Positive markets offset by revenue margins

City of London has announced its pre-close update for FY’23. FUM has grown by 2% over the past year, to $9.42bn, from $9.22bn, albeit it has taken a volatile path in between and the total is slightly down from the end of 3Q’23. Broadly speaking, the rise was due to market and strategy outperformance, with the MSCI Emerging Markets Net TR Index rising 1.7% and the MSCI ACWI ex USA Index increasing 12.7%. This was offset by net outflows across most of the strategies (Opportunistic Value being the exception). Performance was generally strong, with outperformance across most strategies.

• Operations: As usual in its pre-close statement, City of London announced its expectations for year-end results. Expected earnings will be £14.8m, compared with £18.1m in 2022, and basic EPS is expected to be 30.4p, 18% lower than 2022’s 36.9p.
• Estimates: Decreased FUM, exchange rate movements and changes to tax rates have all affected our own estimates. However, the net result is that our 2024E EPS is unchanged, at 33.9p, while our 2025 estimate is trimmed by 0.3%, to 35.8p. We have also adjusted our dividend forecasts.
• Valuation: After the recent performance, the 2024E P/E of 14.8x is roughly in line with that of the peer group. The 2024E dividend yield of 8.4% 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 38% 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 long-term investment performance and operational control, City of London is well-placed to grow organically. We believe the valuation remains reasonable. Now that the Karpus transaction has settled down, the prospects for future dividend increases may be more dependent on markets and the ability to attract new business.