Handling challenging markets well

City of London has announced a trading update for 3Q’20. Market conditions have been challenging for fund managers. With a largely institutional investor base, there has been a mixture of subscriptions and withdrawals, with net withdrawals in the quarter of $35m. Falling markets weighed more heavily on FUM and, at the end of March, total FUM were $4.40bn, down from $6.01bn three months earlier. We do note that markets have recovered somewhat so far in April, suggesting current FUM will have clawed some of that back. No decision has been taken on the dividend, but near-term increases look unlikely.

• Operations: The revenue margin is holding steady at 75bps. There is no direct news on costs, with City of London’s financial strength and desire for stability allowing it to prioritise keeping its team in place. Operationally, it has executed its business continuity plan, and all staff are working remotely.
• Performance: All of the strategies underperformed over the quarter, particularly in March. Widening discounts were the main cause, perhaps aggravated by liquidity issues, although NAV underperformance also contributed. There has been some narrowing of discounts in April.
• Valuation: The 2020E P/E of 8.9x is at a discount to the peer group. The underlying 2020E yield of 8.6% is attractive, in our view, 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 EM fund managers, aided by its good performance and strong client servicing. Further EM volatility could raise the risk of such outflows, 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. FY’17 and FY’18 both saw dividend increases. While dividend increases may be unlikely amid the current volatility, we believe the company can keep the dividend steady in current market conditions.