David Kuo speaks with Tim Howkins, chief executive of IG Group.
You can listen to or download this podcast here.
David:
This is Money Talk, the weekly investing podcast from the Motley Fool. I am David Kuo, and today I'm delighted to welcome on to the podcast Tim Howkins, Chief Executive of IG Group (LSE: IGG), one of the UK's leading spread betting contract for difference and sports betting companies. Thank you for coming onto the show today, Tim.
Tim:
It's my pleasure.
David:
Now, the two main areas that I would like to cover today are spread betting and CFDs, so for the benefit of listeners who are not familiar with these products, these will be the listeners with a huge question mark on their faces right now. Can you explain to them what is the difference between spread betting and CFDs?
Tim:
Yeah, of course. First of all, both spread betting and CFDs are similar in that they are ways of taking leveraged exposure to the financial markets, and you can trade pretty much every sensible financial market in the world. So that includes foreign exchange, or forex; equity indices; individual shares and more exotic things like commodities. In many ways, the two products function in the same way, but the main difference is that, if you look at a spread bet or a CFD on an individual share, then the way we charge for that product is slightly different. So with the CFD, we simply quote the clients the market price, and then we charge a separate fee which is a commission for the transaction. Then for every day that the client has that position open, the client pays a small financing charge.
With the spread betting product, the financing charges and the commission are both wrapped into the spread. So instead of having separate transaction charges, we simply make the spread slightly wider than the market spread to get our commission. Then of course, the principal difference is that for a UK investor, all betting, and that therefore includes spread betting, is free of capital gains tax, whereas CFDs do attract capital gains tax.
David:
Does this rankle with the government? – with the Inland Revenue, the fact that people are effectively placing a bet on movements of shares, but actually they're not paying any taxes whatsoever?
Tim:
They're not paying tax, but we are. We pay betting duty, and the effect of that is that I think the tax authorities are happy to collect betting duty from us, rather than collecting relatively small amounts of capital gains tax from lots and lots of retail individuals.
David:
That's wonderful – I didn't realise that IG Group was a charity as well! Now then, spread betting, and CFDs, or contract for differences, are known as derivatives. In other words, they derive their value from an underlying investment such as a stock market index (the FTSE, for instance), and also the value of a share. So in essence, if the London Stock Exchange didn't exist, nor would you. But are you in some way surprised that your market capitalisation has climbed so quickly that it is almost on the same level, if not at sometimes higher than the London Stock Exchange itself?
Tim:
I'm not surprised, because we have a much broader business than the LSE. Yes, they're a substantial business, but they only offer shares trading, and they have a number of competitors with the multi-lateral trading facilities, which means that that's now a very fragmented market. On the other hand, with us, you can trade the full spectrum of financial markets, not just shares, but indices and forex, and we have clients across the globe.
David:
It's almost as though the student is actually bigger than the master now, isn't it? – that IG Group is bigger, in some cases, than the London Stock Exchange?
Tim:
Indeed, and we certainly intend to continue to outgrow them.
David:
(he laughs) This must worry the people over at the London Stock Exchange. So what do you attribute this popularity of spread betting to? I mean, it can't just simply be that it is tax free? There must be some other reason why the growth has been so strong?
Tim:
I think the best evidence that it isn't just about the tax advantage is that we've managed to grow very significant businesses not in spread betting, but in CFDs. Elsewhere in the world, where we have no tax advantage, we now have a £50 million revenue business in Australia, for instance, and that has no tax advantages at all. So I think what that tells you is that clients are doing this first of all to get leveraged exposure to the markets, and secondly they like the simplicity of being able to trade pretty much every financial market in the world in a single account in a very flexible way.
We do try to package the markets up into a format which is very friendly to the retail investor. So for instance, we offer the major indices 24 hours a day, despite the fact that a number of the futures markets will actually shut at some point in the day. So for instance, you can trade the FTSE for 24 hours a day, despite the fact that the life futures market only trades for nine or ten hours.
David:
And so do you think that the uncertainty in the global markets, the global currencies and everything else that is going on around the world, is a positive for your business?
Tim:
We certainly like market volatility, and we like markets being in the news. To give an example, the second week of October, which was when the banking sector crashed here in the UK, was by far the best week we've ever had for account opening, simply because you couldn't pick up a newspaper any day that week without seeing the things about the financial markets.
David:
So are you saying that IG Group is, or rather spread betting and CFDs, are effectively resistant to global economic downturns then?
