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When the going gets tough, the tough get going, and IG’s chief executive has some quick-fire rebuttals for detractors

by Simon Keane

30 second: IG Group

• IG, which stands for Investors’ Gold, set up in 1974 by Stuart Wheeler to allow spread bets on the gold price

• In 1982 it became first UK firm to offer spread betting on FT 30 companies – then the UK’s benchmark index

• Spread bets on individual shares came in 1995 and three years later it launched online dealing platform.

• Floated on London market July 2000

• Wheeler sold his stake in 2003 to fund repairs the family home, Chilham Castle in Kent

• EU’s Markets in Financial Instruments Directive (MiFID) last year saw IG expand CFDs business into France and Spain

• IG has grown revenues by an average 40% a year over last nine years

Tim Howkins, chief executive of derivatives broker IG Group, reveals his beef with the City when we move on to the topic of analyst forecasts: ‘The analyst community is always quite short-term in its forecasts and I think in the current market conditions no-one is willing to stick their neck out and become the first to look to next year and raise forecasts.’

For a company that has grown the top line on average by about 40% a year over the past decade, predictions of 15% revenue expansion in 2009 are clearly bothering Howkins when we catch up at his south east London headquarters.

Located in the middle of the dealing floor, the chief executive’s office is roomy, accommodating a large table, a desk holding a bank of computer flatscreens and a sideboard on which sit pictures of two children. Sporting an open-necked light blue shirt, the first impression is of a laid-back man.

But once on the receiving end of his lightening-fast, short and concise answers you realise there’s quite an edge to Howkins. As you may expect from someone with a sciences background (first class degree in mathematics and computer science) and a trained accountant, the answers are black and white, with little room for grey.

So, on the issue of analysts’ forecasts, on one side of the fence sits Howkins (‘currently from our point of view there is no reason to think that revenue growth will decline anywhere like the analysts’ forecasts suggest it will’) while on the other we have brokers who have ‘lost their nerve.’ The impression is one of single mindedness, and a drive that probably explains his elevation to chief executive in 2006 aged just 43 years old.

Howkins goes back a long way with IG, having joined the company as finance director in 1999 from chartered accountant Rees Pollock, where he was the partner responsible for IG’s audit. Since this time he has been through the ups and downs, including a testing 2002 of flat revenues, as well as helped take the company private as part of a CVC-backed management buyout and then re-floated the company again in 2005.

Doubts after spectacular growth

Since then IG, which specialises in spread betting and contracts for difference, has delivered spectacular growth in its core UK business and rapid expansion overseas into Asia (Singapore) and Europe (Republic of Ireland, Germany, Italy, France and Spain). Shareholders have been richly rewarded with a threefold increase in share price from the 120p at float to today’s 370p.

But against a backcloth of tougher market conditions, doubts are starting to creep in. It’s true that of the nine brokers covering IG at present, the vast majority (six) continue to rate IG a buy (even if they aren’t predicting revenues will grow as fast as Howkins believes they will) but there have been a couple of negative recommendation changes since the start of the year.

In January Citigroup analysts downgraded the company from buy to hold and in February Fox-Pitt Kelton (FPK) moved from outperform to inline. IG’s share price has drifted since the start of 2008. Both FPK and Citigroup are concerned that in a bear market IG’s clients tend to lose on balance (based on the assumption that they are usually net long) and as a result will trade less, in turn hitting volumes and IG’s revenues.

Given a 19% fall in customer cash on deposit between the end of May 2007 and end of November 2007, I put it to Howkins that clients have been badly burnt by falling markets, that this can’t be good for business.

‘The problem with that number is it is not a good indication of the strength of the business since a huge proportion of that figure is three to four big clients,’ he shoots back.

With UK house prices falling I put it to Howkins that clients will be less tolerant of losses. His response: ‘Our clients are generally speaking reasonably affluent, 80% of our clients tell us that they have at least £10,000 of savings, 30% say more than £100,000, almost by definition if you’re a client of IG you have genuinely surplus risk capital.’

He makes the point that his clients’ wealth has been on an improving trajectory: ‘There has been a steady upward trend in the savings that clients tells us they have. That 30% with more than £100,000 was 10%-15% three to four years ago.’

A matter of timing

When I point out that IG’s full-year revenues were flat between 2001 and 2002 (this was the middle of the last bear market) my subject cuts in before I have a chance to finish the question, rattling off a characteristic quick-fire response.

‘If you look at the timing we embarked on a project to build a new internet platform, which was meant to be a six-month project, but became a 20-month project, our competition beat us to it. The first of these new internet platforms launched in February 2001 and if you look at what happened to account openings between March 2002 and March 2001 the rate of new openings halved, which can only be connected to that. If you look at what happened in the market at that time there was nothing remarkable, if anything it was slightly rallying.’

I quip that he quickly polished off that question, to which he replies it is one he has been asked a ‘few times in the past few weeks’. Glancing at my watch, I wonder whether this interview is going to last more than ten minutes at this rate.

We move onto the subject of business risk. By all accounts it has been a rocky year for derivatives brokers. First we had the collapse of Global Trader Europe in February and then in March, US-quoted MF Global saw its shares collapse 65% in a day. It was reported that the collapse of CFD broker Global Trader was due to losses from a single client. Couldn’t the same happen to your company, I ask Howkins.

‘No, we don’t have any one client who is capable of destroying the business. Global Trader was a business with just a few hundred clients one who was enormous relative to the rest. We will not typically allow a client to hold more than 1% of the market cap of a stock. If a client wants a bigger position we increase the margin level. The combined effect is that we are more risk-averse compared with competitors.’

Following on from its share price crash on 17 March, MF Global, which specialises in exchange-traded futures and options, hiked margins. The broker was reportedly finding it difficult to finance the leveraged positions of its client.

On 25 March IG doubled margins on 26 banking stocks from 5% to 10%, upped margins by 2.5 times (from 10% to 25%) on four banks, including Bradford & Bingley and Alliance & Leicester, and increased margins 1.5 times, from 10% to 15%, on Bank of Ireland and Allied Irish Bank. I put it to Howkins that IG has suffered similar problems to MF Global.

‘We took our margins up on 26 stocks from 5% to 10%, MF Global put up margins on everything outside the FTSE 350 to 90% so it is not the same thing.’

Execution, not spread

So, is IG is finding it hard to keep up with rivals, given that the last time I looked, it was offering a far less competitive two-point spread on its one day FTSE 100 bet, compared with the single point offered by at least one rival.

‘I don’t think that being the narrowest spread is an indication of struggling to keep up,’ Howkins hits back. ‘With us, almost 99% of trades are executed at the price that the clients attempt to deal. There are two to three smaller competitors who compete solely on price since they have nothing else.

‘They lack scale and although they advertise a one-point spread it is very difficult to execute on the quoted price and [clients are] often re-quoted. There is probably a small constituency of clients prepared to accept poor execution, but I think it is quite a small minority. If you look at the three largest providers in the UK, we are all on two points.’

In theory, IG’s clients should trade just as frequently in bear as in bull markets, given the ability to make money each way using derivatives. Howkins remains confident that analysts will have to revisit their forecasts and, going by the company’s record of delivering consistently strong growth, he may very well turn out to be right. Yes, 2002 was a disappointment, but it’s clear that depressed markets were not to blame for that let-down. Of all the brokers covering IG, Landsbanki is easily at the top of the range, forecasting 24% revenue growth in 2009, suggesting that if Howkins is correct, the rest of the pack will have to follow with some pretty hefty upgrades.