Company Reports

This note replaces the original version that accompanied our report "Industry Pulse - Australian Asset Managers: 2024 Q1," published March 14, 2024. We were recently made aware of inaccuracies in the net flow data for certain unlisted managers in that original report. As for our investment conclusions, we stand by our key assessments: the fair value estimates, moat, uncertainty, capital allocation, and star ratings for our Asset Manager coverage.

We recently published our inaugural Industry Pulse: Australian Asset Managers 2024 Q1. It has come to our attention that some the detailed industry data we presented may not be accurate, namely around asset manager inflows and outflows. As far as our investment conclusions are concerned, we stand by our key assessments, namely the fair value estimates and moat, uncertainty, capital allocation, and star ratings for our asset manager coverage. Key data for the companies we cover is captured separately and directly from the relevant companies, and we have no reason to believe it is incorrect. However, while we investigate to confirm the accuracy and presentation of the detailed underlying data, we have retracted the report from our products. We will seek to reissue a corrected report, along with an explanatory accompanying note, as soon as practical.

Share prices of ASX-listed asset managers fell for most of 2023 but broadly rebounded late in the year in anticipation of lower interest rates. Stabilizing interest rates generally enhances investor risk appetite, thus boosting fund flows, asset prices, and earnings for asset managers. Globally, net annual fund flows into open-ended, money market, and exchange-traded funds turned positive in March 2023 after close to six months of net outflows. This reflects a stabilizing US federal-funds rate and an increased likelihood of rate cuts in 2024. In Australia, the prospect of cuts in the Reserve Bank of Australia’s cash rate in the near term is likely positive for flows into Australian-domiciled funds—consisting of ETFs, industry funds, and active managers.

Insignia Financial (formerly IOOF) adopts a multibrand business model. This helps it appeal to a broader set of clients and was effective in alleviating reputational damages stemming from the 2018 Royal Commission. Since then, tighter compliance and operating standards have been enforced. Insignia is also restructuring its advisor network, intending to increase the proportion of salaried advisors within its network, as this helps the firm extract higher gross margins.

Insignia is delivering larger-than-expected cost savings, giving us greater confidence in long-term margins and driving a 6% increase in our fair value to AUD 3.60 per share. First-half fiscal 2024 underlying net profit after tax grew 1.2% from the previous corresponding period, beating the modest decline we had anticipated. Costouts are the main driver. The advice business turned EBITDA profitable, and corporate expenses were also considerably lower than expected. Slower fee compression in platforms and investment products also contributed. The annual cost/income ratio fell to 74.9%, below our prior forecast of 78.5%.

Our conviction in the thesis for listed wealth managers, asset managers, and their related service providers has strengthened after gathering insights from the recent 2023 Super & Wealth Summit, hosted by the Australian Financial Review. These firms are influenced by similar business drivers and industry trends. Most derive their revenue from funds under management and/or administration, or FUMA, which are driven by asset price movements and new fund flows from clients, and management fees or commissions on these FUMA.

We lower our fair value estimate for no-moat Insignia to AUD 3.40 per share from AUD 3.60, after increasing our projected net outflows. This follows Insignia’s funds under administration and management update for the first three months of fiscal 2024. Net outflows were AUD 1.4 billion, already surpassing our prior full-year forecast of AUD 1.2 billion. Of this, around AUD 1.2 billion was redeemed from its older MLC Wrap product.

Insignia Financial (formerly IOOF) adopts a multibrand business model. This helps it appeal to a broader set of clients and was effective in alleviating reputational damages stemming from the 2018 Royal Commission. Since then, tighter compliance and operating standards have been enforced. Insignia is also restructuring its advisor network, intending to increase the proportion of salaried advisors within its network, as this helps the firm extract higher gross margins.

IOOF adopts a multibrand business model. This helps it appeal to a broader set of clients and was effective in alleviating the Royal Commission reputational damage. Immediate priorities include setting a higher bar for advice quality and restructuring the advisor network. Tighter compliance and education requirements are enforced to ensure high operating standards. IOOF also intends to increase the proportion of salaried advisors within its network, as this helps the firm extract higher gross margins.

IOOF adopts a multibrand business model. This helps it appeal to a broader set of clients and was effective in alleviating the Royal Commission reputational damage. Immediate priorities include setting a higher bar for advice quality, with restructuring the advisor network a longer term goal. Tighter compliance and education requirements are enforced to ensure high operating standards. IOOF also intends to increase the proportion of salaried advisors within its network, as this helps the firm extract higher gross margins.

IOOF adopts a multibrand business model. This helps it appeal to a broader set of clients and was effective in alleviating the Royal Commission reputational damage. Immediate priorities include setting a higher bar for advice quality, with restructuring the adviser network a longer term goal. Tighter compliance and education requirements are enforced to ensure high operating standards. IOOF also intends to increase the proportion of salaried advisers within its network, as this helps the firm extract higher gross margins.

IOOF adopts a multibrand business model. This helps it appeal to a broader set of clients and was effective in alleviating the Royal Commission reputational damage. Immediate priorities include setting a higher bar for advice quality, with restructuring the adviser network a longer term goal. Tighter compliance and education requirements are enforced to ensure high operating standards. IOOF also intends to increase the proportion of salaried advisers within its network, as this helps the firm extract higher gross margins.

