REG - City of Lon Inv Grp - Final Results <Origin Href="QuoteRef">CLIG.L</Origin> - Part 1
RNS Number : 9588QCity of London Investment Group PLC18 September 201718th September 2017
CITY OF LONDON INVESTMENT GROUP PLC (LSE:CLIG)
("City of London", "the Company" or "the Group")
FINAL RESULTS FOR THE YEAR TO 30TH JUNE 2017
SUMMARY
Funds under management (FuM) at 30th June 2017 were US$4.7 billion (2016: US$4.0 billion), an increase of 17%. In sterling terms, FuM increased by 20% to 3.6 billion (2016: 3.0 billion). The MSCI Emerging Markets TR Net Index rose 24% in US$ terms over the same period.
Revenues, representing the Group's management charges on FuM, were 31.3 million (2016: 24.4 million). Profit before tax was 11.6 million (2016: 8.0 million).
Basic earnings per share were 36.9p (2016: 23.3p) after a tax charge of 21% (2016: 27%) of pre-tax profits.
An increased final dividend of 17p per share is recommended, payable on 31st October 2017 to shareholders on the register on 13th October 2017, making a total for the year of 25p (2016: 24p)
For a copy of the full report or further information, please visit the shareholders page of our website http://www.citlon.co.uk or contact:
Barry Olliff (CEO)
City of London Investment Group PLC
Tel: 001 215 313 3774
Martin R Green
Zeus Capital Limited
Financial Adviser & Broker
Tel: +44 (0)20 3829 5000
CHAIRMAN'S STATEMENT
I joined the Board of your Company at the time of the flotation on AIM in 2006 and I will be retiring at the end of the current year - it is a good moment, therefore, for me to review the progress that has been made over the last decade.
The primary driver of our fortunes has been the Emerging Markets, where on average over the decade we have invested at least 90 percent of our Funds under Management ("FuM"). The Emerging Markets have been both volatile and, certainly compared to the previous decade, have shown only erratic growth. What I find to be particularly impressive is how, without much of a following wind, your Company has been able amply to reward shareholders well ahead of the performance of the underlying markets. Good investment performance justified relatively high fees whilst attracting new client money - on flotation in 2006 FuM totalled 1.5 billion compared to 3.6 billion at end June 2017. The increased revenues, combined with effective cost controls and the considered use of technology driving efficiencies, ensured that shareholders have been well rewarded through a combination of dividends and stock price.
Results
For the year to 30th June 2017 pre-tax profits were 11.6 million (2016: 8.0 million) and profits after a tax charge of 21% were 9.1 million (2016: profits of 5.9 million after a tax charge of 27%). The tax charge includes an estimated refund of c.0.4 million relating to prior years' US state taxes which if excluded would result in a Group tax rate of 24% of pre-tax profits. Basic and fully diluted earnings per share were 36.9p and 36.7p respectively (2016: 23.3p and 23.1p).
As highlighted previously, the major driver determining our results is the average level of FuM over the year. The underlying MSCI Emerging Markets TR Index (M1EF) performed strongly, averaging 405 and reaching 453 at the year-end, compared to an average of 351 closing at 364 the previous year. Our FuM were US$4.7 billion (3.6 billion) at 30th June 2017 (2016: US$4.0 billion or 3.0 billion). Although this represented a 17% increase in US$ terms, it fell short of the increase of 24% in the M1EF as the good EM performance led clients to rebalance their portfolios away from the EMs. As we report in sterling and with, in addition, some 40% of our costs being sterling based, profits have again benefited from a much weaker sterling currency relative to our US dollar based income. In previous years I have illustrated this with a sterling/dollar Post-Tax Profit matrix; this year an updated matrix is contained in our Finance Director's report. The average rate during the year was 1.27 compared to 1.48 for the previous 12 months. These two drivers accounted for most of the impressive profit increase reported above.
Dividends
Shareholders will be aware that we have a well established policy applied with some flexibility of targeting a 1.2x dividend cover over a rolling 5 year period. In view of both the improvement in underlying profitability and the positive outlook for the current year it has been decided to recommend an increase of 1p in the final dividend giving a total for the year of 25p and a dividend cover for the year of 1.46x (2016: 0.97x).
Board
Your Board continues to evolve and this year we have both good news and not so good news to report. Allan Bufferd, our Senior Independent Director whose wise counsel we have benefited from for 9 years, decided that with the start of his ninth decade beckoning it was time for him to draw stumps on some of his very extensive commitments. He retired at the year end and we have been privileged to welcome as of 1st July Susannah Nicklin to the Board. Information on Susannah's background and experience was included in our announcement on 13th June but suffice to say she is exceptionally well qualified to contribute to your Board. Barry Aling has become our new Senior Independent Director and Susannah now chairs the Nominations Committee.
We again carried out a formal evaluation of the performance of the Board and its members. With the conclusion that each Director is operating effectively I recommend that all Directors be re-elected.
Outlook
With developed markets at all-time highs seemingly oblivious to the mounting political uncertainties in a number of key OECD countries, emerging markets will continue to be vulnerable to both geopolitical and monetary events. However, weak sterling has benefited your Company's profitability substantially and whilst predicting currencies is a fool's game I consider our current level of profits to be soundly based with encouraging upside from the pipeline of potential new client money for both our traditional EM products and the diversification strategies.
Our AGM is on Monday 23rd October at our Gracechurch Street offices and all shareholders are most welcome. Following the meeting's formal business your Directors look forward to having the opportunity to meet and talk to individual shareholders.
In the meantime I do encourage all stakeholders, especially clients and shareholders, to read on (see link below for access to the full annual report) as I believe that this report presents a quite exceptional level of relevant information and transparency on our business underlining our commitment to excellence in all that we do.
http://www.rns-pdf.londonstockexchange.com/rns/9588Q_-2017-9-15.pdf
David Cardale
Chairman
14th September 2017
START OF STRATEGIC REPORT
CEO STATEMENT
An EM Bull Market at last!
After ten years, the Emerging Markets as measured by the MSCI EM T/R Index have just regained the highs of 2008.
For us this has been a tough time with doubts about our asset class abounding.
Fortunately our Clients, Shareholders and Staff have remained loyal as we have continued to do what we do best, which is to take advantage of the volatility that has been created by others.
CLIG Corporate Stability
During this past bear market we have, as mentioned, been successful in keeping most of our Clients. This has been achieved with a Client Retention program that has not just taken time and human resources, but also an ongoing deeper and deeper dive into our Investment Process. The improved information we can now obtain for our clients and for ourselves via the use of technology is to me extraordinary. SWAD, Attribution, Asset Allocation Discrepancies and Country Allocation data would not have been able to be calculated as accurately as they are today even five years ago. Being forensic in our research and using no third party data when making investment decisions are additional Core Values that we bring to our work as markets become more perfectly priced, volatility is reduced and alpha generation is potentially reduced.
Diversification
As this process has worked for the Emerging Markets team for well over 25 years, it's now also working for our Developed, Frontier and Global Tactical Asset Allocation strategies.
Further, these latter teams within CLIM have continued to grow in both absolute and relative terms when compared to our core business of Emerging Markets. I believe it would be fair to say that in terms of our ambitions regarding Diversification, we are in a good place in terms of both momentum and profitability.
Over time an increased contribution to growth from these diversification products will benefit all stakeholders:
Clients via an increased product offering, albeit one that continues to benefit from our core competency within closed-end funds
Shareholders via a less volatile (and potentially greater) stream of earnings from a more diverse client base
Staff via improved opportunities for progression and, from the underpinnings of business profitability, potentially higher remuneration.
Margins and Cost Controls
I would make the point that while margins at all active managers have remained under pressure, we as a firm, as a result of our consistent outperformance relative to our benchmarks, have not had significant downward pressure.
Shareholders should take note of the very disciplined control we have demonstrated over our costs. To the extent that these have increased, it is to a great extent down to the fall in GBP which, when translating the costs - including staff salaries associated with our offices in the US, Singapore and Dubai - into sterling, has had a detrimental effect on our overheads.
During this unique period of increased GBP denominated revenues we have taken the opportunity to enhance our IT infrastructure. These enhancements address the interrelated components of refreshing the Firm's infrastructure and addressing cybersecurity solutions. These expenditures were both necessary and position us well for the future.
In terms of containing costs, this year will be no different. It's my view that when one is at the early stages of a bull market, increased bonuses (variable costs) are a substitute for increased salaries (fixed costs).
