CITY OF LONDON INVESTMENT: Possible 34p EPS Just About Supports 33p Per Share Dividend And 7.8% Yield After H1 2023 FuM Slides 18% And Q3 Update Admits Client Fees Cut To 71 Basis Points

01 July 2023
By Maynard Paton

H1 2023 results summary for City of London Investment (CLIG):

• “Choppy” market conditions causing funds under management (FuM) to slide 18% to $9b led to revenue dropping 9% and profit diving 26%.

• Significant new clients remain very elusive, with H1 outflows of $107m negating the inflows enjoyed during FY 2022 and aggregate withdrawals reaching $404m at merger partner KIM.

• Rising staff costs represented 42% of revenue following a 24% profit share, and questions remain as to whether i) employees rank ahead of shareholders, and ii) the total-return KPI really stretches management.

• The follow-up Q3 update admitted fee rates had declined from 73 to 71 basis points, as clients seemingly chip away at charges after perhaps watching the cheaper S&P 500 continue to outrun their CLIG portfolios.

• Reduced FuM, lower fees and greater expenses now point to earnings of 34p per share that just about support the 33p dividend and 7.8% yield. Capital gains meanwhile look dependent entirely on a broad market recovery. I continue to hold.

Contents

• News links, share data and disclosure
• Why I own CLIG
• Results summary
• Revenue, profit and dividend
• Funds under management: inflows and outflows
• Funds under management: capacity limitations and growth plans
• Funds under management: investment performance
• Funds under management: fee rates
• Management
• Exchange-rate/post-tax profit matrix
• Financials
• Valuation

News links, share data and disclosure

News: Interim results and presentation for the six months to 31 December 2022 published 22 February 2023, Q3 2023 trading update published 25 April 2023 and board changes published 26 May 2023.

Share price: 425p
Share count: 50,679,095
Market capitalisation: £215m

Disclosure: Maynard owns shares in City of London Investment. This blog post contains SharePad affiliate links.

Why I own CLIG

• Fund manager that employs a “risk-averse” strategy of buying investment trusts at wide discounts through a team-based approach (point 1).

• Accounts showcase a super 40% margin, significant net cash and ability to distribute majority of earnings via dividends.

• Yield of 8% offers meaningful income potential with capital-gains upside linked to a wider market recovery — or winning extremely elusive new clients!

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

Results summary

Revenue, profit and dividend

• This H1 2023 performance was never going to sparkle after a Q1 update during October and a Q2 update during January indicated funds under management (FuM) had essentially stagnated during the six months.

• FuM dropped 8% during Q1 but rebounded 8% during Q2 to leave FuM at $9.2b, down 1% from the preceding H2 2022 and down 18% from the comparable H1 2022:

• CLIG described the markets as “choppy” and claimed the FuM performance reflected a “challenging time for the global economy with the combination of rising interest rates, COVID-related disruption in China and supply-chain bottlenecks elsewhere”.

• CLIG emphasised a variety of indices had delivered modest performances during this H1:

• January’s Q2 update estimated an underlying profit before tax of “approximately £11.9m” for this H1.

• Underlying profit before tax was in fact below the projected £11.9m at £11.7m.

• These H1 results were the first following the £102m merger with Karpus Investment Management (KIM) that were not distorted by a part-year KIM contribution. 

• The lower FuM during this H1 caused revenue to fall 9% to £28.7m: 

• CLIG did not publish KIM’s revenue contribution for this H1 2023. 

• Nor did CLIG publish KIM’s revenue for FY 2022 despite previously revealing the contribution for FY 2021 (nine months: £15.5m) and H1 2022 (£10.9m). 

• Amalgamating KIM’s revenue with that of CLIG’s original City of London Investment Management (CLIM) division is not helpful towards evaluating the post-merger progress of both operations.

• But CLIG still publishes the average fee rates for both divisions, which were maintained at 71 basis points for CLIM and 76 basis points for KIM (see Exchange-rate/post-tax profit matrix).

• Excluding amortisation of £2.4m associated with the KIM merger, H1 operating profit was £11.6m and 7% less than the preceding H2 2022 (£12.4m) and 26% less than the comparable H1 2022 (£15.6m):

• The sizeable £4m profit shortfall versus the comparable H1 reflected lower revenue of £2.7m and extra costs of £1.2m. 

• A stronger USD versus GBP helped this H1. 

