Another quarter of steady progress

City of London has announced its trading update for 3Q’21. It has been a quarter of steady progress. Markets were supportive, albeit to a lesser degree than in the previous couple of quarters, with the MSCI EM Net TR Index increasing 2.3% and the MSCI ACWI ex US up 3.5%. Performance was also strong across all product areas, driven by good NAV performance, and partially offset by net outflows across each area. FUM increased in all strategies other than Opportunistic Value and total FUM ticked up from $10.98bn to $11.06bn. City of London retains an active pipeline across all areas.

• Operations: Revenue rates and expenses remain in line with the previous figures, giving a monthly run-rate for operating profit, pre profit share, of £3.3m. Progress has also been made in harmonising the financial and IT infrastructure in CLIM and KIM.
• Estimates: With financial progress largely in line with our expectations, we have only made small changes to our earnings estimates. The net outflows and exchange rate movements have led to small downgrades, with our 2021E EPS reduced by 0.6%, our 2022E EPS by 1.6% and 2023E EPS decreased by 1.5%.
• Valuation: Despite the recent good performance, the 2022E P/E of 13.1x remains at a discount to the peer group. The 2022E yield of 6.7% 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 47% 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 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, a dividend increase in FY’20, and with the EPS boost from Karpus in 2021, the prospects for future dividend increases look very good.