REG - City of Lon Inv Grp - Final Results - Replacement
17th September 2018
CITY OF LONDON INVESTMENT GROUP PLC (LSE:CLIG)
("City of London" or "the Group")
CORRECTION OF FINAL RESULTS FOR THE YEAR TO 30 JUNE 2018
This announcement replaces the announcement issued by the Company at 07:00 today, Monday, 17 September 2018 under RNS number 8961A.
The earlier announcement was incorrectly uploaded to RNS under the heading Interim Results. The headline for the announcement should read Final Results.
In addition, the Chairman's Statement contained two typographical errors. The second paragraph incorrectly stated that Funds under Management (FuM) at the Company's 2006 financial year end were £2.8 billion. This should have been stated as $2.8 billion. The third paragraph incorrectly stated that at 30th June 2018 FuM were just short of $4.0 billion. The FuM at 30th June 2018 should have been stated as $5.1 billion.
All other details remain unchanged. The full announcement including the amended text appears below.
CITY OF LONDON INVESTMENT GROUP PLC (LSE:CLIG)
FINAL RESULTS FOR THE YEAR TO 30TH JUNE 2018
SUMMARY
• Funds under management (FuM) at 30th June 2018 were US$5.1 billion (2017: US$4.7 billion), an increase of 10%. In sterling terms, FuM increased by 8% to £3.9 billion (2017: £3.6 billion).
• Revenues, representing the Group's management charges on FuM, were £33.9 million (2017: £31.3 million). Profit before tax was £12.8 million (2017: £11.6 million).
• Basic earnings per share were 39.5p (2017: 36.9p) after a tax charge of 21% (2017: 21%) of pre-tax profits.
• An increased final dividend of 18p per share is recommended, payable on 30th October 2018 to shareholders on the register on 12th October 2018, making a total for the year of 27p (2017: 25p).
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
As the retiring Chairman after 12 years on your Board I am bound to reflect on where did we come from, how did we get to where we are today and how well prepared are we to face the inevitable challenges that tomorrow will bring?
When I joined the Board on flotation in 2006, we floated at a price of 180p giving a market capitalisation of £48.2 million. Funds under Management (FuM) were $2.8 billion, and profit before tax was £4.8 million at the financial year end. The core Emerging Markets Closed-End Fund (EM CEF) strategy accounted for close to 100 percent of both FuM and profits. We had c.130 clients, almost all in the US and already the quality of our client list was the envy of many of our competitors.
At 30th June 2018 FuM were $5.1 billion and pre-tax profits for the 12 months were £12.8 million. The total return to shareholders since listing has been 377 per cent, a figure that compares very favourably with our industry.
How was this impressive result achieved particularly in the light of the rather variable performance of the Emerging Markets on which our business has historically been very dependent? Numerous factors are relevant but three drivers are worth listing: a focus on a well-established investment methodology, efficient and highly cost effective operations and a fair treatment of staff encouraging continuity and therefore operational consistency.
What of the future? Over the years we have invested heavily in nurturing new strategies in order to diversify away from the core EM CEF cash cow. New products take time to become established and be saleable to institutional clients. There is a chicken and egg dilemma - without investors a track record cannot be established but the investors won't invest until they can be comforted by an impressive historic record. One can seed a new strategy with a few million dollars but then clients say they don't want to be the first outside investor, and in any event the track record should be demonstrated with a fund of at least US$50 million - too big for us to seed.
It is against this background that we are delighted to be able to report that the diversification strategies now represent over 20 per cent of our FuM (18% at 30th June 2018) and are growing faster than the EM CEF product. It should be noted and understood that the investment methodology employed for the diversification products is closely related to that which we have developed and honed over many years for our core strategy. A combination of the new products with the still very profitable and viable core EM CEF strategy should ensure a rewarding future for all CLIG stakeholders including our shareholders.
Results
For the year ended 30th June 2018 pre-tax profits were £12.8 million (2017: £11.6 million) and profits after a tax charge of £2.7 million (21% of pre-tax profits) were £10.1 million (2017: profits of £9.1 million after a tax charge of £2.5 million, representing 21% of pre-tax profit). Basic and fully diluted earnings per share were 39.5p and 39.3p respectively (2017: 36.9p and 36.7p).
Funds under Management, the key driver of our profits, were US$5.1 billion (£3.9 billion) at 30th June 2018 (2017: US$4.7 billion or £3.6 billion), representing a 10% increase in US$ terms for the year.
As already noted, we are greatly encouraged by the extent to which our new, albeit in terms of methodology closely related, products are now a very meaningful percentage of our total FuM.
The core EM strategy underperformed net of fees for the full year whilst longer-term the record remains impressive. For the EM strategy discounts widened costing approximately 200bps and an underweight to China, specifically the IT sector, also detracted from performance. Frontier performance was close to the benchmark. The Developed and Opportunistic Value (formerly GTAA) strategies both recorded positive relative performance due to a combination of positive discount and allocation effects.
The Group's overhead for the year to 30th June 2018 was £12.5 million (2017: £11.9 million) and the current monthly run-rate is c. £1.1m. With largely US dollar based income and substantial sterling costs the exchange rate continues to be a key factor in determining profits; compared to the previous year's rate averaging 1.27 this represented a significant headwind with sterling strengthening to an average rate of US$1.35 to the pound over the year.
Dividends
Following on from last year's 1p increase in the total dividend for the year to June 2017 and the 1p increase for this year's interim dividend, your Board is recommending a further 1p increase for the final to 18p per share (2017: 17p) bringing the total for the year to 27p (2017: 25p), for dividend cover of 1.47 times (2017: 1.46 times). This is in line with your Board's well-established policy of targeting a 1.2 times dividend cover over a rolling 5 year period taking into account years during that period when cover was well below 1.2 times.
