@madamswer
For the avoidance of confusion, let me clarify a few things:
1) I do not
expect a 24% drop in FUMAS; I merely quantified that as the approximate amount that would, on a constant assets basis, nullify IOOF’s EPS.
2) At no point did I say that a 24% drop in equity prices would automatically translate into a 24% drop in FUMAS.
3) I also made no comment about the likelihood and/or the timing of a possible fall in equity prices, be they Australian or international.
and, most of all
4) I am
not trying to kick off a discussion about short-term market movements.
On the contrary, the purpose of my post was to analyse and quantify a source of structural volatility in IOOF’s earnings, namely that source of earnings volatility that Management have little or no control on, i.e. FUMAS mark-to-market risk.
On that basis, my present position is that I feel somewhat uneasy paying a 11.0-12.0x 2-year forward PE for IFL, when a 10% drop in the market value of FUMAS
has the potential (everything else being the same) to erase some 40% of NPBT.
That has nothing to do with market timing, or with investing on the basis of forecasting the unforecastable, it is merely a margin of safety consideration.
Nonetheless, as I do appreciate the asymmetry of the risk reward inherent to IOOF, as well as the additional upside coming from (in no particular order):
1) Correlation between asset classes (or lack thereof) [*]
2) Impact of mandated fund flow
3) Skill of Management in making the right acquisitions
I have decided that I feel comfortable enough to take a synthetic long position on the stock via a derivative, given that:
a) The derivative looks cheap enough (not relative to the historical behaviour of the IFL share price, but relative to the structural mechanics of the Company’s earnings), and
b) It also affords me the time to dig deeper into the Company’s financials, without the risk of missing out in the event that I decide to buy into it and the share price starts running away.
[*]: I do appreciate your historical data, pointing to the limited impact of GFC/Greece on IFL’s NPAT; thanks for that.
What I think is worth pointing out, in that regard, is that nominal AUD bond yield entered those crises at a much higher level than they are today; therefore, the cushion provided by the fixed-income component of FUMAS (negative correlation between bonds and stocks) back then was a lot more effective than it could possibly be right now.
And, of course, a possible spike in long-term nominal yields (in which I am not a believer, as you know from previous discussions, but which is nonetheless a possibility) could cause both bonds and equities (and property) to fall, in which case cross-asset correlation would actually work against IOOF.
(20min delay)
