Positive markets offset by revenue margins

City of London has announced its trading update results for 3Q’23. The headline figures are positive, with FUM increasing 3%, from $9.15bn at December 2022 to $9.47bn at the quarter-end. This was underpinned by good market performance: the MSCI Emerging Markets TR Index increased by 4.0% and the MSCI All Country World Index ex US rose by 6.9%. These were slightly offset at CLIM by some net outflows. Weak sentiment towards the end of the quarter led to widening discounts in closed-ended funds, and, as a consequence, there was some slight underperformance across the strategies.

• Operations: The ongoing decline in City of London’s revenue margin was stronger this quarter, as it reduced from 73bps to 71bps. Fixed costs also increased, from £1.9m to £2.0m, and the run-rate operating profit before profit share declined to £2.5m per month.
• Estimates: Despite the increase in FUM, the reduced revenue margin has led to net downgrades to our estimates. We have lowered our underlying 2023E EPS by 2%, to 33.7p, while our underlying 2024E EPS has decreased by 5%, to 33.9p, and our 2025E EPS has also been lowered by 5%, to 35.9p.
• Valuation: After the recent performance, the 2024E P/E of 16.9x is roughly in line with the peer group. The 2024E dividend yield of 8.7% is attractive, in our view, and should, at the very least, provide support for the shares in the current markets.
• Risks: Although City of London has reduced its relative emerging markets exposure, it is still 39% of assets. It has proved to be more robust than some other fund managers, aided by its good performance and strong client servicing. Market volatility remains a risk, although increasing diversification is also mitigating this.
• Investment summary: Having maintained good long-term investment performance and operational control, City of London is well-placed to grow organically. We believe the valuation remains reasonable. Now that the Karpus transaction has settled down, the prospects for future dividend increases may be more dependent on markets and the ability to attract new business.