Board
In anticipation of our founder and CEO, Barry Olliff, stepping down in 2019, Tom Griffith, who has been on our Board for 14 years with responsibility for Operations, was appointed Deputy CEO from February 2018. This has provided for a lengthy transition and handover period before Tom takes over the reins from Barry in early 2019. Again in anticipation, this time of my retirement from the Board as of the October AGM, we were delighted to welcome Jane Stabile as a new Non-Executive Director (NED) from 1st July 2018. Not only does this appointment ensure that we will continue to have the right balance on the Board between Executive Directors and NEDs, but Jane has already been able to provide more focus at Board level to the increasingly important area of Operations.
Following my retirement it has been agreed that Barry Aling will take over as Chairman. People seem to be obsessed these days with "upgrades" whether it's their mobile phone or their seat on a flight. In this case I can confidently say that your Board will be getting a chairman upgrade! Barry, over his five years on your Board, has consistently demonstrated his understanding of the key issues and invariably applies both common sense and wisdom in his contributions to Board discussions. With important changes on the road ahead we will be fortunate to have Barry in the chair. We are also fortunate that Barry Olliff has agreed to discuss retaining an involvement with CLIG post 2019 through a consultancy role. The goal will be to combine a degree of continuity along with the inevitable change that is almost always required when a founder retires.
As in previous years we carried out a formal evaluation of the performance of the Board and its members. This confirmed that both the Board and its members had continued to operate effectively and I therefore recommend that all Directors standing for re-election be re-elected.
Outlook
As readers of my previous Chairman's Statements will know, predicting the future direction of markets is above my pay grade. I can however observe that the Emerging Markets, which underlie our core product, are currently out of favour. Fortunately our increasingly important diversified products are largely focussed on Developed markets, including the US which is enjoying the Trump stimulus. EM problems are various and range from Argentina (debt) to Turkey (politics) to China (trade wars), with Donald Trump's policies creating significant uncertainty. Having feet in both camps I take a sanguine view and leave it to shareholders to decide whether to sell EMs and buy into Developed markets or do the reverse. At City of London I believe we are well placed other than if there were a general downturn in markets worldwide and even then our flexible cost structure will stand us in good stead.
This year our AGM is on Monday 22nd 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 again 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/0092B_1-2018-9-17.pdf
David Cardale
Chairman
13th September 2018
START OF STRATEGIC REPORT
CHIEF EXECUTIVE OFFICER'S STATEMENT
In terms of the Group's progress, the most significant event of the past financial year has related to the increased assets gained by our Diversification products.
Between Developed, Global Tactical Asset Allocation (now renamed Opportunistic Value), Tactical Income and Frontier, assets under management have increased from 10% to 18% of total Group FuM. While a response could be that this has been a long time coming, my reply would be that in the post 2008 world, everything takes longer as consultants and potential clients undertake deeper due diligence prior to making a commitment. Having said that, once a commitment is made it is likely to be long-term thus diversifying our sources of revenue and improving the quality of our earnings. While most of this new business will accrue fees at lower than EM rates, it would seem likely that we are now on track for this part of our business to grow significantly.
Investment performance
While the Diversification products have generally outperformed their relative benchmarks, I have gone into greater detail regarding our EM performance which has lagged the benchmark over the 12 month period ending June 2018. This was a result of widening discounts and to a lesser extent poor NAV performance from the underlying closed-end funds in which we invest. Our country allocation was positive over the period, led by an overweight to Russia. NAV performance was impacted by the strong performance of the IT sector, particularly in China. Many global, regional and China specific funds have maintained underweights to this sector due to valuation and/or corporate governance concerns as well as structural limitations. A further headwind to NAV performance relates to small cap exposure. For the past two years EM small cap has underperformed large cap by a significant margin; partly the flip side to the very strong IT sector which now constitutes over 28% of the index - for reference, this is the largest EM Sector index weight for at least 20 years. These structural headwinds will eventually mean revert, along with discounts. In the meantime we take comfort from the average size weighted discount on our portfolios at 16% which represents the widest level for at least 10 years. EM client flows have been broadly stable with modest outflows reflecting asset allocation rebalancing. Longer term (3-5 years), as referenced in the chart above, gross returns of the EM CEF strategy returns remain above average when compared with the US institutional peer group.
REIT's
After a search lasting over a year, in July 2018 a team of two joined us to create a new REIT department. Our belief is that our investment process, as originally used with EM CEF's, and now our other Diversification products, could also be used with REIT's which also demonstrate the capacity for disproportionate alpha generation via pricing anomalies.
We are designing an EM REIT Fund with a relevant index to be used as a benchmark. As with our other Diversification products this will be a long term commitment and we will be seeding a fund prior to marketing.
CLIG diversification
We are continuing to consider corporate diversification opportunities. Having looked at many companies over the past ten or so years, we have found none that were suitable. Egos, investment performance, costs and culture differences were the main reason for our lack of success in terms of closure. With close to £20 million in the bank, if we found the right company we would be in a very good position to undertake a transaction that could enhance the Group's earnings and share price. In the event that we don't, my assumption is that the Board would give consideration to a share buy-back or the distribution of a special dividend.
