Hi Paul,
Two interesting stocks here that could indeed look different in the coming years:
Steadfast Group (SDF): makes money primarily by earning commissions and fees from insurers on insurance policies placed through its network of ~400 brokers. It also generates income from its underwriting agencies and by providing services, technology and support to member brokers, as well as from equity stakes in some broker businesses. The risk from AI is real for these sorts of business. In simple terms, we think these sorts of businesses that essentially sit in the middle of product origination and customers are ripe for disruption.
- For SDF the risk from AI is that automation and direct-to-consumer digital insurance platforms could reduce the role of traditional brokers over time.
- AI may also increase competition by enabling insurers or new entrants to price risk, process claims and service customers more efficiently, potentially pressuring commissions and margins if brokers do not adapt.
For these reasons, we will not be investing in SDF.
EQT Holdings (EQT): makes money by charging fees for trustee and fiduciary services, including acting as responsible entity for managed funds, superannuation trustee, estate executor and corporate trustee. It also earns recurring revenue from wealth management and superannuation administration by managing and administering assets on behalf of individuals, families and institutions.
- For EQT the main AI risk is that automation could reduce the value of traditional trustee, administration and back-office services, putting pressure on fees over time.
- AI may also lower barriers to entry for competitors in wealth management and administration, increasing competition and margin pressure if EQT does not keep pace with technology adoption.
- The area that will insulate them from this impact is their trustee services, which is heavily regulated.
As you say the stock has corrected ~35% over the last 6-months despite seeing a +12% lift in revenue to $100mn YoY and now paying a grossed-up yield of more than 7%.One of the main reasons for the weakness is its involvement in the collapse of the Shield and First Guardian Master Funds, and the regulatory/legal fallout from that. ASIC has commenced court action against Equity Trustees Superannuation Limited (a subsidiary of EQT) over its role as trustee in the Shield Master Fund failure. ASIC alleges it failed to exercise appropriate due diligence and oversight in how super savings were made available into that fund, which collapsed and left investors with losses. Their exposure in around $70m, however, there is also the threat of financial penalties, remediation costs, and of course reputational damage.
This situation has been very concerning, and from our perspective, it highlights why really like to stay in simple investment structures – direct investments – without the ‘grey areas’ that are so typical in these sorts of offerings.
We do think EQT will get through this challenge, and while AI may have an impact in the future, it’s not as clear as it is with SDF. EQT is not on our radar at this stage, but we are drawn to the generally defensive qualities of it’s Trustee services model.
