City of London Investment Group plc (LON:CLIG) is the topic of conversation when Hardman & Co’s Financial Analyst Dr Brian Moretta caught up with DirectorsTalk for an exclusive interview.
Q1: What was did City of London Investment Group’s trading statement cover?
A1: It covered the financial year to 30 June 2021, with estimated updates on funds under management and financial results. This is the first year-end since the merger with Karpus Investment Management, a US RIA that also uses closed-end funds in its investment strategies. With a focus on high-net worth individuals and having most assets in US equities and bonds, it brought significant diversification to City of London.
Q2: How have funds under management moved?
A2: They finished the year at an all-time high of $11.45bn, an increase of 36% from the $5.5bn that City of London had 12 months ago plus the $3.58bn that came with Karpus. The biggest driver of this has been the strong equity markets over the last year. Also in its favour was good performance, with all its strategies outperforming over the last year.
Q3: What were the offsets?
A3: The main offset was the ongoing flow of rebalancing and liquidations. The Emerging Markets strategy has been suffering from the former for some time. Essentially, institutional investors are monitoring their asset allocation more strictly. So when a higher risk area, such as emerging markets, performs well, some assets are rebalanced away to keep exposure within limits. With global markets performing well, rebalancing has been much less than market growth so it hasn’t stopped the EM strategy assets growing strongly. There were also some redemptions, notably in the Frontier strategy where the biggest client divested from that area.
Q4: How about financial performance?
A4: With Karpus being a profitable business and funds under management showing strong growth, it is no surprised that profits grew substantially. Adjusted profits, which exclude amortisation, merger costs and tax, are estimated at £27.2m, two and a half times the previous year. On a statutory basis, total earnings rose 124% to £17.0m. Looking at the underlying EPS, we estimate the growth was still almost 30%.
Q5: City of London Investment Group has a reputation as a good income stock – what happened with the dividend?
A5: As we expected, the final dividend was increased to 22p, giving a total for the year of 33p. This represents a 10% increase over the previous year. Perhaps as importantly, the 5-year rolling cover is 1.29x, compared with a target of 1.2x. We’re optimistic that this, together with prospective earnings growth and a very healthy balance sheet, should give scope for more dividend increases in the near future. Given that, a prospective yield of over 6.5% seems conservative.