• The group’s H1 revenue was “almost entirely” denominated in USD, with the GBP:USD rate of 1.18 during this H1 comparing favourably to the 1.36 rate witnessed during the comparable H1. 

• The recent GBP:USD rate of 1.27 suggests H2 2023 will not enjoy similar currency benefits (see Valuation). 

• This H1 experienced a disappointing FuM development.

• After CLIG reported a run of four consecutive quarters of net client-money inflows, January’s Q2 update admitted clients had withdrawn a net $147m between October and December 2022 (see Funds under management: inflows and outflows).

• CLIG’s Q3 update during April disclosed a further $48m net outflow of client money (see Valuation). 

• I had previously speculated whether the choppier markets of 2022 had prompted clients to gravitate towards CLIG’s ‘value’ style of buying investment trusts at wide discounts.

• But management comments at October’s AGM seemed to scotch that idea (“Analysis of our portfolios would show equal growth and value investments“).

• CLIG held the H1 payout at 11p per share and appeared to base that decision on a few weeks of “stable” markets:

“While it is prudent to retain a cautious approach to the coming year, the more stable conditions of recent weeks provide a degree of encouragement and it is with this in mind that your Board is declaring an unchanged interim dividend of 11p per share, despite lower profits for the period .“

• Perhaps with one eye on trailing twelve-month dividend cover at 1.15x — and near-term dividend cover perhaps falling to 1.1x — CLIG reiterated its 1.2x dividend-cover target remained “appropriate” over rolling five-year periods.

• For the five years to December 2022, aggregate earnings were 203p per share and aggregate ordinary dividends were 152p per share to give rolling five-year dividend cover of 1.34x (see Valuation).

Funds under management: inflows and outflows

• CLIM’s FuM can be divided into two main categories:
  • Emerging Markets (EM), and;
  • Other strategies, which cover:
    • Developed (or “International“) markets outside the United States;
    • “Opportunistic Value“;
    • “Frontier” markets, and;
    • Seeded funds (REITs and “Global“).

• Both categories apply CLIG’s long-standing value approach of buying investment trusts at wide discounts and occasionally taking an activist stance.

• KIM meanwhile manages a mix of US equities (including investment trusts) and bonds.

• For years CLIG has struggled to attract significant sums of new client money.

• The (very thin) red bars on the chart below show new client money has been minimal since FY 2016:

• Indeed, this H1 witnessed net withdrawals of $107m that negated the net inflows of $102m enjoyed during FY 2022…

• …while FY 2021 witnessed net withdrawals of $752m, which almost entirely offset the aggregate net inflows of $758m enjoyed during the prior six years:

• Withdrawals at KIM remain frustrating. 

• KIM’s clients withdrew a net $103m during this H1 to take total net withdrawals since the merger to $404m. CLIG blamed “loss aversion” among KIM’s retail investors for the latest outflow. 

• KIM has yet to report a material net quarterly inflow of client money since the merger. Management during October’s AGM said KIM suffers “natural” outflows of $100m a year through clients withdrawing capital and income for retirement. 

• Higher rates on cash were also a factor for KIM’s withdrawals:

“Additionally, due to the increase in interest rates in the US, financial institutions can offer Certificates of Deposit directly to [KIM’s] retail investors at higher interest rates compared to recent history.”

• KIM FuM at $3.4b remains less than the $3.6b enjoyed at the time of the (October 2020) merger.

• At least CLIG stated action had been taken at KIM:

“New business development remains a high priority for the KIM team in 2023 …  A number of seasoned professionals have been added to the client-facing area of the firm who can leverage the improved systems and reporting capabilities that have been a focus of the integration post-merger. Client communications have been upgraded, along with a redesigned website, to improve KIM’s ability to share its story.“

• This H1 witnessed outflows of EM money extending to 12 of the last 14 quarters. CLIG blamed “asset class rebalancing” and “pension plan de-risking” for these latest EM withdrawals. 

• CLIG’s Other strategies garnered a welcome $61m of net client money during this H1, albeit with net inflows recorded during Q1 and net withdrawals recorded during Q2.

• I am pleased CLIG has recognised the persistent client withdrawals have to be addressed:

“Clearly more effort is required on client retention – this remains a Group-wide priority.” 

• The H1 movements had little effect on how FuM is split, with 39% still in EM, 37% still in KIM and 24% still in Other strategies:

• 39% is the lowest proportion of EM FuM in CLIG’s history. 