Closed-end fund corporate governance
As you are probably aware just about 100% of our mandates require that we invest in closed-end funds. We therefore have a very real incentive to encourage the Boards of Directors who oversee the managers of these funds that they do demonstrate relevant oversight. Our view is that correct oversight will lead to a competitive product in what is increasingly becoming a competitive marketplace. As a result of this focus, we have been producing a Statement on Corporate Governance for Closed-End Funds since 1999 - this document articulates our position regarding certain principles that we believe will assist the Board of a fund not just with its governance, but with its overall profile in the marketplace. The next edition of this document will be released at the beginning of 2019. With the SWAD remaining so very wide, corporate governance is an increasingly relevant part of our work.
China fund
Having first invested in the China Fund Inc. (CHN) in the first quarter of 1998, we have watched as the corporate governance has gradually deteriorated. Whilst the earlier performance under Martin Currie was both relevant and ahead of the benchmark, recent events gave us cause for concern. While some of these were investment related, to a greater extent we were worried regarding governance issues - the Chairman had been in place for over 20 years, we were concerned regarding the manner in which a new manager had been selected and we were concerned regarding what seemed to be an increasing Management Expense Ratio (MER). As a result we very unusually proposed the appointment of two new Directors and suggested the contract be terminated under the Investment Act of 1940. Most of our concerns were voiced via regulatory filings - fortunately shareholders were very supportive, resulting in two votes that were approximately two thirds for our proposals and one third against.
In the middle of the transaction CLIM and I were sued by CHN for our actions, and, even though we won in both State and Federal Court, also on appeal, the legal costs of defending our position were c.$300,000. While many shareholders will have watched these events real time there are a couple of points worth noting. In the US the loser of a Court action does not pay the winners legal expenses. CLIM has been invited and is in the process of making suggestions that we believe will improve the Corporate Governance of CHN and expect the outcome to be a slimmed down Board, reduced MER, a significant return of assets at close to NAV, plus a change of manager. This is the first time that we have been sued, but I believe that the outcome vindicated our position - US CEF's are there to provide requisite exposure for shareholders, not to go around suing shareholders (the owners).
Targets, margins and FuM
As shareholders will be aware, CLIM does not use targets. This is because over an extended period history shows us that they provide the seeds of their own destruction. Targets imply / encourage growth, and in an environment of declining index levels or changed circumstance they can, and regular as clockwork do, lead to unnecessary risk taking. Risk taking (and a focus on targets) invariably leads to reduced margins. If margins are reduced, staff cannot be paid adequate bonuses thus leading to employee insecurity and potentially reduced tenure. The approach that I have advocated for 30 years is to learn from my past experience and to gradually develop the business. This approach while quite slow and possibly giving the impression of being ponderous has served shareholders well, as can be demonstrated by comparing the total return of our share price compared with selected peers since CLIG's listing in 2006. The Total Shareholder Return graph can be viewed in the Key Performance Indicator section on pages 20 to 24 of the full Financial Statements (see Chairman's Statement for link).
Our operating margin, which is the weighted average net fee rate earned by the Group, has reduced from 0.86% in June 2016 to 0.80% at June 2018. While to a small extent this reflects a change in our Emerging Market fees, the major influence is from the changing mix of business. We receive lower fees for our Diversification products thus while the overall margin has been reduced their growth has benefited the P&L.
Business plans
Many small companies want to become big. My view is that it's better to keep each of the components of the business relatively small - it being better to have an increasing number of divisions or small units. I would add that in the fund management business many firms become too "large" and then suffer as they receive redemption requests based on poor investment performance. After reviewing the eVestment Alliance database of Emerging Market managers, starting in December 1991, over 30% have removed an Emerging Markets product from their database. The average product life was 9 years. During this period we have closed to new investors on 3 occasions while all of our products remain in the database.
Board changes
You will probably be aware from our interim report of Tom Griffith's appointment as Deputy CEO. Tom will be appointed Group CEO in early 2019. I would like to wish Tom all the best both during the transition, and also with his future appointment. Tom and I have worked closely together for nearly 20 years. Tom will head a very experienced management team.
In addition, and on behalf of the Board, I would like to thank David who has been a part of our Board's deliberations for twelve years. David will be standing down as Chairman during the forthcoming AGM.
Having taken on the Chairmanship from Andrew Davison in 2012, David has overseen our deliberations with patience and pragmatism. He has also been very successful in creating a consensus when this seemed most unlikely. I look forward to welcoming Barry Aling as our new Chairman. Barry is well-versed in the ways of the City and is well equipped to continue David's good stewardship.
My intended CLIG share sales
As in previous years I would like to advise shareholders of my current intentions regarding share sales.
As I approach retirement on 31st December 2019, my intention is to sell 500,000 shares at each of 450p, 475p, and 500p subject to close periods etc.
In my opinion this is an accountable way to proceed and is in keeping with the way that I have attempted to run the firm since its inception.
CLIG outlook
From a CLIG perspective the outlook for our business has improved from last year. Our Diversification products are gaining traction and while US markets have recently outperformed, our EM exposure has underperformed. CLIM's Emerging Market CEF's SWAD is the widest for over a decade and as implied earlier in my statement, we are actively urging many funds to improve their corporate governance.
Also as mentioned earlier, we have a lot of cash on our balance sheet which will need to find a good home.
Barry Olliff
Chief Executive Officer
13th September 2018
BUSINESS DEVELOPMENT REVIEW
Overview
Long-term investment performance in the emerging markets closed-end fund (CEF) strategy remains strong, with first or second quartile results versus manager peers over the 3 and 5-year rolling periods ending 30th June 2018.
There were new inflows of $319 million in our core emerging market strategies, which were countered by outflows of $534 million, leading to net outflows of $215 million as clients rebalanced after strong gains in emerging markets over 2017.
