City Of London Investment: Dividend Yield Still Tops 6% After Mixed 2019 Summary Shows FUM At Record (GBP) High But Fee Rates Sliding Lower

12 thoughts on “City Of London Investment: Dividend Yield Still Tops 6% After Mixed 2019 Summary Shows FUM At Record (GBP) High But Fee Rates Sliding Lower”

1. Maynard as usual this article on CLIG provides an impressive quantitative analysis.  For me the main problem and why Id never invest is that City of London doesn’t have a sticky customer base.  Customers are fickle and this will forever cause it problems.

   • Hello Lorraine,

     Thanks for the comment. CLIG’s presentations do show a slide indicating ‘customer tenure’, and 52 clients (out of 169) have been around for 10 years or more. Ironically, CLIG’s management once told me that part of the challenge to recruit new clients was to combat client inertia — apparently they tend to keep to their favoured funds unless the performance is absolutely awful. But yes, some investors are fickle and chop and change and unless CLIG’s fund performances are consistently good, the group will experience regular client churn.

     Maynard

     • Yes 52 out of 169 is pretty poor – it’s not even a third. I wouldn’t say this paints a full picture either as where is the new money going, even amongst the 52 who have retained some business with them. Investors chop and change markets go up and down, Fund managers exceed and disappointment. They are understandably more expensive but the platforms are better investments.

       • Well, 52 out of 169 over ten years is around an 89% annual retention rate! Which is very good by the standards of most businesses, although asset management in general is a very high retention rate industry (consistent with what CLIG said to Maynard).

         I don’t own any CLIG shares – although I’ve looked pretty closely at the company in the past – but I don’t think the retention rate would put me off, if anything it seems to me that retention is one of the strongest aspects of the investment case.

2. City of London Investment (CLIG)

   Funds under management update

   FUM during July decreased by $58m to $5,338m —- although in GBP terms FUM has reached another new all-time high (c£4,375m) due to recent FX fluctuations:

   

   Using the exchange-rate/FUM table shown in the Blog post above, I arrive at earnings of £10.4m or 39.3p per share with client money at $5,338m and £1 buying $1.22.

   Maynard

3. City of London Investment (CLIG)

   Funds under management update

   FUM during August decreased by $173m to $5,165m:

   

   Using the exchange-rate/FUM table shown in the Blog post above, I arrive at earnings of £9.8m or 36.8p per share with client money at $5,165m and £1 buying $1.23.

   Maynard

4. City of London Investment (CLIG)

   Quarterly funds under management update Q1 published 09 October 2019

   Here is the full text:

   ————————————————————————————————————————————
   City of London (LSE: CLIG), a leading specialist asset management group offering a range of institutional products investing in closed-end funds, announces that as at 30th September 2019, FuM were US$5.3 billion (£4.3 billion). This compares with US$5.4 billion (£4.3 billion) at the Company’s year-end on 30th June 2019. A breakdown by strategy follows:

   

   IM Performance

   IM performance was ahead of the benchmark over the quarter. Specifically, in the Emerging Market strategy NAV performances were positive and discounts narrowed marginally. In the Developed strategy relative returns were impacted by weak NAV performance from European and UK securities. In the Frontier strategy performance was negative due to exposure to Argentina.

   There were continued flows into the Developed and Opportunistic Value strategies totalling $152 million, while flows were negative in the Emerging strategy and neutral in the Frontier strategy.

   Operations

   The Group’s income currently accrues at a weighted average rate of approximately 75 basis points of FuM, net of third party commissions. “Fixed” costs are c. £1.1 million per month, and accordingly the current run-rate for operating profit, before profit-share of 30% and an estimated EIP charge of 5%, is approximately £1.6 million per month based upon current FuM and a US$/£ exchange rate of US$1.23 to £1 as at 30th September 2019.

   The Group estimates that the post-tax profit for the first three months of the year will be approximately £2.4 million (2018: £2.2 million).

   Dividends

   The final dividend of 18 pence per share, subject to approval at the AGM on 21st October 2019, will be paid on the 29th October 2019, bringing the total dividend for the financial year 2018-19 to 40.5 pence, including the special dividend of 13.5 pence paid in March (2017-18: 27 pence, special dividend : nil).

