Company Reports

There was little in no-moat CI Financial's second-quarter results that would alter our long-term view of the firm. We expect to leave our CAD 16 per share fair value estimate in place. We view the shares as being fairly valued. CI Financial closed out June 2024 with CAD 130.1 billion in core assets under management, or AUM, down 0.1% sequentially but up 6.3% year over year. Outflows of CAD 0.6 billion were offset by market gains of CAD 0.5 billion during the quarter. That said, the firm's redemption rate for its Canada fund operations remains in the mid-20s relative to 15%-20% historically, as compared with an average redemption rate of 15% for the Canadian fund industry.

While CI Financial's aggressive pursuit of wealth management operations in both the US and Canada the past few years has provided the firm with a way to offset the shifting balance of power in the Canadian fund market, the company funded most of this acquisition activity with debt. Although revenue and adjusted earnings per share have risen the past several years, the high degree of leverage on the balance sheet has weighed on overall returns (as well as the company's share price) and even led Standard & Poor's to rate their debt "junk" in early May 2023, with Moody's and Morningstar/DBRS currently rating the firm's debt just one notch above noninvestment-grade.

We no longer believe that CI Financial has an economic moat. As we look forward, we've become increasingly concerned that a greater-than-expected correction in the equity markets over the next five-10 years and/or an even more aggressive push by the Big Six banks—Royal Bank of Canada, Toronto-Dominion Bank, Scotiabank, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada—to use price to drive growth and take more share of the Canadian fund market would leave firmwide ROICs below weighted average cost of capital in some years during the next decade. Poorer investment performance relative to benchmarks and peers, higher fees, and a reliance on third-party distribution outside of its own closed advisor network, in our view, leave CI Financial slightly more exposed to the secular headwinds facing the nonbank-affiliated asset managers in the Canadian market—especially with its fund manufacturing operations continuing to account for 60% of firmwide EBITDA.

While CI Financial's aggressive pursuit of wealth management operations in both the US and Canada the past few years has provided the company with a way to offset the shifting balance of power in the Canadian fund market, the company funded most of this acquisition-driven growth with debt. This was the brainchild of CEO Kurt MacAlpine, who was hired in 2019 to take CI Financial in a new direction after years of pressure on its core fund manufacturing business from the growth of lower-cost investment products. Although revenue and adjusted earnings per share have risen the past several years, the high degree of leverage on the balance sheet has weighed on the company's share price (and even led a ratings agency to declare their debt junk in early May 2023).

There was little in narrow-moat CI Financial's first-quarter operating results that would alter our long-term view of the firm. We expect to leave our CAD 16 fair value estimate in place. Even with the May 10 downturn following the earnings release, we view the shares as being only slightly undervalued.

While there was little in narrow-moat CI Financial's fourth-quarter operating results that would alter our long-term view of the firm, improvements in the credit and equity markets the past several months should be beneficial to the company's managed assets, revenue, and profitability going forward.

While CI Financial's aggressive pursuit of wealth management operations in both the U.S. and Canada the past few years has provided the company with a way to offset the shifting balance of power in the Canadian fund market, the company funded most of this acquisition-driven growth with debt. This was the brainchild of CEO Kurt MacAlpine, who was hired in 2019 to take CI Financial in a new direction after years of pressure on its core fund manufacturing business from the growth of lower-cost investment products. Although revenue and adjusted earnings per share have risen the past several years, the high degree of leverage on the balance sheet has weighed on the company's share price (and even led a ratings agency to declare their debt junk in early May 2023).

There was little in narrow-moat CI Financial's third-quarter operating results that would alter our long-term view of the firm. We expect to leave our CAD 16 per share fair value estimate in place.

There was little in narrow-moat CI Financial's second-quarter operating results that would alter our long-term view of the firm. We expect to leave our CAD 16 per share fair value estimate in place.

While CI Financial's aggressive pursuit of wealth management operations in both the U.S. and Canada the past few years has provided the company with a way to offset the shifting balance of power in the Canadian fund market, the company funded most of this acquisition-driven growth with debt. This was the brainchild of CEO Kurt MacAlpine, who was hired in 2019 to take CI Financial in a new direction after years of pressure on its core business from the growth of lower-cost investment products. Although revenue and adjusted earnings per share have risen the past several years, the high degree of leverage on the balance sheet has weighed on the company's share price (and even led the ratings agency to declare their debt junk in early May 2023).