• EM funds represented 90% of client money during FY 2017, since when CLIG has deliberately tried to diversify its FuM by developing the Other CLIM strategies and undertaking the KIM merger.

• CLIG’s largest client appears not to have withdrawn too much money during this H1. Its gross fees declined 9% to match the general revenue decline versus H1 2022:

“Included in revenues are fees of £2,711,686 (year to 30th June 2022 – £5,825,226; six months to 31st December 2021 – £2,966,412) which arose from fee income from the Group’s largest client. No other single client contributed 10% or more to the Group’s revenue in any of the reporting periods.”

Funds under management: capacity limitations and growth plans

• CLIG said all of its CLIM strategies could accept extra client money:

“Given the market falls of 2022, all of CLIM’s strategies have the capacity to take additional funds and with face-to-face meetings now possible, the marketing effort in the institutional space will be given renewed impetus in the coming months.“

• Mind you, the results powerpoint reminded shareholders the EM strategy has “capacity” limitations:

• Capacity problems occur when a fund becomes too large to outperform because of the restricted size of its target universe of stocks.

• Available capacity of $300m for EM is equivalent to only 8% of total EM FuM of $3.6b.

• At least the presentation reiterated the International and Opportunistic Value strategies could handle extra client money of $2b, which is almost double the $2.1b FuM invested in such approaches.

• Despite capacity limitations remaining unchanged and new staff being hired, CLIG has reined in its expectations of new money.

• The preceding FY 2022 had reckoned new client money of $385m could have been obtained during FY 2023:

• But this H1 suggested $300m could be received during the next twelve months:

• For perspective, the preceding twelve months brought in net client money of $108m. 

• An extra $300m is equivalent to only 3.3% of total H1 FuM of $9.2b.

• I note projected new KIM client money has been reduced from $135m to $50m.

• Continuing to expect any new KIM money seems quite ambitious given the division has suffered net withdrawals of $404m since the October 2020 merger:

• Expecting new client money of $250m for CLIM is not completely outrageous; CLIM attracted $338m during FY 2020 and $265m during FY 2015.

• New employees have been recruited to help win new client money:  

“We have taken the opportunity in these six months to continue to invest in our two subsidiaries, CLIM and KIM at a time in the market cycle when other, less-conservatively run companies, may be under pressure. We have hired talented individuals at both Companies to support investment management, business development, and marketing. “

• This H1 did not mention anything about the fledgling Global strategy that was revealed during the preceding FY 2022.

• CLIG still seems prepared to buy somebody else’s FuM:

“We will also continue to evaluate external business opportunities that may appear in the aftermath of a challenging 2022 for many investment advisers.“

• Total FuM at CLIM and KIM has grown from $8.0b to $9.2b since 2011 — equivalent to an average annual growth rate of only 1.2%:

• The average annual growth rate for combined CLIM and KIM FuM since FY 2017 is 3.2%.

Funds under management: investment performance

• CLIG used various positive terms to describe its investment performance:

“The key driver in attracting additional assets across all strategies is performance and results for the most recent six-month period across both operating entities were highly encouraging.

Each of CLIM’s core strategies registered relative outperformance against their respective benchmarks while all but two of KIM’s seven strategies registered both positive returns and relative outperformance against their benchmarks, maintaining an excellent record through the full cycle of rising and falling markets of recent years.

Of particular note once again was the strong returns generated in KIM’s fixed income assets despite a widening of discounts in closed-end funds (CEFs) through most of 2022.“

• CLIG claimed its EM, International and KIM approaches had outperformed their associated benchmarks during the last five years:

• The chart above suggests CLIG has delivered client returns of between 1% and 5% a year (before fees). 

• The 3% mid-ground seems about right, given total CLIM/KIM FuM has gained 3% per annum since FY 2017 and new money received has been minimal.

• If CLIG claims its investment performance has been so great, why have new clients been so elusive?

• Well… CLIG introduced a new chart during the preceding FY 2022 that finally admitted what long-term clients (and shareholders) have almost certainly known for some time…

• …namely the S&P 500 has trounced emerging markets (and CLIM’s EM funds) over the last ten years.

• My calculations indicate the S&P 500 (in USD) has outperformed CLIM’s EM and Other strategies during FYs 2016, 2018, 2019, 2020 and 2022…  

• …and gained 2% during this H1 versus a negative 2% for EM and plus 3% for CLIM’s Other strategies.