Fundraising in the diversification products resulted in inflows of $474 million and outflows of $74 million for a net gain of $400 million. Inflows by product were $279 million in Developed Markets strategies, $67 million in Frontier Emerging Markets strategies and $54 million in Opportunistic Value strategies.
Diversification products now represent circa 18% of Group Assets Under Management (AUM), compared with 10% last year. These additional assets will assist in efforts to raise the profile of our extension CEF products with institutional consultants and plan sponsors.
Products
A combination of strong performance and additional AUM into our diversification products resulted in assets growing in these strategies by 95% over the year.
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.
Opportunistic Value CEF Strategy, formerly known as Global Tactical Asset Allocation CEF Strategy (GTAA), was renamed as it encompasses a variety of asset classes via closed-end funds and adopts a go anywhere approach. While this is a separate team from the team managing client assets in the emerging markets, both teams use a similar methodology and share internal resources. Both taxable and tax-exempt products are available.
The Frontier Emerging Markets CEF Strategy, which is an extension of the emerging markets core equity product focusing on the smallest or pre-emerging markets with high growth potential.
Performance
Relative performance over the period was negative for the Emerging Markets strategy due to negative NAV and discount effects. The Developed and Opportunistic Value (formerly GTAA) strategies all recorded positive relative performance due to a combination of positive discount, NAV and allocation effects. The Frontier strategy had slight underperformance vs the S&P Frontier Index due to negative NAV and currency effects, but outperformed the MSCI Frontier Index over the period.
The Global Emerging Markets Composite investment returns for the rolling one year ending 30th June 2018 were 4.3% vs. 8.2% for the MSCI Emerging Markets Index in USD and 8.1% for the S&P Emerging Frontier Super BMI Index in USD.
The Global Developed Composite investment returns for the rolling one year ending 30th June 2018 were 11.2% vs. 7.3% for the MSCI ACWI ex US in USD.
The Frontier Markets Composite investment returns for the rolling one year ending 30th June 2018 were 4.2% vs. 4.5% for the S&P Frontier EM 150 benchmark in USD.
The Opportunistic Value Composite investment returns for the rolling one year ending 30th June 2018 were 8.3% vs. 6% for the 50/50 MSCI ACWI/Barclays Global Aggregate Bond index 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. Our Developed and Opportunistic Value capabilities will be the focus of our product diversification and business development activities.
FINANCIAL REVIEW
Consolidated income statement and statement of comprehensive income
The average Funds under Management (FuM) for the year was US$5.2 billion compared with US$4.3 billion in 2016/2017 (based on the month end values), an increase of approximately 21%. The Group's gross revenue comprises management fees charged as a percentage of FuM and as a result is also up year on year but by only 8% to £33.9 million (2017: £31.3 million). Revenue did not increase in line with FuM in part due to the significant increase in non-Emerging Market (EM) assets, now representing c.18% of FuM (2017: c.10%). Average fee rates for non-EM products are in general lower than EM products. However, sterling strengthening against the US dollar this year was the major contributor, with an average USD/GBP rate of 1.35 compared to 1.27 last year.
Commissions payable of £1.1 million (2017: £1.4 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 £1.2 million (2017: £0.9 million), is £31.6 million (2017: £29.0 million), up 9% on last year. As a weighted average percentage of FuM, net fee income is currently around 80 basis points compared to 84 basis points at the end of last year.
Administrative expenses of £19.1 million (2017: £17.5 million) includes: the 30% of operating profit that forms the profit-share pool, £6.1 million including payroll taxes (2017: £5.5 million) plus the charge this period of the Company matching the employees' participation in the Employee Incentive Plan (EIP) of £0.5 million (2017: £0.1 million), representing less than 3% (2017:<1%) of pre-bonus operating profit which is within the 5% limit approved by shareholders.
Stripping these variable costs out leaves a core overhead of £12.5 million (2017: £11.9 million), up 5% on last year. This increase primarily relates to one-off legal costs for the proxy solicitation/defence costs relating to the China Fund investment as detailed in the CEO's statement, the set-up of new funds for our diversification products and for the implementation of MiFID II.
The largest component of core overhead continues to be Human Resource (HR) related at £7.5 million (2017: £7.5 million); the mid-year employee salary increase was offset by FX savings due to sterling strengthening against the US dollar.
The overall cost-income ratio this year is 39% (arrived at by comparing core overhead to net fee income) and compares to 41% last year.
Interest receivable and similar gains of £0.3 million (2017: £0.1 million) is principally realised gains on sales of our seed investments this period but also includes bank interest on deposits, fair value losses on hedging and a small write-back of an overestimated interest charge in relation to prior years' US state taxes.
The net of the above results in a pre-tax profit of £12.8 million (2017: £11.6 million).
Corporation tax this year amounts to £2.7 million (2017: £2.4 million), an effective rate of 21%, the same as last year. This reflects the reduction in the US Federal tax rate from 34% to 21% which took effect halfway through the year, as of 1st January 2018. Whilst this year's charge is reflective of a reduced tax rate, last year's tax charge was unusually low due to a provision of £0.4 million in respect of an estimated net refund of prior years' US taxes, 50% of which has now been settled.
Post tax profits plus the release of the fair value gains on the Group's seed investments sold during the year of £0.2 million (2017: £0.2 million increase) results in a total comprehensive income attributable to equity shareholders for the period of £9.9 million (2017: 9.5 million).
Consolidated statement of financial position and statement of changes in equity
The Group's financial position continues to be strong and liquid with cash the major part of net assets at £19.7 million representing 92% (2017: £13.9 million, 77%).
Aside from the £5.8 million increase in cash during the period, which is analysed in the cash flow report on page 68, the other significant movements in net assets are:
• A decrease in available-for-sale financial assets of £0.9 million which reflects the sale of our seed investment in the CLIM International Equity CEF.
