DBRS Confirms Ratings on IGM Financial Inc.

DBRS has today confirmed the ratings of IGM Financial Inc.’s (IGM or the Company) Issuer Rating and Unsecured Debentures at A (high) and the First Preferred Shares at Pfd-2 (high). All 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 Mackenzie and Investment Planning Counsel Inc. (IPC).

With the help of its unique exclusive consultant network, IG has returned to positive net sales during the first half of 2013, after experiencing net redemptions of $149 million during the same period in 2012. The IG distribution model – which relies on close communication between consultants and customers – yields a lower redemption rate (9.8% twelve-month trailing redemption rate on long-term mutual funds at June 30, 2013) than that of the industry (16.5% industry average, provided by IGM).

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 the higher redemption rate of 16.2% for the twelve months trailing Q2 2013. Overall assets under management (AUM) is up, helped by favourable equity market performance and modest net sales so far in 2013. When investor sentiment towards equities stabilizes, Mackenzie funds should fare well versus its peers.

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 economies of scale, 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 1.1 times (x) in 2012 and for H1 2013, which is conservative. The Company’s ratio of debt plus preferred shares-to-total capitalization remains appropriate for the rating, at just over 25%, down noticeably from 2010.

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 applicable methodology is Rating Asset Management Companies (July 2012), which can be found on DBRS’s website at www.dbrs.com under Methodologies.

The sources of information used for this rating include company documents. DBRS considers the quality of information available to it for the purposes of providing this rating of satisfactory quality.

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