Ann: Investor presentation - IOOF FY 2018 results, page-164

@thunderhead1

In a nutshell my updated thinking is that, when one operates in a regulated industry, they have to be able to maintain a constructive relationship with the regulator.

Not being able to do so has obvious and very serious negative repercussions on one’s ability to preserve/attract funds, and therefore maintain/grow revenues. This is irrespective of all other regulatory changes that are about to hit the industry.

While I thought I had appropriately factored in the possible economic impact from various prospective regulatory changes, in my valuation of IFL, I hadn’t quite appreciated how damaged the relationship between APRA and IOOF was. Therefore, as things currently stand, my original investment rationale no longer applies. Accordingly, I have reduced my relatively large holding in IFL, locking in a big loss.

As to what to do going forward: having read through APRA’s documents (Show Cause Notice and Concise Statement) over the weekend, I have formed the view that a) APRA’s case is a bit weak (this is just my very personal and possibly biased/flawed opinion), but b) letting this go to court still doesn’t sound like a great idea.

So, while I welcome the fact that the Company has taken some immediate steps to rectify the situation, I feel that what IOOF should really be focussing on right now is how to repair their relationship with APRA as soon as possible.

If they can somehow manage to do that, then I see the shares as being unquestionably cheap, regardless of whether the ANZ acquisition goes through or not. But, if they can’t, then I see the Company as being under serious existential threat.

Since I do respect Management’s track record of value creation for shareholders, and given that they have plenty of skin in the game to incentivise them, I will personally give them a chance to sort this mess out; hence why I have decided to stay in, albeit with a reduced size.

Cheers