Why iFast is on my watchlist

The iFast Flywheel

Many retail investors know iFast for its online brokerage, FSMOne. But the core of iFast’s business is actually in its funds marketplace.

iFast is like an SGX of funds. The iFAST’s platform allows fund managers to list their funds there. And investors (largely through Financial Advisors aka insurance agents) can invest into these funds. By having a lot of funds listed on their platform, iFast becomes the go-to platform for fund investors as it offers a wide range of options. And because it is the go-to platform for fund investors, many fund managers want to list on iFast. So you see this flywheel effect – iFast will continue to grow bigger simply because it is growing bigger! This also creates very high barriers to entry for new entrants to compete. Aside from Aviva’s Navigator, there are no other serious competitors in this market, and this should continue for the forseeable future.

Side note: This flywheel effect can also be seen in expensive REITS (https://wandering-elephant.com/2021/04/05/why-do-people-buy-expensive-reits/)

Based on my personal unscientific observations, it seems that insurance agents are doing very brisk business. Many people who are scared to invest themselves are somehow quite willing to invest in funds recommended by their Financial Advisors. I don’t understand why these guys can’t just put into an index fund (S&P 500, REIT ETF etc.) or even use a robo advisor. It would probably get them much better returns without taking on much more risk. But in any case, they are doing it, and the Financial Advisors and iFast are making lots of money off them. Investing in iFast is a great way to benefit off these people as they take multiple cuts of fees throughout the whole process:

1. iFast earns a one-off fee when a fund lists on its platform
2. iFast earns another one-off fee when someone invests in a fund on its platform
3. iFast earns recurring fees as a custodian by holding these investments in the funds on the platform (this is called their Assets Under Administration or “AUA”)

Point no. 3 is the most important. People who invest through insurance agents tend to keep the investment there for decades. They are unlike you and I who may switch to another broker for better rates every few years or so. Furthermore, these investment plans often involve a monthly input of new funds, resulting in a steady increase in AUA. Indeed, these recurring fees only go up over the years and never comes down. In fact it has grown so big that it now makes up the bulk of iFast profits, and it continues to grow bigger each day.

My investment in iFast

I first bought into iFast some time in the middle of 2020. First batch was at $1.08, and I added more thereafter. In total, my average price was $1.24 but sold them all off in several batches from around $3.80 to $5.05. That was already a good 300% or so profit. But today, iFast is trading at $8.35!!!

In case you are wondering why I sold since I am so optimistic of iFast’s business prospects…. I simply decided that iFast’s consortium (with Li Ka Shing’s PCCW) was less likely to win the HK eMPF tender than OneConnect, which is controlled by Ping An. Largely due to political reasons. Li Ka Shing has good ties to the Jiang faction of the Chinese Communist Party and is therefore not quite in the good books of the Xi administration. China was also in the midst of tightening its control over HK. So I assessed to prospects of PCCW and iFast winning the tender to be lower.

iFast’s price had gone up by a lot already and would be considered expensive if they lost the eMPF tender. But if they get the eMPF tender, it would have a lot more upside. Of course we now know that my fears were unfounded. PCCW and iFast had won the tender and this eMPF is likely to be hugely profitable to iFast with a large one-off profit during implementation, and then the subsequent maintenance of the system over the years. The details of the partnership between iFast and PCCW are still being finalised. But this eMPF thing is going to be either a good thing or a very good thing for iFast.

iFast continues to trade at a very high multiple. There is some justification for this, given their prospects. But the high multiple also puts it at risk of a sharper drop in the event of a market crash. Also, the details of how the eMPF work and revenue will be split between PCCW and iFast and other consortium members are not yet clear. So I’m now sitting at the sides and waiting for the opportunity to buy.