   Board Change

   City of London Investment Group is pleased to announce that Mr. Carlos M Yuste will be joining the Board as an Executive Director as of 1st January 2020. Carlos is the Head of Business Development. He served on the Board as the Business Development Director from CLIG’s initial listing in 2006 through 2015.
   ————————————————————————————————————————————

   The FUM numbers were not spectacular.

   New client money of $140m during Q1 meant market movements subtracted $191m — equivalent to 3.5% of FUM at the end of Q4. A 3.5% loss does not look out of line with the highlighted benchmarks.

   The $12m outflow for Emerging Market (EM) funds was the sixth quarterly outflow client money from that division in the last seven quarters. A wobbly market presumably does not help attract new contributions.

   A net $101m has left CLIG’s EM funds during the last twelve months.

   Non-EM funds added $152m during Q1 to make $240m added during the last twelve months.

   I will be happy if non-EM funds can attract a further $240m during the next twelve months — that amount would bolster the $1,280m non-EM funds by 19%.

   Non-EM funds now represent 24.0% of total FUM, versus 21.7% for Q4 and 19.8% this time last year.

   The rising proportion of non-EM funds to EM during the last twelve months has been due to EM funds staying at just over $4.0b while non-EM has gained 29% ($288m).

   I am hopeful inflows to non-EM funds can continue to contain EM outflows.

   I am disappointed — but not that surprised — by this line:

   “The Group’s income currently accrues at a weighted average rate of approximately 75 basis points of FuM”

   Oh dear. CLIG’s fee rate has been chipped lower again. The blog post above noted the rate was 76 basis points. This time last year the rate was 77 basis points. The year before that was 84 basis points.

   I am convinced the lower rate is due to lower fees on the non-EM funds.

   My basic algebra suggests EM fees are levied at 90 basis points and non-EM fees are levied at 30 basis points to arrive somewhere close to the overall fee rates CLIG has declared:

   

   I still need to investigate further on this matter — especially if non-EM FUM is meant support CLIG’s growth ambitions.

   I note the promotion of the Head of Business Development to the board. In my view, CLIG has lacked adequate sales and marketing for years given the low levels of extra client money obtained. I hope the promotion can improve matters in this area.

   Maynard

5. City of London Investment (CLIG)

   Board Changes published 31 December 2019

   Confirmation that CLIG founder Barry Olliff has become a non-exec. His impending retirement from executive duties was signalled at least three years in advance. Here is the full text:

   ————————————————————————————————————————————

   As previously announced, Barry M. Olliff, Founder and Director, has retired from his executive role effective 31 December 2019, having retired from the Board of City of London Investment Management Company Limited on 1 December 2019.

   The Board re-confirms that Barry has agreed to serve as an advisor to the executive team for the next two years. In addition, the Board has now asked him to complete his current term as a Non-Executive, non-independent Director on the Group Board through October 2020, in order to advise on the continued development of the business, and the Directors are pleased to announce his acceptance.

   Tracy Rodrigues, Finance Director, has requested a leave of absence for family reasons and will step down from the Group Board on 31 March 2020. The Finance team is well established and will cover her duties during her absence and will report directly to Tom Griffith, CEO of the Group.

   As previously announced, Carlos Yuste, Head of Business Development, will join the Group Board on 1 January 2020.
   ————————————————————————————————————————————

   Maynard

6. City of London Investment (CLIG)

   Funds under management update

   FUM during October, November and December increased by a significant $676m, or 13%, to $6,022m:

   

   FUM has only ever surpassed $6,000m once before — March 2011.

   Using the exchange-rate/FUM table shown in the blog post above, but applying a fee rate of 75 basis points as per this comment, I arrive at earnings of £11.32m or 42.6p per share with client money at $6,022m and £1 buying $1.31.

   Maynard

7. City of London Investment (CLIG)

   Publication of 2019 annual report

   The annual report was published during September 2019. I have only now got round to reading the small print.

   Here are the points of interest:

   1) Management commentary:



   The annual report did not contain any extra commentary beyond what was stated in the results RNS.

