Fighting the market invasion

City of London has announced its trading update for 3Q’22. It has been a tough quarter, with the Russia/Ukraine conflict leading to weakness in markets, albeit they have partially recovered from their initial reaction. Overall, FUM fell from $11.1bn at the end of 2021 to $10.3bn at the quarter-end, a decline of 8%. This compares with declines in the MSCI Emerging Markets total return Index of 7.0% and the MSCI All Country World ex US Index of 5.4%. CLIM saw net inflows across all the strategies, but also underperformance in each of them. KIM experienced small outflows, but positive relative performance.

• Board: After the Karpus transaction took place, City of London had a board that did not fulfil current governance standards. This was kept in place to take advantage of expertise during the merger process. Changes have been announced that will shrink the board and restore an independent majority.
• Estimates: The weak markets and lower fee rates, offset by exchange rate movements, have led to downgrades to our earnings estimates. Our 2022E underlying EPS has decreased by 0.4%, to 47.1p, while our 2023E and 2024E underlying EPS are down 7%, to 46.9p and 49.9p, respectively.
• Valuation: Despite the recent good performance, the 2023E P/E of 12.7x remains at a discount to the peer group. The 2023E dividend yield of 7.4% 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 41% 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 investment performance and operational control, City of London is well-placed to grow organically. We believe the valuation remains reasonable. After special dividends in FY’19 and FY’22, dividend increases in FY’20 and FY’21, and with the EPS boost from Karpus, the prospects for future dividend increases look very good.