In an investment research report issued on Wednesday, research house Morningstar praised a number of IOOF’s company profile characteristics, arguing that its vertically integrated business model has distribution benefits that will positively impact shareholders.
“An integrated business model allows the firm to clip the ticket multiple times, at the adviser, the platform and fund manager level,” the report states. “This provides an advantage in the manufacture and distribution of products, crucial when competing for fund flows”.
IOOF’s vertically integrated structure is “a major strength” from the perspective of shareholders and prospective investors, Morningstar’s analysts suggest, as “aligned planners have a natural inclination to IOOF platforms, which contain IOOF investment funds” thereby opening up avenues for greater overall fund flows.
However, the report also suggests that IOOF fund manager Perennial Investment Partners may not be currently benefiting from this “natural inclination” towards the in-house product.
“IOOF uses its advisor and platform businesses to funnel money into its investment management subsidiaries … but despite strong distribution capability, investment performance is crucial,” it states.
In 2011 and 2012, Perennial’s Value Australian Fund “significantly underperformed its peer group” which resulted in “reducing the value of existing [funds under management]” as well as “discouraging advisers allocating new money”, the report suggests.
“We are encouraged by improved performance recently,” the report adds, “but IOOF continues to lose mandates as it begins to rebuild confidence.”
The report also reveals that Morningstar analsysts “expect [the proposed takeover of SFG Australia] to be approved” and argues that the company’s merger and acquisition activity is a contributing factor in its competitive advantage.
However, the “underperformance” of IOOF’s share price – relative to ASX wealth management peers – is attributed to “uncertainty around shrinking platform management fees”.
