Ann: ANZ Wealth Management updated financial information, page-11

Interesting analysis, @Transversal.

While it - from a valuation theory standpoint - might be correct, there are some aspects of it that warrant some qualification.

For starters, you calculate a ~24% reduction in FUMAS translating to a wipe-out of Gross Profit, and then later you refer to a 24% fall in equity markets being within the realms of possibility.

But - as you say - listed equities represent only around half of IFL's FUMAS, so it would require a far greater fall in the value of equity markets than just 24% (probably closer to double that, all other things held equal... which might not necessarily be the case, anyway, given the uncorrelated nature of equity and fixed income markets. If equity markets halved in value for whatever reason, you can be assured that bonds and bond proxies will be off to the races.)

So, besides the effective "double-counting" of equities as a direct determinant of FUMAS- driven earnings, you have also overlooked the natural hedges inherent in IFL's FUMAS, as a function of uncorrelated asset classes.


Also, what is overlooked is the mandated fund flow into IFL's stable of platforms and funds, which, to some extent, softens the blow of falls in equity values.


And then, of course, there is IFL's propensity to acquire FUM well and cheaply, something which plays more into its hands when capital markets are under pressure, than when they are booming. In fact, I have head Kelaher expressly articulate that they kinda prefer tough market conditions, as opposed to firm markets, because that's when the vendors of businesses, that IOOF is looking to acquired, tend to become more distressed.

(As a case in point, the very reason I am an IOOF shareholder today is because my shares in Australian Wealth Management were acquired by IOOF during the throes of the GFC... too cheaply, I hasten to add!)

There is some precedent to test your hypothesis of IFL's leverage to equity market moves:

1. The GFC (2008-2009).
In this case, the market fell by some 26% over the course of FY2009; yet IFL, Underlying NPAT was just 11% lower (of course, this is clouded a bit - not a lot, but a bit - by the fact that the Australia Wealth acquisition was consummated on 13 May, 2009, so it contributed to around 7 weeks of the FY2009 result).
But still, even if you strip that out, the leverage is not that pronouced.

2. The Greek Dent Crisis (2011-2012)
During this period of debt contagion scares, the equity market fell by around 12% over FY2012. IFL's underlying NPAT fell by 14%.

So, while the theory might indeed point to 4-to-1 leverage, like so many aspects of business, practice seldom works like theory says it should.


But I do agree whole-heartedly with you that IFL is a derivative of the overall level of valuations of listed securities. Which is one of the very reasons that I own shares in the company.

But where I do adopt an opposing position to you is in investing on the basis of contemplating the possibility/probability of market corrections, and viewing IFL as an investment, through that lens.

While such adverse market events undoubtedly impact IFL's profitability when they occur, I have long learnt that trying to anticipate, or predict, market movements is virtually impossible, with the exception of the long-term, where the direction is inexorably gradually upwards.