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  1. --------------------------------------------------------------------------------
  2. Copyright 2016 Thomson Reuters. All Rights Reserved.
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  4.  
  5. Q4 2016 Gluskin Sheff + Associates Inc Earnings Call
  6.  
  7. Toronto Sep 16, 2016 (Thomson StreetEvents) -- Preliminary Transcript of Gluskin Sheff + Associates Inc earnings conference call or presentation Friday, September 16, 2016 at 2:00:00pm GMT
  8.  
  9. TEXT version of Transcript
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  12. Presentation
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  14. Editor [1]
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  16. +++
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  18. Unknown Speaker* [2]
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  20. Please stand by for realtime transcript.
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  22. Unknown Speaker* [3]
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  24. Good morning, Ladies and Gentlemen.
  25. Welcome to Gluskin Sheff & Associates Inc Q4 fiscal 2016 results and Conference Call.
  26. Following the formal comments we will hold a question and answer session.
  27. Please be advised this call is being recorded.
  28. I would like to now turn the meeting over to David Morris Chief Financial Officer of.
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  30. Unknown Speaker* [4]
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  32. Is & Associates Inc.
  33. Please go ahead, Mr. Go us.
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  35. Unknown Speaker* [5]
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  37. Thank you and good morning.
  38. The companies results were issued by Press Release yesterday and are available together with the MD & A on the companies website at www.gluskinsheff.com.
  39. Before we begin we would like to remind everyone that during this call Management may make statements containing forward-looking information relating to the companies business and the environment in which it operates.
  40. Those statements are based on Managements expectations estimates forecasts and projections.
  41. They are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict.
  42. Thesis innings and uncertainties are discussed in the companies regulatory filings available on its website and on SEDAR.
  43. Actual outcomes and results may differ materially from those expressed in these forward-looking statements.
  44. 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.
  45. Management may refer to certain financial terms not measures recognized under International Financial Reporting standards IFRS.
  46. 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.
  47. There for these non-IFRS measures are unlikely to be comparable to similar measures presented by other issuers.
  48. For additional information regarding the companies use of non-IFRS measures including the calculation of these measures please refer to the non-IFRS financial measures section of the companies Management Discussion and analysis and its financial statements available on the companies website and on SEDAR.
  49. And now I'd like to introduce Tom MacMillan, President and Chief Executive Officer of Gluskin Sheff.
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  51. Unknown Speaker* [6]
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  53. Thank you, David.
  54. Good morning everyone and thank you for joining us today.
  55. This is my first Analyst call since starting my new role as President and Senior Executive officer on July 1. I want to start by expressing my gratitude to Jeremy Freedman who retired as President and CEO at the end of June.
  56. Jeremy lead Gluskin Sheff with a clear vision of becoming a top Wealth Management firm by doing the best job possible for each and every client each and every difficulty under his leadership of over 16 years we have made tremendous progress in terms of the strength of our team, the breadth and depth of our investment expertise and strategies, our focus on providing the highest level of client service, and ultimately our ability to provide our clients with strong risk adjusted returns through varying market cycles.
  57. Jeremy's passion, integrity and humor continue to permeate the firm's culture and we are fortunate that he remains a client, shareholder, consultant and friend of the firm.
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  59. Unknown Speaker* [7]
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  61. Joining me from the Company on today's call are Jim Bantis,Executive Vice President and client Wealth Management, Peter Mann, Executive Vice President co-chief Investment Officer and Head of Equities, Peter Zaitz Executive Vice President co-chief Investment Officer and Head of Fixed income and David Morris our CFO who you just heard from.
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  63. Unknown Speaker* [8]
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  65. During our Fiscal Year the Capital Markets experienced several events which unsettled investors and lead to significant volatility.
  66. Among these were the sharp correction in the Chinese equity Markets and the Chinese government decision to devalue its currency in the Summer of 2015 we continue to slide in oil prices and its subsequent recovery.
  67. The broad market sell off in January which lead many pundits to fear far worse outcomes and of course, the Brexit vote in June.
  68. Each of these events and others like them create attractive equity and credit investment opportunities for those who are prepared and willing to look beyond the news headlines of the day.
  69. While we maintain a positive long term view on the equity market withs have recently tactically adjusted our portfolio to become more defensive in the near term given currently elevated equity and credit valuations.
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  71. Unknown Speaker* [9]
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  73. We continue to employ a diversified asset mix including Canadian, US and international equities along with income oriented strategies and credit alternative strategies that can minimize interest rate risk and discipline long short hedge funds that can hedge out market volatility and generate returns that are not highly correlated to the broader equity Markets.
