IGM Financial Inc. (OTCPK:IGIFF) Q4 2022 Earnings Conference Call February 10, 2023 8:00 AM ET
Company Participants
Kyle Martens – Treasurer and Head, IR
James O’Sullivan – President and CEO
Damon Murchison – President and CEO, IG Wealth Management
Luke Gould – President and CEO, Mackenzie Investments
Keith Potter – EVP and CFO
Conference Call Participants
Geoff Kwan – RBC Capital Markets
Scott Chan – Canaccord
Graham Ryding – TD Securities
Tom MacKinnon – BMO Capital
Jaeme Gloyn – National Bank Financial
Operator
Thank you for standing by. This is the conference operator. Welcome to the IGM Financial Fourth Quarter 2022 Analyst Call and Webcast. As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Kyle Martens, Treasurer and Head of Investor Relations. Please go ahead.
Kyle Martens
Thank you and good morning everyone and welcome to IGM Financial’s 2022 fourth quarter earnings call. Joining me on the call today is James O’Sullivan, President and CEO of IGM Financial; Damon Murchison, President and CEO of IG Wealth Management; Luke Gould, President and CEO of Mackenzie Investments; and Keith Potter, Executive Vice President and CFO of IGM Financial.
Before we get started, I’d like to draw your attention to our cautions concerning forward-looking statements on slide three of the presentation. Slide four summarizes non-IFRS financial measures and other financial measures used in this material. On slide five, we provide a list of documents that are available to the public on our website related to the fourth quarter results for IGM Financial.
And with that, I’ll turn it over to James.
James O’Sullivan
Okay, thank you, Kyle and good morning, everyone. I’d like to start the call by reviewing a few highlights from 2022 on slide seven. Earnings per share were $3.63, our second best annual adjusted EPS on record, second only to the record-breaking year in 2021.
We ended the year with AUM&A of $249.9 billion, down 10% from December 31st of the prior year. The decline was caused by broad based global equity and fixed income market volatility during 2022.
In this context, IGM’s overall net flows remained positive, adding $1.2 billion in client assets over the course of the year. IG Wealth Management’s continued momentum in the high net worth market segment was partially offset by Mackenzie’s flows, which are in line with the overall challenging industry environment. While not included in our reported net flow numbers, Northleaf had a strong year with new commitments of $3.8 billion in 2022.
IG Wealth Management announced an investment in and strategic partnership with Nesto bringing an industry leading digital experience to IG clients and advisors. In addition, we closed the ChinaAMC transaction in January 2023 and has increased our ownership to a meaningful 27.8% in a leading Chinese asset manager, providing IGM’s investors attractive exposure to a long-term secular growth opportunity.
We are proud of our results, results that we would not have been able to achieve, but for our employees, consultants, and advisors, each of them persevered through uncertainty in a volatile economic backdrop, demonstrating resilience and positioning IGM for further growth in the year ahead.
Before turning to the results from the quarter, I’ll take us to slide eight, where I’ll share a bit about our outlook and priorities for 2023. To start, we are planning on an improved operating environment through the second half of the year, while continuing to position our businesses for further organic earnings growth as we navigate ongoing market volatility.
Part of our planning includes the continuation of our prudent approach to expense management, while maintaining investments to support our strong competitive positioning. Keith will speak more to our specific expense guidance later in the call.
Our business has remained strong and uniquely well positioned. IG Wealth Management will continue to build on its momentum in the mass affluent and high net worth space.
Mackenzie will continue to focus on executing well on its objective to be Canada’s preferred global asset management solutions provider and business partner. Our capital allocation priorities are aligned to positioning our businesses for continued long-term success.
We look to deploy capital through both organic business investment and through M&A to support and extend our wealth platforms and our global asset management capabilities.
We remain committed to sustaining our current strong dividend. And finally, we will consider and evaluate share buyback opportunities within the overall context of our capital allocation strategy.
On slide nine, we show IGM highlights for the fourth quarter earnings per share of $0.94. That’s the second best adjusted Q4 on record, a strong outcome I think in the current environment. We ended Q4 with a AUM&A of $249.4 billion, an increase of 4.7% quarter-over-quarter.
IGM’s overall net redemptions were $440 million in the fourth quarter, with positive net flows at IG being offset by net outflows at Mackenzie.
IGM continues to receive recognition as a leader. I’d like to take a moment to highlight two recent developments. IGM was recognized as one of Corporate Knights’ Global 100 Most Sustainable Corporations. This is our fourth consecutive year being a part of the top 100. And IGM was also recognized as a Top 100 Employer in Canada.
