarter, saw a 6.6% sequential and 5.5% year-over-year decrease in its managed assets, impacted by both market losses and its third consecutive quarter of outflows. Mackenzie Investments, which accounted for 41% of AUM, recorded a 6.7% sequential and 3.7% year-over-year decline in its managed assets, with the firm continuing to generate positive flows from its ETF operations even as it sheds mutual fund and institutional AUM. Investment Planning Counsel, which is IGM Financial's smallest segment, reported a 7.4% sequential and 4.7% decrease in its managed assets during the period.

While average AUM was down just 0.8% year over year during the fourth quarter, management fee income declined 3.3% when compared with the prior year's period, due primarily to ongoing fee compression. Total revenue was down 1.9%, though, during the period, as an uptick in net investment income and other revenue slightly offset lower levels of management, administration, and distribution fees. Full-year top-line growth of 3.0% was in line with our forecast for low- to mid-single-digit revenue growth for all of 2018. As for profitability, while IGM Financial has had a difficult time keeping expenses from growing faster than revenue, full-year adjusted pretax operating margins of 31.1% were up 20 basis points year over year, in line with our projections for 2018. Our long-term forecast continues to call for pretax margins for the non-bank affiliated asset managers like IGM Financial to be pressured by increased competition from the Big 6 Canadian banks as well as the changing regulatory landscape.