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City of London has announced a trading update for 2Q’20. At the end of December, FUM had grown to $6.01bn, a 13% increase over the September 2019 figure of $5.34bn. This was driven by healthy market growth and more inflows into the Developed World strategy. A rebound in the exchange rate means a smaller increase in FUM of 5% in sterling terms. The highlight for many investors will be in the increase in the interim dividend of 1p to 10p. While nothing has been said about the full-year dividend, increasing that at the same rate would still leave the five-year rolling dividend cover, on our estimates, above the 1.2x target.

  • Operations: The increased FUM in the diversifying strategies did not affect the revenue margin, which stayed at 75bps. The strong market performance and good inflows led to an estimated pre-tax profit of £6.3m, which was a little ahead of our forecast.
  • Performance: Each of the Emerging Market, Developed Market and Opportunistic Value strategies outperformed, with NAV performance and discount narrowing being a factor in each. Frontier underperformed, with country allocation and discount widening both being factors.
  • Valuation: The 2020E P/E of 10.5x is at a significant discount to the peer group. The underlying 2020E yield of 6.6% 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 and, unless there is significant market disruption, more should follow in the next few years.
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