Guardian Capital : 2021 Second Quarter

Guardian

GUARDIAN CAPITAL GROUP LIMITED

Report to Shareholders

SECOND QUARTER

JUNE 30, 2021

TO OUR SHAREHOLDERS:

We present below a summary of the Company's operating results for the periods ended June 30, 2021 and 2020. All per share figures disclosed below are stated on a diluted basis.

For the periods ended June 30,		Three months		Six months
($ in thousands, except per share amounts)		2021		2020		2021		2020
Net revenue	$	69,960	$	50,124	$	134,654	$	100,025
Operating earnings		21,199		13,427		38,703		24,240
Net gains (losses)		56,467		43,254		98,438		(118,035)
Net earnings (loss) attributable to shareholders		65,138		50,486		114,763		(85,882)
Attributable to shareholders, per share:
EBITDA (1)	$	24,708	$	17,302	$	45,919	$	31,672
Adjusted cash flow from operations (1)		19,201		15,403		37,693		28,723
Attributable to shareholders, per share:
Net earnings (loss)	$	2.42	$	1.87	$	4.24	$	(3.38)
EBITDA (1)		0.92		0.64		1.70		1.18
Adjusted cash flow from operations (1)		0.72		0.57		1.39		1.07
As at				2021		2020
($ in millions, except per share amounts)				June 30		December 31		June 30
Assets under management			$	51,641	$	45,984	$	31,196
Assets under administration				29,902		22,289		20,010
Shareholders' equity				780		700		596
Securities				698		633		511
Per share:
Shareholders' equity (1)			$	29.09	$	25.69	$	22.07
Securities (1)				26.03		23.23		18.92

Summary

The Company is once again reporting historic highs in many key financial metrics for the quarter ended June 30, 2021, including Net revenue, Operating earnings, EBITDA attributable to shareholders, Adjusted cash flow from operations attributable to shareholders, assets under management ("AUM") and assets under administration ("AUA").

The Company's total client assets, which include AUM and AUA, increased to $81.5 billion as at June 30, 2021, a 19% increase from $68.3 billion as at December 31, 2020, and a 59% increase from $51.2 billion as at June 30, 2020. AUM grew to $51.6 billion as at June 30, 2021, a 12% increase from $46.0 billion as at December 31, 2020, and a 66% increase from $31.2 billion as at June 30, 2020. The continued recovery in the global financial markets, and the strong inflow of assets experienced by GuardCap Asset Management Limited ("GuardCap"), our UK-based investment management subsidiary, and the acquisition of Agincourt in Q4 2020 drove the growth in AUM. GuardCap's AUM has grown to $15.0 billion as at June 30, 2021, representing a $4.3 billion growth since the beginning of the current year. The Company's AUA grew to $29.9 billion as at June 30, 2021, a 34% increase from $22.3 billion as at December 31, 2020 and a 49% increase from $20.0 billion as at June 30, 2020. The acquisition of a Canadian wealth management business on March 1, 2021, which was subsequently renamed Guardian Partners Inc., added $5.4 billion in total client assets in the first quarter of 2021, of which $5.1 billion was included in AUA and $0.3 billion in AUM.

The Company is reporting Operating earnings of $21.2 million for the quarter ended June 30, 2021, 58% or $7.8 million higher than the $13.4 million reported in the second quarter of 2020. The significant growth experienced by the Company's businesses was led by GuardCap, IDC Worldsource Insurance Network Inc., our MGA subsidiary and, to a lesser extent, the contributions from the businesses acquired over the past three quarters.

Net revenue for the current quarter grew to a historic high of $70.0 million, 40% or $19.9 million higher than the $50.1 million reported in the same quarter in the prior year. The increase reflects largely our successful organic growth in revenues and, to a lesser extent, the addition of revenues from the acquired businesses over the same period.

Expenses in the current quarter were $48.8 million, a $12.1 million increase from $36.7 million in the same quarter in the prior year. The higher expenses reflect the growth in our businesses, strategic investments being made in the Canadian Retail Asset Management initiative and the addition of $5.3 million in new expenses from the acquired businesses over the same period.

Global equity markets continued to experience positive performance during the current quarter, resulting in Net gains of $56.5 million in the current quarter.

