Some members are excited for retirement, while others approach it with a “real sense of shame and fear”. Funds are going to have to figure out how to cater to both groups or risk failing them all.
If there’s one lesson for investors from the past five years, it’s that chopping and changing their strategy – even in the face of massive market turmoil – doesn’t always pay.
IOOF, that ‘scandal’ and the Perpetual rumour
by Greg Bright
IOOF, a 160-year old diverse financial firm built up in recent years largely through takeovers, has had its ups and downs. An increasingly mooted potential merger with 120-year-old Perpetual Trustees, which has had a more conservative growth trajectory, makes a lot of sense. But first, to that ‘scandal’.
Dominic McCormick, a researcher and portfolio manager who co- founded Select Asset Management – now a part of OneVue – in 2002, has written two detailed reports on the IOOF allegations as raised in the media last year and which led to a senate inquiry and ASIC ‘review’. McCormick is now a consultant to Select.
His most recent report was published last week by Graham Rich’s Portfolio Construction Forum newsletter as a follow-up to McCormick’s piece published last year. Both are highly critical of the role played by Adele Ferguson of the Sydney Morning Herald in particular, and the politicians, such as senator John Williams, in the investigations surrounding the incidents in question. McCormick claims Senator Williams is a “close friend” of Adele Ferguson’s.
Around the middle of this year ASIC concluded its review by a markets surveillance team and found that there was nothing that warranted a formal investigation. But, as McCormick points out, by then the damage had been done.
McCormick says in his latest report: “The most serious Fairfax allegation was that Peter Hilton was “insider trading” and “front-running” by trading in securities prior to the release of IOOF research reports on those same securities. “The regulator’s statement on July 8, 2016 said: ‘ASIC’s market surveillance team completed a thorough review of the trades and circumstances involved. This review determined that the release of the research reports had no material effect on the price of the relevant securities and there was no other evidence to warrant the commencement of a formal investigation’.
“ASIC did identify a number of broader concerns at IOOF relating to compliance arrangements, breach reporting, management of conflicts of interest, staff trading policy, disclosure, whistleblower management and protection, and cyber security. It said the corporate culture at the time contributed to these issues.
“Not a glowing report – but let’s be clear. No contraventions of the law were identified. ASIC took no actions on any allegations against IOOF employees or ex-employees and imposed no fines, sanctions, banning orders, enforceable undertakings or licence conditions on IOOF.
“In addition, of the areas of concern ASIC noted, it seems none were prime or direct responsibilities of Hilton or the research team.”
McCormick disclosed that he and Peter Hilton worked together at the former Bridges group, which was acquired by IOOF. He regards Hilton as an industry colleague for whom he has a lot of respect professionally.
The complex issue of whistleblowing in the financial services industry was reignited at the annual conference of IMCA late last month. Jeff Morris, the Commonwealth Bank financial planner who exposed the fraudulent behaviour there starting in 2013, also with the help of the SMH’s Adele Ferguson later in the piece, spoke at the conference, as did Ferguson. Graham Rich chaired the conference.
Morris told of the personal costs to whistleblowers, such as family strains, and called for more protection. He also called for a royal commission into banking as the only way to get to the truth about their advice businesses.
McCormick wrote in his most recent report: “The real scandal here is about reckless and biased elements of the media (and politicians) that are prepared to utilise suspect sources and misrepresent reality for their own narrow agenda. “Increasingly, we need to be sceptical of what is in the media, particularly as the quality of general and investigative journalism from the mainstream press has deteriorated in recent years as technological change has led to job losses and reduced editorial and legal oversight.
“The media can be important in uncovering dangerous or criminal behaviour in the financial services industry but the power it has to destroy reputations and careers needs to be exercised extremely carefully.”
At the IMCA conference in Sydney, Adele Ferguson was asked, by the anonymous audience electronic questioning system, whether she regretted her coverage of the IOOF affair, given that the regulator found no case to answer in her main allegations. She said she did not.
Apart from destroying some careers, such as that of Peter Hilton, and giving the entrepreneurial chief executive, Chris Kellaher, some awkward moments, the IOOF affair does not appear to have done irreparable harm to IOOF.
Corporately, IOOF has gone on its merry way, making an unsolicited, and so-far unsuccessful, bid for managed accounts platform provider HUB24 last year and, so the story goes, having preliminary discussions in recent weeks with Perpetual about a merger.
Over the past five years, the IOOF share price peaked at $10.82 in May 2015, just prior to the calls for an inquiry into alleged front-running and insider trading, sliding to bottom at $7.39 in February this year. This was not much of a fall given the overall movement of the market in the same period. It was a fall of 32 per cent. Perpetual’s share price for the same five-year period peaked in April 2015, at $57.81 and bottomed at $37.87 in February this year. It was a fall of 34 per cent.
The IOOF and Perpetual businesses, despite some overlap in capabilities, look very complementary. With investments, which is the main game in terms of potential growth, Perpetual has a long and strong pedigree as a value equities manager, which has branched out into quant strategies and a fledgling global capability. It used to have a much more focused global capability, acquired out of the Bank of Ireland, but that did not work out. Nowadays, global equities are run out of the Sydney office, which hasn’t been a problem for competitors like Platinum and Magellan. Perpetual has a full suite of retail products.
IOOF also has a full suite of products, but has a more developed multi-manager range, under high-profile CIO, Steve Merlicek, and a big reach in the fast-growing SMA sector through its takeover of Shadforths Financial Group in 2014.
There would be synergies and some job losses, no doubt, in a merger but the increase in penetration through a bigger retail distribution footprint suggests it could be a rare example of a merger which is earnings accretive for both parties, if handled well.
Recent speculation about a potential merger between Perpetual and IOOF started with a report in the Australian Financial Review’s ‘Street Talk’ column in October, based on some analysts’ musings. As you’d expect, investment banks have been knocking on their doors for a long time.
The rumour intensified late last month when both Fairfax Media and ‘The Australian’ ran speculative news items, which were followed up by some stock-pick services, including ‘Motley Fool’.