Turning to slide 10, the fourth quarter saw a market rebound and global equity markets, while Canadian fixed income returns were muted. Equity markets continued to gain ground during January and the Canadian fixed income market delivered attractive total return. Still, we remain somewhat cautious given the continued macro uncertainty. We continue to believe that market volatility will remain an important factor throughout the year.
Turning to slide 11 on the industry operating environment. Market volatility over the past 12 months has continued to weigh on industry flows with net redemptions across equity, balanced, and fixed income asset classes during the fourth quarter, totaling $28.1 billion.
Slide 12 through 15 provide further details on our quarterly and annual performance. I’ll highlight a few key points while Damon Luke, and Keith will dive into greater detail in their prepared remarks.
Slide 13 highlights earnings across our businesses, which reflected the declines in AUM and a AUA year-over-year for IG, IPC, and Mackenzie.
Turning to slide 14, Northleaf on the other hand has delivered a 24% growth in AUM over this period. And ChinaAMC’s AUM grew by approximately 2%, which compares favorably to the roughly 20% decline, experienced in Chinese equity markets over the course of 2022.
Slide 15 presents IGM’s consolidated net flows for the fourth quarter and full year across IG Wealth, IPC, Mackenzie, as well as Northleaf’s fundraising results.
I’ll turn the call over now to Damon and then Luke to expand on the results of their businesses.
Damon Murchison
Great, thank you, James and good morning, everyone. Turning to slide 17 and IG Wealth Management’s fourth quarter highlight. We ended the quarter with AUA of $110.8 billion, an increase of 5.5% during the quarter, driven by client returns of 5.4%. Gross inflows of $3 billion were the second best fourth quarter in our history, second only to the record high of Q4 2021.
We achieved our ninth consecutive quarter of positive net flows at IG Wealth with $429 million during Q4 2022. IG’s gross outflows as a percentage of average AUA over the last 12 months remained well below the industry and ended the quarter up slightly at 9.1%, while the industry redemption rate increased to 16.6%.
Positive net flows continued into January with net inflows of $30 million. While equity markets continue gaining ground in January, we know the speed at which our client contributions are deployed into long-term investment solutions will be impacted by the volatility they experienced over 2022 and the continued uncertainty in the near-term.
Our advisors continue to work with our clients take an unhurried approach in s exceeding their financial plans and in most cases, dollar cost averaging into these volatile markets.
We continue to see strong new client acquisition in the high net worth and mass affluent client segments, with inflows from newly acquired clients over $500,000 to lean $431 million in Q4, and $1.8 billion for full year 2022.
Lastly, we announced a strategic partnership for IG’s Mortgage Operations, which I’ll speak to in a coming slide.
Turning to slide 18, you can see the Q4 2022 growth in net flows remained solid relative to the past 10 years, especially considering last year’s volatile capital markets. IG wealth achieved a second highest annual gross and net flows in over 20 years at $12.9 billion and $2.7 billion, respectively. On the chart on the right, we continue to see short-term solutions like cash and GICs play a larger role due to the current market environment.
Turning to slide 19, I’ll reiterate that during Q2 2022, we achieved the second best growth inflows in our history at $3 billion and our net inflows remained solid. We continue to gain share of wallet from our existing clients, while acquiring new clients and recruiting experienced financial planners to IG.
Given the current market environment, it’s natural and prudent for advisors to build short-term position and dollar cost average into the markets over time. As James mentioned, we are planning for a stronger operating environment in the second half of 2023.
With this in mind, we fully expect there to come a quarter where AUM growth exceeds AUA growth noticeably, as short-term money is redeployed as a function of our clients executing their financial plan.
We firmly believe we are winning market share through new client acquisition and greater share of wallet with our trailing 12-month net flows rate of 2.4% to end the quarter.
On slide 20, we highlight how IG Wealth clients tend to remain committed to their financial plans throughout periods of market volatility. IG Wealth’s last 12-month gross outflows rate of 9.1% remains low. The overall industry redemption rate for long-term funds, on the other hand, has experienced a sharp increase during the fourth quarter, reaching 16.6% as at the end of December 31st.
Turning the slide 21, this demonstrates a very strong year in new client acquisition, in particular clients over $500,000. We had $1.8 billion in gross inflows from newly acquired clients with over $500,000, which represents a 3% increase year-over-year and a 210% increase over the past five years.
Something to note, gross inflows from newly acquired clients with over $1 million represented 25% of newly acquired clients during 2022, that’s up from 22% a year ago and 12% five years ago. This is a testament to our client value proposition and our ability to execute our high net worth strategy, especially in during volatile markets that we continue to experience.