• An increase in liabilities of £0.8 million relating to employee waived profit share in respect of participation in the EIP. These funds are held on account until such time the awards vest or are forfeited. On vesting they will off-set the investment in own shares. On forfeiture the lower of the waived bonus or the market value of the deferred shares at that time will be paid to the employee.
• An increase in liabilities of £0.4 million relating to unbilled custody charges.
• An increase in liabilities of £0.3 million relating to the revaluation of our outstanding forward value foreign exchange trades against the forward market rate available as at 30th June 2018.
The major changes in equity this year are comprehensive income of £9.9 million (2017: £9.5 million) and the dividends paid during the year of £6.6 million (2017: £6.0 million). The dividend comprised the 17p final dividend for 2016/17 plus the 9p interim dividend for the current year (2017:16p final and 8p interim).
During the year, Directors and employees exercised 220,487 options over shares held by the Employee Benefit Trust (EBT), raising £0.6 million. The EBT purchased 227,742 shares at a cost of £1.0 million in preparation for the EIP awards due at the end of October 2018.
A provision for the charge this period of the Company matching the employees' participation in the EIP of £0.5 million is recorded in the EIP share reserve.
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 table presented 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 1.35 to 1.25 on FuM of US$5.5 billion increases post-tax profits by £1.0 million.
FX/Post-tax profit Matrix: Illustration of US$/£ rate effect
FuM US$bn: 4.0 4.5 5.0 5.5 6.0
US$/£ Post -tax, £m
1.20 7.2 9.0 10.8 12.5 14.3
1.25 6.9 8.5 10.2 11.9 13.6
1.30 6.5 8.1 9.7 11.4 13.0
1.35 6.1 7.7 9.3 10.9 12.4
1.40 5.8 7.3 8.9 10.4 11.9
Assumes:
1. Average net fee 80 bp's
2. Annual operating costs £4.5m plus US$9.5m plus S$1m (£1 = S$1.8)
3. Profit-share 30%
4. EIP 3%
5. Average tax rate 21%
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 2018 these forward sales totalled US$9.0 million, with a weighted average exchange rate of US$1.38 to £1 (2017: US$4.8 million at a weighted average rate of US$1.28 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.
END OF STRATEGIC REPORT
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 30TH JUNE 2018
Note
Year to
30th June 2018
£
Year to
30th June 2017
£
Revenue
Gross fee income
4
33,930,846
31,294,370
Commissions payable
(1,159,580)
(1,444,787)
Custody fees payable
(1,164,477)
(880,840)
Net fee income
31,606,789
28,968,743
Administrative expenses
Staff costs
14,066,857
13,153,914
Other administrative expenses
4,717,139
4,074,975
Depreciation and amortisation
294,799
230,635
(19,078,795)
(17,459,524)
Operating profit
5
12,527,994
11,509,219
Interest receivable and similar gains
6
264,501
81,135
Profit before taxation
12,792,495
11,590,354
Income tax expense
7
(2,732,152)
(2,449,217)
Profit for the period
10,060,343
9,141,137
Profit attributable to:
Non-controlling interests
-
(148,618)
Equity shareholders of the parent
10,060,343
9,289,755
Basic earnings per share
8
39.5p
36.9p
Diluted earnings per share
8
39.3p
36.7p
CONSOLIDATED AND COMPANY STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30TH JUNE 2018
Group Company
Year to
30th June 2018
£
Year to
30th June 2017
£
Year to
30th June 2018
£
Year to
30th June 2017
£
Profit for the period
10,060,343
9,141,137
9,888,536
8,629,630
Items which may be reclassified through the profit or loss:
Fair value gains on available-for-sale investments*
1,694
158,597
1,826
158,227
Release of fair value gains on disposal of
available-for-sale investments*
(154,384)
(253)
(153,819)
(253)
Foreign exchange (losses)/gains on non-monetary assets
(20,884)
33,732
-
-
Other comprehensive (loss)/income
(173,574)
192,076
(151,993)
157,974
Total comprehensive income for the period
9,886,769
9,333,213
9,736,543
8,787,604
Attributable to:
Equity shareholders of the parent
9,886,769
9,481,831
9,736,543
8,787,604
Non-controlling interests
-
(148,618)
-
-
*Net of deferred tax.
CONSOLIDATED AND COMPANY STATEMENT OF FINANCIAL POSITION
30TH JUNE 2018
Group Company
Note
30th June 2018
£
30th June 2017
£
30th June 2018
£
30th June 2017
£
Non-current assets
Property and equipment
450,241
560,774
125,917
147,517
Intangible assets
292,037
360,283
47,333
20,407
Other financial assets
38,170
34,660
1,069,930
834,105
Deferred tax asset
119,078
216,693
40,011
64,719
899,526
1,172,410
1,283,191
1,066,748
Current assets
Trade and other receivables
5,833,160
5,857,896
14,397,266
8,248,782
Available-for-sale financial assets
-
915,649
-
915,649
Other financial assets
195,112
135,547
195,112
135,547
Current tax receivable
-
-
835,385
634,890
Cash and cash equivalents
19,704,111
13,936,558
225,806
180,938
25,732,383
20,845,650
15,653,569
10,115,806
Current liabilities
Trade and other payables
(4,801,433)
(3,402,681)
(3,843,071)
(1,219,878)
Current tax payable
(361,021)
(418,513)
-
-
Creditors, amounts falling due within one year
(5,162,454)
(3,821,194)
(3,843,071)
(1,219,878)
Net current assets
20,569,929
17,024,456
11,810,498
8,895,928
Total assets less current liabilities
21,469,455
18,196,866
13,093,689
9,962,676
Non-current liabilities
Deferred tax liability
(3,221)
(115,774)
(3,221)
(115,774)
Net assets
21,466,234
18,081,092
13,090,468
9,846,902
Capital and reserves
Share capital
9
268,617
268,617
268,617
268,617
Share premium account
2,256,104
2,256,104
2,256,104
2,256,104
Investment in own shares
(4,699,115)
(4,355,887)
(4,699,115)
(4,355,887)
Fair value reserve
13,731
166,421
13,731
165,724
Share option reserve
372,762
442,379
372,762
442,379
EIP share reserve
605,707
101,497
605,707
101,497
Foreign exchange reserve
88,255
109,139
-
-
Capital redemption reserve
23,097
23,097
23,097
23,097
Retained earnings
22,537,076
19,069,725
14,249,565
10,945,371
Total equity
21,466,234
18,081,092
13,090,468
9,846,902
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 £9,888,536 (2017: £8,629,630).
