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Media storm hits IOOF
A series of serious allegations against IOOF Holdings in Fairfax newspapers have smashed the wealth manager's share price.
By James Carlisle ·
22 Jun 2015 · 3 min read
IOOF Holdings Limited - IFL
up to 14.50
above 14.50
BUY at $9.17
$3.70 at 16:40 (15 January 2021)
Price at review
$9.17 at (22 June 2015)
Max Portfolio Weighting
Share Price Risk
A series of revelations about compliance failures at IOOF Holdings over the weekend have sent the stock crashing 14% today, taking it well below our buy price.
The 'expose' certainly doesn't make for happy reading. Documents and whistleblower accounts obtained by Fairfax apparently reveal evidence of insider trading, front running, preferential share allocations and exam cheating. In most cases the alleged compliance breaches appear to have been reported to internal compliance officers, but their responses seem to fall short: profits from insider trading were apparently required to be donated to charity, for example, without the relevant incidents being reported to regulators or police.
Details about the allegations, however, are scant and the perpetrators' intentions would make a big difference to their level of wrongdoing. Many of the allegations are also many years old and relate to a period before current chief executive Chris Kelaher took charge following the reverse takeover by Australian Wealth Management. That doesn't make them any less serious, but it does make them less likely to reflect the current culture at the company.
Noting that the allegations follow serious misconduct at other financial services companies, notably Commonwealth Bank, NAB, ANZ and Macquarie Group, Fairfax newspapers are calling for a Royal Commission into the finance sector. We'd say the financial sector is always ripe for a Royal Commission, and we'd welcome one now – but sadly that's because the behaviour described at IOOF is all too common across the industry.
The allegations may also result in specific investigations into IOOF by ASIC. And in a large financial organisation they'd be likely to find some breaches. Overall, though, we continue to have confidence in the current management of IOOF and don't think the recent allegations are likely to have much of an impact on the company's long-term profit potential. The company has made an announcement noting that to the best of management's knowledge 'none of the issues raised in the article will cause any loss to any IOOF client, past or present' and that 'all the issues raised have been appropriately dealt with at the time'.
There is, however, a small risk of reputational damage arising from the allegations and any fallout from them, and for this reason we're going to widen our required margin of safety for the stock and drop our Buy price down from $10.00 to $9.50 (and our Sell down from $15.00 to $14.50). With the price dropping 14%, however, we think this is an excellent opportunity and we're upgrading to BUY.
Note: We're buying 2,000 shares in IOOF in our Growth Portfolio and adding 700 shares in our Income Portfolio at $9.17, for consideration of $18,340 and $6,419 respectively. This takes the weightings from 0% to 4.7% in the Growth Portfolio and from 2.9% to 5.5% in our Income Portfolio. To maintain cash levels we're going to sell our entire holdings of 800 Austbrokers in the Growth portfolio and 500 in the Income portfolio at a price of $9.10 to raise $7,280 and $4,550 respectively.
IMPORTANT: Intelligent Investor is published by InvestSMART Financial Services Pty Limited AFSL 226435 (Licensee). Information is general financial product advice. You should consider your own personal objectives, financial situation and needs before making any investment decision and review the Product Disclosure Statement. InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share. All indications of performance returns are historical and cannot be relied upon as an indicator for future performance.
James Carlisle
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