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Edited Transcript of GS.TO earnings conference call or presentation 13-Nov-17 9:00pm GMT

Q1 2018 Gluskin Sheff + Associates Inc Earnings Call

Toronto Jun 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Gluskin Sheff + Associates Inc earnings conference call or presentation Monday, November 13, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Roy Morris

Gluskin Sheff + Associates Inc. - CFO & Secretary

* Jeffrey W. Moody

Gluskin Sheff + Associates Inc. - President, CEO & Director

* Jim Bantis

Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management

* Peter A. Zaltz

Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Fixed Income

* Peter Mann

Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Equities

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Conference Call Participants

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* Gary Ho

Desjardins Securities Inc., Research Division - Analyst

* Marco Giurleo

CIBC Capital Markets, Research Division - Associate

* Marko Kais

TD Securities Equity Research - Associate

* Nikolaus Priebe

BMO Capital Markets Equity Research - Analyst

* Stephen Boland

GMP Securities L.P., Research Division - Former MD & Equity Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Welcome to the Gluskin Sheff + Associates First Quarter Fiscal 2018 Results and Conference Call. (Operator Instructions) Please be advised this call is being recorded.

I would like to turn the meeting over to you, David Morris, Chief Financial Officer of Gluskin Sheff + Associates. Please go ahead, Mr. Morris. Thank you.

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [2]

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Thank you, and good afternoon, everyone, and thank you for joining us today. Joining me on today's call are: Jeff Moody, President and Chief Executive Officer; Jim Bantis, Executive Vice President, Client Wealth Management; Peter Mann, Executive Vice President, Co-Chief Investment Officer and Head of Equities; and Peter Zaltz, Executive Vice President, Co-Chief Investment Officer and Head of Fixed Income. The company's results were issued by press release last Friday and are available together with the MD&A on the company's website at www.gluskinsheff.com.

Before we begin, we would like to remind everyone that during this call, management may make statements containing forward-looking information relating to the company's business and the environment in which it operates. These statements are based on management's expectations, estimates, forecasts and projections. They are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. These risks and uncertainties are discussed in the company's regulatory filings available on its website and on SEDAR. Actual outcomes and results may differ materially from those expressed in these forward-looking statements. Further, these forward-looking statements speak only as of the date on which such statements are made. And the company undertakes no obligation to publicly update any such statement or to reflect new information or the occurrence of future events or circumstances, except as required by applicable law.

Management may also refer to certain financial terms that are not measures recognized under International Financial Reporting Standards, IFRS. These non-IFRS measures do not have any standardized meanings prescribed by IFRS and should not be considered alternatives to net income or any other measures of performance determined in accordance with IFRS. Therefore, these non-IFRS measures are unlikely to be comparable to similar measures presented by other issuers. For additional information regarding the company's use of non-IFRS measures, including the calculation of these measures, please refer to the non-IFRS measures section of the company's Management Discussion & Analysis and its financial statements available on the company's website and on SEDAR.

And now that the legalities have been dealt with and assuming that everyone has seen the results, we would like to open up the call to your questions and discussions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Gary Ho.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [2]

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First question just maybe for Jeff. I think you talked about this last quarter and in your MD&A as well, the initiative to broaden out your wealth management services. Can you take us through that? What additional services are you thinking, timing? And is this something you plan to charge on top of the existing fee or just something you plan to add and help retain clients and assets?

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Jeffrey W. Moody, Gluskin Sheff + Associates Inc. - President, CEO & Director [3]

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Thanks for the question. I will answer part of it, and then I may turn it over to Jim Bantis, head of our client group, to discuss where we are in the process and timing of the launch and what services. This is not going to be a significant cost item. In fact, we have been running some test pilots with existing software that we have in-house, along with -- we have as part of our team, one of our young stars, who is a lawyer and has legal background as well, although our process is not to be giving legal advice or accounting advice but more along the line of additional financing -- financial planning advice and where needed, we will bringing in our outsourced legal and accounting. So this is going to be additional services that we can offer on a formalized basis to our clients, that our people will all be trained to discuss. And we've been collecting the information from our clients to complete our databases and run our modeling on how we can be a benefit. What we're trying to do is become more important in the financial eyes of our clients. Right now, we see our competitors, certainly on the wealth management side and the competitive landscape, are not offering these services. And the test pilots that we've ran to date have been -- we've had tremendously positive feedback. So Jim, with that, although I probably stole most of your thunder at this point, why don't you talk about implementing when you expect to roll out and anything else you might add?

