Solid FUM update offset by margin changes

City of London has released its trading update for 2Q of FY’19. In this period, market weakness dominated movements in FUM: the 7% fall in the MSCI Emerging Markets Index was trumped by a 13% fall in the MSCI ACWI. Fund flows, in contrast, had a quieter quarter, with a net $15m of inflows to the Opportunistic Value strategies offset by net outflows of $62m from Emerging Markets. City of London has indicated that there may be some positive rebalancing, with $125m of net inflows expected to be funded over the next quarter. The MSCI Emerging Markets is up 4% so far in 2019, suggesting an improvement since the year-end.

• Performance: The Emerging Markets strategy had an inconsistent 2018 in terms of performance, but it finished well, with narrowing discounts and country allocation contributing to outperformance. The other strategies, which had done well earlier in the year, underperformed towards the end of the year.
• Operations: Costs were in line with those indicated in the last announcement. The EIP charge has increased a little, to 5%, from 3% at the full-year results. However, falling markets have impacted revenues, and the first-half profit before tax will be around £5.2m, compared with £6.6m in the previous first half.
• Valuation: The prospective P/E of 11.9x is at a significant discount to the peer group. The historical yield of 7.1% is attractive 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 increase the risk of such outflows, although increased 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. FY’17 and FY’18 both saw dividend increases and, unless there is significant market disruption, more should follow in the next few years.