In our focus to contain costs we should not forget our longer term plans for the (unfortunately inevitable) bear market.
Rather than join in with our peers who invariably start cost cutting once the bear market arrives, we prefer to keep staff together thus maintaining not just corporate knowledge but their focus and long-term commitment.
Advances in, and use of Technology
We would say that we have a very well tried and tested Investment Process. The smart thing though is to continue to delve into data via the use of technology while having better and better trained practitioners. This approach, while very important within an Investment Management context, is equally important in terms of support staff. As we say, this is a team firm and there is no single person here who is considered pivotal in terms of the investment performance we have achieved.
I have referenced IT on a number of occasions in the last few paragraphs. We will continue to invest in technology solutions for the foreseeable future not just to assist our Investment Process but, as Clients become more demanding and we are held increasingly accountable, to enhance support systems to leave staff time for more "added value" tasks. It will also enable us to save on the additional staff costs that would otherwise be inevitable.
Remuneration Policy within a Team Environment
As CLIG Shareholders will be aware, while complying with our regulatory responsibilities, we are reluctant to be compartmentalised into the "one size fits all" environment that has recently been promoted as the way that certain Financial Service companies should be run in terms of their Remuneration Policy.
Specifically, we are going to resist, to the extent possible, employee Key Performance Indicators (KPIs) that are being promoted as a solution to the selfishness and greed that have been referenced as contributing factors to the instability that developed around 2008 and what ultimately became known as the "Financial Crisis".
Having followed this industry for over 50 years it seems to me that the employee KPI approach, while addressing a small component of the problem, does not deal with its root cause.
In my opinion, not only are Financial Service companies being encouraged to measure employee performance over a discrete (and I would suggest excessively short term) period, but this performance does not necessarily relate to a firm's profits, reputation, long-term viability or its strategic positioning in the marketplace.
By attempting to focus on employee KPIs, I would say that our industry is being encouraged to attach a level of credibility to the achievement of targets that cannot be measured within the context of the aforementioned four points.
Further, in my opinion, KPIs could actually motivate employees to increase the risks to which corporations are vulnerable as it is extraordinarily difficult to determine if a relevant period in terms of measurement is one, three or five years, such periods being complicated in terms of remuneration by clawback and deferral. This is made even more complicated in terms of how the benefit could be received - in cash or in shares?
There are three components that in my opinion are far more relevant to any discussion regarding Remuneration Policy.
First, what is the quality of the Profits - their volatility and the extent to which they are forecastable?
Second, the quality of the people being employed - are they selfish and greedy, or are they like those in other Industries such as in Architecture, Dentistry and Accountancy where there is both a profit motive and where employees can become wealthy, but where this can only occur within a team environment?
Third, in many instances within parts of the Financial Service industry, Profits and Profitability actually have nothing to do with individual performance. They are a function of volatility (of markets), (client) activity and the strategic positioning of the business.
At the risk of stating the obvious, the quality of many Financial Service Profits is very poor, on a long-term basis they are not forecastable or sustainable and it's for these reasons that forty or fifty years ago we were paid low salaries (keeping the fixed overhead down) while letting staff benefit hugely in the good times.
Over the past decades as our industry has developed, while the volatility of profits has not changed, both the security of employees and their remuneration has altered, effectively transferring those risks to Shareholders (and sometimes to tax payers). In contrast, the components of our Remuneration (i.e., 30% profit share participation for employees) have not been reset in 25 years. How many other Financial Services firms can say the same?
Within a CLIG and CLIM perspective we understand that Emerging Markets stock market and currency volatility are with us to stay.
We also understand that our Shareholders (who own the business) will be much better off if we work within a team environment. By definition we cannot, or would find it extraordinarily difficult to, reward employees within a team environment via individual KPIs. To propose KPIs would effectively pit one employee against another when the competition is actually outside the firm.
CLIG KPIs
Unlike internal KPIs which we consider to be divisive, we continue to embrace corporate KPIs as we believe the competition is with other companies that undertake similar work to CLIM and CLIG.
For the past few years we have used as our key KPI a comparison of the Total Return of our Share Price compared with selected peers since CLIG was listed in 2006. This remains the main measurement tool that we believe best reflects the relative success of our company in the marketplace.
In an attempt to determine the most relevant drivers or components of what contributes to our main KPI, we have added six measures that we believe allow Shareholders to determine progress. These could be considered leading indicators in terms of potentially determining the value of CLIG Shares.
We have selected funds under management, operating margin, cost/income ratio, investment performance, client longevity and staff longevity as the six additional KPIs.
My intended CLIG Share sales
As in previous years I would like to advise Shareholders of my intentions regarding share sales.
As I approach retirement on 31st December 2019, I have announced that at specific levels of CLIG's Share Price I will sell shares.
In my opinion this is an accountable way to proceed and is in keeping with the way that I have run the firm since its inception.
Previous sales of 500,000 have been made at 50p increments and while as a principle this has worked, 500,000 is a large number of Shares and also seems to act - for a period of time - as a ceiling for the CLIG Share Price.
As a result, going forward, my intention is going to change from selling 500,000 Shares at 50p increments to selling 250,000 Shares at 25p increments.
This will mean that having recently sold 500,000 Shares at 400p, my next sale will be 250,000 at 425p subject to close periods etc.
Information for Shareholders
We spend a lot of time providing information to Shareholders that we believe provides them with relevant data to make investment decisions.
Some of this information relates to our Strategy while some of it is provided in an attempt to demystify our business. As an example we provide on our web site monthly information regarding FuM ( and US$), Income and Expenses.
You are very welcome to join our Investor Afternoon on 23rd October. For further details of the event, and to register your interest, please email investorrelations@citlon.co.uk
Barry Olliff
Chief Executive Officer
14th September 2017
BUSINESS DEVELOPMENT REVIEW
Overview
Relative investment performance in the Emerging Markets Closed-End Fund (CEF) strategy remains strong, with first or second quartile results versus manager peers over the period.
There were new inflows of $178 million in our core emerging market strategies, which were countered by outflows of $484 million, leading to net outflows of $306 million as investors rebalanced their portfolios into the significant emerging markets equity gains.
Fundraising in the diversification products resulted in inflows of $141 million and outflows of $115 million, leading to net inflows of $26 million. Diversification products continued to increase as a percentage of Group Assets Under Management (AUM) at 10%, compared with 9.1% last year. Significant progress occurred over the past year in raising the profile of the extension CEF products with institutional consultants and plan sponsors. As a result, an additional $128 million of inflows into the diversification products during the new financial year are confirmed.
Products
A combination of strong performance and additional AUM into our diversification products resulted in assets growing in these strategies by 33% over the year.
The Global Tactical Asset Allocation Strategy encompasses a variety of asset classes via closed-end funds, which is desirable to asset allocators and other investors looking for exposure to a specific market. This strategy adopts a "go-anywhere" approach and is managed as part of the Developed Closed-End Fund strategy team. While this is a separate team from the team managing client assets in the emerging markets, both teams use the same methodology and internal resources. Both taxable and tax-exempt products are available.
The Developed Markets CEF Strategy utilises our experience with Closed-End Funds in our core Emerging Markets strategy to provide exposure to global developed markets.
The Frontier Emerging Markets CEF Strategy is an extension of the Emerging Markets core equity product focusing on the smallest (pre-emerging) markets with high growth potential.
Performance
Global composite investment returns for the Emerging Market Closed-End Fund strategy for the rolling one year ending 30th June 2017 were 23.2% vs 23.7% for the MSCI Emerging Markets Index in USD and 22.7% for the S&P Super BMI Index in USD terms.
Global composite investment returns for the Developed Market Closed-End Fund strategy for the rolling one year ending 30th June 2017 were 32.6% vs. 20.5% for the MSCI ACWI ex US in USD.
Composite investment returns for the Frontier Emerging Market Closed-End Fund Strategy for the rolling one year ending 30th June 2017 were 24.4% vs 26.0% for the S&P Frontier EM 150 benchmark in USD.
Outlook
Marketing efforts will continue to be targeted at investment consultants, foundations, endowments and pension funds. We will also continue to introduce our capabilities to family offices, outsourced CIO firms and alternative consultants. Increased interest in our Developed Markets CEF strategy during the year provides a positive outlook. Our Developed, Global Tactical Asset Allocation, and Frontier Emerging Market capability will continue to be a focus of our product diversification and business development activities.