Turning to slide 22, this represents the productivity of our advisors. Both our newer advisors and more experienced advisors practices are continuing to deliver strong productivity numbers as measured here by growth inflows per advisor. We have undertaken several initiatives in the past five years to drive productivity gains and expect continued momentum in future quarters.
Lastly, I’ll turn to slide 23. I’d like to take a moment to discuss the changes we made within our mortgage business at IG. We launched new and exciting partnership to drive a simplified and modernize mortgage experience for both our advisors and our clients. This will be done under the IG Wealth brand powered by white label solution.
We view mortgages as an important component of our clients’ financial plans and this renewed focus on our mortgage operations will allow us to better address this important client need.
We view this as a compelling opportunity to grow our mortgage business in a profitable way, while continuing to digitalize our business and improve our overall advisor and client experience.
And I’ll turn the call over to Luke.
Luke Gould
Hey, thanks, Damon. Good morning everyone. So, turn to page 25, a few comments of the quarter. First our AUM increased by 3.4%, driven by financial market improvements during the quarter. Equally important I remarked that we published January a few days ago and these financial market improvements continued with assets up another 4% and we’re starting to see a bit more investor confidence as we start the year.
In point two, you concern net redemptions, which were aligned with industry net sales rates and the industry environment was reviewed by James earlier. In point three, we’re very pleased to see the share of our assets in 4 and 5-star funds increased to 57% from 50% at September. This is the highest we’ve been on this metric over the last two years and places us near the top of the industry on this metric as we enter 2023.
And point four, we have the final prospectus filed and approved for our new Corporate Knights’ Global 100 Most Sustainable Companies ETF and Mutual Fund. I’ll review this in a few slides and we’re launching this product in early April.
And lastly, as described by James, we closed the purchase of our additional 13.9% stake in ChinaAMC at the start of January and we’re very pleased to close that important transaction.
Turning to slide 26, you can see the trended history of Mackenzie’s net flows. As with last quarter and highlighted once again earlier in this call, we continue to see migration as safety and to the sidelines in the industry with meaningful flows to deposits and savings accounts.
With our boutique approach, we have a number of relevant product themes that were emphasized in the market. And as the significant liquidity on the sidelines gets reallocated, we’re optimistic that we’re going to return to very positive net flows.
As you’ve seen, initial industry results for January, I’d highlight the year-over-year declines in gross sales have improved and redemption rates have now stabilized. Our leading position in Canadian retail and access to distribution through strategic relationships provides a strong foundation for us to maintain share in volatile markets, while positioning us to deliver continued growth over time.
Turning to page 27, I’d highlight that our retail gross sales decline at the top left was in line with industry peers and in the bottom left, you can see our net sales rate is similarly in line with the industry.
As mentioned in the bottom right, you can see our share of assets and 4 and 5-star funds improved during the quarter. Andes mentioned, we do ride near the top of the industry on this measure at this time.
Turning to page 28, we have our retail mutual fund AUM, investment performance and net sales by boutique. With our boutique approach, we seek to have a broad roster of relevant products with compelling performance and features across different market environments.
While our sales are reflective of current industry trends and market volatility, you can see based on the asset-weighted percentiles and Morningstar ratings, we have strength across multiple boutiques.
As we enter 2023, a number of our larger boutiques have very compelling performance. I’d note in the middle, Greenchip remains our best-selling product, and we continue to see strong interest here and a lot of sales potential during 2023.
Turning to page 29, we profiled our upcoming launch of the Corporate Knights’ Global 100 Most Sustainable Companies in the World Index ETF and Mutual Fund. We are so pleased to partner with Corporate Knights on this endeavor.
The index reflects the top 100 Most Sustainable Companies under Corporate Knights’ methodology out of all of the 8,000 publicly traded companies with annual revenues in excess of $1 billion a year.
We believe this is a core global equity holding. And as you can see, as part of the methodology, the top 100 is diversified by industry, with industry weightings proportionate to their weights in the MSCI All Cap World Index. It’s also very well-diversified geographically.
The industry has an 18-year track record and as you can see on the right, it behaves very similar to the benchmark and has a very strong track record of risk adjusted outperformance.
Corporate Knights’ methodology incorporates a variety of social responsibility and financial criteria and we’ve highlighted the investment thesis that we believe is simple and intuitive. Responsibly run businesses are consistent with long-term shareholder value creation, and we’re very excited about the launch in April.
Turning to page 30, I’d highlight on the left that the Chinese mutual fund industry declined very slightly in the quarter in AUM with net outflows primarily within fixed income funds.
You can see the strength in net flows over all the prior quarters. And I’d note that this net outflow in fixed income is isolated related to interest rate increases at the long end of the curve and some movement out of these products at Bank Wealth platforms. Growth has been very robust throughout the last three years, and we expect this to continue as China continues to emphasize growth in the retirement system.
