Company Reports

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.

No-moat Insignia Financial’s fiscal 2024 results exceeded our expectations and prior guidance. Underlying net profit after tax grew by 14% to around AUD 217 million against our forecast of AUD 206 million. Slower revenue margin compression and reduced operating expenses drove a stronger-than-expected improvement in EBITDA margins. However, the market focused more on Insignia’s decision to halt its final dividend, which coincided with increased remediation provisions. Concerns about the dividend freeze and potential balance sheet deterioration likely triggered the intraday derating.

Average earnings for the seven asset managers under our coverage—Challenger, GQG, Insignia, Magellan, Perpetual, Pinnacle, and Platinum—will likely improve over the near term to fiscal 2025, but moderate thereafter. This is partly due to our expectations for continuing net outflows, on average. While potentially lower rates in fiscal 2025 could lead to a cyclical flow uplift, any benefits may be short-lived, as asset class rebalancing activity subsides. Given the cohort’s largely average peer-relative returns, we expect their FUM share losses to exchange-traded funds and industry funds to persist. Competitive pressures are also likely to weigh on fees and earnings.

Shares in no-moat Insignia remain materially undervalued relative to our AUD 3.60 per share fair value estimate. Investors appear deterred by margin compression, sluggish flows, restructuring challenges, and deteriorating debt coverage.

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.

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.