City of London Investment Group Plc Solid FUM update offset by margin changes

Hardman & Co

Hardman & Co Report Report DownloadsCity of London Investment Group Plc (LON:CLIG) has released its trading update for 1Q of FY’19. The statement
shows a continuation of the trends seen in recent statements. Aggregate inflows
into the newer strategies were largely offset by rebalancing outflows from the
Emerging Markets strategy, resulting in a small amount of net inflows of $8m.
Market movements were mixed, with only developed markets rising during the
quarter and MSCI EM index declining 1%. Fund performance was slightly behind
benchmarks, with manager performance and widening discounts hampering
different strategies. In aggregate, FUM declined slightly from $5.11bn to $5.01bn.

Operations: The changing mix of the assets continues to affect the revenue
margin. Both Developed Markets and Opportunistic Value are lower margin
than the existing Emerging Market business. Their rising proportion led to a
decline in revenue margin to 77bps, from the 80bps previously indicated.

Costs: The costs were largely in line with those indicated at the time of the fullyear
results. The EIP charge has increased a little, to 4% from the 3% at the fullyear
results. Estimated earnings for the first quarter will be £2.2m, down from
the previous year’s figure of £2.5m.

Valuation: The prospective P/E of 11.2x is at a significant discount to the peer
group. The historical yield of 6.8% is attractive and should, at the very least,
provide support for the shares in the current markets.
► Risks: Although emerging markets can be volatile, City of London has proved
to be more robust than some other EM fund managers, aided by its good
performance and strong client servicing. Further EM volatility could increase
the risk of such outflows, although increased diversification is also mitigating

Investment summary: Having shown robust performance in challenging market
conditions, City of London Investment Group is now reaping the benefits in a more supportive
environment. The valuation remains reasonable. FY’17 and FY’18 both saw
dividend increases and, unless there is significant market disruption, more
should follow in the next few years.

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