• The iShares S&P 500 ETF (CSPX) has gained 108% (in USD) between FY 2016 and this H1, versus my estimated 30% for CLIM’s EM approach and my estimated 33% for CLIM’s Other strategies.

• Prospective clients have perhaps compared CLIM’s funds to the S&P 500 rather than CLIM’s chosen benchmarks, which may explain the minimal new client money won during recent years.

• I raised the subject of the S&P 500’s outperformance during October’s AGM.

• Management admitted at the AGM that some clients have asked in trustee meetings: “What are we doing in emerging markets when the S&P 500 has outperformed?”.

• Management explained at the AGM that clients:
  • “Still want diversification“;
  • Swap from EMs to other strategies to stay with CLIM;
  • “Completely understand” why CLIM may underperform against the S&P 500, and;
  • Exhibit prudence and don’t go “all in” on particular asset types.

• Management suggested the S&P 500 outperformance would one day revert to underperformance:

“Things can not go up for ever, they will eventually stop”

• CLIG’s relative returns have not improved following this H1.

• During CLIG’s Q3 2023 (January to March 2023), CLIM’s strategies returned between 3% and 6%, KIM’s portfolios returned 4% while the S&P 500 returned 7% (see Valuation).

Funds under management: fee rates

• CLIG said group fee rates had dropped a basis point to 73 basis points versus the comparable H1… 

“Net fee income currently accrues at a weighted average rate of approximately 73 basis points (31st December 2021: 74 basis points) of FuM.”

• …while April’s Q3 2023 update admitted the group’s fee rate had declined a further two basis points to 71 basis points:

“The Group’s income currently accrues at a weighted average rate of approximately 71 basis points of FuM, net of third‐party commissions“

• This latest reduction appears due to clients chipping away at fees. 

• CLIG’s fee rates had declined for years before the KIM merger…

Year to 30 June	2016	2017	2018	2019	2020
CLIM net fee rate (bps)	86	84	80	76	75

• … and I had accepted the introduction of lower-fee strategies such as International had influenced the overall group fee rate.

• But with CLIG’s FuM split remaining at 39% EM, 37% KIM and 24% Other strategies during Q3 2023, I can’t see different FuM proportions affecting the overall group fee rate this time.   

• Markets generally suffered a rough 2022, and I speculate clients kicked off 2023 by demanding lower fees. 

• The H1 exchange-rate/post-tax profit matrix highlighted CLIM fees at 71 basis points and KIM fees at 76 basis points…

• …which has now become stale following the subsequent Q3 2023 group fee of 71 basis points (see Exchange-rate/post-tax profit matrix). 

• Reduced disclosure also hints at clients chipping away at fees. The latest Q3 2023 update referred only to the group fee rate, while the comparable Q3 2022 update referred to both CLIM’s fee rate (then 71bps) and KIM’s fee rate (then 76bps).

• I raised the subject of reduced fee rates during October’s AGM. 

• Management said the whole industry was “facing lower fees”, and the decline also reflected the lower fees charged by the International strategy. 

• Management added that fee rates charged by particular strategies would not be disclosed, and the defensive tone of management’s AGM replies about fees gave the distinct impression the matter was very sensitive.

• Note how KIM’s fee rate has reduced.

• The merger document (point 5) claimed KIM enjoyed a “fairly stable” net fee rate of 80 basis points.

• But the FY 2021 results said KIM fees were 77 basis points, and this H1 revealed KIM fees at 76 basis points.

• I speculate fee rates will not stabilise until CLIG’s investment performance improves.

• After all, if typical long-term clients have indeed earned annual gross returns of c3% (i.e. 300 basis points), then fees at 71 basis points will capture 24% of their gains.   

• While many clients may indeed employ CLIG for “diversification” purposes, the attractions of an S&P 500 ETF that:
  • Absorbs fees of 10 (or less) basis points, and;
  • Continues to outperform CLIG’s funds…

• …must surely prompt doubts about their diversification stance.

Management

• My FY 2022 review highlighted this intriguing small-print from the 2022 annual report:

“George Karpus will continue to serve on the Board for the 2022-2023 financial year and we will provide an update prior to next year’s AGM regarding his future plans.“

• George Karpus founded KIM during 1986, led the business until the 2020 merger and then retired to become a CLIG non-exec. Mr Karpus remains a significant, 36%/£78m CLIG shareholder:

• I wrote in my FY 2022 review: 

“I plan to attend the 2022 AGM and I hope Mr Karpus is there to shed some light on his future plans.” 

