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

City of London Investment Group Plc

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

Q1: You have published a research note on City of London Investment Group 8 days after its year end, 30th June, and 8 days before management makes its detailed pre-close statement. Why have you published a note before the statement?

A1: At the end of last week CLIG published its group FUM on its website. We observe

  1. CLIG’s FUM rose 2.4% in the 4th quarter to US$ 5,396m which is 3.6% above our forecast
  2. Sterling has weakened, FUM in Sterling is £4,283m which is 6.9% ahead of our forecast

This FUM supports comments management made on 16 April in its IMS, notably

  • CLIG has an active pipeline … particularly in non-emerging market strategies

Higher than forecast FUM and Sterling Weakness on 1 July 2019 suggests consensus forecasts may need to be increased

Q2: What is the outlook for next year?

A2: We will update our P&L forecasts when CLIG’s management and Board have published their view of the outlook on:

a) The “mix” of net inflows and FUM

  • round $4,200m or 78% of FUM is Emerging Market …. Where the market level is similar to last June and the end of March …. but CLIG’s performance been top quartile  over the past month and exceeded the index over the past year.
  • Around $990m or 18% of FUM is in Developed Market and Opportunistic Value strategies … where the market growth been stronger and CLIG’s assets have probably grown by around 50% over the past year
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     b) The state of the current “pipeline” on new FUM

  • We note that the CAPACITY for CLIG’s non-Emerging Market strategies is larger than that the Emerging Market strategy
  • We expect non-emerging market net inflows to be materially larger than Emerging Market net inflows

Obviously, Sterling weakness will continue to be positive for CLIG which generates substantial non-Sterling revenues

CLIG has a strong capital position, with over £18m of net cash, which suggests that CLIG can continue to make generous payments to shareholders

c) CLIG, like other asset managers, has high cash conversion …. and minimal capital requirements

d) In February 2019 CLIG Board declared a 13p special dividend which is around £3.3m

Q3: At 420p, the CLIG shares are up 6.1% since 31st March.  How do you see City of London Investment Group shares trading over the next few months and years?

A3: Over the past 5 years, CLIG has delivered its shareholders an attractive and reliable dividend stream generated by a leading Emerging Market investment manager.  

CLIG has also been organically developing a track record in non-emerging market strategies. Its non-emerging market FUM has now reached nearly US$ 1bn … this is a level where many asset allocators, who have been tracking CLIG’s performance, may start allocating new funds.

In our opinion, CLIG current share price reflects the current level of Emerging Markets BUT NOT

a) The growth of Non-Emerging Market FUM, which has developed an impressive track record over the past 5 years

b) CLIG’s final 18p dividend or further special returns

  • The yield on the final dividend alone is 4.3%
  • The prospective yield including the interim dividend is 6.4%, is attractive
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