Narrow-moat IOOF Holding’s fair value estimate remains AUD 7.30 per share despite the steep drop in underlying net profit after tax, or UNPAT, in the first half of fiscal 2020. The fall was mainly due to lower interest received as part of the agreement to acquire the Australia & New Zealand Bank’s Pension and Investment, or P&I business. P&I was acquired on Jan. 31, 2020, and we expect this business to drive strong future underlying UNPAT growth of about 8% per year to fiscal 2024. P&I materially increases IOOF’s scale, with its platform and administration business now the fifth-largest in Australia and its advisor network the second-largest. P&I also increases the IOOF’s reach into the employer superannuation market, which benefits from younger employee members still in accumulation phase.

We raise our fair value estimate for IOOF Holdings to AUD 9.70 per share from AUD 9.20 following a better-than-expected fiscal 2017 result, primarily due to a strong operational cost performance. Other key operational trends over the year were broadly in line with our expectations with strong funds flows of AUD 4.6 billion up 156% on the prior year and a lower gross margin down 3 basis points to 0.48%, though the margin was held steady over the second half. Fiscal 2017 was a transitional year for IOOF as it implemented the “ClientFirst” strategy, cycled through the impact of the lower margin MySuper product, and rationalised investment platforms. This saw a largely flat underlying NPAT of AUD 169 million though the fully franked final dividend was AUD 1 cent higher at AUD 27 cents per share. IOOF shares are trading around 10% above our fair value estimate.

We transfer analyst coverage of IOOF Holdings. We reduce our fair value estimate to AUD 9.20 per share from AUD 10.00 on lower funds under management, advice and administration, or FUMA, growth assumptions. As part of the transfer of analyst coverage, we have also reviewed IOOF’s other key data points. Our fair value uncertainty rating is lowered to medium from high as it better reflects the company’s diversified, vertically integrated wealth management business. We maintain narrow moat and Standard stewardship ratings. At current levels, IOOF shares trade around 8% below our fair value estimate.

Our fair value estimate for narrow moat-rated IOOF Holdings is lowered to AUD 10.00 per share from AUD 10.30 following a weaker-than-expected interim fiscal 2017 result and softer near- to medium-term earnings forecasts. Good net flows and growth in funds under management and administration, or FUMA, and tight cost control were more than offset by a lower gross margin across all wealth businesses. Gross margin contracted four basis points on first-half fiscal 2016 and three basis points on second-half fiscal 2016 to 48 basis points. This saw underlying net profit after tax, or NPAT, excluding divested businesses fall 15% to AUD 79.4 million. The fully franked interim dividend was held steady on the 2016 final at AUD 26 cents but was down AUD 2.5 cents from the 2016 interim.

We have lowered our fair value estimate for narrow moat-rated IOOF Holdings by 6% to AUD 10.30 from AUD 11.00 per share following a review of our earnings forecasts. A softer-than-expected funds flow update for the September quarter and a reassessment of our funds under management and administration, or FUMA, growth assumptions has seen our fiscal 2017 underlying net profit after tax cut by 4.0% to AUD 173.5 million. Our forecast five-year compound annual growth EPS declines to 3.9% from our previous forecast of 4.7%.

We have transferred analyst coverage of IOOF Holdings. We reaffirm our current forecasts, DCF-based fair value estimate of AUD 11.00 per share, and narrow moat and high uncertainty ratings The stock is currently trading at nearly a 19% discount to our current fair value, and in our view, the stock is undervalued. We forecast a five-year CAGR in EPS of 4.7% to fiscal 2021.

We make minor downward changes to our forecasts and maintain our AUD 11 fair value estimate following narrow-moat IOOF’s fiscal 2016 result. Although profit met our expectations, up 1% to AUD 171.3 million, shares in IOOF fell by over 8% following the release of its results. We believe the market is growing increasingly pessimistic around the firm’s platform earnings, following a 6% decline in the division's profitability during the year. While we acknowledge headwinds from fee pressure, at the current share price, we believe IOOF is undervalued. The vertically integrated model and strong industry tailwinds of the Australian superannuation system should support growth in FUM and demand for advice. While stronger equity markets remain important, we anticipate a rerating in the share price, stemming from earnings results indicating that margin pressure in platforms is being more than offset by growth in funds under administration, or FUA; stronger inflows across all divisions; and no large client losses.

The market reacted negatively to IOOF’s fiscal 2016 update, with the share price down over 7%. IOOF expects underlying NPAT of AUD 173 million-AUD 176 million, broadly in line with AUD 173.8 million last year. While only 2%-3.7% below our AUD 179.6 million forecast, guidance is 4.4%-6% below consensus. Revenue is being affected by weaker equity markets; this hurts the value of funds under management, advice and administration, or FUMA. We estimate that so far during second-half fiscal 2016, the ASX All Ordinaries Index has on average been 10% lower than the average for second-half fiscal 2015. While Australian equities represented only 39% of FUMA as at Dec. 31, operating leverage within the business accentuates the impact of lower revenue on the bottom line. Gross margins and operating costs are reportedly unchanged in second-half fiscal 2016 from first-half fiscal 2016. Our narrow moat rating, underpinned by brand and switching costs, is unchanged.