Solid FUM update offset by margin changes

City of London has released its trading update for 1Q of FY’19. The statement shows a continuation of the trends seen in recent statements. Aggregate inflows into the newer strategies were largely offset by rebalancing outflows from the Emerging Markets strategy, resulting in a small amount of net inflows of $8m. Market movements were mixed, with only developed markets rising during the quarter and MSCI EM index declining 1%. Fund performance was slightly behind benchmarks, with manager performance and widening discounts hampering different strategies. In aggregate, FUM declined slightly from $5.11bn to $5.01bn.

• Operations: The changing mix of the assets continues to affect the revenue margin. Both Developed Markets and Opportunistic Value are lower margin than the existing Emerging Market business. Their rising proportion led to a decline in revenue margin to 77bps, from the 80bps previously indicated.
• Costs: The costs were largely in line with those indicated at the time of the full-year results. The EIP charge has increased a little, to 4% from the 3% at the full-year results. Estimated earnings for the first quarter will be £2.2m, down from the previous year’s figure of £2.5m.
  Valuation: The prospective P/E of 11.2x is at a significant discount to the peer group. The historical yield of 6.8% is 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 EM fund managers, aided by its good performance and strong client servicing. Further EM volatility could increase the risk of such outflows, although increased 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.