FINANCIAL REVIEW
Consolidated income statement
Funds under Management (FuM) as an average for the year was US$4.3 billion compared to US$3.8 billion in 2015/2016 (based on the month end values), an increase of approximately 13%, due to positive market movements offset in part by net outflows during the financial year of US$0.3 billion. The Group's gross revenue comprises management fees charged as a percentage of FuM and is up year on year by 28% to 31.3 million (2016: 24.4 million). The principal reason for the significant increase in revenue, compared to the rise in FuM, is due to sterling weakening against the US dollar. The average USD/GBP rate this year was 1.27 compared to 1.48 last year.
Commissions payable of 1.4 million (2016: 1.5 million) relates to fees due to third party marketing agents for the introduction of clients. The contract to which all but a small proportion of these commissions relate expired in October 2010. Under the agreement, commission is based on a period of ten years from the date of the client's initial investment.
The Group's net fee income, after custody charges of 0.9 million (2016: 0.7 million), is 29.0 million (2016: 22.2 million). As a weighted average percentage of FuM, net fee income is currently around 84 basis points compared to 86 basis points at the end of last year.
Administrative expenses of 17.5 million (2016: 14.4 million) includes: the 30% of operating profit that forms the profit-share pool, 5.5 million including payroll taxes (2016: 3.7 million) plus the charge this period of the Company matching the employees participation in the new Employee Incentive Plan (EIP) of 0.1 million (2016: n/a), representing 0.6% of pre-bonus operating profit which is within the 5% limit approved by shareholders. The total anticipated cost to the Company for matching the employees' participation is c.0.6 million, 3.5% of pre-bonus operating profit, which under IFRS2 is charged to the income statement over the period from employee election to vesting.
Stripping these variable costs out leaves a core overhead of 11.9 million (2016:10.7 million), representing a cost-income ratio of 41% (arrived at by comparing core overhead to net fee income).This is an improvement on last year's 48%, due to the growth in funds under management. The largest component of core overhead continues to be Human Resource (HR) related at 7.5 million (2016: 6.9 million), the year on year increase attributable to a weaker pound, as the mid-year employee salary increase was offset by other HR savings.
Interest receivable and similar gains of 0.1 million includes bank interest on deposits, realised gains on investments, fair value gains / losses on investments and an estimated interest charge in relation to prior years' US state taxes. Under IFRS10, two of the funds that the Group manages are classified as subsidiaries due to the Group's controlling interest. During the year one of the funds liquidated resulting in a realised gain of 0.2 million and the other attracted a significant tactical investment from an EM client. At the point the fund gained third party funding it ceased to be a controlled entity and is no longer consolidated as a subsidiary. This resulted in a reversal of the cumulative gain of the non-controlling interest of 0.1 million. Further fair value gains or losses on the Group's investment in this fund are accounted for through Comprehensive Income.
The net of all the above results in a pre-tax profit of 11.6 million (2016: 8.0 million).
Corporation tax this year amounts to 2.4 million, an effective rate of 21% compared to 27% last period (2016: 2.1 million). The tax charge includes an estimated refund of 0.4 million in respect of prior years, which relates to the reassessment of US state taxes following a comprehensive review commissioned during the year. Looking ahead to next year, all things being equal, and based on announced tax rates, it is expected that the Group tax rate should equate to c.23% of profits.
Consolidated statement of financial position and statement of changes in equity
The Group's financial position continues to be strong and liquid with 13.9 million in cash, representing 77% of net assets (2016: 10.2 million, 72%).
As mentioned earlier in the income commentary, the Group's seed investments were consolidated last year due to the Group's controlling interest. One fund liquidated and the other, the International Equity CEF, gained a significant third party investor during the year under review which meant the Group no longer had a controlling interest. This accounts for the 2.2 million reduction in other financial assets since last year, with 0.9 million representing the fair value of the liquidated fund, 0.6 million of non-controlling interest and 0.7 million being the fair value of the International Equity CEF now reported as an "available-for-sale financial asset". The fair value of this fund at 30th June 2017 was 0.9 million and the increase in value is reflected in the fair value reserve.
Other components of non-current assets are: property and equipment of 0.6 million (2016: 0.4 million), capitalised software licences of 0.4 million (2016: 0.2 million) representing an increased investment in IT systems and equipment of 0.5 million offset by amortisation of 0.1 million, and a deferred tax asset of 0.2 million (2016: 0.1 million) which is an estimate of the future corporation tax savings to be derived from the exercise of share options in issue at the financial year end.
The major changes in equity attributable to shareholders this year are profit of 9.3 million (2016: 5.8 million) and the dividends paid during the year of 6.0 million (2016: 6.0 million). The dividend comprised the 16p final dividend for 2015/16 plus the 8p interim dividend for the current year.
During the year, the Group took the opportunity to use some of its surplus cash to fund the buyback and cancellation of 35,000 Company shares at 3.65. Directors and employees exercised 424,278 Employee Benefit Trust (EBT) held options, raising 1.1 million. The EBT currently holds sufficient shares to satisfy the EIP awards due at the end of October 2017.
The Group is well capitalised and its regulated entities complied at all times with their local regulatory capital requirements. In the UK the Group's principal operating subsidiary, City of London Investment Management Company Ltd, is regulated by the FCA. As required under the Capital Requirements Directive, the underlying risk management controls and capital position are disclosed on our website www.citlon.co.uk.
Currency exposure
The Group's revenue is almost entirely US dollar based whilst its costs are incurred in US dollars, sterling and to a lesser degree Singapore dollars and UAE dirhams. The US dollar/sterling exchange rate started and ended the year at around 1.30 and reached a low during the year of 1.20. The table below aims to illustrate the effect of a change in the US dollar/sterling exchange rate on the Group's post-tax profits at various FuM levels, based on the assumptions given, which are a close approximation of the Group's current operating parameters. You can see from the illustration that a change in exchange rate from 1.20 to 1.30 on FuM of US$4.5 billion reduces post-tax profits by 1.0 million.
FX/Post-tax profit Matrix: Illustration of US$/ rate effect
FuM US$bn
3.5
4.0
4.5
5.0
5.5
Post -tax
m
1.20
6.4
8.3
10.1
11.9
13.8
1.25
6.1
7.8
9.6
11.3
13.1
1.30
5.7
7.4
9.1
10.8
12.5
1.35
5.4
7.0
8.6
10.3
11.9
1.40
5.1
6.7
8.2
9.8
11.4
Assumes:
1. Average net fee 84 bp's
2. Annual operating costs 5.0m plus US$8m plus S$1m (1 = S$1.8)
3. Profit-share 30%
4. EIP 2%
5. Average tax rate 23%
It is worth noting though that while the Group's fee income is assessed by reference to FuM expressed in US dollars, the underlying investments are primarily in emerging market related stock, and therefore the US dollar market value is sensitive to the movement in the US dollar rate against the currencies of the underlying countries.
To a degree this provides a natural hedge against the movement in the US dollar given that as the US dollar weakens (strengthens) against these underlying currencies the value of the FuM in US dollar terms rises (falls).
The Group's currency exposure also relates to its non-sterling assets and liabilities, which are again to a great extent in US dollars. The exchange rate differences arising on their translation into sterling for reporting purposes each month is recognised in the income statement. In order to minimise the foreign exchange impact the Group monitors its net currency position and offsets it by forward sales of US dollars for sterling. At 30th June 2017 these forward sales totalled US$4.8 million, with a weighted average exchange rate of US$1.28 to 1 (2016: US$4.3 million at a weighted average rate of US$1.45 to 1).
Viability statement
In accordance with the provisions of the UK Corporate Governance Code, the Directors have assessed the viability of the Group, taking into account the Group's current position and prospects, Internal Capital Adequacy Assessment Process ("ICAAP") and principal risks.
The ICAAP is reviewed by the Board semi-annually and incorporates a series of stress tests on the Group's financial position over a three year period. It is prepared to identify and quantify the Group's risks and level of capital which should be held to cover those risks.
Based on the results of this analysis, the Board confirms it has a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years.
While the Directors have no reason to believe that the Group will not be viable over a longer period, any future assessments are subject to a level of uncertainty that increases with time. The Board have therefore determined that a three year period constitutes an appropriate timeframe for its viability assessment.
