UK SMALL & MID CAP
FINANCIALS
Made of stone
• Trading continues to lead to disappointments on forward
earnings across the UK small and mid cap financials
sector, for example BlueBay Asset Management,
Rensburg Sheppards, Fairpoint and Blue Oar during
June 2008.
• Stocks that have outperformed the sector have one thing
in common, conviction that earnings are unlikely to
deteriorate, for example International Personal Finance
(IPF), IG Group and Begbies Traynor.
• However, as value has begun to appear across the
sector our medium-term picks remain the same. We
continue to prefer BlueBay, Intermediate Capital and
Tullett Prebon.

TABLE OF CONTENTS
Executive summary .............................................................................................................6
Valuation ...............................................................................................................................7
Quarterly review...................................................................................................................8
Catalysts for this quarter...................................................................................................11
Other catalysts ...............................................................................................................................12
Asset management ............................................................................................................13
Obvious but true ..............................................................................................................................13
Mind the flow ..................................................................................................................................14
Brokers...............................................................................................................................16
Few IPOs but a return to equity financing?......................................................................................16
Consolidation..................................................................................................................................17
Conclusion......................................................................................................................................18
Credit finance .....................................................................................................................19
Companies.........................................................................................................................20
Aberdeen Asset Management In Line..........................................................................................21
Ambrian Capital In Line ...............................................................................................................23
Arbuthnot Banking Underperform ................................................................................................25
Arden Partners In Line.................................................................................................................27
Begbies Traynor Outperform .......................................................................................................29
BlueBay Asset Management Outperform ....................................................................................31
Blue Oar In Line ........................................................................................................................33
Brewin Dolphin Outperform .........................................................................................................35

Canaccord Capital In Line ...........................................................................................................37
Cattles Underperform ................................................................................................................39
Cenkos In Line...........................................................................................................................41
Charles Stanley In Line ...............................................................................................................43
Close Brothers In Line.................................................................................................................45
Collins Stewart Outperform .........................................................................................................47
Daniel Stewart Underperform ......................................................................................................49
Davenham Underperform .........................................................................................................51
Evolution In Line ........................................................................................................................53
F&C Asset Management Underperform ......................................................................................55
Fairpoint Underperform.............................................................................................................57
Henderson Group Underperform.................................................................................................59
IG Group In Line ........................................................................................................................61
Intermediate Capital Outperform .................................................................................................63
International Personal Finance Underperform.............................................................................65
Invista Real Estate Investment Management ..................................................................................67
Libertas Capital Underperform ....................................................................................................69
Liontrust Asset Management In Line ...........................................................................................71
London Scottish Bank Underperform...........................................................................................73
New Star Asset Management In Line ..........................................................................................75
Numis Outperform ....................................................................................................................77
Panmure Gordon In Line .............................................................................................................79
Paragon In Line ........................................................................................................................81
Paypoint Outperform.................................................................................................................83
Provident Financial Underperform...............................................................................................85
RAB Capital Outperform .............................................................................................................87

Rathbone Brothers Outperform ...................................................................................................89
Rensburg Sheppards In Line .......................................................................................................91
Shore Capital Outperform............................................................................................................93
Tenon Group Outperform ............................................................................................................95
Tullett Prebon Outperform ...........................................................................................................97
WH Ireland Underperform .........................................................................................................99
Disclosure information....................................................................................................101

EXECUTIVE SUMMARY
We remain cautious on the UK general financials sector with a Marketweight ranking.
During the quarter, the sector outperformed the FTSE All Share Index by 5%,
although on a one-year basis the sector index is down 23% with the majority of stocks
in the sector having lost over a third of their value.
During the last three months the sector has potentially become more interesting to
value investors with the following companies having low relative valuations in our
view: Cattles, Collins Stewart, New Star Asset Management, RAB Capital, London
Scottish Bank, Davenham, Fairpoint, Paragon, Blue Oar, Ambrian Capital and
Panmure Gordon.
Since year-end 2007, three companies in the sector have proposed capital raisings.
• Paragon (£287mn), in order to replace a working capital facility that it could not
refinance efficiently in the debt markets.
• Intermediate Capital (£175mn), in order to create additional balance sheet
capacity to take the opportunities provided by a lack of liquidity in its market.
• Cattles’ £209mn capital raising is currently in progress, in order to provide the
regulatory capital for a new banking licence and consequent £1bn funding
programme.
All these capital raisings have been well supported despite prevailing credit market
conditions and, in the case of Paragon, the distressed state of its funding position at
that time.
London Scottish Bank has also indicated as part of its recent half-year results that it is
in the process of raising a minimum of £45mn of new equity.
We have decided not to change any ratings by means of this document. We continue
to look for medium-term outperformance as a driver of our ratings in this very difficult
near-term environment. Our key picks are set out below.
• BlueBay appears to us to offer one of the highest growth options in the sector
because of the scope for higher-than-average new business flows and growth in
assets under management. Our confidence has been shaken a little by the
recent trading statement in the near term but we were encouraged by the higherthan-
expected new business flows.
• Intermediate Capital is not a natural stock to prefer because of its balance sheet
commitments to SME lending. However, we regard the company as experienced
enough to weather the current credit conditions and we actually see it as creating
opportunities in terms of pricing and growth. In addition, we see its recent
acquisition of a team in the US as excellent timing.
• While there are concerns over the impact of deleveraging and risk aversion on
volumes for interdealer brokers, their breadth of coverage, strong cash
generation and gearing to volatility remain positive features. Tullett Prebon is
cautiously valued relative to its larger peer ICAP and therefore we believe it
represents an interesting relative and absolute play.
• We regard Begbies Traynor as a key beneficiary of the current credit conditions
as the only quoted corporate insolvency specialist in the UK. We see a two to
three year phase of the corporate credit cycle to be in place whereby corporate
insolvencies may rise.

VALUATION
Our rating structure is made with reference to a variety of valuation methodologies with
a discounted cash flow valuation being the central model for valuation that we have
adopted. However, we do not generally propose fair values or target prices for stocks in
this sector. For comparison, we show the current P/E multiples, dividend yields and
price to historical book multiples in the following table.