• Mr Karpus did indeed attend October’s AGM and management (surprisingly) disclosed he would stand down from the board during 2023.

• CLIG confirmed in May — seven months after the AGM — that Mr Karpus would indeed stand down from the board at the end of July. 

• Mr Karpus and the rest of CLIG’s board were expecting me at the AGM. All the directors had seemingly read my FY 2022 review and Mr Karpus even commented:

“You made some good points in your thesis. You were spot on about a couple of things“.

• Mr Karpus did not elaborate on the things on which I was “spot on“, but I trust elusive new clients were among them.   

• CLIG announced during May: 

“Whilst Mr. Karpus will be stepping down from his Director role, the Company will retain Mr. Karpus as a strategic advisor to the Board.“

• My impression from the AGM was Mr Karpus could be a vocal “strategic advisor” to the board.

• That May statement also said:

“George Karpus commented, “I have enjoyed my time on the Board of CLIG and look forward to supporting the Company in the future as the management works to add value for clients, shareholders and employees.” “

• No doubt I am reading far too much into this, but Mr Karpus listed shareholders ahead of employees in that above farewell… 

•  …while CLIG within this H1 listed employees ahead of shareholders:

“The Group exists for the mutual benefit of our three primary stakeholders: Clients, Employees and Shareholders.” 

• I have never been quite sure whether CLIG is run for the benefit of its employees or for the benefit of its shareholders.

• CLIG noted this H1 had witnessed “increased” salaries:

“In the shorter term, the rate of unemployment in the US remained at historically low levels resulting in fewer candidates for open positions. That, along with inflationary pressures, had an impact on increased salary levels.” 

• Shareholders meanwhile received an unchanged H1 dividend.  

• Mr Karpus knows how to run a tight ship. Before the merger, KIM enjoyed a superb c60% operating margin, with FuM per employee 27% greater and revenue per employee 31% greater than the respective levels at CLIM (points 8 and 9).

• I do hope outside shareholders can rely on Mr Karpus — in his new role as “strategic advisor” — to provide frank views to the board on employee productivity. 

Exchange-rate/post-tax profit matrix

• CLIG’s exchange-rate/post-tax profit matrix has been revised again:

• Revisions to the matrix since FY 2022 include:
  • CLIM costs increasing from “£6.7m plus $9.4m” to “£7m plus $9.6m”, and;
  • “Amortisation of intangible” increasing from £3.4m to £3.6m. 

• The greater CLIM costs have reduced the associated illustrative earnings by approximately 8%.

• For example: 
  • FuM of $9.2b at GBP:USD of 1.16 now indicates earnings of £15.2m versus £16.5m previously, and;
  • FuM of $10.4b at GBP:USD of 1.28 now indicates earnings of £16.7m versus £18.1m previously:

• The illustrative matrix-profit figures appear to correlate with this H1’s underlying earnings.

• CLIG said GBP:USD averaged 1.18 and its website shows FuM averaging approximately $9.1b during this H1…

• …which I estimate would give earnings of £14.4m if GBP:USD of 1.18 and FuM of $9.1b were applied to the revised matrix.

• CLIG declared underlying H1 earnings of £9.0m…

• …which doubled up gives £18.0m.

• The £3.6m difference (£18.0m less £14.4m) is (I think) explained by the amortisation of the acquired KIM intangibles, which was cited at £3.6m within the illustrative matrix’s assumptions.

• I believe currency movements explain why the matrix cites £3.6m for amortisation while actual trailing twelve-month amortisation was £4.6m (the acquired KIM intangibles are denominated in USD but translated into GBP for the group accounts).

• Older matrices have noted the 30% profit share for the CLIM division:

• But following the KIM merger, the profit-share assumption was removed and the illustrative post-tax figures can no longer be derived from the matrix assumptions that remain.

• Mind you, CLIG has always said the matrix is “not intended to be interpreted or used as a profit forecast.”

• This H1 indicated a 24% profit share:

• The 2022 annual report confirmed a maximum possible 30% profit share, and earnings will suffer if the full 30% is ever paid.

• I raised the subject of profit share reaching 30% during October’s AGM.

