Financial services companies make up a key component of the S&P/ASX 200. Whilst this sector of the index is dominated by the 'Big Four' banks, there are numerous other firms with the potential to generate healthy returns for investors. One such company that has been on my watchlist recently is IOOF Holdings Limited (ASX: IFL).
IOOF provides a range of financial products and administrative services to approximately 650,000 clients, including superannuation, annuities, stock-broking, financial and estate planning and trustee services. Its diversified range of offerings, exposure to Australia's growing pool of superannuation funds and dividend yield of more than 5% should all be positive factors for the company's long-term success.
However, after performing well over the first half of this year (up 20%), IOOF's share price has taken a beating – giving back most of that year-to-date return – after Fairfax Media Limited outlets issued reports of alleged misconduct, front running, cheating by senior staff and misrepresenting performance numbers on some of its funds.
With a Federal Senate inquiry into the Australian banking sector already underway, the allegations against IOOF have been met with renewed calls for a royal commission. According to Senator John Williams, "the dominoes keep falling in the financial services sector. With IOOF the case keeps building for a royal commission." Senator Williams has also called for the Australian Securities and Investments Commission (ASIC) to investigate the latest allegations in relation to IOOF.
What does this mean for IOOF?
Whilst news like this is never pleasant, what does it really mean for investors in IOOF? Now is a good time to re-examine the underlying investment thesis. It was only a few months ago in February 2015 that the company released a bumper set of results to the market. The highlights included:
- Revenues increased to $458.5 million (up 34%)
- Net profit after tax (NPAT) – pre-amortisation – increased to $80.6 million (up 39%)
- Funds under management, advice and administration (FUMA) grew to $118.7 billion (up 26%)
- Underlying earnings increased to 29 cents per share (cps) (up 15%)
- The interim dividend was increased to 25 cps (up 11%)
Since these results, there have been no material changes to the underlying business. In response to the allegations of the past couple of days, IOOF management has issued a statement drawing attention to the company's strong compliance record. It has also responded directly to some of the claims. No doubt there will be more to follow.
Foolish takeaway
In one form or another, IOOF has operated since 1846 when it was formed as the Independent Order of Odd Fellows friendly society. It demutualised in 2002, before listing on the ASX in 2003. Bottom-line: it has been operating in the Australian market for almost 170 years. Furthermore, the company's exposure to the ongoing growth of the Australian superannuation and annuities sector gives it an increasing pool of funds in which to swim.
Whilst any governance concerns should not be dismissed lightly, I believe that the event-driven pullback in share price represents a good long-term entry point for investors thinking about opening a position in IOOF.
