Weak markets weigh on FUM

City of London has announced its trading statement for 1Q’24. The main feature of the quarter was soft markets, with the MSCI Emerging Markets total return index declining 2.9% and the MSCI All-Country World ex US Index down 3.8%. Widening discounts also led to underperformance across the CLIM strategies and group FUM declined 6% to $8.88bn from $9.42bn. There were net outflows as well. The Emerging Markets strategy’s net outflow of $53m was in line with our forecast rate, while the International strategy also saw $71m of net outflows. KIM also experienced net withdrawals of $25m.

• Operations: This statement is the first since City of London changed its reporting currency to US dollars. The run-rate fixed expenses of $2.3m per month is unchanged from 4Q’23, while the run rate operating profit before profit-share of ca. $3.4m per month is a slight improvement.
• Estimates: The decline in FUM has weighed on our estimates. Our 2024E EPS has been reduced by 10% from 44.4¢ to 40.0¢ and our 2025E EPS has been reduced by 9% from 46.0¢ to 41.8¢. We have left our dividend forecasts unchanged.
• Valuation: After the recent performance, the 2024E P/E of 13.5x is roughly in line with that of the peer group. A 2024E dividend yield of 9.5% is well above the market average 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 38% 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.