While such adverse market events undoubtedly impact IFL's...

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.

@madamswer

Yes, I do agree that markets go up in the long run, and do so in an inflation-beating way as well (if for no other reason than positive long-term real growth in the economy).

My point is that, when it comes to determining what a fair PE multiple is for a business, and the “E” is an explicit function of where the market is (because the business itself is a capital market derivative), you want to make sure that such E is not too far “from mid cycle”, which in this case means “from fair value”.

Which is where broad market valuation comes into play.

I do also agree with you that there currently are pockets of value at the large-cap level in the Australian market (so much so that one of the companies in your “reasonably valued” list is my single largest holding, as you know) but, because we are looking at a large pool of assets, the safest assumption is that the equity component of FUMAS broadly resembles the major equity index.

Looking at the ASX200 (on a trailing-twelve month basis), the PE I presently see is more like 16.5x, which is certainly not outrageous, but still above average. Yes, if you adjust it for the level of interest rates you can argue that it is actually "fair", but by saying that you are implicitly assuming that bonds are overvalued, and Fixed Income is part of FUMAS too. So the argument is a bit circular.

But, when it comes to International Equities (which represent some 25% of FUMAS), I think there is no doubt that we are currently in overvalued territory, given that US equities typically hold the lion’s share and that the SP500 is trading at a PE of above 20x at a late stage of the cycle. The same applies to Australian Property, whichever value metric you use for it (my favourite is Rental Yield Spread to Bond Yield, but you can pick whichever you like, really).

So, when it comes to valuing IOOF’s stock, I guess the main question is whether the current PE multiple provides enough margin of safety against the fact that the “E” presently is (in all likelihood) above “mid-cycle” levels.

On a 2-year forward basis, a multiple of 11.0-12.0x is still below the corresponding PE for the ASX200, but not significantly so.
Then of course you have the positive impact of likely future fund inflows, possible synergies from the ANZWM acquisition, etc.

It is not a straightforward one, in my mind, and I will keep looking into it. In this regard, an important factor for me is what portion of the “revenue from financial advisory services” is actually expressed as a percentage of FUMAS.

Reading from page 78 of the 2017 AR:

"The IOOF Group provide management services to unit trusts and funds operated by the IOOF Group at normal commercial rates.
Management and service fees earned from the unit trusts and funds are calculated based on an agreed percentage of the respective funds under management or administration as disclosed in the respective product disclosure statements, and are recognised on an accruals basis.
Management and service fees revenue from the provision of financial advisory services together with revenue from the rendering of services are recognised at the time the service is provided."

So, it doesn’t explicitly state that the revenue from advisory services is derived as a percentage of the corresponding FUMAS. Looking at the evolution of Gross Margin and Net Operating Margin over time, I am inclined to think that the majority of it actually is, but if anyone else sees differently I am happy to be proven wrong.

Thanks in advance to all contributors for any further thoughts on the topic (and a good weekend to everyone).