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [4]

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Sure. Maybe just to elaborate a little bit more. When you think of what we're trying to achieve here and you think of the competitive landscape, remember, we are built on relationships with high net worth families. And many of our competitors start off with the institutional business first and tack on a high net worth business afterwards. And we want to have -- continue to have deep relationships with them beyond investment management. Obviously, that's one of our core strengths that we have in our investment approach. But whether it's dealing with the next generation, whether it's assisting them with lawyers and accounts and their estate planning, their holistic review of their financial picture, we want to have these discussions with them. We already do to date, but I think what Jeff is referring to is a more formalized approach to it. And it's something that we're working on here internally. And I would tell you the first half of 2018 will be much more formalized.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [5]

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Okay. So we should expect the rollout of this gradually in the first half of calendar '18, right?

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [6]

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Yes. You'll see it early in 2018. And again, it's not an additional service in terms of fees. This is something that we already do right now with our clients. It's just formalizing the approach and taking it broadly across our client base.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [7]

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So the right way to think about it is this has helped -- potentially helped retain clients and assets and talk about the gross redemption issues that you guys have talked about in the past?

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [8]

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Well, I would say not with respect to --in the long run, it will make the asset -- the client relationship that more stickier, that more rewarding. But these are the questions our clients are asking us today, "Can you help me with respect to my will? Can you help me with respect to financial planning? Are there any educational services or events that you have with respect to some of our children?" And so we are putting these services together and have been already offering them for a period of time. I think this is going to be a much more integrated approach going forward.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [9]

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Got it. That's very helpful. And then just one more for me. Just wanted to hear about updates on recent PM changes. Any update on potential replacements?

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Peter Mann, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Equities [10]

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Sure. It's Peter Mann. I'm happy to answer that. So as you know, Jeannine and her partner, Adrian, resigned from the firm early in October. They will be with us until December 31. I think that speaks to the relationship that we've had with them all these years. We wish them all the best. Having said that, we are in the process of doing an extensive search ourselves. We've met with a number of very, very high-quality candidates. And I think part of the benefit that we have just at this point in the cycle is some of the changes and disruptions that are going on in our industry. As you know, between some of the mergers and some of the changes from fundamental to more quantitative in thinking has created, I would say, an excess amount of quantity talent out there. I think that we will have something to share in the not-too-distant future. But we've been very, very pleased with the candidates we've been able to see. And we're very confident that this will be a relatively seamless progression for us.

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Operator [11]

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And our next question comes from the line of Marco Giurleo.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [12]

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My first question is on net flows. I was hoping you could provide us with a bit of color on how the flows are progressing post quarter?

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [13]

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Sure. It's Jim Bantis speaking. With respect to the opportunity pipeline that we have, it's still fairly robust. I feel pretty confident in the context of it continues to expand both geography, both demographically and both in terms of our traditional business, which is focused on the holistic needs of a family and as well as meeting the needs of certain foundations or other institutions that require fixed income needs in an environment where maybe interest rates are going to be beginning to rise. So in that context, when I look at the quality of the pipeline, it's still fairly robust, and I feel pretty good about it.

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Jeffrey W. Moody, Gluskin Sheff + Associates Inc. - President, CEO & Director [14]

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Yes. It's Jeff Moody here. I'll just add a couple of things to that. As those of you who have followed us know that the inflow pipeline has been very strong over the years. Where we have needed it to work, I think, is the outflow. And I think it's an interesting situation for a new CEO because normally, one has to figure out how to get more business. What we need to do is understand the outflows that we've had over the last couple of years. And I think there's a number of things that we spent a lot of time analyzing them. And I think there's a number of factors. Clearly, there's been a lot of news on the firm over the last couple of years with the issue with the founders. And we do have some natural turnover, given the high net worth business that we are in, people are making -- purchasing real estate, making acquisitions. Our clientele does have a certain need for funds over the year. But having said that, our focus as a management team is going to be, and that's one of the reasons why we're launching new products and services, is that our focus is squarely on reducing the outflow. And so I think we're all pretty positive looking forward with the initiatives we have in place to address that.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [15]

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All right. My next question is on -- is related to expenses. I was just wondering the G&A expense this quarter was quite low relative to the previous few quarters. So I'm just wondering, is this quarter's run rate a good run rate to be modeling?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [16]

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So it's David, I'll take that. I would say you're right, it was lower than the last couple of quarters. And I think it's seasonally low. I would say, it's probably about $0.5 million low, just seasonal factors. So I think we'll see it pick up again in the following quarters. And as I said, I think it's probably about $500,000 on the low side.

