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Stronger equity markets and a robust retirement savings season are expected to drive asset management companies' first-quarter earnings higher. Against a backdrop of regulatory and retail investor sentiment pressure though, equity valuations will need to stay strong to keep up the momentum.

On Friday, wealth management giant IGM Financial Inc. reported a decrease in first-quarter profits, but sales were up, and the company added to its management team, boosting the stock close to 2 per cent on Friday. Winnipeg-based IGM, a Power Corp. company, is the parent of a large network of mutual funds through its Investors Group and Mackenzie Investments subsidiaries.

"Although market sentiment is improving, inflows from retail investors will likely lag the positive investment performance and the sales environment will remain challenging," John Aiken, analyst at Barclays Capital Inc., cautioned in a note to clients.

Still, improving long-term fund sales could mark a trend among the other asset managers set to report earnings this week, including Gluskin Sheff + Associates Inc. and private equity firm Onex Corp.

"Long-term fund mutual fund net sales remain robust," Scott Chan, analyst at Canaccord Genuity Corp., wrote in an earnings preview note. "Over the last 12 months net sales of about $39-billion compare favourably to its 10-year historical average of about $25-billion," he said, citing data from the Investment Funds Institute of Canada (IFIC). While Mr. Chan believes the drift of long-term funds toward banks rather than independent asset management companies will continue, he still expects strong year-over-year growth for firms such as CI Financial Corp. Rising equity markets alongside a strong RRSP season are expected to contribute to asset managers' earnings. The S&P 500 rose 10 per cent in the quarter, and despite the volatility in the resource sector, the S&P/TSX index eked out a 2.5-per-cent gain. Sales for long-term funds during this year's RRSP season were stronger than last year.

For many of the asset managers, this could lead to net sales growth. CI Financial, which reports Tuesday, is expected to show asset growth outpacing its competitors, according to Mr. Chan. "Of benefit to CI, management has indicated that investors have started to put money back into equities year-to-date which is supported by IFIC results," he wrote.

Results at other companies, such as the actively acquisitive Fiera Capital Corp., reporting later in May, are also expected to be solid. But some firms continue to struggle. AGF Management Ltd., which reported its first-quarter earnings in March, beat market expectations, but continues to face net redemptions and its assets under management remain under pressure. And although Sprott Inc. is working to diversify its business, the volatility of its precious metals-focused investments and lower performance fees are expected to contribute to a significant drop in quarterly net income over last year.

The federal budget announced in March threw a wrench in the works when it proposed to change rules that apply to so-called "character conversion transactions." This change would stop some funds from using forward agreements as a strategy to move income into lower-taxed capital gains. Many fund companies, such as Mackenzie Financial, issued notices that they would stop accepting new money into affected funds. "We closed for new sales 12 funds while we digest what we're going to do more formally," said Charlie Sims, Mackenzie's outgoing co-CEO. "So that's a bump in the road."

Another possible change will affect the cost of disclosure. The Canadian Securities Administrators has proposed improvements on the information available to investors on the total cost of services and commissions, as well as the rate of return earned on the portfolio. Smaller dealers may have more trouble absorbing the costs of those changes.

Consolidation rumours are expected to continue in the coming quarters. Gluskin Sheff said in mid-April that its management had recently considered takeover offers, but decided to stay the course, saying the "current platform remains an excellent way to serve clients."

Indeed, the mood remains optimistic both for the earning season and into the second quarter, at least at IGM. "April tends to be a time of negative cash flows just because of the post-RSP sort of breather in the industry," said IGM co-President Murray Taylor in the company's first quarter earnings call. "But certainly as Aprils go, I would say things are continuing on with quite a buoyant mood."

Others are more cautious: "While the lift in assets under management is a positive start to the year, we don't believe that the level of asset growth experienced in the quarter is sustainable, particularly in light of the recent performance of the S&P TSX," wrote Barclays' Mr. Aiken.

(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)

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