• Management replied that during “down markets with less profit“, CLIG would be “shooting ourselves in the foot” to take a higher percentage.

• CLIG might have already shot itself in the foot. The 24% profit share for this H1 compares to 21% for the comparable H1 — a higher proportion despite pre-profit-share profit being 20% lower.

• Management also said during the AGM the profit share was a “cultural thing” and “if shareholders do well, employees should be doing well“.

• But should employees be doing well if shareholders are not doing well?

• I have never been entirely sure whether the profit-share scheme has actually incentivised the workforce. 

• Between FYs 2015 and 2022, CLIG’s wages and salaries totalled £55m… and were enhanced 82% by aggregate profit-sharing payments of £45m.

• The same eight-year period meanwhile witnessed a minimal aggregate inflow of net client money (see Funds under management: inflows and outflows).

Financials

• Despite rising salaries, CLIG remains a high-margin business. Operating profit before amortisation represented a super 40% of revenue during this H1:

• Mind you, the margin touched 50% during H2 2021 just after the KIM merger (helped by KIM’s then c60% margin!) and had already reached 38% during H1 2021 (prior to the KIM merger).

• Margins are therefore not what they were, with employee costs extracting 42% of revenue during this H1:

• CLIG noted the stronger US dollar lifted costs during H1: 

“…[A]dministrative expenses rose by c.12% to £18.1 million, reflecting a combination of higher payroll costs, ongoing investment in IT systems and business development. It is important to note, however, that c.64% of Group overheads arise in US dollars so the average 14% fall in the £/US$ exchange rate YoY translates to correspondingly higher costs when expressed in sterling terms.”

• Granted, the text above is accurate, 

• But revenue is “almost entirely” denominated in USD as well…

• …which means CLIG is an overall beneficiary of a stronger USD as this H1 in fact confirmed:

“It is evident that a stronger US dollar increases sterling post-tax profits, whilst a weaker US dollar causes the opposite” 

• As mentioned earlier, the H1 exchange-rate/post-tax profit matrix revealed CLIM costs had increased from “£6.7m plus $9.4m” to “£7m plus $9.6m”.

• The balance sheet showed cash at £19.1m, investments at £7.6m and conventional bank debt of zero.

• H1 interest on the cash was a handy £182k, versus only £5k for the comparable H1.

• Cash conversion for this H1 was once again quite acceptable. Adjusted earnings of £9.0m translated into free cash after tax, capex and lease payments of £8.6m. 

• The £10.7m to fund the final FY 2022 dividend and £1.5m spent on shares for the Employee Benefit Trust (EBT) then left overall cash £3.6m lighter.

• CLIG’s EBT expense reflects the true cash cost of CLIG’s staff share schemes and is worth monitoring.

• During FYs 2020, 2021 and 2022, and this H1, the EBT spent £8.7m buying shares to satisfy exercised options and received £1.5m from those exercised options — equating to a net shareholder cost of £6.2m. 

• In contrast, the associated accounting charge during that same period was £2.9m. I would therefore venture reported earnings are not a true reflection of shareholder profit because of the EBT expenditure.

• The EBT purchased shares at an average 391p during this H1. Purchases made after the half year have been undertaken at prices between 427p and 440p.

• CLIG’s accounts remain free of defined-benefit pension obligations.

Valuation

• CLIG’s chairman acknowledged his previously “premature” optimism…

“While I may have been a little premature in my September statement to shareholders in expressing a degree of optimism…” 

• …although he still refers to “green shoots“:

“If, as indicated in recent weeks, inflation subsides in the coming months, policy makers are likely to be more willing to rein back from further monetary tightening, thereby easing the growing wage inflation pressures that otherwise threaten a return to trend growth in 2023. Thus, while it may be premature to voice optimism for the year ahead, there are sufficient green shoots to suggest that the significant dislocation to the global economy, which was the feature of 2022, will prove transitory.” 

• This H1 included a revised dividend-cover chart.

• The previous version had predicted earnings of £3.9m would be retained for FY 2023.

• But the new version now predicts £1.5m will be retained for FY 2023, and also predicts £1.0m will be retained for FY 2024:

• The revised £1.5m is equivalent to 3p per share and, when added to the 33p per share dividend, implies FY 2023 earnings might now be 36p per share.

• But retained earnings of £1m for FY 2024 signals earnings of 35p per share, leaving prospective dividend cover rather thin given the 33p per share payout. 