As a result of the Net gains and Operating earnings described above, the Company's Net earnings attributable to shareholders in the current quarter were $65.1 million, compared to $50.5 million in the same quarter in 2020.

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EBITDA attributable to shareholders(1) for the current quarter was $24.7 million, compared to $17.3 million in the same period in the prior year. Adjusted cash flow from operations attributable to shareholders(1) for the current quarter was $19.2 million, compared to $15.4 million in the same quarter in the prior year. The increases of 43% and 25%, respectively, in these measures are reflective of the growth delivered by the Company's operating businesses.

The Company's Shareholders' equity as at June 30, 2021 increased to $780 million, or $29.09 per share(1), from $700 million, or $25.69 per share(1) as at December 31, 2020, and $596 million, or $22.07 per share(1) as at June 30, 2020. The fair value of the Company's Securities as at June 30, 2021 increased to $698 million, or $26.03 per share(1), from $633 million, or $23.23 per share(1) as at December 31, 2020 and $511 million, or $18.92 per share(1) as at June 30, 2020.

The Board of Directors has declared a quarterly eligible dividend of $0.18 per share, payable on October 18, 2021, to shareholders of record on October 11, 2021.

1. These terms do not have standardized measures under International Financial Reporting Standard ("IFRS"). These non-IFRS measures used by the Company are defined in the quarterly Management's Discussion and Analysis, including a reconciliation of these measures to their most comparable IFRS measures. Certain of the names of these measures were amended to include the words "attributable to shareholders" to better describe the measures.

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Commentary

Market Recap

The second quarter of 2021 continued the tendency of economic dataflow to persistently come in better than expected, despite the ongoing pandemic and its headwinds for the global economy. This time last year the upside surprises were largely the result of economic performance not being as bad as overly pessimistic forecasts. This year, so far, has seen outright positive surprises in economic activity and sentiment survey data that are still besting what have proven to be cautiously optimistic expectations. Gauges of economic surprises across both Developed Markets and Emerging Markets remained deeply entrenched in positive territory. Echoing this, earnings forecasts were revised higher too, providing fundamental support for global equities that already reside at all-time highs. Another important factor influencing the second quarter was that substantial increases in vaccinated populations in developed countries, combined with the impact of renewed targeted and broad lockdowns early in the spring in Europe, Canada and parts of Asia materially reduced new confirmed cases of COVID-19. This allowed optimism to spread, and assisted economic growth and stock market performance. During the Quarter, the Canadian benchmark S&P/TSX Composite Index had a total return of +8.5%, with a cumulative trailing-twelvemonth total return of +33.9%. While in the US, the S&P 500 had a total return of +8.5% during the quarter, with a cumulative trailing-twelve-month total return of a scorching +40.8% (both in USD). Globally, the vast majority of developed markets had positive returns during the second quarter, but underperformed relative to the S&P 500. In the emerging markets space the BRIC markets (Brazil, Russia, India, and China) were generally strong during the quarter and outside of China, performed as well or better than the S&P500.

In other asset classes, most fixed income markets were able to recover some degree of their first quarter losses despite headlines that showed inflation increasing, and heightening potential of monetary policy tightening. However, monetary authorities have made sure to indicate that policy tightening may be visible, but is still a long way off, and the market has seemed to price in the scenario that inflationary pressures are transitory in nature, not a long-term risk. Real estate continues to appreciate in value and, in particular, throughout much of the world, residential real estate seems to be benefitting from households re-evaluating their requirements for their own living spaces in the face of COVID, and looking to upgrade their homes before prices get too far ahead of their ability to pay. Commercial and industrial real estate also seems to be benefitting from improved demand, and is continuing to appreciate in value.

It seems that none of the asset price appreciation described above would have been possible without the vast monetary and fiscal stimulus provided by governments and monetary authorities. What remains to be seen is if the vast pool of savings, accumulated by the public during the crisis will be able to take over and grow the economy when the monetary and fiscal stimulus is inevitably slowed.