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Operator [17]

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And our next question comes from the line of Nik Priebe.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [18]

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Just wondering if you could give us a bit of an update on how you're thinking about the evolution of the asset mix. I know in the past you've sort of highlighted how you saw better returns on the fixed income side. And I'm just wondering how that might be changing. It looks like the international fund has demonstrated some solid returns this year and started attracting greater volume of assets. So any color on that would be helpful.

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Jeffrey W. Moody, Gluskin Sheff + Associates Inc. - President, CEO & Director [19]

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It's Jeff Moody. I'll answer that. The Asset Mix Committee here is made up of all the senior portfolio managers at the firm. And the way we go at asset mix is we take, I would say, a big-picture view of the market, where the market is in terms of strategically the way we want to position the portfolios in terms of valuations and where we see the market over the next year or 2. It's one of the reasons why you see the performance in global is because we made a significant call to move into the global about a year ago. At the same time, in the spring of last year, we made a move to some of our funds out of the U.S. and add to global and Canada.

So I would say this, given the valuations of the market, we are running things more conservatively. We had a big move into fixed income, which has worked very, very well against both our competitors and the fixed income benchmark as our fixed income team and their strategies has had a good year. We will continue to look at asset mix, as given our client's risk profile, where we need to allocate resources to have the best risk-adjusted returns possible. And that's the way we go at it. We don't look at the different fees in the models. We take a look at where we are with the market and where we need to move in our clients' best interests, always in our clients' best interests. So I would say one of the advantages that we have as a firm is the fluid process at which we could move asset mix. And we do move it. And we have moved it historically. And we also used asset mix as a way to be opportunistic in product launch. We moved heavily into U.S. equities in 2011, when the Blair Franklin team joined us. That was, if you will, a significant product launch, but at the same thing, looking for asset mix going forward. We launched preferred fund with that group a couple of years ago. So the way we look at it is we want to position our clients for the best risk return profile in their portfolios. And that's the group that does asset mix, that's their job.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [20]

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Okay. Yes, that's helpful color. Just one more for me. And just going back to the topic of outflows. And I know you spoke a little bit there in your comments about the outlook and the pipeline there. I'm just wondering, I think the announcements of the portfolio manager change on the premium income fund was announced just subsequent to the end of the third quarter. Have you noticed any sort of uptick in withdrawal activity over the past 30 days or so?

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [21]

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It's Jim Bantis speaking. I would say the answer to that is no, and particularly with respect of our core client base, which is Canadian private client business. Remember, they run diversified portfolios. It's a team approach in the context of how they get to know us as a firm. They're all house accounts. So in that regards, no.

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Jeffrey W. Moody, Gluskin Sheff + Associates Inc. - President, CEO & Director [22]

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Well, I think -- and I would say, look, in the private client business, as everybody that follows what this business does, that the institutional business is much more sensitive to manager change than the private client base. A couple of weeks ago, the senior portfolio managers did a trip across the country. And the feedback largely was, "We hired Gluskin Sheff and that too looks after our assets." It's one of the reasons why we've had a focus to shift our business from institutional business to private client. And I would only tell you that, I think, Peter was -- since Peter Mann was quite humble, we had a list of well over 20 candidates, all with significant experience. The people that have called us and the people that we've had a discussion with on filling that position have all been, in our opinion, AAA candidates. And we're quite excited with the prospects going forward with the team that we'll have in place. So on the institutional side, I'm sure there will be some sensitivity. It's still early days. But fortunately, the firm is largely private client and not weighing in the institutional arena. And those clients who see us has seen that the firm, rightly so as Gluskin Sheff managing their money.

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Operator [23]

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(Operator Instructions) And our next question comes from Marko Kais from TD Securities.

