FUM, profits and dividend all moving on up

City of London has published a trading statement this morning covering 1HFY2018. The headline figures are very positive, with funds under management (FUM) growing 14% over the six-month period to $5.33bn. This was driven by positive market performance and inflows from the diversifying strategies, with an offset from net outflows in the Emerging Market strategy. Fund performance was mostly good, with outperformance across all the diversifying strategies, although Emerging Markets underperformed. The interim dividend has been increased by 1p to 9p.

• Operations: Revenue and profitability numbers are ahead of expectations. The revenue accrual rate has dropped to 82 basis points of FUM from 84 basis points at the end of 1Q 2018, although this will affect future revenues more than those announced today. Costs are in line with previous figures.
• Profits: The run-rate operating profitability before profit share and EIP is currently £1.7m per month. This is based on the calendar year-end exchange rate of 1.35 US$/£. The net result is that the estimated first-half pre-tax profit is £6.6m, a 14% increase over 1H FY2017.
• Valuation: The prospective P/E of 10.5 times is at a significant discount to the peer group. The historic yield of 5.7% is very 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 emerging market fund managers, aided by its good performance and strong client servicing. Further EM volatility may increase the risk of such outflows however.
• 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. FY2017 saw the first dividend increase since FY2012 and, unless there is significant market disruption, more should follow in the next few years.