Short position: IOOF (IFL), Market Cap $1,880mIOOF (IFL) is a diversified financial services company. It provides financial advice, platform management and administration services, investment management products and trustee services to retail and wholesale customers.IFL has been a long term short for us, having first opened the position midway through 2015. The initial investment thesis, which comprises two parts, still holds today. Firstly, the underlying IFL business has been ‘ex-growth’ for many years. As such, IFL has relied on growth via acquisition to mask the lack of organic growth, whilst simultaneously cutting costs heavily and underinvesting in its core IT systems. Secondly, we regard the IFL business model as structurally flawed. We believe there is an extremely clear conflict of interest for a provider of independentfinancial advice to consistently recommend the sale of investment products which they themselvesmanufacture over competing offerings.Fast forward to today and despite the equity having nearly halved, we have increased conviction in our IFL short. The company is facing unprecedented headwinds across all parts of its business, largely stemming from the two structural issues discussed above. The company’s platform business is exposed to fee pressure from incumbents with superior IT systems, whilst their vertically integrated strategy has beeneffectivelylabelled as “conflicted advice” by the Financial Services Royal Commission. Furthermore, following pressure from the prudential regulator five of IFL’s business leaders (including the Chairman and Chief Executive Officer) have resigned, the company’s financial advisers are leaving the group en masse, and the firm’s brand has been irreparably damaged by the public briefings held during the Royal Commission.In addition to these headwinds, the company has dramatically underprovided for remediation, guiding for payments required for charging for bad or no advice in the range of $5 to $10 million. Macquarie research estimates the potential liability to be up to $608 million. With the company facing these headwinds, we see declining earnings and a forced cut to the dividend.IFL was a material contributor to the Fund’s positive return in 2018.
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