  74. Initiatives that continue to focus on providing shareholder return and value remain an ongoing priority.
  75. We are well positioned with the tools, the talent, the investment ideas and the confidence to distinguish ourselves in the coming Fiscal Year.
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  77. Unknown Speaker* [10]
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  79. Turning to Gluskin Sheff's financial performance, quarter-over-quarter.
  80. Total AUM increased by $99 million to $8.3 billion as at June 30, 2016 up approximately 1.2% from March 31, 2016. The increase in AUM is attributable to positive net investment performance of $149 million partially offset by net withdrawals of $50 million.
  81. $61 million in net withdrawals were from high net worth clients and 11 million in net additions were from institutional clients.
  82. Base Management fees for the quarter ended June 30, 2016 decreased $1.3 million or approximately 5% to $25.9 million from $27.2 million for the prior year quarter or the prior year quarter as average Assets Under Management decreased approximately $300 million or 3% to $8.3 billion from $8.6 billion and average base Management fee percentage decreased to 1.26% from 1.27%.
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  84. Unknown Speaker* [11]
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  86. Total operating expenses for the three months ended June 30, 2016 increased year-over-year by $1 million or roughly 5% to $22.7 million from $21.7 million.
  87. This increase in operating expense is primarily attributable to a $1.5 million retirement payment to Mr. Freedman and increase of half a million dollars related to the Founders retirement payment obligation provision partially offset by a decrease of $1 million in bonus expense.
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  89. Unknown Speaker* [12]
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  91. Net income was $3.3 million for the three months ended June 30, 2016 and represented earnings per share basic and diluted of $0.11. Net income for the three months ended June 30, 2015 was $12.2 million and represented earnings per share basic and diluted of $0.40 and $0.39 respectively.
  92. The decrease in net income year-over-year was due primarily to the decrease in performance fees and base Management fees.
  93. As one measure of the strength of our business we monitor what we call base EBITDA.
  94. Base EBITDA eliminates the financial impact performance fees as well as certain expenses such as stock option and retirement obligation expenses.
  95. It also reflects the actual base business bonus accrual by removing the effects of RSU amortization.
  96. Base EBITDA for the quarter ended June 30, 2016 decreased year-over-year by $3.2 million to $10.2 million compared with $13.4 million in the year ago quarter.
  97. This decrease is primarily attributable to the decrease in base Management fees and lower other income along with the increase in base business expenses mentioned previously.
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  99. Unknown Speaker* [13]
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  101. As approved the Board of Directors and announced yesterday the Fourth Quarter dividend of $0.25 per common share was declared and is payable on October 7, 2016 to shareholders of record as of September 27, 2016. Total dividends declared or paid to date including the dividends declared yesterday now total $14.51 comprised of regular dividends of $6.39 and special dividends of $8.12. Thank you for your time and attention, we would now be pleased to take your questions.
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  103. Unknown Speaker* [14]
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  105. (Operator Instructions)
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  107. Unknown Speaker* [15]
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  109. Your first question comes from the line with Gary Ho with Desjardins Capital Markets.
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  111. Unknown Speaker* [16]
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  113. Thanks, good morning.
  114. Wanted to revisit the dividend file.
  115. I know you put that at a pause this year.
  116. Can you talk about the discussion at the Board level that came to that decision and as well, what metric should I look at as we kind of look out and consider raising it again.
  117. Is it base EBITDA growth or AUM growth or what not?
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  119. Unknown Speaker* [17]
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  121. So Gary hello.
  122. It's Tom.
  123. I'll start.
  124. It was a good, healthy discussion of the Board for sure and I just want to say at the outset this is definitely not a change in philosophy or policy.
  125. I think the feeling is the last couple of years our increases in dividends out paced our increase in base EBITDA and so being prudent and disciplined we've decided to hold the dividend for the moment where it is right now.
  126. So I would suggest to you that it will increase and we hope it increases with an EBITDA growth which obviously is likely driven by AUM growth and performance and good performance in our returns.
  127. David did you want to add anything to that?
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  129. Unknown Speaker* [18]
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  131. No I think that's exactly right.
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  133. Unknown Speaker* [19]
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  135. Okay that's helpful.
  136. And then maybe second question for Peter Zaitz.
  137. Your global credit fund had a good quarter.
  138. Had market volatility that drove that and just thinking what drivers would cause the fund to outperform perhaps if you can give us an outlook for the remainder of the year that will be helpful.
