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

26 July 2019
By Maynard Paton

Results summary for City of London Investment (CLIG):

  • These 2019 summary figures contained no surprises, as lower funds under management (FUM) throughout the year left revenue down 6% and profit down 16%.
  • FUM ironically ended the year at its highest-ever level in GBP terms (£4.2b), as client money once again trickled out of the main emerging-market funds and in to other strategies.
  • The overall fee rate paid by clients slid from 80 basis points to 76 basis points.
  • The accounts continue to sport high margins, a robust return on equity, decent cash flow and net cash.
  • The P/E is approximately 10 and the yield tops 6%, although the shares have traded on a similar rating for years. I continue to hold.

Contents

Event link and share data
Why I own CLIG
Results summary
Revenue, profit and dividend
Funds under management
FUM fee rates
Income statement, balance sheet and cash flow
Valuation

Event: Summary results for the twelve months to 30 June 2019 published 16 July 2019

Price:
430p
Shares in issue: 26,560,707
Market capitalisation: £114m

Why I own CLIG

  • Emerging-market fund manager that employs a lower-risk ‘value’ strategy of buying investment trusts, and which does not require ‘superstar’ stock-pickers.
  • Management offers regular/transparent reporting and distributes the majority of company earnings as dividends.
  • A P/E of 10 and yield of 6%-plus offer upside potential should significant new clients ever bolster funds under management.    

Further reading: My CLIG Buy report |All my CLIG posts | CLIG website

Results summary

clig city of london investment 2019 full year results summary

Revenue, profit and dividend

  • CLIG commendably published these summary 2019 results just 12 working days following the year end. 
  • Revenue fell 6% to £31.9m while operating profit dived 16% to £10.5m. 
  • Funds under management (FUM) actually ended the year 6% higher at $5.4b.
  • However, FUM on a monthly average basis fell 3% to $5.1b. FUM dropped 9% during the first half then rebounded 17% during the second.
  • Lower fee rates on FUM and greater staff costs also affected the figures (more on those later).
  • The overall performance broadly matched that of 2017:
Year to 30 June20152016201720182019
Funds under management ($m)4,2114,0054,6615,1075,389
Revenue (£k)25,35624,41331,29433,93131,933
Operating profit (£k)8,7277,75711,50812,52810,503
Finance income (£k)20521282264894
Other items (£k)-----
Pre-tax profit (£k)8,9327,96911,59012,79211,397
Earnings per share (p)26.423.636.939.534.9
Dividend per share (p)24.024.025.027.027.0
Special dividend per share (p)----13.5
  • CLIG continues to benefit from the Brexit-weakened GBP.
  • CLIG’s revenue is collected almost entirely in USD but approximately 40% of costs are expensed in GBP — hence the much improved performances after 2016.
  • The dividend was held at 27p per share. A special 13.5p per share payout was declared at the half year.

