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Edited Transcript of GS.TO earnings conference call or presentation 7-Feb-19 3:00pm GMT

Q2 2019 Gluskin Sheff + Associates Inc Earnings Call

Toronto Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Gluskin Sheff + Associates Inc earnings conference call or presentation Thursday, February 7, 2019 at 3:00:00pm 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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* Edward Walzak

* Gary Ho

Desjardins Securities Inc., Research Division - Analyst

* Geoffrey Kwan

RBC Capital Markets, LLC, Research Division - Analyst

* Graham Ryding

TD Securities Equity Research - Research Analyst of Financial Services

* Marco Giurleo

CIBC Capital Markets, Research Division - Associate

* Nikolaus Priebe

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Gluskin Sheff Q2 Fiscal 2019 Results and Conference Call.

(Operator Instructions)

Please be advised, this call is being recorded.

I would like to turn the call over to David Morris, Chief Financial Officer of Gluskin Sheff + Associates, Inc. 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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Good morning, 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 yesterday 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 environments 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 measure 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 financial measures section of the company's management discussion and 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 now be pleased to open up the call to your questions and discussion.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And your first question comes from the line of Gary Ho of Desjardins Capital.

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

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I just wanted to start off with questions on the fund performance side, and then -- and wondering if you can walk us through the positioning of portfolio, especially any major changes since year-end. Peter Mann, can you give us some color on the equity side as well? Peter Zaltz, it's tougher to gauge kind of performance on the credit fund; wondering if you can tell us how that's tracking so far in 2019.

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Peter Mann, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Equities [3]

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Sure. So it's Peter Mann, and I'll start. Look, as you know, Q4 was certainly very challenging across most asset classes, and unfortunately, we obviously were not immune to that. I would say that as we entered this year, we had probably a little bit more of a defensive posture than the overall market, although we've been certainly a participant as the market has gone higher. What I would say, though, is that I think we're also, as we think about where our assets are and where the best risk reward is, the situations in which we are evaluating today is very much centered around, can we capture a better return or an equal return with much less risk? And that's across all of our asset classes. So it -- you could see shifts from equity to credit or vice versa. It's going to be largely dependent on what we see the opportunity set as that's going forward. And maybe I'll pass it over to Peter Zaltz if he wants to comment on credit.

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Peter A. Zaltz, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Fixed Income [4]

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Sure. So last year, the credit spreads obviously widened out about 50 basis points. We took the opportunity in the fourth quarter to add quite a bit of risk to our portfolios; that has paid off quite nicely, and are pleased with how 2019 has begun.

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

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Okay, perfect. Thanks for the color. And then that . . .

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Jeffrey W. Moody, Gluskin Sheff + Associates Inc. - President, CEO & Director [6]

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Why don't we add a little bit of color in terms of asset mix? Because when we just talk about individual products, which is great because it, of course, drives the possibility of performance fees, which is a financial outcome, but I'd also like to point out, in terms of asset mix, because most of our clients here, or there's a good portion of our business that is our balanced fund clients, and of course, they look at their portfolios as a whole and where we are in the mix. So let me add a little bit of color, because in the end, our success drives around a value proposition to our clients, and largely that's investment returns, but the mix is also critical to the outcome of that. So at the end of November, we'd raised some cash for our clients, and that -- and we decided in December if we had a move up in the market that we'd take equity weights down. Of course, December was a tough month in the market, so we left that cash. And having said that, we didn't take equity weights down, and we left our equity weights up for the month of January. Of course, the markets have been very strong in the month of January, and so we have, at the end of January now and beginning now, we have high cash levels. We can see to take our equity weights down a little bit at these levels. As Peter said, the opportunities in the credit portfolios are much better than he's been able to access the last couple of years, and on top of that, which we might get into a little bit on the call, is our suite of products and what we're doing product-wise to meet our clients' needs going forward. We have a new portfolio model launching March 1. The fourth quarter gave us an opportunity, we believe, to buy some of these high-dividending, high-quality stocks at valuations that we felt were fairly reasonable. At the same time, our clients are looking for portfolios that are less volatile. So as of March 1, we'll be launching that portfolio and adding it to our mix. So I would say that on the product side, we're working hard to deliver what we need to deliver to our clients in terms of performance. We've been through a disciplined process of reflecting on how we run all of our strategies, the disciplines around those strategies, the process around those portfolios, and at the same time, we're looking forward to -- I think it's a fairly significant product launch schedule that we can chat about a little later in the call.

