Ann: Investor presentation - IOOF FY 2018 results, page-91

@rcs1359,

Thanks for posting your thoughts. Much appreciated.

The problem I am having - as is often the case - is that I am not a very visceral investor, leaning instead to a need to deal in quantifiable metrics. In doing so, I find that I can very seldom gauge, or anticipate, market sentiment.

So when someone says something, as you have, namely:

"I cannot say what the recommendations will be from the RC, but you would have to think that the amount of regulation of super fund trustee service providers will have to be increased, with greater emphasis on ensuring that the primary obligation is to the best interests of the fund beneficiaries not shareholders. That is a pretty fundamental requirement of the fiduciary duties owed by a trustee. One would assume that will have some impact on profitability."

...I have no doubt that you are correct.

And I also have no doubt that this is the very line of thinking that will drive sentiment for the stock over the near- to medium-term.

So I don't see the IFL's share price going up any time soon (certainly not for the next 6 months because that's how long it is going to take for the negative sentiment to change, if at all).

But the issue for long-term investors should not be on the state of market sentiment at any given time, but on cold, hard financial performance numbers over time.

To that end, some context around IOOF's Trustee Service business, which is where the focus of the RC appeared to be (and where, I emphasise that - as a shareholder - I am deeply disappointed with some of the practices conducted by my company):

For the past financial year, IOOF Group Revenue was in excess of $900m, and Underlying Net Profit After Tax (UNPAT) was $191m.

Trustee Services, for its part, reported $38m of Revenue (4.1% of Group), and $9m of UNPAT (4.7% of Group Total).

Once the ANZ Wealth business is annualised in IOOF's financials (which will take UNPAT to somewhere around $300m). Trustee Services will, at that stage, represent just 3% of Group UNPAT,

IFL's Trustee Services business is therefore rather insignificant in the scheme of things currently, and is about to become even less significant in the next 18 months.

And remember, IOOF's Trustee Service business is not only exclusively focused in-house; it also provides trustee services to other external organisations (in fact, while I don't know for certain I'd wager that the overwhelming bulk of IOOF's trustee service business is conducted with external parties.

So, even in the unlikely scenario that the government forced IFL to shut down its Trustee Service business in totality and the adverse impact on the company's profitability would probably be of the order of magnitude of one or two percent, which is probably within the margins of normal forecasting error.

It strikes me that this might be a case of a very small part of the company that is causing the bulk of the negative publicity, which in turn is causing the soured sentiment to the business.


I don't know how you eliminate these problems when the law allows trustee services to be provided by publicly listed companies whose primary focus is profit for shareholders. That, to my mind, is an anathema to the basic and fundamental nature of the trustee/ beneficiary fiduciary relationship. It is why I have always avoided IOOF and AMP, which are enterprises that I think should operate as member owned mutual funds, rather than shareholder owned profit centres. Talking about acceptable rates of return is not something that sits easily with trusteeship and acting in the best interests of beneficiaries.

Yes, I also don't know how these sorts of problems are are able to be eliminated entirely; I'm not sure anyone does. All that we, as a society, can collectively do is to try to continue to improve, and to implement meaningful incentives for improvement and punitive measures for instances of misconduct.

As for wealth managers operating as member owned mutual funds, I note that they used to, but I recall there being oversight problems (and cases of wholesale fraud) under that arrangement, too. Indeed, one of the motivations for de-mutualisation, at the time, was that it would provide greater oversight independence and governance transparency.

As for "Talking about acceptable rates of return is not something that sits easily with trusteeship and acting in the best interests of beneficiaries" , you are probably right, but what are the alternatives? If one want to receive a professional service, such as trusteeship, then one has to pay for it, unfortunately. It is simply a cost of an affluent society.


"Having said all that, you may well make money in the short term buying IFL given the low price it has fallen to."

On this I disagree with you; given the prevailing adverse "sentiment", I am almost certain I won't make any money buying IFL in the short term.

But as for the long-term prospects, I am strongly looking for some quantifiable factors that will prevent the stock price to be restored to what I believe is fair fundamental value.

What I see and hear aplenty is about how bad this all is, how poor the industry has conducted itself, how poor IOOF's culture appears to be, and how poor the attitude of IOOF's CEO was at the RC; and, consequently, how the authorities are going to come down hard on the industry.

But I see nothing - and, believe me, I'm looking very hard because of the investment I have - that allows me to quantify the likely financial damage IOOF is likely to suffer.

In other words, the question I think that that investors should be asking themselves is:

Given that the value of the company has fallen dramatically in recent months, how does that compare with the actual value-at-risk?



PS. You make mention of IOOF in the same context as AMP. For a host of reasons, I believe AMP to be a vastly inferior business to IOOF, so any grouping of these two organisations together, other than that they both happen to be players in the "wealth" industry, is something that has much validity.