Friday, 5 August 2016

CI Financial (Paradox) Part 1

I'm going to write a lengthier piece on CI Financial over the weekend, for now, I've added an updated evaluation model in googledocs to the top right hand side of the blog showing my work on CI.

The company reported earnings this week and is making new 52 week lows (seemingly by the minute). I find this ironic in that the overall market (as measured by the S&P500) is making all time highs while asset managers are not really following suit (with the exception of Blackrock).  I wrote about this same observation in analyzing Gluskin Sheff a while back (which I bought and still hold).

My guess is that this non-participation by companies like CI echoes investor concern that asset managers with higher AUM fee structures inherent in their business models are at the mercy of do it yourself investors and the accompanying mobility of capital seeking near zero fees.

I've also read that CI is potentially highly exposed to new Canadian mutual fund disclosure rules (see globe and mail article here), CRM2, effective July 2016.

These types of situations intrigue me because it's my belief that investors often unfairly punish companies in the expectation of an adverse event (or series of events) unfolding, and when events do not unfold as horribly as previously thought, investors flock back.

For now, my initial observations are as follows:

  • The company pays close to a 5.4% yield (11.5 cents monthly).  The company pays out about 60% of its free cash flow in dividends.  The dividend alone is worth about $16 per share perpetually at zero growth, using an 8% discount rate. 
  • While the company certainly appears exposed to the impact of CRM2 and resulting fee pressure, I wonder if the company wouldn't adjust trailer fees paid down to somehow mitigate top line fee pressure?  For example, in 2015, the company earned management fees of $1.78B, and paid $554M in trailer fees.  The ratio of trailer fees to management fees is just over 30%.  Hypothetically, why couldn't the company reduce trailer fees paid and pass part of the impact down to third party advisors selling their funds?  If CRM2 affects the entire industry, I'd hazard a guess that the entire industry is facing the same concern, so third party advisors aren't as dis-incentivized to stop selling CI funds if AGF just cut their trailer fees proportionately.
  • What about consolidation in the industry in order to unlock synergies?  CI by EV is second only to IGM Financial, and $113B in AUM is significant.  Top line fee pressure may well end up forcing consolidation at some point. 

I'll post further thoughts over the weekend.

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