On the right, I’d highlight that ChinaAMC’s position remains very strong as the second largest fund manager in terms of long-term mutual funds. Their market share increased during the year from 4.4% to 4.6% within a very robust market.
I’d also highlight that including money market funds, ChinaAMC improved its market position from fifth place to third place during the year and its share increased from 3.9% to 4.2% on this measure.
Turning to page 31, you can see ChinaAMC’s growth in AUM over time. Total assets were up 4% in the year and mutual fund assets were up 10% in the year, driven by strong net flows and market share gains.
And on page 32, you can see the continued growth at Northleaf with AUM growth of 23.6% in the year, driven by strong fundraising. In the chart on the right, you can see that we had fundraising of $1.3 billion in the quarter and this was diversified across private credit, infrastructure and private equity offerings.
I’d also highlight Northleaf has averaged about $1 billion in fundraising during each of the last eight quarters since we began our partnership with them and acquired a stake in them, and we are so pleased with their ongoing success.
I’ll turn the call over to Keith Potter.
Keith Potter
Great. Thank you, Luke and good morning everyone. On slide 34, you can see our AUM&A. This chart on the left shows ending assets were up 4.7% during the quarter due to positive market returns, which is the first positive quarter in 2022. It’s also a good start to the year with client returns of 4.3% in January. However, as James mentioned, we do believe market volatility could persist in the near-term, and we will manage our business with that in mind.
Turning to slide 35, shows quarterly EBIT in millions of dollars on the left and as a percentage of AUM&A on the right. I have a few comments on the left chart on adjusted EBIT.
First, we had a strong contribution from share of associate earnings and net investment income relative to last quarter and Q4 2021. Second, net wealth and asset management fee revenues are down slightly in Q4 relative to Q3, and that’s primarily from lower other financial planning revenue.
And finally, we had a sequential increase in expenses between Q3 and Q4 and that was largely timing related, including technology and other project-related expenses. On the right, you can see the adjusted EBIT margin is down slightly versus last quarter and that’s from the two items I just referred to.
Turning to slide 36, we can see our consolidated earnings at IGM under 0.1%. We had another quarter of higher net investment income and other of $15.6 million, which is driven mostly by interest income earned on cash and secondly, from favorable seed capital marks at Mackenzie.
Looking forward, I’d note we have now closed the ChinaAMC transaction and we’ll have a lower cash balance, and that would have accounted for approximately $6 million in investment income in the quarter.
Second, we had an increase in proportionate share of associated earnings and that was driven by Northleaf and Great-West Lifeco. And on point three, operations and support and business development expenses combined, increased 0.4% year-over-year and 2.3% on an annual basis, which is within our previous guidance of no more than 3%.
We are issuing our full year 2023 expense guidance of 3% growth, and I’ll speak to this further in a few moments. And lastly, our dividend payout rate on a last 12-month basis is 73% of cash earnings.
Turning to slide 37, you can see a summary of IG Wealth’s AUA and the key revenue and expense rates. On the top right, our advisory fee revenue rate was flat quarter-over-quarter.
And as I’ve discussed on past calls, we continue to expect downward pressure of about 0.5 basis points per quarter in this rate from a mix shift as we acquire high net worth clients, but it’s also important to note that the rate will be influenced by the mix of client cash and deposits and the spread on that cash.
For the first quarter, the mix shift from advisory fees earned on high net worth solutions was offset by higher spread on client deposits. In Q1, I’d expect an increase in cash spreads to offset any downward pressure from high net worth client acquisition.
Product and program fee rates were stable quarter-over-quarter and we would expect this line to stay relatively flat going forward as it has in the past several quarters. And on asset-based compensation rate, it’s up 0.4 basis points in the quarter as we continue to see DSC units mature.
And as a reminder, as DSC units do mature, the asset-based compensation rate on those units doubled. We did discontinue to sell these products in 2016. So, the impact of this will come to an end in Q4 of this year, at which time all DSC units will have matured.
On slide 38, you can see IG’s overall earnings of $104.6 million is down 26% relative to Q4 2021, primarily due to lower AUM&A and the impact that had on revenue as well as $6 million in lower contribution from IG’s mortgage business. That was primarily due to unfavorable accounting marks in the management of our securitization structures.
And as Damon commented, we have a great opportunity to enhance our mortgage solutions for our clients in 2023 and would expect to see this having a meaningful benefit for growth over the next three to five years as we implement the platform and build our mortgages under administration.
And finally, we continue to remain focused on managing expense growth, the combination of business development and operations and support for Q4 2022 was up 0.7% year-over-year.
