DBRS Confirms IGM Financial at A (high), Pfd-2 (high)

DBRS has today confirmed the Unsecured Debentures rating of IGM Financial Inc. (IGM or the Company) at A (high) and the First Preferred Shares rating at Pfd-2 (high); the trends are Stable. IGM is one of the most consistently profitable financial services companies in Canada, reflecting a 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 rating is 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 the Company’s Mackenzie and Investment Planning Counsel Inc. (IPC) business segments. By virtue of the nature and the growth of its unique captive career agent distribution sales force, IG has maintained positive net sales of long-term mutual funds (excluding the more volatile money market funds) in the recent cautious investment climate which has hurt gross sales. The IG distribution model – which relies on close communication between consultants and customers – yields a lower redemption rate (8.5% in Q2, 2011) than that of the industry (15.5% per Company).

By contrast, the Mackenzie business model which caters to third party advisors is more vulnerable to underlying fund performance and investor sentiment which is reflected in a higher redemption rate at 16% in the 12-month period ended June 30, 2011 compared to an industry redemption rate of 15.4% (per Company). In spite of strong relative investment performance (with over half of Mackenzie mutual funds and assets rated first or second quartile in terms of five-year performance during each of 2008, 2009, 2010 and YTD 2011), the lack of retail investor appetite for international and domestic equity funds during the current market environment has hurt Mackenzie’s net sales. Nevertheless, positive institutional sales and market appreciation caused total Mackenzie average assets under management (AUM) to increase by 10% which led to a lower 6% increase in operating revenues over the past 12 months reflecting lower average fees earned on institutional funds.

Selling and distribution expenses are somewhat variable, with certain distribution expenses also being 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 increasing scale economies, more efficient work processes and shared service arrangements with its sister companies. Stable-to-declining operating expense ratios highlight the operating leverage and scale advantages that can be achieved in the asset management business.

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 less than one time which is very conservative and a sharp improvement from year ago levels following a large debt maturity and growth in retained earnings. Over the past 12 months, the Company’s ratio of debt plus preferred shares-to-total capitalization fell from 29.1% to 25.7%, which remains appropriate for the rating.

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.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Mutual Fund Companies, which can be found on our website under Methodologies.