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City of London published a trading statement this morning, covering FY2018. Profits are expected to be almost in line with Hardman & Co forecasts, with PBT of approximately £12.8m slightly lower and earnings of £10.1m slightly ahead. The latter represents an increase of over 10% relative to the previous year. The company also announced an increase of 1p in the final dividend, raising it to 18p, and taking the total for the year to 27p, an 8% increase over the total for FY2017. Dividend cover will be almost 1.5x for the second year in a row, well above the rolling five-year target of 1.2x.

  • Funds under management (FUM): Although, in dollar terms, FUM rose 9.5% to $5.1bn over the year, this is down since the 31 March figures. Since then, emerging market equities have been very weak, falling over 10% during the quarter, although July has so far seen a slight recovery.
  • Diversification: While the EM strategy had a mixed year, the diversification areas all gained assets and maintained outperformance. In aggregate, FUM in these areas almost doubled during the year and now represent 17.6% of FUM, from 9.8% a year ago. The diversification strategy is showing good results.
  • Valuation: The prospective P/E of 9.9x is at a significant discount to the peer group. The historical yield of 6.6% is very 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 may increase the risk of such outflows, however.
  • 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. FY2017 and FY2018 both saw dividend increases and, unless there is significant market disruption, more should follow in the next few years.
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