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
30TH JUNE 2018
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 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
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
Profit for the period
-
-
-
-
-
-
-
-
10,060,343
10,060,343
-
10,060,343
Comprehensive income
-
-
-
(152,690)
-
-
(20,884)
-
-
(173,574)
-
(173,574)
Total comprehensive income
-
-
-
(152,690)
-
-
(20,884)
-
10,060,343
9,886,769
-
9,886,769
Transactions with owners
Share option exercise
-
-
637,799
-
(83,312)
-
-
-
83,312
637,799
-
637,799
Purchase of own shares
-
-
(981,027)
-
-
-
-
-
-
(981,027)
-
(981,027)
Share-based payment
-
-
-
-
13,695
-
-
-
-
13,695
-
13,695
EIP provision
-
-
-
-
-
504,210
-
-
-
504,210
-
504,210
Deferred tax
-
-
-
-
-
-
-
-
(100,430)
(100,430)
-
(100,430)
Current tax on share options
-
-
-
-
-
-
-
-
50,204
50,204
-
50,204
Dividends paid
-
-
-
-
-
-
-
(6,626,078)
(6,626,078)
-
(6,626,078)
Total transactions with owners
-
-
(343,228)
-
(69,617)
504,210
-
-
(6,592,992)
(6,501,627)
-
(6,501,627)
At 30th June 2018
268,617
2,256,104
(4,699,115)
13,731
372,762
605,707
88,255
23,097
22,537,076
21,466,234
-
21,466,234
COMPANY STATEMENT OF CHANGES IN EQUITY
30TH JUNE 2018
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 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
Profit for the period
-
-
-
-
-
-
-
9,888,536
9,888,536
Comprehensive income
-
-
-
(151,993)
-
-
-
-
(151,993)
Total comprehensive income
-
-
-
(151,993)
-
-
-
9,888,536
9,736,543
Transactions with owners
Share option exercise
-
-
637,799
-
(83,312)
-
-
46,014
600,501
Purchase of own shares
-
-
(981,027)
-
-
-
-
-
(981,027)
Share-based payment
-
-
-
-
13,695
-
-
-
13,695
EIP provision
-
-
-
-
-
504,210
-
-
504,210
Deferred tax
-
-
-
-
-
-
(25,286)
(25,286)
Current tax on share options
-
-
-
-
-
-
21,008
21,008
Dividends paid
-
-
-
-
-
-
(6,626,078)
(6,626,078)
Total transactions with owners
-
-
(343,228)
-
(69,617)
504,210
-
(6,584,342)
(6,492,977)
At 30th June 2018
268,617
2,256,104
(4,699,115)
13,731
372,762
605,707
23,097
14,249,565
13,090,468
CONSOLIDATED AND COMPANY CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH JUNE 2018
Group Company
Note
30th June 2018
£
30th June 2017
£
30th June 2018
£
30th June 2017
£
Cash flow from operating activities
Operating profit
12,527,994
11,509,219
276,936
217,567
Adjustments for:
Profit on disposal of assets
-
202
-
202
Depreciation charges
200,332
167,748
83,394
57,492
Amortisation of intangible assets
94,467
62,886
6,914
2,915
Share-based payment charge
13,695
26,493
3,042
21,134
EIP charge
504,210
101,497
246,715
50,114
Fair value gain on investments
-
35,367
-
-
Translation adjustments
100,657
(57,966)
47,621
44,963
Cash generated from operations before changes
in working capital
13,441,355
11,845,446
664,622
394,387
Decrease/(Increase) in trade and other receivables
24,735
(813,789)
(6,148,484)
(2,651,355)
Increase/(decrease) in trade and other payables
1,398,752
280,310
2,623,193
(407,031)
Cash generated from/(used in) operations
14,864,842
11,311,967
(2,860,669)
(2,663,999)
Interest received
47,105
28,925
187
76
Interest paid
8,615
(64,064)
-
-
Taxation paid
(2,818,992)
(2,764,001)
(253,292)
(461,085)
Net cash generated from/(used in) operating activities
12,101,570
8,512,827
(3,113,774)
(3,125,008)
Cash flow from investing activities
Dividends received from subsidiaries
-
-
9,400,000
7,700,000
Purchase of property and equipment and intangibles
(136,903)
(485,345)
(95,634)
(156,258)
Proceeds from sale of property and equipment
-
-
-
-
Purchase of non-current financial assets
(2,272)
(768)
(2,272)
(768)
Proceeds from sale of non-current financial assets
1,654
2,538
71
2,538
Proceeds from sale of subsidiary
-
1,073,438
-
1,073,438
Purchase of current financial assets
(151,467)
(155,963)
(151,467)
(155,963)
Proceeds from sale of current financial assets
978,356
-
978,356
-
Net cash generated from/(used in) investing activities
689,368
433,900
10,129,054
8,462,987
Cash flow from financing activities
Ordinary dividends paid
10
(6,626,078)
(6,047,965)
(6,626,078)
(6,047,965)
Purchase and cancellation of own shares
-
(128,007)
-
(128,007)
Purchase of own shares by employee share option trust
(981,027)
(189,698)
(981,027)
(189,698)
Proceeds from sale of own shares by employee
share option trust
637,799
1,132,727
637,799
1,132,727
Net cash used in financing activities
(6,969,306)
(5,232,943)
(6,969,306)
(5,232,943)
Net increase in cash and cash equivalents
5,821,632
3,713,784
45,974
105,036
Cash and cash equivalents at start of period
13,936,558
10,150,799
180,938
74,755
Effect of exchange rate changes
(54,079)
71,975
(1,106)
1,147
Cash and cash equivalents at end of period
19,704,111
13,936,558
225,806
180,938
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2018
