"Are IFL's earnings affected in the ASX drops overall? Lets say it drops 4-5% during 1st 6 months CY16. What is the imapct (if any) on IFL's earnings? I'm aware how the 9% compulsory super paid into working aussies' accounts compounds very rapidly. But need clarity re the correlation between IFL eps and general mkt index."
@DSD,
Some backdrop to preface an answer to your question:
Essentially, IFL's business model involved the clipping of very small fee tickets (but millions of them every year) on the personal wealth of individuals.
When I look at prospective investment opportunities, I always ask myself three questions:
1) does this company have the right to exist?, 2) does it exist in a privileged manner?, and 3) what prevents it from being dislodged [by whatever force(s)] from its privileged position?
IFL's
right to exist is derived from the mandatory compliance enveloping the private wealth of Australian citizens. The wealth management sector is highly institutionalised and equally highly regulated.
It's
privileged position is derived from both its integrated business nature:
Between the time your employer sends your super contributions to your super fund, until - and including - the conclusion of your financial affairs when you die and your estate is wound up, IFL is levying is small charge on you - fees including super fund administration, compliance, platform management, financial advice, investment management, estate planning, trustee services. And the beauty of the model is that you - the person who actually pays IFL - is blissfully unaware of it, so because wealth management for the overwhelming majority of people is largely out of mind, the fees they pay are relatively painless experiences for them.
Which means that there is almost zero price discovery for the consumer to be able to compare...worse, in fact: most consumers of superannuation products and wealth management services don't care enough to understand their superannuation arrangements, let alone go to all the hassle of researching alternative, and then even more hassle of switching to an alternative provider.
And IFL's ability to
retain this privileged position lies in the scale of the business.
With Funds Under Management and Supervision (FUMAS) now touching $150bn, and Funds Under Management (FUM) of around $50bn, IFL is the 5th biggest wealth manager in Australia, behind AMP, Morgans/CIMB, CBA (Colonial First State) and NAB (MLC). It is very difficult to replicate the systems and infrastructure that handles comprehensive, end-to-end, trans-generational wealth management.
To get back to your question about the correlation between IFL's earnings and the level of equity prices, because about 90% of IFL's revenues are based on a percentage of the Funds it manages, lower equity prices - ceteris paribus - mean lower revenues for IFL.
But that's a bit academic because the company's financial performance has been driven by aggressive consolidation of the financial services sector over the past 8 years, commencing with the merger in 2008 with Australian Wealth Management (AUW), and it has basically made significant acquisitions in every year since then. (In 2008, IFL had some $29bn of FUM; today FUMAS is $150bn... of the difference, about $20bn has been has due to net fund inflows, the balance has been FUM that was essentially acquired).
So financial performance, while it has been impressive (EPS has grown almost 60% since 2008 (the peak immediately preceding the GFC), and has trebled since the middle of the GFC) and a cumulative total of $3.00 in dividends have been declared paid to shareholders, it is difficult to know how sensitive the company's underlying earnings are to actual market movements because the company has been so corporately active.
IFL's EPS and DPS (cps) since merger with AUW
FY2008: 37.9 and 30.0
FY2009: 20.1 and 17.0
FY2010: 42.4 and 35.0
FY2011: 48.4 and 43.0
FY2012: 41.6 and 37.0
FY2013: 46.9 and 42.0
FY2014: 47.5 and 47.5
FY2015: 53.1 and 53.0
So, to answer your question, IFL's earnings are immediately and directly correlated with equity market movements; however, it is a bit of an academic exercise because it is not that evident in the financial performance of the business, which has grown earnings even though the market has been relatively static in the past few years since the GFC.
That's because the real thesis to investing in IFL rests in backing the acquisition savvyness (and the discipline) of the company''s management, as well as the ability to integrate acquired busiensses and fully realise systems and scale synergies.
Ordinarily I balk at roll-up strategies because I think that, in 9 out of 10 occasions, they are poorly executed and destroy value.
I was originally an Australian Wealth Management shareholder and when that company was acquired by IFL, I was wary of the IFL team. My intention was to sell my new IFL shares at some stage.
However, I evaluated the first few acquisitions presided over by Kelaher and his fellow managers, and I was pleasantly surprised, so I decided to remain a shareholder.
My intuition has proven correct, because they have done an impressive job in acquiring a number of businesses very smartly over the years and, most importantly, integrating them well, with the result being a reduction in the Cost-to-Income ratio from almost 70% in 2008, to under 58% today.
The share price, in line, has increased by around 60% in the past five years and 60c in the dollar of the share price back then has been recouped in the form of dividends.
Given the industry is now quite consolidated, I suspect the rate of acquisition will slow in the years ahead, so the growth might be somewhat more moderate.
But with the stock trading on a P/E of some 12 times and a dividend yield of some 6.5%, the share price is not factoring much growth at all, going forward.
(20min delay)