Moving to slide 39, you can see Mackenzie’s AUM by client and product type as well as net revenue rates. It was a fairly uneventful quarter on the right, focusing on the blue line. You can see net management fee rate for third-party clients, excluding Canada Life at 82.3 basis points and this was fairly stable and in line with what we had communicated last quarter.
And I’d just remind, as we look forward to Q1, we have two fewer days upon which we charged revenues. However, our asset-based compensation paid to distributors and advisors is based upon one quarter of a year and the combination of those two things will have a negative impact on our revenue rate in Q1. And just for some context, during Q1 2022, this had an approximate 0.3 basis point impact on the overall rate.
Turning to slide 40, where we show Asset Management segment profitability. Just two short comments. First, net investment income increased year-over-year, driven by favorable returns on seed capital and operations and support business development expense combined were flat year-over-year and up 3.1% for the full year 2022.
On slide 41, has ChinaAMC results on the left. Total AUM in RMB172 trillion, which was up 4% from last year and flat quarter-over-quarter. With respect to earnings on the right, Q4 2022 earnings were down relative to Q4 2021, and this was primarily due to lower performance fees that are typically earned in Q4, and this is in the context of very strong markets in 2021 and negative returns in 2022.
Looking forward, we are very pleased with our increased ownership in ChinaAMC and expect strong AUM and earnings growth as markets normalize.
On slide 42, I have a few comments. Firstly, just on IPC, just a reminder that the decline in earnings was driven by pricing changes in Q2 of 2022. And second, on Northleaf earnings are up $6 million relative to 2021, part is certainly due to AUM and revenue growth over the year, but there are also a couple of lumpy items benefiting the quarter, including timing of fees earned on new commitments and a lower effective tax rate from capital distributions within Northleaf entities. We continue to expect earnings closer to about $3.5 million per quarter.
Finally, you can see at the bottom of the page where we have included the pro forma fair value of Lifeco and ChinaAMC, which closed on January 12th.
On slide 43, you can see our typical disclosure on some of the parts at January 31st, closing price of $41.53, the implied P/E multiple for IG Wealth Management and Mackenzie based upon expected 2023 earnings is 8.5 times.
I’d also highlight the second column from the right unallocated capital, where you can see we have excess capital of $196 million as a result of the ChinaAMC transaction that closed on January 12th.
And on slide 44, we provide expense guidance for 2023, a 3% growth. We believe this level of growth enables our business to continue to be positioned for long-term success, and the guidance does account for normalization of in-person and travel entertainment expenses, normalization of Mackenzie wholesaler compensation with a view of improving net sales environment 2023, continued support of competitive compensation for our employees in an inflationary environment, and we do expect lower pension expense in 2023.
I will point out that the increase in Mackenzie is slightly higher than the overall guidance, and that’s really driven by higher variable compensation for wholesalers as we expect the sales environment to improve.
That concludes my remarks, and I’ll turn it over to questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions]
Our first question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.
Geoff Kwan
Hi, good morning. My first question was just on IG Wealth. The consultant count has been declining, albeit very, very, very slightly over the past few years, so let’s call it flattish. But in that, obviously, the percentage of experienced consultants has increased significantly.
Just wondering what’s the strategy here? Because now you’re roughly about 85% of the consultants have at least four years’ of experience. Is it to keep the consultant size around this level and just further mature it in terms of the proportion that have at least four years’ experience?
Or now that you’ve kind of made the changes you’re seeing the fruits of that labor that plan to increase the consultant count? And is that a matter of hiring more in existing offices? Or is it opening up new offices and footprint?
Damon Murchison
Hey, Jeff, it’s Damon. So, in terms of our advisor count, it’s less about the actual number of advisors, and more about the quality of advisors. As you know, we’ve transformed from an organization that that is just focused on 100% career changers, to an organization that is really focused on bringing experienced financial planners that are out there in the industry to IG advisors that want to compete for clients in their community, that value financial planning, and all that IG has to offer.
Now, we still continue to bring in career changers. But we do see that more and more, our strategy is going to be around experienced advisors, just as a whole in the industry, I think the growing trend will be less advisors more experienced bigger teams. So when you look at our organization, I think you want to take a look at not just four years plus and one to four.
But you also want to take a look at the associates by making sure that our teams are larger, and have associates and have teams that that can build capacity, and capabilities. It’s going to allow us to further penetrate the massive fluid and high net worth market.
Geoff Kwan
Okay, that’s helpful. And just my other question, James, just wondering if there’s been any change on the kind of M&A funds in terms of, level of activity that you’re seeing, and also to is just on pricing, if there still is any sort of meaningful disconnects in terms of asking prices, which are which are willing to pay?
