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Shares I sold: IG Group

IG looks well placed to grow but has not consulted shareholders on a planned acquisition
April 8, 2021
  • IG is a UK spread-betting platform with a dominant market share 
  • It also has a number of other growth avenues
  • It has not consulted shareholders on an agreement to acquire US broker Tastytrade

James Harries, manager of Troy Trojan Global Income Fund (GB00BD82KQ40) and Securities Trust of Scotland (STS), explains why he has sold spread-betting platform IG (IGG).

"We have exited our investment in IG Group. It has a dominant market share and resultant tight dealing spreads conferring a sustainable competitive advantage. In addition to the core UK trading business, it has a number of other avenues of growth, which we did not think were adequately reflected in the valuation of the shares. Troy Trojan Global Income has held IG since 2016, having established an investment at a very attractive valuation owing to regulatory concerns that we expected to dissipate over time. During the holding period, the shares appreciated by 91.5 per cent compared with 52.4 per cent for MSCI World index.

"The sale is disappointing as the conditions under which this company thrives are precisely those currently pertaining: macroeconomic uncertainty leading to elevated levels of volatility delivering opportunities for market participants to trade. Against this backdrop, we considered the shares to be inexpensive and well set for some strong performance. Our hope was that excess capital would be used to fund a special dividend or reduce the share count to the benefit of existing shareholders.

"But, instead, IG’s management team executed what we think is a questionable capital allocation decision, part-funded by equity – and without seeking approval from shareholders. IG agreed to pay $1bn (£730m) to acquire a relatively newly established US online options and futures brokerage, and trader education company, called tastytrade. The price represented a full multiple at 8.6 times 2020 sales – sales that are likely to have been bolstered by widespread speculative activity in the US market among retail investors. We fear that this may turn out to be the wrong asset, bought at the wrong price, at the wrong time. There is a reasonable risk that the value of the acquired asset may be written down in the coming years.

"Despite material equity issuance, existing shareholders were not given a vote to approve the deal. We engaged with the company, including the management team and chairman of the board, expressing our reservations about the deal and the governance issues surrounding the lack of a shareholder vote. Having received no comfort on either count we sold the shares."