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 30TH JUNE 2017
Note
Year to
30th June 2017
Year to
30th June 2016
Revenue
Gross fee income
4
31,294,370
24,412,826
Commissions payable
(1,444,787)
(1,514,707)
Custody fees payable
(880,840)
(735,200)
Net fee income
28,968,743
22,162,919
Administrative expenses
Staff costs
13,153,914
10,606,490
Other administrative expenses
4,074,975
3,631,993
Depreciation and amortisation
230,635
168,298
(17,459,524)
(14,406,781)
Operating profit
5
11,509,219
7,756,138
Interest receivable and similar gains
6
81,135
212,595
Profit before taxation
11,590,354
7,968,733
Income tax expense
7
(2,449,217)
(2,115,404)
Profit for the period
9,141,137
5,853,329
Profit attributable to:
Non-controlling interests
(148,618)
61,975
Equity shareholders of the parent
9,289,755
5,791,354
Basic earnings per share
8
36.9p
23.3p
Diluted earnings per share
8
36.7p
23.1p
CONSOLIDATED AND COMPANY STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30TH JUNE 2017
Group Company
Year to
30th June 2017
Year to
30th June 2016
Year to
30th June 2017
Year to
30th June 2016
Profit for the period
9,141,137
5,853,329
8,629,630
9,395,022
Items which may be reclassified through the profit or loss:
Fair value gains/(losses) on available-for-sale investments*
158,597
(542)
158,227
(869)
Release of fair value gains on disposal of
available-for-sale investments*
(253)
-
(253)
-
Foreign exchange gains on non-monetary assets
33,732
83,058
-
-
Other comprehensive income/(loss)
192,076
82,516
157,974
(869)
Total comprehensive income for the period
9,333,213
5,935,845
8,787,604
9,394,153
Attributable to:
Equity shareholders of the parent
9,481,831
5,873,870
8,787,604
9,394,153
Non-controlling interests
(148,618)
61,975
-
-
*Net of deferred tax.
CONSOLIDATED AND COMPANY STATEMENT OF FINANCIAL POSITION
30TH JUNE 2017
Group Company
Note
30th June 2017
30th June 2016
30th June 2017
30th June 2016
Non-current assets
Property and equipment
560,774
431,017
147,517
72,275
Intangible assets
360,283
201,801
20,407
-
Other financial assets
34,660
2,200,099
834,105
1,734,670
Deferred tax asset
216,693
86,106
64,719
19,101
1,172,410
2,919,023
1,066,748
1,826,046
Current assets
Trade and other receivables
5,857,896
5,044,107
8,248,782
5,597,427
Available-for-sale financial assets
915,649
-
915,649
-
Other financial assets
135,547
-
135,547
-
Current tax receivable
-
-
634,890
306,547
Cash and cash equivalents
13,936,558
10,150,799
180,938
74,755
20,845,650
15,194,906
10,115,806
5,978,729
Current liabilities
Trade and other payables
(3,402,681)
(3,122,371)
(1,219,878)
(1,626,909)
Current tax payable
(418,513)
(732,795)
-
-
Creditors, amounts falling due within one year
(3,821,194)
(3,855,166)
(1,219,878)
(1,626,909)
Net current assets
17,024,456
11,339,740
8,895,928
4,351,820
Total assets less current liabilities
18,196,866
14,258,763
9,962,676
6,177,866
Non-current liabilities
Deferred tax liability
(115,774)
(137,514)
(115,774)
(2,019)
Net assets
18,081,092
14,121,249
9,846,902
6,175,847
Capital and reserves
Share capital
9
268,617
268,967
268,617
268,967
Share premium account
2,256,104
2,256,104
2,256,104
2,256,104
Investment in own shares
(4,355,887)
(5,298,916)
(4,355,887)
(5,298,916)
Fair value reserve
166,421
8,077
165,724
7,750
Share option reserve
442,379
563,350
442,379
563,350
EIP share reserve
101,497
-
101,497
-
Foreign exchange reserve
109,139
75,407
-
-
Capital redemption reserve
23,097
22,747
23,097
22,747
Retained earnings
19,069,725
15,593,570
10,945,371
8,355,845
Shareholders interest
18,081,092
13,489,306
9,846,902
6,175,847
Non-controlling interest
-
631,943
-
-
Total equity
18,081,092
14,121,249
9,846,902
6,175,847
As permitted by section 408 of the Companies Act 2006, the income statement of the Parent Company is not presented as part of these financial statements. The Parent Company's profit for the financial period amounted to 8,629,630 (2016: 9,395,022).
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
30TH JUNE 2017
Share capital
Share premium account
Investment in own shares
Fair value reserve
Share option reserve
EIP
Share
reserve
Foreign exchange reserve
Capital redemption reserve
Retained earnings
Total attributable to share-
holders
Non- controlling interest
Total
At 1st July 2015
269,123
2,117,888
(5,692,430)
8,619
807,106
-
(7,651)
21,597
16,127,877
13,652,129
595,387
14,247,516
Profit for the period
-
-
-
-
-
-
-
-
5,791,354
5,791,354
61,975
5,853,329
Comprehensive income
-
-
-
(542)
-
-
83,058
-
-
82,516
-
82,516
Total comprehensive income
-
-
-
(542)
-
-
83,058
-
5,791,354
5,873,870
61,975
5,935,845
Transactions with owners
Forex movement on
NCI investment
-
-
-
-
-
-
-
-
-
-
(25,419)
(25,419)
Share option exercise
994
138,216
393,514
-
(74,059)
-
-
-
74,059
532,724
-
532,724
Share cancellation
(1,150)
-
-
-
-
-
-
1,150
(375,502)
(375,502)
-
(375,502)
Share-based payment
-
-
-
-
16,868
-
-
-
-
16,868
-
16,868
Deferred tax
-
-
-
-
(186,565)
-
-
-
(129,958)
(316,523)
-
(316,523)
Current tax on share options
-
-
-
-
-
-
-
-
87,461
87,461
-
87,461
Dividends paid
-
-
-
-
-
-
-
-
(5,981,721)
(5,981,721)
-
(5,981,721)
Total transactions with owners
(156)
138,216
393,514
-
(243,756)
-
-
1,150
(6,325,661)
(6,036,693)
(25,419)
(6,062,112)
At 30th June 2016
268,967
2,256,104
(5,298,916)
8,077
563,350
-
75,407
22,747
15,593,570
13,489,306
631,943
14,121,249
Profit for the period
-
-
-
-
-
-
-
-
9,289,755
9,289,755
(148,618)
9,141,137
Comprehensive income
-
-
-
158,344
-
-
33,732
-
-
192,076
-
192,076
Total comprehensive income
-
-
-
158,344
-
-
33,732
-
9,289,755
9,481,831
(148,618)
9,333,213
Transactions with owners
Derecognisation of
NCI investment
-
-
-
-
-
-
-
-
-
-
(483,325)
(483,325)
Share option exercise
-
-
1,132,727
-
(147,464)
-
-
-
147,464
1,132,727
-
1,132,727
Purchase of own shares
-
-
(189,698)
-
-
-
-
-
-
(189,698)
-
(189,698)
Share cancellation
(350)
-
-
-
-
-
-
350
(128,007)
(128,007)
-
(128,007)
Share-based payment
-
-
-
-
26,493
-
-
-
-
26,493
-
26,493
EIP provision
-
-
-
-
-
101,497
-
-
-
101,497
-
101,497
Deferred tax
-
-
-
-
-
-
-
-
124,750
124,750
-
124,750
Current tax on share options
-
-
-
-
-
-
-
-
90,158
90,158
-
90,158
Dividends paid
-
-
-
-
-
-
-
(6,047,965)
(6,047,965)
-
(6,047,965)
Total transactions with owners
(350)
-
943,029
-
(120,971)
101,497
-
350
(5,813,600)
(4,890,045)
(483,325)
(5,373,370)
At 30th June 2017
268,617
2,256,104
(4,355,887)
166,421
442,379
101,497
109,139
23,097
19,069,725
18,081,092
-
18,081,092
COMPANY STATEMENT OF CHANGES IN EQUITY
30TH JUNE 2017
Share capital
Share premium account
Investment in own shares
Fair value reserve
Share option reserve
EIP
share
reserve
Capital redemption reserve
Retained earnings
Total attributable to shareholders
At 1st July 2015
269,123
2,117,888
(5,692,430)
8,619
620,541
-
21,597
5,319,645
2,664,983
Profit for the period
-
-
-
-
-
-
-
9,395,022
9,395,022
Comprehensive income
-
-
-
(869)
-
-
-
-
(869)
Total comprehensive income
-
-
-
(869)
-
-
-
9,395,022
9,394,153
Transactions with owners
Share option exercise
994
138,216
393,514
-
(74,059)
-
-
18,133
476,798
Share cancellation
(1,150)
-
-
-
-
-
1,150
(375,502)
(375,502)
Share-based payment
-
-
-
-
16,868
-
-
-
16,868
Deferred tax
-
-
-
-
-
-
-
(22,848)
(22,848)
Current tax on share options
-
-
-
-
-
-
-
3,116
3,116
Dividends paid
-
-
-
-
-
-
-
(5,981,721)
(5,981,721)
Total transactions with owners
(156)
138,216
393,514
-
(57,191)
-
1,150
(6,358,822)
(5,883,289)
At 30th June 2016
268,967
2,256,104
(5,298,916)
7,750
563,350
-
22,747
8,355,845
6,175,847
Profit for the period
-
-
-
-
-
-
-
8,629,630
8,629,630
Comprehensive income
-
-
-
157,974
-
-
-
-
157,974
Total comprehensive income
-
-
-
157,974
-
-
-
8,629,630
8,787,604
Transactions with owners
Share option exercise
-
-
1,132,727
-
(147,464)
-
-
69,349
1,054,612
Purchase of own shares
-
-
(189,698)
-
-
-
-
-
(189,698)
Share cancellation
(350)
-
-
-
-
-
350
(128,007)
(128,007)
Share-based payment
-
-
-
-
26,493
-
-
-
26,493
EIP provision
-
-
-
-
-
101,497
-
-
101,497
Deferred tax
-
-