Funds under management

  • FUM ended the year at its highest-ever level in GBP terms:
clig city of london investment 2019 full year results funds under management history
  • In USD, CLIG’s FUM high occurred during early 2011 when total client money surpassed $6b. 
  • CLIG’s FUM can be divided into two main categories: i) Emerging Markets (EM), and; ii) non-Emerging Market (non-EM), which covers ‘frontier’ markets, developed markets and other themes. 
  • Both categories apply CLIG’s long-standing ‘value’ approach of buying investment trusts at a discount.
  • Non-EM FUM has become a larger part of overall FUM during recent years:
FUM20152016201720182019
EM ($m)3,8553,6594,2024,2074,221
Non-EM ($m)3593464619001,168
Total ($m)4,2144,0054,6635,1075,389
EM (%)91.591.490.182.478.4
Non-EM (%)8.58.69.917.621.6
  • Non-EM funds have often attracted additional client contributions, unlike the EM funds, which have suffered net withdrawals since 2017:
Client flows20152016201720182019
EM ($m)23150(295)(215)(184)
Non-EM ($m)242(12)23400280
Total ($m)265138(272)18596
  • During 2019, client money generally trickled out of EM funds and trickled in to non-EM funds:
Client flowsQ1 2019Q2 2019Q3 2019Q4 2019FY 2019
EM ($m)(95)(62)45(72)(184)
Non-EM ($m)1031210857280
Total ($m)8(50)153(15)96
  • An irony of the growing exposure to non-EM FUM is that EM delivered a greater investment return last year than non-EM:
Market movementsQ1 2019Q2 2019Q3 2019Q4 2019FY 2019
EM ($m)(96)(222)403113198
Non-EM ($m)(11)(113)8923(12)
Total ($m)(107)(335)492136186
  • CLIG said the EM strategy out-performed because “discounts narrowed and country allocation was positive”.
  • CLIG said the non-EM strategies under-performed due to “a combination of negative NAV and country allocation effects”.
  • I estimate total FUM enjoyed a 3.6% gain excluding additional client contributions during 2019. My estimate for 2018 was 5.6%.
  • This next table sums up the additional client contributions and general market movements experienced during 2019:
Movement totalStart
FUM
Q1 2019Q2 2019Q3 2019Q4 2019End
FUM
EM ($m)4,207(191)(284)448414,221
Non-EM ($m)90092(101)197801,168
Total ($m)5,107(99)(385)6451215,389
  • The chart below from CLIG’s 2018 annual report (point 3) shows market movements (the brown boxes) outweighing the movements from client contributions and withdrawals (the yellow boxes):
clig city of london investment 2019 full year results inflows outflows
  • Additional FUM through market movements and client contributions are typically (and frustratingly!) small compared to the overall level of FUM. 

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FUM fee rates

  • CLIG’s greater dependence on non-EM FUM may explain the group’s lower fee rate.
  • Back in 2015, CLIG charged clients 85 basis points (i.e. 0.85%) on its overall FUM.
  • Between 2017 and 2018, the rate slid from 84 to 80 basis points.
  • 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:
clig city of london investment 2019 full year results fund fee rate algebra
  • If my fee-rate algebra is accurate, the advance of non-EM FUM is not surprising given the associated fees are so much lower. 
  • I do wonder if non-EM FUM has been bolstered partly by EM clients switching to non-EM. The total number of clients has increased from 161 to only 169 during the last five years.
  • CLIG claims its representative EM fund has out-performed its benchmark during the last 18 months following two years of prior under-performance:
clig city of london investment 2019 full year results representative fund performance
  • During the last three and a half years, both CLIG’s representative EM fund and its associated benchmark have gained 41%.
  • During the last five and a half years, CLIG’s representative EM fund has gained 29% while the associated benchmark has gained 23%.
  • CLIG claims its representative EM fund (red circles below) has enjoyed consistent first- or second-quartile performances during the last 15 years:
clig city of london investment 2019 full year results representative fund relative performance
  • Given the appealing relative performances, I question why the EM division has suffered net client withdrawals during the last three years.
  • One reason could be that only three people were employed within the business development and marketing department during 2018:
clig city of london investment 2019 full year results 2018 annual report employees
  • A few extra employees tasked to find new clients could easily pay for themselves if/when the extra FUM (and fees) roll in.
  • The (re-)appointment of a senior business-development manager (point 4) might help stir up some new business. 

Dividend-cover template and FUM/exchange-rate table

  • An updated dividend-cover template accompanied these summary full-year results:
clig city of london investment 2019 full year results dividend template
  • Market ups and downs can leave left the template looking rather optimistic or pessimistic at times.
  • The template does nonetheless reveal what CLIG believes could happen during the coming twelve months.
  • The template expects earnings of £3.3m to be retained during the current year.
  • £3.3m is equivalent to approximately 13p per share which, when added to a maintained 27p per share dividend, indicates current-year earnings might be 40p per share.
  • The red dotted lines within the template show the projections at the half year, since when FUM has rebounded 17%.
clig city of london investment 2019 full year results dividend template 2018
  • The template back then expected CLIG to retain earnings of £2.5m during 2019.
  • In actual fact, CLIG retained £1.5m. In other words, the template misjudged total earnings by £1m or 10%. 
clig city of london investment 2019 full year results key assumptions
  • The “key assumptions” used to construct the template expect the non-EM funds to attract a further $250m during 2020. This $250m non-EM assumption has been surpassed during the last two years. 
  • The same assumptions expect EM funds to attract no extra money during 2020. This zero EM assumption has been too optimistic during the last three years.
  • I am pleased the “key assumptions” show overheads not increasing during the current year.
  • CLIG’s updated FUM/exchange-rate table confirms the 76 basis-point fee:
clig city of london investment 2019 full year results fum-fx table
  • The (awful) Employee Incentive Plan (EIP) is set to pinch 5% of pre-bonus profit during the current year
  • The EIP should cease this time next year. 