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

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Got it. And then the second -- just on the G&A expenses. David, I think -- I believe there's some G&A expenses coming offline later in the year and into 2020. Can you tell us specifically what those are? Or can you remind me what those are kind of related to? And when I look at years prior to kind of the co-founder arbitration, G&A used to run at kind of 14-million, 15-million range versus the current run rate of roughly 20 million today. How much of the savings should we think about over the next kind of 18 to 24 months?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [8]

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Sure. So let me answer that question sort of in a broader context. I'll start by saying, the last year or 2, have we been at peak spend, and I think you've all seen that in terms of operating expenditures. You can sort of see that that is starting to trend down, and you can see our G&A start to trend down. But I'd say we're laser-focused on cost reduction. We have a very disciplined program in place. And looking out 12, 24 and 36 months, we see a very clear path toward significant cost reductions. We should see this in -- the first phase of that -- sort of in 2020, coming down, and then ramping up in terms of additional savings in '21, and then we believe we'll be at the full sort of run rate of cost reductions in fiscal '22. I would say we're not ready to share all the details today on that, but we will do so over the coming quarters. Having said that, though, we've spoken numerous times over the last number of quarters regarding the elevated level of technology spend, so clearly we see some of the cost reductions coming from that and through reductions in those -- in that spending, plus efficiencies resulting from that. But also in other areas, there will be savings in other areas.

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

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Okay. And I guess technology spend, that would be the biggest bucket in terms of savings?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [10]

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It'd certainly be one of the chunkier buckets within the total cost savings, but there will be some other ones.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [11]

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Okay. And then my last question, Jeff, just going back to you. Just on the extra bonus accruals. That's typically, I think, booked in the June quarter. Given that it's looking like a softer performance fee year, should we budget a bit of that in the model in the June quarter, or how should we think about that?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [12]

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Yes, I'll take that, Gary, if I can. It's David again. Look, I will say at this point it's a decision that'll be made as we move closer to the end of the year. I don't believe it's something that our board has made a decision on, or -- and I think we'll wait to see how the rest of the year plays out. So that's all I can say about it at this point. I mean, it will be left -- that decision will be made as we get closer to the end of the year.

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Operator [13]

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Your next question comes from the line of Marco Giurleo of CIBC.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [14]

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I'd like to just follow up on the line of questionings with respect to G&A. So for David: G&A was down 22%, if we exclude the impact of the founders' obligation. So can you just dig a little deeper with respect to the factors driving that decline? And perhaps what you think a good run rate is for G&A in the coming quarters?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [15]

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Sure. So I think what's driving it, again, is our sort of very disciplined focus on cost containment and making sure that when we spend, we spend very wisely. And it's just tightening things up. In terms of run rate, again, I mentioned before, I'm not going to get into details of run rate right now. We will come back to you with that in the coming quarters. So all I want to say at this point is that we see opportunities for significant cost reductions, and we will be executing and are executing on -- towards planning for those and executing on them. And again, we will see them in 2020, '21, and certainly the full effect in '22 onwards.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [16]

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All right. But the current levels as both the current run rate that we saw in Q2, do you see that as sustainable, or was there anything one-time-ish that might cause that to lift up in coming quarters, or we can expect that to be sustainable?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [17]

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I would say, look, on a -- the current quarter and the next quarter basis, and any 1- or 2-quarter period in the very near future, that's going to bump around. There were some cost savings. There were some that were one-time in Q2. But again, so maybe this quarter and the next quarter are slightly higher, but again, I'd put that in the context of the sort of broader discussion we just had, which is that the trend is down and we're working very hard to make sure that it goes down, and we believe it will go down significantly.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [18]

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All right. Understood. My next question is with regards to your net flows. So we saw just in excess of 100 million in outflows this past quarter. I was hoping you could just provide some color with respect to the current pipeline and some of the factors driving those outflows, and maybe a split of -- between high net worth and institutional.

