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City of London has announced a trading update for 1Q’20. Weak markets were largely offset by inflows and outperformance in the Emerging Markets strategy, meaning FUM finished the quarter at $5.34bn, down $61m from the June figure of $5.39bn. The main beneficiary of inflows was the Developed Markets strategy, which received a net $142m, and assets rose 16.5% to $849m. In the Emerging Markets strategy, outperformance came from positive NAV performances and narrowing discounts. The Developed Markets strategy was impacted by European and UK weakness, while Frontier Markets saw an impact from exposure to Argentina.

  • Operations: The increased FUM in the diversifying strategies continue to affect the revenue margin, which slipped to 75bps. This, together with weak markets, weighed a little on revenues and, with costs in line with expectations, the expected post-tax profit of £2.4m for 1Q’20 is a little behind our forecast.
  • Board: From 1 January 2020, Carlos Yuste, Head of Business Development, will re-join the board as an Executive Director. He was previously on the board from 2006 until 2015.
  • Valuation: The 2020E P/E of 10.6x is at a significant discount to the peer group. The underlying 2020E yield of 6.2% 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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