Income statement, balance sheet and cash flow

  • CLIG’s operating margin and return on equity remain high, but not as high as they have been:
Year to 30 June20152016201720182019
Operating margin (%)34.431.836.836.932.9
Return on average equity (%)47.742.758.950.943.6
  • The margin reduction was due mainly to staff costs (identified under ‘human resources’, ‘profit-share’ and ‘EIP’ below) increasing 5% to almost £15m:
clig city of london investment 2019 full year results income statement
  • As I have noted before, fund-management employees tend to enjoy higher total remuneration every year regardless of whether their business improves or not.
  • Cash finished the year £6m lighter at almost £14m following a £10m dividend (including a £3.4m special payout), £3.6m to seed a REIT fund and £1.2m spent buying shares for cancellation:
clig city of london investment 2019 full year results cash flow
  • CLIG has spent £2.4m during the last three years buying shares for the employee benefit trust (EBT).  This sum has been counterbalanced by £2.3m generated by staff exercising options to acquire the shares held by the EBT. 
  • CLIG’s balance sheet showed investments of £7.8m, of which ‘non-controlling interests’ (i.e. third-party investors) own £3.4m. Investments actually owned by CLIG are therefore £4.4m:
clig city of london investment 2019 full year results balance sheet
  • Cash and net investments are therefore £18.2m, which less regulatory capital of £1.7m leaves £16.5m or 62p per share.  
  • CLIG’s books remain free of debt and pension obligations.
  • I will look at the accounts in more detail when the full annual report is issued during September.

Valuation

  • My valuation sums employ CLIG’s latest FUM/exchange-rate table (see above).
  • I reckon FUM at $5,389m and GBP:USD at 1.25 may lead to earnings of approximately £10.3m or 38.7p per share.
  • Adjusting the £114m market cap for the near-£17m of cash and net investments, my enterprise value (EV) calculation comes to approximately £98m or 368p per share.
  • Dividing that EV by my earnings guess gives a possible P/E of 9.5.
  • Ignoring the cash and investments gives a potential P/E of 11.  
  • Note that the FUM/exchange-rate table (above) applies an EIP charge of 5%, and the EIP ought to cease after 2020. 
  • Applying an EIP charge of 0% instead of 5% increases my earnings estimate by almost 8%.
  • While the P/E does not look expensive (with or without the EIP), bear in mind:
    • these shares have rarely traded at an extended rating;
    • little progress has been made attracting additional FUM and clients for some years;
    • client fee rates have been sliced lower over time, while costs have been rising;
    • the balance sheet has regularly carried a sizeable cash position, which in reality may be needed to reassure clients and might therefore not be ‘surplus to requirements’ for valuation purposes, and;
    • Founder/chief investment officer Barry Olliff retires during December and is currently reducing his near-8% shareholding. Mr Olliff last sold at 450p and wishes to sell more at 450p, 475p and 500p (point 1).
  • A notable re-rating could be hard to achieve unless the group starts to win fresh clients that bring in significant FUM. 
  • Perhaps the retirement of Mr Olliff may spark a more dynamic approach to attracting extra customers. The new chief exec once worked in marketing (albeit a long time ago):
clig city of london investment 2019 full year results chief exec bio
  • CLIG likes to distribute the majority of its earnings as a dividend. Dividend cover during the last ten years has never topped 1.5 times.
  • My 38.7p per share earnings guess covers the trailing 27p per share dividend 1.43 times.
  • The 27p per share dividend supports a useful 6.3% income at 430p.

Maynard Paton

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Disclosure: Maynard owns shares in City of London Investment.

5 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. Lorraine

    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.

    Reply
    1. Maynard Paton Post author

      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

      Reply
      1. Joe

        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.

        Reply
        1. Philip Hutchinson

          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.

          Reply
  2. Maynard Paton Post author

    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

    Reply

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