James O’Sullivan
Yes. Thanks, Jeff. We remain — we remain active, we remain in the traffic we have — clearly, we have not consummated anything to this point. Although, as I said, in my remarks, we’re very proud of our investment in Nesto and in the commercial partnership with Nesto, as well as the work that led to the closing of China AMC.
In terms of pricing, what I say is, I continue to observe others might see it differently. But I continue to observe a large gap between public company multiples and private market multiples, where deals are being a transacted. Although, overall, I’d say there’s probably fewer deals being transacted in this market environment.
And I think what that means for us, Jeff is that if we’re going to do a transaction, and we’re going to pay a big multiple the property is going to have to be both important strategically. And it’s going to have to have growth rates attached to it that reflect the multiple that we’re paying relative to our own multiple. So we remain active, we remain busy, and we’re looking forward to 2023.
Geoff Kwan
Great. Thank you.
Operator
Our next question comes from Scott Chan of Canaccord. Please go ahead.
Scott Chan
Good morning. Luke just on the county side, 2022 kind of talks about Q4 and the year being in line with the industry for the mutual fund flow fund? And we look at the past two calendar years Mackenzie was punting a lot of fossil and then maybe can you talk about like what issues, outside of the industry that that like could have affected your net flow trend in 2022?
Luke Gould
Yeah. So I guess, two factors I point to, when the significant dislocation in the industry in 2022. And in particular, the way different product categories were impacted. We had a lot of strength, particularly in the brokers channel and fixed income. And when you look through the product level at level answers, it really is getting to those themes. And so one thing I’d say is with us being so diversified and a boutique, and looking at our performance in relation to peers, that’s what you should expect from us.
We’ve been tracking with the market. We’re not as volatile as others. And there was a lot of dislocation and a lot of places. And so we are maintaining share and that we’re not happy with that. We want to grow market share. That’s why we’re here. But when you look through the numbers, that’s what you’ll see is different product areas were affected in different ways.
And in fixed income as a category in particular, that’s when we had strength and given the declines in fixed income markets. And the net outflows in those categories that’s one thing that impacted us and was offset by strength-wide other places.
The other thing I would highlight is, is the percentage of our assets in a four to five star places. We actually were a bit lower throughout most of the year than we had been in those prior two years periods. And I am pleased as we close the European in December, we’re back to the highest level in terms of the percent of assets and four and five star funds than we had been for the last two years.
And so that’s another feature of our — of our condition in 2022 and again, we love having a diversity and loving having all these boutiques, but we’re striving for investment excellence everywhere. And yeah, we’re pleased to be right back close to 60%. For us in Four and Five Star Funds, which is our target.
Scott Chan
So when we think about 2023, and I think the commentary was higher expenses just based on, you know, wholesalers selling more, where do you anticipate that coming from? Is there any particular like kind of hotspots or strategic partnerships, like Primerica that you can kind of point to that, that kind of supports that?
James O’Sullivan
Yeah. The biggest ones is when you look at us, and I’ve been — I’ve been exuberated on these calls, we’ve got a lot of compelling performance and features in a diversity of places that are relevant today. Sustainable, and we showcase the CK100 but and also Greenchip are doing very well.
Dividend income, we’ve got strength across boutiques, and we’re out there emphasizing it and it’s in demand, Canadian equities. We’ve got strength across boutiques and it’s in demand. And then of course, our income offerings and privates are also areas that we’re at we’re emphasizing we think are very relevant and we have real, real strength.
Scott Chan
Right. And then last one question is a house keeping question on green, Great‑West Life equity contribution it seems like it’s on their reported earnings and onward for earnings, just looking at their Q4 results yesterday. Is that correct?
James O’Sullivan
Yes, that’s correct.
Scott Chan
Okay, that’s all. Thank you very much.
Operator
Our next question comes from Graham Ryding of TD Securities. Please go ahead.
Graham Ryding
Good morning. This question, I guess both for IG Wealth and for Mackenzie, but, you know, you’ve got a lot of cash, building up a IG Wealth level, and then Mackenzie, your forecasts even better sales in the second half of the year.
So, what’s the base assumption here that sort of gets sales moving into your higher funds, or into your investment funds at IG and sort of improving sales Mackenzie, is this interest rates increases likely behind us and markets are less volatile or what’s sort of the basic assumption behind those forecasts?
Damon Murchison
Hey, Graham it’s Damon. So from an IG perspective, we do have a significant amount of cash and, and I clearly see that is a significant positive for our firm, it’s important that everyone knows if this was four years ago, this was not possible. It was our move into from client name and nominee. And in the transformation that we went through that’s allowing us to be extremely competitive from the cash standpoint, allow our advisors put our hands around our clients.