-
-
-
-
41,603
41,603
Current tax on share options
-
-
-
-
-
-
24,916
24,916
Dividends paid
-
-
-
-
-
-
(6,047,965)
(6,047,965)
Total transactions with owners
(350)
-
943,029
-
(120,971)
101,497
350
(6,040,104)
(5,116,549)
At 30th June 2017
268,617
2,256,104
(4,355,887)
165,724
442,379
101,497
23,097
10,945,371
9,846,902
CONSOLIDATED AND COMPANY CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH JUNE 2017
Group Company
Note
30th June 2017
30th June 2016
30th June 2017
30th June 2016
Cash flow from operating activities
Operating profit
11,509,219
7,756,138
217,567
154,546
Adjustments for:
Profit/(loss) on disposal of assets
202
(515)
202
185
Depreciation charges
167,748
118,742
57,492
42,943
Amortisation of intangible assets
62,886
49,556
2,915
-
Share-based payment charge
26,493
16,868
21,134
36,374
EIP charge
101,497
-
50,114
-
Fair value gain/(loss) on investments
35,367
-
-
-
Translation adjustments
(57,966)
(243,072)
44,963
(8,903)
Cash generated from operations before changes
in working capital
11,845,446
7,697,717
394,387
225,145
Increase in trade and other receivables
(813,789)
(534,923)
(2,651,355)
(3,662,351)
Increase in trade and other payables
280,310
512,427
(407,031)
24,962
Cash generated from/(used in) operations
11,311,967
7,675,221
(2,663,999)
(3,412,244)
Interest received
28,925
40,195
76
74
Interest paid
(64,064)
-
-
-
Taxation (paid)/received
(2,764,001)
(2,094,937)
(461,085)
(22,012)
Net cash generated from/(used in) operating activities
8,512,827
5,620,479
(3,125,008)
(3,434,182)
Cash flow from investing activities
Dividends received from subsidiaries
-
-
7,700,000
9,269,000
Purchase of property and equipment and intangibles
(485,345)
(139,164)
(156,258)
(26,760)
Proceeds from sale of property and equipment
-
2,047
-
-
Purchase of non-current financial assets
(768)
-
(768)
-
Proceeds from sale of non-current financial assets
2,538
23,098
2,538
310
Proceeds from sale of subsidiary
1,073,438
-
1,073,438
-
Purchase of current financial assets
(155,963)
-
(155,963)
-
Proceeds from sale of current financial assets
-
-
-
-
Net cash generated from/(used in) investing activities
433,900
(114,019)
8,462,987
9,242,550
Cash flow from financing activities
Proceeds from issue of ordinary shares
-
139,210
-
139,210
Ordinary dividends paid
10
(6,047,965)
(5,981,721)
(6,047,965)
(5,981,721)
Purchase and cancellation of own shares
(128,007)
(375,502)
(128,007)
(375,502)
Purchase of own shares by employee share option trust
(189,698)
-
(189,698)
-
Proceeds from sale of own shares by employee
share option trust
1,132,727
393,514
1,132,727
393,514
Capital from non-controlling interest
-
-
-
-
Net cash used in financing activities
(5,232,943)
(5,824,499)
(5,232,943)
(5,824,499)
Net increase/(decrease) in cash and cash equivalents
3,713,784
(318,039)
105,036
(16,131)
Cash and cash equivalents at start of period
10,150,799
10,226,705
74,755
82,804
Effect of exchange rate changes
71,975
242,133
1,147
8,082
Cash and cash equivalents at end of period
13,936,558
10,150,799
180,938
74,755
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2017
The contents of this preliminary announcement have been extracted from the Company's Annual Report, which is currently in print and will be distributed within the week. The information shown for the years ended 30th June 2017 and 30th June 2016 does not constitute statutory accounts and has been extracted from the full accounts for the years ended 30th June 2017 and 30th June 2016. The reports of the auditors on those accounts were unqualified and did not contain adverse statements under sections 498(2) or (3) of the Companies Act 2006. The accounts for the year ended 30th June 2016 have been filed with the Registrar of Companies. The accounts for the year ended 30th June 2017 will be delivered to the Registrar of Companies in due course.
City of London Investment Group PLC ("the Company") is a public limited company which listed on the London Stock Exchange on 29th October 2010 and is domiciled and incorporated in the United Kingdom under the Companies Act 2006.
1 BASIS OF PREPARATION
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union ("EU") and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The Group financial statements have been prepared under the historical cost convention, except for certain financial assets held by the Group that are reported at fair value. The Group and Company financial statements have been prepared on a going concern basis.
New IFRS Standards and Interpretations
As at 30th June 2017, the following Standards and Interpretations as adopted by the EU, which are relevant to the Group, were in issue but not yet effective.
IFRS 9 replaces the classification and measurement models for financial instruments in IAS 39 with three classification categories: amortised cost, fair value through profit or loss and fair value through other comprehensive income. The Group's business model and the contractual cash flows arising from its investments in financial instruments determine the classification. Equity instruments will be recorded at fair value, with gains or losses reported either in the income statement or through equity. However, where fair value gains and losses are recorded through equity there will no longer be a requirement to transfer gains or losses to the Income statement on impairment or disposal.
IFRS 9 also introduces an expected loss model for the assessment of impairment. The current incurred loss model (under IAS 39) requires the Group to recognise impairment losses when there is objective evidence that an asset is impaired; under the expected loss model, impairment losses are recorded if there is an expectation of credit losses, even in the absence of a default event. This standard is currently expected to become effective in 2018.
IFRS 15 deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of goods or service and thus has the ability to direct the use and obtain the benefits from the goods or service. The Standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. The Standard is expected to become effective for annual periods beginning on or after 1st January 2018 and earlier application is permitted.
The following Standards and Interpretations, which are relevant to the Group, were in issue but subject to EU endorsement:
IFRS 16 requires a lessee to recognise lease assets and liabilities, currently accounted for as operating leases, on the statement of financial position and recognise amortisation of the lease assets and interest on the lease liabilities over the term of the lease. This Standard is currently expected to become effective in 2019.
The Group is assessing the impact of the above Standards on its future financial statements. In relation to IFRS 16, the majority of the Group's leases will expire before the Standard is effective and therefore it is not possible at this time to assess the extent of the Standard's impact in the year of adoption.
Accounting estimates and assumptions
The preparation of these financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Whilst estimates are based on management's best knowledge and judgement using information and financial data available to them, the actual outcome may differ from those estimates.
The most significant area of the financial statements that are subject to the use of estimates and assumptions are noted below:
Share-based payments
In order to calculate the charge for share-based compensation as required by IFRS 2, the Group makes estimates principally relating to the assumptions used in its option pricing model.
2 BASIS OF CONSOLIDATION
These financial statements consolidate the financial statements of the Company and all of its subsidiary undertakings. The Group's subsidiaries are those entities which it directly or indirectly controls. Control over an entity is evidenced by the Group's ability to exercise its power in order to affect any variable returns that the Group is exposed to through its involvement with the entity.