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  140. Unknown Speaker* [20]
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  142. Sure, so I think we're fairly pleased with how the funds done so far in 2016 but there's been plenty of opportunity and plenty of volatility to seize on but we see no shortage of opportunity in investment grade credit both in Canada and in the US and Europe as well and so we're quite excited about the outlook going forward.
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  144. Unknown Speaker* [21]
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  146. And can you remind me if that fund capped or is that still open?
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  148. Unknown Speaker* [22]
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  150. It's closed.
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  152. Unknown Speaker* [23]
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  154. Okay, thanks and last one maybe for David.
  155. Something that caught my eye on the Balance Sheet.
  156. There's no more short-term investments.
  157. It seems like you move everything into cash.
  158. Was there a reason for that?
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  160. Unknown Speaker* [24]
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  162. No it's just a one day lag of putting it back into short-term investments.
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  164. Unknown Speaker* [25]
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  166. Oh, okay got it . that's it for me, thank you.
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  168. Unknown Speaker* [26]
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  170. (Operator Instructions)
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  172. Unknown Speaker* [27]
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  174. Your text question comes from Graham Ryding with TD Securities.
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  176. Unknown Speaker* [28]
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  178. Good morning.
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  180. Unknown Speaker* [29]
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  182. Good morning.
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  184. Unknown Speaker* [30]
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  186. Maybe I could just touch on the litigation issue with the co-founders.
  187. Has there been any engagement between the firm and their side towards looking at potentially settling this dispute before the December arbitration?
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  189. Unknown Speaker* [31]
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  191. Graham, I would describe that we're as dialogue has gone on sporadically but this point I can say from our side we're working with our legal team, our consultants and through the Board to proceed to the road that's available to us to go in early December to get in front of the arbitrator.
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  193. Unknown Speaker* [32]
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  195. Okay, that's helpful.
  196. How about just the impact from our client perspective, have you seen any hesitation on the part of existing clients with respect to new sales or are you seeing redemptions from clients because of this issue.
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  198. Unknown Speaker* [33]
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  200. Look, I'll start and then Jim is here.
  201. My sense when I meet clients and with the transition I had with Jeremy, we met a lot of them in the period from April and my position was announced when I took over July 1. I mean, it does come up. When they meet with us that's a question they obviously have but I think there's to me generally speaking they know it's an issue, they know we're dealing with it and they know importantly that I and the Board and our advisors are the one dealing with it not the professionals who are managing money and managing the client they aren't involved in this.
  202. So the client I think is pleased that the focus is correctly on them of the vast vast majority of the people in our Company and I'm focused on the client too I just have another little thing I have to do so Jim if you you want to add to that in terms of the potential impact?
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  204. Unknown Speaker* [34]
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  206. To answer your question directly in terms of impact and redemptions I've seen very little impact in terms of our existing client base withdrawing funds that are tied to this dispute so that is not an issue.
  207. I mean clearly as Tom said in our client meetings or prospect meetings with future clients, that is a discussion point and I'd reiterate Tom's comments about whether it's Peter or the rest of the investment team or client Wealth Management team we aren't involved in it and we are just focused on their needs so once you have the discussion with them they get into a better place.
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  209. Unknown Speaker* [35]
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  211. Okay maybe use that as a segway to just talking about net flows so the last couple of years there's been net outflows, how much of an issue or concern is that for you do you feel like you need to do differently and maybe what is your conviction looking into fiscal 2017 that flows could improve?
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  213. Unknown Speaker* [36]
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  215. So Graham you've been aware in terms of our initiatives we've had over the last couple years in terms of growing our geographic base and with that comes great years and some challenging times and part of the headwinds over the past two years in particular were the weakness of the Canadian Dollar because of the decline in oil prices and I expressed on previous calls we had outflows from our US client base and as naturally, retail investors or the mind set of exiting at the lows of $0.70 as opposed to hanging on at that time and increasing their investments so that was a factor that I think played sharply over the last several quarters.
  216. Less so this quarter in that regard.
  217. I think this quarter in particular what we saw is and just as a it reminder more and more of our clients use us so beyond just their investment needs but sometimes we're holding their liquid investments in cash or Treasury like portfolios and so we have a greater share of their wallet.
  218. When you have a greater share of their wallet sometimes you get called with news that they're looking to make a big donation to a particular charity or a hospital they're involved in. Sometimes you get to call in the context they want to make investment in the businesses they Operator Real Estate investments as we seen across Ontario, so this quarter I think we had a few notablewithdrawals that related to those type of activities as opposed to anything I'm concerned about.
