Short Positions Increasing, page-26

@andy777,

I can't add much value here, I'm afraid, because I don't pay much heed at all to these sorts of updates about what is happening on a quarter-by-quarter basis because I find that to be too short a time frame to be indicative of anything meaningful.

But I think you have, in your post, identified the underlying investment thesis for IFL; and in its very essence, it is a very simple one, namely:

A few hundred basis points (maybe, 2% or 3%) of fund inflows plus each year, plus a few hundred basis points (7% to 8%) of market movements each year, being partly offset by fee pressure of 3% or 4% per year, with the result being structural, organic growth in Revenue of around 6% or 7%pa.

Now, given the highly scale-able nature of the business model, this means the cost base is relatively fixed, and therefore not subject to much inflationary pressure.

So, when you apply this circa 7% organic, top-line growth to the inherent business's operating leverage, it delivers bottom-line earnings growth of around 9% to 12% per annum.
[Over the 6-odd years that I have owned IFL - and that hasn't exactly been an exciting time for equity markets - EPS growth has averaged a compound annual growth rate of 12% pa, and DPS growth has been around 10%pa.]

(Sure, some years, FUM flow might be lower or higher than others, some years market movements might be lower or higher than the average, but really, what you have here is a business that is in a space where EPS of 10%pa is eminently-achievable, without any required recourse to shareholders, simply due to the mechanics of the industry combined with the nature of services IOOF provides.)

So you've got a business where, over time, 10% pa EPS and DPS growth is essentially almost underwritten.

And then, as cream on the top, once in a while the company makes an acquisition whereby it has demonstrated the ability of being able to directly bolt on the almost all of the Revenues of the acquired business, but virtually none of its Costs. The result is a step-function upwards change in the EPS trend line.

In a nutshell, by investing IFL, you are buying into structural, organic EPS growth of ~10%pa, with an acquisition boost to 15%pa every now and then.

And personally, I don't give my investment in IFL much more thought than that.



PS. I think it is noteworthy that fund inflow in the past 12 month of some $1.8bn is the second-highest level on record for the company (despite the uninspiring state of investment markets over the 12 months ending in June 2016).

This impressive performance has occurred in the immediate wake of the "financial services scandal" that the media was howling about a little over 12 months ago, which culminated in nothing less than a Sam Dastyari-led Senate Inquiry whose findings were unable to bring about any formal sanction, other that for IFL to say that they are always trying to do things better.

Indeed some posters on these very forums claimed that the events mid-2015 were going to have significant adverse effects on the IOOF brand, as well as serious ramifications on the financial performance of the company.

In fact, some were even predicting civil law suits were likely to be filed against the company, as laughingly churlish as that might sound.