City Of London Investment Group: A Quality Play On Emerging Market Value?

19th Feb '20 by Jack Brumby

11 comments 4913 reads

City Of London Investment (LON:CLIG) is a pioneer in the Emerging Market closed-end fund (CEF) space. Its long term outlook, consistent investment processes and proven track record of outperformance has attracted a stable base of institutional clients and fund inflows over the years.

Following great success in the early 90s as an emerging market specialist, CLIG used its CEF knowledge to expand into other areas. Today, the group markets five CEF strategies:

Emerging Markets CEF - the original CLIG product that has been marketed for decades
Frontier Markets CEF - an extension of the EM core equity product that focuses on the smallest or pre-emerging markets with high growth potential
Developed Markets CEF - targeting global developed markets
Opportunistic Value - a global, bottom-up, high-conviction fund
Tactical Income - a multi-sector fund focused on generating tax-efficient income for US investors

On top of this, CLIG launched two Real Estate Investment Trust products in January 2019 that focus on emerging market and global REITs.

Given last year’s stories of star fund managers and style drifts, it is reassuring to hear CLIG discuss its investment process:

We have always strived to develop and nurture an investment process which does not rely on 'star' fund managers, but rather upon a series of analytical procedures that can produce repeatable and sustainable first or second quartile performance versus our peers.

This process seems to work. According to the company, CLIG’s cumulative total return since inception through 31st December 2019 was 540% (14.5% per annum) compared with the 152% cumulative return for M1EF over the same time period.

pB5wXzfqRd15JYgvyRcbN2v35GlvG0pJN3J09F6Uo9r_-yRxM6-R2zdpB4xduEV2d0u5SyIUkDB5Raa6K_sj-1-61qGvESnqwCovV_FoN9e-qVNMYjHJfagzjlEh6EW04XyAuZXr

Source: FY19 Annual Report

Given the group’s process-driven multi-decade investment track record, its shareholder-friendly corporate culture, modest valuation and strong quality metrics, the early signs are promising that CLIG could be a good long term investment.

Valuation

CLIG is a small cap financial Super Stock with extremely high levels of long term profitability and returns on capital.

gYqRC4nDtq3AkFQCb2qAosBnZPFTqIATusPEdfUGOLMDzEkkGywwwWgoUwt0zjWmLroTLbP2ulUkLoySJKWBiTuaEKSwKUayw6H69OzYd4-XpA-6qlko4mNff5v3TIx-3Si51bPz

It also generates a lot of cash and pays out a generous forecast dividend yield of 6.25%. Management has an encouraging attitude towards shareholders as shown in the Chairman’s Statement of the FY19 Annual Report:

Your Board attaches great importance to providing shareholders with a generous but stable flow of dividends, balanced by a policy of prudential capital management.

The group has established a solid history…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Robert W

19th Feb '20

Interesting - I had begun to research this stock today as it came up in my screen a couple of weeks ago so nice coincidence. I came to similar conclusions - just slightly nervous on something so heavily exposed to emerging markets at (what must be towards?) the end of the economic cycle. The Buffet point is good one though....

On my watchlist for now as I am fully invested and can't see any obvious sales.

Looking at the last recession, the share price dropped more than 50% which supports my nervousness...

Otemple3

I bought it in the last recession and rate the company highly. I intend to buy in again during the next downturn....

Jack Brumby

20th Feb '20

Yes, even though City Of London Investment (LON:CLIG) is diversifying into other products and areas the fact remains c75% of FuM are in emerging markets... Reading through the accounts did show an encouragingly long term and shareholder-friendly view, but you would have to go into this stock knowing that volatility over the years is likely.

The EM exposure can be a strength as well though - I wonder how many UK investors are invested primarily in UK stocks and therefore already have a lot of country-specific risk? Home bias is fairly established in academic lit & studies... For those people, a company like CLIG might be worth a look precisely because of its diversified EM exposure as a useful fit in their portfolio.

DYOR, of course

OldSchool05

I hold this company and have done so for a few years, re-investing the dividends. The compounding affect has really started to work here for me.

I like the way they are clear and straightforward in their reporting, linking senior remuneration to factors I can understand and agree with. I also appreciate their focus on costs and control, not always the case with these types of business ! I was concerned when Barry Oliff stepped back a while ago but his influence over the business remains and they retain a focus on shareholder return.

It can be a little bit volatile and I would consider stepping out at 500p, if reached, and then waiting for a re-entry point.

tankertonian

I've been a fan of CLIG for about three years now, to the extent of about 5% of my portfolio (which exists to provide my income) . I regard it as part of my emerging market diversification.

It's been a bit of a bumpy ride if you look at the 3 year graph, but certainly I've been very happy over the past 15 months or so. And in the bad times the high dividend kept me sweet.

My simple analysis shows an annual return of about 9% . (Most of this has been in dividends extracted over the three years. Strictly, I should allow for the timing of each dividend in my calculations, which would increase the 9%)

One good point worth a mention (and this is from previous research and not checked) is that the company does not run a bonus-driven culture; it's company profits, and dividends, which incentivise the staff. I'm sure there is a substantial staff share interest.

It might be stating the bleedin' obvious but I like a company which needs to keep the dividends high to reward its staff and encourage them to make money for the benefit of all shareholders. ( Shame there aren't more like it, but it's only really viable in smaller companies where the staff are very close to the profit-making).

My only issue is that the buy/sell spread has always been comparatively large. As I write, it's 2.6%. That's over 40% of the first year's dividend. It's been higher.

Edward King

CLIG was an investment i held until 2015 but although it provided a good income it was rather disappointing regards its growth but i do regret selling it at a slight loss as i am considering buying it again at about 25% above the price that i sold it - such is life

Lemmy Caution

CLIG share fell from approx. 270 to 220 in 2012 mainly because one of it's major clients left to take it's trading in house. I think that the major price support is probably just under 300.
I first bought it in 2012 and share the opinion that it is a good well run company. I'm also waiting for a buying opportunity.

thirty fifty twenty

thks for the research Jack - very clear.

I am a holder for 2 reasons:

1 - a recent excellent presentation by Richard Griffiths showed clearly the long term (20yr +) success of EM investing. I think that as it becomes better known that Chinese GDP is only years away from being largest in world this will only increase investors awareness to have EM exposure. I think this gives CLIG a competitive advantage over the medium term to win mandates, as well as the fact that their fees will benefit from likely higher rates of return in the longer term from EM. The fact that CLIG are boringly conservative and modest in their approach is a much added attraction for many I think.

2 - the chart has broken out of a 10 year resistance on the third attempt. this is a classic sign of strength and indicates further upside. the real benefit though is that it provides a very clear sell signal if it returns below the break out level. thus as a holder I feel that I am only exposing myself to a loss of 10% whilst having a very good chance of divi led upside. of course a market crash would probably eliminate such a safety net but again i think it is very likely CLIG would do everything do maintain their dividend and thus the downfall of CLIG is likely to be somewhat protected.

Holder. Cautious Investor.

21st Feb '20

Cheers, I think "boringly conservative" often stands a good chance of outperforming... I get the impression from a couple of comments here that this might be the type of company that attracts longer term shareholders, which can be a surprisingly rare thing.

Did you see this presentation online or in person? If online do you remember where?

Passive Income

23rd Feb '20

Great numbers, One of the strong ones I found using screens so purchased a few months back. Looking to get more if it stays under 450. However that target may lower if they are hit by China's virus slowdown.

City of London Investment Group: a quality play on emerging market value?

Valuation

Unlock the rest of this article with a 14 day trial

About the Author

Jack Brumby

11 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...