"Just shooting the breeze here, but there is probably a bit of competition in fees between retail and industry funds, and IOOF is having to continually do "cost outs" just to stay still. The other comment that Chris made was that he has never seen so much M&A in the sector. Ho made the point that businesses phone up IOOF wanting to sell to them. Industry consolidation, once it reaches a tipping point will reduce the margin pressure, but I suspect that will be at least 5 to 7 years away. IMO, it will take that long before rational pricing resumes."
Ongoing fee pressure is simply what you get in this industry. And I think if you want to invest in a business that operates in this space, then you need to accept that is the case and that it will be a feature of the landscape for many years to come.
I take it as being a constant.
Naturally, when markets are rising, it masks this fee pressure. But when markets do nothing, as they have been for the past few years, then the margin slippage appears at the bottom line.
To that end, I think that IFL have done stellar job at not only preserving profitability, but increasing it, over the past few years in the face of equity flat markets and the structural decline in fee levels.
Of course, this has been achieved on the back of acquisitions that have offered synergies, the magnitude of which were able to more than offset the Gross Margin pressures.
Given IFL's demonstrated ability to acquire prudently, and to achieve and bank the synergies that are identified at the time of the making of the acquisitions, in a perverse way my desire as a shareholder is for these secular industry headwinds to remain in place, because that inflicts more pain on sub-scale industry participants, which plays into IFL's consolidation strategy, ostensibly with moderating vendor expectations.
Something which is, I believe, informed very well by the fact that IFL's final dividend was reduced despite the company being essentially debt-free. The board is clearly keeping some powder dry for what it reasonably anticipates to be a smorgasbord of acquisition opportunities in coming years.
As an aside, I believe that one of the sources of businesses that IFL will be able to acquire is from the major Australian banks. With increased regulatory capital pressures in their core banking businesses, it would not surprise me to see the major commercial banks start to exit some of their wealth management and related back office businesses before long, which they think might be ex-growth and in need of increasing management attention and focus.
As a case in point, ANZ's recent appointment of a CFO who has no banking experience, but a lot of corporate transaction and investment banking experience, is a leading indicator of what is to come from the major banks, I think, in terms of divesting certain non-core businesses (although, to be fair, in ANZ's case, this appointment has just as much to do with unwinding the half-pregnant Asian foray. but still ....).
Therefore, just as IFL today looks vastly different in scope and stature as a business than it did 5 years ago, I am sure I will look back in 5 years' time at today, and I will be saying the very same thing.
However, I don't think the market fully appreciates much of this, because the market - in its infinite wisdom - is far more pre-occupied by whether the financial result in any given 6-month period comes in a few points above or below "analyst expectations".
IFL Price at posting:
$8.60 Sentiment: Buy Disclosure: Held
(20min delay)
