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City of London Investment Group Q&A with Zeus Capital (LON:CLIG)

City of London Investment Group (LON:CLIG) is the topic of conversation when Zeus Capital’s Robin Savage caught up with DirectorsTalk for an exclusive interview.

Q1: Today, City of London Investment Group published its full year results to 30th June, what’s changed since its pre-close statement which was July 16th?

A1: Well, today’s announcement confirms the detailed financials which were announced in July, there have been no changes to those numbers. These fully audited reporting accounts also include full Profit and Loss accounts, Cashflow and Balance sheet.

There are two new disclosures which weren’t in the previous statement, one of which is the revenue which was within £0.1 million of our forecasts and secondly, the cash balance which was £4.3 million below our expectation.

Q2. So, why was the cash balance below your forecast?

A2: My forecasts made no allowance for ‘seed investment’ into new funds. In January 2019, the Group invested £3.6 million  of its own cash into a new International REIT fund which, at end June, had a value of £7.7 million. Other investors contributed £3.5 million and the strategy already delivered to all of its shareholders £0.6 million fair value gain. So, it is delivering an attractive return to shareholders which are majority Group but also external investors, already delivering a good return.

We expect this strategy to continue to require no further seed investment, to continue delivering a healthy return and over time, attract additional external funding which will enable the seed investment to be released.

The REIT investment class is perfectly suited to CLIG’s investment process and it has the potential, in my view, to double the size of the group’s assets under management, over time.

Q3. How does this Report and Accounts inform shareholders and market valuation of City of London Investment Group shares?

A3: CLIG’s Report and Accounts always provide a clear explanation of the Group’s results, strategy, processes and corporate governance, this year’s report is entirely consistent with prior year reports and announcements but there is something extra.

Tom Griffith, the CEO since 1st March 2019, explains in his report how CLIG has been built on the basis of ‘constant Improvement’ and there are 2 very good examples of this improvement:

Firstly, the diversification products (such as Developed Closed-End Funds) which now, as a group, contributes 22% of Group Assets under Management. The second example is the launch of the Emerging Markets and International REIT funds in January this year.

The report also reveals new primary Key Performance Indicators. The Board is moving from simply comparing the Group’s Total Return to that of its peers, like Standard Life and other Emerging Market asset managers, where CLIG shares have outperformed massively over the short, medium and long term. It’s moving to two new primary KPIs:

The first KPI is Total Compound Return through a 5-year cycle of between 7.5% and 12.5% annualised so that’s the first indicator. The second of the KPIs is to double the Cumulative Total Return of the relevant Emerging Markets Index so for example, if the annual return from the index was 12% then they should expect to be delivering twice that. So, if it’s 12% annualised, it should be 24% what they should be delivering, if however, it’s more like 6% it should be 12% for the company.

Since IPO, the company has delivered a 14.3% annualised total return with dividends reinvested and since that period, the Emerging Markets Index (MXEF) has delivered, in sterling terms, 5.1% return. So, it has clearly delivered more than twice the return from the underlying index and it’s actually outperformed the range that it is now targeting which is 7.5% to 12.5%.

So, CLIG shares trading at around about £4.15, they’re trading cum 18p final dividend and they’re trading on a prospective Price Earnings Ratio of 11.7 times and 6.5% prospective dividend yield.

I think an attractive time now to be investing in the shares because you essentially get the dividend for free and just bear in mind, the Group has no debt, it’s got substantial cash and it’s got numerous growth drivers coming now from diversification products and the REIT funds.

I expect CLIG will continue to deliver more than twice the Total Return of the Underlying Markets and over 10% compound over a 5-year cycle so I think anyone who can look at nay business with those sorts of metrics should see it as being an attractive investment.