• I calculate CLIG’s rolling five-year dividend cover will be 1.24x by FY 2024 assuming:
  • Earnings of 36p and 35p per share for FYs 2023 and FY 2024, and;
  • The 33p per share dividend is maintained:

• CLIG’s 1.2x target dividend cover for rolling five-year periods — alongside the aforementioned £19m (c37p per share) cash position — ought to mean the 33p per share payout can be sustained for FY 2023 and hopefully FY 2024 as well.

• That said, the Q3 2023 (January-March 2023) update published during April gave a mixed picture:

• The good news was Q3 FuM advanced 3% to $9.5b, CLIG’s highest level for twelve months. 

• The not-so-good news was clients withdrew a net $48m (although KIM recorded its first ever inflow following the merger with a $1m positive inflow!)

• The 3%, 4% and 5% Q3 increases to client money reported for EM, KIM and International compared to a 7% advance for the S&P 500. 

• FuM at Q3’s $9.5b is 8% less than the level seen twelve months prior ($10.3b) and 17% less than the all-time high level enjoyed at the end of FY 2021 ($11.4b).

• The bad news from the Q3 update was CLIG said pre-profit-share profit during Q3 ran at £2.5m a month:

“‘Fixed” costs are c.£2.0 million per month, and accordingly the current run‐rate for operating profit before profit‐share is approximately £2.5 million per month based upon current FuM and a US$/£ exchange rate of US$1.2337 to £1 as at 31 March 2023.” 

• The rate for Qs 1 and 2 was £2.7m:

January 2023 (Q2): “Fixed” costs are c. £1.9 million per month, and accordingly the current run-rate for operating profit before profit-share is approximately £2.7 million per month based upon current FuM and a US$/£ exchange rate of US$1.2083 to £1 as at 31 December 2022.

October 2022 (Q1): “Fixed” costs are c.£1.8 million per month, and accordingly the run-rate for operating profit, before profit-share is approximately c.£2.7 million per month based upon current FuM and a US$/£ exchange rate of US$1.117 to £1 as at 30 September 2022.“

• £2.5m a month with a 24% profit share and 25% tax would give earnings of £17.1m or 34p per share. 

• Possible earnings of 34p per share compare with:
  • The adjusted 44p per share reported for the preceding FY 2022;
  • The 36p per share projected by the revised dividend-cover template, and;
  • The trailing 33p per share twelve-month dividend.

• CLIG’s website shows FuM falling back to $9.1b during May 2023… 

• …which suggests current earnings are more likely to be running at 34p than the 35p-36p per share implied within the dividend template.

• Earnings of 34p per share for the next twelve months would cover the trailing 33p per share dividend 1.03x and give a rolling five-year dividend cover of 1.27x.

• Earnings of 34p per share and the trailing 33p per share dividend put the 425p shares on a multiple of 12-13x and yield of 7.8%.

• CLIG’s rating does not look expensive, but the trailing P/E has frequently been less than 12 and trailing yield has almost always offered more than 6%:

• For some perspective, I last bought CLIG shares during October 2022 when the price was 353p, the trailing P/E was 8 and the trailing yield topped 9%. 

• Future returns can be judged through CLIG’s (commendably public) total-return ambition:

“CLIG’s management team has a share price Key Performance Indicator (KPI), which is for the total return (share price plus dividends) of a CLIG share to compound annually in a range of 7.5% to 12.5% over a rolling five-year period. This KPI is meant to stretch the management team, without incentivising managers to take undue levels of risk.“. 

• The minimum 7.5% compound annual total return during the next five years appears very achievable, assuming of course the 33p per share dividend is held to support that 7.8% income.

• But whether maintaining the dividend for five years will actually “stretch the management team” is another matter. 

• The 425p share price is back to where it was more than ten years ago… 

• …and until George Karpus kicks up a fuss about finding new clients, the handsome yield continues to be the major attraction — with capital gains seemingly dependent on a broad market recovery. 

• I first bought CLIG during 2011 at 355p and the shares have since delivered a very generous income. Total payouts (ordinary and special) throughout the last twelve years have totalled 349p per share to almost recoup my initial investment. 

• But the increasing danger for myself and long-term shareholders is the handsome payout eventually becomes untenable as:
  • New clients remain elusive;
  • Markets remain subdued;
  • Client fees keep reducing, and;
  • Costs keep advancing. 

Maynard Paton