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [19]

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Marco, it's Jim Bantis speaking. Earlier, in Peter Mann's earlier comments, as you know, last quarter had extreme volatility, and if you look at industry flows with respect to long-term funds, they were at record levels, particularly in the U.S. as well as in Canada. And at levels that actually exceeded the financial crisis. And if you just kind of think of the period that we've just gone through with respect to equities responding negatively in early October, obviously some widening in terms of credit spreads and the investment-grade market in November, and then a real capitulation of equity valuations in December, that is not an environment, typically, where you see high-net-worth investors look to put new capital to work. That is a period where the client relationship team is actually spending a considerable amount of time having ongoing conversations each and every time throughout those periods reminding clients of their long-term investment strategies and to remind them that there will be periods of volatility during those long-term plans. And so I would say that during the period, there was a drop-off with respect to new additions, which is not uncommon during the period, but that also, one of the things to keep in mind is that it's the calendar year-end, and during the calendar year-end there's a high level of (inaudible) for our clients to fund their personal needs. There's a lot of tax planning that goes on, a lot of assets are being earmarked or placed with respect to charitable donations, things of that nature. And I would tell you, there was no notable impact to our flows this quarter with respect to our institutional client base, and remember our client base is less -- our institutional client base is less than 10% of assets.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [20]

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Right.

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

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I would say, going forward, you need the conditions of a more functioning market, and we're starting to see that, obviously, with respect to January, and hopefully that continues. And when you get a functioning market, you get investor confidence back to put capital back to work in risk absence. I like our pipeline with respect to new opportunities that we have both with our existing clients and as well as new clients, and some of the new activities that we'll see in the months and quarters ahead with respect to broadening our product lineup will help with respect to our share of wallet for our existing clients as well.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [22]

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All right, perfect. Thanks. And my last question is just with respect to portfolio strategy. Jeff, you mentioned in your outlook that there is a focus on value right now. Could you perhaps elaborate a bit on that? And which areas of the market you're seeing the most value?

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Jeffrey W. Moody, Gluskin Sheff + Associates Inc. - President, CEO & Director [23]

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Well, I think that really is Peter. What I was trying to discuss was that -- it's what Jim also mentioned -- is that we're broadening our product focus. So we're broadening it with the feedback from our clients. We have done some preliminary testing and understand what our clients are looking for. And I think this all goes to stemming the net redemptions, and our client base is looking for options and alternatives, and we see a lot of options out there for our clients that are attractive, and we're going to be going through, I would say, a period where you're introducing new products, the first being one next month, which is a high-dividend equity portfolio. It doesn't necessarily mean that all of our portfolios have a value (inaudible); it means that this portfolio in itself meets the needs in terms of some of the equity exposure for our clients, and thus, we're going to be launching it and providing it. I think Peter's better to talk about where they see opportunities in terms of the equity markets as a whole.

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Peter Mann, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Equities [24]

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Sure. Look, I can touch briefly on it, and it's not complicated to say that the areas that were most punitively punished, some of those, was cyclicality, a lot of interest-rate sensitivity globally. Those are areas of the market that we find very reasonably valued here, and I would say particularly when you look at parts of the world where balance sheets in financial services have improved meaningfully, and the valuations have come down, but there's a much better visibility on how income is earned and where and how it gets redeployed, whether it's back to the shareholder in the forms of dividend or buyback. I would say that that's probably one of the core areas that we have been interested in capital allocation right now. But it's very hit or miss. I would also say that we're going through a very challenging earnings season where what you see is a period of time where a lot of companies have, on a backward-looking view, very positive things to comment on, but looking forward, with all of the uncertainty in the market and some of the challenges that exist, I think that that's created a lot of machinations.

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Operator [25]

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Your next question comes from the line of Nik Priebe of BMO Capital Markets.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [26]

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I recognize that it's a pretty small component of your AUM today, but I was wondering if you could just speak to some of the changes that were introduced to the Canadian Equity Trust in the quarter? It seems like it was transitioned to a broader focus on North American equities. Just wondering what the impetus was there, and can we assume that the base fee rate and the performance fee structure remains unchanged from the predecessor fund?

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Peter Mann, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Equities [27]

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Yes. So we, as you know, last March, hired someone named Leanne Caravaggio, and she now runs what was traditionally an older Canadian equity portfolio that had a tendency to mirror our Canadian Premium portfolio, that we have evolved into a North American, what we call All-Cap. And so part of that design was to be able to capture some of the more growth-oriented engines in the U.S. that you couldn't otherwise have in -- or don't exist in Canada, but equally or more importantly, it was also about the combination of 2 funds together rather than separating them out.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [28]

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Okay. Okay, got it. And then just switching gears, this is -- would be a question for David. I was just wondering if you could talk a little bit about the nature of the discussion at the board level just surrounding the regular dividend. And I'm just coming at this from the angle that some of your peers, as you know, have elected to reduce their dividend to support increased buyback activity when -- at a time when their stock is trading at what I presume they would view as trough level. So I'm just wondering, in the context of a pretty exceptionally high dividend yield and a relatively low stock price, has that idea entered the conversation at all?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [29]