   2) Employee and director pay

   Fair enough, CLIG compares director pay to staff pay. But excluding the (sizeable) ‘other benefits’ from the calculations might distort any conclusion made from the accompanying table:

   

   

   The execs were actually paid a total of £2,776k (vs £2,494k in the table). The non-execs were paid a total of £207k.

   In total, staff and directors were actually paid £14,790k:

   

   So the staff (excluding directors) were paid £14,790k less £2,776k less £207k = £11,807k. The earlier table says the staff (excluding directors) were paid £8,987k before ‘other benefits’.

   The table says the staff were paid an average of £130k each, up 5%, and the average exec director was paid £624k, down 15%.

   The accounting notes in fact indicate the average cost of an employee (staff and directors) was £203k, up 5%. Average wage was up 12% to £90k.

   This table says the average staff wage in fact advanced 10%:

   

   For perspective, the average employee cost has increased from £158k to £203k between 2012 and 2019. Meanwhile, gross fee income has declined from £34m to £32m, leaving gross fee income per employee at c£440k.

   Arguably CLIG has not progressed that much during the last seven years, at least judging by the top line. Staff, however, have seen their pay and other benefits increase 28% and now take 46% of gross fee income (versus 36% for 2012).

   Perhaps the extra employee costs are needed because each person (on average) looks after more funds under management (FUM). FUM per employee is now $74m versus $70m for 2018 and $58m for 2012.

   All told, CLIG’s employees are costing shareholders more money and their productivity improvements (at least from fee income) are not obvious.

   The director payments are shown below:

   

   The chunky profit-share payments are based on a pre-defined slice of operating profit:

   

   The outgoing Barry Olliff had collected 4.2% of operating profit during the previous five years, but last year collected ‘only’ 3.7%.

   Not everyone is happy with the pay arrangements. A 16% protest vote was registered at the 2018 AGM:

   

   In response, a bonus cap of ‘just’ 250% of salaries is to be employed:

   

   The main executives also asked for their salary increases to be delayed:

   

   The directors appraise themselves:

   

   3) Client market value


   

   Totals 169 clients. Same number shown at the preceding half-year (7 clients won, 7 clients lost during H2) and 1 less than for full-year 2018.
   

   4) Largest clients

   Top 10 clients represent 47% of FUM:

   

   Previous proportions have been 48%, 47%, 50% and 48% for 2015, 2016, 2017 and 2018 respectively.

   9 of the 10 listed clients for 2019 appeared within the 2018 list. Average value change of those 9 was just +1%, with variations ranging from -18% to +36%.

   The 01-Dec-2010 client did not appear within the 2018 list, but was in the 2016 list. Client value up 61% during the intervening years.
   

   5) Client inflows and outflows

   

This chart is always the most embarrassing for CLIG:

   

   The yellow boxes are important. They represent client money coming in/going out — and they are generally tiny compared to existing FUM. Company does not seem able to attract meaningful new client money, although once attracted, client money tends to remain invested.

   6) KPIs

   Confirmation of the replacement KPIs:

   

   Note the KPIs relate to the share price — so the target of 10% CAGR for five years will come on top of dividends received.

   I am not sure how CLIG will judge the second KPI if the M1EF benchmark returns a negative value during the five-year assessment period.

   7) Fee rate

   Confirmation of the overall fee rate being chipped away as lower-cost non-Emerging Market (EM) funds grow in size:

   

   I remain unsure as to whether my algebra — which suggests EM funds attract 90 basis point fees and non-EM funds attract 30 basis point fees — is accurate.

   8) Fund performance

   The performance of a benchmark CLIG fund is represented by the red circles:

   

   Given this benchmark fund has regularly outperformed three index alternatives, I can never quite understand why inflows of new client money are so modest.

   9) Staff employment longevity

   Not often you see this chart in an annual report:

   

   40% of employees have worked for CLIG for more than 10 years.

   10) Risk management

   No change from 2018. Key risk is loss of FUM:

   

   11) Nomination committee

   The board expects the new chief executive to maintain his predecessor’s “culture”:

   

   12) Audit committee

   Detailed and welcome insights into audit meetings:

   

   

   Useful lives of certain equipment now 4-10 years (previously 4 years)

   

   13) Audit report

   Materiality of £569k equivalent to 5% of pre-tax profit (the general standard for quoted companies):

   

   Audit Committee reporting at £10k is pleasingly low.