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 2018 and 30th June 2017 does not constitute statutory accounts and has been extracted from the full accounts for the years ended 30th June 2018 and 30th June 2017. 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 2017 have been filed with the Registrar of Companies. The accounts for the year ended 30th June 2018 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 2018, the following Standards and Interpretations as adopted by the EU, which are relevant to the Group, were in issue but applicable to future annual accounting periods:
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 effective for annual periods beginning on or after 1st January 2018 so applicable to the Group from 1st July 2018. The Group has assessed its financial instruments held as 30th June 2018, and there will be no change to their measurement except for a number of small investments currently classified as available-for-sale, measured at fair value through other comprehensive income, which will going forward be measured at fair value through profit or loss. The Group does not anticipate the impact of the new expected loss model on those assets to be classified as amortised at cost to be material as a result of the nature of assets held and no previous experience of defaults.
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.
This standard is effective for annual periods beginning on or after 1st January 2018 so applicable to the Group from 1st July 2018. The Group has assessed that IFRS 15 will not have a material impact on its results or a material change to the estimation of management fees.
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. On transition, a lessee may elect not to apply the requirements to leases for which the lease term ends within 12 months of the date of initial application.
This Standard is effective for annual periods beginning on or after 1st January 2019, so applicable to the Group from 1st July 2019. The majority of the Group's leases will expire within 12 months of the date of initial application of the Standard and therefore on transition the Group will continue to account for them as operating leases until such time they expire. For those leases that will be recognised as a right-of-use asset and related lease liability from 1st July 2019, the Group estimates the discounted value of those lease commitments to be approximately £1.7 million based on current discount values and foreign exchange rates.
No other standards or interpretations issued and not yet effective are expected to have an impact on the Group's consolidated financial statements.
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.
The Group's subsidiary undertakings as at 30th June 2018 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 2018
Gross fee income
31,334,283
968,724
453,443
1,174,396
-
33,930,846
Non-current assets:
Property and equipment
324,324
-
85,907
-
40,010
450,241
Intangible assets
244,704
-
47,333
-
-
292,037
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
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 2018
£
30th June 2017
£
Depreciation of owned assets
200,332
167,748
Amortisation of intangible assets
94,467
62,886
Auditors' remuneration:
- Statutory audit
89,399
75,319
- Audit related assurance services
8,348
8,471
- Under-accrual of prior year audit fees
1,276
-
Operating lease rentals:
- Land and buildings
434,469
436,617
- Other
-
1,886
6 INTEREST RECEIVABLE AND SIMILAR GAINS
Year to
30th June 2018
£
Year to
30th June 2017
£
Interest on bank deposit
47,105
28,925
Gain on sale of investments
298,534
187,142
Unrealised loss on investments
(89,753)
(70,868)
Interest receivable/(payable) on restated US state tax returns
8,615
(64,064)
264,501
81,135
7
TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES
Year to
Year to
(a) Analysis of tax charge on ordinary activities:
30th June 2018
£
30th June 2017
£
Tax at 19% (2017: 20%) based on the profit for the period
2,465,715
2,447,718
Double taxation relief
(853,093)
(966,380)
Deferred tax
(79,552)
(64,595)
Change in tax rate to 19%
-
(17,964)
Adjustments in respect of prior years
(11,818)
11,312
Domestic tax total
1,521,252
1,410,091
Foreign tax for the current period
1,195,561
1,396,861
Adjustments in respect of prior years
15,339
(357,735)
Foreign tax total
1,210,900
1,039,126
Total tax charge in income statement
2,732,152
2,449,217
(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 - 19% (prior year - 20%). The differences are explained below:
Year to
30th June 2018
£
Year to
30th June 2017
£
Profit on ordinary activities before tax
12,792,495
11,590,354
Tax at 19% (2017: 20%) thereon
(2,430,574)
(2,318,071)
Effects of:
Unrelieved overseas tax
(342,468)
(430,480)
Expenses not deductible for tax purposes
(11,757)
(28,513)
(Losses)/gains ineligible for tax
-
(88,482)
Capital allowances less than depreciation
(38,884)
(9,397)
Prior period adjustments
(3,521)
346,423
Deferred tax on share based payments and investments
79,552
64,595
Change in tax rate to 19%
-
17,964
Other
15,500
(3,256)
Total tax charge in income statement
(2,732,152)
(2,449,217)
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 £10,060,343 (2017: £9,289,755) divided by the weighted average number of ordinary shares in issue for the period ended 30th June 2018 of 25,456,382 (2017: 25,188,897).