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Sure. So let me address those. So firstly, I'll -- you'll see from our dividend press release that we've renewed our normal-course issuer bid program, and so then, obviously, going forward, the board will consider it and could choose to buy shares under that program. But what may be useful is -- I can't speak, obviously, to what the board may or may not do, therefore, in terms of the dividend, but it might be useful if I sort of outline how it is that we actually look at the cash that's generated from our business to support the regular dividend. And I would start by saying when we look at it from that perspective, we exclude any performance fees earned, in terms of just looking at the regular dividend, and obviously we do earn performance fees over time. But for the purposes of looking at the cash generated to support the regular dividend, we sort of (inaudible) on the analysis. The other thing I would say is, we don't look at it on an earnings per share basis. We look at it, rather, on a cash basis. And by that I mean we look at it as base EBITDA on an after-tax basis. So if you look at it on that basis, even the fourth -- this last quarter of 2018, our second fiscal quarter, we're covering the base dividend on that basis. But the payout ratio even on that basis is very high-end. It's close to 100%. Having said that, though, we have no debt on our balance sheet. We don't really have a need for cash. And we always have the opportunity for performance fees in any case, even if we exclude them in the analysis. So that's kind of how we look at it.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [30]

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Okay, that's helpful. One last one from me: Just moving over to the -- to investment performance, I just wanted to talk a little bit about fixed income portfolios. It looks like -- it was obviously a difficult quarter across asset classes, as I think you alluded to earlier in comments, but I understand that generally speaking, within those portfolios, rate sensitivity tends to be low, which can be a compelling feature relative to traditional fixed-income strategies, but I'm just wondering, what would be the most conducive environment for generating strong returns in those portfolios? Like, is it a period where we're seeing spreads tighten between corporate and government bonds, or anything else that you would mention? Just any insight on that would be appreciated.

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Peter A. Zaltz, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Fixed Income [31]

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Sure. It's Peter Zaltz. I think that the best feature for credit markets for us is some volatility, and we didn't really appreciate much volatility until the fourth quarter. And we've had some good upward volatility in January. But we try not to be refolded into just credit spreads tightening or widening; it's volatility. And I think our advantage is our ability to do fundamental research and pick quality companies that are going to help our investors, as well as avoid companies, which is really important in fixed income, that are suffering from balance sheets that are deteriorating. And we are very mindful that as this credit cycle is about 10 years old, from 2009, there's going to be a lot of volatility in credit spreads. And so we're feeling as good as we have in a while about the opportunities in credit markets.

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Operator [32]

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Your next question comes from the line of Geoff Kwan of RBC Capital Markets.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [33]

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Just wanted to make sure I'm thinking about this the right way in terms of squaring off how the comments around volatility is going to impact your business, because I think in the MD&A you made reference to, you're kind of thinking we're going to have kind of elevated volatility throughout this year, but at the same time, Jim, I think your comments were, volatility is not necessarily the most helpful when trying to bring in gross sales. So if it kind of plays out the way that you're looking, it may be helpful from your investment performance standpoint, maybe for the next several quarters, not great from a flow perspective but kind of playing the long game here, when volatility maybe comes down and the markets become more constructive, you think you're going to be in good position to capture some of those flows. Is that the way to think about it?

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Peter Mann, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Equities [34]

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So -- it's Peter Mann. I think -- I'll pass it over to Jim regarding the flows question, but certainly, I think as we're thinking about the market, there's some volatility and opportunity. Look, we want to be as proactive as we possibly can, and as we look at earnings growth going forward, as a simple example, we see that as continuing to deteriorate, albeit at a lower level than it was, clearly, in Q4. Having said that, we just -- what we want to always do is optimize the unit of risk that we take to earn a unit of return. And so as we think about that cycle, those machinations of where capital flows can be very dynamic. But we're excited by the opportunity set that volatility brings. I'll pass it over to Jim to discuss the opportunity set and challenges that go along with volatility for client capital.