Tim:
Certainly when the downturn is accompanied by volatility, which it does tend to be, because an economic downturn tends to bring greater uncertainty, and therefore greater volatility. So yes, the business has been very resilient over the last two years, despite the worst recession in living memory.
David:
So as a follow up question, Tim, how long do you think this global uncertainty, this global market uncertainty, will continue?
Tim:
To be honest, I'm pretty gloomy about the outlook for world markets at the moment. I think there's still a great deal of denial about how severe the sovereign debt crisis could be across Europe, and I think that could well trigger a second round of banking crises.
David:
That's very worrying for people to ... excuse me for laughing, but I mean that is actually very worrying, and yet at the same time you think it is going to be good for your business?
Tim:
Yes, I do get a reputation at parties as being a bit of a doom monger.
David:
I think you and me both. I think if the both of us were at a cocktail party, people would try and shy away from the both of us completely. Now the thing is, IG Group obviously has competitors in the marketplace, and one of your bigger competitors is CMC. So how do you differentiate the product that you offer from your competitors?
Tim:
For us, it's principally about technology, and our technology in particular, our pricing system allows us to offer a much greater range of products than any of our competitors. So we offer something like 7,000 individual shares. We offer binary bets, or binary options, which are a different way of trading the market. We offer things like access to the multi-lateral trading facilities, like CHIAX and Turquoise and BATS, which allows us to give our clients much finer pricing than some of our competitors.
David:
Now the other thing is, I read today that there is possibly another player coming into the market – a company called Betfair, they might be offering a similar product. Are you in some ways worried that because people have seen the growth in IG Group, that you are going to get more competitors coming into the marketplace, and eventually squeezing your customers, or trying to poach your customers?
Tim:
It's a risk, clearly, but it's a risk that any successful business faces. We have seen a number of competitors come into the market. If you go back 10 years, there were only two firms offering spread betting. We're now up to eight or nine primary providers, and a whole raft of white labels of those providers as well. Despite that, we've managed to keep our market leading position, but clearly we look very carefully at any new competitor.
David:
And is this actually quite good for customers?
Tim:
Certainly Betfair, in the fixed odds industry, were able to drive quite significant pricing improvements for clients. I'm just not sure they're going to be able to achieve the same thing in our industry, because really that's already happened. We now offer the FTSE on a one point spread. When I joined IG 11 years ago, we were offering it on a 10 point spread, so we've seen a tenfold improvement in pricing. I'm not sure that there is the same opportunity for them to come in and offer a better deal for consumers, I think it's already happened.
David:
So effectively, all that will happen is that there'll be this churn going on, people pinching customers from each other, and that is unlikely really to benefit people like you, because you're going to have to keep on making those spreads even smaller and smaller, aren't you?
Tim:
I mean, historically we've been the beneficiary of churn. We're unique in the spread betting industry that we're the only firm which is the net beneficiary of clients switching from other providers, and I think that is because we offer a very good service with a very good trading platform, and already very competitive spreads.
David:
OK, and can you also tell me a little bit about your typical customer? What does he or she actually look like?
Tim:
I always used to say that our typical customer was a dentist living in Scunthorpe. And then it was pointed out to me that actually there are probably only 20 dentists in Scunthorpe, so I really ought to stop saying that. Our typical client is a professional, like an accountant or a lawyer or a dentist, or somebody in middle to senior management, or somebody who runs their own business. I think really the only kind of uniting strand across the client base is, if you've got the sort of day job where you're used to taking lots of decisions, then this sort of active investment is much more likely to appeal to you.
David:
And are they primarily men? Or are they also women?
Tim:
Yes, they are overwhelmingly men. I think current recruitment is about 90% men, 10% women. If you go back seven or eight years, it was 99% men, 1% women. So it is slowly shifting.
David:
And is it quite a difficult pursuit for somebody to get their heads around, or is it a relatively simple thing for people to understand?
Tim:
I think the basics are not that difficult. You buy an instrument, if you think it's going to go up, and then you sell it when the price is higher, and hopefully you can make a profit.
David:
What – buy low, sell high?
Tim:
Absolutely.
David:
It's the secret to all investing, isn't it?
Tim:
Absolutely. It's working out the time to enter and the time to exit the market, which is more challenging. We provide a lot of education to our client base, both physical seminars in our office and around the country, and also a lot of online webinars. Every new client has the option of enrolling in a six-week training programme, where they both get education materials, but they also get the ability to trade in very small size while they hone their skills. But undoubtedly, this is not something you're going to master overnight. You need to work at it, and you need to commit a bit of time to it over a period of time, to get it right.
David:
So after that six-week period, would you then consider yourself to be a hot shot trader in some ways?
