City of London Investment Group: $667m of net outflows in the quarter hits the shares

Down 11% to 465p - Trading Update for the Quarter Ended 30/09/26

The market hasn't liked the update from this Emerging Markets and Fixed Income asset manager:

During the quarter, the Group recorded gross inflows of $87 million and outflows of $754 million, resulting in net outflows of $667 million. Market and investment performance reduced FuM by a further $127 million, reflecting volatile market conditions during the period.

While in isolation this doesn't look disastrous, the combination of weak inflows, large outflows, and negative performance stands out.

This is a company that has seen AuM growing recently:

However, it seems too soon to conclude that the trend is broken, and the company has seen AuM decline in some previous quarters. However, what appears to be accelerating outflows may be worrying:

One difference is that the share price has been strong recently:

Part of the share price strength is due to the recent upgrades in broker forecasts:

I can't see any updated coverage today, but Zeus based its numbers on a $12.3bn closing AUM for the year, which now looks challenging to achieve.

This is an institutional manager, so it tends to see outflows when it has a period of strong performance, as investors rebalance their allocations:

Sentiment for our asset classes was muted for the quarter; however, investment performance remained strong over the long term. Net outflows were primarily driven by client rebalancing and portfolio allocation decisions across the City of London Investment Management (CLIM) business following periods of strong relative and absolute investment performance. These withdrawals were concentrated in Emerging Markets, International Equity and Other.

The breakdown between CLIM and KIM backs this narrative up:

However, looking at the breakdown between inflows and outflows, it is the lack of sales that stands out as well as the rebalancing outflows:

One minor aspect that also stands out is that the "Other" category in CLIM, which they say includes Frontier and alternatives, has gone to zero FuM in this quarter. Presumably this was a specific redemption, or they chose to close this strategy.

Mark's view

A bad quarter is par for the course for asset managers at the moment, so it is probably best not to over-react. However, today's strong share price response suggests many investors expected this to go the other way following recent broker upgrades. This was reflected in the strong Stock Rank:

The Quality Rank has always been high here, as it has for many asset-light businesses, so Momentum has done the heavy lifting recently.

The recent decline in Value Rank suggests this Momentum hasn't been fully backed by fundamentals, making it susceptible to a rapid reversal. Could today's share price decline portend that? Without updated broker coverage, it is hard to be certain. The FUM number for year-end in the latest Zeus number now looks challenging, but it would be a bit embarrassing for them to downgrade the outlook so soon after their recent upgrade.

This leaves me in a bit of a quandary about our view. On balance, I think the roughly 7% dividend yield probably tips it in favour of keeping our AMBER/GREEN stance. However, another weak quarter or a broker EPS downgrade would make me more neutral.