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [35]

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Yes, hi, Geoff. It's Jim speaking. Yes, as you can appreciate, there's 2 types of volatility, and the downside volatility is the one that takes investors off to the sideline. And the upside volatility that we're experiencing right now in the month of January and early February is where people revisit and think about that they need to be actually in the markets and leave it to their advisors to manage their asset mix to make sure that they've got the right proportion of risk in their portfolios. And I would say this has been, actually, a very good time for us, Geoff. When you think of this period over the last quarter, to have real heartfelt discussions with our clients with respect to their asset mix, their ability to sleep at night during these volatile times, and what it enables us to do is to make sure that we're moving away from discussions on investor performance related to benchmarks, but more with respect to goals-based investing. What are their targets? What are they looking to achieve? And this is all part of our holistic view of their balance sheet and their wealth planning. So this is a period that actually, I think, we embrace upon and have more meaningful conversations. And yes, we have the negative volatility that we had over the past quarter, which we don't anticipate, but (inaudible). That is -- that will be a challenge for us. But we think, again, normal functioning markets won't be an issue for us. And one of the things, just as I've touched upon in terms of wealth planning and the initiatives that we've done in that regard, we've been very pleased since the roll-out of these services late in 2017 and early in 2018 that have picked up in the private client part of our client base, sitting down with our team members with respect to providing intimate details regarding their wealth planning goals, their estates, their tax, their will reviews, et cetera. This has been a significant value add to our clients that they've requested, as we did our client survey back in the middle of the summer. And we're following through on that, and when I look at the pipeline of further wealth plans that we need to do over our client base, it's -- let me put it this way: It's oversubscribed. So we're very pleased with it.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [36]

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Okay, thanks. And just the second question, maybe just to follow up, in the past, when we've had markets similar-ish to what we've got today, you've kind of talked about kind of allocation of time on the client wealth side of having those conversations with investors, kind of explaining what's going on in the market, how you guys are positioned and whatnot, as opposed to being, call it more proactive, going out and getting new business. And just wondering if you can kind of talk about what that dynamic looks like there, even ballpark, in terms of, call it percentage of time that the team is working with clients on various initiatives.

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Jim Bantis, Gluskin Sheff + Associates Inc. - Executive Vice-President of Client Wealth Management [37]

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Yes, for sure, Geoff. As I was commenting earlier on in the call, when you have these periods of extreme volatilities, job #1 is communicating with your clients. And I would say that we were out active on a monthly basis. And again, it depends on the client and their profile, but we were in continuous conversations with our clients. And one of the feedbacks that we had, actually, with clients who got multiple managers, that they really appreciated us not going silent during these time periods. The fact that we were out front, talking about our portfolios, talking about what we were doing to manage the risk, talking about some of the new strategies that we were embracing in the upcoming months, and they looked at that ongoing communication as not just -- they looked at us as partners with respect to their overall planning. And so I would say it was very effective. Now that things, I would say, have calmed down a little bit, and all of our client base has been communicated, it actually will be more of an opportunity for us to focus on gathering additional share of wallet through our clients, and again, the wealth planning activities helps undiscovered assets in that regard, as well as embarking on activities with new clients and staying close to our centers of imports. We're naturally going to be close to our tax accountants and lawyers during this period of time, where there's a significant amount of tax planning and execution being done for our clients. That is part of our overall reach out to the market.

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Operator [38]

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Your next question comes from the line of Graham Ryding of TD Securities.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [39]

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You always sort of highlight the importance of managing risk relative to return. Do you feel like, after coming through this recent period, you're able to sort of hold up that message and demonstrate to your clients that that's what you're delivering, or is it more, here's the opportunity as we sort of come into 2019 to sort of demonstrate that your portfolios were positioned to outperform through this volatile period?

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Peter Mann, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Equities [40]

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It's Peter Mann. So look, here's what I would say, that in Q4, and I can speak particularly to equities, we -- there's no question that we could have done a better job. And I think a lot of that stems from the fact that we were comforted by the growth associated with the earnings per share in many of our companies. But I would say that we had, probably, more interest-rate sensitivity than we should. And we probably have a little bit more correlation in our portfolios than we should. Having said that, I still think we own great franchises. In the environment in which we've just come through, if you look at December, it was the worst December since, I think, the '30s. It's very hard to predict those, and without question, there was a period in Q4 where owning staples and REITs and utilities would have made you look like a genius, but that level of clairvoyance that was required, we, unfortunately, didn't have. And the previous 9 years, owning any of those sectors, I think, would have been wrought with challenge. So we have to -- we need to be realistic with how the dynamics of the market are shifting and ensure that while we're managing volatility, we need to be able to do it in an encompassed way that allows us to still be able to achieve return.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [41]

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That's helpful. How about the credit side? Is the performance, I guess, over the last year, supportive of sort of managing risk, or is it really like, here's the opportunity, spreads widened out in Q4, and now you should be able to demonstrate that you were able to capitalize on that in 2019?

