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City of London has announced its trading update for 1Q’22. After several strong quarters for global markets, they have fallen back over the past three months. Emerging markets were particularly weak, with the MSCI Emerging Markets TR Index down 8.1%. This was supplemented by ongoing rebalancing, with lagged reactions to previous strong emerging market performance. Offsetting this was good fund performance, which, in the Emerging Market, International and Opportunistic Value strategies more than offset the outflows. Outperformance was attributed to good country allocation and underlying NAV performance.

  • Operations: Most of the operational figures are in line with previous figures. The only exception is the Karpus revenue run rate, which has dropped 1bp to 76bps of FUM p.a., although the rounding means that the actual reduction will be smaller. Cost and pre-profit share operating profit run rates are unchanged.
  • Estimates: The weak markets have led to downgrades to our earnings estimates, with a small offset from exchange rate movements. Our 2022E underlying EPS has fallen 6%, to 48.9p, while our 2023E EPS is down 7%, to 51.6p.
  • Valuation: Despite the recent good performance, the 2022E P/E of 13.0x remains at a discount to the peer group. The 2022E yield of 6.9% 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 47% 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 shown robust performance in challenging market conditions, City of London is now reaping the benefits in a more supportive environment. The valuation remains reasonable. After a special dividend in FY’19, dividend increases in FY’20 and FY’21, and with the EPS boost from Karpus, the prospects for future dividend increases look very good.
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