  219. To me the pipeline in terms of the opportunities and the leads we have are good but as you know, this is a process of discussion, comfort and trust and it doesn't happen over several week period it could take several months.
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  221. Unknown Speaker* [37]
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  223. Okay that's helpful and maybe I could ask one more.
  224. You mentioned in your MD & A initiatives that focus on providing shareholder return and value.
  225. Can you just elaborate on what that's in reference to?
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  227. Unknown Speaker* [38]
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  229. Sure.
  230. I think that it relates to all of the initiatives across-the-board whether it be investing in new people that we've added over the last six or nine months or whether it be the initiatives on the client side or whether it revolves around the financial side in terms of looking at all of our expenses making sure what we're spending is appropriate and making adjustments where we think it's necessary.
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  232. Unknown Speaker* [39]
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  234. And also investing in longer term projects in terms of our operations, we have two to three year project currently under way in terms of our tie back systems to just make sure we optimize everything we do. We believe over time it will save us money and certainly allow us to continue to grow without adding additional operating costs.
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  236. Unknown Speaker* [40]
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  238. That's helpful.
  239. How should we think about the G & A outlook.
  240. Was any of it back office initiative baked into this years numbers?
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  242. Unknown Speaker* [41]
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  244. I don't expect those back office initiatives to end up being securely costly.
  245. So in terms of run rate the current quarter is maybe a little light, maybe half a million light purely because the consulting agreement for Jeremy Freedman going forward for the next three years is going to end up in the G & A as opposed to in the compensation line so compensation this quarter or the run rate was obviously high and to a certain extent going forward the G & A line is a little low going forward but other than that I wouldn't expect any huge increase in operating costs at all related to any kind of back office initiatives.
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  247. Unknown Speaker* [42]
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  249. Okay thank you.
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  251. Unknown Speaker* [43]
  252. --------------------------------------------------------------------------------
  253. Your next question comes from Scott Chan with Canaccord.
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  255. Unknown Speaker* [44]
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  257. Hi good morning guys.
  258. In your opening remarks when you talk about just getting a bit more defensive near term, what does that entail?
  259. Is that maybe more cash in the portfolio or a potential switch in the asset mix that we haven't seen in the few years that I can see or is that sector bases in terms of perhaps being under weight resources maybe just a bit more color on that comment.
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  261. Unknown Speaker* [45]
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  263. Sure, Scott.
  264. It's Peter Mann.
  265. Look I'd say there's a couple of reasons.
  266. As you know the majority of our portfolios are run on an absolute basis, we focus on risk adjusted returns and I would say in a lot of the areas of the market where we have had a tendency so have overweight those are staples discretionary very predictable long live cash flows we've seen valuations spike quite dramatically and so from our perspective in many ways, safety has become momentum and what we have been able to do is Morph some of that investment and as I said a portion is moved to cash and some is actually moved to what we think is much more value oriented or has a little more cyclical exposure but because it's such enormous under weight in Markets right now we actually feel like almost it is more defensive than what people deem to be the defensive components of the market so it's a twofold shift of adjusting into areas of the market we think are cheaper, that have a better opportunity to actually do well even in a modest GDP environment and a little bit of an increase in cash.
  267. There has been no outsized move in terms of asset allocation in the overall asset mix though.
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  269. Unknown Speaker* [46]
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  271. Okay that's great color and maybe just one more maybe for Peter just on the Blair Franklin fund.
  272. I think the first question is related to excess returns.
  273. The leverage play in somewhat play into the excess returns and maybe if you you can update it on the status of that versus if there was leverage at the start of the year?
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  275. Unknown Speaker* [47]
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  277. It the leverage product and its always been consistent with how much leverage from its inception so there's no change in the utilization of leverage in terms of generating returns.
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  279. Unknown Speaker* [48]
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  281. So it's the same all the time?
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  283. Unknown Speaker* [49]
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  285. It's consistent.
  286. Not always exactly the same but it is absolutely consistent.
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  288. Unknown Speaker* [50]
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  290. Okay perfect, thank you guys.
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  292. Unknown Speaker* [51]
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  294. There are no further questions at this time.
  295. I'll turn the conference back to Mr. McMillan for had closing remarks.
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  297. Unknown Speaker* [52]
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  299. They're very brief.
  300. I want to thank everybody for joining us today and if you have any further questions please don't hesitate to give us a call and we look forward to ongoing dialogue.
  301. Thank you very much.
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  303. Unknown Speaker* [53]
  304. --------------------------------------------------------------------------------
  305. This concludes todays conference.
  306. You may now disconnect.
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