When assessing whether to consolidate an entity, the Group evaluates a range of control factors as defined under IFRS 10, namely:
the purpose and design of the entity
the relevant activities and how these are determined
whether the Group's rights result in the ability to direct the relevant activities
whether the Group has exposure or rights to variable returns
whether the Group has the ability to use its power to affect the amount of its returns
Subsidiaries are consolidated from the date on which control is transferred to the Group and are deconsolidated from the date that control ceases.
During the year the Group liquidated the World Markets Umbrella Global Equity Fund resulting in a realised gain of 185,329. In addition, the Group received a significant tactical investment from an EM client in its International Equity CEF Fund. This reduced the Company's holding to 13% at which point the entity was deconsolidated, which resulted in an unrealised gain of 98,166. These gains were reported through the income statement under interest receivable and similar gains.
Subsequent to the year-end the client liquidated this tactical holding in the International Equity CEF Fund to invest in another of the Group's funds.
The Group's subsidiary undertakings as at 30th June 2017 are detailed below:
Controlling
Country of
Subsidiary undertakings
Activity
interest
incorporation
City of London Investment Management Company Limited
Management of funds
100%
UK
City of London US Investments Limited
Holding company
100%
UK
City of London Investment Management Company Limited holds 100% of the ordinary shares in the following:
City of London Investment Management (Singapore) PTE Ltd Management of funds Singapore
City of London Latin America Limited Dormant company UK
City of London US Investments Limited holds 100% of the ordinary shares in the following:
City of London US Services Limited Service company UK
The registered address of all the UK incorporated companies is 77, Gracechurch Street, London EC3V 0AS. The registered address of City of London Investment Management Company (Singapore) PTE Ltd is 20 Collyer Quay, #10-04, Singapore 049319.
City of London Latin America Limited is dormant and as such is not subject to audit.
The consolidated financial statements are prepared on the historical cost basis except for the revaluation of certain financial instruments as outlined in note 3 (iii).
3 SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies adopted are set out below and have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. In addition, where presentational changes are made in the current period, the prior year figures are also updated to present a true comparative.
(i) Property and equipment
For all property and equipment depreciation is calculated to write off their cost to their estimated residual values by equal annual instalments over the period of their estimated useful lives, which are considered to be:
Short leasehold property improvements - over the remaining life of the lease
Furniture and equipment - four years
Computer and telephone equipment - four years
(ii) Intangible assets
Intangible assets are capitalised at cost and amortised on a straight line basis over the estimated useful life of the asset. The Group's only intangible assets are computer software licences, which are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. Costs include directly attributable overheads.
The estimated useful lives range from 4 to 10 years.
The assets are reviewed for impairment each year.
Software integral to a related item of hardware equipment is accounted for as property, plant and equipment.
Costs associated with maintaining computer software programs are recognised as an expense when they are incurred.
(iii) Financial instruments
Under IAS 39, "Financial Instruments: Recognition and Measurement", financial assets must be classified as either:
Loans and receivables
Held-to-maturity investments
Available-for-sale financial assets
At fair value through profit or loss
Financial liabilities must be classified at fair value through profit or loss or at amortised cost.
Except where investments in funds are identified as subsidiaries, the Group's investments in the funds that it manages are designated as available-for-sale financial assets. Such investments are initially recognised at fair value, being the consideration given together with any acquisition costs associated with the investment. They are subsequently carried at fair value, with any gains or losses arising from changes in fair value included as part of other comprehensive income. Fair value is determined using the price based on the net asset value of the fund. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred all risks and rewards of ownership. When derecognition occurs a realised profit or loss is recognised in the income statement, calculated as the difference between the net sales proceeds and the original cost of the financial asset. Any fair value gains or losses previously recognised as part of other comprehensive income are recycled into the income statement as part of this calculation of the profit or loss arising on derecognition.
The Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of an investment classified as available-for-sale, a significant or prolonged decline in the fair value of the investment below its cost is considered as an indicator that the investment is impaired. If any such evidence exists for available-for-sale investments, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement - is removed from other comprehensive income and recognised in the income statement.
The Group's investments in securities and derivatives are classified as financial assets or liabilities at fair value through profit or loss. Such investments are initially recognised at fair value, and are subsequently remeasured at fair value, with any movement recognised in the income statement. The fair value of the derivatives held by the Group is determined as follows:
Shares - priced using the quoted market mid price*
Options - priced using the quoted market bid price
Forward currency trades - priced using the forward exchange bid rates from Bloomberg
*The funds managed by the Group are valued at the mid price in accordance with US GAAP. Therefore, where the Group has identified investments in those funds as subsidiaries, the fair value consolidated is the net asset values as provided by the administrator of the funds. The underlying investments in these funds are predominantly in blue chip companies and as such are very tradable with a small bid-ask spread.
The Group's investments have been classified here for recognition and measurement purposes under IAS39 but are not necessarily reported in the statement of financial position under those headings.
(iv) Trade receivables
Trade receivables are measured on initial recognition at fair value, and are subsequently carried at the lower of original fair value and their recoverable amount. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is objective evidence that the asset is impaired.
(v) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits with an original maturity of three months or less from inception, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
(vi) Trade payables
Trade payables are measured at initial recognition at fair value and subsequently measured at amortised cost.
(vii) Current and deferred taxation
The Group provides for current tax according to the tax regulations in each jurisdiction in which it operates, using tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. However, deferred tax is not accounted for if it arises from goodwill or the initial recognition (other than in a business combination) of other assets or liabilities in a transaction that affects neither the accounting nor the taxable profit or loss.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. The tax rates used are those that have been enacted, or substantively enacted, by the end of the reporting period. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly as part of other comprehensive income, in which case the deferred tax is also dealt with as part of other comprehensive income. For share-based payments, where the estimated future tax deduction exceeds the amount of the related cumulative remuneration expense, the excess deferred tax is recognised directly in equity.
(viii) Share-based payments
The Company operates an Employee Incentive Plan (EIP) which is open to all employees in the Group. Awards are made to participating employees over shares under the EIP where they have duly waived an element of their annual profit-share before the required waiver date, in general before the start of the relevant financial year.
The Awards are made up of two elements: Deferred Shares and Bonus Shares. The Deferred Shares represent the waived profit share and the Bonus Shares represent the additional award made by the Company as a reward for participating in the EIP. Awards will vest (i.e. no longer be forfeitable) over a three year period with one-third vesting each year.
The full cost of the Deferred Shares is recognised in the year to which the profit share relates. The value of the Bonus Shares is expensed on a straight line basis over the period from the date the employees elect to participate to the date that the awards vest. This cost is estimated during the financial year and at the point when the actual award is made, the share-based payment charge is re-calculated and any difference is taken to the profit or loss.
Prior to the implementation of the EIP, the Company operated an Employee Share Option Plan. The fair value of the employee services received in exchange for share options is recognised as an expense. The fair value has been calculated using the Binomial pricing model, and has then been expensed on a straight line basis over the vesting period, based on the Company's estimate of the number of shares that will actually vest. At the end of the three year period when the actual number of shares vesting is known, the share-based payment charge is re-calculated and any difference is taken to the profit or loss.
(ix) Revenue
Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and such revenue can be reliably measured. Revenue is recognised as services are provided and comprises investment management fees based on a percentage of Funds under Management, in accordance with the underlying agreements.
(x) Commissions payable
A portion of the Group's revenue is subject to commissions payable under third party marketing agreements. Commissions payable are recognised in the same period as the revenue to which they relate.
(xi) Foreign currency translation
Foreign currency transactions are translated using the exchange rates prevailing at the transaction date. Monetary assets held in a currency other than the functional currency are translated at the end of each financial period at the period end closing rates.
The functional currency of the Group's main trading subsidiaries, City of London Investment Management Company Limited and City of London US Services Limited, is US dollars. The functional currency of City of London Investment Group PLC (the "Company") is sterling. The Group uses sterling as the presentation currency. Under IAS 21 this means that exchange differences caused from translating the functional currency to presentational currency for the main trading subsidiaries would be recognised in equity. However, the Group operates a policy whereby the foreign exchange positions of the subsidiaries in relation to the income statement and monetary assets are sold to the Company. As such any exchange differences arising in the Company are "real" in that the functional currency matches the presentational currency. This means that all such exchange differences are included in the income statement and no split is required between other comprehensive income and the income statement. The subsidiaries translate the non-monetary assets at the period end rate and any movement is reflected in other comprehensive income.
(xii) Leases
The cost of operating leases is charged to the income statement in equal periodic instalments over the period of the leases.