The Employee Benefit Trust held 1,485,190 ordinary shares in the Company as at 30th June 2018. 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 £10,060,343 (2017: £9,289,755) divided by the diluted weighted average of ordinary shares for the period ended 30th June 2018 of 25,617,939 (2017: 25,316,917).
Reconciliation of the figures used in calculating basic and diluted earnings per share:
30th June 2018
30th June 2017
Number of shares
Number of shares
Weighted average number of shares - basic earnings per share
25,456,382
25,188,897
Effect of dilutive potential shares - share options
161,557
128,020
Weighted average number of shares - diluted earnings per share
25,617,939
25,316,917
9 SHARE CAPITAL
30th June 2018
30th June 2017
Group and Company
£
£
Allotted, called up and fully paid
At start of period 26,861,707 (2017: 26,896,707) Ordinary shares of 1p each
268,617
268,967
Shares repurchased and cancelled; Nil (2017: 35,000)
-
(350)
At end of period 26,861,707 (2017: 26,861,707) Ordinary shares of 1p each
268,617
268,617
Fully paid ordinary shares carry one vote per share and carry a right to dividends.
10 DIVIDEND
30th June 2018
30th June 2017
£
£
Dividends paid:
Interim dividend of 9p per share (2017: 8p)
2,295,452
2,026,846
Final dividend in respect of year ended:
30th June 2017 of 17p per share (2016: 16p)
4,330,626
4,021,119
6,626,078
6,047,965
A final dividend of 18p per share has been proposed, payable on 30th October 2018, subject to shareholder approval, to shareholders who are on the register of members on 12th October 2018.
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 2018
receivables
profit or loss
for-sale
Total
Assets as per statement of financial position
£
£
£
£
Other financial assets
-
195,112
38,170
233,282
Trade and other receivables
5,131,938
-
-
5,131,938
Available-for-sale financial assets
Cash and cash equivalents
-
19,704,111
-
-
-
-
-
19,704,111
Total
24,836,049
195,112
38,170
25,069,331
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
264,790
4,413,011
4,677,801
Total
264,790
4,413,011
4,677,801
Assets at fair
30th June 2017
Loans and
receivables
value through
profit or loss
Available-
for-sale
Total
Assets as per statement of financial position
£
£
£
£
Other financial assets
-
135,547
34,660
170,207
Trade and other receivables
5,046,231
65,151
-
5,111,382
Available-for-sale financial assets
Cash and cash equivalents
-
13,936,558
-
-
915,649
-
915,649
13,936,558
Total
18,982,789
200,698
950,309
20,133,796
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
-
3,284,762
3,284,762
Total
-
3,284,762
3,284,762
Company
Investment
Loans and
Assets at fair value through
Available-
30th June 2018
in subsidiaries
receivables
profit or loss
for-sale
Total
Assets as per statement of financial position
£
£
£
£
£
Other financial assets
1,031,760
-
195,112
38,170
1,265,042
Trade and other receivables
-
14,127,536
-
-
14,127,536
Available-for-sale financial assets
Cash and cash equivalents
-
-
-
225,806
-
-
--
-
-
225,806
Total
1,031,760
14,353,342
195,112
38,170
15,618,384
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
-
3,755,555
3,755,555
Total
-
3,755,555
3,755,555
Assets at fair
30th June 2017
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
800,911
- 135,547
33,194
969,652
Trade and other receivables
-
7,960,401 -
-
7,960,401
Cash and cash equivalents
-
- -
915,649
915,649
Cash and cash equivalents
-
180,938 -
-
180,938
Total
800,911
8,141,339 135,547
948,843
10,026,640
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
-
1,134,436
1,134,436
Total
-
1,134,436
1,134,436
(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 2018
£
£
£
£
Available-for-sale financial assets
Investment in own funds
-
38,170
-
38,170
Total
-
38,170
-
38,170
Financial assets at fair value through profit or loss
Investment in other financial assets
195,112
-
-
195,112
Forward currency trades
-
-
-
-
Total
195,112
-
-
195,112
Financial liabilities at fair value through profit or loss
Forward currency trades
-
264,790
-
264,790
Total
-
264,790
-
264,790
30th June 2017
Level 1
£
Level 2
£
Level 3
£
Total
£
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
-
-
-
-
Company
30th June 2018
Level 1
£
Level 2
£
Level 3
£
Total
£
Financial assets at fair value through profit or loss
Investment in other financial assets
195,112
-
-
195,112
Total
195,112
-
-
195,112
Available-for-sale financial assets
Investment in own funds
-
38,170
-
38,170
Total
-
38,170
-
38,170
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
Level 3
Level 3 assets as at 30th June 2018 are nil (2017: nil).
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.
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 profit reported for the period is £1,480 (2017: net loss £90,181).
(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 2018, the Group had net asset balances of US$5,656,900 (2017: US$5,463,807), offset by forward sales totalling US$9,000,000 (2017: US$4,750,000). Other significant net asset balances were C$414,997 (2017: C$452,927), AED299,698 (2017: AED246,996), and SGD249,673 (2017: SGD159,498).
Had the US dollar strengthened or weakened against sterling as at 30th June 2018 by 10%, with all other variables held constant, the Group's net assets would have increased or decreased (respectively) by approximately 7%, because the US dollar position is hedged by the forward sales.
(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 not make a material increase or decrease 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 £89,753 (2017: £20,416).
(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 2018 the Group held £19,704,111 (2017: £13,936,558) in cash balances, of which £19,523,996 (2017: £13,799,951) 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.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDFR BXGDCSSBBGIR
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