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Marko Kais, TD Securities Equity Research - Associate [24]

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Just wondering, how do think about your regular dividend at this point? Is growing it still a priority? Or would you rather keep where it is and pay out the excess as a special?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [25]

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Yes. So the capital allocation is something we at the Board looks at on a regular basis. Historically, we've looked at changes to the regular dividend on an annual basis around about the sort of September time frame. And it's such a dynamic process. And again, they look at things as they evolve and our uses of cash, and they'll make the appropriate decisions. We don't tend to comment ahead of time on what that direction is going to be.

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Marko Kais, TD Securities Equity Research - Associate [26]

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Okay. Recently, you lowered the minimum investment threshold to what I believe is $2 million. Just wondering, have you seen any pickup with the younger clientele here?

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [27]

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So I think your question is related to the minimum investment with respect to new clients. Is that correct?

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Marko Kais, TD Securities Equity Research - Associate [28]

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That's right. Yes.

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [29]

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Okay. So I think one of the things we've touched upon on different calls is when you look at new relationships beginning at the firm, whether they're investors that have got sizable levels of investments or families where we're taking the large portion of their investable assets, what we see is a real phase-in, in terms of how they approach their investments with us, and sometimes they happen over time. And so we're comfortable with having a flexible, I would say, initial investment. The other thing too that we've all touched upon is that wealth creation continues to change in this country. It is not just based on real estate or manufacturing or financial services. We are seeing it with respect to technology and other types of businesses. And you're going to see individuals who are, let's say, asset-rich and cash-light. But we know the direction they're going with. And we wanted to forge that relationship with them early on. So I would tell you, we're looking for clients that understand that way we manage money and our approach in terms of our service level and our approach in terms of how we manage risk. The rest takes care of itself.

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Jeffrey W. Moody, Gluskin Sheff + Associates Inc. - President, CEO & Director [30]

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And I'll just add that we do a lot of work with second generation here. We put on educational seminars, launches. We've actually had a number of our historically large families that have been with us for many years ask us to help with transition of assets to the next generation. So I think the hard number is not where we are at nor where we'll head going forward. We're here to build relationships. And I would say this, there are people that have our minimum that aren't necessarily long-term investors that this is probably not the place for, but people that want to grow their wealth over time and look to have a long-term relationship and are growing their businesses. And historically, the firm has missed out on a lot of the young professionals, technology entrepreneurs because they've drawn a hard line in the sand. And I don't think that's where you'll see the firm going forward.

Lastly, when we built the sales force that Jim oversees, if you'd look at that sales force 8 years ago, it's largely made up of a group of 5 or 6 veteran people in the industry, late 40s, early 50s. So clearly, that was the target market. Over the last 5 or 6 years, we've been bringing in late 20, early 30s, training these people, working with them. And that actually is, I think, a big advantage to the firm going forward is that we're now at a stage where we're harvesting the investment in these people that have been with us 5, 6, 7 years. That age group is 30 to 40. And with that age group comes their contacts and is actually our next generation of clients. Since we've been in business 35 years, it behooves us to look out and look at where our clients are going to be 5, 10 and 15 years from now. And squarely, it's with that group of individuals. So we're not going to cut off our nose to spite our face. We're going to welcome all of those people that are building their assets and building their wealth and look forward to having long-term relationships with them.

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Marko Kais, TD Securities Equity Research - Associate [31]

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That was very helpful. And maybe just lastly if I could, which is a question for Peter Zaltz. What is your outlook for the -- fixed income outlook for the rest of the year?

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Peter A. Zaltz, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Fixed Income [32]

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So it's Peter. I think we're beginning to see some volatility. And you've heard about the sort of cracks in the high-yield market beginning to spread a little bit to the investment-grade market. And I think as the Federal Reserve begins to raise rates again probably in December and maybe more next year, I think we're going to see an introduction of volatility. There's certainly some evidence that credit quality is waning out there and there's some cracks in the system. But we're hopeful of some volatility and that's what we're preparing for.

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Operator [33]

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And our next question comes from the line of Stephen Boland from GMP Securities.

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Stephen Boland, GMP Securities L.P., Research Division - Former MD & Equity Research Analyst [34]

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All my questions have been answered.

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Operator [35]

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(Operator Instructions) There are no further audio questions at this time.

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [36]

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Well, thank you. And thank you, everyone, for joining us today. And if you have any further questions, please don't hesitate to give us a call. Thank you.

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Operator [37]

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And that does conclude today's conference. We thank you for your participation, and ask that you please disconnect your lines.