While there was little in narrow-moat CI Financial's first-quarter operating results that would alter our long-term view of the firm, we expect to increase our fair value estimate at least 10% to account for the impact that outside investment and subsequent debt deleveraging will have on our valuation. Asset managers like CI Financial have a high degree of revenue cyclicality and operating leverage, with results tending to be affected by the vagaries of the equity and credit markets. As such, they should not maintain more than low to moderate levels of financial leverage. CI Financial's net debt load of more than CAD 4.0 billion at the end of the first quarter, most of which was issued to fund its acquisition spree of U.S.-based wealth managers the past several years, was equivalent to a net debt/adjusted EBIDTA ratio of 4.0 times. This was much higher than it should have been for an asset manager, in our view.

While there was little in narrow-moat CI Financial's fourth-quarter results that would alter our long-term view of the firm, we expect to increase our fair value estimate slightly to reflect changes in our expectations for AUM, revenue, and profitability in the near to medium term following the release of slightly better-than-expected results from the asset manager for the final quarter of 2022.

We believe that industry consolidation is inevitable for the traditional U.S.-based asset managers as they face an environment where organic growth and fees are being pressured by low-cost index-based products and participants are expected to spend more to produce better investment results and stay relevant on distribution platforms. While the Canadian market has yet to feel the full brunt of competition from index funds and ETFs, we expect to see the same pressures eventually affecting Canadian firms like CI Financial.

While there was little in narrow-moat CI Financial's third-quarter results that would alter our long-term view of the firm, we expect to lower our fair value estimate to CAD 16 per share from CAD 20 due primarily to our expectations for lower levels of AUM, revenue, and profitability in the near to medium term as a result of weakness in the equity and credit market, as well as our pulling out future mergers and acquisitions activity from our model as the company has suspended activity until well after its initial public offering of its U.S. wealth management business in the next several quarters. CI Financial's aggressive pursuit of wealth management operations in both the U.S. and Canada the past several years has been a big driver of growth, such that a freeze on all activity in the near term will impact valuation.

We believe that industry consolidation is inevitable for the traditional U.S.-based asset managers as they face an environment where organic growth and fees are being pressured by low-cost index-based products and participants are expected to spend more to produce better investment results and stay relevant on distribution platforms. While the Canadian market has yet to feel the full brunt of competition from index funds and ETFs, we expect to see the same pressures eventually affecting Canadian firms like CI Financial.

While there was little in narrow-moat CI Financial's second-quarter results that would alter our long-term view of the firm, we expect to lower our fair value estimate to CAD 20 per share from CAD 25 due primarily to our expectations for lower levels of assets under management, or AUM, revenue, and profitability in the near to medium term as a result of the equity and credit market disruptions this year.

While there was little in narrow-moat CI Financial's first-quarter results that would alter our long-term view of the firm, we are lowering our fair value estimate to CAD 25 per share from CAD 28 after updating our valuation model to include slightly lower levels of AUM, revenue, and profitability in the near to medium term as a result of increased market volatility during the first couple of quarters of 2022.

We believe CI Financial's long-term track record of above-average investment performance had historically served it well as non-bank-affiliated Canadian asset managers came under greater competitive pressures from the Big 6 Canadian Banks. Third-party distributors control most of the distribution in Canada, and CI Financial's long track record of solid fund performance historically allowed it to consistently generate positive annual organic growth, even as its peers struggled with net outflows. That said, 2017-21 served as a reminder of just how difficult the asset management business can be, as performance issues and several institutional clients moving their assets to in-house portfolio management led to year after year of negative organic AUM growth (which averaged negative 4.2% annually the past five calendar years).

We believe CI Financial's long-term track record of above-average investment performance had historically served it well as non-bank-affiliated Canadian asset managers came under greater competitive pressures from the Big 6 Canadian Banks. Third-party distributors control most of the distribution in Canada, and CI Financial's long track record of solid fund performance historically allowed it to consistently generate positive annual organic growth, even as its peers struggled with net outflows. That said, 2017-21 served as a reminder of just how difficult the asset management business can be, as performance issues and several institutional clients moving their assets to in-house portfolio management led to year after year of negative organic AUM growth (which averaged negative 4.2% annually the past five calendar years).

There was little in narrow-moat CI Financial's fourth-quarter results that would alter our long-term view of the firm. We are leaving our CAD 30 per share fair value estimate in place. CI Financial closed out the December quarter with CAD 152.1 billion in AUM, reflective of a 3.8% (12.6%) sequential (year-over-year) increase in fund assets. Assets under advisement, which includes assets held by CI Financial's various wealth management subsidiaries in the U.S. and Canada, increased 33.5% (140.4%) sequentially (year over year) to CAD 232.0 billion during the fourth quarter (full-year) driven primarily by a cavalcade of wealth manager acquisitions throughout the year.