City of London has announced a trading statement covering its first quarter FUM and financial performance. With the Karpus merger taking place on 1 October, all figures refer to the pre-transaction entity. Markets were very supportive over the quarter, with a smaller offset from net outflows. At the quarter-end, FUM were $5.94bn, an increase of 8% on the $5.50bn at the financial year-end. Fund performance was good in the main strategies, with Frontier being the exception. It was also the source of the majority of the outflows, as the largest client reallocated away from the sector.
Operations: Operational performance was slightly above our expectations, with revenue margin constant at 74bps and “fixed” costs still at £1.1m per month. The balance of the £1.8m exceptional expenses for Karpus (which are not tax deductible) reduced profit after tax to £1.0m for the quarter.
Karpus completion: As expected, completion was on 1 October. Karpus client servicing has done a good job of getting approvals and 98% of client assets have been retained. The net result is that FUM at completion were $3.6bn, bringing the group total to $9.5bn.
Valuation: The 2021E P/E of 9.5x is at a discount to the peer group. The underlying 2021E yield of 8.1% is attractive, in our view, and should, at the very least, provide support for the shares in the current markets.
Risks: Although emerging markets can be volatile, City of London has proved to be more robust than some other EM fund managers, aided by its good performance and strong client servicing. Further EM volatility could raise the risk of such outflows, although increasing diversification is also mitigating this.
Investment summary: Having shown robust performance in challenging market conditions, City of London is now reaping the benefits in a more supportive environment. The valuation remains reasonable. After a special dividend in FY’19, FY’20 saw another dividend increase. With the expected EPS boost from Karpus in 2021, the prospects for future dividend increases look very good.