The COVID-19 Pandemic Emergency

On March 16, 2020, Guardian's senior management decided that it would be prudent to ask all employees to work from home if they could do so. Guardian's Business Continuity Plan (BCP) was initiated and all of our physical workspaces across our operating business units were left almost completely vacated. We are pleased to report that our BCP continues to meet all of our requirements and expectations extremely well, and no significant problems have been encountered. The majority of our employees continue to work remotely, however as of the writing of this report, some of our locations have permitted reduced levels of staff to attend, at their option, based on the guidance of local health officials. Our service to our clients has transitioned seamlessly to remote working arrangements and while we are prepared to sustain such a work arrangement for a prolonged period of time, there are indications that some locations with well vaccinated populations may be permitted to slowly return to a more normal work environment within a matter of months. When the time comes to re-open a location, initially our employees will be allowed to return at their discretion, in consultation with management and Human Resources. Later on, our employees will be asked to come back to our physical workplaces in a phased manner and with some flexibility. At the current time, we mandate that, if allowed by local health officials, attendance at our offices be at a much reduced capacity, and we are prepared to reverse course, if and when necessary. While we look forward to welcoming our colleagues back to our workspaces, we feel it is necessary to approach this return with an abundance of caution on our part, and we are prepared to move back to work from home if conditions warrant such a decision. We extend our thanks to all our employees who are making it possible.

Investment Management

In the second quarter, positive market performance in equities and in fixed-income, and net new inflows across the group, made roughly equal contributions to the growth in our Assets Under Management ("AUM") to $51.6 billion from $47.6 billion in the first quarter.

Returns for the diverse set of asset classes we manage, were broadly positive during the quarter. Strong returns in equities, particularly North American equities, were a positive driver of growth for Guardian's AUM. While our Fundamental Global equity strategy continued to take in the majority of our inflows with new client wins and positive client cash flows, we also experienced modestly positive inflows into our US equity strategies. Canadian equites continued to see redemptions in the quarter, however the outflows were substantially offset by the positive returns in this asset class. Fixed-income generally saw increases, both in market returns, and in positive cash in-flows, in Canada and in the US, as markets had some bounce back from the declines of the first quarter and, clients rebalancing into fixed income continued. Foreign exchange, particularly in the US dollar had a slight negative impact on our AUM.

Among the many investments we continue to make in order to grow our Investment Management Segment, the largest increase in expenditures initiated by Guardian recently, has been our initiative to build a dedicated Canadian retail distribution team. Since late 2019, we have worked to create new investment vehicles to serve the needs of financial advisors and their clients. Our efforts will leverage both the growing ecosystem within Guardian and the deep expertise in manufacturing to create focused solutions that are innovative and meet the changing investment needs of the retail client segment. Similar to our strategy in building GuardCap, our costs will increase as we resource this effort, and these costs will precede meaningful management fees from the new AUM that we plan on gathering. We are very aware that the market to serve the needs of Canadian financial advisors is quite competitive, however, we anticipate that a fresh, innovative approach to creating solutions from a leading independent asset manager will be a welcome entrant into the market. While we plan on garnering AUM for all of our investment management teams, an important part of our goal is to find new markets for our domestic asset management business, which has seen a secular decline in demand from institutions. If successful, Guardian will benefit from growth in AUM and higher average management fees. Our focus for the future is to highlight the best ideas of our asset management teams in as many formats as possible, including; broker dealer WRAP models, mutual funds, exchange traded funds ("ETF"), closed-end funds and insurance- wrapped products. Our near-term goals are focused on developing brand awareness of the concept of our "Prosperity Journey" with its attention to the two main investing phases in life, the accumulation phase and the decumulation phase, represented by our Guardian Create and Guardian Prosper brand positioning. We are also working to capitalize on Guardian's presence in the broker dealer WRAP channel to cross-sell ETFs and mutual funds to those advisors who already are familiar with us, and we are building on and leveraging our presence in the Worldsource channel to drive AUM growth. We have formed a small but growing and capable team to manage this initiative. To date, our team has launched nine ETFs to complement a diverse investment platform of 30 mutual funds we have been managing and, although new client flows are modest to date, we are encouraged with some early adoption into our ETFs, and substantial interest from advisors participating in our online seminars about our products. Our efforts to build this initiative organically is another test of our discipline to identify a strategy, hire the human resource talent, invest in additional operational infrastructure and allocate meaningful seed capital and operating working capital to patiently build out the track record. Patient capital, perseverance and confidence in the execution of the strategy, despite minimal early stage financial rewards, will be key to achieving our long term goals.

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