- Interactive Brokers has invested in technology, allowing it to reduce its fees and expand global access
- The company often earns operating margins in the 60 per cent range
- It has potential for growth
Ben Preston, co-manager of Orbis OEIC Global Equity, explains why he invests in Interactive Brokers (US:IBKR).
"At first, Interactive Brokers might seem like any other broker. It offers online trading in stocks, bonds, futures, options and other securities. It makes money through a mix of commissions and interest income, and its client base includes both individuals and institutions such as financial advisers and hedge funds.
"Yet it occupies a niche as the go-to platform of choice for active and sophisticated traders. Its core customers trade several hundred times a year whereas most individual investors trade far less than that. It is also one of the few with truly global reach in over 150 markets worldwide.
"A key differentiator is Interactive Brokers' technology. The company’s founder and chairman, Thomas Peterffy, was an early pioneer in developing electronic market-making systems for professional traders in the 1980s. As Interactive Brokers grew its online brokerage business over the ensuing decades, it “gave back” to customers by continually re-investing in its technology to improve the customer value proposition. This has allowed the company to automate to drive customer fees lower, expand global access, and improve products and capabilities.
"As a result of these investments over the years, Interactive Brokers now has a platform in place that is extremely difficult to replicate. It offers best price execution, industry-leading returns on idle cash balances and rock-bottom margin lending rates. Despite charging customers such low fees, it has remarkably attractive profitability given that nearly everything it does is either online or automated rather than a network of physical branches. The company routinely earns operating margins in the 60 per cent range compared with 40 per cent for competitors.
"With just 2mn clients, it is still a relatively small player in a very large industry. Historically, the number of accounts has grown at an average of 30 per cent a year over the past seven years. Additional opportunities for future growth include 'white labelling' its platform [providing platform services for other companies under their brands]. It is onboarding two large institutions onto its platform this year which should add 400,000 accounts, and more could follow.
"It has been a rough year for many financial services stocks, but Interactive Brokers is not a bank and we can take comfort in the strength of its balance sheet and management’s conservative approach to risk. Peterffy is the largest shareholder and has the vast majority of his wealth invested in the company. As such, he is fanatical about risk control, and keeping the majority of the firm’s customer deposits and its own capital in short-term treasuries (US government bonds) and other risk-free instruments marked-to-market every quarter.
"Interactive Brokers trades at about 13 times our estimate of 2024 earnings in contrast to the S&P 500 index which trades at about 19 times earnings. This is compelling for a high-quality company with a durable competitive advantage, exciting long-term growth prospects and well-aligned management."
Interactive Brokers was Orbis OEIC Global Equity Fund's fifth largest investment, accounting for 3.3 per cent of its assets at the end of June. The fund had 31 per cent of its assets in financial companies, its largest sector exposure, and 47 per cent in US-listed equities.