At our firm, we’re a firm made up of financial planners, and financial planners, we don’t time the market. We know it’s best to be invested. So what financial planners tend to do is to dollar average cost into the market. Starting in February, I think you’re going to see that cash deployed, but doing so over a six months to 12-month period, I think it’s for us, the back half of the year looks extremely positive.
As I said in my comments, we believe that we’re going to see a period where AUM growth exceeds AOA growth. And we saw it last year at this time. with IG when we had a significant amount of cash and AUM exceeded AOA was just a great environment to invest. Right now, obviously, there’s a lot of uncertainty in the market. So we’ve seen this — we’ve seen this before. This is nothing new. And it plays out generally the same way every time.
James O’Sullivan
And you know, I echoed Damon’s comments, we’ve seen them. The main mantra, I’d say for 2022 is Canadian stocks, their financial plans, and we’re rewarded for doing so that’s the overall theme when you look at the invested assets. People did not panic in April — in April and May and June of last year. They stayed committed to their plans and they’ve recovered significantly from them.
But the investor confidence we saw it in Q4 with client returns of close to 5%, year-to-date in 2023 we’ve got another 5% on top of that. And we are starting to see investor confidence strengthen again and there is just a glut of liquidity on the sidelines. So when it comes back, it could be quite the wave, just like we did see in 2021 following a buildup in 2020.
Graham Ryding
Okay, great. Luke, I think what you just — the investment performance or the percentage of your funds that have moved into the four or five star bucket, any mandates specifically driving that change? Or anything you would call out?
Luke Gould
Yes, actually, there are a few — some of our flagships. So we did see a strategic income increase in rating. And we have seen that’s an improvement in Bluewater as well, which are some for larger funds.
Graham Ryding
Okay, perfect. And my last question, just could you remind us, what is the payout ratio on your cash earnings that you would sort of be targeting in terms of the threshold where you start to consider a dividend increase?
Keith Potter
We’ve — it’s Keith here. Yes, we’ve guided to 60% is when we start to take a look at a dividend increase. And we’re tracking at 73% right now.
Graham Ryding
Okay, perfect. That’s it for me. Thank you.
Operator
Our next question comes from Tom MacKinnon of BMO Capital. Please go ahead.
Tom MacKinnon
Yes. Thanks very much, and good morning. Just now that you’ve gone to doubled up your share of ChinaAMC. I was wondering if there’s anything different in terms of your approach with respect to that. If I look at the boutique slide, would look like ChinaAMC is probably like less than 1% or 2% of your retail AUM at Mackenzie.
But to what extent can you do anything different now that you’ve doubled up your share of ChinaAMC. And what are your plans to sort of capitalize more of that investment other than just getting your share of their earnings into your P&L?
Damon Murchison
Yes, right on time, we’re going to continue to stay the course on collaborating with ChinaAMC in both markets. We believe Canadians and North Americans should have more exposure to China in their portfolios, that’s only going to become more relevant over time. And we’re going to continue to be the leader in bringing those solutions to it to Canada and beyond.
And then of course, cultivating relationships in Asia is another advantage for us. And so we did announce some very good flows last year in terms of us advising to ChinaAMC Hong Kong. And we have a lot of doors open for us in Asia that we wouldn’t otherwise have absent this investment.
So we’re really staying the course. This is a secular investment for us. And that collaboration between the companies is so important to us. We’re also pleased now, obviously, in the last number of months and weeks to see China opening again, and there’s a lot of excitement with both the companies around being face-to-face, as opposed to virtual. And so that’s this is actually a very exciting moment for us.
Tom MacKinnon
Okay. And then the second question is with respect to the 3% OpEx guide for 2023. Like in the face of inflation here, obviously, there’s got to be quite a bit of wage inflation, that’s apparent across all kinds of financial services industries, not to mention US as well. So, how do you kind of marry that with a guiding to a 3% an OpEx growth?
And so just kind of looking for your comments there? Is it some other discretionary spends that get cut back? Just trying to see if how you can balance it with respect to kind of what you pay employees and how you can still all-in come guide to a 3% SG&A growth?
James O’Sullivan
Sure. Thanks for the question, Tom. It’s James. I’ll start. So, of course, in 2022, we came out of the gate saying, look for 5% growth. And there’s no question there were significant, obviously, inflationary pressures in 2022. And we started to as our outlook grew more cautious, we said, well, what do we control?
And certainly one of the things we do control is our expenses to a significant degree. So, we lowered our guidance on expenses, and ultimately, as you’ve observed come in not at 5% on the full year, but just under 2.5%.