   100% full-scope audit, too.

   14) New accounting standards



   a) IFRS 9

   No material impact:

   

   b) IFRS 15

   No material impact:

   

   c) IFRS 16:

   Impact seems small, but I am not quite sure how the sums work.

   Accounting small print suggests IFRS 16 will create an asset and a corresponding liability of £2.3m:

   

   However, the present lease accounting indicates a £1.1m lease obligation:

   

   Brownie points for anyone who works out what I have missed.

   15) Interest receivable

   Finance income is mostly gains from investments:

   

   However, I can’t reconcile the £800k-plus investment gain within the P&L to the gains/losses elsewhere in the accounting notes (£572k and (£32k)):

   

   

   More brownie points for anyone who works out what I have missed.

   I note within that last table that CLIG’s current listed investments have lost more than half of their cost value.

   16) Property and equipment

   Despite the depreciation/useful-life policy change (point 11), the difference between capital expenditure and depreciation was only £217k and not material for valuation purposes:

   

   17) Trade and other receivables

   An interesting note:

   

   Trade receivables represent revenue earned during the year but where invoice has yet to be paid. Accrued income represents revenue earned during the year but where the invoice has yet to be sent.

   Often within businesses handling large and long contracts, hefty accrued-income balances could mean suspect accounting, as the company ‘guesses’ the contract revenue earned as the invoice has yet to be sent — let alone paid.

   I doubt that is the case with CLIG. Over the last 5 years, working-capital cash movements have been positive — suggesting the revenue recognised was backed up by cash.

   Trade receivables and accrued income represented 16% of revenue at the year end, in line with the 15% to 18% seen during the previous four years.

   18) Trade and other payables

   Another interesting note:

   

   Trade payables represent payments owed by CLIG to suppliers. Accruals and deferred income represent i) P&L expenses incurred by CLIG but yet to be paid for, and ii) upfront customer payments for services yet to be delivered by CLIG.

   I suspect the £5.5m entry represents mostly staff payments/bonuses, where the cost has been expensed in the P&L but not yet paid as cash.

   The report included this new graphic:

   

   Bonuses are paid throughout the year, with the largest (Q4) bonus paid in July — i.e. after the June year end.

   19) Options and Employee Incentive Plan (EIP)

   630,750 options represent 2.4% of the year-end share count:

   

   The Employee Benefit Trust already holds 630,750 shares to cover those options and a further 901,798 shares to cover awards relating to the EIP:

   

   During the last 3 years, CLIG has recorded a £1.5m P&L charge for the EIP and options. Actual cash to purchase EBT shares has been £2.4m, with the EBT receiving £2.3m from employees to exercise their options. So the actual net cash cost to CLIG (and therefore shareholders) of the EIP and past options has not been that bad of late.

   This table suggests the EIP will incur a further £636k charge to the P&L, to take the entire EIP accounting cost to £2m:

   

   Small print elsewhere confirms the cost of the EIP will fall into the existing bonus pool from July 2020:

   

   The taxation note indicates CLIG enjoys a tax benefit from share options:

   

   This tax-benefit entry is unusual. I must admit to not understanding how the benefit arises or is calculated.

   More brownie points for anyone who can tell me.

   Maynard

8. City of London Investment (CLIG)

   Quarterly funds under management update Q2 and Presentation published 14 January 2020

   Here is the full text interspersed with my comments:

   ————————————————————————————————————————————
   City of London (LSE: CLIG), a leading specialist asset management group offering a range of institutional products investing in closed-end funds, announces that as at 31 December 2019, FuM were US$6 billion (£4.5 billion). This compares with US$5.4 billion (£4.3 billion) at the Company’s year-end on 30 June 2019. A breakdown by strategy follows:

   

   The EM and International Developed strategies outperformed, driven by narrower discounts, positive country allocation and good NAV performance. The Opportunistic Value Strategy outperformed led by good NAV performance and significant discount narrowing. The Frontier strategy underperformed due primarily to negative country allocation and discount widening.