(xiii) Pensions
The Group operates defined contribution pension schemes covering the majority of its employees. The costs of the pension schemes are charged to the income statement as they are incurred. Any amounts unpaid at the end of the period are reflected in other creditors.
4 SEGMENTAL ANALYSIS
The Directors consider that the Group has only one reportable segment, namely asset management, and hence only analysis by geographical location is given.
USA
Canada
UK
Europe (ex UK)
Other
Total
Year to 30th June 2017
Gross fee income
28,893,685
983,509
463,821
953,355
-
31,294,370
Non-current assets:
Property and equipment
413,257
-
107,080
-
40,437
560,774
Intangible assets
339,876
-
20,407
-
-
360,283
Year to 30th June 2016
Gross fee income
22,609,241
798,158
344,259
661,168
-
24,412,826
Non-current assets:
Property and equipment
358,742
-
63,715
-
8,560
431,017
Intangible assets
201,801
-
-
-
-
201,801
The Group has classified its fee income based on the domicile of its clients and non-current assets based on where the assets are held. Any individual client generating revenue of 10% or more would be disclosed separately, as would assets in a foreign country if they were material.
5
OPERATING PROFIT
Year to
Year to
The operating profit is arrived at after charging:
30th June 2017
30th June 2016
Depreciation of owned assets
167,748
118,742
Amortisation of intangible assets
62,886
49,556
Auditors' remuneration:
- Statutory audit
75,319
75,160
- Taxation services
-
-
- Audit related assurance services
8,471
7,968
- Other services
-
-
Operating lease rentals:
- Land and buildings
436,617
429,995
- Other
1,886
81
6 INTEREST RECEIVABLE AND SIMILAR GAINS
Year to
30th June 2017
Year to
30th June 2016
Interest on bank deposit
28,925
40,195
Gain/(loss) on sale of investments
187,142
(197)
Unrealised (loss)/gain on investments
(70,868)
172,597
Interest payable on restated US state tax returns
(64,064)
-
81,135
212,595
7
TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES
Year to
Year to
(a) Analysis of tax charge on ordinary activities:
30th June 2017
30th June 2016
Tax at 20% (2016: 20%) based on the profit for the period
2,447,718
1,586,907
Double taxation relief
(966,380)
(911,452)
Deferred tax
(64,595)
14,849
Change in tax rate to 19%
(17,964)
-
Adjustments in respect of prior years
11,312
134
Domestic tax total
1,410,091
690,438
Foreign tax for the current period
1,396,861
1,509,277
Adjustments in respect of prior years
(357,735)
(84,311)
Foreign tax total
1,039,126
1,424,966
Total tax charge in income statement
2,449,217
2,115,404
(b) Factors affecting tax charge for the current period:
The tax assessed for the period is different to that resulting from applying the standard rate of corporation tax in the UK - 20% (prior year - 20%). The differences are explained below:
Year to
30th June 2017
Year to
30th June 2016
Profit on ordinary activities before tax
11,590,354
7,968,733
Tax at 20% (2016: 20%) thereon
(2,318,071)
(1,593,747)
Effects of:
Unrelieved overseas tax
(430,480)
(597,825)
Expenses not deductible for tax purposes
(28,513)
(8,605)
(Losses)/gains ineligible for tax
(88,482)
34,519
Capital allowances less than depreciation
(9,397)
(21,705)
Prior period adjustments
346,423
84,177
Deferred tax on share based payments and investments
64,595
(14,849)
Change in tax rate to 19%
17,964
-
Other
(3,256)
2,631
Total tax charge in income statement
(2,449,217)
(2,115,404)
8 EARNINGS PER SHARE
The calculation of earnings per share is based on the profit attributable to shareholders of the parent for the period of 9,289,755 (2016: 5,791,354) divided by the weighted average number of ordinary shares in issue for the period ended 30th June 2017 of 25,188,897 (2016: 24,903,965).
The Employee Benefit Trust held 1,477,935 ordinary shares in the Company as at 30th June 2017. The Trustees of the Trust have waived all rights to dividends associated with these shares. In accordance with IAS 33 the ordinary shares held by the Employee Benefit Trust have been excluded from the calculation of the weighted average of ordinary shares in issue.
The calculation of diluted earnings per share is based on the profit attributable to shareholders of the parent for the period of 9,289,755 (2016: 5,791,354) divided by the diluted weighted average of ordinary shares for the period ended 30th June 2017 of 25,316,917 (2016: 25,045,522).
Reconciliation of the figures used in calculating basic and diluted earnings per share:
30th June 2017
30th June 2016
Number of shares
Number of shares
Weighted average number of shares - basic earnings per share
25,188,897
24,903,965
Effect of dilutive potential shares - share options
128,020
141,557
Weighted average number of shares - diluted earnings per share
25,316,917
25,045,522
9 SHARE CAPITAL
30th June 2017
30th June 2016
Group and Company
Allotted, called up and fully paid
At start of period 26,896,707 (2016: 26,912,271) Ordinary shares of 1p each
268,967
269,123
Dilutive share options exercised; Nil (2016: 99,436)
-
994
Shares repurchased and cancelled; 35,000 (2016: 115,000)
(350)
(1,150)
At end of period 26,861,707 (2016: 26,896,707) Ordinary shares of 1p each
268,617
268,967
Fully paid ordinary shares carry one vote per share and carry a right to dividends.
10 DIVIDEND
30th June 2017
30th June 2016
Dividends paid:
Interim dividend of 8p per share (2016: 8p)
2,026,846
1,996,704
Final dividend in respect of year ended:
30th June 2016 of 16p per share (2015: 16p)
4,021,119
3,985,017
6,047,965
5,981,721
A final dividend of 17p per share has been proposed, payable on 31st October 2017, subject to shareholder approval, to shareholders who are on the register of members on 13th October 2017.
11 FINANCIAL INSTRUMENTS
The Group's financial assets include cash and cash equivalents, investments and other receivables. Its financial liabilities include accruals and other payables. The fair value of the Group's financial assets and liabilities is materially the same as the book value.
(i) Financial instruments by category
The tables below show the Group and Company's financial assets and liabilities as classified under IAS39:
Group
Loans and
Assets at fair value through
Available-
30th June 2017
receivables
profit or loss
for-sale
Total
Assets as per statement of financial position
Other financial assets
-
135,547
34,660
170,207
Trade and other receivables
5,792,745
65,151
-
5,857,896
Available-for-sale financial assets
Cash and cash equivalents
-
13,936,558
-
-
915,649
-
915,649
13,936,558
Total
19,729,303
200,698
950,309
20,880,310
Liabilities at
Financial
fair value
liabilities at
through
amortised
profit or loss
cost
Total
Liabilities as per statement of financial position
Trade and other payables
-
3,402,681
3,402,681
Total
-
3,402,681
3,402,681
Assets at fair
30th June 2016
Loans and
receivables
value through
profit or loss
Available-
for-sale
Total
Assets as per statement of financial position
Other financial assets
-
2,172,645
27,454
2,200,099
Trade and other receivables
5,044,107
-
-
5,044,107
Cash and cash equivalents
10,150,799
-
-
10,150,799
Total
15,194,906
2,172,645
27,454
17,395,005
Liabilities at
Financial
fair value
liabilities at
through
amortised
profit or loss
cost
Total
Liabilities as per statement of financial position
Trade and other payables
276,743
2,845,628
3,122,371
Total
276,743
2,845,628
3,122,371
Company
Investment
Loans and
Assets at fair value through
Available-
30th June 2017
in subsidiaries
receivables
profit or loss
for-sale
Total
Assets as per statement of financial position
Other financial assets
800,911
-
135,547
33,194
969,652
Trade and other receivables
-
8,248,782
-
-
8,248,782
Available-for-sale financial assets
Cash and cash equivalents
-
-
-
180,938
-
-
915,649
-
915,649
180,938
Total
800,911
8,429,720
135,547
948,843
10,315,021
Liabilities at
Financial
fair value
liabilities at
through
amortised
profit or loss
cost
Total
Liabilities as per statement of financial position
Trade and other payables
-
1,219,878
1,219,878
Total
-
1,219,878
1,219,878
Assets at fair
30th June 2016
Investment
in subsidiaries
Loans and value through
receivables profit or loss
Available-
for-sale
Total
Assets as per statement of financial position
Other financial assets
1,707,216
- -
27,454
1,734,670
Trade and other receivables
-
5,597,427 -
-
5,597,427
Cash and cash equivalents
-
74,755 -
-
74,755
Total
1,707,216
5,672,182 -
27,454
7,406,852
Liabilities at
Financial
fair value
liabilities at
through
amortised
profit or loss
cost
Total
Liabilities as per statement of financial position
Trade and other payables
-
1,626,909
1,626,909
Total
-
1,626,909
1,626,909
(ii) Fair value measurements recognised in the statement of financial position
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable.
