City of London issued a trading statement for the FY third quarter. Funds under management have benefitted from the equity market recovery and finished the quarter at $3.9bn, a 3% rise over the figure at the end of 2015. Unfortunately this lagged the MSCI Emerging Markets Index rise of 6%. The main factor in this lag was underperformance, with discounts on the underlying Closed End Funds widening and an overweight exposure to small-cap companies within those funds. This follows a lengthy period of outperformance and annualised figures remain first or second quartile across all periods.
Over the third quarter inflows slightly exceeded outflows. Other than saying the pipeline remains robust there was no news on future prospects. After the recent market volatility it seems likely that investors may sit on their hands for a while.
The net revenue margin remains at approximately 85 basis points. Profitability has been improved by the growth in FUM and some currency benefit. Operating profit is now £1.0m per month before profit-share.
The prospective P/E of 14.2 times is now at a slight premium to the peer group. The yield of 7.6% is very attractive and should at the very least provide support for the shares in the current volatile markets. At current market levels we’d expect dividend cover to be restored in 2017.
To date, City of London has not experienced the sort of outflows that some other emerging market fund managers have, aided by its good performance and strong client servicing. Further EM volatility may increase the risk of such outflows however.
City of London has continued to show robust performance in challenging market conditions. The valuation remains reasonable. Unless the market surges suddenly the dividend will probably be uncovered in 2016, but with over £8m of cash the company can easily cover the gap that current market levels imply.