   During the period under review, the Developed strategies recorded net inflows of $272 million. The EM strategies saw net outflows of $118 million. We have to date received notification of circa $200 million of net inflows in aggregate across all strategies, which we expect to fund over the next quarter.

   With regard to business development, the Group continues to maintain an active pipeline across all of its major CEF offerings with an increased interest in the diversification CEF strategies.
   ————————————————————————————————————————————

   These FuM numbers were impressive and a significant improvement on October’s Q1 update. FuM has only ever surpassed $6 billion once before, during March 2011. FuM during Q2 advanced 13%.

   The general trend of inflows into non-EM strategies and outflows from EM strategies continued during Q2.

   I calculate Q2 witnessed $148 million of client money added to non-EM strategies and $106 million of client money leaving EM strategies. Net outflows from EM strategies have occured during 7 of the last 8 quarters.

   Non-EM funds now represent 26.4% of total FuM. Non-EM funds generally attract lower management fees, so their greater size will impact revenue and profit (see Operations below).

   The total Q2 FuM movement was a positive $676 million, which after the net $42 million of new client money meant market movements created the other $634 million.

   The market return during Q2 was 11.9% (versus a negative 3.5% during Q1).

   During the last 12 months, net inflows of client money (both EM and non-EM) have come to $320 million. Total FuM 12 months ago was $4,623 million, so 6.9% extra client money is not actually that bad.

   ———————————————————————————————————————————
   Operations

   The Group’s income currently accrues at a weighted average rate of approximately 75 basis points of FuM, net of third party commissions.

   “Fixed” costs are c£1.1 million per month, and accordingly the current run-rate for operating profit, before profit-share of 30% and an EIP charge of 5%, is approximately £1.8 million per month based upon current FuM and a US$/£ exchange rate of US$1.3257 to £1 as at 31 December 2019.

   The Group estimates the unaudited profit before taxation for the six months ended 31 December 2019 to be approximately £6.3 million, which compares with £5.2 million for the equivalent period to 31 December 2018.

   The Company is currently in a close period which will end with the publication of results for the six months ended 31 December 2019 on 17 February 2020.
   ———————————————————————————————————————————

   The 75 basis-points rate was disclosed during October’s Q1 update. The fee rate has been chipped lower for some years now. Back in January 2017 the rate was 85 basis points.

   ———————————————————————————————————————————
   Dividend

   In recognition of the improved results and having regard to the current dividend cover policy the Board has decided to increase the interim dividend by 1p to 10p per share, which will be paid on 20 March 2020 to shareholders registered at the close of business on 6 March 2020 (2019: 9 pence).
   ———————————————————————————————————————————

   This dividend lift is good news. When the H1 dividend was lifted from 7p to 8p per share two years ago, the final payout was lifted by a penny (to 18p per share) as well. Could the full-year payout therefore be 10p + 19p = 29p per share?

   ———————————————————————————————————————————
   Template

   Please see the attached graph which is based on the following assumptions and includes the estimated quarterly cost of the dividend:

   http://www.rns-pdf.londonstockexchange.com/rns/6507Z_1-2020-1-13.pdf

   

   
   ———————————————————————————————————————————

   I never pay too much attention to this template because FuM bobs higher and lower and often makes the ‘retained earnings’ prediction somewhat academic.

   Still, the projection for 2020/21 retained earnings of £5.2 million suggests total earnings could be £12.1 million (or 46p per share) given a 28p per share dividend would have a cash cost of close to £6.9 million.

   Within the assumptions, I welcome confirmation of the Employee Incentive Plan (EIP) being absorbed into the main bonus pool from 2020/2021 (point 19).

   CLIG’s new projections for 2020/2021 are not too radical — a net FuM increase of $250 million and overheads (mostly staff costs) up 3%.

   Maynard

9. City of London Investment (CLIG)

   Funds under management update

   FUM during January and February decreased by a significant $707m, or 12%, to $5,315m:

   

   FUM is back to where it was at the end of September.

   Using the exchange-rate/FUM table shown in the blog post above, but applying a fee rate of 75 basis points as per this comment, I arrive at earnings of £9.43m or 35.5p per share with client money at $5,315m and £1 buying $1.29.

   Maynard

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