So, as we think about 2023, as you point out, we’re saying not more than 3%. And I would say, the principal tactic to kind of generate and maintain that discipline is around headcount, Tom. It’s really around headcount, just discipline. Around who were how hiring, why we’re hiring, whether the role is critical sort of or not.
And at the same time, I’m very proud of the fact that we have been able to for our lower tiers of employees, we’ve been able to respond with wage increases that we’re proud of. So for lower bands of employees, as the wage increase was in the 5% range, the total budget was kind of 4%. So as you went up, as you got higher in the organization, the lesser was the merit or the COLA increase.
The other thing we did this year is we made sure that everyone in the organization on salary was earning a salary of at least $40,000. So if you’re going to do that, you’ve got to watch headcount. And I would say the principal tactic has been watching headcount, the second major tactic has been being disciplined on project spend.
And in that regard, Tom, we spent, $65-ish million a year on what we call project spend. And that’s a number that, if you’re not disciplined can kind of creep up and we’re committed to maintaining spend at that level. But we meet frequently to make sure that we’re on budget, and then we’re not approving projects that are going to take it meaningfully north of there.
So I point the headcount. I’d point to project spend, and I’d say, it’s balancing all of that against an imperative to treat the lower band employees well in this environment. We believe we’ve done that squared that circle as well as we can.
Damon Murchison
And I just add to that the — we’ve also invested in technology in places process automation, and other investments in technology that has taken costs out of our business that gives us the opportunity to invest in other places to grow the business. And a great example this year is the mortgage business and the partnership we’re building with Nesto. That’s an area that we’re going to invest. And we’re doing that through savings from other initiatives in the past.
Tom MacKinnon
Okay. Thanks. Appreciate the color.
Operator
[Operator Instructions] Our next question comes from Jaeme Gloyn of National Bank Financial. Please go ahead.
Jaeme Gloyn
Yes, thanks. I wanted to dig into the mortgage banking upside. I mean, this is a business that generated I think $26 million last year, $45 million roughly in the years prior to that. What kind of upside you think you can drive to that revenue line?
And is there a plan to shift, I guess, the strategic outlook for that business from maybe holdings, mortgages, selling mortgages? Like are you looking to change how you generate those revenues at all in that platform?
Damon Murchison
Hey, Jaeme, it’s Damon. I’ll jump in and then I’m sure Keith will have some words to say. But in terms of the mortgage business, we’re very excited about the opportunity here. Really, what we’re trying to do is we’re trying to elevate the experience of both our advisors and our clients by being modernized, make sure it’s digital, by leveraging really a best-in-class tech stack with Nesto, to be able to offer mortgages at a very competitive rates for our clients.
Right now, we’re punching below our rate. And if you look back, and not-too-distant future, I believe at one point, we’re earning $70 million in this business, we believe that we can get there back again, and be very, very competitive. It’s not like we need more clients, we have the clients. We just want to make sure that we have the experience to be able to deliver what they expect from us.
From our standpoint, we’ve transformed our business, our platforms, our investment products, the natural sequence of things is to be looking at mortgage and banking, and then to look at insurance. So, we believe that we have drivers for future earnings to accelerate future earnings across a number of different factors for this firm.
Jaeme Gloyn
Got it. Yes, go ahead.
Keith Potter
I was going to add to that, Jaeme, we’re probably normalized $35 million per year in the mortgage business. If you do look back 2012 to 2016, we’re growing our mortgage under administration by a $1 billion plus a year, and we grew from $7 billion to close to $11 billion, or over 11 billion. So we think we can easily do that again, now that we have a great competitive offering for our clients and gets back to that number Damon just mentioned, or you can, $35 million and double the business, we’re at $70 million and call it five years.
Jaeme Gloyn
Understood. And then just respect to the, I guess, the net flow outlook seems a little bit more tepid here with Mackenzie and if I look at like January performance in wealth same story. What do you think it is like are just — are investors just sitting on too much cash at this point? That’s kind of what’s kind of flows you’re seeing, especially in this RSP season, it just seems a little bit maybe lighter than maybe otherwise you would expect?
Damon Murchison
You hit the nail on the head. It’s investor confidence, we are seeing an improved as we’re entering 2023, but that is it. And as mentioned, there will be a lag. We did see financial markets up 5% in Q4, we have seen another 5% in the first five weeks of 2023. And that’s what’s going to take to actually drive investor confidence. And there is a lot of money on the sidelines right now.
Jaeme Gloyn
Yes. Okay. Thank you.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Martens for any closing remarks.
Kyle Martens
Thank you, Ariel. And thank you everyone for joining us on the call this morning. And I hope everyone has a good weekend. Ariel, with that, so we’ll close out today’s call.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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