Level 1: fair value derived from quoted prices (unadjusted) in active markets for identical assets and liabilities.
Level 2: fair value derived from inputs other than quoted prices included within level 1 that are observable for the assets or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: fair value derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data.
The fair values of the financial instruments are determined as follows:
Investments for hedging purposes are valued using the quoted bid price and shown under level 1.
Investments in own funds are determined with reference to the net asset value (NAV) of the fund. Where the NAV is a quoted price the fair value is shown under level 1, where the NAV is not a quoted price the fair value is shown under level 2.
Forward currency trades are valued using the forward exchange bid rates and are shown under level 2.
The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement.
Group
Level 1
Level 2
Level 3
Total
30th June 2017
Available-for-sale financial assets
Investment in own funds
-
950,309
-
950,309
Total
-
950,309
-
950,309
Financial assets at fair value through profit or loss
Investment in other financial assets
135,547
-
-
135,547
Forward currency trades
-
65,151
-
65,151
Total
135,547
65,151
-
200,698
Financial liabilities at fair value through profit or loss
Forward currency trades
-
-
-
-
Total
-
-
-
-
30th June 2016
Level 1
Level 2
Level 3
Total
Available-for-sale financial assets
Investment in own funds
-
27,454
-
27,454
Total
-
27,454
-
27,454
Financial assets at fair value through profit or loss
Investment in other financial assets
2,160,174
12,457
14
2,172,645
Forward currency trades
-
-
-
-
Total
2,160,174
12,457
14
2,172,645
Financial liabilities at fair value through profit or loss
Forward currency trades
-
276,743
-
276,743
Total
-
276,743
-
276,743
Company
30th June 2017
Level 1
Level 2
Level 3
Total
Financial assets at fair value through profit or loss
Investment in other financial assets
135,547
-
-
135,547
Total
135,547
-
-
135,547
Available-for-sale financial assets
Investment in own funds
-
948,843
-
948,843
Total
-
948,843
-
948,843
30th June 2016
Level 1
Level 2
Level 3
Total
Available-for-sale financial assets
Investment in own funds
-
27,454
-
27,454
Total
-
27,454
-
27,454
Level 3
Level 3 assets as at 30th June 2017 are nil (2016: one security valued at 14).
The Fund establishes valuation processes and procedures to ensure that the valuation techniques for investments that are categorised within Level 3 of the fair value hierarchy are fair, consistent, and verifiable. The Group is responsible for overseeing the implementation of the valuation policies and procedures, which includes the valuation process of the Fund's Level 3 investments.
As the Group gained a significant investor in the International Equity CEF Fund, this entity is not being consolidated in our books this year. This has the effect of changing the category we report this entity in at the Group level from a Level 1 Financial asset at fair value through profit and loss last year to a Level 2 "Available-for-sale" financial asset in the current year.
All fair value gains and losses included in other comprehensive income relate to the investment in own funds.
Where there is an impairment in the investment in own funds, the loss is reported in the income statement. No impairment was recognised during the period or the preceding year.
The fair value gain on the forward currency trades is offset in the income statement by the foreign exchange losses on other currency assets and liabilities held during the period and at the period end. The net loss reported for the period is 90,181 (2016: net loss 179,495).
(iii) Foreign currency risk
Almost all of the Group's revenues, and a significant part of its expenses, are denominated in currencies other than sterling, principally US dollars. These revenues are derived from fee income which is based upon the net asset value of accounts managed, and have the benefit of a natural hedge by reference to the underlying currencies in which investments are held. Inevitably, debtor and creditor balances arise which in turn give rise to currency exposure.
The Group assesses its hedging requirements and executes forward foreign exchange transactions so as to substantially reduce the Group's exposure to currency market movements. The level of forward currency hedging is such as is judged by the Directors to be consistent with market conditions.
As at 30th June 2017, the Group had net asset balances of US$5,463,807 (2016: US$5,399,570), offset by forward sales totalling US$4,750,000 (2016: US$4,250,000). Other significant net asset balances were C$452,927 (2016: C$387,803), AED246,996 (2016: AED248,149), and SGD159,498 (2016: SGD196,587).
Had the US dollar strengthened or weakened against sterling as at 30th June 2017 by 10%, with all other variables held constant, the Group's net assets would have increased or decreased (respectively) by approximately 1%, because the US dollar position is hedged by the forward sales.
Further details on the effects on the Group's post-tax profits due to movements in the US dollar/sterling exchange rate have been demonstrated in the Financial Review.
(iv) Market risk
Changes in market prices, such as foreign exchange rates and equity prices will affect the Group's income and the value of its investments.
Where the Group holds investments in its own funds, the market price risk is managed through diversification of the portfolio. A 10% increase or decrease in the price level of the funds' relevant benchmarks, with all other variables held constant, would result in an increase or decrease of approximately 0.1 million in the value of the investments and profit before tax.
The Group is also exposed to market risk indirectly via its assets under management, from which its fee income is derived. To hedge against any potential loss in fee income due to a fall in the markets, the Group will look to invest in out-of-the-money put options on the emerging markets index. The purchase and sale of these options are subject to limits established by the Board and are monitored on a regular basis. The investment management and settlement functions are totally segregated.
The loss from hedging recognised in the Group income statement for the period is 20,416 (2016: Nil).
Further details on the effects on the Group's post-tax profits due to movements in market prices have been demonstrated in the post-tax profits table in the Chairman's statement.
(v) Credit risk
The majority of debtors relate to management fees due from funds and segregated account holders. As such the Group is able to assess the credit risk of these debtors as minimal. For other debtors a credit evaluation is undertaken on a case by case basis.
The Group has zero experience of bad or overdue debts.
The majority of cash and cash equivalents held by the Group are with leading UK banks. The credit risk is managed by carrying out regular reviews of each institution's credit rating and of their published financial position. Given their high credit ratings, management does not expect any counterparty to fail to meet its obligations.
(vi) Liquidity risk
The Group's liquidity risk is minimal because commission payable forms the major part of trade creditors, and payment is made only upon receipt of the related fee income plus the Group's strategy is to maximise its cash position. In addition, the Group's investments in funds that it manages can be liquidated immediately if required.
(vii) Interest rate risk
The Group has no borrowings, and therefore has no exposure to interest rate risk other than that which attaches to its interest earning cash balances and forward currency contracts. The Group's strategy is to maximise the amount of cash which is maintained in interest bearing accounts, and to ensure that those accounts attract a competitive interest rate. At 30th June 2017 the Group held 13,936,558 (2016: 10,150,799) in cash balances, of which 13,799,951 (2016: 9,899,916) was held in bank accounts which attract variable interest rates. The effect of a 100 basis points increase/decrease in interest rates on the Group's net assets would not be material.
(viii) Capital risk management
The Group manages its capital to ensure that all entities within the Group are able to operate as going concerns and exceed any minimum externally imposed capital requirements. The capital of the Group and Company consists of equity attributable to the equity holders of the Parent Company, comprising issued share capital, share premium, retained earnings and other reserves as disclosed in the statement of changes in equity.
The Group's principal operating subsidiary company, City of London Investment Management Company Ltd is subject to the minimum capital requirements of the Financial Conduct Authority ("FCA") in the UK. This subsidiary held surplus capital over its requirements throughout the period. The Group is required to undertake an Internal Capital Adequacy Assessment Process ("ICAAP"), under which the Board quantifies the level of capital required to meet operational risks. The objective of this is to ensure that the firm has adequate capital to enable it to manage risks which are not adequately covered under the Pillar 1 requirements. This process includes stress testing for the effects of major risks, such as a significant market downturn, and includes an assessment of the Group's ability to mitigate the risks.
12 SUBSEQUENT EVENTS
During the year the Group gained a significant tactical investment from an EM client in its International Equity CEF Fund. This reduced the Company's holding to 13%, at which point the entity was deconsolidated, which resulted in an unrealised gain of 98,166. This gain was reported through the income statement under interest receivable and similar gains.
Subsequent to the year-end the client liquidated the tactical holding in the International Equity CEF Fund to invest in another of the Group's funds.
This information is provided by RNSThe company news service from the London Stock ExchangeENDFR OKPDBFBKDFCD
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