Tim:
No, I think after six weeks you're still a relative beginner. I think you'll even find clients who have been trading for two or three years who are still eager to learn more and to learn new strategies. I think it's the sort of subject that you can continue to learn almost forever.
David:
Right, and can you give me some kind of percentage? How likely am I to make money doing this, on a percentage basis? One in 10, one in 20, 5% chance of making money? – or even more?
Tim:
Of our established client base, almost half make money.
David:
And the other half lose money?
Tim:
Yes, but relatively small and manageable amounts.
David:
OK. Now I was recently in Singapore, Tim, where you also have a presence. Do you notice any regional differences? In other words, do Singaporean traders differ from UK traders and Australian traders? Do people have slightly different attitudes, or different ways in which they trade?
Tim:
The main difference we see is there is quite a difference in what asset classes people are interested in, in the different countries. So our Singapore business is overwhelmingly clients trading forex – something like 70 or 80% is forex, whereas in both the UK and Australia there's a much more significant shares component, and shares makes up about a third of revenue in both the UK and Australia. Then if you look across Europe, there's a lot of interest in both forex and indices, and again very little interest in shares.
David:
What would be the next big thing for IG Group? Are you planning to bring out some new products, or some new areas where people can actually take part in this?
Tim:
I think innovation for us will be more about new platform features than it will be about new product. We already offer pretty much every sensible financial market in the world, and we offer them in different forms – as a spread bet, where the payout is effectively linear; as a binary option, which is a yes/no proposition; or in some cases as a conventional option.
So there's neither a missing subject matter, nor a missing way of trading it, if you like, but I think you will see a progressively richer trading experience, with more and more features in the platform. A good example of that is, in the last couple of weeks we've brought out an iPhone app, and I think increasingly, as mobile technology gets better, I think you'll see a much greater proportion of our clients trading using mobile devices, as well as sitting at a PC.
David:
That's wonderful. So when somebody says, "Have you got an app for that?", you can say, "Yes, I have"?
Tim:
Absolutely.
David:
OK, so what is the biggest risk that IG Group faces?
Tim:
I think in the current climate it's regulation. There's no doubt that regulators have been quite stirred up by what's happened in the financial markets over the last couple of years, and as a result it's kind of no more Mr Nice Guy from the FSA.
David:
(he laughs) OK. And my final question today, Tim, is – and this is one that quite often, whenever we get people, because we've actually had one of your employees, I think David Jones, come on before talking about spread betting, and when he was on, people emailed me, and they said, "Can you ask the next person that comes on and talks about spread betting, and CFDs, what does spread betting and CFDs have to do with investing?" It is a tough one, isn't it?
Tim:
If you ask most of our clients, they do see this as part of their investment strategy. It's very common to hear one of our clients say something like, "I've got 90% of my investments in shares, or in property, or in unit trusts, but I've set aside something like 10% of my investable wealth to actively trade the market, and I recognise that it's higher risk, but it's also potentially higher return. It's the kind of Tabasco sauce in my investment mix."
David:
Effectively, what you're saying is, you see it as a bit of fun alongside a boring investment, and you don't really encourage anybody to put their entire wealth, or 100% of their pension fund, into CFDs?
Tim:
No, I think you'd be very foolish to put your entire investable wealth in something which is leveraged and on higher risk, but I think used sensibly, and in moderation, it has a place in the overall investment strategy of some people, people who are prepared to commit a bit of time to studying the market.
David:
I do like that. Actually, I found it very reassuring that you say that, because this makes me feel a little bit happier when I put this podcast up, because as I said in the past, quite often when we talk to people about things like options trading, spread betting, CFDs, I get this charge in my email box from people saying, "David – how can you encourage people to do that?" And I think that analogy about putting a bit of Tabasco sauce onto a rather sort of bland meal actually makes CFDs and things like spread betting more understandable for people. So thank you very much for joining me today.
Now Tim, I end each podcast with a quote, which I hope will sum up today's podcast. Today's quote comes from an American journalist called Heywood Broun, who said, "The urge to gamble is so universal, and its practice so pleasurable, that I assume it must be evil", but I don't think there's anything particularly evil about spread betting.
Tim:
That's a marvellous quote.
David:
Right then, this has been Money Talk, I have been David Kuo, and my guest has been Tim Howkins, Chief Executive of IG Group. If you have a comment about today's show, please post it on the Money Talk blog, which you can find at fool.co.uk/podcast, and if you have a suggestion about future topics for the show, please email me at moneytalk@fool.co.uk. Until next week everyone, happy investing.
