Companies: BRW    CAY    CSH    FKE    NUM    SGR    TEG    WHI   

Investing in stockbrokers has been even worse than investing in most of the stocks they broke during the past 30-month bear market.

David Youngman, chief executive of Manchester-based WH Ireland, says there has been nothing like today's grim climate 'since the great 1973-4 bear market, when everyone said "capitalism is dead"'.

Clive Harrison, chief executive officer at Fiske, meanwhile warns: 'The market bottom will be lower than this.'

With leading shares at six-year lows, the FTSE 100 Share and All Share indices are 50 per cent down on 1999 and 2000, while the Aim index has shed 80 per cent. Among the brokers, Teather & Greenwood, at 29.5p, has fallen nearly 90 per cent since 2000, Shore Capital, at 8.5p, is 85 per cent lower, and Seymour Pierce, at 5.75p, has lost 82 per cent of its peak value.

WH Ireland, Charles Stanley and Brewin Dolphin have fallen 75-78 per cent to 34.5p, 145p and 55p respectively. And, at 63.5p, Fiske is 63 per cent below its high.

Not everyone has suffered as much. Collins Stewart – whose outspoken chief executive, Terry Smith, has been (and remains) a long-term bear of London and Wall Street – has suffered a lesser bruising, shedding 31 per cent to 312.5p.

Numis, a busy searcher after deals with an active investment banking side, has fallen 21 per cent this year to 255p. That is more than 25 per cent above its 2000 level.

Deals and strategies

In response to the fall-out, stockbrokers have reacted in various ways. Most have sacked staff, cut other costs, put parts of their business up for sale, discussed mergers and started looking for acquisitions – though pricing and personalities are often stumbling blocks.

Fiske says it recently put in a tentative £1.5-3 million bid for T&G's private client asset management side. T&G's adviser says it was 'well below its client's expectations'. But Fiske says that, significantly, T&G asked to 'reserve the right to come back to us'. (T&G has 'no comment').

Many brokers have stepped up the hunt for 'market niches' and ways to diversify. Several have taken one-off profits by selling holdings in the London Stock Exchange itself.

Quoted brokers, which are smaller than London's foreign or domestic bank-owned broking giants, feel their bigger brethren have been slow to adjust and are feeling intense pain. Howard Shore, chairman of Shore Capital, argues: 'Reality has only just started to come home: job cuts in the big houses have only been made in the past two months.'

Ken Ford, chief executive of T&G, which turned a £6 million profit into a £3.8 million loss in the year to April, comments: 'We have all been affected, but the real squeeze is in the medium-sized and global banks with huge overheads.

'We are small enough to adjust our overheads,' argues Ford, who points out that T&G has built an investment trust team to fill a gap vacated by the likes of Merrill Lynch and Societe Generale. 'I don't like getting rid of people, some of whom are my friends,' he adds. But T&G has done it, and cut annual overheads from £38 million to £20 million.

Ford says the broker has £10 million-worth of assets, mostly cash, against a stock market value of less than £8 million. The negotiations to sell private client asset management are part of a restructuring which has seen the firm pick up new investment trust mandates, six corporate brokerships, handle three floats and expand its corporate finance capability.

Risks and rewards

Interestingly, corporate finance is not an area Fiske's Harrison believes is worth pursuing at present. 'It is a delusion to think the boom of 1998-2000 will be repeated,' he contends.

Fiske, which would have lost £640,000 in the year to May but for a £1.1 million windfall on its London Stock Exchange shares, thinks activity will pick up this autumn. The firm recently bought £52 million fund manager Ionian Group for up to £1.6 million in shares and cash. But Harrison says it still has cash equivalent to its stock market value.

Fiske had a 'small involvement' in a split-capital trust which went wrong, and that was 'embarrassing enough'.

Analysts reckon several other brokers were exposed to split-capital problems, among them Brewin Dolphin (which has been unable to comment). However, Brewin remained profitable, certainly in the six months to March. Pre-tax profits fell by £2.7 million to £6.1 million, before a £2.2 million profit on selling its Exchange shares. Steered by managing director John Hall, the firm has made several acquisitions this year, including Stoke-on-Trent stockbroker Popes, for up to £8.6 million over three years in cash or Brewin shares.

Speculation surrounds potential moves at Seymour Pierce, an entrepreneurial player in the Aim issue market. Under chief executive John Mackay the firm lost £19.9 million in the six months to March, after goodwill write-offs. However it said it still had £22 million of cash and remains unruffled by internet carping over the deployment of funds after acquiring the antfactory incubator fund.

Rumours suggest the company is reviewing its separate Seymour Pierce Ellis operation in Crawley, and that Clive Mattock, its veteran classic car-loving wheeler-dealer, might end his association. Mattock says he is staying, while Seymour Pierce, which has recruited Alan Matthews from Beeson Gregory as joint deputy head of research, remains tight-lipped.

WH Ireland is recruiting a corporate financier and working on a new Aim 'financial solutions' float. The firm lost £469,000 in the six months to May, but chief executive Youngman says its shares are still at a 30 per cent discount to net assets (mostly cash).

WH Ireland's investment management and corporate finance have held up well, he says. That is partly because of its speciality in mining, chiefly Down Under.

At Shore Capital, which is 'themed around selected entrepreneurs', Howard Shore says the team is 'sticking to our knitting', after making only £33,000 pre-tax in the six months to June. With a growth fund and a property fund, 'we should move quickly when demand improves', he suggests.

Charles Stanley has been expanding by acquiring firms and teams on and near the south coast of England – as well as Edinburgh, where it bought Torrie, with whose website it amalgamated its own. After pre-tax profits halved to £7.7 million in the year to March, chairman Sir David Howard spoke hopefully of 'solid achievement, rather than a sparkling upturn', with fees rising as a proportion of income.

Staying power

Diversification is being pursued by Terry Smith at Collins Stewart, which increased pre-tax profits by £300,000 to £11.9 million in the six months to June, helped by tight cost control. With £2.4 billion under management, corporate brokerages up from 70 to 83 and a new private clients division, Stewart has acquired an operation in Tokyo, is talking to banks about bond services and is thinking of raising money for two new hedge funds. 'We aim to be the last man standing,' declares a cheerfully bearish Smith.

Harbouring a similar ambition is Oliver Hemsley, entrepreneurial boss of Numis, which boosted pre-tax profits 117 per cent to £3.7 million in the six months to March.

Fundraising for insurance clients played a big part, although at the interim stage Hemsley was looking at media stocks to enliven the second half – and had already raised £60 million for clients.

All the brokers agree that calling the market turn will be near-impossible, but most – except Smith – argue it must come soon, perhaps once the issue of an Iraq war is settled. Investors looking for what will ultimately be a strong recovery should consider Collins Stewart and Numis, with Fiske and Seymour Pierce as speculative outsiders.