City of London published a trading statement yesterday morning, covering 3Q’18. Over a volatile quarter for markets, City of London’s FUM rose by 1.7% to $5.4bn. Most of this increase came from inflows, with asset gains of $115m in the developed market and GTAA strategies offset by $38m outflow from emerging markets. There was a small positive market contribution, with the MSCI Emerging Markets Index up 1% in the quarter. Short term performance was mixed. The market volatility led to discounts widening in emerging markets. In developed markets, strong NAV movements contributed to outperformance.

  • New business: The pipeline continues to be active, with the $400m of potential business being in line with the previous statement. City of London indicate that the opportunities are spread across all the product areas, suggesting the recent underperformance has not had an effect.
  • Operations: With new business being at a lower fee rate than existing business, the average fee rate declined to 80bps. The rising exchange rate has also affected profitability, with the run rate for operating profit before profit share and EIP declining to £1.5m per month.
  • Valuation: The prospective P/E of 10.9x times is at a significant discount to the peer group. The historical yield of 5.7% 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 fund outflows.
  • 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 saw the first dividend increase since FY2012 and, unless there is significant market disruption, more should follow in the next few years.