Stock Stories brings you closer to the heart of our investment strategy. In these short videos, our investment team discuss interesting stocks and how they contribute to our objectives of delivering a high and rising income together with capital growth for our shareholders by investing in a diversified portfolio of well-established UK-listed companies.
In this short episode of ‘Stock Stories’, Product Specialist Stephanie Sutton discusses an investment decision that was made and is illustrative of the Trust’s strategy: IG Group. Stephanie shares her thoughts on how it aligns with the Trust's objectives of seeking to deliver a high and rising income together with capital growth.
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I'm Stephanie Sutton, Product Specialist for The Merchants Trust. All investments come with risk. And when looking at potential investment in equities, it's very important to think about risk. For Merchants, we seek to mitigate some of this risk by focusing on good companies with strong balance sheets and the potential to pay attractive dividends, and also making sure we don't pay too much for them.
Sometimes companies can be undervalued despite operating in areas of high growth that are driven by powerful structural tailwinds. We believe that one such company is fintech provider IG Group. As a specialist in online trading and investments, it benefits from rising demand for self-directed investing as we see increasing wealth accumulation and wealth transfer. As the world's 'mass affluent' population grows, so does the demand for online investment and trading.
Digital technology allows people to trade whatever they want, whenever they want, wherever they are, and users IG's dealing platforms and apps can access around 19,000 global financial markets, including shares, currencies and also commodities. With operations in 19 countries across five continents, the company scales allows it to invest heavily in technology, giving its customers fast, flexible, and round-the-clock access to the world's financial markets.
The company derives most of its revenue from enabling its customers to trade, and to take a view on the direction of markets or assets. The business model is well hedged and is therefore relatively agnostic to the customer success. However, given its generating revenues from transaction fees and not trader losses, the business benefits more when customers do well. When the trades go well, they're more likely to continue trading and paying to use IG services.
Altogether, this is a highly cash generative business with a history of returning capital to shareholders through dividends. This coupled with strong fundamentals and a modest valuation, has led to IG Group being among the largest holdings of The Merchants Trust.
Although we are not making any recommendation here. IG is a great illustration of the type of company we like to have in our investment portfolio. A diverse portfolio of high quality, undervalued assets with strong dividend profiles and trading on modest valuations.
Disclaimers: Securities mentioned in this document are for illustrative purposes only and do not constitute a recommendation or solicitation to buy or sell any particular security. These securities will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date. Past performance does not predict future returns.
IG Group Stock Story: Inside the MRCH Portfolio
Merchants recognises that equity investments come with risk. The Merchants Trust seeks to mitigate this risk by targeting good companies with strong balance sheets and the potential to pay attractive dividends. At the same time, the managers focus on ensuring that they pay an attractive price for each stock, so that it should provide good value to investors. Companies can sometimes be undervalued by the market even when they operate in high-growth areas and are driven by powerful structural forces.
IG Group could benefit from customer trends in financial services
The fintech company IG Group, which provides online trading and investment services, could be an example of such a company. Demand for self-directed investing is rising due to increasing wealth accumulation and wealth transfer. Digital technology, meanwhile, allows investors to trade various types of investment, whenever and wherever they please.
Providing global access to financial markets
IG Group’s clients can access around 19,000 financial ‘instruments’, including shares, currencies and commodities. With a presence in 19 countries, the company is large enough to invest heavily in technology and provide its clients with fast, round-the-clock access to the world’s financial markets. Its customers’ trading activities generate most of the company’s revenues and, although the business does perform better when its customers do well, corporate earnings are not wholly dependent on their success. In terms of IG Group’s dividends, this has been a highly cash-generative business with a history of returning capital to shareholders through dividends.
We believe that the company benefits from a loyal and relatively wealthy client base, and a well-established brand. On the flip side, challenges include continuing regulatory pressure designed to protect consumers, as well as rising costs. Competitive pressures are also increasing in key markets. The company has initiated cost-savings measures aimed at cutting £50 million in expenses by 2026.
How to invest in IG Group/ The benefits of diversification
This is not a recommendation to buy IG Group; it simply highlights the types of businesses Merchants Trust targets. Investing in IG Group or any other stock carries risks. Nobody can predict how well IG Group’s stock price will perform in the future. There are clearly risks associated with investing in any individual stock and, therefore, in adding IG Group to an investment portfolio. Many factors could influence the behaviour of IG Group’s share price or that of any other company. Such factors might include a downturn in the economic cycle, which could affect individuals’ discretionary income available for trading on financial markets.
The Trust seeks to control investment risk by limiting exposure to any one company to no more than 15% of the portfolio at the time of acquisition. The Trust seeks to diversify its portfolio into at least five market sectors, with no one sector comprising more than 35% of the portfolio.
Article disclaimers
Securities mentioned in this document are for illustrative purposes only and do not constitute a recommendation or solicitation to buy or sell any particular security. These securities will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date.
The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. We assume no obligation to update any forward-looking statement.