City of London has announced a merger with Karpus Management Inc, a US SEC-registered investment adviser. Based in upstate New York, it is focused on wealth management for HNW individuals and, as of end-March, it had FUM of $3.22bn. Like City of London, it primarily invests through funds. Its primary focus is closed-end funds (CEFs) but it also uses mutual funds, ETFs and other vehicles. With a range of balanced mandates, on an underlying basis, 39% of assets are equities, predominantly in the US, and 61% fixed income. City of London will be significantly diversifying its exposure by asset class and client type.

  • Finances: Private client management has a higher revenue margin than City of London’s institutional business. Karpus is also run very efficiently and, ex the compensation of the departing founder, generates a higher profit with an estimated adjusted PBT of $16.0m in FY’19 and $8.9m in 1H’20.
  • Earnings upgrades: We have significantly upgraded our earnings estimates. We estimate Karpus will enhance EPS by 15% in 2021 and 14% in 2022. There are also significant increases from market improvements. In addition, we have upgraded our dividend forecasts and have restored increases in 2021 and 2022.
  • Valuation: The 2021E P/E of 6.9x is at a discount to the peer group. The 2021E yield of 9.2% is very 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. With the EPS upgrades from Karpus, the prospects for future dividend increases look very good.


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