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Peter A. Zaltz, Gluskin Sheff + Associates Inc. - Executive VP, Co-CIO & Head of Fixed Income [42]

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I mean, I think credit is an asymmetric asset class. So it behooves us to manage risk, but at the same time, when we -- the symmetry gets a little bit better in our favor, like it did in the fourth quarter, we sometimes take advantage of that to add risk. You have to have a view that we're not going into a recession or something like that, and that would be my baseline view, and so that's how we're approaching it. But like I said, I think volatility is going to be a feature of 2019, and that is, in my mind, obviously, a double-edged sword, but we think we can handle it well, and it should be beneficial to our portfolios.

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Jeffrey W. Moody, Gluskin Sheff + Associates Inc. - President, CEO & Director [43]

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And just let me add a little bit from the firm process. We are not sitting still. We learned a lot of things in the fourth quarter. We're conducting reviews on our disciplines and our process at both the individual security level with import flows and the asset mix, with a goal of being better for our clients going forward, and I think the opportunity exists to always be better. And secondly, in terms of controlling volatility and downside, it does speak a little bit to what Jim touched on in our suite of products and where we're headed going forward. We do seek products in the industry that we think are opportunities for our clients that we need to give them access to, and I think that in terms of our business model, it is absolutely to provide an overall investment mix with our clients that will dampen volatility going forward and give assets to some of those products that we think are opportunities to do so.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [44]

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Okay, perfect segue there. On the new product side, this is sort of a 2019 initiative where there'll be some new products coming through? Is that right? And I believe the only one that you've mentioned to date is the dividend-focused sort of value product. Is that correct, or is there other things that you can talk to at this point?

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Jeffrey W. Moody, Gluskin Sheff + Associates Inc. - President, CEO & Director [45]

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That's the only one I've mentioned today. That's correct. I'm not actually -- I don't think it's appropriate that at this time I talk about what we're working on, on the call. But I can tell you it's -- we've launched the program in terms of knowing exactly where we want to go and what we want to do, but I'm not comfortable at this time -- over the next quarter or 2, a lot more will come out to the community.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [46]

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Yes, that's great. Okay, that's fine. And then just lastly on the balance sheet and the dividend and share buybacks, David, am I right to sort of -- or, not am I right. Are you comfortable at this level of cash or working capital on your balance sheet, or do you feel like you have excess cash at this point to fund the NCIB if you saw that opportunity, or are we safe to assume that debt is really what you would tap into if you wanted to aggressively go after that NCIB?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [47]

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So I can answer that point. We're comfortable with our balance sheet. We don't have any debt. We have $10 million to $15 million worth of surplus cash and we'll utilize that as the board sees fit. I can't comment any further on that.

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Operator [48]

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(Operator Instructions)

Your next question comes from the line of Ed Walzak of RBCDS.

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Edward Walzak, [49]

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Performance fees have a significant impact on your financials, and -- either up or down, so 2 questions: First of all, can you please tell me how they are calculated? Secondly, to follow up on the dividend discussion, you paid a significant special dividend in 2017, and have you ever eliminated or reduced the dividend in recent memory? In the last 10 years, let's say?

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [50]

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So, it's David. I'll answer just your second question first. Since we went public in 2006, up until about a couple of years ago, the regular dividend was sort of increased on average on a CAGR basis by about 10% a year. We got to a fairly high payout ratio a couple of years ago, and the board decided we would keep it at the $1 a share level, and that's where it's been since then. In terms of performance fees, again, it's -- we have a fairly sort of intricate calculation of performance fees. It's a little different for each of our different models. I would encourage you to have a look at the annual information form. It's spelled out in detail there. And if you have any further questions beyond that, I'm happy to have a chat offline about that.

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Operator [51]

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There are no further questions in the queue. I'll turn the call back over to the presenters for final remarks.

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David Roy Morris, Gluskin Sheff + Associates Inc. - CFO & Secretary [52]

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Thanks, everyone, for joining us today. We appreciate the opportunity to have this dialogue. And if you have any further questions, please don't hesitate to give us a call.

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Operator [53]

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This concludes today's conference call. You may now disconnect.